<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 1996
REGISTRATION NO. 333-13755
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
UGLY DUCKLING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5521 86-0721358
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
(602) 852-6600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
STEVEN P. JOHNSON, ESQ.
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
UGLY DUCKLING CORPORATION
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
(602) 852-6600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
STEVEN D. PIDGEON, ESQ. CHRISTOPHER D. JOHNSON, ESQ.
SNELL & WILMER L.L.P. SQUIRE, SANDERS & DEMPSEY L.L.P.
ONE ARIZONA CENTER 40 NORTH CENTRAL, SUITE 2700
PHOENIX, ARIZONA 85004-0001 PHOENIX, ARIZONA 85004-4440
(602) 382-6000 (602) 528-4000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value.......... 5,044,444 $18.00 $90,799,992 $27,515
===============================================================================================================
</TABLE>
(1) Includes 600,000 shares of Common Stock that the Underwriters have the
option to purchase to cover over-allotments, if any, and 444,444 shares of
Common Stock held by a shareholder of the Company.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PROSPECTUS
SUBJECT TO COMPLETION, DATED OCTOBER 9, 1996
4,000,000 Shares
[LOGO]
Common Stock
------------------------
All of the 4,000,000 shares of Common Stock offered hereby are being issued
and sold by Ugly Duckling Corporation (the "Company"). The Common Stock is
quoted on the Nasdaq Stock Market's National Market under the symbol "UGLY." On
October 23, 1996, the last reported price of the Common Stock was $17 3/8 per
share. See "Price Range of Common Stock."
SEE "RISK FACTORS" AT PAGE 8 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF
THE COMMON STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING
PRICE TO DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------------------------
Per Share......................... $ $ $
- --------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $
==================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities under the Securities Act of 1933, as amended, in connection with
this offering. See "Underwriting."
(2) Before deducting expenses of the offering payable by the Company estimated
at $405,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
600,000 additional shares of Common Stock on the same terms and conditions
as set forth above solely to cover over-allotments, if any. To the extent
that the option is exercised, the Underwriters will offer the additional
shares at the Price to Public shown above. If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions, and
Proceeds to Company will be $ , $ , and $ ,
respectively. See "Underwriting."
The shares of Common Stock are being offered severally by the Underwriters,
subject to prior sale, when, as, and if delivered to and accepted by the
Underwriters and subject to their right to reject any order in whole or in part.
It is expected that delivery of the shares of Common Stock will be made against
payment therefor at the offices of Friedman, Billings, Ramsey & Co., Inc.,
Arlington, Virginia or in book entry form through the book entry facilities of
the Depository Trust Company on or about , 1996.
------------------------
FRIEDMAN, BILLINGS, RAMSEY CRUTTENDEN ROTH
& CO., INC. INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE> 3
[PHOTOS]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES
ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Except as otherwise specified, all
information in this Prospectus assumes no exercise of the over-allotment option
granted to the Underwriters. See "Underwriting." Investors should carefully
consider the information set forth under the heading "Risk Factors."
THE COMPANY
Ugly Duckling Corporation (the "Company") operates one of the largest
chains of "buy here-pay here" used car dealerships in the United States and
underwrites, finances, and services retail installment contracts generated from
the sale of used cars by its dealerships and by third party used car dealers
located in selected markets throughout the country. As part of its financing
activities, the Company has initiated a collateralized dealer financing program
pursuant to which it intends to provide qualified independent used car dealers
with operating credit lines secured by the dealers' retail installment contract
portfolios. The Company targets its products and services to the sub-prime
segment of the automobile financing industry, which focuses on selling and
financing the sale of used cars to persons who have limited credit histories,
low incomes, or past credit problems ("Sub-Prime Borrowers").
The rapidly growing used car sales and finance industry achieved record
sales in 1995 of 30.5 million cars, representing approximately $290.0 billion in
sales. During this same period, more than $185.0 billion in retail installment
contracts were originated through the sale of used cars. Of these totals,
approximately 11.0 million cars were sold to Sub-Prime Borrowers, generating
approximately $50.0 billion in retail installment contracts.
Consistent with the industry's growth, the Company has expanded
significantly in recent periods. From 1994 to 1995, total revenues increased by
72.2% from $33.8 million to $58.2 million. Reflecting development of its
infrastructure and expansion of its operations, the Company incurred losses of
approximately $2.0 million and $4.0 million for these periods.
For the six months ended June 30, 1996, the Company's revenues totaled
$39.5 million, including $30.2 million on the sale of more than 4,000 used cars
and $7.1 million in finance income. During this period, the Company achieved
profitability with net earnings before preferred stock dividends of
approximately $2.1 million, including $1.2 million from the sale of contract
receivables under a newly instituted securitization program. Historically, the
Company has experienced higher revenues in the first two quarters of the year
than in the latter half of the year and the results of operations for this
period may not necessarily be indicative of results to be expected for the rest
of the year. See "Risk Factors -- No Assurance of Continued Profitability;
Fluctuations in Operating Results," "Risk Factors -- Dependence on
Securitizations," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Seasonality."
The Company originated more than 3,800 contracts through its dealerships
with an aggregate principal balance of $27.1 million and purchased more than
3,000 contracts from third party dealers with an aggregate principal balance of
$17.2 million during the six months ended June 30, 1996. The principal balance
of the Company's total contract portfolio serviced as of June 30, 1996 was $71.3
million, including $20.5 million in contracts serviced under the Company's
securitization program. Substantially all of the contracts the Company services
are with Sub-Prime Borrowers. As a result, the Company incurs substantial charge
offs for which the Company establishes an Allowance for Credit Losses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Allowance for Credit Losses."
Company Dealership Operations. The Company sells used cars through eight
wholly owned used car dealerships ("Company Dealerships") in Arizona and
finances such sales through retail installment contracts that the Company
services. The Company's targeted competition for its Company Dealerships are the
numerous small independent used car dealerships that sell and finance sales of
used cars to Sub-Prime Borrowers ("Buy Here-Pay Here" dealers). The Company
estimates that there are over 63,000 independent used car dealers in the United
States, a substantial portion of which are Buy Here-Pay Here dealers. The
Company distinguishes its Company Dealership operations from those of typical
Buy Here-Pay Here dealers by providing multiple locations, upgraded facilities,
large inventories of used automobiles, centralized
3
<PAGE> 5
purchasing, value-added marketing programs, and dedication to customer service.
Most Company Dealerships maintain extensive inventories of 100 to 300 used cars
and feature a wide selection of makes and models (with ages generally ranging
from 5 to 10 years). The average sales price per car at Company Dealerships was
$7,206 for the six months ended June 30, 1996. The Company has developed
flexible underwriting guidelines and techniques, which combine established
underwriting criteria with managerial discretion, to facilitate rapid credit
decisions and utilizes networked computer systems to monitor and service large
volumes of contracts. See "Business -- Company Dealership Operations."
The Company believes it has achieved widespread brand name recognition
through extensive television, radio, and billboard advertising featuring its
widely recognized animated duck mascot and logo. The Company emphasizes its
large network of Company Dealerships, its wide selection of quality used cars,
and its ability to finance most Sub-Prime Borrowers. The Company has also
established several innovative marketing programs that are designed to attract
Sub-Prime Borrowers by assisting them in re-establishing their credit, offering
rewards for timely payment on contracts, and promoting customer loyalty. See
"Business -- Company Dealership Operations -- Advertising and Marketing."
Recently, the growth of the used car sales and finance market has attracted
significant attention from a number of large companies, including Circuit City's
CarMax, AutoNation, U.S.A., and Driver's Mart, which have entered or announced
plans to enter the used car sales and finance business. The entrance into the
used car market by these companies, each of which have substantially greater
resources than the Company, could lead to greater competition and have a
negative impact on the Company's gross margins. See "Business -- Competition."
Third Party Dealer Operations. The Company also purchases and services
contracts originated by third party used car dealers ("Third Party Dealers").
Through its acquisition of Champion Financial Services, Inc., in 1994, the
Company entered the Third Party Dealer financing market in order to leverage the
contract servicing expertise it had acquired through its Company Dealership
activities. Since that time, the Company has significantly expanded its Third
Party Dealer contract purchasing operations and, as of September 30, 1996, had
opened twenty-two Third Party Dealer contract buying offices ("Branch Offices")
in selected markets throughout the United States (six in Texas, five in Arizona,
four in Indiana, two each in Colorado, Florida, and Nevada, and one in New
Mexico) and entered into contract purchasing agreements with approximately 800
Third Party Dealers. The Company generally competes against independent
automobile finance companies and, to a lesser extent, traditional financial
institutions such as banks, savings and loans, credit unions, and captive
finance companies of major automobile manufacturers. See "Business -- Third
Party Dealer Operations" and "Business -- Competition."
The Company is in the process of expanding its Third Party Dealer
operations by implementing a collateralized dealer financing program (the
"Cygnet Dealer Program"). The Company believes that providing operating credit
lines to qualified Third Party Dealers will give such dealers a unique
opportunity to obtain the debt financing necessary to expand their businesses
while enabling the Company to earn additional finance income and diversify its
earning asset base. The Company also believes that the relationships established
with these dealers will provide it with a preferred position to acquire retail
installment contracts from them. Such contract purchases would provide these
dealers with an additional source of financing and enable the Company to further
expand its contract portfolio. The Company anticipates that it will begin
testing this program with one or more selected Third Party Dealers during the
fourth quarter of 1996 and will begin full-scale marketing of the program during
the first quarter of 1997. The Company has also established insurance operations
directed to the sub-prime market. Its initial activities in this area have
focused on force placing casualty insurance on its Third Party Dealer contracts.
See "Business -- Third Party Dealer Operations -- Collateralized Dealer
Financing" and "Business -- Third Party Dealer Operations -- Insurance
Services."
Growth Strategy. The Company's strategy has been to increase sales revenue
and finance income by opening new Company Dealerships and Branch Offices in
selected markets. Since its initial public offering in June 1996, the Company
has opened one new Company Dealership in Arizona and has entered into a
definitive agreement to acquire the leasehold rights to an existing dealership
in Las Vegas, Nevada. In
4
<PAGE> 6
addition, the Company has three other dealerships (one in Phoenix, Arizona and
two in Albuquerque, New Mexico) and a used car reconditioning facility (in
Albuquerque, New Mexico) currently under development. Also since June 1996, the
Company has opened nine Branch Offices in various states and it intends to open
eight more Branch Offices during the fourth quarter of 1996. The Company intends
to continue its aggressive growth strategy, developing or acquiring additional
Company Dealerships and opening 15 or more additional Branch Offices through the
end of 1997. The Company believes that it will expend an average of
approximately $1.5 million to $1.7 million (excluding inventory) to develop each
dealership and $50,000 to establish each new Branch Office, which the Company
expects to finance through operating cash flows, supplemental borrowings, and
the proceeds of this offering. See "Use of Proceeds." As an additional element
of its growth strategy, the Company intends to augment its Third Party Dealer
operations by expanding its insurance services and implementing its Cygnet
Dealer Program. Although the Company believes its current management team,
monitoring and collection operations, and corporate infrastructure are capable
of supporting the planned expansion of its operations and services, the start-up
costs and incremental overhead created by such expansion could adversely affect
the Company's results of operations in the short-term. See "Business -- Business
Strategy."
Capital Resources. The Company finances its operations through a variety
of funding sources, including a $50.0 million revolving credit facility (the
"Revolving Facility") with General Electric Capital Corporation ("GE Capital").
The Company has also entered into a securitization program (the "Securitization
Program") with SunAmerica Life Insurance Company ("SunAmerica") pursuant to
which SunAmerica may purchase up to $175.0 million of the Company's asset-backed
securities. Through June 30, 1996, the Company had securitized an aggregate of
$24.2 million in contracts originated through Company Dealerships. Standard &
Poor's has given the $18.6 million in securities issued to SunAmerica in
connection with this securitization a "BBB" rating, which the Company believes
is the first "investment grade" rating given to certificates collateralized by
used car installment contracts originated at Buy Here-Pay Here dealerships
without any external credit enhancement. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." The Standard & Poor's rating is unrelated to an investment
in the securities being offered pursuant to this Prospectus.
THE OFFERING
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Common Stock offered......................... 4,000,000 shares
Common Stock to be outstanding immediately
after the offering......................... 12,691,264 shares(1)
Use of proceeds.............................. Redemption of outstanding 10% cumulative
Preferred Stock and repayment of amounts
outstanding under the Revolving Facility
(approximately $36.8 million as of October 23,
1996), with increased borrowing capacity to be
used for development of new Company
Dealerships and Branch Offices, expansion of
contract portfolio, development or acquisition
of new products and services, and general
corporate purposes. See "Use of Proceeds."
Nasdaq symbol................................ "UGLY"
</TABLE>
- ---------------
(1) Excludes 600,000 shares of Common Stock that may be sold by the Company upon
exercise of the Underwriters' over-allotment option. Also excludes: (i)
631,438 shares of Common Stock issuable upon exercise of stock options
outstanding at September 30, 1996 under the Company's Long-Term Incentive
Plan with a weighted average exercise price of $3.55 per share; and (ii)
286,000 shares of Common Stock issuable upon exercise of warrants issued in
connection with the Company's initial public offering with a weighted
average exercise price of $8.36 per share. See "Management -- Long-Term
Incentive Plan" and "Description of Capital Stock."
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
PRO FORMA, AS ADJUSTED(1)
----------------------------------
SIX MONTHS YEAR ENDED SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30, DECEMBER 31, ENDED JUNE 30,
--------------------------- ----------------- ------------ -------------------
1993 1994 1995 1995 1996 1995 1995 1996
------- ------- ------- ------- ------- ------------ -------- --------
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STATEMENT OF OPERATIONS
DATA:
Total Revenues............. $16,477 $33,773 $58,203 $26,520 $39,477 $ 48,747 $ 22,908 $ 39,477
Dealership Sales of Used
Cars................... 13,969 27,768 47,824 22,448 30,177 38,368 18,836 30,177
Income on Dealership
Finance Receivables.... 1,629 4,739 8,227 3,475 4,591 8,227 3,475 4,591
Gain on Sale of Finance
Receivables............ -- -- -- -- 1,178 -- -- 1,178
Servicing Income......... -- -- -- -- 248 -- -- 248
Income on Residual in
Finance Receivables
Sold................... -- -- -- -- 579 -- -- 579
Income on Third Party
Finance Receivables.... -- 710 1,844 438 2,521 1,844 438 2,521
Franchise Fees and Other
Income................. 879 556 308 159 183 308 159 183
Cost of Used Cars Sold..... 6,089 12,577 27,964 11,888 16,858 20,685 9,419 16,858
Provision for Credit
Losses................... 3,292 8,140 8,359 4,404 5,172 7,839 4,018 5,172
Net Revenues from
Dealership Activities.... 6,217 11,790 19,728 9,631 14,495 18,071 8,874 14,495
Income before Operating
Expenses................. 7,096 13,056 21,880 10,228 17,447 20,223 9,471 17,447
Total Operating Expenses... 5,411 12,150 19,600 8,560 11,990 16,468 7,201 11,029
Operating Income........... 1,685 906 2,280 1,668 5,457 3,755 2,270 6,418
Total Interest Expense..... 893 3,037 5,956 2,360 3,289 1,584 689 1,024
Net Earnings (Loss)(2)..... 698 (1,967) (3,972) (748) 2,148 2,096 1,525 5,374
Earnings (Loss) Available
for Common Shares(2)..... 698 (1,967) (3,972) (748) 1,582 2,096 1,525 5,374
Earnings (Loss) per Common
Share(2)................. $ 0.14 $ (0.35) $ (0.67) $ (0.13) $ 0.26 $ 0.17 $ 0.12 $ 0.42
Weighted Average Common
Shares Outstanding during
Period(3)................ 5,011 5,584 5,892 5,892 6,136 12,537 12,537 12,781
</TABLE>
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PRO FORMA, AS ADJUSTED(1)
----------------------------------
DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30,
--------------------------- ----------------- ------------ -------------------
1993 1994 1995 1995 1996 1995 1995 1996
------- ------- ------- ------- ------- ------------ -------- --------
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BALANCE SHEET DATA:
Cash and Cash
Equivalents.............. $ 79 $ 168 $ 1,419 $ 315 $ 263 $ 41,698 $ 51,503 $ 37,337
Finance Receivables, Net... 7,089 15,858 40,726 27,129 43,612 40,726 27,129 43,612
Total Assets............... 11,936 29,711 60,790 44,701 70,142 108,404 103,339 114,665
Subordinated Notes
Payable.................. 8,941 18,291 14,553 20,000 14,000 14,553 10,000 14,000
Total Debt................. 9,380 28,617 50,737 42,425 37,292 22,986 18,583 24,180
Preferred Stock............ -- -- 10,000 -- 10,000 -- -- --
Common Stock............... 1 77 127 127 18,122 85,492 82,607 85,757
Total Stockholders' Equity
(Deficit)(4)............. 697 (1,194) 4,884 (1,892) 24,461 $ 80,250 $ 80,588 $ 82,096
Principal Balances
Outstanding:
Dealership Portfolio....... 9,588 19,881 34,226 28,896 25,307
Third Party Dealer
Portfolio................ -- 1,620 13,805 5,848 25,476
Portfolio Securitized with
Servicing Retained....... $ -- $ -- $ -- $ -- $20,470
</TABLE>
(footnotes on following page)
6
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
PRO FORMA, AS ADJUSTED(1)
----------------------------------
SIX MONTHS YEAR ENDED SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30, DECEMBER 31, ENDED JUNE 30,
--------------------------- ----------------- ------------ -------------------
1993 1994 1995 1995 1996 1995 1995 1996
------- ------- ------- ------- ------- ------------ -------- --------
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DEALERSHIP OPERATING DATA
(UNAUDITED):
Number of Used Cars Sold... 3,359 5,270 7,383 3,611 4,188 6,326 3,170 4,188
Company Dealerships........ 5 8 8 8 7 7 7 7
Units Sold per
Dealership............... 672 659 923 451 598 904 453 598
Number of Contracts
Outstanding.............. 2,929 5,515 8,049 7,393 4,253
Allowance as % of
Outstanding Principal.... 30.0% 30.4% 21.9% 27.3% 23.6%
Average Principal Balances
Outstanding.............. $ 3,273 $ 3,605 $ 4,252 $ 3,909 $ 5,950
Delinquencies:
Principal Balances 31 to 60
Days..................... 10.5% 5.1% 4.2% 4.2% 2.8%
Principal Balances over 60
Days..................... 15.0% 1.3% 1.1% 2.3% 1.0%
Average Yield on
Contracts................ 26.4% 28.2% 28.0% 28.9% 28.9%
THIRD PARTY OPERATING DATA
(UNAUDITED):
Number of Contracts
Purchased................ -- 1,423 3,012 1,244 3,112
Number of Branch Offices... -- 1 8 5 13
Number of Third Party
Dealers.................. -- 20 118 27 510
Number of Contracts
Outstanding.............. -- 726 2,733 1,539 5,028
Allowance as % of
Outstanding Principal.... -- 9.8% 7.2% 11.1% 8.1%
Average Principal Balance
Outstanding.............. $ -- $ 2,232 $ 5,051 $ 3,800 $ 5,067
Delinquencies:
Principal Balances 31 to 60
Days..................... -- 6.0% 1.2% 1.3% 1.4%
Principal Balances over 60
Days..................... -- 2.6% 0.4% 0.2% 0.2%
Average Yield on
Contracts................ -- 30.9% 26.7% 30.5% 26.5%
</TABLE>
- ---------------
(1) Pro forma, as adjusted, financial information gives effect to: (i) certain
recapitalization transactions which took effect as of June 21, 1996; (ii)
the sale of the Company's Gilbert, Arizona dealership (the "Gilbert
Dealership"); (iii) the sale of 2,645,000 shares of Common Stock at $6.75
per share pursuant to the Company's initial public offering and the
application of the net proceeds therefrom (approximately $14.9 million) to
repay amounts outstanding under the Revolving Facility; and (iv) the sale of
the 4,000,000 shares of Common Stock offered hereby at an assumed price of
$18.00 per share and the initial application of the net proceeds therefrom
as described in "Use of Proceeds," in each case as if such transaction had
occurred as of December 31, 1994. See "Recapitalization and Related
Transactions," "Use of Proceeds," and Notes (1) and (2) to "Selected
Consolidated Financial Data."
(2) Net Earnings has not been reduced by a provision for income taxes due to the
Company's utilization of certain income tax benefits. See Note 14 to the
Consolidated Financial Statements.
(3) See Notes to the Consolidated Financial Statements for a determination of
the weighted average common shares outstanding.
(4) The Accumulated Deficit component of Total Stockholders' Equity does not
give any effect to the pro forma adjustments.
7
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RISK FACTORS
Investment in the Common Stock offered hereby involves certain risks. In
addition to the other information included elsewhere in this Prospectus,
prospective investors should give careful consideration to the following factors
before purchasing shares of the Common Stock offered hereby.
NO ASSURANCE OF CONTINUED PROFITABILITY; FLUCTUATIONS IN OPERATING RESULTS
The Company began operations in 1992 and incurred significant losses in
1994 and 1995. For the six months ended June 30, 1996, however, the Company
achieved profitability with net earnings of approximately $2.1 million
(including $1.2 million from the sale of contract receivables pursuant to the
Securitization Program) on total revenues of $39.5 million. There can be no
assurance that the Company will remain profitable. Historically, the Company has
experienced higher car sales revenues in the first two quarters of the year than
in the latter half of the year. The Company believes that these results are due
to seasonal buying patterns resulting in part from the fact that many of its
customers receive income tax refunds during the first part of the year, which
are a primary source of down payments on used car purchases. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON SECURITIZATIONS
In recent periods, a significant portion of the Company's net earnings have
been attributable to gains on sales of contract receivables under its
Securitization Program, which program the Company expects to continue for the
foreseeable future. Consequently, the Company's net income may fluctuate from
quarter to quarter as a result of the timing and size of its securitizations.
The Company's ability to successfully complete securitizations in the future may
be affected by several factors, including the condition of securities markets
generally, conditions in the asset-backed securities markets specifically, and
the credit quality of the Company's servicing portfolio. The amount of any gain
on sale is based upon certain estimates, which may not subsequently be realized.
To the extent that actual cash flows on a securitization are materially below
estimates, the Company would be required to revalue the residual portion of the
securitization which it retains, and record a charge to earnings based upon the
reduction. In addition, the Company records ongoing income based upon the cash
flows on its residual portion. The income recorded on the residual portion will
vary from quarter to quarter based upon cash flows received in a given period.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
POOR CREDITWORTHINESS OF BORROWERS; HIGH RISK OF CREDIT LOSSES
Substantially all of the contracts that the Company services are with
Sub-Prime Borrowers. Due to their poor credit histories, Sub-Prime Borrowers are
generally unable to obtain credit from traditional financial institutions, such
as banks, savings and loans, credit unions, or captive finance companies owned
by automobile manufacturers. The Company typically charges a fixed interest rate
of 29.9% on contracts originated at Company Dealerships while rates range from
17.6% to 29.9% on the Third Party Dealer contracts it purchases. In addition,
the Company has established an Allowance for Credit Losses, which approximated
17.7% and 15.8% of contract principal balances for the year ended December 31,
1995 and the six months ended June 30, 1996, respectively, to cover anticipated
credit losses on the contracts currently in its portfolio. At December 31, 1995
and June 30, 1996, the principal balance of delinquent contracts as a percentage
of total outstanding contract principal balances was 4.2% and 2.8%,
respectively. The Company's net charge offs as a percentage of average principal
outstanding for the year ended December 31, 1995 and the six months ended June
30, 1996 were 21.7% and 8.9%, respectively. The Company believes its Allowance
for Credit Losses is adequate to absorb anticipated credit losses. However, no
assurance can be given that the Company has adequately provided for, or will
adequately provide for, such credit risks or that credit losses in excess of its
Allowance for Credit Losses will not occur in the future. A significant
variation in the timing of or increase in credit losses on the Company's
portfolio would have a material adverse effect on the Company's profitability.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Allowance for Credit Losses" and "Business -- Monitoring and
Collections."
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RISKS ASSOCIATED WITH GROWTH STRATEGY AND NEW PRODUCT OFFERINGS
The Company's business strategy calls for aggressive growth in its sales
and financing activities through the development and acquisition of new Company
Dealerships and Branch Offices and the expansion of its existing operations to
include additional financing and insurance services. The Company's ability to
remain profitable as it pursues this business strategy will depend upon its
ability to: (i) expand its revenue generating operations while not
proportionately increasing its administrative overhead; (ii) originate and
purchase contracts with an acceptable level of credit risk; (iii) effectively
collect payments due on the contracts in its portfolio; (iv) locate sufficient
financing, with acceptable terms, to fund the expansion of used car sales and
the origination and purchase of additional contracts; and (v) adapt to the
increasingly competitive market in which it operates. Outside factors, such as
the economic, regulatory, and judicial environments in which it operates, will
also have an effect on the Company's business. The Company's inability to
achieve or maintain any or all of these goals could have a material adverse
effect on the Company's operations, profitability, and growth. See
"Business -- Business Strategy."
The Company has initiated its Cygnet Dealer Program, pursuant to which the
Company intends to provide qualified Third Party Dealers with operating lines of
credit secured by such dealers' retail installment contract portfolios. While
the Company will require Third Party Dealers to meet certain minimum net worth
and operating history criteria to be considered for inclusion in the Cygnet
Dealer Program, the Company will, nevertheless, be extending credit to dealers
who are not otherwise able to obtain debt financing from traditional lending
institutions such as banks, credit unions, and major finance companies.
Consequently, as with its other financing activities, the Company will be
subject to a high risk of credit losses that could have a material adverse
effect on the Company's financial condition and results of operations and on the
Company's ability to meet its own financing obligations. Further, there can be
no assurance that the Company will be able to obtain the financing necessary to
fully implement the Cygnet Dealer Program. In addition, there can be no
assurance that the Company will be successful in its efforts to expand its
insurance services. See "Business -- Third Party Dealer Operations --
Collateralized Dealer Financing" and "Business -- Third Party Dealer
Operations -- Insurance Services."
HIGHLY COMPETITIVE INDUSTRY
Although the used car sales industry has historically been highly
fragmented, it has attracted significant attention recently from a number of
large companies, including Circuit City's CarMax, AutoNation, U.S.A., and
Driver's Mart, which have entered the used car sales business or announced plans
to develop large used car sales operations. Many franchised new car dealerships
have also increased their focus on the used car market. The Company believes
that these companies are attracted by the relatively high gross margins that can
be achieved in this market and the industry's lack of consolidation. Many of
these companies and franchised dealers have significantly greater financial,
marketing, and other resources than the Company. Among other things, increased
competition could result in increased wholesale costs for used cars, decreased
retail sales prices, and lower margins.
Like the sale of used cars, the business of purchasing and servicing
contracts originated from the sale of used cars to Sub-Prime Borrowers is a
highly fragmented and very competitive market. In recent years, several consumer
finance companies have completed public offerings in order to raise the capital
necessary to fund expansion and support increased purchases of contracts. These
companies have increased the competition for the purchase of contracts, in many
cases purchasing contracts at prices that the Company believes are not
commensurate with the associated risk. There are numerous financial services
companies serving, or capable of serving, this market, including traditional
financial institutions such as banks, savings and loans, credit unions, and
captive finance companies owned by automobile manufacturers, and other
non-traditional consumer finance companies, many of which have significantly
greater financial and other resources than the Company. Increased competition
may cause downward pressure on the interest rates the Company charges on
contracts originated by its Company Dealerships or cause the Company to reduce
or eliminate the nonrefundable acquisition discount on the contracts it
purchases from Third Party Dealers, which could have a material adverse effect
on the Company's profitability. See "Business -- Competition."
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<PAGE> 11
The Company believes that recent demographic, economic, and industry trends
favor growth in the used car sales and Sub-Prime Borrower financing markets. To
the extent such trends do not continue, however, the Company's profitability may
be materially and adversely affected. See "Business -- Overview of Used Car
Sales and Finance Industry."
GENERAL ECONOMIC CONDITIONS
The Company's business is directly related to sales of used cars, which are
affected by employment rates, prevailing interest rates, and other general
economic conditions. While the Company believes that current economic conditions
favor continued growth in the markets it serves and those in which it seeks to
expand, a future economic slowdown or recession could lead to decreased sales of
used cars and increased delinquencies, repossessions, and credit losses that
could hinder the Company's business. Because of the Company's focus on the
sub-prime segment of the automobile financing industry, its actual rate of
delinquencies, repossessions, and credit losses could be higher under adverse
conditions than those experienced in the used car sales and finance industry in
general. See "Business -- Company Dealership Operations" and "Business -- Third
Party Dealer Operations."
NEED TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH THIRD PARTY DEALERS
The Company enters into nonexclusive agreements with Third Party Dealers,
which may be terminated by either party at any time, pursuant to which the
Company purchases contracts originated by such dealers that meet the Company's
established terms and conditions. Pursuant to the Cygnet Dealer Program, the
Company will also enter into financing agreements with qualified Third Party
Dealers. The Company's Third Party Dealer financing activities depend in large
part upon its ability to establish and maintain relationships with such dealers.
While the Company believes that it has been successful in developing and
maintaining relationships with Third Party Dealers in the markets that it
currently serves, there can be no assurance that the Company will be successful
in maintaining or increasing its existing Third Party Dealer base, that such
dealers will continue to generate a volume of contracts comparable to the volume
of contracts historically generated by such dealers, or that any such dealers
will become involved in the Cygnet Dealer Program. See "Business -- Third Party
Dealer Operations."
GEOGRAPHIC CONCENTRATION
Company Dealership operations are currently concentrated in Arizona. In
addition, as of September 30, 1996, five of the Company's twenty-two Branch
Offices were located in Arizona. Of the $71.3 million in total contracts
serviced by the Company at June 30, 1996, approximately $62.1 million were
originated in Arizona. Because of this concentration, the Company's business may
be adversely affected in the event of a downturn in the general economic
conditions existing in Arizona and the southwestern United States. See
"Business -- Company Dealership Operations" and "Business -- Third Party Dealer
Operations."
DEPENDENCE ON EXTERNAL FINANCING
The Company has borrowed, and will continue to borrow, substantial amounts
to fund its operations from financing companies and other lenders, some of which
are affiliated with the Company. Currently, the Company receives financing
pursuant to the Revolving Facility with GE Capital, which has a maximum
commitment of $50.0 million. Under the Revolving Facility, the Company may
borrow up to 65.0% of the principal balance of eligible Company Dealership
contracts and up to 90.0% of the principal balance of eligible Third Party
Dealer contracts. The Revolving Facility expires in September 1997, at which
time the Company has the option to renew it for one additional year. The
Revolving Facility is secured by substantially all of the Company's assets. In
addition, the Revolving Facility contains various covenants that limit, among
other things, the Company's ability to engage in mergers and acquisitions, incur
additional indebtedness, and pay dividends or make other distributions, and also
requires the Company to meet certain financial tests. As of June 30, 1996, the
Company's borrowing capacity under the Revolving Facility was approximately
$38.0 million, the aggregate principal amount outstanding under the Revolving
Facility was $20.6 million, and the
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<PAGE> 12
amount available to be borrowed was $17.4 million. Although the Company believes
it is currently in compliance with the terms and conditions of the Revolving
Facility, there can be no assurance that the Company will be able to continue to
satisfy such terms and conditions or that the Revolving Facility will be
extended beyond its current expiration date. In addition, the Company and
SunAmerica have entered into the Securitization Program pursuant to which
SunAmerica may purchase up to $175.0 million of the Company's asset-backed
securities. The Securitization Program is subject to numerous terms and
conditions, including the Company's ability to achieve investment-grade ratings
on its asset-backed securities. As of June 30, 1996, the Company had securitized
an aggregate of $24.2 million in contracts originated through Company
Dealerships, issuing $18.6 million in securities to SunAmerica. There can be no
assurance, however, that any further securitizations will be completed or that
the Company will be able to secure additional financing, including the financing
necessary to fully implement the Cygnet Dealer Program, when and as needed in
the future, or on terms acceptable to the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
SENSITIVITY TO INTEREST RATES
A substantial portion of the Company's financing income results from the
difference between the rate of interest it pays on the funds it borrows and the
rate of interest it earns under the contracts in its portfolio. While the
contracts the Company services bear interest at a fixed rate, the indebtedness
that the Company incurs under its Revolving Facility bears interest at a
floating rate. In the event the Company's interest expense increases, it would
seek to compensate for such increases by raising the interest rates on its
Company Dealership contracts, increasing the acquisition discount at which it
purchases Third Party Dealer contracts, or raising the retail sales prices of
its used cars. To the extent the Company were unable to do so, the Company's net
interest margins would decrease, thereby adversely affecting the Company's
profitability.
IMPACT OF USURY LAWS
The Company typically charges a fixed interest rate of 29.9% on the
contracts originated at Company Dealerships, while rates range from 17.6% to
29.9% on the Third Party Dealer contracts it purchases. Currently, all of the
Company's used car sales activities are conducted in, and a majority of the
contracts the Company services are originated in, Arizona, which does not impose
limits on the interest rate that a lender may charge. The Company has expanded,
and will continue to expand, its operations into states that impose usury
limits. The Company attempts to mitigate these rate restrictions by purchasing
contracts originated in these states at a higher discount. The Company's
inability to achieve adequate discounts in states imposing usury limits would
adversely affect the Company's planned expansion and its results of operations.
There can be no assurance that Arizona will not adopt a usury statute or that
Arizona or other jurisdictions in which the Company operates will not adopt
additional laws, rules, and regulations that could adversely affect the
Company's business. See "Business -- Regulation, Supervision, and Licensing."
DEPENDENCE UPON KEY PERSONNEL
The Company's future success will depend upon the continued services of the
Company's senior management as well as the Company's ability to attract
additional members to its management team with experience in the used car sales
and financing industry. The unexpected loss of the services of any of the
Company's key management personnel, or its inability to attract new management
when necessary, could have a material adverse effect upon the Company. The
Company has entered into employment agreements (which include non-competition
provisions) with certain of its officers. See "Management."
CONTROL BY PRINCIPAL STOCKHOLDER
Upon the completion of the offering, Mr. Ernest C. Garcia, II, the
Company's Chairman, Chief Executive Officer, and principal stockholder, will
hold 36.6% of the outstanding Common Stock. As a result, Mr. Garcia will have a
significant influence upon the activities of the Company, as well as on all
matters requiring approval of the stockholders, including electing or removing
members of the Company's Board of Directors, causing the Company to engage in
transactions with affiliated entities, causing or restricting the sale
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<PAGE> 13
or merger of the Company, and changing the Company's dividend policy. See
"Management" and "Principal Stockholders."
POTENTIAL ANTI-TAKEOVER EFFECT OF PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the Company to issue
"blank check" Preferred Stock, the designation, number, voting powers,
preferences, and rights of which may be fixed or altered from time to time by
the Board of Directors. Accordingly, the Board of Directors has the authority,
without stockholder approval, to issue Preferred Stock with dividend,
conversion, redemption, liquidation, sinking fund, voting, and other rights that
could adversely affect the voting power or other rights of the holders of the
Common Stock. The Preferred Stock could be utilized, under certain
circumstances, to discourage, delay, or prevent a merger, tender offer, or
change in control of the Company that a stockholder might consider to be in its
best interests. Although the Company has no present intention of issuing any
additional shares of its authorized Preferred Stock, there can be no assurance
that the Company will not do so in the future. See "Description of Capital
Stock -- Preferred Stock."
REGULATION, SUPERVISION, AND LICENSING
The Company's operations are subject to ongoing regulation, supervision,
and licensing under various federal, state, and local statutes, ordinances, and
regulations. Among other things, these laws require that the Company obtain and
maintain certain licenses and qualifications, limit or prescribe terms of the
contracts that the Company originates and/or purchases, require specified
disclosures to customers, limit the Company's right to repossess and sell
collateral, and prohibit the Company from discriminating against certain
customers. The Company is also subject to federal and state franchising and
insurance laws. See "Business -- Regulation, Supervision, and Licensing."
The Company believes that it is currently in substantial compliance with
all applicable federal, state, and local laws and regulations. There can be no
assurance, however, that the Company will be able to remain in compliance with
such laws, and such failure could have a material adverse effect on the
operations of the Company. In addition, the adoption of additional statutes and
regulations, changes in the interpretation of existing statutes and regulations,
or the Company's entrance into jurisdictions with more stringent regulatory
requirements could have a material adverse effect on the Company's business.
SHARES ELIGIBLE FOR FUTURE SALE
Approximately 6,046,264 shares of Common Stock outstanding as of the date
of this Prospectus are "restricted securities," as that term is defined under
Rule 144 promulgated under the Securities Act. In general, under Rule 144 as
currently in effect, subject to the satisfaction of certain other conditions, if
two years have elapsed since the later of the date of acquisition of restricted
shares from an issuer or an affiliate of an issuer, the acquiror or subsequent
holder is entitled to sell in the open market, within any three-month period, a
number of shares that does not exceed the greater of one percent of the
outstanding shares of the same class or the average weekly trading volume during
the four calendar weeks preceding the filing of the required notice of sale. (A
person who has not been an affiliate of the Company for at least the three
months immediately preceding the sale and who has beneficially owned shares of
Common Stock as described above for at least three years is entitled to sell
such shares under Rule 144 without regard to any of the limitations described
above.) Of the 6,046,264 "restricted securities" outstanding, substantially all
of these shares have been held for the two-year holding period required under
Rule 144. However, the Company and its officers and directors have agreed not to
sell or otherwise dispose of any shares of Common Stock for a period of 90 days
after the effective date of this offering (180 days in the case of the Company's
Chief Executive Officer and principal stockholder, Mr. Ernest C. Garcia, II)
without the written consent of the Representatives. Concurrent with this
offering, the Company is registering for resale 444,444 shares held by
SunAmerica, which will be eligible for sale in the open market on December 14,
1996. No predictions can be made with respect to the effect, if any, that sales
of Common Stock in the market or the availability of shares of Common Stock for
sale under Rule 144 will have on the market price of Common Stock prevailing
from time to time.
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<PAGE> 14
Nevertheless, the possibility that substantial amounts of Common Stock may be
sold in the public market may adversely affect prevailing market prices for the
Common Stock.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock could be subject to significant
fluctuations in response to such factors as, among others, variations in the
anticipated or actual results of operations of the Company or other companies in
the used car sales and finance industry, changes in conditions affecting the
economy generally, analyst reports, or general trends in the industry.
PRIOR LEGAL ACTIONS INVOLVING CHIEF EXECUTIVE OFFICER
In October 1990, Mr. Garcia pled guilty to one felony count of bank fraud
brought by the United States, on behalf of the Resolution Trust Corporation
("RTC"), for his participation in a real estate transaction involving Lincoln
Savings and Loan Association, a federally insured savings and loan institution
that later went into receivership. In connection with this matter, Mr. Garcia
also settled civil lawsuits filed against him by the RTC and the Securities and
Exchange Commission (the "Commission"), and consented to an administrative order
imposed by the Commission. In addition, a real estate investment company owned
by Mr. Garcia, as well as several limited partnerships organized by that
company, filed petitions for reorganization under Chapter 11 of the United
States Bankruptcy Code in 1990 and 1991. Mr. Garcia and his wife filed a
petition for discharge under Chapter 7 of the United States Bankruptcy Code in
June 1990. Mr. Garcia's company and the related partnerships were successfully
reorganized in the period from 1990 to 1993 and Mr. Garcia was fully discharged
in 1991. See "Management -- Involvement in Certain Legal Proceedings."
FORWARD LOOKING STATEMENTS
This Prospectus contains forward looking statements. Additional written or
oral forward looking statements may be made by the Company from time to time in
filings with the Securities and Exchange Commission or otherwise. Such forward
looking statements are within the meaning of that term in Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such
statements may include, but not be limited to, projections of revenues, income,
or loss, capital expenditures, plans for future operations, financing needs or
plans, and plans relating to products or services of the Company, as well as
assumptions relating to the foregoing. The words "believe," "expect,"
"anticipate," "estimate," "project," and similar expressions identify forward
looking statements, which speak only as of the date the statement was made.
Forward looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results could differ materially from those set forth in, contemplated by, or
underlying the forward looking statements. Statements in this Prospectus,
including those contained in this section entitled "Risk Factors," in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and in the Notes to the Company's Consolidated
Financial Statements, describe factors, among others, that could contribute to
or cause such differences.
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THE COMPANY
The Company operates one of the largest chains of Buy Here-Pay Here used
car dealerships in the United States and underwrites, finances, and services
retail installment contracts generated from the sale of used cars by its Company
Dealerships and Third Party Dealers located in selected markets throughout the
country. As part of its financing activities, the Company has initiated the
Cygnet Dealer Program pursuant to which it intends to provide qualified Third
Party Dealers with operating credit lines secured by the dealers' retail
installment contract portfolios. The Company began its used car sales and
financing operations in 1992 and has pursued an aggressive growth strategy since
that time. As of September 30, 1996, the Company had developed or acquired eight
Company Dealerships in Arizona and had opened twenty-two Branch Offices located
in seven states.
In 1990, Duck Ventures, Inc., currently a subsidiary of the Company,
acquired the assets of the Ugly Duckling Rent-A-Car, Inc. franchise system. The
Company currently administers 45 Ugly Duckling Rent-A-Car franchises throughout
the United States. The Company has suspended efforts to solicit new franchisees
or otherwise expand the Ugly Duckling Rent-A-Car business and it does not expect
to reinitiate such activities in the foreseeable future.
The Company operates through numerous direct and indirect wholly owned
subsidiaries, including: Duck Ventures, Inc., which provides all administrative
services to the Company, such as corporate finance and accounting, personnel
administration, data processing, communication systems maintenance, and software
development; Ugly Duckling Car Sales, Inc., which operates the Company
Dealerships; Champion Acceptance Corp., which services contracts originated by
Company Dealerships and contracts purchased from Third Party Dealers; Champion
Financial Services, Inc., which purchases contracts originated by Third Party
Dealers; UDRAC, Inc., which provides administrative services to Ugly Ducking
Rent-A-Car franchisees; Champion Receivables Corp., which is the Company's
special purpose corporation for purposes of the Securitization Program; Cygnet
Finance, Inc., which operates the Cygnet Dealer Program; Drake Insurance
Services, Inc., which serves as a holding company for Drake Insurance Agency,
Inc., an Arizona licensed insurance agency, and Drake Property & Casualty
Insurance Company and Drake Life Insurance Company, which are Turks and Caicos
Islands-chartered and licensed reinsurance companies; and several other inactive
subsidiaries.
The Company was formed in Arizona in 1992 for the purpose of purchasing
Duck Ventures, Inc. and other subsidiaries and was reincorporated in Delaware in
1996. Except as otherwise specified, all references in this Prospectus to the
"Company" refer to Ugly Duckling Corporation and its subsidiaries. The Company's
principal executive offices are located at and its mailing address is 2525 East
Camelback Road, Suite 1150, Phoenix, Arizona 85016. The telephone number of the
Company is 1-800-THE-DUCK.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,000,000 shares of
Common Stock offered hereby, assuming a public offering price of $18.00 per
share and after deducting underwriting discounts and estimated offering
expenses, are estimated to be approximately $67.6 million ($77.8 million if the
Underwriters' over-allotment option is exercised in full). The Company intends
to use $10.0 million of the net proceeds of the offering to redeem the Company's
outstanding 10.0% cumulative Preferred Stock, and an additional portion of the
net proceeds to reduce amounts outstanding under its Revolving Facility with GE
Capital (approximately $36.8 million as of October 23, 1996). The Revolving
Facility has a maximum commitment of $50.0 million through September 1997, at
which time the Company has the option to renew it for one additional year. Debt
outstanding under the Revolving Facility accrues interest daily at an annual
rate of 3.6% over the 30-day average London Inter-Bank Offered Rate ("LIBOR")
(total rate of 9.1% as of October 23, 1996). The balance of the proceeds will be
added to working capital for general corporate purposes.
The amount repaid under the Revolving Facility will remain available for
use by the Company to implement its growth strategy. Since its initial public
offering in June 1996, the Company has opened one new Company Dealership in
Arizona and has entered into a definitive agreement to acquire the leasehold
rights to an existing dealership in Las Vegas, Nevada. In addition, the Company
has three other dealerships (one in Phoenix, Arizona and two in Albuquerque, New
Mexico) and a used car reconditioning facility (in Albuquerque, New Mexico)
currently under development and has begun an expansion of its contract servicing
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and collection facility. Also since June 1996, the Company has opened nine
Branch Offices in various states and it intends to open eight more Branch
Offices during the fourth quarter of 1996. Through the end of 1997, the Company
anticipates developing or acquiring additional Company Dealerships and opening
15 or more new Branch Offices. The Company estimates that it will expend an
average of approximately $1.5 million to $1.7 million (excluding inventory) to
develop each Company Dealership and $50,000 to establish each new Branch Office.
See "Business -- Business Strategy."
Amounts available to the Company as a result of this offering could also be
used by the Company to acquire other businesses, such as used car sales and
finance companies or automobile-related insurance agencies, which the Company
evaluates from time to time as a means of enhancing its ability to provide sub-
prime market financing and otherwise expand its operations. Except as disclosed
in this Prospectus, there are no agreements, arrangements, or understandings
with regard to any such transaction. See "Business -- Third Party Dealer
Operations -- Insurance Services."
PRICE RANGE OF COMMON STOCK
Since the Company's initial public offering of Common Stock at $6.75 per
share, the Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "UGLY." The following table sets forth the high and low closing
sale prices of the Common Stock, as reported by the Nasdaq National Market, for
the periods indicated:
<TABLE>
<CAPTION>
MARKET PRICE
------------
FISCAL YEAR 1996 HIGH LOW
- ----------------------------------------------------------------------------- ---- ---
<S> <C> <C>
Second Quarter (from June 18, 1996).......................................... $10 $ 8 1/2
Third Quarter................................................................ $15 1/2 $ 8 1/8
Fourth Quarter (through October 23, 1996).................................... $17 3/8 $13
</TABLE>
On October 23, 1996, the last reported sale price of the Common Stock on
the Nasdaq National Market was $17 3/8 per share. As of July 31, 1996, there
were approximately 1,200 beneficial holders of the Company's Common Stock.
DIVIDEND POLICY
The Company has never paid cash dividends on the Common Stock and does not
anticipate doing so in the foreseeable future. It is the current policy of the
Company's Board of Directors to retain any earnings to finance the operations
and expansion of the Company's business. In addition, the terms of the Revolving
Facility prevent the Company from declaring or paying dividends in excess of
10.0% of each year's net earnings available for distribution. The Company is
also subject to certain prohibitions against the payment of cash dividends to
holders of Common Stock pursuant to the terms of its outstanding 10% cumulative
Preferred Stock (which will be redeemed from the proceeds of the offering). See
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources -- Revolving
Facility" and "Description of Capital Stock -- Preferred Stock."
RECAPITALIZATION AND RELATED TRANSACTIONS
Effective June 21, 1996, the Company entered into an agreement (the
"Modification Agreement") with Verde Investments, an affiliate of the Company
whose sole stockholder, Ernest C. Garcia, II, is also the Chairman, Chief
Executive Officer, and principal stockholder of the Company, pursuant to which
Verde Investments agreed to sell to the Company at any time prior to June 21,
1997, subject to financing, nine properties owned by Verde Investments and
leased to the Company at the lower of $7.45 million or the appraised value (as
determined by an independent third party), and to lower the rental rates on such
properties to an aggregate of $745,000 per year subject to cost of living
adjustments if the sale does not take place. The Company believes the reduced
rental rates approximate the financing costs to be incurred in connection with
the purchase of such properties. In addition, Verde Investments assigned to the
Company its leasehold interests in two properties it sub-leased to the Company.
These transactions (the reduction in rental rates and/or the purchase of
property) would have resulted in savings to the Company of approximately
$730,000 for 1995 and $626,000 for the six months ended June 30, 1996. Also
pursuant to the Modification
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<PAGE> 17
Agreement, Verde Investments lowered the interest rate on the $14.0 million of
subordinated debt payable to Verde Investments from 18.0% to 10.0% per annum and
lowered from 12.0% to 10.0% the dividend rate on the $10.0 million of Preferred
Stock held by Verde Investments (which will be redeemed from the proceeds of
this offering). See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources," "Certain
Relationships and Related Transactions," and "Description of Capital
Stock -- Preferred Stock." Also effective June 21, 1996, SunAmerica, a
significant funding source for the Company, converted $3.0 million of
subordinated indebtedness into Common Stock of the Company. As a result of the
foregoing transactions (the "Recapitalization Transactions"), the Company
expects to achieve savings of over $2.6 million annually through 1997.
CAPITALIZATION
The following table sets forth: (i) the actual capitalization of the
Company as of June 30, 1996; (ii) the pro forma capitalization of the Company,
which assumes the consummation of the Recapitalization Transactions and the sale
of 2,645,000 shares of Common Stock at $6.75 per share pursuant to the Company's
intitial public offering and the application of the net proceeds therefrom
(approximately $14.9 million) to repay amounts outstanding under the Revolving
Facility, in each case as of December 31, 1994; and (iii) the pro forma
capitalization of the Company as adjusted to give effect to the sale of the
4,000,000 shares of Common Stock offered hereby (exclusive of the over-allotment
option) at an assumed price of $18.00 per share and the initial application of
the estimated net proceeds therefrom in the manner described in "Use of
Proceeds," also as of December 31, 1994. The table should be read in conjunction
with the Company's Consolidated Financial Statements and the related notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Debt:
Obligations under Capital Leases......................... $ 904 $ 904 $ 904
Revolving Facility....................................... 20,562 20,562 --
Notes Payable, Other..................................... 1,826 1,826 1,826
Debt on real property to be acquired from Verde
Investments........................................... -- 7,450 7,450
Subordinated Notes Payable............................... 14,000 14,000 14,000
------- ------- -------
Total Debt....................................... 37,292 44,742 24,180
------- ------- -------
Stockholders' Equity:
Preferred Stock(1)....................................... 10,000 10,000 --
Common Stock(1).......................................... 18,122 18,122 85,757
Accumulated Deficit(2)................................... (3,661) (3,661) (3,661)
------- ------- -------
Total Stockholders' Equity(3).................... 24,461 24,461 82,096
------- ------- -------
Total Capitalization........................ $61,753 $69,203 $ 106,276
======= ======= =======
</TABLE>
- ---------------
(1) The Company has 1,000,000 shares of Preferred Stock and 8,691,264 shares of
Common Stock issued and outstanding, actual, and no shares of Preferred
Stock and 12,691,264 shares of Common Stock issued and outstanding, pro
forma as adjusted.
(2) The Accumulated Deficit component of Total Stockholders' Equity does not
give effect to the pro forma adjustments. See "Selected Consolidated
Financial Data."
(3) Excludes up to 600,000 shares of Common Stock that may be sold by the
Company upon the exercise of the Underwriters' over-allotment option. Also
excludes: (i) 631,438 shares of Common Stock issuable upon exercise of stock
options outstanding at September 30, 1996, under the Company's Long-Term
Incentive Plan with a weighted average exercise price of $3.55 per share;
and (ii) 286,000 shares of Common Stock issuable upon exercise of warrants
issued in connection with the Company's initial public offering of Common
Stock with a weighted average exercise price of $8.36 per share. See
"Management -- Long-Term Incentive Plan" and "Description of Capital Stock."
16
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
The following table sets forth selected historical consolidated financial
data of the Company for each of the years in the five-year period ended December
31, 1995, and for the six month periods ended June 30, 1995 and 1996. The
selected annual historical consolidated financial data for 1993, 1994, and 1995
are derived from the Company's Consolidated Financial Statements audited by KPMG
Peat Marwick LLP, independent certified public accountants. The selected annual
historical consolidated financial data for 1992 are derived from the Company's
Consolidated Financial Statements audited by Toback & Co., independent certified
public accountants. Information for the six months ended June 30, 1995 and 1996
and for the year ended December 31, 1991, is derived from unaudited interim
consolidated financial statements which reflect, in the opinion of the Company,
all adjustments, which include only normal recurring adjustments, necessary for
fair presentation of the financial data for such periods. For additional
information, see the Consolidated Financial Statements of the Company included
elsewhere in this Prospectus. The following table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
PRO FORMA(1)
---------------------
SIX
MONTHS
SIX MONTHS ENDED
ENDED YEAR ENDED JUNE
YEARS ENDED DECEMBER 31, JUNE 30, DECEMBER 31, 30,
--------------------------------------------- ----------------- ---------- -------
STATEMENT OF OPERATIONS DATA: 1991 1992 1993 1994 1995 1995 1996 1995 1995
------ ------ ------- ------- ------- ------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dealership Revenues:
Sales of Used Cars...................... $ -- $2,136 $13,969 $27,768 $47,824 $22,448 $30,177 $ 38,368 $18,836
Income on Finance Receivables........... -- 148 1,629 4,739 8,227 3,475 4,591 8,227 3,475
Gain on Sale of Finance Receivables..... -- -- -- -- -- -- 1,178 --
Income on Residual in Finance
Receivables Sold....................... -- -- -- -- -- -- 579 --
------ ------ ------- ------- ------- ------- ------- ------- -------
-- 2,284 15,598 32,507 56,051 25,923 36,525 46,595 22,311
------ ------ ------- ------- ------- ------- ------- ------- -------
Cost of Dealership Revenues:
Cost of Used Cars Sold.................. -- 1,010 6,089 12,577 27,964 11,888 16,858 20,685 9,419
Provision for Credit Losses............. -- 826 3,292 8,140 8,359 4,404 5,172 7,839 4,018
------ ------ ------- ------- ------- ------- ------- ------- -------
-- 1,836 9,381 20,717 36,323 16,292 22,030 28,524 13,437
------ ------ ------- ------- ------- ------- ------- ------- -------
Net Revenues from Dealership Activity... -- 448 6,217 11,790 19,728 9,631 14,495 18,071 8,874
Other Income:
Servicing Income........................ -- -- -- -- -- -- 248 -- --
Income on Third Party Finance
Receivables............................ -- -- -- 710 1,844 438 2,521 1,844 438
Franchise Fees and Other Income......... 819 982 879 556 308 159 183 308 159
------ ------ ------- ------- ------- ------- ------- ------- -------
819 982 879 1,266 2,152 597 2,952 2,152 597
------ ------ ------- ------- ------- ------- ------- ------- -------
Income before Operating Expenses........ 819 1,430 7,096 13,056 21,880 10,228 17,447 20,223 9,471
Operating Expenses:
Selling and Marketing................... 302 656 1,293 2,402 3,856 1,725 2,263 3,229 1,507
General and Administrative.............. 905 876 3,561 8,971 14,430 6,289 9,026 11,974 5,170
Depreciation and Amortization........... 326 429 557 777 1,314 546 701 1,265 524
------ ------ ------- ------- ------- ------- ------- ------- -------
1,533 1,961 5,411 12,150 19,600 8,560 11,990 16,468 7,201
------ ------ ------- ------- ------- ------- ------- ------- -------
Operating Income (Loss)................. (714) (531) 1,685 906 2,280 1,668 5,457 3,755 2,270
Other Expenses:
Interest on Subordinated Debt........... -- -- 678 2,569 3,492 1,594 1,237 1,940 886
Interest Expense, Other................. 1 12 215 468 2,464 766 2,052 1,532 386
Other, Net.............................. -- (48) 64 170 296 56 20 75 56
------ ------ ------- ------- ------- ------- ------- ------- -------
1 (36) 957 3,207 6,252 2,416 3,309 3,547 1,328
------ ------ ------- ------- ------- ------- ------- ------- -------
Income Tax Expense (Benefit)............ -- -- 30 (334) -- -- -- -- --
------ ------ ------- ------- ------- ------- ------- ------- -------
Net Earnings (Loss)..................... (715) (495) 698 (1,967) (3,972) (748) 2,148 208 942
------ ------ ------- ------- ------- ------- ------- ------- -------
Preferred Stock Dividend................ -- -- -- -- -- -- (566) -- --
------ ------ ------- ------- ------- ------- ------- ------- -------
Earnings (Loss) Available to Common
Shares................................. $ (715) $ (495) $ 698 $(1,967) $(3,972) $ (748) $ 1,582 $ 208 $ 942
====== ====== ======= ======= ======= ======= ======= ======= =======
Earnings (Loss) per Common Share........ $(0.15) $(0.11) $ 0.14 $ (0.35) $ (0.67) $ (0.13) $ 0.26 $ 0.02 $ 0.11
====== ====== ======= ======= ======= ======= ======= ======= =======
Weighted Average Common Shares
Outstanding during Period(3)........... 4,640 4,640 5,011 5,584 5,892 5,892 6,136 8,537 8,537
====== ====== ======= ======= ======= ======= ======= ======= =======
<CAPTION>
PRO FORMA (1)
-------------------------------
PRO FORMA AS ADJUSTED(2)
--------- -------------------------------
SIX SIX MONTHS
MONTHS YEAR ENDED ENDED
ENDED DECEMBER 31, JUNE 30,
JUNE ---------- -----------------
STATEMENT OF OPERATIONS DATA: 1996 1995 1995 1996
------- ------------ ------- -------
<S> <C> <C> <C> <C>
Dealership Revenues:
Sales of Used Cars...................... $30,177 $ 38,368 $18,836 $30,177
Income on Finance Receivables........... 4,591 8,227 3,475 4,591
Gain on Sale of Finance Receivables..... 1,178 -- 1,178
Income on Residual in Finance
Receivables Sold....................... 579 -- 579
------- ------- ------- -------
36,525 46,595 22,311 36,525
------- ------- ------- -------
Cost of Dealership Revenues:
Cost of Used Cars Sold.................. 16,858 20,685 9,419 16,858
Provision for Credit Losses............. 5,172 7,839 4,018 5,172
------- ------- ------- -------
22,030 28,524 13,437 22,030
------- ------- ------- -------
Net Revenues from Dealership Activity... 14,495 18,071 8,874 14,495
Other Income:
Servicing Income........................ 248 -- -- 248
Income on Third Party Finance
Receivables............................ 2,521 1,844 438 2,521
Franchise Fees and Other Income......... 183 308 159 183
------- ------- ------- -------
2,952 2,152 597 2,952
------- ------- ------- -------
Income before Operating Expenses........ 17,447 20,223 9,471 17,447
Operating Expenses:
Selling and Marketing................... 2,263 3,229 1,507 2,263
General and Administrative.............. 8,065 11,974 5,170 8,065
Depreciation and Amortization........... 701 1,265 524 701
------- ------- ------- -------
11,029 16,468 7,201 11,029
------- ------- ------- -------
Operating Income (Loss)................. 6,418 3,755 2,270 6,418
<CAPTION>
Other Expenses:
Interest on Subordinated Debt........... 687 940 386 687
Interest Expense, Other................. 1,495 644 303 337
Other, Net.............................. 20 75 56 20
------- ------- ------- -------
2,202 1,659 745 1,044
------- ------- ------- -------
Income Tax Expense (Benefit)............ -- -- -- --
------- ------- ------- -------
Net Earnings (Loss)..................... 4,216 2,096 1,525 5,374
------- ------- ------- -------
Preferred Stock Dividend................ (500) -- -- --
------- ------- ------- -------
Earnings (Loss) Available to Common
Shares................................. $ 3,716 $ 2,096 $ 1,525 $ 5,374
======= ======= ======= =======
Earnings (Loss) per Common Share........ $ 0.42 $ 0.17 $ 0.12 $ 0.42
======= ======= ======= =======
Weighted Average Common Shares
Outstanding during Period(3)........... 8,781 12,537 12,537 12,781
======= ======= ======= =======
(footnotes on page 19)
</TABLE>
17
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
PRO FORMA(1)
---------------------
JUNE
DECEMBER 31, JUNE 30, DECEMBER 31, 30,
--------------------------------------------- ----------------- ---------- -------
1991 1992 1993 1994 1995 1995 1996 1995 1995
------ ------ ------- ------- ------- ------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents................. $ 10 $ 415 $ 79 $ 168 $ 1,419 $ 315 $ 263 $ 1,419 $ 315
Finance Receivables, Net.................. -- 1,758 7,089 15,858 40,726 27,129 43,612 40,726 27,129
Total Assets.............................. 1,195 4,392 11,936 29,711 60,790 44,701 70,142 68,125 52,151
Subordinated Notes Payable................ -- 93 8,941 18,291 14,553 20,000 14,000 14,553 20,000
Total Debt................................ 400 4,189 9,380 28,617 50,737 42,425 37,292 40,342 35,029
Preferred Stock........................... -- -- -- -- 10,000 -- 10,000 10,000 --
Common Stock.............................. 1 1 1 77 127 127 18,122 17,857 14,972
Total Stockholders' Equity (Deficit)(4)... 4 (1) 697 (1,194) 4,884 (1,892) 24,461 $ 22,615 $12,953
Principal Balances Outstanding:
Dealership Sales Portfolio............... -- 2,492 9,588 19,881 34,226 28,896 25,307
Third Party Dealer Portfolio............. -- -- -- 1,620 13,805 5,848 25,476
Portfolio Securitized with Servicing
Retained............................... -- -- -- -- -- -- 20,470
------ ------ ------- ------- ------- ------- -------
Total..................................... $ -- $2,492 $ 9,588 $21,501 $48,031 $34,744 $71,253
====== ====== ======= ======= ======= ======= =======
PRO FORMA (1)
-----------------------------------------
AS ADJUSTED(2)
DECEMBER 31, JUNE 30,
JUNE 30, ---------- -----------------
1996 1995 1995 1996
------- ------------ ------- -------
BALANCE SHEET DATA:
Cash and Cash Equivalents................. $ 263 $ 41,698 $51,503 $37,337
Finance Receivables, Net.................. 43,612 40,726 27,129 43,612
Total Assets.............................. 77,592 108,404 103,339 114,665
Subordinated Notes Payable................ 14,000 14,553 10,000 14,000
Total Debt................................ 44,742 22,986 18,583 24,180
Preferred Stock........................... 10,000 -- -- --
Common Stock.............................. 18,122 85,492 82,607 85,757
Total Stockholders' Equity (Deficit)(4)... $24,461 $ 80,250 $80,588 $82,096
Principal Balances Outstanding:
Dealership Sales Portfolio...............
Third Party Dealer Portfolio.............
Portfolio Securitized with Servicing
Retained...............................
Total.....................................
SIX
MONTHS
ENDED
JUNE
YEARS ENDED DECEMBER 31, 30,
---------------------------------------------- -------
1991 1992 1993 1994 1995 1995
---- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
DEALERSHIP OPERATING DATA (UNAUDITED):
Average Sales Price per Car....................................... -- n/a(5) $ 4,159 $ 5,269 $ 6,478 $ 6,217
Number of Used Cars Sold.......................................... -- n/a 3,359 5,270 7,383 3,611
Company Dealerships............................................... -- 1 5 8 8 8
Units Sold per Dealership......................................... -- n/a 672 659 923 451
Number of Contracts Originated.................................... -- n/a 3,093 4,731 6,129 3,156
Principal Balances Originated (000 Omitted)....................... -- n/a $12,984 $23,589 $36,568 $18,002
Number of Contracts Outstanding................................... -- 803 2,929 5,515 8,049 7,393
Allowance as % of Outstanding Principal........................... -- 29.4% 30.0% 30.4% 21.9% 27.3%
Average Principal Balance Outstanding............................. -- $3,105 $ 3,273 $ 3,605 $ 4,252 $ 3,909
Average Yield on Contracts........................................ -- n/a 26.4% 28.2% 28.0% 28.9%
Delinquencies:
Principal Balances 31 to 60 Days.................................. -- n/a 10.5% 5.1% 4.2% 4.2%
Principal Balances over 60 Days................................... -- n/a 15.0% 1.3% 1.1% 2.3%
THIRD PARTY OPERATING DATA (UNAUDITED):
Number of Contracts Purchased..................................... -- -- -- 1,423 3,012 1,244
Principal Balances Purchased (000 Omitted)........................ -- -- -- $ 3,607 $16,455 $ 5,505
Number of Branch Offices.......................................... -- -- -- 1 8 5
Number of Third Party Dealers..................................... -- -- -- 20 118 27
Number of Contracts Outstanding................................... -- -- -- 726 2,733 1,539
Allowance as % of Outstanding Principal........................... -- -- -- 9.8% 7.2% 11.1%
Average Principal Balance Outstanding............................. -- -- -- $ 2,232 $ 5,051 $ 3,800
Average Yield on Contracts........................................ -- -- -- 30.9% 26.7% 30.5%
Delinquencies:
Principal Balances 31 to 60 days.................................. -- -- -- 6.0% 1.2% 1.3%
Principal Balances over 60 days................................... -- -- -- 2.6% 0.4% 0.2%
Per Contract Purchased:
Average Discount.................................................. -- -- -- $ 504 $ 551 $ 548
Average Percent Discount.......................................... -- -- -- 12.5% 10.1% 12.4%
PRO FORMA(1)
-----------------------
SIX
SIX YEAR MONTHS
MONTHS ENDED ENDED
ENDED DECEMBER 31, JUNE 30,
JUNE 30, ----------- -------
1996 1995 1995
------- ------------ --------
DEALERSHIP OPERATING DATA (UNAUDITED):
Average Sales Price per Car....................................... $ 7,206 $ 6,065 $ 5,942
Number of Used Cars Sold.......................................... 4,188 6,326 3,170
Company Dealerships............................................... 7 7 7
Units Sold per Dealership......................................... 598 904 453
Number of Contracts Originated.................................... 3,838 5,768 2,889
Principal Balances Originated (000 Omitted)....................... $27,097 $ 34,419 $16,450
Number of Contracts Outstanding................................... 4,253
Allowance as % of Outstanding Principal........................... 23.6%
Average Principal Balance Outstanding............................. $ 5,950
Average Yield on Contracts........................................ 28.9%
Delinquencies:
Principal Balances 31 to 60 Days.................................. 2.8%
Principal Balances over 60 Days................................... 1.0%
THIRD PARTY OPERATING DATA (UNAUDITED):
Number of Contracts Purchased..................................... 3,112
Principal Balances Purchased (000 Omitted)........................ $17,203
Number of Branch Offices.......................................... 13
Number of Third Party Dealers..................................... 510
Number of Contracts Outstanding................................... 5,028
Allowance as % of Outstanding Principal........................... 8.1%
Average Principal Balance Outstanding............................. $ 5,067
Average Yield on Contracts........................................ 26.5%
Delinquencies:
Principal Balances 31 to 60 days.................................. 1.4%
Principal Balances over 60 days................................... 0.2%
Per Contract Purchased:
Average Discount.................................................. $ 588
Average Percent Discount.......................................... 10.6%
</TABLE>
(footnotes on following page)
18
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
(FOOTNOTES)
- ---------------
(1) The pro forma financial data presented herein gives information concerning
the continuing impact of certain transactions on the Company's operations by
showing how such transactions might have affected the Company's historical
consolidated financial statements if the transactions had been consummated
as of December 31, 1994. Unless otherwise indicated, the transactions to
which such retroactive effect has been given in the pro forma financial data
are the Recapitalization Transactions and the sale of 2,645,000 shares of
Common Stock at $6.75 per share pursuant to the Company's initial public
offering and the application of the net proceeds therefrom (approximately
$14.9 million) to repay amounts outstanding under the Revolving Facility,
all of which took effect as of June 21, 1996, and the sale of the Company's
Gilbert Dealership, which took effect as of December 31, 1995. See
"Recapitalization and Related Transactions" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Introduction."
The pro forma effect of the Recapitalization Transactions and the Company's
initial public offering is presented for all periods since December 31,
1994. The pro forma effect of the sale of the Gilbert Dealership is
presented only for the six months ended June 30, 1995 and the year ended
December 31, 1995, since the dealership was not operating during the six
months ended June 30, 1996. The following table indicates the transactions
giving rise to the pro forma presentation, the line items of the Company's
results of operations affected by the pro forma presentation, the amounts of
such adjustments, and the periods in which such adjustments have been made.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -----------------
1995 1995 1996
------------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Pro Forma Adjustments due to the Recapitalization Transactions:
Reduction in Interest on Subordinated Debt due to rate reduction on
Subordinated Debt from 18.0% to 10.0%............................... $1,552 $ 708 $ 550
Elimination of rent expense charged to General and Administrative
Expense on real property to be purchased from Verde Investments..... 1,185 560 867
Additional Interest Expense, Other arising from the purchase of real
property financed at an assumed rate of 10.0%....................... (645) (303) (335)
Reduction in rent expense charged to General and Administrative
Expense on properties sub-leased from Verde Investments............. 187 94 94
Reduction in Preferred Stock Dividend due to rate reduction on the
Preferred Stock from 12.0% to 10.0%................................. -- -- 66
Reduction in Interest Expense, Other arising from the conversion of
$3.0 million of subordinated debt held by SunAmerica into Common
Stock at the initial public offering price and the pro forma
reduction of borrowings............................................. 366 172 198
------ ------ ------
Total pro forma increase in Net Earnings Available to Common Shares
arising from the Recapitalization Transactions...................... 2,645 1,231 1,440
------ ------ ------
Pro Forma Adjustments due to the Sale of the Gilbert Dealership:
Reduction in:
Sales of Used Cars.................................................. 9,456 3,612 --
Cost of Used Cars Sold.............................................. 7,279 2,469 --
Provision for Credit Losses......................................... 520 386 --
------ ------ ------
Net Revenues from Dealership Activities........................ 1,657 757 --
------ ------ ------
Selling and Marketing Expenses...................................... 627 218 --
General and Administrative Expenses................................. 1,084 465 --
Depreciation........................................................ 49 22 --
Other Expenses (loss on sale of leasehold improvements, property,
and equipment).................................................... 221 --
------ ------ ------
Total pro forma increase (decrease) in Net Earnings Available to
Common Shares arising from the sale of the Gilbert Dealership....... 324 (52) --
------ ------ ------
Pro Forma Adjustment due to the Company's Initial Public Offering:
Reduction in Interest Expense, Other due to the application of the net
proceeds of the Company's initial public offering (approximately
$14.9 million) to reduce borrowings under the Revolving Facility.... 1,211 511 694
------ ------ ------
Total pro forma increase in Net Earnings Available to Common Shares
arising from all pro forma adjustments................................ $4,180 $1,690 $2,134
====== ====== ======
</TABLE>
(2) As adjusted financial information reflects the sale of the 4,000,000 shares
of Common Stock offered hereby at an assumed public offering price of $18.00
per share and the initial application of the estimated net proceeds
therefrom in the manner described in "Use of Proceeds" as of December 31,
1994. Such adjustment reduces the Company's Interest Expenses and increases
the Company's Net Earnings for the year ended December 31, 1995 by
$1,887,808, for the six months ended June 30, 1995 by $583,091, and for the
six months ended June 30, 1996 by $1,182,897 (variances are due to the
fluctuating rate under the Revolving Facility).
(3) See Notes to the Consolidated Financial Statements for a determination of
the weighted average common shares outstanding.
(4) The Accumulated Deficit component of Total Stockholders' Equity does not
give any effect to the pro forma adjustments.
(5) n/a -- not available.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information regarding the
Company's consolidated financial position as of December 31, 1994 and 1995 and
June 30, 1995 and 1996, and its results of operations for the years ended
December 31, 1993, 1994, and 1995 and the six months ended June 30, 1995 and
1996. This discussion should be read in conjunction with the preceding "Selected
Consolidated Financial Data" and the Company's Consolidated Financial Statements
and related Notes thereto and other consolidated financial data appearing
elsewhere in this Prospectus. In the opinion of management, such unaudited
interim data reflect all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the Company's financial position and
results of operations for the periods presented. The results of operations for
any interim period are not necessarily indicative of results to be expected for
a full fiscal year.
INTRODUCTION
General. The Company commenced its used car sales and finance operations
with the acquisition of two Company Dealerships in 1992. During 1993, the
Company acquired three additional Company Dealerships. In 1994, the Company
constructed and opened four new Company Dealerships that were built specifically
to meet the Company's new standards of appearance, reconditioning capabilities,
size, and location. During 1994, the Company closed one Company Dealership
because the facility failed to satisfy these new standards and, at the end of
1995, closed its Gilbert, Arizona dealership (the "Gilbert Dealership").
The Gilbert Dealership was used by the Company to evaluate the sale of
later model used cars. These cars had an average age of approximately three
years, which is two to five years newer than the cars typically sold at Company
Dealerships, and cost more than twice that of typical Company Dealership cars.
The Company determined that its standard financing program could not be
implemented on these higher cost cars. Furthermore, operation of this dealership
required additional corporate infrastructure to support its market niche, such
as distinct advertising and marketing programs, which the Company was unable to
leverage across its other operations. Accordingly, the Company terminated this
program, and sold the land, dealership building, and other improvements to a
third party for $1.7 million. Pursuant to this sale and the disposition of other
assets, the Company recognized a loss of approximately $221,000. See "Certain
Relationships and Related Transactions." During fiscal year 1995, the Gilbert
Dealership produced sales of $9.5 million (average of $8,946 per car sold) and
gross profits (Sales of Used Cars less Cost of Used Cars Sold) of $2.2 million
(average of $2,060 per car sold), and the Company incurred selling and marketing
expenses of $627,000 (average of $593 per car sold). The pro forma results of
operations discussed below have been adjusted as if the Gilbert Dealership had
been terminated as of December 31, 1994, as management believes these pro forma
results are more indicative of ongoing operations.
In 1994, the Company acquired Champion Financial Services, Inc., an
independent automobile finance company, primarily for its management expertise
and contract servicing software and systems. Champion had a portfolio of
approximately $1.9 million in sub-prime contracts averaging approximately $2,000
in principal amount. For the balance of 1994, the Company purchased an
additional $1.7 million in contracts.
In April 1995, the Company initiated an aggressive plan to expand the
number of contracts purchased from its Third Party Dealer network. This
expansion enabled the Company to leverage its existing infrastructure and
increase its contract portfolio much more quickly than it could through the
expansion of its Company Dealerships. The Company is in the process of further
expanding its Third Party Dealer operations and diversifying its earning asset
base by implementing the Cygnet Dealer Program pursuant to which the Company
will provide Third Party Dealers with operating credit lines secured by the
dealers' retail installment contract portfolios. See "Business -- Third Party
Dealer Operations."
Growth in Finance Receivables. As a result of the Company's rapid
expansion, contract receivables serviced increased from $9.6 million at December
31, 1993 to $71.3 million at June 30, 1996 (including $20.5 million in contracts
serviced under the Company's Securitization Program).
20
<PAGE> 22
The following tables reflect the growth in contract originations by Company
Dealerships and contract purchases from Third Party Dealers as well as the
period end balances measured in terms of the principal amount and the number of
contracts.
TOTAL CONTRACTS ORIGINATED/PURCHASED
(IN THOUSANDS, EXCEPT NUMBER OF CONTRACTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1993 1994 1995
--------------------- --------------------- ---------------------
PRINCIPAL NO. OF PRINCIPAL NO. OF PRINCIPAL NO. OF
AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT CONTRACTS
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Company Dealerships... $12,984 3,093 $23,589 4,731 $36,568 6,129
Third Party Dealers... -- -- 3,607 1,423 16,455 3,012
------- ----- ------- ----- ------- -----
Total....... $12,984 3,093 $27,196 6,154 $53,023 9,141
======= ===== ======= ===== ======= =====
SIX MONTHS ENDED JUNE 30,
---------------------------------------------
1995 1996
--------------------- ---------------------
PRINCIPAL NO. OF PRINCIPAL NO. OF
AMOUNT CONTRACTS AMOUNT CONTRACTS
--------- --------- --------- ---------
Company Dealerships... $18,002 3,156 $27,097 3,838
Third Party Dealers... 5,505 1,244 17,203 3,112
------- ----- ------- -----
Total....... $23,507 4,400 $44,300 6,950
======= ===== ======= =====
TOTAL CONTRACTS OUTSTANDING
(IN THOUSANDS, EXCEPT NUMBER OF CONTRACTS)
AS OF DECEMBER 31,
---------------------------------------------------------------------
1993 1994 1995
--------------------- --------------------- ---------------------
PRINCIPAL NO. OF PRINCIPAL NO. OF PRINCIPAL NO. OF
AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT CONTRACTS
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Company Dealerships.... $ 9,588 2,929 $19,881 5,515 $34,226 8,049
Third Party Dealers... -- -- 1,620 726 13,805 2,733
Total Portfolio
Serviced............. $ 9,588 2,929 $21,501 6,241 $48,031 10,782
Less Portfolio
Securitized and
Sold................. -- -- -- -- -- --
------- ----- ------- ----- ------- ------
Company Total....... $ 9,588 2,929 $21,501 6,241 $48,031 10,782
======= ===== ======= ===== ======= ======
AS OF JUNE 30,
---------------------------------------------
1995 1996
--------------------- ---------------------
PRINCIPAL NO. OF PRINCIPAL NO. OF
AMOUNT CONTRACTS AMOUNT CONTRACTS
--------- --------- --------- ---------
Company Dealerships....
Third Party Dealers... $28,896 7,393 $45,777 9,407
Total Portfolio
Serviced............. 5,848 1,539 25,476 5,028
Less Portfolio
Securitized and
Sold................. $34,744 8,932 $71,253 14,435
------- ----- ------- -----
Company Total....... -- -- (20,470) (5,154)
------- ----- ------- -----
$34,744 8,932 $50,783 9,281
======= ===== ======= =====
</TABLE>
RESULTS OF OPERATIONS
Presentation of Dealership Revenues and Cost of Revenues. Revenues from
Company Dealership operations consist of Sales of Used Cars, Income on Finance
Receivables and, beginning in 1996, Gain on Sale of Finance Receivables and
Income on Residual in Finance Receivables Sold. Cost of Revenues of Dealership
operations is comprised of Costs of Used Cars Sold and the Provision for Credit
Losses.
The prices at which the Company sells its cars and the interest rate that
MF_PS3
it charges to finance these sales take into consideration that the Company's
primary customers are high-risk borrowers, many of whom ultimately default. The
Provision for Credit Losses reflects these factors and is treated by the Company
as a cost of both the future finance income derived on the contract receivables
originated at Company Dealerships as well as a cost of the sale of the cars
themselves. Accordingly, unlike traditional car dealerships, the Company does
not present gross profits in its Statement of Operations calculated as Sales of
Used Cars less Cost of Used Cars Sold.
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
Sales of Used Cars. Sales of Used Cars increased by 60.6% from $18.8
million (pro forma) for the six months ended June 30, 1995 to $30.2 million for
the six months ended June 30, 1996. This growth reflects increases in the
average unit sales price and the average number of units sold by each Company
Dealership. The sales for both periods reflect the results of all current
Company Dealerships except the Prescott dealership, which opened in July 1996.
The average sales price per car increased by 21.3% from $5,942 (pro forma)
for the six months ended June 30, 1995 to $7,206 for the six months ended June
30, 1996. This increase reflects management's decision to sell higher quality
vehicles at its seven operating dealerships. Units sold per Company Dealership
averaged
21
<PAGE> 23
453 (pro forma) for the six months ended June 30, 1995, and 598 for the six
months ended June 30, 1996. The Company attributes the increase in units sold
per Company Dealership to the success of the Company's business strategy, most
notably its advertising and marketing programs.
Income on Finance Receivables from Dealership Sales. A primary element of
the Company's sales strategy is to provide financing to customers with poor
credit histories who are unable to obtain automobile financing through
traditional sources. The Company financed 87.3% (pro forma) of sales revenue and
91.1% (pro forma) of the used cars sold at Company Dealerships for the six
months ended June 30, 1995 compared to 89.8% of sales revenue and 91.6% of the
used cars sold for the six months ended June 30, 1996. The average amount
financed increased by 24.4% from $5,694 (pro forma) for the six months ended
June 30, 1995 to $7,060 for the six months ended June 30, 1996. Finance income
rose in conjunction with the growth in the Company Dealership contract
portfolio, increasing by 31.4% from $3.5 million for the six months ended June
30, 1995 to $4.6 million for the six months ended June 30, 1996. Finance income
during the six months ended June 30, 1996 was affected by the sale of $24.2
million in contract principal balances pursuant to the Securitization Program,
and will continue to be affected in future periods by additional
securitizations. The Company Dealership contract portfolio had an average
balance of $24.0 million for the six months ended June 30, 1995 compared to an
average balance of $32.1 million for the six months ended June 30, 1996. The
effective yield on finance receivables from Company Dealerships was 28.9% at
both June 30, 1995 and 1996.
Gain on Sale of Finance Receivables. During the first quarter of 1996, the
Company initiated a Securitization Program with SunAmerica under which the
Company sells securities backed by Company Dealership contracts to SunAmerica.
The Company retains a residual in the contracts sold and records a gain on the
sale. The amount of the gain on sale reflects the difference between the yield
earned on the contract portfolio securitized and the return on the securities
sold, and is computed based on the difference between: (i) the dollar amount
received for the securities plus the value of the residual retained by the
Company, and (ii) the net principal balance of the contract portfolio sold less
the amount of the Allowance for Credit Losses allocable to such contract
portfolio and direct expenses. The amount of any gain on sale is based upon
certain estimates, which may not subsequently be realized. To the extent that
actual cash flows on a securitization are materially below estimates, the
Company would be required to revalue the residual portion of the securitization
which it retains, and record a charge to earnings based upon the reduction.
Through June 30, 1996, the Company had securitized an aggregate of $24.2
million in contracts originated through Company Dealerships (of which $20.5
million was outstanding at June 30, 1996), issuing $18.6 million in securities
to SunAmerica. Pursuant to these transactions, the Company reduced its Allowance
for Credit Losses by $2.9 million and retained a residual in the contracts sold
of $5.0 million, recording a gain on sale of $1.2 million, net of expenses.
The Company's net income may fluctuate from quarter to quarter in the
future as a result of the timing and size of its securitizations.
Income on Residual in Finance Receivables Sold. The Residual in Finance
Receivables Sold is based on the Company's right to cash flows from the trust to
which the finance receivables are sold in the Securitization Program to the
extent cash is not required to make payments on the securities sold to
SunAmerica or for associated costs. The amount of the residual is calculated
using estimates for prepayments and losses (charge-offs), with cash flows
discounted at a rate for similar maturing instruments. The Company records
ongoing income based upon such cash flows. Accordingly, the income earned on the
residual will vary based upon cash flows collected in a given period. For the
six months ended June 30, 1996, income on the residual was $579,000 reflecting
activity from March 12, 1996. See "Risk Factors -- Dependence on
Securitizations."
Cost of Used Cars Sold and Gross Margin. The Cost of Used Cars Sold
increased by 79.8% from $9.4 million (pro forma) for the six months ended June
30, 1995 to $16.9 million for the six months ended June 30, 1996. On a per unit
basis, the Cost of Used Cars Sold increased by 35.5% from $2,971 (pro forma) for
the six months ended June 30, 1995 to $4,025 for the six months ended June 30,
1996, largely due to management's determination to sell higher quality cars
throughout its operations. The gross margin on used car sales (Sales of Used
Cars less Cost of Used Cars Sold excluding Provision for Credit Losses)
increased by 41.5% from $9.4 million (pro forma) for the six months ended June
30, 1995 to $13.3 million for the six
22
<PAGE> 24
months ended June 30, 1996. As a percentage of sales, the gross margin decreased
from 50.0% (pro forma) for the six months ended June 30, 1995 to 44.1% for the
six months ended June 30, 1996. The Company attributes the decline in the gross
margin percentage to management's strategy of increasing the quality and,
therefore, the cost, of cars sold at Company Dealerships while maintaining a
consistent dollar gross margin. The decline in the gross margin percentage was
offset by corresponding increases in the quality of finance contracts generated
(resulting in a lower Provision for Credit Losses) and greater unit sales per
Company Dealership. On a per unit basis, the gross margin per car sold was
$2,971 (pro forma) for the six months ended June 30, 1995 and $3,180 for the six
months ended June 30, 1996.
Provision for Credit Losses. A high percentage of Company Dealership
customers ultimately do not make all of their contractually scheduled payments,
requiring the Company to charge off the remaining principal balance due. The
Company maintains an Allowance for Credit Losses to absorb such losses. To fund
the Allowance as it relates to cars financed through Company Dealerships, a
direct charge to revenues is recorded through the Provision for Credit Losses
for each contract originated. The Provision for Credit Losses increased by 30.0%
from $4.0 million (pro forma) for the six months ended June 30, 1995 to $5.2
million for the six months ended June 30, 1996. As a percentage of contract
balances originated, the Provision decreased from 24.4% (pro forma) for the six
months ended June 30, 1995 to 19.1% for the six months ended June 30, 1996. The
decrease for the six months ended June 30, 1996, reflects the Company's
strengthened underwriting requirements, the higher quality of used cars sold,
and the Company's improved collection efforts. The amount of the Provision in a
given period is based on the amount the Company estimates is required to
maintain an adequate Allowance. See "-- Allowance for Credit Losses," for
additional information about the Allowance, including with respect to contracts
purchased from Third Party Dealers.
The Company charges its Provision for Credit Losses to current operations
and does not recognize any portion of the unearned interest income as a
component of its Allowance for Credit Losses. Accordingly, the Company's
unearned finance income is comprised of the full annual percentage rate ("APR")
on its contracts less amortization of loan origination costs.
Net Revenues from Dealership Activities. Net Revenues from Dealership
Activities increased significantly in the six months ended June 30, 1996
compared to the six months ended June 30, 1995, reflecting primarily the rapid
growth of the Company Dealerships and the completion of the first two
securitizations. Net revenues as a percentage of total revenues from dealership
activities were 39.8% (pro forma) and 39.7% for the six months ended June 30,
1995 and 1996, respectively. The decrease in 1996 reflects increases in the Cost
of Used Cars Sold offset by first time revenues from the Gain on Sale and Income
on Residual in Finance Receivables Sold from the Securitization Program and the
decrease in the Provision for Credit Losses as a percentage of sales.
Servicing Income. The Company services the $24.2 million in contracts sold
in the initial sercuritization for a monthly fee of .417% of beginning of period
principal balance (5.0% annualized). Servicing Income for the six months ended
June 30, 1996 totaled $248,000.
Income on Third Party Finance Receivables. Finance income has increased in
conjunction with the increases in Third Party Dealer contracts purchased and
outstanding. See "-- Introduction -- Growth in Finance Receivables." Finance
income increased by 470.8% from $438,000 for the six months ended June 30, 1995,
which was prior to the expansion of the Company's Third Party Dealer operations,
to $2.5 million for the six months ended June 30, 1996. Subsequent to June 30,
1995, as a result of its migration to higher quality contracts and expansion
into markets with interest rate limits, the Company's yield on its Third Party
Dealer contract portfolio has trended downward. Portfolio yield was
approximately 30.5% and 26.5% at June 30, 1995 and 1996, respectively.
Franchise Fees and Other Income. Franchise Fees and Other Income consist
primarily of franchise fees from the Company's rent-a-car franchisees. This
income increased by 15.1% from $159,000 for the six months ended June 30, 1995
to $183,000 for the six months ended June 30, 1996. The Company no longer
actively engages in the rent-a-car franchise business.
23
<PAGE> 25
Income before Operating Expenses. As a result of the Company's continued
expansion, Income before Operating Expenses grew by 83.2% from $9.5 million (pro
forma) for the six months ended June 30, 1995 to $17.4 million for the six
months ended June 30, 1996. Net Revenue from Dealership Activity was the primary
contributor to the increase. The increase also reflects the growth of the
Company's Third Party Dealer operations.
Operating Expenses. Operating Expenses consist of Selling and Marketing
Expenses, General and Administrative Expenses, Depreciation and Amortization,
and Amortization of Covenants. The allocation of these expenses to each of the
Company's business segments (Company Dealerships, Third Party Dealers, and
Corporate and Other) is shown at Note 21 to the Consolidated Financial
Statements.
Selling and Marketing Expenses. For the six months ended June 30, 1995 and
1996, Selling and Marketing Expenses were comprised entirely of advertising
costs and commissions relating to Company Dealership operations. Selling and
Marketing Expenses increased by 53.3% from $1.5 million (pro forma) for the six
months ended June 30, 1995 to $2.3 million for the six months ended June 30,
1996 . As a percentage of Sales of Used Cars, these expenses averaged 8.0% (pro
forma) for the six months ended June 30, 1995 and 7.5% for the six months ended
June 30, 1996. On a per unit sold basis, Selling and Marketing Expenses of
Company Dealerships increased by 13.7% from $475 (pro forma) for the six months
ended June 30, 1995 to $540 for the six months ended June 30, 1996. Beginning in
the middle of 1994 and continuing throughout June 1996, the Company undertook to
significantly expand its advertising and marketing efforts. Advertising
increased by 49.1% from $872,000 (pro forma) for the six months ended June 30,
1995 to $1.3 million for the six months ended June 30, 1996.
General and Administrative Expenses. General and Administrative Expenses
increased by 42.9% from $6.3 million for the six months ended June 30, 1995 to
$9.0 million for the six months ended June 30, 1996. These expenses represented
23.7% of total revenues for the six months ended June 30, 1995 and 22.9% for the
six months ended June 30, 1996. For the six months ended June 30, 1995, 75.3% of
General and Administrative Expenses were attributable to Company Dealership
sales and financing activities, 5.7% to Third Party Dealer activities and 19.0%
to Corporate overhead. For the six months ended June 30, 1996, 65.7% of General
and Administrative Expenses were attributable to Company Dealership sales and
financing activities, 13.4% to Third Party Dealer activities and 20.9% to
Corporate overhead. Increased lease costs attributable to base and percentage
rent factors on leases relating to six Company Dealerships leased from an
affiliate, Verde Investments, were contributors to the increase in General and
Administrative Expenses. These rents increased 23.5% from $891,000 for the six
month period ended June 30, 1995 to $1.1 million for the six month period ended
June 30, 1996. The build up of these expenses reflects the development of a
corporate infrastructure, including the hiring of senior management and the
implementation of sophisticated contract servicing facilities and systems, to
accommodate future growth.
Depreciation and Amortization. Depreciation and Amortization consists of
depreciation on the Company's property and equipment and amortization of the
Company's trademarks. Depreciation and amortization increased by 33.8% from
$524,000 (pro forma) for the six months ended June 30, 1995 to $701,000 for the
six months ended June 30, 1996. The increase was due primarily to the
construction of Company servicing facilities, which opened in June 1995, and the
purchase of associated equipment. For the six months ended June 30, 1996, 73.8%
of these expenses were attributable to Company Dealership sales and financing
activities, 10.7% to Third Party Dealer activities and 15.5% to Corporate
overhead. Amortization of Covenants was $148,000 for the six months ended June
30, 1995. As of December 31, 1995, all existing covenants had been fully
amortized.
Other Expenses. Interest on Subordinated Debt, which currently bears
interest at 10.0%, decreased by 25.0% from $1.6 million for the six months ended
June 30, 1995 to $1.2 million for the six months ended June 30, 1996. The
decrease was due to a decrease in the average principal balance outstanding from
$17.8 million for the six months ended June 30, 1995 to $13.8 million for the
six months ended June 30, 1996, as well as a decrease, effective June 21, 1996,
in the interest rate from 18.0% to 10.0%. On a pro forma basis, the interest
rate decrease would have lowered subordinated debt interest expense for the six
months ended June 30, 1995 and 1996 by approximately $708,000 and $550,000,
respectively.
24
<PAGE> 26
Interest Expense, Other increased by 174.2% from $766,000 for the six
months ended June 30, 1995 to $2.1 million for the six months ended June 30,
1996, due to increased borrowings from GE Capital under the Revolving Facility
and from SunAmerica under the $3.0 million convertible note issued in August
1995. The average amount outstanding on the Revolving Facility increased from
$13.5 million during the six months ended June 30, 1995 to $34.3 million during
the six months ended June 30, 1996. For the six months ended June 30, 1995 and
1996, the average interest rates on the Revolving Facility were 11.3% and 10.5%,
respectively. See "Liquidity and Capital Resources," below. Effective June 21,
1996, SunAmerica converted its convertible note into Common Stock. On a pro
forma basis this conversion to Common Stock would have lowered Interest Expense,
Other by $172,000 and $198,000 for the six months ended June 30, 1995 and 1996,
respectively.
Income Taxes. The Company incurred no income tax expense for the six
months ended June 30, 1996. Current income tax expense for federal and state
reporting purposes was $226,000 which was offset by a deferred income tax
benefit of $226,000. The income tax benefit resulted primarily from a reduction
in the valuation allowance for deferred tax assets which had a remaining balance
of $1.3 million as of June 30, 1996. It is estimated that the Company will begin
reporting income tax expense once it has earned an additional $3.2 million in
pre-tax income.
YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
Sales of Used Cars. Sales of Used Cars increased by 98.6% from $14.0
million in 1993 to $27.8 million in 1994 and by 38.1% to $38.4 million (after
giving pro forma effect to the sale of the Gilbert Dealership) in 1995. This
growth reflects increases in the number of Company Dealerships, the average unit
sales price, and, in 1995, the average number of units sold by each Company
Dealership. The number of Company Dealerships increased from two to five in
1993. In 1994 the Company opened four additional Company Dealerships, and closed
one in August 1994. Seven Company Dealerships, excluding the Gilbert Dealership,
were open throughout 1995.
The average sales price per car increased by 26.7% from $4,159 in 1993 to
$5,269 in 1994 and by 15.1% to $6,065 (pro forma) in 1995. These increases
reflect management's decision to sell higher quality vehicles at its seven
operating dealerships. Units sold per Company Dealership averaged 672 in 1993,
659 in 1994, and 904 (pro forma) in 1995. The Company attributes the decrease in
average units sold in 1994 as compared to 1993 to the adoption of stricter
underwriting guidelines in mid-1994, resulting in an increase in the rate of
rejection of credit applications. The increase in units sold per Company
Dealership in 1995 over 1994 is attributed to the success of the Company's
business strategy, most notably its advertising and marketing programs.
Income on Finance Receivables from Dealership Sales. The Company financed
92.1%, 89.8%, and 91.2% (pro forma) of the used cars sold at Company Dealerships
in 1993, 1994, and 1995, respectively. As of December 31, 1995, the Company had
retained all of the contracts originated by its Company Dealerships, including
its Gilbert Dealership. Finance income rose in conjunction with the growth in
the Company Dealership contract portfolio, increasing by 193.8% from $1.6
million in 1993 to $4.7 million in 1994 and by 74.5% to $8.2 million in 1995.
The effective yield on finance receivables from Company Dealerships was 26.4%,
28.2% and 28.0% for 1993, 1994 and 1995, respectively.
Cost of Used Cars Sold and Gross Margin. The Cost of Used Cars Sold
increased by 106.6% from $6.1 million in 1993 to $12.6 million in 1994 and by
64.3% to $20.7 million (pro forma) in 1995. On a per unit basis, the Cost of
Used Cars Sold increased by 31.7% from $1,813 in 1993 to $2,387 in 1994 and by
37.0% to $3,270 (pro forma) in 1995, largely due to management's determination
to sell higher quality cars throughout its operations. The gross margin on used
car sales (Sales of Used Cars less Cost of Used Cars Sold excluding Provision
for Credit Losses) increased by 92.4% from $7.9 million in 1993 to $15.2 million
in 1994 and by 16.4% to $17.7 million (pro forma) in 1995. As a percentage of
sales, the gross margins for such periods were 56.4%, 54.7% and 46.1% (pro
forma), respectively. The Company attributes the decline in the gross margin
percentage to management's strategy of increasing the quality and, therefore,
the cost of cars sold at Company Dealerships while maintaining a consistent
dollar gross margin. The decline in the gross margin percentage was offset by
corresponding increases in the quality of finance contracts generated resulting
in a lower
25
<PAGE> 27
Provision for Credit Losses and greater unit sales per Company Dealership. On a
per unit basis, the gross margin per car sold was $2,346 in 1993, $2,882 in
1994, and $2,795 (pro forma) in 1995.
Provision for Credit Losses. The Provision for Credit Losses increased by
145.5% from $3.3 million in 1993 to $8.1 million in 1994 and by 3.7% to $8.4
million in 1995. As a percentage of contract balances originated, the Provision
for Credit Losses increased from 25.4% in 1993 to 34.5% in 1994 and then
decreased to 22.9% in 1995. The decrease in 1995 resulted from the Company's
strengthened underwriting requirements, the higher quality of used cars sold,
and the Company's improved collection efforts. The amount of the Provision for
Credit Losses in a given period is based on the amount the Company estimates is
required to maintain an adequate Allowance. See "-- Allowance for Credit
Losses."
Net Revenues from Dealership Activities. Net Revenues from Dealership
Activities increased significantly over the past three fiscal years, reflecting
primarily the rapid growth of the Company Dealerships. Net revenues as a
percentage of total revenues from dealership activities were 39.9%, 36.3% and
38.8% (pro forma) in 1993, 1994 and 1995, respectively. The percentage decrease
from 1993 to 1994 was primarily the result of a substantial increase in the
Provision for Credit Losses prompted by the rapid growth of the Company's
portfolio. The increase from 1994 to 1995 reflected a decrease in the Provision
as a percentage of Company Dealership revenues due to the Company's ability to
maintain its sales growth while strengthening its underwriting requirements,
sale of better quality and higher priced cars (which both increased sales and
lowered net losses), and improved collection efforts. See "-- Allowance for
Credit Losses."
Income on Third Party Finance Receivables. Finance income has increased in
conjunction with the increases in Third Party contracts purchased and
outstanding. See "-- Introduction -- Growth in Finance Receivables." Finance
income increased by 153.5% from $710,000 in 1994, when the Company initiated its
Third Party Dealer operations, to $1.8 million in 1995. During this two year
period, substantially all contracts purchased carried APR's ranging from 21.0%
to 29.9%. As a result of its migration in 1995 to higher quality contracts, the
Company's yield on its Third Party Dealer contract portfolio trended downward.
Portfolio yield was approximately 30.9% and 26.7% at the end of 1994 and 1995,
respectively.
Franchise Fees and Other Income. Franchise Fees and Other Income decreased
by 36.6% from $879,000 in 1993 to $557,000 in 1994 and by 44.7% to $308,000 in
1995, reflecting the Company's suspension of active engagement in the rent-a-car
business.
Income before Operating Expenses. As a result of the Company's rapid
expansion, Income before Operating Expenses grew by 84.5% from $7.1 million in
1993 to $13.1 million in 1994, and by 54.2% to $20.2 million (pro forma) in
1995. Net Revenue from Dealership Activity was the primary contributor to the
increase. The increase also reflects the development of the Company's Third
Party Dealer operations.
Selling and Marketing Expenses. In 1995, Selling and Marketing Expenses
were comprised entirely of advertising costs and commissions relating to Company
Dealership operations. Excluding expenses of $400,000 in 1993 and $140,000 in
1994 attributable to rent-a-car franchising, Selling and Marketing Expenses
increased by 155.6% from $900,000 in 1993 to $2.3 million in 1994 and by 39.1%
to $3.2 million (pro forma) in 1995. As a percentage of Sales of Used Cars,
these expenses averaged 6.3% in 1993, 8.1% in 1994, and 8.4% (pro forma) in
1995. On a per unit sold basis, Selling and Marketing Expenses of Company
Dealerships increased by 63.7% from $262 in 1993 to $429 in 1994 and by 18.9% to
$510 (pro forma) in 1995. In the Company's view, by the middle of 1994 its
dealership network had achieved a sufficient critical mass in the Tucson and
Phoenix markets to justify a more extensive advertising campaign and the Company
undertook to significantly expand its advertising and marketing efforts. As a
result, advertising increased by 226.3% from $429,000 in 1993 to $1.4 million in
1994 and by 57.1% to $2.2 million in 1995. In addition, the Company believed
that it could develop programs that would distinguish its Company Dealerships
from other Buy Here-Pay Here dealers. Although the development and
implementation of the advertising and marketing programs has raised costs on a
per unit basis substantially, the Company believes that these efforts have
produced corresponding increases in unit sales per Company Dealership.
26
<PAGE> 28
General and Administrative Expenses. General and Administrative Expenses
increased by 150.0% from $3.6 million in 1993 to $9.0 million in 1994, and by
60.0% to $14.4 million in 1995. These expenses represented 21.6% of total
revenues in 1993, 26.6% in 1994, and 24.8% in 1995. In 1995, 73.4% of General
and Administrative Expenses were attributable to Company Dealership sales and
financing activities, 8.1% to Third Party Dealer activities, and 18.5% to
Corporate overhead. Increased lease costs attributable to base and percentage
rent factors on leases relating to six Company Dealerships leased from an
affiliate, Verde Investments, contributed to the increase in General and
Administrative Expenses. These rents increased by 410.6% from $235,000 in 1993
to $1.2 million in 1994 and by 50.0% to $1.8 million in 1995. The build up of
these expenses reflected the development of a corporate infrastructure,
including the hiring of senior management and the establishment of sophisticated
contract servicing facilities and systems, to accommodate future growth.
Depreciation and Amortization. Depreciation and Amortization consists of
depreciation on the Company's property and equipment and amortization of the
Company's trademarks. In 1995, 57.7% of these expenses were attributable to
Company Dealership sales and financing activities, 6.8% to Third Party Dealer
activities, and 35.5% to Corporate overhead. Depreciation and Amortization
increased by 39.5% from $557,000 in 1993 to $777,000 in 1994 and by 67.3% to
$1.3 million in 1995. These increases were due primarily to the construction of
Company Dealerships and servicing facilities and the purchase of associated
equipment.
Amortization of Covenants. Amortization of Covenants was $366,000 in 1993,
$296,000 in 1994 and $296,000 in 1995. As of December 31, 1995, all existing
covenants had been fully amortized.
Other Expenses. Interest on Subordinated Debt increased by 283.5% from
$678,000 in 1993 to $2.6 million in 1994 and by 34.6% to $3.5 million in 1995 as
additional subordinated debt borrowings were incurred to meet the Company's cash
needs. Effective June 21, 1996, the interest rate on the subordinated debt was
decreased from 18.0% to 10.0%. On a pro forma basis, such adjustments would have
lowered subordinated debt interest expense in 1995 by approximately 45.7%, from
$3.5 million to $1.9 million.
Interest Expense, Other relating primarily to the Revolving Facility with
GE Capital and to a much lesser extent in 1995 on the convertible subordinated
note issued to SunAmerica, increased by 117.7% from $215,000 in 1993 to $468,000
in 1994 and by 434.2% to $2.5 million in 1995. The Revolving Facility commenced
in June 1994 and had a balance of $9.9 million outstanding at the end of 1994,
which increased to $32.2 million at the end of 1995. For 1995, the average
interest rate on the Revolving Facility was 10.7%. See "Liquidity and Capital
Resources," below. Effective June 21, 1996, SunAmerica converted its convertible
note into Common Stock. On a pro forma basis this conversion to Common Stock
would have lowered Interest Expense, Other by $366,000 for the year ended
December 31, 1995.
Other Expenses increased by 165.6% from $64,000 in 1993 to $170,000 in 1994
and by 74.1% to $296,000 in 1995. The primary cause for the increase from 1994
to 1995 was the accrual of an estimated loss of $120,000 related to the sale of
the Gilbert Dealership.
ALLOWANCE FOR CREDIT LOSSES
The Company has established an Allowance for Credit Losses to cover
anticipated credit losses on the contracts currently in its portfolio. The
Allowance has been established through the Provision for Credit Losses on
contracts originated at Company Dealerships, and through nonrefundable
acquisition discounts on contracts purchased from Third Party Dealers. The
Allowance as a percentage of Company Dealership contracts increased from 21.9%
at December 31, 1995 to 23.6% at June 30, 1996, and the Allowance as a
percentage of Third Party Dealer contracts increased from 7.2% to 8.1% over the
same period. However, the Allowance as a percentage of the Company's combined
contract portfolio decreased from 17.7% at December 31, 1995 to 15.8% at June
30, 1996 due to the greater portion of the combined contract portfolio
represented by contracts purchased from Third Party Dealers, for which a lower
level of Allowance is required.
27
<PAGE> 29
CONTRACTS ORIGINATED AT COMPANY DEALERSHIPS
Allowance Attributable to Company Dealership Contracts. The Allowance for
Credit Losses on contracts originated at Company Dealerships increased to 23.6%
of outstanding principal balances as of June 30, 1996, compared to 21.9% as of
December 31, 1995. The following table reflects activity in the Allowance for
Credit Losses on contracts originated at Company Dealerships for the years ended
December 31, 1994 and 1995 and for the periods ended June 30, 1995 and 1996.
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -------------------
1994 1995 1995 1996
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, Beginning of period........................ $ 2,876 $ 6,050 $ 6,050 $ 7,500
Provision for Credit Losses......................... 8,140 8,359 4,404 5,172
Reduction in Allowance for Finance Receivables
Sold.............................................. -- -- -- (2,924)
Net Charge Offs..................................... (4,966) (6,909) (2,580) (3,774)
------- ------- ------- -------
Balances, End of Period............................. $ 6,050 $ 7,500 $ 7,874 $ 5,974
======= ======= ======= =======
Allowance as % of Principal......................... 30.4% 21.9% 27.3% 23.6%
======= ======= ======= =======
</TABLE>
The Provision for Credit Losses is charged to Company Dealership revenues
for contracts originated at Company Dealerships. The Provision has declined as a
percentage of principal balances due to the factors discussed above. See
"-- Results of Operations -- Provision for Credit Losses."
Since many of the Company's customers use income tax refunds as a source of
down payments, Company Dealerships generally experience increased car sales and
contract originations during the first six months of a fiscal year. See
"-- Seasonality." Accordingly, the increase in the Allowance at June 30, 1996
over December 31, 1995 is primarily a timing difference, reflecting the fact
that such increased sales and contract originations (and the associated
Provision for Credit Losses taken on each contract at the time of sale)
immediately impact the Allowance while charge offs related to such contracts may
occur later.
Net Charge Offs. The Company's policy is to charge off contracts when they
are deemed uncollectible, but in any event at such time as a contract is
delinquent for 90 days. The net charge off amount is the principal balance of
the contract at the time of the charge off plus accrued but unpaid interest,
less any recovery. The following table sets forth information regarding charge
off activity for Company Dealership contracts for the years ended December 31,
1994 and 1995, and for the periods ended June 30, 1995 and 1996:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -------------------
1994 1995 1995 1996
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Principal Balances:
Collateral Repossessed............................ $ 5,743 $ 6,686 $ 2,498 $ 3,590
Other............................................. 2,457 2,478 904 1,277
------- ------- ------- -------
Total Principal Balances.......................... 8,200 9,164 3,402 4,867
Accrued Interest.................................. 654 653 243 376
Recoveries, net................................... (3,888) (2,908) (1,065) (1,469)
------- ------- ------- -------
Net Charge Offs..................................... $ 4,966 $ 6,909 $ 2,580 $ 3,774
======= ======= ======= =======
Average Principal Outstanding....................... $16,507 $28,764 $24,021 $32,127
======= ======= ======= =======
Net Charge Offs as % of Average Principal
Outstanding....................................... 30.1% 24.0% 10.7% 11.7%
======= ======= ======= =======
</TABLE>
Recoveries averaged 47.4% of principal balances charged off on contracts
originated through Company Dealerships in 1994 versus 31.7% in 1995 and 30.2%
for the six months ended June 30, 1996, primarily reflecting reductions in the
percentage of repossessed cars sold at Company Dealerships from 57.5% in 1994 to
33.6% in 1995, and to 17.2% for the six months ended June 30, 1996. Repossessed
cars not sold through
28
<PAGE> 30
Company Dealerships are sold in wholesale transactions. The average recovery on
repossessed cars sold at Company Dealerships was $4,869 in 1995 compared to an
average recovery of $481 in wholesale transactions. The Company's net charge
offs on contracts generated through Company Dealerships are favorably affected
by a reduction in sales tax liability as a result of loan defaults.
Static Pool Analysis. The Company has reduced its Allowance for Credit
Losses as a percentage of contract principal balances as a result of the
improved performance of its Company Dealership contract portfolio. To monitor
contract performance, beginning in June 1995, the Company implemented "static
pool" analysis for all contracts originated since January 1, 1993. Static pool
analysis is a monitoring methodology by which each month's originations and
subsequent charge offs are assigned a unique pool and the pool performance is
monitored separately. Improving or deteriorating performance is measured based
on cumulative gross and net charge offs as a percentage of original principal
balances, based on the number of complete payments made by the customer before
charge off.
The following table sets forth the cumulative net charge offs as a
percentage of original contract cumulative balances, based on the quarter of
origination and segmented by the number of payments made prior to charge off.
While the Company monitors its static pools on a monthly basis, for presentation
purposes the information in the table is presented on a quarterly basis.
POOL'S CUMULATIVE NET LOSSES AS PERCENTAGE OF POOL'S ORIGINAL
AGGREGATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
PAYMENTS COMPLETED BY CUSTOMER BEFORE CHARGE OFF
----------------------------------------------------------
0 3 6 12 18 24
--- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
1993:
1st Quarter............. 6.6% 18.3% 26.6% 33.2% 35.1% 35.3%
2nd Quarter............. 7.7% 18.4% 26.2% 30.6% 32.1% 32.3%
3rd Quarter............. 8.5% 19.9% 25.2% 30.4% 31.5% 31.7%
4th Quarter............. 7.1% 16.9% 23.4% 27.7% 28.9% 29.5%
1994:
1st Quarter............. 3.5% 10.8% 14.3% 17.7% 19.3% x
2nd Quarter............. 3.7% 11.3% 15.3% 19.7% 21.7% --
3rd Quarter............. 3.5% 8.5% 12.9% 17.0% x --
4th Quarter............. 2.9% 9.1% 13.3% 18.0% -- --
1995:
1st Quarter............. 1.6% 8.3% 13.8% x
2nd Quarter............. 2.5% 7.9% 12.7% -- -- --
3rd Quarter............. 1.9% 6.5% x -- -- --
4th Quarter............. 1.1% x -- -- -- --
1996:
1st Quarter............. 1.0% -- -- -- -- --
</TABLE>
For periods denoted by an "x", the pools have not seasoned sufficiently to
allow for computation of cumulative losses. With respect to periods denoted by a
"--", the pools have not yet attained the indicated cumulative age. However,
management has factored the improved trends indicated by its static pool
analysis into its determination of the adequacy of the Allowance for Credit
Losses for these periods.
The Company attributes the improvement in its credit loss experience as a
percentage of contracts originated to a variety of factors. First, the Company
believes it has strengthened its underwriting requirements at the Company
Dealerships. Second, as a result of the higher quality of cars sold at Company
Dealerships, defaults arising from mechanical problems tend to be less frequent,
and when repossession is necessary, the amount recovered upon resale is
generally higher as a percentage of the contract balance. Finally, the Company
believes it has significantly improved its servicing and collection efforts.
29
<PAGE> 31
Delinquencies. Analysis of delinquency trends is also considered in
evaluating the adequacy of the Allowance. The following table reflects the
principal balance of delinquent Company Dealership contracts as a percentage of
total outstanding contract principal balances of the Company Dealership
portfolio as of December 31, 1993, 1994 and 1995, and as of June 30, 1995 and
1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
--------------------------------- ------------------------
1993 1994 1995 1995 1996
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
DELINQUENCY PERCENTAGES:
Principal Balances 31 Days to 60
Days............................ 10.5% 5.1% 4.2% 4.2% 2.8%
Principal Balances Over 60 Days... 15.0 1.3 1.1 2.3 1.0
---- --- --- --- ---
Total Over 30 days................ 25.5% 6.4% 5.3% 6.5% 3.8%
==== === === === ===
</TABLE>
The Company's improved delinquency experience on its Company Dealership
portfolio is attributable to the factors discussed above. See "-- Allowance for
Credit Losses -- Contracts Originated at Company Dealerships -- Static Pool
Analysis."
CONTRACTS PURCHASED FROM THIRD PARTY DEALERS
Allowance Attributable to Third Party Dealer Contracts. The Allowance on
contracts purchased from Third Party Dealers increased to 8.1% of the
outstanding principal balance of the Third Party Dealer portfolio as of June 30,
1996 from 7.2% as of December 31, 1995. The following table reflects activity in
the Allowance for Credit Losses on contracts purchased from Third Party Dealers
for the years ended December 31, 1994 and 1995, and for the periods ended June
30, 1995 and 1996.
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------- ----------------
1994 1995 1995 1996
----- ------ ----- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, Beginning of Period............................. $ -- $ 159 $ 159 $1,000
----- ------ ----- ------
Provision for Credit Losses.............................. -- -- -- --
Discount Acquired........................................ 767 1,660 681 1,830
Discount Accreted to Income.............................. (188) -- -- --
Net Charge Offs.......................................... (420) (819) (191) (757)
----- ------ ----- ------
Balances, End of Period.................................. $ 159 $1,000 $ 649 $2,073
===== ====== ===== ======
Allowance as % of Principal.............................. 9.8% 7.2% 11.1% 8.1%
===== ====== ===== ======
</TABLE>
Each of the contracts acquired from Third Party Dealers is purchased at a
discount to the principal amount of the contract. Beginning January 1, 1995, the
Company has allocated nonrefundable discounts to the Allowance. In 1994, the
acquisition discount averaged $504 per contract, or 12.5% of the principal
balance. In 1995, the acquisition discount averaged $551 per contract, or 10.1%
of the principal balance. As a percentage of Third Party Dealer contracts
purchased, the discount has decreased from 1994 through the end of the second
quarter of 1996, averaging 12.4% and 10.6% for the six months ended June 30,
1995 and 1996, respectively, and reflecting the increase in the quality of
contracts purchased. The increase in the Allowance for Credit Losses at June 30,
1996 compared to December 31, 1995 is attributable to the difference in the time
at which the discount is acquired and credited to the Allowance and the time at
which the Allowance is reduced through expected charge offs.
As with the Allowance on Company Dealership contracts, the Company does not
allocate any portion of the unearned interest income on its Third Party Dealer
contracts to its Allowance for Credit Losses. Accordingly, the Company's
unearned finance income is comprised of the full APR on its contracts.
30
<PAGE> 32
Net Charge Offs. The following table sets forth information regarding
charge off activity for Third Party Dealer contracts for the years ended
December 31, 1994 and 1995, and for the periods ended June 30, 1995 and 1996:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------- ------------------
1994 1995 1995 1996
------ ------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Principal Balances:
Collateral Repossessed............................... $ 290 $ 806 $ 122 $ 1,067
Other................................................ 107 220 53 225
------ ------ ------ -------
Total Principal Balances............................. 397 1,026 175 1,292
Accrued Interest..................................... 23 59 16 60
Recoveries, net...................................... -- (266) -- (595)
------ ------ ------ -------
Net Charge Offs........................................ $ 420 $ 819 $ 191 $ 757
====== ====== ====== =======
Average Principal Outstanding.......................... $1,788 $6,889 $2,752 $18,810
====== ====== ====== =======
Net Charge Offs as % of Average Principal
Outstanding.......................................... 23.5% 11.9% 6.9% 4.0%
====== ====== ====== =======
</TABLE>
The Company significantly revised and expanded its Third Party Dealer
program in April 1995. Prior to April 1995, the Company purchased from Third
Party Dealers, at discounts of approximately 15.0% to 25.0%, contracts with
average principal balances of approximately $4,000 bearing a typical APR of
29.9%. Under the Company's current program, which is aimed at more creditworthy
borrowers, it purchases from Third Party Dealers, at discounts averaging
approximately 10.0%, contracts with average principal balances of approximately
$5,600 bearing an average APR of 25.0%. As a result, Net Charge Offs as a
percentage of Third Party Dealer contract average principal balances were 23.5%
in the year ended December 31, 1994, and 6.9% in the six months ended June 30,
1995 versus 11.9% in the year ended December 31, 1995 and 4.0% in the six months
ended June 30, 1996. This continued improvement in Net Charge Off percentage is
considered by management in reviewing the adequacy of the Allowance for Credit
Losses as a percentage of contract principal balances outstanding.
The Company's Net Charge Offs on its Third Party Dealer contract portfolio
are significantly lower than those incurred on its Company Dealership contract
portfolio. See "-- Allowance for Credit Losses -- Contracts Originated at
Company Dealerships -- Allowance Attributable to Contracts Originated at Company
Dealerships." This is attributable to the generally more creditworthy customers
served by Third Party Dealers and the relationship of the average amount
financed to the underlying collateral's wholesale value. In its Third Party
Dealer portfolio, the Company generally limits its investment (advance to
wholesale book ratio) to not more than 120.0% of the wholesale value of the
underlying car, although the Company will make exceptions on a case-by-case
basis. For 1995, the advance to wholesale book ratio on the Third Party Dealer
portfolio averaged 117.0%, as compared to 184.0% for the Company Dealership
portfolio (105.0% of Kelly Blue Book retail value). Accordingly, when it becomes
necessary to repossess the collateral securing Third Party Dealer contracts, the
Company's net recovery is expected to be approximately 45.0% to 55.0% of the
outstanding contract balance, while on the Company Dealership portfolio the net
recovery is expected to be approximately 33.0%. See "Business -- Comparison of
Contracts Originated at Company Dealerships and Third Party Dealers."
Recoveries averaged 25.9% of principal balances charged off on contracts
purchased from Third Party Dealers in 1995 versus 46.1% for the six months ended
June 30, 1996. Management believes that the recoveries in 1995 related primarily
to contracts purchased prior to April 1995. Since then, the Company has
purchased contracts with more creditworthy borrowers, where the value of the
amount financed more closely approximates the wholesale value of the car.
Static Pool Analysis. Although the Company intends to apply static pool
analysis to its Third Party Dealer portfolio, this portfolio has not had
sufficient seasoning for meaningful analysis. While the static pool
31
<PAGE> 33
information is developing, management evaluates the adequacy of the Allowance
for the Third Party Dealer portfolio through comparisons in the characteristics
of collateral ratios and borrowers on the Third Party Dealer contracts versus
those of the Company Dealership contracts, as well as through comparisons of
actual contract performance and portfolio delinquency.
Delinquencies. Major factors in determining the expected collectability
and performance of the Company's Third Party Dealer portfolio are current
delinquencies and historical trends. The following table reflects the principal
balance of delinquent Third Party Dealer contracts as a percentage of total
outstanding contract principal balances of the Third Party Dealer portfolio as
of December 31, 1993, 1994 and 1995, and as of June 30, 1995 and 1996.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------- -------------------------
1993 1994 1995 1995 1996
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
DELINQUENCY PERCENTAGES:
Principal Balances 31 to 60
Days.......................... -- 6.0% 1.2% 1.3% 1.4%
Principal Balances Over 60
Days.......................... -- 2.6 0.4 0.2 0.2
--- --- ---- --- - --- -
Total Over 30 Days.............. -- 8.6% 1.6% 1.5% 1.6%
=== === ==== ==== ====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to support increases in its contract
portfolio, expansion of Company Dealerships and Branch Offices, the purchase of
inventories, the purchase of property and equipment, and for working capital and
general corporate purposes. The funding sources available to the Company include
operating cash flow and supplemental borrowings.
The Company's Net Cash Provided by Operating Activities decreased by 10.5%
from $3.8 million in 1993 to $3.4 million in 1994, and then increased by 85.3%
to $6.3 million in 1995. The decrease from 1993 to 1994 was primarily
attributable to significant increases in inventory in connection with the
Company's opening of four new Company Dealerships, while the increase from 1994
to 1995 was primarily due to increases in accrued expenses and other long-term
liabilities. The Net Cash Used in Investing Activities increased by 121.5% from
$9.3 million in 1993 to $20.6 million in 1994 and then increased by 76.7% to
$36.4 million in 1995. The principal uses in 1994 were $15.0 million for the
increase in the contract portfolio and $5.3 million for the purchase of property
and equipment. The principal uses in 1995 were $33.2 million for the increase in
the contract portfolio and $3.2 million for purchase of property and equipment.
The Company's Net Cash Provided by Operating Activities increased by 157.1%
from $4.2 million for the six months ended June 30, 1995 to $10.8 million for
the six months ended June 30, 1996. The increase was primarily due to increases
in Net Earnings, Provision for Credit Losses, Accounts Payable and Accrued
Expenses, and other long-term liabilities and a decrease in refundable income
taxes offset by the Gain on Sale of Finance Receivables. The Net Cash Used in
Investing Activities decreased by 12.0% from $17.5 million in the six months
ended June 30, 1995 to $15.4 million in the six months ended June 30, 1996. The
$18.4 million provided by the sale of finance receivables and the $19.0 million
provided by collections on finance receivables were offset by the $44.3 million
used in the increase in finance receivables, $6.6 million used for the increase
in Investments Arising from Finance Receivables Sold, and $2.1 million used for
the purchases of property and equipment.
The Company's Net Cash Provided by Financing Activities in 1995 was $31.3
million, the primary sources of which were the Revolving Facility with GE
Capital, subordinated debt from Verde Investments, and a convertible note issued
to SunAmerica. The Company's Net Cash Provided by Financing Activities decreased
by 74.1% from $13.5 million in the six months ended June 30, 1995 to $3.5
million in the six months ended June 30, 1996. The primary financing activities
in the first six months of 1996 were the $14.9 million in proceeds from the
issuance of Common Stock and corresponding $10.2 million reduction in the
Revolving Facility.
Revolving Facility. The Revolving Facility with GE Capital has a maximum
commitment of up to $50.0 million. Under the Revolving Facility, the Company may
borrow up to 65.0% of the principal balance of eligible Company Dealership
contracts and up to 90.0% of the principal balance of eligible Third Party
Dealer
32
<PAGE> 34
contracts. The Revolving Facility expires in September 1997, at which time the
Company has the option to renew the Revolving Facility for one additional year.
The facility is secured by substantially all of the Company's assets. As of June
30, 1996, the Company's borrowing capacity under the Revolving Facility was
approximately $38.0 million, the aggregate principal amount outstanding under
the Revolving Facility was $20.6 million, and the amount available to be
borrowed under the facility was $17.4 million. The Revolving Facility bears
interest at the 30-day LIBOR plus 3.6%, payable daily (total rate of 9.1% as of
October 23, 1996). The Company intends to use a portion of the net proceeds of
this offering to temporarily repay indebtedness under the Revolving Facility.
See "Use of Proceeds."
The Revolving Facility contains covenants that, among other things, limit
the Company's ability to, without GE Capital's consent: (i) incur additional
indebtedness; (ii) engage in securitization transactions; (iii) merge with,
consolidate with, acquire, or otherwise combine with any other person or entity,
transfer any division or segment of its operations to another person or entity,
or form new subsidiaries; (iv) make changes in its capital structure; (v) pay
dividends or make certain other distributions; (vi) make certain investments and
capital expenditures; and (vii) engage in certain transactions with affiliates.
These covenants also require the Company to maintain specified financial ratios
and comply with all laws relating to the Company's business. The Revolving
Facility also provides that a transfer of ownership of the Company that results
in less than 25.0% of the Company's voting stock being owned by Mr. Ernest C.
Garcia, II, will result in an event of default under the Revolving Facility. No
such default will occur as a result of this offering.
Subordinated Indebtedness and Preferred Stock. The Company has borrowed
substantial amounts from Verde Investments, a company owned by the Company's
Chairman, Chief Executive Officer and principal stockholder. The balances
outstanding to Verde Investments under these arrangements totaled $8.9 million
as of December 31, 1993, $18.3 million as of December 31, 1994, and $14.6
million as of December 31, 1995 ($24.6 million prior to the conversion of $10.0
million to Preferred Stock as discussed below), and $14.0 million as of June 30,
1996. Effective June 21, 1996, the annual interest rate on these borrowings was
reduced from 18.0% to 10.0%. The Company is required to make monthly payments of
interest and annual payments of principal in the amount of $2.0 million. The
debt is junior to all of the Company's other indebtedness and the Company may
suspend interest and principal payments in the event it is in default on
obligations to any other creditors. See "Recapitalization and Related
Transactions."
On December 31, 1995, Verde converted $10.0 million of subordinated debt to
Preferred Stock of the Company. Prior to June 21, 1996, the Preferred Stock
accrued a dividend of 12.0% annually, increasing one percent per year up to a
maximum of 18.0%. Effective June 21, 1996, the dividend on the Preferred Stock
was decreased from 12.0% to 10.0%. The Preferred Stock will be redeemed from the
proceeds of this offering. See "Use of Proceeds," "Recapitalization and Related
Transactions," and "Description of Capital Stock -- Preferred Stock."
Convertible Note. In August 1995, the Company entered into a note purchase
agreement with SunAmerica pursuant to which SunAmerica purchased a $3.0 million
convertible subordinated note. The convertible note, which was due June 30,
1998, bore interest at a rate of 12.5%, payable quarterly, and was secured by a
pledge of the Common Stock of the Company held by the Company's Chairman, Chief
Executive Officer and principal stockholder. Effective June 21, 1996, SunAmerica
converted the note into Common Stock (444,444 shares at the initial public
offering price of $6.75 per share). In return for the conversion, the Company
granted SunAmerica a ten-year warrant to purchase 116,000 shares of Common Stock
at the initial public offering price per share and paid fees to SunAmerica
totaling $150,000. See "Recapitalization and Related Transactions."
Securitizations. SunAmerica and the Company have entered into the
Securitization Program under which SunAmerica may purchase up to $175.0 million
of certificates secured by contracts. The Securitization Program is intended to
provide the Company with an additional source of funding to the Revolving
Facility. At the closing of each securitization, the Company receives payment
from SunAmerica for the certificates sold (net of investments held in trust).
The Company also generates cash flow under this program from ongoing servicing
fees and excess cash flow distributions resulting from the difference between
the payments received from customers on the contracts and the payments paid to
SunAmerica.
33
<PAGE> 35
Although the Securitization Program had significant up-front expenses which
reduced the Company's gain on sale on the first pool of contracts securitized,
ongoing funding costs have been lower than those of the Revolving Facility. In
addition, securitization allows the Company to fix its borrowing cost for a
given contract portfolio, broadens the Company's capital source alternatives,
and provides a higher advance rate than that available under the Revolving
Facility.
Capital Expenditures and Commitments. The Company has entered into a
definitive agreement to acquire the leasehold rights to an existing dealership
in Las Vegas, Nevada, has three other dealerships (one in Phoenix, Arizona and
two in Albuquerque, New Mexico) and a reconditioning facility (in Albuquerque,
New Mexico), currently under development, and has begun an expansion of its
contract servicing and collection facility. In addition, the Company intends to
open eight new Branch Offices during the fourth quarter of 1996. The Company
intends to continue its aggressive growth strategy, developing or acquiring
additional Company Dealerships and opening 15 or more new Branch Offices through
the end of 1997. The Company believes that it will expend an average of
approximately $1.5 million to $1.7 million (excluding inventory) to develop each
new Company Dealership and $50,000 to establish each new Branch Office. The
Company intends to finance these expenditures through operating cash flows,
supplemental borrowings, (including under the Revolving Facility), and the
proceeds of this offering.
SEASONALITY
Historically, the Company has experienced higher revenues in the first two
quarters of the year than in the latter half of the year. The Company believes
that these results are due to seasonal buying patterns resulting in part from
the fact that many of its customers receive income tax refunds during the first
half of the year, which are a primary source of down payments on used car
purchases.
INFLATION
Increases in inflation generally result in higher interest rates. Higher
interest rates on the Company's borrowings would decrease the profitability of
the Company's existing portfolio. The Company will seek to limit this risk
through its Securitization Program and, to the extent market conditions permit,
for contracts originated at Company Dealerships, either by increasing the
interest rate charged, or the profit margin on, the cars sold, or for contracts
acquired from Third Party Dealers, either by acquiring contracts at a higher
discount or with a higher APR. To date, inflation has not had a significant
impact on the Company's operations.
ACCOUNTING MATTERS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of "
(SFAS No. 121), which the Company adopted for its fiscal year beginning January
1, 1996, requires "that long-lived assets and certain identifiable intangibles
to be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable." The adoption of SFAS No. 121 did not have any effect on the
Company's financial position.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS No. 123) establishes financial accounting and
reporting standards for stock-based employee compensation plans. These plans
include all arrangements by which employees receive shares of stock or other
equity instruments of the employer or the employer incurs liabilities to
employees in amounts based on the price of the employer's stock. Examples
include stock purchase plans, stock options, restricted stock, and stock
appreciation rights. SFAS No. 123 also applies to transactions in which an
entity issues its equity instruments to acquire goods or services from
nonemployees. These transactions must be accounted for, or at least disclosed in
the case of stock options, based on the fair value of the consideration received
or the equity instruments issued, whichever is the more reliable measure. The
Company will adopt the disclosure requirements of SFAS No. 123 for its fiscal
year ending December 31, 1996.
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS No. 125), which the Company will adopt for its fiscal year beginning
January 1, 1997, establishes accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities. Management
has not determined the impact that adoption of SFAS No. 125 will have on the
Company.
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BUSINESS
GENERAL
Ugly Duckling Corporation (the "Company") operates one of the largest
chains of Buy Here-Pay Here used car dealerships in the United States and
underwrites, finances, and services retail installment contracts generated from
the sale of used cars by its Company Dealerships and by Third Party Dealers
located in selected markets throughout the country. As part of its financing
activities, the Company has initiated the Cygnet Dealer Program pursuant to
which it intends to provide qualified Third Party Dealers with operating credit
lines secured by the dealers' retail installment contract portfolios. The
Company targets its products and services to the sub-prime segment of the
automobile financing industry, which focuses on selling and financing the sale
of used cars to Sub-Prime Borrowers.
The rapidly growing used car sales and finance industry achieved record
sales in 1995 of 30.5 million units, representing approximately $290.0 billion
in sales. During this same period, more than $185.0 billion in retail
installment contracts were originated through the sale of used cars. Of these
totals, approximately 11.0 million units were sold to Sub-Prime Borrowers,
generating approximately $50.0 billion in retail installment contracts.
Consistent with the industry's growth, the Company has expanded
significantly in recent periods. From 1994 to 1995, total revenues increased by
72.2% from $33.8 million to $58.2 million. Reflecting development of its
infrastructure and expansion of its operations, the Company incurred losses of
approximately $2.0 million and $4.0 million for these periods, respectively.
For the six months ended June 30, 1996, the Company's revenues totaled
$39.5 million, including $30.2 million on the sale of more than 4,000 used cars
and $7.1 million in finance income. During this period, the Company achieved
profitability with net earnings before preferred stock dividends of
approximately $2.1 million, including $1.2 million from the sale of contract
receivables under the Securitization Program. The Company originated more than
3,800 contracts through its Company Dealerships with an aggregate principal
balance of $27.1 million and purchased more than 3,000 contracts from Third
Party Dealers with an aggregate principal balance of $17.2 million during the
six months ended June 30, 1996. The principal balance of the Company's total
contract portfolio serviced as of June 30, 1996, was $71.3 million, including
$20.5 million in contracts serviced under the Securitization Program.
OVERVIEW OF USED CAR SALES AND FINANCE INDUSTRY
Used Car Sales. Used car retail sales typically occur through franchised
new car dealerships that sell used cars or independent used car dealerships. The
market for used car sales in the United States is significant and has steadily
increased over the past five years. The Company believes that the factors that
have led to growth in this industry include substantial increases in new car
prices, which have made new cars less affordable to the average consumer
relative to used cars, the greater reliability and durability of used cars
resulting from the production of higher quality cars, and the increasing number
of vehicles coming off-lease in recent years. Many analysts expect these trends
to continue, leading to further expansion of the used car sales market.
The used car sales industry is highly fragmented and, traditionally, sales
to customers have occurred through franchised and independent dealerships owned
by individuals, families, and small groups. According to industry sources, there
are over 23,000 franchised and 63,000 independent used car dealership locations
in the United States. Used car sales from franchised dealerships (or affiliated
used-only car lots) accounted for approximately 61.3% of used car sales during
1995, with the remaining 38.7% resulting from sales by independent dealerships.
Approximately 675 independent used car dealerships are located in Arizona.
The Company participates in the sub-prime segment of the independent used
car sales and finance market. This segment is serviced primarily by Buy Here-Pay
Here dealers that sell and finance the sale of used cars to Sub-Prime Borrowers.
Buy Here-Pay Here dealers typically offer their customers certain advantages
over more traditional financing sources, such as expanded credit opportunities,
flexible payment terms (including prorating customer payments due within one
month into several smaller payments and scheduling
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<PAGE> 37
payments to coincide with a customer's pay days), and the ability to make
payments in person, an important feature to many Sub-Prime Borrowers who may not
have checking accounts or are otherwise unable to make payments by the due date
through use of the mail because of the timing of paychecks.
Recently, the growth of the used car sales and finance market has attracted
significant attention from a number of large companies, including Circuit City's
CarMax, AutoNation, U.S.A., and Driver's Mart, which have entered the used car
sales business or announced plans to develop large used car sales operations.
The Company believes that these companies are attracted by the relatively high
gross margins that can be earned in this business and the lack of consolidation
in this market. None of these companies have indicated an intention to focus on
the Buy Here-Pay Here segment.
Used Car Financing. The automobile financing industry is the third-largest
consumer finance market in the country, after mortgage debt and credit card
revolving debt, with more than $350.0 billion in contracts on new and used cars
originated in 1995. The sub-prime segment of this industry accounted for
approximately $50.0 billion of the overall market. Growth in automobile
financing has been fueled by the increasing prices of both new and used cars,
which has forced greater numbers of purchasers to seek financing when purchasing
a car. This industry is served by such traditional lending sources as banks,
savings and loans, and captive finance subsidiaries of automobile manufacturers,
as well as by independent finance companies and Buy Here-Pay Here dealers. In
general, the industry is categorized according to the type of car sold (new
versus used) and the credit characteristics of the borrower. With respect to the
borrowers, finance companies classify such individuals according to the
following generalized criteria:
- An "A" credit or "prime" borrower is a person who has a long credit
history with no defaults, has been employed in the same job for a period
of at least 18 months, and can easily finance a new car purchase through
a bank, a captive finance subsidiary of an automobile manufacturer, or an
independent finance company.
- A "B" credit or "non-prime" borrower is a person who has a substantial
credit history that includes late payments, an inconsistent employment
history, or significant or unresolved problems with credit in the past.
To finance a used car purchase, this borrower will generally not be able
to obtain a loan from a captive finance subsidiary or a bank, and will
have to obtain financing from an independent finance company that lends
into this market category.
- A "C" credit or "sub-prime" borrower generally has little or no credit
history or a credit history characterized by consistently late payments
and sporadic employment. Like "B" credit borrowers, "C" credit borrowers
generally are not able to obtain a loan from a captive finance subsidiary
or a bank, and have to obtain financing from an independent finance
company that lends into this market category.
- A "D" credit borrower is also referred to as a "sub-prime" borrower.
These persons, however, in addition to having an unfavorable employment
history, have also experienced debt charge offs, foreclosures, or
personal bankruptcy. In purchasing a car, this borrower's only choice is
to obtain financing from an independent finance company or through a Buy
Here-Pay Here lot.
As with its sales operations, the Company's finance operations are directed
to the sub-prime segment of the market. In particular, the finance operations of
Company Dealerships are directed toward Sub-Prime Borrowers classified in the
"C" and "D" categories, while its Third Party Dealer finance operations are
generally directed to "C" credit borrowers. Despite significant opportunities,
many of the traditional lending sources do not consistently provide financing to
the sub-prime consumer finance market. The Company believes traditional lenders
avoid this market because of its high credit risk and the associated collection
efforts.
Many of the 63,000 independent used car dealers are not able to obtain debt
financing from traditional lending sources such as banks, credit unions, or
major finance companies. These dealers typically finance their operations
through the sale of contract receivables at a substantial discount. The Company
believes that independent dealers prefer to finance their operations through
credit facilities that enable them to retain their receivables, thereby
increasing their finance income. Accordingly, the Company believes that there is
a
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substantial opportunity for a company capable of serving the needs of such
dealers to make significant penetration into this underdeveloped segment of the
sub-prime market.
The industry statistical information presented herein is derived from
information provided to the Company by CNW Marketing/Research of Bandon, Oregon.
BUSINESS STRATEGY
The Company intends to leverage its management team, collection facilities,
computer networks, and capital base to grow its Company Dealership and Third
Party Dealer operations, both in Arizona and in other geographic locales.
Expand Company Dealership Operations. Since commencing its used car sales
and financing operations in 1992, the Company has pursued an aggressive growth
strategy through both internal development and acquisition. As of September 30,
1996, the Company had developed or acquired eight Company Dealerships. Recently,
the Company entered into a definitive agreement to acquire the leasehold rights
to an existing dealership in Las Vegas, Nevada, and has three other dealerships
currently under development (one in Phoenix, Arizona and two in Albuquerque, New
Mexico). The Company intends to continue the aggressive development or
acquisition of Company Dealerships throughout the southwestern United States and
in other locations where opportunities may arise.
The Company distinguishes its direct sales and financing operations from
typical Buy Here-Pay Here dealers by providing multiple locations, upgraded
facilities, large inventories of used automobiles, and dedication to customer
service. The Company has designed and implemented a marketing program featuring
its animated duck mascot that promotes its image as a professional, yet
approachable, operation, in contrast to the generally unfavorable public image
of many Buy Here-Pay Here dealers. In addition, the Company has developed
flexible underwriting guidelines and techniques, which combine established
underwriting criteria with managerial discretion, to facilitate rapid credit
decisions, as well as an integrated, technology-based corporate infrastructure
that enables the Company to monitor and service large volumes of contracts.
Expand Third Party Dealer Operations. The Company has leveraged the
contract servicing experience and capabilities it acquired through its Company
Dealership activities by purchasing and servicing contracts originated by Third
Party Dealers. Since 1995, the Company has opened twenty-two Branch Offices (six
in Texas, five in Arizona, four in Indiana, two each in Colorado, Florida, and
Nevada, and one in New Mexico), nine of which opened in the third quarter of
1996. These Branch Offices service approximately 800 Third Party Dealers. The
Company continually evaluates expansion of its Third Party Dealer operations
into additional geographic areas. In this regard, the Company intends to open
eight new Branch Offices during the fourth quarter of 1996, and anticipates
opening 15 or more additional Branch Offices in various states in 1997.
Implement New Products and Services. The Company is in the process of
expanding its Third Party Dealer operations by implementing the Cygnet Dealer
Program. The Company believes that providing operating credit lines to qualified
Third Party Dealers will give such dealers a unique opportunity to obtain the
debt financing necessary to expand their businesses while enabling the Company
to earn additional finance income and diversify its earning asset base. The
Company also believes that the relationships established with these dealers will
provide it with a preferred position to acquire retail installment contracts
from them. Such contract purchases would provide these dealers with an
additional source of financing and enable the Company to further expand its
contract portfolio. The Company anticipates that it will begin testing this
program with selected Third Party Dealers during the fourth quarter of 1996 and
will begin full-scale marketing of the program during the first quarter of 1997.
The Company also intends to expand its insurance operations, which to date
consist of force placing casualty insurance on its Third Party Dealer contracts.
Among other things, the Company is evaluating the sale of other insurance
products to its customer base and recently entered into a letter of intent to
acquire an existing insurance agency. See "-- Third Party Dealer Operations."
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COMPANY DEALERSHIP OPERATIONS
Company Dealership operations include the retail sale of used cars and the
underwriting, financing, and servicing of contracts originated from such sales.
The Company's total revenues from its Company Dealership operations were $15.6
million, $32.5 million, and $56.1 million ($46.6 million excluding sales at the
Gilbert Dealership) for fiscal years 1993, 1994, and 1995, respectively. See
"Selected Consolidated Financial Data."
Retail Car Sales. The Company operates a chain of eight used car
dealerships in Arizona. The Company distinguishes its Company Dealership
operations from those of typical Buy Here-Pay Here dealers through its network
of multiple locations, upgraded facilities, large inventories of used cars,
centralized purchasing, value-added marketing programs, and dedication to
customer service. All Company Dealerships are located in high visibility, high
traffic commercial areas, and generally are newer and cleaner in appearance than
other Buy Here-Pay Here dealers, which helps promote the Company's image as a
friendly and reputable business. The Company believes that these factors,
coupled with its widespread brand name recognition (achieved through extensive
promotion of its duck mascot and logo), enable it to attract customers who might
otherwise visit another Buy Here-Pay Here dealer.
Company Dealerships generally maintain an average inventory of 100 to 300
used cars and feature a wide selection of makes and models (with ages generally
ranging from 5 to 10 years) and a range of sale prices, all of which enables the
Company to meet the tastes and budgets of a broad range of potential customers.
The Company acquires its inventory from new or late-model used car dealers, used
car wholesalers, used car auctions, and customer trade-ins, as well as from
repossessions. The Company's size enables it to cut inventory costs by making
volume purchases for all Company Dealerships. In making its purchases, the
Company takes into account each car's retail value and the costs of buying,
reconditioning, and delivering the car for resale. After purchase, cars are
delivered to the individual dealerships, where they are inspected and
reconditioned for sale. Although the prices of used cars are subject to market
variance, the Company does not believe that it will encounter significant
difficulty in maintaining its current inventory levels.
The average sales price per car at Company Dealerships was $7,206 for the
six months ended June 30, 1996, and $6,065 for the fiscal year ended December
31, 1995 (exclusive of sales at the Company's Gilbert Dealership). Company
Dealerships use a standardized sales contract that typically provides for down
payments of approximately 10.0% to 15.0% of the purchase price with the balance
of the purchase price financed at a fixed interest rate of 29.9% over periods
ranging from 12 to 36 months. The Company sells cars on an "as is" basis, and
requires its customers to sign an agreement at the date of sale releasing the
Company from any obligation with respect to vehicle-related problems that
subsequently occur. See "-- Legal Proceedings."
Used Car Financing. The Company finances approximately 90.0% of the used
car sales at its Company Dealerships through retail installment contracts that
the Company services. Subject to the discretion of its sales managers, potential
customers must meet the Company's underwriting guidelines, referred to as
minimum deal standards, before the Company will agree to finance the purchase of
a car. The Company created these minimum deal standards to control its exposure
to credit risk while providing its sales managers with sufficient flexibility to
consummate sales when appropriate. In connection with each sale, customers are
required to complete a credit application. Company personnel analyze and verify
the application, which contains employment and residence histories, income
information, and references, as well as the customer's personal cash flow
statement (taking into account the completion of the sale), credit bureau
reports, and other information regarding the customer's credit history.
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The Company's credit underwriting process takes into account the ability of
its managers and other sales employees, who have extensive experience, to make
sound judgments regarding the extension of credit to Sub-Prime Borrowers and to
personalize financing terms to meet the needs of individual customers. For
example, contract payments may be scheduled to coincide with the customer's pay
days, whether weekly, biweekly, semi-monthly, or monthly. In addition, each
manager makes credit approvals only after a "face-to-face" interview with the
potential customer in which the manager gains firsthand information regarding
the customer's financial situation, sources of income, and past credit problems.
The Company believes that its customers value the expanded credit opportunities
that such flexibility provides and, consequently, will pay a higher price for
their cars. The Company believes that the higher prices it charges are necessary
to fund the high rate of credit losses incurred as a result of financing
Sub-Prime Borrowers. To the extent the Company is unable to charge such higher
prices or otherwise obtain acceptable margins, its results of operations will be
adversely affected.
Subsequent to each sale, all finance transactions are "audited" by the
Company's portfolio manager and reviewed for compliance with the Company's
underwriting standards. To the extent such audits reveal non-compliance, such
non-compliance is discussed with dealership management and, where appropriate,
remedial action is taken against the responsible manager, ranging from oral or
written reprimands to termination.
The Company's use of wide area and local area networks enables it to
service large volumes of contracts from its centralized servicing facilities
while allowing the customer the flexibility to make payments at and otherwise
deal with the individual dealerships. In addition, the Company has developed
comprehensive databases and sophisticated management tools, including static
pool analysis, to analyze customer payment history and contract performance and
to monitor underwriting effectiveness.
Advertising and Marketing. The Company believes that it maintains the
largest advertising budget of any Buy Here-Pay Here dealer in Arizona. In
general, the Company's advertising campaigns emphasize its multiple locations,
wide selection of quality used cars, and ability to provide financing to most
Sub-Prime Borrowers. The Company's advertising campaign revolves around a series
of television commercials that feature the Company's animated duck mascot, as
well as complementary radio, billboard, and print advertisements. The Company
believes that its marketing approach creates brand name recognition and promotes
its image as a professional, yet approachable, business, in contrast to the lack
of name recognition and generally unfavorable public image of many Buy Here-Pay
Here dealers. The Company believes that its advertising has helped establish it
as the most widely recognized Buy Here-Pay Here dealership network in Arizona.
A primary focus of the Company's marketing strategy is its ability to
finance consumers with poor credit histories. Under the slogan "Ugly Duckling
Car Sales -- Putting You on the Road to Good Credit," the Company has initiated
innovative marketing programs designed to attract Sub-Prime Borrowers, assist
such customers in reestablishing their credit, reward those customers who pay on
time, develop customer loyalty, and increase referral and repeat business. Among
these programs are:
- The Down Payment Back Program. This program encourages customers to make
timely payments on their contracts by enabling them to receive a refund
of their initial down payment (typically representing 10%-15% of the
initial purchase price of the car) at the end of the contract term if all
payments have been made by the scheduled due date.
- The Income Tax Refund Program. During the first quarter of each year,
the Company offers assistance to customers in the preparation of their
income tax returns, including forwarding customers' tax information to a
designated preparer, paying the preparation fee, and, if there is a
forthcoming tax refund, crediting such refund toward the required down
payment. This program enables customers to purchase cars without having
to wait to receive their income tax refund.
- Secured $250 Visa Card Program. Pursuant to this program, the Company
arranges for qualified applicants to obtain a Visa credit card secured by
a nonrefundable $250 payment made by the Company to the credit card
company. This program offers otherwise unqualified customers the chance
to obtain the convenience of a credit card and rebuild their credit
records.
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The Company also utilizes various telemarketing programs. For example,
potential customers are contacted within several days of their visit to a
Company Dealership to follow up on leads and obtain information regarding their
experience while at a Company Dealership. In addition, customers with
satisfactory payment histories are contacted several months before contract
maturity and are offered an opportunity to purchase another vehicle with a
nominal down payment requirement. The Company also maintains a loan-by-phone
program utilizing its toll-free telephone number of 1-800-THE-DUCK.
Sales Personnel and Compensation. Each Company Dealership is run by a
general manager who has complete responsibility for the operations of the
dealership facility, including final approval of sales and contract
originations, inventory maintenance, the appearance and condition of the
facility, and the hiring, training, and performance of Company Dealership
employees. In addition to the general manager, the Company typically staffs each
dealership with, among others, up to three sales managers, an office manager, a
lot supervisor, five to twelve salespersons, and several mechanics.
The Company trains its managers to be contract underwriters. The Company
pays its managers a base salary and allows them to earn bonuses based upon a
variety of factors, including the overall performance of the contract portfolio
originated. Although sales persons are paid on commission, each sale must be
underwritten and approved by a manager. By giving its managers a strong
incentive to underwrite quality contracts, the Company believes that it can
maintain its current level of credit losses while continuing to achieve
significant growth in sales revenue.
THIRD PARTY DEALER OPERATIONS
Contract Purchasing. In 1994, the Company acquired Champion Financial
Services, Inc., an independent automobile finance company, primarily for its
management expertise and contract servicing software and systems. Champion had a
portfolio of approximately $1.9 million in sub-prime contracts averaging
approximately $2,000 in principal amount. For the balance of 1994, the Company
purchased an additional $1.7 million in contracts.
In April 1995, the Company initiated an aggressive plan for purchasing
contracts from Third Party Dealers and by September 30, 1996 had opened
twenty-two Branch Offices in seven different states throughout the country and
entered into contract purchasing agreements with approximately 800 Third Party
Dealers. The Company has hired experienced branch managers having existing
relationships with Third Party Dealers and opened Branch Offices near its Third
Party Dealers to better service their needs. The Company services the Third
Party Dealer contract portfolio from its centralized collection and servicing
centers. The expansion of its Third Party Dealer network enabled the Company to
leverage its existing infrastructure and increase its contract portfolio much
more quickly than it could through the planned expansion of its Company
Dealerships. The Company was also able to increase the socioeconomic and
geographic diversity of its contract portfolio by purchasing higher quality
contracts and contracts from areas where there are no Company Dealerships.
The Company generally purchases contracts from Third Party Dealers that are
originated with customers possessing financial characteristics superior to those
of Company Dealership customers and that reflect principal amounts closer to the
actual wholesale value of the underlying car. Consequently, its Third Party
Dealer contracts generally present a reduced credit and collateral risk. The
Company's total revenues from its Third Party Dealer operations were $710,000
and $1.8 million in fiscal years 1994 and 1995, respectively, and $2.5 million
for the six months ended June 30, 1996. See "Selected Consolidated Financial
Data."
The Company purchases contracts from Third Party Dealers at a nonrefundable
acquisition discount from the principal amount of the contract that generally
ranges from 5.0% to 20.0%, and averages approximately 10.0%. The Company
determines the appropriate discount needed to cover estimated losses on a
contract-by-contract basis, taking into account, among other things, the
principal amount of the contract in relation to the wholesale value of the
underlying car and the credit risk presented by the particular customer. The
Company generally will not purchase a contract from a Third Party Dealer if the
discounted price exceeds 120.0% of the Kelly Blue Book wholesale value of the
underlying car plus license and tax, although it will make exceptions on a
contract-by-contract basis. If the Company cannot negotiate an appropriate
discount, it will not purchase the contract.
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As of September 30, 1996, the Company had established twenty-two Branch
Offices in seven states for the purpose of identifying, and purchasing contracts
from, Third Party Dealers interested in affiliating with the Company. When
opening a new office, the Company hires experienced branch managers having
existing relationships with Third Party Dealers. The Company's branch managers
have an average of approximately nine years of experience in the sub-prime
automobile finance industry. Upon the execution of a dealer agreement with a
Third Party Dealer, Branch Office employees will introduce the dealer to the
Company's systems and procedures. The Company provides uniform contract buying
criteria as well as expedient application processing and funding. The Company
expects its Branch Office employees to develop and maintain excellent
relationships with its Third Party Dealers.
Branch Office employees monitor and evaluate Third Party Dealer contracts
for conformity to established policies and procedures. Selected finance
transactions are examined each month and a written report on each Branch Office
is prepared. Included in the report is an evaluation of Branch Office decisions
and practices as well as the portfolio performance of individual Third Party
Dealers. Branch Office management is notified and counseled with respect to
variances from underwriting standards that are found. Branch Office management
monitors the first six months of contract performance. Substandard contract
performance during this period is discussed with the Third Party Dealers.
Collateralized Dealer Financing. The Company believes that many Third
Party Dealers have difficulty obtaining traditional debt financing and, as a
result, are forced to sell the contracts that they originate through used car
sales at deep discounts in order to obtain the working capital necessary to
operate their businesses. To capitalize on this opportunity, the Company intends
to implement the Cygnet Dealer Program, pursuant to which it will provide
qualified Third Party Dealers (generally, dealers that meet certain minimum net
worth and operating history criteria) with operating credit lines secured by the
dealers' retail installment contract portfolios. These lines will be for a
specified amount but will in all cases be subject to various collateral coverage
ratios, maximum advance rates, and performance measurements depending on
financial condition of the dealer and the quality of the contracts originated.
As a condition to providing such financing, the Company will require each dealer
to upload its portfolio information to the Company's computer network on a daily
basis, utilize the Company's management information systems, and provide the
Company with periodic financial statements in a standardized format. These
controls will allow Company account officers, who will oversee the operations of
each dealer participating in the program, to maintain supervision over the
dealers, thereby enabling the account officers to ensure dealer compliance with
financial covenants and determine the appropriateness of continued credit
extensions.
The Company believes that the Cygnet Dealer Program will fulfill the need
of Third Party Dealers for debt financing to expand their businesses while
enabling the Company to earn finance income at favorable rates and diversify its
earning asset base. The Company also believes that the relationships established
with these dealers will provide it with a preferred position to acquire retail
installment contracts from them. Such contract purchases would provide these
dealers with an additional source of financing and enable the Company to further
expand its contract portfolio. The Company has hired a person with extensive
sub-prime finance industry experience to oversee the Cygnet Dealer Program and
expects to begin implementing the program with one or more selected Third Party
Dealers during the fourth quarter of 1996. The Company expects to begin
full-scale marketing of the program during the first quarter of 1997, although
the program is not expected to begin generating any substantial revenue before
the second quarter of 1997.
Insurance Services. The retail installment contracts that the Company
purchases from Third Party Dealers generally require the customers to obtain
casualty insurance within 30 days of their vehicle purchase. While all customers
are free to obtain such coverage from an insurer of their choice, if a customer
fails to obtain the required coverage, the Company may purchase a policy on the
customer's behalf and charge back to the customer the cost of the premiums and
fees associated with such policy. The Company's ability to force place such
insurance has significantly increased the number of customers who have obtained
their own casualty insurance.
To facilitate its ability to force place mandated insurance coverage, the
Company has contracted with American Bankers Insurance Group ("ABIG"), a
licensed property, casualty, and life insurance company.
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Through its subsidiary, Drake Insurance Agency, Inc., which acts as agent for
ABIG, the Company places casualty insurance policies issued by ABIG with Third
Party Dealer customers. These policies provide for a maximum payment on a claim
equal to the current contract principal balance. ABIG, in turn, reinsures the
policies it issues with Drake Property & Casualty Insurance Company, one of the
Company's Turks and Caicos Islands-chartered and licensed reinsurance
subsidiaries. Under the terms of its relationship with ABIG, the Company earns
commissions on each policy issued by ABIG (which mitigate any credit loss the
Company might suffer in the event of an otherwise uninsured casualty), while
ABIG administers all accounts and claims and is responsible for regulatory
compliance. As of September 30, 1996, the Company had placed casualty insurance
policies with more than 600 customers. The Company anticipates expanding its
insurance services to include the provision of credit life, disability, and
unemployment insurance.
In order to expand its insurance service capabilities, the Company entered
into a letter of intent in October 1996 to acquire the capital stock of an
insurance agency that provides insurance services primarily to the sub-prime
segment of the automobile financing industry. The proposed purchase price
includes a cash payment of $2.5 million and an additional payment (a portion of
which may be made in Common Stock) based upon the retained earnings of the
agency as of December 31, 1996 (which are not expected to exceed $1.5 million).
The transaction, which would be accounted for under the purchase method of
accounting, is subject to the negotiation and execution of definitive
agreements, completion of due diligence, approval of the Company's Board of
Directors, the receipt by the Company of the agency's audited financial
statements, and other customary closing conditions, including regulatory
approvals.
COMPARISON OF CONTRACTS ORIGINATED AT COMPANY DEALERSHIPS AND THIRD PARTY
DEALERS
The chart below compares the characteristics of the average contract
originated by Company Dealerships and purchased from Third Party Dealers from
January 1996 through June 1996:
<TABLE>
<CAPTION>
COMPANY THIRD PARTY
------- -----------
<S> <C> <C>
Principal Amount of Contract................................... $ 7,025 $ 5,601
Annual Percentage Rate......................................... 29.8% 24.8%
Loan Term (Months)............................................. 37.5 32.7
Total Down Payment............................................. $ 888 $ 1,377
Company Cost or Third Party Dealer Advance..................... $ 3,384 $ 5,016
Blue Book Value (Wholesale).................................... $ 3,742 $ 4,835
Model Year..................................................... 1987 1988
Age of Borrower................................................ 34 34
Annual Income.................................................. $25,314 $26,836
Years at Current Residence..................................... 4.7 3.5
Years at Current Job........................................... 2.9 3.2
</TABLE>
The Company expects that approximately 35.0% to 40.0% of Company Dealership
contracts will ultimately default at some time prior to maturity. The aggregate
principal balances of all Company Dealership contracts charged-off is estimated
to be 30.0% of the original principal amount financed. Recoveries on the Company
Dealership portfolio are expected to average approximately 33.0% of the
principal balance charged-off, for a net loss of approximately 20.0% of the
original principal amount financed. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Allowance for Credit Losses --
Contracts Originated at Company Dealerships."
The Company expects that approximately 20.0% to 25.0% of Third Party Dealer
contracts will ultimately default at some time prior to maturity. The aggregate
principal balances of all Third Party Dealer contracts charged-off is estimated
to be 16.0% to 20.0% of the original principal amount financed. Recoveries on
the Third Party Dealer portfolio are expected to average approximately 50.0% of
the principal balance charged-off, for a net loss of approximately 8.0% to 10.0%
of the original principal amount financed, which is the amount of the average
acquisition discount included in the Company's Allowance for Credit Losses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Allowance for Credit Losses -- Contracts Purchased From Third
Party Dealers."
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MONITORING AND COLLECTIONS
The Company believes that its ability to minimize credit losses is due in
great part to the sophisticated manner in which it monitors the Company
Dealership and Third Party Dealer contracts in its portfolio.
Upon the origination or purchase of a contract, Company personnel enter all
terms of the contract into the Company's centralized computer system. The
Company's monitoring and collections staff then utilizes the Company's
collections software to monitor the performance of the contracts.
The collections software provides the Company with, among other things,
up-to-date activity reports, allowing immediate identification of customers
whose accounts have become past due. In accordance with Company policy,
collections personnel contact a customer with a past due account within three
days of delinquency (or in the case of first payment delinquencies, within one
day) to inquire as to the reasons for such delinquency and to suggest ways in
which the customer can resolve the underlying problem, thereby enabling the
customer to continue making payments and keep the car. The Company's early
detection of a customer's delinquent status, as well as its commitment to
working with its customers, allows it to identify and address payment problems
quickly, thereby reducing the chance of credit loss. The successful results of
this program are evidenced by the decline in the average percentage of the
Company's contracts that are delinquent. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Allowance for
Credit Losses."
If the Company's efforts to work with a customer are unsuccessful and the
customer becomes seriously delinquent, the Company will take the necessary steps
to protect its collateral. Frequently, delinquent customers will recognize their
inability to honor their contractual obligations and will work with the Company
to coordinate "voluntary repossessions" of their cars. For cases involving
uncooperative customers, the Company retains independent firms to repossess the
cars pursuant to prescribed legal procedures. Upon repossession and after a
statutorily-mandated waiting period, the Company will recondition the car, if
necessary, and sell it in the wholesale market or at retail through its Company
Dealerships. The Company's statistics indicate that it recovers over 95.0% of
the cars that it attempts to repossess, approximately 85.0% of which are sold on
a wholesale basis and the remainder of which are sold through Company
Dealerships. The Company's access to a retail outlet for its repossessed
collateral provides the Company with additional flexibility with respect to the
disposal of the collateral and helps lessen its credit losses. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Allowance for Credit Losses."
Unlike most other used car dealerships with multiple locations or
automobile finance companies, the Company permits its customers to make cash
payments on their contracts in person at Company Dealerships or at the Company's
collection facilities. Historically, cash payments account for over 40.0% of
monthly contract receipts on the Company Dealership portfolio. The Company's
computer technology enables it to process these payments on-line in real time
and its internal procedures enable it to verify that such cash receipts are
deposited and credited to the appropriate accounts.
COMPETITION
Although the used car industry has historically been highly fragmented, it
has attracted significant attention recently from a number of large companies,
including Circuit City's CarMax, AutoNation, U.S.A., and Driver's Mart, which
have entered the used car sales business or announced plans to develop large
used car sales operations. Many franchised automobile dealers have increased
their focus on the used car market as well. The Company believes that these
companies are attracted by the relatively high gross margins that can be
achieved in this market as well as the industry's lack of consolidation. Many of
these companies and franchised dealers have significantly greater financial,
marketing, and other resources than the Company.
The Company's targeted competition for its Company Dealerships are the
numerous independent Buy Here-Pay Here dealers that sell and finance sales of
used cars to Sub-Prime Borrowers. The Company distinguishes its direct sales and
financing operations from those of typical Buy Here-Pay Here dealers by
providing multiple locations, upgraded facilities, large inventories of used
automobiles, centralized purchasing, value-added marketing programs, and
dedication to customer service. In addition, the Company has developed
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<PAGE> 45
flexible underwriting guidelines and techniques to facilitate rapid credit
decisions, as well as an integrated, technology-based corporate infrastructure
that enables the Company to monitor and service large volumes of contracts. The
Company believes that it is the largest Buy Here-Pay Here dealer in Arizona and
one of the largest in the United States. Of the numerous large companies that
have entered the used car business, none have announced an intention to focus on
the Buy Here-Pay Here segment.
The sub-prime segment of the used car financing business is also highly
fragmented and very competitive. In recent periods, several consumer finance
companies have completed public offerings in order to raise the capital
necessary to fund expansion and support increased purchases of used car retail
installment contracts. These companies have increased the competition for the
purchase of contracts, in many cases purchasing contracts at prices which the
Company believes are not commensurate with the associated risk. In addition,
there are numerous financial services companies serving, or capable of serving,
this market. While traditional financial institutions, such as commercial banks,
savings and loans, credit unions, and captive finance companies of major
automobile manufacturers, have not consistently serviced Sub-Prime Borrowers,
the high rates of return earned by companies involved in sub-prime financing
have encouraged certain of these traditional institutions to enter, or
contemplate entering, this market. Increased competition may cause downward
pressure on the interest rate the Company charges on contracts originated by its
Company Dealerships or cause the Company to reduce or eliminate the
nonrefundable acquisition discount on the contracts it purchases from Third
Party Dealers. Such events would have a material adverse affect on the Company's
profitability.
REGULATION, SUPERVISION, AND LICENSING
The Company's operations are subject to ongoing regulation, supervision,
and licensing under various federal, state, and local statutes, ordinances, and
regulations. Among other things, these laws require that the Company obtain and
maintain certain licenses and qualifications, limit or prescribe terms of the
contracts that the Company originates and/or purchases, require specified
disclosures to customers, limit the Company's right to repossess and sell
collateral, and prohibit the Company from discriminating against certain
customers. The Company is also subject to federal and state franchising and
insurance laws.
The Company typically charges a fixed interest rate of 29.9% on the
contracts originated at Company Dealerships while rates range from 17.6% to
29.9% on the Third Party Dealer contracts it purchases. Currently, all of the
Company's used car sales activities are conducted in, and a majority of the
contracts the Company services are originated in, Arizona, which does not impose
limits on the interest rate that a lender may charge. The Company has expanded,
and will continue to expand, its operations into states that impose interest
rate limits. The Company attempts to mitigate these rate restrictions by
purchasing contracts originated in these states at a higher discount.
The Company believes that it is currently in substantial compliance with
all applicable federal, state, and local laws and regulations. There can be no
assurance, however, that the Company will be able to remain in compliance with
such laws, and such failure could have a material adverse effect on the
operations of the Company. In addition, the adoption of additional statutes and
regulations, changes in the interpretation of existing statutes and regulations,
or the Company's entrance into jurisdictions with more stringent regulatory
requirements could have a material adverse effect on the Company's business.
TRADEMARKS AND PROPRIETARY RIGHTS
The Company has obtained federal trademark registrations on its duck mascot
and logo, as well as for the trade names "Ugly Duckling Car Sales," "Ugly
Duckling Rent-A-Car," and "America's Second Car." These registrations are
effective through 2002 and are renewable for additional terms of ten years. The
Company grants its Ugly Duckling Rent-a-Car franchisees the limited right to use
its duck mascot and logo in their used car rental operations. The Company has
applied for a federal trademark registration for the slogan "Putting You On the
Road to Good Credit," although there can be no assurances that such registration
will be obtained.
The Company licenses software from various third parties. It has also
developed and copyrighted customized software to facilitate its sales and
financing activities. Although the Company believes it takes
44
<PAGE> 46
appropriate measures to protect its proprietary rights and technology, there can
be no assurance that such efforts will be successful. The Company believes it is
in material compliance with all third party licensing requirements.
EMPLOYEES
At August 31, 1996, the Company employed 528 persons, of which 51 were
employed in the Company's executive and administrative offices, 242 were
employed in its Company Dealership operations, 130 were employed in the
Company's credit and collection activities, and 105 were employed in Third Party
Dealer operations. None of the Company's employees are covered by a collective
bargaining agreement. The Company considers its relations with its employees to
be good.
PROPERTIES
As of September 30, 1996, the Company leased 40 facilities. The Company's
corporate headquarters are located in approximately 13,300 square feet of leased
space in Phoenix, Arizona. This lease commenced in April 1996 and expires in
August 2001. Of the Company's eight dealerships, four are leased from Verde
Investments and four are leased from unrelated third parties. The Company's
other facilities at that date included three monitoring and collection
facilities, two storage lots, two reconditioning facilities, and twenty-four
Branch Offices (of which 22 were open). Rent expense totaled $1.4 million and
$2.4 million for 1994 and 1995, respectively, and $1.4 million for the six
months ended June 30, 1996. See "Recapitalization and Related Transactions" and
"Certain Relationships and Related Transactions."
LEGAL PROCEEDINGS
The Company sells its cars on an "as is" basis, and requires all customers
to sign an agreement on the date of sale pursuant to which the Company disclaims
any obligation for vehicle-related problems that subsequently occur. Although
the Company believes that such disclaimers are enforceable under Arizona and
other applicable law, there can be no assurance that they will be upheld in
every instance. Despite obtaining these disclaimers, the Company, in the
ordinary course of business, receives complaints from customers relating to such
vehicle-related problems as well as alleged violations of federal and state
consumer lending or other similar laws and regulations. While most of these
complaints are made directly to the Company or to various consumer protection
organizations and are subsequently resolved, the Company is named occasionally
as a defendant in civil suits filed by customers in state, local, or small
claims courts. There can be no assurance that the Company will not be a target
of similar claims in the future. In the opinion of the Company, the ultimate
disposition of these matters on an individual basis will not have a material
adverse effect on the Company. However, there can be no assurance in this
regard.
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<PAGE> 47
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Information concerning the Company's directors and executive officers is
set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------------------------ --- ----------------------------------
<S> <C> <C>
Ernest C. Garcia, II...................... 39 Chairman of the Board and Chief
Executive Officer
Gregory B. Sullivan....................... 38 President and Chief Operating
Officer
Steven P. Johnson......................... 36 Senior Vice President and General
Counsel
Steven T. Darak........................... 49 Senior Vice President and Chief
Financial Officer
Scott A. Allen............................ 40 Vice President -- Sales
Walter T. Vonsh........................... 53 Vice President -- Credit
Donald L. Addink.......................... 46 Vice President -- Senior Analyst
Sheila A. Brandt.......................... 31 Vice President and Chief
Information Officer
Peter R. Fratt............................ 38 Vice President -- Real Estate
Eric J. Splaver........................... 33 Corporate Controller
Robert J. Abrahams........................ 69 Director
Christopher D. Jennings................... 42 Director
John N. MacDonough........................ 52 Director
Arturo R. Moreno.......................... 49 Director
Frank P. Willey........................... 42 Director
</TABLE>
Ernest C. Garcia, II, has served as the Chairman of the Board and Chief
Executive Officer of the Company since its founding in 1992, and served as
President from 1992 to 1996. In 1990, Mr. Garcia founded Duck Ventures, Inc.,
currently a subsidiary of the Company, to buy the assets of the Ugly Duckling
Rent-a-Car System. Since 1991, Mr. Garcia has served as President of Verde
Investments, a real estate investment corporation that is also an affiliate of
the Company. Prior to 1990, when he founded the Company, Mr. Garcia was involved
in various real estate, securities, and banking ventures. See "Recapitalization
and Related Transactions" and "Certain Relationships and Related Transactions."
Gregory B. Sullivan has served as President and Chief Operating Officer of
the Company since February 1996 after serving as a consultant to the Company
since 1995. Mr. Sullivan formerly served as President and principal stockholder
of National Sports Games, Inc., an amusement game manufacturing company that he
co-founded in 1989 and sold in 1994. Prior to 1989, Mr. Sullivan was involved in
the securities industry and practiced law with a large Arizona firm. He is a
member of the State Bar of Arizona.
Steven P. Johnson has served as the Senior Vice President, Secretary, and
General Counsel of the Company since its founding in 1992. Since 1991, Mr.
Johnson has also served as the General Counsel of Verde Investments, an
affiliate of the Company. Prior to 1991, Mr. Johnson practiced law in Tucson,
Arizona. Mr. Johnson is licensed to practice law in Arizona and Colorado and is
married to the sister of Mr. Garcia.
Steven T. Darak has served as the Senior Vice President and Chief Financial
Officer of the Company since February 1995, having joined the Company in 1994 as
Vice President and Chief Financial Officer. From 1989 to 1994, Mr. Darak owned
and operated Champion Financial Services, Inc., a used car finance company that
the Company acquired in early 1994. Prior to 1989, Mr. Darak served in various
positions in the banking industry and in public accounting.
Scott A. Allen has served as the Vice President -- Sales of the Company
since 1994, having joined the Company in 1993 as a general manager of one of the
Company Dealerships. From 1979 until joining the Company, Mr. Allen was a
principal of Harris Mobile Home Sales, a manufactured housing sales and finance
company.
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<PAGE> 48
Walter T. Vonsh has served as the Vice President -- Credit of the Company
since July 1995. Mr. Vonsh joined the Company in March 1995 as the President of
Champion Financial Services, Inc., the Company's Third Party Dealer financing
subsidiary, and also serves as the President of Champion Acceptance Corp. From
1992 to 1995, Mr. Vonsh served as a Regional Director for Mercury Finance Co., a
consumer finance company. Prior to 1992, Mr. Vonsh was President of Gemini
Leasing Corp., an equipment leasing company, and held various positions at other
finance companies.
Donald L. Addink has served as the Vice President -- Senior Analyst of the
Company since 1995 and also serves as the Vice President of Verde Investments.
From 1988 to 1995, Mr. Addink served as Executive Vice President of Pima Capital
Co., a life insurance holding company. Prior to 1988, Mr. Addink served in
various capacities with a variety of insurance companies. Mr. Addink is a Fellow
of the Society of Actuaries and a Member of the American Academy of Actuaries.
Sheila A. Brandt has served as Vice President and Chief Information Officer
of the Company since May 1996. Prior thereto, Ms. Brandt served as a Research
Scientist for the Center for the Management of Information at the University of
Arizona. From 1992 to 1995, Ms. Brandt earned an M.S. and Ph.D. in Management
Information Systems at the University of Arizona while practicing as an
independent systems consultant. Prior to 1992, Ms. Brandt held various positions
with Andersen Consulting and Eastman Kodak Company.
Peter R. Fratt has served as Vice President -- Real Estate of the Company
since October 1993. From 1989 to 1993, Mr. Fratt was an associate of CB
Commercial Real Estate Services. Prior to that time, Mr. Fratt was involved in
commercial real estate brokerage and investment.
Eric J. Splaver has served as Corporate Controller of the Company since May
1994. From 1985 to 1994, Mr. Splaver worked as a certified public accountant
with KPMG Peat Marwick LLP.
Robert J. Abrahams has served as a director of the Company since June 1996.
Mr. Abrahams has served since 1988 as a consultant to the financing industry,
including service as a consult to the Company from 1994 to 1995. From 1960 to
1988, Mr. Abrahams was an executive officer of Heller Financial, Inc., a finance
company. Prior to joining Heller Financial, Inc., Mr. Abrahams co-founded
Financial Acceptance Company in 1948. During 1995, Mr. Abrahams served as a
consultant to the Company. Mr. Abrahams also serves as a member of the Audit
Committee of the Board of Directors.
Christopher D. Jennings has served as a director of the Company since June
1996. Mr. Jennings has served as a managing director of Cruttenden Roth
Incorporated, an investment banking firm, since 1995. From 1992 to 1994, Mr.
Jennings served as a Managing Director of investment banking at Sutro & Co., an
investment banking firm. From 1989 to 1992, Mr. Jennings served as a Senior
Managing Director at Maiden Lane Associates, Ltd., a private equity fund. Prior
to 1989, Mr. Jennings served in various positions with, among others, Dean
Witter Reynolds, Inc. and Warburg Paribas Becker, Inc., both of which are
investment banking firms. Mr. Jennings also serves as a member of the
Compensation Committee of the Board of Directors.
John N. MacDonough has served as a director of the Company since June 1996.
Mr. MacDonough has served as Chairman and Chief Executive Officer of Miller
Brewing Company, a brewer and marketer of beer, since 1993, having previously
served from 1992 to 1993 as President and Chief Operating Officer. Prior to
1992, Mr. MacDonough was employed in various positions at Anheuser Busch, Inc.,
also a brewer and marketer of beer. Mr. MacDonough is married to the sister of
Mr. Sullivan.
Arturo R. Moreno has served as a director of the Company since June 1996.
Mr. Moreno has served as the President and Chief Executive Officer of Outdoor
Systems, Inc., one of the largest outdoor media companies in the United States,
since 1984. Prior to 1984, Mr. Moreno held various executive positions in the
outdoor advertising industry. Mr. Moreno also serves as a member of the Audit
Committee of the Board of Directors.
Frank P. Willey has served as a director of the Company since June 1996.
Mr. Willey has served as the President of Fidelity National Financial, Inc., one
of the nation's largest title insurance underwriters, since
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<PAGE> 49
January 1995. From 1984 to 1995, Mr. Willey served as the Executive Vice
President and General Counsel of Fidelity National Title. Mr. Willey is also a
director of CKE Restaurants, Inc., an operator of various quick-service
restaurant chains, and Southern Pacific Funding Corporation, a specialty finance
company that originates, purchases and sells high-yielding, non-conforming
mortgage loans. Mr. Willey also serves as a member of the Compensation Committee
of the Board of Directors.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
In March 1987, Mr. Ernest C. Garcia, II, the Company's Chairman, Chief
Executive Officer, and principal stockholder, obtained $20 million in financing
from Lincoln Savings and Loan Association ("Lincoln") to repurchase stock in his
real estate development company held by a corporate investor. Subsequently, Mr.
Garcia agreed to facilitate the purchase of certain land from a Lincoln
subsidiary. The two transactions closed simultaneously. Soon thereafter, Lincoln
was placed into receivership and federal regulators from the RTC and other
government agencies began investigating numerous transactions involving Lincoln
and a variety of third parties, including Mr. Garcia.
Upon being notified of the RTC's investigation, Mr. Garcia met voluntarily
with RTC investigators, without counsel, for several months and provided full
disclosure concerning the details of his dealings with Lincoln. Nearly one year
later, the RTC asserted that the financing transaction and the land transaction,
though documented separately, were linked and that, as a result of the
transaction, Lincoln improperly recorded a gain in violation of certain
accounting rules applicable to Lincoln. As a result, in October 1990, the United
States, on behalf of the RTC, informed Mr. Garcia that it intended to charge him
with bank fraud. Mr. Garcia was never indicted for his role in the transaction,
but, facing severe financial pressures, agreed to plead guilty to one count of
bank fraud.
Prior to his sentencing in 1993, the RTC submitted a letter to the United
States District Court for the Central District of California urging that the
court take favorable account of Mr. Garcia's relative responsibility and
culpability, as well as his timely and honest cooperation, in determining an
appropriate sentence. In this letter, the RTC stated its belief that the chief
executive officer of Lincoln's parent company, Charles H. Keating, Jr., not Mr.
Garcia, devised the transaction and that Mr. Garcia was not even aware of the
existence of Mr. Keating's illegal schemes and had no reason to believe that the
transaction would enable Mr. Keating to defraud Lincoln. The RTC letter also
noted Mr. Garcia's extensive cooperation with federal investigators, which began
prior to the time he was charged and continued until his sentencing. In December
1993, the court, following the RTC's recommendation, sentenced Mr. Garcia to
three years of probation and fined him $50 (the minimum fine that the court
could assess). Under the terms of the probation, Mr. Garcia was barred from
affiliating in any way with a federally insured banking institution without
prior approval. Mr. Garcia's probation is scheduled to be lifted in December
1996.
In connection with the criminal action, the RTC filed a civil suit against
Mr. Garcia, which the parties settled after Mr. Garcia agreed to cooperate fully
with the RTC in its investigation and prosecution of Lincoln-related matters.
Pursuant to the terms of his settlement agreement, and in light of Mr. Garcia's
cooperation, the RTC released Mr. Garcia from civil liability. Also in
connection with this action, the Securities and Exchange Commission commenced
civil and administrative actions against Mr. Garcia. Without admitting or
denying any of the Commission's allegations, Mr. Garcia consented to a court
order permanently enjoining him and his affiliates from violating the federal
securities laws and to a Commission order barring him (with a right to reapply
upon the cessation of his probation) from associating in any capacity with any
broker, dealer, municipal securities dealer, investment adviser, or investment
company.
As a result of a decline in the Arizona real estate market in the late
1980s, changes in the tax laws affecting real estate, and the 1987 stock market
crash, in April 1990 a real estate investment company controlled by Mr. Garcia,
as well as several limited partnerships organized by that company, filed
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code (the "Bankruptcy Code"). All of these reorganization proceedings were
successfully concluded by 1993. Many of the obligations of these entities were
personally guaranteed by Mr. Garcia and his wife. As a result, Mr. Garcia and
his wife filed a petition under Chapter 7 of the Bankruptcy Code in 1990, which
was discharged in October 1991.
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<PAGE> 50
SUMMARY OF EXECUTIVE COMPENSATION
The table below sets forth information concerning the annual and long-term
compensation for services rendered in all capacities to the Company during the
fiscal year ended December 31, 1995, of those persons who were, at December 31,
1995: (i) the chief executive officer of the Company and (ii) the other
executive officers of the Company whose total annual salary and bonus exceeded
$100,000 (the "Named Executive Officers"):
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION
COMPENSATION -------------
------------------ SECURITIES ALL OTHER
NAME AND SALARY BONUS UNDERLYING COMPENSATION
PRINCIPAL POSITION ($) ($) OPTIONS(#)(1) ($)(2)
- ------------------------------------------------ ------- ------- ------------- ------------
<S> <C> <C> <C> <C>
Ernest C. Garcia, II............................ 100,000 -- -- 201
Chairman and Chief Executive Officer
Steven P. Johnson............................... 100,000 -- -- 177
Senior Vice President and General Counsel
Steven T. Darak................................. 100,000 100,000 -- --
Senior Vice President and Chief Financial
Officer
Scott A. Allen.................................. 100,000 100,000 116,000 187
Vice President -- Sales
</TABLE>
- ---------------
(1) The amounts shown in this column represent outstanding stock options granted
pursuant to the Company's Long-Term Incentive Plan. See "-- Long-Term
Incentive Plan."
(2) The amounts shown in this column represent the dollar value of 401(k) plan
contributions made by the Company for the benefit of the Named Executive
Officers. See "-- 401(k) Plan."
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock options granted
pursuant to the Company's Long-Term Incentive Plan during the fiscal year ended
December 31, 1995, to the Named Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(3)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ---------------------
NAME GRANTED(#)(1) FISCAL YEAR SHARE($/SH)(2) DATE 5%($) 10%($)
- ------------------------ ----------- ------------ -------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Ernest C. Garcia, II.... -- -- -- -- -- --
Steven P. Johnson....... -- -- -- -- -- --
Steven T. Darak......... -- -- -- -- -- --
Scott A. Allen.......... 116,000 26.3% 0.86 06/30/01 1,002,000 1,426,000
</TABLE>
- ---------------
(1) Generally, options are subject to vesting over a five-year period, with
20.0% of the options becoming exercisable on each successive anniversary of
the date of grant.
(2) The exercise price of the options granted to Mr. Allen approximated the fair
market value of the Common Stock on the date of grant, as determined by the
Board of Directors of the Company.
(3) Gains are reported net of the option exercise price, but before taxes
associated with exercise. These amounts represent certain assumed rates of
appreciation. Actual gains, if any, on stock option exercises are dependent
on the future performance of the Common Stock and overall stock market
conditions, as well as the option holder's continued employment with the
Company throughout the vesting period. The amounts reflected in this table
will not necessarily be achieved.
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<PAGE> 51
FISCAL YEAR END OPTION VALUES
The following table sets forth information concerning the value of
unexercised options held by the Named Executive Officers as of December 31,
1995. No Named Executive Officer exercised any options in 1995.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR END(#)(1) FISCAL YEAR END($)(2)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ernest C. Garcia, II............................. -- -- -- --
Steven P. Johnson................................ -- -- -- --
Steven T. Darak.................................. -- -- -- --
Scott A. Allen................................... -- 116,000 -- $ 683,240
</TABLE>
- ---------------
(1) Generally, options are subject to vesting over a five-year period, with
20.0% of the options becoming exercisable on each successive anniversary of
the date of grant.
(2) Assumes a market price for the Common Stock at December 31, 1995, equal to
the initial public offering price of $6.75 per share less the exercise price
thereof.
LONG-TERM INCENTIVE PLAN
In June 1995, the Company's stockholders approved the Ugly Duckling
Corporation Long-Term Incentive Plan (the "Incentive Plan"). Under the Incentive
Plan, the Company may grant incentive stock options, non-qualified stock
options, stock appreciation rights, performance shares, restricted stock,
dividend equivalents, and other Common Stock-based awards to employees,
consultants, and advisors of the Company. The Company believes that the
Incentive Plan promotes the success and enhances the value of the Company by
linking the personal interests of participants to those of the Company's
stockholders and providing participants with an incentive for outstanding
performance. The total number of shares of Common Stock available for awards
under the Incentive Plan, as amended, is 800,000, subject to a proportionate
increase or decrease in the event of a stock split, reverse stock split, stock
dividend, or other adjustment to the Company's total number of issued and
outstanding shares of Common Stock.
The Incentive Plan is administered by the Compensation Committee of the
Board of Directors, which has the exclusive authority to administer the
Incentive Plan, including the power to determine eligibility, the type and
number of awards to be granted, and the terms and conditions of any award
granted, including the price and timing of awards. As of September 30, 1996, the
Company had granted options to purchase 631,438 shares of Common Stock to
various of its employees. Generally, such options are subject to vesting over a
five-year period, with 20.0% of the options becoming exercisable by the holder
thereof on each successive anniversary date of the grant. The exercise price of
all options granted under the Incentive Plan is the fair market value of the
Common Stock on the date of grant.
401(K) PLAN
Under the Company's 401(k) plan, adopted in October 1995, eligible
employees may direct that a portion of their compensation, up to a legally
established maximum, be withheld by the Company and contributed to their
account. All 401(k) plan contributions are placed in a trust fund to be invested
by the 401(k) plan's trustee, except that the 401(k) plan may permit
participants to direct the investment of their account balances among mutual or
investment funds available under the plan. The 401(k) plan provides a matching
contribution of 10.0% of a participant's contributions. Amounts contributed to
participant accounts under the 401(k) plan and any earnings or interest accrued
on the participant accounts are generally not subject to federal income tax
until distributed to the participant and may not be withdrawn until death,
retirement, or termination of employment.
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<PAGE> 52
EMPLOYMENT CONTRACTS
On January 1, 1996, the Company entered into a three-year employment
agreement with Mr. Ernest C. Garcia, II, the Company's Chairman and Chief
Executive Officer. The agreement establishes Mr. Garcia's base salary for 1996
at $120,000 per year and provides a minimum 10.0% increase in the base salary
each year throughout the term of the agreement. In addition, the agreement
provides for the continuation of Mr. Garcia's base salary and certain benefits
for a period of one year in the event Mr. Garcia is terminated by the Company
without cause prior to that time. The agreement also contains confidentiality
and non-compete covenants. The Company also has an employment agreement with Mr.
Steven T. Darak, which sets his base salary at $100,000 per year and contains
confidentiality and non-compete covenants. The agreement with Mr. Darak expires
on December 31, 1996.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has established a Compensation Committee and an Audit
Committee. The Compensation Committee, which consists of Messrs. Jennings and
Willey, reviews executive salaries and administers any bonus, incentive
compensation, and stock option plans of the Company, including the Long-Term
Incentive Plan. In addition, the Compensation Committee consults with management
of the Company regarding compensation policies and practices of the Company. The
Audit Committee, which consists of Messrs. Abrahams and Moreno, reviews the
professional services provided by the Company's independent auditors, the annual
financial statements of the Company, and the Company's system of internal
controls.
DIRECTOR FEES
The Company's independent directors are compensated $1,000 for attendance
at meetings of the Board of Directors and at meetings of committees of the Board
of Directors of which they are members, and are reimbursed for reasonable travel
expenses incurred in connection with attendance at each Board and committee
meeting. In addition, pursuant to the Company's Director Incentive Plan, upon
appointment or election to the Board of Directors, each independent director of
the Company receives Common Stock of the Company valued at $30,000, which is
subject to vesting in equal annual increments over a three-year period.
Directors who are also officers of the Company are not compensated for their
services as directors.
51
<PAGE> 53
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 1996, and as
adjusted to reflect the sale of Common Stock offered hereby for: (i) each
director of the Company; (ii) the Named Executive Officers of the Company; (iii)
all directors and executive officers of the Company as a group; and (iv) each
beneficial owner of more than 5% of the outstanding Common Stock. To the
knowledge of the Company, all persons listed below have sole voting and
investment power with respect to their shares, except to the extent that
authority is shared by their respective spouses under applicable law.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) OFFERING(1)
--------------------- ---------------------
NAME OF BENEFICIAL OWNER(2) NUMBER PERCENT NUMBER PERCENT
------------------------------------------ --------- ------- --------- -------
<S> <C> <C> <C> <C>
Ernest C. Garcia, II...................... 4,640,000 53.4 4,640,000 36.6
SunAmerica Life Insurance Company(3)...... 708,592 8.2 708,592 5.6
Steven P. Johnson......................... 300,000 3.5 300,000 2.4
Robert J. Abrahams........................ 4,944 * 4,944 *
Christopher D. Jennings................... 4,444 * 4,444 *
John N. MacDonough........................ 4,444 * 4,444 *
Arturo R. Moreno.......................... 4,444 * 4,444 *
Frank P. Willey........................... 4,444 * 4,444 *
Steven T. Darak........................... 130,000 1.5 130,000 1.0
Scott A. Allen(4)......................... 154,200 1.8 154,200 1.2
All directors and executive officers as a
group (15 persons)(5)................... 5,437,400 62.6 5,437,400 42.8
</TABLE>
- ---------------
* Represents less than one percent of the outstanding Common Stock.
(1) A person is deemed to be the beneficial owner of securities that can be
acquired within 60 days from the date set forth above through the exercise
of any option, warrant, or right. Shares of Common Stock subject to options,
warrants, or rights which are currently exercisable or exercisable within 60
days are deemed outstanding for computing the percentage of the person
holding such options, warrants, or rights, but are not deemed outstanding
for computing the percentage of any other person. The amounts and
percentages are based upon 8,691,264 shares of Common Stock outstanding as
of September 30, 1996, and 12,691,264 shares of Common Stock outstanding as
of the closing of the offering, respectively.
(2) Unless otherwise noted, the address of each of the listed stockholders is
2525 East Camelback Road, Suite 1150, Phoenix, Arizona 85016.
(3) The total for SunAmerica includes 116,000 shares of Common Stock subject to
immediately exercisable warrants, which have an exercise price of $6.75 per
share. The address of SunAmerica is 1 SunAmerica Center, Los Angeles,
California 90067.
(4) The total for Mr. Allen includes 23,200 shares of Common Stock subject to
immediately exercisable options, which have an exercise price of $0.86 per
share.
(5) The total for all directors and executive officers as a group includes
67,280 shares subject to unexercised options that are exercisable on
September 30, 1996 or within 60 days thereafter.
52
<PAGE> 54
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since its inception, the Company has maintained business relationships and
engaged in certain transactions with the affiliated companies and parties
described below. Any future transactions between the Company and its affiliated
entities, executive officers, directors, or significant stockholders will
require the approval of a majority of the independent directors of the Company
and will be on terms no less favorable to the Company than the Company could
obtain from non-affiliated parties.
As of June 30, 1996, the Company leased nine operating facilities owned by
Verde Investments under operating leases, with one lease expiring in July 1998
and the remaining leases expiring in December 2008. Mr. Ernest C. Garcia, II,
the Company's Chairman, Chief Executive Officer, and principal stockholder, is
the President and sole stockholder of Verde Investments. These leases require
the Company to make monthly base rent payments aggregating approximately
$71,000, and have renewal options for periods ranging from one to ten years. The
Company is also responsible for occupancy and maintenance costs, including real
estate taxes, insurance, and utilities. In connection with these leases the
Company has paid security deposits to Verde Investments totaling $328,000, which
are included in other assets in the consolidated balance sheets of the Company
as of June 30, 1996. Rents paid to Verde Investments pursuant to these leases
totaled $235,000, $1.2 million, and $1.9 million during fiscal years 1993, 1994,
and 1995, respectively, and $1.1 million during the six months ended June 30,
1996. Pursuant to the Modification Agreement between the Company and Verde
Investments, effective June 21, 1996, Verde Investments agreed to sell to the
Company at any time prior to June 21, 1997, subject to financing, those
properties owned by Verde Investments and leased to the Company at the lower of
$7.45 million or the appraised value (as determined by an independent third
party), and to lower the rents on such properties to an aggregate of $745,000
per year subject to cost of living adjustments if the sale does not take place.
The Company believes the reduced rental rates approximate the financing costs to
be incurred in connection with the purchase of such properties. In addition,
Verde Investments assigned to the Company its leasehold interest in two
properties it sub-leased to the Company. These transactions (the reduction in
rental rates and/or the purchase of property) would have resulted in savings to
the Company of approximately $730,000 for 1995 and $626,000 for the six months
ended June 30, 1996. Also pursuant to the Modification Agreement, Verde
Investments lowered the interest rate on $14.0 million of the Company's
subordinated debt payable to Verde Investments from 18.0% to 10.0% per annum and
lowered from 12.0% to 10.0% the dividend rate on $10.0 million of the Company's
Preferred Stock held by Verde Investments. See "Recapitalization and Related
Transactions" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources." The Company
intends to use a portion of the proceeds of this offering to redeem the
Preferred Stock at the issuance price of $10.00 per share. See "Use of Proceeds"
and "Description of Capital Stock."
In January 1996, in connection with the sale of the Gilbert Dealership, the
Company purchased the land for the Gilbert Dealership from Verde Investments for
a total price of $750,000, which the Company believes approximated fair market
value. Simultaneous with such purchase, the Company sold the land purchased from
Verde Investments together with the dealership building and other improvements
(which had been constructed by the Company) to a third party for $512,500 in
cash and a promissory note in the principal amount of $1.2 million. The Company
recognized a loss on the sale of $120,000, for which a reserve was established
as of December 31, 1995.
Mr. Christopher D. Jennings, a managing director of Cruttenden Roth
Incorporated ("Cruttenden Roth"), is a director of the Company. Cruttenden Roth
served as the sole representative in the Company's initial public offering. In
its capacity as representative, Cruttenden Roth participated in the underwriting
discount and received a non-accountable expense allowance and warrants to
purchase Common Stock. See "Description of Capital Stock -- Other Securities and
Registration Rights."
53
<PAGE> 55
DESCRIPTION OF CAPITAL STOCK
The Company is a Delaware corporation and its affairs are governed by its
Certificate of Incorporation and Bylaws and the Delaware General Corporation
Law. The following description of the Company's capital stock, which is complete
in all material respects, is qualified in its entirety by reference to the
provisions of the Company's Certificate of Incorporation and Bylaws, as amended.
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, par value $.001 per share, and 10,000,000 shares of Preferred
Stock, par value $.001 per share. At September 30, 1996, 8,691,294 shares of
Common Stock and 1,000,000 shares of Preferred Stock were issued and outstanding
(assuming no exercise of outstanding options or warrants).
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters on which stockholders are entitled to vote. Holders of
Common Stock do not have cumulative voting rights, and therefore holders of a
majority of the shares voting for the election of directors can elect all of the
directors. In such event, the holders of the remaining shares will not be able
to elect any directors.
Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The Company does not anticipate paying cash dividends in the
foreseeable future. In the event of liquidation, dissolution, or winding up of
the Company, the holders of Common Stock are entitled to share ratably in any
corporate assets remaining after payment of all debts, subject to any
preferential rights of any outstanding Preferred Stock. See "Dividend Policy."
Holders of Common Stock have no preemptive, conversion, or redemption
rights and are not subject to further calls or assessments by the Company. All
of the outstanding shares of Common Stock are, and the shares offered by the
Company hereby will be, if issued, validly issued, fully paid, and
nonassessable.
PREFERRED STOCK
The Board of Directors of the Company has the authority, without further
action by the Company's stockholders, to issue from time to time up to
10,000,000 shares of Preferred Stock in one or more series and to fix the number
of shares, designations, voting powers, preferences, optional and other special
rights, and the restrictions or qualifications thereof. The rights, preferences,
privileges, and restrictions or qualifications of different series of Preferred
Stock may differ with respect to dividend rates, amounts payable on liquidation,
voting rights, conversion rights, redemption provisions, sinking fund
provisions, and other matters. The issuance of Preferred Stock could: (i)
decrease the amount of earnings and assets available for distribution to holders
of Common Stock; (ii) adversely affect the rights and powers, including voting
rights, of holders of Common Stock; and (iii) have the effect of delaying,
deferring, or preventing a change in control of the Company.
The Company's outstanding Preferred Stock consists of one series designated
as "Series B Preferred Stock." The series consists of 1,000,000 shares, $.001
par value per share, all of which were issued to Verde Investments on June 21,
1996, in exchange for all of the issued and outstanding shares of the Company's
Series A Preferred Stock. The Series B Preferred Stock is redeemable at any time
by the Company upon 30 days' notice at the issuance price per share plus all
accrued and unpaid dividends. Except as expressly provided in the Certificate of
Designations relating to the Series B Preferred Stock or by applicable law,
shares of Series B Preferred Stock are not entitled to vote on matters submitted
to a vote of the stockholders of the Company. The approval of 66 2/3% of the
outstanding shares of Series B Preferred Stock, voting separately as a class, is
necessary to, among other things, change the rights, preferences, or privileges
of the shares of the Series B Preferred Stock or create any new class of stock
having preference over or being on a parity with the shares of the Series B
Preferred Stock as to distributions upon the liquidation, winding up, or
dissolution of the Company. Cumulative dividends are payable quarterly out of
funds legally available therefor at an annual rate of 10.0% through December 31,
1997, at which time, under the terms of the Certificate of Designations, the
rate will increase to 12.0%. If dividends for an entire calendar year have not
been declared and paid within
54
<PAGE> 56
30 days after the end of the calendar year, then until said dividends are paid,
holders of Series B Preferred Stock are entitled to vote in the election of
members of the Board of Directors of the Company. The Company is prohibited from
paying dividends to holders of Common Stock unless all dividends on the Series B
Preferred Stock have been paid or declared and a sum sufficient for the payment
thereof set aside. In the event of any liquidation, dissolution, or winding up
of the Company, either voluntarily or involuntarily, the holders of Series B
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Company to holders of
Common Stock of the Company, an amount equal to the issuance price per share
plus all accrued and unpaid dividends.
The Company intends to redeem all outstanding shares of the Series B
Preferred Stock at the issuance price of $10.00 per share plus accrued and
unpaid dividends. Such redemption will be accomplished using the proceeds of the
offering. See "Use of Proceeds."
OTHER SECURITIES AND REGISTRATION RIGHTS
In connection with its initial public offering, the Company issued warrants
to SunAmerica to purchase 116,000 shares of Common Stock at an exercise price
per share of $6.75 and to Cruttenden Roth to purchase 170,000 shares of Common
Stock at an exercise price per share of $9.45. The agreements with respect to
the issuance of such warrants provide for certain registration rights. The
Company is required to use its best efforts to effect such registrations,
subject to certain conditions and limitations, and is required to pay all
expenses of SunAmerica and Cruttenden Roth in connection with any registration
of such securities, except for any underwriting discounts and commissions.
In conjunction with its initial public offering, the Company registered the
warrants issued to Cruttenden Roth and the shares underlying such warrants.
Under the terms of such warrants, however, Cruttenden Roth may not exercise such
warrants and sell the underlying Common Stock until June 21, 1997, and only
pursuant to a currently effective registration statement.
In connection with the Company's initial public offering, SunAmerica
converted $3 million of subordinated debt into Common Stock (444,444 shares at
the initial public offering price of $6.75 per share). Pursuant to a
registration rights agreement with SunAmerica, the Company has agreed to
register such shares concurrently with the shares being registered for this
offering. However, under a lock-up agreement entered into with Cruttenden Roth
in conjunction with the Company's initial public offering, SunAmerica has agreed
not to sell any of these shares until December 14, 1996 without the consent of
Cruttenden Roth.
The Company has authorized for issuance 800,000 shares of Common Stock
under its Incentive Plan, as amended. See "Management -- Long-Term Incentive
Plan."
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by Delaware law, a director of the Company shall not be
personally liable to the Company or its stockholders for monetary damages for
breach of such director's fiduciary duty, except for liability: (i) for any
breach of the director's duty of loyalty to the Company or its stockholders;
(ii) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law; (iii) in respect of certain unlawful
dividend payments or stock redemptions or repurchases; and (iv) for any
transaction from which the director derives an improper benefit. The effect of
the provision of the Company's Certificate of Incorporation is to eliminate the
rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against a director
for breach of the fiduciary duty of care as a director (including breaches
resulting from negligent or grossly negligent behavior), except in the
situations described in clauses (i) through (iv) above. This provision does not
limit or eliminate the rights of the Company or any stockholder to seek
nonmonetary relief such as an injunction or recision in the event of a breach of
a director's duty of care. In addition, the Company's Certificate of
Incorporation provides that the Company shall indemnify any person who is or was
a director, officer, employee, or agent of the Company, or who is or was serving
at the request of the Company as a director, officer, employee, or agent of
another corporation or entity, against expenses, liabilities, and losses
incurred by any such person by reason of the fact that such
55
<PAGE> 57
person is or was acting in such capacity. The Company has also obtained
insurance on behalf of its directors and officers for any liability arising out
of such person's actions in such capacity.
The Company has entered into agreements to indemnify its directors and
officers. These agreements, among other things, indemnify the Company's
directors and officers for certain expenses (including attorneys' fees),
judgments, fines, and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in the right of the Company,
arising out of such person's services as a director or officer of the Company,
any subsidiary of the Company, or any other company or enterprise to which such
person provides services at the request of the Company. To the extent that the
Board of Directors or the stockholders of the Company may in the future wish to
limit or repeal the ability of the Company to provide indemnification as set
forth in the Company's Certificate of Incorporation, such repeal or limitation
may not be effective as to directors or officers who are parties to the
indemnification agreements because their rights to full protection would be
contractually assured by such agreements. It is anticipated that similar
contracts may be entered into, from time to time, with future directors of the
Company. The Company believes that the indemnification provisions in its
Certificate of Incorporation and in the indemnification agreements are necessary
to attract and retain qualified persons as directors and officers.
CERTAIN BYLAW PROVISIONS
The Company's Bylaws, as amended, contain several provisions that regulate
the nomination of directors and the submission of proposals in connection with
stockholder meetings. The Company's Bylaws require that, subject to certain
exceptions, any stockholder desiring to propose business or nominate a person to
the Board of Directors at a stockholders meeting must give notice of any
proposals not less than 30 days nor more than 90 days prior to the meeting. Such
notice is required to contain certain information as set forth in the Bylaws. No
business matter shall be transacted nor shall any person be eligible for
election as a director of the Company unless proposed or nominated, as the case
may be, in strict accordance with this procedure set forth in the Company's
Bylaws.
Although the Bylaws do not give the Board of Directors any power to approve
or disapprove of stockholder nominations for the election of directors or of any
other business desired by stockholders to be conducted at an annual or any other
meeting, the Bylaws may have the effect of precluding a nomination for the
election of directors or the conduct of business at a particular annual meeting
if the proper procedures are not followed or may discourage or deter a third
party from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of the Company, even if the
conduct of such solicitation or such attempt might be beneficial to the Company
and its stockholders. The Company's procedures with respect to all stockholder
proposals and the nomination of directors will be conducted in accordance with
Section 14 of the Securities Exchange Act of 1934, as amended, and the rules
promulgated thereunder.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock of the Company is
Harris Trust Company of California, 601 S. Figueroa, Los Angeles, California
90017.
56
<PAGE> 58
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), represented by Friedman,
Billings, Ramsey & Co., Inc. and Cruttenden Roth Incorporated (the
"Representatives"), have severally agreed to purchase from the Company the
following respective number of shares of Common Stock at the public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------------------------------------------------------------------ ---------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc...................................
Cruttenden Roth Incorporated............................................
---------
Total....................................................
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares of Common Stock offered hereby if
any of such shares are purchased.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the shares of Common Stock directly to the public at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to certain other dealers. After the Common Stock has been
released for sale to the public, the offering price and other selling terms may
be changed by the Representatives.
The Company has granted an option to the Underwriters, exercisable for a
period of 30 days after the date of this Prospectus, to purchase up to a maximum
of 600,000 additional shares of Common Stock at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus. The Underwriters may exercise this option only to cover
over-allotments, if any. To the extent that the Underwriters exercise this
option, each of the Underwriters will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage thereof that the
number of shares of Common Stock to be purchased by it shown in the table above
bears to 4,000,000 and the Company will be obligated, pursuant to the option, to
sell such shares to the Underwriter as set forth in the above table. If
purchased, the Underwriters will offer such additional shares on the same terms
as those on which the 4,000,000 shares are being offered.
Certain of the Underwriters that currently act as market makers for the
Company's Common Stock may engage in "passive market making" in the Common Stock
on the Nasdaq National Market in accordance with Rule 10b-6A under the Exchange
Act. Rule 10b-6A permits, upon the satisfaction of certain conditions,
underwriters participating in a distribution that are also Nasdaq market makers
in the security being distributed to engage in limited market making
transactions during the period when Rule 10b-6 under the Exchange Act would
otherwise prohibit such activity. Rule 10b-6A prohibits underwriters engaged in
passive market making generally from entering a bid or effecting a purchase at a
price that exceeds the highest bid for those securities displayed on the Nasdaq
National Market by a market maker that is not participating in the distribution.
Under Rule 10b-6A, each underwriter engaged in passive market making is subject
to a daily net purchase limitation equal to 30% of such market maker's average
daily trading volume in the security during the two full calendar months
immediately preceding the date of the filing of the registration statement under
the Securities Act pertaining to the security being distributed.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters and their controlling persons against certain liabilities under the
Securities Act or will contribute to payments the Underwriters and their
controlling persons may be required to make in respect thereof. The Company has
been advised that, in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
57
<PAGE> 59
Mr. Christopher D. Jennings, a managing director of Cruttenden Roth
Incorporated, is a director of the Company.
LEGAL MATTERS
The validity of the shares offered hereby is being passed upon for the
Company by Snell & Wilmer L.L.P, Phoenix, Arizona. Certain legal matters will be
passed upon for the Underwriters by Squire, Sanders & Dempsey L.L.P., Phoenix,
Arizona.
EXPERTS
The consolidated financial statements and schedule of the Company as of
December 31, 1994 and 1995, and for each of the years in the three-year period
ended December 31, 1995, have been included herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form
S-1 (as amended, the "Registration Statement") under the Securities Act with
respect to the Common Stock offered hereby. This Prospectus constitutes a part
of the Registration Statement and does not contain all of the information set
forth therein and in the exhibits thereto, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is hereby made to such Registration Statement and exhibits. Statements
contained in this Prospectus as to the contents of any document are not
necessarily complete and in each instance are qualified in their entirety by
reference to the copy of the appropriate document filed with the Commission. The
Registration Statement, including the exhibits thereto, may be examined without
charge at the Commission's public reference facility at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, copies of
all or any part of the Registration Statement, including such exhibits thereto,
may be obtained from the Commission at its principal office in Washington, D.C.,
upon payment of the fees prescribed by the Commission.
The Company is subject to the reporting and informational requirements of
the Exchange Act and, in accordance therewith, files reports, proxy statements,
and other information with the Commission. Such reports, proxy statements, and
other information filed by the Company can be inspected and copied at the
principal office of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington D.C. 20549, and at the following regional offices of
the Commission: 7 World Trade Center, New York, NY 10048, and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, IL 60601. Copies of
such material may be obtained from the Public Reference Section of the
Commission at its principal office at 450 Fifth Street, N.W., Washington D.C.
20549, upon payment of the fees prescribed by the Commission. The Commission
maintains a World Wide Web site (http://www.sec.gov) that contains reports,
proxy statements, and other information regarding registrants, such as the
Company, that file electronically with the Commission.
58
<PAGE> 60
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1994 and 1995, and
June 30, 1996 (unaudited)........................................................ F-3
Consolidated Statements of Operations for the years ended December 31,
1993, 1994, and 1995, and the six months ended June 30, 1995 (unaudited)
and 1996 (unaudited)............................................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1993, 1994, and 1995, and the six months ended
June 30, 1996 (unaudited)........................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994, and 1995, and the six months ended June 30, 1995
and 1996 (unaudited)............................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 61
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Ugly Duckling Corporation:
We have audited the accompanying consolidated balance sheets of Ugly
Duckling Corporation and subsidiaries as of December 31, 1994 and 1995, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ugly
Duckling Corporation and subsidiaries as of December 31, 1994 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Phoenix, Arizona
January 24, 1996, except as to Note 23
to the Consolidated Financial Statements,
which is as of April 24, 1996
F-2
<PAGE> 62
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995, AND JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1994 1995 1996
------- ------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and Cash Equivalents......................................... $ 168 $ 1,419 $ 263
Finance Receivables:
Principal Balances.............................................. 22,067 49,226 51,660
Less: Allowance for Credit Losses............................... (6,209) (8,500) (8,048)
------- ------- -------
Finance Receivables, Net.................................. 15,858 40,726 43,612
------- ------- -------
Residual in Finance Receivables Sold.............................. -- -- 5,001
Investments Held in Trust......................................... -- -- 1,574
Note Receivable................................................... -- -- 1,138
Inventory, at Cost................................................ 4,849 6,329 6,386
Income Taxes Receivable........................................... -- 850 --
Prepaid Expenses.................................................. 459 643 421
Property and Equipment Held for Sale.............................. -- 1,086 --
Property and Equipment, Net....................................... 5,975 7,797 9,477
Covenants Not to Compete and Trademarks, Net...................... 629 269 238
Deferred Income Taxes............................................. 1,374 925 1,151
Other Assets...................................................... 399 746 881
------- ------- -------
$29,711 $60,790 $70,142
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities:
Accounts Payable................................................ $ 773 $ 595 $ 1,683
Accrued Expenses and Other Liabilities.......................... 1,381 4,574 6,196
Income Taxes Payable............................................ 134 -- 510
Obligations Under Capital Leases................................ 384 983 904
Notes Payable................................................... 9,942 32,201 22,388
Convertible Note Payable........................................ -- 3,000 --
Subordinated Notes Payable...................................... 18,291 14,553 14,000
------- ------- -------
Total Liabilities............................................ 30,905 55,906 45,681
------- ------- -------
Stockholders' Equity (Deficit):
Preferred Stock................................................. -- 10,000 10,000
Common Stock.................................................... 77 127 18,122
Accumulated Deficit............................................. (1,271) (5,243) (3,661)
------- ------- -------
Total Stockholders' Equity (Deficit)......................... (1,194) 4,884 24,461
------- ------- -------
Commitments, Contingencies and Subsequent Events..................
------- ------- -------
$29,711 $60,790 $70,142
======= ======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-3
<PAGE> 63
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995, AND
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1993 1994 1995 1995 1996
------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Dealership Revenues:
Sales of Used Cars............................................ $13,969 $27,768 $47,824 $22,448 $30,177
Income on Finance Receivables................................. 1,629 4,739 8,227 3,475 4,591
Gain on Sale of Finance Receivables........................... -- -- -- -- 1,178
Income on Residual in Finance Receivables Sold................ -- -- -- -- 579
------ ------- ------- ------- -------
15,598 32,507 56,051 25,923 36,525
------ ------- ------- ------- -------
Cost of Dealership Revenues:
Cost of Used Cars Sold........................................ 6,089 12,577 27,964 11,888 16,858
Provision for Credit Losses................................... 3,292 8,140 8,359 4,404 5,172
------ ------- ------- ------- -------
9,381 20,717 36,323 16,292 22,030
------ ------- ------- ------- -------
Net Revenues from Dealership Activities..................... 6,217 11,790 19,728 9,631 14,495
Other Income:
Servicing Income.............................................. -- -- -- -- 248
Income on Third Party Finance Receivables..................... -- 710 1,844 438 2,521
Franchise Fees and Other Income............................... 879 556 308 159 183
------ ------- ------- ------- -------
879 1,266 2,152 597 2,952
------ ------- ------- ------- -------
Income before Operating Expenses............................ 7,096 13,056 21,880 10,228 17,447
Operating Expenses:
Selling and Marketing......................................... 1,293 2,402 3,856 1,725 2,263
General and Administrative.................................... 3,561 8,971 14,430 6,289 9,026
Depreciation and Amortization................................. 191 481 1,018 398 701
Amortization of Covenants..................................... 366 296 296 148 --
------ ------- ------- ------- -------
5,411 12,150 19,600 8,560 11,990
------ ------- ------- ------- -------
Operating Income............................................ 1,685 906 2,280 1,668 5,457
Other Expenses:
Interest on Subordinated Notes Payable........................ 678 2,569 3,492 1,594 1,237
Interest, Other............................................... 215 468 2,464 766 2,052
Other, Net.................................................... 64 170 296 56 20
------ ------- ------- ------- -------
957 3,207 6,252 2,416 3,309
------ ------- ------- ------- -------
Income (Loss) before Income Taxes........................... 728 (2,301) (3,972) (748) 2,148
Income Tax Expense (Benefit):................................... 30 (334) -- -- --
------ ------- ------- ------- -------
Net Earnings (Loss)......................................... $ 698 $(1,967) $(3,972) $ (748) $ 2,148
Preferred Stock Dividend.................................... -- -- -- -- (566)
------ ------- ------- ------- -------
Earnings Available to Common Shares......................... $ 698 $(1,967) $(3,972) $ (748) $ 1,582
====== ======= ======= ======= =======
Earnings (Loss) per Common Share:
Primary....................................................... $ 0.14 $ (0.35) $ (0.67) $ (0.13) $ 0.26
====== ======= ======= ======= =======
Fully diluted................................................. $ 0.14 $ (0.35) $ (0.67) $ (0.13) $ 0.26
====== ======= ======= ======= =======
Weighted Average Common and Common
Equivalent Shares Outstanding:
Primary....................................................... 5,011 5,584 5,892 5,892 6,136
====== ======= ======= ======= =======
Fully diluted................................................. 5,011 5,584 5,892 5,892 6,145
====== ======= ======= ======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-4
<PAGE> 64
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995, AND SIX MONTHS ENDED JUNE 30,
1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED TOTAL
SHARES AMOUNT EARNINGS STOCKHOLDERS'
------------------ ----------------- (ACCUMULATED EQUITY
PREFERRED COMMON PREFERRED COMMON DEFICIT) (DEFICIT)
--------- ------ ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1992.................. -- 4,640 $ -- $ 1 $ (2) $ (1)
Net Earnings for the Year...................... -- -- -- -- 698 698
----- ----- ------- ------- ------- -------
Balances at December 31, 1993.................. -- 4,640 -- 1 696 697
Issuance of Common Stock for Purchase
of Subsidiary................................ -- 174 -- 15 -- 15
Issuance of Common Stock for Cash.............. -- 708 -- 61 -- 61
Net Loss for the Year.......................... -- -- -- -- (1,967) (1,967)
----- ----- ------- ------- ------- -------
Balances at December 31, 1994.................. -- 5,522 -- 77 (1,271) (1,194)
Issuance of Common Stock....................... -- 58 -- 50 -- 50
Conversion of Subordinated Notes Payable to
Preferred Stock.............................. 1,000 -- 10,000 -- -- 10,000
Net Loss for the Year.......................... -- -- -- -- (3,972) (3,972)
----- ----- ------- ------- ------- -------
Balances at December 31, 1995.................. 1,000 5,580 10,000 127 (5,243) 4,884
Six Months Ended June 30, 1996:
Issuance of Common Stock (Unaudited)........... -- 2,645 -- 14,845 -- 14,845
Conversion of Debt to Common Stock
(Unaudited).................................. -- 444 -- 3,000 -- 3,000
Issuance of Common Stock to Board of Directors
(Unaudited).................................. -- 22 -- 150 -- 150
Preferred Stock Dividend (Unaudited)........... -- -- -- -- (566) (566)
Net Earnings for the Period (Unaudited)........ -- -- -- -- 2,148 2,148
----- ----- ------- ------- ------- -------
Balances at June 30, 1996 (Unaudited).......... 1,000 8,691 $10,000 $18,122 $ (3,661) $ 24,461
===== ===== ======= ======= ======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-5
<PAGE> 65
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995, AND
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SIX MONTHS ENDED
------------------------------- JUNE 30,
1993 1994 1995 --------------------------
------- -------- -------- 1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net Earnings (Loss)..................................... $ 698 $ (1,967) $ (3,972) $ (748) $ 2,148
Adjustments to Reconcile Net Earnings (Loss) to Net
Cash Provided by Operating Activities:
Provision for Credit Losses........................... 3,292 8,140 8,359 4,404 5,172
Gain on Sale of Finance Receivables................... -- -- -- -- (1,178)
Compensation Expense Related to Sale of Common -- -- 45 45 --
Stock...............................................
Decrease (Increase) in Deferred Income Taxes.......... (913) (461) 449 (584) (226)
Loss on Disposal of Property and Equipment............ -- 20 124 3 --
Depreciation and Amortization......................... 557 777 1,314 546 701
Minority Interest..................................... 1 5 -- -- --
Changes in Assets and Liabilities, Net of Effects from
the Purchase of Champion Financial Services, Inc.:
Decrease (Increase) in Inventory...................... (1,081) (3,098) (1,500) (1,144) (57)
Decrease (Increase) in Prepaid Expenses............... (140) (160) (184) (84) 273
Increase in Other Assets.............................. (280) (134) (345) (168) (138)
Increase in Accounts Payable, Accrued Expenses, and 709 1,064 3,035 1,706 2,710
Other Liabilities...................................
Increase (Decrease) in Income Taxes Receivable/ 943 (809) (984) 174 1,360
Payable.............................................
------- -------- -------- -------- --------
Net Cash Provided by Operating Activities........ 3,786 3,377 6,341 4,150 10,765
------- -------- -------- -------- --------
Cash Flows from Investing Activities:
Increase in Finance Receivables......................... (8,622) (14,994) (33,228) (15,675) (25,290)
Proceeds from Sale of Finance Receivables............... -- -- -- -- 18,410
Increase in Investments Held in Trust................... -- -- -- -- (6,574)
Increase in Notes Receivable............................ (82) -- -- -- --
Repayments of Notes Receivable.......................... 86 121 -- -- 63
Purchase of Property and Equipment...................... (271) (5,334) (3,195) (1,838) (2,056)
Payment for Purchase of Inventory and Equipment......... (425) -- -- -- --
Purchase of Minority Interest of Subsidiary............. -- (15) -- -- --
Payment for Purchase of Subsidiary, Net of Cash -- (376) -- -- --
Acquired..............................................
------- -------- -------- -------- --------
Net Cash Used in Investing Activities............ (9,314) (20,598) (36,423) (17,513) (15,447)
------- -------- -------- -------- --------
Cash Flows from Financing Activities:
Repayments of Obligations Under Capital Leases.......... -- (16) (193) (51) (79)
Additions to Notes Payable.............................. -- 9,942 22,259 -- --
Repayments of Notes Payable............................. (3,749) (2,027) -- 11,847 (10,221)
Addition to Convertible Note Payable.................... -- -- 3,000 -- --
Net Issuance (Repayment) of Subordinated Notes 8,941 9,350 6,262 1,709 (553)
Payable...............................................
Preferred Stock Dividend Paid........................... -- -- -- -- (566)
Proceeds from Issuance of Common Stock.................. -- 61 5 5 14,945
------- -------- -------- -------- --------
Net Cash Provided by Financing Activities........ 5,192 17,310 31,333 13,510 3,526
------- -------- -------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents...... (336) 89 1,251 147 (1,156)
Cash and Cash Equivalents at Beginning of Period.......... 415 79 168 168 1,419
------- -------- -------- -------- --------
Cash and Cash Equivalents at End of Period................ $ 79 $ 168 $ 1,419 $ 315 $ 263
======= ======== ======== ======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-6
<PAGE> 66
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
(1) ORGANIZATION AND ACQUISITIONS
Ugly Duckling Corporation, a Delaware corporation (the Company), was
incorporated in April 1996 as the successor to Ugly Duckling Holdings, Inc.
(UDH), an Arizona corporation, formed in 1992. Contemporaneous with the
formation of the Company, UDH was merged into the Company with each share of
UDH's common stock exchanged for 1.16 shares of common stock in the Company and
each share of UDH's preferred stock exchanged for one share of preferred stock
in the Company under identical terms and conditions. UDH was effectively
dissolved in the merger. The resulting effect of the merger was a
recapitalization increasing the number of authorized shares of common stock to
20,000,000 and a 1.16-to-1 common stock split effective April 24, 1996 (note
23). The stockholders' equity section of the Consolidated Balance Sheets as of
December 31, 1994 and 1995 and as of June 30, 1996, reflects the number of
authorized shares after giving effect to the merger and common stock split. The
Company's principal stockholder is also the sole stockholder of Verde Holdings,
Inc. and Verde Investments, Inc., affiliated entities under common control. The
Company's subordinated debt (note 13) is held by, and the land for certain of
its operating facilities is leased from, Verde Investments, Inc. (Verde) (note
16).
As of June 30, 1996 (unaudited), the Company has twelve wholly owned
subsidiaries: Duck Ventures, Inc.; Champion Acceptance Corporation (formerly
Ugly Duckling Credit Corp.); Ugly Duckling Car Sales, Inc.; UDRAC, Inc. (rental
car franchisor); Champion Financial Services, Inc.; UDRAC Rentals, Inc.; Ugly
Duckling Franchising, Inc.; Drake Insurance Services, Inc.; Drake Insurance
Agency, Inc.; Drake Property & Casualty Insurance Company; Drake Life Insurance
Company, and Champion Receivables Corp. (CRC). CRC is a special purpose
corporation formed to accommodate the structure under which the Company sells
its finance receivables.
Verde Holdings, Inc. originally acquired Duck Ventures, Inc. and its
subsidiaries (Ventures) from an unrelated entity in January 1992. The
acquisition price was $1,530,000, which represented the net book value of
Ventures plus an additional $716,373 for a covenant not to compete (note 8) and
$580,855 for trademarks (note 8). No "goodwill" was recorded in connection with
the acquisition. During December 1992, Verde Holdings, Inc. transferred the
common stock of Ventures to UDH for a price of $2,913,000, representing the net
book value of Ventures, in exchange for the assumption by UDH of notes payable
to unrelated third parties of $1,375,000 and the issuance of a note payable to
Verde Holdings, Inc. in the amount of $1,538,000. The assets were recorded at
their historical cost basis in a manner similar to a pooling of interests
because of the common ownership of UDH and Verde Holdings, Inc. Subsequently,
the notes became a component of the subordinated debt (note 13) when Verde
acquired these notes, at face value, from Verde Holdings, Inc.
During 1993, Ugly Duckling Car Sales, Inc. purchased from an unrelated
entity the assets of a used car lot for $424,850 in cash. No liabilities were
assumed in connection with the acquisition. The acquisition was recorded in
accordance with the "purchase method" of accounting. The cost was allocated,
based upon the estimated fair value of the assets on the acquisition date, as
follows: $349,850 to inventory and $75,000 to property, equipment, and leasehold
improvements.
During 1994, Champion Acceptance Corporation (CAC) acquired from unrelated
parties 100% of the common stock of Champion Financial Services, Inc. (CFS) for
$420,886. CAC paid $125,886 in cash, $15,000 in common stock of UDH (174,000
shares), and financed the balance of $280,000, which was subsequently paid in
full prior to December 31, 1994. The acquisition was recorded in accordance with
the "purchase method" of accounting with the results of CFS being included in
the accompanying statements of operations from the February 1, 1994 acquisition
date. The purchase price approximated the fair value of the tangible net assets
acquired.
F-7
<PAGE> 67
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations as if CFS had been acquired as of the
beginning of the periods presented (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1994
----------------- -----------------
<S> <C> <C>
Income on Third Party Finance
Receivables.............................. $ 1,005 $ 788
Income (Loss) before Income Taxes.......... 1,080 (2,284)
Net Earnings (Loss)........................ 930 (1,956)
</TABLE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
The Company, through its subsidiaries, owns and operates a sales finance
company, used car sales lots, and is a franchiser of rental car operations. The
Company's recently formed insurance companies will sell car casualty, credit
life and disability insurance.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company
and its subsidiaries. Significant intercompany accounts and transactions have
been eliminated in consolidation.
Concentration of Credit Risk
CAC and CFS provide sales finance services in connection with the sale of
used cars to individuals residing primarily in the metropolitan areas of Phoenix
and Tucson, Arizona. The Company operated two, three and three dealerships in
the Tucson metropolitan area in 1993, 1994, and 1995, respectively; and three,
five, and five dealerships in the Phoenix metropolitan area in 1993, 1994, and
1995, respectively (company dealerships). As of June 30, 1996, CFS maintains
relationships with approximately 500 (unaudited) third party car dealers (third
party dealers) in six states from whom it purchases sales finance contracts.
Periodically during the year, the Company maintains cash in financial
institutions in excess of the amounts insured by the federal government.
Cash Equivalents and Supplemental Statement of Cash Flow Information
The Company considers all highly liquid debt instruments purchased with an
original maturity of six months or less to be cash equivalents. Cash equivalents
consist of demand deposit accounts.
Interest paid totaled $921,892 during the year ended December 31, 1993;
there were no income taxes paid during the year ended December 31, 1993.
Interest paid totaled $3,030,778 during the year ended December 31, 1994; income
taxes paid totaled $960,000 during the year ended December 31, 1994. Interest
paid totaled $5,889,606 during the year ended December 31, 1995; income taxes
paid totaled $535,000 during the year ended December 31, 1995. Interest paid
totaled $2,343,707 (unaudited) during the period ended June 30, 1995; income
taxes paid totaled $410,000 (unaudited) during the period ended June 30, 1995.
Interest paid totaled $3,126,009 (unaudited) during the period ended June 30,
1996; there were no (unaudited) income taxes paid during the period ended June
30, 1996.
During 1994, the Company purchased 100% of the common stock of CFS for
$420,886. In connection with the acquisition, liabilities were assumed as
follows (in thousands):
<TABLE>
<S> <C>
Fair Value of Assets Acquired...................................... $2,178
Purchase Price of the Common Stock................................. (421)
------
Liabilities Assumed................................................ $1,757
======
</TABLE>
During the period ended June 30, 1996, the Company acquired property and
equipment of approximately $900,000 (unaudited) in exchange for the execution of
certain notes payable. On June 21, 1996, the $3,000,000 convertible note payable
was converted to common stock (Note 12).
F-8
<PAGE> 68
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
Income on finance receivables is recognized using the interest method.
Direct loan origination costs related to contracts originated at the company
dealerships are deferred and charged against finance income over the life of the
related installment sales contract as an adjustment of yield. Pre-opening and
start-up costs incurred on third party dealer branch offices are deferred and
charged to expense over a twelve month period. The accrual of interest is
suspended if collection becomes doubtful and is resumed when the loan becomes
current.
Revenue from the sale of cars is recognized upon delivery, when the sales
contract is signed and the agreed-upon down payment has been received.
Franchise fees recorded by UDRAC, Inc. are accounted for in accordance with
Statement of Financial Accounting Standards No. 45, "Accounting for Franchise
Fee Revenue," issued by the Financial Accounting Standards Board. Initial
franchise fees are recognized as revenue at the time of sale of the related
franchise. Franchise fees, based on the franchise's sales, are recognized as
earned.
Gain on Sale of Finance Receivables and Income on Residual in Finance
Receivables Sold
In 1996, the Company initiated a securitization program under which it
sells finance receivables to a trust which uses the finance receivables to
create asset backed securities (certificates) which are remitted to the Company
in consideration for the sale. The Company then sells senior certificate(s) to
third party investors and retains subordinated certificate(s). In consideration
of such sale, the Company receives cash proceeds from the sale of certificates
collateralized by the finance receivables and the right to future cash flows
under the subordinated certificates (residual in finance receivables sold, or
residual) arising from those receivables to the extent not required to make
payments on the senior certificates sold to a third party or to pay associated
costs.
Gains or losses are determined based upon the difference between the sales
proceeds for the portion of finance receivables sold and the Company's recorded
investment in the finance receivables sold. The Company allocates the recorded
investment in the finance receivables between the portion of the finance
receivables sold and the portion retained based on the relative fair values of
those portions on the date of sale.
Servicing Income
Servicing income is recognized when earned. Servicing costs are charged to
expense as incurred. In the event delinquencies and/or losses on the portfolio
serviced exceed specified levels, the trustee may require the transfer of
servicing of the portfolio to another servicer.
Finance Receivables, Allowance for Credit Losses and Nonrefundable Acquisition
Discount
The Company originates installment sales contracts from its company
dealerships and purchases contracts from third party dealers. Finance
receivables consist of contractually scheduled payments from installment sales
contracts net of unearned finance charges, accrued interest receivable, direct
loan origination costs, and an allowance for credit losses, including
nonrefundable acquisition discount.
Unearned finance charges represent the balance of finance income (interest)
remaining from the capitalization of the total interest to be earned over the
original term of the related installment sales contract. Direct loan origination
costs represent the unamortized balance of costs incurred in the origination of
contracts at the Company's dealerships.
The Company follows the provisions of Statement of Financial Accounting
Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases."
An allowance for credit losses (allowance) is established by charging the
provision for credit losses and the allocation of nonrefundable acquisition
discount. For contracts generated by the company dealerships, the
F-9
<PAGE> 69
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
allowance is established by charging the provision for credit losses. Contracts
purchased from third party dealers are generally purchased with a nonrefundable
acquisition discount (discount). The discount is negotiated with third party
dealers pursuant to a financing program that bases the discount on, among other
things, the credit risk of the borrower and the amount to be financed in
relation to the car's wholesale value. The discount is allocated between
discount available for credit losses and discount available for accretion to
interest income. The portion of discount allocated to the allowance is based
upon historical performance and write-offs of contracts acquired from third
party dealers, as well as the general credit worthiness of the borrowers and the
wholesale value of the vehicle. The remaining discount, if any, is deferred and
accreted to income using the interest method. To the extent that the discount is
considered insufficient to absorb anticipated losses on the third party dealer
portfolio, additions to the allowance are established through a charge to the
provision for credit losses. The evaluation of the discount and allowance
considers such factors as the performance of each third party dealer's loan
portfolio, the Company's historical credit losses, the overall portfolio quality
and delinquency status, the review of specific problem loans, the value of
underlying collateral, and current economic conditions that may affect the
borrower's ability to pay.
Inventory
Inventory consists of used vehicles held for sale and is valued at the
lower of cost or market. Vehicle reconditioning costs are capitalized as a
component of inventory cost. The cost of used vehicles sold is determined on a
specific identification basis. Repossessed vehicles are valued at the lower of
estimated net realizable value or the related loan balance.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
straight-line and accelerated methods over the estimated useful lives of the
assets which range from three to ten years for equipment and thirty years for
buildings. Leasehold and land improvements are amortized using straight-line and
accelerated methods over the shorter of the lease term or the estimated useful
lives of the related improvements.
The Company has capitalized costs related to the development of software
products for internal use. Capitalization of costs begins when technological
feasibility has been established and ends when the software is available for
general use. Amortization is computed using the straight-line method over the
estimated economic life of five years.
Trademarks, Trade Names, Logos, and Contract Rights
The registered trade names, "Ugly Duckling Car Sales," "Ugly Duckling
Rent-A-Car," and "America's Second Car" and related trademarks, logos, and
contract rights are stated at cost. The cost of trademarks, trade names, logos,
and contract rights is amortized on a straight-line basis over their estimated
economic lives of ten years.
Covenants Not to Compete
The covenants not to compete are stated at cost. Amortization is provided
using the straight-line method over the respective terms of the contracts.
Post Sale Customer Support Programs
A liability for the estimated cost of post sale customer support, including
car repairs and the Company's down payment back and credit card programs, is
established at the time the used car is sold by charging Cost of Used Cars Sold.
The liability is evaluated for adequacy through a separate analysis of the
various programs' historical performance.
F-10
<PAGE> 70
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Advertising
The Company expenses production and other costs of advertising as incurred.
Earnings per Share
Earnings per share is based upon the weighted average number of common
shares outstanding plus common stock equivalents after giving effect to the
1.16-to-1 common stock split (note 1).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited Interim Financial Information
The unaudited interim consolidated financial statements as of June 30, 1996
and for the six month periods ended June 30, 1995 and 1996 reflect, in the
opinion of management all adjustments (which include only normal recurring
adjustments) necessary to fairly present the financial position, results of
operations, and cash flows as of and for the periods presented. The results for
the interim periods presented are not necessarily indicative of results to be
expected for the full year.
(3) FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
The Company provides financing for a substantial portion of its company
dealerships' retail sales and purchases contracts from a network of third party
dealers. Installment sales contracts generated by company dealerships are
executed by customers with terms which typically include down payments of
approximately 15%, interest rates of 29.9%, and maturity terms ranging from 12
to 36 months. Purchased installment sales contracts generally contain interest
rates ranging from 21% to 29.9% and maturity terms ranging from 12 to 48 months.
F-11
<PAGE> 71
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of net finance receivables at December 31, 1994 and 1995 and June
30, 1996 (unaudited) follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1994 1995 1996
------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Contractually Scheduled Payments...................... $27,965 $ 66,425 $ 72,363
Less: Unearned Finance Income......................... (6,464) (18,394) (21,580)
------ ------ ------
Installment Sales Contract Principal Balances......... 21,501 48,031 50,783
Add: Accrued Interest Receivable...................... 270 613 548
Loan Origination Costs, Net..................... 367 582 329
Less: Dealer Holdbacks................................ (71) -- --
------ ------ ------
Principal Balances, Net............................... 22,067 49,226 51,660
Less: Allowance for Credit Losses..................... (6,209) (8,500) (8,048)
------ ------ ------
Finance Receivables, Net.............................. $15,858 $ 40,726 $ 43,612
====== ====== ======
</TABLE>
Allowance for credit losses as a percent of principal balances totaled
28.9% and 17.7% at December 31, 1994 and 1995, respectively and 15.8%
(unaudited) at June 30, 1996.
The changes in the allowance for credit losses (allowance) and the
nonrefundable acquisition discount (discount) for the years ended December 31,
1994 and 1995 and the period ended June 30, 1996 (unaudited) follow (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Balances, Beginning of Period...................... $ 2,876 $ 6,209 $ 8,500
Provision for Credit Losses...................... 8,140 8,359 5,172
Discount Acquired................................ 767 1,660 1,830
Discount Accreted to Income...................... (188) -- --
Charge Off Activity:
Principal Balances Charged Off................ (8,597) (10,191) (6,160)
Accrued Interest Balances Charged Off......... (677) (711) (436)
Recoveries.................................... 3,888 3,174 2,066
----- ------ -----
Net Charge Offs............................. (5,386) (7,728) (4,530)
----- ------ -----
Amount Relieved from Sale of Associated
Contracts................................ -- -- (2,924)
----- ------ -----
Balances, End of Period............................ $ 6,209 $ 8,500 $ 8,048
===== ====== =====
</TABLE>
For the year ended December 31, 1994, approximately seventy-five percent
(75%) of the non-refundable acquisition discount acquired was allocated to
acquisition discount available for credit losses. For the year ended December
31, 1995, and the six months ended June 30, 1996 (unaudited), the entire
nonrefundable acquisition discount acquired was allocated to acquisition
discount available for credit losses.
(4) RESIDUAL IN FINANCE RECEIVABLES SOLD (UNAUDITED)
The valuation of the residual in finance receivables sold as of June 30,
1996 totaled $5,000,594 (unaudited) which represented the present value of the
Company's interest in the anticipated future cash flows of the underlying
portfolio after taking into consideration anticipated prepayments and net charge
offs.
At June 30, 1996, the remaining balance of finance receivables sold totaled
$20,470,034 (unaudited). The Company services these finance receivables,
originated solely in the state of Arizona, for one client.
F-12
<PAGE> 72
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) INVESTMENTS HELD IN TRUST (UNAUDITED)
In connection with its securitization, the Company is required to make an
initial cash deposit into an account held by the trustee (spread account) and to
pledge this cash to the trust to which the finance receivables were sold. The
trust in turn invests the cash in high quality liquid investment securities. In
addition, the Company (through the trustee) deposits additional cash flows from
the residual to the spread account as necessary to attain and maintain the
spread account at a specified percentage of the underlying finance receivables
principal balance.
In the event that the cash flows generated by the finance receivables sold
to the trust are insufficient to pay obligations of the trust, including
principal or interest due to certificate holders or expenses of the trust, the
trustee will draw funds from the spread account as necessary to pay the
obligations of the trust. The spread account must be maintained at a specified
percentage of the principal balances of the finance receivables held by the
trust, which can be increased in the event delinquencies or losses exceed
specified levels. If the spread account exceeds the specified percentage, the
trustee will release the excess cash to the Company from the pledged spread
account. Except for releases in this manner, the cash in the spread account is
restricted from use by the Company. Investments Held in Trust, which are funds
deposited in an interest-bearing, money market account, totaled $1,573,622
(unaudited) at June 30, 1996.
(6) NOTE RECEIVABLE
In January 1996, the Company sold the land and improvements of one of its
used car dealerships to an unrelated party. In connection with the sale, the
Company received a note receivable totaling $1,200,000 (note 11). The note calls
for monthly principal payments of $12,500 plus interest at the prime rate plus
1% through January 2001, at which time the Company is scheduled to receive a
balloon payment of $450,000 plus any accrued but unpaid interest. The note is
secured by a first deed of trust on the related land and improvements. The
balance on this note receivable totaled $1,137,500 (unaudited) at June 30, 1996.
(7) PROPERTY AND EQUIPMENT
A summary of property and equipment as of December 31, 1994 and 1995 and
June 30, 1996 (unaudited) follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE
---------------- 30,
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Buildings and Leasehold Improvements
(note 16)............................................... $4,139 $5,143 $ 5,853
Furniture and Equipment (note 10)......................... 1,767 3,401 4,780
Vehicles.................................................. 115 133 138
Software Development Costs................................ 440 533 762
Land...................................................... 15 15 15
Construction in Process................................... 71 11 24
----- ------ ------
6,547 9,236 11,572
Less Accumulated Depreciation and Amortization............ (572) (1,439) (2,095)
----- ------ ------
Property and Equipment, Net............................... $5,975 $7,797 $ 9,477
===== ====== ======
</TABLE>
There was no interest expense capitalized during 1993 due to immateriality.
Interest expense capitalized in 1994, 1995 and in the periods ending June 30,
1995 and 1996 totaled $142,324, $54,475, $34,225 (unaudited) and zero
(unaudited), respectively.
F-13
<PAGE> 73
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) COVENANTS NOT TO COMPETE AND TRADEMARKS
A summary of covenants not to compete as of December 31, 1994 and 1995 and
June 30, 1996 (unaudited) follows (in thousands):
<TABLE>
<CAPTION>
ORIGINAL ACCUMULATED NET
COST AMORTIZATION COVENANTS
------ ------------ ---------
<S> <C> <C> <C>
December 31, 1994:
Original Date
January 1992........................................ $ 716 $ 557 $ 159
December 1992....................................... 411 274 137
----- ----- ----
$1,127 $ 831 $ 296
===== ===== ====
December 31, 1995 and June 30, 1996 (unaudited):
Original Date
January 1992........................................ $ 716 $ 716 $ --
December 1992....................................... 411 411 --
------ ------------ ---------
$1,127 $1,127 $ --
====== ========= =======
</TABLE>
Amortization Expense relating to the covenants not to compete for the years
ended December 31, 1993, 1994, and 1995 and the period ended June 30, 1995
totaled $365,911, $296,232, $296,231, and $148,116, respectively. The covenants
were fully amortized as of December 31, 1995.
A summary of trademarks as of December 31, 1994 and 1995 and June 30, 1996
(unaudited) follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30,
1994 1995 1996
----- ----- -----------
(UNAUDITED)
<S> <C> <C> <C>
Original Cost............................................ $ 581 $ 581 $ 581
Accumulated Amortization................................. (248) (312) (343)
----- ----- -----
Trademarks, Net........................................ $ 333 $ 269 $ 238
===== ===== =====
</TABLE>
Amortization expense relating to trademarks for the years ended December
31, 1993, 1994, 1995 and the periods ended June 30, 1995 and 1996 totaled
$63,378, $63,378, $63,378, $31,689 (unaudited) and $31,689 (unaudited),
respectively.
(9) ACCRUED EXPENSES AND OTHER LIABILITIES
A summary of accrued expenses as of December 31, 1994 and 1995 and June 30,
1996 (unaudited) follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1994 1995 1996
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Sales Taxes........................................... $ 501 $2,258 $ 2,575
Others................................................ 880 2,316 3,621
----- ----- -----
$1,381 $4,574 $ 6,196
===== ===== =====
</TABLE>
In connection with the retail sale of vehicles, the Company is required to
pay sales taxes to certain government jurisdictions. The Company has elected to
pay these taxes using the "cash basis", which requires the Company to pay the
sales tax obligation for a sale transaction as principal is collected over the
life of the receivable contract.
F-14
<PAGE> 74
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) OBLIGATIONS UNDER CAPITAL LEASES
During the years ended December 31, 1994 and 1995, and the period ending
June 30, 1996 (unaudited), the Company acquired certain equipment under lease
agreements which expire through 2000. These leases meet various criteria of a
capital lease and are, therefore, classified as obligations under capital
leases. The cost of the equipment was $399,055 in 1994, $792,274 in 1995, and
$57,232 (unaudited) during the period ended June 30, 1996. The total cost of
equipment under capital leases totaled $1,191,329 at December 31, 1995 and
$1,248,561 (unaudited) at June 30, 1996 and is included in property and
equipment (note 7). Accumulated depreciation totaled $229,097 at December 31,
1995 and $383,833 (unaudited) at June 30, 1996. Amortization expense related to
these capital leases is included in depreciation and amortization on the
accompanying Consolidated Statements of Operations.
A summary of the present value of future minimum capital lease payments
after December 31, 1995 and June 30, 1996 follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1996
DECEMBER 31, -----------
1995
------------ (UNAUDITED)
<S> <C> <C>
1996................................................... $ 366 $ 386
1997................................................... 366 385
1998................................................... 291 206
1999................................................... 113 68
2000................................................... 34 18
----- -----
Total Minimum Lease Payments................................ 1,170 1,063
Less Amount Representing Interest (ranging from
approximately 10% to 12%)................................. (187) (159)
----- -----
Present Value of Net Minimum Capital Lease Payments......... $ 983 $ 904
===== =====
</TABLE>
(11) NOTES PAYABLE
In October 1995, the Company amended its loan agreement for a revolving
loan with a finance company. The note calls for interest payable daily at an
annual rate of 30 day LIBOR (5.83% at December 31, 1995) plus 4.25%. The note is
secured by certain assets of the Company, and the personal guarantee of the
Company's President. As of December 31, 1995, the note had a maximum commitment
of $50,000,000 through September 1997, at which time the Company retains the
right to extend the loan for one additional year. The Company had borrowed
$9,942,147, $32,201,329 and $20,561,708 (unaudited) under this loan as of
December 31, 1994, 1995 and June 30, 1996, respectively.
The loan agreement contains various reporting and performance covenants
including the maintenance of certain ratios and limitations on additional
borrowings from other sources. The Company was in compliance with the covenants
at December 31, 1994 and 1995 and at June 30, 1996 (unaudited).
Interest expense related to this note payable totaled $439,137 and
$2,232,282 for the years ended December 31, 1994 and 1995, respectively, and
779,268 (unaudited) and $1,769,737 (unaudited) for the periods ended June 30,
1995 and 1996, respectively.
In April 1996, the Company executed a $1,000,000 note with a finance
company. The note is secured by a note receivable of $1,200,000 and the personal
guarantee of the Company's Chairman. The note accrues interest at prime plus 4%
per annum. The monthly principal and interest payment under the note is required
to be the amount of the monthly collections of the note receivable (note 6)
collateralizing the note payable which approximate $21,000 per month. The note
is scheduled to mature in April 1999 with an anticipated balloon payment of
approximately $550,000 (unaudited). The amount outstanding under this note
payable at June 30, 1996 was $963,703 (unaudited).
F-15
<PAGE> 75
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In April 1996, the Company executed a $455,000 note payable, with interest
imputed at 10%. The note calls for annual principal and interest payments of
$120,000 each May with the note scheduled to mature in May 2001. The note is
secured by certain furniture and equipment. The amount outstanding under this
note payable at June 30, 1996 was $454,894 (unaudited).
The Company has executed certain other notes payable totaling approximately
$405,000, with interest rates ranging from 9% to 11% per annum. The notes call
for monthly principal and interest payments totaling approximately $4,000, and
mature through April 2007. The notes are secured by certain real property. The
amount outstanding under these notes payable at June 30, 1996 was $407,886
(unaudited).
(12) CONVERTIBLE NOTE PAYABLE
In August 1995, the Company executed a $3,000,000 convertible note with an
insurance company. The note called for interest payable quarterly at an annual
rate of 12.5% and was scheduled to mature in June 1998. The note was secured by
a pledge of 100% of the common stock owned by the Company's President, and the
guarantee of Verde. The note was subordinate to the aforementioned revolving
loan. The Company had borrowed $3,000,000 related to this note as of December
31, 1995.
The loan agreement contains various reporting and performance covenants
including the maintenance of certain ratios and limitations on additional
borrowings from other sources. The Company was in compliance with the covenants
at December 31, 1995.
Interest expense related to this convertible note payable totaled zero and
$140,855 for the years ended December 31, 1994 and 1995, respectively, and
$197,944 (unaudited) for the period ended June 30, 1996.
Pursuant to the terms of the related loan agreement, the insurance company
exercised its right to convert the loan into common stock of the company. The
$3,000,000 (unaudited) loan balance was converted into 444,444 shares ($6.75 per
share) of common stock concurrent with the completion of the company's initial
public offering in June 1996. In conjunction with the conversion, the Company
issued warrants to the insurance company to purchase 116,000 shares of common
stock at an exercise price of $6.75 per share.
(13) SUBORDINATED NOTES PAYABLE
The Company has executed three subordinated notes payable with Verde. As
discussed in the following paragraphs, the balance outstanding under these notes
totaled $18,290,916 and $14,552,804 at December 31, 1994 and 1995, respectively.
There was no accrued interest payable related to these notes at December 31,
1994 and 1995.
In August 1993, the Company entered into a ten-year, subordinated note
payable agreement with Verde. This unsecured $15,000,000 note bears interest at
an annual rate of 18%, with interest payable monthly and is subordinated to all
other Company liabilities. The note also provides for suspension of interest
payments should the Company be in default with any other creditors. The Company
had $15,000,000 and $10,000,000 outstanding related to this note payable at
December 31, 1994 and 1995, respectively.
In September 1994, the Company entered into a nine-year, senior
subordinated note payable agreement with Verde. This $2,000,000 note is senior
to and contains terms identical to the aforementioned subordinated note payable.
The Company had $2,000,000 outstanding related to this note payable at December
31, 1994. This note was paid in full in 1995.
In December 1995, the Company amended its five-year junior subordinated
revolving note payable agreement with Verde. The note was increased from
$3,000,000 to $5,000,000, bears interest at an annual rate of 18%, with interest
payable monthly, and is scheduled to mature in December 1999. The Company had
$1,290,916 and $4,552,804 outstanding related to this note payable at December
31, 1994 and 1995, respectively and $4,000,000 (unaudited) at June 30, 1996.
Unused amounts related to this revolving note payable totaled $1,709,084 and
$447,196 at December 31, 1994 and 1995, respectively.
F-16
<PAGE> 76
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In conjunction with the closing of the Company's initial public offering,
the two previously outstanding subordinated notes payable were exchanged for a
new subordinated note payable. The new $14,000,000 unsecured note bears interest
at an annual rate of 10%, with interest payable monthly and is subordinate to
all other Company indebtedness. The note also calls for annual principal
payments of $2,000,000 through June 2003 when the loan will be paid in full. The
Company had $14,000,000 (unaudited) outstanding under this note payable at June
30, 1996.
Interest expense related to these notes totaled $677,625, $2,568,738,
$3,491,673, $1,594,611 (unaudited) and $1,236,695 (unaudited) for the years
ended December 31, 1993, 1994, 1995, and the periods ended June 30, 1995 and
1996, respectively.
On December 31, 1995, Verde converted $10,000,000 of subordinated notes
payable to preferred stock (note 17) of the Company. Verde agreed to waive any
prepayment penalties associated with the reduction of the subordinated notes
payable in connection with the conversion.
(14) INCOME TAXES
Income tax expense (benefit) amounted to $30,000, ($333,626), zero and $40
(unaudited) for the years ended December 31, 1993, 1994, and 1995 and the period
ended June 30, 1996, respectively (an effective tax rate of 4.1%, 14.5%, 0% and
0% (unaudited), respectively). A reconciliation between taxes computed at the
federal statutory rate of 34% and at the effective tax rate on income (loss)
before income taxes follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- JUNE 30,
1993 1994 1995 1996
----- ----- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Computed "Expected" Tax Expense (Benefit).... $ 248 $(782) $(1,350) $ 731
State Income Taxes, Net of Federal Effect.... 4 (125) (217) 117
Change in Valuation Allowance................ (191) 897 1,418 (1,030)
Others, Net.................................. (31) (324) 149 182
---- ---- ----- -----
$ 30 $(334) $ -- $ --
==== ==== ===== =====
</TABLE>
Components of income tax expense (benefit) for the years ended December 31,
1993, 1994, and 1995 and the period ended June 30, 1996 (unaudited) follow (in
thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
1993:
Federal................................................ $ 741 $ (717) $ 24
State.................................................. 202 (196) 6
----- ----- -----
$ 943 $ (913) $ 30
===== ===== =====
1994:
Federal................................................ $ 79 $ (367) $(288)
State.................................................. 48 (94) (46)
----- ----- -----
$ 127 $ (461) $(334)
===== ===== =====
1995:
Federal................................................ $(449) $ 449 $ --
State.................................................. -- -- --
----- ----- -----
$(449) $ 449 $ --
===== ===== =====
June 30, 1996 (unaudited):
Federal................................................ $ 226 $ (169) $ 57
State.................................................. -- (57) (57)
----- ----- -----
$ 226 $ (226) $ --
===== ===== =====
</TABLE>
F-17
<PAGE> 77
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of December
31, 1994 and 1995 and as of June 30, 1996 (unaudited) are presented below (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1994 1995 1996
------ ------- -----------
(UNAUDITED)
-----------
<S> <C> <C> <C>
Deferred tax assets:
Finance Receivables, Principally Due to the
Allowance for Credit Losses..................... $2,387 $ 2,987 $ 2,375
Acquisition Discount............................... -- 95 --
Federal and State Income Tax Net Operating
Loss Carryforward............................... 197 317 174
Accrued Vacation Benefits.......................... 43 67 67
Accrued Post-Sale Liabilities...................... -- 194 256
Property and Equipment, Principally Due to
Depreciation.................................... 15 87 --
----- ------ ------
Total Gross Deferred Tax Assets.................... 2,642 3,747 2,872
Less: Valuation Allowance.......................... (897) (2,315) (1,285)
----- ------ ------
Net Deferred Tax Assets....................... 1,745 1,432 1,587
----- ------ ------
Deferred Tax Liabilities:
Acquisition Discount............................... -- -- (114)
Covenant Not to Compete, Principally Due to
Amortization.................................... (63) -- --
Software Development Costs......................... (83) (96) (186)
Loan Origination Fees.............................. -- (198) (107)
Basis Adjustment Related to the Acquisition
of CFS.......................................... (32) -- --
Inventory, Principally Related to Repossessed
Vehicles........................................ (193) (213) (29)
----- ------ ------
Total Gross Deferred Tax Liabilities............ (371) (507) (436)
----- ------ ------
Net Deferred Tax Asset........................ $1,374 $ 925 $ 1,151
===== ====== ======
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1994 and
1995 was $897,000 and $2,315,000, respectively and $1,285,000 (unaudited) at
June 30, 1996. The net change in the total valuation allowance for the years
ended December 31, 1994 and 1995 was an increase of $897,000 and $1,418,000,
respectively, and a decrease of $1,030,000 (unaudited) for the period ended June
30, 1996. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and projections for future taxable
income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not that the Company will realize the
benefits of these deductible differences, net of the existing valuation
allowance at June 30, 1996.
At December 31, 1995, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $632,000, which, subject to annual
limitations, are available to offset future taxable income, if any, through 2006
and net operating loss carryforwards for state income tax purposes of
$1,464,000, which are available to offset future taxable income through 2000.
At June 30, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $271,000 (unaudited), which,
subject to annual limitations, are available to offset future
F-18
<PAGE> 78
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
taxable income, if any, through 2006 and net operating loss carryforwards for
state income tax purposes of $1,082,000 (unaudited), which are available to
offset future taxable income through 2000.
(15) RENTAL CAR FRANCHISING ACTIVITY
The Company sold twenty-nine and four additional franchises and recognized
initial franchise fee revenue totaling $148,358 and $17,711 during 1993 and
1994, respectively. No rental car franchises were sold during the year ended
December 31, 1995 or the period ended June 30, 1996 (unaudited). Additionally,
ongoing Franchise Fees from rental car franchisees average 6% of the
franchisees' gross revenue and totaled $408,344, $404,083 and $299,062 for the
years ended December 31, 1993, 1994, and 1995, respectively. Franchise fees
totaled $115,900 (unaudited) for the period ended June 30, 1996.
The Company terminated agreements with twenty-four, fifty, twenty-eight and
nine (unaudited) franchisees during the years ended December 31, 1993, 1994, and
1995 and the period ended June 30, 1996, respectively. Costs associated with
these terminations are not material. As of June 30, 1996, the Company retained
agreements with approximately forty-five (unaudited) franchisees with the
related agreements extending over periods ranging from five to ten years.
(16) LEASE COMMITMENTS
As of December 31, 1995, the Company leased seven car lots, a vehicle
reconditioning center, and two office buildings from Verde under operating
leases, with one lease expiring July 1998, and the remaining leases expiring
December 2008. Verde's leases with the Company require base monthly rent
payments aggregating approximately $123,000, contain provisions for additional
contingent rents and have renewal options for periods ranging from one to ten
years. The Company is also responsible for occupancy and maintenance costs,
including real estate taxes, insurance, and utilities. The leases contain rent
escalation provisions where annual rents will increase with the increase in the
Consumer Price Index. In connection with these leases, the Company has paid
security deposits to Verde totaling $334,000 and $364,000 and $328,000
(unaudited) which are included in Other Assets in the accompanying Consolidated
Balance Sheets as of December 31, 1994, 1995 and June 30, 1996, respectively.
As of June 30, 1996, the Company leases an additional operating facility
and sixteen offices from unrelated entities under operating leases which expire
through April 2000. The leases require monthly rental payments aggregating
approximately $47,000 (unaudited) and contain various renewal options from one
to ten years. The Company is also responsible for occupancy and maintenance
costs, including real estate taxes, insurance, and utility costs.
As of June 30, 1996, the Company leases a vehicle, and certain office
equipment from unrelated entities under operating leases which expire through
September 1998. The leases require monthly rental payments aggregating
approximately $5,600 (unaudited).
Rent expense for the year ended December 31, 1993 totaled $488,400, of
which $235,000 was paid to Verde. There were no contingent rents paid in 1993.
Rent expense for the year ended December 31, 1994 totaled $1,399,851. Rents
paid to Verde totaled $1,220,703, including contingent rents of $310,102, and
$127,000 of rent capitalized during the construction period of two used car
dealership facilities. Accrued rent payable to Verde totaled $63,142 at December
31, 1994 and is included in Accrued Expenses on the accompanying Consolidated
Balance Sheets.
Rent expense for the year ended December 31, 1995 totaled $2,376,802. Rents
paid to Verde totaled $1,889,007, including contingent rents of $465,000, and
$112,943 of rent capitalized during the construction period of a facility.
Accrued rent payable to Verde totaled $100,805 at December 31, 1995 and is
included in Accrued Expenses on the accompanying Consolidated Balance Sheets.
Rent expense for the period ended June 30, 1996 totaled $1,385,843
(unaudited). Rents paid to Verde totaled $1,085,196 (unaudited) including
contingent rents of $440,330 (unaudited). Accrued rent payable to
F-19
<PAGE> 79
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Verde totaled $81,383 (unaudited) at June 30, 1996 and is included in Accrued
Expenses on the accompanying Consolidated Balance Sheets.
A summary of future minimum lease payments required under noncancelable
operating leases with remaining lease terms in excess of one year as of December
31, 1995 and June 30, 1996 (unaudited) follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996 (UNAUDITED)
----------------------------------- -----------------------------------
UNRELATED RELATED PARTY UNRELATED RELATED PARTY
PARTIES LEASES TOTAL PARTIES LEASES TOTAL
--------- ------------- ------- --------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
1996...................... $ 488 $ 1,245 $ 1,733 $ 609 $ 857 $ 1,466
1997...................... 482 1,218 1,700 554 857 1,411
1998...................... 320 1,141 1,461 322 757 1,079
1999...................... 181 1,033 1,214 161 707 868
2000...................... 48 1,033 1,081 10 707 717
Thereafter................ -- 8,262 8,262 -- 5,306 5,306
----- ------ ------ ----- ----- ------
$ 1,519 $13,932 $15,451 $ 1,656 $ 9,191 $10,847
===== ====== ====== ===== ===== ======
</TABLE>
(17) STOCKHOLDERS' EQUITY
On January 1, 1994, the Company had a 4,000-for-1 stock split with the
1,000 shares of common stock outstanding on December 31, 1993 being exchanged
for 4,000,000 shares. There were no changes in the stock's par value (no par) or
the 10,000,000 shares authorized. Further, on April 24, 1996, the Company
effectuated a 1.16-to-1 stock split. The effect of these stock splits have been
reflected in the Consolidated Financial Statements.
In February 1994, the Company issued 174,000 shares of common stock in
connection with the purchase of CFS. The common stock was recorded at $15,000,
which in the opinion of management approximated the fair market value of the
stock on the date of issuance.
In May 1994, the Company issued 707,600 shares of common stock to employees
for $61,000 in cash, which in the opinion of management approximated the fair
market value of the stock on the date of issuance.
In March 1995, the Company issued 58,000 shares of common stock to an
employee for $5,000 in cash. The Company recorded compensation expense of
$45,000 in 1995 related to this sale of common stock.
On June 30, 1995, the Company adopted a long-term incentive plan (stock
option plan). The stock option plan, as amended, set aside 800,000 shares of
common stock to be granted to employees at a price not less than fair market
value of the stock at the date of grant. Options are to vest over a period to be
determined by the Board of Directors upon grant and will generally expire ten
years after the date of grant. Concurrent with the adoption of the stock option
plan, the Company granted options to certain employees to purchase a total of
294,060 shares of common stock. The options generally vest over a period of five
years.
The Company has authorized 10,000,000 shares of $.001 par value preferred
stock. There were zero, 1,000,000, and 1,000,000 (unaudited) shares issued and
outstanding at December 31, 1994, 1995, and June 30, 1996, respectively.
The Company has authorized 20,000,000 shares of $.001 par value common
stock. There were 5,521,600, 5,579,600, and 8,691,264 (unaudited) shares issued
and outstanding at December 31, 1994, 1995 and June 30, 1996, respectively.
F-20
<PAGE> 80
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the aforementioned stock plan follows:
<TABLE>
<CAPTION>
PRICE PER SHARE
-------------------------
WEIGHTED
NUMBER RANGE AVERAGE
------- ------------ --------
<S> <C> <C> <C>
Balance, December 31,1994........................ -- -- --
Granted.......................................... 458,780 $0.86 - 2.59 $ 1.72
Forfeited........................................ (17,400) 2.16 - 2.16 2.16
Exercised........................................ -- -- --
------- ------------ -----
Balance, December 31,1995........................ 441,380 $0.86 - 2.59 $ 1.70
Granted.......................................... 187,650 $3.45 - 6.75 6.62
Forfeited........................................ (23,200) 1.72 - 2.59 2.55
Exercised........................................ -- -- --
------- ------------ -----
Balance, June 30, 1996 (unaudited)............... 605,830 $0.86 - 3.45 $ 3.19
======= ============ =====
</TABLE>
As of June 30, 1996, there were 32,480 (unaudited) options exercisable.
On December 31, 1995, the Company exchanged 1,000,000 shares of Series A
preferred stock for $10,000,000 of subordinated notes payable with Verde. The
preferred stock is redeemable at any time at the option of the Company.
Cumulative dividends were payable at a rate of 12% per annum through June 21,
1996, at which time the Series A preferred stock was exchanged on a
share-for-share basis for 1,000,000 shares of Series B preferred stock and the
dividends were reduced to 10% per annum, increasing two-percent on January 1,
1998 to their maximum rate of 12% per annum. The dividends are payable quarterly
upon declaration by the Company's Board of Directors. In the event that
dividends are not declared or paid, the Company is restricted from issuing
dividends on common stock, and from purchasing outstanding common stock until
all undeclared and unpaid dividends have been declared and paid. Further, in the
event that dividends have not been declared and paid for an entire calendar
year, the Series B stockholders shall be entitled to vote in the election of the
Company's Board of Directors with each share of Series B preferred stock
equivalent to ten shares of common stock. Additionally, in the event of
liquidation, the holders of Series B preferred stock shall be entitled to
receive, prior and in preference to any distribution of any of the assets of the
Company, an amount equal to the issuance price paid for each share plus all
dividends due and unpaid.
The Company's Board of Directors declared two quarterly dividends totaling
$566,667 (unaudited) during the period ended June 30, 1996. There were no
cumulative unpaid dividends at June 30, 1996 (unaudited).
In June 1996, the Company completed its initial public offering in which it
issued 2,645,000 shares of common stock for $14,945,344 cash (unaudited) net of
stock issuance costs of $2,908,406 (unaudited).
(18) COMMITMENTS AND CONTINGENCIES
The Company has executed an agreement to sell up to $50,000,000 in finance
receivable backed certificates through December 31, 1996 to an insurance
company. In addition, the purchaser has the right of first refusal to purchase
up to an additional $125,000,000 of finance receivables through December 31,
1998. The Company completed the sale of $18.6 million (unaudited) in receivable
backed certificates during the period ended June 30, 1996.
The Company is involved in various claims and actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a materially adverse effect on the
Company's financial position.
(19) PENSION PLAN
During 1995, the Company established a qualified 401(k) retirement plan
(defined contribution plan) which became effective on October 1, 1995. The plan
covers substantially all employees having no less than
F-21
<PAGE> 81
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
one year of service, have attained the age of 21, and work at least 1,000 hours
per year. Participants may voluntarily contribute to the plan up to the maximum
limits established by Internal Revenue Service regulations. The Company will
match 10% of the participants' contributions. Participants are immediately
vested in the amount of their direct contributions and vest over a five-year
period, as defined by the plan, with respect to the Company's contribution.
Pension expense totaled $5,282 and $13,707 (unaudited) during the year ended
December 31, 1995 and the period ended June 30, 1996, respectively.
(20) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that the Company disclose
estimated fair values for its financial instruments. The following summary
presents a description of the methodologies and assumptions used to determine
such amounts.
Limitations
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument; they
are subjective in nature and involve uncertainties, matters of judgment and,
therefore, cannot be determined with precision. These estimates do not reflect
any premium or discount that could result from offering for sale at one time the
Company's entire holdings of a particular instrument. Changes in assumptions
could significantly affect these estimates.
Since the fair value is estimated as of December 31, 1995, the amounts that
will actually be realized or paid in settlement of the instruments could be
significantly different.
Cash and Cash Equivalents and Investments Held in Trust
The carrying amount is assumed to be the fair value because of the
liquidity of these instruments.
Finance Receivables, Net
The carrying amount is assumed to be the fair value because of the relative
short maturity and repayment terms of the portfolio as compared to similar
instruments.
Accounts Payable, Accrued Expenses, and Notes Payable
The carrying amount approximates fair value because of the short maturity
of these instruments.
Convertible Note Payable and Subordinated Notes Payable
The terms of the Company's convertible note payable and subordinated notes
payable approximate the terms in the market place at which they could be
replaced. Therefore, the fair value approximates the carrying value of these
financial instruments.
(21) BUSINESS SEGMENTS
Operating results and other financial data are presented for the principal
business segments of the Company for the years ended December 31, 1993, 1994,
and 1995, and the periods ended June 30, 1995 and 1996, respectively. Total
revenue by business segment includes sales of vehicles, finance income and other
income as reported in the Company's Consolidated Financial Statements. Operating
profit is total revenue less cost of sales, where appropriate, and other
operating expenses. In computing operating profit by business segment, the
following items were considered in the Corporate and Other category: portions of
administrative expenses, interest expense and other items not considered direct
operating expenses. Identifiable assets by business segment are those assets
used in each segment of Company operations.
F-22
<PAGE> 82
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
COMPANY THIRD CORPORATE
DEALERSHIPS PARTY AND OTHER TOTAL
----------- ------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1993:
Total Revenue.................................. $15,598 $ -- $ 879 $16,477
====== ====== ====== ======
Cost of Sales.................................. $ 6,089 $ -- $ -- $ 6,089
====== ====== ====== ======
Provision for Credit Losses.................... $ 3,292 $ -- $ -- $ 3,292
====== ====== ====== ======
Selling and Marketing.......................... 881 -- 412 1,293
General and Administrative..................... 2,700 -- 861 3,561
Depreciation and Amortization.................. 186 -- 5 191
Amortization of Covenants...................... -- -- 366 366
------ ------ ------ ------
Operating Expenses............................. $ 3,767 $ -- $ 1,644 $ 5,411
====== ====== ====== ======
Operating Income (Loss)........................ $ 2,450 $ -- $ (765) $ 1,685
====== ====== ====== ======
Capital Expenditures........................... $ 217 $ -- $ 54 $ 271
====== ====== ====== ======
Identifiable Assets............................ $10,070 $ -- $ 1,866 $11,936
====== ====== ====== ======
December 31, 1994:
Total Revenue.................................. $32,507 $ 709 $ 557 $33,773
====== ====== ====== ======
Cost of Sales.................................. $12,577 $ -- $ -- $12,577
====== ====== ====== ======
Provision for Credit Losses.................... $ 8,024 $ 116 $ -- $ 8,140
====== ====== ====== ======
Selling and Marketing.......................... 2,263 -- 139 2,402
General and Administrative..................... 6,530 240 2,201 8,971
Depreciation and Amortization.................. 290 64 127 481
Amortization of Covenants...................... -- -- 296 296
------ ------ ------ ------
Operating Expenses............................. $ 9,083 $ 304 $ 2,763 $12,150
====== ====== ====== ======
Operating Income (Loss)........................ $ 2,823 $ 289 $ (2,206) $ 906
====== ====== ====== ======
Capital Expenditures........................... $ 4,662 $ 302 $ 370 $ 5,334
====== ====== ====== ======
Identifiable Assets............................ $25,552 $ 1,558 $ 2,601 $29,711
====== ====== ====== ======
December 31, 1995:
Total Revenue.................................. $56,051 $ 1,845 $ 307 $58,203
====== ====== ====== ======
Cost of Sales.................................. $27,964 $ -- $ -- $27,964
====== ====== ====== ======
Provision for Credit Losses.................... $ 8,359 $ -- $ -- $ 8,359
====== ====== ====== ======
Selling and Marketing.......................... 3,856 -- -- 3,856
General and Administrative..................... 10,595 1,163 2,672 14,430
Depreciation and Amortization.................. 758 89 171 1,018
Amortization of Covenants...................... -- -- 296 296
------ ------ ------ ------
Operating Expenses............................. $15,209 $ 1,252 $ 3,139 $19,600
====== ====== ====== ======
Operating Income (Loss)........................ $ 4,519 $ 593 $ (2,832) $ 2,280
====== ====== ====== ======
Capital Expenditures........................... $ 2,756 $ 216 $ 223 $ 3,195
====== ====== ====== ======
Identifiable Assets............................ $43,639 $13,419 $ 3,732 $60,790
====== ====== ====== ======
</TABLE>
F-23
<PAGE> 83
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
COMPANY THIRD CORPORATE
DEALERSHIPS PARTY AND OTHER TOTAL
------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
June 30, 1995 (unaudited):
Total Revenue.................................. $25,924 $ 437 $ 159 $26,520
====== ====== ====== ======
Cost of Sales.................................. $11,888 $ -- $ -- $11,888
====== ====== ====== ======
Provision for Credit Losses.................... $ 4,404 $ -- $ -- $ 4,404
====== ====== ====== ======
Selling and Marketing.......................... 1,725 -- -- 1,725
General and Administrative..................... 4,737 360 1,192 6,289
Depreciation and Amortization.................. 266 37 95 398
Amortization of Covenants...................... -- -- 148 148
------ ------ ------ ------
Operating Expenses............................. $ 6,728 $ 397 $ 1,435 $ 8,560
====== ====== ====== ======
Operating Income (Loss)........................ $ 2,904 $ 40 $ (1,276) $ 1,668
====== ====== ====== ======
Capital Expenditures........................... $ 1,736 $ 89 $ 13 $ 1,838
====== ====== ====== ======
Identifiable Assets............................ $36,196 $ 5,358 $ 3,147 $44,701
====== ====== ====== ======
June 30, 1996 (unaudited):
Total Revenue.................................. $36,773 $ 2,521 $ 183 $39,477
====== ====== ====== ======
Cost of Sales.................................. $16,858 $ -- $ -- $16,858
====== ====== ====== ======
Provision for Credit Losses.................... $ 5,172 $ -- $ -- $ 5,172
====== ====== ====== ======
Selling and Marketing.......................... 2,263 -- -- 2,263
General and Administrative..................... 5,933 1,210 1,883 9,026
Depreciation and Amortization.................. 517 75 109 701
------ ------ ------ ------
Operating Expenses............................. $ 8,713 $ 1,285 $ 1,992 $11,990
====== ====== ====== ======
Operating Income (Loss)........................ $ 6,030 $ 1,236 $ (1,809) $ 5,457
====== ====== ====== ======
Capital Expenditures........................... $ 1,560 $ 314 $ 182 $ 2,056
====== ====== ====== ======
Identifiable Assets............................ $42,087 $24,046 $ 4,009 $70,142
====== ====== ====== ======
</TABLE>
(22) QUARTERLY FINANCIAL DATA -- UNAUDITED
A summary of the quarterly data for the years ended December 31, 1994 and
1995 and the period ended June 30, 1996 follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1994:
Total Revenues............................ $ 8,378 $ 8,128 $ 8,956 $ 8,311
======= ======= ======= =======
Income before Operating Expenses.......... $ 3,411 $ 3,410 $ 2,961 $ 3,274
======= ======= ======= =======
Operating Expenses........................ $ 2,225 $ 2,759 $ 3,410 $ 3,756
======= ======= ======= =======
Operating Income.......................... $ 1,186 $ 651 $ (449) $ (482)
======= ======= ======= =======
Net Earnings (Loss)....................... $ 679 $ (58) $(1,485) $(1,103)
======= ======= ======= =======
</TABLE>
F-24
<PAGE> 84
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1995:
Total Revenues............................ $11,546 $14,975 $16,944 $14,738
======= ======= ======= =======
Income before Operating Expenses.......... $ 4,628 $ 5,601 $ 5,858 $ 5,793
======= ======= ======= =======
Operating Expenses........................ $ 3,946 $ 4,614 $ 5,358 $ 5,682
======= ======= ======= =======
Operating Income.......................... $ 682 $ 987 $ 500 $ 111
======= ======= ======= =======
Net Loss.................................. $ (465) $ (283) $(1,169) $(2,055)
======= ======= ======= =======
1996:
Total Revenues............................ $19,396 $20,081 $ -- $ --
======= ======= ======= =======
Income before Operating Expenses.......... $ 8,442 $ 9,005 $ -- $ --
======= ======= ======= =======
Operating Expenses........................ $ 5,694 $ 6,296 $ -- $ --
======= ======= ======= =======
Operating Income.......................... $ 2,748 $ 2,709 $ -- $ --
======= ======= ======= =======
Net Earnings.............................. $ 1,065 $ 1,083 $ -- $ --
======= ======= ======= =======
Primary and Fully Diluted Earnings
Per Share.............................. $ 0.13 $ 0.13 $ -- $ --
======= ======= ======= =======
</TABLE>
(23) REINCORPORATION
On April 24, 1996, the Company reincorporated from Arizona to Delaware by
way of a merger in which the Company, an Arizona corporation, merged with and
into a newly created Delaware subsidiary of the Company. In the merger, each
share of the Arizona corporation's issued and outstanding common stock was
exchanged for 1.16 shares of the Delaware corporation's common stock and each
option to purchase shares of the Arizona corporation's common stock was
exchanged for 1.16 options to purchase shares of the Delaware corporation's
common stock. All share and per share information in these Consolidated
Financial Statements have been adjusted to give effect to the terms of the
reincorporation.
F-25
<PAGE> 85
======================================================
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE UNDERWRITERS, OR ANY OTHER
PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER
THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
The Company........................... 14
Use of Proceeds....................... 14
Price Range of Common Stock........... 15
Dividend Policy....................... 15
Recapitalization and Related
Transactions........................ 15
Capitalization........................ 16
Selected Consolidated Financial
Data................................ 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 35
Management............................ 46
Principal Stockholders................ 52
Certain Relationships and Related
Transactions........................ 53
Description of Capital Stock.......... 54
Underwriting.......................... 57
Legal Matters......................... 58
Experts............................... 58
Available Information................. 58
Index to Consolidated Financial
Statements.......................... F-1
Independent Auditors' Report.......... F-2
Consolidated Financial Statements..... F-3
</TABLE>
======================================================
======================================================
4,000,000 Shares
LOGO
Common Stock
-----------------------
PROSPECTUS
-----------------------
FRIEDMAN, BILLINGS, RAMSEY
& CO., INC.
CRUTTENDEN ROTH
INCORPORATED
, 1996
======================================================
<PAGE> 86
[ALTERNATE PAGE FOR SELLING SECURITYHOLDER PROSPECTUS]
SUBJECT TO COMPLETION, DATED OCTOBER , 1996
444,444 SHARES
LOGO
COMMON STOCK
This Prospectus relates to 444,444 shares of Common Stock of Ugly Duckling
Corporation (the "Company"), which are held by a selling stockholder of the
Company (the "Selling Stockholder").
The distribution of the shares of Common Stock offered hereby by the
Selling Securityholder may be effected in one or more transactions that may take
place on one or more exchanges, including the Nasdaq Stock Market, or in the
over-the-counter market, and may include ordinary broker's transactions,
privately-negotiated transactions and sales to one or more dealers for resale of
such securities as principals. The shares of Common Stock may be sold at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. Usual and customary or specifically
negotiated brokerage fees or commissions may be paid by the Selling
Securityholder.
None of the proceeds of the sales of Common Stock by the Selling
Securityholder will be received by the Company. Substantially all of the
expenses in connection with the registration of the Common Stock will be borne
by the Company, except for any underwriter's, brokers' or dealers' commissions
or discounts. See "Plan of Distribution."
The Common Stock is traded on the Nasdaq National Market under the symbol
UGLY. On , 1996, the last reported sale price for the Common Stock as
reported on the Nasdaq National Market was $ .
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE HEREOF.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is , 1996.
<PAGE> 87
[ALTERNATE PAGE FOR SELLING SECURITYHOLDER PROSPECTUS]
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered............... 444,444 shares.
Common stock to be outstanding
immediately after the
offering(1)...................... 12,691,264 shares.
Use of Proceeds.................... None of the proceeds of the offering of Common Stock
by the Selling Securityholder will be paid to the
Company. See "Use of Proceeds."
Nasdaq Symbol...................... "UGLY"
</TABLE>
- ---------------
(1) Includes 4,000,000 shares of Common Stock offered in an underwritten public
offering by the Company concurrently with the date of this Prospectus.
Excludes 600,000 shares of Common Stock that may be sold by the Company upon
exercise of the underwriters' over-allotment option relating to such
offering. Also excludes: (i) 631,438 shares of Common Stock issuable upon
exercise of stock options outstanding at September 30, 1996 under the
Company's Long-Term Incentive Plan with a weighted average exercise price of
$3.55 per share; and (ii) 286,000 shares of Common Stock issuable upon
exercise of warrants issued in connection with the Company's initial public
offering with a weighted average exercise price of $8.36 per share. See
"Management -- Long-Term Incentive Plan" and "Description of Capital Stock."
<PAGE> 88
[ALTERNATE PAGE FOR SELLING SECURITYHOLDER PROSPECTUS]
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Common Stock by
the Selling Securityholder.
<PAGE> 89
[ALTERNATE PAGE FOR SELLING SECURITYHOLDER PROSPECTUS]
SELLING STOCKHOLDER
The following table provides certain information with respect to the Common
Stock beneficially owned by the Selling Securityholder as of the date of this
Prospectus. The Company has been advised that the Selling Securityholder has
sole voting and investment power with respect to the shares of Common Stock set
forth below. The shares of Common Stock offered by this Prospectus may be
offered from time to time by the Selling Securityholder named below or its
nominees. Affiliates of the Selling Securityholder provide financing to the
Company. See "Management's Discussion and Analysis of Results of Operations and
Financial Condition."
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO THE AFTER THE
OFFERING(1) NUMBER OF OFFERING(1)
------------------- SHARES -------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------------- ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
SunAmerica Life Insurance Company.......... 708,592 8.2 444,444 264,148 2.1
</TABLE>
- ---------------
(1) Includes 116,000 shares subject to immediately exercisable warrants, which
have an exercise price of $6.75 per share.
<PAGE> 90
[ALTERNATE PAGE FOR SELLING SECURITYHOLDER PROSPECTUS]
PLAN OF DISTRIBUTION
The shares of Common Stock offered hereby (the "Offered Securities") may be
sold from time to time by the Selling Securityholder or its nominees. Such sales
may be made on one or more exchanges, including the Nasdaq Stock Market, or in
the over-the-counter market or otherwise, at prices and at terms then prevailing
or at prices related to the then current market price, or at negotiated prices.
The Offered Securities may be sold by one or more of the following methods: (a)
a block trade in which the broker-dealer so engaged will attempt to sell the
Offered Securities as agent but may position and resell a portion of the block
as principal to facilitate the transaction; (b) purchases by a broker-dealer as
principal and resale by such broker-dealer for its account pursuant to this
Prospectus; (c) an exchange distribution in accordance with the rules of such
exchange; and (d) ordinary brokerage transactions and transactions in which the
broker solicits purchasers. In effecting sales, broker-dealers engaged by the
Selling Securityholder may arrange for other broker-dealers to participate in
the resales.
In connection with distributions of the Offered Securities or otherwise,
the Selling Securityholder may enter into hedging transactions with
broker-dealers. In connection with such transactions, broker-dealers may engage
in short sales of the Offered Securities in the course of hedging the positions
they assume with the Selling Securityholder. The Selling Securityholder may also
sell Offered Securities short and redeliver the Offered Securities to close out
such short positions. The Selling Securityholder may also enter into option or
other transactions with broker-dealers which require the delivery to the
broker-dealer of the Offered Securities, which the broker-dealer may resell or
otherwise transfer pursuant to this Prospectus. The Selling Securityholder may
also loan or pledge offered Securities to a broker-dealer and the broker-dealer
may sell the Offered Securities so loaned or, upon a default, the broker-dealer
may effect sales of the pledged Offered Securities pursuant to this Prospectus.
Broker-dealers or agents may receive compensation in the form of
commissions, discounts or concessions from Selling Securityholders in amounts to
be negotiated in connection with the sale. Such broker-dealers and any other
participating broker-dealers may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales and any such
commission, discount or concession may be deemed to be underwriting discounts or
commissions under the Securities Act. In addition, any securities covered by
this Prospectus which qualify for sale pursuant to Rule 144 may be sold under
Rule 144 rather than pursuant to this Prospectus.
All costs, expenses and fees in connection with the registration of the
shares will be borne by the Company. Commissions and discounts, if any,
attributable to the sales of the Offered Securities will be borne by the Selling
Securityholder. The Selling Securityholder may agree to indemnify any
broker-dealer or agent that participates in transactions involving sales of the
Offered Securities against certain liabilities, including liabilities arising
under the Securities Act. The Company has agreed to indemnify the Selling
Securityholder against certain liabilities in connection with the offering of
the Offered Securities, including liabilities arising under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling the Company, the
Company has been informed that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
<PAGE> 91
[ALTERNATE PAGE FOR SELLING SECURITYHOLDER PROSPECTUS]
======================================================
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY UNDERWRITER, OR ANY OTHER PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON
IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.........................
Risk Factors...............................
The Company................................
Use of Proceeds............................
Price Range of Common Stock................
Dividend Policy............................
Recapitalization and Related
Transactions.............................
Capitalization.............................
Selected Consolidated Financial Data.......
Management's Discussion and Analysis of
Financial Condition and Results of
Operations...............................
Business...................................
Management.................................
Principal Stockholders.....................
Selling Stockholder........................
Certain Relationships and Related
Transactions.............................
Description of Capital Stock...............
Shares Eligible for Future Sale............
Plan of Distribution.......................
Legal Matters..............................
Experts....................................
Available Information......................
Index to Consolidated Financial
Statements...............................
Independent Auditors' Report...............
Consolidated Financial Statements..........
</TABLE>
=====================================================
444,444 Shares
LOGO
Common Stock
-----------------------
PROSPECTUS
-----------------------
, 1996
======================================================
<PAGE> 92
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Other expenses in connection with the issuance and distribution of the
securities to be registered hereunder, all of which will be paid by the
registrant, will be substantially as follows:
<TABLE>
<CAPTION>
ITEM AMOUNT
------------------------------------------------------------------ --------
<S> <C>
SEC Registration Fee............................................. $ 23,239
*Nasdaq Filing Fee................................................ 17,500
*Blue Sky Fees and Expenses (including legal fees)................ 15,000
*Accounting Fees and Expenses..................................... 75,000
*Legal Fees and Expenses.......................................... 125,000
*Printing and Engraving........................................... 75,000
*Registrar and Transfer Agent's Fees.............................. 10,000
*Miscellaneous Expenses........................................... 64,261
--------
Total................................................... $405,000
========
</TABLE>
- ---------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation provides that a director of the
Company shall not be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability for: (i) any breach of the director's duty of loyalty to the Company
or its stockholders; (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) liability for
payments of dividends or stock purchases or redemptions in violation of Section
174 of the Delaware General Corporation Law; or (iv) any transaction from which
the director derived an improper personal benefit. In addition, the Company's
Certificate of Incorporation provides that the Company shall to the fullest
extent authorized by the Delaware General Corporation Law, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the corporation to provide broader
indemnification rights than such law permitted the corporation to provide prior
to such amendment), indemnify and hold harmless any person who was or is a
party, or is threatened to be made a party to or is otherwise involved in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative by reason of the fact that such person
is or was a director or officer of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, including
service with respect to an employee benefit plan (hereinafter an "Indemnitee")
against expenses, liabilities and losses (including attorneys' fees, judgments,
fines, excise taxes or penalties paid in connection with the Employee Retirement
Income Security Act of 1974, as amended, and amounts paid in settlement)
reasonably incurred or suffered by such Indemnitee in connection therewith;
provided, however, that except as otherwise provided with respect to proceedings
to enforce rights to indemnification, the Company shall indemnify any such
Indemnitee in connection with a proceeding (or part thereof) initiated by such
Indemnitee only if such proceeding or part thereof was authorized by the board
of directors of the Company.
The right to indemnification set forth above includes the right to be paid
by the Company the expenses (including attorneys' fees) incurred in defending
any such proceeding in advance of its final disposition; provided, however,
that, if the Delaware General Corporation Law requires, an advancement of
expenses incurred by an Indemnitee in his capacity as a director or officer (and
not in any other capacity in which
II-1
<PAGE> 93
service was or is rendered by such Indemnitee, including, without limitation,
service to an employee benefit plan) shall be made only upon delivery to the
Company of an undertaking, by or on behalf of such Indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is not further right to appeal that such Indemnitee is
not entitled to be indemnified for such expenses under this section or
otherwise. The rights to indemnification and to the advancement of expenses
conferred herewith are contract rights and continue as to an Indemnitee who has
ceased to be a director, officer, employee or agent and inures to the benefit of
the Indemnitee's heirs, executors and administrators.
The Delaware General Corporation Law provides that indemnification is
permissible only when the director, officer, employee, or agent acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the conduct was unlawful. The
Delaware General Corporation Law also precludes indemnification in respect of
any claim, issue, or matter as to which an officer, director, employee, or agent
shall have been adjudged to be liable to the Company unless and only to the
extent that the Court of Chancery or the court in which such action or suit was
brought shall determine that, despite such adjudication of liability but in view
of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
The Company has agreed to indemnify the Underwriters and their controlling
persons, and the Underwriters have agreed to indemnify the Company and its
controlling persons, against certain liabilities, including liabilities under
the Securities Act. Reference is made to the Underwriting Agreement filed as
part of Exhibit 1 hereto.
For information regarding the Company's undertaking to submit to
adjudication the issue of indemnification for violation of the securities laws,
see Item 17 hereof.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On January 1, 1994, the Company authorized a stock split-up, effected in
the form of a stock dividend, whereby each of the 1,160 issued and outstanding
shares of common stock held by Ernest C. Garcia, II, was cancelled and replaced
by 4,000 shares of Common Stock.
On February 1, 1994, Steven T. Darak purchased 174,000 shares of Common
Stock from the Company for an aggregate purchase price of $15,000.
On May 31, 1994: (i) Steven P. Johnson purchased 290,000 shares of Common
Stock from the Company for an aggregate purchase price of $25,000; (ii) Scott A.
Allen and Wm. Don Gray each purchased 116,000 shares of Common Stock from the
Company for an aggregate purchase price of $10,000; (iii) Steven T. Darak and
Nancy V. Young each purchased 58,000 shares of Common Stock from the Company for
an aggregate purchase price of $5,000; (iv) Peter R. Fratt purchased 46,400
shares of Common Stock from the Company for an aggregate purchase price of
$4,000; (v) and Eric J. Splaver and Mary E. Reiner each purchased 11,600 shares
of Common Stock from the Company for an aggregate purchase price of $1,000.
On March 22, 1995, Walter T. Vonsh purchased 58,000 shares of Common Stock
from the Company for an aggregate purchase price of $5,000.
On August 31, 1995, SunAmerica purchased $3 million of the Company's
convertible subordinated debt. This indebtedness was due December 31, 1998, and
bore interest at a per annum rate of 12.5%, payable quarterly. Effective June
21, 1996, SunAmerica converted the note into Common Stock of the Company at the
initial public offering price per share (444,444 shares at the initial public
offering price of $6.75 per share).
On December 31, 1995, Verde Investments converted $10,000,000 of
subordinated debt into 1,000,000 shares of the Company's Preferred Stock.
On April 24, 1996, the Company reincorporated from Arizona to Delaware by
way of a merger in which the Company, an Arizona corporation, merged with and
into a newly created Delaware subsidiary of the Company. In the merger, each
share of the Arizona corporation's issued and outstanding common stock was
exchanged for 1.16 shares of the Delaware corporation's common stock and each
option to purchase shares of
II-2
<PAGE> 94
the Arizona corporation's common stock was exchanged for 1.16 options to
purchase shares of the Delaware corporation's common stock. All share figures
set forth above give effect to this exchange ratio.
Exemption from registration for each transaction described above was
claimed pursuant to Section 4(2) of the Securities Act regarding transactions by
an issuer not involving any public offering and/or pursuant to Rule 145 under
the Securities Act regarding transactions the sole purpose of which is to change
an issuer's domicile solely within the United States.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- ----------------------------------------------------------------------------------
<S> <C>
1 Form of Underwriting Agreement by and between Friedman, Billings, Ramsey & Co.,
Inc., Cruttenden Roth Incorporated and the Registrant
3.1 Certificate of Incorporation of the Registrant*
3.1(a) Amendment to Certificate of Incorporation of the Registrant*
3.2 Bylaws of the Registrant*
3.2(a) Amendment to Bylaws of the Registrant*
4.1 Certificate of Incorporation of the Registrant filed as Exhibit 3.1*
4.2 Series A Preferred Stock Agreement*
4.3 18% Subordinated Debenture of the Registrant issued to Verde Investments, Inc.*
4.4 18% Junior Subordinated Revolving Debenture of the Registrant issued to Verde
Investments, Inc., as amended*
4.5 Convertible Note of the Registrant issued to SunAmerica Life Insurance Company*
4.6 Form of Certificate representing Common Stock*
4.7 Form of warrant issued to Cruttenden Roth Incorporated as Representative of the
several underwriters*
4.8 Form of warrant issued to SunAmerica Life Insurance Company*
5 Opinion of Snell & Wilmer L.L.P. regarding the legality of the common stock being
registered
10.1 Motor Vehicle Installment Contract Loan and Security Agreement between the
Registrant and General Electric Capital Corporation*
10.1(a) Amendment to Motor Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation*
10.1(b) Amendment to Motor Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation*
10.1(c) Amendment No. 3 to Motor Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation*
10.1(d) Amendment No. 4 to Motor Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation*
10.1(e) Amendment No. 5 to Motor Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation*
10.1(f) Amendment No. 6 to Moter Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation
10.1(g) Assumption and Amendment Agreement between the Registrant and General Electric
Capital Corporation*
10.2 Note Purchase Agreement between the Registrant and SunAmerica Life Insurance
Company*
10.2(a) First Amendment to Note Purchase Agreement between the Registrant and SunAmerica
Life Insurance Company*
10.2(b) Second Amendment to Note Purchase Agreement between the Registrant and SunAmerica
Life Insurance Company*
10.2(c) Third Amendment to Note Purchase Agreement between the Registrant and SunAmerica
Life Insurance Company*
10.2(d) Fourth Amendment to Note Purchase Agreement between the Registrant and SunAmerica
Life Insurance Company*
</TABLE>
II-3
<PAGE> 95
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- ----------------------------------------------------------------------------------
<S> <C>
10.2(e) Commitment Letter entered into between the Registrant and SunAmerica Life
Insurance Company*
10.2(f) Letter Agreement regarding Note Conversion between the Registrant and SunAmerica
Life Insurance Company*
10.3 Registration Rights Agreement between the Registrant and SunAmerica Life Insurance
Company*
10.3(a) Amended and Restated Registration Rights Agreement between the Registrant and
SunAmerica Life Insurance Company*
10.4 Form of Pooling and Servicing Agreement relating to SunAmerica securitization
program*
10.5 Form of Certificate Purchase Agreement relating to SunAmerica securitization
program*
10.6 Form of Origination Agreement and Assignment relating to SunAmerica securitization
program*
10.7 Form of Purchase Agreement and Assignment relating to SunAmerica securitization
program*
10.8 Form of Servicing Guaranty relating to SunAmerica securitization program*
10.9 Ugly Duckling Corporation Long-Term Incentive Plan*
10.9(a) Amendment to Ugly Duckling Corporation Long-Term Incentive Plan*
10.10 Employment Agreement between the Registrant and Ernest C. Garcia, II*
10.11 Employment Agreement between the Registrant and Steven T. Darak*
10.12 Employment Agreement between the Registrant and Wally Vonsh*
10.13 Employment Agreement between the Registrant and Donald Addink*
10.14 Lease Agreement between the Registrant and Camelback Esplanade Limited Partnership
for corporate offices in Phoenix, Arizona*
10.15 Land Lease Agreement between the Registrant and Verde Investments, Inc. for
property located at 5104 West Glendale Avenue in Glendale, Arizona*
10.16 Building Lease Agreement between the Registrant and Verde Investments, Inc. for
property and buildings located at 9630 and 9650 North 19th Avenue in Phoenix,
Arizona*
10.17 Land Lease Agreement between the Registrant and Verde Investments, Inc. for
property located at 330 North 24th Street in Phoenix, Arizona*
10.18 Land Lease Agreement between the Registrant and Verde Investments, Inc. for
property located at 333 South Alma School Road in Mesa, Arizona*
10.19 Lease Agreements between the Registrant and Blue Chip Motors, the Registrant and S
& S Holding Corporation, and the Registrant and Edelman Brothers for certain
properties located at 3901 East Speedway Boulevard in Tucson, Arizona*
10.20 Real Property Lease between the Registrant and Peter and Alva Keesal for property
located at 3737 South Park Avenue in Tucson, Arizona*
10.21 Land Lease Agreement between the Registrant and Verde Investments, Inc. for
property located at 2301 North Oracle Road in Tucson, Arizona*
10.22 Related Party Transactions Modification Agreement between the Registrant and Verde
Investments, Inc.*
10.23 Sublease Agreement between the Registrant and Envirotest Systems Corp. for
corporate offices in Phoenix, Arizona*
10.24 Form of Indemnity Agreement between the Registrant and its directors and officers*
10.25 Ugly Duckling Corporation 1996 Director Incentive Plan*
11 Earnings per Share Computation*
22 List of Subsidiaries*
24.1 Consent of KPMG Peat Marwick LLP, independent certified public accountants
24.2 Consent of Snell & Wilmer L.L.P. (included in Exhibit 5)
</TABLE>
- ---------------
* Previously filed
(b) Financial Statement Schedule:
II Valuation and Qualifying Accounts
II-4
<PAGE> 96
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price represent
no more than 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for purposes of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4), or 497(b) Under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 97
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Phoenix, State of Arizona, on October 24, 1996.
Ugly Duckling Corporation
By: /s/ ERNEST C. GARCIA, II
------------------------------------
Ernest C. Garcia, II
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ -----------------
<C> <S> <C>
/s/ ERNEST C. GARCIA, II Chief Executive Officer and October 24, 1996
- --------------------------------------------- Director (Principal executive
Ernest C. Garcia, II officer)
/s/ STEVEN T. DARAK Senior Vice President and October 24, 1996
- --------------------------------------------- Chief Financial Officer
Steven T. Darak (Principal financial and
accounting officer)
/s/ ROBERT J. ABRAHAMS Director October 24, 1996
- ---------------------------------------------
Robert J. Abrahams
/s/ CHRISTOPHER D. JENNINGS Director October 24, 1996
- ---------------------------------------------
Christopher D. Jennings
/s/ JOHN N. MACDONOUGH Director October 24, 1996
- ---------------------------------------------
John N. MacDonough
/s/ ARTURO R. MORENO Director October 24, 1996
- ---------------------------------------------
Arturo R. Moreno
/s/ FRANK P. WILLEY Director October 24, 1996
- ---------------------------------------------
Frank P. Willey
</TABLE>
II-6
<PAGE> 98
Schedule II
UGLY DUCKLING CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1994, 1995 and Six Months Ended June 30, 1996
<TABLE>
<CAPTION>
Balance at Charged to Charged Balance
beginning costs and to other at end
Description of period expenses accounts(1) Deductions(2) of period
----------- ---------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for credit losses:
Years ended:
December 31, 1994 $2,876 $8,140 $ 579 $(5,386) $6,209
December 31, 1995 $6,209 $8,359 $1,660 $(7,728) $8,500
Six Months ended:
June 30, 1996 $8,500 $5,172 $1,830 $(7,454) $8,048
</TABLE>
(1) Represents acquisition of nonrefundable acquisition discount
allocated to the allowance for credit losses, net of accretion of
nonrefundable acquisition discount to finance income.
(2) Represents charge offs, net of recoveries and reduction in
allowance for credit losses related to the sale of finance
receivables.
<PAGE> 99
APPENDIX A
DESCRIPTION OF GRAPHIC AND IMAGE MATERIAL
1. Location: Outside Front and Back Covers of Prospectus
Item: Ugly Duckling Corporation Logo
Description: The logo consists of a duck next to the words "Ugly Duckling
Corporation".
2. Location: Inside Front Cover Page of Prospectus
Item: Photograph
Description: The photograph shows the Company's dealership in Glendale,
Arizona. There is no caption under the photograph.
3. Location: Inside Gatefold Page (Left Side)
Item: Map
Description: This page contains a map of the United States indicating the
location of each of the Company's Dealerships and Branch
Offices. The map also indicates the locations where the
Company plans to open new Company Dealerships and Branch
Offices and indicates them as "proposed" locations.
4. Location: Inside Gatefold Page (Right Side)
Item: Photographs
Description: The following photographs appear on the right side of the
inside of the gatefold page: (i) Photograph of a Company
Dealership located in Tucson, Arizona; (ii) photograph of the
interior of the Company's credit collection facility in
Gilbert, Arizona; and (iii) photograph of the exterior of the
Company's credit collection facility in Gilbert, Arizona.
There are no captions under these photographs.
5. Location: Inside Back Cover Page of Prospectus
Item: Samples of the Company's Advertising
Description: The inside back cover page of the Prospectus shows various
samples of some of the Company's advertising. The page
contains the following caption: "Samples of the Company's
print advertising and storyboards from two of the Company's
animated television advertising for the Company Dealership
operations." The advertisements depict various programs of
the Company including the Company's Visa card program and the
use of tax refunds to make down payments. The advertisements
display the Company's logo and its toll free number
1-800-THE-DUCK.
<PAGE> 100
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- ----------------------------------------------------------------------------------
<S> <C>
1 Form of Underwriting Agreement between Freidman, Billings, Ramsey & Co., Inc.,
Cruttenden Roth Incorporated and the Registrant
3.1 Certificate of Incorporation of the Registrant*
3.1(a) Amendment to Certificate of Incorporation of the Registrant*
3.2 Bylaws of the Registrant*
3.2(a) Amendment to Bylaws of the Registrant*
4.1 Certificate of Incorporation of the Registrant filed as Exhibit 3.1*
4.2 Series A Preferred Stock Agreement*
4.3 18% Subordinated Debenture of the Registrant issued to Verde Investments, Inc.*
4.4 18% Junior Subordinated Revolving Debenture of the Registrant issued to Verde
Investments, Inc., as amended*
4.5 Convertible Note of the Registrant issued to SunAmerica Life Insurance Company*
4.6 Form of Certificate representing Common Stock*
4.7 Form of Warrant issued to Cruttenden Roth Incorporated as representative of the
several Underwriters*
4.8 Form of Warrant issued to SunAmerica Life Insurance Company*
5 Opinion of Snell & Wilmer L.L.P. regarding the legality of the common stock being
registered
10.1 Motor Vehicle Installment Contract Loan and Security Agreement between the
Registrant and General Electric Capital Corporation*
10.1(a) Amendment to Motor Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation*
10.1(b) Amendment to Motor Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation*
10.1(c) Amendment No. 3 to Motor Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation*
10.1(d) Amendment No. 4 to Motor Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation*
10.1(e) Amendment No. 5 to Motor Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation*
10.1(f) Amendment No. 6 to Motor Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation
10.1(g) Assumption and Amendment Agreement between the Registrant and General Electric
Capital Corporation*
10.2 Note Purchase Agreement between the Registrant and SunAmerica Life Insurance
Company*
10.2(a) First Amendment to Note Purchase Agreement between the Registrant and SunAmerica
Life Insurance Company*
10.2(b) Second Amendment to Note Purchase Agreement between the Registrant and SunAmerica
Life Insurance Company*
10.2(c) Third Amendment to Note Purchase Agreement between the Registrant and SunAmerica
Life Insurance Company*
10.2(d) Fourth Amendment to Note Purchase Agreement between the Registrant and SunAmerica
Life Insurance Company*
10.2(e) Commitment Letter entered into between the Registrant and SunAmerica Life
Insurance Company*
10.2(f) Letter Agreement regarding Note Conversion between the Registrant and SunAmerica
Life Insurance Company*
</TABLE>
<PAGE> 101
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- ----------------------------------------------------------------------------------
<S> <C>
10.3 Registration Rights Agreement between the Registrant and SunAmerica Life Insurance
Company*
10.3(a) Amended and Restated Registration Rights Agreement between the Registrant and
SunAmerica Life Insurance Company*
10.4 Form of Pooling and Servicing Agreement relating to SunAmerica securitization
program*
10.5 Form of Certificate Purchase Agreement relating to SunAmerica securitization
program*
10.6 Form of Origination Agreement and Assignment relating to SunAmerica securitization
program*
10.7 Form of Purchase Agreement and Assignment relating to SunAmerica securitization
program*
10.8 Form of Servicing Guaranty relating to SunAmerica securitization program*
10.9 Ugly Duckling Corporation Long-Term Incentive Plan*
10.9(a) Amendment to Ugly Duckling Corporation Long-Term
Incentive Plan*
10.10 Employment Agreement between the Registrant and Ernest C. Garcia, II*
10.11 Employment Agreement between the Registrant and Steven T. Darak*
10.12 Employment Agreement between the Registrant and Wally Vonsh*
10.13 Employment Agreement between the Registrant and Donald Addink*
10.14 Lease Agreement between the Registrant and Camelback Esplanade Limited Partnership
for corporate offices in Phoenix, Arizona*
10.15 Land Lease Agreement between the Registrant and Verde Investments, Inc. for
property located at 5104 West Glendale Avenue in Glendale, Arizona*
10.16 Building Lease Agreement between the Registrant and Verde Investments, Inc. for
property and buildings located at 9630 and 9650 North 19th Avenue in Phoenix,
Arizona*
10.17 Land Lease Agreement between the Registrant and Verde Investments, Inc. for
property located at 330 North 24th Street in Phoenix, Arizona*
10.18 Land Lease Agreement between the Registrant and Verde Investments, Inc. for
property located at 333 South Alma School Road in Mesa, Arizona*
10.19 Lease Agreements between the Registrant and Blue Chip Motors, the Registrant and S
& S Holding Corporation, and the Registrant and Edelman Brothers for certain
properties located at 3901 East Speedway Boulevard in Tucson, Arizona*
10.20 Real Property Lease between the Registrant and Peter and Alva Keesal for property
located at 3737 South Park Avenue in Tucson, Arizona*
10.21 Land Lease Agreement between the Registrant and Verde Investments, Inc. for
property located at 2301 North Oracle Road in Tucson, Arizona*
10.22 Related Party Transactions Modification Agreement between the Registrant and Verde
Investments, Inc.*
10.23 Sublease Agreement between the Registrant and Envirotest Systems Corp. for
corporate offices in Phoenix, Arizona*
10.24 Form of Indemnity Agreement between the Registrant and its directors and officers*
10.25 Ugly Duckling Corporation 1996 Director Incentive Plan*
11 Earnings per Share Computation*
22 List of Subsidiaries*
</TABLE>
<PAGE> 102
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- ----------------------------------------------------------------------------------
<S> <C>
24.1 Consent of KPMG Peat Marwick LLP, independent certified public accountants
24.2 Consent of Snell & Wilmer L.L.P. (included in Exhibit 5)
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
EXHIBIT 1
UGLY DUCKLING CORPORATION
4,000,000 Shares(1)
Common Stock
UNDERWRITING AGREEMENT
October ___, 1996
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209
CRUTTENDEN ROTH INCORPORATED
18301 Von Karman, Suite 100
Irvine, California 92715
As Representatives of the Several Underwriters
Dear Sirs:
Ugly Duckling Corporation, a Delaware corporation (the "Company"),
hereby confirms its agreement with the several underwriters named in Schedule 1
hereto (the "Underwriters"), for whom you have been duly authorized to act as
representatives (in such capacity, the "Representatives"), as set forth below.
If you are the only Underwriters, all references herein to the Representatives
shall be deemed to be to the Underwriters.
1. Securities. Subject to the terms and conditions herein contained, the
Company proposes to issue and sell to the several Underwriters an aggregate of
4,000,000 shares (the "Firm Securities") of the Company's Common Stock, $.001
par value per share ( the "Common Stock"). The Company also proposes to issue
and sell to the several Underwriters not more than 600,000 additional shares of
Common Stock if requested by the Representatives as provided in Section 3 of
this Agreement. Any and all shares of Common Stock to be purchased by the
Underwriters pursuant to such option are referred to herein as the "Option
Securities," and the Firm Securities and any Option Securities are collectively
referred to herein as the "Securities."
2. Representations and Warranties of the Company.
(a) The Company represents and warrants to, and agrees with, each of
the several Underwriters that:
(i) registration statement on Form S-1 (File No. 333-_____) with
respect to the Securities, including a prospectus subject to completion,
has been filed by the Company with
- --------
(1)Plus an option to purchase up to 600,000 additional shares to cover
over-allotments, if any.
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the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act"), and one or more amendments
to such registration statement may have been so filed. After the execution
of this Agreement, the Company will file with the Commission either (i) if
such registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, either (A) if
the Company relies on Rule 434 under the Act, a Term Sheet (as hereinafter
defined) relating to the Securities, that shall identify the Preliminary
Prospectus (as hereinafter defined) that it supplements containing such
information as is required or permitted by Rules 434, 430A and 424(b)
under the Act or (B) if the Company does not rely on Rule 434 under the
Act, a prospectus in the form most recently included in an amendment to
such registration statement (or, if no such amendment shall have been
filed, in such registration statement), with such changes or insertions as
are required by Rule 430A under the Act or permitted by Rule 424(b) under
the Act, and in the case of either clause (i)(A) or (i)(B) of this
sentence, as have been provided to and approved by the Representatives
prior to the execution of this Agreement, or (ii) if such registration
statement, as it may have been amended, has not been declared by the
Commission to be effective under the Act, an amendment to such
registration statement, including a form of prospectus, a copy of which
amendment has been furnished to and approved by the Representatives prior
to the execution of this Agreement. The Company may also file a related
registration statement with the Commission pursuant to Rule 462(b) under
the Act for the purpose of registering certain additional Securities,
which registration statement shall be effective upon filing with the
Commission. As used in this Agreement, the term "Original Registration
Statement" means the registration statement initially filed relating to
the Securities, as amended at the time when it was or is declared
effective, including all financial schedules and exhibits thereto and
including any information omitted therefrom pursuant to Rule 430A under
the Act and included in the Prospectus (as hereinafter defined); the term
"Rule 462(b) Registration Statement" means any registration statement
filed with the Commission pursuant to Rule 462(b) under the Act (including
the Registration Statement and any Preliminary Prospectus or Prospectus
incorporated therein at the time such Registration Statement becomes
effective); the term "Registration Statement" includes both the Original
Registration Statement and any Rule 462(b) Registration Statement; the
term "Preliminary Prospectus" means each prospectus subject to completion
filed with such registration statement or any amendment thereto (including
the prospectus subject to completion, if any, included in the Registration
Statement or any amendment thereto at the time it was or is declared
effective); the term "Prospectus" means: (A) if the Company relies on Rule
434 under the Act, the Term Sheet relating to the Securities that is first
filed pursuant to Rule 424(b)(7) under the Act, together with the
Preliminary Prospectus identified therein that such Term Sheet
supplements; (B) if the Company does not rely on Rule 434 under the Act,
the prospectus first filed with the Commission pursuant to Rule 424(b)
under the Act; or (C) if the Company does not rely on Rule 434 under the
Act and if no prospectus is required to be filed pursuant to Rule 424(b)
under the Act, the prospectus included in the Registration Statement; and
the term "Term Sheet" means any term sheet that satisfies the requirements
of Rule 434 under the Act. Any reference herein to the "date" of a
Prospectus that includes a Term Sheet shall mean the date of such Term
Sheet.
(ii) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus. When any Preliminary
Prospectus was filed with the Commission
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it (A) contained all statements required to be stated therein in
accordance with, and complied in all material respects with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (B) did not include any untrue statement of a material fact
or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading. When the Registration Statement or any
amendment thereto was or is declared effective, it (A) contained or will
contain all statements required to be stated therein in accordance with,
and complied or will comply in all material respects with the requirements
of, the Act and the rules and regulations of the Commission thereunder and
(B) did not or will not include any untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein
not misleading. When the Prospectus or any Term Sheet that is a part
thereof or any amendment or supplement to the Prospectus is filed with the
Commission pursuant to Rule 424(b) (or, if the Prospectus or any part
thereof or such amendment or supplement is not required to be so filed,
when the Registration Statement or the amendment thereto containing such
amendment or supplement to the Prospectus was or is declared effective)
and on the Firm Closing Date and any Option Closing Date (both as
hereinafter defined), the Prospectus, as amended or supplemented at any
such time, (A) contained or will contain all statements required to be
stated therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (B) did not or will not
include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
foregoing provisions of this paragraph (ii) do not apply to statements or
omissions made in any Preliminary Prospectus, the Registration Statement
or any amendment thereto or the Prospectus or any amendment or supplement
thereto in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through the Representatives
specifically for use therein.
(iii) If the Company has elected to rely on Rule 462(b), the
Company has filed a Rule 462(b) Registration Statement in compliance with
Rule 462(b), which is effective upon filing pursuant to Rule 462(b), and
has received confirmation of its receipt and (ii) the Company has given
irrevocable instructions for transmission of the applicable filing fee in
connection with the filing of the Rule 462(b) Registration Statement, in
compliance with Rule 111 promulgated under the Act or the Commission has
received payment of such filing fee.
(iv) The Company and each of its subsidiaries have been duly
organized and are validly existing as corporations in good standing under
the laws of their respective jurisdictions of incorporation and are duly
qualified to transact business as foreign corporations and are in good
standing under the laws of all other jurisdictions where the ownership or
leasing of their respective properties or the conduct of their respective
businesses requires such qualification, except where the failure to be so
qualified does not result in a material adverse change in the condition
(financial or otherwise), business, net worth or results of operations of
the Company and its subsidiaries, taken as a whole (a "Material Adverse
Effect").
(v) The Company and each of its subsidiaries have full power
(corporate and other) to own or lease their respective properties and
conduct their respective businesses as described in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence,
the
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most recent Preliminary Prospectus); and the Company has full power
(corporate and other) to enter into this Agreement and to carry out all
the terms and Provisions hereof to be carried out by it.
(vi) The issued shares of capital stock of each of the Company's
subsidiaries have been duly authorized and validly issued, are fully paid
and nonassessable and are owned beneficially by the Company free and clear
of any security interests, liens, encumbrances, equities or claims.
(vii) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus). All of the
issued shares of capital stock of the Company have been duly authorized
and validly issued and are fully paid and nonassessable. The Firm
Securities and the Option Securities have been duly authorized and at the
Firm Closing Date or the related Option Closing Date (as the case may be),
after payment therefor in accordance herewith, will be validly issued,
fully paid and nonassessable. At the Firm Closing Date or the Option
Closing Date, no holders of outstanding shares of capital stock of the
Company will be entitled as such to any preemptive or other rights to
subscribe for any of the Securities, and no holder of securities of the
Company has any right which has not been fully exercised or waived to
require the Company to register the offer or sale of any securities owned
by such holder under the Act in the public offering contemplated by this
Agreement.
(viii) The capital stock of the Company conforms in all material
respects to the description thereof contained in the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus).
(ix) Except as disclosed in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), there are no
outstanding (A) securities or obligations of the Company or any of its
subsidiaries convertible into or exchangeable for any capital stock of the
Company or any such subsidiary, (B) warrants, rights or options to
subscribe for or purchase from the Company or any such subsidiary any such
capital stock or any such convertible or exchangeable securities or
obligations, or (C) obligations of the Company or any such subsidiary to
issue any shares of capital stock, any such convertible or exchangeable
securities or obligations, or any such warrants, rights or options.
(x) The consolidated financial statements and schedules of the
Company and its consolidated subsidiaries included in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus) fairly present the financial
position of the Company and its consolidated subsidiaries and the results
of operations and cash flows as of the dates and periods therein
specified. Such financial statements and schedules have been prepared in
accordance with generally accepted accounting principles ("GAAP")
consistently applied throughout the periods involved (except as otherwise
noted therein). The selected financial data set forth under the captions
"Summary Consolidated Financial Information," "Capitalization" and
"Selected Consolidated Financial Data" in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus)
fairly present, in accordance with GAAP, as applicable, on the basis
stated in the Prospectus (or such Preliminary
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Prospectus), the information included therein.
(xi) KPMG Peat Marwick LLP, which has audited certain financial
statements of the Company and its consolidated subsidiaries and delivered
their report with respect to the audited consolidated financial statements
included in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
are independent public accountants as required by the Act and the
applicable rules and regulations thereunder.
(xii) The execution and delivery of this Agreement have been duly
authorized by the Company and this Agreement has been duly executed and
delivered by the Company, and is the valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms,
except as such enforceability may be limited by the effect of bankruptcy,
insolvency, reorganization, moratorium and other similar laws relating to
rights and remedies of creditors or by general equitable principles.
(xiii) No legal or governmental proceedings are pending to which
the Company or any of its subsidiaries is a party or to which the property
of the Company or any of its subsidiaries is subject that are required to
be described in the Registration Statement or the Prospectus and are not
described therein (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus), and, to the Company's knowledge, no such
proceedings have been threatened against the Company or any of its
subsidiaries or with respect to any of their respective properties; and no
contract or other document is required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement that is not described therein (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) or
filed as required.
(xiv) The issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement, the execution and
delivery of this Agreement by the Company, the compliance by the Company
with the other provisions of this Agreement and the consummation of the
other transactions herein contemplated do not (A) require the consent,
approval, authorization, registration or qualification of or with any
court, government or governmental authority, domestic or foreign, except
such as have been obtained, such as may be required under state securities
or blue sky laws, such as may be required by the National Association of
Securities Dealers, Inc. (the "NASD") and, if the Registration Statement
filed with respect to the Securities (as amended) is not effective under
the Act as of the time of execution hereof, such as may be required (and
shall be obtained as provided in this Agreement) under the Act, or (B)
conflict with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, lease or other agreement or instrument to which the Company
or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or any of their respective properties are bound, or the
charter documents or by-laws of the Company or any of its subsidiaries, or
any statute or any judgment, decree, order, rule or regulation of any
court or other governmental authority or any arbitrator applicable to the
Company or any of its subsidiaries, which would have a Material Adverse
Effect.
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(xv) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
neither the Company nor any of its subsidiaries has sustained any loss or
interference with their respective businesses or properties having or
resulting in a Material Adverse Effect from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from
any labor dispute or any legal or governmental proceeding and there has
not been any event, circumstance, or development that results in, or that
the Company believes would result in, a Material Adverse Effect, except in
each case as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(xvi) The Company has not, directly or indirectly (except for the
sale of Securities under this Agreement), (i) taken any action designed to
cause or to result in, or that has constituted or which might reasonably
be expected to constitute, the stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of the
Securities or (ii) since the filing of the Registration Statement (A)
sold, bid for, purchased, or paid anyone any compensation for soliciting
purchases of, the Securities or (B) paid or agreed to pay to any person
any compensation for soliciting another to purchase any other securities
of the Company.
(xvii) The description of past securitization transactions
effected by the Company, as contained in the Registration Statement and
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), is true and complete in all material respects
and, to the Company's knowledge, no event or series of events has occurred
relating to the Company that are reasonably likely to result in any of the
securities issued in connection with any of such transactions being
downgraded or placed on a watch list with negative implications by any
rating agency or similar organization, or that would impair the Company's
or its subsidiaries' ability to consummate securitization transactions in
the foreseeable future upon terms substantially consistent with past
securitization transactions.
(xviii) (a) The Company and its subsidiaries possess all
certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct
their respective businesses except where the failure to possess any such
item would not have a Material Adverse Effect, and (b) neither the Company
nor any such subsidiary has received any notice of proceedings relating to
the revocation or modification of any such certificate, authorization or
permit that, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a Material Adverse Effect, except
as described in or contemplated by the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus).
(xix) The Company is not an investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), and this
transaction will not cause the Company to become an investment company
subject to registration under the 1940 Act.
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(xx) The Company has filed all foreign, federal, state and local
tax returns that are required to be filed or has requested extensions
thereof (except in any case in which the failure so to file would not have
a Material Adverse Effect) and has paid all taxes required to be paid by
it and any other assessment, fine or penalty levied against it, to the
extent that any of the foregoing is due and payable, except for any such
assessment, fine or penalty that is currently being contested in good
faith or as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(xxi) Except for the shares of capital stock of each of the
subsidiaries owned by the Company, neither the Company nor any such
subsidiary owns any shares of stock or any other equity securities of any
corporation or has any equity interest in any firm, partnership,
association or other entity other than trusts in which the Company retains
a securitization interest.
(xxii) The Company and each of its subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable assurance
that (A) transactions are executed in accordance with management's general
or specific authorizations; (B) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (C)
access to assets is permitted only in accordance with management's general
or specific authorization; and (D) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(xxiii) Except as described in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), no default exists and no event has occurred that,
with notice or lapse of time or both, would constitute a default, in the
due performance and observance of any term, covenant or condition of any
contract, indenture, mortgage, deed of trust, lease or other agreement or
instrument to which the Company or any of its subsidiaries is a party or
by which the Company or any of its subsidiaries or any of their respective
properties is bound or may be affected, in any respect that would have a
Material Adverse Effect. The agreements to which the Company is a party
described in the Registration Statements are valid agreements, enforceable
by the Company, except as the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by
general equitable principles and, to the best of the Company's knowledge,
except for loan agreements with customers, the other contracting party or
parties thereto are not in material breach or material default under any
of such agreements.
(xxiv) The Company has not distributed and, prior to the later of
(A) the Firm Closing Date or any Option Closing Date and (B) the
completion of the distribution of the Securities, will not distribute any
written offering material in connection with the offering and sale of the
Securities other than the Registration Statement or any amendment thereto,
any Preliminary Prospectus, the Prospectus or Term Sheet or any amendment
or supplement thereto, or other materials, if any, permitted by the Act.
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(xxv) The description of the Company's real property contained in
the Registration Statement and the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), is true and
complete in all material respects and the Company and its subsidiaries
have good and marketable title to all real and personal property owned by
each of them, in each case free and clear of any security interests,
liens, encumbrances, equities, claims and other defects, except for those
relating to debts of the Company described in the Registration Statement
and the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) and those that do not interfere with the
use made or proposed to be made of such property by the Company or such
subsidiary, and any real property and buildings held under lease by the
Company or any such subsidiary are held under valid, subsisting and
enforceable leases (except as enforceability may be limited by the effect
of bankruptcy, insolvency, reorganization, moratorium and other similar
laws relating to rights and remedies of creditors or by general equitable
principles), with such exceptions as are not material and do not interfere
with the use made or proposed to be made of such property and buildings by
the Company or such subsidiary, in each case except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus). The Company owns or leases all
such properties as are necessary to its operations as now conducted and as
described in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(xxvi) No labor dispute with the employees of the Company or any
of its subsidiaries exists or to the Company's knowledge, is threatened or
imminent that could result in a Material Adverse Effect, except as
described in or contemplated by the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus).
(xxvii) The Company and its subsidiaries own or possess, or can
acquire on reasonable terms, all material trademarks, service marks, trade
names, licenses, copyrights and proprietary or other confidential
information currently employed by them in connection with their respective
businesses, and neither the Company nor any such subsidiary has received
any notice of infringement of or conflict with asserted rights of any
third party with respect to any of the foregoing which, singly or in the
aggregate, if the subject of unfavorable decisions, rulings or findings,
would have a Material Adverse Effect, except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(xxviii) The Company and each of its subsidiaries are insured by
insurer of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses
in which they are engaged; and neither the Company nor any such subsidiary
has any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its
business at a cost that would not have a Material Adverse Effect, except
as described in or contemplated by the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus).
(xxix) The Common Stock is registered pursuant to Section 12(g)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act")
and is quoted on the Nasdaq
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National Market, and the Company has taken no action designed to, or
likely to have the effect of, terminating the registration of the Common
Stock under the Exchange Act or delisting the Common Stock from the Nasdaq
National Market, nor has the Company received any notification that the
Commission or NASD is contemplating terminating such registration or
listing. The Company has timely filed all reports required to be filed by
it under the Exchange Act.
(xxx) The Company has not at any time during the last five (5)
years (i) made any unlawful contribution to any candidate for foreign
office or failed to disclose fully any contribution in violation of law,
or (ii) made any payment to any federal or state governmental officer or
official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the
United States or any jurisdiction thereof.
(b) Any certificate signed by any officer of the Company and delivered
to the Representatives or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company to each Underwriter, as to the
matters covered thereby.
3. Purchase, Sale and Delivery of the Securities.
(a) On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each of the Underwriters, and each of the
Underwriters, severally and not jointly, agrees to purchase from the Company, at
a purchase price of $_____ per share, the number of Firm Securities set forth
opposite the name of such Underwriter in Schedule 1 hereto. One or more
certificates in definitive form for the Firm Securities that the several
Underwriters have agreed to purchase hereunder, in such denomination or
denominations and registered in such name or names as the Representatives
requests upon notice to the Company at least 48 hours prior to the Firm Closing
Date, shall be delivered by or on behalf of the Company to the Representatives
for the respective accounts of the Underwriters, against payment by or on behalf
of the Underwriters of the aggregate purchase price therefor by wire transfer in
same day funds (the "Wired Funds") to the account of the Company. Such delivery
of and payment for the Firm Securities shall be made at the offices of Snell &
Wilmer L.L.P., One Arizona Center, Phoenix, Arizona 85004-0001 at 9:30 A.M.,
Phoenix, Arizona time, on __________, 1996, or at such other place, time or date
as the Representatives and the Company may agree upon or as the Representatives
may determine pursuant to Section 9 hereof, such time and date of delivery
against payment being herein referred to as the "Firm Closing Date." The Company
will make such certificate or certificates for the Firm Securities available for
checking and packaging by the Representatives at the offices of the Company's
transfer agent or registrar at least 24 hours prior to the Firm Closing Date or,
if available, will coordinate the transfer of the Firm Securities to the
Underwriters through the facilities of the Depository Trust Company.
(b) For the sole purpose of covering any over-allotments in connection
with the distribution and sale of the Firm Securities as contemplated by the
Prospectus, the Company hereby grants to the several Underwriters an option to
purchase, severally and not jointly, the Option Securities. The purchase price
to be paid for any Option Securities shall be the same price per share as the
price per share for the Firm Securities set forth above in paragraph (a) of this
Section 3 The option granted hereby may be exercised as to all or any part of
the Option Securities from time to
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time within thirty days after the date of the Prospectus (or, if such 30th day
shall be a Saturday or Sunday or a holiday, on the next business day thereafter
when the Nasdaq National Market is open). The Underwriters shall not be under
any obligation to purchase any of the Option Securities prior to the exercise of
such option. The Representatives may from time to time exercise the option
granted hereby by giving notice in writing or by telephone (confirmed within 24
hours in writing) to the Company setting forth the aggregate number of Option
Securities as to which the several Underwriters are then exercising the option
and the date and time for delivery of and payment for such Option Securities.
Any such date of delivery shall be determined by the Representatives but shall
not be earlier than two business days or later than five business days after
such exercise of the option and, in any event, shall not be earlier than the
Firm Closing Date. The time and date set forth in such notice, or such other
time on such other date as the Representatives and the Company may agree upon or
as the Representatives may determine pursuant to Section 9 hereof, is herein
called the "Option Closing Date" with respect to such Option Securities. Upon
exercise of the option as provided herein, the Company shall become obligated to
sell to each of the several Underwriters, and, subject to the terms and
conditions herein set forth, each of the Underwriters (severally and not
jointly) shall become obligated to purchase from the Company, the same
percentage of the total number of the Option Securities as to which the several
Underwriters are then exercising the option as such Underwriter is obligated to
purchase of the aggregate number of Firm Securities, as adjusted by the
Representatives in such manner as it deems advisable to avoid fractional shares.
If the option is exercised as to all or any portion of the Option Securities,
one or more certificates in definitive form for such Option Securities, and
payment therefor, shall be delivered on the related Option Closing Date in the
manner, and upon the terms and conditions, set forth in paragraph (a) of this
Section 3, except that reference therein to the Firm Securities and the Firm
Closing Date shall be deemed, for purposes of this paragraph 3(b), to refer to
such Option Securities and Option Closing Date, respectively.
(c) It is understood that you, individually and not as the
Representatives, may (but shall not be obligated to) make payment on behalf of
any Underwriter or Underwriters for any of the Securities to be purchased by
such Underwriter or Underwriters. No such payment shall relieve such Underwriter
or Underwriters from any of its or their obligations hereunder.
(d) The Company hereby acknowledges that the wire transfer by or on
behalf of the Underwriters of the purchase price for any Securities does not
constitute closing of a purchase and sale of the Securities. Only execution and
delivery of a receipt (by facsimile or otherwise) for the Securities by the
Underwriters indicates completion of the closing of a purchase of the Securities
from the Company. Furthermore, in the event that the Underwriters wire funds to
the Company prior to the completion of the closing of a purchase of Securities,
the Company hereby acknowledges that until the Underwriters execute and deliver
a receipt for the Securities, by facsimile or otherwise, the Company will not be
entitled to the wired funds and shall return the wired funds to the Underwriters
as soon as practicable (by wire transfer of same-day funds) upon demand. In the
event that the closing of a purchase of Securities is not completed and the wire
funds are not returned by the Company to the Underwriters on the same day the
wired funds were received by the Company, the Company agrees to pay to the
underwriters in respect of each day the wire funds are not returned by it, in
same-day funds, interest at the Prime Rate as stated in the Wall Street Journal
on the date hereof on the amount of such wire funds.
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4. Offering by the Underwriters. Upon your authorization of the release of
the Firm Securities, the several Underwriters propose to offer the Firm
Securities for sale to the public upon the terms set forth in the Prospectus.
5. Covenants of the Company. The Company covenants and agrees with each
of the Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement, to
become effective as promptly as possible. If required, the Company will file the
Prospectus or any Term Sheet that constitutes a part thereof and any amendment
or supplement thereto with the Commission in the manner and within the time
period required by Rules 434 and 424(b) under the Act. During any time when a
prospectus relating to the Securities is required to be delivered under the Act,
the Company (i) will comply with all requirements imposed upon it by the Act and
the rules and regulations of the Commission thereunder to the extent necessary
to permit the continuance of sales of or dealings in the Securities in
accordance with the provisions hereof and of the Prospectus, as then amended or
supplemented, and (ii) will not file with the Commission the Prospectus, Term
Sheet or the amendment referred to in the second sentence of Section 2(a)(i)
hereof, any amendment or supplement to such Prospectus, Term Sheet or any
amendment to the Registration Statement or any Rule 462(b) Registration
Statement of which the Representatives shall not previously have been advised
and furnished with a copy for a reasonable period of time prior to the proposed
filing and as to which filing the Representatives shall not have given its
consent. The Company will prepare and file with the Commission, in accordance
with the rules and regulations of the Commission, promptly upon request by the
Representatives or counsel for the Underwriters, any amendments to the
Registration Statement or amendments or supplements to the Prospectus that may
be deemed necessary or advisable in connection with the distribution of the
Securities by the several Underwriters, and will use its best efforts to cause
any such amendment to the Registration Statement to be declared effective by the
Commission as promptly as possible. The Company will advise the Representatives,
promptly after receiving notice thereof, of the time when the Registration
Statement or any amendment thereto has been filed or declared effective or the
Prospectus or any amendment or supplement thereto has been filed and will
provide to the Representatives copies of each such filing.
(b) The Company will advise the Representatives, promptly after
receiving notice or obtaining knowledge thereof, of (i) the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or any Rule 462(b) Registration Statement or any amendment thereto or
any order preventing or suspending the use of any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, (ii) the suspension of the
qualification of the Securities for offering or sale in any jurisdiction, (iii)
the institution, threatening or contemplation of any proceeding for any such
purpose, or (iv) any request made by the Commission for amending the Original
Registration Statement or any Rule 462(b) Registration Statement, for amending
or supplementing the Prospectus or for additional information. The Company will
use its best efforts to prevent the issuance of any such stop order and, if any
such stop order is issued, to obtain the withdrawal thereof as promptly as
possible.
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(c) The Company will arrange for the qualification of the Securities
for offering and sale under the securities or blue sky laws of such
jurisdictions as the Representatives may designate and will continue such
qualifications in effect for as long as may be necessary to complete the
distribution of the Securities; provided, however, that in connection therewith
the Company shall not be required to qualify as a foreign corporation or to
execute a general consent to service of process in any jurisdiction.
(d) If, at any time prior to the later of (i) the final date when a
prospectus relating to the Securities is required to be delivered under the Act
or (ii) the Option Closing Date, any event occurs as a result of which the
Prospectus, as then amended or supplemented, would include any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, or if for any other reason it is necessary at any time to
amend or supplement the Prospectus to comply with the Act or the rules or
regulations of the Commission thereunder, the Company will promptly notify the
Representatives thereof and, subject to Section 5(a) hereof, will prepare and
file with the Commission, at the Company's expense, an amendment to the
Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.
(e) The Company will, without charge, provide (i) to the
Representatives and to counsel for the Underwriters a signed copy of the
registration statement originally filed with respect to the Securities and each
amendment thereto (in each case including exhibits thereto) and any Rule 462(b)
Registration Statement, (ii) to each other Underwriter, a conformed copy of such
registration statement and any Rule 462(b) Registration Statement and each
amendment thereto (in each case without exhibits thereto) and (iii) so long as a
prospectus relating to the Securities is required to be delivered under the Act,
as many copies of each Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto as the Representatives may reasonably request; without
limiting the application of clause (iii) of this sentence, the Company shall, as
soon as practicable following the determination of the public offering price,
deliver to the Underwriters, without charge, as many copies of the Prospectus
and any amendment or supplement thereto as the Representatives may reasonably
request for purposes of confirming orders that are expected to settle on the
Firm Closing Date. The Company will provide or cause to be provided to each of
the Representatives, and to each Underwriter that so requests in writing, a copy
of each report on Form SR filed by the Company as required by Rule 463 under the
Act.
(f) If the Company elects to rely on Rule 462(b), the Company shall
both transmit a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) and pay the applicable fees in accordance with Rule
111 promulgated under the Act by the earlier of (i) 10:00 P.M., Eastern time on
the date of this Agreement and (ii) the time confirmations are sent or given, as
specified by Rule 462(b)(2).
(g) The Company, as soon as practicable, will make generally available
to its security holders and to the Representatives a consolidated earnings
statement of the Company and its subsidiaries that satisfies the provisions of
Section 11(a) of the Act and Rule 158 thereunder.
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(h) The Company will apply the net proceeds from the sale of the
Securities as set forth under "Use of Proceeds" in the Prospectus.
(i) The Company will not, directly or indirectly, without the prior
written consent of the Representatives, which consent shall not be unreasonably
withheld, on behalf of the Underwriters, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other sale or disposition) of any shares of Common Stock
or any securities convertible into, or exchangeable or exercisable for, shares
of Common Stock for a period of 180 days after the date hereof, except pursuant
to this Agreement, issuances pursuant to the exercise of or employee stock
options or issuances in connection with a merger or acquisition. If the Company
plans to issue any Common Stock or other securities in connection with a merger
or acquisition, the Company shall provide the Representatives with three days'
advance written notice of its intention to so issue such securities including
the terms of any such proposed transaction.
(j) The Company will not, directly or indirectly, (i) take any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (ii) (A) sell, bid for, purchase, or pay anyone any compensation
for soliciting purchases of, the Securities or (B) pay or agree to pay to any
person any compensation for soliciting another to purchase any other securities
of the Company.
(k) The Company will obtain the lockup agreements described in Section
7(g) hereof prior to the Firm Closing Date.
(l) The Company will cause the Securities to be duly included for
quotation on the Nasdaq National Market prior to the Firm Closing Date. The
Company will use its best efforts to ensure that the Securities remain included
for quotation on the Nasdaq National Market following the Firm Closing Date.
6. Expenses. The Company will pay all costs and expenses incident to the
performance of its obligations under this Agreement, whether or not the
transactions contemplated herein are consummated or this Agreement is terminated
pursuant to Section 11 hereof, including all costs and expenses incident to (i)
the printing or other production of documents with respect to the transactions,
including any costs of printing the Registration Statement originally filed with
respect to the Securities and any amendment thereto, any Rule 462(b)
Registration Statement, any Preliminary Prospectus and the Prospectus and any
amendment or supplement thereto, this Agreement and any blue sky memoranda, (ii)
all arrangements relating to the delivery to the Underwriters of copies of the
foregoing documents, (iii) the fees and disbursements of the counsel, the
accountants and any other experts or advisors retained by the Company, (iv)
preparation, issuance and delivery to the Underwriters of any certificates
evidencing the Securities, including transfer agent's and registrar's fees, (v)
the qualification of the Securities under state securities and blue sky laws,
including filing fees and fees and disbursements of counsel for the Underwriters
relating thereto, (vi) the filing fees of the Commission and the NASD relating
to the Securities and (vii) any quotation of the Securities on the Nasdaq
National Market. If the sale of the Securities provided for herein is not
consummated because any condition to the obligations of the
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<PAGE> 14
Underwriters set forth in Section 7 hereof is not satisfied, because this
Agreement is terminated pursuant to Section 11 hereof or because of any failure,
refusal or inability on the part of the Company to perform all obligations and
satisfy all conditions on its part to be performed or satisfied hereunder other
than by reason of a default by any of the Underwriters, the Company will
reimburse the Representatives upon demand for all reasonable out-of-pocket
expenses (including counsel fees and disbursements) that shall have been
incurred by it in connection with the proposed purchase and sale of the
Securities. The Company shall not in any event be liable to any of the
Underwriters for the loss of anticipated profits from the transactions covered
by this Agreement. If the sale of the Securities provided for herein is
consummated, the Underwriters shall pay all of their own out-of-pocket expenses
(including fees and disbursements of counsel) and the Company shall have no
obligation therefor.
7. Conditions of the Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Firm Securities shall be
subject to the accuracy of the representations and warranties of the Company
contained herein as of the date hereof and as of the Firm Closing Date, as if
made on and as of the Firm Closing Date, to the accuracy of the statements of
the Company's officers made pursuant to the provisions hereof, to the
performance by the Company of its covenants and agreements hereunder and to the
following additional conditions:
(a) If the Original Registration Statement or any amendment thereto
filed prior to the Firm Closing Date has not been declared effective as of the
time of execution hereof, the Registration Statement or such amendment, and if
the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration
Statement, shall have been declared effective not later than the earlier of (i)
11:00 A.M., Eastern time, on the date on which the amendment to the Registration
Statement originally filed with respect to the Securities or to the Registration
Statement, as the case may be, containing information regarding the initial
public offering price of the Securities has been filed with the Commission, and
(ii) the time confirmations are sent or given as specified by Rule 462(b) or,
with respect to the Original Registration Statement, such later time and date as
shall have been consented to by the Representatives; if required, the Prospectus
or any Term Sheet that constitutes a part thereof and any amendment or
supplement thereto shall have been filed with the Commission in the manner and
within the time period required by Rules 434 and 424(b) under the Act; no stop
order suspending the effectiveness of the Registration Statement or any
amendment thereto shall have been issued, and no proceedings for that purpose
shall have been instituted or threatened or, to the knowledge of the Company or
the Representatives, shall be contemplated by the Commission; and the Company
shall have complied with any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise).
(b) The Representatives shall have received an opinion, dated the Firm
Closing Date, of Snell & Wilmer L.L.P., counsel for the Company, dated the
Closing Date (and stating that it may be relied on by Squire, Sanders & Dempsey,
L.L.P., Underwriter's Counsel, in rendering their opinion), to the effect that:
(i) the Company and each of its subsidiaries listed in Schedule 2
hereto (the "Subsidiaries") have been duly organized and are validly
existing as corporations in good standing under the laws of their
respective jurisdictions of incorporation and are duly qualified to
transact business as foreign corporations and are in good standing under
the laws of all other
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<PAGE> 15
jurisdictions where, to counsel's knowledge, the ownership or leasing of
their respective properties or the conduct of their respective businesses
requires such qualification, except where the failure to be so qualified
does not or would not have a Material Adverse Effect;
(ii) the Company and each of the Subsidiaries have corporate
power to own or lease their respective properties and conduct their
respective businesses as described in the Registration Statement and the
Prospectus, and the Company has the corporate power to enter into this
Agreement and to carry out all the terms and provisions hereof to be
carried out by it;
(iii) the issued and outstanding shares of capital stock of each
of the Subsidiaries have been duly authorized and validly issued, are
fully paid and nonassessable and, to counsel's knowledge, are owned by the
Company free and clear of any perfected security interests (other than
security interests relating to debt described in the Registration
Statement and the Prospectus) and, to such counsel's knowledge, the
Prospectus accurately describes, to the extent so described, any material
corporation, association, or other entity owned or controlled, directly or
indirectly, by the Company other than trusts in which the Company retains
a securitization interest;
(iv) the Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus; all of the issued and
outstanding shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid and nonassessable, and,
to counsel's knowledge, were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities;
the Firm Securities have been duly authorized by all necessary corporate
action of the Company and, when issued and delivered to and paid for by
the Underwriters pursuant to this Agreement, will be validly issued, fully
paid and nonassessable; to counsel's knowledge, no holders of outstanding
shares of capital stock of the Company are entitled as such to any
preemptive or other rights to subscribe for any of the Securities; and, to
such counsel's knowledge, no holders of securities of the Company are
entitled to have such securities registered under the Registration
Statement except for those which have been so registered;
(v) the statements set forth under the heading "Description of
Capital Stock" in the Prospectus, insofar as such statements purport to
summarize certain provisions of the capital stock of the Company, provide
a fair summary of such provisions; and the statements set forth under the
heading "Business--Regulation, Supervision, and Licensing" and "Risk
Factors - Shares Eligible for Future Sale" in the Prospectus, insofar as
such statements constitute a summary of the legal matters, documents or
proceedings referred to therein, provide a fair summary of such legal
matters, documents and proceedings in all material respects (provided that
counsel need express no opinion as to the completeness of such
information);
(vi) the execution and delivery of this Agreement have been duly
authorized by all necessary corporate action of the Company and this
Agreement has been duly executed and delivered by the Company and,
assuming due authorization, execution and delivery by you, is a valid and
binding agreement of the Company, enforceable in accordance with its
terms, except insofar as indemnification provisions may be limited by
applicable law and to which counsel need not express any opinion and
except as enforceability may be limited by
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<PAGE> 16
bankruptcy, insolvency, reorganization, moratorium or similar laws
relating to or affecting creditors' rights generally or by general
equitable principles;
(vii) to counsel's knowledge, (A) no legal or governmental
proceedings are pending to which the Company or any of the Subsidiaries is
a party or to which the property of the Company or any of the Subsidiaries
is subject that are required to be described in the Registration Statement
or the Prospectus and are not described therein, and no such proceedings
have been threatened against the Company or any of the Subsidiaries or
with respect to any of their respective properties and (B) no contract or
other document is required to be described in the Registration Statement
or the Prospectus or to be filed as an exhibit to the Registration
Statement that is not described therein or filed as required;
(viii) to counsel's knowledge, subsequent to the respective dates
as of which information is given in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), (1) the Company and its Subsidiaries have not
incurred any material liability or obligation, direct or contingent, nor
entered into any material transaction not in the ordinary course of
business; and (2) the Company has not purchased any of its outstanding
capital stock, nor declared, paid or otherwise made any dividend or
distribution of any kind on its capital stock, except in each case as
described in or contemplated by the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus);
(ix) the issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement, the compliance by
the Company with the other provisions of this Agreement and the
consummation of the other transactions herein contemplated do not (A)
require the consent, approval, authorization, registration or
qualification of or with any governmental authority, except such as have
been obtained and such as may be required under state securities or blue
sky laws and by the NASD, or (B) conflict with or result in a breach or
violation of any of the terms and provisions of, or constitute a default
under, any material contract, indenture, mortgage, deed of trust, lease or
other agreement or instrument known to such counsel to which the Company
or any of the Subsidiaries is a party or by which the Company or any of
the Subsidiaries or any of their respective properties are bound, or the
charter documents or by-laws of the Company or any of the Subsidiaries,
or, so far as it is known to such counsel, any statute or any judgment,
decree, order, rule or regulation of any court or other governmental
authority or any arbitrator having jurisdiction over the Company or any of
the Subsidiaries, in each case, where such conflict, breach, violation or
default would have a Material Adverse Effect;
(x) the Registration Statement is effective under the Act; any
required filing of the Prospectus, or any Term Sheet that constitutes a
part thereof, pursuant to Rules 434 and 424(b) has been made in the manner
and within the time period required by Rules 434 and 424(b); and, to such
counsel's best knowledge, no stop order suspending the effectiveness of
the Registration Statement or any amendment thereto has been issued, and
no proceedings for that purpose have been instituted or threatened or are
contemplated by the Commission;
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(xi) the Registration Statement originally filed with respect to
the Securities and each amendment thereto, any Rule 462(b) Registration
Statement and the Prospectus (in each case, other than the financial
statements and other financial and statistical information contained
therein, as to which such counsel need express no opinion) comply as to
form in all material respects with the applicable requirements of the Act
and the rules and regulations of the Commission thereunder;
(xii) if the Company elects to rely on Rule 434, the Prospectus
is not "materially different," as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time of its
effectiveness or an effective post-effective amendment thereto (including
such information that is permitted to be omitted pursuant to Rule 430A);
(xiii) the Company is not, and the transactions contemplated by
this Agreement will not cause the Company to become, an investment company
subject to registration under the 1940 Act;
(xiv) the specimen stock certificate of the Company filed as an
exhibit to the Registration Statement is in due and proper form to
evidence shares of Common Stock, has been duly authorized and approved by
the Board of Directors of the Company and complies with all legal
requirements applicable under the Delaware General Corporation Law;
(xv) the descriptions in the Registration Statement and the
Prospectus of the charter and bylaws of the Company and of statutes are
accurate and fairly present the information required to be presented by
the Act and the applicable rules and regulations (provided that counsel
need not express any opinion as to their completeness);
(xvi) to such counsel's knowledge, except as described in the
Prospectus, no holders of Common Stock or other securities of the Company
have registration rights with respect to securities of the Company; and
(xvii) counsel has no reason to believe that the offer and sale
of all securities of the Company made within the last three years as set
forth in Item 15 of the Registration Statements were not exempt from the
registration requirements of the Securities Act, pursuant to the
provisions set forth in such Item, and from the registration or
qualification requirements of all relevant state securities laws.
Such counsel shall also state that they have no reason to believe that the
Registration Statement, as of its effective date, contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus, as of its date or the date of such opinion, included or includes any
untrue statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading (except such counsel
need express no view as to the financial statements and notes thereto, schedules
and reports thereon, and other financial and statistical data included or
incorporated by reference in the Registration Statement or Prospectus).
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In rendering any such opinion, such counsel may rely, as to matters of fact, to
the extent such counsel deem(s) proper, on certificates or opinions of
responsible officers of the Company and public officials, and may limit its
opinions to the laws of the United States of America and the States of Arizona
and Delaware, as appropriate.
References to the Registration Statement and the Prospectus in this paragraph
(b) shall include any amendment or supplement thereto at the date of such
opinion.
(c) The Representatives shall have received from KPMG Peat Marwick LLP
a letter or letters dated, respectively, the date hereof and the Firm Closing
Date, in form and substance satisfactory to the Representatives, to the effect
that:
(i) they are independent accountants with respect to the Company
and its consolidated subsidiaries within the meaning of the Act and the
applicable rules and regulations thereunder;
(ii) in their opinion, the audited consolidated financial
statements examined by them and included in the Registration Statement and
the Prospectus comply in form in all material respects with the applicable
accounting requirements of the Act and the related published rules and
regulations;
(iii) on the basis of carrying out certain specified procedures
(which do not constitute an examination made in accordance with generally
accepted auditing standards) that would not necessarily reveal matters of
significance with respect to the comments set forth in this paragraph
(iii), a reading of the minute books of the shareholders, the board of
directors and any committees thereof of the Company and each of its
consolidated subsidiaries, and inquiries of certain officials of the
Company and its consolidated subsidiaries who have responsibility for
financial and accounting matters, nothing came to their attention that
caused them to believe that at a specific date not more than five business
days prior to the date of such letter, there were any changes in the
capital stock or total debt of the Company and its consolidated
subsidiaries or any decreases in net current assets or stockholders'
equity of the Company and its consolidated subsidiaries, in each case
compared with amounts shown on the December 31, 1995 consolidated balance
sheet included in the Registration Statement and the Prospectus, or for
the period from January 1, 1996 to such specified date there were any
decreases, as compared with the same period in the prior year, in total
revenues, net income or net income per share, respectively, of the Company
and its consolidated subsidiaries, except in all instances for changes,
decreases or increases set forth in such letter; and
(iv) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information that are derived from the general accounting records
of the Company and its consolidated subsidiaries and are included in the
Registration Statement and the Prospectus, and have compared such amounts,
percentages and financial information with such records of the Company and
its consolidated subsidiaries and with information derived from such
records and have found them to be in agreement, excluding any questions of
legal interpretation.
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<PAGE> 19
In the event that the letters referred to above set forth any such
changes, decreases or increases which, in the reasonable discretion of the
Representatives, are likely to result in a Material Adverse Effect, it shall be
a further condition to the obligations of the Underwriters that such letters
shall be accompanied by a written explanation of the Company as to the
significance thereof, unless the Representatives deem such explanation
unnecessary.
References to the Registration Statement and the Prospectus in this
paragraph (c) with respect to either letter referred to above shall include any
amendment or supplement thereto by the date of such letter.
(d) The Representatives shall have received a certificate, dated the
Firm Closing Date, of Ernest C. Garcia, II, and Steven T. Darak in their
capacities as the principal executive officer and the principal financial or
accounting officer, respectively, of the Company to the effect that:
(i) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Firm Closing
Date; the Registration Statement, as amended as of the Firm Closing Date,
does not include any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein not misleading,
and the Prospectus, as amended or supplemented as of the Firm Closing
Date, does not include any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading; and the Company has performed all covenants and agreements and
satisfied all conditions on its part to be performed or satisfied at or
prior to the Firm Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and no
proceedings for that purpose have been instituted or, to the best of the
Company's knowledge, threatened or, are contemplated by the Commission;
and
(iii) subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, neither the
Company nor any of its subsidiaries has sustained any loss or interference
with their respective businesses or properties having or resulting in a
Material Adverse Effect from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor dispute
or any legal or governmental proceeding, and there has not been any event,
circumstance, or development that results in, or that the Company
reasonably believes will result in, a Material Adverse Effect, except in
each case as described in or contemplated by the Prospectus (exclusive of
any amendment or supplement thereto).
(e) The Representatives shall have received from each officer and
director of the Company an agreement to the effect that such person or entity
will not, except to the extent otherwise specifically permitted by the terms of
each such person's or entity's agreement, directly or indirectly, without the
prior written consent of Friedman, Billings, Ramsey & Co., Inc., offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, pledge, grant of an option to purchase or other sale or disposition) of
any shares of Common Stock or any securities convertible into, or exchangeable
or
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exercisable for, shares of Common Stock for a period of 90 days after the date
of this Agreement; except with respect to Ernest C. Garcia, II, who shall agree
to the foregoing for a period of 180 days from the date of this Agreement.
(f) On or before the Firm Closing Date, the Representatives and
counsel for the Underwriters shall have received such further certificates,
documents or other information as they may have reasonably requested from the
Company.
(g) Prior to the commencement of the offering of the Securities, the
Securities shall have been included for trading on the Nasdaq National Market.
(h) The Representatives shall have received an opinion, dated the Firm
Closing Date, of Squire, Sanders & Dempsey L.L.P., counsel for the Underwriters,
with respect to the issuance and sale of the Firm Securities, the Registration
Statement and Prospectus, and such other related matters as the Representatives
may reasonably require, and the Company shall have furnished to such counsel
such documents as they may reasonably request for the purpose of enabling them
to pass upon such matters.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
counsel for the Underwriters. The Company shall furnish to the Representatives
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representatives and counsel for the Underwriters shall
reasonably request.
The respective obligations of the several Underwriters to purchase and pay
for any Option Securities shall be subject, in their discretion, to each of the
foregoing conditions to purchase the Firm Securities, except that all references
to the Firm Securities and the Firm Closing Date shall be deemed to refer to
such Option Securities and the related Option Closing Date, respectively.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, against any losses,
claims, damages or liabilities to which such Underwriter or such controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon:
(i) any breach by the Company of the representations or
warranties set forth in Section 2(a) of this Agreement;
(ii) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto or (B) any application or other document, or any
amendment or supplement thereto, executed by the Company or based upon
written information furnished by or on behalf of the Company filed in any
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jurisdiction in order to qualify the Securities under the securities or
blue sky laws thereof or filed with the Commission or any securities
association or securities exchange (each, an "Application");
(iii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or
any Application, a material fact required to be stated therein or
necessary to make the statements therein not misleading; or
(iv) any untrue statement or alleged untrue statement of any
material fact contained in any audio or visual materials produced by the
Company and used in connection with the marketing of the Securities,
including without limitation, slides, videos, films, tape recordings, and,
such party or parties, as the case may be, will reimburse, as incurred,
each Underwriter and each such controlling person for any legal or other
expenses reasonably incurred by such Underwriter or such controlling
person in connection with investigating, defending against or appearing as
a third-party witness in connection with any such loss, claim, damage,
liability or action; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any untrue statement or alleged
untrue statement or omission or alleged omission made in such Registration
Statement or any amendment thereto, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto or any Application in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through the Representatives specifically for
use therein; and provided, further, that the Company will not be liable to
any Underwriter or any person controlling such Underwriter with respect to
any such untrue statement or omission made in any Preliminary Prospectus
that is corrected in the Prospectus (or any amendment or supplement
thereto) if the person asserting any such loss, claim, damage or liability
purchased Securities from such Underwriter but was not sent or given a
copy of the Prospectus (as amended or supplemented) at or prior to the
written confirmation of the sale of such Securities to such person in any
case where such delivery of the Prospectus (as amended or supplemented) is
required by the Act, unless such failure to deliver the Prospectus (as
amended or supplemented) was a result of noncompliance by the Company with
Section 5(d) and (e) of this Agreement. This indemnity agreement will be
in addition to any liability that the Company may otherwise have. The
Company shall not, without the prior written consent of the
Representatives, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder (whether or not
any Underwriter or any person who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act is a
party to such claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of all of the
Underwriters and such controlling persons from all liability arising out
of such claim, action, suit or proceeding.
(b) Each Underwriter, severally and not jointly, will indemnify and
hold harmless the Company, each of its directors, each of its officers who
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act against any losses, claims, damages or liabilities to which the
Company or
21
<PAGE> 22
any such director, officer of the Company, or controlling person of the Company
or may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment thereto,
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or any Application or (ii) the omission or the alleged omission to
state therein a material fact required to be stated in the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto, or any Application or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through the
Representatives specifically for use therein; and, subject to the limitation set
forth immediately preceding this clause, will reimburse, as incurred, any legal
or other expenses reasonably incurred by the Company or any such director,
officer or controlling person in connection with investigating or defending any
such loss, claim, damage, liability or any action in respect thereof. This
indemnity agreement will be in addition to any liability which such Underwriter
may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party of the commencement thereof, but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section.
(d) In case any such action is brought against any indemnified party,
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the extent
that it may wish, jointly with any other indemnifying party similarly notified,
to assume the defense thereof, with counsel satisfactory to such indemnified
party; provided, however, that if the defendants in any such action include both
the indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded or shall have been advised by its counsel that there
may be one or more legal defenses available to it and/or other indemnified
parties that conflict with those available to the indemnifying party, the
indemnifying party shall not have the right to direct the defense of such action
on behalf of such indemnified party or parties and such indemnified party or
parties shall have the right to select separate counsel to defend such action on
behalf of such indemnified party or parties. After notice from the indemnifying
party to such indemnified party of its election so to assume the defense thereof
and approval by such indemnified party of counsel appointed to defend such
action, the indemnifying party will not be liable to such indemnified party
under this Section 8 for any legal or other expenses, other than reasonable
costs of investigation, subsequently incurred by such indemnified party in
connection with the defense thereof, unless (i) the indemnified party shall have
employed separate counsel in accordance with the proviso to the next preceding
sentence (it being understood, however, that in connection with such action the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (in addition to local counsel) in any one action or separate
but substantially similar actions in the same jurisdiction arising out of the
same general allegations or circumstances, designated by the Representatives in
the case of paragraph (a) of this Section 8, representing the indemnified
parties under such paragraph (a) who are parties to such action or actions) or
(ii) the indemnifying party does not promptly retain counsel satisfactory to the
22
<PAGE> 23
indemnified party or (iii) the indemnifying party has authorized the employment
of counsel for the indemnified party at the expense of the indemnifying party.
After such notice from the indemnifying party to such indemnified party, the
indemnifying party will not be liable for the costs and expenses of any
settlement of such action effected by such indemnified party without the consent
of the indemnifying party.
(e) In circumstances in which the indemnity agreement provided for in
the preceding paragraphs of this Section 8 is unavailable or insufficient, for
any reason, to hold harmless an indemnified party in respect of any losses,
claims, damages or liabilities (or actions in respect thereof), each
indemnifying party, in order to provide for just and equitable contribution,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect (i) the relative
benefits received by the indemnifying party or parties on the one hand and the
indemnified party on the other from the offering of the Securities or (ii) if
the allocation provided by the foregoing clause (i) is not permitted by
applicable law, not only such relative benefits but also the relative fault of
the indemnifying party or parties on the one hand and the indemnified party on
the other in connection with the statements or omissions or alleged statements
or omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total proceeds from the offering (before deducting expenses) received by
the Company bear to the total underwriting discounts and commissions received by
the Underwriters. The relative fault of the parties shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Underwriters, the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission, and any other equitable considerations
appropriate in the circumstances. The Company and the Underwriters agree that it
would not be equitable if the amount of such contribution were determined by pro
rata or per capita allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation that does not take
into account the equitable considerations referred to above in this paragraph
(d). Notwithstanding any other provision of this paragraph (e), no Underwriter
shall be obligated to make contributions hereunder that in the aggregate exceed
the total public offering price of the Securities purchased by such Underwriter
under this Agreement, less the aggregate amount of any damages that such
Underwriter has otherwise been required to pay in respect of the same or any
substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute hereunder are
several in proportion to their respective underwriting obligations and not
joint, and as between themselves, contributions among Underwriters shall be
governed by the provisions of the Representatives's Agreement Among
Underwriters. For the purposes of this paragraph 8(e), each person, if any, who
controls an Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act shall have the same rights to contribution as such
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, shall have the same rights to contribution as the Company.
23
<PAGE> 24
9. Default of Underwriters. If one or more Underwriters default in their
obligations to purchase Firm Securities or Option Securities hereunder and the
aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, then the other Underwriters may make
arrangements satisfactory to the Representatives for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities or Option
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase. If one or more Underwriters so default with respect to an aggregate
number of Securities that is more than ten percent of the aggregate number of
Firm Securities or Option Securities, as the case may be, to be purchased by all
of the Underwriters at such time hereunder, and if arrangements satisfactory to
the Representatives are not made within 36 hours after such default for the
purchase by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives) of the Securities with respect to
which such default occurs, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter or the Company other than as provided
in Section 10 hereof. In the event of any default by one or more Underwriters as
described in this Section 9, the Representatives shall have the right to
postpone the Firm Closing Date or the Option Closing Date, as the case may be,
established as provided in Section 3 hereof for not more than seven business
days in order that any necessary changes may be made in the arrangements or
documents for the purchase and delivery of the Firm Securities or Option
Securities, as the case may be. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 9. Nothing herein shall relieve any defaulting Underwriter from
liability for its default.
10. Survival. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company, its officers, and
the several Underwriters set forth in this Agreement or made by or on behalf of
them, respectively, pursuant to this Agreement shall remain in full force and
effect, regardless of (i) any investigation made by or on behalf of the Company,
any of its officers or directors, any Underwriter or any controlling person
referred to in Section 8 hereof and (ii) delivery of and payment for the
Securities. The respective agreements, covenants, indemnities and other
statements set forth in Sections 6 and 8 hereof shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement.
11. Termination.
(a) This Agreement may be terminated with respect to the Firm
Securities or any Option Securities in the sole discretion of the
Representatives by notice to the Company given prior to the Firm Closing Date or
the related Option Closing Date, respectively, in the event that the Company
shall have failed, refused or been unable to perform all obligations and satisfy
all conditions on its part to be performed or satisfied hereunder at or prior
thereto or, if at or prior to the Firm Closing Date or, such Option Closing
Date, respectively,
24
<PAGE> 25
(i) the Company or any of its subsidiaries shall have, in the
reasonable judgment of the Representatives, sustained any loss or
interference with their respective businesses or properties having or
resulting in a Material Adverse Effect from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from
any labor dispute or any legal or governmental proceeding or there shall
have been any event, circumstance of development that results in, or that
the Representatives reasonably believe would result in, a Material Adverse
Effect, except in each case as described in or contemplated by the
Prospectus (exclusive of any amendment or supplement thereto);
(ii) trading in the Common Stock shall have been suspended by the
Commission or the Nasdaq National Market or minimum or maximum prices
shall have been established on the Nasdaq National Market;
(iii) a banking moratorium shall have been declared by New York or
United States authorities; or
(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or
material adverse change in general economic, political or financial
conditions having an effect on the U.S. financial markets that, in the
reasonable judgment of the Representatives, makes it impractical or
inadvisable to proceed with the public offering or the delivery of the
Securities as contemplated by the Registration Statement, as amended as of
the date hereof.
(b) Termination of this Agreement pursuant to this Section 11 shall be
without liability of any party to any other party except as provided in Section
10 hereof.
12. Information Supplied by Underwriters. The statements set forth in (i)
the last paragraph on the front cover page of any Preliminary Prospectus or the
Prospectus, (ii) under the heading "Underwriting" in any Preliminary Prospectus
or the Prospectus and (iii) on page 2 in any Preliminary Prospectus or the
Prospectus pertaining to stabilization (to the extent such statements relate to
the Underwriters) constitute the only information furnished by any Underwriter
through the Representatives to the Company for the purposes of Section 8 hereof.
The Underwriters confirm that such statements (to such extent) are correct.
13. Notices. All communications hereunder shall be in writing and, if sent
to any of the Underwriters, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to Friedman, Billings, Ramsey &
Co., Inc., Potomac Tower, 1001 Nineteenth Street North, Arlington, Virginia
22209, Attention: Edward M. Wheeler; and if sent to the Company, shall be
delivered or sent by mail, telex or facsimile transmission and confirmed in
writing to the Company at 2525 East Camelback Road, Suite 1150, Phoenix, Arizona
85016, Attention:
Chief Executive Officer.
14. Successors. This Agreement shall inure to the benefit of and shall be
binding upon the several Underwriters, the Company and their respective
successors and legal representatives, and nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any
25
<PAGE> 26
other person any legal or equitable right, remedy or claim under or in respect
of this Agreement, or any provisions herein contained, this Agreement and all
conditions and provisions hereof being intended to be and being for the sole and
exclusive benefit of such persons and for the benefit of no other person except
that (i) the indemnities of the Company contained in Section 8 of this Agreement
shall also be for the benefit of any person or persons who control any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act and (ii) the indemnities of the Underwriters contained in Section 8
of this Agreement shall also be for the benefit of the directors of the Company,
the officers of the Company who have signed the Registration Statement and any
person or persons who control the Company within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act. No purchaser of Securities from any
Underwriter shall be deemed a successor because of such purchase.
15. Applicable Law. The validity and interpretation of this Agreement, and
the terms and conditions set forth herein, shall be governed by and construed in
accordance with the laws of the State of Arizona, without giving effect to any
provisions relating to conflicts of laws.
16. Consent to Jurisdiction and Service of Process. All judicial
proceedings arising out of or relating to this Agreement may be brought in any
state or federal court of competent jurisdiction in the State of Virginia, and
by execution and delivery of this Agreement, the Company accepts for itself and
in connection with their respective properties, generally and unconditionally,
the nonexclusive jurisdiction of the aforesaid courts and waives any defense of
forum non conveniens and irrevocably agree to be bound by any judgment rendered
thereby in connection with this Agreement. The Company designates and appoints
Ernest C. Garcia, II and such other persons as may hereafter be selected by the
Company irrevocably agreeing in writing to so serve, as its agent to receive on
its behalf service of all process in any such proceedings in any such court,
such service being hereby acknowledged by the Company to be effective and
binding service in every respect. A copy of any such process so served shall be
mailed by registered mail to the Company at its address provided in Section 13
hereof; provided, however, that, unless otherwise provided by applicable law,
any failure to mail such copy shall not affect the validity of service of such
process. If any agent appointed by the Company refuses to accept service, the
Company hereby agrees that service of process sufficient for personal
jurisdiction in any action against the Company in the State of Virginia may be
made by registered or certified mail, return receipt requested, to the Company
at its address provided in Section 13 hereof, and the Company hereby
acknowledges that such service shall be effective and binding in every respect.
Nothing herein shall affect the right to serve process in any other manner
permitted by law or shall limit the right of any Underwriter to bring
proceedings against the Company in the courts of any other jurisdiction.
17. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
26
<PAGE> 27
If the foregoing correctly sets forth our understanding please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter shall constitute an agreement binding the Company and each of the
several Underwriters.
Very truly yours,
UGLY DUCKLING CORPORATION
By:_____________________________
Ernest C. Garcia, II
Chief Executive Officer
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
By:____________________________________
Name:____________________________
Title:___________________________
For itself and as a Representative.
CRUTTENDEN ROTH INCORPORATED
By:____________________________________
Name:____________________________
Title:___________________________
For itself and as a Representative.
27
<PAGE> 28
Schedule 1
UNDERWRITERS
Number of Firm
Underwriting Securities to be Purchased
- ------------ --------------------------
Friedman, Billings, Ramsey & Co., Inc
Cruttenden Roth Incorporated
Total.................................................. 3,250,000
<PAGE> 29
Schedule 2
SUBSIDIARIES
Name Jurisdiction of Incorporation
- ---- -----------------------------
Ugly Duckling Car Sales, Inc.
Champion Acceptance Corp.
Champion Financial Services, Inc.
Champion Receivables Corp.
Cygnet Finance, Inc.
Drake Insurance Agency, Inc.
Drake Property & Casualty Insurance, Company
<PAGE> 1
EXHIBIT 5
[SNELL & WILMER LETTERHEAD]
October 24, 1996
UGLY DUCKLING CORPORATION
2525 East Camelback Road, Suite 1150
Phoenix, Arizona 85016
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel to Ugly Duckling Corporation, a Delaware
corporation (the "Company"), in connection with the preparation and filing with
the United States Securities and Exchange Commission (the "Commission") under
the Securities Act of 1933, as amended (the "Securities Act"), of the Company's
Registration Statement on Form S-1 (the "Registration Statement"), relating to
the registration of up to 5,044,444 shares of the Company's Common Stock, par
value $.001 per share (the "Common Stock"). In arriving at the opinions
expressed below, we have reviewed the Registration Statement and the exhibits
thereto. In addition, we have reviewed the originals or copies certified or
otherwise identified to our satisfaction of all such corporate records of the
Company and such other instruments and other certificates of public officials,
officers and representatives of the Company and such other persons, and we have
made such investigations of law, as we have deemed appropriate as a basis
for the opinions expressed below. In rendering the opinions expressed below,
we have assumed that the signatures on all documents that we have reviewed
are genuine and that the Common Stock will conform in all material respects
to the description thereof set forth in the Registration Statement.
Based upon the foregoing, we advise you that in our opinion, when the
following events have occurred:
(a) The Registration Statement has become effective under the
Securities Act of 1933, as amended;
(b) The due authorization, registration and delivery of the certificate
or certificates evidencing the Common Stock; and
(c) The Common Stock has been issued and sold in the manner specified
in the Registration Statement and the exhibits thereto. Then
1. The Common Stock to be issued by you will be legally issued, fully
paid and non-assessable.
The foregoing opinions are limited to the federal law of the United
States of America and the General Corporation Law of the State of Delaware. We
express no opinion as to the application of the various state securities laws
to the offer, sale, issuance or delivery of the Common Stock.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Registration Statement and in the Prospectus included therein.
Very truly yours,
SNELL & WILMER L.L.P.
/s/ SNELL & WILMER L.L.P.
<PAGE> 1
Exhibit - 10.1(f)
AMENDMENT NO. 6 TO MOTOR VEHICLE INSTALLMENT CONTRACT
LOAN AND SECURITY AGREEMENT
This Amendment (the "Amendment") is entered into by and between General Electric
Capital Corporation, a New York corporation ("Lender") and Ugly Duckling
Corporation successor in interest to Ugly Duckling Holdings, Inc. ("Ugly
Duckling") a Delaware corporation, Duck Ventures, Inc. ("Ventures"), Champion
Acceptance Corporation formerly known as Ugly Duckling Credit Corporation
("Credit"), Ugly Duckling Car Sales, Inc. ("Sales"), UDRAC, Inc. ("UDRAC"), and
Champion Financial Services, Inc. ("Champion") all Arizona corporations (Ugly
Duckling, Ventures, Credit, Sales, Champion and UDRAC hereinafter collectively
and individually referred to as "Borrower").
RECITALS
A. Borrower and Lender entered into a Motor Vehicle Installment Contract
Loan and Security Agreement dated as of June 1, 1994, as amended (the
"Agreement") pursuant to which Lender agreed to make Advances to Borrower on the
terms and conditions set forth in the Agreement.
B. Borrower and Lender desire to amend certain provisions of the
Agreement pursuant to the terms set forth in this Amendment.
In consideration of the premises and other good and valuable
consideration, the receipt of which is hereby acknowledged by each of the
parties hereto, the parties agree as follows:
1. Defined Terms. Unless otherwise specified herein, all capitalized
terms used in this Amendment shall have the same meaning given to such term(s)
in the Agreement.
2. Amendments to Agreement. Effective as of the date hereof, the
Agreement is hereby amended as follows:
(a) General Interest Rate, Fees. Subsections 2.3(A) of the Agreement are
hereby amended in their entirety to read as follows:
"Section 2.3 General Interest Rate, Fees. (A) Except as modified by
Sections 2.5 and 15.1, the Loan shall bear interest, calculated daily on the
basis of a 365-day year, at a per annum rate equal to Three Hundred Sixty basis
points (3.60%) plus the LIBOR Rate."
(b) Capital Structure. Section 14.4 of the Agreement is hereby amended
in its entirety to read as follows:
"Capital Structure. Borrower shall not (i) redeem, retire, purchase or
otherwise acquire, directly or indirectly, any of Borrower's stock, or (ii)
make any change in Borrower's capital structure, or (iii) make any change in any
of its business objectives, purposes and operations which might in any way
adversely affect the payment or performance of, or Borrower's ability to pay
and perform, its obligations to Lender with respect to this Agreement. However,
Borrower may complete a second public offering of its common stock and, in
connection therewith, authorize and retire a class of preferred stock in the
amount of Ten Million Dollars ($10,000,000.00) held by
<PAGE> 2
Verde Investments, Inc. from the proceeds of a second public offering and
redeem not more than One Hundred Thousand Dollars ($100,000.00) worth of the
common stock of Borrower held by Ernest C. Garcia II from the proceeds of a
second public offering on or about November 15, 1996 provided that the
Borrower's Net Worth does not fall below Twenty-Five Million Dollars
($25,000,000.00). This transaction will conform to such terms and conditions as
have been disclosed to Lender prior to the date of this Amendment. Upon
completion of the second public offering Borrower shall not allow a transfer of
ownership of Borrower which results in less than 25% of the voting stock of
Borrower being owned by Ernest C. Garcia, II."
(c) Underutilization Fee: The definition of "Underutilization Fee"
in Section 1.0 of the Agreement is hereby amended in its entirety to read as
follows:
"Underutilization Fee: the fee payable by Borrower to Lender equal to
one half of one percent (0.50%) on an annualized basis or 0.0013699% times the
unused portion of the Credit Line below Thirty Million Dollars ($30,000,000.00),
with the unused portion being equal to the difference between Thirty Million
Dollars ($30,000,000.00) and the actual daily balance of the outstanding
Advance. This fee will be due monthly for the previous month and will be billed
immediately following the month end."
(d) Rolling Average Delinquency. Paragraph (L) of Section 15.0 of
the Agreement, Events of Default, is hereby amended in its entirety to read as
follows:
"(L) The Rolling Average Delinquency exceeds eight and one half percent
(8.5%)."
(e) Financial Condition. Section 13.6 of the Agreement is hereby
amended in its entirety to read as follows:
"Financial Condition. Borrower shall not allow its Debt Ratio to
exceed 2.0 to 1. Borrower shall maintain a Net Worth of at least Twenty-five
Million Dollars ($25,000,000.00). Borrower shall notify Lender in writing,
promptly upon its learning thereof of any material adverse change in the
financial condition of Borrower or a Guarantor."
3. Incorporation of Amendment: The parties acknowledge and agree
that this Amendment is incorporated into and made a part of the Agreement, the
terms and provisions of which, unless expressly modified herein, or unless no
longer applicable by their terms, are hereby affirmed and ratified and remain
in full force and effect. To the extent that any term or provision of this
Amendment is or may be deemed expressly inconsistent with any term or provision
of the Agreement, the terms and provisions of this Amendment shall control. Each
reference to the Agreement shall be a reference to the Agreement as amended by
this Amendment. This Amendment, taken together with the unamended provisions of
the Agreement which are affirmed and ratified by Borrower, contains the entire
agreement among the parties regarding the transactions described herein and
supersedes all prior agreements, written or oral, with respect thereto.
4. Borrower Remains Liable. Borrower hereby confirms that the
Agreement and each document executed by Borrower in connection therewith
continue unimpaired and in full force and effect and shall cover and secure all
of Borrower's existing and future obligations to Lender.
2
<PAGE> 3
5. Headings. The paragraph headings contained in this Amendment are for
convenience of reference only and shall not be considered a part of this
Amendment in any respect.
6. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of Arizona. Nothing herein shall preclude
Lender from bringing suit or taking other legal action in any jurisdiction.
7. Execution in Counterparts. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to
be an original and all of which taken together shall constitute one and the
same instrument.
IN WITNESS WHEREOF, the undersigned have entered into this Amendment as
of October 11, 1996.
GENERAL ELECTRIC CAPITAL CORPORATION UGLY DUCKING CAR SALES, INC.
By: /s/ By: /s/ Steven P. Johnson
Title: Title: Secretary
-------------------------
UGLY DUCKLING CORPORATION UDRAC, INC.
By: /s/ Steven P. Johnson By: /s/ Steven P. Johnson
Title: Sr. Vice President Title: Secretary
DUCK VENTURES, INC. CHAMPION FINANCIAL SERVICES, INC.
By: /s/ Steven P. Johnson By: /s/ Steven P. Johnson
Title: Sr. Vice President Title: Secretary
CHAMPION ACCEPTANCE CORPORATION
formerly known as UGLY DUCKLING
CREDIT CORPORATION
By: /s/ Steven P. Johnson
Title: Secretary
3
<PAGE> 1
EXHIBIT 24.1
[KPMG PEAT MARWICK LETTERHEAD]
INDEPENDENT AUDITORS' REPORT ON SCHEDULE AND CONSENT
The Board of Directors
Ugly Duckling Corporation:
The audits referred to in our report dated January 24, 1996, except for note 23
to the Consolidated Financial Statements which is as of April 24, 1996,
included the related financial statement schedule as of December 31, 1995, and
for each of the years in the two-year period ended December 31, 1995, included
in the registration statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
We consent to the use of our report dated January 24, 1996, except for note 23
which is as of April 24, 1996, on the consolidated financial statements of Ugly
Duckling Corporation included herein and to the reference to our firm under the
heading "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
Phoenix, Arizona
October 24, 1996
