<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 29, 1996
REGISTRATION NO. 333-3998
================================================================================
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)
DELAWARE 5521 86-0721358
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
------------------------
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
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. / /
------------------------
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
UGLY DUCKLING CORPORATION
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM
NUMBER REGISTRATION STATEMENT HEADING LOCATION OR CAPTION IN PROSPECTUS
- ------ -------------------------------------- ---------------------------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus............................ Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus................... Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information and Risk
Factors............................... Prospectus Summary; Risk Factors
4. Use of Proceeds....................... Prospectus Summary; Use of Proceeds; Management's
Discussion and Analysis of Financial Condition and
Results of Operations
5. Determination of Offering Price....... Underwriting
6. Dilution.............................. Dilution
7. Selling Security Holders.............. *
8. Plan of Distribution.................. Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to be
Registered............................ Description of Capital Stock
10. Interests of Named Experts and
Counsel............................... *
11. Information with Respect to the
Registrant............................ Prospectus Summary; Risk Factors; The Company; Use
of Proceeds; Dividend Policy; Recapitalization and
Related Transactions; Capitalization; Dilution;
Selected Consolidated Financial Data; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business; Management;
Principal Stockholders; Certain Relationships and
Related Transactions; Description of Capital Stock;
Shares Eligible for Future Sale; Underwriting;
Consolidated Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................... *
</TABLE>
- ---------------
* Not applicable
<PAGE> 3
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.
SUBJECT TO COMPLETION, DATED MAY 29, 1996
2,000,000 Shares
LOGO
Common Stock
All of the 2,000,000 shares of Common Stock offered hereby are being sold
by Ugly Duckling Corporation (the "Company"). Prior to this offering, there has
been no public market for the Common Stock of the Company. The Common Stock has
been approved for quotation on the Nasdaq Stock Market's National Market under
the symbol "UGLY." It is currently estimated that the initial public offering
price will be between $6.00 and $7.50 per share. See "Underwriting," for a
discussion of the factors considered in determining the initial public offering
price.
It is anticipated that SunAmerica Life Insurance Company ("SunAmerica")
will purchase from the Underwriters $1 million of the Common Stock offered
hereby. SunAmerica has agreed to convert $3 million of convertible subordinated
debt of the Company into additional Common Stock at the initial public offering
price. SunAmerica has also agreed to enter into certain securitization
transactions with the Company, the first of which was completed in March 1996.
See "Recapitalization and Related Transactions" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
------------------
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.
<TABLE>
<CAPTION>
=================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
Per Share......................... $ $ $
- -------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $
=================================================================================================
</TABLE>
(1) Excludes the value of warrants to purchase up to 150,000 shares of Common
Stock (the "Representative's Warrant") granted to the representative of the
several Underwriters (the "Representative"). 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
$1,262,500, including the Representative's non-accountable expense allowance.
See "Underwriting." (3) The Company has granted the Underwriters a 45-day option
to purchase up to 300,000 additional shares of Common Stock on the same terms
and conditions as set forth above solely to cover over-allotments, if any. 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 the right to reject any order in whole or in part
and certain other conditions. It is expected that delivery of the shares will be
made against payment therefor at the offices of Cruttenden Roth Incorporated,
Irvine, California, or the facilities of the Depository Trust Company, on or
about , 1996.
------------------
CRUTTENDEN ROTH
INCORPORATED
The date of this Prospectus is , 1996
<PAGE> 4
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.
<PAGE> 5
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. Investors should carefully consider the information
set forth under the heading "Risk Factors."
THE COMPANY
Ugly Duckling Corporation (the "Company") is a fully integrated used car
sales and finance company that operates the largest chain of "buy here-pay here"
used car dealerships in Arizona. As part of its activities, the Company
underwrites, finances and services installment contracts generated by its
dealerships and by third party used car dealerships located in selected markets
throughout the United States. The Company targets customers 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 units, representing approximately $290 billion in
sales. During this same period, more than $185 billion in retail installment
contracts were originated through the sale of used cars. Of this amount,
approximately 19.2 million units were sold to Sub-Prime Borrowers, generating
$124 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.
During the three months ended March 31, 1996, the Company's net earnings
before preferred stock dividends were approximately $1.1 million. The
Company's first quarter of each year has historically been one of its most
profitable and may not necessarily be indicative of results to be expected for
the rest of the year. See "Risk Factors -- Fluctuations in Quarterly Results"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality." The Company's total revenues for the first quarter
of 1996 were $19.4 million, including $15.1 million on the sale of more than
2,000 used cars, and $3.6 million in finance income. Revenues also included a
gain of approximately $540,000 on the sale of receivables pursuant to a newly
instituted securitization program. See "-- Capital Resources". In addition, the
Company purchased more than 1,200 contracts from third party dealers with an
aggregate principal balance of $7.2 million during the quarter. The combined
principal balance of the Company's dealership and third party dealer contract
portfolios as of March 31, 1996 was $46.3 million.
Sales and Finance Operations. The Company sells used cars through seven
wholly owned used car dealerships ("Company Dealerships") serving the Phoenix
and Tucson, Arizona metropolitan areas and finances such sales through retail
installment contracts that the Company services. The Company also purchases and
services contracts originated by third party used car dealerships ("Third Party
Dealers"). Substantially all of the contracts the Company services are with
Sub-Prime Borrowers. As a result, the Company incurs substantial credit losses,
which it provides for through its Allowance for Credit Losses. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Allowance for Credit Losses -- Net Charge Offs," "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Allowance for Credit Losses -- Delinquencies," and "Business -- Comparison of
Contracts Originated at Company Dealerships and Third Party Dealers."
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 purchasing, value-added
marketing programs, and dedication to customer service. In addition, the Company
has developed flexible underwriting guidelines and techniques, which combine
established underwriting criteria with managerial
3
<PAGE> 6
discretion, to facilitate rapid credit decisions, as well as networked computer
systems and proprietary software that enable the Company to monitor and service
large volumes of contracts. See "Business -- Business Strategy" and
"Business -- Company Dealership Operations." 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.,
Driver's Mart and CarChoice. 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."
In 1994, the Company entered the Third Party Dealer financing market 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 April 15, 1996,
had opened eleven Third Party Dealer contract buying offices ("Branch Offices")
in selected markets throughout the United States (five in Arizona, two in
Indiana, two in Colorado, one in Florida, and one in Nevada) and entered into
contract purchasing agreements with over 300 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 -- Business Strategy," "Business -- Third Party
Operations," and "Business -- Competition."
Marketing. 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."
Growth Strategy. 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. During 1996 and 1997, the
Company expects to develop or acquire approximately five additional Company
Dealerships and to open 15 to 20 additional Branch Offices in various states.
The Company believes that the aggregate cost of such expansion will be
approximately $8.5 million, which the Company expects to finance through
operating cash flows and supplemental borrowings. See "Use of Proceeds." The
additional overhead created by this expansion could adversely affect results of
operations in the short-term. In conjunction with its expected expansion in the
number of Branch Offices, during the next two years the Company expects to add
up to 300 additional Third Party Dealers to its dealer network. The Company
believes its current management team, monitoring and collection operations, and
corporate infrastructure are capable of supporting the planned expansion of its
operations. See "Business -- Business Strategy" and "Business -- Expansion Plans
and Acquisition Opportunities."
Capital Resources. The Company finances its operations through a variety
of funding sources, including a $50 million revolving credit facility (the
"Revolving Facility") with General Electric Capital Corporation ("GE Capital").
In addition, the Company has agreed to the terms of a securitization program
(the "Securitization Program") with SunAmerica pursuant to which SunAmerica may
purchase up to $175 million of the Company's asset-backed securities. The
Company and SunAmerica have completed one securitization of an aggregate of $13
million in contracts originated through Company Dealerships. Standard & Poor's
gave the $10 million in certificates issued to SunAmerica in connection with the
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.
Recapitalization and Related Transactions. Upon the closing of this
offering, Verde Investments, Inc. ("Verde Investments"), an affiliate of the
Company whose sole stockholder is also the Chairman, Chief
4
<PAGE> 7
Executive Officer, and majority stockholder of the Company, has agreed to sell
to the Company, 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, pending such sale, to lower
the rental rates on such properties to an aggregate of $745,000 per year. In
addition, Verde Investments has agreed to assign to the Company its leasehold
interest in two properties it sub-leases to the Company. These two transactions
would have resulted in savings to the Company of approximately $730,000 for 1995
and $310,000 for the three months ended March 31, 1996. Also effective upon the
closing of this offering, Verde Investments has agreed to lower the interest
rate on $14 million of subordinated debt payable to Verde Investments from 18%
to 10% per annum and to lower the dividend rate on $10 million of Preferred
Stock held by Verde Investments (which currently accrues a dividend of 12%
annually, increasing one percent annually to a maximum of 18%) to 10% through
1997. SunAmerica, a significant funding source for the Company, has agreed to
convert $3 million of subordinated debt into Common Stock at the public offering
price. It is also anticipated that SunAmerica will purchase $1 million of the
Common Stock offered hereby. Through the lowering of rents and financing costs
as a result of the above-referenced transactions (the "Recapitalization
Transactions"), the Company expects to save over $2.6 million annually through
1997. See "Recapitalization and Related Transactions" and "Certain Relationships
and Related Transactions."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered......................... 2,000,000 shares
Common Stock to be outstanding immediately
after the offering......................... 8,024,044 shares(1)
Use of proceeds.............................. Repayment of debt, with increased borrowing
capacity to be used for development and/or
acquisition of additional Company Dealerships
and Branch Offices, expansion of contract
portfolio, and general corporate purposes. See
"Use of Proceeds."
Nasdaq symbol................................ "UGLY"
</TABLE>
- ---------------
(1) Includes 444,444 shares issuable to SunAmerica upon conversion of $3 million
of convertible subordinated debt at an assumed public offering price of
$6.75 per share. Excludes 300,000 shares of Common Stock that may be sold by
the Company upon exercise of the Underwriters' over-allotment option. Also
excludes: (i) 443,120 shares of Common Stock issuable upon exercise of stock
options outstanding at March 31, 1996 under the Company's Long-Term
Incentive Plan with a weighted average exercise price of $1.70 per share;
(ii) 150,000 shares of Common Stock issuable upon exercise of the
Representative's Warrant; (iii) 116,000 shares of Common Stock issuable upon
exercise of warrants to be issued to SunAmerica; and (iv) 22,220 shares of
Common Stock issuable to the Company's independent directors upon their
appointment to the Board of Directors at the close of the offering. See
"Recapitalization and Related Transactions," "Management," "Description of
Capital Stock," and "Underwriting."
5
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
PRO FORMA, AS ADJUSTED(1)
--------------------------------
THREE MONTHS YEAR ENDED THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31, DECEMBER 31, ENDED MARCH 31,
--------------------------- ----------------- ------------ -----------------
1993 1994 1995 1995 1996 1995 1995 1996
------- ------- ------- ------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total Revenues................. $16,477 $33,774 $58,203 $11,546 $19,396 $ 48,747 $10,553 $19,396
Dealership Sales of Used
Cars....................... 13,969 27,768 47,824 9,683 15,081 38,368 8,690 15,081
Income on Dealership Finance
Receivables................ 1,629 4,739 8,227 1,564 2,490 8,227 1,564 2,490
Gain on Sale of Finance
Receivables................ -- -- -- -- 539 -- -- 539
Servicing Income............. -- -- -- -- 54 -- -- 54
Income on Residual in Finance
Receivables Sold........... -- -- -- -- 103 -- -- 103
Income on Third Party Finance
Receivables................ -- 710 1,844 217 1,069 1,844 217 1,069
Franchise Fees and Other
Income..................... 879 557 308 82 60 308 82 60
Cost of Used Cars Sold......... 6,089 12,578 27,964 4,858 8,348 20,685 4,311 8,348
Provision for Credit Losses.... 3,292 8,140 8,360 2,060 2,606 7,840 1,872 2,606
Net Revenues from Dealership
Activities................... 6,217 11,790 19,728 4,329 7,259 18,071 4,071 7,259
Income before Operating
Expenses..................... 7,096 13,056 21,880 4,628 8,442 20,223 4,370 8,442
Total Operating Expenses....... 5,411 12,150 19,600 3,946 5,694 16,468 3,409 5,214
Operating Income............... 1,685 906 2,280 682 2,748 3,755 961 3,228
Total Interest Expense......... 893 3,037 5,956 1,122 1,650 3,486 518 1,160
Net Earnings (Loss)............ 699 (1,967) (3,972) (465) 1,066 195 419 2,036
Net Earnings (Loss) Available
for Common Shares............ 699 (1,967) (3,972) (465) 766 195 419 1,793
Net Earnings (Loss) per Common
Share........................ $ 0.14 $ (0.35) $ (0.67) $ (0.08) $ 0.13 $ 0.02 $ 0.05 $ 0.21
Weighted Average Common Shares
Outstanding during
Period(2).................... 5,010 5,584 5,892 5,892 5,892 8,337 8,337 8,337
PRO FORMA, AS ADJUSTED(1)
--------------------------------
DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31,
--------------------------- ----------------- ------------ -----------------
1993 1994 1995 1995 1996 1995 1995 1996
------- ------- ------- ------- ------- ------------ ------- -------
BALANCE SHEET DATA:
Total Finance Receivables,
Net.......................... $ 7,089 $15,858 $40,726 $19,459 $39,479 $ 40,726 $19,459 $39,479
Total Assets................... 11,936 29,711 60,790 33,722 61,659 68,125 41,057 68,994
Total Subordinated Notes
Payable...................... 8,941 18,291 14,553 17,215 14,000 14,553 17,215 14,000
Total Debt..................... 9,380 28,617 50,737 29,804 49,755 44,187 23,254 43,205
Total Preferred Stock.......... -- -- 10,000 -- 10,000 10,000 -- 10,000
Total Common Stock............. 1 77 127 127 127 14,012 14,012 14,012
Total Stockholders' Equity
(Deficit)(3)................. 697 (1,194) 4,884 (1,609) 5,650 18,769 12,276 19,535
Principal Balances Outstanding:
Dealership Portfolio........... $ 9,588 $19,881 $34,227 $23,801 $27,830 $ 34,227 $23,801 $27,830
Third Party Dealer Portfolio... $ -- $ 1,620 $13,805 $ 1,998 $18,492 $ 13,805 $ 1,998 $18,492
Portfolio Securitized with
Servicing Retained........... $ -- $ -- $ -- $ -- $12,622 $ -- $ -- $12,622
</TABLE>
(footnotes on following page)
6
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
PRO FORMA, AS ADJUSTED(1)
--------------------------------
THREE MONTHS YEAR ENDED THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31, DECEMBER 31, ENDED MARCH 31,
--------------------------- ----------------- ------------ -----------------
1993 1994 1995 1995 1996 1995 1995 1996
------- ------- ------- ------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DEALERSHIP OPERATING DATA
(UNAUDITED):
Number of Used Cars Sold....... 3,359 5,270 7,383 1,654 2,119 6,326 1,496 2,119
Company Dealerships............ 5 8 8 8 7 7 7 7
Units Sold per Dealership...... 672 659 923 207 303 904 214 303
Number of Contracts
Outstanding.................. 2,929 5,515 8,049 6,414 6,194
Allowance as % of Outstanding
Principal.................... 30.0% 30.4% 21.9% 28.3% 23.0%
Average Principal Balances
Outstanding.................. $ 3,273 $ 3,605 $ 4,252 $ 3,711 $ 4,493
Delinquencies:
Principal Balances 31 to 60
Days......................... 10.5% 5.1% 4.2% 3.6% 2.6%
Principal Balances over 60
Days......................... 15.0% 1.3% 1.1% 2.0% 1.1%
Average Yield on Contracts..... 26.4% 28.2% 28.0% 27.9% 28.0%
THIRD PARTY OPERATING DATA
(UNAUDITED):
Number of Contracts
Purchased.................... -- 1,423 3,012 484 1,268
Number of Branch Offices....... -- 1 8 1 10
Number of Third Party
Dealers...................... -- 20 118 20 317
Number of Contracts
Outstanding.................. -- 726 2,733 1,029 3,592
Allowance as % of Outstanding
Principal.................... -- 9.8% 7.2% 7.6% 7.3%
Average Principal Balance
Outstanding.................. $ -- $ 2,232 $ 5,051 $ 1,942 $ 5,148
Delinquencies:
Principal Balances 31 to 60
Days......................... -- 6.0% 1.2% 2.8% 0.9%
Principal Balances over 60
Days......................... -- 2.6% 0.4% 3.0% 0.1%
Average Yield on Contracts..... -- 30.9% 26.7% 30.5% 26.9%
</TABLE>
- ---------------
(1) Pro forma, as adjusted, financial information gives effect to the
Recapitalization Transactions, the sale of the Company's Gilbert, Arizona
dealership (the "Gilbert Dealership"), and the sale of the 2,000,000 shares
of Common Stock offered hereby and the initial application of the net
proceeds therefrom to repay indebtedness under the Company's Revolving
Facility, in each case as if such transaction had occurred as of December
31, 1994. See Notes (1) and (2) to the Selected Consolidated Financial Data
and "Use of Proceeds."
(2) See Notes to the Consolidated Financial Statements for a determination of
the weighted average common shares outstanding.
(3) The Accumulated Deficit component of Total Stockholders' Equity does not
give any effect to the pro forma adjustments.
7
<PAGE> 10
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 HISTORY OF PROFITABLE OPERATIONS; NO ASSURANCE OF CONTINUED PROFITABILITY
The Company began operations in 1992 and incurred significant losses in
1994 and 1995. For the three months ended March 31, 1996, however, the Company
achieved profitability with net earnings of approximately $1.1 million on total
revenues of $19.4 million. The Company's business strategy calls for aggressive
growth in its sales and financing activities. Over the next two years, the
Company anticipates developing or acquiring approximately five new Company
Dealerships and opening 15 to 20 new Branch Offices. 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) locate
sufficient financing, with acceptable terms, to fund the expansion of used car
sales and the origination and purchase of additional contracts; and (iv) 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."
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
21% 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 16.7% of contract principal balances for the year ended December 31, 1995
and the three months ended March 31, 1996, respectively, to cover anticipated
credit losses on the contracts currently in its portfolio. At December 31, 1995
and March 31, 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 three months ended
March 31, 1996 were 21.7% and 4.7%, 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 reserves 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."
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., Driver's
Mart, and CarChoice, 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.
8
<PAGE> 11
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 periods, 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."
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 increased
delinquencies, repossessions, and credit losses that could hinder the Company's
planned expansion. Because of the Company's focus on Sub-Prime Borrowers, its
actual rate of delinquencies, repossessions, and credit losses on contracts
could be higher under adverse conditions than those experienced in the used car
sales and finance industry in general. Economic changes are uncertain, and
sluggish sales of used cars and weakness in the economy could have an adverse
effect on the Company's business and that of the Third Party Dealers from which
it purchases contracts. 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. 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, or that such dealers will continue to generate a volume of
contracts comparable to the volume of contracts historically generated by such
dealers. See "Business -- Third Party Dealer Operations."
GEOGRAPHIC CONCENTRATION
The Company's direct used car sales and financing operations are currently
conducted in the Phoenix and Tucson, Arizona, metropolitan areas. In addition,
as of April 15, 1996, the Company had opened eleven Branch Offices, five of
which were located in Arizona, two in Indiana, two in Colorado, one in Florida,
and one in Nevada. Of the $46.3 million in total contracts owned by the Company
at March 31, 1996, the Company estimates that approximately $42.2 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."
9
<PAGE> 12
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 million. Under the Revolving Facility, the Company may borrow
up to 65% of the principal balance of eligible Company Dealership contracts and
up to 90% 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. As of March 31, 1996, the Company's
borrowing capacity under the Revolving Facility was approximately $34.2 million,
the aggregate principal amount outstanding under the Revolving Facility was
$31.8 million, and the amount available to be borrowed was $2.4 million. There
can be no assurance that the Company will be able to continue to satisfy the
terms and conditions of the Revolving Facility or that it will be extended
beyond its current expiration date. In addition, the Company has agreed to terms
with SunAmerica pursuant to which SunAmerica may purchase up to $175 million of
the Company's asset-backed securities created pursuant to the Securitization
Program. 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. The Company and SunAmerica have completed one
securitization of an aggregate of $10 million in certificates backed by $13
million in contracts originated through Company Dealerships. There can be no
assurance, however, that any further securitizations will be completed or that
the Company will be able to secure additional financing when and as needed in
the future, or on terms acceptable to the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
SUBSTANTIAL LEVERAGE
In connection with its growth over the past several years, the Company has
incurred substantial indebtedness, resulting in a highly leveraged capital
structure. At March 31, 1996, the Company's total indebtedness was approximately
$49.8 million. See "Capitalization" and "Selected Consolidated Financial Data."
The Company's substantial leverage could have important consequences, including
limiting its ability to obtain additional financing, requiring the Company to
use substantial portions of operating cash flow to meet interest and principal
repayment obligations, exposing the Company to interest rate fluctuations due to
floating interest rates, increasing the Company's vulnerability to changes in
general economic conditions and competitive pressures, and limiting the
Company's ability to realize some or all of the benefit of significant business
opportunities. 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. See "Dividend Policy." The covenants also require the Company to
meet certain financial tests. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Revolving Facility." Although the Company believes that it is
currently in compliance with the terms and conditions of its borrowing
arrangements, a default thereunder could have a material adverse effect on the
Company's financial condition and results of operations.
SENSITIVITY TO INTEREST RATES; IMPACT OF USURY LAWS
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.
10
<PAGE> 13
The Company typically charges a fixed interest rate of 29.9% on the
contracts originated at Company Dealerships, while rates range from 21% 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, the State of Arizona, which
does not impose limits on the 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."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Historically, the Company has experienced higher revenues in the first two
quarters of the year (particularly in the first quarter) 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. Given the possibility of such
fluctuations, the Company believes that quarterly comparisons of the results of
its operations during any fiscal year are not necessarily meaningful and that
results for any one fiscal quarter should not be relied upon as an indication of
future performance. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Seasonality."
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 MAJORITY STOCKHOLDER
Upon the completion of the offering, Mr. Ernest C. Garcia, II, the
Company's Chairman, Chief Executive Officer, and majority stockholder, will hold
52% of the outstanding Common Stock, assuming exercise of all outstanding
options and warrants. 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 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."
11
<PAGE> 14
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 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.
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."
ABSENCE OF PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICES
Prior to this offering, there has been no public trading market for the
Common Stock and there can be no assurance that a regular trading market for the
Common Stock will develop after this offering or, if developed, that it will be
sustained following the offering. No assurance can be given that the Common
Stock will continue to be listed on the Nasdaq National Market. The initial
public offering price of the Common Stock offered hereby will be determined
through negotiations between the Company and the Representative and may not
necessarily bear any relationship to the price at which the Common Stock will
trade after completion of the offering, or to the Company's book value, assets,
past operating results, or financial condition or to any other established
criteria of value. The market price of the Common Stock could also 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, general trends in
the industry, and other events or factors. See "Underwriting."
12
<PAGE> 15
THE COMPANY
The Company is a fully integrated used car sales and finance company. The
Company operates the largest chain of Buy Here-Pay Here used car dealerships in
Arizona and underwrites, finances, and services retail installment contracts
generated from sales by its Company Dealerships and Third Party Dealers located
in selected markets throughout the United States. The Company began its used car
sales and financing operations in 1992 and has pursued an aggressive growth
strategy since that time. As a result of both internal development and
acquisition, as of April 15, 1996 the Company had developed or acquired seven
Company Dealerships in Arizona and, since 1994, had opened eleven Branch Offices
located in five 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 49 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; Drake
Insurance Services, Inc., which serves as a holding company for Drake Insurance
Agency, Inc., an Arizona licensed insurance agency, and Drake Casualty
Insurance, Inc. and Drake Life Insurance, Inc., which are Turks and Caicos
Islands-chartered and licensed reinsurance companies; and several other inactive
subsidiaries. The Company has not yet conducted significant insurance
operations.
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 2,000,000 shares of
Common Stock offered hereby are estimated to be approximately $11.0 million
($12.8 million if the Underwriters' over-allotment option is exercised in full)
based upon an assumed initial public offering price of $6.75 per share.
The Company intends to use the net proceeds of the offering to reduce the
debt outstanding under its Revolving Facility with GE Capital (approximately
$31.8 million as of March 31, 1996) by approximately $11.0 million. The
Revolving Facility has a maximum commitment of $50 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 4.25% over the 30-day average London Inter-Bank Offered Rate
("LIBOR") (total rate of 9.6% as of March 31, 1996).
The amount repaid under the Revolving Facility will remain available for
use by the Company to implement its growth strategy. The Company anticipates
developing or acquiring approximately five new Company Dealerships and opening
15 to 20 new Branch Offices over the next two years. The Company estimates that
it would cost an aggregate of approximately $7.5 million to develop these
Company Dealerships and an additional $750,000 to $1,000,000 to establish the
Branch Offices. See "Business -- Business Strategy -- Growth Strategy" and
"Business -- Expansion Plans and Acquisition Opportunities."
13
<PAGE> 16
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%
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 Preferred Stock. See "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 upon the closing of this offering, Verde Investments, an
affiliate of the Company whose sole stockholder, Ernest C. Garcia, II, is also
the Chairman, Chief Executive Officer, and majority stockholder of the Company,
has agreed to modifications to its present lease and financing arrangements with
the Company. In addition, SunAmerica, a significant funding source for the
Company, has agreed to convert $3 million of subordinated indebtedness into
Common Stock of the Company. As a result of the Recapitalization Transactions,
the Company expects to achieve savings of over $2.6 million annually through
1997.
VERDE INVESTMENTS
As of March 31, 1996, the Company leased nine properties and sub-leased two
additional properties from Verde Investments. Upon the closing of the offering,
Verde Investments has agreed to sell to the Company, 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, pending such sale, to lower the rental rates on such properties to
an aggregate of $745,000 per year, which the Company believes approximates the
financing costs to be incurred in connection with the purchase of such
properties. In addition, Verde Investments has agreed to assign to the Company
its leasehold interest in the two properties it sub-leases to the Company. These
two transactions would have resulted in savings to the Company of approximately
$730,000 for 1995 and $310,000 for the three months ended March 31, 1996.
Verde Investments also currently holds $14 million of the Company's
subordinated debt and $10 million of the Company's Preferred Stock, which
accrues a dividend of 12% annually, increasing one percent per year up to a
maximum of 18%. At the closing of this offering, the interest rate on the
outstanding subordinated debt payable to Verde Investments will be reduced from
18% to 10% per annum. In addition, Verde Investments has agreed with the Company
to reduce the dividend rate on the Preferred Stock to 10% through the end of
1997, at which time the rate will be raised to 12%. See "Description of Capital
Stock -- Preferred Stock," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources," and
"Certain Relationships and Related Transactions."
SUNAMERICA
In 1995, SunAmerica purchased $3 million of convertible subordinated debt
of the Company. Upon the effectiveness of the offering, SunAmerica has agreed to
convert this debt into Common Stock at the initial public offering price
(444,444 shares at an assumed initial public offering price of $6.75 per share).
In connection with such conversion, the Company has agreed to grant SunAmerica a
ten-year warrant to purchase 116,000 shares of Common Stock at the initial
public offering price and to pay to SunAmerica fees totaling $150,000.
Separately, it is anticipated that SunAmerica will purchase $1 million of Common
Stock from the Underwriters in this offering at the initial public offering
price. See "Description of Capital Stock -- Other Securities."
14
<PAGE> 17
CAPITALIZATION
The following table sets forth the: (i) actual capitalization of the
Company as of March 31, 1996; (ii) the pro forma capitalization of the Company,
which assumes the consummation of the Recapitalization Transactions as of
December 31, 1994; and (iii) the pro forma capitalization of the Company as
adjusted to give effect to the sale of the 2,000,000 shares of Common Stock
offered hereby (exclusive of the over-allotment option) at an assumed initial
public offering price of $6.75 per share and the initial application of the
estimated net proceeds therefrom to repay $11.0 million under the Revolving
Facility as of December 31, 1994. See "Recapitalization and Related
Transactions." 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>
MARCH 31, 1996
-------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
<S> <C> <C> <C>
Debt:
Obligations under Capital Leases.................. $ 916,357 $ 916,357 $ 916,357
Revolving Facility................................ 31,839,050 31,839,050 20,839,050
Debt on real property to be acquired from Verde
Investments.................................... -- 7,450,000 7,450,000
Convertible Note Payable (excluding $114,950 in
unamortized debt issuance costs)............... 3,000,000 -- --
Subordinated Notes Payable........................ 14,000,000 14,000,000 14,000,000
----------- ----------- -----------
Total Liabilities......................... 49,755,407 54,205,407 43,205,407
----------- ----------- -----------
Stockholders' Equity:
Preferred Stock, $.001 par value; 10,000,000
shares authorized; 1,000,000 shares issued and
outstanding.................................... 10,000,000 10,000,000 10,000,000
Common Stock, $.001 par value; 20,000,000 shares
authorized; 5,579,600 shares issued and
outstanding, actual; 6,024,044 shares issued
and outstanding, pro forma; 8,024,044 shares
issued and outstanding, pro forma, as
adjusted(1).................................... 127,000 3,012,050 14,012,050
Accumulated Deficit(2)............................ (4,476,936) (4,476,936) (4,476,936)
----------- ----------- -----------
Total Stockholders' Equity................ 5,650,064 8,535,114 19,535,114
----------- ----------- -----------
Total Capitalization...................... $55,405,471 $62,740,521 $62,740,521
=========== =========== ===========
</TABLE>
- ---------------
(1) Includes 444,444 shares issuable to SunAmerica upon conversion of $3 million
of convertible subordinated debt at an assumed public offering price of
$6.75 per share. Excludes up to 300,000 shares of Common Stock that may be
sold by the Company upon the exercise of the Underwriters' over-allotment
option. Also excludes: (i) 443,120 shares of Common Stock issuable upon
exercise of stock options outstanding at March 31, 1996, under the Company's
Long-Term Incentive Plan with a weighted average exercise price of $1.70 per
share; (ii) 150,000 shares of Common Stock issuable upon exercise of the
Representative's Warrant; (iii) 116,000 shares of Common Stock issuable upon
exercise of warrants to be issued to SunAmerica; and (iv) 22,220 shares of
Common Stock issuable to the Company's independent directors upon their
appointment to the Board of Directors at the close of the offering. See
"Recapitalization and Related Transactions," "Management," "Description of
Capital Stock," and "Underwriting."
(2) The Accumulated Deficit component of Total Stockholders' Equity does not
give effect to the pro forma adjustments. See "Selected Consolidated
Financial Data."
15
<PAGE> 18
DILUTION
The pro forma net tangible book value (deficit) of the Company's Common
Stock at March 31, 1996, was approximately $(1.7 million), or $(0.29) per share.
Pro forma net tangible book value per common share represents the book value of
the Company's tangible assets less Preferred Stock and total liabilities (after
giving effect to the conversion by SunAmerica of its $3 million of convertible
subordinated debt into Common Stock at the initial public offering price)
divided by the number of shares of Common Stock outstanding.
Dilution per share to new investors represents the difference between the
amount per share paid by purchasers of Common Stock of the Company pursuant to
the offering and the pro forma net tangible book value per share of Common Stock
immediately after completion of the offering. After giving effect to the sale of
the 2,000,000 shares of Common Stock offered hereby (at an assumed initial
public offering price of $6.75 per share) and the application of the net
proceeds therefrom, the as adjusted pro forma net tangible book value of the
Common Stock at March 31, 1996, would have been $9.3 million, or $1.16 per
share. This represents an immediate increase in pro forma net tangible book
value of $1.45 per common share to existing stockholders and an immediate
dilution of $5.59 per common share to new investors purchasing Common Stock
pursuant to the offering. The following table illustrates the per share effect
of this dilution on an investor's purchase of shares:
<TABLE>
<S> <C> <C>
Initial public offering price per common share...................... $6.75
Pro forma net tangible book value per common share before
offering....................................................... $(0.29)
Increase in pro forma net tangible book value per common share
attributable to new investors.................................. $ 1.45
----
As adjusted pro forma net tangible book value per common share after
the offering...................................................... $1.16
----
Dilution per common share to new investors.......................... $5.59
====
</TABLE>
The following table summarizes, on an as adjusted basis as of March 31,
1996, the difference between the number of shares of Common Stock purchased from
the Company, the total price paid, and the average price per share paid by
existing stockholders and by new investors purchasing shares of Common Stock
pursuant to the offering, after giving effect to SunAmerica's conversion of $3
million of convertible subordinated debt into Common Stock at the initial public
offering price:
<TABLE>
<CAPTION>
TOTAL CONSIDERATION
SHARES PURCHASED PAID AVERAGE
--------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 6,024,044 75.1% $ 3,012,050 18.2% $0.50
New investors................. 2,000,000 24.9% $13,500,000 81.8% $6.75
--------- --- ----------- ---
Total............... 8,024,044 100.0% $16,512,050 100.0%
========= === =========== ===
</TABLE>
The foregoing tables include 444,444 shares issuable to SunAmerica upon
conversion of $3 million of convertible subordinated debt at an assumed public
offering price of $6.75 per share. The tables exclude up to 300,000 shares of
Common Stock that may be sold by the Company upon the exercise of the
Underwriters' over-allotment option. The tables also exclude: (i) 443,120 shares
of Common Stock issuable upon exercise of stock options outstanding at March 31,
1996, under the Company's Long-Term Incentive Plan with a weighted average
exercise price of $1.70 per share; (ii) 150,000 shares of Common Stock issuable
upon exercise of the Representative's Warrant; (iii) 116,000 shares of Common
Stock issuable upon exercise of warrants to be issued to SunAmerica; and (iv)
22,220 shares of Common Stock issuable to the Company's independent directors
upon their appointment to the Board of Directors at the close of the offering.
See "Recapitalization and Related Transactions," "Management," "Description of
Capital Stock," and "Underwriting."
16
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
The following selected consolidated financial data are qualified by
reference to, and should be read in conjunction with, the Company's Consolidated
Financial Statements and the related Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Prospectus. The following selected Consolidated Balance Sheet
data of the Company as of December 31, 1993, 1994 and 1995 and the Statement of
Operations data for the fiscal years ended December 31, 1993, 1994 and 1995, are
derived from the Consolidated Financial Statements of the Company audited by
KPMG Peat Marwick LLP, independent certified public accountants. The following
selected consolidated financial information for the three months ended March 31,
1995 and 1996 has been derived from the Company's unaudited consolidated
financial information for such periods. The following Consolidated Balance Sheet
data as of December 31, 1992 and the Statement of Operations data for the year
ended December 31, 1992 are derived from Consolidated Financial Statements of
the Company audited by Toback & Co. independent certified public accountants.
Also presented is certain consolidated financial data as of December 31, 1991
and for the fiscal year then ended which has been derived from the Company's
unaudited Consolidated Financial Statements for such periods. In the opinion of
management, such unaudited 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.
<TABLE>
<CAPTION>
PRO FORMA(1)
---------------------
THREE
MONTHS
THREE MONTHS ENDED
ENDED MARCH
YEARS ENDED DECEMBER 31, MARCH 31, YEAR ENDED 31,
--------------------------------------------- ----------------- DECEMBER 31, -------
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 $ 9,683 $15,081 $ 38,368 $ 8,690
Income on Finance Receivables............. -- 148 1,629 4,739 8,227 1,564 2,490 8,227 1,564
Gain on Sale of Finance Receivables....... -- -- -- -- -- -- 539 -- --
Income on Residual in Finance Receivables
Sold..................................... -- -- -- -- -- -- 103 -- --
------ ------ ------- ------- ------- ------- ------- ------- -------
-- 2,284 15,598 32,507 56,051 11,247 18,213 46,595 10,254
------ ------ ------- ------- ------- ------- ------- ------- -------
Cost of Dealership Revenues:
Cost of Used Cars Sold.................... -- 1,010 6,089 12,578 27,964 4,858 8,348 20,685 4,311
Provision for Credit Losses............... -- 826 3,292 8,140 8,360 2,060 2,606 7,840 1,872
------ ------ ------- ------- ------- ------- ------- ------- -------
-- 1,836 9,381 20,717 36,324 6,918 10,954 28,525 6,183
------ ------ ------- ------- ------- ------- ------- ------- -------
Net Revenues from Dealership Activity..... -- 448 6,217 11,790 19,728 4,329 7,259 18,071 4,071
Other Income:
Servicing Income.......................... -- -- -- -- -- -- 54 -- --
Income on Third Party Finance
Receivables.............................. -- -- -- 710 1,844 217 1,069 1,844 217
Franchise Fees and Other Income........... 819 982 879 557 308 82 60 308 82
------ ------ ------- ------- ------- ------- ------- ------- -------
819 982 879 1,266 2,152 299 1,183 2,152 299
------ ------ ------- ------- ------- ------- ------- ------- -------
Income before Operating Expenses.......... 819 1,430 7,096 13,056 21,880 4,628 8,442 20,223 4,370
Operating Expenses:
Selling and Marketing..................... 302 656 1,293 2,402 3,856 751 1,041 3,229 710
General and Administrative................ 905 876 3,561 8,971 14,430 2,935 4,321 11,974 2,449
Depreciation and Amortization............. 326 429 557 777 1,314 260 332 1,265 250
------ ------ ------- ------- ------- ------- ------- ------- -------
1,533 1,962 5,411 12,150 19,600 3,946 5,694 16,468 3,409
------ ------ ------- ------- ------- ------- ------- ------- -------
Operating Income (Loss)................... (714) (531) 1,685 906 2,280 682 2,748 3,755 961
AS ADJUSTED(2)
-------------------------------
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -----------------
STATEMENT OF OPERATIONS DATA: 1996 1995 1995 1996
- ------------------------------------------ ------- ------------ ------- -------
<S> <C> <C> <C> <C>
Dealership Revenues:
Sales of Used Cars........................ $15,081 $ 38,368 $ 8,690 $15,081
Income on Finance Receivables............. 2,490 8,227 1,564 2,490
Gain on Sale of Finance Receivables....... 539 -- -- 539
Income on Residual in Finance Receivables
Sold..................................... 103 -- -- 103
------- ------- ------- -------
18,213 46,595 10,254 18,213
------- ------- ------- -------
Cost of Dealership Revenues:
Cost of Used Cars Sold.................... 8,348 20,685 4,311 8,348
Provision for Credit Losses............... 2,606 7,840 1,872 2,606
------- ------- ------- -------
10,954 28,525 6,183 10,954
------- ------- ------- -------
Net Revenues from Dealership Activity..... 7,259 18,071 4,071 7,259
Other Income:
Servicing Income.......................... 54 -- -- 54
Income on Third Party Finance
Receivables.............................. 1,069 1,844 217 1,069
Franchise Fees and Other Income........... 60 308 82 60
------- ------- ------- -------
1,183 2,152 299 1,183
------- ------- ------- -------
Income before Operating Expenses.......... 8,442 20,223 4,370 8,442
Operating Expenses:
Selling and Marketing..................... 1,041 3,229 710 1,041
General and Administrative................ 3,841 11,974 2,449 3,841
Depreciation and Amortization............. 332 1,265 250 332
------- ------- ------- -------
5,214 16,468 3,409 5,214
------- ------- ------- -------
Operating Income (Loss)................... 3,228 3,755 961 3,228
Other Expenses:
Interest on Subordinated Debt............. -- -- 678 2,569 3,492 792 631 1,940 440
Interest Expense, Other................... 1 12 215 468 2,464 330 1,019 2,742 394
Other, Net................................ -- (48) 64 170 296 25 32 75 25
------ ------ ------- ------- ------- ------- ------- ------- -------
1 (36) 957 3,207 6,251 1,147 1,682 4,757 859
------ ------ ------- ------- ------- ------- ------- ------- -------
Income Tax Expense (Benefit).............. -- -- 30 (334) -- -- -- -- --
------ ------ ------- ------- ------- ------- ------- ------- -------
Net Earnings (Loss)....................... $ (715) $ (495) $ 699 $(1,967) $(3,972) $ (465) $ 1,066 $ (1,002) $ 102
------ ------ ------- ------- ------- ------- ------- ------- -------
Preferred Stock Dividend.................. $ -- -- -- -- -- -- $ 300 -- --
------ ------ ------- ------- ------- ------- ------- ------- -------
Net Earnings (Loss) Available to Common
Shares................................... $ (715) $ (495) $ 699 $(1,967) $(3,972) $ (465) $ 766 $ (1,002) $ 102
====== ====== ======= ======= ======= ======= ======= ======= =======
Net Earnings (Loss) per Common Share...... $(0.15) $(0.11) $ 0.14 $ (0.35) $ (0.67) $ (0.08) $ 0.13 $ (0.16) $ 0.02
====== ====== ======= ======= ======= ======= ======= ======= =======
Weighted Average Common Shares Outstanding
during Period(3)......................... 4,640 4,640 5,010 5,584 5,892 5,892 5,892 6,337 6,337
====== ====== ======= ======= ======= ======= ======= ======= =======
Interest on Subordinated Debt............. 350 1,940 440 350
Interest Expense, Other................... 1,081 1,545 77 810
Other, Net................................ 32 75 25 32
------- ------- ------- -------
1,463 3,560 542 1,192
------- ------- ------- -------
Income Tax Expense (Benefit).............. -- -- -- --
------- ------- ------- -------
Net Earnings (Loss)....................... $ 1,765 $ 195 $ 419 $ 2,036
------- ------- ------- -------
Preferred Stock Dividend.................. $ 250 -- -- $ 250
------- ------- ------- -------
Net Earnings (Loss) Available to Common
Shares................................... $ 1,515 $ 195 $ 419 $ 1,786
======= ======= ======= =======
Net Earnings (Loss) per Common Share...... $ 0.24 $ 0.02 $ 0.05 $ 0.21
======= ======= ======= =======
Weighted Average Common Shares Outstanding
during Period(3)......................... 6,337 8,337 8,337 8,337
======= ======= ======= =======
(footnotes on page 19)
</TABLE>
17
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
PRO FORMA(1)
---------------------
MARCH
DECEMBER 31, MARCH 31, 31,
--------------------------------------------- ----------------- DECEMBER 31, -------
1991 1992 1993 1994 1995 1995 1996 1995 1995
------ ------ ------- ------- ------- ------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total Finance Receivables, Net............ $ -- $1,758 $ 7,089 $15,858 $40,726 $19,459 $39,479 $ 40,726 $19,459
Total Assets.............................. 1,195 4,392 11,936 29,711 60,790 33,722 61,659 68,125 41,057
Total Subordinated Notes Payable.......... 93 8,941 18,291 14,553 17,215 14,000 14,553 17,215
Total Debt................................ 400 4,189 9,380 28,617 50,737 29,804 49,755 55,187 34,254
Total Preferred Stock..................... -- -- -- -- 10,000 -- 10,000 10,000 --
Total Common Stock........................ 1 1 1 77 127 127 127 3,012 3,012
Total Stockholders' Equity (Deficit)(4)... 4 (1) 697 (1,194) 4,884 (1,609) 5,650 7,769 1,276
Principal Balances Outstanding:
Dealership Sales Portfolio................ -- 2,492 9,588 19,881 34,227 23,801 27,830 34,227 23,801
Third Party Dealer Portfolio.............. -- -- -- 1,620 13,805 1,998 18,492 13,805 1,998
Portfolio Securitized with Servicing
Retained................................. -- -- -- -- -- -- 12,622 -- --
------ ------ ------- ------- ------- ------- ------- ------ -------
Total..................................... $ -- $2,492 $ 9,588 $21,501 $48,031 $25,799 $58,944 $ 48,031 $25,799
======= ======= ======== ======== ======== ======== ======== ============== ========
PRO FORMA (1) AS ADJUSTED(2)
---------------------------------------
MARCH 31,
DECEMBER 31, -----------------
1996 1995 1995 1996
------- ------------ ------- -------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total Finance Receivables, Net............ $39,479 $ 40,726 $19,459 $39,479
Total Assets.............................. 68,944 68,125 41,057 68,944
Total Subordinated Notes Payable.......... 14,000 14,553 17,215 14,000
Total Debt................................ 54,205 44,187 23,254 43,205
Total Preferred Stock..................... 10,000 10,000 -- 10,000
Total Common Stock........................ 3,012 14,012 14,012 14,012
Total Stockholders' Equity (Deficit)(4)... 8,535 18,769 12,276 19,535
Principal Balances Outstanding:
Dealership Sales Portfolio................ 27,830 34,227 23,801 27,830
Third Party Dealer Portfolio.............. 18,492 13,805 1,998 18,492
Portfolio Securitized with Servicing
Retained................................. 12,622 -- -- 12,622
------- ------ ------- -------
Total..................................... $58,944 $ 48,031 $25,799 $58,944
======== ============== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
---- ------ ------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
DEALERSHIP OPERATING DATA (UNAUDITED):
Average Sales Price per Car.................................. -- n/a(1) $ 4,159 $ 5,269 $ 6,478 $5,854 $ 7,117
Number of Used Cars Sold..................................... -- n/a 3,359 5,270 7,383 1,654 2,119
Number of Contracts Originated............................... -- n/a 3,093 4,731 6,129 1,470 1,986
Principal Balances Originated (000 Omitted).................. -- n/a $12,984 $23,589 $36,568 $8,165 $13,635
Company Dealerships.......................................... -- 1 5 8 8 8 7
Units Sold per Dealership.................................... -- n/a 672 659 923 207 303
Number of Contracts Outstanding.............................. -- 803 2,929 5,515 8,049 6,414 6,194
Allowance as % of Outstanding Principal...................... -- 29.4% 30.0% 30.4% 21.9% 28.3% 23.0%
Average Principal Balance Outstanding........................ -- $3,105 $ 3,273 $ 3,605 $ 4,252 $3,711 $ 4,493
Average Yield on Contracts................................... -- n/a 26.4% 28.2% 28.0% 27.9% 28.0%
Delinquencies:
Principal Balances 31 to 60 Days............................. -- n/a 10.5% 5.1% 4.2% 3.6% 2.6%
Principal Balances over 60 Days.............................. -- n/a 15.0% 1.3% 1.1% 2.0% 1.1%
THIRD PARTY OPERATING DATA (UNAUDITED):
Number of Contracts Purchased................................ -- -- -- 1,423 3,012 484 1,268
Principal Balances Purchased (000 Omitted)................... -- -- -- $ 3,607 $16,455 $ 932 $ 7,186
Number of Branch Offices..................................... -- -- -- 1 8 1 10
Number of Third Party Dealers................................ -- -- -- 20 118 20 317
Number of Contracts Outstanding.............................. -- -- -- 726 2,733 1,029 3,592
Allowance as % of Outstanding Principal...................... -- -- -- 9.8% 7.2% 7.6% 7.3%
Average Principal Balance Outstanding........................ -- -- -- $ 2,232 $ 5,051 $1,942 $ 5,148
Average Yield on Contracts................................... -- -- -- 30.9% 26.7% 30.5% 26.9%
Delinquencies:
Principal Balances 31 to 60 days............................. -- -- -- 6.0% 1.2% 2.8% 0.9%
Principal Balances over 60 days.............................. -- -- -- 2.6% 0.4% 3.0% 0.1%
Per Contract Purchased:
Average Discount............................................. -- -- -- $ 504 $ 551 $ 212 $ 569
Average Percent Discount..................................... -- -- -- 12.5% 10.1% 11.0% 10.0%
<CAPTION>
PRO FORMA(1)
---------------------------
YEAR THREE MONTHS
ENDED ENDED
DECEMBER 31, MARCH 31,
1995 1995
------------ ------------
<S> <<C> <C>
DEALERSHIP OPERATING DATA (UNAUDITED):
Average Sales Price per Car.................................. $ 6,065 $5,809
Number of Used Cars Sold..................................... 6,326 1,496
Number of Contracts Originated............................... 5,768 1,338
Principal Balances Originated (000 Omitted).................. $ 34,419 $7,418
Company Dealerships.......................................... 7 7
Units Sold per Dealership.................................... 904 214
Number of Contracts Outstanding.............................. 8,049 6,414
Allowance as % of Outstanding Principal......................
Average Principal Balance Outstanding........................ $ 4,252 $3,711
Average Yield on Contracts................................... 28.0% 27.9%
Delinquencies:
Principal Balances 31 to 60 Days.............................
Principal Balances over 60 Days..............................
THIRD PARTY OPERATING DATA (UNAUDITED):
Number of Contracts Purchased................................
Principal Balances Purchased (000 Omitted)...................
Number of Branch Offices.....................................
Number of Third Party Dealers................................
Number of Contracts Outstanding..............................
Allowance as % of Outstanding Principal......................
Average Principal Balance Outstanding........................
Average Yield on Contracts...................................
Delinquencies:
Principal Balances 31 to 60 days.............................
Principal Balances over 60 days..............................
Per Contract Purchased:
Average Discount.............................................
Average Percent Discount.....................................
</TABLE>
(footnotes on following page)
18
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL INFORMATION (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
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, which will take effect upon the closing of
the offering, 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 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 three months ended March 31, 1995 and
the year ended December 31, 1995, since the dealership was not operating
during the three months ended March 31, 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>
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -----------------------
1995 1995 1996
------------ --------- ---------
<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% to 10%.......................... $1,551,855 $ 352,151 $ 280,615
Elimination of rent expense charged to General and
Administrative Expense on real property to be purchased from
Verde Investments............................................. 1,185,432 258,999 433,380
Additional Interest Expense, Other arising from the purchase of
real property financed at an assumed rate of 10%.............. (645,000) (151,250) (167,500)
Reduction in rent expense charged to General and Administrative
Expense on properties sub-leased from Verde Investments....... 187,000 46,750 46,750
Reduction in Preferred Stock Dividend due to rate reduction on
the Series A Preferred Stock from 12% to 10%.................. -- -- 50,000
Reduction in Interest Expense, Other arising from the purchase
of $3 million of Common Stock at the public offering price
pursuant to the conversion of convertible debt held by
SunAmerica and the pro forma reduction of borrowings.......... 366,222 86,565 105,641
---------- --------- ---------
Total pro forma increase in Net Earnings Available to Common
Shares arising from the Recapitalization Transactions......... $2,645,509 $ 593,215 $ 748,886
---------- --------- ---------
Pro Forma Adjustments due to the Sale of the Gilbert Dealership:
Reduction in:
Sales of Used Cars............................................ 9,456,814 992,869 --
Cost of Used Cars Sold........................................ 7,279,436 546,765 --
Provision for Credit Losses................................... 520,077 187,653 --
---------- --------- ---------
Net Revenues from Dealership Activities.................. 1,657,301 258,451 --
---------- --------- ---------
Selling and Marketing Expenses................................ 627,021 40,373 --
General and Administrative Expenses........................... 1,083,689 180,460 --
Depreciation.................................................. 48,808 10,759 --
Other Expenses (loss on sale of leasehold improvements,
property, and equipment).................................... 221,396 -- --
---------- --------- ---------
Total pro forma increase (decrease) in Net Earnings Available to
Common Shares arising from the sale of the Gilbert
Dealership.................................................... 323,613 (26,859) --
---------- --------- ---------
Total pro forma increase in Net Earnings Available to Common
Shares arising from all pro forma adjustments................. $2,969,122 566,356 748,886
========== ========= =========
</TABLE>
(2) As adjusted financial information reflects the sale of the 2,000,000 shares
of Common Stock offered hereby at an assumed public offering price of $6.75
per share and the initial application of the estimated net proceeds
therefrom to repay indebtedness under the Company's Revolving Facility as of
December 31, 1994. Such adjustment reduces the Company's Interest Expense,
Other and increases the Company's Net Earnings for the year ended December
31, 1995 by $1,197,215, for the three months ended March 31, 1995 by
$317,404, and for the three months ended March 31, 1996 by $271,003
(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> 22
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
March 31, 1995 and 1996, and its results of operations for the years ended
December 31, 1993, 1994, and 1995 and the three months ended March 31, 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. For information relating to factors that could affect future
operating results, see "Risk Factors." Any forward-looking statements included
in this Prospectus should be considered in light of such factors, as well as the
information set forth below.
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 for purchasing
contracts from Third Party Dealers and by April 15, 1996 had opened eleven
Branch Offices in five states serving over 300 Third Party Dealers. This
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 expansion of its Company Dealerships.
Growth in Finance Receivables. As a result of the Company's rapid
expansion, total assets, consisting primarily of contract receivables, increased
from $11.9 million at December 31, 1993, to $29.7 million at December 31, 1994,
to $60.8 million at December 31, 1995 to $61.7 million at March 31, 1996 (which
excludes $13.0 million in contracts sold and securitized in March 1996).
20
<PAGE> 23
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
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED MARCH
YEARS ENDED DECEMBER 31, 31,
--------------------------------------------------------------------------- -----------
1993 1994 1995 1995
----------------------- ----------------------- ----------------------- -----------
PRINCIPAL NO. OF PRINCIPAL NO. OF PRINCIPAL NO. OF PRINCIPAL
AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT
----------- --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Company Dealerships.............. $12,983,997 3,093 $23,589,458 4,731 $36,568,158 6,129 $ 8,164,833
Third Party Dealers.............. -- -- 3,606,554 1,423 16,455,472 3,012 931,831
----------- ----- ----------- ----- ----------- ----- -----------
Total......................... $12,983,987 3,093 $27,196,012 6,154 $53,023,630 9,141 $ 9,096,664
=========== ===== =========== ===== =========== ===== ===========
<CAPTION>
1996
-----------------------
NO. OF PRINCIPAL NO. OF
CONTRACTS AMOUNT CONTRACTS
--------- ----------- ---------
<S> <C> <C> <C>
Company Dealerships.............. 1,470 $13,635,146 1,986
Third Party Dealers.............. 484 7,185,662 1,268
----- ----------- ------
Total......................... 1,954 $20,820,808 3,254
===== =========== ======
</TABLE>
TOTAL CONTRACTS OUTSTANDING
<TABLE>
<CAPTION>
AS OF MARCH
AS OF DECEMBER 31, 31,
--------------------------------------------------------------------------- -----------
1993 1994 1995 1995
----------------------- ----------------------- ----------------------- -----------
PRINCIPAL NO. OF PRINCIPAL NO. OF PRINCIPAL NO. OF PRINCIPAL
AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT
----------- --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Company Dealerships.............. $ 9,587,995 2,929 $19,881,034 5,515 $34,226,909 8,049 $23,801,383
Third Party Dealers.............. -- -- 1,620,098 726 13,804,533 2,733 1,997,896
----------- ----- ----------- ----- ----------- ----- -----------
Total Portfolio Serviced......... $ 9,857,995 2,929 $21,501,132 6,241 $48,031,442 10,782 $25,799,279
----------- ----- ----------- ----- ----------- ----- -----------
Less Portfolio Securitized and
Sold............................ -- -- -- -- -- -- --
----------- ----- ----------- ----- ----------- ----- -----------
Company Total.................... $ 9,587,995 2,929 $21,501,132 6,241 $48,031,442 10,782 $25,799,279
=========== ===== =========== ===== =========== ===== ===========
<CAPTION>
1996
-----------------------
NO. OF PRINCIPAL NO. OF
CONTRACTS AMOUNT CONTRACTS
--------- ----------- ---------
<S> <C> <C> <C>
Company Dealerships.............. 6,414 $40,451,684 8,880
Third Party Dealers.............. 1,029 18,492,469 3,592
----- ----------- -----
Total Portfolio Serviced......... 7,443 $58,944,153 12,472
----- ----------- -----
Less Portfolio Securitized and
Sold............................ -- (12,621,846) (2,686)
----- ----------- -----
Company Total.................... 7,443 $46,322,307 9,786
===== =========== =====
</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
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.
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
Sales of Used Cars. Sales of Used Cars increased by 73.6% from $8.7
million (pro forma) for the three months ended March 31, 1995 to $15.1 million
for the three months ended March 31, 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 seven current
Company Dealerships.
The average sales price per car increased by 22.5% from $5,809 (pro forma)
for the three months ended March 31, 1995 to $7,117 for the three months ended
March 31, 1996. This increase reflect management's decision to sell higher
quality vehicles at its seven operating dealerships. Units sold per Company
Dealership averaged 214 (pro forma) for the three months ended March 31, 1995,
and 303 for the three months ended March 31, 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.
21
<PAGE> 24
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 89.4% (pro forma) and 93.7% of the
used cars sold at Company Dealerships for the three months ended March 31, 1995
and 1996, respectively. Finance income rose in conjunction with the growth in
the Company Dealership contract portfolio, increasing by 56.3% from $1.6 million
for the three months ended March 31, 1995 to $2.5 million for the three months
ended March 31, 1996. Finance income was reduced in March 1996 and will be
reduced further in future periods by the securitization completed in March 1996
and by additional securitizations. Substantially all contracts have been
originated with a 29.9% annual percentage rate ("APR").
The Company defers certain costs associated with the origination of finance
receivables at its Company Dealerships and amortizes these loan origination
costs against Income on Finance Receivables using the interest method. In each
of the three month periods ended March 31, 1995 and 1996, the Company deferred
$100 in loan origination costs per contract originated. Total costs deferred for
these three month periods in 1995 and 1996 were $181,000 and $206,000,
respectively. Income on receivables was reduced for these periods by the
amortization of the loan origination costs by $107,000 and $152,000,
respectively. The effective yield on finance receivables from Company
Dealerships was 28.0% at both March 31, 1995 and 1996.
Gain on Sale of Finance Receivables. During the quarter ended March 31,
1996, the Company initiated a securitization program ("Securitization Program")
with SunAmerica under which the Company sells certificates backed by Company
Dealership contracts to SunAmerica. The Company retains a residual in the
contracts sold and records a gain on the sale. The Company's intention is to
periodically securitize an amount of contracts commensurate with the amount of
contracts produced during the period. Through the recognition of a gain on the
sale of finance receivables, the Company has effectively present valued the
income from finance receivables generated from the sale of used cars, net of all
associated administrative, servicing, credit loss, and financing costs. To the
extent that the amount of finance receivables generated from used car sales in a
period is equal to the amount of receivables sold, the Company's results of
operations in a given period will more closely reflect the profitability of used
car sales and financing for the period. Such sales will also have the effect of
reducing the Company's future finance income.
The amount of the gain on sale reflects the difference between the yield
earned on the contract portfolio securitized and the return on the certificates
sold, and is computed based on the difference between: (i) the dollar amount
received for the certificates plus the value of the residual retained by the
Company, and (ii) the 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 first securitization was completed in March, 1996 with the sale to
SunAmerica of $10.0 million in certificates backed by $13.0 million in
contracts. The Company reduced its Allowance by $1.7 million in this transaction
and retained a residual in the contracts sold of $2.6 million, recording a gain
on sale of $539,000, net of expenses of $318,000. The Company plans to complete
a securitization approximately every three to four months.
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 certificates 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. In the event actual
performance of the receivables sold results in less cash flow than originally
anticipated, and to the extent that the net realizable value of the Residual is
impaired, the Residual's value will be reduced with a corresponding charge to
operations in the period in which the adjustment is made. For the quarter ended
March 31, 1996, income on the residual was $103,000 reflecting activity from
March 12, 1996.
Cost of Used Cars Sold and Gross Margin. The Cost of Used Cars Sold
increased by 93.0% from $4.3 million (pro forma) for the three months ended
March 31, 1995 to $8.3 million for the three months ended March 31, 1996. On a
per unit basis, the Cost of Used Cars Sold increased by 36.7% from $2,882 (pro
forma) for the three months ended March 31, 1995 to $3,939 for the three months
ended March 31, 1996,
22
<PAGE> 25
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 52.3% from
$4.4 million (pro forma) for the three months ended March 31, 1995 to $6.7
million for the three months ended March 31, 1996. As a percentage of sales, the
gross margin decreased from 50.4% for the three months ended March 31, 1995 (pro
forma) to 44.6% for the three months ended March 31, 1996. The Company
attributes the decline in the gross margin percentage to the increased cost of
the higher quality cars sold at Company Dealerships which was not accompanied by
a proportionate increase in sales price. 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 $2,927 (pro forma) for the three months ended March 31, 1995
and $3,178 for the three months ended March 31, 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 36.8%
from $1.9 million (pro forma) for the three months ended March 31, 1995 to $2.6
million for the three months ended March 31, 1996. As a percentage of contract
balances originated, the Provision decreased from 25.2% (pro forma) for the
three months ended March 31, 1995 to 19.1% for the three months ended March 31,
1996. The decrease for the three months ended March 31, 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 APR on its contracts less
amortization of loan origination costs.
Net Revenues from Dealership Activities. Net Revenues from Dealership
Activities increased significantly in the three months ended March 31, 1996
compared to the three months ended March 31, 1995, reflecting primarily the
rapid growth of the Company Dealerships and the completion of the first
securitization in March 1996. Net revenues as a percentage of total revenues
from dealership activities were 39.7% (pro forma) and 39.9% for the three months
ended March 31, 1995 and 1996, respectively. The increase in 1996 reflects first
time revenues from the Gain on Sale and Income on Residual in Finance
Receivables from the first securitization, and the decrease in the Provision for
Credit Losses as a percentage of sales. These factors were offset by increases
in the Cost of Used Cars Sold.
Servicing Income. The Company services the $13.0 million in contracts sold
in the initial sercuritization for a monthly fee of .417% of beginning of period
principal balance (5% annualized). Servicing Income for March 1996 totaled
$54,000.
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 407% from $217,000 for the three months ended March 31,
1995, which was prior to the expansion of the Company's Third Party Dealer
operations, to $1.1 million for the three months ended March 31, 1996.
Subsequent to March 31, 1995, as a result of its migration to more creditworthy
borrowers and expansion into markets with interest rate limits of 21%, the
Company's yield on its Third Party Dealer contract portfolio has trended
downward. Portfolio yield was approximately 30.5% and 26.7% at March 31, 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 decreased by 26.8% from $82,000 for the three months ended March 31, 1995
to $60,000 for the three months ended March 31, 1996. The Company no
23
<PAGE> 26
longer actively engages in the rent-a-car franchise business. The Company has
informed its rent-a-car franchisees that it will not advertise or actively
support the rent-a-car business and that they may terminate their franchise
agreements provided that they cease to use the Company's trademarks.
Income before Operating Expenses. As a result of the Company's rapid
expansion, Income before Operating Expenses grew by 90.9% from $4.4 million (pro
forma) for the three months ended March 31, 1995 to $8.4 million for the three
months ended March 31, 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 three months ended March 31, 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 42.9% from $710,000 (pro forma) for the three
months ended March 31, 1995 to $1.0 million for the three months ended March 31,
1996 . As a percentage of Sales of Used Cars, these expenses averaged 8.2% (pro
forma) for the three months ended March 31, 1995 and 6.9% for the three months
ended March 31, 1996. On a per unit sold basis, Selling and Marketing Expenses
of Company Dealerships increased by 3.5% from $475 (pro forma) for the three
months ended March 31, 1995 to $491 for the three months ended March 31, 1996.
Beginning in the middle of 1994 and continuing throughout March 1996, the
Company undertook to significantly expand its advertising and marketing efforts.
Advertising increased by 30.1% from $428,000 (pro forma) for the three months
ended March 31, 1995 to $557,000 for the three months ended March 31, 1996.
General and Administrative Expenses. General and Administrative Expenses
increased by 48.3% from $2.9 million for the three months ended March 31, 1995
to $4.3 million for the three months ended March 31, 1996. These expenses
represented 25.4% of total revenues for the three months ended March 31, 1995
and 22.3% for the three months ended March 31, 1996. For the three months ended
March 31, 1995, 76.9% of General and Administrative Expenses were attributable
to Company Dealership sales and financing activities, 3.1% to Third Party Dealer
activities and 20.0% to Corporate overhead. For the three months ended March 31,
1996, 67.0% of General and Administrative Expenses were attributable to Company
Dealership sales and financing activities, 13.0% to Third Party Dealer
activities and 20.0% 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 primary
contributors to the increase in General and Administrative Expenses. These rents
increased 47.7% from $394,000 for the three month period ended March 31, 1995 to
$582,000 for the three month period ended March 31, 1996. Upon the closing of
the offering, Verde Investments, an affiliate of the Company, has agreed to sell
to the Company, 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, pending such sale, to lower
the rental rates on such properties to an aggregate of $745,000 per year, which
the Company believes approximates the financing costs to be incurred in
connection with the purchase of such properties. In addition, Verde Investments
has agreed to assign to the Company its leasehold interest in two properties it
sub-leases to the Company. These two transactions would have resulted in savings
to the Company of approximately $310,000 for the three months ended March 31,
1996. See "Recapitalization and Related Transactions." In addition, 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 32.8% from
$250,000 (pro forma) for the three months ended March 31, 1995 to $332,000 for
the three months ended March 31, 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 three
24
<PAGE> 27
months ended March 31, 1996, 75.6% of these expenses were attributable to
Company Dealership sales and financing activities, 10.1% to Third Party Dealer
activities and 14.3% to Corporate overhead. Amortization of Covenants was
$70,000 for the three months ended March 31, 1995. As of December 31, 1995, all
existing covenants had been fully amortized.
Other Expenses. Interest on Subordinated Debt, which bears interest at
18%, decreased by 20.3% from $792,000 for the three months ended March 31, 1995
to $631,000 for the three months ended March 31, 1996, due to the decrease in
the average principal balance outstanding during the quarter. Effective upon the
closing of this offering, the interest rate on the subordinated debt will be
decreased from 18% to 10%. On a pro forma basis, such adjustments would have
lowered subordinated debt interest expense for the three months ended March 31,
1995 and 1996 by approximately $352,000 and $281,000, respectively.
Other Interest Expense increased by 203% from $330,000 for the three months
ended March 31, 1995 to $1.0 million for the three months ended March 31, 1996,
due to increased borrowings from GE Capital under the Revolving Facility and
from SunAmerica under the $3 million convertible note issued in August 1995. The
amount outstanding on the Revolving Facility increased from $12.1 million at
March 31, 1995 to $31.8 million at March 31, 1996. For the three months ended
March 31, 1995 and March 31, 1996, the average interest rates on the Revolving
Facility were 11.5% and 10.5%, respectively. See "Liquidity and Capital
Resources," below. Effective upon the closing of the offering, SunAmerica will
convert its convertible note into Common Stock. On a pro forma basis this
conversion to Common Stock would have lowered Interest Expense, Other by $86,000
and $106,000 for the three months ended March 31, 1995 and 1996, respectively.
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 194% from $1.6 million
in 1993 to $4.7 million in 1994 and by 74.5% to $8.2 million in 1995. During
this three year period, substantially all contracts were originated with a 29.9%
APR.
The Company defers certain costs associated with the origination of finance
receivables at its Company Dealerships and amortizes these loan origination
costs against Income on Finance Receivables using the interest method. In 1993,
1994 and 1995, the Company deferred $75, $85, and $100 in loan origination costs
per contract originated, respectively. Total costs deferred for 1993, 1994 and
1995 were $252,000, $503,000 and $737,000, respectively. Income on finance
receivables was reduced by the amortization of the loan origination costs by
$79,000, $309,000 and $522,000 in 1993, 1994 and 1995, respectively. The
effective yield on finance receivables from Company Dealerships was 26.4%, 28.2%
and 28.0% for 1993, 1994 and 1995, respectively.
25
<PAGE> 28
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 the increased cost of the higher quality cars sold at Company
Dealerships which was not accompanied by a proportionate increase in sales
price. 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 $2,346 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% 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 Finance Receivables from Third Party Dealers. 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 157.1% 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% to
29.9%. As a result of its migration in 1995 to more creditworthy borrowers
financed at lower interest rates, 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 36.7% 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
26
<PAGE> 29
increased by 63.7% from $262 in 1993 to $429 in 1994 and by 18.9% to $510 (pro
forma) in 1995. Beginning in the middle of 1994 and continuing throughout 1995,
the Company undertook to significantly expand its advertising and marketing
efforts. Advertising increased by 226% from $429,000 in 1993 to $1.4 million in
1994 and by 57.1% to $2.2 million 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. 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.
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% from $235,000 in 1993 to
$1.2 million in 1994 and by 50.0% to $1.8 million in 1995. Upon the closing of
the offering, Verde Investments, an affiliate of the Company, has agreed to sell
to the Company, 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, pending such sale, to lower
the rental rates on such properties to an aggregate of $745,000 per year, which
the Company believes approximates the financing costs to be incurred in
connection with the purchase of such properties. In addition, Verde Investments
has agreed to assign to the Company its leasehold interest in two properties it
sub-leases to the Company. These two transactions would have resulted in savings
to the Company of approximately $730,000 for for 1995. See "Recapitalization and
Related Transactions." In addition, 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 69.1% 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 upon the closing of this offering, the interest rate on the
subordinated debt will be decreased from 18% to 10%. 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.
Other Interest Expense, 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. Effective upon the closing of the
offering, SunAmerica will convert its convertible note into Common Stock. 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.
27
<PAGE> 30
Other Expenses increased by 166.8% from $64,000 in 1993 to $170,000 in 1994
and by 73.6% 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 following tables reflect activity in the Allowance for Credit Losses
for the years ended December 31, 1994 and 1995 and for the three months ended
March 31, 1995 and 1996.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1994 1995
------------------------------------- --------------------------------------
COMPANY THIRD COMPANY THIRD
DEALERSHIPS PARTY TOTAL DEALERSHIPS PARTY TOTAL
----------- --------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, Beginning of
Period.................... $ 2,876,399 $ -- $ 2,876,399 $ 6,049,439 $ 159,221 $ 6,208,660
Provision for Credit
Losses.................... 8,139,791 -- 8,139,791 8,359,585 -- 8,359,585
Discount Acquired........... -- 766,820 766,820 -- 1,659,798 1,659,798
Discount Accreted to
Income.................... -- (187,692) (187,692) -- -- --
Net Charge Offs............. (4,966,751) (419,907) (5,386,658) (6,909,024) (819,019) (7,728,043)
----------- --------- ----------- ----------- ---------- -----------
Balance, End of Period...... $ 6,049,439 $ 159,221 $ 6,208,660 $ 7,500,000 $1,000,000 $ 8,500,000
=========== ========= =========== =========== ========== ===========
Allowance as % of
Principal................. 30.4% 9.8% 28.9% 21.9% 7.2% 17.7%
=========== ========= =========== =========== ========== ===========
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------------
1995 1996
------------------------------------- --------------------------------------
COMPANY THIRD COMPANY THIRD
DEALERSHIPS PARTY TOTAL DEALERSHIPS PARTY TOTAL
----------- --------- ----------- ----------- ---------- -----------
Balance, Beginning of
Period.................... $ 6,049,439 $ 159,221 $ 6,208,660 $ 7,500,000 $1,000,000 $ 8,500,000
Provision for Credit
Losses.................... 2,217,331 -- 2,217,331 2,606,112 -- 2,606,112
Discount Acquired........... -- 102,814 102,814 -- 720,931 720,931
Reduction in Allowance for
Finance Receivables
Sold...................... -- -- -- (1,658,534) -- (1,658,534)
Net Charge Offs............. (1,521,887) (110,883) (1,632,770) (2,047,578) (370,931) (2,418,509)
----------- --------- ----------- ----------- ---------- -----------
Balance, End of Period...... $ 6,744,883 $ 151,152 $ 6,896,035 $ 6,400,000 $1,350,000 $ 7,750,000
=========== ========= =========== =========== ========== ===========
Allowance as % of
Principal................. 28.3% 7.6% 26.7% 23.0% 7.3% 16.7%
=========== ========= =========== =========== ========== ===========
</TABLE>
The reduction in the Allowance as a percentage of principal balances
reflects the increase in Third Party Dealer contracts as a percentage of the
Company's total contract portfolio, the strengthening of the Company's
underwriting procedures, increases in collateral ratios, and improved collection
procedures.
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 originated due to the factors discussed above.
See "-- Results of Operations -- Provision for Credit Losses."
Each of the contracts acquired from Third Party Dealers are purchased at a
discount to the principal amount of the contract. Beginning January 1, 1995, the
Company has allocated all 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. For the three months ended March 31, 1996, the
discount averaged $569 per contract or 10.0%. The decrease in the discount as a
percentage of the contract principal balance from 1994 through the end of the
first quarter of 1996 reflects the increase in the quality of contracts
purchased. 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.
28
<PAGE> 31
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 tables set forth information regarding charge
off activity for the years ended December 31, 1994 and 1995, and for the periods
ended March 31, 1995 and 1996:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1994 1995
-------------------------------------- ----------------------------------------
COMPANY THIRD COMPANY THIRD
DEALERSHIPS PARTY TOTAL DEALERSHIPS PARTY TOTAL
----------- ---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Charge off Activity:
Principal Balances:
Collateral Repossessed.... $ 5,743,090 $ 289,708 $ 6,032,798 $ 6,685,926 $ 806,619 $ 7,492,545
Other..................... 2,456,919 106,920 2,563,839 2,478,353 219,652 2,698,005
----------- ---------- ----------- ----------- ----------- ------------
Total Principal Balances.... 8,200,009 396,628 8,596,637 9,164,279 1,026,271 10,190,550
Accrued Interest............ 653,969 23,279 677,248 652,592 58,723 711,315
Recoveries.................. (3,887,227) -- (3,887,227) (2,907,847) (265,975) (3,173,822)
----------- ---------- ----------- ----------- ----------- ------------
Net Charge Offs............... $ 4,966,751 $ 419,907 $ 5,386,658 $ 6,909,024 $ 819,019 $ 7,728,043
============ ========== ============ ============ ============ =============
Ave. Principal Outstanding.... $16,507,497 $1,788,245 $18,295,742 $28,764,336 $ 6,889,247 $ 35,653,583
============ ========== ============ ============ ============ =============
Net Charge Offs as % of Ave.
Principal Outstanding....... 30.1% 23.5% 29.4% 24.0% 11.9% 21.7%
============ ========== ============ ============ ============ =============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------------------
1995 1996
-------------------------------------- ----------------------------------------
COMPANY THIRD COMPANY THIRD
DEALERSHIPS PARTY TOTAL DEALERSHIPS PARTY TOTAL
----------- ---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Charge off Activity:
Principal Balances:
Collateral Repossessed.... $ 1,155,327 $ 57,646 $ 1,212,973 $ 2,252,042 $ 542,028 $ 2,794,070
Other..................... 569,865 47,369 617,234 462,299 90,902 553,201
Total Principal Balances.... 1,725,192 105,015 1,830,207 2,714,341 632,930 3,347,271
Accrued Interest............ 119,612 5,868 125,480 167,157 29,785 196,942
Recoveries.................. (322,917) -- (322,917) (833,920) (291,784) (1,125,704)
----------- ---------- ----------- ----------- ----------- ------------
Net Charge Offs............... $ 1,521,887 $ 110,883 $ 1,632,770 $ 2,047,578 $ 370,931 $ 2,418,509
============ ========== ============ ============ ============ =============
Ave. Principal Outstanding.... $22,348,582 $1,927,865 $24,276,447 $35,426,966 $16,522,191 $ 51,949,157
============ ========== ============ ============ ============ =============
Net Charge Offs as % of Ave.
Principal Outstanding....... 6.8% 5.8% 6.7% 5.8% 2.2% 4.7%
============ ========== ============ ============ ============ =============
</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% to 25%, contracts with average
principal balances of approximately $4,000 bearing a typical APR of 29.9%. Under
the Company's revised program, which is aimed at more creditworthy borrowers, it
purchases from Third Party Dealers, at discounts averaging approximately 10%,
contracts with average principal balances of approximately $5,600 bearing an
average APR of 25%. As a result, Net Charge Offs as a percentage of contract
principal balances outstanding were 23.5% in the year ended December 31, 1994
and 5.8% in the three months ended March 31, 1995 versus 11.9% in the year ended
December 31, 1995 and 2.2% in the three months ended March 31, 1996. The
continued improvement in the Company's 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.
29
<PAGE> 32
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. 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% of the wholesale value of the
underlying car, as determined by various recognized valuation services such as
NADA or Kelly Blue Book, plus tax and license, 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 contract portfolio averaged 117%, as compared to
184% for the Company Dealership portfolio (105% 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% to 55% of the outstanding contract balance, while on the
Company Dealership portfolio the net recovery is expected to be approximately
33%.
Recoveries averaged 47.4% of principal balances charged off on contracts
originated through Company Dealerships in 1994 versus 31.7% in 1995 and 30.7%
for the three months ended March 31, 1996, primarily reflecting reductions in
the percentage of repossessed cars sold at its Company Dealerships from 57.5% in
1994 to 33.6% in 1995, and to 16.5% for the three months ended March 31, 1996.
Repossessed cars not sold through 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.
Recoveries of charge offs on Third Party Dealer purchased contracts were
25.9% in 1995 and 46.1% for the three months ended March 31, 1996. Management
believes that 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. 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
portfolio 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 to 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, which relates to Company Dealership contracts only as
of April 30, 1996, 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
analyzes its static pools on a monthly basis, for presentation purposes the
information in the table is presented on a quarterly basis:
<TABLE>
<CAPTION>
POOLS' CUMULATIVE NET LOSSES AS PERCENT OF POOLS'
ORIGINAL AGGREGATE PRINCIPAL BALANCE
-------------------------------------------------------------------------------------------
PAYMENTS COMPLETED 1993 1994 1995
BY CUSTOMER ----------------------------- ----------------------------- ---------------------------
BEFORE CHARGE OFF 1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
- --------------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 Payments........... 6.6% 7.7% 8.5% 7.1% 3.5% 3.6% 3.4% 2.9% 1.6% 2.5% 2.0% 0.8%
3 Payments........... 18.3% 18.4% 19.9% 16.9% 10.7% 11.3% 8.3% 8.8% 7.9% 7.5% 6.1% x
6 Payments........... 26.6% 26.2% 25.2% 23.4% 14.2% 15.3% 12.6% 12.8% 13.1% 11.9% x --
12 Payments.......... 33.2% 30.6% 30.4% 27.7% 17.5% 19.7% 16.5% 16.9% x -- -- --
18 Payments.......... 35.1% 32.1% 31.5% 28.9% 18.9% 21.4% x -- -- -- -- --
24 Payments.......... 35.3% 32.3% 31.7% 29.5% x -- -- -- -- -- -- --
</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
30
<PAGE> 33
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 that 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.
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. In the meantime, management evaluates the adequacy of the
Allowance on the Third Party Dealer portfolio through comparisons in the
characteristics of the 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.
Delinquencies. Analysis of delinquency trends is also considered in
evaluating the adequacy of the Allowance. The following tables reflect the
principal balances of delinquent contracts as a percentage of total outstanding
contract principal balances as of December 31, 1993, 1994, and 1995, and as of
March 31, 1995 and 1996.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------------------------------------
1993 1994 1995
--------------------------- --------------------------- ---------------------------
COMPANY THIRD COMPANY THIRD COMPANY THIRD
DEALERSHIPS PARTY TOTAL DEALERSHIPS PARTY TOTAL DEALERSHIPS PARTY TOTAL
----------- ----- ----- ----------- ----- ----- ----------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
31 Days to 60 Days.............. 10.5% -- 10.5 % 5.1% 6.0% 5.2% 4.2% 1.2% 3.3%
Over 60 Days.................... 15.0% -- 15.0 % 1.3% 2.6% 1.4% 1.1% 0.4% 0.9%
--- ----- ----- --- ----- ----- --- ----- -----
Total Over 30 Days.............. 25.5% -- 25.5 % 6.4% 8.6% 6.6% 5.3% 1.6% 4.2%
========== ===== ===== ========== ===== ===== ========== ===== =====
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
-------------------------------------------------------------------------------------
1995 1996
----------------------------------------- -----------------------------------------
COMPANY SECURITIZED THIRD COMPANY SECURITIZED THIRD
DEALERSHIPS PORTFOLIO PARTY TOTAL DEALERSHIPS PORTFOLIO PARTY TOTAL
----------- ----------- ----- ----- ----------- ----------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
31 Days to 60 Days................ 3.6% -- 2.8% 3.5% 2.6% 2.9% 0.9% 2.1%
Over 60 Days...................... 2.0% -- 3.0% 2.1% 1.1% 0.6% 0.1% 0.7%
--- --- ----- ----- --- --- ----- -----
Total Over 30 Days................ 5.6% -- 5.8% 5.6% 3.7% 3.5% 1.0% 2.8%
========== ========== ===== ===== ========== ========== ===== =====
</TABLE>
The Company's improved delinquency experience on its Company Dealership
contract portfolio is attributable to the factors discussed above. See
"-- Allowance for Credit Losses -- Static Pool Analysis." The Company attributes
the improved delinquency experience of its Third Party Dealer contract portfolio
to the increased quality of the contracts it purchases from Third Party Dealers.
Because its Third Party Dealer contract portfolio is relatively unseasoned, the
Company expects delinquencies in this portfolio to increase in the aggregate,
reflecting the fact that delinquencies occur throughout the term of a contract.
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
31
<PAGE> 34
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 291.4% from $9.3 million in 1993
to $36.4 million in 1995. 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 54.5%
from $3.3 million for the three months ended March 31, 1995 to $5.1 million for
the three months ended March 31, 1996. The increase was primarily due to
increases in net earnings, Provision for Credit Losses and accrued expenses, and
other long-term liabilities offset by a reduction in prepaid expenses. The Net
Cash Used in Investing Activities decreased by 30.3% from $6.6 million in the
three months ended March 31, 1995 to $4.6 million in the three months ended
March 31, 1996. The principal uses in 1996 were $10.8 million for the increase
in the contract portfolio and the $2.6 million increase in the residual in
finance receivables offset by $10.0 million provided by the sale of finance
receivables.
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 Used in Financing Activities for the three
months ended March 31, 1996 was $1.3 million, the primary uses of which were pay
down of the Revolving Facility of $362,000, repayments on subordinated debt of
$552,000, and a dividend on the Preferred Stock of $300,000.
Revolving Facility. The Revolving Facility with GE Capital has a maximum
commitment of up to $50 million. Under the Revolving Facility, the Company may
borrow up to 65% of the principal balance of eligible Company Dealership
contracts and up to 90% 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 the Revolving Facility for one additional year.
The facility is secured by substantially all of the Company's assets. As of
March 31, 1996, the Company's borrowing capacity under the Revolving Facility
was approximately $34.2 million, the aggregate principal amount outstanding
under the Revolving Facility was $31.8 million, and the amount available to be
borrowed under the facility was $2.4 million. The Revolving Facility bears
interest at the 30-day LIBOR plus 4.25%, payable daily (total rate of 9.6% as of
March 31, 1996). The Company intends to use all or substantially all 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's outstanding
voting securities resulting in a change in control in which Mr. Ernest C.
Garcia, II, the Company's majority stockholder, owns less than 51% of the
Company will result in an event of default under the Revolving Facility. No
change in control 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 majority 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 at March 31,
1996. At all times, these borrowings have accrued interest at an annual rate of
18%.
On December 31, 1995, Verde converted $10.0 million of subordinated debt to
Preferred Stock of the Company. The Preferred Stock accrues a dividend of 12%
annually, increasing one percent per year up to a maximum of 18%. Concurrently
with the closing of the offering, the dividend on the Preferred Stock will be
32
<PAGE> 35
decreased to 10% through December 31, 1997, at which time the rate will be
raised to 12%. See "Recapitalization and Related Transactions" and "Description
of Capital Stock -- Preferred Stock."
Upon the closing of this offering, the interest rate on the $14 million of
subordinated debt payable to Verde Investments will be lowered to 10%, and the
Company will be required to make monthly payments of interest and annual
payments of principal in the amount of $2 million. This debt will be junior to
all of the Company's other indebtedness. The Company may suspend interest and
principal payments in the event it is in default on obligations to any other
creditors.
Convertible Note. In 1995, the Company entered into a note purchase
agreement with SunAmerica pursuant to which SunAmerica purchased a $3 million
convertible subordinated note. The convertible note, which is due June 30, 1998,
bears interest at a rate of 12.5%, payable quarterly, and is secured by a pledge
of the Common Stock of the Company held by the Company's Chairman, Chief
Executive Officer and majority stockholder. The note is convertible into Common
Stock of the Company at the initial public offering price of the Common Stock.
Effective upon the closing of the offering, SunAmerica will exercise its
conversion rights. In return for the conversion, the Company has agreed to grant
SunAmerica a ten-year warrant to purchase 100,000 of Common Stock at the initial
public offering price and pay to SunAmerica fees 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 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.
Although the Securitization Program had significant up-front expenses which
reduced the Company's gain on sale on the first securitization, management
expects that the ongoing funding costs will be 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. Pursuant to its growth strategy, the
Company anticipates developing or acquiring five new Company Dealerships and
opening 15 to 20 new Branch Offices through the end of 1997. The Company
estimates that it will cost an aggregate of approximately $7.5 million to
develop these Company Dealerships and an additional $750,000 to $1,000,000 to
establish the Branch Offices. The Company intends to finance these expenditures
through operating cash flows and supplemental borrowings, including under the
Revolving Facility.
SEASONALITY
Historically, the Company has experienced higher revenues in the first two
quarters (particularly in the first quarter) 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.
33
<PAGE> 36
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 will adopt for its fiscal year ending December
31, 1996, will require "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." In the opinion of management, the adoption of SFAS No.
121 will 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.
34
<PAGE> 37
BUSINESS
GENERAL
Ugly Duckling Corporation (the "Company") is a fully integrated used car
sales and finance company that operates the largest chain of "buy here-pay here"
used car dealerships in Arizona. As part of its activities, the Company
underwrites, finances and services installment contracts generated by its
dealerships and by third party used car dealerships located in selected markets
throughout the United States. The Company targets Sub-Prime Borrowers who have
limited credit histories, low incomes, or past credit problems.
The rapidly growing used car sales and finance industry achieved record
sales in 1995 of 30.5 million units, representing approximately $290 billion in
sales. During this same period, more than $185 billion in retail installment
contracts were originated through the sale of used cars. Of this amount,
approximately 19.2 million units were sold to Sub-Prime Borrowers, generating
$124 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.
During the three months ended March 31, 1996, the Company's net earnings
before preferred stock dividends were approximately $1.1 million. The Company's
first quarter of each year has historically been one of its most profitable and
may not necessarily be indicative of results to be expected for the rest of the
year. The Company's total revenues for the first quarter of 1996 were $19.4
million, including $15.1 million on the sale of more than 2,000 used cars, and
$3.6 million in finance income. Revenues also included a gain of approximately
$540,000 on the sale of receivables pursuant to a newly instituted
securitization program. In addition, the Company purchased more than 1,200
contracts from Third Party Dealers with an aggregate principal balance of $7.2
million during the quarter. The combined principal balance of the Company's
dealership and third party dealer contract portfolios as of March 31, 1996 was
$46.3 million.
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 vehicles 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 51.4% of these sales, with the
remaining 48.6% 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 sales 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
35
<PAGE> 38
(including prorating customer payments due within one month into several smaller
payments and scheduling 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., Driver's Mart, and CarChoice, 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 billion in contracts on new and used cars
originated in 1995. The sub-prime segment of this industry accounted for
approximately $50 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 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.
The industry statistical information presented herein is derived from
information provided to the Company by CNW Marketing/Research of Bandon, Oregon.
36
<PAGE> 39
BUSINESS STRATEGY
The Company's primary objective is to increase income from its used car
sales and financing operations through the application of a comprehensive
business strategy combining various operating, marketing, and growth objectives.
Company Dealership Operations. 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,
centralized purchasing, value-added marketing programs, and dedication to
customer service. 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. See "-- Company Dealership
Operations."
Company Dealership Marketing Strategy. The Company has designed and
implemented a marketing program that promotes its image as a professional, yet
approachable, operation, in contrast to the generally unfavorable public image
of typical Buy Here-Pay Here dealers. The Company's advertising employs its
widely recognized duck mascot and logo in television, radio, and billboard
advertisements and features its multiple locations, wide selection of quality
used cars, and ability to finance most Sub-Prime Borrowers. The Company has also
implemented innovative marketing programs that are designed to attract Sub-Prime
Borrowers by assisting them in reestablishing their credit, offering incentives
for timely payment on contracts, and promoting customer loyalty. The Company
believes that these programs have enabled it to create brand name awareness in
its target market. See "-- Company Dealership Operations -- Advertising and
Marketing."
Third Party 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. The Company hires experienced branch managers having existing
relationships with Third Party Dealers. The Company's branch managers have an
average of approximately 12 years of experience in the sub-prime automobile
finance industry. The Company also continually evaluates expansion into
additional geographic areas with Third Party Dealers whose contracts meet the
Company's underwriting standards. The Company expects that contracts purchased
from Third Party Dealers will make up an increasingly greater percentage of its
total contract portfolio. See "-- Third Party Dealer Operations."
Growth Strategy. 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 April 15, 1996, the
Company had developed or acquired seven Company Dealerships (excluding two
others which it has subsequently closed) and, since 1994, had opened eleven
Branch Offices (five in Arizona, two in Indiana, two in Colorado, one in
Florida, and one in Nevada). These Branch Offices service the more than 300
Third Party Dealers with whom the Company currently has dealer agreements. The
Company intends to leverage its management team, collection facilities, and
computer networks and proprietary software to grow its Company Dealership and
Third Party Dealer activities, both in Arizona and in other geographic locales.
Over the next two years, the Company anticipates developing or acquiring
approximately five additional Company Dealerships and opening 15 to 20
additional Branch Offices in various states, and also expects to add up to 300
Third Party Dealers to its dealer network. See "-- Expansion Plans and
Acquisition Opportunities."
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 seven used car
dealerships serving the Phoenix and Tucson, Arizona metropolitan areas. The
Company distinguishes its direct sales and financing operations from
37
<PAGE> 40
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.
Each Company Dealership maintains an extensive inventory of 100 to 300 used
cars and features a broad 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 $7,117 for the
three months ended March 31, 1996, and $6,065 for the fiscal year ended December
31, 1995 (exclusive of sales at the Company's Gilbert Dealership). Customer down
payments during these periods averaged 10% to 15% of the purchase price. The
Company typically finances the balance of the purchase price at a fixed interest
rate of 29.9% over periods ranging from 18 to 36 months. Company Dealerships use
a standardized sales contract. 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.
Used Car Financing. The Company finances sales by Company Dealerships
through retail installment contracts which 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.
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 were unable to charge such higher
prices or otherwise obtain acceptable margins, its results of operations would
be adversely affected.
Subsequent to each sale, all finance transactions are "audited" by the
Company's corporate staff and reviewed for compliance with minimum deal
standards. To the extent such audits reveal non-compliance with minimum deal
standards, such non-compliance is discussed with dealership management and,
where
38
<PAGE> 41
appropriate, remedial action against the responsible manager, ranging from oral
or written reprimands to termination, is taken.
The Company's use of wide area and local area networks, which feature its
proprietary software, 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.
The Company reserves a percentage of the principal balance of each contract
originated by a Company Dealership for future credit losses, recording this
amount as a direct charge to expense through its Provision for Credit Losses,
which increases the Allowance for Credit Losses. The size of this Allowance,
which as of March 31, 1996 averaged 23% of the total outstanding principal
balance of all contracts originated by Company Dealerships, reflects the credit
risk presented by the customers of Company Dealerships, the relatively low
wholesale value of the cars securing the contracts, and the generally high
margins earned by Company Dealerships on sales of used cars. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Provision for Credit Losses" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Allowance for Credit Losses."
At December 31, 1994 and 1995, the Company serviced approximately $19.9
million and $34.2 million, respectively, in contracts originated by Company
Dealerships.
Advertising and Marketing. The Company believes that it maintains the
largest advertising budget of any single independent 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
(or, in some cases, substantially 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. The Company has implemented a program
pursuant to which the Company arranges for qualified applicants to obtain
a Visa credit card secured by a $250 deposit paid 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.
39
<PAGE> 42
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
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 April 15, 1996 had opened eleven
Branch Offices serving over 300 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 originated with customers that
are superior in quality to those of Company Dealerships (i.e., customers who are
"C" rated or higher). 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 $700,000 and $1.8 million in fiscal years
1994 and 1995, respectively, and $1.1 million for the three months ended March
31, 1996. See "Selected Consolidated Financial Data."
Third Party Dealer Financing. 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% to 20%, and averages approximately
10%. The Company allocates the discount to the allowance for credit losses,
which enables the Company to establish such allowance without having to record a
provision for credit losses. The Company determines the appropriate discount
needed 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% of the Kelly Blue Book
40
<PAGE> 43
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.
At December 31, 1994 and 1995, and March 31, 1996, the Company owned and
serviced $1.6 million, $13.8 million, and $18.5 million in contracts,
respectively, that were originated by Third Party Dealers. As of March 31, 1996,
the Company had entered into dealer agreements with more than 300 Third Party
Dealers as compared to approximately 20 at December 31, 1994.
Branch Offices. As of April 15, 1996, the Company had established eleven
Branch Offices in five states for the purpose of identifying, and purchasing
contracts from, Third Party Dealers interested in affiliating with the Company.
In 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 12 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 minimum deal 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.
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 in
December 1995:
<TABLE>
<CAPTION>
COMPANY THIRD PARTY
------- -----------
<S> <C> <C>
Principal amount of contract..................... $ 6,260 $ 6,035
Annual percentage rate........................... 29.7% 25.5%
Loan term (months)............................... 35.9 34.8
Total down payment............................... $ 851 $ 1,495
Company cost or Third Party Dealer advance....... $ 2,853 $ 5,470
Blue book value.................................. $ 3,302 $ 5,185
Model year....................................... 1987 1989
Age of borrower.................................. 35 35
Annual income.................................... $24,165 $31,545
Years at current residence....................... 5.2 3.3
Years at current job............................. 3.6 3.1
</TABLE>
The Company expects that approximately 35% to 40% 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% of the original principal amount financed. Recoveries on the Company
Dealership portfolio are expected to average approximately 33% of the principal
balance charged-off, for a net loss of approximately 20% of the original
principal amount financed. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Allowance for Credit
Losses -- Static Pool Analysis."
41
<PAGE> 44
The Company expects that approximately 25% 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 20%
of the original principal amount financed. Recoveries on the Third Party Dealer
portfolio are expected to average approximately 50% of the principal balance
charged-off, for a net loss of approximately 10% 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 -- Static Pool Analysis."
MONITORING AND COLLECTIONS
The Company believes that its ability to minimize credit losses is due in
great part to its sophisticated monitoring and collection systems which are used
with respect to contracts originated by Company Dealerships and those purchased
from Third Party Dealers.
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
proprietary collections software to monitor the performance of all of the
contracts.
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% 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 cash receipts are deposited
and credited to the appropriate accounts.
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 steady decline over the past several quarters
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 -- Delinquencies."
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 a "voluntary repossession" of the car. 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 80% of the
cars that it attempts to repossess, and that of these, approximately two-thirds
are sold on a wholesale basis and the rest are sold through Company Dealerships.
The Company's access to a retail outlet for its repossessed collateral lessens
its credit losses and provides the Company with additional flexibility with
respect to the disposal of the collateral. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
42
<PAGE> 45
EXPANSION PLANS AND ACQUISITION OPPORTUNITIES
The Company's business strategy calls for aggressive growth in both its
Company Dealership and Third Party Dealer operations. Consistent with its
historical practice, the Company intends to expand its operations through a
combination of internal development and acquisitions. The Company anticipates
that, during 1996 and 1997, it will develop or acquire approximately five
Company Dealerships. The Company is in the process of opening a Company
Dealership in Prescott, Arizona and other locations under consideration include
Albuquerque, New Mexico, and Las Vegas, Nevada. The Company also intends to open
15 to 20 Branch Offices and significantly increase the number of Third Party
Dealers under contract.
The Company also intends to explore acquisition opportunities. Because the
used car sales and financing market is highly fragmented, participants with
access to sufficient funding have an opportunity to act as market consolidators.
The Company believes its current management team, monitoring and collection
operations, and corporate infrastructure are capable of supporting substantially
larger operations. In addition, the Company believes that, with the improved
capital base and access to capital resulting from this offering, it will have
greater access to the financing required for its growth. With respect to Company
Dealership operations, the Company intends to explore the acquisition of both
single dealership locations and multiple dealership networks. In its Third Party
Dealer operations, the Company reviews opportunities to acquire contract
portfolios and independent finance companies.
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., Driver's Mart, and
CarChoice, 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 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. 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
43
<PAGE> 46
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 21% 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, the State of Arizona, which
does not impose limits on the 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 currently operates in Indiana and Colorado, each of
which impose interest rate limits of 21%. 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 the trade names "Ugly Duckling Car Sales," "Ugly Duckling
Rent-A-Car," and "America's Second Car." These registrations are effective
though 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 rental car 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 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 March 31, 1996, the Company employed 425 persons, of which 46 were
employed in the Company's executive and administrative offices, 216 were
employed in its Company Dealership operations, 112 were employed in the
Company's credit and collection activities, and 51 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.
44
<PAGE> 47
PROPERTIES
As of April 15, 1996, the Company leased 25 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 seven dealerships, six are leased from Verde
Investments and one is leased from an unrelated third party. The principal lease
on this latter facility expires in 1998 and the Company has a five year renewal
option. The Company's other facilities at that date included three monitoring
and collection facilities, two storage lots, one reconditioning facility, and
eleven Branch Offices. Rent expense totaled $1.4 million and $2.4 million for
1994 and 1995, respectively, and $736,000 for the three months ended March 31,
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, the Company is named occasionally as a defendant in civil suits
filed by customers in state or local 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's financial position or
results of operations. However, there can be no assurance in this regard.
45
<PAGE> 48
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Information concerning the Company's current directors and executive
officers, and persons nominated to become directors upon the closing of the
offering, 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........................... 48 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
Peter R. Fratt............................ 38 Vice President -- Real Estate
Eric J. Splaver........................... 33 Corporate Controller
Robert J. Abrahams........................ 69 Director-Nominee
Christopher D. Jennings................... 42 Director-Nominee
John N. MacDonough........................ 52 Director-Nominee
Arturo R. Moreno.......................... 49 Director-Nominee
Frank P. Willey........................... 42 Director-Nominee
</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 was appointed President and Chief Operating Officer of
the Company in 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 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.
46
<PAGE> 49
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.
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 been nominated and has agreed to serve as a director
of the Company upon the closing of the offering. 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 has agreed to serve as a member of the Audit Committee of the Board of
Directors.
Christopher D. Jennings has been nominated and has agreed to serve as a
director of the Company upon the closing of the offering. Mr. Jennings has
served as a managing director of Cruttenden Roth Incorporated, an investment
banking firm that is the Representative of the several Underwriters of this
offering, since 1995. From 1992 to 1994, Mr. Jennings served as a Managing
Director of investment banking at Sutro & Co., an investment banking firm. Prior
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.
John N. MacDonough has been nominated and has agreed to serve as a director
of the Company upon the closing of the offering. 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 been nominated and has agreed to serve as a director
of the Company upon the closing of the offering. Mr. Moreno has served as the
President and Chief Executive Officer of Outdoor Systems Advertising, 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 has agreed to serve as a member of the Audit Committee of
the Board of Directors.
Frank P. Willey has been nominated and has agreed to serve as a director of
the Company upon the closing of the offering. Mr. Willey has served as the
President of Fidelity National Financial, Inc., one of the nation's largest
title insurance underwriters, since January 1995. From 1984 to 1995, Mr. Willey
served as the Executive Vice President and General Counsel of Fidelity National
Title. Mr. Willey is also a director of CKE Restaurants, Inc., an operator of
various quick-service restaurant chains.
47
<PAGE> 50
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 A. 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 various businesses controlled by Mr. Garcia 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 Mr. Garcia's businesses 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.
48
<PAGE> 51
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 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%($)
- -------------------------- ----------- ------------ -------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Ernest C. Garcia, II...... -- -- -- -- -- --
Steven P. Johnson......... -- -- -- -- -- --
Steven T. Darak........... -- -- -- -- -- --
Scott A. Allen............ 116,000 26.3% 0.86 06/30/01 1,002,000 1,426,000
</TABLE>
- ---------------
(1) Generally, options are subject to vesting over a five-year period, with 20%
of the options becoming exercisable on each successive anniversary of the
date of grant.
(2) The exercise price of the options granted to Mr. Allen approximated the fair
market value of the Common Stock on the date of grant, as determined by the
Board of Directors of the Company.
(3) Gains are reported net of the option exercise price, but before taxes
associated with exercise. These amounts represent certain assumed rates of
appreciation. Actual gains, if any, on stock option exercises are dependent
on the future performance of the Common Stock and overall stock market
conditions, as well as the option holder's continued employment with the
Company throughout the vesting period. The amounts reflected in this table
will not necessarily be achieved.
49
<PAGE> 52
FISCAL YEAR END OPTION VALUES
The following table sets forth information concerning the value of
unexercised options held by the Named Executive Officers as of December 31,
1995. No Named Executive Officer exercised any options in 1995.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR END(#)(1) FISCAL YEAR END($)(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%
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 assumed 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.
Following the offering, the Incentive Plan will be administered by the
Board of Directors or a committee that is appointed by, and serves at the
discretion of, the Board of Directors consisting of at least two nonemployee
directors. The Board of Directors or the committee, as the case may be, will
have 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 the date of this Prospectus, the Company has granted options to
purchase 443,120 shares of Common Stock to various of its employees. Generally,
such options are subject to vesting over a five-year period, with 20% of the
options becoming exercisable by the holder thereof on each successive
anniversary date of the grant. The exercise price of the options granted to date
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 maximum of
$9,240, 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 not
to exceed 10% 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.
50
<PAGE> 53
EMPLOYMENT CONTRACTS
On January 1, 1996, the Company entered into a three-year employment
agreement with Mr. Ernest C. Garcia, II, the Company's Chaiman and Chief
Executive Officer. The agreement establishes Mr. Garcia's base salary for 1996
at $120,000 per year and provides a minimum ten-percent 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 expired by its terms on December 31, 1995, and is currently in effect
on a month-to-month basis.
COMMITTEES OF THE BOARD OF DIRECTORS
Effective upon the closing of the offering, the Company will establish a
Compensation Committee and an Audit Committee. The Compensation Committee, a
majority of which will be independent directors, will review executive salaries
and administer any bonus, incentive compensation, and stock option plans of the
Company, including the Long-Term Incentive Plan. In addition, the Compensation
Committee will consult with management of the Company regarding compensation
policies and practices of the Company. The Audit Committee, which will consist
of Messrs. Abrahams and Moreno, both of whom are independent directors, will
review the professional services provided by the Company's independent auditors,
the annual financial statements of the Company, and the Company's system of
internal controls.
DIRECTOR FEES
The Company's independent directors will be 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 will be reimbursed for
reasonable travel expenses incurred in connection with attendance at each Board
and committee meeting. In addition, upon the close of the offering, each
independent director will receive Common Stock of the Company valued at $30,000
(4,444 shares each based upon an initial public offering price of $6.75 per
share), which will be subject to vesting in equal annual increments over a
three-year period. Directors who are also officers of the Company will not be
compensated for their services as directors.
51
<PAGE> 54
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of April 15, 1996, the number and
percentage of outstanding shares of Common Stock beneficially owned by: (i) each
director and director-nominee of the Company; (ii) the Named Executive Officers
of the Company; (iii) all directors, director-nominees, 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 83.2 4,640,000 57.8
SunAmerica Life Insurance Company(3)...... -- -- 708,592 8.7
Steven P. Johnson......................... 290,000 5.2 290,000 3.6
Robert J. Abrahams(4)..................... -- -- 4,444 *
Christopher D. Jennings(4)................ -- -- 4,444 *
John N. MacDonough(4)..................... -- -- 4,444 *
Arturo R. Moreno(4)....................... -- -- 4,444 *
Frank P. Willey(4)........................ -- -- 4,444 *
Steven T. Darak........................... 232,000 4.2 232,000 2.9
Scott A. Allen(5)......................... 139,200 2.5 139,200 1.7
All directors, director-nominees and
executive
officers as a group (15 persons)(6)..... 5,417,200 97.1 5,439,420 67.8
</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 5,579,600 shares of Common Stock outstanding as
of April 15, 1996, and 8,024,044 shares of Common Stock outstanding as of
the close 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 gives effect to the conversion by SunAmerica of $3
million of subordinated debt into Common Stock and the purchase by
SunAmerica of $1 million of Common Stock in the offering (based on an
assumed public offering price of $6.75). The total also includes 116,000
shares of Common Stock issuable upon the exercise of warrants to be issued
to SunAmerica upon the close of the offering. The address of SunAmerica is 1
SunAmerica Center, Los Angeles, California 90067.
(4) The totals for Messrs. Abrahams, Jennings, MacDonough, Moreno, and Willey
include 4,444 shares of Common Stock that each will receive upon their
appointment to the Board of Directors at the close of the offering (assuming
an initial public offering price of $6.75 per share). See "Management --
Director Fees."
(5) The total for Mr. Allen includes 23,200 shares subject to unexercised
options that are exercisable on April 15, 1996 or within 60 days thereafter.
(6) The total for all directors, director-nominees, and executive officers as a
group includes 22,220 shares of Common Stock issuable to the Company's
independent directors upon the closing of the offering (assuming an initial
public offering price of $6.75 per share).
52
<PAGE> 55
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. In the future, any 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 that will be no less favorable to the Company than
the Company could obtain from non-affiliated parties.
As of March 31, 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 majority stockholder, is
the President and sole stockholder of Verde Investments. These leases require
the Company to make monthly base rent payments aggregating approximately
$100,000, 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. In connection with these leases, the Company has paid
security deposits to Verde Investments totaling $364,000, which are included in
other assets in the consolidated balance sheets of the Company as of March 31,
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 $582,000 during the three months ended March 31, 1996. Upon
the closing of the offering, Verde Investments has agreed to sell to the
Company, 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, pending such sale, to lower the
rents on such properties to an aggregate of $745,000 per year, which the Company
believes approximates the financing costs to be incurred in connection with the
purchase of such properties. In addition, Verde Investments has agreed to assign
to the Company its leasehold interest in the two properties it sub-leases to the
Company. These two transactions would have resulted in savings to the Company of
approximately $730,000 for 1995 and $310,000 for the three months ended March
31, 1996. See "Recapitalization and Related Transactions."
From time to time, the Company has borrowed money from Verde Investments on
a subordinated basis, which amounts bear interest at a per annum rate of 18%,
payable monthly. Immediately prior to the end of 1995, the aggregate amount
outstanding under these subordinated notes was $24,553,000. At December 31,
1995, $10 million of this subordinated debt was converted into Preferred Stock
of the Company. The Preferred Stock accrues a dividend of 12% annually,
increasing one percent per year up to a maximum of 18%. In March 1996, the
Company paid $553,000 in principal to Verde Investments, lowering the total
amount of subordinated debt owed to Verde Investments to $14 million. Effective
upon closing of the offering, Verde Investments has agreed to enter into a new
subordinated note payable agreement that will lower the interest rate on the
outstanding subordinated debt payable to Verde Investments from 18% to 10% per
annum and that will require monthly payments of interest and annual principal
payments of $2 million, with the note balance payable in full seven years after
the date of the close of this offering. In addition, Verde Investments has
agreed to lower the dividend rate on the Preferred Stock stock to 10% through
the end of 1997, at which time the rate will be raised to 12%. See "Description
of Capital Stock -- Preferred 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 the Representative, has
been nominated and has agreed to serve as a director of the Company upon the
closing of the offering.
53
<PAGE> 56
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, copies of
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
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. Immediately following the completion of this
offering, 8,024,044 shares of Common Stock will be issued and outstanding
(assuming no exercise of outstanding options or warrants), and 1,000,000 shares
of Preferred Stock will be issued and outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters on which stockholders are entitled to vote. Holders of
Common Stock do not have cumulative voting rights, and therefore holders of a
majority of the shares voting for the election of directors can elect all of the
directors. In such event, the holders of the remaining shares will not be able
to elect any directors.
Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The Company does not anticipate paying cash dividends in the
foreseeable future. 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. As of the date of this Prospectus, there are ten holders of
Common Stock.
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 Certificate of Incorporation designates a series of Preferred
Stock as the "Series A Preferred Stock." The series consists of 1,000,000
shares, $.001 par value per share, all of which were issued to Verde Investments
on December 31, 1995, in exchange for $10 million of 18% subordinated debt. The
Series A 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 Company's Certificate of Incorporation or by
applicable law, shares of Series A 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 A 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 A Preferred Stock or create any new
class of stock having preference over or being on a parity with the shares of
the Series A Preferred Stock as to distributions upon the liquidation, winding
up, or dissolution of the Company. Cumulative dividends are payable quarterly
out of
54
<PAGE> 57
funds legally available therefor at an annual rate of 12%, which rate increases
one percent per year through 2002 at which point they reach their maximum rate
of 18% per annum. If dividends for an entire calendar year have not been
declared and paid within 30 days after the end of the calendar year, then until
said dividends are paid, holders of Series A 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 A 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 A 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.
At the closing of the offering, Verde Investments has agreed to lower the
dividend rate on the Series A Preferred Stock to 10% through the end of 1997, at
which time the rate will be raised to 12%. See "Recapitalization and Related
Transactions."
OTHER SECURITIES
Upon the closing of the offering, the Company will issue warrants to
SunAmerica to purchase 116,000 shares of Common Stock at an exercise price per
share equal to the initial public offering price. Other warrants will be issued
to the Representative to purchase up to 150,000 shares of Common Stock at an
exercise price per share equal to 120% of the initial public offering price.
Options for 800,000 shares of Common Stock have been authorized for issuance
under the Company's Long-Term Incentive Plan, as amended. See "Recapitalization
and Related Transactions," "Underwriting," and "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 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
55
<PAGE> 58
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 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 and,
in the case of nominations, not less than 90 days prior to the anniversary date
of the immediately preceding annual meeting, subject to certain exceptions. 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> 59
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
8,024,044 shares of Common Stock. Of these shares, the 2,000,000 shares of
Common Stock sold in the offering, plus any additional shares sold upon exercise
of the Underwriters' over-allotment option, will be freely tradeable without
restriction under the Securities Act of 1933, as amended (the "Securities Act").
Commencing 180 days following the date of this Prospectus, 5,579,600 shares of
Common Stock held by existing stockholders will become eligible for sale under
Rule 144, subject to compliance with the volume limitations and other
requirements of Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted" shares for
at least two years, including persons who may be deemed "affiliates" of the
Company, as that term is defined under Rule 144, would be entitled to sell (in
accordance with the provisions specified in the rule) within any three-month
period a number of shares that does not exceed the greater of one percent of the
then outstanding shares of the Company's Common Stock (approximately 80,240
shares immediately following the offering assuming no exercise of the
Underwriters' over-allotment option) or the average weekly trading volume of the
Common Stock during the four calendar weeks preceding the date on which notice
of the sale is filed with the Commission. An "affiliate" of the Company or of a
business it has acquired within two years by merger or share exchange may sell
securities that are not "restricted" without regard to the period of beneficial
ownership but subject to the volume limitations described above and other
conditions of Rule 144. A person (or persons whose shares are aggregated) who is
not deemed an "affiliate" of the Company (and has not been at any time during
the three months immediately preceding the sale) and who has beneficially owned
his or her shares for at least three years, would be entitled to sell such
shares under Rule 144 without regard to the volume limitations described above,
manner of sale provisions, notice requirements, or availability of public
information.
The Company and its directors, director-nominees, and officers have agreed
with the Underwriters that, except in certain circumstances, they will not
issue, offer to sell, sell, contract to sell, or otherwise dispose of any shares
of Common Stock or any shares convertible or exchangeable into any shares of
Common Stock for a period of 180 days after the date of this Prospectus without
the prior written consent of the Representative. The Company does not intend to
make a public announcement in the event the Representative consents to sales
prior to the 180-day period expiring.
Prior to this offering, there has been no public market for the Company's
Common Stock and no prediction can be made of the effect, if any, that market
sales of shares or the availability of such shares for sale will have on the
market price prevailing from time to time. Nevertheless, sales of substantial
amounts of the Common Stock in the public market could adversely affect
prevailing market conditions and could impair the Company's future ability to
raise capital through the sale of its equity securities.
57
<PAGE> 60
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters") for whom Cruttenden Roth
Incorporated is acting as Representative, have severally agreed to purchase from
the Company, and the Company has agreed to sell to the Underwriters, the
respective number of shares of Common Stock set forth opposite each
Underwriter's name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Cruttenden Roth Incorporated................................
---------
Total........................................ 2,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to certain conditions precedent, including
the absence of any material adverse change in the Company's business and the
receipt of certain certificates, opinions, and letters from the Company and its
respective counsel and the Company's independent certified public accountants.
The nature of the Underwriters' obligation is such that they are committed to
purchase and pay for all the shares of Common Stock if any are purchased.
The Company has been advised by the Representative that the Underwriters
propose to offer the shares of Common Stock directly to the public at the
initial public offering price set forth on the cover page of this Prospectus and
to certain securities dealers at such price less a concession not in excess of
$ per share. The Underwriters may allow, and such selected dealers may
reallow, a discount not in excess of $ per share to certain brokers and
dealers. After the initial public offering of the shares, the public offering
price and other selling terms may be changed by the Representative. No change in
such terms shall change the amount of proceeds to be received by the Company as
set forth on the cover page of this Prospectus.
The Company has granted an option to the Underwriters, exercisable for a
period of 45 days after the date of this Prospectus, to purchase up to an
additional 300,000 shares of Common Stock at the public offering price set forth
on the cover page of this Prospectus, less the underwriting discounts and
commissions. 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 be committed, subject to certain
conditions, to purchase such additional shares of Common Stock in approximately
the same proportion as set forth in the above table.
In connection with the offering, SunAmerica, a significant funding source
for the Company, has agreed with the Representative to purchase, at the initial
public offering price, $1 million of the Common Stock offered hereby.
The Company has agreed to issue to the Representative, for a total of
$1,500, warrants (the "Representative's Warrants") to purchase up to 150,000
shares of Common Stock at an exercise price per share equal to 120% of the
initial public offering price. The Representative's Warrants are exercisable for
a period of four years beginning one year from the date of this Prospectus, and
are not transferable for a period of one year except to officers of the
Representative or any successor to the Representative. The holders of the
Representative's Warrants will have no voting, dividend, or other stockholder
rights until the Representative's Warrants are exercised. In addition, the
Company has granted certain rights to the holders of the Representative's
Warrants to register the Common Stock underlying the Representative's Warrants
under the Securities Act.
58
<PAGE> 61
The Company has agreed to pay the Representative a non-accountable expense
allowance equal to 3% of the aggregate Price to Public (including with respect
to shares of Common Stock underlying the over-allotment option, if and to the
extent it is exercised) set forth on the front cover of this Prospectus for
expenses in connection with this offering, of which the sum of $30,000 has been
paid. The Representative's expenses in excess of such allowance will be borne by
the Representative. To the extent that the expenses of the Representative are
less than the non-accountable expense allowance, the excess may be deemed to be
compensation to the Representative.
The Company has granted to the Representative a right of first refusal to
manage or co-manage certain public offerings or private placements of the
Company's debt or equity securities by the Company and certain stockholders. The
right of first refusal terminates upon the first to occur of (i) the date the
Company has completed two offerings that the Representative has declined, or
(ii) the second anniversary of the closing date of the sale of Common Stock
offered by this Prospectus.
The Representative has advised the Company that it does not expect any
sales of the shares of Common Stock offered hereby to be made to discretionary
accounts controlled by the Underwriters.
Prior to this offering, there has been no established trading market for
the Common Stock. Consequently, the initial public offering price for the Common
Stock offered hereby has been determined by negotiation among the Company and
the Representative. Among the factors considered in such negotiations were the
preliminary demand for the Common Stock, the prevailing market and economic
conditions, the Company's results of operations, estimates of the business
potential and prospects of the Company, the present state of the Company's
business operations, an assessment of the Company's management, the
consideration of these factors in relation to the market valuation of comparable
companies in related businesses, the current condition of the markets in which
the Company operates, and other factors deemed relevant. There can be no
assurance that an active trading market will develop for the Common Stock or
that the Common Stock will trade in the public market subsequent to this
offering at or above the initial public offering price.
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.
Mr. Christopher D. Jennings, a managing director of the Representative, has
been nominated and has agreed to serve as a director of the Company upon the
closing of the offering.
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, Phoenix, Arizona.
EXPERTS
The consolidated financial statements and schedule of the Company as of
December 31, 1994 and 1995, and for each of the three fiscal years in the 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.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act of 1933 with respect to the Common Stock offered
hereby. This Prospectus constitutes a part of the
59
<PAGE> 62
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 Registration Statement and the reports and other information to be
filed by the Company following the offering in accordance with the Securities
and Exchange Act of 1934, as amended, 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 Company intends to provide its stockholders with annual reports
containing financial statements audited by independent auditors and quarterly
reports for the first three fiscal quarters of each year containing unaudited
summary consolidated financial information.
60
<PAGE> 63
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
March 31, 1996 (unaudited)....................................................... F-3
Consolidated Statements of Operations for the years ended December 31,
1993, 1994, and 1995, and the three months ended March 31, 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 three months ended
March 31, 1996 (unaudited)....................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994, and 1995, and the three months ended March 31, 1995 (unaudited)
and 1996 (unaudited)............................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 64
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.
Phoenix, Arizona
January 24, 1996, except as to Note 23,
which is as of April 24, 1996.
F-2
<PAGE> 65
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995, AND MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and Cash Equivalents............................... $ 168,092 $ 1,419,043 $ 663,979
Finance Receivables (notes 3 and 11):
Principal Balances.................................... 22,066,711 49,226,410 47,228,925
Less: Allowance for Credit Losses..................... (6,208,660) (8,500,000) (7,750,000)
----------- ---------- ----------
Finance Receivables, Net........................ 15,858,051 40,726,410 39,478,925
----------- ---------- ----------
Residual in Finance Receivables Sold (note 4)........... -- -- 2,645,419
Investments Held in Trust (note 5)...................... -- -- 624,770
Note Receivable (note 6)................................ -- -- 1,175,000
Inventory, at Cost (note 11)............................ 4,848,685 6,328,973 6,205,028
Income Taxes Receivable (note 14)....................... -- 850,300 432,958
Prepaid Expenses........................................ 458,636 642,827 154,192
Property and Equipment Held for Sale (note 6)........... -- 1,086,020 --
Property and Equipment, Net (notes 7 and 11)............ 5,974,579 7,797,155 7,900,188
Covenants Not to Compete and Trademarks, Net (note 8)... 628,855 269,246 253,402
Deferred Income Taxes (note 14)......................... 1,374,000 925,000 925,000
Other Assets............................................ 399,827 745,247 1,200,537
----------- ---------- ----------
$29,710,725 $60,790,221 $61,659,398
=========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities:
Accounts Payable...................................... $ 773,877 $ 594,894 $ 1,319,521
Accrued Expenses and Other Liabilities (note 9)....... 1,380,630 4,574,134 4,934,406
Income Taxes Payable (note 14)........................ 133,700 -- --
Obligations Under Capital Leases (note 10)............ 383,592 982,754 916,357
Note Payable (note 11)................................ 9,942,147 32,201,329 31,839,050
Convertible Note Payable (note 12).................... -- 3,000,000 3,000,000
Subordinated Notes Payable (note 13).................. 18,290,916 14,552,804 14,000,000
----------- ---------- ----------
Total Liabilities.................................. 30,904,862 55,905,915 56,009,334
----------- ---------- ----------
Stockholders' Equity (Deficit) (notes 17 and 23):
Preferred Stock, $.001 Par Value; Authorized 10,000,000
Shares; Zero and 1,000,000 and 1,000,000
(unaudited)Shares Issued and Outstanding at December
31,1994, 1995 and March 31, 1996, Respectively........ -- 10,000,000 10,000,000
Common Stock, $.001 Par Value; Authorized 20,000,000
Shares; 5,521,600, 5,579,600 and 5,579,600 (unaudited)
Shares Issued and Outstanding at December 31, 1994,
1995 and March 31, 1996, Respectively................. 77,000 127,000 127,000
Accumulated Deficit..................................... (1,271,137) (5,242,694) (4,476,936)
----------- ---------- ----------
Total Stockholders' Equity (Deficit)............... (1,194,137) 4,884,306 5,650,064
----------- ---------- ----------
Commitments, Contingencies and Subsequent Events
(notes 6, 16, 18, 19, and 23).........................
----------- ---------- ----------
$29,710,725 $60,790,221 $61,659,398
=========== ========== ==========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-3
<PAGE> 66
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995, AND THREE MONTHS ENDED MARCH 31,
1995 (UNAUDITED) AND MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH
--------------------------------------- 31,
1993 1994 1995 -------------------------
----------- ----------- ----------- 1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Dealership Revenues:
Sales of Used Cars................................ $13,969,287 $27,768,095 $47,824,074 $ 9,683,175 $15,081,069
Income on Finance Receivables..................... 1,628,628 4,739,348 8,227,360 1,564,375 2,490,300
Gain on Sale of Finance Receivables............... -- -- -- -- 538,528
Income on Residual in Finance Receivables Sold.... -- -- -- -- 103,290
---------- ---------- ---------- ----------
15,597,915 32,507,443 56,051,434 11,247,550 18,213,187
---------- ---------- ---------- ----------
Cost of Dealership Revenues:
Cost of Used Cars Sold............................ 6,089,093 12,577,696 27,964,258 4,857,746 8,347,707
Provision for Credit Losses (note 3).............. 3,291,620 8,139,791 8,359,585 2,060,271 2,606,112
---------- ---------- ---------- ----------
9,380,713 20,717,487 36,323,843 6,918,017 10,953,819
---------- ---------- ---------- ----------
Net Revenues from Dealership Activities......... 6,217,202 11,789,956 19,727,591 4,329,533 7,259,368
Other Income:
Servicing Income.................................. -- -- -- -- 54,321
Income on Third Party Finance Receivables......... -- 709,710 1,844,577 216,723 1,068,695
Franchise Fees and Other Income (note 15)......... 878,663 556,509 307,741 82,111 60,099
---------- ---------- ---------- ----------
878,663 1,266,219 2,152,318 298,834 1,183,115
---------- ---------- ---------- ----------
Income before Operating Expenses................ 7,095,865 13,056,175 21,879,909 4,628,367 8,442,483
Operating Expenses:
Selling and Marketing............................. 1,292,773 2,401,998 3,855,771 750,630 1,041,004
General and Administrative (note 16).............. 3,560,526 8,970,923 14,429,925 2,935,206 4,321,445
Depreciation and Amortization..................... 191,311 481,152 1,018,047 186,519 331,614
Amortization of Covenants (note 8)................ 365,911 296,232 296,231 74,058 --
---------- ---------- ---------- ----------
5,410,521 12,150,305 19,599,974 3,946,413 5,694,063
---------- ---------- ---------- ----------
Operating Income................................ 1,685,344 905,870 2,279,935 681,954 2,748,420
Other Expenses:
Interest on Subordinated Notes Payable (note
13)............................................. 677,625 2,568,738 3,491,673 792,339 631,383
Interest, Other................................... 215,292 467,813 2,464,119 330,318 1,018,853
Other, Net........................................ 63,846 170,333 295,700 23,996 32,426
---------- ---------- ---------- ----------
956,763 3,206,884 6,251,492 1,146,653 1,682,662
---------- ---------- ---------- ----------
Income (Loss) before Income Taxes............... 728,581 (2,301,014) (3,971,557) (464,699) 1,065,758
Income Tax Expense (Benefit) (note 14):............. 30,000 (333,626) -- -- --
---------- ---------- ---------- ----------
Net Earnings (Loss)............................. $ 698,581 $(1,967,388) $(3,971,557) $ (464,699) $ 1,065,758
Preferred Stock Dividend........................ -- -- -- -- (300,000)
---------- ---------- ---------- ----------
Net Earnings Available to Common Shares......... $ 698,581 $(1,967,388) $(3,971,557) $ (464,699) $ 765,758
========== ========== ========== ==========
Earnings (Loss) per Common Share................ $ 0.14 $ (0.35) $ (0.67) $ (0.08) $ 0.13
========== ========== ========== ==========
Weighted Average Common and Common
Equivalent Shares Outstanding..................... 5,010,513 5,584,125 5,892,113 5,892,113 5,892,113
========== ========== ========== ==========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-4
<PAGE> 67
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995, AND THREE MONTHS ENDED MARCH 31,
1996 (UNAUDITED)
<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........... -- 4,640,000 $ -- $ 1,000 $ (2,330) $ (1,330)
Net Earnings for the Year............... -- -- -- -- 698,581 698,581
--------- --------- ----------- ------- ---------- ---------
Balances at December 31, 1993........... -- 4,640,000 -- 1,000 696,251 697,251
Issuance of Common Stock for Purchase
of Subsidiary (note 1 and 17)......... -- 174,000 -- 15,000 -- 15,000
Issuance of Common Stock for Cash
(note 17)............................. -- 707,600 -- 61,000 -- 61,000
Net Loss for the Year................... -- -- -- -- (1,967,388) (1,967,388)
--------- --------- ----------- ------- ---------- ---------
Balances at December 31, 1994........... -- 5,521,600 -- 77,000 (1,271,137) (1,194,137)
Issuance of Common Stock (note 17)...... -- 58,000 -- 50,000 -- 50,000
Conversion of Subordinated Notes Payable
to Preferred Stock (note 17).......... 1,000,000 -- 10,000,000 -- -- 10,000,000
Net Loss for the Year................... -- -- -- -- (3,971,557) (3,971,557)
--------- --------- ----------- ------- ---------- ---------
Balances at December 31, 1995........... 1,000,000 5,579,600 10,000,000 127,000 (5,242,694) 4,884,306
Three Months Ended
March 31, 1996 (Unaudited)
Preferred Stock Dividend................ -- -- -- -- (300,000) (300,000)
Net Earnings for the Period............. -- -- -- -- 1,065,758 1,065,758
--------- --------- ----------- ------- ---------- ---------
Balances at March 31, 1996
(unaudited)........................... 1,000,000 5,579,600 $10,000,000 $127,000 $ (4,476,936) $ 5,650,064
========= ========= =========== ======= ========== =========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-5
<PAGE> 68
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995, AND THREE MONTHS ENDED MARCH 31,
1995 (UNAUDITED) AND
MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, THREE MONTHS ENDED
---------------------------------------- MARCH 31,
1993 1994 1995 --------------------------
---------- ------------ ------------ 1995 1996
----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net Earnings (Loss)............................... $ 698,581 $ (1,967,388) $ (3,971,557) $ (464,698 ) $ 1,065,758
Adjustments to Reconcile Net Earnings (Loss) to
Net Cash Provided by Operating Activities:
Provision for Credit Losses..................... 3,291,620 8,139,791 8,359,585 2,060,271 2,606,112
Gain on Sale of Finance Receivables............. -- -- -- -- (538,528)
Compensation Expense Related to Sale of Common -- -- 45,000 45,000 --
Stock...........................................
Decrease (Increase) in Deferred Income Taxes.... (913,000) (461,000) 449,000 (168,000 ) --
Loss on Disposal of Property and Equipment...... -- 20,221 123,781 381 --
Depreciation and Amortization................... 557,222 777,384 1,314,278 260,577 331,614
Minority Interest............................... 1,252 5,210 -- -- --
Changes in Assets and Liabilities, Net of
Effects from the Purchase of Champion
Financial Services, Inc.:
Decrease (Increase) in Inventory................ (1,081,130) (3,098,247) (1,500,288) 482,208 123,945
Decrease (Increase) in Prepaid Expenses......... (139,476) (160,299) (184,191) 96,801 488,635
Increase in Other Assets........................ (281,347) (134,483) (345,420) (21,692 ) (455,290)
Increase in Accounts Payable, Accrued Expenses, 709,540 1,063,740 3,034,521 920,138 1,084,899
and Other Liabilities.........................
Increase (Decrease) in Income Taxes Receivable/ 943,000 (809,300) (984,000) 68,000 417,342
Payable.......................................
---------- ----------- ----------- ---------- ----------
Net Cash Provided by Operating 3,786,262 3,375,629 6,340,709 3,278,986 5,124,487
Activities...............................
---------- ----------- ----------- ---------- ----------
Cash Flows from Investing Activities:
Increase in Finance Receivables................... (8,621,895) (14,992,896) (33,227,944) (5,660,755 ) (13,402,831)
Proceeds from Sale of Finance Receivables......... -- -- -- -- 9,937,313
Increase in Investments Held in Trust............. -- -- -- -- (624,770)
Increase in Notes Receivable...................... (82,341) -- -- -- --
Repayments of Notes Receivable.................... 85,688 120,483 -- -- 25,000
Purchase of Property and Equipment (270,701) (5,333,797) (3,194,772) (901,624 ) (532,783)
Payment for Purchase of Inventory and Equipment... (424,850) -- -- -- --
Purchase of Minority Interest of Subsidiary....... -- (15,000) -- -- --
Payment for Purchase of Subsidiary, Net of Cash -- (376,070) -- -- --
Acquired........................................
---------- ----------- ----------- ---------- ----------
Net Cash Used in Investing Activities...... (9,314,099) (20,597,280) (36,422,716) (6,562,379 ) (4,598,071)
---------- ----------- ----------- ---------- ----------
Cash Flows from Financing Activities:
Increase in Deposit Liability..................... -- -- -- 2,250,000 --
Repayments of Obligations Under Capital Leases.... -- (15,463) (193,112) (17,841 ) (66,397)
Additions to Notes Payable........................ -- 9,942,147 22,259,182 2,202,811 --
Repayments of Notes Payable....................... (3,749,547) (2,026,944) -- -- (362,279)
Addition to Convertible Note Payable.............. -- -- 3,000,000 -- --
Net Issuance (Repayment) of Subordinated Notes 8,941,055 9,349,861 6,261,888 (1,076,131 ) (552,804)
Payable.........................................
Preferred Stock Dividend Paid..................... -- -- -- -- (300,000)
Proceeds from Issuance of Common Stock............ -- 61,000 5,000 5,000 --
---------- ----------- ----------- ---------- ----------
Net Cash Provided by (Used in) Financing 5,191,508 17,310,601 31,332,958 3,363,839 (1,281,480)
Activities...............................
---------- ----------- ----------- ---------- ----------
Net Increase (Decrease) in Cash and Cash (336,329) 88,950 1,250,951 80,446 (755,064)
Equivalents.......................................
Cash and Cash Equivalents at Beginning of Period.... 415,471 79,142 168,092 168,092 1,419,043
---------- ----------- ----------- ---------- ----------
Cash and Cash Equivalents at End of Period.......... $ 79,142 $ 168,092 $ 1,419,043 $ 248,538 $ 663,979
========== =========== =========== ========== ==========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-6
<PAGE> 69
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE THREE MONTHS ENDED MARCH 31, 1995 (UNAUDITED) AND MARCH 31, 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. 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, 1995 and March 31, 1996, reflects the number of
authorized shares after giving effect to the merger and common stock split. The
Company's majority 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 March 31, 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 Casualty Insurance Inc.; Drake Life Insurance, Inc., 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> 70
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:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1994
----------------- -----------------
<S> <C> <C>
Income on Third Party Finance
Receivables........................... $ 1,004,879 $ 787,891
Income (Loss) before Income Taxes....... 1,079,570 (2,283,825)
Net Earnings (Loss)..................... 930,234 (1,956,043)
</TABLE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
The Company, through its subsidiaries, owns and operates a sales finance
company and 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 March 31, 1996, CFS maintains
relationships with approximately 317 (unaudited) third party car dealers (third
party dealers) in five 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 three 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 $850,675 (unaudited) during the period ended March 31, 1995; income
taxes paid totaled $100,000 (unaudited) during the period ended March 31, 1995.
Interest paid totaled $1,660,750 (unaudited) during the period ended March 31,
1996; there were no (unaudited) income taxes paid during the period ended March
31, 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:
<TABLE>
<S> <C>
Fair Value of Assets Acquired.................................... $2,178,346
Purchase Price of the Common Stock............................... (420,886)
----------
Liabilities Assumed.............................................. $1,757,460
=========
</TABLE>
The Company entered into capital lease obligations totaling $399,055 and
$792,274 for certain equipment during 1994 and 1995, respectively.
F-8
<PAGE> 71
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. 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 discounts.
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."
F-9
<PAGE> 72
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 creditworthiness 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
the 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.
F-10
<PAGE> 73
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Post Sale Customer Support Programs
A liability (reserve) 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.
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). Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 83, common stock and common stock
equivalents issued during the 12-month period prior to the Company's proposed
initial public offering have been included in the calculation as if they were
outstanding for all periods presented (even if antidilutive, using the treasury
stock method and an anticipated public offering price of $6.75 per share).
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities to prepare the Consolidated
Financial Statements in conformity with generally accepted accounting
principals. Actual results could differ from those estimates.
Unaudited Interim Financial Information
The unaudited interim financial statements as of March 31, 1996 and for the
three month periods ended March 31, 1995 and 1996 reflect, in the opinion of
management all adjustments (which include only normal recurring adjustments)
necessary to fairly present the results of operations, changes in cash flows,
and financial position 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> 74
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of net finance receivables at December 31, 1994 and 1995 and
March 31, 1996 (unaudited) follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
1994 1995 1996
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Contractually Scheduled Payments.......... $27,964,991 $ 66,425,902 $ 64,845,537
Less: Unearned Finance Income............. (6,463,859) (18,394,460) (18,523,230)
----------- ------------ ------------
Installment Sales Contract Principal
Balances................................ 21,501,132 48,031,442 46,322,307
Add: Accrued Interest Receivable.......... 270,123 612,979 510,614
Loan Origination Costs, Net......... 367,307 581,989 396,004
Less: Dealer Holdbacks.................... (71,851) -- --
----------- ------------ ------------
Principal Balances, Net................... 22,066,711 49,226,410 47,228,925
Less: Allowance for Credit Losses......... (6,208,660) (8,500,000) (7,750,000)
----------- ------------ ------------
Finance Receivables, Net.................. $15,858,051 $ 40,726,410 $ 39,478,925
=========== ============ ============
</TABLE>
The allowance for credit losses as a percent of principal balances totaled
28.9% and 17.7% at December 31, 1994 and 1995, respectively, and 16.7%
(unaudited) at March 31, 1996.
The changes in the allowance and the discount for the years ended December
31, 1994 and 1995 and the period ended March 31, 1996 (unaudited) follow:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
1994 1995 1996
----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Balances, Beginning of Period.............. $ 2,876,399 $ 6,208,660 $ 8,500,000
Provision for Credit Losses on:
Company Dealership Contracts.......... 8,023,576 8,359,585 2,606,112
Third Party Dealer Contracts.......... 116,215 -- --
Discount Acquired........................ 766,820 1,659,798 720,931
Discount Accreted to Income.............. (187,692) -- --
Charge Off Activity:
Principal Balances Charged Off........ (8,596,637) (10,190,550) (3,347,271)
Accrued Interest Balances Charged
Off................................. (677,248) (711,315) (196,942)
Recoveries............................ 3,887,227 3,173,822 1,125,704
----------- ------------ -----------
Net Charge Offs..................... (5,386,658) (7,728,043) (2,418,509)
----------- ------------ -----------
Amount Relieved from Sale of
Associated Contracts............. -- -- (1,658,534)
----------- ------------ -----------
Balances, End of Period.................... $ 6,208,660 $ 8,500,000 $ 7,750,000
========== =========== ==========
</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 three months ended March 31, 1996 (unaudited), the entire
nonrefundable acquisition discount acquired was allocated to acquisition
discount available for credit losses.
F-12
<PAGE> 75
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) RESIDUAL IN FINANCE RECEIVABLES SOLD (UNAUDITED)
The valuation of the residual in finance receivables sold as of March 31,
1996 follows:
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
(UNAUDITED)
<S> <C>
Present Value of Future Cash Flows............................. $ 4,261,696
Discounted Allowance for Credit Losses......................... (1,616,277)
-----------
Residual in Finance Receivables Sold........................... $ 2,645,419
===========
</TABLE>
At March 31, 1996, the remaining balance of finance receivables sold
totaled $12,621,846 (unaudited). The discounted allowance as a percentage of the
remaining balance of finance receivables sold was 12.8% (unaudited). The Company
services these finance receivables, originated solely in the state of Arizona,
for one client.
(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 balance 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 $624,770
(unaudited) at March 31, 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. 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 $1,175,000 (unaudited) at March 31,
1996.
F-13
<PAGE> 76
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) PROPERTY AND EQUIPMENT
A summary of property and equipment as of December 31, 1994 and 1995 and
March 31, 1996 (unaudited) follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1994 1995 1996
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Buildings and Leasehold Improvements
(note 16).................................. $4,139,230 $ 5,142,551 $ 5,198,877
Furniture and Equipment (note 10)............ 1,766,984 3,401,111 3,731,232
Vehicles..................................... 114,941 133,258 133,258
Software Development Costs................... 439,909 532,884 550,601
Land......................................... 15,524 15,524 15,524
Construction in Process...................... 69,852 10,748 11,975
---------- ----------- -----------
6,546,440 9,236,076 9,641,467
Less Accumulated Depreciation and
Amortization............................... (571,861) (1,438,921) (1,741,279)
---------- ----------- -----------
Property and Equipment, Net.................. $5,974,579 $ 7,797,155 $ 7,900,188
========== =========== ===========
</TABLE>
There was no interest expense capitalized during 1993 due to immateriality.
Interest Expense capitalized in 1994, 1995 and in the period ending March 31,
1996 totaled $142,324, $54,475, and zero (unaudited), respectively.
(8) COVENANTS NOT TO COMPETE AND TRADEMARKS
A summary of covenants not to compete as of December 31, 1994 and 1995 and
March 31, 1996 (unaudited) follows:
<TABLE>
<CAPTION>
ORIGINAL ACCUMULATED NET
COST AMORTIZATION COVENANTS
---------- ----------- ---------
<S> <C> <C> <C>
December 31, 1994:
Original Date
January 1992.................................. $ 716,373 $ 557,179 $ 159,194
December 1992................................. 411,112 274,075 137,037
---------- ---------- --------
$1,127,485 $ 831,254 $ 296,231
========== ========== ========
December 31, 1995 and March 31, 1996
(unaudited):
Original Date
January 1992.................................. $ 716,373 $ 716,373 $ --
December 1992................................. 411,112 411,112 --
---------- ---------- --------
$1,127,485 $ 1,127,485 $ --
========== ========== ========
</TABLE>
Amortization Expense relating to the covenants not to compete for the years
ended December 31, 1993, 1994, and 1995 totaled $365,911, $296,232, and
$296,231. The covenants were fully amortized as of December 31, 1995.
F-14
<PAGE> 77
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of trademarks as of December 31, 1994 and 1995 and March 31, 1996
(unaudited) follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Original Cost................................... $ 580,855 $ 580,855 $ 580,855
Accumulated Amortization........................ (248,231) (311,609) (327,453)
--------- --------- ---------
Trademarks, Net............................... $ 332,624 $ 269,246 $ 253,402
========= ========= =========
</TABLE>
Amortization Expense relating to trademarks for the years ended December
31, 1993, 1994, 1995 and the periods ended March 31, 1995 and 1996 totaled
$63,378, $63,378, $63,378, $15,884 (unaudited) and $15,844 (unaudited),
respectively.
(9) ACCRUED EXPENSES AND OTHER LIABILITIES
A summary of accrued expenses as of December 31, 1994 and 1995 and March
31, 1996 (unaudited) follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Sales Taxes.................................... $ 500,826 $2,257,780 $ 2,304,171
Accrued Payroll and Payroll Taxes.............. 347,288 510,047 481,603
Accrued Promotions............................. 67,692 220,000 160,000
Deferred Revenue............................... 15,339 157,130 143,933
Provision for Loss on Disposal of Property and
Equipment.................................... -- 120,000 --
Accrued Property Taxes......................... 78,952 132,593 148,809
Accrued Rent Payable........................... 63,142 100,805 326,437
Accrued Professional Fees...................... 65,000 85,000 204,200
Amounts Collected on Behalf of Others.......... -- -- 118,626
Post-sale Customer Support Programs............ -- 450,000 550,000
Others......................................... 242,391 540,779 496,627
---------- --------- ---------
$1,380,630 $4,574,134 $ 4,934,406
========== ========= =========
</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 over the life of the receivable
contract.
(10) OBLIGATIONS UNDER CAPITAL LEASES
During the years ended December 31, 1994 and 1995, 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
and $792,274 in 1995. The total cost of equipment under capital leases totaled
$1,191,329 at December 31, 1995 and at March 31, 1996 (unaudited) and is
included in property and equipment (note 7). Accumulated depreciation totaled
$229,097 at December 31, 1995 and $304,081 (unaudited) at March 31, 1996.
Amortization expense related to these capital leases is included in depreciation
and amortization on the accompanying Consolidated Statements of Operations.
F-15
<PAGE> 78
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the present value of future minimum capital lease payments
after December 31, 1995 follows:
<TABLE>
<CAPTION>
MARCH 31,
1996
DECEMBER 31, -----------
1995
------------ (UNAUDITED)
<S> <C> <C>
1996.................................................. $ 366,328 $ 366,328
1997.................................................. 366,328 366,328
1998.................................................. 290,627 242,395
1999.................................................. 112,491 86,124
2000.................................................. 33,967 16,985
------------ -----------
Total Minimum Lease Payments............................... 1,169,741 1,078,160
Less Amount Representing Interest (ranging from
approximately 10% to 12%)................................ (186,987) (161,803)
------------ -----------
Present Value of Net Minimum Capital Lease Payments........ $ 982,754 $ 916,357
============ ===========
</TABLE>
(11) NOTE 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 $31,839,050 (unaudited) under this loan as of
December 31, 1994, 1995 and March 31, 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 March 31, 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
$886,780 (unaudited) for the period ended March 31, 1996.
(12) CONVERTIBLE NOTE PAYABLE
In August 1995, the Company executed a $3,000,000 convertible note with an
insurance company. The note calls for interest payable quarterly at an annual
rate of 12.5% and is scheduled to mature in June 1998. The note is secured by a
pledge of 100% of the common stock owned by the Company's President, and the
guarantee of Verde. The note is subordinate to the aforementioned revolving
loan. The Company had borrowed $3,000,000 related to this note as of December
31, 1995 and at March 31, 1996 (unaudited).
Pursuant to the terms of the related loan agreement, the insurance company
retains the right to convert the loan to common stock in the Company at any time
prior to repayment of the loan balance should the Company have previously
completed an initial public offering (IPO) of its common stock. The loan balance
may be converted at a price equal to the price paid per share of common stock in
the IPO.
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 and at March 31, 1996 (unaudited).
Interest expense related to this convertible note payable totaled zero and
$140,855 for the years ended December 31, 1994 and 1995, respectively, and
$105,641 (unaudited) for the period ended March 31, 1996.
F-16
<PAGE> 79
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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, $14,552,804 and $14,000,000 (unaudited) at December 31,
1994, 1995 and March 31, 1996, respectively. There was no accrued interest
payable related to these notes payable at December 31, 1994, 1995, and at March
31, 1996 (unaudited).
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. Through
December 31, 1997, the note bears a prepayment penalty of 20% of the then
outstanding principal balance. The prepayment penalty percentage decreases to
15% beginning January 1, 1998, and decreases 5% per year each year thereafter,
with no prepayment penalty beginning January 1, 2001. The Company has
$15,000,000 and $10,000,000 outstanding related to this note payable at December
31, 1994 and 1995, respectively and $10,000,000 (unaudited) at March 31, 1996.
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. In 1995, Verde agreed to waive any prepayment penalty associated with
the payment of the note, and the note was paid in full.
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 note, which
may be prepaid without penalty, provides for suspension of interest payments in
the event the Company is in default with any other creditors. The Company has
$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 March 31, 1996.
Unused amounts related to this revolving note payable totaled $1,709,084 and
$447,196 at December 31, 1994 and 1995, respectively and $1,000,000 (unaudited)
at March 31, 1996.
Interest expense related to these notes totaled $677,625, $2,568,738,
$3,491,673 and $631,383 (unaudited) for the years ended December 31, 1993, 1994,
1995, and the period ended March 31, 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 zero
(unaudited) for the years ended December 31, 1993, 1994, and 1995 and the period
ended March 31, 1996, respectively (an effective
F-17
<PAGE> 80
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------- MARCH 31,
1993 1994 1995 1996
--------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Computed "Expected" Tax Expense
(Benefit)....................... $ 247,718 $(782,345) $(1,350,329) $ 362,357
State Income Taxes, Net of Federal
Effect.......................... 3,960 (125,442) (216,513) 58,101
Change in Valuation Allowance..... (191,000) 897,000 1,418,000 (682,000)
Others, Net....................... (30,678) (322,839) 148,842 261,542
--------- --------- ----------- ---------
$ 30,000 $(333,626) $ -- $ --
========= ========= =========== =========
</TABLE>
Components of income tax expense (benefit) for the years ended December 31,
1993, 1994, and 1995 and the period ended March 31, 1996 (unaudited) follow:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
--------- --------- ---------
<S> <C> <C> <C>
1993:
Federal....................................... $ 741,000 $(717,000) $ 24,000
State......................................... 202,000 (196,000) 6,000
--------- --------- ---------
$ 943,000 $(913,000) $ 30,000
========= ========= =========
1994:
Federal....................................... $ 79,422 $(367,000) $(287,578)
State......................................... 47,952 (94,000) (46,048)
--------- --------- ---------
$ 127,374 $(461,000) $(333,626)
========= ========= =========
1995:
Federal....................................... $(449,000) $ 449,000 $ --
State......................................... -- -- --
--------- --------- ---------
$(449,000) $ 449,000 $ --
========= ========= =========
March 31, 1996 (unaudited):
Federal....................................... $ -- $ (30,000) $ (30,000)
State......................................... -- 30,000 30,000
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
</TABLE>
F-18
<PAGE> 81
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 March 31, 1996 (unaudited) are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1994 1995 1996
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Finance Receivables, Principally Due to the
Allowance for Credit Losses............. $2,387,000 $ 2,987,000 $ 2,463,000
Acquisition Discount....................... -- 95,000 --
Federal and State Income Tax Net Operating
Loss Carryforward....................... 197,000 317,000 257,000
Accrued Vacation Benefits.................. 43,000 67,000 67,000
Accrued Post-Sale Liabilities.............. -- 194,000 309,000
Property and Equipment, Principally Due
to Depreciation......................... 15,000 87,000 90,000
---------- ----------- -----------
Total Gross Deferred Tax Assets............ 2,642,000 3,747,000 3,186,000
Less: Valuation Allowance.................. (897,000) (2,315,000) (1,633,000)
---------- ----------- -----------
Net Deferred Tax Assets................. 1,745,000 1,432,000 1,553,000
---------- ----------- -----------
Deferred Tax Liabilities:
Acquisition Discount....................... -- -- (153,000)
Covenant Not to Compete, Principally Due
to Amortization......................... (63,000) -- --
Software Development Costs................. (83,000) (96,000) (137,000)
Loan Origination Fees...................... -- (198,000) (143,000)
Basis Adjustment Related to the Acquisition
of CFS.................................. (32,000) -- --
Inventory, Principally Related to
Repossessed Vehicles.................... (193,000) (213,000) (195,000)
---------- ----------- -----------
Total Gross Deferred Tax Liabilities.... (371,000) (507,000) (628,000)
---------- ----------- -----------
Net Deferred Tax Asset............. $1,374,000 $ 925,000 $ 925,000
========= ========== ==========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1994 and
1995 was $897,000 and $2,315,000, respectively and $1,633,000 (unaudited) at
March 31, 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 $682,000 (unaudited) for the period ended March
31, 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 March 31, 1996.
At December 31, 1995, the Company has 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.
F-19
<PAGE> 82
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At March 31, 1996, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $633,000 (unaudited), 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 $1,887,000 (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 March 31, 1996 (unaudited). Additionally,
ongoing rental Franchise Fees from franchises 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 $58,424
(unaudited) for the period ended March 31, 1996.
The Company terminated agreements with twenty-four, fifty, twenty-eight and
five (unaudited) franchisees during the years ended December 31, 1993, 1994, and
1995 and the period ended March 31, 1996, respectively. Costs associated with
these terminations are not material. As of March 31, 1996, the Company retains
agreements with approximately forty-nine (unaudited) franchises with the related
agreements extending over periods ranging from five to ten years.
(16) LEASE COMMITMENTS
As of December 31, 1995, the Company leases 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 $364,000
(unaudited) which are included in Other Assets in the accompanying Consolidated
Balance Sheets as of December 31, 1994, 1995 and March 31, 1996 (unaudited),
respectively.
As of March 31, 1996 (unaudited), the Company leases an additional
operating facility and fourteen offices from unrelated entities under operating
leases which expire through April 2000. The leases require monthly rental
payments aggregating approximately $37,000 and contain various renewal options
from one to ten years. The Company is also responsible for occupancy and
maintenance costs, including real estate taxes, insurance, and utility costs.
As of March 31, 1996 (unaudited), 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.
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.
F-20
<PAGE> 83
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense for the period ended March 31, 1996 totaled $736,008
(unaudited). Rents paid to Verde totaled $582,244 (unaudited) including
contingent rents of $241,632 (unaudited). Accrued rent payable to Verde totaled
$326,437 (unaudited) at March 31, 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 March
31, 1996 (unaudited) follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996 (UNAUDITED)
---------------------------------------- -----------------------------------------
UNRELATED RELATED PARTY UNRELATED RELATED PARTY
PARTIES LEASES TOTAL PARTIES LEASES TOTAL
---------- ------------- ----------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
1996.......... $ 487,832 $ 1,245,254 $ 1,733,086 $ 476,239 $ 1,254,719 $1,730,958
1997.......... 481,827 1,217,532 1,699,359 478,322 1,251,558 1,729,880
1998.......... 320,222 1,140,526 1,460,748 280,936 1,125,138 1,406,074
1999.......... 181,026 1,032,717 1,213,743 156,952 1,061,928 1,218,880
2000.......... 48,162 1,032,717 1,080,879 21,220 1,061,928 1,083,148
Thereafter.... -- 8,261,734 8,261,734 -- 8,229,942 8,229,942
----------- ---------- ------------ ----------- ------------ ------------
$1,519,069 $ 13,930,480 $15,449,549 $1,413,669 $ 13,985,213 $15,398,882
=========== ========== ============ =========== ============ ============
</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, as described in Note 23, on April 24,
1996, the Company effectuated a 1.16-to-1 common 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.
F-21
<PAGE> 84
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.......................................... 2,900 $3.45 - 3.45 3.45
Forfeited........................................ (1,160) 2.59 - 2.59 2.59
Exercised........................................ -- -- --
------- ------------ -----
Balance, March 31,1996 (unaudited)............... 443,120 $0.86 - 3.45 $ 1.70
======= ============ =====
</TABLE>
There were no options exercisable as of March 31, 1996 (unaudited).
The Company's stockholders have executed a stockholder agreement
(agreement) which places certain restrictions on the sale of the Company's
common stock by the stockholders. The Company retains a right of first refusal
to purchase the common stock from any selling stockholder. The agreement defines
procedures to be followed in the event a stockholder wishes to sell their stock
and the method for determining the selling price and payment term. The agreement
terminates upon the closing of the Company's anticipated public offering (note
23).
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 are initially payable at a rate of 12% per annum increasing
one-percent each year through 2002 at which point they reach their maximum rate
of 18% 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, except as required by the Company's
stockholder agreement, 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 A stockholders shall be
entitled to vote in the election of the Company's Board of Directors with each
share of Series A preferred stock equivalent to ten shares of common stock.
Additionally, in the event of liquidation, the holders of Series A 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.
On March 31, 1996, the Company's Board of Directors declared a quarterly
dividend of $300,000 (unaudited) which was paid in full on that date. There were
no cumulative unpaid dividends at March 31, 1996 (unaudited).
(18) COMMITMENTS AND CONTINGENCIES
The Company has executed an agreement to sell up to $50,000,000 in
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 $10 million (unaudited) in receivable
backed certificates during the first fiscal quarter of 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.
F-22
<PAGE> 85
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 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 $7,576 (unaudited) during the year ended December 31, 1995 and the
period ended March 31, 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 short
maturity of the portfolio due to paydown and charge-offs.
Accounts Payable, Accrued Expenses, and Note 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. 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
F-23
<PAGE> 86
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
considered direct operating expenses. Identifiable assets by business segment
are those assets used in each segment of Company operations.
<TABLE>
<CAPTION>
CORPORATE
COMPANY THIRD AND
DEALERSHIPS PARTY OTHER TOTAL
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
December 31, 1993:
Total Revenue....................... $15,597,915 $ -- $ 878,663 $16,476,578
=========== =========== ========== ===========
Cost of Sales....................... $ 6,089,098 $ -- $ -- $ 6,089,093
=========== =========== ========== ===========
Provision for Credit Losses......... $ 3,291,620 $ -- $ -- $ 3,291,620
=========== =========== ========== ===========
Selling and Marketing............... $ 880,460 $ -- $ 412,313 $ 1,292,773
General and Administrative.......... 2,699,638 -- 860,888 3,560,526
Depreciation and Amortization....... 186,353 -- 4,958 191,311
Amortization of Covenants........... -- -- 365,911 365,911
----------- ----------- ---------- -----------
Operating Expenses.................. $ 3,766,451 $ -- $ 1,644,070 $ 5,410,521
=========== =========== ========== ===========
Operating Income (Loss)............. $ 2,450,752 $ -- $ (765,408) $ 1,685,344
=========== =========== ========== ===========
Capital Expenditures................ $ 216,645 $ -- $ 54,056 $ 270,701
=========== =========== ========== ===========
Identifiable Assets................. $10,070,055 $ -- $ 1,866,293 $11,936,348
=========== =========== ========== ===========
December 31, 1994:
Total Revenue....................... $32,507,443 $ 709,710 $ 556,509 $33,773,662
=========== =========== ========== ===========
Cost of Sales....................... $12,577,696 $ -- $ -- $12,577,696
=========== =========== ========== ===========
Provision for Credit Losses......... $ 8,023,576 $ 116,215 $ -- $ 8,139,791
=========== =========== ========== ===========
Selling and Marketing............... $ 2,262,990 $ -- $ 139,008 $ 2,401,998
General and Administrative.......... 6,529,991 239,981 2,200,951 8,970,923
Depreciation and Amortization....... 290,239 64,309 126,604 481,152
Amortization of Covenants........... -- -- 296,232 296,232
----------- ----------- ---------- -----------
Operating Expenses.................. $ 9,083,220 $ 304,290 $ 2,762,795 $12,150,305
=========== =========== ========== ===========
Operating Income (Loss)............. $ 2,822,950 $ 289,205 $(2,206,286) $ 905,870
=========== =========== ========== ===========
Capital Expenditures................ $ 4,662,055 $ 301,728 $ 370,014 $ 5,333,797
=========== =========== ========== ===========
Identifiable Assets................. $25,551,669 $ 1,558,086 $ 2,600,970 $29,710,725
=========== =========== ========== ===========
</TABLE>
F-24
<PAGE> 87
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
CORPORATE
COMPANY THIRD AND
DEALERSHIPS PARTY OTHER TOTAL
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1995:
Total Revenue....................... $56,051,434 $ 1,844,577 $ 307,741 $58,203,752
=========== =========== ========== ===========
Cost of Sales....................... $27,964,258 $ -- $ -- $27,964,258
=========== =========== ========== ===========
Provision for Credit Losses......... $ 8,359,585 $ -- $ -- $ 8,359,585
=========== =========== ========== ===========
Selling and Marketing............... $ 3,855,771 $ -- $ -- $ 3,855,771
General and Administrative.......... 10,594,519 1,162,449 2,672,957 14,429,925
Depreciation and Amortization....... 758,054 89,304 170,689 1,018,047
Amortization of Covenants........... -- -- 296,231 296,231
----------- ----------- ---------- -----------
Operating Expenses.................. $15,208,344 $ 1,251,753 $ 3,139,877 $19,599,974
=========== =========== ========== ===========
Operating Income (Loss)............. $ 4,519,247 $ 592,824 $(2,832,136) $ 2,279,935
=========== =========== ========== ===========
Capital Expenditures................ $ 2,756,474 $ 215,539 $ 222,759 $ 3,194,772
=========== =========== ========== ===========
Identifiable Assets................. $43,638,872 $13,419,461 $ 3,731,888 $60,790,221
=========== =========== ========== ===========
March 31, 1995 (unaudited):
Total Revenue....................... $11,247,550 $ 216,723 $ 82,111 $15,546,384
=========== =========== ========== ===========
Cost of Sales....................... $ 4,857,746 $ -- $ -- $ 4,857,746
=========== =========== ========== ===========
Provision for Credit Losses......... $ 2,060,271 $ -- $ -- $ 2,060,271
=========== =========== ========== ===========
Selling and Marketing............... $ 750,630 $ -- $ -- $ 750,630
General and Administrative.......... 2,256,480 90,606 588,120 2,935,206
Depreciation and Amortization....... 134,680 18,319 33,520 186,519
Amortization of Covenants........... -- -- 74,058 74,058
----------- ----------- ---------- -----------
Operating Expenses.................. $ 3,141,790 $ 108,925 $ 695,698 $ 3,946,413
=========== =========== ========== ===========
Operating Income (Loss)............. $ 1,187,743 $ 107,798 $ (613,587) $ 681,954
=========== =========== ========== ===========
Capital Expenditures................ $ 897,796 $ -- $ 3,828 $ 901,624
=========== =========== ========== ===========
Identifiable Assets................. $28,860,621 $ 1,835,509 $ 3,025,553 $33,721,683
=========== =========== ========== ===========
March 31, 1996 (unaudited):
Total Revenue....................... $18,267,508 $ 1,068,695 $ 60,099 $19,396,302
=========== =========== ========== ===========
Cost of Sales....................... $ 8,347,707 $ -- $ -- $ 8,347,707
=========== =========== ========== ===========
Provision for Credit Losses......... $ 2,606,112 $ -- $ -- $ 2,606,112
=========== =========== ========== ===========
Selling and Marketing............... $ 1,041,004 $ -- $ -- $ 1,041,004
General and Administrative.......... 2,895,247 560,157 866,041 4,321,445
Depreciation and Amortization....... 250,774 33,542 47,298 331,614
Amortization of Covenants........... -- -- -- --
----------- ----------- ---------- -----------
Operating Expenses.................. $ 4,187,025 $ 593,699 $ 913,339 $ 5,694,063
=========== =========== ========== ===========
Operating Income (Loss)............. $ 3,126,664 $ 474,996 $ (853,240) $ 2,748,420
=========== =========== ========== ===========
Capital Expenditures................ $ 375,116 $ 89,238 $ 68,428 $ 532,782
=========== =========== ========== ===========
Identifiable Assets................. $41,392,533 $17,425,382 $ 2,841,483 $61,659,398
=========== =========== ========== ===========
</TABLE>
F-25
<PAGE> 88
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(22) QUARTERLY FINANCIAL DATA -- UNAUDITED
A summary of the quarterly data for the years ended December 31, 1994 and
1995 follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
1994:
Total Revenues............................ $ 8,378 $ 8,128 $ 8,956 $ 8,312
======= ======= ======= =======
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)
======= ======= ======= =======
1995:
Total Revenues............................ $11,546 $14,975 $16,944 $14,739
======= ======= ======= =======
Income before Operating Expenses.......... $ 4,628 $ 5,601 $ 5,858 $ 5,793
======= ======= ======= =======
Operating Expenses........................ $ 3,946 $ 4,614 $ 5,359 $ 5,682
======= ======= ======= =======
Operating Income.......................... $ 682 $ 987 $ 500 $ 111
======= ======= ======= =======
Net Loss.................................. $ (465) $ (283) $(1,169) $(2,055)
======= ======= ======= =======
</TABLE>
(23) PUBLIC OFFERING
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.
Contingent upon closing of the public offering, Verde has agreed to lower
the interest rate on its subordinated debt, lower the dividend rate on its
preferred stock and agreed to sell certain property owned by it to the Company,
and, pending such sale, to lower the rental rates on properties leased to the
Company. In addition, the party holding the $3,000,000 convertible note has
agreed to convert the note to common stock at the initial public offering price.
F-26
<PAGE> 89
- ------------------------------------------------------
- ------------------------------------------------------
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................................ 13
Use of Proceeds............................ 13
Dividend Policy............................ 14
Recapitalization and Related
Transactions............................. 14
Capitalization............................. 15
Dilution................................... 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
Shares Eligible for Future Sale............ 57
Underwriting............................... 58
Legal Matters.............................. 59
Experts.................................... 59
Additional Information..................... 59
Index to Consolidated Financial
Statements............................... F-1
Report of Independent Auditors............. F-2
Consolidated Financial Statements.......... F-3
</TABLE>
------------------------
UNTIL , 1996 (25 CALENDAR DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF THE DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,000,000 Shares
LOGO
Common Stock
-----------------------
PROSPECTUS
-----------------------
CRUTTENDEN ROTH
INCORPORATED
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 90
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............................................ $ 6,415
*Nasdaq Filing Fee............................................... 20,000
*Blue Sky Fees and Expenses (including legal fees)............... 30,000
*Accounting Fees and Expenses.................................... 140,000
*Legal Fees and Expenses......................................... 200,000
*Printing and Engraving.......................................... 75,000
*Registrar and Transfer Agent's Fees............................. 20,000
*Directors' and Officers' Insurance.............................. 175,000
*Representative's Nonaccountable Expense Allowance............... 367,500
*Miscellaneous Expenses.......................................... 228,585
--------
Total.................................................. $1,262,500
========
</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> 91
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, Sun America purchased $3 million of the Company's
convertible subordinated debt. This indebtedness is due December 31, 1998, and
bears interest at a per annum rate of 12.5%, payable quarterly.
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> 92
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 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*
10.2 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>
II-3
<PAGE> 93
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- ----------------------------------------------------------------------------------
<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) Ugly Duckling Corporation Amended and Restated 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 Form of Ugly Duckling Corporation Nonemployee Director Restricted Stock Plan**
11 Earnings per Share Computation
21 List of Subsidiaries*
23.1 Consent of KPMG Peat Marwick LLP, independent certified public accountants
23.2 Consent of Snell & Wilmer L.L.P. (included in Exhibit 5)
24 Power of Attorney (see signature page included in Registration Statement)*
99.1 Consent of Robert J. Abrahams*
99.2 Consent of Christopher D. Jennings
99.3 Consent of John N. MacDonough
99.4 Consent of Arturo R. Moreno*
99.5 Consent of Frank P. Willey*
</TABLE>
- ---------------
* Previously filed
** To be filed by amendment
II-4
<PAGE> 94
(b) Financial Statement Schedule:
II Valuation and Qualifying Accounts
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 filedwith 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;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the registration statement is on Form S-3 or Form S-8 and
the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the
Registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference 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.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denomination and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
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 Commission such indemnification is
against public policy as expressed in the Securities 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 Securities Act and will be governed by the final
adjudication of such issue.
II-5
<PAGE> 95
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, 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-6
<PAGE> 96
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 Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Phoenix, State of Arizona, on May 29,
1996.
Ugly Duckling Corporation
By: /s/ ERNEST C. GARCIA, II
------------------------------------
Ernest C. Garcia, II
Chairman of the Board, President,
and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the 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 May 29, 1996
- --------------------------------------------- Director (Principal executive
Ernest C. Garcia, II officer)
/s/ STEVEN T. DARAK Senior Vice President and Chief May 29, 1996
- --------------------------------------------- Financial Officer (Principal
Steven T. Darak financial and accounting
officer)
</TABLE>
II-7
<PAGE> 97
Schedule II
UGLY DUCKLING CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1994, 1995 and Three Months Ending March 31, 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 $2,876,399 $8,139,791 $ 579,128 $(5,386,658) $6,208,660
December 31, 1995 $6,208,660 $8,359,585 $1,659,798 $(7,728,043) $8,500,000
Three Months ended:
March 31, 1996 $8,500,000 $2,606,112 $ 720,931 $(4,077,043) $7,750,000
</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> 98
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> 99
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBITS PAGE
- -------- --------------------------------------------------------------------- ------------
<S> <C> <C>
1 Form of Underwriting Agreement between the 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*.................................................
10.2 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>
<PAGE> 100
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBITS PAGE
- -------- --------------------------------------------------------------------- ------------
<S> <C> <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) Ugly Duckling Corporation Amended and Restated 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................................
</TABLE>
<PAGE> 101
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBITS PAGE
- -------- --------------------------------------------------------------------- ------------
<S> <C> <C>
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 Form of Ugly Duckling Corporation Nonemployee Director Restricted
Stock Plan**.........................................................
11 Earnings per Share Computation.......................................
21 List of Subsidiaries*................................................
23.1 Consent of KPMG Peat Marwick LLP, independent certified public
accounts.............................................................
23.2 Consent of Snell & Wilmer L.L.P. (included in Exhibit 5).............
24 Power of Attorney (see signature page included in Registration
Statement)*..........................................................
99.1 Consent of Robert J. Abrahams*.......................................
99.2 Consent of Christopher D. Jennings...................................
99.3 Consent of John N. MacDonough........................................
99.4 Consent of Arturo R. Moreno*.........................................
99.5 Consent of Frank P. Willey*..........................................
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
<PAGE> 1
EXHIBIT 1
2,000,000 SHARES(1)
UGLY DUCKLING CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
____________, 1996
CRUTTENDEN ROTH INCORPORATED
As Representatives of the several Underwriters
c/o Cruttenden Roth Incorporated
18301 Von Karman, Suite 100
Irvine, California 92715
Ladies and Gentlemen:
UGLY DUCKLING CORPORATION, a Delaware corporation (the "Company"),
addresses you as the Representative of each of the persons, firms and
corporations listed in Schedule A hereto (herein collectively called the
"Underwriters") and hereby confirms its agreement with the several Underwriters
as follows:
1. Description of Shares. The Company proposes to issue and sell
2,000,000 shares of its authorized and unissued Common Stock, $.001 par value
per share (the "Firm Shares"), to the several Underwriters. The Company also
proposes to grant to the Underwriters an option to purchase up to 300,000
additional shares of the Company's Common Stock, $.001 par value per share (the
"Option Shares"), as provided in Section 7 hereof. In addition, the Company
proposes to sell to you, individually and not in your capacity as
Representative, five-year warrants (the "Representative's Warrants") to purchase
up to 150,000 shares of Common Stock, $.001 par value per share, of the Company
(the "Representative's Warrant Stock"), which sale will be consummated in
accordance with the terms and conditions of the Representative's Warrant
Agreement (the "Representative's Warrant Agreement"), the form of which is filed
as an exhibit to the Registration Statement described below. As used in this
Agreement, the term "Shares" shall include the Firm Shares and the Option
Shares. All shares of Common Stock, $.001 par value per share, of the Company to
be outstanding after giving effect to the sales contemplated hereby, including
the sale of the Shares, are hereinafter referred to as "Common Stock." Unless
the context otherwise requires, references herein to the "Company" include Ugly
___________________
1 Plus an option to purchase up to 300,000 additional shares from the
Company to cover over-allotments.
<PAGE> 2
Duckling Corporation together with its subsidiaries described in the Prospectus
(hereinafter defined.).
2. Representations, Warranties and Agreements of the Company.
The Company represents and warrants to and agrees
with each Underwriter that:
(a) A registration statement on Form S-1 (File No.
333-3998) with respect to the Shares, the Representative's Warrants and the
Representative's Warrant Stock, including a prospectus subject to completion,
has been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the applicable rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Act and has been filed with the
Commission; such amendments to such registration statement and such amended
prospectuses subject to completion as may have been required prior to the date
hereof have been similarly prepared and filed with the Commission; and the
Company will file such additional amendments to such registration statement and
such amended prospectuses subject to completion as may hereafter be required.
Copies of such registration statement and amendments and of each related
prospectus subject to completion (the "Preliminary Prospectuses") have been
delivered to you.
If the registration statement relating to the Shares
has been declared effective under the Act by the Commission, the Company will
prepare and promptly file with the Commission the information previously omitted
from the registration statement pursuant to Rule 430A(a) of the Rules and
Regulations pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and
Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus. The term
"Registration Statement" as used in this Agreement shall mean such registration
statement, including financial statements, schedules and exhibits, in the form
in which it became or becomes, as the case may be, effective (including, if the
Company omitted information from the registration statement pursuant to Rule
430A(a) of the Rules and Regulations, the information deemed to be a part of the
registration statement at the time it became effective pursuant to Rule 430A(b)
of the Rules and Regulations) and, in the event of any amendment thereto after
the effective date of such registration statement, shall also mean (from and
after the effectiveness of such amendment) such registration statement as so
amended. The term "Prospectus" as used in this Agreement shall mean the
prospectus relating to the Shares as included in such Registration Statement at
the time it becomes effective (including, if the Company omitted information
from the Registration Statement pursuant to Rule 430A(a) of the Rules and
Regulations, the information deemed to be a part of the Registration Statement
at the time it became effective pursuant to Rule 430A(b) of the Rules and
Regulations), except that if any revised prospectus shall be provided to the
Underwriters by the Company for use in
2
<PAGE> 3
connection with the offering of the Shares that differs from the prospectus on
file with the Commission at the time the Registration Statement became or
becomes, as the case may be, effective (whether or not such revised prospectus
is required to be filed with the Commission pursuant to Rule 424(b)(3) of the
Rules and Regulations), the term "Prospectus" shall refer to such revised
prospectus from and after the time it is first provided to the Underwriters for
such use.
(b) The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus or instituted
proceedings for that purpose, and each such Preliminary Prospectus, at the time
of filing thereof, has conformed in all material respects to the requirements of
the Act and the Rules and Regulations and, as of its date, has not included any
untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and at the time the Registration
Statement became or becomes, as the case may be, effective and at all times
subsequent thereto up to and on the Closing Date (hereinafter defined) and on
any later date on which Option Shares are to be purchased, (i) the Registration
Statement and the Prospectus, and any amendments or supplements thereto,
contained and will contain all material information required to be included
therein by the Act and the Rules and Regulations and will in all material
respects conform to the requirements of the Act and the Rules and Regulations,
(ii) the Registration Statement, and any amendments or supplements thereto, did
not and will not include any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, and (iii) the Prospectus, and any amendments
or supplements thereto, did not and will not include any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that none of the representations and warranties
contained in this subparagraph (b) shall apply to information contained in or
omitted from the Registration Statement or Prospectus, or any amendment or
supplement thereto, in reliance upon, and in conformity with, written
information relating to any Underwriter furnished to the Company by such
Underwriter specifically for use in the preparation thereof.
(c) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation with full power and authority (corporate and
other) to own, lease and operate its properties and conduct its business as
described in the Prospectus; the Company is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction in which the
ownership or leasing of its properties or the conduct of its business requires
such qualification, except where the failure to be so qualified or be in good
standing would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations or business of the Company taken as a whole;
no proceeding has been instituted in any such jurisdiction, revoking, limiting
or curtailing, or seeking to revoke, limit or curtail, such power and authority
or qualification; the Company is in possession of and operating in compliance
with all authorizations, licenses, certificates, consents, orders and permits
from state, federal and other regulatory authorities that are material to the
conduct of its business, all of which are valid and in full force and effect;
the Company is not in material violation of its charter or bylaws or in default
in the performance or observance of any material obligation, agreement, covenant
or condition contained in any
3
<PAGE> 4
material bond, debenture, note or other evidence of indebtedness, or in any
material lease, contract, indenture, mortgage, deed of trust, loan agreement,
joint venture or other agreement or instrument to which the Company is a party
or by which it or its properties or assets may be bound; and the Company is not
in material violation of any law, order, rule, regulation, writ, injunction,
judgment or decree of any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or over its properties
or assets. The Prospectus accurately describes any corporation, association or
other entity owned or controlled, directly or indirectly, by the Company.
(d) The Company has full legal right, power and
authority to enter into this Agreement and the Representative's Warrant
Agreement and to perform the transactions contemplated hereby and thereby. Each
of this Agreement and the Representative's Warrant Agreement has been duly
authorized, executed and delivered by the Company and is a valid and binding
agreement on the part of the Company, enforceable in accordance with its terms,
except as rights to indemnification under this Agreement or the Representative's
Warrant Agreement may be limited by applicable law and except as the enforcement
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; the performance of this Agreement and the
Representative's Warrant Agreement and the consummation of the transactions
herein or therein contemplated will not result in a material breach or violation
of any of the terms and provisions of, or constitute a default under, (i) any
bond, debenture, note or other evidence of indebtedness, or under any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which the Company is a party or by which its
properties or assets may be bound, (ii) the charter or bylaws of the Company, or
(iii) any law, order, rule, regulation, writ, injunction, judgment or decree of
any court, government or governmental agency or body, domestic or foreign,
having jurisdiction over the Company or over its properties or assets. No
consent, approval, authorization or order of or qualification with any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or over its properties or assets is required for
the execution and delivery of this Agreement or the Representative's Warrant
Agreement and the consummation by the Company of the transactions herein and
therein contemplated, except such as may be required under the Act or under
state or other securities or Blue Sky laws, all of which requirements have been
satisfied in all material respects.
(e) There is not any pending or, to the best of the
Company's knowledge, threatened action, suit, claim or proceeding against the
Company, or any of its officers or any of its properties, assets or rights
before any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or over its officers or properties
or otherwise that (i) is reasonably likely to result in any material adverse
change in the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company or might materially and adversely affect
its properties, assets or rights, (ii) might prevent consummation of the
transactions contemplated hereby or (iii) is required to be disclosed in the
Registration Statement or Prospectus and is not so disclosed; and there are no
agreements, contracts, leases or documents of the Company of a character
required to be described or referred to in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement by the Act
or the Rules and Regulations or by the Securities Exchange
4
<PAGE> 5
Act of 1934 (the "Exchange Act") or the rules and regulations of the Commission
thereunder that have not been accurately described in all material respects in
the Registration Statement or Prospectus or filed as exhibits to the
Registration Statement.
(f) All outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully paid and
nonassessable, have been issued in compliance with all federal and state
securities laws, were not issued in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase securities, and the
authorized and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" and conforms in all material
respects to the statements relating thereto contained in the Registration
Statement and the Prospectus (and such statements correctly state the substance
of the instruments defining the capitalization of the Company); the Company
Shares and the Option Shares have been duly authorized for issuance and sale to
the Underwriters pursuant to this Agreement and, when issued and delivered by
the Company against payment therefor in accordance with the terms of this
Agreement, will be duly and validly issued and fully paid and nonassessable, and
will be sold free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest; and no preemptive right, co-sale right,
registration right, right of first refusal or other similar right of
stockholders exists with respect to any of the Firm Shares or Option Shares or
the issuance and sale thereof other than those that will automatically expire
upon the consummation of the transactions contemplated on the Closing Date. No
further approval or authorization of any stockholder, the Board of Directors of
the Company or others is required for the issuance and sale or transfer of the
Shares except as may be required under the Act, the Rules and Regulations or
under state or other securities or Blue Sky laws. Except as disclosed in or
contemplated by the Prospectus and the financial statements of the Company, and
the related notes thereto, included in the Prospectus, the Company has no
outstanding options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. The description
of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised thereunder,
set forth in the Prospectus accurately and fairly presents the information
required to be shown with respect to such plans, arrangements, options and
rights under the Act and the Rules and Regulations.
(g) KPMG Peat Marwick LLP, which has examined the
financial statements of the Company, together with the related schedules and
notes, as of December 31, 1994 and 1995 and for each of the years in the three
(3) year period ended December 31, 1995 filed with the Commission as a part of
the Registration Statement, which are included in the Prospectus, are
independent accountants within the meaning of the Act and the Rules and
Regulations; the audited financial statements of the Company, together with the
related schedules and notes, and the unaudited financial information, forming
part of the Registration Statement and Prospectus, fairly present the financial
position and the results of operations of the Company at the respective dates
and for the respective periods to which they apply; and all audited financial
statements of the Company, together with the related schedules and notes, and
the unaudited financial information, filed with the Commission as part of the
Registration Statement, have been prepared in accordance with generally accepted
accounting principles consistently
5
<PAGE> 6
applied throughout the periods involved except as may be otherwise stated
therein. The selected and summary financial and statistical data included in the
Registration Statement present fairly the information shown therein and have
been compiled on a basis consistent with the audited financial statements
presented therein. No other financial statements or schedules are required to be
included in the Registration Statement.
(h) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has not
been (i) any material adverse change in the condition (financial or otherwise),
earnings, operations or business of the Company, (ii) any transaction that is
material to the Company, (iii) any obligation, direct or contingent, that is
material to the Company, incurred by the Company, except obligations incurred in
the ordinary course of business, (iv) any change in the capital stock or
outstanding indebtedness of the Company that is material to the Company, (v) any
dividend or distribution of any kind declared, paid or made on the capital stock
of the Company (other than dividends paid in respect of the Company's preferred
stock outstanding on the date of the Prospectus in amounts not in excess of
those described in the Prospectus), or (vi) any loss or damage (whether or not
insured) to the property of the Company, which has a material adverse effect on
the condition (financial or otherwise), earnings, operations or business of the
Company.
(i) Except as set forth in the Registration Statement
and Prospectus, (i) the Company has good and marketable title to all properties
and assets described in the Registration Statement and Prospectus as owned by
it, free and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest, other than such as would not have a material adverse effect
on the condition (financial or otherwise), earnings, operations or business of
the Company, (ii) the agreements to which the Company is a party described in
the Registration Statement 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, and (iii) the Company has valid
and enforceable leases for all properties described in the Registration
Statement and Prospectus as leased by it, 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. Except as set forth in the Registration Statement
and 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.
(j) The Company has timely filed all federal, state,
local and foreign tax returns required to be filed by it and has paid all taxes
shown thereon as due, and there is no tax deficiency that has been or, to the
best of the Company's knowledge, is reasonably likely to be asserted against the
Company, which might have a material adverse effect on the condition (financial
or otherwise), earnings, operations or business of the Company, and all tax
liabilities are adequately provided for on the books of the Company.
(k) The Company maintains insurance with insurers of
recognized financial responsibility of the types and in the amounts generally
deemed adequate for its
6
<PAGE> 7
business, including, but not limited to, insurance covering real and personal
property owned or leased by the Company against theft, damage, destruction, acts
of vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect; the Company has not been refused any
insurance coverage sought or applied for; and the Company does have 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
materially and adversely affect the condition (financial or otherwise),
earnings, operations or business of the Company.
(l) To the best of Company's knowledge, no labor
disturbance by the employees of the Company exists or is imminent. No collective
bargaining agreement exists with any of the Company's employees and, to the best
of the Company's knowledge, no such agreement is imminent.
(m) The Company owns or possesses adequate rights to
use all trade secrets, know-how, trademarks, service marks and trade names that
are necessary to conduct its businesses as described in the Registration
Statement and Prospectus; the Company has not received any notice of, and has no
knowledge of, any infringement of or conflict with asserted rights of the
Company by others with respect to any trade secrets, know-how, trademarks,
service marks or trade names; and the Company has not received any notice of,
and has no knowledge of, any infringement of or conflict with asserted rights of
others with respect to any trade secrets, know-how, trademarks, service marks or
trade names which, singly or in the aggregate, in the event of an unfavorable
decision, ruling or finding, would have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company.
(n) The Common Stock is registered pursuant to
Section 12(g) of the Exchange Act and is approved for quotation on
__________________________, 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
__________________________, nor has the Company received any notification that
the Commission or the National Association of Securities Dealers, Inc. ("NASD")
is contemplating terminating such registration or listing.
(o) The Company has been advised concerning the
Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and
regulations thereunder, and has in the past conducted, and intends in the future
to conduct, its affairs in such a manner as to ensure that it will not become an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the 1940 Act and such rules and regulations.
(p) The Company has not distributed and will not
distribute prior to the later of (i) the Closing Date, or any date on which
Option Shares are to be purchased, as the
7
<PAGE> 8
case may be, and (ii) completion of the distribution of the Shares, any offering
material in connection with the offering and sale of the Shares other than any
Preliminary Prospectuses, the Prospectus, the Registration Statement and other
materials, if any, permitted by the Act.
(q) 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.
(r) The Company has not taken and will not take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization in violation of law or
manipulation of the price of the Common Stock to facilitate the sale or resale
of the Shares.
(s) Each officer, director and director-nominee of
the Company and each beneficial owner of five (5) percent or more of the
Company's Common Stock has agreed in writing that such person will not, for a
period of 180 days from the date that the Registration Statement is declared
effective by the Commission (the "Lock-up Period"), offer to sell, contract to
sell, or otherwise sell, dispose of, loan, pledge or grant any rights with
respect to (collectively, a "Disposition") any shares of Common Stock, any
options or warrants to purchase any shares of Common Stock or any securities
convertible into or exchangeable for shares of Common Stock (collectively,
"Securities") now owned or hereafter acquired directly by such person or with
respect to which such person has or hereafter acquires the power of disposition,
otherwise than (i) as a bona fide gift or gifts, provided the donee or donees
thereof agree in writing to be bound by this restriction, (ii) as a distribution
to limited partners or stockholders of such person, provided that the
distributees thereof agree in writing to be bound by the terms of this
restriction, or (iii) with the prior written consent of Cruttenden Roth
Incorporated. The foregoing restriction is expressly agreed to preclude the
holder of the Securities from engaging in any hedging or other transaction that
is designed to or reasonably expected to lead to or result in a Disposition of
Securities during the Lock-up Period, even if such Securities would be disposed
of by someone other than such holder. Such prohibited hedging or other
transactions would include, without limitation, any short sale (whether or not
against the box) or any purchase, sale or grant of any right (including, without
limitation, any put or call option) with respect to any Securities or with
respect to any security (other than a broad-based market basket or index) that
includes, relates to or derives any significant part of its value from
Securities. Furthermore, such person will also agree and consent to the entry of
stop transfer instructions with the Company's transfer agent against the
transfer of the Securities held by such person except in compliance with this
restriction. The Company has provided to counsel for the Underwriters a complete
and accurate list of all securityholders of the Company and the number and type
of securities held by each securityholder. The Company has provided to counsel
for the Underwriters true, accurate and complete copies of all of the agreements
pursuant to which its officers, directors, director-nominees and stockholders
have agreed to such restrictions (the "Lock-up Agreements"). The Company hereby
represents and warrants that it will not release any of its officers, directors
or director-nominees or other stockholders from any Lock-up
8
<PAGE> 9
Agreements currently existing or hereafter effected without the prior written
consent of Cruttenden Roth Incorporated.
(t) Except as set forth in the Registration Statement
and Prospectus, (i) the Company is in material compliance with all rules, laws
and regulations relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental Laws")
that are applicable to its business, (ii) the Company has received no notice
from any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the Registration
Statement and the Prospectus, (iii) to its best knowledge, the Company is not
likely to be required to make future material capital expenditures to comply
with Environmental Laws and (iv) no property which is owned, leased or occupied
by the Company has been designated as a Superfund site pursuant to the
Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42
U.S.C. Section 9601, et seq.), or otherwise designated as a contaminated site
under applicable state or local law.
(u) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, including
without limitation cash receipts, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(v) There are no outstanding loans, advances (except
normal advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by the Company to or for the benefit of any of the
officers, directors or director-nominees of the Company or any of the members of
the families of any of them, except as disclosed in the Registration Statement
and the Prospectus.
(w) The Representative's Warrants have been duly and
validly authorized by the Company and upon delivery to you in accordance with
the Representative's Warrant Agreement will be duly issued and legal, valid and
binding obligations of the Company.
(x) The Representative's Warrant Stock has been duly
authorized and reserved for issuance upon the exercise of the Representative's
Warrants and when issued upon payment of the exercise price therefor will be
validly issued, fully paid and nonassessable shares of Common Stock of the
Company.
3. Purchase, Sale and Delivery of Shares. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $_____ per share, the
respective number of Firm Shares as hereinafter set forth. The obligation of
each Underwriter to the Company shall be to purchase from the Company that
number of Firm Shares which is
9
<PAGE> 10
set forth opposite the name of such Underwriter in Schedule A hereto (subject to
adjustment as provided in Section 10).
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made against
payment of the purchase price therefor by the several Underwriters by certified
or official bank check or checks drawn in next-day funds, payable to the order
of the Company (and the Company agrees not to deposit any such check in the bank
on which it is drawn until the day following the date of its delivery to the
Company) at the offices of the Representatives or such other place as may be
agreed upon among the Representative and the Company, at 7:00 A.M., Phoenix
time, on the third (3rd) full business day following the first day that Shares
are traded (or at such time and date to which payment and delivery shall have
been postponed pursuant to Section 10 hereof), such time and date of payment and
delivery being herein called the "Closing Date." The certificates for the Firm
Shares to be so delivered will be made available to you at such office or such
other location as you may reasonably request for checking at least one (1) full
business day prior to the Closing Date and will be in such names and
denominations as you may request, such request to be made at least two (2) full
business days prior to the Closing Date. If the Representative so elects,
delivery of the Firm Shares may be made by credit through full fast transfer to
the accounts at The Depository Trust Company designated by the Representative.
It is understood that you, individually, and not as the
Representative of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such Underwriter or Underwriters.
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the
several Underwriters intend to make an initial public offering (as such term is
described in Section 11 hereof) of the Firm Shares at an initial public offering
price of $_____ per share. After the initial public offering, the several
Underwriters may, in their discretion, vary the public offering price.
The information set forth in the last paragraph on the front
cover page (insofar as such information relates to the Underwriters), in the
first paragraph on page 2, concerning stabilization and over-allotment by the
Underwriters, and in third and eighth paragraphs under the caption
"Underwriting" in any Preliminary Prospectus and in the final form of Prospectus
filed pursuant to Rule 424(b) constitutes the only information furnished by the
Underwriters to the Company for inclusion in any Preliminary Prospectus, the
Prospectus or the Registration Statement, and you, on behalf of the respective
Underwriters, represent and warrant to the Company that the statements made
therein do not include any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
4. Further Agreements of the Company. The Company agrees with the
several Underwriters that:
10
<PAGE> 11
(a) The Company will use reasonable efforts to cause
the Registration Statement and any amendment thereof, if not effective at the
time and date that this Agreement is executed and delivered by the parties
hereto, to become effective as promptly as possible; it will notify you,
promptly after it shall receive notice thereof, of the time when the
Registration Statement or any subsequent amendment to the Registration Statement
has become effective or any supplement to the Prospectus has been filed; if the
Company omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule
424(b) of the Rules and Regulations or as part of a post-effective amendment to
such Registration Statement as originally declared effective which is declared
effective by the Commission; if for any reason the filing of the final form of
Prospectus is required under Rule 424(b)(3) of the Rules and Regulations, it
will provide evidence satisfactory to you that the Prospectus contains such
information and has been filed with the Commission within the time period
prescribed; it will notify you promptly of any request by the Commission for the
amending or supplementing of the Registration Statement or the Prospectus or for
additional information; promptly upon your request, it will prepare and file
with the Commission any amendments or supplements to the Registration Statement
or Prospectus which, in the opinion of counsel for the several Underwriters
("Underwriters' Counsel"), may be necessary or advisable in connection with the
distribution of the Shares by the Underwriters; it will promptly prepare and
file with the Commission, and promptly notify you of the filing of, any
amendments or supplements to the Registration Statement or Prospectus which may
be necessary to correct any statements or omissions, if, at any time when a
prospectus relating to the Shares is required to be delivered under the Act, any
event shall have occurred as a result of which the Prospectus or any other
prospectus relating to the Shares as then in effect would include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; in case any Underwriter is required to deliver a
prospectus nine (9) months or more after the effective date of the Registration
Statement in connection with the sale of the Shares, it will prepare promptly
upon request, but at the expense of such Underwriter, such amendment or
amendments to the Registration Statement and such prospectus or prospectuses as
may be necessary to permit compliance with the requirements of Section 10(a)(3)
of the Act; and it will file no amendment or supplement to the Registration
Statement or Prospectus which shall not previously have been submitted to you a
reasonable time prior to the proposed filing thereof or to which you shall
reasonably object in writing, subject, however, to compliance with the Act and
the Rules and Regulations and the rules and regulations of the Commission
thereunder and the provisions of this Agreement.
(b) The Company will advise you, promptly after it
shall receive notice or obtain knowledge, of the issuance of any stop order by
the Commission suspending the effectiveness of the Registration Statement or of
the initiation or threat of any proceeding for that purpose; and it will
promptly use its best efforts to prevent the issuance of any stop order or to
obtain its withdrawal at the earliest possible moment if such stop order should
be issued.
11
<PAGE> 12
(c) The Company will use reasonable efforts to
qualify the Shares for offering and sale under the securities laws of such
jurisdictions as you may designate and to continue such qualifications in effect
for so long as may be required for purposes of the distribution of the Shares,
except that the Company shall not be required in connection therewith or as a
condition thereof to qualify as a foreign corporation or to execute a general
consent to service of process in any jurisdiction in which it is not otherwise
required to be so qualified or to so execute a general consent to service of
process. In each jurisdiction in which the Shares shall have been qualified as
above provided, the Company will make and file such statements and reports in
each year as are or may be reasonably required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as
available, copies of the Registration Statement (three of which will be signed
and which will include all exhibits), each Preliminary Prospectus, the
Prospectus and any amendments or supplements to such documents, including any
prospectus prepared to permit compliance with Section 10(a)(3) of the Act (three
of which will include all exhibits) all in such quantities as you may from time
to time reasonably request.
(e) The Company will make generally available to its
securityholders as soon as practicable, but in any event not later than the
forty-fifth (45th) day following the end of the fiscal quarter first occurring
after the first anniversary of the effective date of the Registration Statement,
an earnings statement (which will be in reasonable detail but need not be
audited) complying with the provisions of Section 11(a) of the Act and covering
a twelve (12) month period beginning after the effective date of the
Registration Statement.
(f) During a period of five (5) years after the date
hereof and for so long as the Company is subject to Section 13 or 15 of the
Exchange Act, the Company will furnish to its stockholders as soon as
practicable after the end of each respective period, annual reports (including
financial statements audited by independent certified public accountants) and
unaudited quarterly reports of operations for each of the first three quarters
of the fiscal year, and will furnish to you and the other several Underwriters
hereunder, upon request (i) concurrently with furnishing such reports to its
stockholders, statements of operations of the Company for each of the first
three (3) quarters in the form furnished to the Company's stockholders, (ii)
concurrently with furnishing to its stockholders, a balance sheet of the Company
as of the end of such fiscal year, together with statements of operations, of
stockholders' equity, and of cash flows of the Company for such fiscal year,
accompanied by a copy of the certificate or report thereon of independent
certified public accountants, (iii) as soon as they are available, copies of all
reports (financial or other) mailed to stockholders, (iv) as soon as they are
available, copies of all reports and financial statements furnished to or filed
with the Commission, any securities exchange or the NASD, (v) every material
press release and every material news item or article in respect of the Company
or its affairs which was generally released to stockholders or prepared by the
Company, and (vi) any additional information of a public nature concerning the
Company or its business which you may reasonably request. During such five (5)
year period, if the Company shall have active subsidiaries, the foregoing
financial statements shall be on a consolidated basis to the extent that the
accounts of the Company and its subsidiaries are consolidated, and shall be
accompanied by similar financial statements for any significant subsidiary that
is not so consolidated.
12
<PAGE> 13
(g) The Company will apply the net proceeds from the
sale of the Shares being sold by it in the manner set forth under the caption
"Use of Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and,
if necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for its Common Stock.
(i) The Company will file Form SR in conformity with
the requirements of the Act and the Rules and Regulations.
(j) If the transactions contemplated hereby are not
consummated by reason of any failure, refusal or inability on the part of the
Company to perform any agreement on its part to be performed hereunder or to
fulfill any condition of the Underwriters' obligations hereunder, or if the
Company shall terminate this Agreement pursuant to Section 11(a) hereof, or if
the Underwriters shall terminate this Agreement pursuant to Section 11(b)(i),
the Company will pay the several Underwriters for all out-of-pocket expenses
(including fees and disbursements of Underwriters' Counsel) incurred by the
Underwriters in investigating or preparing to market or marketing the Shares.
(k) If at any time during the ninety (90) day period
after the Registration Statement becomes effective, any rumor, publication or
event relating to or affecting the Company shall occur as a result of which in
your opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
if reasonably requested by you, forthwith prepare, and, if permitted by law,
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
(l) During the Lock-up Period, the Company will not,
without the prior written consent of Cruttenden Roth Incorporated, effect the
Disposition of, directly or indirectly, any Securities other than (i) the sale
of the Firm Shares and the Option Shares hereunder, (ii) the Company's issuance
of options or Common Stock under the Company's presently authorized stock option
plans or restricted stock plans (collectively, the "Option Plans") and (iii)
securities issued in connection with acquisitions.
(m) For a period of two years from the Closing Date
or until two offerings are completed by the Company that the Representative
declined, the Company shall notify Cruttenden Roth Incorporated in writing at
least ten (10) days before (i) the proposed public offering or private placement
of any debt or equity securities by the Company (other than bank and similar
financings) or (ii) the filing of a registration statement for the proposed
public offering of any equity securities by any of its five (5) percent or
greater holders of its Common Stock (other than SunAmerica Life Insurance
Company) so that you, individually, and not
13
<PAGE> 14
as Representative, or at your option, a group of associated investment bankers,
shall have the right of first refusal to manage or co-manage the offering on
terms as favorable as theretofore offered in writing by a reputable investment
banker. You agree to notify the Company if you intend to exercise your right of
first refusal within ten (10) days of receipt by you of such notice from the
Company. If you fail to exercise the right of first refusal with the ten (10)
day period and the terms of the proposed subsequent financings thereafter are
altered in any material respect, the Company shall again offer to you the right
of first refusal to effect subsequent financings upon such altered terms and you
shall have ten (10) days from the date of receipt to notify the Company of your
acceptance. If Cruttenden Roth Incorporated's Managing Director on the date of
this Agreement is no longer employed by the Representative on the date of notice
from the Company to Cruttenden Roth Incorporated regarding the proposed
offering, the Company shall have the right to buy the Representative's right of
first refusal for $50,000 within ten (10) days of such notice and prompt payment
to the Representative of such sum.
5. Expenses.
(a) The Company agrees with each Underwriter that:
(i) The Company will pay and bear all costs
and expenses in connection with the preparation, printing and filing of the
Registration Statement (including financial statements, schedules and exhibits),
Preliminary Prospectuses and the Prospectus and any amendments or supplements
thereto; the printing of this Agreement, the Agreement Among Underwriters, the
Selected Dealer Agreement, the Preliminary Blue Sky Survey and any supplemental
Blue Sky Survey, the Underwriters' Questionnaire and Power of Attorney, and any
instruments related to any of the foregoing; the issuance and delivery of the
Shares hereunder to the several Underwriters, including transfer taxes, if any,
the cost of all certificates representing the Shares and transfer agents' and
registrars' fees; the fees and disbursements of counsel and accountants for the
Company; all fees and other charges of the Company's independent certified
public accountants; the cost of furnishing to the several Underwriters copies of
the Registration Statement (including appropriate exhibits), Preliminary
Prospectus and the Prospectus, and any amendments or supplements to any of the
foregoing; NASD filing fees and the cost of qualifying the Shares under the laws
of such jurisdictions as you may designate (including filing fees and fees and
disbursements of counsel for the Underwriters related to such qualification
up to $30,000); the Company's road show costs and expenses, the cost of
preparing bound volumes of the documents relating to the public offering of
Common Stock contemplated hereby; and all other expenses directly incurred by
the Company in connection with the performance of its obligations hereunder.
(ii) In addition to its other obligations
under Section 5(a)(i) hereof, the Company will pay to you a nonaccountable
expense allowance equal to 3.0% of the gross sales price of the Shares to the
public. This nonaccountable expense allowance with respect to the Firm Shares
shall be paid to you on the Closing Date and the nonaccountable expenses with
respect to the Option Shares shall be paid to you on the closing of the sale to
you of such Option Shares. The Company has previously paid to you a fee of
$30,000 which shall be credited to this nonaccountable expense allowance.
14
<PAGE> 15
(iii) In addition to its other obligations
under Section 8(a) hereof, the Company agrees that, as an interim measure during
the pendency of any claim, action, investigation, inquiry or other proceeding
described in Section 8(a) hereof, it will reimburse the Underwriters on a
monthly basis for all reasonable legal or other expenses incurred in connection
with investigating or defending any such claim, action, investigation, inquiry
or other proceeding, notwithstanding the absence of a judicial determination as
to the propriety and enforceability of the Company's obligation to reimburse the
Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Underwriters shall promptly return such payment to the Company
together with interest, compounded daily, determined on the basis of the prime
rate (or other commercial lending rate for borrowers of the highest credit
standing) listed from time to time in The Wall Street Journal which represents
the base rate on corporate loans posted by a substantial majority of the
nation's five (5) largest banks (the "Prime Rate"). Any such interim
reimbursement payments which are not made to the Underwriters within thirty (30)
days of a request for reimbursement shall bear interest at the Prime Rate from
the date of such request.
(b) In addition to their other obligations under
Section 8(b) hereof, the Underwriters severally and not jointly agree that, as
an interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding described in Section 8(b) hereof, they will
reimburse the Company on a monthly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company shall
promptly return such payment to the Underwriters together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to the Company within thirty (30) days
of a request for reimbursement shall bear interest at the Prime Rate from the
date of such request.
(c) It is agreed that any controversy arising out of
the operation of the interim reimbursement arrangements set forth in Sections
5(a)(iii) and 5(b) hereof, including the amounts of any requested reimbursement
payments, the method of determining such amounts and the basis on which such
amounts shall be apportioned among the reimbursing parties, shall be settled by
arbitration conducted pursuant to the Code of Arbitration Procedure of the NASD
in Orange County, California (or as close geographically to Orange County,
California as is reasonably practical). Any such arbitration must be commenced
by service of a written demand for arbitration or a written notice of intention
to arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 5(a)(iii) and 5(b)
hereof and will not resolve the ultimate propriety or enforceability of the
obligation to indemnify for expenses which is created
15
<PAGE> 16
by the provisions of Sections 8(a) and 8(b) hereof or the obligation to
contribute to expenses which is created by the provisions of Section 8(d)
hereof.
6. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company to the performance by the
Company of its obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become
effective not later than 2:00 P.M., California time, on the date following the
date of this Agreement, or such later date as shall be consented to in writing
by you; and no stop order suspending the effectiveness thereof shall have been
issued and no proceedings for that purpose shall have been initiated or, to the
knowledge of the Company or any Underwriter, threatened by the Commission, and
any request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been complied
with to the satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters
in connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issuance, sale and delivery of
the Shares, shall have been reasonably satisfactory to Underwriters' Counsel,
and such counsel shall have been furnished with such documents and information
as they may reasonably have requested to enable them to pass upon the matters
referred to in this Section.
(c) Subsequent to the execution and delivery of this
Agreement and prior to the Closing Date there shall not have been any change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company from that set forth in the Registration
Statement or Prospectus, which, in your sole judgment, is material and adverse
and that makes it, in your sole judgment, impracticable or inadvisable to
proceed with the public offering of the Shares as contemplated by the
Prospectus.
(d) You shall have received on the Closing Date and
on any later date on which Option Shares are purchased, as the case may be, the
following opinion of Snell & Wilmer, L.L.P., counsel for the Company, dated the
Closing Date or such later date on which Option Shares are purchased, addressed
to the Underwriters (and stating that it may be relied upon by Squire, Sanders &
Dempsey, Underwriters' Counsel, in rendering its opinion pursuant to Section
6(e) of this Agreement) and with reproduced copies or signed counterparts
thereof for each of the Underwriters, to the effect that:
(i) The Company is a corporation in good
standing under the laws of the jurisdiction of its
incorporation;
16
<PAGE> 17
(ii) The Company has the corporate power and
authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus;
(iii) The Company is duly qualified to do
business as a foreign corporation and is in good standing in
each jurisdiction, if any, in which the ownership or leasing
of its properties or the conduct of its business requires such
qualification, except where the failure to be so qualified or
be in good standing, would not have a material adverse effect
on the condition (financial or otherwise), earnings,
operations or business of the Company taken as a whole. To
such counsel's knowledge, the Prospectus accurately describes
any corporation, association or other entity owned or
controlled, directly or indirectly, by the Company;
(iv) The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus
under the caption "Capitalization" as of the dates stated
therein, the issued and outstanding shares of capital stock of
the Company have been duly and validly issued and are fully
paid and nonassessable, and, to such counsel's knowledge,
have not been issued in violation of or subject to any
preemptive right, co-sale right, registration right, right of
first refusal or other similar right;
(v) The Firm Shares and the Option Shares,
as the case may be, to be issued by the Company pursuant to
the terms of this Agreement each have been duly authorized
and, upon issuance and delivery against payment therefor in
accordance with the terms hereof, will be duly and validly
issued and fully paid and nonassessable, and will not have
been issued in violation of or subject to any preemptive
right, co-sale right, registration right, right of first
refusal or other similar right of stockholders;
(vi) The Company has the corporate power and
authority to enter into this Agreement and to issue, sell and
deliver to the Underwriters the Shares to be issued and sold
by it hereunder;
(vii) The Company has the corporate power
and authority to enter into the Representative's Warrant
Agreement and to issue, sell and deliver to the
Representatives the Representative's Warrants to be issued and
sold by it thereunder;
(viii) Each of this Agreement and the
Representative's Warrant Agreement has been duly authorized by
all necessary corporate action on the part of the Company and
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 as to which
counsel need not express any opinion and except as
enforceability may be limited by bankruptcy, insolvency,
reorganization,
17
<PAGE> 18
moratorium or similar laws relating to or affecting creditors'
rights generally or by general equitable principles;
(ix) The Registration Statement has become
effective under the Act and, to such counsel's knowledge, no
stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose
have been instituted or are pending or threatened under the
Act;
(x) The Registration Statement and the
Prospectus, and each amendment or supplement thereto (other
than the financial statements (including supporting schedules)
and financial and statistical data included in the
Registration Statement as to which such counsel need express
no opinion), as of the effective date of the Registration
Statement, complied as to form in all material respects with
the requirements of the Act and the applicable Rules and
Regulations;
(xi) The information in the Prospectus under
the caption (a) "Description of Capital Stock" and "Shares
Eligible For Future Sale," to the extent that it constitutes
matters of law or legal conclusions, has been reviewed by such
counsel and is a fair summary of such matters and conclusions
and (b) "Business -- Regulation, Supervision, and Licensing,"
to the extent that it reflects matters of law or summaries of
law or regulations, is correct in all material respects
(provided that counsel need not express any opinion as to
its completeness);
(xii) The forms of certificates evidencing
the Common Stock and filed as exhibits to the Registration
Statement comply with Delaware law;
(xiii) The description 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 its completeness);
(xiv) To such counsel's knowledge, there are
no agreements, contracts, leases or documents to which the
Company is a party of a character required to be described or
referred to in the Registration Statement or Prospectus or to
be filed as an exhibit to the Registration Statement that are
not described or referred to therein or filed as required;
(xv) The performance of this Agreement and
the Representative's Warrant Agreement and the consummation of
the transactions herein and therein contemplated (other than
performance of the Company's indemnification obligations
hereunder or under the Representative's Warrant Agreement,
concerning which no opinion need be expressed) will not (a)
result in any violation of the Company's charter or bylaws or
(b) to such counsel's knowledge, result in a material breach
or violation of any of the terms and provisions of, or
constitute a material default under, any material bond,
debenture, note or other evidence of indebtedness, or under
any material lease, contract, indenture, mortgage, deed
of trust,
18
<PAGE> 19
loan agreement, joint venture or other agreement or instrument
known to such counsel to which the Company is a party or by
which its properties are bound, or any applicable statute,
rule or regulation known to such counsel or, to such counsel's
knowledge, any order, writ or decree of any court, government
or governmental agency or body having jurisdiction over the
Company or over any of its properties or operations;
(xvi) To counsel's best knowledge, no
consent, approval, authorization or order of or
qualification with any court, government or governmental
agency or body having jurisdiction over the Company or over
any of its properties or operations is necessary in
connection with the consummation by the Company of the
transactions herein contemplated, except
such as have been obtained under the Act or such as may be
required under state or other securities or Blue Sky laws in
connection with the purchase and the distribution of the
Shares by the Underwriters;
(xvii) To such counsel's knowledge, there
are no legal or governmental proceedings pending or threatened
against the Company of a character required to be disclosed in
the Registration Statement or the Prospectus by the Act or the
Rules and Regulations or by the Exchange Act or the applicable
rules and regulations of the Commission thereunder, other than
those described therein;
(xviii) The Representative's Warrants have
been duly and validly authorized by the Company and upon
delivery to you in accordance with the Representative's
Warrant Agreement will be duly issued and legal, valid and
binding obligations of the Company;
(xix) The Representative's Warrant Stock to
be issued by the Company pursuant to the terms of the
Representative's Warrant has been duly authorized and, upon
issuance and delivery against payment therefor in accordance
with the terms of the Representative's Warrant Agreement, will
be duly and validly issued and fully paid and nonassessable,
and to such counsel's knowledge will not have been issued in
violation of or subject to any preemptive right, co-sale
right, registration right, right of first refusal or other
similar right of stockholders;
(xx) To such counsel's knowledge, no
holders of Common Stock or other securities of the Company
have registration rights with respect to securities of the
Company; and
19
<PAGE> 20
(xxi) 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 Statement were 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.
In addition, such counsel shall state that such
counsel has participated in conferences with officials and other representatives
of the Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although (except as specifically set forth in paragraphs (xi) and (xiii) above)
they have not verified the accuracy or completeness of the statements contained
in the Registration Statement or the Prospectus, nothing has come to the
attention of such counsel that leads them to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the Closing Date and on any later date on which Option Shares are to
be purchased, the Registration Statement and any amendment or supplement, when
such documents became effective or were filed with the Commission (other than
the financial statements including supporting schedules and other financial and
statistical data included in the Registration Statement, as to which such
counsel need express no comment) contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or at the Closing Date
or any later date on which the Option Shares are to be purchased, as the case
may be, the Registration Statement, the Prospectus and any amendment or
supplement thereto contained any untrue statement of a material fact or omitted
to state a material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
Counsel rendering the foregoing opinion may rely as
to questions of law not involving the laws of the United States or the State of
Delaware upon opinions of local counsel, and as to questions of fact upon
representations or certificates of officers of the Company, and of government
officials, in which case its opinion is to state that they are so relying and
that they have no knowledge of any material misstatement or inaccuracy in any
such opinion, representation or certificate. Copies of any opinion,
representation or certificate so relied upon shall be delivered to you, as
Representatives of the Underwriters, and to Underwriters' Counsel.
(e) You shall have received on the Closing Date and
on any later date on which Option Shares are to be purchased, as the case may
be, an opinion of Squire, Sanders & Dempsey in form and substance satisfactory
to you, with respect to the sufficiency of all such corporate proceedings and
other legal matters relating to this Agreement and the transactions contemplated
hereby as you may reasonably require, and the Company shall have furnished to
such counsel such documents as they may have requested for the purpose of
enabling them to pass upon such matters.
(f) You shall have received on the Closing Date and
on any later date on which Option Shares are to be purchased, as the case may
be, a letter from KPMG Peat Marwick LLP, addressed to the Company and the
Underwriters, dated the Closing Date or such
20
<PAGE> 21
later date on which Option Shares are to be purchased, as the case may be,
confirming that they are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable published Rules
and Regulations and based upon the procedures described in such letter delivered
to you concurrently with the execution of this Agreement (herein called the
"Original Letter"), but carried out to a date not more than five (5) business
days prior to the Closing Date or such later date on which Option Shares are to
be purchased, as the case may be, (i) confirming, to the extent true, that the
statements and conclusions set forth in the Original Letter are accurate as of
the Closing Date or such later date on which Option Shares are to be purchased,
as the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of such letter, or to reflect the availability of more recent financial
statements, data or information. The letter shall not disclose any change in the
condition (financial or otherwise), earnings, operations or business of the
Company from that set forth in the Registration Statement or Prospectus, which,
in your sole judgment, is material and adverse and that makes it, in your sole
judgment, impracticable or inadvisable to proceed with the public offering of
the Shares as contemplated by the Prospectus. The Original Letter from KPMG Peat
Marwick LLP shall be addressed to or for the use of the Underwriters in form and
substance satisfactory to the Underwriters and shall (i) represent, to the
extent true, that they are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable published Rules
and Regulations, (ii) set forth its opinion with respect to its examination of
the balance sheet of the Company as of December 31,1994 and 1995 and related
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 1993, 1994 and 1995, and (iii) address other matters agreed
upon by KPMG Peat Marwick LLP and you. In addition, you shall have received from
KPMG Peat Marwick LLP a letter addressed to the Company and made available to
you for the use of the Underwriters stating that its review of the Company's
system of internal accounting controls, to the extent they deemed necessary in
establishing the scope of its examination of the Company's financial statements
as of December 31, 1995, did not disclose any weaknesses in internal controls
that they considered to be material weaknesses.
(g) You shall have received on the Closing Date and
on any later date on which Option Shares are to be purchased, as the case may
be, a certificate of the Company, dated the Closing Date or such later date on
which Option Shares are to be purchased, as the case may be, signed by the
President and Chief Financial Officer of the Company, to the effect that, and
you shall be satisfied that:
(i) The representations and warranties of
the Company in this Agreement are true and correct, as if made
on and as of the Closing Date or any later date on which
Option Shares are to be purchased, as the case may be, and the
Company has complied, in all material respects, with all the
agreements and satisfied all the conditions on its part to be
performed or satisfied, in all material respects, at or prior
to the Closing Date or any later date on which Option Shares
are to be purchased, as the case may be;
21
<PAGE> 22
(ii) No stop order suspending the
effectiveness of the Registration Statement has been issued
and no proceedings for that purpose have been instituted or,
to their knowledge, are pending or threatened under the Act;
(iii) When the Registration Statement became
effective and at all times subsequent thereto up to the
delivery of such certificate, the Registration Statement and
the Prospectus, and any amendments or supplements thereto,
contained all material information required to be included
therein by the Act and the Rules and Regulations or the
Exchange Act and the applicable rules and regulations of the
Commission thereunder, as the case may be, and in all material
respects conformed to the requirements of the Act and the
Rules and Regulations or the Exchange Act and the applicable
rules and regulations of the Commission thereunder, as the
case may be, the Registration Statement, and any amendment or
supplement thereto, did not and does not include any untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the
statements therein not misleading, the Prospectus, and any
amendment or supplement thereto, did not and does not include
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not
misleading, and, since the effective date of the Registration
Statement, there has occurred no event required to be set
forth in an amended or supplemented Prospectus that has not
been so set forth; and
(iv) Subsequent to the respective dates as
of which information is given in the Registration Statement
and Prospectus, there has not been (a) any material adverse
change in the condition (financial or otherwise), earnings,
operations or business of the Company, (b)
any transaction that is material to the Company, except
transactions entered into in the ordinary course of business,
(c) any obligation, direct or contingent, that is material to
the Company, incurred by the Company, except obligations
incurred in the ordinary course of business, (d) any change in
the capital stock or outstanding indebtedness of the Company
that is material to the Company, (e) any dividend or
distribution of any kind declared, paid or made on the capital
stock of the Company (other than dividends paid in respect of
the Company's preferred stock outstanding on the date of the
Prospectus in amounts not in excess of those described in the
Prospectus), or (f) any loss or damage (whether or not
insured) to the property of the Company, which has a material
adverse effect on the condition (financial or otherwise),
earnings, operations or business of the Company.
(h) The Company shall have obtained and delivered to
you an agreement from each officer, director and director-nominee of the
Company, and each beneficial owner of five percent or more of the Common Stock
immediately after the offering contemplated hereby, in writing prior to the date
hereof that such person will not, during the Lock-up Period, effect the
Disposition of any Securities now owned or hereafter acquired directly by such
person or with respect to which such person has or hereafter acquires the power
of disposition, otherwise than (i) as a bona fide gift or gifts, provided the
donee or donees thereof agree in writing to be bound by this restriction, (ii)
as a distribution to limited partners or stockholders
22
<PAGE> 23
of such person, provided that the distributees thereof agree in writing to be
bound by the terms of this restriction, or (iii) with the prior written consent
of Cruttenden Roth Incorporated. The foregoing restriction is expressly agreed
to preclude the holder of the Securities from engaging in any hedging or other
transaction which is designed to or reasonably expected to lead to or result in
a Disposition of Securities during the Lock-up Period, even if such Securities
would be disposed of by someone other than the such holder. Such prohibited
hedging or other transactions would include, without limitation, any short sale
(whether or not against the box) or any purchase, sale or grant of any right
(including, without limitation, any put or call option) with respect to any
Securities or with respect to any security (other than a broad-based market
basket or index) that includes, relates to or derives any significant part of
its value from Securities. Furthermore, such person will have also agreed and
consented to the entry of stop transfer instructions with the Company's transfer
agent against the transfer of the Securities held by such person except in
compliance with this restriction.
(i) The Company shall have furnished to you such
further certificates and documents as you shall reasonably request, including
certificates of officers of the Company as to the accuracy of the
representations and warranties of the Company, as to the performance by the
Company of its obligations hereunder and as to the other conditions concurrent
and precedent to the obligations of the Underwriters hereunder.
(j) The Representative's Warrant Agreement shall have
been entered into by the Company and you, and the Representative's Warrants
shall have been issued and sold to you pursuant thereto.
All such opinions, certificates, letters and
documents will be in compliance with the provisions hereof only if they are
reasonably satisfactory to Underwriters' Counsel. The Company will furnish you
with such number of conformed copies of such opinions, certificates, letters and
documents as you shall reasonably request.
7. Option Shares.
(a) On the basis of the representations, warranties
and agreements herein contained, but subject to the terms and conditions herein
set forth, the Company hereby grants to the several Underwriters, for the
purpose of covering over-allotments in connection with the distribution and sale
of the Firm Shares only, a nontransferable option to purchase up to an aggregate
of 300,000 Option Shares at the purchase price per share for the Firm Shares set
forth in Section 3 hereof. Such option may be exercised by the Representatives
on behalf of the several Underwriters on one (1) or more occasions in whole or
in part during the period of forty-five (45) days after the date on which the
Firm Shares are initially offered to the public, by giving written notice to the
Company. The number of Option Shares to be purchased by each Underwriter upon
the exercise of such option shall be the same proportion of the total number of
Option Shares to be purchased by the several Underwriters pursuant to the
exercise of such option as the number of Firm Shares purchased by such
Underwriter (set forth in Schedule A hereto) bears to the total number of Firm
Shares purchased by the several Underwriters (set forth in Schedule A hereto),
adjusted by the Representatives in such manner as to avoid fractional shares.
23
<PAGE> 24
Delivery of definitive certificates for the Option
Shares to be purchased by the several Underwriters pursuant to the exercise of
the option granted by this Section 7 shall be made against payment of the
purchase price therefor by the several Underwriters by certified or official
bank check or checks drawn in next-day funds, payable to the order of the
Company (and the Company agrees not to deposit any such check in the bank on
which it is drawn until the day following the date of its delivery to the
Company). Such delivery and payment shall take place at the offices of the
Representative, or at such other place as may be agreed upon among the
Representatives and the Company (i) on the Closing Date, if written notice of
the exercise of such option is received by the Company at least three (3) full
business days prior to the Closing Date, or (ii) on a date which shall not be
later than the fifth (5th) full business day following the date the Company
receives written notice of the exercise of such option, if such notice is
received by the Company less than three (3) full business days prior to the
Closing Date.
The certificates for the Option Shares to be so
delivered will be made available to you at such office or such other location as
you may reasonably request for inspection at least two (2) full business days
prior to the date of payment and delivery and will be in such names and
denominations as you may request, such request to be made at least three (3)
full business days prior to such date of payment and delivery. If the
Representatives so elect, delivery of the Option Shares may be made by credit
through full fast transfer to the accounts at The Depository Trust Company
designated by the Representatives.
It is understood that you, individually, and not as
the Representative of the several Underwriters, may (but shall not be obligated
to) make payment of the purchase price on behalf of any Underwriter or
Underwriters whose check or checks shall not have been received by you prior to
the date of payment and delivery for the Option Shares to be purchased by such
Underwriter or Underwriters. Any such payment by you shall not relieve any such
Underwriter or Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in
Section 7(a) hereof, the obligations of the several Underwriters to purchase
such Option Shares will be subject (as of the date hereof and as of the date of
payment and delivery for such Option Shares) to the accuracy of and compliance
with the representations, warranties and agreements of the Company herein, to
the accuracy of the statements of the Company and officers of the Company made
pursuant to the provisions hereof, to the performance by the Company of its
obligations hereunder, and to the condition that all proceedings taken at or
prior to the payment date in connection with the sale and transfer of such
Option Shares shall be reasonably satisfactory in form and substance to you and
to Underwriters' Counsel, and you shall have been furnished with all such
documents, certificates and opinions as you may reasonably request in order to
evidence the accuracy and completeness of any of the representations,
warranties or statements, the performance of any of the covenants or agreements
of the Company or the compliance with any of the conditions herein contained in
each case in all material respects.
24
<PAGE> 25
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless
each Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under
the Act, the Exchange Act or otherwise, specifically including, but not limited
to, losses, claims, damages or liabilities, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon (i) any breach of any representation, warranty, agreement or covenant of
the Company herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, or (iii) any untrue statement or alleged untrue statement of any
material fact contained in any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, and agrees to reimburse each Underwriter for any legal or other
expenses reasonably incurred by it in connection with investigating or defending
any such loss, claim, damage, liability or action; provided, however, that the
Company shall not be liable in any such case to the extent that any such loss,
claim, damage, liability or action arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
the Registration Statement, such Preliminary Prospectus or the Prospectus, or
any such amendment or supplement thereto, in reliance upon, and in conformity
with, written information relating to any Underwriter furnished to the Company
by such Underwriter, directly or through you, specifically for use in the
preparation thereof and, provided further, that the indemnity agreement provided
in this Section 8(a) with respect to any Preliminary Prospectus shall not inure
to the benefit of any Underwriter from whom the person asserting any losses,
claims, damages, liabilities or actions based upon any untrue statement or
alleged untrue statement of material fact or omission or alleged omission to
state therein a material fact purchased Shares, if a copy of the Prospectus in
which such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall
extend upon the same terms and conditions to, and shall inure to the benefit of,
each person, if any, who controls any Underwriter within the meaning of the Act
or the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which the Company may otherwise have.
(b) Each Underwriter, severally and not jointly,
agrees to indemnify and hold harmless the Company against any losses, claims,
damages or liabilities, joint or several, to which the Company may become
subject under the Act or otherwise, specifically including, but not limited to,
losses, claims, damages or liabilities, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
25
<PAGE> 26
(i) any breach of any representation, warranty, agreement or covenant of such
Underwriter herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, or (iii) any untrue statement or alleged untrue statement of any
material fact contained in any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, in the case of
subparagraphs (ii) and (iii) of this Section 8(b) 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, directly or through
you, specifically for use in the preparation thereof, and agrees to reimburse
the Company for any legal or other expenses reasonably incurred by the Company
in connection with investigating or defending any such loss, claim, damage,
liability or action.
The indemnity agreement in this Section 8(b) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
officer of the Company who signed the Registration Statement and each director
of the Company and each person, if any, who controls the Company within the
meaning of the Act or the Exchange Act. This indemnity agreement shall be in
addition to any liabilities which each 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 shall, if a claim in respect thereof is to be made against any
indemnifying party under this Section 8, notify the indemnifying party in
writing 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 8. In case any such
action is brought against any indemnified party, and it notified the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein and, to the extent that it shall elect by
written notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof,
with counsel reasonably 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 that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party which pose a conflict of interest for such counsel, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of the indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses
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 the indemnifying party shall not be liable for the expenses of
more
26
<PAGE> 27
than one separate counsel (together with appropriate local counsel) approved by
the indemnifying party representing all the indemnified parties under Section
8(a) or 8(b) hereof who are parties to such action), (ii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; provided that such
consent shall not be unreasonably withheld. No indemnifying party shall, without
the prior written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnification could have been sought hereunder by
such indemnified party, unless such settlement includes an unconditional release
of such indemnified party from all liability on claims that are the subject
matter of such indemnification.
(d) In order to provide for just and equitable
contribution in any action in which a claim for indemnification is made pursuant
to this Section 8 but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
this Section 8 provides for indemnification in such case, all the parties hereto
shall contribute to the aggregate losses, claims, damages or liabilities to
which they may be subject (after contribution from others) in such proportion so
that the Underwriters severally and not jointly are responsible pro rata for the
portion represented by the percentage that the underwriting discount bears to
the initial public offering price, and the Company is responsible for the
remaining portion, provided, however, that (i) no Underwriter shall be required
to contribute any amount in excess of the underwriting discount applicable to
the Shares purchased by such Underwriter and (ii) no person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. The contribution agreement in this Section 8(d)
shall extend upon the same terms and conditions to, and shall inure to the
benefit of, each person, if any, who controls the Underwriters or the Company
within the meaning of the Act or the Exchange Act and each officer of the
Company who signed the Registration Statement and each director of the Company.
(e) The parties to this Agreement hereby acknowledge
that they are sophisticated business persons who were represented by counsel
during the negotiations regarding the provisions hereof including, without
limitation, the provisions of this Section 8, and are fully informed regarding
said provisions. They further acknowledge that the provisions of this Section 8
fairly allocate the risks in light of the ability of the parties to investigate
the Company and its business in order to assure that adequate disclosure is made
in the Registration Statement and Prospectus as required by the Act and the
Exchange Act. The parties are advised that federal or state public policy, as
interpreted by the courts in certain jurisdictions, may be contrary to certain
of the provisions of this Section 8, and the parties hereto hereby expressly
waive and relinquish any right or ability to assert such public policy as a
defense to a claim under this Section 8 and further agree not to attempt to
assert any such defense.
27
<PAGE> 28
9. Representations, Warranties, Covenants and Agreements to Survive
Delivery. All representations, warranties, covenants and agreements of the
Company and the Underwriters herein or in certificates delivered pursuant
hereto, and the indemnity and contribution agreements contained in Section 8
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any controlling person
within the meaning of the Act or the Exchange Act, or by or on behalf of the
Company or any of its officers, directors or controlling persons within the
meaning of the Act or the Exchange Act, and shall survive the delivery of the
Shares to the several Underwriters hereunder or termination of this Agreement.
10. Substitution of Underwriters. If any Underwriter or Underwriters
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the
aggregate number of Firm Shares which such defaulting Underwriter or
Underwriters agreed but failed to take up and pay for exceeds 10% of the Firm
Shares, the remaining Underwriters shall have the right, but shall not be
obligated, to take up and pay for (in such proportions as may be agreed upon
among them) the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase. If such remaining Underwriters do not, at the
Closing Date, take up and pay for the Firm Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase, the Closing Date
shall be postponed for twenty-four (24) hours to allow the several Underwriters
the privilege of substituting within twenty-four (24) hours (including
non-business hours) another underwriter or underwriters (which may include any
nondefaulting Underwriter) satisfactory to the Company. If no such underwriter
or underwriters shall have been substituted as aforesaid by such postponed
Closing Date, the Closing Date may, at the option of the Company, be postponed
for a further twenty-four (24) hours, if necessary, to allow the Company the
privilege of finding another underwriter or underwriters, satisfactory to you,
to purchase the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase. If it shall be arranged for the remaining
Underwriters or substituted underwriter or underwriters to take up the Firm
Shares of the defaulting Underwriter or Underwriters as provided in this Section
10, (i) the Company shall have the right to postpone the time of delivery for a
period of not more than seven (7) full business days, in order to effect
whatever changes may thereby be made necessary in the Registration Statement or
the Prospectus, or in any other documents or arrangements, and the Company
agrees promptly to file any amendments to the Registration Statement or
supplements to the Prospectus which may thereby be made necessary, and (ii) the
respective number of Firm Shares to be purchased by the remaining Underwriters
and substituted underwriter or underwriters shall be taken as the basis of their
underwriting obligation. If the remaining Underwriters shall not take up and pay
for all such Firm Shares so agreed to be purchased by the defaulting Underwriter
or Underwriters or substitute another underwriter or underwriters as aforesaid
and the Company shall not find or shall not elect to seek another
28
<PAGE> 29
underwriter or underwriters for such Firm Shares as aforesaid, then this
Agreement shall terminate.
In the event of any termination of this Agreement pursuant to
the preceding paragraph of this Section 10, the Company shall not be liable to
any Underwriter (except as provided in Sections 5 and 8 hereof) nor shall any
Underwriter (other than an Underwriter who shall have failed, otherwise than for
some reason permitted under this Agreement, to purchase the number of Firm
Shares agreed by such Underwriter to be purchased hereunder, which Underwriter
shall remain liable to the Company and the other Underwriters for damages, if
any, resulting from such default) be liable to the Company (except to the extent
provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any
person substituted for an Underwriter under this Section 10.
11. Effective Date of this Agreement and Termination.
(a) This Agreement shall become effective at the
earlier of (i) 6:30 A.M., California time, on the second full business day
following the effective date of the Registration Statement, or (ii) the time of
the initial public offering of any of the Shares by the Underwriters after the
Registration Statement becomes effective. The time of the initial public
offering shall mean the time of the release by you, for publication, of the
first newspaper advertisement relating to the Shares, or the time at which the
Shares are first generally offered by the Underwriters to the public by letter,
telephone, telegram or telecopy, whichever shall first occur. By giving notice
as set forth in Section 12 before the time this Agreement becomes effective,
you, as Representative of the several Underwriters, or the Company, may prevent
this Agreement from becoming effective without liability of any party to any
other party, except as provided in Sections 4(j), 5 and 8 hereof.
(b) You, as Representative of the several
Underwriters, shall have the right to terminate this Agreement by giving notice
as hereinafter specified at any time at or prior to the Closing Date or on or
prior to any later date on which Option Shares are to be purchased, as the case
may be, (i) if the Company shall have failed, refused or been unable to perform
any agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled is not fulfilled,
including, without limitation, any change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
from that set forth in the Registration Statement or Prospectus, which, in your
sole judgment, is material and adverse, or (ii) if additional material
governmental restrictions, not in force and effect on the date hereof, shall
have been imposed upon trading in securities generally or minimum or maximum
prices shall have been generally established on the New York Stock Exchange or
on the American Stock Exchange or in the over the counter market by the NASD, or
trading in securities generally shall have been suspended on either such
exchange or in the over the counter market by the NASD, or if a banking
moratorium shall have been declared by federal, New York or California
authorities, or (iii) if the Company shall have sustained a loss by strike,
fire, flood, earthquake, accident or other calamity of such character as to
interfere materially with the conduct of the business and operations of the
Company
29
<PAGE> 30
regardless of whether or not such loss shall have been insured, or (iv) if there
shall have been a material adverse change in the general political or economic
conditions or financial markets as in your reasonable judgment makes it
inadvisable or impracticable to proceed with the offering, sale and delivery of
the Shares, or (v) if there shall have been an outbreak or escalation of
hostilities or of any other insurrection or armed conflict or the declaration by
the United States of a national emergency which, in the reasonable opinion of
the Representatives, makes it impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. Any termination
pursuant to any of subparagraphs (ii) through (v) above shall be without
liability of any party to any other party except as provided in Sections 4(j), 5
and 8 hereof. In the event of termination pursuant to subparagraph (i) above,
the Company shall also remain obligated to pay costs and expenses pursuant to
Sections 4(i), 5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective
or to terminate this Agreement as provided in this Section 11, you shall
promptly notify the Company by telephone, telecopy or telegram, in each case
confirmed by letter. If the Company shall elect to prevent this Agreement from
becoming effective, the Company shall promptly notify you by telephone, telecopy
or telegram, in each case, confirmed by letter.
12. Notices. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o Cruttenden Roth Incorporated, 18301 Von Karman,
Suite 100, Irvine, California 92715, telecopier number (714) 852-9603,
Attention: Christopher D. Jennings; if sent to the Company, such notice shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to 2525 East Camelback Road, Suite 1150, Phoenix, Arizona
85016, telecopier number (602) 852-6696, Attention: Gregory B. Sullivan.
13. Parties. This Agreement shall inure to the benefit of and be
binding upon the several Underwriters and the Company and their respective
executors, administrators, successors and assigns. Nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any person
or corporation, other than the parties hereto and their respective executors,
administrators, successors and assigns, and their controlling persons within the
meaning of the Act or the Exchange Act, officers and directors referred to in
Section 8 hereof, any legal or equitable right, remedy or claim 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 the parties hereto and their respective executors,
administrators, successors and assigns and said controlling persons and said
officers and directors, and for the benefit of no other person or corporation.
No purchaser of any of the Shares from any Underwriter shall be construed a
successor or assign by reason merely of such purchase. The Agreement constitutes
the entire agreement and understanding of the parties with respect to the
subject matter hereof.
In all dealings with the Company under this Agreement, you
shall act on behalf of each of the several Underwriters, and the Company shall
be entitled to act and rely upon any statement, request, notice or agreement
made or given by you on behalf of each of the several Underwriters.
30
<PAGE> 31
14. Applicable Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of California.
15. Counterparts. This Agreement may be signed in several counterparts,
each of which will constitute an original.
If the foregoing correctly sets forth the understanding among the
Company and the several Underwriters, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement among the Company and the several Underwriters.
Very truly yours,
UGLY DUCKLING CORPORATION
By:
--------------------------------------
Name:
-------------------------------
Title:
---------------------------------
Accepted as of the date first above written:
CRUTTENDEN ROTH INCORPORATED
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
By: CRUTTENDEN ROTH INCORPORATED
By:
-------------------------------
Name:
------------------------
Title:
------------------------
31
<PAGE> 32
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Firm
Shares
To Be
Underwriters Purchased
- ------------------------------------------- ---------
<S> <C>
Cruttenden Roth Incorporated .................................... -----
---------
Total.................................................... 2,000,000
=========
</TABLE>
32
<PAGE> 1
EXHIBIT 3.1(a)
CERTIFICATE OF AMENDMENT TO THE
CERTIFICATE OF INCORPORATION OF
UGLY DUCKLING CORPORATION
Ugly Duckling Corporation, a corporation organized and existing under
the General Corporation Law of Delaware ("Corporation") pursuant to Section 242
of the General Corporation Law of the State of Delaware DOES HEREBY CERTIFY:
FIRST: That the following resolution was duly adopted by the Board of
Directors on May 29, 1996, in accordance with the Bylaws and the General
Corporation Law of Delaware setting forth a proposed amendment to the
Certificate of Incorporation of the Corporation:
WHEREAS, the Board of Directors believes it is in the best
interest of the Corporation to amend the Certificate of
Incorporation to elect not to be governed by Section 203 of
the Delaware General Corporation Law.
NOW THEREFORE, BE IT RESOLVED, that the Corporation amend
its Certificate of Incorporation to elect not to be governed
by Section 203 of the Delaware General Corporation Law; and
RESOLVED FURTHER, that the foregoing amendment to the
Certificate of Incorporation be submitted for approval by
the stockholders of the Corporation.
SECOND: The foregoing proposed amendment to the Certificate of
Incorporation was duly adopted in accordance with the provisions of Section 242
of the General Corporation Law of the State of Delaware and has been duly
approved by the stockholders in accordance with said Section 242.
THIRD: Resolved that Article Thirteen of the Certificate of
Incorporation of the Corporation is hereby renumbered as Article Fourteen.
FOURTH: Resolved that a new Article Thirteen is hereby added to read
as follows:
"The Corporation hereby elects not to be governed by Section
203 (Business Combinations with Interested Stockholders) of the
Delaware General Corporation Law."
FIFTH: All the other Articles of the Certificate of Incorporation
remain unchanged.
IN WITNESS WHEREOF, Ugly Duckling Corporation has caused this
Certificate of Amendment to the Certificate of Incorporation to be signed by
Gregory B. Sullivan, its President, and Steven P. Johnson, its Senior Vice
President and Secretary, who declare under penalty of perjury that the matters
set forth in the foregoing Certificate of Amendment are true and correct to
their knowledge executed at Phoenix, Arizona, as of this 29th day of May, 1996.
/s/ Gregory B. Sullivan
---------------------------------
By: Gregory B. Sullivan
Its: President
Attest:
/s/ Steven P. Johnson
- ---------------------------
Its: Senior Vice President
-----------------------
<PAGE> 1
EXHIBIT 3.2(a)
ACTION BY WRITTEN CONSENT
OF THE BOARD OF DIRECTORS
OF UGLY DUCKING CORPORATION
IN LIEU OF SPECIAL MEETING
------------
May 29, 1996
------------
Pursuant to Section 141 of the Delaware General Corporation Law, the
undersigned, being the sole director of Ugly Duckling Corporation, a Delaware
corporation (the "Corporation"), does hereby unanimously consent to the
adoption of the following resolutions without the formality of convening a
meeting of the Board of Directors, for and as the actions of the Corporation,
as of the date set forth above.
Amendment to Bylaws
RESOLVED, that the third paragraph Section 2.8, entitled "Nomination
of Directors," is hereby amended in its entirety to read as follows:
"No person shall be elected to the Board of Directors of this
Corporation at an annual meeting of the stockholders, or at a special
meeting called for that purpose, unless, with respect to a person nominated
by a stockholder of the Corporation, a written notice of nomination of such
person by the stockholder shall have been received by the Secretary of the
Corporation not less than thirty (30) days nor more than ninety (90) days
prior to the meeting; provided, however, that in the event that less than
forty (40) days' notice of the date of the meeting is given by the
Corporation, notice by the stockholder to be timely must be so received not
later than the close of business on the tenth day following the day on which
such notice of the date of the meeting was mailed or otherwise given. Each
such notice shall set forth: (a) the name and address of the stockholder who
intends to make the nomination and of the person or persons to be nominated;
(b) a representation that the stockholder is a holder of record of stock of
the Corporation entitled to vote at such meeting (including the number of
shares of stock of the Corporation owned beneficially or of record by such
stockholder and the nominee or nominees) and intends to appear in person or
by proxy at the meeting to nominate the person or persons specified in the
notice; (c) a description of all arrangements or understandings between the
stockholders and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by the stockholder; (d) such other information regarding each nominee
proposed by such stockholder as would
<PAGE> 2
have been required to be included in a proxy statement filed pursuant to the
proxy rules of the Securities and Exchange Commission had each nominee been
nominated, or intended to be nominated, by the Board of Directors; and (e)
the consent of each nominee to serve as a director of the Corporation if so
elected."
RESOLVED, that the third paragraph of Section 2.9, entitled "Business
at Annual Meetings," is hereby amended in its entirety to read as follows:
"To be timely, a stockholder's notice to the Secretary must be delivered
to or mailed and received at the principal executive offices of the
Company not less than thirty (30) days nor more than ninety (90) days
prior to the meeting; provided, however, that in the event that less than
forty (40) days' notice of the date of the meeting is given by the
Corporation, notice by the stockholder to be timely must be so received not
later than the close of business on the tenth day following the day on which
such notice of the date of the meeting was mailed or otherwise given."
RESOLVED, that 3.7, entitled "Meetings by Means of Conference
Telephone," is hereby amended in its entirety to read as follows:
"Unless otherwise provided by the Certificate of Incorporation or these
By-Laws, members of the Board of Directors of the Corporation, or any
committee designated by the Board of Directors, may participate in a meeting
of the Board of Directors or such committee by means of a conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a
meeting pursuant to this Section 3.7 shall constitute presence in person at
such meeting."
Effective Date.
RESOLVED, that this consent shall be effective as of the day and year
first above written.
/s/ ERNIE C. GARCIA, II
------------------------------
Ernest C. Garcia, II
-2-
<PAGE> 1
EXHIBIT 4.7
------------------------------------------------------------
UGLY DUCKLING CORPORATION
and
CRUTTENDEN ROTH INCORPORATED
-----------------------
REPRESENTATIVE'S WARRANT AGREEMENT
Dated as of __________, 1996
------------------------------------------------------------
<PAGE> 2
REPRESENTATIVE'S WARRANT AGREEMENT
THIS REPRESENTATIVE'S WARRANT AGREEMENT (the "Agreement"), dated as of
________ 1996 is made and entered into by and between UGLY DUCKLING CORPORATION,
a Delaware corporation (the "Company"), and CRUTTENDEN ROTH INCORPORATED (the
"Warrantholder").
The Company agrees to issue and sell, and the Warrantholder agrees to
purchase, for the price of $1,500, warrants, as hereinafter described (the
"Warrants"), to purchase up to an aggregate of 150,000 shares (the "Shares") of
the Company's Common Stock, $0.001 par value (the "Common Stock"), in connection
with a public offering (the "Public Offering") by the Company of 2,000,000
shares of Common Stock pursuant to an underwriting agreement (the "Underwriting
Agreement"), dated as of _____________, 1996 between the Company and the
Warrantholder, as Representative of the several Underwriters named in the
Underwriting Agreement. The purchase and sale of the Warrants shall occur on the
Closing Date, as defined in the Underwriting Agreement, and be subject to the
conditions to the Underwriters' obligations to purchase Common Stock thereunder
and the performance of such obligations by the Underwriters.
In consideration of the foregoing and for the purpose of defining the
terms and provisions of the Warrants and the respective rights and obligations
thereunder, the Company and the Warrantholder, for value received, hereby agree
as follows:
Section 1. Transferability and Form of Warrants.
1.1 Registration. The Warrants shall be numbered and shall
be registered on the books of the Company when issued.
1.2 Transfer. The Warrants shall be transferable only on
the books of the Company maintained at its principal office in Phoenix, Arizona,
or wherever its principal office may then be located, upon delivery thereof duly
endorsed by the Warrantholder or by its duly authorized attorney or
representative, accompanied by proper evidence of succession, assignment or
authority to transfer. Upon any registration of transfer, the Company shall
execute and deliver new Warrants to the person entitled thereto and the
surrendered Warrants shall be canceled by the Company. Canceled Warrants shall
be disposed of by the Company in a manner satisfactory to the Company.
1.3 Limitations on Transfer of the Warrants. Subject to the
provisions of Section 11, the Warrants shall not be sold, transferred, assigned
or hypothecated by the Warrantholder until ___________, 1997, except to (i) one
or more persons, each of whom on the date of transfer is an officer or partner
of the Warrantholder; (ii) a successor to the Warrantholder in a merger or
consolidation; (iii) a purchaser of all or substantially all of the
Warrantholder's assets; or (iv) any person receiving the Warrants from one or
more of the persons listed in this subsection 1.3 at such person's or persons'
death pursuant to will, trust or the laws of intestate succession. The Warrants
may be divided or combined, upon request to the Company by the Warrantholder,
into a certificate or certificates representing the right to purchase the same
aggregate number of Shares. Unless the context indicates otherwise, the term
<PAGE> 3
"Warrantholder" shall include any transferee or transferees of the Warrants
pursuant to this subsection 1.3, and the term "Warrants" shall include any and
all warrants outstanding pursuant to this Agreement, including those evidenced
by a certificate or certificates issued upon division, exchange, substitution or
transfer pursuant to this Agreement.
1.4 Form of Warrants. The text of the Warrants and of the
form of election to purchase Shares shall be substantially as set forth in
Exhibit A attached hereto. The number of Shares issuable upon exercise of the
Warrants is subject to adjustment upon the occurrence of certain events, all as
hereinafter provided. The Warrants shall be executed on behalf of the Company by
its President or by a Vice President, attested to by its Secretary or an
Assistant Secretary. A Warrant bearing the signature of an individual who was at
any time the proper officer of the Company shall bind the Company,
notwithstanding that such individual shall have ceased to hold such office prior
to the delivery of such Warrant or did not hold such office on the date of this
Agreement.
The Warrants shall be dated as of the date of signature thereof by the
Company either upon initial issuance or upon division, exchange, substitution or
transfer.
1.5 Legend on Shares. Each certificate for Shares initially
issued upon exercise of the Warrants shall bear the following legend, unless, at
the time of exercise, such Shares are subject to a currently effective
Registration Statement under the Securities Act of 1933, as amended (the "Act"):
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES
LAWS AND MAY NOT BE SOLD, EXCHANGED, HYPOTHECATED OR OTHERWISE
TRANSFERRED IN ANY MANNER EXCEPT IN COMPLIANCE WITH SECTION 11 OF THE
AGREEMENT PURSUANT TO WHICH THEY WERE ISSUED."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution pursuant to a registration statement under the Act, of
the securities represented thereby) shall also bear the above legend unless, in
the opinion of the Company's counsel, the securities represented thereby need no
longer be subject to such restrictions.
Section 2. Exchange of Warrant Certificate. Any Warrant
certificate may be exchanged for another certificate or certificates entitling
the Warrantholder to purchase a like aggregate number of Shares as the
certificate or certificates surrendered then entitled such Warrantholder to
purchase. Any Warrantholder desiring to exchange a Warrant certificate shall
make such request in writing delivered to the Company, and shall surrender,
properly endorsed, with signatures guaranteed, the certificate evidencing the
Warrant to be so exchanged. Thereupon, the Company shall execute and deliver to
the person entitled thereto a new Warrant certificate as so requested.
2
<PAGE> 4
Section 3. Term of Warrants; Exercise of Warrants.
(a) Subject to the terms of this Agreement, the
Warrantholder shall have the right, at any time during the period commencing at
9:00 a.m., Phoenix time, on ___________, 1997 and ending at 5:00 p.m., Phoenix
time, on ___________, 2001 (the "Termination Date"), to purchase from the
Company up to the number of fully paid and nonassessable Shares to which the
Warrantholder may at the time be entitled to purchase pursuant to this
Agreement, upon surrender to the Company, at its principal office, of the
certificate evidencing the Warrants to be exercised, together with the purchase
form on the reverse thereof duly filled in and signed, with signatures
guaranteed, and upon payment to the Company of the Warrant Price (as defined in
and determined in accordance with the provisions of this Section 3 and Sections
7 and 8 hereof), for the number of Shares in respect of which such Warrants are
then exercised, but in no event for less than 100 Shares (unless less than an
aggregate of 100 Shares are then purchasable under all outstanding Warrants held
by the Warrantholder).
(b) Payment of the aggregate Warrant Price shall be made in
cash, by wire transfer, by certified or official bank check or through the use
of Appreciation Currency (as defined below), or any combination thereof. Upon
such surrender of the Warrants and payment of such Warrant Price as aforesaid,
the Company shall issue and cause to be delivered with all reasonable dispatch
to or upon the written order of the Warrantholder and in the name or names of
the Warrantholder or, subject to compliance with the provisions of Section
11(a), in such name or names as the Warrantholder may designate, a certificate
or certificates for the number of full Shares so purchased upon the exercise of
the Warrant, together with cash, as provided in Section 9 hereof, in respect of
any fractional Shares otherwise issuable upon such surrender. Such certificate
or certificates shall be deemed to have been issued and any person so designated
to be named therein shall be deemed to have become a holder of record of such
securities as of the date of surrender of the Warrants and payment of the
Warrant Price, as aforesaid, notwithstanding that the certificate or
certificates representing such securities shall not actually have been delivered
or that the stock transfer books of the Company shall then be closed. The
Warrants shall be exercisable, at the election of the Warrantholder, either in
full or from time to time in part and, in the event that a certificate
evidencing the Warrants is exercised in respect of less than all of the Shares
specified therein at any time prior to the Termination Date, a new certificate
evidencing the remaining portion of the Warrants will be issued by the Company.
(c) As used herein, "Appreciation Currency" shall mean the
consideration given by the surrender of Warrants in exchange for Shares. The
number of Shares to which the holder shall be entitled upon such surrender of
Warrants ("X") shall be determined by applying the following formula: X = N x
(($S - $W) divided by $S), where "N" is the number of Shares that would be
received if the Warrants surrendered were instead exercised for cash, "$S" is
the Current Market Price (as defined in section 9) per share of Common Stock
and "$W" is the Warrant Price defined in section 7 as adjusted and readjusted
as set forth in Section 8.
Section 4. Payment of Taxes. The Company will pay all documentary
stamp taxes, if any, attributable to the initial issuance of the Warrants or the
securities comprising the Shares; provided, however, the Company shall not be
required to pay any tax or taxes which may be payable (i) in respect of any
secondary transfer of the Warrants or the securities comprising the
3
<PAGE> 5
Shares; or (ii) as a result of the issuance of the Shares to any person, other
than the Warrantholder thereof. The Company shall not be required to issue or
deliver any certificate for any Shares unless and until the person requesting
the issuance thereof shall have paid to the Company the amount of such tax or
shall have produced evidence that such tax has been paid to the appropriate
taxing authority.
Section 5. Mutilated or Missing Warrants. In case the certificate
or certificates evidencing the Warrants shall be mutilated, lost, stolen or
destroyed, the Company shall, at the request of the Warrantholder, issue and
deliver in exchange and substitution for and upon cancellation of the mutilated
certificate or certificates, or in lieu of and substitution for the certificate
or certificates lost, stolen or destroyed, a new Warrant certificate or
certificates of like tenor and representing an equivalent right or interest, but
only upon receipt of evidence reasonably satisfactory to the Company of such
loss, theft or destruction of such Warrant and a bond of indemnity, if
requested, also satisfactory in form and amount, and issued at the applicant's
cost. Applicants for such substitute Warrant certificate shall also comply with
such other reasonable regulations and pay such other reasonable charges as the
Company may prescribe.
Section 6. Reservation of Shares. There has been reserved, and the
Company shall at all times keep reserved so long as the Warrants remain
outstanding, out of its authorized Common Stock, such number of shares of Common
Stock as shall be subject to purchase under the Warrants. The Company will
supply every transfer agent for the Common Stock and other securities of the
Company issuable upon the exercise of the Warrants with duly executed stock and
other certificates, as appropriate, for such purpose and will provide or
otherwise make available any cash which may be payable as provided in Section 9
hereof.
Section 7. Warrant Price. The price per Share at which Shares
shall be purchasable upon the exercise of the Warrants (the "Warrant Price")
shall be $_____ subject to further adjustment pursuant to Section 8 hereof.
Section 8. Adjustment of Number of Shares. The number and kind of
securities purchasable upon the exercise of the Warrants and the Warrant Price
shall be subject to adjustment from time to time upon the happening of certain
events, as follows:
8.1 Adjustments. The number of Shares purchasable upon the
exercise of the Warrants shall be subject to adjustment as follows: In case the
Company shall (i) pay a dividend in Common Stock or make a distribution in
Common Stock; (ii) subdivide its outstanding Common Stock; (iii) combine its
outstanding Common Stock into a smaller number of shares of Common Stock; or
(iv) issue by reclassification of its Common Stock other securities of the
Company, the Warrant Price and the number of Shares purchasable upon exercise of
the Warrants immediately prior thereto shall be proportionately adjusted so that
the Warrantholder shall be entitled to receive the kind and number of Shares or
other securities of the Company which it would have owned or would have been
entitled to receive immediately after the happening of any of the events
described above, had the Warrants been exercised at the Warrant Price
immediately prior to the happening of such event or any record date with respect
thereto, whichever is earlier. Any adjustment made pursuant to this subsection
8.1 shall become
4
<PAGE> 6
effective immediately after the effective date of such event retroactive to the
record date, if any, for such event.
For the purpose of this subsection 8.1, the term "Common
Stock" shall mean (i) the class of stock designated as the Common Stock of the
Company at the date of this Agreement; or (ii) any other class of stock
resulting from successive changes or reclassifications of such Common Stock
consisting solely of changes in par value, or from par value to no par value, or
from no par value to par value.
8.2 No Adjustment for Dividends. Except as provided in
subsection 8.1, no adjustment in respect of any dividends or distributions out
of earnings shall be made during the term of the Warrants or upon the exercise
of the Warrants.
8.3 Certificate of Adjustment. Whenever the number of
Shares purchasable upon the exercise of the Warrants is adjusted as herein
provided, the Company shall cause to be promptly mailed to the Warrantholder by
first class mail, postage prepaid, notice of such adjustment and a certificate
of the chief financial officer of the Company setting forth the number of Shares
purchasable upon the exercise of the Warrants after such adjustment, a brief
statement of the facts requiring such adjustment and the computation by which
such adjustment was made.
8.4 Preservation of Purchase Rights upon Reclassification,
Consolidation, etc. In case of any consolidation of the Company with or merger
of the Company into another corporation or in case of any sale or conveyance to
another corporation of the property, assets or business of the Company as an
entirety or substantially as an entirety, the Company or such successor or
purchasing corporation, as the case may be, shall execute with the Warrantholder
an agreement that the Warrantholder shall have the right thereafter upon payment
of the Warrant Price in effect immediately prior to such action to purchase,
upon exercise of the Warrants, the kind and amount of shares and other
securities and property which it would have owned or have been entitled to
receive after the happening of such consolidation, merger, sale or conveyance
had the Warrants been exercised immediately prior to such action. In the event
of a merger described in Section 368(a)(2)(E) of the Internal Revenue Code of
1986, in which the Company is the surviving corporation, the right to purchase
Shares under the Warrants shall terminate on the date of such merger and
thereupon the Warrants shall become null and void, but only if the controlling
corporation shall agree to substitute for the Warrants its warrant which
entitles the holder thereof to purchase upon its exercise the kind and amount of
shares and other securities and property which it would have owned or been
entitled to receive had the Warrants been exercised immediately prior to such
merger. Any such agreements referred to in this subsection 8.4 shall provide for
adjustments, which shall be as nearly equivalent as may be practicable to the
adjustments provided for in Section 8.1 hereof. The provisions of this
subsection 8.4 shall similarly apply to successive consolidations, mergers,
sales or conveyances.
8.5 Par Value of Shares of Common Stock. Before taking any
action that would cause an adjustment effectively reducing the portion of the
Warrant Price allocable to each Share below the then par value per share of the
Common Stock issuable upon exercise of the Warrants, the Company will take any
corporate action which may, in the opinion of its counsel,
5
<PAGE> 7
be necessary in order that the Company may validly and legally issue fully paid
and nonassessable Common Stock upon exercise of the Warrants.
8.6 Independent Public Accountants. The Company may retain
a firm of independent public accountants of recognized national standing (which
may be any such firm regularly employed by the Company) to make any computation
required under this Section 8.
8.7 Statement on Warrant Certificates. Irrespective of any
adjustments in the number of securities issuable upon exercise of Warrants,
Warrant certificates theretofore or thereafter issued may continue to express
the same number of securities as are stated in the similar Warrant certificates
initially issuable pursuant to this Agreement. However, the Company may, at any
time, make any change in the form of Warrant certificate that it may deem
appropriate and that does not affect the substance thereof; and any Warrant
certificate thereafter issued, whether upon registration of transfer of, or in
exchange or substitution for, an outstanding Warrant certificate, may be issued
in the form so changed.
Section 9. Fractional Interests; Current Market Price. The Company
shall not be required to issue fractional Shares on the exercise of the
Warrants. If any fraction of a Share would, except for the provisions of this
Section 9, be issuable on the exercise of the Warrants (or specified portion
thereof), the Company shall pay an amount in cash equal to the then Current
Market Price per share of Common Stock multiplied by such fraction.
For purposes of this Agreement, the term "Current Market
Price" shall mean (i) if the Common Stock is traded in the over-the-counter
market and not on The Nasdaq National Market nor on any national securities
exchange, the average of the per share closing bid price on the 20 consecutive
trading days immediately preceding the date in question, as reported by The
Nasdaq Small Cap Market (or an equivalent generally accepted reporting service
if quotations are not reported on The Nasdaq Small Cap Market); or (ii) if the
Common Stock is traded on The Nasdaq National Market or on a national securities
exchange, the average for the 20 consecutive trading days immediately preceding
the date in question of the daily per share closing prices on The Nasdaq
National Market or on the principal stock exchange on which it is listed, as the
case may be. For purposes of clause (i) above, if trading in the Common Stock is
not reported by The Nasdaq Small Cap Market, the applicable bid price referred
to in said clause shall be the lowest bid price as reported by The Nasdaq
Electronic Bulletin Board or, if not reported thereon, as reported in the "pink
sheets" published by National Quotation Bureau, Incorporated, and, if such
securities are not so reported, shall be the price of a share of Common Stock
determined by the Company's Board of Directors in good faith. The closing price
referred to in clause (ii) above shall be the last reported sale price or, in
case no such reported sale takes place on such day, the average of the reported
closing bid and asked prices, in either case in The Nasdaq National Market or on
the national securities exchange on which the Common Stock is then listed.
Section 10. No Rights as Shareholder; Notices to Warrantholder.
Nothing contained in this Agreement or in the Warrants shall be construed as
conferring upon the Warrantholder or its transferees any rights as a shareholder
of the Company, including the right to vote, receive dividends or other
distributions, consent or receive notices as a shareholder in respect of any
6
<PAGE> 8
meeting of shareholders for the election of directors of the Company or any
other matter, or any rights whatsoever as shareholders of the Company. If,
however, at any time prior to the expiration of the Warrants and prior to their
exercise, any one or more of the following events shall occur:
(a) any action that would require an adjustment pursuant to
Section 8.1; or
(b) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation, merger or sale of its property,
assets and business as an entirety or substantially as an entirety) shall be
proposed;
then the Company shall give notice in writing of such event to the
Warrantholder, as provided in Section 14 hereof, at least 15 days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the shareholders entitled to any relevant dividend,
distribution, subscription rights or other rights or for the determination of
shareholders entitled to vote on such proposed dissolution, liquidation or
winding up. Such notice shall specify such record date or the date of closing
the transfer books, as the case may be. The failure to give notice required by
this Section 10 or any defect therein shall not affect the legality or validity
of any dividend, distribution, right, dissolution, liquidation or winding up, or
the vote upon any action.
Section 11. Restrictions on Transfer; Registration Rights.
(a) The Warrantholder agrees that prior to making any
disposition of the Warrants or the Shares, including without limitation, to
persons or entities identified in clauses (i) through (vi), inclusive, of
Section 1.3 other than pursuant to a registration statement or other
notification or post-effective amendment thereto (hereinafter collectively a
"Registration Statement") filed by the Company with, and declared effective by,
the Securities and Exchange Commission (the "Commission"), the Warrantholder
shall give written notice to the Company describing briefly the manner in which
any such proposed disposition is to be made and shall provide such other
information as may reasonably be required by the Company to conclude that no
Registration Statement under the Act or under applicable state laws is required
with respect to such disposition, and no such disposition shall be made if the
Company has notified the Warrantholder that in the opinion of counsel reasonably
satisfactory to the Warrantholder a Registration Statement under the Act is
required with respect to such disposition and no such Registration Statement has
been filed by the Company with, and, to the extent required, declared effective
by, the Commission.
(b)(i) Whenever during the four-year period beginning on
______________, 1997 and ending on ___________, 2001, the Company proposes to
file with the Commission a Registration Statement (other than as to securities
issued pursuant to an employee benefit plan or as to a transaction subject to
Rule 145 promulgated under the Act or for which a Form S-4 Registration
Statement could be used), it shall, at least 30 days prior to each such filing,
give written notice of such proposed filing to the Warrantholder and each holder
of Shares, at their respective addresses as they appear on the records of the
Company, and shall offer to include and shall include in such filing any
proposed disposition of the Warrants and Shares upon receipt
7
<PAGE> 9
by the Company, not less than 10 days prior to the proposed filing date, of a
request therefor setting forth the facts with respect to such proposed
disposition and all other information with respect to such person reasonably
necessary to be included in such Registration Statement. In the event that the
managing underwriter for said offering advises the Company in writing that the
inclusion of such securities in the offering would be detrimental to the
offering, such securities shall nevertheless be included in the Registration
Statement, as long as the Warrantholder and each holder of Warrants and Shares,
desiring to have such securities included in the Registration Statement agrees
in writing, for a period of 90 days following such offering, not to sell or
otherwise dispose of such securities pursuant to such Registration Statement,
which Registration Statement the Company shall keep effective for a period of at
least nine months following the expiration of such 90-day period.
(ii) In addition to any Registration Statement
pursuant to subparagraph (i) above, during the four-year period beginning on
______________, 1997 and ending on ___________, 2001 the Company will, as
promptly as practicable (but in any event within 60 days), after written request
(the "Request") by Cruttenden Roth Incorporated, or by a person or persons
holding (or having the right to acquire by virtue of holding the Warrants) at
least 50% of the shares of Common Stock which have been (or may be) issued upon
exercise of the Warrants, prepare and file at its own expense a Registration
Statement with the Commission and appropriate Blue Sky authorities sufficient to
permit the public offering of the Warrants and Shares, and will use reasonable
efforts at its own expense through its officers, directors, auditors and
counsel, in all matters necessary or advisable, to cause such Registration
Statement to become effective as promptly as practicable and to maintain such
effectiveness so as to permit resale of the Shares covered by the Request until
the earlier of the time that all such Shares have been sold or the expiration of
one hundred twenty (120) days from the effective date of the Registration
Statement; provided, however, that the Company shall only be obligated to file
one such Registration Statement under this Section 11(b)(ii).
(c) All fees, disbursements and out-of-pocket expenses
(other than Warrantholders' and holders' of Shares brokerage fees and
commissions and legal fees of counsel to the Warrantholders and holders of
Shares, if any) in connection with the filing of any Registration Statement
under Section 11(b) and in complying with applicable securities and Blue Sky
laws shall be borne by the Company. The Company at its expense will supply any
Warrantholder and any holder of Shares with copies of such Registration
Statement and the prospectus included therein and other related documents in
such quantities as may be reasonably requested by the Warrantholder or holder of
Shares.
(d) The Company shall not be required by this Section 11 to
file such Registration Statement if, in the opinion of counsel for the
Warrantholders and holders of Shares and counsel for the Company (or, should
they not agree, in the opinion of another counsel experienced in securities law
matters acceptable to counsel for such Warrantholders, holders and the Company),
the proposed public offering or other transfer as to which such Registration
Statement is requested is exempt from applicable federal and state securities
laws and would result in unaffiliated purchasers or transferees obtaining
securities which are not "restricted securities," as defined in Rule 144 under
the Act.
8
<PAGE> 10
(e) The provisions of this Section 11 and Section 12 hereof
shall apply to the extent as provided herein if the Company chooses to file an
Offering Statement under Regulation A promulgated under the Act.
(f) The Company agrees that until all Shares have been sold
under a Registration Statement or pursuant to Rule 144 under the Act, it will
use reasonable efforts to keep current in filing all materials required to be
filed with the Commission in order to permit the holders of such securities to
sell the same under Rule 144.
Section 12. Indemnification.
(a) In the event of the filing of any Registration
Statement with respect to the Shares pursuant to Section 11 hereof, the Company
agrees to indemnify and hold harmless the Warrantholder or any holder of such
Shares and each person, if any, who controls the Warrantholder or any holder of
such Shares within the meaning of the Act, against any losses, claims, damages
or liabilities, joint or several (which shall, for all purposes of this
Agreement, include, but not be limited to, all costs of defense and
investigation and all reasonable attorneys' fees), to which the Warrantholder or
any holder of such Shares 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 any untrue statement
or alleged untrue statement of any material fact contained in any such
Registration Statement, or any related preliminary prospectus, final prospectus,
or amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading;
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 an untrue statement or alleged untrue statement or omission or alleged
omission made in such Registration Statement, preliminary prospectus, final
prospectus or amendment or supplement thereto in reliance upon, and in
conformity with, written information furnished to the Company by such
Warrantholder or the holder of such Shares or any person who controls the
Warrantholder or any holder of such Shares within the meaning of the Act
specifically for use in the preparation thereof. This indemnity will be in
addition to any liability which the Company may otherwise have.
(b) The Warrantholders and the holders of the Shares agree
that they will indemnify and hold harmless the Company, each other person
referred to in subparts (1), (2) and (3) of Section 11(a) of the Act in respect
of the Registration Statement and each person, if any, who controls the Company
within the meaning of the Act, against any losses, claims, damages or
liabilities (which shall, for all purposes of this Agreement, include but not be
limited to, all costs of defense and investigation and all attorneys' fees) to
which the Company or any such director, officer or controlling person may become
subject under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
such Registration Statement, or any related preliminary prospectus, final
prospectus or amendment or supplement thereto, or arise out of or are based upon
the omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
but in each case only to the extent that such untrue statement
9
<PAGE> 11
or alleged untrue statement or omission or alleged omission was made in such
Registration Statement, preliminary prospectus, final prospectus or amendment or
supplement thereto in reliance upon, and in conformity with, written information
furnished to the Company by the Warrantholder or such holder of Shares
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability that the Warrantholder or such holder of Shares
may otherwise have.
(c) Promptly after receipt by an indemnified party under
this Section 12 of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against any
indemnifying party under this Section 12, notify the indemnifying party in
writing 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 12. In case any such
action is brought against any indemnified party, and it notified the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein and, to the extent that it shall elect by
written notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof,
with counsel reasonably 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 that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party which poses a conflict of interest for such counsel, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of the indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 12 for any legal or other expenses
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 the indemnifying party shall not be liable for the expenses of
more than one separate counsel (together with appropriate local counsel)
approved by the indemnifying party representing all the indemnified parties
under Section 12(a) or 12(b) hereof who are parties to such action); (ii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of commencement of the action; or (iii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense of
the indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; provided that such
consent shall not be unreasonably withheld. No indemnifying party shall, without
the prior written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnification could have been sought hereunder by
such indemnified party, unless such settlement includes an unconditional release
of such indemnified party from all liability on claims that are the subject
matter of such indemnification.
10
<PAGE> 12
Section 13. Contribution. In order to provide for just and
equitable contribution under the Act in any case in which (i) a Warrantholder or
any holder of the Shares or controlling person makes a claim for indemnification
pursuant to Section 12 hereof but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of Section 12 hereof provide for indemnification in such
case; or (ii) contribution under the Act may be required on the part of any
Warrantholder or any holder of the Shares or controlling person, then the
Company and any Warrantholder or any such holder of the Shares or controlling
person shall contribute to the aggregate losses, claims, damages or liabilities
to which they may be subject (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees), in either such case (after contribution from others) on the
basis of relative fault as well as any other relevant equitable considerations.
The relative fault 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 on the one hand or a Warrantholder or holder of Shares
or controlling person on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company and such holders of such securities and such controlling
persons agree that it would not be just and equitable if contribution pursuant
to this Section 13 were determined by pro rata allocation or by any other method
which does not take account of the equitable considerations referred to in this
Section 13. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this Section 13 shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. 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.
Section 14. Notices. Any notice pursuant to this Agreement by the
Company or by a Warrantholder or a holder of Shares shall be in writing and
shall be deemed to have been duly given if delivered or mailed by certified
mail, return receipt requested:
(a) If to a Warrantholder or a holder of Shares addressed
to Cruttenden Roth Incorporated, 18301 Von Karman, Suite 100, Irvine,
California, Attention: Corporate Finance Department.
(b) If to the Company addressed to it at 2525 East
Camelback Road, Suite 1150, Phoenix, Arizona 85016, Attention: President.
Each party may from time to time change the address to which notices to it are
to be delivered or mailed hereunder by notice in accordance herewith to the
other party.
Section 15. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company, the Warrantholders, or the
holders of Shares shall bind and inure to the benefit of their respective
successors and permitted assigns hereunder.
11
<PAGE> 13
Section 16. Merger or Consolidation of the Company. The Company
will not merge or consolidate with or into any other corporation or sell all or
substantially all of its property to another corporation, unless the provisions
of Section 8.4 are complied with.
Section 17. Survival of Representations and Warranties. All
statements contained in any schedule, exhibit, certificate or other instrument
delivered by or on behalf of the parties hereto, or in connection with the
transactions contemplated by this Agreement, shall be deemed to be
representations and warranties hereunder. Notwithstanding any investigations
made by or on behalf of the parties to this Agreement, all representations,
warranties and agreements made by the parties to this Agreement or pursuant
hereto shall survive.
Section 18. Applicable Law. This Agreement shall be deemed to be a
contract made under the laws of the State of Delaware and for all purposes shall
be construed in accordance with the laws of said State.
Section 19. Benefits of this Agreement. Nothing in this Agreement
shall be construed to give to any person or corporation other than the Company,
the Warrantholder and the holders of Shares any legal or equitable right, remedy
or claim under this Agreement. This Agreement shall be for the sole and
exclusive benefit of the Company, the Warrantholder and the holders of Shares.
Section 20. Counterparts. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, all as of the day and year first above written.
UGLY DUCKLING CORPORATION
By:
-------------------------------
Name:
--------------------------
Title:
-------------------------
CRUTTENDEN ROTH INCORPORATED
By:
-------------------------------
Name:
--------------------------
Title:
-------------------------
12
<PAGE> 14
EXHIBIT A
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, EXCHANGED,
HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT IN COMPLIANCE WITH
THE AGREEMENT PURSUANT TO WHICH THEY WERE ISSUED.
Warrant Certificate No. ___
REPRESENTATIVE'S WARRANTS TO PURCHASE 150,000 SHARES
OF COMMON STOCK, $0.001 PAR VALUE PER SHARE
VOID AFTER 5:00 P.M.,
PHOENIX TIME, ON ________________, 2001
UGLY DUCKLING CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE
This certifies that, for value received, __________________, the
registered holder hereof or assigns (the "Warrantholder"), is entitled to
purchase from UGLY DUCKLING CORPORATION (the "Company"), at any time during the
period commencing at 9:00 a.m., Phoenix time, on ______________, 1997, and
before 5:00 p.m., Phoenix time, on ____________, 2001, at the purchase price per
share of $_______ (the "Warrant Price"), the number of shares of Common Stock of
the Company set forth above (the "Shares"). The number of shares of Common Stock
of the Company purchasable upon exercise of these Warrants shall be subject to
adjustment from time to time as set forth in the Representative's Warrant
Agreement referred to below.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form attached hereto
duly executed (with a signature guarantee as provided thereon) and simultaneous
payment of the Warrant Price at the principal office of the Company. Payment of
such price shall be made at the option of the Warrantholder in cash, by wire
transfer, by certified or official bank check or through the use of
"Appreciation Currency" as defined in the Representatives' Warrant Agreement, or
any combination thereof.
The Warrants evidenced hereby represent the right to purchase an
aggregate of up to 150,000 Shares and are issued under and in accordance with a
Representative's Warrant Agreement, dated as of ___________1996 (the
"Representative's Warrant Agreement"), between the Company and Cruttenden Roth
Incorporated and are subject to the terms and provisions contained in the
Representative's Warrant Agreement, to all of which the Warrantholder by
acceptance hereof consents.
Upon any partial exercise of the Warrants evidenced hereby, there shall
be signed and issued to the Warrantholder a new Warrant Certificate in respect
of the Shares as to which the Warrants evidenced hereby shall not have been
exercised. These Warrants may be exchanged at the office of the Company by
surrender of this Warrant Certificate properly endorsed for one or more new
Warrants of the same aggregate number of Shares as here evidenced by the Warrant
or Warrants exchanged. No fractional securities will be issued upon the exercise
of rights to purchase hereunder, but the Company shall pay the cash value of any
fraction upon the exercise of one or more Warrants. These Warrants are
transferable at the office of the Company in the manner and subject to the
limitations set forth in the Representatives' Warrant Agreement.
This Warrant Certificate does not entitle any Warrantholder to any of
the rights of a shareholder of the Company.
UGLY DUCKLING CORPORATION
By: _______________________________
Name: ______________________
Title: _____________________
Dated: __________, 1996
ATTEST: [Seal]
__________________________
Secretary
<PAGE> 15
UGLY DUCKLING CORPORATION
PURCHASE FORM
UGLY DUCKLING CORPORATION
2525 East Camelback Road, Suite 1150
Phoenix, Arizona 85016
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant Certificate for, and to purchase
thereunder, shares of Common Stock (the "Shares") provided for
therein, and requests that certificates for the Shares be issued in the name of:
---------------------------------------------
(Please Print or Type Name, Address and Social Security Number)
---------------------------------------------
---------------------------------------------
and, if said number of Shares shall not be all the Shares purchasable hereunder,
that a new Warrant Certificate for the balance of the Shares purchasable under
the within Warrant Certificate be registered in the name of the undersigned
Warrantholder or his Assignee as below indicated and delivered to the address
stated below.
Dated:
--------------------
Name of Warrantholder or Assignee:
---------------------------------------------
(Please Print)
Address:
-----------------------------------------------------------------
Signature:
-----------------------------------------------------------------
Note: The above signature must correspond with the name as written upon the face
of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatever, unless these Warrants have been assigned.
Signature Guaranteed:
---------------------------------------------------------
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange or the National Association of Securities Dealers, Inc.)
ASSIGNMENT
(To be signed only upon assignment of Warrants.)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
(Name and Address of Assignee Must Be Printed or Typewritten)
----------------------------------------
----------------------------------------
----------------------------------------
the within Warrants, hereby irrevocably constituting and appointing
Attorney to transfer said Warrants on the books of the Company,
with full power of substitution in the premises.
Dated:
---------------- --------------------------------------------------
Signature of Registered Holder
Note: The signature on this assignment must correspond with the name as it
appears upon the face of the within Warrant Certificate in every particular,
without alteration or enlargement or any change whatever.
Signature Guaranteed:
---------------------------------------------------------
(Signature must be guaranteed by a bank or trust company having an
office or correspondent in the United States or by a member firm of a registered
securities exchange or the National Association of Securities Dealers, Inc.)
<PAGE> 1
EXHIBIT 5
[SNELL & WILMER LETTERHEAD]
May 29, 1996
UGLY DUCKLING CORPORATION
2525 East Camelback Road, Suite 510
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 2,300,000 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 10.2(e)
[LETTERHEAD OF SUNAMERICA CORPORATE FINANCE]
Timothy J. Cesarek
Vice President
August 31, 1995
Ugly Duckling Holdings, Inc.
2525 East Camelback Road, Suite 510
Phoenix, Arizona 85016
Attention: Mr. Ernest C. Garcia II
Chairman and Chief Executive Officer
Re: Auto Loan Pass-Through Certificates
-----------------------------------
Dear Mr. Garcia:
SunAmerica Corporate Finance and/or one of its affiliates (collectively
"SACF") and Ugly Duckling Holdings, Inc. ("Ugly Duckling"), Duck Ventures, Inc.
("Ventures"), Ugly Duckling Credit Corporation ("Credit"), Ugly Duckling Car
Sales, Inc. ("Sales"), UDRAC, Inc. ("UDRAC") and Champion Financial Services,
Inc. ("Champion") (each separately referred to as a "Borrowing Entity" and
collectively referred to as "Borrower") have entered into, or will enter into,
as of the date hereof, a Note Purchase Agreement ("Note Purchase Agreement")
pursuant to which, subject to the terms and conditions therein, SACF will agree
to purchase a convertible note of the Borrower in a principal amount of
$3,000,000 ("Note"), subject to the terms and conditions of the Note Purchase
Agreement and related Credit Documents (as defined in the Note Purchase
Agreement). The Borrower's obligations under the Note and the Note Purchase
Agreement and hereunder are the joint and several liability of each of Ugly
Duckling, Ventures, Credit, Sales, UDRAC and Champion. The obligations of the
Borrower under this letter agreement constitute a material inducement to SACF to
enter into the Note Purchase Agreement and to purchase the Note and the Common
Stock referred to below. Defined terms not otherwise defined herein as used are
as defined in the Note Purchase Agreement.
This letter agreement is to confirm (i) SACF's commitment, subject to the
terms and conditions hereof and as contemplated by the term sheet ("Term Sheet")
attached as Annex A hereto, to purchase or cause one or more of its affiliates
to purchase (A) up to (at SACF's request) $125,000,000 of the Certificates
("Certificates") as defined in the Term Sheet, and (B) up to $1,000,000 in
Common Stock at the IPO (defined in the Note Purchase Agreement), and (ii) the
Borrower's obligations to sell to SACF or one of SACF's affiliates, at SACF's
request, up to $125,000,000 in Certificates as contemplated hereby (including on
the terms set out in the Term Sheet), and such additional terms and conditions
as may be mutually agreed upon, which obligations of the Borrower shall be
irrevocable and unconditional and without set-off or counterclaim in all
circumstances.
<PAGE> 2
The commitment of SACF herein (including under Annex A) is subject to the
terms set out in Annex A hereto and to all terms and conditions for the
transactions, and related documentation, results of due diligence on Ugly
Duckling and its subsidiaries and affiliates, satisfaction of closing conditions
(including legal opinions, ratings and consents), and the structure and
collateral securing the Certificates, being in form and substance in all
respects satisfactory to SACF. Further, the commitment of SACF is subject to the
absence of any adverse change or circumstance deemed material by SACF in the
capital markets or otherwise affecting the contemplated transactions, or
affecting the assets, liabilities, business, financial condition or prospects of
Ugly Duckling and its subsidiaries and affiliates, and there having occurred no
defaults by Ugly Duckling or any of its subsidiaries or affiliates under the
Note Purchase Agreement or related documents or otherwise. This letter agreement
will become effective and binding upon the parties' execution hereof where
indicated below.
To induce SACF to proceed with this effort and to purchase the Note, Ugly
Duckling and the other entities comprising the Borrower acknowledge and agree,
by executing this letter agreement as provided below, and without limiting any
other rights in connection herewith or therewith (i) to indemnify and hold
harmless SACF and its affiliates, directors, officers, employees, agents,
consultants and counsel from and against any and all losses, claims, damages and
liabilities in connection with this letter agreement or relating to the
commitment pursuant to this letter agreement, which obligation to indemnify and
hold harmless shall remain effective regardless of whether final or further
documentation is executed and notwithstanding any expiry or termination hereof
(except in the case of SACF's own gross negligence or wilful misconduct); and
(ii) SACF shall not be liable in any manner with respect to this letter
agreement or any dispute relating hereto including, without limitation, for any
damages, whether special, indirect, consequential punitive or otherwise.
By executing this letter agreement, Ugly Duckling and the other entities
comprising the Borrower agree that Ugly Duckling will reimburse SACF for all
out-of-pocket expenses, including reasonable legal fees, incurred by SACF before
and after delivery of this letter agreement, regardless of whether any of the
transactions contemplated hereby are consummated (including without limitation
all of SACF's reasonable legal counsel costs in connection with the
documentation and structuring of the contemplated securitizations whether or not
completed). Ugly Duckling and the other entities comprising the Borrower and the
Borrower agree to take such action as is necessary for, and to use their
respective best efforts in good faith to negotiate, execute and deliver
documentation for, and to complete by December 31, 1995, the issuance of at
least $20,000,000 in Certificates on the terms set out in the Term Sheet.
Without limiting the foregoing, if Ugly Duckling does not complete at least
$20,000,000 of the securitizations contemplated by Annex A for any reason by
December 31, 1995, in light of the time, effort, and internal costs that will
have been expended and incurred by SACF in connection herewith, in addition to
all rights and remedies of SACF in connection
-2-
<PAGE> 3
with the Note Purchase Agreement, the Borrower shall pay a $150,000
non-refundable "work fee" to SACF, such work fee being immediately due and
payable on demand. In addition, without limiting the foregoing, if Ugly
Duckling or any of its affiliates or subsidiaries proceed with such
securitizations or with any securitization similar thereto for any amount of
pass-through certificates or any other securitization of any assets by Ugly
Duckling or any of its subsidiaries or affiliates with anyone other than SACF
or its affiliates at any time on or prior to December 31, 1996 (except with
respect to transactions as to which SACF has decided not to exercise its call
and right of first refusal as contemplated under "Amount and Call" on Annex
A), in light of the time, effort, and internal costs that will have been
expended and incurred by SACF in connection herewith, in addition to all rights
and remedies of SACF in connection with the Note Purchase Agreement, the
Borrower shall also pay a $300,000 non-refundable "break fee" to SACF, such
work fee being immediately due and payable on demand.
We look forward to working with you on this important transaction. Should
you have any questions, please feel free to call me at (310) 772-6125.
Sincerely,
SUNAMERICA CORPORATE FINANCE
By: /s/
-------------------------
Its: Managing Director
------------------------
Accepted and Agreed on
this 31st day of August, 1995
UGLY DUCKLING HOLDINGS, INC.
By: /s/
------------------------
Its: President
------------------------
OTHER BORROWERS:
DUCK VENTURES, INC.
By: /s/
-------------------------
Its: Vice President
------------------------
-3-
<PAGE> 4
UGLY DUCKLING CREDIT CORPORATION
By: /s/ Steven P. John
---------------------------
Its: Vice President
--------------------------
UGLY DUCKLING CAR SALES, INC.
By: /s/ Steven P. John
--------------------------
Its: Vice President
--------------------------
UDRAC, INC.
By: /s/ Steven P. John
--------------------------
Its: Vice President
--------------------------
CHAMPION FINANCIAL SERVICES, INC.
By: /s/ Steven P. John
--------------------------
Its: Vice President
--------------------------
-4-
<PAGE> 5
ANNEX A
UGLY DUCKLING HOLDINGS
UDH 1995-I
AUTO LOAN PASS-THROUGH CERTIFICATES
SUMMARY OF TERMS
SECURITIZATION
Originator: Ugly Duckling Credit Corporation, Ugly Duckling Car
Sales, Inc., and Champion Financial Services, Inc.
Seller/Debtor: A newly formed, special purpose bankruptcy - remote entity
that will be wholly owned by Ugly Duckling Holdings Inc.
("UDH" or the Company").
Purchaser: SunAmerica Life Insurance Company ("SLIC") and/or one or
more of its affiliates.
Amount and Call: Initially up to $50 million in Certificates in multiple
structured (Rule 144A) transactions during the Commitment
Period (as defined below). In addition, until December 31,
1997, Purchaser has the right of first refusal with respect
to, and shall have a call on, the purchase or placement of
$75 million in additional (Rule 144A) Certificates at a
price and structure as contemplated below. All eligible
Contracts (as defined below) and related receivables (based
on eligibility criteria to be set out in the documentation
for the transaction) originated by the Originator will, if
Purchaser elects, be required to be sold to Seller as soon
as portfolios of at least $20,000,000 in Contracts are
accumulated, and will be required to be transferred to the
Trust (as defined below), in consideration of payment
therefor, until the entire facility amount (as increased)
is utilized. Seller shall have no obligation to sell any of
the Certificates contemplated hereby, if not previously
sold, if Purchaser then holds the Note (defined in the Note
Purchase Agreement dated as of August 31, 1995 between
Purchaser and Seller) and it exercises its right to call
for a mandatory prepayment of the Note under Section 6B(i)
of the Note Purchase Agreement or pursuant to receipt of
the IPO Expected Effectiveness Notice under Section 6B of
the Note Purchase Agreement and such call has been paid in
full within 30 days thereof; or if the IPO has been
consummated and Purchaser has failed to purchase Common
Stock in the IPO on the terms contemplated in this letter
agreement to which this Annex A is attached including on
the terms contemplated under "Common Stock Purchase" below.
Commitment Period: The Commitment Period shall expire on December 31, 1996,
or if the total principal amount of the Certificates is
increased beyond
<PAGE> 6
$50,000,000 as described above at the request or call
of Purchaser, then on December 31, 1997.
Initial Advance Amount: For the first $20 million of Certificates purchased
by Purchaser, a minimum of a 65% advance rate on all
eligible direct originated Contracts backing the
Certificates and an 85% advance rate on all eligible
indirect originated Contracts backing the
Certificates. The remaining $30 million of
Certificates will have a minimum advance rate of 70%
on all eligible direct originated Contracts backing
the Certificates and a minimum advance rate of 90% on
all eligible indirect originated Contracts backing
the Certificates, in each case net of any credit
enhancement provided by the Company or any affiliate.
Initial Amount: $50 million in Certificates in multiple transactions
with minimum issuances of $20 million and in
multiples of $5 million.
Initial Closing Date: On or before December 31, 1995 for at least
$20,000,000 in Certificates purchased.
Initial Interest Rate: 275 basis points over U.S. Treasury securities having
a maturity equal to the anticipated average life of
the portfolio (estimated at 2 years).
Initial Rating: At least (i) "BBB" rating for the first $25,000,000
in Certificates and (ii) at least "BBB" rating, with
a best efforts to achieve "A" rating, for all
subsequent Certificates, from a NRSRO approved by the
NAIC's Securities Valuation Office, in each case with
respect to the Senior Certificates ("Class A"), if a
senior/subordinated structure is used or with respect
to all Certificates if no senior/subordinated
structure is used (such rating requirement being
the "Threshold Rating Requirement").
Structure: Pass-through or pay-through structure as may be
agreed upon , e.g., an owner trust, or other special
purpose "bankruptcy remote" entity acceptable to
SACF, which will issue the Certificates ("SPV" or
"Trust"). The assets will be serviced pursuant to a
pooling and servicing agreement among Seller, Ugly
Duckling Credit Corporation (as servicer, defined
below), and a Trustee satisfactory to both Purchaser
and UDH. The Series A class of Certificates will
represent an undivided interest in a minimum of 75%
of the Trust. SACF and Seller will endeavor to
structure a transaction acceptable to a NRSRO that
has both a senior and subordinated class of
Certificates in the initial transaction and in the
subsequent transactions contemplated hereby. The
balance will consist of Credit Enhancement in the
form of a Cash Reserve Account at least equivalent to
such percentage of the principal amount of the
Certificates as is acceptable to the NRSRO, to
achieve the Threshold Rating Requirement.
Trust: Seller will sell and assign its entire interest in
the Contracts and the related receivables to the
Trust. The Trust assets will include the Contracts,
security interests in the vehicles financed thereby,
any proceeds from the claims on certain insurance
policies relating to the
-A2-
<PAGE> 7
financed vehicles and rights to payment from a Reserve
Account in an amount which will be determined based
upon the required rating.
Certificates: The Class A Certificates will be issued by the Trust
and purchased by Purchaser and will represent undivided
interests in the Trust. Seller's interests will be
subordinated to the Class A certificates. Transfers to
the Trust are intended to be true sales. Payments of
principal and interest on the Certificates shall be
made monthly by wire transfer of immediately available
funds. In addition, if then requested by Purchaser,
Seller will covenant to use its best efforts to
register the Certificates with the Securities and
Exchange Commission for resale by Purchaser within
ten months of issuance. The cost of Registration will
be covered by Purchaser, provided Purchaser shall have
the right to approve such costs before they are
incurred.
Contracts: The Contracts shall consist solely of fixed rate retail
installment sale contracts secured by first priority
perfected liens on new or used automobiles, light
trucks, vans and minivans which will have aggregate
APR's, Weighted Average Maturities, uniform
underwriting criteria and other characteristics
satisfactory to Purchaser ("Eligible Contracts"). The
Contracts and related receivables will be financed
and/or acquired directly and indirectly by the
Originator from new and used vehicle dealers in the
ordinary course of business of the Originator.
At the time of the issuance of the Certificates,
the Originator will sell and assign to Seller and
in turn Seller will deposit in the Trust, its
entire interest in the Contracts and related
receivables to be purchased with the proceeds of the
Certificates, including its security interests in the
financed vehicles. The Contracts sold to Seller and
deposited in the Trust will constitute "Eligible
Contracts", and will contain such representations,
warranties, definitions, covenants as mutually agreed
to by the Company and Purchaser. The Contracts will
be reviewed and vetted, at Seller's cost, by a "Big 6"
accounting firm to confirm the accuracy, completeness
and sufficiency of recordkeeping and data with respect
to such Contracts and to confirm the suitability
thereof for purposes of accurate investor reports.
Credit Enhancement: On each Closing Date, Seller will provide Credit
Enhancement satisfactory to Purchaser and the NRSRO
in the form of a Cash Reserve Account with an initial
deposit at least equivalent to such percentage of the
aggregate principal amount of the Certificates issued
on such Closing Date, including any credit enhancement
that may be accomplished through a Spread Account
which will trap the excess spread building to a
percentage of the aggregate principal balance of the
Certificates acceptable to the NRSRO, to achieve at
least the Threshold Rating Requirement. To the extent
the Cash Reserve Account is at the relevant amount
required to achieve and maintain the Threshold Rating
Requirement, excess spread may be released to
Seller/Originator. In addition, as principal balances
of the Certificates amortize, cash may be released
from the Cash Reserve Account in an amount equal to
the difference between the Cash Reserve Account at
the relevant amount
-A3-
<PAGE> 8
required to achieve and maintain the Threshold Rating
Requirement at the prior Distribution Date and the Cash
Reserve Account at the relevant amount required to achieve
and maintain the Threshold Rating Requirement given the
ending principal balance at the current Distribution Date
less any losses to be funded from the Cash Reserve Account.
Distributions of
Amounts Received
on the Contracts: All amounts relating to the Contracts received during each
month shall be distributed, on or before the 15th of the
immediately succeeding month ("Distribution Date"), in the
following manner: (i) to the payment of the Trustee and
administrative fees; (ii) to the payment of the Back-Up
Servicer fee; (iii) to the payment of the Servicer fee;
(iv) to the payment of interest on the outstanding
principal balance of the Certificates; (v) to the payment
of principal on the Certificates; (vi) to maintain the
minimum Cash Reserve Account balance, including to the
Spread Account; and (vii) to Seller.
Servicer and
Servicing Fee: Ugly Duckling Credit Corporation will act as Servicer for
the Contracts on terms and conditions mutually agreed to by
Purchaser, UDH, and the Back-Up Servicer. The Servicer
shall receive a fee of [to be agreed]% of the outstanding
principal balance of the Contracts as of the first day of
each month.
Back-Up Servicer: To be mutually agreed upon by SLIC, UDH and the NRSRO.
Trustee and
Custodian: To be mutually agreed upon by SLIC and UDH.
OPTIONAL CERTIFICATES
Additional Amount: During the Commitment Period, Purchaser has the right of
first refusal with respect to the purchase or placement
of an additional $75 million in Certificates in minimum
issuances of $20 million and in multiples of $5 million.
Advance Amount on
Additional
Contracts: For the second $75 million in Certificates purchased, a
minimum advance rate of 70% on all eligible direct
originated Contracts backing the Certificates and a minimum
advance rate of 90% on all eligible indirect originated
Contracts backing the Certificates.
Interest Rate Schedule
for Additional $75
million: The following spreads (in basis points) represent the
spread over U.S. Treasury securities having a maturity
equal to the anticipated average life of the portfolio
(estimated at 2 years).
First $25 million over $50 million T+250
Following $25 million over $50 million T+225
Following $25 million over $50 million T+200
-A4-
<PAGE> 9
Structure for
Additional $75
million: If acceptable to the NRSRO, SACF may employ a
Senior/Subordinated structure to optimize both the advance
rate and pricing.
GENERAL TERMS APPLICABLE
TO THE SECURITIZATION
Origination Fee: 75 basis points for the first $75 million in Certificates
issued, and 50 basis points on the remaining balance of
Certificates issued.
Placement Agent: In addition, SACF will have a right of first refusal to
place any other corporate debt financing facility or
non-auto related securitization, within the Commitment
Period, excluding any revolving credit facilities entered
into with GE or short-term borrowings facilities entered
into with GE or any credit facility entered into with
American Bankers Insurance Group.
Other for This and
Other Contemplated
Facilities: Among other terms and conditions of Purchaser, the
transactions shall be subject to negotiation and execution
of documentation, and satisfaction of closing conditions
satisfactory to SACF and the investors in all respects and
documentation to include conditions precedent,
representations and warranties, covenants, opinions of
counsel (including tax and bankruptcy counsel) and events
of default and collateral provisions that SACF and the
investors deem customary for transactions of this type or
otherwise appropriate, and shall be subject to the absence
of any material adverse change in the capital markets or in
the opinion of SACF with respect to the Originator and its
affiliates and subsidiaries and their respective financial
condition, businesses and prospects, the capital markets or
any other matters relating to the contemplated
transactions.
COMMON STOCK PURCHASE
Purchase: Common Stock issued in IPO of Holdings, provided the IPO is
consummated on or before March 31, 1996 and at least
$20,000,000 in Certificates have been purchased by
Purchaser on or before December 31, 1995.
Purchase Price: $1 million at, and subject to consummation of, IPO.
Price: The IPO Price
-A5-
<PAGE> 1
EXHIBIT 10.22
RELATED PARTY TRANSACTIONS
MODIFICATION AGREEMENT
AGREEMENT DATE: MAY 28, 1996
VERDE: VERDE INVESTMENTS, INC.
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
DUCK: UGLY DUCKLING CORPORATION,
INCLUDING SUBSIDIARIES, SUCCESSORS AND ASSIGNS
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
RECITALS.
The parties acknowledge that the following recitals are correct
statements of fact and are a material part of this Related Party Transactions
Modification Agreement (this "Agreement"):
A. Verde and Duck are related to and affiliates of each other as a
result of common ownership and management.
B. Verde holds a Subordinated Debenture of Duck dated August 31, 1993 in
the original principal amount of $15 million and a First Amended 18% Junior
Subordinated Revolving Debenture of Duck dated October 1, 1995 in the original
principal amount of $5 million (collectively, the "Debentures"). The principal
balance of the Debentures as of the Agreement Date is $14 million.
C. Verde holds 1,000,000 shares of the Series A Preferred Stock of Duck
issued for $10 million on December 31, 1995 (the "Preferred Stock").
D. Verde owns or controls the following real properties (the "Verde
Properties"):
1. Grant/Oracle Dealership
2. Park/Ajo Dealership
3. 24th Street/Van Buren Dealership
4. Alma School/Broadway Dealership
5. 19th Avenue/Mountain View Dealership
6. 51st Avenue/Glendale Dealership
7. Glendale Avenue Dealership
8. Tucson Credit Corp. Offices
9. Gilbert Credit Corp. Offices
10. Tempe Reconditioning Facilities
The Verde Properties are leased to Duck pursuant to several written Lease
Agreements (the "Verde Leases").
E. Duck is preparing for an initial sale of its common stock in a public
offering registered with the Securities and Exchange Commission (the "IPO"). For
purposes of this Agreement, the IPO shall be deemed completed on the first day
of the first calendar month after Duck sells any of its common stock in a public
offering registered under the Securities Act of 1933 as amended (the "IPO
Completion Date").
F. In connection with the IPO, Duck has requested that Verde modify the
Debentures, Preferred Stock and Leases and agree to sell the Verde Properties to
Duck, all effective as of the IPO Completion Date (the "Modifications").
G. Verde is willing to consent to the Modifications under the terms and
conditions of this Agreement.
<PAGE> 2
NOW, THEREFORE, in consideration of the respective covenants of the
parties stated herein and respective benefits of the parties to be obtained
herefrom, Verde and Duck mutually agree and intend to be legally bound as
follows:
SECTION 1. MODIFICATION OF DEBENTURES.
The Debentures now accrue interest at 18% per annum, are payable in
monthly installments of interest only and mature on December 31, 2003 and
December 31, 1999, respectively. Effective as of the IPO Completion Date, the
Debentures shall accrue interest at 10% per annum, be payable in monthly
installments of interest only and annual installments of principal of $2
million, mature on the seventh anniversary of the IPO Completion Date, may be
prepaid at any time without penalty, and shall convert from a revolving line of
credit to a single advance facility. To further evidence the modification of the
Debentures, on or before the IPO Completion Date, the parties shall execute a
single 10% Subordinated Debenture in substantially the form attached hereto and
incorporated herein as Exhibit A in exchange for and replacement of the
Debentures (the "Modified Debenture").
SECTION 2. MODIFICATION OF PREFERRED STOCK.
The Preferred Stock now accrues dividends at 12% per annum and the
dividends increase by 1% each year beginning in 1997. Effective as of the IPO
Completion Date, the Preferred Stock shall accrue dividends at 10% per annum
through December 31, 1997. Dividends shall increase to 12% per annum on January
1, 1998, and remain at 12% thereafter. To further evidence the modification of
the Preferred Stock, on or before the IPO Completion Date, Duck shall issue a
new certificate of preferred stock in substantially the form attached hereto and
incorporated herein as Exhibit B (the "Modified Preferred Stock").
SECTION 3. VERDE PROPERTIES PURCHASE.
Effective as of the IPO Completion Date, Verde shall agree to sell to
Duck and Duck shall agree to purchase from Verde the Verde Properties (the
"Verde Properties Purchase"). Duck shall pay to Verde as the total purchase
price for the Verde Properties the lesser of the fair market value of the Verde
Properties as determined by an independent professional appraiser retained by
Duck, or $7,450,000.00. The purchase price shall be payable in full in
immediately available funds. The Verde Properties shall be conveyed to Duck on
a date or dates mutually acceptable to Verde and Duck within one year after the
IPO Completion Date. The obligation of Duck to purchase the Verde Properties is
contingent on Duck obtaining financing secured by the Verde Properties under
terms and conditions acceptable to Duck. If Duck is unable to obtain acceptable
financing for the Verde Properties Purchase or otherwise fails to complete the
Verde Properties Purchase within one year after the IPO Completion Date, then
the Verde Properties Purchase shall expire. In such event, the Verde Leases
shall continue in accordance with their respective terms. To further evidence
the Verde Properties Purchase, on or before the IPO Completion Date, the parties
shall execute the Agreement For Purchase And Sale Of Properties in substantially
the form attached hereto as Exhibit C (the "Verde Properties Purchase
Agreement") and the parties shall establish an escrow for the Verde Properties
Purchase as required by the Verde Properties Purchase Agreement.
SECTION 4. MODIFICATION OF VERDE LEASES.
Effective as of the IPO Completion Date, the monthly rent payable by
Duck to Verde under the Verde Leases shall be reduced from the following current
rent to the following reduced rent:
<TABLE>
<CAPTION>
Properties Current Rent Reduced Rent
- ---------- ------------ ------------
<S> <C> <C>
Grant/Oracle Dealership $9,481.00 $6,667.67
Park/Ajo Dealership $15,000.00 $12,500.00
24th Street/Van Buren Dealership $9,481.00 $6,667.67
Alma School/Broadway Dealership $21,070.00 $13,333.00
19th Avenue/Mountain View Dealership $14,749.00 $7,284.67
51st Avenue/Glendale Dealership $10,535.00 $5,000.00
Glendale Avenue Dealership $9,482.00 $6,250.00
Tucson Credit Corp. Offices $10,535.00 $8,333.33
Gilbert Credit Corp. Offices $7,375.00 $6,667.67
Tempe Reconditioning Facilities $5,268.00 $5,000.00
----------- ----------
TOTAL $112,976.00 $77,704.01
</TABLE>
2
<PAGE> 3
In addition, effective as of the IPO Completion Date, no contingent or
percentage rents will accrue or be payable under the Leases. To further evidence
the reduction of rents under the Verde Leases, the Verde Leases shall be amended
by the parties executing, on or before the IPO Completion Date, the First
Amendments to Leases in substantially the form attached hereto and incorporated
herein as Exhibit D (the "Lease Amendments").
SECTION 5. EFFECT.
This Agreement shall be effective as of the Agreement Date but the
Modified Debenture, Modified Preferred Stock, Verde Properties Purchase
Agreement and Lease Amendments shall not be effective until the IPO Completion
Date. If for any reason the IPO Completion Date does not occur on or before
December 31, 1996, then either party may terminate this Agreement on or at any
time after January 1, 1997. The parties acknowledge that this Agreement,
including all Exhibits, may be included in and disclosed by the registration
statement or other documents filed with the Securities and Exchange Commission
in connection with the IPO.
SECTION 6. GENERAL MATTERS.
This Agreement may not be assigned by either party without the other
party's prior written consent, which consent shall not be unreasonably withheld.
The unenforceability or invalidity of any provision of this Agreement shall not
render any other provisions herein unenforceable or invalid. The validity,
interpretation, enforcement and effect of this Agreement shall be governed by
the laws of the State of Arizona. Any legal proceeding in connection with this
Agreement shall be brought and prosecuted in a court of competent jurisdiction
in Maricopa County, Arizona and the parties consent to the jurisdiction of such
court. The terms and provisions of this Agreement represent the results of
extensive negotiations between Verde and Duck, neither of which has acted under
duress or compulsion, whether legal, economic or otherwise. All understandings
and agreements heretofore had between the parties are merged into this
Agreement, which alone fully and completely expresses their agreement. This
Agreement is entered into after full investigation, neither party relying upon
any statements or representations made by the other not embodied in this
Agreement. This Agreement may not be changed orally, but only by an agreement in
writing, signed by the parties.
Verde: Verde Investments, Inc.,
an Arizona corporation
By: ___________________________________
Name: ___________________________________
Its: ___________________________________
Duck: Ugly Duckling Corporation,
a Delaware corporation
By: ___________________________________
Name: ___________________________________
Its: ___________________________________
3
<PAGE> 4
EXHIBITS
A. Modified Debenture
B. Modified Preferred Stock
C. Verde Properties Purchase Agreement
D. Lease Amendments
4
<PAGE> 5
THIS UGLY DUCKLING CORPORATION 10% SUBORDINATED DEBENTURE (THIS "DEBENTURE") IS
ISSUED IN EXCHANGE FOR AND RETIREMENT OF THAT CERTAIN UGLY DUCKLING HOLDINGS,
INC. 18% SUBORDINATED DEBENTURE DATED AUGUST 31, 1993, IN THE ORIGINAL PRINCIPAL
AMOUNT OF $15,000,000.00, AND THAT CERTAIN FIRST AMENDED UGLY DUCKLING HOLDINGS,
INC. 18% JUNIOR SUBORDINATED REVOLVING DEBENTURE DATED OCTOBER 1, 1995 IN THE
ORIGINAL PRINCIPAL AMOUNT OF $5,000,000.00 (COLLECTIVELY, THE "ORIGINAL
DEBENTURES"), AS OF THE IPO COMPLETION DATE, WHICH DATE SHALL BE STATED ON THE
FACE OF THIS DEBENTURE WHEN DETERMINED. THE IPO COMPLETION DATE SHALL BE THE
FIRST DAY OF THE FIRST CALENDAR MONTH AFTER UGLY DUCKLING CORPORATION COMPLETES
THE SALE OF ITS EQUITY SECURITIES IN A PUBLIC OFFERING REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THIS DEBENTURE IS NOT EFFECTIVE UNTIL THE
IPO COMPLETION DATE AND THE ORIGINAL DEBENTURES SHALL REMAIN IN FULL FORCE AND
EFFECT UNTIL THE IPO COMPLETION DATE.
UGLY DUCKLING CORPORATION
10% SUBORDINATED DEBENTURE
$14,000,000.00 _____________, 199__
PHOENIX, ARIZONA
FOR VALUE RECEIVED, Ugly Duckling Corporation, a Delaware corporation
("Maker"), hereby promises to pay to the order of Verde Investments, Inc., an
Arizona corporation ("Payee"), the principal sum of Fourteen Million Dollars
($14,000,000.00) ("Principal") and interest thereon at a fixed rate of ten
percent (10%) per annum ("Interest"), all in United States currency.
1. Loan. This Debenture evidences a single advance loan of Fourteen
Million Dollars ($14,000,000.00) (the "Loan").
2. Payments. This Debenture shall be payable in monthly installments of
Interest only and annual installments of Principal. On the last day of each
calendar month, Maker shall pay all accrued and unpaid Interest. On each
anniversary of the date hereof, Maker shall pay not less than Two Million
Dollars ($2,000,000.00) of Principal. If not sooner paid, the balance of the
Principal and all accrued and unpaid Interest shall be due and payable on the
seventh anniversary of the IPO Completion Date (the "Maturity Date"). If the due
date of any payment is on a day other than a business day, such payment shall be
due and made on the next succeeding business day but such extension of time for
payment shall not constitute a waiver of any Interest. If at any time Payee is
in default with respect to any Senior Indebtedness, as hereinafter defined, then
Payee may suspend payment of this Debenture until all such defaults are cured
and all Senior Indebtedness is current (the "Permitted Suspension"). Interest
shall continue to accrue during the Permitted Suspension. All payments under
this Debenture shall be made to Payee at 2525 East Camelback Road, Suite 1150,
Phoenix, Arizona 85016, or at such other address as Payee may designate from
time to time.
<PAGE> 6
3. Prepayments. Principal may be prepaid at any time.
4. Late Charge. In the event any payment becoming due hereunder is not
made in full within ten (10) days after receipt of notice from Payee that such
payment is late, then without prejudice to any other remedy available to the
Payee, Maker shall immediately pay to Payee a charge of five percent (5%) of the
amount due and not paid to compensate Payee for the delay and inconvenience
caused by the late payment (the "Late Charge"). The Late Charge shall not be
applied to but shall be in addition to Principal and Interest.
5. Subordination. The indebtedness evidenced by this Debenture shall be
subordinate and subject in right of payment, to the extent and in the manner
hereinafter set forth, to the prior payment in full of all of the Maker's Senior
Indebtedness. For purposes hereof, the Maker's "Senior Indebtedness" shall mean
the principal of and unpaid interest on (i) indebtedness of the Maker or
indebtedness with respect to which the Maker is a guarantor, whether outstanding
on the date hereof or hereafter created, to banks, insurance companies or other
lending institutions regularly engaged in the business of lending money, which
is for money borrowed by the Maker, whether or not secured, and (ii) any
deferrals, renewals or extensions of any such indebtedness issued in exchange
for such Senior Indebtedness.
6. Liquidation. In the event of any liquidation, reorganization,
dissolution or winding up of the Maker (whether in bankruptcy, insolvency,
reorganization or receivership proceedings, or upon an assignment for the
benefit of creditors, or any other marshaling of the assets and liabilities of
the Maker, or otherwise) the assets of Maker may be distributed in payment of
the Senior Indebtedness, but not the Junior Debenture, prior to any distribution
to Payee as follows:
(a) All Senior Indebtedness shall first be paid in full in cash, or
provision made for such payment, before any holder of this Debenture
shall be entitled to receive any payment or distributions from or by
the Maker on account of the Principal of, or Interest on, the
indebtedness evidenced by this Debenture;
(b) Any payment or distribution of assets of the Maker of any kind
or character, whether in cash, property or securities, to which any
holder of this Debenture would be entitled except for the provisions of
this Section shall be paid or delivered by the Maker or by any trustee
in bankruptcy, receiver, assignee on behalf of creditors, or other
liquidating agent making such payment or distribution, directly to the
holders of Senior Indebtedness or their representatives, or to such
trustees under any indenture pursuant to which any instruments
evidencing any of such Senior Indebtedness may have been issued,
ratably according to the aggregate amounts remaining unpaid on account
of the Senior Indebtedness held or represented by each, to the extent
necessary to pay all Senior Indebtedness in full after giving effect to
any concurrent payment or distribution, or provision therefor, to the
holders of such Senior Indebtedness; and
(c) In the event that any payment or distribution of assets of the
Maker of any kind or character, whether in cash, property or
securities, shall be received by any holder of this Debenture before
all Senior Indebtedness is paid in full, or provision made for its
payment, such payment or distribution shall be held in trust for the
benefit of, and shall be paid over or delivered to, the holders of such
Senior Indebtedness or their representative or representatives, or to
the trustee or trustees under any indenture pursuant to which any
instruments evidencing any of such Senior Indebtedness may have been
issued ratably as aforesaid, for application to the payment of all
Senior Indebtedness remaining unpaid to the
2
<PAGE> 7
extent necessary to pay all such Senior Indebtedness after giving
effect to any concurrent payment or distribution, or provision
therefor, to the holders of such Senior Indebtedness.
(d) Subject to the payment in full of all Senior Indebtedness, the
holder of this Debenture shall be subrogated to the rights of the
holders of Senior Indebtedness to receive payments or distributions of
assets of the Maker made on the Senior Indebtedness until the Principal
of and Interest of this Debenture shall be paid in full, and for
purposes of such subrogation, no such payments or distributions to the
holders of Senior Indebtedness of cash, property or securities, which
otherwise would be payable or distributable to the holder of this
Debenture, shall as between the Maker, its creditors other than the
holders of Senior Indebtedness, and the holder of this Debenture, be
deemed to be a payment by the Maker to or on account of this Debenture,
it being understood that the provisions of this Section are intended
solely for the purpose of defining the relative rights of the holder of
this Debenture, on the one hand, and the holders of Senior
Indebtedness, on the other hand.
7. Non-Impairment. Nothing contained in this Debenture is intended to
or shall impair, as between the Maker, the Maker's creditors other than the
holders of Senior Indebtedness, and any holder of this Debenture, the obligation
of the Maker to pay to the holder of this Debenture the Principal and Interest
on this Debenture, as and when the same shall become due and payable in
accordance with its terms, and which (subject to the rights of the holders of
Senior Indebtedness) is intended to rank equally with all other general
obligations of the Maker. Nor is this Debenture intended to or shall affect the
relative rights of the holder of this Debenture and creditors of the Maker other
than the holders of Senior Indebtedness. Nothing contained herein shall prevent
the holder of this Debenture from exercising all remedies otherwise permitted by
applicable law upon the occurrence of an Event of Default (as that term is
hereinafter defined), subject to the rights, if any, under this Debenture of the
holders of Senior Indebtedness in respect of cash, property or securities of the
Maker received upon the exercise of any such remedy.
8. Events of Default. Each of the following events shall constitute a
material default under this Debenture ("Events of Default").
(a) The Maker fails to pay any amount or perform any obligation
under this Debenture with respect to the payment of Principal,
Interest, Late Charges or any other amount and does not cure that
failure within ten (10) days after written notice from the Payee unless
such failure is the result of a Permitted Suspension; or
(b) The Maker shall apply for, consent to, or acquiesce in, the
appointment of a trustee, receiver, sequestrator or other custodian for
the Maker, or make a general assignment for the benefit of creditors;
or
(c) The Maker shall permit or suffer to exist the commencement of
bankruptcy, reorganization, debt arrangement or other case or
proceeding under any bankruptcy or insolvency law, except for any
involuntary proceeding initiated or consented to by the Payee, or any
dissolution, winding up or liquidation proceeding in respect of the
Maker; or
(d) Maker breaches any representation, warranty or covenant of Maker
stated in this Debenture and Maker has not cured such breach within
thirty (30) days, or any longer cure period provided herein, after
written notice from Payee.
3
<PAGE> 8
9. Remedies. Upon the occurrence of an Event of Default, Payee shall
have the following rights and remedies.
(a) Interest shall automatically accrue at the rate of fifteen
percent (15%) per annum (the "Default Interest") and the outstanding
Principal, all accrued and unpaid Interest, all unpaid Late Charges and
all other amounts payable pursuant hereto shall then accrue Default
Interest from the date of occurrence of the Event of Default until the
Event of Default is fully cured or, if payment of all amounts due
hereunder has been accelerated, then until this Debenture is paid in
full.
(b) Payee may accelerate the Maturity Date and demand immediate
payment of all amounts due under the Debenture, all without additional
notice, demand or cure period.
(c) Payee may, but shall not be required to, perform any obligation
and or pay any amount that Payee determines is reasonably required to
cure any or all defaults of Maker, and all amounts paid and costs
incurred by Payee in curing any and all defaults of Maker shall be
included in this Debenture and shall be payable by Maker, together with
Default Interest until paid.
(d) Payee may exercise all other rights and remedies of Payee at law
or in equity and this Debenture is a full recourse obligation
enforceable by Payee against Maker, subject to the limitations stated
herein.
10. Representations, Warranties and Covenants of Maker. As of the date
hereof and at all times until all amounts payable hereunder are paid in full,
Maker represents, warrants and covenants unto Payee as follows:
(a) Maker is a corporation duly organized and validly existing under
the laws of the State of Delaware and is qualified to transact business
in the State of Arizona. Maker has all requisite power and authority
and rights to own and operate its properties and to carry on its
businesses as now conducted and to execute, deliver and perform this
Debenture.
(b) The execution, delivery and performance of this Debenture are
within the Maker's powers and have been duly authorized by all
necessary action of Maker. The execution, delivery and performance of
this Debenture by Maker will not violate the Certificate of
Incorporation or Bylaws of Maker or any subsidiaries of Maker or
violate any legal requirements affecting Maker or any of its
subsidiaries or violate any agreement to which Maker or the
Subsidiaries are bound or to which they are a party. All governmental
or regulatory orders, consents, permits, authorizations and approvals
required for the execution, delivery and performance of this Debenture
by Maker have been obtained and are in full force and effect and no
additional governmental or regulatory actions, filings or registrations
with respect to the execution, delivery and performance of this
Debenture are required.
(c) This Debenture has been duly executed and delivered by Maker and
is a legally valid and binding obligation of Maker enforceable against
Maker in accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency, reorganization, or similar laws
affecting creditor's rights generally and by general principals of
equity.
4
<PAGE> 9
(d) The financial statements and all financial data previously
delivered to Payee in connection with the Debenture and or relating to
Maker are true, correct and complete in all material respects and
fairly present the financial position of the parties who are the
subject thereof, and no material adverse change has occurred in such
financial statements and, except for this Debenture and other borrowing
in the ordinary course of business, no recourse borrowings have been
made by Maker since the date thereof.
(e) Within sixty (60) days after each fiscal quarter of Maker, Maker
shall deliver to Payee a balance sheet and income statement of Maker
including a statement of the total indebtedness of Maker and a
statement that no Event of Default has occurred under this Debenture,
all certified by Maker's chief financial officer. Within one hundred
five (105) days after each fiscal year of Maker, Maker shall deliver to
Payee a similar balance sheet and income statement and a statement that
no Event of Default has occurred under this Debenture, all certified by
Maker's chief financial officer.
11. Governing Law. This Debenture is governed by the laws of the State
of Arizona.
12. No Waiver. If the Payee delays in exercising or fails to exercise
any of its rights under this Debenture, such delay or failure shall not
constitute a waiver of any of the Payee's rights, or of any breach, default or
failure of condition of or under this Debenture. No waiver by the Payee of any
of its rights, or of any such breach, default or failure of condition shall be
effective, unless the waiver is expressly stated in a writing signed by the
Payee. All of the Payee's remedies in connection with this Debenture or under
applicable law shall be cumulative, and the Payee's exercise of any one or more
of those remedies shall not constitute an election of remedies.
13. Binding Effect. This Debenture inures to the benefit of, and binds,
the respective successors and assigns of the Maker and the Payee.
14. Attorney's Fees and Costs. Upon the occurrence of any Event of
Default, if an attorney is retained by Payee to enforce this Debenture or to
represent Payee in any legal action relating to this Debenture or Maker, then
Maker shall pay to Payee all reasonable attorney's fees and costs incurred by
Payee, whether or not any judicial proceeding has been commenced.
15. Notice. Any notice to Maker provided for in this Debenture shall be
given by personal delivery, by mailing such notice by certified mail addressed
to Maker at the address stated below or by "overnight" delivery service. Notices
shall be deemed delivered and received upon actual receipt in the case of
personal delivery, within three (3) days after deposit into the Untied States
mail or within twenty-four (24) hours after delivery to an "overnight" delivery
service.
16. Time. Time is of the essence of each term of this Debenture.
5
<PAGE> 10
17. Modification and Assignment. This Debenture may not be amended and
no obligation hereunder shall be discharged or waived unless such amendment,
discharge or waiver is evidenced by a written instrument signed by any of the
entities constituting Payee. Maker acknowledges that Payee may assign and
negotiate this Debenture and that this Debenture shall be enforceable by any
such assignee.
Ugly Duckling Corporation,
a Delaware corporation
2525 East Camelback Road, Suite 1150
Phoenix, Arizona 85016
By: ______________________________
Name: ______________________________
Its: ______________________________
Date: ______________________________
Accepted and Approved by Payee:
Verde Investments, Inc.,
an Arizona corporation
By: ___________________________________
Name: ___________________________________
Its: ___________________________________
Date: ___________________________________
6
<PAGE> 11
EXHIBIT B
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
FEDERAL SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAW AND MAY
NOT BE SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF ABSENT AN EFFECTIVE
REGISTRATION STATEMENT FOR SUCH SHARES UNDER APPLICABLE SECURITIES LAWS AND/OR
PURSUANT TO AN EXEMPTION THEREFROM. THE CORPORATION IS AUTHORIZED TO ISSUE
PREFERRED STOCK IN VARIOUS SERIES. THE BOARD OF DIRECTORS OF THE CORPORATION IS
AUTHORIZED TO FIX AND DETERMINE THE RIGHTS, PREFERENCES, LIMITATIONS AND
RESTRICTIONS OF SUBSEQUENT SERIES OF PREFERRED STOCK. THIS UGLY DUCKLING
CORPORATION SERIES B PREFERRED STOCK IS ISSUED IN EXCHANGE FOR AND RETIREMENT OF
ALL SERIES A PREFERRED STOCK ISSUED BY UGLY DUCKLING HOLDINGS, INC. TO VERDE
INVESTMENTS, INC.
UGLY DUCKLING CORPORATION
A DELAWARE CORPORATION
SERIES B PREFERRED STOCK
AUTHORIZED: 1,000,000 Shares ISSUED: 1,000,000 Shares
CERTIFICATE NO. 1 ISSUANCE PRICE: $10.00/Share
DATE: _____________________ TOTAL PRICE: $10,000,000.00
This certifies that Verde Investments, Inc., an Arizona corporation, is
the owner of 1,000,000 fully paid and nonassessable shares of the Series B
Preferred Stock (the "Series B Preferred Stock") of Ugly Duckling Corporation, a
Delaware corporation (the "Corporation"). The Corporation has received from
Verde Investments, Inc. for the shares of Series B Preferred Stock evidenced by
this Certificate shares of Series A Preferred Stock issued by Ugly Duckling
Holdings, Inc. The Series B Preferred Stock is transferable only upon the books
of the Corporation by the holder hereof in person or by duly authorized attorney
upon surrender of this Certificate duly endorsed. The Series B Preferred Stock
shall have the following designations, powers, preferences and rights, and shall
be subject to the following qualifications, limitations and restrictions:
1. Designation and Rank.
The Series B Preferred Stock shall rank prior to the Corporation's
common stock (the "Common Stock") and to all other classes and series of equity
securities of the Corporation now or hereafter authorized, issued or outstanding
(such other classes and series of equity securities collectively may be referred
to herein as the "Junior Stock"), other than any classes or series of equity
securities of the Corporation ranking on a parity with (the "Parity Stock") or
senior to (the "Senior Stock") the Series B Preferred Stock as to dividend
rights and rights upon
<PAGE> 12
liquidation, winding up or dissolution of the Corporation. The Series B
Preferred Stock shall be junior to all outstanding debt of the Corporation. the
Series B Preferred Stock shall be subject to creation of Senior Stock, Parity
Stock and Junior Stock to the extent not expressly prohibited by the
Corporation's Articles of Incorporation, and the provisions hereof.
2. Dividends.
a. The holders of record of shares of the Series B Preferred Stock
shall be entitled to receive, when, as and if declared by the Board of Directors
of the Corporation, out of any funds of the Corporation legally available
therefor, cumulative cash dividends ("Dividends") at the per annum rates set
forth below, which shall accrue from the date hereof, and be payable quarterly
in arrears on the last day of March, June, September and December, in each year
(each of such dates, a "Dividend Payment Date").
<TABLE>
<S> <C>
Issuance Date - December 31, 1997 10%
January 1, 1998 and thereafter 12%
</TABLE>
Each declared Dividend shall be payable to holders of record as they
appear on the stock books of the Corporation at the close of business on the
applicable record date, which shall be not more than 30 nor less than 10
calendar days preceding the Dividend Payment Date therefor, as determined by the
Board or a duly authorized committee thereof (each of such dates, a "Record
Date"). Dividends on each share of Series B Preferred Stock shall accrue and be
cumulative from the date of issuance thereof, whether or not there shall be
profits, surplus or other funds of the Corporation legally available for the
payment of such Dividends at the time such Dividends shall accrue or become due
and whether or not such Dividends are declared. Accrued and unpaid Dividends for
any prior Dividend periods may be declared and paid at any time, without
reference to any regular Dividend Payment Date, to holders of record on such
date, not exceeding 45 days preceding the payment date thereof, as may be fixed
by the Board.
b. Unless full Dividends on the Series B Preferred Stock at the
rates set forth in paragraph 2(a) above shall have been paid or declared and a
sum sufficient for the payment thereof set apart: (i) no dividend whatsoever
shall be paid or declared, and no distribution shall be made, on any Common
Stock or any other Junior Stock and (ii) no Common Stock shall be purchased,
redeemed or acquired by the Corporation and no monies shall be paid into or set
aside or made available for a sinking fund for the purchase, redemption or
acquisition thereof; provided, however, that this restriction shall not apply to
the repurchase of shares of Common Stock or any other Junior Stock from
directors, officers or employees of the Corporation pursuant to agreements under
which the Corporation has the option to repurchase such shares upon the
occurrence of certain events, including the termination of employment.
3. Liquidation Preference.
a. In the event of any liquidation, dissolution or winding up of the
Corporation, 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 Corporation to the
holders of Common Stock of the Corporation or any other Junior Stock,
2
<PAGE> 13
an amount equal to the Issuance Price for each share of Series B Preferred Stock
plus all Dividends due and not paid on such shares (the "Liquidation Payment").
If upon such liquidation, dissolution or winding up of the Corporation the
assets of the Corporation are insufficient to pay the Liquidation Payment in
full on each share of Series B Preferred Stock, then such assets as are
available for distribution to the holders of the Series B Preferred Stock shall
be distributed ratably among such holders. Unless specifically designated as
Junior Stock or Senior Stock with respect to the distribution of assets, all
other series or classes of Preferred Stock shall rank on a parity with the
Series B Preferred Stock with respect to the distribution of assets. All of the
preferential amounts to be paid to the holders of the Series B Preferred Stock
and any Parity Stock under this paragraph shall be paid or set apart for payment
before the payment or setting apart for payment of any amount for or the
distribution of any assets of the Corporation to the holders of the Common Stock
in connection with such liquidation, dissolution or winding up.
b. A consolidation or merger of the Corporation with or into any
other corporation where less than 50% of the outstanding voting securities of
the surviving corporation are held by the shareholders of the Corporation
existing immediately prior to the consolidation or merger or a sale of all or
substantially all of the assets of the Corporation, shall be deemed to be a
liquidation, dissolution or winding up of the Corporation within the meaning of
this paragraph 2.
4. Voting Rights.
a. Except as provided in b. below, or as otherwise from time to time
required by applicable law, the shares of Series B Preferred Stock shall not
entitle the holder thereof to any voting rights in the Corporation.
b. The approval of 66 2/3% of the outstanding shares of the Series B
Preferred Stock, voting separately as a class, shall be required to authorize
any action of the Corporation which (i) changes the rights, preferences or
privileges of the shares of the Series B Preferred Stock, or (ii) creates 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 Corporation. If Dividends for an entire
calendar year have not been declared and paid within 30 days after the end of
the calendar year, then until said Dividends are paid, holders of Series B
Preferred Stock shall be entitled to vote in the election of members of the
Board of Directors of the Corporation. In such event, each share of Series A
Preferred Stock shall entitle the holder thereof to ten votes in the election of
members of the Board of Directors and said votes may be cumulated in accordance
with applicable law. At any time that holders of Series B Preferred Stock are
entitled to vote in the election of members of the Board of Directors, the
holders of 25% of the outstanding shares of the in interest of Series B
Preferred Stock may call a special meeting of the Board of Directors in
accordance with the Bylaws of the Corporation.
5. Right of Redemption. The Corporation shall have the right to redeem
the Series B Preferred Stock, in whole or in part, from time to time and at any
time, except as otherwise prohibited by law, at the Issuance Price per share,
plus an amount equal to all accrued and unpaid Dividends (whether or not any
such Dividend has been declared, but without interest thereon) to the date such
payment is made available in full to holder of shares of Series B Preferred
Stock
3
<PAGE> 14
(the "Redemption Price"). If fewer than all of the shares of Series B Preferred
Stock are to be redeemed at any time, selection of shares for redemption shall
be made by the Board of Directors of the Corporation on a pro rata basis or in
such other equitable manner as the Board shall determine. The Corporation shall
cause a notice of the record date set by the Board of Directors for the payment
of the Redemption Price (the "Redemption Date") to be mailed to the holders of
the Series B Preferred Stock to be redeemed at least 30 days prior to the
Redemption Date. Following the Redemption Date, unless this Corporation defaults
in payment the Redemption Price on the Redemption Date, the holders of the
shares of Series B Preferred Stock called for redemption shall cease to have any
rights as stockholders of the Corporation with respect to such shares called for
redemption except the right to receive the Redemption Price upon surrender of
the certificate or certificates representing the shares of Series B Preferred
Stock called for redemption, endorsed for transfer to the Corporation, and such
shares shall not be deemed to be outstanding for any purpose whatsoever.
6. Transfer. The Corporation shall keep a register in which the
Corporation shall register the transfer of any shares of Series B Preferred
Stock. Upon presentment for registration of transfer of a certificate
representing shares of Series B Preferred Stock (accompanied by such stock
assignments or stock powers as the Corporation may require), the Corporation
shall cancel such certificate and shall execute and issue to the transferor
and/or transferee new certificates aggregating a number of shares of Series B
Preferred Stock as is equal to the number represented by the canceled
certificate.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed and delivered by its duly authorized officers this ____ day of
___________, 199__.
Ugly Duckling Corporation,
a Delaware corporation
By: _________________________________
Gregory B. Sullivan, President
By: _________________________________
Steven P. Johnson, Secretary
Accepted and approved by Verde
Investments, Inc.
By: _________________________
Name: _________________________
Its: _________________________
4
<PAGE> 15
EXHIBIT C
AGREEMENT FOR PURCHASE AND SALE
OF
PROPERTIES
AGREEMENT DATE: ___________________, 1996
SELLER: VERDE INVESTMENTS, INC.,
AN ARIZONA CORPORATION,
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
BUYER: UGLY DUCKLING CAR SALES, INC.
AN ARIZONA CORPORATION, AND
CHAMPION ACCEPTANCE CORPORATION,
AN ARIZONA CORPORATION
2525 E. CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
ESCROW AGENT: LAWYERS TITLE OF ARIZONA, INC.
VICKI ETHERTON - ESCROW OFFICER
ONE SOUTH CHURCH AVENUE, SUITE 2130
TUCSON, ARIZONA 85701
PHONE: (520) 740-0424
FAX: (520) 740-0436
PROPERTIES: GRANT/ORACLE DEALERSHIP
PARK/AJO DEALERSHIP
24TH STREET/VAN BUREN DEALERSHIP
ALMA SCHOOL/BROADWAY DEALERSHIP
19TH AVENUE/MOUNTAIN VIEW DEALERSHIP
51ST AVENUE/GLENDALE DEALERSHIP
GLENDALE AVENUE DEALERSHIP
TUCSON CREDIT CORP. OFFICES
GILBERT CREDIT CORP. OFFICES
TEMPE RECONDITIONING FACILITIES
<PAGE> 16
EXHIBIT A
RECITALS:
1. Seller owns those properties identified in Exhibit A-1 attached
hereto and incorporated herein (the "Owned Properties") and leases those
properties identified in Exhibit A-2 attached hereto and incorporated herein
(the "Leased Properties") (collectively, the Owned Properties and Leased
Properties may be referred to as the "Properties").
2. Seller leases the Properties to Buyer pursuant to several written
agreements (the "Leases").
3. Under the terms and conditions stated in this Agreement, Buyer has
offered to purchase from Seller the Properties and Seller has accepted such
offer and agreed to sell the Properties to Buyer, all to be completed on a date
mutually acceptable to Seller and Buyer within one year after the Agreement Date
(the "Closing Date").
NOW, THEREFORE, in consideration of the covenants, representations and
warranties of the parties stated herein, the performances of the parties
required hereby and the benefits accruing to the parties hereunder, Seller and
Buyer mutually agree as follows:
SECTION 1. CONVEYANCE OF PROPERTIES.
1.1 AGREEMENT TO CONVEY. Under the terms and conditions stated in this
Agreement, Seller hereby agrees to sell the Properties to Buyer and Buyer hereby
agrees to purchase the Properties from Seller, all on or before the Closing
Date.
1.2 OWNED PROPERTIES. The Owned Properties shall be conveyed by
Seller's execution, delivery and recordation of one or more Special Warranty
Deeds in the form of Exhibit B attached hereto and incorporated herein (the
"Deeds").
1.3 LEASED PROPERTIES. The Seller's leasehold interest in the Leased
Properties shall be conveyed by Seller's and Buyer's execution, delivery and
recordation of one or more Assignment and Assumption of Lease in the form of
Exhibit C attached hereto and incorporated herein (the "Lease Assignments").
Seller shall obtain the consent of the owner of the Leased Properties to the
assignment of Seller's leasehold interest in the Leased Properties by the
owner's execution of the Lease Assignments.
1.4 EXCLUDED PROPERTIES. Except as otherwise provided herein, the
Properties do not include and Seller is not conveying to Buyer (a) any deposits
of Seller held by utility companies in connection with the provision of utility
services to the Properties; (b) any funds held in impound accounts; (c) any
other funds held by Seller in connection with the Properties; or (d) any other
real or personal properties of Seller not described in this Agreement. All
excluded property shall be retained by Seller.
SECTION 2. PURCHASE PRICE AND PAYMENT.
2.1 PURCHASE PRICE. Buyer shall pay to Seller as the total price for
Seller's interests in the Properties the lesser of (a) the fair market value of
the Owned Properties as determined by a professional appraiser retained by
Buyer; or (b) Seven Million Four Hundred Fifty Thousand Dollars ($7,450,000.00)
(the "Purchase Price"). The Purchase Price shall be allocated among the
Properties pursuant to the schedule attached hereto and incorporated herein as
Exhibit D.
2.2 PAYMENT. The Purchase Price shall be paid by Buyer to Seller in
certified and immediately available funds delivered to Escrow Agent on or before
the Closing Date. The Purchase Price shall be applied and disbursed by Escrow
Agent to payment and discharge of all liens, encumbrances and judgments, if any,
payable by Seller. After such application and disbursement, the remainder of the
Purchase Price shall be disbursed to Seller.
2
<PAGE> 17
SECTION 3. CONTINGENCIES.
3.1 TITLE MATTERS. Within 30 days after the Agreement Date, Seller
shall deliver to Buyer a preliminary report of the status of title to the
Properties issued by Escrow Agent as title insurer (the "Title Reports"). The
Title Reports shall include copies of all matters of public record affecting
title to the Properties and shall identify all requirements for the issuance to
Buyer of ALTA extended owner and leasehold title insurance policies (the "Title
Policies"). The Title Policies shall insure Buyer's fee title or leasehold
interest to the Properties, subject to the standard exceptions in the Title
Policies, all matters disclosed in the Title Reports, and all matters disclosed
or discoverable by a diligent physical inspection and accurate instrument survey
of the Properties, whether or not a diligent physical inspection and/or accurate
instrument survey is completed by Buyer (collectively, the "Permitted
Exceptions"). If Buyer reasonably objects to any matter disclosed in the Title
Reports (the "Title Objections"), then Buyer shall notify Seller thereof by
deliver to Seller of written notice of the Title Objections within 10 days after
delivery of the Title Reports to Buyer. If Buyer fails to notify Seller of a
Title Objection within said 10 days, then Buyer shall be deemed to have accepted
the condition of title to the Properties and the requirements to be performed by
Buyer for the issuance of the Title Policies. If Buyer does properly notify
Seller of a Title Objection by timely delivery of written notice thereof to
Seller, then Seller shall, within five (5) business days, elect to either
terminate this Agreement or cure the Title Objection on or before the Closing
Date. If Seller elects to cure the Title Objection and then fails to cure the
Title Objection on or before the Closing Date, then on the Closing Date Buyer
shall elect to either accept the Properties without the cure of the Title
Objection or declare Seller in default.
3.2 FINANCING. The obligation of Buyer to purchase the Properties is
contingent on Buyer obtaining financing secured by the Properties under terms
and conditions acceptable to Buyer in Buyer's sole discretion. Buyer shall use
reasonable efforts to obtain financing acceptable to Buyer. If Buyer is unable
to obtain financing for the purchase of the Properties under terms and
conditions acceptable to Buyer within one year after the Agreement Date, then
Buyer may terminate this Agreement. In such event, the Leases shall continue in
accordance with their respective terms.
SECTION 4. CLOSING MATTERS.
4.1 CLOSING DATE. The Closing Date shall be a date or dates mutually
acceptable to Seller and Buyer within one year after the Agreement Date and the
parties shall complete the purchase and sale of the Properties on or before the
Closing Date.
4.2 ESCROW AGENT. Seller and Buyer hereby retain Escrow Agent as their
mutual agent for closing the conveyance of the Properties pursuant to this
Agreement. This Agreement shall constitute the mutual instructions of the
parties to the Escrow Agent and such instructions cannot be modified without the
written consent of both parties. The Escrow Agent shall prepare statements of
the closing of the transactions described herein for review and approval by the
parties prior to the Closing Date (the "Closing Statements").
4.3. SELLER'S CLOSING DOCUMENTS. On or before the Closing Date, Seller
shall deliver to Escrow Agent the following, duly executed and acknowledged by
Seller as required:
4.3.1 The Deeds.
4.3.2 The Lease Assignments.
4.3.3 A certificate of Seller stating that Seller is not a foreign
corporation.
4.3.4 All other documents reasonably required for Seller and or
Escrow Agent to perform their respective obligations
hereunder.
4.4. BUYER'S CLOSING DOCUMENTS. On or before the Closing Date, Buyer
shall deliver to Escrow Agent the following, duly executed and acknowledged by
Buyer as required:
4.4.1 The Lease Assignments.
4.4.2 The Purchase Price.
4.4.3 All other documents reasonably required for Buyer and or
Escrow Agent to perform their respective obligations
hereunder.
3
<PAGE> 18
4.5 PRORATIONS. All real property taxes, personal property taxes and
assessments on the Properties, if any, ("Taxes") and all expenses of operation
of the Properties, if any, ("Operation Expenses") shall not be prorated as Buyer
is responsible for all Taxes and Operation Expenses pursuant to the Leases.
4.6 COSTS. The parties acknowledge that it is their intention that
Seller receive the entire Purchase Price. Therefore, Buyer shall pay for all
closing costs, including all charges of Escrow Agent for performing the services
required by this Agreement, including recording and filing fees.
4.7 POSSESSION AND RISK OF LOSS. Possession of the Properties shall be
delivered to Buyer on the Closing Date after completion of the transactions
described herein. All risk of loss to the Properties shall be retained by Seller
prior to the Closing Date and shall be assumed by Buyer on the Closing Date
after completion of the transaction described herein. Any Properties, casualty
and liability insurance of the Properties maintained by Seller shall not be
canceled on or prior to the Closing Date.
4.8 1031 EXCHANGES. If either Seller or Buyer seeks to sell or purchase
the Properties as part of a tax free exchange pursuant to Internal Revenue Code
Section 1031, the other party shall cooperate therein, provided such exchange
does not change the terms and conditions of this Agreement and does not impose
any additional expense or liability on the other party.
SECTION 5. REPRESENTATIONS, WARRANTIES AND INDEMNIFICATION BY SELLER.
5.1 AUTHORITY. Seller is a corporation duly organized, validly existing
and in good standing under the laws of the State of Arizona, and Seller has full
power, authority and legal right to enter into this Agreement and to perform all
covenants, obligations and agreements of Seller hereunder. Seller has taken all
necessary action to authorize the execution, delivery and performance by Seller
of this Agreement and all other documents or instruments required in connection
with this Agreement, and upon execution and delivery of this Agreement and such
other documents and instruments by Seller and the other parties thereto, this
Agreement and each of such documents and instruments will have been duly
authorized, executed and delivered by Seller and will constitute the legal,
valid and binding obligation of Seller enforceable in accordance with its terms.
Seller is not a foreign entity and no withholdings of the proceeds of the sale
of the Properties is required under Section 1445 of the Internal Revenue Code.
5.2 GOVERNMENT NOTICES. To the best of Seller's knowledge, Seller has
not received any notice from any governmental agency or authority exercising
jurisdiction over the Properties of any pending or threatened condemnation,
public improvement, assessments or reduction of utilities services affecting the
Properties.
5.3 TITLE. Seller has good and marketable title to the Properties. No
person or entity has any right, title or interest in or to the Properties or any
part thereof or interest therein other than (a) the Permitted Exceptions and (b)
the interest of the owner of the Leased Properties.
5.4 DISCLAIMER. Except for the representations and warranties made by
the Seller herein, Seller makes no representations or warranties of any kind
regarding the condition, operation, financial performance, marketability or
profitability of the Properties. Seller disclaims any representations,
warranties or covenants of any person or entity other than those of Seller
stated in this Agreement.
SECTION 6. REPRESENTATIONS. WARRANTIES AND INDEMNIFICATION BY BUYER.
6.1 AUTHORITY. Seller is a corporation duly organized, validly existing
and in good standing under the laws of the Sate of Arizona and Buyer has full
power, authority and legal right to enter into this Agreement and to perform all
covenants, obligations and agreements of Buyer hereunder. Buyer has taken all
necessary action to authorize the execution, delivery and performance by Buyer
of this agreement and all other documents or instruments required in connection
with this Agreement, and upon execution and delivery of this Agreement and such
other documents and instruments by Buyer and the other parties thereto, this
Agreement and each of such documents and instruments will have been duly
authorized, executed and delivered by Buyer and will constitute the legal, valid
and binding obligation of Buyer enforceable in accordance with its terms.
4
<PAGE> 19
6.2 LIABILITIES. Buyer represents and warrants unto Seller that,
because Buyer has possession of the Properties pursuant to the Leases and the
Leases are absolute triple net Leases, Seller does not and shall not have any
liability with respect to any claim, obligation or cost, including but not
limited to attorney's fees and costs, arising out of the Properties or any
portion thereof or the business or any activity conducted thereon accruing
before or after the Closing Date.
6.3 DISCLAIMER. Buyer acknowledges that Buyer has occupied the
Properties and used the Properties in Buyer's business for several years, that
Buyer is authorized by this Agreement to conduct any and all investigations,
inspections and studies of the Properties and all matters relating thereto and
that Buyer is not relying upon any covenants, representations or warranties of
Seller other than those stated in this Agreement. Buyer acknowledges that Buyer
is an experienced, sophisticated, knowledgeable and professional investor and
that Buyer has retained and relied upon its own financial, accounting, legal,
management and operations advisors. Buyer acknowledges that Buyer is acquiring
the Properties in their current condition, AS IS, subject to the Permitted
Exceptions, but with the representations and warranties of Seller stated in this
Agreement.
SECTION 7. DEFAULT AND REMEDIES.
7.1 SELLER. In addition to any other actions constituting a default
hereunder, Seller shall be in default hereunder if on the Closing Date this
Agreement is in full force and effect, Buyer has tendered full performance and
Seller wrongfully fails to convey the Properties to Buyer in accordance with
this Agreement. In such event, Buyer may elect, as its exclusive remedy, to
either (a) terminate this Agreement; or (b) prosecute a claim for specific
performance of this Agreement.
7.2 BUYER. In addition to any other actions constituting a default
hereunder, Buyer shall be in default hereunder if on the Closing Date this
Agreement is in full force and effect, Seller has tendered full performance and
Buyer fails to purchase the Properties in accordance with this Agreement. In
such event, Seller may terminate this Agreement as its exclusive remedy.
SECTION 8. GENERAL PROVISIONS.
8.1 NOTICE. All notices and communications hereunder shall be in
writing and shall be given by personal delivery, overnight delivery or mailed
first class, registered or certified mail, postage prepaid, and shall be deemed
given and received upon the earlier of actual delivery or three (3) days after
deposit in the United States Mail as aforesaid. Notices shall be delivered or
mailed to the addresses stated in this Agreement.
8.2 NEGOTIATION AND INTEGRATION. The terms and provisions of this
Agreement represent the results of negotiations between the parties, each of
which has been represented by counsel or other representative of its own
choosing and neither of which have acted under duress or compulsion, whether
legal, economic or otherwise. This Agreement is entered into after full
investigation, neither party relying upon any statements or representations made
by the other not embodied in this Agreement. All prior and contemporaneous
statements, representations, implications, understandings and agreements between
the parties are superseded by and merged in this Agreement, which alone fully
and completely expresses their entire agreement. There are no other agreements
between the parties.
8.3 ASSIGNMENT AND MODIFICATION. This Agreement shall be binding upon
the successors and assigns of the parties. This Agreement may not be assigned by
Buyer without the prior written consent of Seller, which consent shall not be
unreasonably withheld or delayed. However, the Seller's consent is not required
for an assignment to an entity controlled by Buyer or an entity in which Buyer
is a principal or to principals of Buyer. This Agreement may not be changed
orally, but only by an agreement in writing, signed by the parties.
8.4 SEVERABILITY. If any provision of this Agreement is held by a court
to be void or unenforceable, the balance of the Agreement shall remain valid and
enforceable.
8.5 OTHER AGREEMENTS. Except in the ordinary course, Seller shall not
enter into any contracts, leases, agreements or amendments to existing
agreements or encumbrances affecting the Properties while this Agreement remains
in force without the express written consent of Buyer.
5
<PAGE> 20
8.6 NO AGENCY. It is expressly agreed and understood by the parties
hereto that neither party is the agent, partner nor joint venture partner of the
other. It is also expressly agreed and understood that neither Seller nor Buyer
has any obligations or duties to the other except as specifically provided for
in this Agreement.
8.7 ATTORNEY'S FEES. In the event any party hereto finds it necessary
to bring an action at law or other proceeding against the other party to enforce
this Agreement or any instrument executed pursuant to this Agreement, or by
reason of any breach hereunder, the party prevailing in any such action or other
proceeding shall be paid all costs and reasonable attorney's fees by the
defaulting party, and in the event any judgment is secured by such prevailing
party all such costs and attorneys' fees shall be included in any such judgment,
attorney's fees to be set by the court and not by the jury.
8.8 TIME. Time is of the essence of this Agreement. However, if any
action is required to be taken on a Saturday, Sunday, or legal holiday, the
action shall be deemed timely if it is taken on the next regular business day.
8.9 STATE LAW AND JURISDICTION. This Agreement shall be governed by the
laws of the State of Arizona. Any judicial action relating to this Agreement
shall be prosecuted in a court of competent jurisdiction in Maricopa County,
Arizona as the court of exclusive jurisdiction and proper venue and the parties
hereby consent to the jurisdiction and venue of said court.
8.10 COUNTERPARTS. This Agreement may be executed in counterparts, and
the signature of any person required by this Agreement shall be effective if
signed on any and or all counterparts. All counterparts together shall be
considered one and the same Agreement.
IN WITNESS WHEREOF, the parties have entered into this Agreement as of
the dates set forth below, effective as of the Agreement Date.
Seller: Verde Investments, Inc.,
an Arizona corporation,
By: __________________________________
Name: __________________________________
Its: __________________________________
Buyer: Ugly Duckling Car Sales, Inc.
an Arizona corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Champion Acceptance Corporation,
an Arizona corporation
By: ___________________________________
Name: ___________________________________
Its: ___________________________________
Received and accepted with signatures of Seller and Buyer this ____ day of
__________, 1996.
Lawyers Title of Arizona, Inc.
By: __________________________________
Name: __________________________________
Its: __________________________________
6
<PAGE> 21
EXHIBITS
A-1 Owned Properties
A-2 Leased Properties
B Deed
C. Lease Assignment
D. Purchase Price Allocation Schedule
7
<PAGE> 22
EXHIBIT A-1
OWNED PROPERTIES
1. Grant/Oracle Dealership
2301 North Oracle
Tucson, Arizona 85705
2. 24th Street/Van Buren Dealership
330 North 24th Street
Phoenix, Arizona 85006
3. Alma School/Broadway Dealership
333 South Alma School
Mesa, Arizona 85210
4. 19th Avenue Dealership
9650 North 19th Avenue
Phoenix, Arizona 85021
5. 51st Avenue/Glendale Dealership
5104 West Glendale Avenue
Glendale, Arizona 85301
6. Glendale Dealership
5017 West Glendale Avenue
Glendale, Arizona 85301
7. Tucson Credit Corp. Offices
3434 East Broadway
Tucson, Arizona 85716
8. Gilbert Credit Corp. Office
1030 North Colorado
Gilbert, Arizona 85233
9. Tempe Reconditioning Facilities
1002 South 52nd Street
Tempe, Arizona 85281
8
<PAGE> 23
EXHIBIT A-2
LEGAL DESCRIPTION OF LEASED PROPERTIES
1. Park/Ajo Dealership
3737 South Park
Tucson, Arizona 85713
2. 19th Avenue Dealership
9630 North 19th Avenue
Phoenix, Arizona 85021
9
<PAGE> 24
EXHIBIT B
WHEN RECORDED, RETURN TO:
Steven P. Johnson, Esq.
2525 East Camelback Road, Suite 1150
Phoenix, Arizona 85016
SPECIAL WARRANTY DEED
In consideration of Ten Dollars ($10.00) and other valuable
consideration received by Verde Investments, Inc., an Arizona corporation
("Grantor") from Ugly Duckling Car Sales, Inc., an Arizona corporation
("Grantee"), Grantor hereby grants and conveys to Grantee all right, title and
interest of Grantor in and to the real Properties located in Maricopa County,
Arizona and described in Exhibit A attached hereto and incorporated herein. The
title to the real Properties conveyed hereby is warranted by Grantor against its
acts and none other, subject to all matters of public record.
Dated: _________________, 1996 Verde Investments, Inc.,
an Arizona corporation
By: __________________________
Name: __________________________
Its: __________________________
STATE OF ARIZONA )
)ss
COUNTY OF MARICOPA )
Acknowledged before me this ____ day of _________________, 1996 by
___________________, as _____________________ of Verde Investments, Inc., an
Arizona corporation.
__________________________
Notary Public
My commission expires:
_______________________
10
<PAGE> 25
EXHIBIT C
ASSIGNMENT AND ASSUMPTION
OF
LEASE
ASSIGNMENT DATE: __________________, 1996
ASSIGNOR: VERDE INVESTMENTS, INC.
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
ASSIGNEE: UGLY DUCKLING CAR SALES, INC.
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
LANDLORD: ____________________________
____________________________
____________________________
____________________________
RECITALS.
1. Landlord owns the real property located at ____________________ (the
"Property").
2. Landlord leases the Property to Assignor pursuant to a written
agreement dated __________________, a copy of which is attached hereto (the
"Lease").
3. Assignor seeks to assign the Lease to Assignee and Assignee seeks to
assume all obligations of Assignor under the Lease accruing after the Assignment
Date.
4. Assignor and Assignee seek the consent of Landlord to the assignment
and assumption of the Lease.
NOW, THEREFORE, in consideration of the acknowledgments,
representations, warranties and covenants of the respective parties stated
herein, Assignor, Assignee and Landlord hereby mutually agree as follows:
1. ASSIGNMENT AND ASSUMPTION. Assignor hereby assigns and transfers to
Assignee all right, title and interest of Assignor in and to the Lease as of the
Assignment Date. Assignee hereby accepts the assignment of Assignor's interests
in the Lease and hereby assumes and agrees to perform all obligations of the
Assignor under the Lease accruing after the Assignment Date. On the Assignment
Date, Assignee shall pay to Assignor $______________ in immediately available
funds to reimburse Assignor for the $_____________ security deposit paid by
Assignor to Landlord under the Lease (the "Security Deposit"). Assignor hereby
assigns to Assignee the Security Deposit and acknowledges that any refund of the
Security Deposit shall be made exclusively to Assignee.
2. CONSENT. Landlord hereby consents to the assignment and assumption
of the Lease, effective as of the Assignment Date. Landlord acknowledges
Assignor's assignment of the Security Deposit to Assignee and acknowledges that
any refund of the Security Deposit shall be made exclusively to Assignee.
Landlord hereby releases and discharges Assignor from all obligations under the
Lease accruing after the Assignment Date.
3. GENERAL PROVISIONS. Except as modified by this Assignment and
Assumption of Lease (this "Assignment"), the Lease remains in full force and
effect. This Assignment evidences the entire agreement among
11
<PAGE> 26
the parties regarding the subject matter hereof and all prior and
contemporaneous oral or written statements are superseded by this Assignment.
IN WITNESS WHEREOF, the undersigned have read this Assignment and
acknowledge their understanding and acceptance of this Assignment as of the
Assignment Date.
ASSIGNOR: Verde Investments, Inc.,
an Arizona corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
ASSIGNEE: Ugly Duckling Car Sales, Inc.,
an Arizona corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
LANDLORD: ___________________________________________
___________________________________________
12
<PAGE> 27
EXHIBIT D
PURCHASE PRICE ALLOCATION
<TABLE>
<CAPTION>
PROPERTIES PURCHASE PRICE
- ---------- --------------
<S> <C>
Grant/Oracle Dealership $800,000.00
24th Street/Van Buren Dealership $800,000.00
Alma School/Broadway Dealership $1,600,000.00
19th Avenue/Mountain View Dealership $500,000.00
51st Avenue/Glendale Dealership $600,000.00
Glendale Avenue Dealership $750,000.00
Tucson Credit Corp. Offices $1,000,000.00
Gilbert Credit Corp. Offices $800,000.00
Tempe Reconditioning Facilities $600,000.00
--------------
TOTAL $7,450,000.00
</TABLE>
13
<PAGE> 28
FIRST AMENDMENT
TO
LAND LEASE AGREEMENT
ORACLE/GRANT DEALERSHIP
FIRST AMENDMENT DATE: IPO COMPLETION DATE
LANDLORD: VERDE INVESTMENTS, INC.
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
TENANT: UGLY DUCKLING CAR SALES, INC.
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
LAND: 2301 NORTH ORACLE ROAD
TUCSON, ARIZONA
RECITALS
The parties acknowledge that the following recitals are true, correct
and a material part of this First Amendment to Land Lease Agreement (this "First
Amendment"):
1. Unless otherwise defined in this First Amendment, all capitalized
terms used herein shall have the definitions ascribed thereto in the Lease. For
purposes of this First Amendment, the IPO Completion Date shall be the first day
of the first calendar month after Ugly Duckling Corporation completes a sale of
its equity securities pursuant to a public offering registered with the
Securities and Exchange Commission.
2. Landlord owns the Land and leases the Land to Tenant pursuant to a
Land Lease Agreement dated January 1, 1994 (the "Lease").
3. Landlord and Tenant have entered into an Agreement For Purchase And
Sale of Property for the sale of the Land by Landlord to Tenant (the "Purchase
Agreement").
4. Tenant has requested that Landlord reduce the Land Rent payable by
Tenant from and after the First Amendment Date to the date of Tenant's
acquisition of the Land pursuant to the Purchase Agreement.
5. Landlord is willing to consent to the reduction of the Land Rent
under the terms and conditions stated in this First Amendment.
NOW, THEREFORE, in consideration of the respective covenants of the
parties stated herein and the respective performances of the parties required
hereby, Landlord and Tenant hereby mutually agree to the following amendments to
the Lease, all effective as of the First Amendment Date:
Section 3.1 of the Lease is entirely amended and restated as follows:
3.1 Amount. Commencing on the First Amendment Date, Tenant shall pay to
Landlord rent for each month of the Land Term ("Land Rent"). The Land
Rent payable by Tenant to Landlord for each month after the First
Amendment Date shall be Six Thousand Six Hundred Sixty-Six and 67/100
Dollars
<PAGE> 29
($6,666.67). The Land Rent shall be payable in monthly installments on
the first day of each calendar month during the Lease Term, commencing
on the First Amendment Date.
Except as modified by this First Amendment, the Lease remains in full force and
effect and is hereby ratified and affirmed by Landlord and Tenant, all effective
as of the First Amendment Date.
IN WITNESS WHEREOF, Landlord and Tenant have caused this First Amendment
to be executed as of the dates shown below, effective as of the First Amendment
Date. Though executed prior to the First Amendment Date, this First Amendment
shall not be effective until the First Amendment Date.
Landlord: Verde Investments, Inc.,
an Arizona corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
Tenant: Ugly Duckling Car Sales, Inc.,
an Arizona corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
Approved by Ugly Duckling Corporation, a Delaware corporation, as guarantor of
the Lease.
Ugly Duckling Corporation,
a Delaware corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
2
<PAGE> 30
FIRST AMENDMENT
TO
LAND LEASE AGREEMENT
24TH STREET/VAN BUREN DEALERSHIP
FIRST AMENDMENT DATE: IPO COMPLETION DATE
LANDLORD: VERDE INVESTMENTS, INC.
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
TENANT: UGLY DUCKLING CAR SALES, INC.
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
LAND: 330 NORTH 24TH STREET
PHOENIX, ARIZONA 85006
RECITALS
The parties acknowledge that the following recitals are true, correct
and a material part of this First Amendment to Land Lease Agreement (this "First
Amendment"):
1. Unless otherwise defined in this First Amendment, all capitalized
terms used herein shall have the definitions ascribed thereto in the Lease. For
purposes of this First Amendment, the IPO Completion Date shall be the first day
of the first calendar month after Ugly Duckling Corporation completes a sale of
its equity securities pursuant to a public offering registered with the
Securities and Exchange Commission.
2. Landlord owns the Land and leases the Land to Tenant pursuant to a
Land Lease Agreement dated November 1, 1993 (the "Lease").
3. Landlord and Tenant have entered into an Agreement For Purchase And
Sale of Property for the sale of the Land by Landlord to Tenant (the "Purchase
Agreement").
4. Tenant has requested that Landlord reduce the Land Rent payable by
Tenant from and after the First Amendment Date to the date of Tenant's
acquisition of the Land pursuant to the Purchase Agreement.
5. Landlord is willing to consent to the reduction of the Land Rent
under the terms and conditions stated in this First Amendment.
NOW, THEREFORE, in consideration of the respective covenants of the
parties stated herein and the respective performances of the parties required
hereby, Landlord and Tenant hereby mutually agree to the following amendments to
the Lease, all effective as of the First Amendment Date:
Section 3.1 of the Lease is entirely amended and restated as follows:
3.1 Amount. Commencing on the First Amendment Date, Tenant shall pay to
Landlord rent for each month of the Land Term ("Land Rent"). The Land
Rent payable by Tenant to Landlord for each month
<PAGE> 31
after the First Amendment Date shall be Six Thousand Six Hundred
Sixty-Six and 67/100 Dollars ($6,667.00). The Land Rent shall be payable
in monthly installments on the first day of each calendar month during
the Lease Term, commencing on the First Amendment Date.
Except as modified by this First Amendment, the Lease remains in full force and
effect and is hereby ratified and affirmed by Landlord and Tenant, all effective
as of the First Amendment Date.
IN WITNESS WHEREOF, Landlord and Tenant have caused this First Amendment
to be executed as of the dates shown below, effective as of the First Amendment
Date. Though executed prior to the First Amendment Date, this First Amendment
shall not be effective until the First Amendment Date.
Landlord: Verde Investments, Inc.,
an Arizona corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
Tenant: Ugly Duckling Car Sales, Inc.,
an Arizona corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
Approved by Ugly Duckling Corporation, a Delaware corporation, as guarantor of
the Lease.
Ugly Duckling Corporation,
a Delaware corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
2
<PAGE> 32
FIRST AMENDMENT
TO
LAND LEASE AGREEMENT
ALMA SCHOOL/BROADWAY DEALERSHIP
FIRST AMENDMENT DATE: IPO COMPLETION DATE
LANDLORD: VERDE INVESTMENTS, INC.
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
TENANT: UGLY DUCKLING CAR SALES, INC.
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
LAND: 333 SOUTH ALMA SCHOOL
MESA, ARIZONA 85210
RECITALS
The parties acknowledge that the following recitals are true, correct
and a material part of this First Amendment to Land Lease Agreement (this "First
Amendment"):
1. Unless otherwise defined in this First Amendment, all capitalized
terms used herein shall have the definitions ascribed thereto in the Lease. For
purposes of this First Amendment, the IPO Completion Date shall be the first day
of the first calendar month after Ugly Duckling Corporation completes a sale of
its equity securities pursuant to a public offering registered with the
Securities and Exchange Commission.
2. Landlord owns the Land and leases the Land to Tenant pursuant to a
Land Lease Agreement dated April 1, 1994 (the "Lease").
3. Landlord and Tenant have entered into an Agreement For Purchase And
Sale of Property for the sale of the Land by Landlord to Tenant (the "Purchase
Agreement").
4. Tenant has requested that Landlord reduce the Land Rent payable by
Tenant from and after the First Amendment Date to the date of Tenant's
acquisition of the Land pursuant to the Purchase Agreement.
5. Landlord is willing to consent to the reduction of the Land Rent
under the terms and conditions stated in this First Amendment.
NOW, THEREFORE, in consideration of the respective covenants of the
parties stated herein and the respective performances of the parties required
hereby, Landlord and Tenant hereby mutually agree to the following amendments to
the Lease, all effective as of the First Amendment Date:
Section 3.1 of the Lease is entirely amended and restated as follows:
3.1 Amount. Commencing on the First Amendment Date, Tenant shall
pay to Landlord rent for each month of the Land Term ("Land Rent"). The
Land Rent payable by Tenant to Landlord for each
<PAGE> 33
month after the First Amendment Date shall be Thirteen Thousand Three
Hundred Thirty-Three Dollars ($13,333.00). The Land Rent shall be
payable in monthly installments on the first day of each calendar month
during the Lease Term, commencing on the First Amendment Date.
Except as modified by this First Amendment, the Lease remains in full force and
effect and is hereby ratified and affirmed by Landlord and Tenant, all effective
as of the First Amendment Date.
IN WITNESS WHEREOF, Landlord and Tenant have caused this First Amendment
to be executed as of the dates shown below, effective as of the First Amendment
Date. Though executed prior to the First Amendment Date, this First Amendment
shall not be effective until the First Amendment Date.
Landlord: Verde Investments, Inc.,
an Arizona corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
Tenant: Ugly Duckling Car Sales, Inc.,
an Arizona corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
Approved by Ugly Duckling Corporation, a Delaware corporation, as guarantor of
the Lease.
Ugly Duckling Corporation,
a Delaware corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
<PAGE> 34
FIRST AMENDMENT
TO
BUILDING LEASE AGREEMENT
19TH AVENUE/MOUNTAIN VIEW DEALERSHIP
FIRST AMENDMENT DATE: IPO COMPLETION DATE
LANDLORD: VERDE INVESTMENTS, INC.
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
TENANT: UGLY DUCKLING CAR SALES, INC.
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
PROPERTY: 9650 NORTH 19TH AVENUE AND
9630 NORTH 19TH AVENUE
PHOENIX, ARIZONA 85021
RECITALS
The parties acknowledge that the following recitals are true, correct
and a material part of this First Amendment to Building Lease Agreement (this
"First Amendment"):
1. Unless otherwise defined in this First Amendment, all capitalized
terms used herein shall have the definitions ascribed thereto in the Lease. For
purposes of this First Amendment, the IPO Completion Date shall be the first day
of the first calendar month after Ugly Duckling Corporation completes a sale of
its equity securities pursuant to a public offering registered with the
Securities and Exchange Commission.
2. Landlord owns the Property at 9650 North 19th Avenue and holds a
leasehold interest in the Property at 9630 North 19th Avenue and Landlord leases
the Property to Tenant pursuant to a Building Lease Agreement dated April 15,
1994 (the "Lease").
3. Landlord and Tenant have entered into an Agreement For Purchase And
Sale of Property for the sale of the Property at 9650 North 19th Avenue by
Landlord to Tenant (the "Purchase Agreement").
4. Tenant has requested that Landlord reduce the Building Rent payable
by Tenant from and after the First Amendment Date to the date of Tenant's
acquisition of the Property at 9650 North 19th Avenue pursuant to the Purchase
Agreement.
5. Landlord is willing to consent to the reduction of the Building Rent
under the terms and conditions stated in this First Amendment.
<PAGE> 35
NOW, THEREFORE, in consideration of the respective covenants of the
parties stated herein and the respective performances of the parties required
hereby, Landlord and Tenant hereby mutually agree to the following amendments to
the Lease, all effective as of the First Amendment Date:
Section 3.1 of the Lease is entirely amended and restated as follows:
3.1 Amount. Commencing on the First Amendment Date, Tenant shall pay to
Landlord rent for each month of the Building Term ("Building Rent"). The
Building Rent payable by Tenant to Landlord for each month after the
First Amendment Date shall be Seven Thousand Two Hundred Eighty-Four and
67/100 Dollars ($7,284.67). The Building Rent shall be payable in
monthly installments on the first day of each calendar month during the
Lease Term, commencing on the First Amendment Date.
Except as modified by this First Amendment, the Lease remains in full force and
effect and is hereby ratified and affirmed by Landlord and Tenant, all effective
as of the First Amendment Date.
IN WITNESS WHEREOF, Landlord and Tenant have caused this First Amendment
to be executed as of the dates shown below, effective as of the First Amendment
Date. Though executed prior to the First Amendment Date, this First Amendment
shall not be effective until the First Amendment Date.
Landlord: Verde Investments, Inc.,
an Arizona corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
Tenant: Ugly Duckling Car Sales, Inc.
an Arizona corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
Approved by Ugly Duckling Corporation, a Delaware corporation, as guarantor of
the Lease.
Ugly Duckling Corporation,
a Delaware corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
2
<PAGE> 36
FIRST AMENDMENT
TO
LAND LEASE AGREEMENT
51ST AVENUE/GLENDALE DEALERSHIP
FIRST AMENDMENT DATE: IPO COMPLETION DATE
LANDLORD: VERDE INVESTMENTS, INC.
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
TENANT: UGLY DUCKLING CAR SALES, INC.
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
LAND: 5104 WEST GLENDALE AVENUE
GLENDALE, ARIZONA 85301
RECITALS
The parties acknowledge that the following recitals are true, correct
and a material part of this First Amendment to Land Lease Agreement (this "First
Amendment"):
1. Unless otherwise defined in this First Amendment, all capitalized
terms used herein shall have the definitions ascribed thereto in the Lease. For
purposes of this First Amendment, the IPO Completion Date shall be the first day
of the first calendar month after Ugly Duckling Corporation completes a sale of
its equity securities pursuant to a public offering registered with the
Securities and Exchange Commission.
2. Landlord owns the Land and leases the Land to Tenant pursuant to a
Land Lease Agreement dated April 1, 1994 (the "Lease").
3. Landlord and Tenant have entered into an Agreement For Purchase And
Sale of Property for the sale of the Land by Landlord to Tenant (the "Purchase
Agreement").
4. Tenant has requested that Landlord reduce the Land Rent payable by
Tenant from and after the First Amendment Date to the date of Tenant's
acquisition of the Land pursuant to the Purchase Agreement.
5. Landlord is willing to consent to the reduction of the Land Rent
under the terms and conditions stated in this First Amendment.
NOW, THEREFORE, in consideration of the respective covenants of the
parties stated herein and the respective performances of the parties required
hereby, Landlord and Tenant hereby mutually agree to the following amendments to
the Lease, all effective as of the First Amendment Date:
Section 3.1 of the Lease is entirely amended and restated as follows:
3.1 Amount. Commencing on the First Amendment Date, Tenant shall pay to
Landlord rent for each month of the Land Term ("Land Rent"). The Land
Rent payable by Tenant to Landlord for each month after the First
Amendment Date shall be Five Thousand Dollars ($5,000.00). The Land Rent
shall be
<PAGE> 37
payable in monthly installments on the first day of each calendar month
during the Lease Term, commencing on the First Amendment Date.
Except as modified by this First Amendment, the Lease remains in full force and
effect and is hereby ratified and affirmed by Landlord and Tenant, all effective
as of the First Amendment Date.
IN WITNESS WHEREOF, Landlord and Tenant have caused this First Amendment
to be executed as of the dates shown below, effective as of the First Amendment
Date. Though executed prior to the First Amendment Date, this First Amendment
shall not be effective until the First Amendment Date.
Landlord: Verde Investments, Inc.,
an Arizona corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
Tenant: Ugly Duckling Car Sales, Inc.,
an Arizona corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
Approved by Ugly Duckling Corporation, a Delaware corporation, as guarantor of
the Lease.
Ugly Duckling Corporation,
a Delaware corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
2
<PAGE> 38
EXHIBIT D
FIRST AMENDMENT
TO
BUILDING LEASE AGREEMENT
TUCSON CREDIT CORP. OFFICES
FIRST AMENDMENT DATE: IPO COMPLETION DATE
LANDLORD: VERDE INVESTMENTS, INC.
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
TENANT: CHAMPION ACCEPTANCE CORPORATION
F/K/A UGLY DUCKLING CREDIT CORPORATION
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
PROPERTY: 3434 EAST BROADWAY BOULEVARD
TUCSON, ARIZONA
RECITALS
The parties acknowledge that the following recitals are true, correct
and a material part of this First Amendment to Building Lease Agreement (this
"First Amendment"):
1. Unless otherwise defined in this First Amendment, all capitalized
terms used herein shall have the definitions ascribed thereto in the Lease. For
purposes of this First Amendment, the IPO Completion Date shall be the first day
of the first calendar month after Ugly Duckling Corporation completes a sale of
its equity securities pursuant to a public offering registered with the
Securities and Exchange Commission.
2. Landlord owns the Property and leases the Property to Tenant pursuant
to a Building Lease Agreement dated January 1, 1994 (the "Lease").
3. Landlord and Tenant have entered into an Agreement For Purchase And
Sale of Property for the sale of the Property by Landlord to Tenant (the
"Purchase Agreement").
4. Tenant has requested that Landlord reduce the Building Rent payable
by Tenant from and after the First Amendment Date to the date of Tenant's
acquisition of the Property pursuant to the Purchase Agreement.
5. Landlord is willing to consent to the reduction of the Building Rent
under the terms and conditions stated in this First Amendment.
NOW, THEREFORE, in consideration of the respective covenants of the
parties stated herein and the respective performances of the parties required
hereby, Landlord and Tenant hereby mutually agree to the following amendments to
the Lease, all effective as of the First Amendment Date:
Section 3.1 of the Lease is entirely amended and restated as follows:
3.1 Amount. Commencing on the First Amendment Date, Tenant shall pay to
Landlord rent for each month of the Building Term ("Building Rent"). The
Building Rent payable by Tenant to Landlord for each
<PAGE> 39
month after the First Amendment Date shall be Eight Thousand Three
Hundred Thirty-Three and 33/100 Dollars ($8,333.33). The Building Rent
shall be payable in monthly installments on the first day of each
calendar month during the Lease Term, commencing on the First Amendment
Date.
Except as modified by this First Amendment, the Lease remains in full force and
effect and is hereby ratified and affirmed by Landlord and Tenant, all effective
as of the First Amendment Date.
IN WITNESS WHEREOF, Landlord and Tenant have caused this First Amendment
to be executed as of the dates shown below, effective as of the First Amendment
Date. Though executed prior to the First Amendment Date, this First Amendment
shall not be effective until the First Amendment Date.
Landlord: Verde Investments, Inc.,
an Arizona corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
Tenant: Champion Acceptance Corporation
f/k/a Ugly Duckling Credit Corporation
an Arizona corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
Approved by Ugly Duckling Corporation, a Delaware corporation, as guarantor of
the Lease.
Ugly Duckling Corporation,
a Delaware corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
2
<PAGE> 40
FIRST AMENDMENT
TO
LAND LEASE AGREEMENT
GILBERT CREDIT CORP. OFFICES
FIRST AMENDMENT DATE: IPO COMPLETION DATE
LANDLORD: VERDE INVESTMENTS, INC.
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
TENANT: CHAMPION ACCEPTANCE CORPORATION
F/K/A UGLY DUCKLING CREDIT CORPORATION
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
LAND: 1030 NORTH COLORADO
GILBERT, ARIZONA 85233
RECITALS
The parties acknowledge that the following recitals are true, correct
and a material part of this First Amendment to Land Lease Agreement (this "First
Amendment"):
1. Unless otherwise defined in this First Amendment, all capitalized
terms used herein shall have the definitions ascribed thereto in the Lease. For
purposes of this First Amendment, the IPO Completion Date shall be the first day
of the first calendar month after Ugly Duckling Corporation completes a sale of
its equity securities pursuant to a public offering registered with the
Securities and Exchange Commission.
2. Landlord owns the Land and leases the Land to Tenant pursuant to a
Land Lease Agreement dated July 1, 1994 (the "Lease").
3. Landlord and Tenant have entered into an Agreement For Purchase And
Sale of Property for the sale of the Land by Landlord to Tenant (the "Purchase
Agreement").
4. Tenant has requested that Landlord reduce the Land Rent payable by
Tenant from and after the First Amendment Date to the date of Tenant's
acquisition of the Property pursuant to the Purchase Agreement.
5. Landlord is willing to consent to the reduction of the Land Rent
under the terms and conditions stated in this First Amendment.
NOW, THEREFORE, in consideration of the respective covenants of the
parties stated herein and the respective performances of the parties required
hereby, Landlord and Tenant hereby mutually agree to the following amendments to
the Lease, all effective as of the First Amendment Date:
Section 3.1 of the Lease is entirely amended and restated as follows:
<PAGE> 41
3.1 Amount. Commencing on the First Amendment Date, Tenant shall pay to
Landlord rent for each month of the Land Term ("Land Rent"). The Land
Rent payable by Tenant to Landlord for each month after the First
Amendment Date shall be Six Thousand Six Hundred Sixty-Six and 67/100
Dollars ($6,667.00). The Land Rent shall be payable in monthly
installments on the first day of each calendar month during the Lease
Term, commencing on the First Amendment Date.
Except as modified by this First Amendment, the Lease remains in full force and
effect and is hereby ratified and affirmed by Landlord and Tenant, all effective
as of the First Amendment Date.
IN WITNESS WHEREOF, Landlord and Tenant have caused this First Amendment
to be executed as of the dates shown below, effective as of the First Amendment
Date. Though executed prior to the First Amendment Date, this First Amendment
shall not be effective until the First Amendment Date.
Landlord: Verde Investments, Inc.,
an Arizona corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
Tenant: Champion Acceptance Corporation,
f/k/a Ugly Duckling Credit Corporation
an Arizona corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
Approved by Ugly Duckling Corporation, a Delaware corporation, as guarantor of
the Lease.
Ugly Duckling Corporation,
a Delaware corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
2
<PAGE> 42
FIRST AMENDMENT
TO
BUILDING LEASE AGREEMENT
TEMPE RECONDITIONING FACILITY
FIRST AMENDMENT DATE: IPO COMPLETION DATE
LANDLORD: VERDE INVESTMENTS, INC.
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
TENANT: CHAMPION ACCEPTANCE CORPORATION
F/K/A UGLY DUCKLING CREDIT CORPORATION
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
PROPERTY: 1002 SOUTH 52ND STREET
TEMPE, ARIZONA
RECITALS
The parties acknowledge that the following recitals are true, correct
and a material part of this First Amendment to Building Lease Agreement (this
"First Amendment"):
1. Unless otherwise defined in this First Amendment, all capitalized
terms used herein shall have the definitions ascribed thereto in the Lease. For
purposes of this First Amendment, the IPO Completion Date shall be the first day
of the first calendar month after Ugly Duckling Corporation completes a sale of
its equity securities pursuant to a public offering registered with the
Securities and Exchange Commission.
2. Landlord owns the Property and leases the Property to Tenant pursuant
to a Building Lease Agreement dated February 1, 1994 (the "Lease").
3. Landlord and Tenant have entered into an Agreement For Purchase And
Sale of Property for the sale of the Property by Landlord to Tenant (the
"Purchase Agreement").
4. Tenant has requested that Landlord reduce the Building Rent payable
by Tenant from and after the First Amendment Date to the date of Tenant's
acquisition of the Property pursuant to the Purchase Agreement.
5. Landlord is willing to consent to the reduction of the Building Rent
under the terms and conditions stated in this First Amendment.
NOW, THEREFORE, in consideration of the respective covenants of the
parties stated herein and the respective performances of the parties required
hereby, Landlord and Tenant hereby mutually agree to the following amendments to
the Lease, all effective as of the First Amendment Date:
Section 3.1 of the Lease is entirely amended and restated as follows:
3.1 Amount. Commencing on the First Amendment Date, Tenant shall pay to
Landlord rent for each
<PAGE> 43
month of the Building Term ("Building Rent"). The Building Rent payable
by Tenant to Landlord for each month after the First Amendment Date
shall be Five Thousand Dollars ($5,000.00). The Building Rent shall be
payable in monthly installments on the first day of each calendar month
during the Lease Term, commencing on the First Amendment Date.
Except as modified by this First Amendment, the Lease remains in full force and
effect and is hereby ratified and affirmed by Landlord and Tenant, all effective
as of the First Amendment Date.
IN WITNESS WHEREOF, Landlord and Tenant have caused this First Amendment
to be executed as of the dates shown below, effective as of the First Amendment
Date. Though executed prior to the First Amendment Date, this First Amendment
shall not be effective until the First Amendment Date.
Landlord: Verde Investments, Inc.,
an Arizona corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
Tenant: Champion Acceptance Corporation
f/k/a Ugly Duckling Credit Corporation
an Arizona corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
Approved by Ugly Duckling Corporation, a Delaware corporation, as guarantor of
the Lease.
Ugly Duckling Corporation,
a Delaware corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
2
<PAGE> 44
FIRST AMENDMENT
TO
SUBLEASE AGREEMENT
FIRST AMENDMENT DATE: IPO COMPLETION DATE
LESSEE: VERDE INVESTMENTS, INC.
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
SUBLESSEE: UGLY DUCKLING CAR SALES, INC.
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
PROPERTY: 3737 SOUTH PARK
TUCSON, ARIZONA 85713
RECITALS
The parties acknowledge that the following recitals are true, correct
and a material part of this First Amendment to Sublease Agreement (this "First
Amendment"):
1. Unless otherwise defined in this First Amendment, all capitalized
terms used herein shall have the definitions ascribed thereto in the Lease. For
purposes of this First Amendment, the IPO Completion Date shall be the first day
of the first calendar month after Ugly Duckling Corporation completes a sale of
its equity securities pursuant to a public offering registered with the
Securities and Exchange Commission.
2. Lessee leases the Property to Sublessee pursuant to a Sublease
Agreement dated January 1, 1994 (the "Sublease").
3. Sublessee has requested that Lessee reduce the Sublease Rent payable
by Sublessee from and after the First Amendment Date.
4. Lessee is willing to consent to the reduction of the Sublease Rent
under the terms and conditions stated in this First Amendment.
NOW, THEREFORE, in consideration of the respective covenants of the
parties stated herein and the respective performances of the parties required
hereby, Lessee and Sublessee hereby mutually agree to the following amendments
to the Sublease, all effective as of the First Amendment Date:
Section 3.1 of the Sublease is entirely amended and restated as follows:
3.1 Sublease Rent. Commencing on the First Amendment Date, Sublessee
shall pay to Lessee rent for each month of the Term ("Sublease Rent").
The Sublease Rent payable by Sublessee to Lessee for each month after
the First Amendment Date shall be Twelve Thousand Five Hundred Dollars
($12,500.00). The Sublease Rent shall be payable in monthly installments
on the first day of each calendar month during the
<PAGE> 45
Term, commencing on the First Amendment Date. Upon any increase in rent
payable under the Lease, the Sublease Rent shall be increased by the
same amount.
Section 3.3 of the Sublease is deleted.
Except as modified by this First Amendment, the Sublease remains in full force
and effect and is hereby ratified and affirmed by Lessee and Sublessee, all
effective as of the First Amendment Date.
IN WITNESS WHEREOF, Lessee and Sublessee have caused this First
Amendment to be executed as of the dates shown below, effective as of the First
Amendment Date. Though executed prior to the First Amendment Date, this First
Amendment shall not be effective until the First Amendment Date.
Landlord: Verde Investments, Inc.,
an Arizona corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
Tenant: Ugly Duckling Car Sales, Inc.
an Arizona corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
Approved by Ugly Duckling Corporation, a Delaware corporation, as guarantor of
the Lease.
Ugly Duckling Corporation,
a Delaware corporation
By: __________________________________
Name: __________________________________
Its: __________________________________
Date: __________________________________
2
<PAGE> 1
EXHIBIT 10.23
ESPLANADE SUBLEASE
AGREEMENT
(ENVIROTEST/UGLY DUCKLING - SUITE 1150)
This Esplanade Sublease Agreement (Envirotest/Ugly Duckling - Suite
1150) is entered into as of April 15, 1996 (the "Sublease Date") between the
undersigned Subtenant and Sublandlord.
BACKGROUND
A. Landlord and Tenant are parties to the Master Lease covering
the Premises generally described as Suite 1150 located at 2525 East Camelback
Road, Phoenix, Arizona. The Rentable Area of the Premises is 13,324 square feet.
B. Tenant, as the Sublandlord, desires to sublease the Premises to
Subtenant upon the terms and conditions of this Sublease.
C. As of the Consent Date, Landlord has executed the Consent
authorizing the execution of this Sublease.
For valuable consideration, Sublandlord and Subtenant agree as follows:
AGREEMENT
1. Incorporation and Defined Terms. This Sublease incorporates by
reference all of the terms and conditions of the Master Lease, and initially
capitalized terms that are used in this Sublease but not defined in this
Sublease will have the meanings ascribed to them in the Master Lease. In
addition to those terms defined elsewhere in this Sublease or in the Master
Lease, the following defined terms are used in this Sublease:
a. "Consent" means the attached Landlord Consent to
Sublease.
b. "Landlord" means Esplanade Office Limited Partnership,
a Delaware limited partnership, and its successors and
assigns under the Master Lease.
c. "Master Lease" means the Esplanade Lease Agreement
(Office) Parcel 1B, dated June 22, 1994, between
Landlord and Tenant, covering the 13,324 square feet
known as Suite 1150 located on the 11th Floor of the
Building.
<PAGE> 2
d. "Obligations" means all duties, obligations, covenants,
liabilities, indemnities and the like of the applicable
party under the Master Lease or this Sublease, as
indicated in the text of this Sublease, throughout the
Sublease Term.
e. "Occupancy Date" means April 27, 1996.
f. "Rentable Sublease Square Feet" means the rentable
square footage of the Sublease Space as confirmed and
approved by Subtenant and Sublandlord under
Paragraph 9 below.
g. "Sublandlord" means Envirotest Systems Corp., a Delaware
corporation. Sublandlord is referred to as the "Tenant"
under the Master Lease, and is likewise sometimes
referred to as the Tenant in this Sublease.
h. "Sublease" means this Esplanade Sublease Agreement
(Envirotest/Ugly Duckling - Suite 1150) and the attached
Consent, as either or both are amended from time to time
during the Sublease Term.
i. "Sublease Base Rent" means the following base rents to
be paid by Subtenant under this Sublease:
* From the Sublease Rent Commencement Date of
April 27, 1996 through August 31, 1997, $20.00
per Rentable Sublease Square Foot per annum
($20.00 X 13,324 X 1/12 = $22,206.67 per month).
* From September 1, 1997 through August 31, 1999,
$22.00 per Rentable Sublease Square Foot per
annum ($22.00 X 13,324 X 1/12 = $24,427.33 per
month).
* From September 1, 1999 through August 31, 2001,
$24.00 per Rentable Sublease Square Foot per
annum ($24.00 X 13,324 X 1/12 = $26,648.00 per
month).
j. "Sublease Expiration Date" means the expiration date of
the Sublease Term, as defined below.
-2-
<PAGE> 3
k. "Sublease Rent Commencement Date" means April 27, 1996.
l. "Sublease Space" means the entire Premises described in
the Master Lease.
m. "Sublease Term" means the Original Sublease Term as may
be extended by any Extension Term established in this
Sublease. The "Original Sublease Term" means the term
commencing on the Sublease Date and expiring on August
31, 2001.
n. "Subtenant" means Ugly Duckling Holdings, Inc., an
Arizona corporation.
o. "Subtenant's Proportionate Share of Building Direct
Expense" means 5 and 68/100 percent (5.68%) which was
obtained by dividing the Rentable Space Square Feet by
the Rental Area and the Building Office Space (i.e.,
234,658 square feet), as set forth in the Master Lease,
and multiplying the resulting quotient to the fourth
decimal place by one hundred (100).
p. "Subtenant's Proportionate Share of Project Direct
Expense" means 1 and 21/100 percent (1.21%).
2. Incorporation of Master Lease. The Master Lease, a copy of
which is attached as Exhibit "A" to this Sublease, is incorporated into and
made a part of this Sublease by this reference.
a. Subtenant assumes, agrees to perform, and agrees to be
bound by each and every one of the Obligations of the
Tenant stated in the Master Lease accruing on and after
the Sublease Date (as if Subtenant were the Tenant, and
Sublandlord were the Landlord, under the Master Lease)
throughout the end of the Sublease Term. In the event of
any conflict between the terms of this Sublease and
those stated in the Master Lease, the terms of this
Sublease shall govern for the purposes of resolving
conflicts between the Subtenant and Sublandlord only.
b. Because Sublandlord and Subtenant have agreed to
incorporate the Master Lease by reference, the
provisions stated in the Master Lease shall be deemed
modified as they apply to the Sublandlord-Subtenant
relationship, to the extent reasonably necessary, so
that application of
-3-
<PAGE> 4
the Master Lease provisions will be consistent with the
purpose and intentions of the parties in entering into
this Sublease. Except as otherwise provided in this
Sublease, in any case where a grace period would be
granted to the Tenant under the Master Lease with
respect to the performance or observance of any
covenant, condition, or obligation, the Subtenant shall
be deemed to be in default under this Sublease if it has
not performed or observed the covenant, condition, or
obligation within a grace period of the same length as
that stated in the Master Lease. In any case where the
Master Lease would require or permit the Tenant to
notify the Landlord of any matter, the Subtenant shall
give to Sublandlord and Landlord any corresponding
required or permitted notice in writing on or before the
date by which the Tenant under the Master Lease would be
required or permitted to give the notice.
3. Sublease. Subtenant agrees to sublease from Sublandlord, and
Sublandlord agrees to sublease to Subtenant, the Sublease Space for the
Sublease Term upon the terms and conditions in this Sublease. The Sublease
Space constitutes the entire Premises leased to Sublandlord by Landlord under
the Master Lease. This Sublease will not be valid and binding on Sublandlord
and Subtenant until Landlord has executed the Consent.
4. Continued Partial Occupancy by Sublandlord. Subtenant agrees to
permit Sublandlord to occupy that portion of the Sublease Space designated as
Rooms 3 through 17, inclusive (which is located to the northwest of the
reception area), and to store one wire rack of computer equipment and a floor
standing PBX telephone system in the Sublease Space, until May 31, 1996,
without any compensation or other consideration paid or payable by Sublandlord
to Subtenant.
5. Subtenant Covenants. Subtenant covenants to Sublandlord that:
a. Subtenant will perform in a timely and complete manner
all Obligations of Subtenant under this Sublease.
b. Subtenant will perform in a timely and complete manner
all Obligations of Tenant under the Master Lease to the
extent the Obligations relate to the Sublease Space.
c. Subtenant has reviewed and understands the terms of the
Master Lease and this Sublease.
-4-
<PAGE> 5
d. Subtenant will not perform any act or fail to perform
any act with respect to the Sublease Space that would
constitute a default under the Master Lease.
6. Sublandlord Covenants. Sublandlord covenants to Subtenant that:
a. Sublandlord will perform in a timely and complete manner
all Obligations of Sublandlord under this Sublease.
b. Sublandlord will perform in a timely and complete manner
all Obligations of Tenant under the Master Lease, to
the extent they are not performed by Subtenant
including: (i) the payment of all Monthly Base Rent at
the per square foot rental rate enumerated in the Master
Lease; (ii) the payment of Tenant's Proportionate Share
of Building Direct Expenses and Tenant's Proportionate
Share of Project Direct Expenses enumerated in the
Master Lease; and (iii) the payment of any other
additional rent due under the Master Lease.
c. Sublandlord has reviewed and understands the terms of
the Master Lease and this Sublease.
7. Direct Payments to Landlord. During the Sublease Term, Subtenant
agrees to pay the Sublease Base Rent, Subtenant's Proportionate Share of Project
Direct Expense, and any and all other additional rent and other payments
(including late charges, interest, and fees) corresponding to the Sublease Space
and due under the Master Lease, directly to Landlord at the times and in the
manner required under this Sublease or under the Master Lease, as appropriate.
8. Other Compensation. Sublandlord and Subtenant acknowledge that
Article 15 of the Master Lease contains a provision that obligates Sublandlord
to pay to Landlord certain fees, rent, or other compensation collected on any
Sublease Agreement over and above stated rent due under the Master Lease.
Sublandlord and Subtenant acknowledge that Landlord has not waived this
provision. As consideration for Landlord's consent to this Sublease Agreement,
Sublandlord and Subtenant represent to Landlord that there are no oral or
written agreements for fees, rent, or other compensation to Sublandlord between
Sublandlord and Subtenant regarding the Sublease of the Premises other than
those set forth in the Sublease. Landlord acknowledges that Subtenant, pursuant
to an Equipment Sale Agreement, has agreed to purchase from Sublandlord certain
furniture, equipment, and other personal property currently located in the
Sublease Space, and Landlord acknowledges that the proceeds of this sale are
separate and distinct from this Sublease of the Sublease Space and do not
constitute additional rent due Landlord for purposes of Article 15 of the
Master Lease.
-5-
<PAGE> 6
9. Sublease Space Confirmations. Sublandlord and Subtenant agree
that they, respectively, have had ample opportunity to review and measure the
Rentable Sublease Square Feet and agree that the Rentable Area of the Premises
is conclusively deemed to be 13,324 square feet for all purposes under this
Sublease and the Master Lease. Recognizing that different methods of measuring
the square footage of the Premises may lead to different results, Sublandlord
and Subtenant agree that 13,324 square feet in an accurate and agreeable
measurement of the square footage of the Premises and each agrees not to claim
any error or discrepancy in the measurement for any purpose under this Sublease
and the Master Lease.
10. Use. Subtenant agrees to use the Sublease Space for general
office use only and no other use without the prior consent of the Landlord
under the terms and conditions of the Master Lease. Subtenant further agrees to
be bound by all use restrictions in the Master Lease.
11. Compliance with Office Building Rules and Regulations. A copy
of the Office Building Rules and Regulations pertaining to the Premises is
attached as "Exhibit "E" to the Master Lease. Subtenant has reviewed and
understands the Office Building Rules and Regulations. Subtenant agrees to
observe and comply with the terms and provisions of such Office Building Rules
and Regulations, as they may be amended or modified from time to time under the
terms of the Master Lease.
12. Signage. Subtenant understands that Article 51 of the Master
Lease specifically provides signage rights to Sublandlord. By its execution of
this Sublease, Sublandlord intends to transfer all signage rights available to
Sublandlord under the Master Lease to Subtenant. Any additional signage rights
available to Subtenant will be solely those made available by Landlord to
Subtenant under the Consent.
13. Parking. Subtenant is entitled to utilize up to thirteen (13)
reserved and up to twenty-six (26) non-reserved parking spaces available under
the terms of the Master Lease. Commencing with the Sublease Rent Commencement
Date, Subtenant agrees to pay directly to Landlord the Parking Charge specified
in the Master Lease for the maximum number of parking spaces available to
Subtenant.
14. Cancellation Right. Sublandlord and Subtenant agree that
neither will retain any cancellation rights under Article 50 of the Master
Lease with respect to the Sublease Space, and Article 50 of the Master Lease
will be deleted in its entirety.
15. Option to Renew. Sublandlord and Subtenant agree that neither
will retain any renewal options contained in Article 49 of the Master Lease
with respect to the Sublease Space, and Article 49 of the Master Lease will be
deleted in its entirety. Notwithstanding the foregoing, Subtenant, and only
Subtenant, will have the following renewal option:
-6-
<PAGE> 7
a. The Original Sublease Term may be extended only by Subtenant for
one (1) additional five (5) year term ("Extension Term") only if the following
conditions are satisfied: (i) Subtenant delivers written notice to Landlord of
Subtenant's extension election at least ninety (90) days and no earlier than
one hundred eighty (180) days before the expiration of the Original Sublease
Term; (ii) Subtenant has fully and faithfully performed its obligations under
the Master Lease and Sublease through the Original Sublease Term; and (iii)
neither Subtenant nor Tenant are in default under the Master Lease or the
Sublease and no event has occurred or fact exists which, but for the passage of
time or the giving of notice, would constitute a default under the Master Lease
or the Sublease. If any of these conditions are not satisfied at the time of
the delivery of the extension by Subtenant, the extension election will be
deemed ineffective and not valid. This ability to extend will be a right
personal only to Ugly Duckling Holdings, Inc. and may not be assigned to any
other subsequent tenant, unless Landlord otherwise agrees specifically in
writing at the time of the assignment, in Landlord's sole discretion.
b. During the Extension Term, all terms and provision of the
Master Lease and Sublease will remain in full force and effect, except that the
Monthly Base Rent will be established in the manner set forth below, Landlord
will not be obligated to construct any tenant improvements or make or pay any
tenant improvement allowance during the Extension Term or to make any rent or
other concessions, and no options to extend will be available or enforceable.
c. The Monthly Base Rent payable by Subtenant under this Lease
during the Extension Term will be determined in accordance withe the following
procedures. During the twenty (20) day period following Subtenant's extension
election, Landlord and Subtenant will negotiate in good faith to establish the
rent to be paid for the Sublease Space throughout the Extension Term based on
the fair rental value of the Sublease Space at the expiration of the Original
Sublease Term, taking into consideration length of lease, tenant improvement
allowances, parking charges, differing base years, rent concessions, and other
relevant economic factors. If an agreement establishing the rent for the
Extension Term is reached, the parties immediately will evidence the agreement
in a written instrument signed by both parties.
d. If the parties are unable to agree upon a fair rental value for
the Leased Premises within the twenty (20) day negotiation period and
Subtenant, by written notice to Landlord delivered prior to expiration of the
twenty (20) day negotiation period described above, notifies Landlord that
Subtenant still wishes to exercise its option to renew (with Subtenant's
written notice being referred to as the "Tenant Extension Confirmation"),
Landlord and Subtenant will each select a qualified and independent MAI
appraiser of its choice with at least five (5) years' experience in appraising
office projects in the Phoenix area and will each notify the other party in
writing within ten (10) days after the expiration of the twenty (20) day
negotiation period of their selected appraiser.
e. By no later than thirty (30) days after the selection of both
appraisers, the appraisers will determine the fair rental value of the Sublease
Space. If the fair rental value determined by the two (2) appraisers differs by
less than five percent (as determined by dividing (i)
-7-
<PAGE> 8
the difference between the higher fair rental value and the lower fair rental
value applicable to the first year of the Extension Term by (ii) the lower fair
rental value applicable to the first year of the Extension Term), the fair
rental value for the Sublease Space will be the higher of the two fair rental
values.
f. If the two (2) appraisals differ by five percent (5%)
or more, as determined above, the appraisers that are selected will each select
a third independent MAI appraiser with similar qualifications. The third
appraiser will be selected within a period of ten (10) days after preparation of
the later of the two (2) appraisals described above. By no later than thirty
(30) days after selection of the third appraiser, the three (3) appraisers will
make a unanimous determination of the fair rental value for the Sublease Space
at the expiration of the Original Sublease Term and will send a copy of their
determination to Landlord and Subtenant. If the three appraisers cannot agree
upon a fair rental value of the Sublease Space at the expiration of the Original
Sublease Term, the joint decision of any two of the appraisers will establish
the fair rental value for the Extension Term.
g. If either party fails to select an appraiser and to
notify the other party within the time period described above of the identity of
that appraiser, the other party will notify the non-selecting party of the
non-selecting party's failure to select an appraiser, and the non-selecting
party will have an additional period of five (5) business days after the
receipt of the additional notice to select an appraiser. If the non-selecting
party again fails to select a MAI appraiser during the additional five (5)
business day period, the appraiser selected by the other party will determine
the fair value of the Sublease Spaces and the determination will be binding on
both parties.
h. Landlord and Subtenant will each bear the full expense
of the appraiser each selects, and the expense of the third appraiser will be
shared equally by Landlord and Subtenant.
i. To memorialize Subtenant's election to exercise its
extension options and the agreement of Landlord and Subtenant as to the new
Monthly Base Rent during any Extension Term, Landlord may require Subtenant to
execute a "Lease Extension Agreement" or similar document.
16. Right of First Refusal. Sublandlord and Subtenant, agree that
neither will retain any right to exercise the rights of first refusal under
Article 52 of the Master Lease and Article 52 of the Master Lease will be
deleted in its entirety. Notwithstanding the foregoing, Subtenant, and only
Subtenant, will have the following first right of refusal:
a. During the Sublease Term, and so long at the Subtenant
is not in default under the Master Lease or the Sublease and no event has
occurred or fact exists which, but for the passage of time or the giving of
notice, would constitute a default under the Master Lease or
-8-
<PAGE> 9
the Sublease, Landlord, before entering into a lease with any third party for
the contiguous space described on Exhibit "B" to this Sublease and located on
the 11th floor of the Building ("Additional 11th Floor Space"), will notify
Subtenant in writing of the monthly rent, rental increases, and other economic
provisions ("Rental Terms") upon which Landlord would be willing to lease the
Additional 11th Floor Space directly to Subtenant, and Subtenant will have the
first right of refusal ("FRR") to lease the Additional 11th Floor Space. This
first right of refusal is not applicable unless and until the Additional 11th
Floor Space is vacated by the existing tenant (Unisys Corporation) or its
successors and assigns.
b. If, within five (5) business days after receipt of
Landlord's notice, Subtenant delivers to Landlord a written notice of
Subtenant's intent to lease the Additional 11th Floor Space for a lease term
not to exceed the Sublease Term (including any then exercised lease renewal
options), Landlord will proceed to negotiate directly with Subtenant for a
lease of the Additional 11th Floor Space on the same terms as contained in the
Master Lease and the Sublease, except: (1) the Rental Terms will be
incorporated into a new lease or an amendment to the Master Lease and Sublease;
(ii) if a new lease is utilized, the new lease and the Master Lease and
Sublease will be cross-defaulted; and (iii) lease terms that are dependent upon
the size of the premises, such as Subtenant's proportionate share of expenses,
will be modified accordingly. If the lease renewal option available under
Paragraph 15 of the Sublease has not been exercised, the new lease or lease
amendment also will contain a renewal option similar to that contained in the
Sublease at the fair rental value for the Additional 11th Floor Space. If
Subtenant does not deliver its notice of intent to lease the Additional 11th
Floor Space in a timely manner, or if Landlord and Subtenant are unable to
agree on the terms of a lease for the Additional 11th Floor Space within ten
(10) days following Subtenant's delivery of its written notice of intent,
Subtenant's FRR for the Additional 11th Floor Space will terminate, and
Landlord will have the right to lease the Additional 11th Floor Space or any
portion of the Additional 11th Floor Space to a third party on the same or
substantially similar Rental Terms.
c. This first right of refusal to lease the Additional
11th Floor Space is a one time right that is personal only to Ugly Duckling
Holdings, Inc. and is not transferrable or assignable and is not exercisable by
the Sublandlord under the Sublease.
17. Alterations. Subtenant agrees to take possession of the
Sublease Space in an "AS IS--WHERE IS" condition.
18. Termination. Sublandlord and Subtenant agree that, if either
receives a default of termination notice from Landlord under the Master Lease
or this Sublease, they will deliver a copy of the notice immediately to the
other party. No additional grace or notice and cure periods will apply to this
Sublease beyond the grace or notice and cure periods described in the Master
Lease.
-9-
<PAGE> 10
19. Default by Subtenant--Sublandlord Remedy. In the event of any
material default or breach by Subtenant under the terms of this Sublease or
under Article 21 of the Master Lease, Sublandlord shall have all of the rights
and remedies against Subtenant that Landlord would have against Sublandlord
under Article 22 of the Master Lease if Sublandlord was in default or breach
under the Master Lease.
20. Representations and Warranties of Subtenant.
a. Organization, Corporate Power and Good Standing.
Subtenant represents and warrants to Sublandlord and
Landlord that it is duly incorporated, validly existing
and in good standing under the laws of Arizona.
b. Authority. Subtenant represents and warrants to
Sublandlord and Landlord that Subtenant has all
requisite corporate power and authority to enter into
this Sublease.
c. Compliance with Applicable Laws. Subtenant represents,
warrants, and covenants to Sublandlord and Landlord that
it is presently in compliance, and that it will continue
throughout the Sublease Term to remain in compliance,
with all applicable laws, rules, and regulations
relating to or otherwise affecting its business
operations.
d. No Conflicts. Subtenant represents and warrants to
Sublandlord and Landlord that this Sublease does not
create any default, breach, or other conflict with or
under any other contract, agreement or obligation to
which Subtenant is a party or by which any of
Subtenant's assets are bound.
e. Financial Condition. Subtenant represents and warrants
that Subtenant has delivered to Sublandlord financial
statements that fairly present the financial condition
of Subtenant as of December 31, 1995 in accordance with
generally accepted accounting procedures.
21. Representations and Warranties of Sublandlord.
a. Organization, Corporate Power and Good Standing.
Sublandlord represents and warrants to Subtenant and
Landlord that it is duly incorporated, validly existing
and in good standing under the laws of Delaware, and
that it is authorized to do business in Arizona.
-10-
<PAGE> 11
b. Authority. Sublandlord represents and warrants to
Subtenant and Landlord that Sublandlord has all
requisite corporate power and authority to enter into
this Sublease.
c. Compliance with Applicable Laws. Sublandlord
represents, warrants, and covenants to Subtenant and
Landlord that it is presently in compliance, and that it
will continue throughout the Sublease Term to remain in
compliance, with all applicable laws, rules, and
regulations relating to or otherwise affecting its
business operations pertaining to the Sublease Space.
d. No Conflicts. Sublandlord represents and warrants to
Subtenant and Landlord that this Sublease does not
create any default, breach, or other conflict with or
under any other contract, agreement, or obligation to
which Sublandlord is a party or by which any of
Sublandlord's assets are bound.
22. Indemnification of Sublandlord. Subtenant agrees to indemnify
Sublandlord and hold Sublandlord harmless from and against any and all
penalties, costs, expenses (including reasonable attorneys' fees), claims,
demands, and causes of action arising out of or pertaining to any acts, events
or omissions occurring on or after the Sublease Date, including claims based
upon imputed negligence, that arise out of or in connection with: (a) any
accident or other occurrence in or on the facilities (including, without
limitation, stairways passageways or hallways), the use of which Subtenant may
have in conjunction with other tenants of the Building, when such injury or
damage is caused in part or in whole by the act or omission of Subtenant, its
agents, contractors, servants, employees, licensees, invitees, permittees,
customers, clients or guests; (b) the condition of, or any defect in, the
Sublease Space or any part of the Sublease Space or any improvements of the
Sublease Space; (c) the condition of, or any defect in, all or any part of
Subtenant's fixtures or equipment; or (d) the use or occupancy of the Sublease
Space by Subtenant. If any action or proceeding is brought against Sublandlord
for any of the foregoing reasons, Subtenant, upon notice from Sublandlord,
shall defend the same at Subtenant's expense by counsel satisfactory to
Sublandlord.
23. Insurance. Subtenant shall at its own cost and expense procure
and maintain during the entire Sublease Term and any extensions of this
Sublease workmen's compensation insurance as required by statute as well as
comprehensive public liability insurance covering the Sublease Space and their
surrounding areas and naming Sublandlord as an additional insured in such
amounts as Sublandlord may from time to time require. The initial liability
coverage under such comprehensive public liability insurance shall not be less
than $1,000,000 combined single limit, together with excess liability coverage
of not less than $5,000,000, including fire damage legal liability coverage in
an amount adequate to cover the cost of replacement of the Sublease Space. The
comprehensive public liability insurance shall be an occurrence type policy and
also shall contain
-11-
<PAGE> 12
cross liability endorsements and insure performance by Subtenant of the
indemnity provisions provided in Paragraph 22. The limits of the insurance
shall not, however, limit the liability of Subtenant under Paragraph 22. The
originals of all policies shall remain in possession of Subtenant; however,
Subtenant shall provide Sublandlord a certificate of insurance confirming the
coverage prior to the commencement of this Sublease and at each subsequent
insurance renewal. Subtenant also shall maintain in full force and effect
throughout the Sublease Term all risks insurance coverage in an amount adequate
to cover the cost of replacement of all personal property (including inventory)
and contents in the Sublease Space. All policies of insurance shall name
Sublandlord as an additional insured and shall provide that such insurance will
not be cancelled or subject to reduction of coverage or other modification
except after thirty (30) days written notice to Sublandlord. Subtenant shall
furnish policy renewals or binders to Sublandlord not less than ten (10) days
prior to the expiration of any policy required under this Sublease. All
insurance policies procured shall be issued by a responsible company or
companies authorized to do business in the State of Arizona and reasonably
satisfactory to Sublandlord.
24. Third-Party Beneficiary. Except for Landlord, which is an
express beneficiary of this Sublease, Sublandlord and Subtenant do not intend
that this Sublease benefit any third party.
25. Amendments. No amendments to this Sublease will be valid
unless in writing, signed by Sublandlord and Subtenant, and consented to by
Landlord.
26. Notices. All notices between Sublandlord and Subtenant under
this Sublease will be delivered in the manner required under Article 26 of the
Master Lease to the addresses set forth below.
Envirotest Systems, Inc.
246 Sobranty Way
Sunnyvale, California 94086
Attention: General Counsel
and
Ugly Duckling Holdings, Inc.
2525 East Camelback Road, Suite 1150
Phoenix, Arizona 85016
27. Governing Law. The terms of this Sublease are governed by the
procedural and substantive laws of the State of Arizona.
28. Counterparts. This Sublease may be executed in any number of
original or telecopy counterparts, each of which, when executed and delivered,
will constitute one binding contract and instrument.
-12-
<PAGE> 13
This Sublease is executed and effective as of the Sublease Date.
"Sublandlord"
Envirotest Systems Corp., a
Delaware corporation
By: /s/
------------------------------
Its: Vice President
----------------------------
Address: 246 Sobranty Way
Sunnyvale, California 94086
Attention: General Counsel
"Subtenant"
Ugly Duckling Holdings, Inc.
an Arizona corporation
By: /s/
----------------------------------
Its: Sr. Vice President
--------------------------------
Address: 2525 East Camelback Road
Suite 1150
Phoenix, Arizona 85016
-13-
<PAGE> 14
EXHIBIT "A"
TO
ESPLANADE SUBLEASE AGREEMENT
(MASTER LEASE, PARAGRAPH 2)
<PAGE> 15
ESPLANADE
LEASE AGREEMENT
(Office)
PARCEL IB
OFFICE LEASE SUMMARY
THIS OFFICE LEASE (hereinafter referred to as the "Lease") is entered
into by Landlord and Tenant as described in the following Basic Lease
Information on the Date which is set forth for reference only in the following
Basic Lease Information.
Landlord and Tenant agree:
Basic Lease Information. In addition to the terms that are defined elsewhere in
this Lease, the following defined terms are used in this Lease:
(a) Date: June 22, 1994
(b) Landlord: Esplanade Office Limited Partnership, a Delaware
limited partnership
(c) Landlord's Address: Esplanade Office Limited Partnership
c/o CORE Properties Incorporated
2425 East Camelback Road, Suite 390
Phoenix, Arizona 85016
with a copy at the same time to:
Aldrich Eastman Waltch
225 Franklin Street
Boston, MA 02110
Attention: General Counsel
(d) Tenant: Envirotest Systems Corp.,
a Delaware corporation.
(e) Tenant's Address: Prior to Occupancy:
2002 North Forbes Boulevard
Tucson, Arizona 85745-1448
Attention: William J. Beckham, Jr.
Following Occupancy:
2525 East Camelback Road
Suite 1150
Phoenix, Arizona 85016
(f) Building Address: 2525 East Camelback Road
Phoenix, Arizona 85016
(g) Premises: The Premises shown on Exhibit A to this Lease,
located on the eleventh (11th) floor of the
Building.
(h) Rentable Area of the Premises: 13,324 square feet.
(i) Rentable Area of the Building Office Space: 234,658 square feet.
(j) Scheduled Completion Date: September 1, 1994.
(k) Term: 84 months, beginning on the Commencement Date
and expiring at midnight on the Expiration
Date.
(l) Commencement Date: The earlier to occur of (i) the date that Tenant
first occupies the Premises for the conduct of
its business or (ii) September 1, 1994.
(m) Expiration Date: August 31, 2001 or as extended pursuant to
Article 6.
<PAGE> 16
Page Two
(n) Security Deposit: N/A.
(o) Monthly Base Rent: One-twelfth (1/12) of the amount obtained by
multiplying the annual base rental rate for the Premises by the number
of square feet of Rentable Area of the Premises, as set forth more
specifically below:
$22,206.66 per month for Lease Years 1-3 ($20.00 x
13,324 square feet x 1/12)
$24,427.33 per month for Lease Years 4-5 ($22.00 x
13,324 square feet x 1/12)
$26,648.00 per month for Lease Years 6-7 ($24.00 x
13,324 square feet x 1/12)
(q) Tenant's Proportionate Share of Building Direct Expenses: 5.68%
(determined by dividing the Rentable Area of the Premises by the
Rentable Area of the Building Office Space and multiplying the resulting
quotient to the fourth decimal place by one hundred).
(r) Tenant's Proportionate Share of Project Direct Expenses: 1.21%
(which percentage equals the ratio between the gross building area in
the Premises and the gross building area in the Project (other than the
hotel) if the Project were fully constructed and which percentage shall
be modified if there is any increase or decrease in the size of the
actual gross building area of the fully constructed Project over that
which Landlord anticipates on the date hereof).
(s) Base Year: 1994.
(t) Scheduled Space Plan and Construction Plan Information Delivery Date:
June 15, 1994. The date by which Tenant shall supply Landlord with the
information required in Article 6(a) for completion of space and
construction plans.
(u) Parking Charge: $25.00 per parking space per month for reserved parking
and $20.00 per parking space per month for non-reserved parking for
years one through five. $35.00 per parking space per month for reserved
parking and $30.00 per parking space per month for non-reserved parking
for years six and seven.
(v) Parking Spaces: Tenant shall have the right to rent up to thirteen (13)
reserved parking spaces and twenty-six (26) non-reserved parking spaces.
(w) Brokers: CORE Properties Incorporated
2200 East Camelback Road
Suite 110
Phoenix, Arizona 85016
and
CB Commercial
2346 North Central Avenue
Suite 100
Phoenix, Arizona 85004
Attention: Mike McQuaid
<PAGE> 17
ESPLANADE LEASE AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE PAGE
- ------- ----
<S> <C> <C>
1. PREMISES..................................................... 1
2. TERM......................................................... 1
3. RENT;........................................................ 1
5. ESCALATION................................................... 2
6. COMPLETION OF PREMISES....................................... 4
7. POSSESSION................................................... 5
8. USE OF PREMISES.............................................. 5
9. COMPLIANCE WITH LAW.......................................... 6
10. RULES AND REGULATIONS........................................ 6
11. ALTERATIONS.................................................. 6
12. REPAIRS...................................................... 7
13. ABANDONMENT.................................................. 7
14. LIENS........................................................ 7
15. ASSIGNMENT AND SUBLETTING.................................... 7
16. INDEMNIFICATION OF LANDLORD; INSURANCE....................... 7
17. DENIAL OF SUBROGATION RIGHTS................................. 8
18. SERVICES..................................................... 8
19. HOLDING OVER................................................. 9
20. ENTRY BY LANDLORD............................................ 9
21. DEFAULT...................................................... 9
22. REMEDIES..................................................... 10
23. DAMAGE OR DESTRUCTION........................................ 10
24. EMINENT DOMAIN............................................... 11
25. SUBORDINATION; ATTORNMENT.................................... 12
26. NOTICES...................................................... 12
27. LANDLORD'S RIGHT TO CURE DEFAULTS............................ 12
28. DELAYS; DEFAULT BY LANDLORD.................................. 12
29. LIMITATIONS ON LANDLORD'S LIABILITY.......................... 14
30. TRANSFER OF LANDLORD'S INTEREST.............................. 15
31. SUCCESSORS AND ASSIGNS....................................... 15
32. ATTORNEYS' FEES.............................................. 15
33. SUBSTITUTED PREMISES......................................... 15
34. SURRENDER OF PREMISES........................................ 16
35. WAIVER....................................................... 16
36. GOVERNING LAW................................................ 16
37. DEFINITIONS AND MARGINAL HEADINGS............................ 16
38. TIME OF ESSENCE.............................................. 16
39. PARKING...................................................... 16
40. COVENANTS AND CONDITIONS..................................... 17
41. RECORDING.................................................... 17
42. INTEREST ON PAST DUE OBLIGATIONS............................. 17
43. SEVERABILITY................................................. 17
44. PERSONAL PROPERTY TAXES...................................... 17
45. ENTIRE AGREEMENT............................................. 17
47. ENVIRONMENTAL PROVISIONS..................................... 18
48. BROKER....................................................... 19
49. OPTION TO RENEW.............................................. 19
50. CANCELLATION RIGHT........................................... 20
51. SIGNAGE...................................................... 20
52. RIGHT OF FIRST REFUSAL....................................... 20
EXHIBIT "A" - THE PREMISES
EXHIBIT "B" - SITE PLAN
EXHIBIT "B-1" - PROJECT SITE PLAN
EXHIBIT "C" - SPACE PLAN
EXHIBIT "D" - STANDARD BUILDING TENANT IMPROVEMENTS
EXHIBIT "E" - OFFICE BUILDING RULES AND REGULATIONS
</TABLE>
<PAGE> 18
1.
PREMISES
Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord, on the terms and conditions herein set forth, the Premises which are
located in the eleven (11) story office tower known as Office Building B (the
"Building") at the approximately twenty (20) acre Camelback Esplanade (the
"Project") on the southeast corner of 24th Street and Camelback Road, Phoenix,
Arizona. The Building was constructed on that portion of the Project ("Parcel
IB") which is more particularly described on the Phase Two site plan attached
hereto as Exhibit B and made a part hereof by this reference (the "Site
Plan"). The location of the Building is crosshatched on the Site Plan. Attached
hereto as Exhibit B-1 and made a part hereof by this reference is the site plan
for the entire Project (the "Project Site Plan").
The Project Site Plan sets forth the proposed general layout of the
Project but shall not be a warranty, representation or agreement on the part
of Landlord that the Project will be constructed exactly as indicated. Tenant
understands and agrees that the Project will be built in phases. Landlord or the
owners of the balance of the Project may increase, reduce or change the
numbers, dimensions, use or location of the buildings, walkways, parking areas
and access roads in the Project in any manner whatsoever as Landlord or such
owners shall deem proper, and Landlord and such owners reserve the right to
make alterations, reductions or additions to, or to build additional stories
on, the buildings in the Project, to add or delete buildings in the Project,
and to change the phasing pattern of the Project.
2.
TERM
The Term of this Lease shall be the period commencing on the
Commencement Date and expiring on the Expiration Date.
3.
RENT;
(a) Tenant shall pay to Landlord, as rent for the Premises during
the Term of this Lease, the Monthly Base Rent payable on or before the first
day of each calendar month, commencing on the Commencement Date; provided,
however, the first month's rent shall be paid by Tenant upon execution of this
Lease. The Monthly Base Rent due for a period of less than a full month shall
be prorated on the basis of a thirty-day month. The Monthly Base Rent shall be
paid to Landlord, without deduction or offset, in lawful money of the Untied
States of America at the address designated herein or at such other place as
Landlord may, from time to time, designate. Tenant shall also pay to Landlord
with the Monthly Base Rent, as additional rent, any privilege, excise, sales,
gross proceeds, rent or other tax now or hereafter levied, assessed or imposed,
directly or indirectly, by any governmental authority upon any rent or other
payments required by this Lease.
Tenant hereby acknowledges that late payment by Tenant to Landlord of
rent or other sums due hereunder will cause Landlord to incur costs not
contemplated by this Lease, the exact amounts of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed on Landlord by
the terms of any mortgage or deed of trust covering Parcel IB or any part
thereof. Accordingly, if any such payments due from Tenant shall not be received
by Landlord within five (5) days following the due date, Tenant shall pay to
Landlord a late charge equal to five percent (5%) of such overdue amount plus
any attorneys' fees incurred by Landlord by reason of Tenant's failure to pay
such rent and/or other charges when due hereunder. The parties hereby agree that
such late charge represents a fair and reasonable estimate of the costs Landlord
will incur by reason of late payment by Tenant. Acceptance of such late charge
by Landlord shall in no event constitute a waiver of Tenant's default with
respect to such overdue amount, nor prevent Landlord from exercising any of the
other rights and remedies granted hereunder.
<PAGE> 19
5.
ESCALATION
For the purpose of this Article the terms herein are defined as
follows:
Expense Statement: An annual statement from Landlord setting forth (i)
the Direct Expenses for the Building and Project (excluding all above-ground
levels of any parking garage) for the calendar year ending on the prior
December 31; (ii) Tenant's Proportionate Share thereof; (iii) the estimated
Direct Expenses that will be incurred by Landlord for the Building and the
Project during the current calendar year ending on the next following December
31; and (iv) Tenant's Proportionate Share thereof. Landlord shall allocate to
the Building all Direct Expenses which are incurred exclusively in connection
with or for the exclusive benefit of the Building, such as insurance,
maintenance expenses, utility charges, and all expenses relating to those
portions of the underground parking garage and any surface parking which are
designated for the exclusive use of Building tenants and their guests,
invitees, agents and visitors, and the Expense Statement shall designate such
expenses as Building Direct Expenses ("Building Direct Expenses"). All other
Direct Expenses (defined below) shall be designated as Project Direct Expenses
("Project Direct Expenses") except that the Project Direct Expenses shall also
exclude those Direct Expenses which Landlord or others have designated will be
paid only by the hotel or only by the tenants of other office or retail space.
Tenant's Proportionate Share of Building Direct Expenses: Tenant
reimbursement in an amount equal to the percentage shown in the Basic Lease
Information of the Lease of the Building Direct Expenses.
Tenant's Proportionate Share of Project Direct Expenses: Tenant
reimbursement in an amount equal to the percentage shown in the Basic Lease
Information of the Lease of the Project Direct Expenses.
Direct Expenses: All direct costs of operation and maintenance of the
Building and Project (excluding all above-ground levels of any parking garage),
including, but not limited to, the following costs: real property taxes and
assessments, personal property taxes levied on equipment, fixtures and other
property of Landlord located in the Project and used in connection with the
operation thereof, and any other taxes imposed by any federal, state, county,
municipal or other governmental entity, whether assessed against Landlord
and/or Tenant (except any tax payable by Tenant pursuant to Articles 3(a) and
44 and any net income tax or estate, inheritance or succession tax payable by
Landlord); water and sewer charges; insurance premiums of any type, including,
but not limited to, fire and other casualty insurance and public liability
insurance; utility expenses, including, without limitation, expenses for gas,
electricity and telephone; janitorial expenses; expenses for landscaping and
other services; costs incurred directly in the management of the Project,
including, without limitation, management fees, air conditioning maintenance
and repair and elevator maintenance and repair, the costs of supplies,
materials, equipment and tools used in the operation of the Project, the wages
and salaries of employees used in the management, operation and maintenance of
the Project and taxes (other than net income taxes) or assessments of any type,
whether or not now customary or within the contemplation of the parties hereto,
including expenditures for improvements normally designated as capital
improvements (but excluding expenditures for additional capital improvements
not included in the original construction of the Building or Project), and
including expenditures for capital improvements which are imposed or required
by or result from statutes or regulations, or interpretations thereof,
promulgated by any Federal, state, county, municipal or other governmental body
or agency of any type performing any governmental or other function (including,
but not limited to, the Environmental Protection Agency and the authority
administering the Occupational Safety and Health Act, or any successor agencies
performing the same or similar functions); provided, however, the cost of any
capital improvements made necessary by the actions of any governmental
authority shall be amortized over the useful life to Landlord of such
improvement according to sound accounting practice, and only the portion of
such amortization applicable to any calendar year or, if applicable, any
partial calendar year, shall be included as a Direct Expense for such calendar
year or partial calendar year.
Except as above provided, Direct Expenses shall not include
depreciation of the Project, interest on mortgages or other loans to Landlord,
real estate brokers' commissions or expenses related to Landlord's operation as
a business enterprise, as the same are distinguished from the expenses of
operating the Building or Project.
If, during any calendar year or fraction thereof within the Term, the
Building is less than 95% occupied, the amount of the Building Direct Expenses
for purposes of calculating the Expense Statement shall be adjusted to the
amount of Landlord's good faith estimate of what the Building Direct Expenses
would have been, as determined under generally accepted accounting principles,
had the Building been 95% occupied for the entire calendar year.
Beginning with the calendar year following the Base Year and for each
calendar year thereafter ("Comparison Year") Tenant shall pay Landlord an
amount equal to Tenant's Proportionate Share of Building Direct Expenses
and Project Direct Expenses incurred by Landlord in the Comparison Year which
-3-
<PAGE> 20
exceeds the total amount of Building and Project Direct Expenses payable by
Landlord for the Base Year. Any Comparison Year having less than 365 days shall
be appropriately prorated.
Notwithstanding anything contained herein to the contrary, Tenant's
share of Prorated Charges (excluding real estate taxes, insurance and utility
charges) shall not increase by more than six percent (6%) per year.
Landlord shall use its best efforts to give to Tenant on or before
April 1 of each calendar year throughout the Term an Expense Statement as set
forth herein, but Landlord's failure to provide Tenant with an Expense
Statement by said date shall not constitute a waiver by Landlord of its right
to require payment by Tenant of Tenant's Proportionate Share of estimated or
actual Building and Project Direct Expenses. Until receipt of the Expense
Statement, Tenant shall continue to pay Tenant's Proportionate Share of
Building and Project Direct Expenses currently being paid in accordance with
the prior Expense Statement, if any, and shall pay any adjusted amount
following receipt of the Expense Statement. Expense Statements shall be
prepared in accordance with generally recognized and established accounting
practices, and each such annual determination and statement, certified by
Landlord, subject to reasonable review by Tenant, shall be final and conclusive
on both parties.
Tenant's Proportionate Share of estimated Building and Project Direct
Expenses for the calendar year in which the Expense Statement is received shall
be paid in twelve (12) equal installments concurrently with payment of the
Monthly Base Rent. In addition, Tenant shall pay in full concurrently with the
first Monthly Base Rent payment due following receipt of the Expense Statement
an amount equal to the excess of the monthly installment required to be paid by
Tenant under the most current Expense Statement over the monthly installment
made under the preceding Expense Statement (if any) multiplied by the number of
months from January through the month in which the Expense Statement is
received by Tenant.
If Tenant's Proportionate Share of actual Building and Project Direct
Expenses for the past calendar year as shown on the Expense Statement is
greater than the payments made by Tenant for that calendar year, then,
concurrently with the first Monthly Base Rent payment due following receipt by
Tenant of the Expense Statement, Tenant shall pay in full an amount equal to
such excess. If Tenant's Proportionate Share of actual Building and Project
Direct Expenses for the past calendar year as shown on the Expense Statement is
less than the payments made by Tenant for that calendar year, the amount of
such overpayment shall first be credited against any past due charges and then
credited against the next monthly installment(s) to be paid by Tenant under the
most current Expense Statement.
Even though the Term will have expired and Tenant will have vacated the
Premises when the final determination is made of Tenant's Proportionate Share
of actual Building and Project Direct Expenses for the calendar year in which
the Lease expires, Tenant shall immediately pay the excess of Tenant's
Proportionate Share of actual Building and Project Direct Expenses for the
portion of such year in which Tenant was in occupancy over the estimated
payments made by Tenant for that calendar year and, conversely, any overpayment
made shall be rebated promptly by Landlord to Tenant.
Notwithstanding anything contained in the Lease to the contrary, Tenant
shall have the right to audit Landlord's books relevant to the Direct Expenses
set forth in Article 5 of the Lease within sixty (60) days following receipt of
any invoice or accounting showing additional rent due hereunder. Tenant's right
to audit the books and records of Landlord shall be limited to one time per
calendar year. If any such audit reveals an overpayment of Direct Expenses for
the period covered by such annual statement, then the amount of such
overpayment shall be credited against the next installment(s) of rent and all
other sums due under the Lease from Tenant. If such audit reveals an
underpayment of Direct Expenses for the period covered, then Tenant shall pay
the same with its next monthly rent payment, or if the Term has expired, then
within thirty (30) days after receipt of the audit results. The fees and
expenses of said audit shall be borne (a) entirely by Landlord if the audit
reveals a discrepancy which is detrimental to Tenant of greater than five
percent (5%) from Landlord's Expense Statement, or (b) entirely by Tenant if
such audit reveals a discrepancy of five percent (5%) or less.
6.
COMPLETION OF PREMISES
The parties acknowledge that tenant improvements will need to be
installed in the Premises and that tenant improvement work will be constructed
in accordance with the following terms and conditions:
(a) Tenant shall furnish to Landlord in writing on or before the
date set forth in the Basic Lease Information such full and complete
information as will be required for Landlord to complete the space and
construction plans for the Premises. Said full and complete information shall
include, without limitation, the following details:
(i) Exact location of telephone and electrical outlets.
-4-
<PAGE> 21
(ii) Interior wall finish specifications.
(iii) Detailed plans and specifications of all non-standard
construction work to be accomplished within the Premises by Landlord's general
contractor or other contractor employed by Landlord.
Landlord shall cause such space and construction plans to be prepared
within sixty (60) days after Landlord's receipt from Tenant of all of such
information required above, and Tenant shall either approve or disapprove such
plans within seven (7) working days after Tenant's receipt of such plans and
the cost breakdown of the tenant improvements, which approval shall not be
unreasonably withheld. If Tenant disapproves such plans, Tenant shall specify
its objections in writing and Landlord shall, within a reasonable time
thereafter, submit revised plans to Tenant. After Tenant has approved the
plans, such plans may thereafter be changed from time to time so long as all
changes are approved by both Landlord and Tenant, which approvals shall not be
unreasonably withheld.
(b) Landlord shall, at its sole cost and expense, furnish and
install within the Premises, substantially in accordance with Exhibit C
attached hereto and made a part hereof by this reference, standard building
tenant improvements listed on Exhibit D attached hereto and made a part hereof
by this reference.
Any additional interior improvements, additions or alterations required
by Tenant and approved by Landlord shall be furnished and installed at Tenant's
sole cost and expense. Any such additional work shall be furnished and
installed either by Landlord's general contractor or other contractor employed
by Landlord at such cost and on such terms as shall have been agreed to between
Landlord and Tenant.
All work to be performed on the Premises which is not within the scope
of work shown on Exhibit C and Exhibit D shall be performed by Tenant at
Tenant's expense. Agents, contractors and employees obtained by Tenant to
perform such work shall be subject to Landlord's approval, which approval shall
not be unreasonably withheld, and to the administrative supervision of
Landlord's general contractor, said supervision at Landlord's expense. Landlord
shall allow access to the Premises during construction of the Premises to
Tenant's agents, contractors and employees for the purpose of enabling Tenant
to prepare the Premises for Tenant's use and occupancy. All such construction
work performed by Tenant's agents, contractors or employees shall be
accomplished in such a manner as not to unreasonably interfere with or delay
the work of Landlord's general contractor in the completion of the Premises.
Tenant agrees that in the event Tenant shall have failed to furnish
Landlord with the necessary information to complete the space plans for the
Premises by the time hereinabove specified or should Tenant, its agents,
contractors or employees otherwise cause delay in Landlord's preparation of the
Premises or should any changes in the space plans requested by Tenant and
approved by Landlord cause delay in Landlord's preparation of the Premises,
thereby delaying Tenant's occupancy of the Premises beyond the Scheduled
Completion Date and provided that Landlord would have completed the preparation
of the Premises by the Scheduled Completion Date were it not for Tenant's delay,
then Landlord may at its option require Tenant to commence payment of rental on
the Scheduled Completion date or on the date on which the Premises would have
been Ready for Occupancy (as defined below) as reasonably determined by
Landlord if the necessary information had been supplied or if the changes in
the plans had not been requested or if Tenant or its agents, contractors or
employees had not caused such delay.
(c) Landlord shall complete the tenant improvements and the
Premises shall be Ready for Occupancy (as defined in subparagraph (d) below) by
Tenant not later than the Scheduled Completion Date. Notwithstanding the
foregoing, the aforesaid date shall be extended for such periods as Landlord is
prevented from completing such construction requirements due to governmental
restrictions or orders of any governmental authority beyond the reasonable
control of Landlord, strikes, labor disputes, lockouts, shortages of material
or labor, riots, acts of God, enemy action, delays caused by Tenant, civil
commotion, fire, casualty, inclement weather, and the like, or any other causes
beyond the reasonable control of Landlord (which events or causes are
hereinafter referred to as "force majeure events"). In addition, Landlord may
also automatically extend the aforesaid date for a period of sixty (60) days
upon giving written notice to Tenant. If Landlord shall not have completed such
construction by the aforesaid date, as said date may be extended as
hereinbefore provided, then Tenant shall have the right to terminate this Lease
at any time within thirty (30) days thereafter by giving written notice of such
termination, within such time, to Landlord. If within said thirty-day period
Tenant shall not elect to terminate, the time for completion shall be extended
for another period of sixty (60) days from the end of the thirty (30) day
notice period, and if completion has not been accomplished within said
additional sixty (60) day period, Tenant shall again have the right to
terminate this Lease at any time within thirty (30) days thereafter by giving
written notice of such termination, within said time, to Landlord. Upon the
giving of such notice of termination, the Term of this Lease shall cease and
come to an end as if such date were the date originally fixed for the
termination hereof, and thereupon there shall be no further liability or
obligation upon either party by reason hereof. Landlord shall incur no
liability to Tenant for failure to complete construction by the Scheduled
Completion Date. Landlord shall use good faith efforts to have all such work of
improvement performed promptly and diligently in a first class and workmanlike
manner.
-5-
<PAGE> 22
(d) The Premises shall be deemed ready for occupancy ("Ready for
Occupancy") when (1) Landlord's architect or engineer in charge of the tenant
improvement construction work certifies (i) that the tenant improvement
construction work in the Premises has been substantially completed in
accordance with the construction plans and (ii) the date of such completion,
and (2) the City of Phoenix has issued a final certificate of occupancy on the
entire improved Premises. Landlord shall diligently complete, as soon as
reasonably possible, any "punchlist" items of work and adjustments not
completed when the Premises are Ready for Occupancy.
(e) During the construction and until the Commencement Date of this
Lease, the Building shall be insured against loss or damage by fire and other
risks under standard policies for fire, extended coverage, and "builder's risk"
procured and paid for by Landlord. Tenant shall have no interest in any such
policy or policies or any proceeds thereof.
7.
POSSESSION
If Landlord, for any reason whatsoever, cannot delivery possession of
the Premises to Tenant on the Scheduled Completion Date, this Lease shall not
be void or voidable (except as hereinafter provided or as provided in Article
6(c) above) nor shall Tenant have a claim for any loss or damage resulting
therefrom. If Landlord shall not have delivered possession of the Premises to
Tenant within six (6) months after the Scheduled Completion Date, except for
delays caused by Tenant, its agents, contractors or employees, either party
shall have the option to cancel this Lease by giving ten (10) days' written
notice to the other, in which event this Lease shall be null and void and of no
further force or effect and neither Landlord nor Tenant shall have further
liability or obligation to the other hereunder.
8.
USE OF PREMISES
The Premises are to be used for GENERAL OFFICE USE (the "Permitted
Use") and for no other purpose without the prior written consent of Landlord.
Tenant shall not do nor permit anything to be done in or about the
Premises which will in any way increase the risk of fire to the Premises beyond
that inherent or reasonably necessary to the Permitted Use, nor keep or bring
anything therein which will in any way increase the existing rate of or affect
any policy of fire, extended coverage or any other insurance covering the
Building or Project or any of its contents, or cause a cancellation of any of
the same. Tenant shall not do nor permit anything to be done in or about the
Premises which will in any way obstruct or interfere with the rights of other
tenants or occupants of the Project or injure them, nor use nor allow the
Premises to be used for any unlawful purpose, nor maintain nor permit any
nuisance in, on or about the Premises or permit anything to be done which may
injure or damage the Premises. Tenant shall not damage, deface or commit or
suffer to be committed any waste in or upon the Premises, normal wear and tear
excepted.
9.
COMPLIANCE WITH LAW
Landlord hereby represents and warrants to Tenant that to the best of
Landlord's actual knowledge, the Permitted Use set forth above is in compliance
with and is permitted by all zoning and other governmental laws, ordinances,
regulations and requirements now in force. Tenant shall not permit anything to
be done in or about the Premises which will in any way conflict with any law,
statute, ordinance or governmental rule or regulation now in force or which may
hereafter be enacted or promulgated. Tenant shall at its sole cost and expense
promptly comply with all such laws, statutes, ordinances and governmental
rules, regulations or requirements now in force or which may hereafter be in
force, including, without limitation, the Americans with Disabilities Act of
1990 (42 U.S.L. Sections 12101 et. seq.) (the "ADA") and with the requirements
of any board of fire underwriters or other similar body relating to or
affecting the condition, use or occupancy of the Premises, excluding structural
changes not related to or affected by Tenant's improvements or acts.
10.
RULES AND REGULATIONS
Tenant agrees to comply with (and cause its agent, contractors,
employees and invitees to comply with) the Office Building Rules and
Regulations attached hereto as Exhibit E. Landlord may from time to time make
such modifications, additions and deletions in the Office Building Rules and
Regulations as in the sole judgment of Landlord are necessary or convenient for
the management and operation of Parcel IB. Landlord shall notify Tenant from
time to time of modifications, additions, or deletions in the Office
-6-
<PAGE> 23
Building Rules and Regulations, and any such modification, addition, or
deletion shall be effective after Landlord gives five days' written notice
thereof to Tenant; provided, however, if an emergency arises which in the sole
judgment of Landlord makes it impracticable to give five days' written notice,
such modification, addition, or deletion shall become effective immediately
upon implementation by Landlord, with the written notice to be subsequently
given. Tenant agrees to faithfully observe and comply with the Office Building
Rules and Regulations and all modifications, additions or deletions thereto,
and the breach of any Office Building Rule and Regulation by Tenant shall
constitute a material breach of this Lease. Landlord shall not be responsible
to Tenant for the nonperformance by any other tenant or occupant of the Project
of any such Office Building Rules and Regulations, but the Office Building
Rules and Regulations from time to time in effect shall be uniformly applicable
to all tenants and occupants similarly situated. Tenant shall be obligated to
comply with such Office Building Rules and Regulations only to the extent that
such Office Building Rules and Regulations do not unreasonably interfere with
or preclude Tenant's use of the Premises in the manner permitted by this Lease.
11.
ALTERATIONS
Tenant shall not make nor permit to be made any alterations, additions,
improvements, or installations to or of the Premises or any part thereof, except
moveable furniture and trade fixtures, without the prior written consent of
Landlord, which consent shall not be unreasonably withheld. Notwithstanding
anything contained herein to the contrary, Tenant shall have the right to make
any alterations to the Premises, without Landlord's consent, which do not exceed
$10,000,000 in cost, do not impact the Building's systems or structure, are not
visible from the exterior of the Premises, and are of a cosmetic nature such as
painting, wallpapering, hanging pictures, or the installation of furniture. Any
alterations, additions, improvements, or installations to or of the Premises,
except moveable furniture and trade fixtures, shall be completed in compliance
with all laws and ordinances, including, without limitation, the ADA, and all
rules and regulations of all governmental authorities having jurisdiction of or
over the Premises. All such alterations, additions, improvements and
installations shall at once become a part of the realty and belong to Landlord.
In the event Landlord consents to alterations, additions, improvements, or
installations pursuant to this Article, the same shall be made by Tenant at
Tenant's sole cost and expense, and selection by Tenant of any person or entity
to construct or install the same shall be subject to the prior written consent
of Landlord, which consent may be conditioned upon (1) Tenant providing
Landlord, at Tenant's sole cost and expense, a lien and completion bond in an
amount equal to one and one-half times the estimated cost of all such
alterations, additions, improvements or installations and (2) acquisition by
Tenant of all permits needed to authorize such alterations, additions,
improvements or installations from the appropriate governmental agencies,
furnishing a copy thereof to Landlord at least ten (10) days prior to the
commencement of such work and complying with all of the conditions of such
permits in a prompt manner. It shall be a material breach hereof for Tenant to
make any alterations, additions, improvements or installations without the prior
consent of Landlord, and in addition to any other remedies Landlord may have,
Landlord may require that Tenant remove any or all of the same within thirty
(30) days of receipt by Tenant of a notice demanding such removal. Upon the
expiration or sooner termination of the Term hereof and upon demand by Landlord,
Tenant, at Tenant's sole cost and expense, shall forthwith and with all due
diligence remove any such alterations, additions, improvements, or installations
designated by Landlord to be removed and repair any damage to the Premises
caused by such removal.
12.
REPAIRS
Tenant and its agents shall have been given full opportunity to inspect
and examine the Premises prior to occupancy and, by entry hereunder, Tenant
accepts the Premises in its present "as is" condition, except for latent
defects, and without any warranty as to the condition of the Premises or the
Building; provided, however, Landlord warrants that all tenant improvements
constructed by Landlord in the Premises shall be free from material defects for
a period of one (1) year from the date the Premises are delivered to Tenant by
Landlord. Except as required by Landlord in the next paragraph below, Tenant
shall, at Tenant's sole cost and expense, keep the Premises and every part
thereof in good condition and repair, ordinary wear and tear and damage thereto
by fire, earthquake, act of God or the elements excepted. If Tenant does not
make such repairs, Landlord may, after reasonable notice to Tenant, make such
repairs and Tenant shall pay the costs thereof and any accrued interest thereon
upon demand. In the event Tenant makes any repairs to the Premises or Building
at the expense of Landlord as provided by any law, statute or ordinance now or
hereafter in effect, Tenant shall do so only after having given reasonable
notice to Landlord and Tenant shall only incur reasonable costs in making such
repairs and shall make only such repairs as are reasonable, necessary and
prudent under the prevailing circumstances.
Landlord shall, at Landlord's expense subject to the provisions of
Article 5, keep the structural portion including the IIVAC, plumbing and
electrical systems of the Building in good order, condi-
-7-
<PAGE> 24
tion and repair; provided, however, that in the event any damage to the
structural portion including the IIVAC, plumbing and electrical systems of the
Building is caused by the acts or omissions of Tenant, its agents, contractors,
invitees or employees, Landlord shall, at Tenant's sole cost and expense,
complete the repairs necessary to place the Building in good order, condition
and repair and Tenant shall pay the costs thereof upon demand.
Upon the expiration or sooner termination of the Term hereof, Tenant
shall surrender the Premises to Landlord in the same condition as when
received, ordinary wear and tear and damage thereto by fire, earthquake, act of
God or the elements excepted.
13.
ABANDONMENT
Tenant shall not abandon the Premises at any time prior to the
expiration or earlier termination of the Term hereof. In the event Tenant shall
abandon, vacate or surrender the Premises, or be dispossessed by process of
law, or otherwise, any personal property belonging to Tenant and left on the
Premises shall be deemed to have been abandoned.
14.
LIENS
Tenant shall keep the Premises and Parcel IB free from any vendor's,
mechanic's, materialmen's or like liens arising out of any work performed,
materials furnished or obligations incurred by Tenant. Landlord shall have the
right at all times to post notices of non-responsibility on the Premises and
record verified copies thereof in connection with all work of any kind upon the
Premises.
15.
ASSIGNMENT AND SUBLETTING
Tenant shall not sublet the whole or any part of the Premises, nor
assign this Lease or any interest therein (nor may this Lease be assigned by
operation of law) to any person whomsoever, without the prior written consent
of Landlord, which consent may be withheld in Landlord's sole discretion for
any reason, and any attempted or purported assignment or subletting without
Landlord's prior written consent shall constitute a breach of this Lease and
shall at Landlord's election be void. If Tenant is a corporation or is an
unincorporated association or partnership, the transfer, assignment or
hypothecation of any stock or interest in such corporation, association, or
partnership in the aggregate in excess of fifty percent (50%) shall be deemed
an assignment within the meaning and provisions of this Article.
Notwithstanding the foregoing provisions of this Article 15, it shall not
constitute an assignment or subletting for purposes of this Article 15 for
Tenant to assign this Lease or sublet the Premises without Landlord's consent
to any corporation or business entity which controls, is controlled by, or is
under common control with Tenant, or to any corporation or other business
entity resulting from a merger or consolidation with Tenant, or to any person
or entity which acquires all of the assets of Tenant's business as a going
concern, provided that the assignee or sublessee assumes in full the
obligations of Tenant under the Lease, that Tenant remains fully liable under
the Lease, no use of the Premises is made which is not allowed for by the
permitted purposes, and Tenant provided prompt written notice to Landlord of
such assignment or sublease and the circumstances thereof.
Any consent given by Landlord to Tenant to sublet the Premises, or any
portion thereof, or to assign this Lease shall not be construed as a consent to
any other assignment or subletting, or waiver of Landlord's right to object to
or declare void any assignment or sublease to which Landlord's consent in
writing has not been obtained. Any assignment or subletting of Tenant's
interest permitted or consented to by Landlord shall not in any way release
Tenant from any liability or obligation assumed under the terms of this Lease.
Any sums or other economic consideration received by Tenant as a result
of such assignment or subletting, however denominated under the assignment or
sublease, which exceed, in the aggregate, (i) the total sums which Tenant is
obligated to pay Landlord under this Lease (prorated to reflect obligations
allocable to any portion of the Premises subleased), plus (ii) any real estate
brokerage commissions or fees payable in connection with such assignment or
subletting, shall be paid to Landlord as additional rent under this Lease
without affecting or reducing any other obligations of Tenant hereunder. The
sums payable hereunder shall be paid to Landlord as and when payable by the
assignee or subtenant to Tenant.
-8-
<PAGE> 25
16.
INDEMNIFICATION OF LANDLORD; INSURANCE
Tenant agrees to indemnify Landlord and hold Landlord, the Premises and
Parcel IB free and harmless for, from, and against any and all penalties,
costs, expenses (including reasonable attorneys' fees), claims, demands and
causes of action, including claims based upon imputed negligence due to
ownership of the Building arising out of or in connection with (a) any accident
or other occurrence in or on the facilities (including, without limiting the
generality of the term "facilities", stairways, passageways or hallways), the
use of which Tenant may have in conjunction with other tenants of the Project,
when such injury or damage shall be caused in part or in whole by the act or
omission of Tenant, its agents, contractors, servants, employees, licensees,
invitees, permittees, customers, clients or guests, (b) the condition of, or
any defect in, the Premises or any part thereof or any improvements thereof, (c)
the condition of, or any defect in, Tenant's fixtures or equipment or any part
thereof, or (d) the use or occupancy of the Premises by Tenant or any tenant of
Tenant.
If any action or proceeding be brought against Landlord for any of the
foregoing reasons, Tenant, upon notice from Landlord, shall defend the same at
Tenant's expense by counsel satisfactory to Landlord.
Tenant shall at its own cost and expense procure and maintain during
the entire Term and any extensions thereof workmen's compensation insurance as
required by statute as well as comprehensive public liability insurance
covering the Premises and their surrounding areas and naming Landlord as an
additional insured in such amounts as Landlord may from time to time require.
The initial liability coverage under such comprehensive public liability
insurance shall not be less than $1,000,000 combined single limit, together
with excess liability coverage of not less than $5,000,000, including fire
damage legal liability coverage in an amount adequate to cover the cost of
replacement of the Premises. Said comprehensive public liability insurance
shall be an occurrence type policy and shall also contain cross liability
endorsements and insure performance by Tenant of the indemnity provisions
provided above. The limits of said insurance shall not, however, limit the
liability of Tenant under the first paragraph of this Article. The originals of
all policies shall remain in possession of Tenant; provided, however, Tenant
shall provide Landlord a certificate of insurance confirming the coverage prior
to the commencement of this Lease and at each subsequent insurance renewal.
Tenant shall also maintain in full force and effect throughout the Term all
risks insurance coverage in an amount adequate to cover the cost of replacement
of all personal property (including inventory) and contents in the Premises.
All policies of insurance shall name Landlord and Landlord's property manager
as additional insureds and shall provide that such insurance will not be
canceled or subject to reduction of coverage or other modification except after
thirty (30) days written notice to Landlord. Tenant shall furnish policy
renewals or binders to Landlord not less than ten (10) days prior to the
expiration of any policy required hereunder. All insurance policies procured
shall be issued by a responsible company or companies authorized to do business
in the State of Arizona with a Best's rating of at least A-/VII and reasonably
satisfactory to Landlord.
Landlord shall maintain at all times during the Term of this Lease the
following insurance:
(a) Comprehensive general liability insurance against
claims for bodily injury, death, or property damage occurring in, upon,
or about the Building in an amount not less than the greater of (i)
$1,000,000 combined single limit, (ii) the amount required by Landlord's
lender, or (iii) the amount which a reasonably prudent landlord would
carry on a comparable multi-use project, less any deductible which
Landlord may reasonably determine; and
(b) "All risk broad form" insurance covering the Building in
an amount not less than the greater of (1) the amount required by
Landlord's lender or (ii) the amount which a reasonably prudent landlord
would carry on a comparable multi-use project, less any deductible which
Landlord may reasonably determine.
17.
DENIAL OF SUBROGATION RIGHTS
Neither Landlord nor Tenant shall be liable to the other for any
business interruption or any loss or damage to property or injury to or death
of persons occurring on the Premises, or in any manner growing out of or
connected with Tenant's use and occupation of the Premises or the condition
thereof, whether or not caused by the negligence or other fault of Landlord or
Tenant, or of their respective agents, employees, subtenants, licensees, or
assignees. This release shall apply only to the extent that such business
interruption, loss or damage to property, or injury to or death of persons, is
covered by insurance, regardless of whether such insurance is payable to or
protects Landlord or Tenant or both. Nothing in this Article shall be construed
to impose any other or greater liability upon either Landlord or Tenant than
would have existed in the absence of this Article. This release shall be in
effect only so long as the applicable insurance policies contain a clause to
the effect that this release shall not affect the right of the insured to
recover under such
-9-
<PAGE> 26
policies. Such clauses shall be obtained by Landlord and Tenant in the policies
of insurance required to be provided by either hereunder.
18.
SERVICES
Landlord agrees to furnish to the Premises water and electricity
suitable for the use of the Premises. Landlord further agrees to furnish to the
Premises during the hours of 7 a.m. to 7 p.m., Monday through Friday, and 7
a.m. to 3 p.m. Saturday, excluding Christmas, Thanksgiving and other Federal
holidays, subject to the Office Building Rules and Regulations, heating and air
conditioning suitable for the use of the Premises; provided, however, Tenant
shall pay to Landlord upon receipt of a statement therefor Landlord's charge for
heating and air conditioning furnished to the Premises during any Federal
holiday, any weekday from 7 p.m. to 7 a.m., and on any week-end day except
between the hours of 7 a.m. and 3 p.m. on Saturday. Landlord shall provide
five-day janitorial service. Landlord shall maintain the common stairs,
corridors, entries, and restrooms in the Project in a safe, neat and clean
condition. The services to be provided by Landlord shall be consistent with
comparable first class office buildings located in Phoenix, Arizona. Landlord
shall not be liable for, and Tenant shall not be entitled to, any abatement or
reduction of rent by reason of Landlord's failure to furnish any of the
foregoing when such failure is caused by accidents, breakage, repairs, strikes,
labor disturbances of any character, governmental order, material shortages,
energy or fuel shortages, or by any other cause, similar or dissimilar, beyond
the reasonable control of Landlord, or when Landlord acts with reasonable
diligence to correct the failure to furnish such service after receiving
written notice of the absence of such service. Landlord shall not be liable
under any circumstances for loss of or injury to property occurring through or
in connection with or incidental to Landlord's or Landlord's agents',
contractors' or employees' failure to furnish any of the foregoing services.
Wherever heat generating machines or equipment are used in the Premises which
materially affect the temperature otherwise maintained by the air conditioning
systems, Landlord reserves the right to install supplementary air conditioning
units in the Premises or Building and the cost thereof, including the cost of
installation and the cost of operation and maintenance thereof, shall be paid
by Tenant to Landlord as additional rent upon demand by Landlord.
In the event Landlord should neglect or fail to furnish any of the
utilities or services required to be furnished by landlord in this Lease and
such failure should continue for two (2) business days after receipt of written
notice of such failure from Tenant, Tenant shall be entitled to an abatement of
all of the rent payable hereunder with respect to that portion of the Premises
so affected by such failure for the period beginning on the day that such
portion of the Premises is unusable and continuing until the use of such
portion of the Premises is restored to Tenant.
Tenant will not, without the prior written consent of Landlord, use any
apparatus or device in the Premises, including, without limitation, machines
using current in excess of 110 volts, e.g., electronic data processing machines
and punch card machines, mainframe computers or mini-computers, which will in
any way increase the amount of electricity or water usually furnished or
supplied for use in the Premises as general office space; nor shall Tenant
connect with electric current, except through existing electrical outlets in
the Premises, any apparatus, water pipe or other device for the purposes of
using electric current or water. If Tenant shall require water or electric
current in excess of that usually furnished or supplied for use of the Premises
as general office space and shall have obtained the consent of Landlord for
such excess use, Landlord may cause a water meter or electric current meter to
be installed in the Premises to measure the amount of such excess water or
electric current consumed. The cost of any such meters and of installation,
maintenance and repair thereof shall be paid by Tenant, and Tenant agrees to
pay to Landlord as additional rent promptly upon demand therefor the cost of
all such water and electric current consumed as shown by said meters, at the
rates charged for such services by the local public utility furnishing the
same, plus any additional bookkeeping expense in connection therewith.
Tenant and its employees shall have access to the Premises, subject to
established security procedures, on a twenty-four (24) hour per day, fifty-two
(52) weeks per year basis.
19.
HOLDING OVER
Tenant shall not hold over after the termination or expiration of this
Lease without Landlord's written consent. If Tenant holds possession of the
Premises after the Term of this Lease with Landlord's consent, Tenant shall
become a tenant from month to month upon the terms herein specified except at a
rental rate to be determined by Landlord. In no event shall such rental rate be
less than 150% of the rental rate in effect immediately prior to the expiration
of the Term of this Lease. The rent shall be payable in advance on or before
the first day of each month. Tenant shall continue in possession until such
tenancy shall be terminated by either Landlord or Tenant giving written notice
of termination to the other party at least thirty (30) days prior to the
effective date of termination.
-10-
<PAGE> 27
20.
ENTRY BY LANDLORD
Landlord shall have the right to enter the Premises at any time to
inspect the same or to cure any default (including a breach of the Office
Building Rules and Regulations), to supply any service to be provided by
landlord hereunder, to submit the Premises to prospective purchasers, tenants
or mortgagees, to post notices of non-responsibility, and to alter, improve or
repair the Premises and any portion of the Building without abatement of rent,
and may for the purposes of repair and alteration erect scaffolding and other
necessary structures where reasonably required by the character of the work to
be performed, providing that the business of Tenant shall not be interfered
with unreasonably. Unless caused by the negligent or willful acts of Landlord,
Tenant hereby waives any claim for damages for any injury or inconvenience to
or interference with Tenant's business, any loss of occupancy or quiet
enjoyment of the Premises, and any other loss occasioned by Landlord's entry
for any of the aforesaid purposes.
For each of the aforesaid purposes, Landlord at all times shall have
and retain a key with which to unlock all of the doors upon the Premises,
excluding Tenant's vaults, and Landlord shall have the right to use any and all
means to open said doors in an emergency in order to obtain entry to the
Premises, and any such entry to the Premises obtained by Landlord shall not
under any circumstances constitute forcible or unlawful entry into or a
detainer of the Premises or an eviction of Tenant from the Premises or any
portion thereof. Landlord shall not be liable for the consequences of admitting
by passkey or refusing to admit to the Premises Tenant or any agent or employee
of Tenant.
21.
DEFAULT
In addition to any events defined elsewhere in this Lease as
constituting a default of Tenant, any of the following shall be considered an
event of default by Tenant hereunder: (a) the failure of Tenant to pay rent
(including additional rent) or any part thereof or any other sums payable
pursuant to this Lease as and when due hereunder where such failure shall
continue for three (3) days after written notice from Landlord; (b) the failure
of Tenant to observe or perform any of the covenants or agreements contained in
this Lease to be observed or performed by Tenant, other than those described in
Article 22(a) hereof, where such failure shall continue for twenty (20) days
after written notice of such failure from Landlord; provided, however, if such
failure is of a type that can be cured or corrected but not reasonably within a
twenty (20) day period and Tenant has, during the twenty (20) day period,
commenced the cure or correction of such failure and thereafter diligently
purses such cure or correction, then no default shall exist unless Tenant ceases
the diligent curing or correcting of such failure; (c)(i) the making by Tenant
of any general assignment, or general arrangement for the benefit of creditors;
(ii) the filing by or against Tenant of a petition to have Tenant adjudged
bankrupt or a petition for reorganization or arrangement under any law relating
to bankruptcy (unless, in the case of a petition filed against Tenant, the same
is dismissed within ninety (90) days); (iii) the appointment of a trustee or
receiver to take possession of substantially all of Tenant's assets or of
Tenant's interest in this Lease where possession is not restored to Tenant
within ninety (90) days; or (iv) the attachment, execution or judicial seizure
of substantially all of Tenant's assets or of Tenant's interest in this Lease,
where such seizure is not discharged within ninety (90) days; (d) the default by
Tenant under any other lease agreement between Landlord and Tenant pertaining to
premises within the Project; (e) the passage or other devolution of Tenant's
interest in this Lease to any person or entity except that named as Tenant
herein, by law or otherwise, without the prior written consent of Landlord
except as provided in Article 15 of this Lease; (f) the abandoning of the
Premises by Tenant; or (g) the discovery by Landlord that any financial
statement given to Landlord by Tenant, any assignee of Tenant, any subtenant of
Tenant, or any successor in interest of Tenant, or any of them, was materially
false.
22.
REMEDIES
In the event of any such material default or breach by Tenant, Landlord
may at any time thereafter, with or without notice or demand and without
limiting Landlord in the exercise of any right or remedy which Landlord may
have by reason of such default or breach:
(a) terminate Tenant's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Tenant shall
immediately surrender possession of the Premises to Landlord. In such event
Landlord shall be entitled to recover from Tenant all damages incurred by
Landlord by reason of Tenant's breach or default, including, but not limited
to: the cost of recovering possession of the Premises; expenses of reletting,
including the cost of necessary renovation and alteration of the Premises,
reasonable attorneys' fees, and any real estate commissions actually paid; the
amount by which the total of the unpaid rent and other sums due hereunder for
the balance of the Term hereof exceeds the total amount
-11-
<PAGE> 28
of any payments of like character to be received by Landlord from any
subsequent tenant or tenants during the same period; and that portion
applicable to the unexpired Term of any tenant improvements and of any
commission paid by Landlord to a real estate broker or agent as a result of
this Lease;
(c) re-enter the Premises without terminating this Lease and relet
the Premises or any part thereof for such term or terms and at such rental or
rentals and upon such other terms and conditions as Landlord in its sole
discretion may deem advisable, with the right to make alterations and repairs
to said Premises. Rentals received by Landlord from such reletting shall be
applied as follows: first, to the payment of the cost of such reletting as more
specifically set forth in subsection (a) above; second, to the payment of the
cost of any alterations and repairs to the Premises; third, to the payment of
any indebtedness, other than rent, due hereunder; and the residue, if any, to
be held by Landlord and applied in payment of future rent as the same may
become due and payable hereunder. Should such rentals received from such
reletting during any month be less than that agreed to be paid during that
month by Tenant hereunder, then Tenant shall pay such deficiency to Landlord.
Such deficiency shall be calculated and paid monthly. Tenant shall also pay to
Landlord, as soon as ascertained, the costs and expenses incurred by Landlord
in such reletting or in making such alteration and repairs. No such re-entry
or taking possession of the Premises by Landlord shall be construed as an
election on its part to terminate this Lease unless a written notice of such
intention be given to Tenant or unless the termination thereof be decreed by a
court of competent jurisdiction. Notwithstanding any such reletting without
termination, Landlord may at any time thereafter elect to terminate this Lease
for such previous breach; and
(d) pursue any other remedy now or hereafter available to Landlord
under the laws or judicial decision of the State of Arizona.
23.
DAMAGE OR DESTRUCTION
Except as otherwise provided in this Lease, in the event the Premises
or the Building are damaged by fire or other casualty covered by Landlord's
insurance, such damage shall be repaired by and at the expenses of Landlord and
this Lease shall remain in full force and effect, except that Tenant shall be
entitled to a proportionate reduction of rent while such repairs are being
made, such proportionate reduction to be based upon the extent to which the
making of such repairs shall materially interfere with Tenant's business.
In the event such repairs cannot, in the reasonable opinion of
Landlord, be substantially completed within sixty (60) days after the
occurrence of such damage (without the payment of overtime or other premiums),
Landlord may, at its option, exercisable by giving written notice to Tenant
within thirty (30) days after the occurrence of such damage, make such repairs
within a reasonable time and Landlord shall proceed to make such repairs with
reasonable dispatch. In such event, this Lease shall continue in full force and
effect and the rent payable by Tenant hereunder shall be determined as provided
in the first paragraph of this Article. In the event Landlord does not elect to
repair the damage, as provided above, either Landlord or Tenant, by written
notice given to the other within ten (10) additional days, may terminate this
Lease effective as of the date of the occurrence of such damage. In the event
Landlord terminates this Lease pursuant to this Article, all proceeds of
Landlord's insurance shall belong to and become the sole property of Landlord.
In the event of damage to or destruction of all or any portion of
the Premises or Building to the extent of five percent (5%) or more of the then
insurable replacement value of the Premises or the Building, as applicable,
from any cause not covered by insurance, or in the event of a declaration of
any governmental authority that the Premises or the Building are unsafe or
unfit for occupancy and would require repairs exceeding five percent (5%) or
more of the then insurable replacement value of the Building, Landlord shall
have the right to terminate this Lease by written notice to Tenant given
within thirty (30) days after the date of such damage, destruction or
declaration. Upon the giving of any such notice, this Lease shall terminate. In
the event of damage to or destruction of all or any portion of the Premises or
the Building to an extent less than five percent (5%) of the then insurable
replacement value of the Premises or the Building, as applicable, from any
cause not covered by insurance, or in the event Landlord does not elect to
terminate this Lease in accordance with this paragraph, the Lease shall remain
in full force and effect except that rent shall be proportionately reduced as
provided above and the Premises shall be repaired and rebuilt by Landlord at
Landlord's cost with reasonable dispatch; provided, however, Tenant shall bear
the cost of all fixtures, equipment, furnishings, draperies and other items
that were not contemplated by Exhibit D hereto.
Notwithstanding anything to the contrary contained herein, in the event
the Premises or the Building shall be damaged by fire or other casualty due to
the negligent or willful acts of Tenant, its agents,
-12-
<PAGE> 29
officers, employees, contractors, servants, invitees, licensees or guests and
the Lease is not terminated as hereinabove provided, then, without prejudice to
any other rights and remedies of Landlord, there shall be no abatement of rent.
With respect to any damage which Landlord is obligated to repair or
elects to repair, Tenant waives the provisions of Arizona Revised Statutes
Section 33-343 (which Section deals with Tenant's right to termination in the
event of damage to or destruction of the Premises).
Landlord shall not be required under any circumstances to make any
repairs to or replacements of any paneling, decoration, office fixtures,
railings, ceilings or floor coverings, partitions or any other property
installed in the Premises by Tenant.
24.
EMINENT DOMAIN
If at any time during the Term of this Lease the entire Premises or any
part thereof shall be taken as a result of the exercise of the power of eminent
domain or sold under threat of the exercise of such power (a "taking"), this
Lease shall terminate as to the part so taken as of the date the condemning
authority takes possession or title, whichever occurs first.
If all or any substantial portion of the Premises, or any portion of
the Project other than the Premises, shall be taken, Landlord may terminate
this Lease, at its option, by giving Tenant written notice of such termination
within thirty (30) days of such taking. If all or a portion of the premises in
excess of twenty percent (20%) of the floor area thereof shall be taken with
the result that Tenant's use of the Premises is substantially impaired, Tenant
may terminate this Lease at its option by giving Landlord written notice of
such termination within thirty (30) days of such taking. If neither party
terminates this Lease pursuant to this Article, this Lease shall remain in full
force and effect except that the rent payable by Tenant hereunder shall be
reduced in the same proportion as the floor area taken in the Premises bears to
the total floor area in the Premises.
Landlord shall be entitled to and Tenant hereby assigns to Landlord the
entire amount of any award or payment made in connection with a taking;
provided, however, that Tenant shall be entitled to any payment or award
attributable to the taking of removable personal property or trade fixtures
belonging to Tenant or Tenant's moving expenses or any award for the value of
tenant's leasehold interest except to the extent that such award would reduce or
otherwise diminish the condemnation award to Landlord for the Property.
25.
SUBORDINATION; ATTORNMENT
This Lease shall be subordinate to any ground lease, mortgage, deed of
trust, or any other hypothecation for security now or hereafter placed upon
Parcel IB or any part thereof and to any and all advances made on the security
thereof and to all renewals, modifications, increases and extensions thereof. If
any mortgagee, trustee or ground lessor shall elect to have this Lease prior to
the lien of its mortgage, deed of trust or ground lease, and shall give written
notice thereof to Tenant, this Lease shall be deemed prior to such mortgage,
deed of trust, or ground lease regardless of whether this Lease is dated prior
or subsequent to the date of said mortgage, deed of trust or ground lease or the
date of recording thereof. Tenant agrees to execute any documents required to
effectuate such subordination or to make this Lease prior to the lien of any
mortgage, deed of trust or ground lease, as the case may be, and by failing to
do so within ten (10) days after written demand therefor shall automatically
make, constitute and irrevocably appoint Landlord as Tenant's attorney-in-fact
and in Tenant's name, place and stead, to do so.
Tenant agrees that in the event any proceedings are brought for the
foreclosure of the Premises, or in the event of exercise of the power of sale
under any mortgage or deed of trust affecting the Premises, whether or not the
Lease is terminated by such foreclosure or sale, Tenant will, upon request by
the purchaser, attorn to the purchaser under any such foreclosure or sale and
recognize such purchaser as Landlord under this Lease.
26.
NOTICES
All notices, demands, consents and statements which may or are required
to be given by either party to the other hereunder shall be in writing. All
notices and demands by Landlord to Tenant shall be personally delivered,
delivered by a nationally utilized overnight delivery service or sent by United
States certified or registered mail, postage prepaid and addressed to Tenant at
Tenant's Address. All notices and
-13-
<PAGE> 30
demands by Tenant to Landlord shall be personally delivered, delivered by a
nationally utilized overnight delivery service or sent by United States
certified or registered mail, postage prepaid, addressed to Landlord at the
Landlord's Address. Either party may change its address by notice given to the
other in the manner set forth in this paragraph. Notices, demands, and
statements shall be deemed given and received when personally delivered or two
(2) days after they are mailed as above provided.
27.
LANDLORD'S RIGHT TO CURE DEFAULTS
All covenants and agreements to be performed by Tenant under any of the
terms of this Lease shall be at its sole cost and expense and, except as
otherwise specifically provided herein, without any abatement of rent. If Tenant
shall fail to pay any sum of money owing to a party other than Landlord and
required to be paid by it hereunder or shall fail to perform any other act on
its part to be performed hereunder, Landlord may, but shall not be obligated to
and without waiving any rights of Landlord or releasing Tenant from any
obligations of Tenant hereunder, make such payment or perform such other act to
be made or performed by Tenant hereunder. Tenant covenants to reimburse Landlord
for such sums and Landlord shall have (in addition to any other right or remedy
of Landlord) the same rights and remedies in the event of the nonpayment thereof
by Tenant as in the case of default by Tenant in the payment of any sums due
Landlord hereunder. All sums so paid or expenses incurred by Landlord and all
necessary incidental costs together with interest thereon at the lesser of the
rate of the Bank One prime rate plus 5% or the highest rate permitted by
applicable law from the date of such payment by Landlord until paid shall be
considered as rent owing hereunder and shall be payable to Landlord on demand
or, at the option of Landlord, may be added to any rent then due or thereafter
becoming due under this Lease. Notwithstanding the foregoing, Landlord shall
not, except in the case of an emergency, cure any alleged default of Tenant in
the performance of any covenant herein contained until after the expiration of
five (5) days after the delivery of written notice to Tenant.
28.
DELAYS; DEFAULT BY LANDLORD
Landlord shall not be responsible for any delay or failure in the
observance or performance of any term or condition of this Lease to be observed
or performed by Landlord to the extent that such delays result from action or
order of governmental authorities; civil commotions; strikes, fires, acts of
God or the public enemy; act or default of any tenant in the Project; inability
to procure labor, material, fuel, electricity, or other forms of energy or any
other cause beyond the reasonable control of Landlord, whether or not similar
to the matters herein specifically enumerated. Any delay shall extend by like
time any period of performance by Landlord and shall not be deemed a breach of
or failure to perform this Lease or any provisions hereof.
In the event of any default under this Lease by Landlord, Tenant,
before exercising any rights that it may have at law to cancel this Lease,
shall have given notice of such default to Landlord and shall have offered
Landlord thirty (30) days to correct and cure the default, or if the default is
of a nature that cannot reasonably be cured within said thirty (30)-day period,
then Tenant shall not exercise any remedies for such default if Landlord has
commenced the cure within such thirty (30)-day period and thereafter diligently
prosecutes the cure. Tenant also agrees to give the holders of any mortgages or
deeds of trust ("mortgagees") by registered mail a copy of any notice of
default served upon the Landlord, provided that prior to such notice Tenant has
been notified in writing (by way of Notice of Assignment of Rents and Leases,
or otherwise) of the addresses of such mortgagees. Tenant further agrees that
if Landlord shall have failed to cure or commence to cure such default within
the aforesaid time limit, then the mortgagees shall have an additional thirty
(30) days within which to cure such default or if such default cannot be cured
within that time, then such additional time as may be necessary if within
thirty (30) days any mortgagee has commenced and is diligently pursuing the
remedies necessary to cure such default (including, but not limited to,
commencement of foreclosure proceedings if necessary to effect such cure) in
which event this Lease shall not be terminated while such remedies are being so
diligently pursued.
29.
LIMITATIONS ON LANDLORD'S LIABILITY
The obligations of Landlord under this Lease do not constitute personal
obligations of the partners in Landlord or of the directors, officers or
shareholders of any of the partners in Landlord, and Tenant shall look solely
to Landlord's interest in the real estate that is the subject of this Lease and
to no other assets of Landlord for satisfaction of any liability in respect of
this Lease and will not seek recourse against the partners in Landlord or the
directors, officers or shareholders of any of the partners in Landlord or any
of their personal assets for such satisfaction.
-14-
<PAGE> 31
30.
TRANSFER OF LANDLORD'S INTEREST
In the event Landlord transfers its interest in the Premises or
Parcel IB (other than a transfer for security purposes only), Landlord shall be
relieved of all obligations accruing hereunder after the effective date of such
transfer, including, but not limited to, the return of the Security Deposit or
other funds held by Landlord, provided that such obligations have been
expressly assumed in writing by the transferee.
Tenant agrees at any time and from time to time upon ten (10)
days' prior request by Landlord, to execute, acknowledge and deliver to
Landlord a statement in writing certifying to Landlord, any mortgagee,
prospective purchaser or other party designated by Landlord: (a) that this
Lease is unmodified and in full force and effect (or if there have been
modifications, that the same is in full force and effect as modified and stating
the modifications), (b) the dates to which the rent and any other charges have
been paid in advance, if any, (c) that there are not any uncured defaults on
the part of Landlord hereunder, or specifying such defaults if any are claimed,
(d) whether or not there are then any existing defenses against enforcement of
any provision of the Lease, (e) the Lease Commencement Date and Lease
Expiration Date and (f) any other information which may be reasonably requested
by Landlord. Any such statement delivered pursuant to this paragraph may be
conclusively relied upon by any prospective purchaser, mortgagee or assignee of
any mortgage of the Premises or Parcel IB.
If Tenant fails to deliver such statement within such time, any
prospective purchaser or encumbrancer may conclusively assume: (i) that this
Lease is in full force and effect, without modification except as may be
represented by Landlord, (ii) that there are no uncured defaults in Landlord's
performance, (iii) that not more than one month's rent and no other charges
have been paid in advance, (iv) that there are no existing defenses against
enforcement of any provision of the Lease, and (v) that the Commencement Date
and Expiration Date are as stated by Landlord. Such failure by Tenant to
deliver such statement shall constitute a material default by Tenant under this
Lease.
If Landlord desires to finance, refinance or sell Parcel IB or
any part thereof, Tenant hereby agrees to deliver to any prospective lender or
purchaser designated by Landlord such financial statements of Tenant as may be
reasonably required by such prospective lender or purchaser. Such statements
shall include the past three years' financial statements of Tenant that are made
available to the public in the normal course of business. All such financial
statements shall be received in confidence, shall be used only for the purposes
herein set forth and shall by furnished by Tenant promptly upon request
therefor by Landlord.
31.
SUCCESSORS AND ASSIGNS
Subject to all limitations on assignment and subletting set
forth herein, all of the terms and provisions of this Lease shall inure to the
benefit of and be binding upon the successors and assigns of each of the
parties hereto.
32.
ATTORNEYS' FEES
Should either party be required to commence legal proceedings
relating to this Lease, the prevailing party shall be entitled to receive
reimbursement for its reasonable attorneys' fees and costs of suit both in
connection with the litigation and in enforcing a judgement in its favor.
33.
SUBSTITUTED PREMISES
Landlord reserves the right on thirty (30) days written notice
to Tenant to substitute other premises within the Project for the Premises
described herein. The substituted premises shall be equal size to the Premises
(subject to a variation of ten percent) and shall contain comparable tenant
improvements. The unadjusted rental for the substituted premises shall be at
the then current rate for such space but shall not exceed the unadjusted rental
specified in Article 3. All other provisions of this Lease shall remain in
full force and effect with respect to the substituted premises, except that
Tenant's Proportionate Share of Building and Project Direct Expenses shall be
proportionately reduced if the rentable area of the substituted premises is
less than the rentable area of the original Premises. Landlord shall pay all
reasonable moving expenses of Tenant incidental to such substitution of
premises. This Article 33 shall only apply to any Additional Space (as defined
in Article 52) leased by Tenant in accordance with Article 52.
-15-
<PAGE> 32
34.
SURRENDER OF PREMISES
The voluntary or other surrender of this Lease by Tenant, or a mutual
cancellation thereof, shall not work a merger, and shall, at the option of
Landlord, terminate all or any existing subtenancies, or may, at the option of
Landlord, operate as an assignment to it of any or all such subtenancies.
35.
WAIVER
No waiver of any term, covenant, condition, or obligation of this
Lease, or any breach thereof, shall be effective unless granted in writing. The
waiver by Landlord of any term, covenant, condition or obligation herein
contained or any breach thereof shall not be deemed to be a waiver of any other
term, covenant, condition or obligation herein contained. The subsequent
acceptance of rent hereunder by Landlord shall not constitute a waiver of any
preceding breach by Tenant, regardless of Landlord's knowledge of such
preceding breach at the time of acceptance of such rent.
36.
GOVERNING LAW
This Lease shall be governed by and construed in accordance with
Arizona law, and the invalidity or un-enforceability of any provision of this
Lease shall not affect or impair the validity of any other provision hereof.
37.
DEFINITIONS AND MARGINAL HEADINGS
The term "Tenant" as used herein shall include the plural as well as
the singular and shall include the masculine, feminine and neuter. If there is
more than one Tenant, the obligations of Tenant hereunder shall be joint and
several. Article headings in this Lease are for convenience only and shall not
define or limit the scope or intent of any provision hereof.
38.
TIME OF ESSENCE
Time is of the essence of this Lease and each and every provision
hereof.
39.
PARKING
Tenant hereby also rents the Parking Spaces referred to in the Basic
Lease Information of the Lease in the garage parking area located substantially
beneath the Building on such terms and conditions as may be established by
Landlord from time to time during the Term; provided, however, the rent for
such Parking Spaces during the initial Term shall be equal to the Parking
Charge and said rents shall never be less than these charges during the
remainder of the Term of this Lease. Landlord shall have the right to designate
where such parking spaces shall be located and to relocate such parking spaces
within the underground garage parking area from time to time, but shall not,
except for reserved spaces, be required to mark specific spaces. Landlord shall
have the further right to relocate or eliminate any surface parking areas from
time to time during the Term of this Lease. If additional underground garage
parking is requested by Tenant during the Term of this Lease, Landlord shall
make such space available to Tenant, on the terms, conditions and rates then
applicable to the other underground garage parking spaces, if in Landlord's
sole discretion adequate underground garage parking is available to the other
tenants in the Building. All parking spaces rented by Tenant shall be
considered part of the Premises for the purposes of Tenant's obligations and
Landlord's rights under Articles 8, 9, 10, 14, 16 and 17 hereof, and the rental
owing for such spaces shall be considered additional rent under the Lease. The
parking areas referred to herein, except for reserved spaces during normal
business hours, shall be used on a non-exclusive basis with occupants of the
Building and Parcel IB.
Tenant also acknowledges that there are parking spaces in uncovered
surface parking areas within the Project. Tenant and visitors of the Building
may not park in such spaces unless expressly authorized in writing by Landlord.
Such permitted parking may or may not be without charge; provided, however, at
such time as validated parking becomes, in the opinion of Landlord, common
practice among similar offices in the immediate vicinity of the Project, Tenant
shall participate in such validated parking on
-16-
<PAGE> 33
the same basis as other tenants in the Project and Landlord shall charge a
competitive parking charge for such spaces.
Tenant's use of all parking areas shall be subject to any rules and
regulations relating thereto, including regulations governing the designation
of specific parking spaces for use by Tenant and its guests and invitees, the
hours during which such parking spaces may be used, the size of such parking
spaces, and the traffic flow in the parking areas. Landlord shall not be
responsible for any vandalism or other damages from any cause occurring to
automobiles or their contents while located in such parking spaces or moving in
the parking area.
40.
COVENANTS AND CONDITIONS
Each provision of this Lease performable by Tenant shall be deemed both
a covenant and a condition.
41.
RECORDING
Tenant shall not record this Lease without Landlord's prior written
consent, and such recordation shall, at the option of Landlord, constitute a
non-curable default by Tenant. Tenant shall, upon request of Landlord, execute,
acknowledge and deliver to Landlord's "short form" memorandum of this Lease for
recording purposes. Any costs or taxes associated with such recording shall be
at the sole cost and expense of the party requesting that this Lease be
recorded.
42.
INTEREST ON PAST DUE OBLIGATIONS
Any amount due Landlord not paid when due shall bear interest at the
Bank One prime rate plus 5% per annum from the date due or, if said rate is not
a lawful one, the highest rate permitted by law. Payment of such interest shall
not excuse or cure any default by Tenant under this Lease; provided, however,
that interest shall not be payable on late charges assessed against Tenant.
43.
SEVERABILITY
The invalidity of any provision of this Lease as determined by a court
of competent jurisdiction shall in no way affect the validity of any other
provision hereof.
44.
PERSONAL PROPERTY TAXES
Tenant shall pay when due all taxes assessed against and levied upon
tenant alterations, tenant improvements, and any property of Tenant contained
in, on or about the Premises or any part thereof. When possible, Tenant shall
cause all such taxes to be levied and assessed separately from taxes upon the
Premises.
45.
ENTIRE AGREEMENT
This Lease, the Office Building Rules and Regulations, and any addendum
attached hereto and executed by the parties, constitute the entire agreement of
the parties and supersede all prior agreements or understandings between the
parties with respect to the subject matter hereof. No prior agreement or
understanding shall be effective. This Lease may not be modified or amended
except by written agreement of the parties.
46.
-17-
<PAGE> 34
47.
ENVIRONMENTAL PROVISIONS
(a) Tenant represents and warrants to Landlord that Tenant will not
generate, store, treat, use, release, or dispose of any hazardous materials on
or about the Premises or the Project except in compliance with all environmental
laws and any additional conditions reasonably imposed by Landlord. Tenant will
not release or dispose of any hazardous materials in or on the Premises or the
Project without the express written approval of Landlord. Tenant shall obtain,
comply with and provide Landlord with copies of all permits required in
connection with the generation, storage, treatment, use, release, or disposal
of any hazardous materials.
(b) Tenant shall not install nor permit to be installed on or in
the Premises any substance containing asbestos and determined to be hazardous
by any governmental authority or any friable asbestos. If any such substance or
any friable asbestos is determined to be in or on the Premises as a result of
the actions of Tenant, Tenant shall promptly comply with any applicable
environmental laws (which may or may not require removal of the material), at
Tenant's expense.
(c) In the event Tenant fails to perform any of its obligations
under this Article 46 within thirty (30) days after the giving to Tenant by
Landlord of written notice of such failure, or within a reasonable period of
time not to exceed ninety (90) days after the giving to Tenant by Landlord of
written notice of such failure if, due to the nature of such failure, such
failure cannot be cured within a 30-day period but is otherwise susceptible to
cure within a reasonable period of time not exceeding ninety (90) days, or
within a shorter period of time if prescribed by any environmental law, then,
after expiration of such applicable period of time, Landlord may enter upon the
Premises and remove or cause to be removed such hazardous material or otherwise
cause compliance with any applicable environmental law, provided, however, that
Landlord may enter upon the Premises and remove or cause to be removed such
hazardous material or otherwise cause compliance with any applicable
environmental law upon written notice to Tenant but prior to the expiration of
the applicable time period, if Landlord determines that such action is necessary
prior to the expiration of the applicable time period (i) for the preservation
or safety of the Project or the tenants in the Project, or other persons, (ii)
to avoid suspension of a necessary service in, or with respect to, the Project,
(iii) for the preservation of the lien and grant of any deed of trust granted to
any lender with respect to the Project or the priority of such lien and grant,
or (iv) to assure the continued operation of the Project. The cost of any such
removal or compliance shall be immediately due to Landlord upon demand as
additional rent.
(d) Tenant shall, at Tenant's own expense, comply with all present
and hereinafter enacted environmental laws affecting Tenant's activities on
the Premises or the Project. Tenant shall keep the Premises free of any lien
imposed pursuant to any environmental laws, except for any liens being
contested by Tenant in good faith and at its own expense by appropriate
action or legal proceedings, provided that such actions or proceedings operate
to prevent collection thereunder or realization thereon and the sale or
forfeiture of the Premises or Parcel IB to satisfy the same, and provided
further that during such contest Tenant shall, at the option of Landlord,
provide security reasonably satisfactory to Landlord assuring the discharge of
Tenant's obligations in respect of the lien being contested and any additional
interest, charge, penalty, or expense arising from or incurred as a result of
such contest.
(e) As used herein, the term "hazardous materials" means materials
defined as "hazardous waste or substances" under the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq.,
Resource Conservation and Recovery Act, 42 U.S.C. Section 6903 et seq., or the
Arizona Environmental Quality Act of 1986, A.R.S. Section 49-201(16), including
without limitation asbestos, urea formaldehyde foam insulation, and any fluid
containing polychlorinated biphenyls.
(f) As used herein, the term "environmental laws" means any one
or all of the following, as they may be amended from time to time: the
Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C.
Sections 9601 et seq.), the Resource Conservation and Recovery Act (42 U.S.C.
Sections 6901 et seq.), the Safe Drinking Water Act (42 U.S.C. Sections 300f et
seq.), the Clean Water Act (33 U.S.C. Sections 12151 et seq.), the Clean Air
Act (42 U.S.C. Sections 7401 et seq.), the Toxic Substances Control Act (15
U.S.C. Sections 136 et seq.), the Solid Waste Disposal Act (42 U.S.C. Sections
3251 et seq.), and the Arizona Environmental Quality Act, including provisions
on water quality control (A.R.S. Sections 49-210 et seq.), air quality (A.R.S.
Sections 49-401 et seq.), solid waste management (A.R.S. Sections 49-701 et
seq.), hazardous waste disposal (A.R.S. Sections 49-901 et seq.), and
underground storage tank regulation (A.R.S. Sections 49-1001 et seq.); and
regulations thereunder and any other laws and regulations now in effect or
hereinafter enacted that deal with the regulation or protection of the
environment, including the ambient air, ground water, surface water, and land
use, including sub-strata land.
(g) Tenant shall be responsible for removing from the Premises any
hazardous materials put there by Tenant or its agents which either Tenant or
Landlord is required by law to remove. In addition, Tenant shall be responsible
for restoring the Premises to their condition immediately prior to the time
of such
-18-
<PAGE> 35
required removal. If Landlord is so required to remove any such hazardous
materials put there by Tenant or its agents, Landlord shall promptly give
notice thereof to Tenant.
(h) Tenant shall immediately notify Landlord, both orally and in
writing, of any of the following:
(i) Any emission, spill, release, or discharge into the
environment of any hazardous materials.
(ii) Any correspondence or communication to Tenant or its
agents regarding the presence or suspected presence of hazardous materials on
the Premises or the Project or regarding the application of environmental laws
to the Premises, the Project or Tenant's activities on the Premises.
(iii) Tenant's knowledge of any circumstances which could give
rise to a claim that Tenant, Landlord, the Premises, or the Project may be in
violation of environmental laws.
(iv) Any change in Tenant's activities on the Premises that
change or has the potential to change Tenant's or Landlord's obligations or
liabilities under environmental laws.
(i) Tenant shall indemnify and hold harmless Landlord, it employees,
and agents for, from and against any of the following which result from or are
related to any activity or operation of Tenant or its agents, contractors,
employees, or invitees on the Premises or the Project during the Term of this
Lease; any and all loss, damage, obligation, penalty, liability, litigation,
demand, defense, judgment, suit, proceeding, cost, disbursement, and expense
(including, but not limited to, reasonable investigation, remediation, removal,
and legal fees and expenses) resulting from or arising from or in connection
with, or alleged to have resulted or arisen form or in connection with,
contamination of or adverse effects on the environment, the Premises, or the
Project, or violation of any environmental law or other statute, ordinance,
rule, regulation, judgment, or order of any government or judicial entity.
Tenant's obligations and liabilities under this paragraph shall continue after
the expiration or termination of this Lease so long as Landlord bears any
liability or responsibility under the environmental laws for any action by
Tenant or its agents, contractors, or invitees that occurred on the Premises or
the Project during the Term of this Lease. Tenant's failure to abide by the
terms of this paragraph shall be restrainable by injunction.
(j) If any claim is brought against Tenant, its officers, directors,
employees, agents or representatives, by any third party relating in any way to
hazardous or toxic materials as defined under the Lease, Landlord shall
indemnify and hold Tenant harmless for, from and against all liabilities,
claims, demands, losses, costs, damages, actions, suits, including reasonable
attorney's fees and costs, to the extent that such loss or expense is caused by
the negligence of Landlord or its employees, agents or contractors.
48.
BROKERS
Tenant represents that it has had no dealing with any real estate
brokers or agents in connection with this Lease other than Brokers, whose
commission, if any is due, shall be paid by Landlord in accordance with a
separate agreement between Landlord and such Brokers. Tenant shall indemnify
and hold Landlord harmless from any and all claims.
49.
OPTION TO RENEW
(a) Tenant shall have the option to extend the term of the Lease for
two (2) consecutive periods of five (5) years (the "Extended Term"), subject to
the further provisions of this paragraph; provided, however, should Tenant fail
to exercise its right to extend the term of the Lease for the first option
term, Tenant's right to extend the term of the Lease for a second option term
shall automatically terminate. Tenant must exercise its option with respect to
the Extended Term by giving written notice of exercise to Landlord on or before
the date that is six (6) months prior to the Expiration Date of the Term. Any
notice of extension to be given by Tenant pursuant to this subparagraph (a)
shall be called "Tenants Notice".
(b) In the event an option to extend is exercised in a timely manner,
the Lease shall be extended for the period of the applicable Extended Term upon
all of the terms and conditions of the Lease, provided that the Monthly Base
Rent shall be (i) ninety-five percent (95%) of the fair market rental value of
the Premises, as of the commencement date of the Extended Term for the first
option period, and (ii) the fair market rental value of the Premises, as of
the commencement date of the Extended Term for the second option period.
-19-
<PAGE> 36
(c) Tenant shall have no right to extend the term of the Lease if
Tenant's Notice is not delivered in a timely manner or if there is an Event of
Default under this Lease at the time Tenant's Notice is delivered or on the
expiration date of the then current term of the Lease.
(d) Tenant shall have no right to extend the term beyond the
Extended Term.
(e) If during the initial Term of the Lease Tenant has exercised
its Right of First Refusal to lease additional space in accordance with Article
52 of the Lease, Tenant shall have the option to extend the term of the Lease
in accordance with this Article 49 for the additional space leased; provided,
however, the Monthly Base Rent for any additional space shall be at the fair
market rental value of said additional space for both the first and second
option periods. Should Tenant fail to exercise its right to extend the term of
the Lease for the first option term, Tenant's right to extend the term of the
Lease for a second option term shall automatically terminate.
(f) The option granted to Tenant in this Article 48 is personal to
Envirotest Systems Corp. and shall not be transferable, except for an
assignment or sublease which does not require Landlord's consent in accordance
with the provisions of Article 15.
50.
CANCELLATION RIGHT
If Tenant is not then in default hereunder beyond any applicable cure
period and Tenant is in possession of the Premises and has not assigned its
rights under this Lease (unless the assignment was in accordance with the
provisions of Article 15), Tenant shall have the one (1) time right to cancel
this Lease as to all of the Premises, effective as of the fifth anniversary of
the Commencement Date, if, and only if, (a) Tenant has given Landlord written
notice of such cancellation at least six (6) months before the fifth
anniversary of the Commencement Date, and (b) within fifteen (15) days of the
delivery of such notice to Landlord, Tenant has delivered to Landlord a cash
cancellation fee which shall be equal to (i) the unamortized cost at the
effective date of termination of (A) all tenant improvements for the Premises,
and (B) all leasing commissions paid by Landlord with respect to this Lease,
and (ii) $39,972.00. Amortization shall be on a straight line basis over seven
(7) years with no interest penalty being charged. If Tenant fails to deliver
such cancellation notice and cancellation fee at least six (6) months prior to
the fifth anniversary of the Commencement Date, Tenant's cancellation right
shall automatically terminate.
51.
SIGNAGE
Landlord shall permit Tenant, at Tenant's sole cost and expense, to
install Tenant's name on the existing monument sign for the Building in either
the location currently occupied by Texas Instruments or the location currently
occupied by Equitable Home Mortgage should either of said spaces become vacant
as the result of the expiration or termination of the lease with either tenant.
No sign shall be installed until the design, size, content, structure and
location of the sign have been approved by the Landlord, which consent shall
not be unreasonably withheld, and the City of Phoenix.
52.
RIGHT OF FIRST REFUSAL
(a) During the initial Term, and so long as an event of default has
not occurred, Landlord shall, before entering into a lease with any third party
for any contiguous space located on the 11th floor of the Building (the
"Additional 11th Floor Space"), notify Tenant in writing of the monthly rent,
rental increases, and other economic provisions (the "Rental Terms") upon which
Landlord would be willing to lease the Additional 11th Floor Space to Tenant.
This Right of First Refusal shall not be applicable unless and until the
Additional 11th Floor Space is vacated by the existing tenant (Unisys
Corporation), its successors or assigns.
(b) Commencing with the beginning of the thirtieth month following
the Commencement Date and terminating with the end of the forty-second month
following the Commencement Date, and so long as an event of default has not
occurred, Landlord shall, before entering into a lease with any third party for
any two (2) spaces ranging in size between approximately 1,800 rentable square
feet and approximately 3,000 rentable square feet located either in the
Building or located in the building at 2425 East Camelback Road (the
"Additional Space"), notify Tenant in writing of the monthly rent, rental
increases, and other economic provisions (the "Rental Terms") upon which
Landlord would be willing to lease the Additional Space to Tenant. This Right
of First Refusal shall not be applicable unless and until the Additional Space
is vacated by any existing tenants and any rights with respect to the Additional
Space have been satisfied.
-20-
<PAGE> 37
(c) If, within five (5) business days after receipt of Landlord's
notice, Tenant shall deliver to Landlord a written notice of Tenant's intent to
lease the Additional 11th Floor Space or the Additional Space on the Rental
Terms, for a term not to exceed the then remaining Term of the Lease (including
any then exercised options), Landlord and Tenant shall proceed to negotiate a
lease for the Additional 11th Floor Space or the Additional Space on the same
terms as contained in the Lease, except for the Rental Terms and other matters
dependent upon the size of the premises, such as Tenant's Share. If Tenant does
not deliver its notice of intent to lease the Additional 11th Floor Space or
the Additional Space in a timely manner, or if Landlord and Tenant are unable
to agree on the terms of a lease for the Additional 11th Floor Space or the
Additional Space within ten (10) days following Tenant's delivery of its
notice of intent, Tenant's Right of First Refusal for the Additional 11th Floor
Space or the Additional Space shall terminate and Landlord shall have the right
to lease the Additional 11th Floor Space or the Additional Space or any portion
of the Additional 11th Floor Space to a third party on the same or any other
terms and conditions, provided that such terms and conditions do not result in
an effective rental (taking into account the stated monthly rent, rental
increases, tenant improvement allowance and other economic provisions or
concessions), more than five percent (5%) lower than the effective rental
resulting from the Rental Terms previously offered to Tenant.
(d) This right of first refusal to lease the Additional 11th Floor
Space or the Additional Space is a one time right that is personal to
Envirotest Systems Corp. and shall not be transferrable, except for an
assignment or sublease which does not require Landlord's consent in accordance
with the provisions of Article 15.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of
the date first above written.
LANDLORD:
Esplanade Office Limited Partnership,
a Delaware limited partnership,
By: Eastrich No. 143, L.L.C.,
a Delaware limited liability company,
its general partner
By: /s/
-------------------------
Its: Vice President
-------------------------
TENANT:
ENVIROTEST SYSTEMS CORP.,
a Delaware corporation
2525 East Camelback Road
Suite 1150
Phoenix, Arizona 85016
By: /s/
--------------------------
Its: Executive Vice President
--------------------------
/s/ Chester C. Davenport
- ------------------------
Chester C. Davenport
Chairman
-21-
<PAGE> 38
[TICORE LETTERHEAD]
DATE: 5/31/94
BUILDING: ESPLANADE "B"
TENANT: ENVIROTEST
SUITE: 1150
USABLE SQ FT: 12118
RENTABLE SQ FT: 13324
PLAN DATE: 5/13/94
REVISED: 5/24/94
<TABLE>
<CAPTION>
BUILDING PLAN BLD. STD UNIT UNIT TOTAL TENANT
ITEMS QUANTITY ALLOW. MEASURE COST COST OVERAGE
<S> <C> <C> <C> <C> <C> <C>
DEMOLITION OF WALLS 60 60 LIN FT 10.00 600.00 0.00
DEMISING PARTITION 1ST SIDE 0 0 LIN FT 18.75 0.00 0.00
DEMISING PARTITION 2ND SIDE 64 64 LIN FT 13.00 832.00 0.00
CORRIDOR PARTITION 1ST SIDE 3 3 LIN FT 15.25 45.75 0.00
CORRIDOR PARTITION TENANT SIDE 45 45 LIN FT 8.50 382.50 0.00
INTERIOR PARTITION 1406 1156 LIN FT 21.00 29,526.00 5,254.20
SOUND INSULATION 6160 0 SQ FT 0.23 1,416.80 1,416.80
FURR & SHEETROCK 132 0 LIN FT 11.25 1,485.00 1,485.00
FINISH SHEETROCK BELOW WINDOWS 450 450 LIN FT 2.25 1,012.50 0.00
FINISH SHEETROCK FULL HEIGHT 44 44 LIN FT 7.76 341.44 0.00
SHEETROCK COLUMNS 20 20 EACH 100.00 2,000.00 0.00
COFFERED SHEETROCK CEILING 221 0 SQ FT 4.50 994.50 994.50
DOUBLE SINGLE LITE FRENCH ENTRY 1 0 EACH 4,500.00 4,500.00 4,500.00
TENANT ENTRY (SECONDARY) 2 0 EACH 1,230.00 2,460.00 2,460.00
INTERIOR DOOR 44 36 EACH 750.00 33,000.00 5,734.50
SINGLE LITE FRENCH DOORS 1 0 EACH 1,150.00 1,150.00 1,150.00
BI-FOLD DOORS (3'-0") 1 0 EACH 750.00 750.00 750.00
BI-FOLD DOORS (6'-0") 2 0 EACH 1,250.00 2,500.00 2,500.00
RELOCATE PATIO DOORS 1 0 LUMP 7,500.00 7,500.00 7,500.00
WINDOW WALL FULL HEIGHT 18 0 LIN FT 181.25 3,262.50 3,262.50
SIDELIGHT (3'-0") 34 0 LIN FT 543.75 18,487.50 18,487.50
UPPER & LOWER CABINETS (P-LAM) 50 0 LIN FT 250.00 12,500.00 12,500.00
RECEPTION DESK ALLOWANCE 1 0 EACH 4,000.00 4,000.00 4,000.00
SHELF & POLE 24 0 LIN FT 15.00 360.00 360.00
TELEPHONE BOARD 1 1 EACH 100.00 100.00 0.00
PAINT WALLS 29054 29054 SQ FT 0.25 7,263.50 0.00
WALLCOVERING ALLOWANCE 220 0 LIN YDS 35.00 7,700.00 7,700.00
FLOAT FLOOR @ PERIMETER 450 450 LIN FT 10.00 4,500.00 0.00
FLOORCOVERING (BLD. STD.) 1481 1481 SQ FT 15.85 23,475.26 0.00
</TABLE>
EXHIBIT "D"
1 of 2
<PAGE> 39
[TICORE Logo]
<TABLE>
<CAPTION>
BUILDING PLAN BLD. STD UNIT UNIT TOTAL TENANT
ITEMS QUANTITY ALLOW. MEASURE COST COST OVERAGE
<S> <C> <C> <C> <C> <C> <C>
RUBBER BASE 3216 3706 LIN FT 0.78 2,508.48 -382.20
WOOD BASE (2-1/2") 490 0 LIN FT 5.40 2,646.00 2,646.00
CEILING GRID & TILE 12118 12118 SQ FT 0.55 6,664.90 0.00
MINI-BLINDS 5 0 EACH 85.00 425.00 425.00
DUPLEX OUTLET (NEW WALL) 130 81 EACH 33.00 4,290.00 1,624.04
FOUR-PLEX OUTLET (NEW WALL) 15 0 EACH 42.00 630.00 630.00
TELEPHONE/DATA (NEW WALL) 58 48 EACH 15.00 870.00 142.92
CONDUIT & GROUND FOR T.M.B. 1 1 EACH 62.00 62.00 0.00
INCANDESCENT DOWN LIGHTS 22 0 EACH 125.00 2,750.00 2,750.00
INSTALL 2X4 LIGHT FIXTURE 151 151 EACH 43.00 6,493.00 -20.42
SINGLE POLE SWITCH 48 48 EACH 35.00 1,680.00 -16.52
3-WAY SWITCH 4 0 EACH 65.00 260.00 260.00
DIMMER SWITCH 6 0 EACH 85.00 510.00 510.00
LIGHT ON EMERGENCY CIRCUIT 14 14 EACH 40.00 560.00 0.00
EXIT LIGHT 12 12 EACH 125.00 1,500.00 0.00
TENANT SIGN LIGHT FIXTURE 1 1 EACH 231.00 231.00 0.00
HOT TAP HOOK UP 3 0 EACH 235.00 705.00 705.00
GROUND FAULT CIRCUIT 3 0 EACH 42.50 127.50 127.50
A/C HOOK UP 3 0 EACH 375.00 1,125.00 1,125.00
FIRE ALARM (HORN STROBE) 12 12 EACH 168.00 2,016.00 0.00
FIRE ALARM (PERMIT & SUPER VISION) 2 2 LOT 525.00 1,050.00 0.00
H.V.A.C. TENANT CONSTRUCTION 12118 12118 SQ FT 1.65 19.994.70 0.00
H.V.A.C. NEW HEATPUMP 3 0 EACH 2,500.00 7,500.00 7,500.00
PLUMBING 1 0 LOT 6,500.00 6,500.00 6,500.00
HOT TAP 3 0 EACH 375.00 1,125.00 1,125.00
X-RAY FLOOR 3 0 LOT 350.00 1,050.00 1,050.00
ENERGY MANAGEMENT SYSTEM 12118 12118 SQ FT 0.35 4,241.30 0.00
FIRE SPRINKLERS 126 126 EACH 80.00 10,080.00 0.00
NOTE: THIS PROPOSAL EXCLUDES COSTS SUBTOTAL 259,740.13 106,756.32
FOR NOTES #13, #14, #15 PROGRESS & FINAL CLEAN UP (1.5%) 3,896.10 0.00
SUPERVISION (4%) 10,545.45 0.00
RESPECTFULLY SUBMITTED, PLAN CHECK & PERMIT FEE 6,795.00 0.00
TICORE CONSTRUCTION INCORPORATED INSURANCE (.5%) 140.49 53.38
CONTRACTORS FEE (7%) 19,678.20 7,476.68
TAX 13,295.16 5,051.46
/S/ CHARLES P. HERNANDEZ TOTAL $314,090.53 $119,337.83
- ---------------------------- COST PER USABLE SQ. FT. $25.92 $9.85
CHARLES P. HERNANDEZ COST PER RENTABLE SQ. FT. $23.57 $8.96
PRESIDENT
</TABLE>
EXHIBIT "D"
2 of 2
<PAGE> 40
OFFICE BUILDING RULES AND REGULATIONS
1. No sign, placard, picture, advertisement, name or notice shall
be inscribed, displayed, printed or affixed on or to any part of the outside or
inside of the Project, the Premises, or the surrounding area without the
written consent of the Landlord being first obtained. If such consent is given
by Landlord, Landlord may regulate the manner of display of the sign, placard,
picture, advertisement, name or notice. Landlord shall have the right to remove
any sign, placard, picture, advertisement, or name or notice which has not been
approved by Landlord or is being displayed in a non-approved manner without
notice to, and at the expense of the Tenant. All approved signs or lettering on
doors, and/or windows shall be printed, painted, affixed or inscribed at the
expense of Tenant by a person approved by Landlord.
Tenant shall not place anything or allow anything to be placed
near the glass of any window, door partition or wall which may appear unsightly
from outside of the Premises. Landlord shall have the right to control all
internal lighting that may be visible from the Project's exterior.
2. The directory of the Project will be provided exclusively for
the display of the name and location of tenants only, and Landlord reserves the
right to exclude any other names therefrom and to charge a reasonable fee for
each name other than the tenant's name, placed upon the directory.
3. The sidewalks, halls, passages, toilets, exits, entrances,
parking areas, elevators and stairways shall not be obstructed by tenant, its
customers, invitees, licensees and guests, or to be used (except toilets) by
them for any purpose other than for ingress to and egress from their respective
premises. The halls, passages, toilets, balconies and roof are not for the use
of the general public and Landlord shall in all cases retain the right to
control thereof and prevent access thereto by all persons whose presence in the
judgment of the Landlord shall be prejudicial to the safety, character,
reputation and interests of the Project or its tenants; provided, however, that
nothing herein contained shall be construed to prevent access by persons with
whom Tenant normally deals in the ordinary course of Tenant's business unless
such persons are engaged in illegal activities. No tenant, no employees or
invitees of any tenant shall not go upon the roof of the Project. Further,
Tenant shall not install any radio, television or satellite antenna,
loudspeaker or other device on the roof or entrance walls without the prior
written permission of Landlord. In any case, the Tenant shall not keep or
display any merchandise or otherwise obstruct the sidewalks, malls or other
areas adjacent to the Leased Premises.
4. Tenant shall not alter any lock or install any new additional
locks or any bolts on any door of the Premises without the written consent of
Landlord.
5. The toilet rooms, urinals, wash bowls and other apparatus shall
not be used for any purpose other than that for which they were constructed,
and no foreign substance of any kind whatsoever shall be thrown therein. The
expense of any breakage, stoppage or damage resulting from a violation of this
rule shall be borne by the tenant who, or whose employees or invitees, shall
have caused it.
6. Tenant shall not overload any floor of the Premises in excess
of one hundred (100) pounds per square foot, nor shall it hang or suspend from
any wall or ceiling or roof, or any other part of the Building, any equipment,
displays, fixtures, or signs which are not authorized by the Landlord.
7. No furniture, freight or equipment of any kind shall be bought
into the Project without the consent of Landlord, and all moving of the same
into or out of the Project shall be done at such time and in such manner as
Landlord may designate. Landlord shall have the right to prescribe the weight,
size and position of all safes and other heavy equipment brought into the
Project and also the times and manner of moving the same in and out of the
Project. Safes or other heavy objects shall, if considered necessary by
Landlord, stand on wood strips of such thickness as shall be necessary to
properly distribute the weight. Landlord will not be responsible for loss of or
damage to any such safe or property from any cause and all damage done to the
Project by moving or maintaining any such safe or other property shall be
repaired at the expense of Tenant. There shall not be used in any Premises, or
in the public halls of the Project, either by any tenant or other, any hand
trucks except those equipped with soft rubber tires and side guards or other
such material handling equipment the Landlord may approve.
8. Tenant shall not cause any unnecessary labor by reason of
Tenant's carelessness or indifference in the preservation of good order and
cleanliness. Landlord shall in no way be responsible to any Tenant for any loss
of property on the Premises, however occurring, or for any damage done to the
effects of any Tenant, by or as a result of the acts of any employee or
contractor of Landlord, or any other person. Window cleaning shall be done only
by Landlord at intervals it deems appropriate.
EXHIBIT "E"
(1 OF 3)
<PAGE> 41
OFFICE BUILDING RULES AND REGULATIONS
Revised March, 1994
Page Two
9. Tenant shall not use, keep or permit to be used or kept any
noxious gas or substance in the Premises, or permit or suffer the Premises to
be occupied or used in a manner offensive or objectionable to the Landlord or
other occupants of the Project by reason of noise, odors and/or vibrations, or
interfere in any way with other tenants or those having business in the
Project. No skateboards or similar vehicles, animals or birds shall be brought
in or kept in or about the Premises or the Project. No tenant shall make or
permit to be made any disturbing noises or disturb or interfere with occupants
of this or neighboring buildings or premises, or with those having business
with such occupants, by the use of any musical instrument, radio, phonograph,
unusual noise, or in any other way. No Tenant shall throw anything out of doors
or down the passageways.
10. The Premises shall not be used for manufacturing without the
express written permission of Landlord. No Tenant shall occupy or permit any
portion of this Premises to be occupied for the manufacture or sale of liquor,
narcotics or tobacco in any form, or as a medical office, or as a barber shop
or manicure shop except with prior written consent of Landlord. No Tenant shall
advertise for laborers giving an address at the Premises. The Premises shall
not be used for lodging or sleeping or for illegal purposes.
11. Tenant shall not use or keep in the Premises or the Project any
kerosene, gasoline or inflammable or combustible fluid or material or use any
method of heating or air conditioning other than that supplied or approved by
Landlord.
12. Landlord will direct electricians as to where and how telephone
and telegraph wires are to be introduced. No boring or cutting for, or
stringing of wire will be allowed without the consent of Landlord. The location
of telephones, call boxes and other office equipment affixed to the Premises
shall be subject to the approval of Landlord.
13. All keys to the Project, offices, rooms and toilet rooms shall
be obtained from Landlord's office and Tenant shall not from any other source
duplicate or obtain keys or have keys made. Additional or duplicate keys will
be provided by Landlord at a reasonable charge to Tenant. Tenant, upon
termination to the tenancy, shall deliver to Landlord the keys to the Project,
offices, rooms, and toilet rooms which shall have been furnished and shall pay
Landlord the cost of replacing any lost key or of changing the lock or locks
opened by such lost key if Landlord deems it necessary to make such a charge.
14. No Tenant shall lay linoleum, tile, carpet or other similar
floor coverings so that the same shall be affixed to the floor of the Premises
in any manner except as approved by Landlord. The expense of repairing any
damage resulting from a violation of this rule or removal of any floor covering
shall be borne by the Tenant by whom, or by whose contractors, employees or
invitees, the floor covering shall have been laid.
15. On Sundays and legal holidays, and on other days during certain
hours for which the Building may be closed after Normal Business Hours, access
to the Building or to the halls, corridors, or stairways in the Building, or to
the Premises or Project may be controlled through the use of security personnel
and/or security devices. Such personnel will have the right to demand of any
and all persons seeking access to the Project proper identification to
determine if they have right of access to the Premises. Landlord shall in no
case be liable for damages for any error with regard to the admission to or
exclusion from the Project of any person. In cases of invasion, mob, riot,
public excitement or other commotion, Landlord reserves the right to prevent
access to the Project during the continuance of the same, by closing the doors
or otherwise, for the safety of all tenants and protection of the Project and
property located therin. The foregoing notwithstanding, Landlord shall have no
duty to provide security protection for the Project at any time or to monitor
access therto.
16. Tenant shall see that the doors of the Premises are closed and
securely locked before leaving the Building and that all water faucets, water
apparatus and electricity are entirely shut off before Tenant or Tenant's
employees leave the Building. Tenant shall be responsible for any damage to the
Project or other tenants caused by a failure to comply with this rule.
17. Landlord reserves the right to exclude or expel from the
Project any person who, in the judgment of Landlord, is intoxicated or under
the influence of liquor or drugs, or who shall in any manner do any act in
violation of any of the rules and regulations of the Project.
18. No vending machine shall be installed, maintained or operated
upon the Premises or the Project without the prior written consent of Landlord.
EXHIBIT "E"
(2 OF 3)
<PAGE> 42
OFFICE BUILDING RULES AND REGULATIONS
Revised March, 1994
Page Three
19. Landlord shall have the right, exercisable without notice and
without liability to Tenant, to change the street address of the Project of
which the premises are a part.
20. Tenant agrees that it shall comply with all fire regulations
that may be issued from time to time by Landlord, and Tenant also shall provide
Landlord with the name of a designated responsible employee to represent Tenant
in all matters pertaining to fire regulations. Tenant, at tenant's sole expense
will provide such reasonable fire retarding devices as required by the City of
Phoenix Fire Code or Landlord's insurance carrier, separate from the building
fire sprinkler. Tenant shall be responsible for the routine maintenance of the
aforementioned equipment.
21. Landlord reserved the right by written notice to Tenant to
rescind, alter or waive any rules or regulations at any time prescribed for the
Project when, in Landlord's judgment, it is necessary, desirable or proper for
the best interest of the Project or its tenants.
22. Tenant shall not disturb, solicit, or canvass any occupant of
the Building and shall cooperate to prevent the same. Peddlers, solicitors and
beggars shall be reported to Landlord.
23. Without the written consent of Landlord, Tenant shall not use
the name of the Project in connection with or in promotion or advertising the
business of Tenant except as Tenant's address.
24. Tenant shall be entitled to use parking spaces during working
hours, the exact location of which shall be designated by Landlord. Tenant
shall not park in driveways or loading areas nor reserved parking spaces of
other tenants. Landlord or its agents shall have the right to cause to be
removed any car of Tenant, its employees, agents, invitees, licensees,
contractors or guests that may be parked in unauthorized areas, and Tenant
agrees to save and hold harmless Landlord, its agents and employees from any and
all claims, losses, damages and demands asserted or arising in respect to or in
connection with the removal of any such vehicle and for all expenses incurred
by Landlord in connection with such removal. Tenant will from time to time,
upon request of Landlord, supply Landlord with a list of license plate numbers
of vehicles owned or operated by its employees and agents.
25. All interior window covering must be approved by Landlord and
Tenant may not install any awnings or other exterior window shades or coverings.
26. Tenant shall not waste electricity or water and agrees to
cooperate fully with Landlord to assure the most effective operation of the
Building's heating and air conditioning equipment.
27. Tenant assumes full responsibility for protecting, at all
times, the Premises and all personal effects of Tenant, its employees, agents
and invitees from theft, robbery and pilferage, which includes keeping doors
locked and other means of entry to the Premises closed and secured, and
Landlord shall have no liability with respect thereto.
28. Tenant shall not install or operate machinery, equipment or any
mechanical or electrical device of a nature not directly related to Tenant's
ordinary use of the Premises, without the written permission of Landlord.
29. Tenant shall not be entitled, by virtue of this Lease, to use
or patronize any service, business or facility in the Project, but may become
entitled to use or patronize the same by satisfactory arrangements with the
operator of such business or facility.
30. Tenant shall provide to Landlord, and update as necessary, the
names, addresses and telephone numbers of three authorized employees of the
Tenant who may be contacted by Landlord in the event of an emergency relative
to the Leased Premises.
31. Tenant shall store all of its trash and garbage within its
Leased Premises. Tenant shall not place in any trash box, receptacle or
compactor, any material which cannot be disposed of in the ordinary and
customary manner of trash and garbage disposal. All garbage and refuse disposal
shall be made at such times and in such a manner as may be directed by Landlord
from time to time.
32. All delivery vehicles shall use designated loading docks or
loading zones which may be established from time to time by Landlord.
Deliveries to individual suites shall be made using the rear entrance of suites
where applicable, and in cases where the front of courtyard entrance of is used,
deliveries will be made in such manner and at such time as to not interfere
with pedestrian traffic. Tenant shall be responsible for the actions and
control of their delivery vendors.
EXHIBIT "E"
(3 OF 3)
<PAGE> 43
EXHIBIT ""B""
TO
ESPLANADE SUBLEASE AGREEMENT
(Additional 11th Floor Space, Paragraph 16.a.)
<PAGE> 44
LANDLORD CONSENT TO SUBLEASE
This Landlord Consent to Sublease ("Consent") is given as of the date
set forth below Landlord's signature ("Consent Date"), by Esplanade Office
Limited Partnership, a Delaware limited partnership, as "Landlord" under the
Master Lease described in the Esplanade Sublease Agreement (Office - Parcel 1B)
dated as of April 15, 1996 ("Sublease"), by and between Envirotest Systems
Corp., a Delaware corporation, as Sublandlord, and Ugly Duckling Holdings,
Inc., an Arizona corporation, as Subtenant. Landlord consents to the Sublease
subject to the following terms and conditions:
A. All initially capitalized terms used in this Consent shall have
the meanings given them in the Sublease or Master Lease, as applicable, unless
expressly superseded by the terms of this Consent.
B. Nothing contained in this Consent or in the Sublease shall be
construed to:
i. modify, waive, or affect: (i) any of the terms or
conditions of the Master Lease; (ii) any of the Tenant's
Obligations under the Master Lease; or (iii) any rights
or remedies of the Landlord under the Master Lease or
otherwise;
ii. waive any present or future breach or default on the
part of the Tenant under the Master Lease (provided,
however, that Landlord acknowledges that, to the best of
its actual knowledge, there are no existing or uncured
defaults under the Master Lease); or
iii. release or discharge the Tenant from any of its
Obligations under the Master Lease.
C. In case of any conflict between the provisions of this Consent
and the provisions of the text of the Sublease, the provisions of this Consent
will prevail over those contained in the text of the Sublease. Except as
provided in the Sublease and this Consent, the Master Lease and all of its
terms and conditions will remain in full force and effect.
D. Landlord does not intend to release or discharge Tenant from
its Obligations under the Master Lease or Sublease, and Tenant shall remain
liable and responsible for the full performance and observation of all of the
Obligations under the Master Lease or Sublease to be performed and observed by
Tenant, including the payment of all rent and late charges due under the Master
Lease.
E. This Consent is not assignable.
F. This Consent shall be effective with respect to the Sublease
only, and shall not be construed as a consent to further subletting or
assigning by Tenant or Subtenant or as a waiver of Landlord's right to object
to or declare void any other assignment or sublease under the Master Lease.
<PAGE> 45
G. Landlord may directly enforce the Obligations of Subtenant
under the Sublease, and Landlord may exercise all rights and remedies available
under the Master Lease directly against Subtenant in the event of Subtenant's
breach or default under the Sublease or Master Lease. Landlord agrees to
provide Subtenant with copies of any notice to Sublandlord of any material
breach or default under the terms of the Master Lease.
H. Landlord agrees that, so long as Subtenant continues to timely
perform its Obligations under the Master Lease and Sublease and is not in
default or breach of the Master Lease or Sublease, Landlord will permit
Subtenant's continued use and occupancy of the Sublease Space under the
Sublease notwithstanding any default or breach by Sublandlord under the Master
Lease.
I. Landlord, at Subtenant's sole cost and expense, agrees to
provide building standard Tenant signage for the Sublease Space and Tenant
identification on all lobby directories for the Building identifying the name
of the Subtenant.
J. Landlord specifically advises Sublandlord and Subtenant that,
as of the Consent Date, Landlord has not approved any Subtenant improvements or
alterations and that all Landlord approvals for Subtenant improvements or
alterations must be obtained through the separate consent of Landlord under the
terms of the Master Lease. Any occupancy of the Premises during the performance
of any improvements or alterations by the Sublandlord or Subtenant will be at
the sole risk of the occupant, notwithstanding Landlord's consent to the
improvements or alterations.
K. Sublandlord and Subtenant have represented to Landlord that
there are no oral or written agreements for fees, rent, or other compensation
to Sublandlord between Sublandlord and Subtenant regarding the Sublease of the
Premises other than those set forth in the Sublease. Landlord acknowledges the
existence of the Equipment Sale Agreement through which Subtenant has agreed to
purchase from Sublandlord certain furniture, equipment, and other personal
property currently located in the Sublease Space. Landlord acknowledges that
the proceeds of this sale are separate and distinct from the Sublease of the
Premises and do not constitute additional rent due Landlord for purposes of
Article 15 of the Master Lease. Landlord's acknowledgement of the Equipment
Sale Agreement is not, however, an agreement on its part to subordinate any
statutory or contractual liens arising out of the lease of the Premises, and
the Subtenant's payment and performance under the Equipment Sale Agreement will
not be a condition to (and will not give Sublandlord the ability to terminate)
Subtenant's occupancy of the Sublease Space.
L. Landlord agrees to Subtenant the renewal rights described in
Paragraph 15 of the Sublease and agrees to the deletion of Article 49 of the
Master Lease.
M. Landlord grants to Subtenant the first right of refusal
described in Paragraph 16 of the Sublease and agrees to the deletion of Article
52 of the Master Lease.
N. Landlord agrees to the deletion of Article 50 of the Master
Lease.
O. Nothing in this Consent will be deemed a waiver by Landlord of
the indemnification obligations, insurance requirements, and liability
limitations outlined in the Master
<PAGE> 46
Lease, and Paragraphs 22 and 23 of the Sublease will not apply to Landlord and
are solely agreements between Subtenant and Sublandlord.
P. Notwithstanding anything to the contrary in the Sublease
(including Paragraph 4), Landlord has not agreed to waive any payments of rent
under the Master Lease.
Q. Nothing in this Consent will be deemed an undertaking by
Landlord of any Obligations under the Sublease other than those Obligations of
the Landlord to the Tenant under the Master Lease and under the Sublease.
Landlord has executed this Consent as of the Consent Date.
"Landlord"
Esplanade Office Limited
Partnership, a Delaware limited
partnership
By: Eastrich No. 143, L.L.C., a
Delaware limited liability
company, its general partner
By: /s/
-----------------------
Its: VP
-----------------------
Consent Date: 4/29/96
----------------------
<PAGE> 1
EXHIBIT 10.24
INDEMNITY AGREEMENT
By this INDEMNITY AGREEMENT (this "Agreement"), Ugly Duckling
Corporation, a Delaware corporation (the "Company"), and the undersigned officer
or member of its Board of Directors ("Indemnitee") warrant, covenant and agree
as follows:
WHEREAS, Indemnitee is an officer and/or a member of the Board of
Directors of the Company and in such capacity is performing a valuable service
for the Company; and
WHEREAS, the Company's Certificate of Incorporation provides for
indemnification of officers and directors to the fullest extent authorized by
the Delaware General Corporation Law; and
WHEREAS, the Delaware General Corporation Law provides that the
indemnification rights provided thereunder are not exclusive, and that
agreements may be entered into between Company and its officers and the members
of its Board of Directors with respect to indemnification; and
WHEREAS, in order to induce Indemnitee to serve as an officer or member
of the Board of Directors of the Company, the Company desires to enter into this
contract with Indemnitee;
NOW, THEREFORE, in consideration of Indemnitee's continued service as
an officer and/or director after the date hereof the parties hereto agree as
follows:
1. Indemnification of Indemnitee. Subject to Section 2 below, the
Company shall hold harmless and indemnify Indemnitee against any and all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by Indemnitee in connection with any
threatened, pending or completed action, suit or proceeding, whether, civil,
criminal, administrative or investigative to which Indemnitee is, was or at any
time becomes a party, or is threatened to be made a party, by reason of the fact
that Indemnitee is, was or at any time becomes a director, officer, employee or
agent of the Company, or is or was serving or at any time serves at the request
of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, to the extent currently
set forth in the Company's Certificate of Incorporation, a copy of which is
attached hereto as Exhibit A. No amendment or termination of the Company's
Certificate of Incorporation shall affect or terminate the contracted rights
granted to the Indemnitee hereunder.
2. Limitations on Indemnification. No indemnity pursuant to Section 1
hereof shall be paid by the Company:
(a) Except to the extent the aggregate of losses to be indemnified
hereunder exceeds the amount of losses for which the Indemnitee is
indemnified pursuant to any policy of insurance purchased and
maintained by the Company;
(b) In respect to remuneration paid to Indemnitee if it shall be
determined by a final judgment or other final adjudication that such
remuneration was in violation of law;
(c) On account of any suit in which final judgment is rendered
against Indemnitee or an accounting of profits made from the purchase
or sale by Indemnitee of securities of the Company pursuant to the
provisions of Section 16(b) of the Securities Exchange Act of 1934 and
amendments thereto or similar provisions of any law; or
<PAGE> 2
(d) If a final decision by a court having jurisdiction in the matter
shall determine that such indemnification is not lawful;
3. Continuation of Indemnification. All obligations of the Company
hereunder shall continue during the period Indemnitee is a director, officer,
employee or agent of the Company (or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise) and shall continue
thereafter so long as Indemnitee shall be subject to any possible claim or
threatened, pending or completed action, suit or proceeding, whether civil,
criminal or investigative, by reason of the fact that Indemnitee was a director
of the Company or serving in any other capacity referred to herein.
4. Notification and Defense of Claim. Indemnitee shall promptly notify
the Company of any matter which is or may be the subject of any indemnification
claim hereunder. Promptly after receipt by Indemnitee of notice of the
commencement of any action, suit or proceeding, Indemnitee will notify the
Company thereof. With respect to any such action, suit or proceeding:
(a) The Company will be entitled to participate therein at its own
expense;
(b) Except as otherwise provided below, to the extent that it may
wish, the Company jointly with any other indemnifying party may assume
the defense thereof, with counsel reasonably satisfactory to
Indemnitee. After notice from the Company to Indemnitee of its election
so to assume the defense thereof, the Company will not be liable to
Indemnitee for any legal or other expenses subsequently incurred by
Indemnitee in connection with the defense thereof other than reasonable
costs of investigation or as otherwise provided below. Indemnitee shall
have the right to employ counsel in such action, suit or proceeding but
the fees and expenses of such counsel incurred after notice from the
Company of its assumption of the defense thereof shall be at the
expense of Indemnitee unless (i) the employment of counsel by
Indemnitee has been authorized by the Company, (ii) Indemnitee shall
have reasonably concluded that there may be a material conflict of
interest between the Company and Indemnitee in the conduct of the
defense of such action or (iii) the Company shall not in fact have
employed counsel to assume the defense of such action, in each of which
cases the fees and expenses of counsel shall be borne by the Company.
The Company shall not be entitled to assume the defense of any action,
suit or proceeding brought by or on behalf of the Company or as to
which Indemnitee shall have made the determination provided for in (ii)
above.
(c) The Company shall not be liable to indemnify Indemnitee under
the Agreement for any amounts paid in settlement of any action or claim
effected without its written consent. The Company shall not settle any
action or claim in any manner which would impose any material penalty
or limitation on Indemnitee without Indemnitee's written consent.
Neither the Company nor Indemnitee will unreasonably withhold its or
his consent to any settlement proposed by the other of any matter for
which indemnity is provided hereunder, including any settlement
including a penalty or limitation on the Indemnitee.
5. Prepaid Expenses. The expenses (including attorneys' fees) incurred
by Indemnitee in investigating, defending, or appealing any threatened, pending
or completed action, suit or proceeding covered hereunder, whether civil,
criminal, administrative or investigative, including without limitation any
action by or in the right of the Company (other than expenses to be paid
directly by the Company in assuming the defense of any matter covered hereby
under Section 4(b) hereof), shall be paid in advance by the Company.
2
<PAGE> 3
6. Repayment of Expenses. Indemnitee shall reimburse the Company for
all expenses paid by the Company in defending any civil or criminal action, suit
or proceeding against Indemnitee in the event and only to the extent that it
shall be finally determined that Indemnitee is not entitled to be indemnified by
the Company for such expenses under the Agreement or otherwise.
7. Other Rights and Remedies. The rights provided by any provision of
this Agreement shall not be deemed exclusive of any other rights to which
Indemnitee may be entitled under any provision of law or of the Company's
Certificate of Incorporation, any Bylaw, this or other agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while occupying any of
the positions or having any of the relationships referred to in Section 1 of
this Agreement, and shall continue after Indemnitee has ceased to occupy such
position or have such relationship.
8. Enforcement. In the event Indemnitee is required to bring any action
to enforce rights or to collect monies due under this Agreement and is
successful in such action, the Company shall reimburse Indemnitee for all of
Indemnitee's reasonable fees and expenses in bringing and pursuing such action.
9. Separability. Each of the provisions of this Agreement is a separate
and distinct agreement and independent of the others, so that if any provision
hereof shall be held to be invalid or unenforceable for any reason, such
invalidity or unenforceability shall not affect the validity or enforceability
of the other provisions hereof.
10. Miscellaneous. This Agreement shall be interpreted and enforced in
accordance with the laws of Delaware. This Agreement shall be binding upon
Indemnitee and upon Company, its successors and assigns, and shall inure to the
benefit of Indemnitee, his heirs, personal representatives and assigns and to
the benefit of the Company, its successors and assigns. No amendment,
modification, termination or cancellation of this Agreement, other than pursuant
to Section 9, shall be effective unless in writing signed by both parties
hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of _____ __, 1996.
UGLY DUCKLING CORPORATION
By __________________________________
Its _________________________________
Indemnitee
_____________________________________
3
<PAGE> 1
Exhibit 11
UGLY DUCKLING CORPORATION
SCHEDULE OF COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
Years ended December 31, Three months ended March 31,
------------------------------------------ ----------------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Earnings (Loss) $ 698,581 $(1,967,388) $(3,971,557) $ (464,699) $1,065,768
Preferred stock dividend paid $ -- $ -- $ -- $ -- $ (300,000)
------------------------------------------- --------------------------
Net Earnings (Loss) available
to Common Shares $ 698,581 $(1,967,388) $(3,971,557) $ (464,699) $ 765,768
=========================================== ==========================
Weighted average number of common
shares equivalent:
Weighted average common
shares outstanding 4,000,000 4,494,493 4,760,000 4,760,000 4,760,000
Common equivalent shares using
the treasury stock method (1) 319,407 319,407 319,407 319,407 319,407
------------------------------------------- --------------------------
4,319,407 4,813,901 5,079,408 5,079,407 5,079,407
Effect of 1.16-to-1 split (2) 1.16 1.16 1.16 1.16 1.16
------------------------------------------ --------------------------
Weighted average common shares
outstanding as adjusted 5,010,513 5,584,125 5,892,113 5,892,113 5,892,113
========================================== ==========================
Net Earnings (Loss) per Share (3) $ 0.14 $ (0.35) $ (0.67) $ (0.08) $ 0.13
========================================== ==========================
</TABLE>
- --------------------
(1) Treasury Stock Method Applied To All Periods Presented
<TABLE>
<S> <C> <C>
Common Stock issued 50,000
Options issued for purchase of Common Stock 382,000
-------
432,000
Proceeds received/to be received $760,000
Estimated Offering price per share
(Midpoint of offering range) $ 6.75
--------
Common Shares repurchased via application of
Treasury Stock Method 112,593
--------
Common Stock Equivalents using the Treasury Stock Met 319,407
========
</TABLE>
(2) Gives effect to the 1.16-to-1 common stock split effective with the
reincorporation of the Company in Delaware on April 24, 1996.
(3) Fully diluted earnings per common share is equivalent to primary earnings
per share.
<PAGE> 1
EXHIBIT 23.1
[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
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 three-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
May 29, 1996
<PAGE> 1
EXHIBIT 99.2
CONSENT OF DIRECTOR-NOMINEE
The undersigned hereby consents to being named as a director-nominee in
the Registration Statement of Form S-1 of Ugly Duckling Corporation to be filed
with the Securities and Exchange Commission within the next 30 days.
Dated: 5/28/96
-------
By: Christopher S. Jennings
<PAGE> 1
EXHIBIT 99.3
CONSENT OF DIRECTOR-NOMINEE
The undersigned hereby consents to being named as a director-nominee in
the Registration Statement on Form S-1 of Ugly Duckling Corporation to be filed
with the Securities and Exchange Commission on or about April 22, 1996.
Dated: 4/30/96
By: /s/ John N. MacDonough
--------------------------
Name: John N. MacDonough
