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Exhibit 10.24
CAPITALIZATION AGREEMENT
THIS CAPITALIZATION AGREEMENT (this "Agreement") is dated the ____ day
of ______, 1998 and made by and among Ugly Duckling Corporation, a Delaware
corporation (the "Company"), Cygnet Finance, Inc., an Arizona corporation ("Old
Cygnet"), Cygnet Finance Alabama, Inc., an Alabama corporation ("Old Cygnet
Alabama"), Champion Acceptance Corporation, an Arizona corporation ("CAC"), and
Cygnet Financial Corporation, a Delaware corporation (including any wholly-owned
subsidiary "Cygnet").
RECITALS
WHEREAS, the Company's Board of Directors has determined that the
separation of the operations of the Company and its subsidiaries into two
separate publicly-traded corporate groups will promote the growth of each
separate business group and enhance aggregate shareholder value; and
WHEREAS, subject to approval by the Company's shareholders, the
Company's Board of Directors has proposed that there be transferred and/or
delegated to Cygnet or its subsidiaries various assets including (a) the
Company's bulk purchase and servicing operations with respect to contracts
originated by independent used car dealerships, (b) the assets of Old Cygnet and
Old Cygnet Alabama through which the Company provides independent automobile
dealerships with warehouse purchase facilities and operating credit lines, (c)
substantially all of the Company's rights and obligations with respect to
certain transactions entered into in respect of the bankruptcy proceedings of
First Merchants Acceptance Corporation, as described in Article Six hereof, (d)
substantially all of the Company's rights and obligations with respect to
certain transactions entered into in respect of the bankruptcy proceedings of
Reliance Acceptance Corporation, as described in Article Six hereof, (d)
substantially all of the Company's rights and obligations with respect to
certain other transactions entered into by the Company since January, 1998 as
specifically set forth in Section 4.13 (collectively, the "Third Party Dealer
Assets"), following which Cygnet and its subsidiaries will own and operate the
Third Party Dealer Assets and related liabilities as well as any and all
additional assets and liabilities they may acquire in one publicly-traded
corporate group and the Company will own and operate the remaining assets
currently held by the Company and its subsidiaries in a separate publicly-traded
corporate group (the "Split-up"); and
WHEREAS, prior to the Split-up, Cygnet may enter into certain
additional transactions effected as contemplated in Article Four hereof; and
WHEREAS, it is proposed that Cygnet be capitalized through a
combination of transactions involving (a) the issuance of stock by Cygnet for
cash following the issuance by Cygnet of rights to acquire such stock and the
issuance by Cygnet of stock and warrants to purchase stock pursuant to certain
other transactions and (b) the acquisition by Cygnet and its subsidiaries of the
Third Party Dealer Assets in exchange for cash and preferred stock; and
WHEREAS, this Agreement is intended to set forth the details governing
the capitalization of the Company and matters ancillary thereto as a part of a
single integrated plan relating to the capitalization of Cygnet and matters
ancillary thereto;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties hereto agree as follows:
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ARTICLE ONE
DEFINITIONS
1.01 General. As used in this Agreement, and except as otherwise
defined in Articles Seven and Eight hereof, the terms below shall have the
following meanings:
"Action" shall mean any action, order, writ, injunction,
judgment, ruling, decree outstanding, any statute, rule, regulation, or
executive order, or any claim, suit, litigation, proceeding, labor dispute,
arbitral action, government audit or investigation.
"Affiliate" shall mean any corporation or other entity
directly or indirectly controlled by Xxxxxx.
"B Pieces" shall mean the residual interests in the
Securitized Pools of FMAC represented by the B-Certificates, all of which are
held by FMARC and FMARC II.
"Break-Up Agreement" shall ________________.
"Break-Up Fee" shall ______________________.
"Business Day" shall mean a day of the year on which banks are
not required or authorized to close in Minneapolis, Minnesota or Phoenix,
Arizona.
"Closing Date" shall have the meaning given in Section 3.1.
"Commencement Date" shall mean the date on which the Rights
are first mailed or delivered to stockholders of the Company pursuant to the
Rights Offering.
"Company" shall mean Ugly Duckling Corporation, a Delaware
corporation.
"Company Common Stock" shall mean the common stock of the
Company, $.001 par value.
"Company Subsidiary" shall mean a corporation, limited
liability company, partnership or other entity, all of the shares or interests
in which are owned by the Company.
"Company Transferor Subsidiary" shall mean a Company
Subsidiary transferring a portion of the Third Party Dealer Assets to Cygnet or
a Cygnet Subsidiary in accordance with Article Four.
"Consultants" shall have the meaning given in Section 5.4.
"Contract Purchaser" shall mean General Electric Capital
Corporation.
"Contract Purchaser Guaranty" shall mean that certain Guaranty
dated as of December 18, 1997 by the Company in favor of the Contract Purchaser.
"Contract Purchaser Reimbursement Obligation" shall have the
meaning given in Section 6.1.c.
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"Contribution Agreement" shall mean that certain Contribution
Agreement, dated as of December 15, 1998, by and between FMAC and the Company.
"Corporate Headquarters Building" shall mean the building
located at 0000 X. Xxxxxxxxx Xxxx.
"Corporate Headquarters Lease" shall mean that certain lease
between the Company and Landlord and relating to the Corporate Headquarters
Building.
"Credit Bid Purchase Price" shall mean the entire amount of
the senior bank debt plus interest, fees, costs and expenses credit bid for the
Owned Contracts prior to the transfer thereof to the Contract Purchaser.
"Cutoff Date" shall mean one (1) year following the Closing
Date or such later date as is agreed to by Company and Cygnet.
"Cygnet" shall mean Cygnet Financial Corporation, a Delaware
corporation.
"Cygnet Common Stock" shall mean the $.001 par value common
stock of Cygnet.
"Cygnet Preferred Stock" shall mean $.001 par value Series A
Cumulative Convertible Preferred Stock of Cygnet with an aggregate liquidation
preference of $40 million.
"Cygnet Registration Statement" shall mean that certain
registration statement on Form S-1 pursuant to which the Rights and shares of
Cygnet Common Stock issuable pursuant to the Rights Offering are registered
under the Securities Act.
"Cygnet Subsidiary" shall mean a subsidiary or limited
liability company all of the shares or interests in which are owned by Cygnet.
"DIP Facility" shall mean that certain Credit and Security
Agreement dated as of July 17, 1997 by and between the Company and FMAC, as
amended or modified.
"DIP Reimbursement Obligation" shall have the meaning given in
Section 6.1.b.
"Distribution Agent" shall mean Norwest Bank Minnesota,
National Association, as distribution agent for the Rights Offering.
"Electing Employee" shall have the meaning given in Section
3.4.b.
"Employee Shares" shall have the meaning given in Section
3.4.b.
"Encumbrance" shall mean any claim, lien, pledge, option,
charge, easement, security interest, deed of trust, mortgage, right-of-way,
encroachment, building or use restriction, conditional sales agreement,
encumbrance or other right of third parties, whether voluntarily incurred or
arising by operation of law, and includes, without limitation, any agreement to
give any of the foregoing in the future, and any contingent sale or other title
retention agreement or lease in the nature thereof.
"Escrow Account" shall have the meaning given in Section 2.5.
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"Escrow Agent" shall have the meaning given in Section 2.5.
"Escrow Agreement" shall mean that certain Escrow Agreement
between Cygnet and the Escrow Agent in substantially the form of Exhibit A
hereto.
"Escrowed Subscription Funds" shall mean the aggregate
Subscription Price paid by all holders of Rights who elect to purchase shares of
Cygnet Common Stock pursuant to the Rights Offering either upon exercise of
their Rights and/or the related Over-Subscription Election, but excluding monies
payable by Xxxxxx or his Affiliates whether upon exercise of their Rights,
Over-Subscription Election and/or Standby Purchase Obligation.
"Excess Collection Split" shall mean any recovery on the Owned
Contracts in excess of the Secured Claim Recovery Amount and any distributions
on the B Pieces after payment in full of the Secured Claim Recovery Amount, the
DIP Facility, the Modified UDC Fee [and certain other amounts], to be shared
between FMAC and the Company on the basis of 82 1/2% for the benefit of FMAC and
17 1/2% for the benefit of the Company, subject to adjustment in certain cases.
"Expiration Date" shall mean the date that is [twenty-one
(21)] days following the Commencement Date or such other date to which the
Rights Offering shall be extended.
"FMAC" shall mean First Merchants Acceptance Corporation.
"FMAC Excluded Obligations" shall mean (1) all of the
Company's obligations remaining due and owing to certain Sellers as defined in
that certain Loan Purchase Agreement, dated August 20, 1997 by and among Ugly
Duckling Corporation, LaSalle National Bank and certain other lenders; and (2)
all of the Company's obligations under these certain Warrant Agreements, dated
August 21, 1998 and April 1, 1998, between Ugly Duckling Corporation and Xxxxxx
Trust Company of California.
"FMAC Plan" shall mean that certain Plan of Reorganization
confirmed by the United States Bankruptcy Court for the District of Delaware on
March 16, 1998.
"FMARC" shall mean First Merchants Auto Receivables
Corporation.
"FMARC II" shall mean First Merchants Auto Receivables
Corporation II.
"FSA" shall mean Financial Security Assurance, Inc.
"FSA Reimbursement Obligation" shall have the meaning given in
Section 6.1.d.
"Xxxxxx" shall mean Xxxxxx X. Xxxxxx, XX.
"Xxxxxx Additional Shares" shall have the meaning given in
Section 3.4.a.
"Xxxxxx Payment Obligation" shall have the meaning given in
Section 2.9.
"Xxxxxx Warrants" shall have the meaning given in Section 3.3.
"Headquarters Sublease" shall have the meaning given in
Section 4.3.
"Interim Assets" shall have the meaning given in Section 4.13.
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"Interim Consideration" shall have the meaning given in
Section 4.13.
"Interim Earnings" shall have the meaning given in Section
4.13.
"Interim Loan" shall mean any loan made by the Company to
Cygnet or its related subsidiaries and which is necessary to consummate any
Interim Transaction.
"Interim Transaction" shall have the meaning given in Section
4.13.
"Landlord" shall mean _______________.
"Lender Warrants" shall have the meaning given in Section
3.4.c.
"Material Adverse Effect" shall mean, with respect to the
Third Party Dealer Business or the Third Party Dealer Assets, any significant
and substantial adverse effect in the condition (financial or other), business,
results of operations, prospects, assets, liabilities, customer, supplier or
employee relations or operations of the Third Party Dealer Business and/or the
Third Party Dealer Assets or on the ability of the Company to consummate the
transactions contemplated by Article Four hereof, or any event or condition
which would, with the passage of time, constitute a "Material Adverse Effect."
"Modified UDC Fee" shall mean a fee of $450,000 payable prior
to any payments pursuant to the Excess Collection Split solely from collections
on the B Pieces, and secured by a pledge of the stock of FMARC and FMARC II,
subordinate only to the DIP Facility, the Secured Claim Recovery Amount and
prior pledges of FMARC II stock.
"Nasdaq" shall mean the National Association of Securities
Dealers, Inc. Automated Quotation System (National Market System).
"Net Appraised Value" shall mean the fair market value of the
Third Party Dealer Assets as determined by the Company's appraiser, Willamette
Management Associates, and advised to the Company in writing less book
liabilities of the Third Party Dealer Assets.
"Net Book Value" of the Third Party Dealer Assets shall mean
the book value less book liabilities of the Third Party Dealer Assets, as
reflected in the Company's Third Party Dealer Asset Balance Sheet.
"Offered Shares" shall mean the aggregate number of shares of
Cygnet Common Stock offered for purchase pursuant to the Rights.
"Over-Subscription Election" shall mean the election described
in Section 2.8 pursuant to which a Rights Holder may purchase additional shares
of Cygnet Common Stock in connection with the Rights Offering.
"Owned Contract Purchase Agreement" means that certain
Purchase Agreement dated as of December 18, 1997 by and among the Company, the
Contract Purchaser, and LaSalle National Bank, as Agent.
"Owned Contracts" shall mean the receivables for the purchase
of new or used automobiles, trucks, vans, and sport utility vehicles that
originally secured the senior bank debt of FMAC and were purchased by credit bid
of the agent for the holders of the senior bank debt and then sold to the
Contract Purchaser.
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"Permits" shall mean all licenses, permits, franchises,
approvals, authorizations, consents or orders of, or filings with, any
governmental authority, whether foreign, federal, state or local, or any other
person, necessary or desirable for the past, present or anticipated conduct of,
or relating to the operation of, the Third Party Dealer Business.
"Purchase Notice" shall have the meaning given in Section
3.4.b.
"Record Holder" shall mean a holder of record of Company
Common Stock on the Rights Record Date.
"Reliance" shall mean Reliance Acceptance Corporation.
"Reliance Leases" shall have the meaning given in Section
6.2.c.
"Reliance Servicing Agreement" shall have the meaning given in
Section 6.11.
"Reliance Subleases" shall have the meaning given in Section
6.2.c.
"Reliance Warrants" shall have the meaning given in Section
6.2.a.
"Required Agreements" shall mean (i) the Escrow Agreement and
(ii) the Standby Purchase Agreement described in Section 3.2.
"Retained Reliance Obligation" shall have the meaning given in
Section 6.2.a.
"Rights" shall mean the rights to purchase shares of Cygnet
Common Stock described in Article Two of this Agreement.
"Rights Certificates" shall have the meaning given in Section
2.2.
"Rights Holder" shall have the meaning given in Section 2.8.
"Rights Offering" shall mean the offering of Rights to
purchase shares of Cygnet Common Stock pursuant to Article Two hereof.
"Rights Record Date" shall mean August 17, 1998.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Securitized Pools" shall mean the various securitized loan
pools of FMAC.
"Secured Claim Recovery Amount" shall mean any shortfall
between (i) the Credit Bid Purchase Price of the Owned Contracts plus interest
thereon at the rate of 11% per annum from December 15, 1997, plus an additional
charge for servicing the Owned Contracts, calculated on a monthly basis, of the
greater of 1/12 of 3 1/4% of the outstanding principal balance of the Owned
Contracts of $15.00 per Owned Contract, applied only to Owned Contracts that are
less than 120 days past due and for which the related vehicle has not been
repossessed and (ii) collections and proceeds of the Owned Contracts.
"Shares" shall have the meaning given in Section 4.6.b.
"Split-up" shall have the meaning given in the second WHEREAS
clause in the Recitals hereof.
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"Split Up Proposal" shall mean the proposal of the Board of
Directors to separate the Company and its subsidiaries into two separate
publicly-traded corporate groups as approved by the Board at its meeting of July
16, 1998 and as revised by the Board from time to time.
"Standby Purchase Obligation" shall mean the obligation of
Xxxxxx to purchase shares of Cygnet Common Stock described in Section 3.2.
"Stock Option Shares" shall mean Company Common Stock that may
be issued by the Company to FMAC or its unsecured creditors at the election of
the Company as described in Section 6.1.e.
"Stock Option Value" shall mean the aggregate value of the
Stock Option Shares on the date of their issuance determined by multiplying the
Stock Option Shares by 98% of the average of the closing prices for the previous
ten trading days of Company Common Stock on Nasdaq or such other market on which
such stock may then be traded.
"Subscription Price" shall have the meaning given in Section
2.1.
"Third Party Agreements" shall have the meaning given in
Section 4.5.
"Third Party Dealer Assets" shall have the meaning given in
the Second WHEREAS clause in the Recitals hereof and shall include the assets
described on Schedule 4.1.
"Third Party Dealer Asset Balance Sheet" shall mean the
balance sheet of the Company, dated as of the last day of the calendar month
preceding the Closing Date (the "Preliminary Third Part Asset Balance Sheet")
and updated as of the Closing Date as soon as practicable thereafter (the "Final
Third Party Asset Balance Sheet"), relating to the Third Party Dealer Business.
"Third Party Dealer Business" shall mean the business
conducted by the Company and its subsidiaries with respect to the Third Party
Dealer Assets.
"Third Party Dealer Liabilities" shall have the meaning given
in Section 4.2.
"Transfer Agent" shall mean Norwest Bank Minnesota, National
Association, as transfer agent for the Cygnet Common Stock.
"Transition Period" shall mean the time period commencing on
the Closing Date and ending on the Cutoff Date.
"Unpurchased Allotment" shall have the meaning given in
Section 2.8.
"Verde Note" shall mean that certain 10% Subordinated
Debenture dated June 21, 1996, as amended, from the Company, as Payor, to Verde
Investments, Inc., an Arizona corporation, as Payee.
"Voice and Data Transmission System" shall mean the phone and
network system leased from _____________.
1.02 Other Defined Terms. The following terms shall have the
meanings defined for such terms in the Sections set forth below:
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CAC Introductory Paragraph
Old Cygnet Alabama Introductory Paragraph
Old Cygnet Introductory Paragraph
ARTICLE TWO
ISSUANCE OF RIGHTS TO PURCHASE CYGNET COMMON STOCK
2.1 General. Provided that the conditions to the Rights Offering
provided in Section 2.11 are satisfied or waived, and unless the Company's Board
of Directors exercises its right in its sole discretion to abandon the Split-Up
Proposal, Cygnet shall, on the Commencement Date, issue Rights directly to each
holder of Company Common Stock as of the Rights Record Date. Subject to Section
2.3 hereof, each Record Holder would be entitled to receive one (1) Right for
every four (4) shares of Company Common Stock owned. Except as otherwise
provided in Sections 2.3 and 2.8 hereof, each Right shall entitle the Record
Holder thereof to purchase one share of Cygnet Common Stock at the price of
$7.00 per share (the "Subscription Price"). The Rights shall be transferable,
and shall be exercisable through the Expiration Date.
2.2 Form of Certificate; Transmittal. The Rights shall be
evidenced by certificates ("Rights Certificates"). The Right Certificates (and
the forms of election to purchase Cygnet Common Stock and of transfer or other
assignment to be incorporated therein) shall have such marks of identification
or designation and such legends, summaries or endorsements printed thereon as
Cygnet may deem appropriate and as are not inconsistent with the provisions of
this Agreement, or as may be required to comply with any applicable law or with
any rule or regulation made pursuant thereto or with any rule or regulation of
any stock exchange or association on which the Rights may from time to time be
listed, or to conform to usage. The Rights Certificates shall be sent on the
Commencement Date by or on behalf of Cygnet to holders of Company Common Stock
as of the Rights Record Date by first class, insured, postage pre-paid mail or
such other method of delivery as shall be satisfactory to Cygnet as soon as
practicable after satisfaction of the conditions to the Rights Offering set
forth in Section 2.11.
2.3 No Fractional Rights. The Company shall not issue fractions of
Rights or issue Right Certificates which evidence fractional Rights. Instead, in
the event that the number of shares of Company Common Stock held by any Record
Holder as of the Rights Record Date shall not be divisible by four (4), the
number of Rights to be issued to such holder shall be rounded upward to the
nearest whole Right. Record Holders will be instructed to allocate the Rights
among beneficial owners for whom the Record Holders hold such Rights by rounding
upward or downward to the nearest whole Right.
2.4 Trading Market for Rights. Cygnet shall be obligated to
utilize all reasonable efforts to cause the Rights to be tradable on an
established securities market for the entire period during which the Rights may
be exercised. To the extent that the assistance of the Company is required or is
requested by Cygnet in this regard, such assistance shall be furnished by the
Company.
2.5 Agents. Cygnet shall be obligated to engage an agent (the
"Escrow Agent") to establish an account (the "Escrow Account") in which the
Subscription Price payable upon the exercise of the Rights, the
Over-Subscription Election, and the Standby Purchase Obligation, except as
provided in Section 2.9, would be deposited pending the Closing Date. Each of
Cygnet and/or
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the Company shall be authorized to engage the Escrow Agent and one
or more other agents to assist it in connection with all additional procedural
matters relating to the issuance, delivery and exercise of the Rights.
2.6 Exercise of Rights. Except as provided in Section 2.9 below, a
Rights Holder shall be authorized to exercise his Rights in whole or in part at
any time on or after the Commencement Date and before the close of business
(5:00 p.m. Minnesota time) on the Expiration Date upon surrender of the Rights
Certificates evidencing such Rights, with the form of election to purchase duly
executed, to the Distribution Agent at the principal office of the Distribution
Agent, together with payment of the Subscription Price in lawful money of the
United States by certified check or money order payable to the Escrow Agent for
each share of Cygnet Common Stock as to which the Rights are exercised, on or
prior to the Expiration Date. Notwithstanding anything to the contrary herein,
the Company or Cygnet may agree to allow certain guaranteed delivery procedures
in connection with exercises of the Rights and related Over-Subscription
Elections, whereby if a notice of guaranteed delivery is deposited with the
Distribution Agent by close of business on the Expiration Date, subscribers may
subsequently deposit executed Rights Certificates and subscription monies in
accordance with such procedures.
2.7 Recordkeeping. Following the Commencement Date, Cygnet shall
keep or cause to be kept, at its principal office or at the office of the
Transfer Agent for the Cygnet Common Stock, books for registration and transfer
or other assignment of the Rights Certificates issued hereunder. Such books
shall reflect the names and addresses of the Rights Holders and the number of
Rights evidenced on its face by each of the Rights Certificates and the date of
each of the Rights Certificates.
2.8 Over-Subscription Election. The terms governing the issuance
of Rights shall authorize each holder of Rights (a "Rights Holder") who elects
to exercise all of his Rights to elect to purchase an additional number of
shares of Cygnet Common Stock up to the number of shares of Cygnet Common Stock
purchased upon exercise of such holder's Rights. Exercise of such an
Over-Subscription Election by a Rights Holder shall enable such holder to
purchase additional shares of Cygnet Common Stock in connection with the Rights
Offering in the event that fewer than all of the Offered Shares are purchased.
If the number of shares elected for purchase pursuant to all Over-Subscription
Elections by Rights Holders shall exceed the excess of (a) the number of Offered
Shares over (b) the number of shares purchased pursuant to the terms of the
Rights Offering excluding shares of Cygnet Common Stock designated for purchase
pursuant to any Over-Subscription Election (such excess hereafter referred to as
the "Unpurchased Allotment"), each holder who makes an Over-Subscription
Election shall be authorized to purchase a pro rata portion of the Unpurchased
Allotment as described in the Escrow Agreement. Each Rights Certificate shall
contain a form of Over-Subscription Election incorporated therein. Except as
provided in Section 2.9 below and except in accordance with any guaranteed
delivery procedures as described in Section 2.6 above, a Rights Holder shall be
authorized to exercise the Over-Subscription Election concurrently with the
exercise of the related Rights by duly executing the form of Over-Subscription
Election thereon, together with payment in full of the Subscription Price in
lawful money of the United States by certified check or money order payable to
the Escrow Agent for all shares of Cygnet Common Stock subject to such election,
on or prior to the Expiration Date.
2.9 Xxxxxx Exercises. Notwithstanding anything to the contrary
herein, Xxxxxx and his Affiliates may validly exercise their Rights (including
any Rights purchased by Xxxxxx or his Affiliates) and the Over-Subscription
Elections related thereto, by surrender of their Rights Certificates with the
form of election to purchase and, if applicable, the form of Over- Subscription
Election thereon duly executed to the Distribution Agent or Cygnet, together
with payment of the Subscription Price therefor in accordance with the next
sentence below concurrently with the satisfaction of the
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Standby Purchase Obligation as provided in Section 3.2, on or prior to the
Closing Date. Xxxxxx and his Affiliates may pay all or any portion of the monies
required to exercise their Rights, related Over-Subscription Elections and
Standby Purchase Obligation (the "Xxxxxx Payment Obligation") directly to
Cygnet, including, at their election, by delivery of the Verde Note or an
assignment of any portion thereof, and such delivery shall be deemed to satisfy
the Xxxxxx Payment Obligation in the full face amount of the Verde Note or
assigned portion thereof.
2.10 Deposit of Subscription Funds. Cygnet shall require the
Distribution Agent to deposit all subscription funds into the Escrow Account
within one Business Day of receipt thereof. In the event that the Closing Date
does not occur within the time period provided in the Escrow Agreement, the
Escrow Agent shall return all Escrowed Subscription Funds to the exercising
Rights Holders, without interest.
2.11 Conditions to the Rights Offering. The obligation of the
Company and Cygnet to consummate the transactions contemplated in this Article
Two are subject to the satisfaction or waiver on or prior to the Commencement
Date, of each of the following conditions:
a. The stockholders of the Company shall have approved
the Split-up Proposal.
b. The Company's Board of Directors shall not have
exercised its right in its sole discretion to abandon the Split-Up Proposal.
c. The Rights and Cygnet Common Stock shall have been
approved for listing on Nasdaq or on such other trading exchange or electronic
medium as is acceptable to the Boards of Directors of the Company and Cygnet,
subject to official notice of issuance.
d. The Cygnet Registration Statement shall have been
filed with the Securities and Exchange Commission and shall have become
effective with no stop order being in effect with respect thereto.
e. The Company shall have received the opinion by an
independent third party engaged by the Company customarily furnishing opinions
of a similar nature, opining as to the fairness to the Company's shareholders of
certain aspects of the Split-up and such opinion shall be in full force and
effect.
f. The Company shall have received the opinion of
Willamette Management Associates as to the Net Appraised Value of the Third
Party Dealer Assets, the fair market value of the Rights, and the fair market
value of the Cygnet Preferred Stock and such opinion shall be in full force and
effect.
g. The Required Agreements shall have been validly
executed and delivered and shall be in full force and effect.
h. All authorizations, consents, approvals, waivers and
clearances of all federal, state, local and foreign governmental agencies and
all other persons required therefor shall have been obtained and shall be in
full force and effect, without any conditions being imposed that would have a
material adverse effect on the Company or Cygnet.
i. No Action by any governmental authority or other
person shall have been instituted or threatened which questions the validity or
legality of the Rights Offering or the Split-up.
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j. All legal and regulatory issues relating to the
Rights Offering and the Split-up shall have been resolved to the satisfaction
of the Boards of Directors of the Company and Cygnet.
ARTICLE THREE
ISSUANCE OF CYGNET STOCK AND WARRANTS
3.1 Payment from Escrow Account. Provided that the Company's Board
of Directors does not exercise its right in its sole discretion to abandon the
Split-Up Proposal and all other conditions thereto are satisfied or waived, not
later than the date following the Expiration Date that is notified to the Escrow
Agent by the Company upon at least three (3) Business Day's notice as the
closing date for the Rights Offering unless the Escrow Agent shall accept a
shorter period (the "Closing Date"), the Escrow Agent shall be required,
pursuant to and on conditions stated in the Escrow Agreement, to deliver or
cause to be delivered to Cygnet the Escrowed Subscription Funds. Cygnet shall
promptly thereafter requisition Cygnet's transfer agent to deliver certificates
evidencing ownership of the Cygnet Company Stock to all purchasers of Cygnet
Common Stock pursuant to the Rights Offering.
3.2 Standby Purchase. If fewer than seventy-five percent (75%) of
the Offered Shares shall have been subscribed for in connection with the Rights
Offering (including any Offered Shares subscribed for pursuant to
Over-Subscription Elections), Xxxxxx shall be required to purchase, not later
than the Closing Date, such number of shares of Cygnet Common Stock as shall be
required to result in the aggregate purchase of seventy-five percent (75%) of
the Offered Shares (the "Standby Purchase Obligation"). The subscription price
per share for the shares of Cygnet Common Stock required to be purchased by
Xxxxxx pursuant to the Standby Purchase Obligation shall be identical to the
Subscription Price per share of Cygnet Common Stock payable in connection with
the Rights Offering and shall be payable directly to Cygnet pursuant to Section
2.9 hereof. Xxxxxx'x Standby Purchase Obligation may be satisfied by any
Affiliate of Xxxxxx. The Standby Purchase Obligation shall be governed by a
Rights Exercise and Standby Purchase Agreement in substantially the form
attached hereto as Exhibit B.
3.3 Xxxxxx Warrants. On the Closing Date, Cygnet shall, in
consideration for the obligation incurred by Xxxxxx pursuant to Section 3.2,
grant to Xxxxxx warrants to acquire Cygnet Common Stock ("Xxxxxx Warrants"),
entitling Xxxxxx to purchase, at any time during the period commencing on the
Closing Date and ending five (5) years following the Closing Date, up to 500,000
shares of Cygnet Common Stock at an exercise price per share equal to
one-hundred twenty percent (120%) of the Subscription Price per share of Cygnet
Common Stock payable under the Rights Offering. Notwithstanding the foregoing,
the Xxxxxx Warrants shall be delivered to Xxxxxx only if, on the Closing Date,
Xxxxxx has fully satisfied his Standby Purchase Obligation pursuant to Section
3.2. Cygnet shall enter into a warrant agreement relating to the Xxxxxx Warrants
either with Xxxxxx or, at his request, with a warrant agent acceptable to Cygnet
and Xxxxxx, and shall agree to register the Cygnet Common Stock issuable upon
exercise of the Xxxxxx Warrants pursuant to the Securities Act on terms mutually
acceptable to Cygnet and Xxxxxx but no such registration shall be required prior
to one year following the Closing Date.
3.4 Additional Stock and Warrant Issuances. Provided that the
Board of Directors of the Company has not exercised its right to abandon the
Split-Up Proposal and all other conditions thereto have been satisfied or
waived, and provided that at least seventy-five percent (75%) of the Offered
Shares shall have been purchased in accordance with the Rights Offering and the
Standby Purchase Obligation, on the Closing Date:
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x. Xxxxxx shall be authorized to purchase from Cygnet up
to an additional 714,285 shares of Cygnet Common Stock ("Xxxxxx Additional
Shares") at a price per share equal to the Subscription Price. Xxxxxx must give
notice to Cygnet and the Transfer Agent of his election to purchase all or any
portion of the Xxxxxx Additional Shares no later than one (1) Business Day prior
to the Closing Date. The subscription price payable upon purchase of the Xxxxxx
Additional Shares must be paid not later than the Closing Date directly to
Cygnet.
b. Directors and employees of the Company and/or the
Company Subsidiaries who will become directors or employees of Cygnet or any of
its subsidiaries as of the Closing Date (other than Xxxxxx) shall be authorized
to purchase from Cygnet an aggregate of 214,285 shares of Cygnet Common Stock
(the "Employee Shares") at a price equal to the Subscription Price. Each such
director or employee who elects to purchase shares of Cygnet Common Stock
pursuant to this Section 3.4.b (an "Electing Employee") must give notice (a
"Purchase Notice") to Cygnet and the Transfer Agent of his election so to
purchase and of the number of shares he elects to purchase not later than three
(3) Business Days prior to the Closing Date. If all Purchase Notices received
evidence subscription to the Employee Shares in excess of the number of Employee
Shares available for purchase each Electing Employee will be authorized to
purchase a pro rata portion of the Employee Shares determined by calculating the
product of (a) a fraction, the numerator of which is equal to the number of
Employee Shares as to which the Purchase Notice of the Electing Employee is
given and the denominator of which is the total number of Employee Shares as to
which all Purchase Notices are given and (b) 214,285. Cygnet will give notice to
each Electing Employee no later than one (1) Business Day prior to the Closing
Date of the number of Employee Shares that each Electing Employee may purchase
(with a copy to the Transfer Agent). The subscription price payable upon
purchase of the Employee Shares must be paid not later than the Closing Date
directly to Cygnet.
c. Cygnet shall be authorized to issue to one or more
lenders furnishing Cygnet up to $5 million of indebtedness, as additional
consideration for the furnishing of such indebtedness, warrants to purchase up
to 115,000 shares of Cygnet Common Stock ("Lender Warrants") at an exercise
price per share equal to one hundred twenty percent (120%) of the Subscription
Price per share of Cygnet Common Stock payable under the Rights Offering and on
such other terms and conditions as shall be acceptable to Cygnet, and to enter
into a registration rights agreement with respect to the resale of the Cygnet
Common Stock underlying the Lender Warrants.
3.5 Availability of Cygnet Common Stock; Restriction on Issuance
of Additional Cygnet Common Stock. Cygnet covenants that it shall cause to be
reserved and kept available out of its authorized and unissued shares of Cygnet
Common Stock the number of shares of Cygnet Common Stock that will be sufficient
to permit the exercise in full of all Rights issued pursuant to the Rights
Offering, as well as the issuance of (i) the Cygnet Common Stock underlying the
Xxxxxx Warrants and the Lender Warrants, as they may be adjusted from time to
time, (ii) the Xxxxxx Additional Shares, and (iii) the Employee Shares. Cygnet
also covenants and agrees that prior to the Closing Date it will not agree or
bind itself to issue any additional shares of Cygnet Common Stock without the
prior written approval of the Company.
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ARTICLE FOUR
ACQUISITION OF ASSETS FROM COMPANY AND SUBSIDIARIES,
ASSUMPTION OF LIABILITIES
4.1 Transfer of Assets. Upon the terms and subject to the
conditions contained herein, the Company shall, on the Closing Date, transfer
(or cause to be transferred from one or more Company Transferor Subsidiaries) to
Cygnet or one or more Cygnet Subsidiaries (as designated in writing by Cygnet)
the Third Party Dealer Assets, including but not limited to the assets described
in Schedule 4.1 hereof. The Third Party Dealer Assets shall also include all of
the assets to be transferred pursuant to Article Six hereof relating to FMAC and
Reliance matters, and all of the assets described in Sections 4.3, 4.4, and 4.5
hereof.
4.2 Assumption of Liabilities. Upon the terms and subject to the
conditions contained herein, Cygnet shall, on the Closing Date, assume or cause
to be assumed by one or more Cygnet Subsidiaries (as designated in writing by
Cygnet) from the Company or any Company Subsidiary those certain liabilities
described in Schedule 4.2 (the "Third Party Dealer Liabilities"). The Third
Party Dealer Liabilities shall also include all of the liabilities to be
transferred pursuant to Article Six hereof relating to FMAC and Reliance
matters, Article Eight hereof relating to employee matters, and all of the
liabilities described in Sections 4.3, 4.4, and 4.5 hereof. Nothing in this
Agreement is intended to preclude the Company from transferring to any Company
Subsidiary any Third Party Dealer Liabilities or to preclude such Company
Subsidiary from assuming any such Third Party Dealer Liabilities preliminary to
the assumption of such liabilities by Cygnet or a Cygnet Subsidiary pursuant to
the first two sentences of this Section 4.2.
4.3 Corporate Headquarters Lease. On the Closing Date, Cygnet
shall acquire all of the Company's right, title and interest in the real
property listed on Schedule 4.3. Specifically, the Company is the lessee under
the Corporate Headquarters Lease and occupies the __nd, __th and 11th floors of
the Corporate Headquarters Building. Subject to the terms of the Corporate
Headquarters Lease, Cygnet shall, on the Closing Date, sublease from the Company
(the "Headquarters Sublease"), or enter into a direct lease with Landlord for,
the 11th floor of the Corporate Headquarters Building. The terms of the
Headquarters Sublease, if any, including the remaining term and rental rate,
shall be substantially identical to both the monetary and non-monetary terms and
conditions of the Corporate Headquarters Lease, except that the Company shall be
named as sub-lessor and Cygnet shall be named as sub-lessee. Cygnet shall use
its best efforts to obtain from the Landlord an agreement releasing the Company
from any and all liability with respect to the 11th Floor Space under the
Corporate Headquarters Lease. To the extent the Landlord does not agree to
release the Company from its obligations under such lease, Cygnet agrees that it
will be primarily liable to the Landlord for the obligations accruing with
respect to the 11th floor under the Corporate Headquarters Lease from and after
the Closing Date until termination of such lease and agrees to hold the Company
harmless from any liability arising from any actions or inactions of Cygnet.
4.4 Personal Property to Be Acquired By Cygnet. On the Closing
Date, and subject to the terms of any applicable equipment lease, Cygnet shall
sublease from the Company, or enter into a direct lease from the applicable
equipment lessor with respect to, the personal property set forth on Schedule
4.4 hereto. The terms of any sublease entered into under this subsection with
the Company, including any remaining term and rental rate, shall be
substantially identical to both the monetary and non-monetary terms and
conditions of the applicable lease with such equipment lessor, except that the
Company shall be named as sub- lessor and Cygnet shall be named as sub-lessee.
Cygnet shall use its best efforts to obtain from each lessor an agreement
releasing the Company from any and all liability under the applicable lease. To
the extent that any lessor does
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not agree to release the Company from its obligations under a lease, Cygnet
agrees that it will be primarily liable to the lessor for the obligations
accruing under such lease from and after the Closing Date until the termination
of such lease and agrees to hold the Company harmless from any liability arising
from any actions or inactions of Cygnet.
4.5 Licenses and Other Executory Contracts. On the Closing Date,
and subject to the terms of any applicable third party agreement, the Company
shall assign the licenses and other executory contracts ("Third Party
Agreements") set forth on Schedule 4.5 to Cygnet. Cygnet shall use its best
efforts to obtain from the applicable third parties to such Third Party
Agreements an agreement releasing the Company from any and all liability under
such Third Party Agreements. To the extent that any third party does not agree
to release the Company from its obligations under any Third Party Agreement,
Cygnet agrees that it shall be primarily liable for the obligations accruing
under the applicable Third Party Agreement from and after the Closing Date until
termination of such agreement and agrees to hold the Company harmless from any
liability arising from any actions or inactions of Cygnet.
4.6 Consideration.
a. Consideration for Transferred Assets. In exchange for
the transfer of the Third Party Dealer Assets to Cygnet pursuant to this Article
Four and the assumption by Cygnet of the Third Party Dealer Liabilities pursuant
to this Article Four, Cygnet shall transfer to the Company or the applicable
Company Transferor Subsidiaries (as designated in writing by the Company on or
before the Closing Date) consideration in an aggregate amount equal to the
greater of the Net Appraised Value and the Net Book Value of the Third Party
Dealer Assets. The Net Appraised Value shall be determined based on an interim
appraisal as of June 30, 1998, which shall be updated to the Closing Date as
soon as practicable thereafter. The Net Book Value shall be determined based on
the Preliminary Third Party Asset Balance Sheet and shall be updated as of the
Closing Date as soon as practicable thereafter based on the Final Third Party
Asset Balance Sheet. Consideration shall be payable by Cygnet to the Company
based on the principles outlined above. As soon as practicable following the
Closing Date, the parties shall finalize the calculation of the Net Appraised
Value and the Net Book Value and of the consideration payable pursuant to this
Article Four. Cygnet shall pay any additional consideration required to be paid
and the Company shall reimburse to Cygnet any consideration paid by Cygnet in
excess of the consideration required. Except to the extent prohibited by law or
as otherwise mutually agreed by the Company and Cygnet, (1) if the Net Appraised
Value is paid, it shall be allocated among each of the Third Party Dealer Assets
pro rata in accordance with their respective appraised values and (2) if the Net
Book Value is paid, it shall be allocated among each of the Third Party Dealer
Assets: (i) first, among all of the Third Party Dealer Assets to the extent of
their respective appraised values and (ii) the balance, among each of the Third
Party Dealer Assets with respect to which the book value exceeded the appraised
value, pro rata in accordance with their respective book values of such assets.
In each case, liabilities assumed by Cygnet (other than those liabilities
relating to a specific Third Party Dealer Asset) shall be allocated among each
of the Third Party Dealer Assets in accordance with their respective appraised
values. With respect to such consideration, $40 million shall be paid in the
form of Cygnet Preferred Stock and the balance shall be payable in the form of
cash or a combination of cash and surrender of the Verde Note or any portion
thereof assigned to Cygnet. If the Company designates that all or a portion of
the consideration for the Third Party Dealer Assets be paid to one or more
Company Transferor Subsidiaries, the Company shall designate in writing to
Cygnet on or before the Closing Date the amount and medium of consideration
payable by Cygnet to each such Company Transferor Subsidiary. The Cygnet
Preferred Stock shall be issued pursuant to a Certificate of Designation in
substantially the form of Exhibit C hereto.
b. Private Sale of Cygnet Preferred Stock. The Company
represents and warrants that it is acquiring the Cygnet Preferred Stock for
investment and not with a view to the distribution thereof. Each holder of the
Cygnet Preferred Stock agrees that prior to making any
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disposition or transfer of the Cygnet Preferred Stock or shares of Cygnet Common
Stock issuable upon exercise of the Cygnet Preferred Stock ("Shares"), unless a
registration statement under the Securities Act is in effect with regard thereto
and the disposition may be effected in accordance therewith and with applicable
state securities laws, the holder shall give written notice to Cygnet describing
briefly the manner in which any such proposed disposition or transfer is to be
made; and no such disposition shall be made except pursuant to an exemption from
the registration requirements of all applicable federal and state securities
laws, which exemption shall be proved to the satisfaction of Cygnet and its
counsel prior to the effectuation of any such disposition or transfer.
Each certificate evidencing the Cygnet Preferred Stock and
Shares issuable upon exercise of the Cygnet Preferred Stock shall bear a legend
in substantially the following form, until such time as such Cygnet Preferred
Stock or such Shares have been sold pursuant to a registration statement or
unless, in the opinion of legal counsel to Cygnet, such legend is not required
in order to establish compliance with any provisions of applicable security
laws:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACTS OF 1933 OR ANY STATE
SECURITIES LAWS AND MAY NOT BE SOLD, EXCHANGED, HYPOTHECATED
OR OTHERWISE TRANSFERRED IN ANY MANNER EXCEPT IN COMPLIANCE
WITH SECTION ____ OF THE CAPITALIZATION AGREEMENT DATED AS OF
___________, 1998 BETWEEN UGLY DUCKLING CORPORATION AND CYGNET
FINANCIAL CORPORATION, AS THE SAME MAY BE AMENDED FROM TIME TO
TIME.
c. Registration Rights. The Company and Cygnet agrees to
negotiate and enter into a registration rights agreement with respect to
registration of the Shares underlying the Cygnet Preferred Stock under the
Securities Act for resale following any conversion of the Cygnet Preferred
Stock. Such registration would be effected at the expense of Cygnet at the
request of the Company upon the terms and conditions specified in such
registration rights agreement.
4.7 Company Conveyances at Closing. To effect the transfers and
related assumptions referred to in Sections 4.1 and 4.2, the Company and/or each
Company Transferor Subsidiary, as the case may be, shall execute or cause to be
executed and deliver or cause to be delivered (a) one or more bills of sale,
conveying in the aggregate all of the Third Party Dealer Assets free and clear
of all Encumbrances except as otherwise set forth in Schedule 4.2, (b) all
assignable Permits and any other third party consents required for the valid
transfer and operation of the Third Party Dealer Assets as contemplated by this
Agreement; and (c) such other instruments as shall be requested by Cygnet to
vest in Cygnet or the Cygnet Subsidiaries title in and to the Third Party Dealer
Assets in accordance with the provisions hereof, including estoppel certificates
and subordination agreements.
[4.8 No Company Representations. Cygnet and the Cygnet Subsidiaries
understand and agree that neither the Company nor any Company Transferor
Subsidiary is, in this Agreement or in any other agreement or document,
representing or warranting to Cygnet or to the Cygnet Subsidiaries in any way as
to the Third Party Dealer Assets, the Third Party Dealer Business or the Third
Party Dealer Liabilities or as to any consents or approvals required in
connection with the consummation of the transactions contemplated by Article
Four of this Agreement, it being agreed and understood that Cygnet and the
Cygnet Subsidiaries shall take all of the Third Party Dealer Assets "as is,
where is" and that, except as otherwise expressly provided in this Agreement,
Cygnet and the Cygnet Subsidiaries shall bear the economic and legal risk that
conveyances of the Third
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Party Dealer Assets shall prove to be insufficient or that the title of the
Company or any Company Transferor Subsidiary shall be other than good and
marketable and free from Encumbrances.]
4.9 Covenants of Company and Cygnet. The Company and Cygnet each
covenant with the other that, upon the terms and subject to the conditions
contained herein, each of the parties hereto agrees, both before and after the
Closing Date, (a) to use all reasonable efforts to take, or cause to be taken,
all actions and to do, or cause to be done, all things necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, (b) to execute any documents, instruments or conveyances of any kind
which may be reasonably necessary or advisable to carry out any of the
transactions contemplated hereunder, and (c) to cooperate with each other in
connection with the foregoing.
4.10. Conditions to Company's Obligations. The obligations of the
Company to consummate the transactions contemplated hereby are subject to the
satisfaction or waiver on or prior to the Closing Date, of each of the following
conditions:
a. At least seventy-five percent (75%) of the Offered
Shares shall have been purchased pursuant to the Rights Offering and the Standby
Purchase Obligation.
b. The Company's Board of Directors shall not have
exercised its right in its sole discretion to abandon the Split-Up Proposal.
c. No Action by any governmental authority or other
person shall have been instituted or threatened which questions the validity or
legality of the transactions contemplated hereby and which could reasonably be
expected to materially damage the Company.
d. There shall not be any statute, rule or regulation
that makes the transfer of the Third Party Dealer Assets contemplated hereby
illegal or otherwise prohibited.
e. Each of the Company Transferor Subsidiaries (to the
extent applicable) shall have received the consent of its Board of Directors to
consummate the transactions, subject to the terms and conditions set forth
herein.
f. The Company shall have received the opinion of an
independent third party engaged by the Company customarily furnishing opinions
of a similar nature, opining as to the fairness to the Company's shareholders of
certain aspects of the Split-up and such opinion shall be in full force and
effect.
g. The Company shall have received the opinion of
Willamette Management Associates as to the Net Appraised Value of the Third
Party Dealer Assets, the fair market value of the Rights, and the fair market
value of the Cygnet Preferred Stock and such opinion shall be in full force and
effect.
h. The Required Agreements shall have been validly
executed and delivered and shall be in full force and effect.
i. All authorizations, consents, approvals, waivers and
clearances of all federal, state, local and foreign governmental agencies and
all other persons required therefor shall have been obtained and shall be in
full force and effect, without any conditions being imposed that would have a
material adverse effect on the Company.
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j. All legal and regulatory issues relating to the
Rights Offering and the Split-up shall have been resolved to the satisfaction
of the Board of Directors of the Company.
k. The Company shall have such financing facilities and
capital resources available to it that shall, in the judgment of the Board of
Directors of the Company, be sufficient to allow the continuing operations of
the Company without material disruption.
4.11 Conditions to Cygnet's Obligations. The obligations of Cygnet
to consummate the transactions provided for hereby are subject to the
satisfaction or waiver, on or prior to the Closing Date, of each of the
following conditions:
a. The Cygnet Common Stock shall have been approved for
listing on the Nasdaq or on such other trading exchange or electronic medium as
is acceptable to Cygnet, subject to official notice of issuance.
b. The Cygnet Registration Statement shall have been
filed with the Securities and Exchange Commission and shall have become
effective with no stop order being in effect with respect thereto.
c. All Permits and waivers necessary to the consummation
of the transactions contemplated hereby and for the operation of the Third Party
Dealer Business shall have been obtained, including, without limitation, all
required third party consents.
d. Each of Cygnet and the Cygnet Subsidiaries (to the
extent applicable) shall have received the consent of its Board of Directors to
consummate the transactions, subject to the terms and conditions set forth
herein.
e. No Action by any governmental authority or other
person shall have been instituted or threatened which questions the validity or
legality of the transactions contemplated hereby and which could reasonably be
expected to materially damage Cygnet or the Cygnet Subsidiaries if the
transactions contemplated hereby are consummated, including without limitation
any Material Adverse Effect on the right or ability of Cygnet and the Cygnet
Subsidiaries to own, operate, possess or transfer the Third Party Dealer Assets
after the Closing Date. There shall not be any statute, rule or regulation that
makes the purchase and sale of the Third Party Dealer Assets contemplated hereby
illegal or otherwise prohibited.
f. The Company shall have executed and delivered each of
documents described in this Article Four so as to effect the transfer and
assignment to Cygnet (and the Cygnet Subsidiaries to the extent applicable) of
all right, title and interest in and to the Third Party Dealer Assets.
g. All authorizations, consents, approvals, waivers and
clearances of all federal, state, local and foreign governmental agencies and
all other persons required therefor shall have been obtained and shall be in
full force and effect, without any conditions being imposed that would have a
material adverse effect on Cygnet.
h. All legal and regulatory issues relating to the
Rights Offering and the Split-up shall have been resolved to the satisfaction
of the Board of Directors of Cygnet.
i. Cygnet shall have such financing facilities and
capital resources available to it that shall, in the judgment of Cygnet's Board
of Directors, be sufficient to allow the continuing operations of Cygnet without
material disruption.
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4.12 Conduct by Company Pending Closing of Third Party Dealer Asset
Transfers. Following the date of this Agreement, the Company shall not sell,
transfer, or otherwise dispose of any of the Third Party Dealer Assets outside
the ordinary course of business of the Third Party Dealer Business without
furnishing written notice thereof to Cygnet. In the event of any such sale,
appropriate modification shall be made to Schedule 4.1 and other applicable
schedules hereto and the consideration payable by Cygnet pursuant to this
Agreement.
4.13 Interim Transactions. Prior to the Closing Date, Cygnet may
enter into one or more transactions identified by the Company as transactions to
be effected by or assigned to Cygnet on or before the Closing Date, including,
without limitation, (1) acquisitions of automobile retail installment sale
contracts, or interests therein, from any third party; (2) acquisitions of
assets from third parties to be utilized in the servicing of such contracts; (3)
purchases of certain interests or rights in bank participations secured by
automobile retail installment sale contracts; (4) agreements to service or
assume the servicing obligations regarding portfolios of automobile retail
installment sales contracts; and (5) the making of loans, obtaining warrants or
investment rights in any third party. Certain contemplated transactions are
identified on Schedule 4.13 attached hereto and shall be updated as of the
Closing Date (the "Interim Transactions"). The assets and rights and related
liabilities acquired pursuant to the Interim Transactions are referred to as
"Interim Assets." If any such Interim Transactions are effected or Cygnet
otherwise has operations prior to the Closing Date, on the business day
immediately preceding the Closing Date, Cygnet will distribute to the Company
all earnings accrued to such date ("Interim Earnings"). In addition, Cygnet will
pay to the Company the excess, if any, of the aggregate appraised value of the
Interim Assets, as of the Effective Date, over the aggregate book value of the
Interim Assets (the "Interim Consideration"). The Company may agree to other
terms with respect to how Interim Transactions will be structured or treated if
the Company believes that such structure or treatment results in adequate
consideration to the Company at the time of the Split-up with respect to Interim
Assets.
ARTICLE FIVE
TRANSITIONAL MATTERS
5.1 General. The Company and Cygnet acknowledge and agree that
during the Transition Period, Cygnet shall require the use of certain premises,
equipment, services, licenses, software and data processing which are currently
owned or leased by the Company and its subsidiaries, and which shall be retained
by the Company and its subsidiaries following the Closing Date. The Company and
Cygnet also anticipate that the Company shall require the consultation and
assistance services of several former employees who will become, as of the
Closing Date, employees of Cygnet. Further, during the Transition Period, the
Company and its agents shall provide Cygnet and its agents the physical access
to and availability to utilize services necessary for Cygnet to acquire or
develop, as applicable, suitable or replacement premises, equipment, services,
licenses, software and data processing prior to the Cutoff Date as set forth in
this Article Five. Neither the Company nor Cygnet shall have any further
obligation to render the services, or provide access to the property referenced
herein from and after the Cutoff Date unless the Company and Cygnet so mutually
agree or contract.
5.2 Voice and Data Transmission System. During the Transition
Period, Cygnet shall be permitted to utilize the Voice and Data Transmission
System for ordinary business purposes. Cygnet will be responsible for (a)
training its employees to use the Voice and Data Transmission System, and (b)
ensuring that its employees utilize the Voice and Data Transmission System only
for ordinary business purposes. The Company shall incur no liability or
obligation to Cygnet due to, or related to, disruptions in service of the Voice
and Data Transmission System or any incompatibility with the Voice and Data
Transmission System of any present or future operating
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system of Cygnet. Cygnet shall pay to the Company a fee for use of the Voice and
Data Transmission System as provided in Schedule 5.
5.3 Computing Services, Accounting Software and Other Related
Functions. During the Transition Period, the Company shall provide Cygnet with
certain computing and accounting services. Cygnet shall have access to these
services in accordance with the following terms:
a. Accounting Software. [New License?] [Share License?]
b. Certain Proprietary Software of the Company. The
Company shall license to Cygnet the software listed on Schedule 5.3(b) attached
hereto. On the Cutoff Date, any license created hereunder in favor of Cygnet
shall terminate unless renewed or extended in writing by the parties hereto.
c. Computer Information Services. The Company shall
provide computer personnel and other related support as reasonably requested by
Cygnet and only to the extent that the provision of such services will not
materially impact upon the operations of the Company.
d. Fees. Cygnet shall pay to the Company the fees
specified in Schedule 5 for the services and licenses described in this Section
5.3.
5.4 Consultation Services During the Transition Period, the
Company may need to obtain consultation and advice from Xxxxxx X. Xxxxxx, Xxxx
X. Xxxxxxx and certain other former Company employees and Cygnet may need to
obtain consultation and advice from Xxxxxx X. Xxxxxxx, Xxxxx Xxxxxxxx and
certain other Company employees (all such employees of the Company or Cygnet, as
the case may be, the "Consultants") with respect to various matters. Each of
Cygnet and the Company agrees to make the Consultants available to the other on
a reasonable basis and on the following terms:
a. Description of Services to Be Rendered. Each of the
Consultants may be requested by the Company or Cygnet, as the case may be, to
consult and provide assistance to the Company or Cygnet, as the case may be, and
its employees with respect to the matters included in their job descriptions (i)
in the case of Cygnet employees, while each such Consultant was employed by the
Company and (ii) in the case of Company employees, as employees of the Company.
b. Time Commitment. The Consultants shall not be
required to provide more than __ hours of consultation during any one
[week][month] period. The Consultants shall not be required to provide the
consultation or assistance services requested in the event that such services
would materially affect such Consultant's employment obligations to Cygnet or
the Company, as the case may be.
c. Compensation. As compensation for the services to be
rendered hereunder by the Consultants, the Company or Cygnet, as the case may
be, shall pay the other a fee calculated as specified in Schedule 5 hereto. The
Company or Cygnet, as the case may be, shall also promptly reimburse [the other
or each Consultant] for any and all expenses related to services rendered
hereunder.
d. Independence of Consultants. For all purposes of this
Agreement, each Consultant shall be an independent contractor and expressly not
an employee of the Company or Cygnet, as the case may be. Unless authorized
separately in writing by the Company or Cygnet, as the case may be, none of the
Consultants shall have any authority to act for, represent or bind
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the Company or Cygnet, as the case may be, and shall not otherwise be deemed an
agent of the Company or Cygnet, as the case may be.
e. Access to Records and Confidentiality. The parties
hereto and the Consultants recognize that the Company or Cygnet, as the case may
be, may, during the Transition Period, be required to provide to the Consultants
certain confidential material or records. The Company or Cygnet, as the case may
be, agrees to take and to cause the Consultants to take appropriate precautions
and measures to ensure that such information remains confidential.
5.5 Not a Joint Venture. Cygnet and the Company acknowledge and
agree that nothing in this Article Five or this Agreement (a) shall constitute
or create among the parties a partnership, joint venture, association,
syndicate, unincorporated business or other separate entity or (b) be deemed to
confer on any of them any express, implied or apparent authority to incur any
obligation or liability on behalf of the other party hereto.
5.6 Other Costs; Cooperation. The parties shall give each other
all reasonable cooperation during the Transition Period with a view to making
the transition of the Third Party Dealer Business to Cygnet as smooth as
possible and costs for any assistance or services rendered shall be allocated in
a reasonable manner as the parties shall mutually agree.
ARTICLE SIX
FMAC AND RELIANCE MATTERS
6.1 FMAC Rights and Obligations Generally. On the Closing Date,
all of the Company's right, title and interest in and to the assets, rights
(including, but not limited to, security interests, liens or other interests)
claims and remedies sold by, created or granted under or by (except cash
received by the Company prior to the Closing Date) and all obligations,
liabilities, responsibilities and duties of the Company (except the FMAC
Excluded Obligations), the agreements and documents entered into in connection
with the Chapter 11 reorganization of FMAC, including, but not limited to, the
agreements and documents listed on Schedule 6.1, shall be shall be assigned,
conveyed, transferred and delegated to Cygnet.
a. FMAC Servicing Platform. By way of illustration, and
not by limitation of the provisions of Section 6.1 hereof, the Company shall
assign, convey and transfer to Cygnet all assets, leases (real and personal) and
contracts in which the Company received an interest pursuant to the FMAC Plan,
including, but not limited to, those assets set forth in Exhibit B to the FMAC
Plan. Any such lease or contract shall, subject to the terms of any such lease
or contract, be assigned to Cygnet from the Company. To the extent the Company
is unable to assign its rights under any such lease or contract, the Company
shall enter into a sublease with Cygnet on substantially identical terms as such
related lease or contract except that the Company shall be named as sublessor
and Cygnet shall be named as sublessee. In connection with any such assignment,
Cygnet shall use its best efforts to obtain from the applicable lessor or other
third party an agreement releasing the Company from any further liability under
the applicable lease or contract, and in the event such release cannot be
obtained, Cygnet agrees to hold the Company harmless from, and indemnify the
Company against, any liability arising from any actions or inactions of Cygnet.
b. Pledge of Security For DIP Facility. Notwithstanding
that the Company will remain primarily liable to FMAC to perform any obligations
due and owing FMAC under the DIP Facility, from and after the Closing Date,
Cygnet hereby agrees to satisfy and fund any draw or
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request of monies made by FMAC under the DIP Facility. Cygnet agrees to
indemnify and hold the Company harmless from any failure of Cygnet to satisfy
the Company's obligations under the DIP Facility and, in the event the Company
is required to fund any draw request of FMAC, Cygnet hereby agrees to
immediately reimburse (the "DIP Reimbursement Obligation") the Company in an
amount equal to such advance. As security for Cygnet's DIP Reimbursement
Obligation and indemnity obligations hereunder, Cygnet shall grant to the
Company a security interest in all of Cygnet's rights and interests in and to
the assets set forth on Schedule 6.1.b. The Company and Cygnet each agree to
execute such security agreements or other documents and to file such financing
statements as are necessary or appropriate to make effective and perfect the
security interest contemplated in this Section 6.1.b.
c. Pledge of Security For Contract Purchaser Guaranty.
Notwithstanding that the Company will remain primarily liable to Contract
Purchaser to perform any obligations due and owing the Contract Purchaser under
the Owned Contract Purchase Agreement and Contract Purchaser Guaranty, from and
after the Closing Date, Cygnet hereby agrees to indemnify and hold the Company
harmless from any failure of Cygnet to satisfy the Company's obligations under
the Owned Contract Purchase Agreement and Contract Purchaser Guaranty and, in
the event the Company is required to pay to Contract Purchaser any amounts under
such documents, Cygnet hereby agrees to immediately reimburse (the "Contract
Purchaser Reimbursement Obligation") the Company in an amount equal to such
payment. As security for Cygnet's Contract Purchaser Reimbursement Obligation
and indemnity obligations hereunder, Cygnet shall grant to the Company a
security interest in all of Cygnet's rights and interests in and to the assets
set forth on Schedule 6.1.c. The Company and Cygnet each agree to execute such
security agreements or other documents and to file such financing statements as
are necessary or appropriate to make effective and perfect the security interest
contemplated in this Section 6.1.c.
d. Pledge of Security for Assignment Agreement.
Notwithstanding that the Company will remain primarily liable to FSA to pay the
amounts due and owing to FSA under that certain Contribution Sharing Agreement,
dated as of March 31, 1998, by and between the Company and FSA, Inc., from and
after the Closing Date, Cygnet hereby agrees to indemnify and hold the Company
harmless from any failure of Cygnet to satisfy the Company's obligations under
such agreement and, in the event the Company is required to pay to FSA any
amount under such agreement, Cygnet hereby agrees to immediately reimburse (the
"FSA Reimbursement Obligation") the Company in an amount equal to such payment.
As security for Cygnet's FSA Reimbursement Obligation and indemnity obligations
hereunder, Cygnet shall grant to the Company a security interest in all of
Cygnet's rights and interests in and to the assets set forth on Schedule 6.1.c.
The Company and Cygnet each agree to execute such security agreements or other
documents and to file such financing statements as are necessary or appropriate
to make effective and perfect the security interest contemplated in this Section
6.1.c.
e. Stock Option Shares. Pursuant to the FMAC Plan, at
the option of the Company and subject to certain conditions, the Company may
distribute the Stock Option Shares to FMAC or at the request of FMAC and
pursuant to its instructions directly to the unsecured creditors of FMAC, in
lieu of FMAC's right to receive all or a portion of distributions under the
Excess Collections Split (including both recoveries under the Excess Collections
Split from the Owned Contracts and the B Pieces) in cash. In the event that
Cygnet is then servicing the Owned Contracts and the Securitized Pools, Cygnet
agrees to advise the Company at least 20 days prior to the date upon which cash
distributions under the Excess Collections Split are likely to begin and to
provide the Company with an estimate as to the likely amount and timing of such
cash distributions. Cygnet further agrees to give the Company reasonable access
to Cygnet's books and records to allow the Company to verify such estimate of
the timing and amount of distributions, and to cooperate with the Company in
determining the amount and timing of the Company's issuance
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of Stock Option Shares. In the event the Company issues the Stock Option Shares,
Cygnet will thereafter pay over to the Company all of FMAC's share of the cash
distributions under the Excess Collections Split up to the Stock Option Value.
6.2 Reliance Generally. On the Closing Date, all of the Company's
right, title and interest in and to the assets, rights (including, but not
limited to, security interests, liens or other interests) and remedies sold by,
created or granted under or by (except cash received by the Company prior to the
Closing Date), and all obligations, responsibilities and duties of the Company
(except Retained Reliance Obligations) under the agreements and documents listed
on Schedule 6.2 and any and all assets, rights, claims and remedies arising from
or relating thereto shall be assigned, conveyed, delegated and transferred to
Cygnet.
a. Retained Reliance Obligations. The Company shall
retain its obligation under that certain Warrant Agreement dated February 9,
1998 between the Company and Reliance Acceptance Corporation ("Reliance") to
issue warrants to Reliance from time to time (the "Reliance Warrants"). The
Company shall use its best efforts to issue the Reliance Warrants at the request
of Cygnet from time to time when required, and Cygnet will pay to the Company an
amount of consideration upon each such issuance equal to the fair value of the
Reliance Warrants (as reasonably determined by the Company for financial
accounting purposes) on the date of issuance of the Reliance Warrants.
b. Break-Up Fee. On or about the Closing Date, the
Company shall transfer and delegate to, and Cygnet shall accept, all rights,
duties and responsibilities under the BreakUp Agreement. Cygnet agrees that if
its actions or inactions triggers an obligation to pay the Break-Up Fee, Cygnet
shall immediately make such payment on the Company's behalf. If the Break-Up Fee
becomes payable by Reliance for any reason, Cygnet shall be entitled to receive
the distribution of any Break-Up Fee.
c. Reliance Real Property Leases. Although not currently
contemplated, the Company possesses the ability to acquire interests in
additional real property leases should Reliance assume and assign such leases
through the plan confirmation process (the "Reliance Leases"). In the event the
Company acquires an interest by assignment of such Reliance Leases, subject to
the terms of such leases, the Reliance Leases shall be assigned by the Company
to Cygnet on or about the Closing Date. In the event the Company shall be unable
to assign its interest in any Reliance Lease, the Company shall sublease to
Cygnet the premises which are the subject of such leases (such subleases, the
"Reliance Subleases"). The terms of the Reliance Subleases shall be on
substantially identical terms as the Reliance Leases except that the Company
shall be named as sublessor and Cygnet named as sublessee.
ARTICLE SEVEN
TAX MATTERS
7.1 Definitions . As used in this Article Seven, the terms below
shall have the following meanings:
"Affiliate" shall mean any Person that directly or indirectly
controls, is under the control of, or is under common control with, the Person
in question. Except as otherwise provided in this Agreement, the term
"Affiliate" shall refer to Affiliates of a Person determined immediately after
the Asset Closing Date. Further, except as otherwise provided in this Agreement,
in no event shall Cygnet or any Affiliate of Cygnet be deemed to constitute an
Affiliate of the Company and,
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similarly, in no event shall the Company or any Affiliate of the Company be
deemed to constitute an Affiliate of Cygnet.
"Carryover" and "Carryback" shall mean any net operating loss,
net capital loss, excess tax credit, or other similar Tax item which may or must
be carried forward or back, respectively, from one Tax Period to another under
the Code or other applicable Laws.
"Company Group" shall mean the Company and its Affiliates.
"Company Tax Reduction" shall mean as defined at Section
7.11(b).
"Compromising Party" shall mean as defined at Section 7.20(b).
"Control" of a Person shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such Person, whether through ownership or voting securities, by
contract or otherwise.
"Cutoff Date" shall mean as defined at Section 7.7.
"Cygnet Carryback" shall mean as defined at Section 7.11(a).
"Cygnet Group" shall mean Cygnet and its Affiliates.
"Deemed Tax Reduction" shall mean as defined at Section
7.11(c).
"Group" shall mean each of the Company Group and the Cygnet
Group whenever no distinction is otherwise required between them.
"Indemnification Payment"shall mean as defined at Section
7.15.
"Indemnified Party" shall mean as defined at Section 7.15(a).
"Indemnifying Party" shall mean as defined at Section 7.15(a).
"IRS" shall mean the United States Internal Revenue Service.
"Joint Contest" shall mean any Tax Contest seeking a
redetermination of Taxes which involves or could involve one or more members of
both the Company Group and the Cygnet Group.
"Law" shall mean the law of any governmental entity or
political subdivision thereof, other than the Code, relating to any Tax.
"Liable Party" shall mean as defined at Section 7.26(c).
"Non-Compromising Party" shall mean as defined at Section
7.20(b).
"Person" shall mean any individual and any partnership, joint
venture, corporation, limited liability company, trust, unincorporated
organization or other business entity formed or operating under United States or
foreign law.
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"Pre-Closing Period" shall mean any Tax Period ending on or
before the Asset Closing Date, and, in the case of any Tax Period that begins
before and ends after the Asset Closing Date, the portion of such Tax Period
ending on the Asset Closing Date.
"Preparing Party" shall mean as defined at Section 7.8.
"Prime Rate"shall mean the prime interest rate published in
The Wall Street Journal from time to time.
"Post-Closing Period" shall mean any Tax Period beginning
after the Asset Closing Date, and in the case of any Tax Period that begins
before and ends after the Asset Closing Date, the portion of such Tax Period
ending after the Asset Closing Date.
"Return" shall mean any report of Taxes due, any information
return with respect to Taxes, or any other similar report, statement,
declaration, or document required to be filed under the Code or other laws, any
claims for refund of Taxes paid, and any amendments or supplements to any of the
foregoing.
"Separate Contest" shall mean a Tax Contest which involves (a)
only the Company and members of the Company Group, or (b) only Cygnet and
members of the Cygnet Group.
"Straddle Period" shall mean (a) any Tax Period that begins
before and ends after the Asset Closing Date, (b) any Short Period that ends on
the Asset Closing Date and (c) any Short Period that begins on the first day
following the Asset Closing Date. The term "Short Period" shall mean any Tax
Period which is based on an accounting period which is shorter than the normal
accounting period used for determining such Tax (e.g., in the case of the United
States federal income Tax, any Tax Period of less than one year).
"Taxes" shall mean all federal, state, territorial, local,
foreign and other net income, gross income, gross receipts, sales, use, value
added, ad valorem, transfer, franchise, profits, license, lease, service,
service use, withholding, payroll, employment, unemployment insurance, workers
compensation, social security, excise, severance, stamp, business license,
occupation, premium, property, environmental, windfall profits, customs, duties,
alternative minimum, estimated or other taxes, fees, premiums, assessments or
charges of any kind whatever imposed or collected by any governmental entity or
political subdivision thereof, which any member of the Company Group or the
Cygnet Group is required to pay, collect or withhold, together with any interest
and any penalties, additions to Tax or additional amounts with respect thereto,
and the term "Tax" means any one of the foregoing Taxes.
"Tax Adjustment" shall mean as defined at Section 7.26.
"Tax Authority" shall mean, with respect to any Tax, the
governmental entity or political subdivision thereof that imposes such Tax and
the agency (if any) charged with the determination or collection of such Taxes
for such entity or subdivision.
"Tax Benefit" shall mean any refund, credit, Carryover,
Carryback or other reduction in otherwise required Tax payments. Except as
otherwise provided in this Agreement, such term does not include a decrease in
any Tax in one Tax Period that results from a Tax Adjustment in another Tax
Period, such as an increase in a deduction for depreciation that results from a
determination that, in a previous Tax Period, an expenditure is capitalized and
not deducted, or an item of gain is recognized.
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"Tax Contest" shall mean means an audit, review, examination,
or any other administrative or judicial proceeding (including any determination
with respect to a claim for refund) with the purpose or effect of redetermining
Taxes of any member of either the Company Group or the Cygnet Group for (a) any
Pre-Closing Period, (b) any Straddle Period, or (c) any Post-Closing Period, if
such proceeding could result in any Tax Adjustment or Tax Benefit for any
Pre-Closing Period or Straddle Period (without regard to whether such matter was
initiated by an appropriate Tax Authority or in response to a claim for a refund
of Taxes).
"Tax Period" shall mean, with respect to any Tax, the period
for which the Tax is reported as provided under the Code or other applicable
Laws.
"Tax Records" shall mean as defined at Section 7.16.
"Transaction" shall mean, collectively, the Rights Offering,
the transfer of the Third Party Dealer Assets, and all other transactions
related thereto.
7.2 Allocation of Tax Liabilities - General.
(a) Subject to Sections 7.3 and 7.4, Cygnet shall be
liable for, and shall indemnify and hold the Company and the Company Group
harmless from all Taxes imposed on or with respect to Cygnet and the Cygnet
Group for any Post-Closing Period.
(b) Subject to Sections 7.3 and 7.4, the Company shall be
liable for, and shall indemnify and hold Cygnet and the Cygnet Group harmless
from:
(i) all Taxes for any Pre-Closing Period imposed
on or with respect to the Company, the Company Group, Cygnet, or the Cygnet
Group; and
(ii) all Taxes imposed on or with respect to the
Company and the Company Group for any Post-Closing Period.
7.3 Transaction Taxes.
(a) The Company shall be liable for, and shall indemnify
and hold Cygnet and the Cygnet Group harmless from, all Taxes arising as a
consequence of or otherwise attributable to the Transaction which are imposed on
or with respect to the Company or the Company Group under Code Section 311(b) or
the corresponding provision of state, local or foreign law, including, without
limitation, Taxes imposed under Code Section 311(b) or the corresponding
provision of state, local or foreign law by reason of the distribution of the
Rights.
(b) The Company shall be liable for, and shall indemnify
and hold Cygnet and the Cygnet Group harmless from, all Taxes arising as a
consequence of or otherwise attributable to the Transaction which are imposed on
or with respect to the Company or the Company Group under Code Section 1001 or
the corresponding provisions of state, local or foreign law, including without
limitation, Taxes imposed under Code Section 1001 or the corresponding provision
of state, local or foreign law by reason of the transfer of the Third Party
Dealer Assets in exchange for the consideration paid by Cygnet therefor.
(c) The Company shall be liable for, and shall indemnify
and hold Cygnet and the Cygnet Group harmless from, all Taxes arising as a
consequence of or otherwise attributable to the Transaction which are imposed on
or with respect to the Company or the Company Group by reason of the triggering
of deferred intercompany gain under Treasury Regulations Section
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_____ or the corresponding provision of state, local or foreign law, including
without limitation, deferred intercompany gain created in connection with the
Transaction.
(d) The Company shall be liable for, and shall indemnify
and hold Cygnet and the Cygnet Group harmless from, all Taxes arising as a
consequence of the payment by Cygnet to the Company of the Interim Earnings and
the Interim Consideration.
(e) Except as otherwise provided in the preceding
provisions of this Section 7.3, Cygnet shall be liable for, and shall indemnify
and hold the Company and the Company Group harmless from, any and all Taxes
arising as a consequence of or otherwise attributable to the Transaction, but
only to the extent that Cygnet or the Cygnet Group derives or will derive a Tax
Benefit which it would not otherwise derive in the absence of the circumstances
triggering such Taxes. Accordingly, by way of illustration and not by way of
limitation, if any Taxes not otherwise encompassed within the preceding
provisions of this Section 7.3 arising as a consequence of or otherwise
attributable to the Transaction are imposed on or with respect to the Company or
the Company Group by reason of the transfer of the Transferred Assets and the
bases of the Transferred Assets acquired by Cygnet or any member of the Cygnet
Group in the Transaction are increased in excess of the bases that the
transferee would otherwise derive by an amount corresponding to the amount of
gain triggering such Taxes thereby providing a Tax Benefit to Cygnet or the
Cygnet Group at a subsequent time in connection with a disposition of the
Transferred Assets or the liquidation of Cygnet or any Affiliate thereof, Cygnet
shall be liable for, and shall hold the Company and the Company Group harmless
from, such Taxes to the extent of such Tax Benefit.
(f) Except as otherwise provided in the preceding
provisions of this Section 7.3, the Company shall be liable for, and shall
indemnify and hold Cygnet and the Cygnet Group harmless from, any and all
additional Taxes arising as a consequence of or otherwise attributable to the
Transaction, but only to the extent that Cygnet or the Cygnet Group does not or
will not derive a Tax Benefit which it would not otherwise derive in the absence
of circumstances triggering such Taxes.
7.4 Limited Liability of Cygnet for Pre-Closing Period Tax
Liabilities Attributable to Third Party Dealer Assets . Cygnet shall be liable
for, and shall indemnify and hold the Company and the Company Group harmless
from, all Taxes attributable to Tax Adjustments relating to the Pre-Closing
Period which are imposed on or with respect to the Company or the Company Group,
but only to the extent that (a) such Taxes arise from the income, profits, or
transactions of, or are otherwise attributable to Old Cygnet, Old Cygnet
Alabama, the Third Party Dealer Assets, or the Third Party Dealer Business for
taxable periods ending prior to the date of this Agreement (b) Cygnet or the
Cygnet Group derives or will derive a Tax Benefit during the Post-Closing Period
by reason of such Tax Adjustment. Accordingly, by way of illustration and not by
way of limitation, if a Tax Adjustment relating to the Company Group's 1996
consolidated federal income tax return arises as a consequence of a denial of a
deduction to the Company Group for such taxable year (the "1996 Tax Adjustment")
and the Cygnet Group may claim a corresponding deduction in the Cygnet Group's
1999 consolidated federal income tax return, Cygnet shall be liable for, and
shall indemnify and harmless the Company and the Company Group from, the Taxes
attributable to the 1996 Tax Adjustment; however, if a Tax Adjustment relating
to the Company Group's 1996 consolidated federal income tax return relating to
the Third Party Dealer Assets arises as a consequence of a denial of a deduction
to the Company Group for such taxable year but the Company Group may claim a
corresponding in the Company Group's 1997 consolidated federal income tax
return, Cygnet shall not be liable for, and shall not be obligated to indemnify
and hold harmless the Company and the Company Group for the Taxes attributable
to the 1996 Tax Adjustment.
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7.5 Preparation and Filing of Tax Returns - General. Except as
otherwise provided in this Agreement, Tax Returns shall be prepared and filed by
the Person liable for the Tax reported on such Tax Return, or otherwise
obligated to file such Return, under the Code or other applicable Laws. Without
limiting the foregoing, the party responsible for filing such a Return shall
also be responsible for filing and/or responding to any revenue agent request or
any other formal or informal request for information or otherwise relating to
such Return by the IRS or any other applicable Tax Authority. The parties shall
assist and cooperate with one another in accordance with Section 7.17 with
respect to the preparation and filing of Tax Returns.
7.6 Joint Returns. Any Tax Returns for Taxes imposed for any
Pre-Closing Period which reflect Taxes for which one or more members of both the
Company Group and the Cygnet Group have liability under Sections 7.2 through 7.4
(including, without limitation, the Company's consolidated federal income Tax
Return for the Tax Period or Tax Periods in which the Transaction occurs) shall
be prepared by and filed by the Company.
7.7 Method of Pro Ration For Straddle Periods. In the case of any
Straddle Period relating to the Company, Cygnet or their respective Affiliates,
unless the books of such Person are closed on the Asset Closing Date, Taxes
shall be apportioned for purposes of Sections 7.2 through 7.4 between
Pre-Closing and Post-Closing Periods, as follows: First, Taxes for Tax Periods
or portions thereof ending on the last day of the calendar month preceding the
Asset Closing Date (such date is hereinafter referred to as the "Cutoff Date")
shall be based on actual events and activities through the Cutoff Date and in
accordance with past accounting practices if any. Second, Taxes for the Tax
Period from the Cutoff Date through the Asset Closing Date shall be computed by
prorating the activities of the calendar month which includes the Asset Closing
Date on a daily pro rata basis. Notwithstanding the foregoing provisions of this
Section 7.7, (a) depreciation, amortization and depletion for any Straddle
Period shall be apportioned on a daily pro rata basis and (b) extraordinary
items not arising in the ordinary course of business shall be apportioned to the
Tax Period in which the event giving rise to such item occurs. To the extent
applicable, with respect to any consolidated or similar Tax Return, the Taxes of
Cygnet and any Affiliate thereof for purposes hereof shall be determined as if
the Cygnet Group were a separate group of companies filing a consolidated or
similar Tax Return.
7.8 Tax Accounting Practices. Any Straddle Period Returns prepared
by one or more members of the Company Group or the Cygnet Group, as the case may
be (the "Preparing Party"), shall be prepared in accordance with past Tax
accounting practices used with respect to the Returns in question (unless such
past practices are no longer permissible under the Code or other applicable
Laws), and to the extent any items are not covered by past practices (or in the
event such past practices are no longer permissible under the Code or other
applicable Laws), in accordance with reasonable Tax accounting practices
selected by the Preparing Party (except that accounting elections and
determinations shall be made, where reasonably possible, in a manner that
minimizes the net Tax incurred by the other party and its Affiliates). In the
event the Preparing Party files Tax Returns for Straddle Periods inconsistently
with such past Tax accounting practices, then, notwithstanding any provision of
this Agreement to the contrary, in addition to any other remedies available, the
other party and its Affiliates shall only be responsible for the amount of Taxes
they would owe if such Tax Returns had been filed consistently with such past
Tax accounting practices.
7.9 Right to Review Returns. Upon the request of either party, the
other party shall make available for inspection and copying all Tax Returns (and
related workpapers) with respect to Taxes to the extent that (a) such Return
relates to Taxes for which the requesting party may be liable under this
Agreement, (b) such Return relates to Taxes for which the requesting party may
have a claim for Tax Benefits hereunder, or (c) the requesting party reasonably
determines that it must inspect
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such Return to confirm compliance with the terms of this Agreement. The Company
and Cygnet shall attempt in good faith to resolve any issues arising out of the
review of such Returns.
7.10 Refunds.
(a) In the case of any separate Tax Return filed by the
Company, Cygnet, or their respective Affiliates for a Pre-Closing Period, the
Company shall be entitled to any refund of Taxes with respect to such Return.
(b) Subject to Section 7.11, any refund of Taxes with
respect to a joint, combined, consolidated or unitary Tax Return for any
Pre-Closing Period shall be allocated to the Company.
(c) If any amounts become payable under this Section
7.10, the Person obligated to make such payment shall notify the Person entitled
to receive such payment within thirty (30) days after receipt of the refund or
credit for overpayment and shall remit the amount of the refund to such Person
within thirty (30) days after such receipt.
7.11 Carrybacks.
(a) In the event Cygnet or any member of the Cygnet Group
desires to carry back a loss or other Tax attribute arising after the Asset
Closing Date (the "Cygnet Carryback") to a Pre-Closing Period with respect to a
joint, combined, consolidated or unitary Tax Return, Cygnet shall notify the
Company in writing of its intent to carry back such item (and to forego any
election to waive such Carryback). Such notification shall include a
certification by an appropriate officer of Cygnet setting forth Cygnet's belief,
based on a thorough examination of the facts and law relating to the tax
treatment of such item, that the tax treatment of such item is supported by
"substantial authority" within the meaning of Code Section 6662 (and the
Treasury Regulations promulgated thereunder). Promptly upon its receipt of such
notification, the Company shall notify Cygnet, in writing, as to whether the
Company believes that the filing of the Cygnet Carryback will result in any
Deemed Tax Reduction under Section 7.11(c) and if so, the Company shall provide
information to Cygnet pertaining to the amount of such Deemed Tax Reduction and
the computation thereof. The Company shall cooperate with Cygnet in connection
with the filing and processing of any Cygnet Carryback and shall provide Cygnet
with copies of all correspondence in connection therewith.
(b) Subject to Section 7.11(c), if, pursuant to the terms
of Section 7.11(a), Cygnet elects to carryback a loss or other Tax attribute to
a Pre-Closing Period, the Company shall be obligated to make a payment to Cygnet
equal to the amount by which the Taxes imposed on the Company Group for such
Pre-Closing Period have been reduced as a result of utilization of the Cygnet
Carryback (the "Company Tax Reduction").
(c) For purposes of computing the amount of the Company
Tax Reduction, if, in the absence of the Cygnet Carryback, losses or other Tax
attributes of the Company or its Affiliates would have resulted in a reduction
of Taxes of the Company Group for such Period (the "Deemed Tax Reduction"), the
amount of the Company Tax Reduction shall be reduced by the amount of the Deemed
Tax Reduction. In the event any losses or other Tax attributes of the Company
which are taken into account in computing a Deemed Tax Reduction are
subsequently utilized by the Company Group to reduce Taxes in a future Tax
Period, the Company shall be obligated to pay to Cygnet the amount of such
subsequent Tax reduction (provided that the aggregate amount of payments to
Cygnet with respect to any Cygnet Carryback shall not exceed the Company Tax
Reduction computed without regard to the first sentence of this Section
7.11(c)).
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(d) If the Company is required to make a payment to
Cygnet with respect to any Cygnet Carryback under Section 7.11(b), the Company
shall have the option, in its sole discretion, of (i) making such payment within
30 days of receiving the Tax refund attributable to such Cygnet Carryback, or
(ii) making such payment not later than 30 days of the date on which the
statutory period (under the Code of other applicable law) for examining the
Return on which such Cygnet Carryback was claimed has expired (provided, such
payment shall bear interest at the Prime Rate for the period commencing 30 days
from the date of receipt of such refund and ending on the date of such payment).
7.12 Payment of Consolidated Return Taxes for Pre-Closing Periods.
The Company shall pay to the IRS all Taxes due (or shall receive all refunds) in
connection with the filing of the Company's consolidated federal income Tax
Return for any and all Company fiscal years which begin before the Asset Closing
Date and with respect to which Cygnet or an Affiliate of Cygnet was a member of
the Company's federal consolidated group for all or a portion of such year.
Immediately before the due date for filing such Tax Return (taking into account
any extension of time for filing that the Company requests and is granted), or
immediately after receipt of any refund of Taxes relating thereto, the Company
and Cygnet shall compute, based on the information contained in the federal
consolidated income Tax Return for such year and subject to Sections 7.2 through
7.4, 7.7 through 7.8, and the remaining provisions of this Agreement, to the
extent applicable, Cygnet's share of the consolidated federal income Tax
liability for such year, if any, (the "Cygnet Tax Liability") as if the Cygnet
Group were a separate group of companies filing a consolidated federal income
Tax Return. Cygnet shall make pay to the Company the Cygnet Tax Liability
immediately before the due date for filing the Company's consolidated federal
income Tax Return for such fiscal year. In the case of any refund, the Company
shall make payments to Cygnet to the extent applicable immediately following the
receipt of such refund.
7.13 Payment of State, Local and Foreign Taxes for Pre-Closing
Period for Which The Company has Filing Responsibility. The Company shall pay to
the appropriate Tax Authority all state, local and foreign Taxes for Tax Returns
with respect to which the Company (or another member of the Company Group) has
filing responsibility pursuant to Sections 7.5 and 7.6. Immediately before the
time such Return is due (taking into account any extension of time for filing
that the Company requests and is granted), or immediately after receipt of any
refund, Cygnet shall make payments to the Company (or the Company shall make
payments to Cygnet) of amounts which shall, in each case, be determined in
accordance with the principles, applied mutatis mutandis, set forth in Section
7.12.
7.14 Payment of State, Local and Foreign Taxes for Which Cygnet has
Filing Responsibility. Cygnet shall pay to the appropriate Tax Authority all
state, local, and foreign Taxes for Tax Returns with respect to which Cygnet (or
another member of the Cygnet Group) has filing responsibility pursuant to
Sections 7.5 and 7.6. Immediately before the due date such Return is due (taking
into account any extension of time for filing that Cygnet requests and is
granted), or immediately after receipt of any refund, the Company shall make
payments to Cygnet (or Cygnet shall make payments to the Company) of amounts
which shall, in each case, be determined in accordance with the principles,
applied mutatis mutandis, set forth in Section 7.12.
7.15 Indemnification Payments.
(a) Upon payment of any Taxes with respect to which a
party is entitled to receive indemnification hereunder, such party (the
"Indemnified Party") shall send the other party (the "Indemnifying Party") an
invoice accompanied by evidence of payment and a statement detailing the Taxes
paid and describing in reasonable detail the particulars relating thereto. The
Indemnifying Party (or such one or more members of the Indemnifying Party's
Group as it shall nominate) shall
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remit payment for Taxes for which the Indemnifying Party is liable for
indemnification hereunder to the Indemnified Party (or such one or more members
of the Indemnified Party's Group as it shall nominate) within 30 days of receipt
of such invoice, evidence of payment and statement, or at any earlier time
identified by the Indemnifying Party.
(b) If any Indemnified Party realizes a Tax Benefit or a
Tax detriment in one or more Tax Periods by reason of having, incurred any Tax
for which such Indemnified Party receives indemnification hereunder, then such
Indemnified Party shall pay to such Indemnifying Party an amount equal to the
Tax Benefit or such Indemnifying Party shall pay to such Indemnified Party an
additional amount equal to the Tax detriment (taking into account any Tax
detriment resulting from the receipt of such additional amounts), as the case
may be. The amount of any Tax Benefit or any Tax detriment for a Tax Period
realized by an Indemnified Party by reason of having incurred a Tax for which
such Indemnified Party received indemnification hereunder shall be deemed to
equal the product obtained by multiplying (i) the amount of any deduction or
inclusion in income for such period resulting from such Tax or the payment
thereof, as the case may be, by (ii) the highest applicable marginal Tax rate
for such Period. Any payment due under this Section 7.15(b) with respect to a
Tax benefit or Tax detriment realized by an Indemnified Party in a Tax Period
shall be due and payable within 30 days from the time the Return for such Tax
Period is due, without taking into account any extension of time granted to the
party filing such Return.
7.16 Tax Records.
(a) The Company and Cygnet (and their respective
Affiliates) shall keep in their possession all Tax Records relating to Taxes for
which the other party may have liability under this Agreement, until the
expiration of any applicable statute of limitations and as otherwise required by
law. Notwithstanding the foregoing, Cygnet shall retain all Tax Records relating
to Pre-Closing Periods until such time as the Company shall consent to the
disposition of such Tax Records, which consent shall not be unreasonably
withheld. For purposes of this Section 7.16, "Tax Records" shall include, inter
alia, journal vouchers, cash vouchers, general ledgers, material contracts and
authorizations for expenditures.
(b) The Company and Cygnet (and their respective
Affiliates) shall make available to each other for inspection and copying during
normal business hours all Tax Records in their possession, to the extent such
Tax Records are reasonably required by the other party in connection with the
preparation of Tax Returns, audits, litigation or the resolution of items under
this Agreement.
(c) Notwithstanding anything in this Agreement to the
contrary, if either the Company or Cygnet fails to comply with the requirements
of this Section 7.16, the party failing so to comply shall be liable for, and
shall hold the other party harmless from, any Taxes (including penalties for
failure to comply with the record retention requirements of the Code) and other
costs resulting from such party's failure to comply.
7.17 Cooperation. The Company and Cygnet shall each provide the
other with such assistance as may reasonably be requested in connection with the
preparation of any Tax Return, audit or other examination by any Tax Authority
or judicial or administrative proceedings relating to liability for any Taxes.
Further, the Company and Cygnet shall cooperate in connection with satisfaction
of all reporting requirements associated with the transfer of the Third Party
Dealer Assets and the assumption of the Third Party Dealer Liabilities, whether
pursuant to Code Section 1060, Code Section 351, or otherwise. Additionally, the
Company and Cygnet agree, upon reasonable request by the other, to use their
reasonable best efforts to obtain any certificate or other document from any Tax
Authority or any other person or entity as may be necessary to mitigate,
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reduce, or eliminate any Tax imposed with respect to any transaction
contemplated by this Agreement, including without limitation, any sales or use
Tax imposed with respect to the transfer of the Third Party Dealer Assets and
the Third Party Dealer Liabilities.
7.18 Notice of Tax Contest. The Company and Cygnet shall provide
prompt notice to the other party of any pending or threatened Tax Contest that
it becomes aware of relating to Taxes for Tax Periods for which it is
indemnified by, or is to indemnify, the other party hereunder. Such notice shall
contain factual information (to the extent known) describing any asserted Tax
liability in reasonable detail and shall be accompanied by copies of any notice
or other document received from any Tax Authority in respect of any such matter.
If any party has knowledge of an asserted Tax liability with respect to a matter
for which it is to be indemnified hereunder and such party fails to give the
indemnifying party notice of such asserted Tax liability within 30 days after it
has received written notice thereof, then, unless such failure has no material
adverse effect upon the indemnifying party's ability to participate in the Tax
Contest, the indemnifying party shall have no obligation to indemnify the
indemnified party for any Taxes arising out of such asserted Tax liability.
7.19 Control of Audits and Appeals.
(a) Separate Contests. Any Separate Contest shall be
controlled solely by the party involved in the Tax Contest.
(b) Joint Contests.
(i) The Company shall control any Joint Contest.
The personnel and outside advisers (including counsel) of Cygnet may
participate, at Cygnet's expense, in the proceeding to the extent such
proceeding relates to items or adjustments for which Cygnet may incur indemnity
liability under this Agreement. Such participation shall include: (A)
participation in all conferences, meetings or proceedings with any Tax
Authority; (B) participation in all appearances before any court; (C) with
respect to matters described in the preceding clauses (A) and (B), participation
in the submission and determination of content of documentation, protests,
memoranda of fact and law and briefs, the conduct of oral arguments or
presentations, the selection of witnesses and the negotiation of stipulations of
fact in such matters. If Cygnet fails to timely and fully participate in any
proceeding to the extent to which such proceeding relates to items or
adjustments for which Cygnet has indemnity liability under this Article Seven,
Cygnet shall be liable for, in addition to all Taxes for which Cygnet shall be
liable under this Article Seven, any and all costs imposed on, or incurred by,
the Company as a result of Cygnet's failure to participate.
(ii) Each of the Company and Cygnet agrees to
cooperate in seeking an agreement with the IRS or any other Tax Authority under
which such Authority would conduct separate audits of the Company and Cygnet
with respect to returns including both parties. To the extent permitted by such
an Agreement, each party would control its separate audits in accordance with
the terms thereof, and the procedures provided in the remainder of this Section
7.19(b) and in Section 7.20 shall not apply.
7.20 Consent to Settlements in Joint Contests.
(a) With respect to any Joint Contest, neither party
shall have the right to accept or enter into the settlement of any Tax
liability, or compromise any Tax claim to the extent such liability or claim
relates to an item for which the other party has indemnity liability hereunder,
without the prior written consent of the other party (which consent shall not be
unreasonably withheld).
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(b) In the case of any Joint Contest, either party (the
"Compromising Party"), without the consent or permission of the other party (the
"Non-Compromising Party"), may, if permitted by the appropriate agency or
tribunal, accept or enter into the settlement of any Tax liability to the extent
such liability relates solely to items for which such party has indemnity
liability hereunder. In the event the Non-Compromising Party's refusal to settle
its portion of the contest prevents the Compromising Party from reaching a
settlement as to its portion of the contest, the Non-Compromising Party shall
indemnify the Compromising Party from and against any outcome less favorable
than the settlement which the Compromising Party was willing to accept. With
respect to any Joint Contest, each of Cygnet and the Company hereby agrees that
it shall not participate in the negotiation, settlement or other resolution of
any item at issue in such Joint Contest in a manner discriminating against the
other party's interests in such contest.
(c) Notwithstanding anything to the contrary in the
foregoing, in the event the judgment of the United States Tax Court or other
court of competent jurisdiction results in an adverse determination with respect
to the liability of either party hereunder, such party shall have the right (at
its own expense) to appeal such adverse determination; provided, however, that
the second sentence of Section 7.20(b) shall apply for purposes of determining
the liability of any non-appealing party hereunder.
7.21 Expenses.
(a) With respect to any Separate Contest, the party
involved in such contest shall bear all expenses related thereto.
(b) With respect to any Joint Contest, except as
otherwise provided herein, the parties shall share any and all costs and
expenses incurred in connection with such contest based on each party's
potential liability with respect to such contest as agreed to by the parties at
the outset of such contest.
7.22 Tax Allocation Agreements. Immediately prior to the Asset
Closing Date, the Company shall cause any and all tax allocation, tax sharing
and similar agreements or arrangements existing between the Company (including
its Affiliates) and Cygnet (including its Affiliates) to be terminated with
respect to the Cygnet Group, as of an effective date agreed to by the parties
prior to the Asset Closing Date, and shall cause any amounts due under such
agreements or arrangements to be settled in the manner agreed to by the parties
prior to the Asset Closing Date. Upon such termination and settlement, no
further payments made by one party to the other with respect to such agreements
or arrangements shall be made, and all other rights and obligations resulting
from such agreements or arrangements between the parties shall cease as of such
time.
7.23 Affiliate Obligations. To the extent that the provisions of
this Agreement pertain to an Affiliate of the Company or Cygnet, the Company and
Cygnet hereby respectively agree that they will cause such Affiliate to carry
out the terms of this Agreement.
7.24 Further Action. The parties shall execute and deliver all
documents, provide all information, and take or refrain from taking any action
as may be necessary or appropriate to achieve the purposes of this Agreement.
Without limiting the preceding sentence, and subject to Section 7.19(b), each
party and its Affiliates shall provide the other party and its Affiliates with
such powers of attorney or other authorizing documentation as is reasonably
necessary to empower them to execute and file Tax Returns, refunds and
equivalent claims for Taxes for which they are responsible hereunder, and
contest, settle and resolve any Tax Contests that they control pursuant to this
Agreement.
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7.25 Form of Payments and Late Payments. Any payments owed by one
party to another under this Agreement shall be made in the currency in which the
Tax to which such payment relates is assessed by the Tax Authority, and shall be
paid in immediately available funds and in such other manner as the party to
whom such payment is owed may reasonably request. Any payments required by this
Agreement that are not made when due shall bear interest at the Prime Rate plus
six percent from the due date of the payment to the date paid.
7.26 Tax Adjustments. For purposes of Section 7.2, if, as a result
of any Tax Contest, there is any redetermination of Taxes on a consolidated
basis for any Pre-Closing Period, the determination of whether additional United
States federal Taxes imposed on the Company or Cygnet (or their respective
Affiliates) for any Pre-Closing Period shall be deemed to arise from the income,
profits or transactions of, or are otherwise attributable to, the Company or
Cygnet (or their respective Affiliates) to the extent relevant shall be made
pursuant to the following principles:
(a) Each party shall compute the difference between (A)
the recomputed consolidated federal tax liability for each Pre-Closing Period
affected, taking into account solely those adjustments which relate to or arise
out of the income, profits or activities of such party or its Affiliates, and
(B) the consolidated federal tax liability of the consolidated group for such
Tax Period based on the Tax Return as originally filed (the difference between
(A) and (B) shall be referred to herein as a party's "Tax Adjustment").
(b) If one party's Tax Adjustment for the Tax Period is
greater than or equal to zero, that party shall then be liable for that portion
of additional Taxes equal to the amount obtained by multiplying the additional
Taxes by a percentage equal to such party's Tax Adjustment divided by the
aggregate Tax Adjustment of the parties.
(c) If one party's Tax Adjustment for the Tax Period is
greater than zero (the "Liable Party") and the other party's Tax Adjustment for
the Tax Period is less than zero (the "Other Party"), the Liable Party shall be
responsible for all of the additional Taxes owed for such Tax Period. In
addition, the Liable Party shall make an Indemnification Payment to the Other
Party equal to the Other Party's Tax Adjustment for such Tax Period (for this
purpose, the Tax Adjustment of the Other Party shall be deemed to be positive);
provided, however, that such Indemnification Payment shall not exceed the amount
by which the Liable Party's Tax Adjustment exceeds the additional Taxes for the
Tax Period. Further, the Other Party shall be entitled to any refund received in
respect of such Tax Period.
(d) If each party's Tax Adjustment for the Tax Period is
less than or equal to zero, each party shall be entitled to that portion of any
refund received in respect of such Tax Period equal to the amount obtained by
multiplying the amount of the refund by a percentage equal to such party's Tax
Adjustment divided by the aggregate Tax Adjustment of the parties.
(e) Similar principles shall be applied in the context of
state, local or foreign Taxes to the extent applicable and the term Tax
Adjustment for all purposes of this Agreement shall not be confined to federal
income Tax liabilities.
ARTICLE EIGHT
EMPLOYEE BENEFITS; LABOR MATTERS
8.1 Definitions. As used in this Article Eight, the terms below
shall have the following meanings:
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"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Company Affiliate" shall mean any member of a "controlled
group of corporations" (within the meaning of Section 414(b) of the Code) that
includes the Company as a member of the group; any member of an "affiliated
service group" (within the meaning of Section 414(m)(2) of the Code) that
includes the Company as a member of the group; any member of a group of trades
or businesses under common control (within the meaning of Section 414(c) of the
Code) that includes the Company as a member of the group; and any other entity
required to be aggregated with the Company pursuant to regulations issued by the
United States Treasury Department pursuant to Section 414(o) of the Code.
"Company Employees" shall mean those persons who, prior to the
Closing Date, are employed by Company or any Company Affiliate and whose
employment relationship is not transferred to Cygnet after the Closing Date.
"Company Plan" shall mean the Ugly Duckling Corporation
Retirement Savings Plan maintained by the Company.
"Cygnet Affiliate" shall mean any member of a "controlled
group of corporations" (within the meaning of Section 414(b) of the Code) that
includes Cygnet as a member of the group; any member of an "affiliated service
group" (within the meaning of Section 414(m)(2) of the Code) that includes
Cygnet as a member of the group; any member of a group of trades or businesses
under common control (within the meaning of Section 414(c) of the Code) that
includes Cygnet as a member of the group; and any other entity required to be
aggregated with Cygnet pursuant to regulations issued by the United States
Treasury Department pursuant to Section 414(o) of the Code.
"Cygnet Employees" shall mean those persons who, immediately
after the Closing Date are employed by Cygnet or any Cygnet Affiliate.
"Cygnet Plan" shall mean the Cygnet Financial Corporation
Retirement Savings Plan established by Cygnet as set forth in Section 8.4.a
below.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended.
"Welfare Plan" shall mean any employee welfare benefit plan as
defined in Section 3(1) of ERISA.
8.2 Welfare Benefit Arrangements.
a. Cygnet to Establish Comparable Welfare Arrangements.
Cygnet shall take all actions necessary or appropriate to establish, on or
before the Closing Date, Welfare Plans to provide Cygnet Employees with benefits
that are substantially similar to the benefits provided to him or her under the
Welfare Plans sponsored by the Company.
b. Liabilities. The Company shall be responsible for and
shall pay all liabilities arising in connection with claims incurred on or prior
to the Closing Date with respect to both the Company Employees and Cygnet
Employees under each Welfare Plan in which such Employees participate,
including, but not limited to all incurred but not reported claims. Cygnet shall
be responsible for and shall pay all liabilities arising in connection with
claims incurred after the Closing Date by Cygnet Employees under each Welfare
Plan in which Cygnet Employees participate after
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the Closing Date. For purposes of this Section, a claim shall be considered
incurred on the date treatment is rendered or a service performed.
Notwithstanding the above, Cygnet agrees to assume the liabilities related to
Cygnet Employees with respect to vacation and sick pay accrued prior to the
Closing Date and Cygnet and the Company acknowledge that these liabilities will
be deemed to be Third Party Dealer Liabilities.
Worker's compensation claims of any Company Employee
or Cygnet Employee shall be the responsibility and liability of the Company if
the event giving rise to such claim occurred on or prior to the Closing Date.
Worker's compensation claims of any Cygnet Employee shall be the responsibility
and liability of Cygnet if the event giving rise to the claim occurs after the
Closing Date.
8.3 COBRA. The Company and Cygnet agree that the transfer of
employment relationship of Cygnet Employees as of the Closing Date shall not be
a "qualifying event" as set forth in Section 4980B(f) of the Code or Section 603
of ERISA. Consequently, Cygnet Employees shall not be entitled to elect to
continue their COBRA coverage under the Company's group health plan under Code
Section 4980B(f) and Part 6 of Title I of Subtitle B of ERISA ("COBRA"). The
Company shall retain the liability to provide COBRA coverage for those qualified
beneficiaries who incurred a qualifying event prior to the Closing Date. Cygnet
shall be responsible for providing COBRA coverage for those Cygnet Employees and
their qualified beneficiaries who incur a qualifying event after the Closing
Date.
8.4 Retirement Savings Plan.
a. Establishment of Cygnet Plan. On or prior to the
Closing Date, Cygnet shall establish the Cygnet Plan and related trust, it being
the intention that such plan and trust will satisfy the requirements under
Section 401(a) and 501(a) of the Code.
b. Transfer of Assets from Company Plan to Cygnet Plan.
After the Closing and within the time frame set forth below, the Company shall
cause assets and liabilities in the amount determined herein to be transferred
from the Company Plan to the Cygnet Plan. The Cygnet Plan shall preserve all
accrued benefits and optional forms of benefits and other rights within the
scope of Section 411(d)(6) of the Code. The transfer shall occur as soon as
practicable following the Closing Date or such later date as required by law
(the "Transfer Date").
The Company Plan shall retain all benefit obligations
and liabilities that relate to Company Employees. As of the Transfer Date, the
Company Plan shall transfer, and the Cygnet Plan shall assume, all benefit
obligations and liabilities under the Cygnet Plan that relate to Cygnet
Employees (such amount to be adjusted to reflect benefit payments, expenses, and
other activity of the Company Plan (including but not limited to interest or
investment income) which is directly attributable period prior to the Closing
but which is not properly reflected in the reported asset value on the Closing
Date)
The transfer contemplated herein shall comply with
all requirements of Sections 414(l) and 401(a)(12) of the Code
Upon such transfer, neither the Company, any Company
Affiliate, nor the Company Plan shall have any liability or obligation to the
Cygnet Employees for benefits previously accrued under the Company Plan.
Additionally, upon such transfer, neither Cygnet, any Cygnet Affiliate nor the
Cygnet Plan shall have any liability or obligation to the Company Employees for
benefits accrued under the Company Plan.
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8.5 Stock Options. Except as disclosed on Schedule 8.5 of this
Agreement, the Company and Cygnet shall take all action necessary or appropriate
so that each Company option held by a Cygnet Employee that has not been
exercised as of the Closing Date shall be replaced with an option to purchase
Cygnet stock under the Cygnet Financial Corporation 1998 Incentive Stock Plan.
The option to purchase Cygnet stock shall be adjusted with respect to the
number of shares subject to the option and the option exercise price all in
accordance with EITF 90-9. Such Cygnet options shall otherwise have the same
terms and conditions as the corresponding Company options.
8.6 Recognition of Service with the Company. The Cygnet Plan and
any Welfare Plan adopted by Cygnet and all other employee benefit plans,
programs and policies of Cygnet shall recognize service before the Closing Date
with the Company and any Company Affiliate. Each Cygnet Welfare Plan shall
provide benefits to Cygnet Employees without interruption or change solely as a
result of the transition from the corresponding Company Welfare Plans and
without limiting the generality of the foregoing: (a) shall, to the extent
applicable, recognize all amounts applied to deductibles, out-of-pocket maximums
and lifetime maximum benefits with respect to Cygnet Employees under the
corresponding Company Welfare Plan for the plan year that includes the Closing
Date and prior periods (if applicable); (b) shall, to the extent applicable, not
impose any limitations on coverage or pre-existing conditions of Cygnet
Employees, except to the extent such limitations applied to such Cygnet
Employees under the corresponding Company Welfare Plans immediately before such
Cygnet Welfare Plan became effective; and (c) shall not impose any other
conditions (such as proof of good health, evidence of insurability or a
requirement of a physical examination) upon the participation by Cygnet
Employees who were participating in the corresponding Company Welfare Plan
immediately before such Cygnet Welfare Plan became effective.
8.7 Assumption of Employment Contracts. Cygnet shall assume all
obligations arising on and after the Closing Date under employment contracts
between the Company and any of its employees who become Cygnet Employees on the
Closing Date.
ARTICLE NINE
MISCELLANEOUS
9.1 Assignment. Neither this Agreement nor any of the rights or
obligations hereunder may be assigned by any party without the prior written
consent of the other parties; except that Cygnet may assign its rights to
receive the Third Party Dealer Assets to one or more Cygnet Subsidiaries and the
Company may assign its rights to receive the consideration therefor to one or
more Company Subsidiaries. Subject to the foregoing, this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, and no other person shall have any right,
benefit or obligation under this Agreement as a third party beneficiary or
otherwise.
9.2 Notices. All notices, requests, demands and other
communications which are required or may be given under this Agreement shall be
in writing and shall be deemed to have been duly given when received if
personally delivered; when transmitted if transmitted by telecopy, electronic or
digital transmission method; the day after it is sent, if sent for next day
delivery to a domestic address by recognized overnight delivery service (e.g.,
Federal Express); and upon receipt, if sent by certified or registered mail,
return receipt requested. In each case notice shall be sent to:
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If to the Company, addressed to:
Ugly Duckling Corporation
0000 Xxxx Xxxxxxxxx Xxxx, Xxxxx 0000
Xxxxxxx, Xxxxxxx 00000
Attention: ___________
with a copy to:
________________________________
________________________________
________________________________
________________________________
If to Cygnet, addressed to:
Cygnet Financial Corporation
0000 Xxxx Xxxxxxxxx Xxxx, Xxxxx 0000
Xxxxxxx, Xxxxxxx 00000
Attention: ___________
with a copy to:
________________________________
________________________________
________________________________
________________________________
or to such other place and with such other copies as either party may designate
as to itself by written notice to the others.
9.3 Choice of Law. This Agreement shall be construed, interpreted
and the rights of the parties determined in accordance with the laws of the
State of Arizona (without reference to the choice of law provisions thereof),
except with respect to matters of law concerning the internal corporate affairs
of any corporate entity which is a party to or the subject of this Agreement,
and as to those matters the law of the jurisdiction under which the respective
entity derives its powers shall govern.
9.4 Entire Agreement; Amendments and Waivers. This Agreement,
together with all exhibits and schedules hereto constitutes the entire agreement
among the parties pertaining to the subject matter hereof and supersedes all
prior agreements, understandings, negotiations and discussions, whether oral or
written, of the parties. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto. No
amendment, supplement, modification or waiver of this Agreement shall be binding
unless executed in writing by the party to be bound thereby. No waiver of any of
the provisions of this Agreement shall be deemed or shall constitute a waiver of
any other provision hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver unless otherwise expressly provided.
9.5 Additional Capitalization. Nothing in this Agreement is
intended to preclude the Company from capitalizing Cygnet with cash preliminary
to the delivery by the Escrow Agent to Cygnet of the Escrowed Subscription Funds
pursuant to Section 3.1 or Cygnet from issuing stock, including common stock, in
exchange therefor. To the extent not prohibited by law, Cygnet shall at the
request of the Company, redeem shares of Cygnet common stock acquired as a
consequence of the capitalization of Cygnet by the Company at any time following
the Closing Date but not later than 90 days following request by the Company
therefor. Further, nothing in this Agreement is
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intended to preclude the Company from loaning amounts to Cygnet at any time or
Cygnet from entering into agreements at any time for the repayment of any such
loaned amounts.
9.6 Transfers of Stock, Other Consideration. Nothing in this
Agreement is intended to preclude:
a. Any Company Subsidiary from transferring to the
Company or any other Company Subsidiary all or any portion of the consideration
received by such Company Subsidiary from Cygnet pursuant to Section 4.6 in
exchange for the transfer to Cygnet or a Cygnet Subsidiary by such Company
Subsidiary of all or a portion of the Third Party Dealer Assets, or received by
such Company Subsidiary pursuant to this Section 9.6;
b. The Company from transferring to one or more Company
Subsidiaries all or any portion of the consideration received by the Company
pursuant to Section 4.6 or this Section 9.6;
c. Except as provided in Section 4.6 the Company from
transferring any stock or debt of Cygnet received by the Company pursuant to
Section 9.5; or
d. Except as expressly stated herein, the Company or any
Company Subsidiary from transferring to any third party stock or debt of Cygnet
received by the Company or such Company Subsidiary pursuant to this Agreement or
in any other transaction.
9.7 Cooperation. The Company and Cygnet shall each provide the
other with such assistance as may reasonably be requested in connection with any
audit or examination by any governmental body or authority, judicial or
administrative proceedings, litigation, investigation or other similar matter
relating to any period prior to the Closing Date. Further, the Company and
Cygnet shall cooperate in connection with satisfaction of all reporting
requirements associated with the transfer and ownership of the Third Party
Dealer Assets and the assumption of the Third Party Dealer Liabilities.
9.8 Multiple Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
9.9 Expenses. Except as otherwise specified in this Agreement,
each party hereto shall pay its own legal, accounting, out-of-pocket and other
expenses incident to this Agreement and to any action taken by such party in
preparation for carrying this Agreement into effect.
9.10 Invalidity. In the event that any one or more of the
provisions contained in this Agreement or in any other instrument referred to
herein, shall, for any reason, be held to be invalid, illegal or unenforceable
in any respect, then to the maximum extent permitted by law, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement or any other such instrument.
9.11 Titles. The titles, captions or headings of the Articles,
Sections and subsections herein are inserted for convenience of reference only
and are not intended to be a part of or to affect the meaning or interpretation
of this Agreement.
9.12 Cygnet and its Subsidiaries. Except as the context otherwise
indicates, reference in this Agreement to "Cygnet" shall encompass Cygnet and
each of its subsidiaries.
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IN WITNESS WHEREOF, the parties hereto have executed or caused
this Agreement to be duly executed on their respective behalf, by their
respective officers thereunto duly authorized, all as of the day and year first
above written.
UGLY DUCKLING CORPORATION
By_______________________________________
Its______________________________________
CYGNET FINANCE, INC.
By_______________________________________
Its______________________________________
CYGNET FINANCE ALABAMA, INC.
By_______________________________________
Its______________________________________
CYGNET FINANCIAL CORPORATION
By_______________________________________
Its______________________________________
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