<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 11, 1997
REGISTRATION NO. 333-22237
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
UGLY DUCKLING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5521 86-0721358
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
(602) 852-6600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
STEVEN P. JOHNSON, ESQ.
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
UGLY DUCKLING CORPORATION
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
(602) 852-6600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPY TO:
STEVEN D. PIDGEON, ESQ.
SNELL & WILMER L.L.P.
ONE ARIZONA CENTER
PHOENIX, ARIZONA 85004-0001
(602) 382-6000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
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.
PURSUANT TO RULE 429(a), THE PROSPECTUS THAT IS A PART OF THIS REGISTRATION
STATEMENT ALSO RELATES TO ANOTHER REGISTRATION STATEMENT OF THE COMPANY
(REGISTRATION NO. 333-13755).
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED APRIL 11, 1997
5,413,144 SHARES
UGLY DUCKLING LOGO
COMMON STOCK
This Prospectus relates to an aggregate of 5,413,144 shares of Common
Stock, par value $.001 per share ("Common Stock"), of Ugly Duckling Corporation,
a Delaware corporation (the "Company"), which may be offered for sale by persons
(the "Selling Securityholders") who have acquired such shares in certain private
placement transactions by the Company not involving a public offering. The
Common Stock is being registered under the Securities Act of 1933, as amended
(the "Securities Act"), on behalf of the Selling Securityholders in order to
permit the public sale or other distribution of the Common Stock. The Common
Stock offered hereby is approximately 29.4% of the total outstanding Common
Stock of the Company. See "Risk Factors -- Shares Eligible for Future Sale."
The Common Stock may be sold or distributed from time to time by or for the
account of the Selling Securityholders or their nominees or pledgees through
underwriters or dealers, through brokers or other agents, or directly to one or
more purchasers, including pledgees, at market prices prevailing at the time of
sale or at prices otherwise negotiated.
None of the proceeds from the sale of the 5,413,144 shares of Common Stock
offered by the Selling Securityholders will be received by the Company.
Substantially all of the expenses in connection with the registration of the
Common Stock will be borne by the Company, except for any underwriter's,
brokers' or dealers' commissions or discounts. See "Plan of Distribution."
The Common Stock is quoted on Nasdaq National Market ("Nasdaq") under the
symbol "UGLY". On April 10, 1997, the last reported price of the Common Stock
was $16.375 per share.
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.
------------------------
The date of this Prospectus is April , 1997.
<PAGE> 3
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. Investors should carefully consider the
information set forth under the heading "Risk Factors."
As used herein, amounts followed by "(pro forma)" do not include revenues
or sales derived from one Company dealership which was sold December 31, 1995.
THE COMPANY
Ugly Duckling Corporation (the "Company") operates the largest publicly
held chain of "buy here-pay here" used car dealerships in the United States and
underwrites, finances, and services retail installment contracts generated from
the sale of used cars by its dealerships and by third party used car dealers
located in selected markets throughout the country. As part of its financing
activities, the Company has initiated a collateralized dealer financing program
pursuant to which it provides qualified independent used car dealers with
operating credit lines secured by the dealers' retail installment contract
portfolios. The Company targets its products and services to the sub-prime
segment of the automobile financing industry, which focuses on selling and
financing the sale of used cars to persons who have limited credit histories,
low incomes, or past credit problems ("Sub-Prime Borrowers").
The Company has expanded significantly in recent periods. From 1995 to
1996, total revenues increased by 55.2%, from $48.7 million (pro forma) to $75.6
million. The Company's net income grew to $5.9 million in 1996 (including $4.4
million in gains recognized from the sale of contract receivables pursuant to a
securitization program (the "Securitization Program") with SunAmerica Life
Insurance Company ("SunAmerica") discussed below), or $.60 per share, compared
with a net loss of $(4.0) million, or $(.67) per share in 1995.
The Company originated 6,929 contracts through its dealerships with an
aggregate principal balance of $49.0 million and purchased 9,825 contracts from
third party dealers with an aggregate principal balance of $56.8 million during
1996. The principal balance of the Company's total contract portfolio managed as
of December 31, 1996 was $109.9 million, including $51.7 million in contracts
serviced under the Securitization Program. Substantially all of the contracts
the Company services are with Sub-Prime Borrowers.
Company Dealership Operations. The Company sells used cars through
twenty-one wholly owned used car dealerships ("Company Dealerships") in Arizona,
Florida, Nevada, and Texas and finances such sales through retail installment
contracts that the Company services. The Company plans to open three additional
dealerships in the second quarter (two in New Mexico and one in Arizona). 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. Most Company Dealerships
maintain extensive inventories of 100 to 300 used cars and feature a wide
selection of makes and models (with ages generally ranging from 5 to 10 years).
The average sales price per car at Company Dealerships was $7,107 for 1996. The
Company has developed flexible underwriting guidelines and techniques, which
combine established underwriting criteria with managerial discretion, to
facilitate rapid credit decisions and utilizes networked computer systems to
monitor and service large volumes of contracts.
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.
Third Party Dealer Operations. The Company also purchases and services
contracts originated by third party used car dealers ("Third Party Dealers").
Through its acquisition of Champion Financial Services, Inc. in 1994, the
Company entered the Third Party Dealer financing market in order to leverage the
contract
3
<PAGE> 4
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 the date of this Prospectus, has
opened 42 Third Party Dealer contract buying offices ("Branch Offices") in 13
states and entered into contract purchasing agreements with approximately 1,800
Third Party Dealers.
The Company is in the process of expanding its Third Party Dealer
operations by implementing a collateralized dealer financing program (the
"Cygnet Dealer Program"). The Company believes that providing operating credit
lines to qualified Third Party Dealers will give such dealers a unique
opportunity to obtain the debt financing necessary to expand their businesses
while enabling the Company to earn additional finance income and to diversify
its earning asset base. The Company also believes that the relationships
established with these dealers will provide it with a preferred position to
acquire retail installment contracts from them. Such contract purchases would
provide these dealers with an additional source of financing and enable the
Company to further expand its contract portfolio.
The Company has also established insurance operations directed to the
sub-prime market. Its initial activities in this area have focused on force
placing casualty insurance on its Third Party Dealer contracts.
Growth Strategy. The Company believes that it is the largest publicly held
chain of Buy Here-Pay Here used car dealerships in the United States and that
its size has enabled it to have greater access to capital than smaller
competitors. The Company's strategy is to deploy this capital base to increase
sales revenue and finance income by acquiring or opening new dealerships and
finance operations. In the last several months, the Company has opened new
Company Dealerships in Arizona and Nevada, and has three other dealerships (one
in Arizona and two in New Mexico) currently under development. The Company
acquired four operating used car dealership locations and a used car
reconditioning facility in Florida on January 15, 1997 and has since opened a
fifth location in Florida. On April 1, 1997, the Company purchased substantially
all of the assets of a company engaged in the business of selling and financing
used motor vehicles, including seven dealerships in San Antonio and a contract
portfolio of approximately $24.3 million. The purchase price for the acquisition
was $26.3 million, subject to adjustment. The seven dealerships had sales in
1996 of approximately $22.5 million. The assets purchased have an unaudited book
value of $28.1 million, exclusive of reserves on approximately $26.2 million of
contract receivable principal balances.
Company Dealerships provide the Company with multiple benefits. First, the
dealerships generally generate income from operations within several months of
commencement of operations. Second, the Company Dealerships generate finance
receivable contracts which produce interest income prior to securitization, or
produce gain on sale at the time the finance receivables are securitized.
Newly acquired or opened dealerships have historically generated operating
profit within the first few months of operation, although results have varied
significantly by dealership. The Company's recent dealership acquisitions,
however, have been of larger groups of dealerships than those previously
acquired and are in new markets. Accordingly, no assurance can be given that the
recently acquired dealerships will become profitable, if at all, as quickly as
previously opened or acquired dealerships.
In recent periods, the Company has also rapidly expanded its Branch Office
network. Since December 31, 1995 the Company has opened 34 Branch Offices. As an
additional element of its growth strategy, the Company intends to expand its
insurance services and its Cygnet Dealer Program.
In recent periods, the Company has rapidly grown both its Company
Dealership and Branch Office operations and intends to focus future growth
opportunities in these areas and its Cygnet Dealer Program. While the Company
anticipates that its Cygnet Dealer Program could be a substantial revenue
contributor and is currently planning significant marketing emphasis on this
product, the Company is unable to predict the success or size of this program.
The Company intends to place continued emphasis on the growth of its
dealership operations and continually evaluates potential expansion and
acquisition opportunities. Continued expansion is subject to numerous factors,
including the identification of attractive market opportunities, the
availability of inventory, the hiring and training of personnel, and other
factors. The Company has rapidly grown its Branch Office network and intends to
continue to develop this network, consistent with the Company's guidelines on
contract portfolio risk, and its desire for continued geographic diversity.
4
<PAGE> 5
Capital Resources. The Company finances its operations through the
issuance of equity securities and borrowings pursuant to various credit
arrangements, including a revolving credit facility (the "Revolving Facility")
with General Electric Capital Corporation ("GE Capital") and the Securitization
Program with SunAmerica. Through December 31, 1996, the Company had securitized
an aggregate of $58.2 million in contracts originated through Company
Dealerships and $10.0 million in loans originated at Third Party Dealers and
purchased by the Company. Standard & Poor's has given "BBB" ratings to the $53.5
million in securities issued to SunAmerica in connection with the Securitization
Program, which the Company believes are the only "investment grade" ratings
given to certificates collateralized by used car installment contracts
originated at Buy Here-Pay Here dealerships without any external credit
enhancement. The Standard & Poor's rating is unrelated to an investment in the
Common Stock being offered pursuant to this Prospectus.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered............... 5,413,144 shares.
Common Stock outstanding(1)........ 18,440,404 shares.
Use of Proceeds.................... None of the proceeds from the sale of the 5,413,144
shares of Common Stock offered by the Selling
Securityholders will be received by the Company.
Nasdaq Symbol...................... "UGLY"
</TABLE>
- ---------------
(1) Excludes: (i) 992,932 shares of Common Stock issuable upon exercise of stock
options outstanding at March 31, 1997 under the Company's Long-Term
Incentive Plan with a weighted average exercise price of $10.26 per share;
and (ii) 291,023 shares of Common Stock issuable upon exercise of warrants
issued in connection with the Company's initial public offering with a
weighted average exercise price of $8.33 per share.
5
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total Revenues.................................................. $ 75,629 $58,203 $33,773
Sales of Used Cars............................................ 53,768 47,824 27,768
Interest Income............................................... 15,856 10,071 5,449
Gain on Sale of Loans......................................... 4,434 -- --
Servicing Income.............................................. 921 -- --
Other Income.................................................. 650 308 556
Cost of Used Cars Sold.......................................... 29,890 27,964 12,577
Provision for Credit Losses..................................... 9,811 8,359 8,140
Income before Operating Expenses................................ 35,928 21,880 13,056
Total Operating Expenses........................................ 24,700 19,896 12,320
Income Before Interest Expense.................................. 11,228 1,984 736
Interest Expense................................................ 5,262 5,956 3,037
Net Earnings (Loss)............................................. $ 5,866 $(3,972) $(1,967)
Earnings (Loss) per Share....................................... $ 0.60 $ (0.67) $ (0.35)
Shares used in Computation...................................... 8,283 5,892 5,584
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31,
------------------------ ------------------
ACTUAL PRO FORMA(1) 1995 1994
-------- ------------ ------- -------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents........................ $ 18,455 $102,708 $ 1,419 $ 168
Finance Receivables, Net......................... 51,063 51,063 40,726 15,858
Total Assets..................................... 118,083 202,336 60,790 29,711
Subordinated Notes Payable....................... 14,000 14,000 14,553 18,291
Total Debt....................................... 26,904 22,302 49,754 28,233
Preferred Stock.................................. -- -- 10,000 --
Common Stock..................................... 82,612 171,467 127 77
Total Stockholders' Equity (Deficit)(2).......... $ 82,319 $171,174 $ 4,884 $(1,194)
Principal Balances Outstanding:
Dealership Portfolio............................. $ 7,068 $34,226 $19,881
Third Party Dealer Portfolio..................... 51,213 13,805 1,620
------- ------- --------
Total Retained Portfolio......................... 58,281 48,031 21,501
------- ------- --------
Securitized with Servicing Retained:
Dealership Loans................................. 41,998 -- --
Third Party Dealer Loans......................... 9,665 -- --
------- ------- --------
Total Securitized with Servicing Retained........ 51,663 -- --
------- ------- --------
Total Managed Portfolio.......................... $109,944 $48,031 $21,501
======= ======= ========
</TABLE>
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(1) Pro Forma to give effect to the sale of 5,075,500 shares of Common Stock in
a private placement which closed February 13, 1997 (the "Private Placement")
and the initial application of the net proceeds therefrom, as if the Private
Placement had occurred as of December 31, 1996.
(2) Excludes (i) 912,000 shares of Common Stock issuable upon exercise of stock
options outstanding at December 31, 1996, under the Company's Long-Term
Incentive Plan with a weighted average exercise price of $8.60 per share;
and (ii) 291,023 shares of Common Stock issuable upon exercise of warrants
issued in connection with the Company's initial public offering of Common
Stock with a weighted average exercise price of $8.33 per share.
6
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
DEALERSHIP OPERATING DATA (UNAUDITED):
Number of Used Cars Sold......................................... 7,565 7,383 5,270
Company Dealerships.............................................. 8 8 8
Units Sold per Dealership........................................ 946 923 659
Number of Contracts Outstanding.................................. 1,045 8,049 5,515
Retained Portfolio:
Allowance as % of Outstanding Principal.......................... 23.0% 21.9% 30.4%
Average Principal Balances Outstanding........................... $6,764 $4,252 $3,605
Delinquencies:
Principal Balances 31 to 60 Days................................. 2.3% 4.2% 5.1%
Principal Balances over 60 Days.................................. 0.6% 1.1% 1.3%
Average Yield on Contracts....................................... 29.2% 28.0% 28.2%
THIRD PARTY OPERATING DATA (UNAUDITED):
Number of Contracts Purchased.................................... 9,825 3,012 1,423
Number of Branch Offices......................................... 35 8 1
Number of Third Party Dealers.................................... 1,400 118 20
Number of Contracts Outstanding.................................. 8,430 2,733 726
Retained Portfolio:
Allowance as % of Outstanding Principal.......................... 12.7% 7.2% 9.8%
Average Principal Balance Outstanding............................ $5,252 $5,051 $2,232
Delinquencies:
Principal Balances 31 to 60 Days................................. 3.1% 1.2% 6.0%
Principal Balances over 60 Days.................................. 1.1% 0.4% 2.6%
Average Yield on Contracts....................................... 25.8% 26.7% 30.9%
</TABLE>
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RISK FACTORS
Investment in the Common Stock offered hereby involves certain risks. In
addition to the other information included elsewhere in this Prospectus,
prospective investors should give careful consideration to the following factors
before purchasing shares of the Common Stock offered hereby.
NO ASSURANCE OF CONTINUED PROFITABILITY; FLUCTUATIONS IN OPERATING RESULTS
The Company began operations in 1992 and incurred significant losses in
1994 and 1995. In 1996, however, the Company achieved profitability with net
earnings of approximately $5.9 million (including $4.4 million of gains
recognized from the sale of contract receivables pursuant to the Securitization
Program) on total revenues of $75.6 million. There can be no assurance that the
Company will remain profitable. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON SECURITIZATIONS
In recent periods, a significant portion of the Company's net earnings have
been attributable to gains on sales of contract receivables under its
Securitization Program, which the Company expects to continue for the
foreseeable future. Consequently, the Company's net earnings may fluctuate from
quarter to quarter as a result of the timing and size of its securitizations.
The Company's ability to successfully complete securitizations in the future may
be affected by several factors, including the condition of securities markets
generally, conditions in the asset-backed securities markets specifically, and
the credit quality of the Company's portfolio. The amount of any gain on sale is
based upon certain estimates, which may not subsequently be realized. To the
extent that actual cash flows on a securitization are materially below
estimates, the Company would be required to revalue the residual portion of the
securitization which it retains, and record a charge to earnings based upon the
reduction. In addition, the Company records ongoing income based upon the cash
flows on its residual portion. The income recorded on the residual portion will
vary from quarter to quarter based upon cash flows received in a given period.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
POOR CREDITWORTHINESS OF BORROWERS; HIGH RISK OF CREDIT LOSSES
Substantially all of the contracts that the Company services are with
Sub-Prime Borrowers. Due to their poor credit histories, Sub-Prime Borrowers are
generally unable to obtain credit from traditional financial institutions, such
as banks, savings and loans, credit unions, or captive finance companies owned
by automobile manufacturers. The Company typically charges fixed interest rates
ranging from 21.0% to 29.9% on contracts originated at Company Dealerships,
while rates range from 17.6% to 29.9% on the Third Party Dealer contracts it
purchases. In addition, the Company has established an Allowance for Credit
Losses, which approximated 17.7% and 13.9% of contract principal balances for
1995 and 1996, respectively, to cover anticipated credit losses on the contracts
currently in its portfolio. At December 31, 1995 and 1996, the principal balance
of delinquent contracts as a percentage of total outstanding contract principal
balances was 4.2% and 3.7%, respectively. The Company's net charge offs as a
percentage of average principal outstanding for the years ended December 31,
1995 and 1996 were 21.7% and 16.7%, respectively. The Company believes its
current Allowance for Credit Losses is adequate to absorb anticipated credit
losses. However, no assurance can be given that the Company has adequately
provided for, or will adequately provide for, such credit risks or that credit
losses in excess of its Allowance for Credit Losses will not occur in the
future. A significant variation in the timing of or increase in credit losses on
the Company's portfolio would have a material adverse effect on the Company's
profitability. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Allowance for Credit Losses" and
"Business -- Monitoring and Collections."
RISKS ASSOCIATED WITH GROWTH STRATEGY AND NEW PRODUCT OFFERINGS
The Company's business strategy calls for aggressive growth in its sales
and financing activities through the development and acquisition of new Company
Dealerships and Branch Offices and the expansion of its existing operations to
include additional financing and insurance services. The Company's ability to
remain profitable as it pursues this business strategy will depend upon its
ability to: (i) expand its revenue generating operations while not
proportionately increasing its administrative overhead; (ii) originate and
purchase
8
<PAGE> 9
contracts with an acceptable level of credit risk; (iii) effectively collect
payments due on the contracts in its portfolio; (iv) locate sufficient
financing, with acceptable terms, to fund the expansion of used car sales and
the origination and purchase of additional contracts; and (v) adapt to the
increasingly competitive market in which it operates. Outside factors, such as
the economic, regulatory, and judicial environments in which it operates, will
also have an effect on the Company's business. The Company's inability to
achieve or maintain any or all of these goals could have a material adverse
effect on the Company's operations, profitability, and growth. See
"Business -- Business Strategy."
The Company has initiated its Cygnet Dealer Program, pursuant to which the
Company provides qualified Third Party Dealers with operating lines of credit
secured by such dealers' retail installment contract portfolios. While the
Company will require Third Party Dealers to meet certain minimum net worth and
operating history criteria to be considered for inclusion in the Cygnet Dealer
Program, the Company will, nevertheless, be extending credit to dealers who are
not otherwise able to obtain debt financing from traditional lending
institutions such as banks, credit unions, and major finance companies.
Consequently, as with its other financing activities, the Company will be
subject to a high risk of credit losses that could have a material adverse
effect on the Company's financial condition and results of operations and on the
Company's ability to meet its own financing obligations. Further, there can be
no assurance that the Company will be able to obtain the financing necessary to
fully implement the Cygnet Dealer Program. In addition, there can be no
assurance that the Company will be successful in its efforts to expand its
insurance services. See "Business -- Third Party Dealer Operations --
Collateralized Dealer Financing" and "Business -- Third Party Dealer
Operations -- Insurance Services."
NO ASSURANCE OF SUCCESSFUL ACQUISITIONS
The Company has recently completed two acquisitions and intends to consider
additional acquisitions of and alliances with other companies that could
complement the Company's existing business. There can be no assurance that
suitable acquisition or joint venture candidates can be identified, or that, if
identified, any such transactions will be consummated. Furthermore, there can be
no assurance that the Company will be able to integrate successfully such
acquired businesses, including those recently acquired, into its existing
operations, which could increase the Company's operating expenses in the
short-term and materially and adversely affect the Company's results of
operations. Moreover, any acquisition by the Company may result in potentially
dilutive issuances of equity securities, the incurrance of additional debt, and
amortization of expenses related to goodwill and intangible assets, all of which
could adversely affect the Company's profitability. Acquisitions involve
numerous risks, such as the diversion of the attention of the Company's
management from other business concerns, the entrance of the Company into
markets in which it has had no or only limited experience, and the potential
loss of key employees of the acquired company, all of which could have a
material adverse effect on the Company's business, financial condition, and
results of operations. See "Business -- Recent Acquisitions."
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 AutoNation, U.S.A. and Driver's Mart, which have
entered the used car sales business or announced plans to develop large used car
sales operations. Many franchised new car dealerships have also increased their
focus on the used car market. The Company believes that these companies are
attracted by the relatively high gross margins that can be achieved in this
market and the industry's lack of consolidation. Many of these companies and
franchised dealers have significantly greater financial, marketing, and other
resources than the Company. Among other things, increased competition could
result in increased wholesale costs for used cars, decreased retail sales
prices, and lower margins.
Like the sale of used cars, the business of purchasing and servicing
contracts originated from the sale of used cars to Sub-Prime Borrowers is highly
fragmented and very competitive. In recent years, several consumer finance
companies have completed public offerings in order to raise the capital
necessary to fund expansion and support increased purchases of contracts. These
companies have increased the competition for the purchase of contracts, in many
cases purchasing contracts at prices that the Company believes are not
commensurate with the associated risk. There are numerous financial services
companies serving, or capable
9
<PAGE> 10
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 decreased sales of
used cars and increased delinquencies, repossessions, and credit losses that
could hinder the Company's business. Because of the Company's focus on the
sub-prime segment of the automobile financing industry, its actual rate of
delinquencies, repossessions, and credit losses could be higher under adverse
conditions than those experienced in the used car sales and finance industry in
general. See "Business -- Company Dealership Operations" and "Business -- Third
Party Dealer Operations."
INDUSTRY CONSIDERATIONS
In recent periods, several major used car finance companies have announced
major downward adjustments to their financial statements, violations of loan
covenants, related litigation and other events. In addition, one of these
companies has filed for bankruptcy protection. These announcements have had and
may continue to have a disruptive effect on the market for securities of
sub-prime automobile finance companies, are expected to result in a tightening
of credit to the sub-prime markets and could lead to enhanced regulatory
oversight. Furthermore, companies in the used car financing market have been
subject to an increasing number of lawsuits brought by customers alleging
violations of various federal and state consumer credit and similar laws and
regulations. Although the Company is not currently subject to any such lawsuits,
no assurance can be given that such claims will not be asserted against the
Company in the future or that the Company's operations will not be subject to
enhanced regulatory oversight. See "Regulation, Supervision, and Licensing."
NEED TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH THIRD PARTY DEALERS
The Company enters into nonexclusive agreements with Third Party Dealers,
which may be terminated by either party at any time, pursuant to which the
Company purchases contracts originated by such dealers that meet the Company's
established terms and conditions. Pursuant to the Cygnet Dealer Program, the
Company enters into financing agreements with qualified Third Party Dealers. The
Company's Third Party Dealer financing activities depend in large part upon its
ability to establish and maintain relationships with such dealers. While the
Company believes that it has been successful in developing and maintaining
relationships with Third Party Dealers in the markets that it currently serves,
there can be no assurance that the Company will be successful in maintaining or
increasing its existing Third Party Dealer base, that such dealers will continue
to generate a volume of contracts comparable to the volume of contracts
historically generated by such dealers, or that any such dealers will become
involved in the Cygnet Dealer Program. See "Business -- Third Party Dealer
Operations" and "Business -- Collateralized Dealer Program."
GEOGRAPHIC CONCENTRATION
Company Dealership operations are currently concentrated in Arizona,
Florida, Nevada, and Texas. In addition, a majority of the Company's Branch
Offices are located in Arizona, Texas, Florida, and Indiana. Of the $109.9
million in total contracts serviced by the Company at December 31, 1996,
approximately
10
<PAGE> 11
$66.8 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 the Company's primary markets. See
"Business -- Company Dealership Operations" and "Business -- Third Party Dealer
Operations."
DEPENDENCE ON EXTERNAL FINANCING
The Company has borrowed, and will continue to borrow, substantial amounts
to fund its operations from financing companies and other lenders, some of which
are affiliated with the Company. Currently, the Company receives financing
pursuant to the Revolving Facility with GE Capital, which has a maximum
commitment of $50.0 million. Under the Revolving Facility, the Company may
borrow up to 65.0% of the principal balance of eligible Company Dealership
contracts and up to 90.0% of the principal balance of eligible Third Party
Dealer contracts. The Revolving Facility expires in September 1997, at which
time the Company has the option to renew it for one additional year. The
Revolving Facility is secured by substantially all of the Company's assets. In
addition, the Revolving Facility contains various covenants that limit, among
other things, the Company's ability to engage in mergers and acquisitions, incur
additional indebtedness, and pay dividends or make other distributions, and also
requires the Company to meet certain financial tests. As of December 31, 1996,
the aggregate principal amount outstanding under the Revolving Facility was $4.6
million, and the amount available to be borrowed was $45.4 million. Although the
Company believes it is currently in compliance with the terms and conditions of
the Revolving Facility, there can be no assurance that the Company will be able
to continue to satisfy such terms and conditions or that the Revolving Facility
will be extended beyond its current expiration date. In addition, the Company
and SunAmerica have entered into the Securitization Program pursuant to which
SunAmerica may purchase up to $175.0 million of the Company's asset-backed
securities. The Securitization Program is subject to numerous terms and
conditions, including the Company's ability to achieve investment-grade ratings
on its asset-backed securities. As of December 31, 1996, the Company had
securitized an aggregate of $58.2 million in contracts originated through
Company Dealerships and $10.0 million in loans originated at Third Party Dealers
and purchased by the Company, and had issued $53.5 million in asset-backed
securities to SunAmerica in 1996. There can be no assurance, however, that any
further securitizations will be completed or that the Company will be able to
secure additional financing, including the financing necessary to fully
implement the Cygnet Dealer Program, when and as needed in the future, or on
terms acceptable to the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
SENSITIVITY TO INTEREST RATES
A substantial portion of the Company's financing income results from the
difference between the rate of interest it pays on the funds it borrows and the
rate of interest it earns on the contracts in its portfolio. While the contracts
the Company services bear interest at a fixed rate, the indebtedness that the
Company incurs under its Revolving Facility bears interest at a floating rate.
In the event the Company's interest expense increases, it would seek to
compensate for such increases by raising the interest rates on its Company
Dealership contracts, increasing the acquisition discount at which it purchases
Third Party Dealer contracts, or raising the retail sales prices of its used
cars. To the extent the Company were unable to do so, the Company's net interest
margins would decrease, thereby adversely affecting the Company's profitability.
IMPACT OF USURY LAWS
The Company typically charges fixed interest rates ranging from 21.0% to
29.9% on the contracts originated at Company Dealerships, while rates range from
17.6% to 29.9% on the Third Party Dealer contracts it purchases. Currently, a
majority of the Company's used car sales activities are conducted in, and a
majority of the contracts the Company services are originated in, Arizona, which
does not impose limits on the interest rate that a lender may charge. However,
the Company has expanded, and will continue to expand, its operations into
states that impose usury limits, such as Florida and Texas. 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
11
<PAGE> 12
expansion and its results of operations. There can be no assurance that the
usury limitations to which the Company is or may become subject or that
additional laws, rules, and regulations that may be adopted in the future will
not adversely affect the Company's business. See "Business -- Regulation,
Supervision, and Licensing."
DEPENDENCE UPON KEY PERSONNEL
The Company's future success will depend upon the continued services of the
Company's senior management as well as the Company's ability to attract
additional members to its management team with experience in the used car sales
and financing industry. The unexpected loss of the services of any of the
Company's key management personnel, or its inability to attract new management
when necessary, could have a material adverse effect upon the Company. The
Company has entered into employment agreements (which include non-competition
provisions) with certain of its officers. See "Management."
CONTROL BY PRINCIPAL STOCKHOLDER
Mr. Ernest C. Garcia, II, the Company's Chairman, Chief Executive Officer,
and principal stockholder, holds 25.2% of the outstanding Common Stock. As a
result, Mr. Garcia will have a significant influence upon the activities of the
Company, as well as on all matters requiring approval of the stockholders,
including electing or removing members of the Company's Board of Directors,
causing the Company to engage in transactions with affiliated entities, causing
or restricting the sale or merger of the Company, and changing the Company's
dividend policy. See "Management" and "Principal Stockholders."
POTENTIAL ANTI-TAKEOVER EFFECT OF PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the Company to issue
"blank check" Preferred Stock, the designation, number, voting powers,
preferences, and rights of which may be fixed or altered from time to time by
the Board of Directors. Accordingly, the Board of Directors has the authority,
without stockholder approval, to issue Preferred Stock with dividend,
conversion, redemption, liquidation, sinking fund, voting, and other rights that
could adversely affect the voting power or other rights of the holders of the
Common Stock. The Preferred Stock could be utilized, under certain
circumstances, to discourage, delay, or prevent a merger, tender offer, or
change in control of the Company that a stockholder might consider to be in its
best interests. Although the Company has no present intention of issuing any
additional shares of its authorized Preferred Stock, there can be no assurance
that the Company will not do so in the future. See "Description of Capital
Stock -- Preferred Stock."
REGULATION, SUPERVISION, AND LICENSING
The Company's operations are subject to ongoing regulation, supervision,
and licensing under various federal, state, and local statutes, ordinances, and
regulations. Among other things, these laws require that the Company obtain and
maintain certain licenses and qualifications, limit or prescribe terms of the
contracts that the Company originates and/or purchases, require specified
disclosures to customers, limit the Company's right to repossess and sell
collateral, and prohibit the Company from discriminating against certain
customers. The Company is also subject to federal and state franchising and
insurance laws. See "Business -- Regulation, Supervision, and Licensing."
The Company believes that it is currently in substantial compliance with
all applicable federal, state, and local laws and regulations. There can be no
assurance, however, that the Company will be able to remain in compliance with
such laws, and such failure could have a material adverse effect on the
operations of the Company. In addition, the adoption of additional statutes and
regulations, changes in the interpretation of existing statutes and regulations,
or the Company's entrance into jurisdictions with more stringent regulatory
requirements could have a material adverse effect on the Company's business.
SHARES ELIGIBLE FOR FUTURE SALE
Approximately 5,122,456 shares of Common Stock outstanding as of the date
of this Prospectus (excluding the 5,413,144 shares offered hereby) are
"restricted securities," as that term is defined under Rule 144 promulgated
under the Securities Act. In general, under Rule 144 as currently in effect,
subject to the
12
<PAGE> 13
satisfaction of certain other conditions, if two years have elapsed since the
later of the date of acquisition of restricted shares from an issuer or an
affiliate of an issuer, the acquiror or subsequent holder is entitled to sell in
the open market, within any three-month period, a number of shares that does not
exceed the greater of one percent of the outstanding shares of the same class or
the average weekly trading volume during the four calendar weeks preceding the
filing of the required notice of sale. (A person who has not been an affiliate
of the Company for at least the three months immediately preceding the sale and
who has beneficially owned shares of Common Stock as described above for at
least three years is entitled to sell such shares under Rule 144 without regard
to any of the limitations described above.) Of the "restricted securities"
outstanding, substantially all of these shares have been held for the two-year
holding period required under Rule 144. In addition, up to 5,413,144 shares of
Common Stock offered hereby may be sold in the market. No predictions can be
made with respect to the effect, if any, that sales of the Common Stock offered
hereby in the market or the availability of shares of Common Stock for sale
under Rule 144 will have on the market price of Common Stock prevailing from
time to time. However, since nearly 10,535,600 out of the Company's 18,440,404
shares of Common Stock outstanding are available for sale pursuant to this
Prospectus or pursuant to Rule 144, substantial amounts of Common Stock may be
sold in the public market which may adversely affect prevailing market prices
for the Common Stock.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock could be subject to significant
fluctuations in response to such factors as, among others, variations in the
anticipated or actual results of operations of the Company or other companies in
the used car sales and finance industry, changes in conditions affecting the
economy generally, analyst reports, or general trends in the industry.
PRIOR LEGAL ACTIONS INVOLVING CHIEF EXECUTIVE OFFICER
In October 1990, Mr. Garcia pled guilty to one felony count of bank fraud
brought by the United States, on behalf of the Resolution Trust Corporation
("RTC"), for his participation in a real estate transaction involving Lincoln
Savings and Loan Association, a federally insured savings and loan institution
that later went into receivership. In connection with this matter, Mr. Garcia
also settled civil lawsuits filed against him by the RTC and the Securities and
Exchange Commission (the "Commission"), and consented to an administrative order
imposed by the Commission. In addition, a real estate investment company owned
by Mr. Garcia, as well as several limited partnerships organized by that
company, filed petitions for reorganization under Chapter 11 of the United
States Bankruptcy Code in 1990 and 1991. Mr. Garcia and his wife filed a
petition for discharge under Chapter 7 of the United States Bankruptcy Code in
June 1990. Mr. Garcia's company and the related partnerships were successfully
reorganized in the period from 1990 to 1993 and Mr. Garcia was fully discharged
in 1991. See "Management -- Involvement in Certain Legal Proceedings."
FORWARD LOOKING STATEMENTS
This Prospectus contains forward looking statements. Additional written or
oral forward looking statements may be made by the Company from time to time in
filings with the Commission or otherwise. Such forward looking statements are
within the meaning of that term in Section 27A of the Securities Act, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Such statements may include, but not be limited to, projections of
revenues, income, or loss, capital expenditures, plans for future operations,
financing needs or plans, and plans relating to products or services of the
Company, as well as assumptions relating to the foregoing. The words "believe,"
"expect," "anticipate," "estimate," "project," and similar expressions identify
forward looking statements. Forward looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified. Future
events and actual results could differ materially from those set forth in,
contemplated by, or underlying the forward looking statements. Statements in
this Prospectus, including those contained in this section entitled "Risk
Factors," in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and in the Notes to the
Company's Consolidated Financial Statements, describe factors, among others,
that could contribute to or cause such differences.
13
<PAGE> 14
THE COMPANY
The Company operates the largest publicly held chain of Buy Here-Pay Here
used car dealerships in the United States and underwrites, finances, and
services retail installment contracts generated from the sale of used cars by
its Company Dealerships and Third Party Dealers located in selected markets
throughout the country. As part of its financing activities, the Company has
initiated the Cygnet Dealer Program pursuant to which it provides qualified
Third Party Dealers with operating credit lines secured by the dealers' retail
installment contract portfolios. The Company began its used car sales and
financing operations in 1992 and has pursued an aggressive growth strategy since
that time. The Company has developed or acquired twenty-one Company Dealerships
in Arizona, Florida, Nevada, and Texas and has opened forty-two Branch Offices
located in thirteen 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 31 Ugly Duckling Rent-A-Car franchises throughout
the United States. The Company has suspended efforts to solicit new franchisees
or otherwise expand the Ugly Duckling Rent-A-Car business and it does not expect
to reinitiate such activities in the foreseeable future.
The Company operates through numerous direct and indirect wholly owned
subsidiaries, including: Duck Ventures, Inc., which provides all administrative
services to the Company, such as corporate finance and accounting, personnel
administration, data processing, communication systems maintenance, and software
development; Ugly Duckling Car Sales, Inc., which operates the Company
Dealerships; Champion Acceptance Corp., which services contracts originated by
Company Dealerships and contracts purchased from Third Party Dealers; Champion
Financial Services, Inc., which purchases contracts originated by Third Party
Dealers; UDRAC, Inc., which provides administrative services to Ugly Ducking
Rent-A-Car franchisees; Champion Receivables Corp., which is the Company's
special purpose corporation for purposes of the Securitization Program; Cygnet
Finance, Inc., which operates the Cygnet Dealer Program; Ugly Duckling Car Sales
Florida, Inc., which operates the Company Dealerships in Florida; Ugly Duckling
Car Sales Texas, L.L.P. which operates the Company Dealerships in Texas; Drake
Insurance Services, Inc., which serves as a holding company for Drake Insurance
Agency, Inc., an Arizona licensed insurance agency; and Drake Property &
Casualty Insurance Company and Drake Life Insurance Company, which are Turks and
Caicos Islands-chartered and licensed reinsurance companies; and several other
inactive subsidiaries.
The Company was formed in Arizona in 1992 for the purpose of purchasing
Duck Ventures, Inc. and other subsidiaries and was reincorporated in Delaware in
1996. Except as otherwise specified, all references in this Prospectus to the
"Company" refer to Ugly Duckling Corporation and its subsidiaries. The Company's
principal executive offices are located at and its mailing address is 2525 East
Camelback Road, Suite 1150, Phoenix, Arizona 85016. The telephone number of the
Company is 1-800-THE-DUCK.
USE OF PROCEEDS
None of the proceeds from the sale of the 5,413,144 shares of Common Stock
offered by the Selling Securityholders will be received by the Company.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock trades on Nasdaq under the symbol "UGLY." The
following table sets forth the high and low sale prices of the Common Stock, as
reported by Nasdaq, for the periods indicated:
<TABLE>
<CAPTION>
MARKET PRICE
-----------------
FISCAL YEAR 1996 HIGH LOW
--------------------------------------------------------- ------ ------
<S> <C> <C>
Second Quarter (from June 18, 1996)...................... $10.00 $ 8.50
Third Quarter............................................ $15.50 $ 8.13
Fourth Quarter........................................... $21.63 $13.00
FISCAL YEAR 1997
---------------------------------------------------------
First Quarter............................................ $25.75 $16.25
</TABLE>
14
<PAGE> 15
On April 10, 1997, the last reported sale price of the Common Stock on
Nasdaq was $16.375 per share. The Company estimates that there are approximately
1,600 beneficial holders of the Company's Common Stock.
DIVIDEND POLICY
The Company has never paid cash dividends on the Common Stock and does not
anticipate doing so in the foreseeable future. It is the current policy of the
Company's Board of Directors to retain any earnings to finance the operation 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
15.0% of each year's net earnings available for distribution. 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."
CAPITALIZATION
The following table sets forth: (i) the actual capitalization of the
Company as of December 31, 1996; (ii) the pro forma capitalization of the
Company giving effect to the sale of the 5,075,500 shares of Common Stock in the
Private Placement and the initial application of the net proceeds therefrom; and
(iii) the pro forma capitalization of the Company giving effect to the sale of
the 5,075,500 shares of Common Stock in the Private Placement, the initial
application of the net proceeds therefrom, and the acquisition of four
dealerships, a reconditioning facility, and a contract portfolio in Florida. The
table should be read in conjunction with the Company's Consolidated Financial
Statements and the related notes thereto included elsewhere in this Prospectus.
See "Seminole Finance Corporation Combined Financial Statements" and "Pro Forma
Financial Information."
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Debt:
Revolving Facility...................................... $ 4,602 $ -- $ 29,900
Notes Payable, Other.................................... 8,302 8,302 8,302
Subordinated Notes Payable.............................. 14,000 14,000 14,000
-------- --------- ---------
Total Debt...................................... 26,904 22,302 52,202
-------- --------- ---------
Stockholders' Equity:
Common Stock............................................ 82,612 171,467 171,467
Accumulated Deficit..................................... (293) (293) (293)
-------- --------- ---------
Total Stockholders' Equity(1)................... 82,319 171,174 171,174
-------- --------- ---------
Total Capitalization....................... $109,223 $ 193,476 $ 223,376
======== ========= =========
</TABLE>
- ---------------
(1) Excludes (i) 912,000 shares of Common Stock issuable upon exercise of stock
options outstanding at December 31, 1996, under the Company's Long-Term
Incentive Plan with a weighted average price of $8.60 per share; and (ii)
291,023 shares of Common Stock issuable upon exercise of warrants issued in
connection with the Company's initial public offering of Common Stock with a
weighted average exercise price of $8.33 per share.
15
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
The following table sets forth selected historical consolidated financial
data of the Company for each of the years in the five-year period ended December
31, 1996. The selected annual historical consolidated financial data for 1993,
1994, 1995, and 1996 are derived from the Company's Consolidated Financial
Statements audited by KPMG Peat Marwick LLP, independent certified public
accountants. The selected annual historical consolidated financial data for 1992
are derived from the Company's Consolidated Financial Statements audited by
Toback & Co., independent certified public accountants. For additional
information, see the Consolidated Financial Statements of the Company included
elsewhere in this Prospectus. The following table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales of Used Cars........................... $53,768 $47,824 $27,768 $13,969 $ 2,136
Less:
Cost of Used Cars Sold..................... 29,890 27,964 12,577 6,089 1,010
Provision for Credit Losses................ 9,811 8,359 8,140 3,292 826
------ ------- ------- ------- -------
14,067 11,501 7,051 4,588 300
------ ------- ------- ------- -------
Interest Income.............................. 15,856 10,071 5,449 1,629 148
Gain on Sale of Loans........................ 4,434 -- -- -- --
------ ------- ------- ------- -------
20,290 10,071 5,449 1,629 148
------ ------- ------- ------- -------
Servicing Income............................. 921 -- -- -- --
Other Income................................. 650 308 556 879 982
------ ------- ------- ------- -------
1,571 308 556 879 982
------ ------- ------- ------- -------
Income before Operating Expenses............. 35,928 21,880 13,056 7,096 1,430
Operating Expenses:
Selling and Marketing........................ 3,585 3,856 2,402 1,293 656
General and Administrative................... 19,538 14,726 9,141 3,625 828
Depreciation and Amortization................ 1,577 1,314 777 557 429
------ ------- ------- ------- -------
24,700 19,896 12,320 5,475 1,913
------ ------- ------- ------- -------
Income before Interest Expense............... 11,228 1,984 736 1,621 (483)
Interest Expense............................. 5,262 5,956 3,037 893 12
------ ------- ------- ------- -------
Earnings (Loss) before Income Taxes.......... 5,966 (3,972) (2,301) 728 (495)
Income Taxes (Benefit)....................... 100 -- (334) 30 --
------ ------- ------- ------- -------
Net Earnings (Loss).......................... $ 5,866 $(3,972) $(1,967) $ 698 $ (495)
====== ======= ======= ======= =======
Earnings (Loss) per Share.................... $ 0.60 $ (0.67) $ (0.35) $ 0.14 $ (0.11)
====== ======= ======= ======= =======
Shares used in Computation................... 8,283 5,892 5,584 5,011 4,640
====== ======= ======= ======= =======
</TABLE>
16
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents.............................. $ 18,455 $ 1,419 $ 168 $ 79 $ 415
Finance Receivables, Net............................... 51,063 40,726 15,858 7,089 1,758
Total Assets........................................... 118,083 60,790 29,711 11,936 4,392
Subordinated Notes Payable............................. 14,000 14,553 18,291 8,941 93
Total Debt............................................. 26,904 49,754 28,233 9,380 4,189
Preferred Stock........................................ -- 10,000 -- -- --
Common Stock........................................... 82,612 127 77 1 1
Total Stockholders' Equity (Deficit)................... 82,319 4,884 (1,194) 697 (1)
Principal Balances Outstanding:
Dealership Sales Portfolio........................... 7,068 34,226 19,881 9,588 2,492
Third Party Dealer Portfolio......................... 51,213 13,805 1,620 -- --
Portfolio Securitized with Servicing Retained........ 51,663 -- -- -- --
-------- ------- ------- ------- ------
Total.............................................. $109,944 $48,031 $21,501 $ 9,588 $2,492
======== ======= ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1996 1995 1994 1993 1992(1)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
DEALERSHIP OPERATING DATA (UNAUDITED):
Average Sales Price per Car........................... $ 7,107 $ 6,478 $ 5,269 $ 4,159 n/a
Number of Used Cars Sold.............................. 7,565 7,383 5,270 3,359 n/a
Company Dealerships................................... 8 8 8 5 1
Units Sold per Dealership............................. 946 923 659 672 n/a
Number of Contracts Originated........................ 6,929 6,129 4,731 3,093 n/a
Principal Balances Originated (000 Omitted)........... $48,996 $36,568 $23,589 $12,984 n/a
Retained Portfolio:
Number of Contracts Outstanding....................... 1,045 8,049 5,515 2,929 803
Allowance as % of Outstanding Principal............... 23.0% 21.9% 30.4% 30.0% 29.4%
Average Principal Balance Outstanding................. $ 6,764 $ 4,252 $ 3,605 $ 3,273 $3,105
Average Yield on Contracts............................ 29.2% 28.0% 28.2% 26.4% n/a
Delinquencies:
Principal Balances 31 to 60 Days...................... 2.3% 4.2% 5.1% 10.5% n/a
Principal Balances over 60 Days....................... 0.6% 1.1% 1.3% 15.0% n/a
THIRD PARTY OPERATING DATA (UNAUDITED):
Number of Contracts Purchased......................... 9,825 3,012 1,423 -- --
Principal Balances Purchased (000 Omitted)............ $56,770 $16,455 $ 3,607 -- --
Number of Branch Offices.............................. 35 8 1 -- --
Number of Third Party Dealers......................... 1,400 118 20 -- --
Number of Contracts Outstanding....................... 8,430 2,733 726 -- --
Retained Portfolio:
Allowance as % of Outstanding Principal............... 12.7% 7.2% 9.8% -- --
Average Principal Balance Outstanding................. $ 5,252 $ 5,051 $ 2,232 -- --
Average Yield on Contracts............................ 25.8% 26.7% 30.9% -- --
Delinquencies:
Principal Balances 31 to 60 days...................... 3.1% 1.2% 6.0% -- --
Principal Balances over 60 days....................... 1.1% 0.4% 2.6% -- --
Per Contract Purchased:
Average Discount...................................... $ 660 $ 551 $ 504 -- --
Average Percent Discount.............................. 11.4% 10.1% 12.5% -- --
</TABLE>
- ---------------
(1) n/a -- not available
17
<PAGE> 18
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, 1996, and 1995, and
its results of operations for the years ended December 31, 1996, 1995 and 1994.
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"). In
July, 1996, the Company opened a small dealership in Prescott, Arizona.
For substantially all of 1995 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 seven 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 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. Accordingly, 1995 amounts followed by "(pro forma)" have
been adjusted to eliminate Gilbert Dealership operations. For the Company's
actual 1995 results, including the Gilbert Dealership, see "Summary Consolidated
Financial Information," "Selected Consolidated Financial Data," and
"Consolidated Financial Statements."
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 one office and a
portfolio of approximately $1.9 million in sub-prime contracts averaging
approximately $2,000 in principal amount. For the balance of 1994, the Company
purchased an additional $1.7 million in contracts.
In April 1995, the Company initiated an aggressive plan to expand the
number of contracts purchased from its Third Party Dealer network. By the end of
1996, the Company had 35 branch offices in 12 states. This expansion enabled the
Company to leverage its existing infrastructure and increase its contract
portfolio much more quickly than it could through the expansion of its Company
Dealerships. The Company is in the process of further expanding its Third Party
Dealer operations and diversifying its earning asset base by implementing the
Cygnet Dealer Program pursuant to which the Company will provide Third Party
Dealers with operating credit lines secured by the dealers' retail installment
contract portfolios.
In 1996 the Company completed an initial public offering and a secondary
offering in which it sold common stock for a total of $82.3 million.
On January 15, 1997, the Company acquired substantially all of the assets
of Seminole Finance Corporation and related companies ("Seminole") in exchange
for approximately $2.5 million in cash and assumption of $29.9 million in debt.
See "Ugly Duckling Corporation -- Pro Forma Condensed Combined Balance
Sheet -- Unaudited" and "Ugly Ducking Corporation -- Pro Forma Condensed
Combined State-
18
<PAGE> 19
ment of Operations -- Unaudited." The pro forma statement of operations was
prepared by combining the Company's audited consolidated statement of operations
for the year ended December 31, 1996 and Seminole's audited combined statement
of operations for the same period as if the Seminole acquisition had taken place
on January 1, 1996. The pro forma statement of operations discloses a combined
net loss for the year ended December 31, 1996 of $(3.6) million. The pro forma
statement of operations is not necessarily indicative of the future results of
operations of the Company or the results that would have been obtained had the
Seminole acquisition occurred on January 1, 1996. In addition, the pro forma
results are not intended to be a projection of future results. The Company
expects the results of operations in 1997 for the assets acquired from Seminole
to differ materially from 1996 results because the Company's management intends
to significantly alter the type of vehicles sold at the newly acquired car
dealerships, the methodology by which the acquired operations acquire,
recondition, and market used cars, and the methodology by which the related
finance receivables are underwritten and collected, which management believes
will result in the acquired operations being profitable in 1997. Furthermore,
Seminole's audited combined statement of operations for 1996 was impacted by
several factors that are not expected to have an impact on future operations.
Such factors were related to the deterioration of its loan portfolio, which the
Company believes resulted from poor underwriting and ineffective collection
efforts. First, due to the deterioration of its loan portfolio in 1996, Seminole
recorded a total of $7.1 million in provision for credit losses. Second, the
deterioration of its loan portfolio also reduced its borrowing capacity, thereby
reducing Seminole's liquidity. As a result, in order to raise cash, Seminole
sold vehicles at substantially lower margins and sold a portfolio of notes in
December 1996 for a loss of approximately $1.5 million.
The following discussion and analysis provides information regarding the
Company's consolidated financial position as of December 31, 1996, and 1995, and
its results of operations for the years ended December 31, 1996, 1995 and 1994.
Growth in Finance Receivables. As a result of the Company's rapid
expansion, contract receivables serviced increased by 129.0% to $109.9 million
at December 31, 1996 (including $51.7 million in contracts serviced under the
Company's Securitization Program) from $48.0 million at December 31, 1995, which
was an increase of 123.3% from $21.5 million at December 31, 1994.
The following tables reflect the growth in contract originations by Company
Dealerships and contract purchases from Third Party Dealers as well as the
period end balances measured in terms of the principal amount and the number of
contracts.
TOTAL CONTRACTS ORIGINATED/PURCHASED
(IN THOUSANDS, EXCEPT NUMBER OF CONTRACTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ----------------------
PRINCIPAL NO. OF PRINCIPAL NO. OF PRINCIPAL NO. OF
AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT CONTRACTS
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Company Dealerships.................... $ 48,996 6,929 $ 36,568 6,129 $ 23,589 4,731
Third Party Dealers.................... 56,770 9,825 16,455 3,012 3,607 1,423
--------- ------ -------- ----- -------- -----
Total................................ $ 105,766 16,754 $ 53,023 9,141 $ 27,196 6,154
========= ====== ======== ===== ======== =====
</TABLE>
19
<PAGE> 20
TOTAL CONTRACTS OUTSTANDING
(IN THOUSANDS, EXCEPT NUMBER OF CONTRACTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ----------------------
PRINCIPAL NO. OF PRINCIPAL NO. OF PRINCIPAL NO. OF
AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT CONTRACTS
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Company Dealerships.................... $ 49,066 9,615 $ 34,226 8,049 $ 19,881 5,515
Third Party Dealers.................... 60,878 12,942 13,805 2,733 1,620 726
--------- ------- -------- ------ -------- -----
Total Portfolio Serviced............... $ 109,944 22,557 $ 48,031 10,782 $ 21,501 6,241
--------- ------- -------- ------ -------- -----
Less Portfolio Securitized and Sold.... (51,663) (10,612) -- -- -- --
--------- ------- -------- ------ -------- -----
Company Total........................ $ 58,281 11,945 $ 48,031 10,782 $ 21,501 6,241
========= ======= ======== ====== ======== =====
</TABLE>
The first table, reflecting Third Party Dealer purchases excludes $5.6
million in principal balances (2,095 contracts) acquired in a single bulk
purchase in late December 1996 and also excludes $1.6 million in lease contracts
acquired in October 1996 as part of a purchase of certain assets of a used car
dealership in Las Vegas, Nevada. The second table, reflecting Third Party Dealer
principal balances includes $5.5 million in principal balances related to this
bulk purchase and includes $1.4 million (375 contracts) in balances related to
these leases. There were no material bulk purchases in 1995 or 1994.
RESULTS OF OPERATIONS
The prices at which the Company sells its cars and the interest rates 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 interest 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 Statements of Operations calculated as Sales of
Used Cars less Cost of Used Cars Sold.
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Sales of Used Cars. Sales of Used Cars increased by 40.1% to $53.8 million
for the year ended December 31, 1996 from $38.4 million (pro forma) for the year
ended December 31, 1995 and by 38.1% for the year ended December 31, 1995 from
$27.8 million for the year ended December 31, 1994. This growth reflects
increases in the average unit sales price and the average number of units sold
by each Company Dealership.
The average sales price per car increased by 17.2% to $7,107 for the year
ended December 31, 1996 from $6,065 (pro forma) for the year ended December 31,
1995 compared to 15.1% from $5,269 in 1994. This increase reflects management's
decision to sell higher quality vehicles at its Company Dealerships. Units sold
per Company Dealership averaged 946, 904 (pro forma), and 659 for the years
ended December 31, 1996, 1995, and 1994, respectively. 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.
Cost of Used Cars Sold and Gross Margin. The Cost of Used Cars Sold
increased by 44.4% to $29.9 million for the year ended December 31, 1996 from
$20.7 million (pro forma) for the year ended December 31, 1995, which was an
increase of 64.3% from $12.6 million for the year ended December 31, 1994. On a
per unit basis, the Cost of Used Cars Sold increased by 20.8% to $3,951 for the
year ended December 31, 1996 from $3,270 (pro forma) for the year ended December
31, 1995, which was an increase of 37.0% from $2,387 for the year ended December
31, 1994, 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 35.0% to $23.9 million for the year ended December 31, 1996 from
$17.7 million (pro forma) for the year ended December 31, 1995, which was an
increase of 16.4% from $15.2 million for the year ended December 31, 1994. As a
percentage of sales, the gross margin was 44.4%, 46.1% (pro forma), and 54.7%
for the years ended December 31, 1996, 1995, and 1994, respectively. The Company
attributes the decline in the gross margin percentage to management's
20
<PAGE> 21
strategy of increasing the quality and, therefore, the cost, of cars sold at
Company Dealerships while maintaining a consistent dollar gross margin per unit
sold. 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 $3,156, $2,795(pro forma), and
$2,882 for the years ended December 31, 1996, 1995, and 1994, respectively.
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. As a
result, the Company recognizes a Provision for Credit Losses in order to
establish an Allowance for Credit Losses sufficient to absorb anticipated future
losses. The Provision for Credit Losses increased by 25.6% to $9.8 million in
1996 over $7.8 million (pro forma) in 1995, which was a decrease of $300,000 or
3.7% from $8.1 million in 1994. This includes an increase of $153,000 in the
Provision for Credit Losses in 1996 for third party receivables over 1995 when
the Company recorded no Provision for Credit Losses for third party receivables.
In 1994, the Company recorded Provision for Credit Losses totaling $116,000 for
its third party loan portfolio. On a percentage basis, the Provision for Credit
Losses per unit originated at Company Dealerships increased by 3.1% to $1,277
per unit in 1996 over $1,239 (pro forma) per unit in 1995, which was a decrease
of 18.7% from 1994 when the average was $1,523 per unit. As a percentage of
contract balances originated, the Provision for Credit Losses averaged 19.7%,
22.8% (pro forma), and 34.5% in 1996, 1995, and 1994, respectively. This
decrease reflects the Company's strengthened underwriting requirements, the
higher quality of the cars sold, and the Company's improved collection efforts.
The Company charges its Provision for Credit Losses to current operations
and does not recognize any portion of the unearned interest income as a
component of its Allowance for Credit Losses. Accordingly, the Company's
unearned finance income is comprised of the full annual percentage rate ("APR")
on its contracts less amortization of loan origination costs.
Interest Income. Interest Income consists primarily of interest on both
finance receivables from Company Dealership sales and interest on Third Party
Dealer finance receivables.
Company Dealership Sales -- Interest Income increased by 2.4% to $8.4
million for the year ended December 31, 1996 from $8.2 million for the year
ended December 31, 1995, which increased by 74.5% compared to $4.7 million in
the year ended December 31, 1994. Interest Income during the year ended December
31, 1996 was affected by the sale of $58.2 million in contract principal
balances pursuant to the Securitization Program, and will continue to be
affected in future periods by additional securitizations. 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 91.1% of sales revenue and 91.6% of
the used cars sold at Company Dealerships for the year ended December 31, 1996
compared to 89.7% (pro forma) of sales revenue and 91.2% (pro forma) of the used
cars sold for the year ended December 31, 1995, and 85.0% of sales revenue and
89.8% of used cars sold in the year ended December 31, 1994. The average amount
financed increased to $7,071 for the year ended December 31, 1996 from $5,966
for the year ended December 31, 1995 which had increased from $4,986 for the
year ended December 31, 1994. The effective yield on Finance Receivables from
Company Dealerships was 29.2%, 28.0%, and 28.2% for the years ended December 31,
1996, 1995, and 1994, respectively. The Company operated 8, 7 (pro forma), and 8
dealerships at December 31, 1996, 1995, and 1994, respectively.
Third Party Dealers -- Interest Income increased by 305.6% to $7.3 million
for the year ended December 31, 1996 from $1.8 million in 1995, which was an
increase of 153.5% from $710,000 in 1994. Interest Income during the year ended
December 31, 1996 was effected by the sale of $10.0 million in contract
principal balances pursuant to the Securitization Program, and will continue to
be effected in future periods by additional securitizations. Interest income has
increased in conjunction with the increases in Third Party Dealer contracts
purchased and outstanding. As noted above, the Company began to significantly
expand its Third Party Dealer branch office operations in April 1995. Further,
subsequent to June 30, 1995, as a result of its migration to higher quality
contracts and expansion into markets with interest rate limits, the Company's
yield on its Third Party Dealer contract portfolio has trended downward.
Portfolio yield was approximately
21
<PAGE> 22
25.8%, 26.7%, and 30.9% for the years ended December 31, 1996, 1995, and 1994,
respectively. The Company operated 35, 8 and 1 branch office(s) at December 31,
1996, 1995, and 1994, respectively.
Gain on Sale of Loans. Champion Receivables Corporation ("CRC"), a
"bankruptcy remote entity" is the Company's wholly-owned special purpose
securitization subsidiary. During the first quarter of 1996, the Company
initiated a Securitization Program under which CRC sells securities backed by
contracts to SunAmerica. Under the Securitization Program, CRC assigns and
transfers the contracts to separate trusts (the "Trusts") pursuant to Pooling
and Servicing Agreements (the "Pooling Agreements"). Pursuant to the Pooling
Agreements, Class A Certificates and subordinated Class B Certificates are
issued to CRC. CRC then sells the Class A Certificates to SunAmerica or its
nominees. The transferred contracts are serviced by Champion Acceptance
Corporation ("CAC"), another subsidiary of the Company. As a requirement to
obtain a "BBB" rating from Standard & Poors, CRC is required to provide a credit
enhancement by establishing and maintaining a cash spread account for the
benefit of the certificate holders. The Company makes an initial cash deposit
into the spread account, ranging from 3% to 4% of the initial underlying finance
receivables principal balance and pledges this cash to the Trusts. The Company
is also required to then make additional deposits from the residual cash flow
(through the trustees) to the spread account as necessary to attain and maintain
the spread account at a specified percentage, ranging from 6.0% to 8.0%, of the
underlying finance receivables principal balance. Distributions are not made to
CRC on the Class B Certificates unless the spread account has the required
balance, the required periodic payments to the Class A Certificate holders are
current, and the trustee, servicer and other administrative costs are current.
During 1996, the Company made initial spread account deposits totaling
$2,630,000. Additional net deposits through the trustees during 1996 totaled
$213,000 resulting in a total balance in the spread accounts of $2,843,000 as of
December 31, 1996. In connection therewith, the specified spread account balance
based upon the aforementioned specified percentages of the balances of the
underlying portfolios as of December 31, 1996 was $3,941,000, resulting in
additional funding requirements from future cash flows as of December 31, 1996
of $1,098,000. The additional funding requirement will decline as the trustees
deposit additional cash flows into the spread account and as the principal
balance of the underlying finance receivables declines.
The contracts transferred to the Trusts were purchased by CRC from either
CAC or Champion Financial Services ("CFS"), another subsidiary of the Company in
"true sale" transactions pursuant to separate Purchase Agreements. The
obligations of CAC, as servicer, pursuant to the Pooling Agreements are
guaranteed by the Company and certain other subsidiaries of the Company, other
than CRC, CAC and CFS.
The Company recognizes a Gain on Sale of Loans equal to the difference
between the yield earned on the contract portfolio securitized and the return on
the securities sold. The amount of any Gain on Sale of Loans is based upon
certain estimates, which may not subsequently be realized. To the extent that
actual cash flows on a securitization are materially below estimates, the
Company would be required to revalue the residual portion of the securitization
which it retains, and record a charge to earnings based upon the reduction.
The Company utilizes a number of estimates in arriving at the Gain on Sale
of Loans. The estimated cash flows into the trusts were discounted with rates
ranging from 16% to 25%. For contracts originated at Company Dealerships, net
losses were estimated using total expected cumulative net losses at loan
origination of approximately 25.0%, adjusted for actual cumulative net losses
prior to securitization. For contracts purchased from Third Party Dealers, net
losses were estimated using total expected cumulative net losses at loan
origination of approximately 13.5%, adjusted for actual cumulative net losses
prior to securitization. Losses are discounted at an assumed risk free rate.
Prepayment rates were estimated to be 1.5% per month of the beginning of month
balance. The assumptions utilized in prior securitizations may not necessarily
be the same as those utilized in future securitizations, if any.
Through December 31, 1996, the Company had securitized an aggregate of
$68.2 million in contracts, issuing $53.5 million in securities to SunAmerica.
Pursuant to these transactions, the Company reduced its Allowance for Credit
Losses by $10.0 million during 1996 and retained a residual in the contracts
sold of $9.9 million at December 31, 1996. The Company also recorded Gain on
Sale of Loans during 1996 of $4.4 million, net of expenses.
22
<PAGE> 23
During 1996, the Trusts issued certificates to Sun America at a weighted
average yield of 8.38% with the yields ranging from 8.15% to 8.62%, resulting in
net spreads, after servicing and trustee fees, ranging from 12.56% to 17.40%,
and averaging 16.36%.
The Company's net earnings may fluctuate from quarter to quarter in the
future as a result of the timing and size of its securitizations.
Servicing Income. The Company services the $51.7 million in contracts sold
in the securitization for monthly fees ranging from .33% to .42% of beginning of
period principal balances (4% to 5% annualized). Servicing Income for the year
ended December 31, 1996 totaled $921,000.
Other Income. Other Income consists primarily of franchise fees from the
Company's rent-a-car franchisees and insurance premiums earned on force placed
insurance policies. This income increased by 111.0% to $650,000 for the year
ended December 31, 1996 from $308,000 for the year ended December 31, 1995,
which was a decrease of 44.6% from the $556,000 in 1994. The Company no longer
actively engages in the rent-a-car franchise business.
Income before Operating Expenses. As a result of the Company's continued
expansion, Income before Operating Expenses grew by 77.7% to $35.9 million for
the year ended December 31, 1996 from $20.2 million (pro forma) for the year
ended December 31, 1995, which was an increase of 54.2% from $13.1 million in
1994. Interest Income on the loan portfolios and Gain on Sale of Loans were the
primary contributors to the increase. The increase also reflects the growth of
Sales of Used Cars.
Operating Expenses. Operating Expenses consist of Selling and Marketing
Expenses, General and Administrative Expenses, and Depreciation and
Amortization. The allocation of these expenses to each of the Company's business
segments (Company Dealerships, Company Dealership Receivables, Third Party
Dealers, and Corporate and Other) is shown at Note 20 to the Consolidated
Financial Statements.
Selling and Marketing Expenses. For the years ended December 31, 1996,
1995, and 1994, Selling and Marketing Expenses were comprised almost entirely of
advertising costs and commissions relating to Company Dealership operations.
Selling and Marketing Expenses increased by 12.5% to $3.6 million for the year
ended December 31, 1996 from $3.2 million (pro forma) for the year ended
December 31, 1995, which was an increase of 33.3% from $2.4 million in 1994. As
a percentage of Sales of Used Cars, these expenses averaged 6.7%, 8.3% (pro
forma), and 8.6% for the years ended December 31, 1996, 1995, and 1994,
respectively. On a per unit sold basis, Selling and Marketing Expenses of
Company Dealerships decreased by 7.1% to $474 per unit for the year ended
December 31, 1996 from $510 (pro forma) per unit for the year ended December 31,
1995, which was an increase of 18.9% from $429 per unit in 1994.
General and Administrative Expenses. General and Administrative Expenses
increased by 45.5% to $19.5 million for the year ended December 31, 1996 from
$13.4 million (pro forma) for the year ended December 31, 1995, which was an
increase of 47.3% from $9.1 million in 1994. These expenses represented 25.8%,
27.5%, and 27.0% of total revenues for the years ended December 31, 1996, 1995,
and 1994, respectively. For the year ended December 31, 1996, 42.5% of General
and Administrative Expenses were attributable to Company Dealership sales, 15.6%
to the Company Dealership Receivables' financing activities, 20.2% to Third
Party Dealer activities and 21.7% to Corporate overhead. For the year ended
December 31, 1995, 55.8% of General and Administrative Expenses were
attributable to Company Dealership sales, 18.2% to the Company Dealership
Receivables' financing activities, 7.9% to Third Party Dealer activities and
18.1% to Corporate overhead. The increase in General and Administrative Expenses
is a direct result of the Company's significant expansion of its Third Party
Dealer financing operations as well as continued expansion of infrastructure to
administer growth.
Depreciation and Amortization. Depreciation and Amortization consists of
depreciation and amortization on the Company's property and equipment and
amortization of the Company's trademarks. Depreciation and amortization
increased by 23.1% to $1.6 million for the year ended December 31, 1996 from
$1.3 million for the year ended December 31, 1995, which was an increase of
62.5% from $777,000 in 1994 . 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 year ended December 31, 1996, 20.2% of these
expenses were attributable to Company Dealership sales, 48.7% to the Company
Dealership receivables' financing activities, 12.4% to Third Party Dealer
activities and 18.7% to Corporate overhead. For the year ended December 31,
23
<PAGE> 24
1995, 21.2% of these expenses were attributable to Company Dealership sales,
36.5% to the Company Dealership receivables' financing activities, 6.8% to Third
Party Dealer activities and 35.5% to Corporate overhead. Amortization of
Covenants was $296,000 and $296,000 for the years ended December 31, 1995, and
1994 respectively. As of December 31, 1995, all existing covenants had been
fully amortized.
Interest Expense. Interest expense decreased by 11.7% to $5.3 million in
1996 from $6.0 million in 1995, which was an increase of 100.0% from $3.0
million in 1994. The decrease in 1996, despite significant growth in Company
assets, is the direct result of the two public offerings that were completed in
1996 which generated $79.4 million in cash, and the Company's Securitization
Program which generated $39.0 million in cash from the sale of Finance
Receivables which the Company utilized to pay down debt. Further, concurrent
with the Company's initial public offering on June 21, 1996, the Company
restructured its Subordinated Notes Payable reducing the borrowing rate on that
debt from 18% to 10% per annum.
Income Taxes. Income tax expense totaled $100,000 in 1996, up from zero in
1995. In 1994, the Company realized a tax benefit of $334,000. In 1996, the
Company utilized all of the Valuation Allowance that existed against its
deferred income tax assets as of December 31, 1995. Therefore, the Company
anticipates incurring income tax expense in the future at the statutory income
tax rates.
ALLOWANCE FOR CREDIT LOSSES
The Company has established an Allowance for Credit Losses ("Allowance") 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 and Provision for Credit Losses on contracts purchased
from Third Party Dealers. The Allowance on contracts originated at Company
Dealerships increased to 23.0% of outstanding principal balances as of December
31, 1996 compared to 21.9% as of December 31, 1995. The Allowance as a
percentage of Third Party Dealer contracts increased to 12.7% from 7.2% over the
same period. However, the Allowance as a percentage of the Company's combined
contract portfolio decreased to 13.9% at December 31, 1996 from 17.7% at
December 31, 1995 reflecting the fact that a greater portion of the Company's
overall contract portfolio is represented by contracts purchased from Third
Party Dealers, for which a lower level of Allowance is required.
24
<PAGE> 25
The following table reflects activity in the Allowance, as well as
information regarding charge off activity, for the years ended December 31, 1996
and 1995, in thousands.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
COMPANY DEALERSHIPS THIRD PARTY DEALERS
------------------- -------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Allowance Activity:
Balance, beginning of period........................ $ 7,500 6,050 $ 1,000 159
Provision for credit losses......................... 9,658 8,359 153 --
Discount acquired................................... -- -- 8,963 1,660
Reduction attributable to loans sold................ (9,331) -- (650) --
Net Charge offs..................................... (6,202) (6,909) (2,966) (819)
------- ------ ------- -----
Balance, end of period.............................. $ 1,625 7,500 $ 6,500 1,000
======= ====== ======= =====
Allowance as percent of period ended principal
balance........................................... 23.0% 21.9% 12.7% 7.2%
======= ====== ======= =====
Charge off Activity:
Principal Balances:
Collateral Recovered.............................. $ 6,256 6,686 $ 3,618 806
Collateral Not Recovered.......................... 1,859 2,478 717 220
------- ------ ------- -----
Total Principal Balances.......................... 8,115 9,164 4,335 1,026
Accrued interest.................................. 487 653 123 59
Recoveries, net................................... (2,400) (2,908) (1,492) (266)
------- ------ ------- -----
Net Charge Offs..................................... $ 6,202 6,909 $ 2,966 819
======= ====== ======= =====
Net Charge Offs as % of average principal
outstanding....................................... 23.0% 24.0% 10.7% 11.9%
======= ====== ======= =====
</TABLE>
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.
Net Charge Offs - Company Dealerships. Net Charge Offs for contracts
originated at Company dealerships in 1996 were 23.0% of the average principal
balance outstanding compared to 24.0% in 1995. As discussed above, beginning in
1995 and continuing in 1996 the Company has migrated to selling higher quality
cars at its dealerships. Accordingly, repossessions have less frequently met
Company standards for resale and, therefore, have been sold primarily at
wholesale auction.
Recoveries averaged 29.6% of principal balances charged off in 1996
compared to 31.7% in 1995, primarily reflecting reductions in the percentage of
repossessed cars sold at Company Dealerships of 11.0% in 1996 compared to 33.6%
in 1995.
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.
Net Charge Offs - Third Party Dealers. Net Charge Offs for contracts
purchased from Third Party Dealers in 1996 were 10.7% of the average principal
balance outstanding compared to 11.9% in 1995. Prior to April 1995, the Company
purchased from Third Party Dealers, at discounts of approximately 15.0% to
25.0%, contracts with average principal balances of approximately $4,000 bearing
a typical APR of 29.9%. In April 1995 the Company significantly revised and
expanded its Third Party Dealer program. Under the current program, which is
aimed at more creditworthy borrowers, it purchases from Third Party Dealers, at
discounts averaging approximately 11.0%, contracts with average principal
balances of approximately $5,800 bearing an average APR of 24.5%.
Recoveries averaged 34.4% of principal balances charged off on contracts
purchased from Third Party Dealers in 1996 compared to 25.9% for the year ended
December 31, 1995. The increase is due to both an
25
<PAGE> 26
increase in the percent of charged off collateral actually recovered to 83.5% in
1996 from 78.6% in 1995 and an increase in the percent realized from the resale
of recovered collateral to 41.2% in 1996 from 33.0% in 1995.
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 relationship of the average amount
financed to the underlying collateral's wholesale value and to a lesser degree
the generally more creditworthy customers served by Third Party Dealers. In its
Third Party Dealer portfolio, the Company generally limits the amount financed
to not more than 120.0% of the wholesale value of the underlying car, although
the Company will make exceptions on a case-by-case basis. For 1996, the amount
financed to wholesale book on the Third Party Dealer portfolio averaged 116.0%,
as compared to 191.9% for the Company Dealership portfolio (112.3% of Kelly Blue
Book retail value). For 1995, the amount financed to wholesale book on the Third
Party Dealer portfolio averaged 117.0%, as compared to 184.0% for the Company
Dealership portfolio (105.0% of Kelly Blue Book retail value). See
"Business -- Comparison of Contracts Originated at Company Dealerships and Third
Party Dealers."
Net Charge Off percentage trends for the respective portfolios are
considered by management in determining the adequacy of the Allowance as a
percentage of contract principal balances outstanding.
Static Pool Analysis. To monitor contract performance, beginning in June
1995, the Company implemented "static pool" analysis for all contracts
originated since January 1, 1993. Static pool analysis is a monitoring
methodology by which each month's originations and subsequent charge offs are
assigned a unique pool and the pool performance is monitored separately.
Improving or deteriorating performance is measured based on cumulative gross and
net charge offs as a percentage of original principal balances, based on the
number of complete payments made by the customer before charge off. The table
herein 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. For periods denoted by "x",
the pools have not seasoned sufficiently to allow for computation of cumulative
losses. For periods denoted by "-", the pools have not yet attained the
indicated cumulative age. While the Company monitors its static pools on a
monthly basis, for presentation purposes the information in the tables are
presented on a quarterly basis.
CONTRACTS ORIGINATED AT COMPANY DEALERSHIPS
The following table sets forth the cumulative net charge offs as a
percentage of original contract cumulative balances, based on the quarter of
origination and segmented by the number of monthly payments made prior to charge
off.
POOL'S CUMULATIVE NET LOSSES AS PERCENTAGE OF POOL'S ORIGINAL
AGGREGATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
MONTHLY PAYMENTS COMPLETED BY CUSTOMER BEFORE CHARGE
OFF
-----------------------------------------------------
0 3 6 12 18 24
--- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
1993:
1st Quarter................................ 6.6% 18.3% 26.6% 33.2% 35.1% 35.3%
2nd Quarter................................ 7.7% 18.4% 26.2% 30.6% 32.1% 32.3%
3rd Quarter................................ 8.5% 19.9% 25.2% 30.4% 31.5% 31.7%
4th Quarter................................ 7.1% 16.9% 23.4% 27.7% 28.9% 29.5%
1994:
1st Quarter................................ 3.5% 10.8% 14.3% 17.7% 19.3% 21.4%
2nd Quarter................................ 3.7% 11.3% 15.3% 19.7% 21.7% 22.8%
3rd Quarter................................ 3.5% 8.5% 12.9% 17.0% 19.4% 20.0%
4th Quarter................................ 2.9% 9.1% 13.3% 18.0% 20.1% x
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
MONTHLY PAYMENTS COMPLETED BY CUSTOMER BEFORE CHARGE
OFF
-----------------------------------------------------
0 3 6 12 18 24
--- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
1995:
1st Quarter................................ 1.6% 8.3% 13.8% 18.2% 20.6% --
2nd Quarter................................ 2.5% 7.9% 12.7% 17.2% x --
3rd Quarter................................ 1.9% 6.5% 11.3% 18.3% -- --
4th Quarter................................ 1.1% 5.8% 11.0% x -- --
1996:
1st Quarter................................ 1.4% 7.6% 13.3% -- -- --
2nd Quarter................................ 2.2% 9.3% x -- -- --
3rd Quarter................................ 1.5% -- -- -- -- --
</TABLE>
Analysis of portfolio delinquencies is also considered in evaluating the
adequacy of the Allowance. Principal balances 31 to 60 days delinquent as a
percentage of total outstanding contract principal balances totaled 2.3% and
4.2% as of December 31, 1996 and 1995, respectively. Principal balances 61 to 90
days delinquent as a percentage of total outstanding contract principal balances
totaled 0.6% and 1.1% as of December 31, 1996 and 1995, respectively. In
accordance with the Company's charge off policy, there are no accounts more than
90 days delinquent as of December 31, 1996 and 1995.
CONTRACTS PURCHASED FROM THIRD PARTY DEALERS
Non-refundable acquisition discount ("Discount") acquired totaled $9.0
million and $1.7 million for the years ended December 31, 1996 and 1995,
respectively. The Discount, attributable to Third Party Dealer branch purchases,
averaged 11.4% as a percentage of principal balances purchased in 1996, compared
to 10.1% in 1995. Beginning in 1996, the Company expanded into markets with
interest rate limits. While contractual interest rates on these contracts are
limited by law, the Company has been able to purchase these contracts at a
reasonably consistent effective yield and therefore Discounts have trended
upward. To date, the Company has credited the Allowance for Credit Losses all
Discount acquired with the purchase of contracts from Third Party Dealers.
The following table sets forth the cumulative net charge offs as a
percentage of original contract cumulative balances, based on the quarter of
origination and segmented by the number of monthly payments made prior to charge
off.
POOL'S CUMULATIVE NET LOSSES AS PERCENTAGE OF POOL'S ORIGINAL
AGGREGATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
MONTHLY PAYMENTS COMPLETED BY CUSTOMER BEFORE CHARGE
OFF
-----------------------------------------------------
0 3 6 12 18 24
--- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
1995:
2nd Quarter................................ 0.9% 4.1% 5.7% 7.8% x --
3rd Quarter................................ 1.4% 4.0% 5.2% 7.0% -- --
4th Quarter................................ 1.0% 4.4% 6.8% x -- --
1996:
1st Quarter................................ 0.8% 3.7% 6.9% -- -- --
2nd Quarter................................ 1.6% 6.3% x -- -- --
3rd Quarter................................ 1.4% -- -- -- -- --
</TABLE>
Beginning April 1, 1995, the Company initiated a new purchasing program for
Third Party Dealer contracts which included a rapid migration to higher quality
contracts. As of March 31, 1995, the Third Party Dealer portfolio originated
under the prior program had a principal balance of $2.0 million and has a
remaining balance of $133,000 as of December 31, 1996. Static pool results under
the prior program are not a material consideration for management evaluation of
the current Third Party Dealer portfolio and contract performance under this
prior program has been excluded from the table above.
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<PAGE> 28
While the static pool information is developing, management augments its
evaluation of the adequacy of the Allowance for Third Party Dealers through
comparisons in the characteristics of collateral ratios and borrowers on Third
Party Dealer contracts versus those of the Company Dealership contracts, as well
as through comparisons of portfolio delinquency, actual contract performance
and, to the extent information is available, industry statistics.
Analysis of portfolio delinquencies is also considered in evaluating the
adequacy of the Allowance. Principal balances 31 to 60 days delinquent as a
percentage of total outstanding contract principal balances totaled 3.1% and
1.2% as of December 31, 1996 and 1995, respectively. Principal balances 61 to 90
days delinquent as a percentage of total outstanding contract principal balances
totaled 1.1% and 0.4% as of December 31, 1996 and 1995, respectively. In
accordance with the Company's charge off policy there are no Third Party Dealer
contracts more than 90 days delinquent as of December 31, 1996 and 1995.
At December 31, 1995 the average number of days a customer was delinquent
when repossession took place was under 30 days for both contracts originated at
Company Dealerships and those purchased from Third Party Dealers. In 1996, the
Company elected to extend the time period before repossession is ordered with
respect to those customers who exhibit a willingness and capacity to bring their
contracts current. As a result of this revised repossession policy,
delinquencies increased slightly, as expected.
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 Company funds its capital requirements through
equity offerings, operating cash flow, the sale of finance receivables, and
supplemental borrowings.
The Company's Net Cash Provided by Operating Activities increased by 10.1%
from $6.3 million for 1995 to $7.0 in 1996, compared to an increase of 87.8%
from $3.4 million in 1994. The increase was primarily due to increases in Net
Earnings and the Provision for Credit Losses offset by an increase in Other
Assets and the Gain on Sale of Finance Receivables. The increase in 1995 over
1994 was primarily a result of a smaller increase in Inventory of $1.5 million,
and an increase in Accounts Payable, Accrued Expenses and Other Liabilities of
$2.0 million.
The Net Cash Used in Investing Activities decreased by 17.6% from $36.4
million in the year ended December 31, 1995 to $30.0 million in the year ended
December 31, 1996. The decrease was due primarily to a net increase in Finance
Receivables of $14.6 million and the $2.8 million used for the net increase in
the securitization spread account (Investments Held in Trust), the deposit of
$636,000 into a trust account and the $2.9 million increase used for the
purchases of Property and Equipment. Gross deposits into the spread account by
the trustees were $955,000 while gross disbursements from the spread account
totaled $742,000 during 1996. Cash used in investing activities increased from
1994 to 1995 by $15.8 million or 76.8% primarily as a result of a net increase
in Finance Receivables of $18.2 million offset by Property and Equipment
additions of $2.1 million.
The Company's Net Cash Provided by Financing Activities increased by 28.1%
from $31.3 million in the year ended December 31, 1995 to $40.1 million in the
year ended December 31, 1996. This increase was the result of the $79.4 million
in proceeds from the Company's public offerings of common stock, net of the
$28.6 million of repayment of Notes Payable and the redemption of $10.0 million
of Preferred Stock. The Company's Net Cash Provided by Financing Activities
increased by 80.9% or $14.0 million from 1994 to 1995 due primarily to a net
increase in Notes Payable of $12.3 million.
Revolving Facility. The Company maintains a Revolving Facility with GE
Capital that has a maximum commitment of up to $50.0 million. Under the
Revolving Facility, the Company may borrow up to 65.0% of the principal balance
of eligible Company Dealership contracts and up to 90.0% of the principal
balance of eligible Third Party Dealer 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 December 31, 1996, the
Company's borrowing capacity under
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<PAGE> 29
the Revolving Facility was $50.0 million, the aggregate principal amount
outstanding under the Revolving Facility was $4.6 million, and the amount
available to be borrowed under the facility was $45.4 million. The Revolving
Facility bears interest at the 30-day LIBOR plus 3.60%, payable daily (total
rate of 9.0% as of December 31, 1996).
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) make unsecured loans or other advances of money to officers,
directors, employees, stockholders or affiliates in excess of $25,000 in total;
(iii) engage in securitization transactions (other than the Securitization
Program with Sun America, for which GE Capital has consented); (iv) 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; (v) make any change in its capital structure; (vi)
declare or pay dividends except in accordance with all applicable laws and not
in excess of fifteen percent (15%) of each year's net earnings available for
distribution; (vii) make certain investments and capital expenditures; and
(viii) engage in certain transactions with affiliates. These covenants also
require the Company to maintain specified financial ratios, including a debt
ratio of 2.0 to 1 and a net worth of at least $75,000,000, and to comply with
all laws relating to the Company's business. The Revolving Facility also
provides that a transfer of ownership of the Company that results in less than
15.0% of the Company's voting stock being owned by Mr. Ernest C. Garcia II, will
result in an event of default under the Revolving Facility.
Subordinated Indebtedness and Preferred Stock. The Company has
historically borrowed substantial amounts from Verde Investments Inc. ("Verde"),
an affiliate of the Company. The Subordinated Notes Payable balances outstanding
to Verde totaled $14.6 million as of December 31, 1995 ($24.6 million prior to
the conversion of $10.0 million to Preferred Stock as discussed below), and
$14.0 million as of December 31, 1996. Prior to June 21, 1996, these borrowings
accrued interest at an annual rate of 18.0%. Effective June 21, 1996 the annual
interest rate on these borrowings was reduced to 10.0%. The Company is required
to make monthly payments of interest and annual payments of principal in the
amount of $2.0 million. This debt is junior to all of the Company's other
indebtedness and the Company may suspend interest and principal payments in the
event it is in default on obligations to any other creditors.
On December 31, 1995, Verde converted $10.0 million of subordinated debt to
Preferred Stock of the Company. Prior to June 21, 1996, the Preferred Stock
accrued a dividend of 12.0% annually, increasing one percent per year up to a
maximum of 18.0%. Effective June 21, 1996, the dividend on the Preferred Stock
was decreased from 12.0% to 10.0%. During 1996, the Company paid a total of
$916,000 in dividends to Verde on the Preferred Stock which was redeemed in
November 1996.
Convertible Note. In August 1995, the Company entered into a note purchase
agreement with SunAmerica pursuant to which SunAmerica purchased a $3.0 million
convertible subordinated note. The convertible note, which was due June 30,
1998, bore interest at a rate of 12.5%, payable quarterly, and was secured by a
pledge of the Common Stock of the Company held by the Company's Chairman, Chief
Executive Officer and principal stockholder. Effective June 21, 1996, SunAmerica
converted the note into Common Stock (444,444 shares at the initial public
offering price of $6.75 per share). In return for the conversion, the Company
granted SunAmerica a ten-year warrant to purchase 121,023 (as adjusted) shares
of Common Stock at the initial public offering price per share and paid fees to
SunAmerica totaling $150,000.
Securitizations. SunAmerica and the Company have entered into the
Securitization Program under which SunAmerica may purchase up to $175.0 million
of certificates secured by contracts. The Securitization Program provides the
Company with a source of funding in addition 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. 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.
In connection with its securitization transactions, 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
29
<PAGE> 30
receivables were sold. The trust in turn invests the cash in high quality liquid
investment securities. In addition, the Company (through the trustee) deposits
additional cash flows from the residual to the spread account as necessary to
attain and maintain the spread account at a specified percentage of the
underlying finance receivables principal balance. In the event that the cash
flows generated by the finance receivables sold to the trust are insufficient to
pay obligations of the trust, including principal or interest due to certificate
holders or expenses of the trust, the trustee will draw funds from the spread
account as necessary to pay the obligations of the trust. The spread account
must be maintained at a specified percentage of the principal balances of the
finance receivables held by the trust, which can be increased in the event
delinquencies or losses exceed specified levels. If the spread account exceeds
the specified percentage, the trustee will release the excess cash to the
Company from the pledged spread account.
Capital Expenditures and Commitments. The Company is pursuing an
aggressive growth strategy. In the fourth quarter of 1996, the Company acquired
the leasehold rights to an existing dealership in Las Vegas, Nevada, and has
three other dealerships (one in Phoenix, Arizona and two in Albuquerque, New
Mexico) currently under development. In addition, the Company opened thirteen
new Branch Offices during the fourth quarter of 1996, and recently completed
expansion of its contract servicing and collection facility.
In January 1997, the Company acquired selected operating assets of a group
of companies engaged in the business of selling and financing used vehicles,
including four dealerships located in the Tampa Bay/St. Petersburg market. See
"Business -- Recent Acquisitions," "Seminole Finance Corporation Combined
Financial Statements," and "Pro Forma Financial Information."
On April 1, 1997, the Company purchased substantially all of the assets of
a Company engaged in the business of selling and financing used motor vehicles,
including seven dealerships in San Antonio and a contract portfolio of
approximately $24.3 million. The purchase price for the acquisition was $26.3
million, subject to adjustment. The seven dealerships had sales in 1996 of
approximately $22.5 million. The assets purchased have an unaudited book value
of $28.1 million, exclusive of reserves on approximately $26.2 million of
contract receivable principal balances. See "Business -- Recent Acquisitions."
In addition to the facilities currently under development, the Company intends
to open 15 or more new Branch Offices and three or more Company Dealerships
through the end of 1997. The Company believes that it will expend approximately
$50,000 to establish each new Branch Office. New Company Dealerships cost
approximately $1.5 to $1.7 million to construct (excluding inventory). The
Company intends to finance these expenditures through operating cash flows and
supplemental borrowings, including amounts available under the Revolving
Facility and Securitization Program.
SEASONALITY
Historically, the Company has experienced higher revenues in the first two
quarters of the year than in the latter half of the year. The Company believes
that these results are due to seasonal buying patterns resulting in part from
the fact that many of its customers receive income tax refunds during the first
half of the year, which are a primary source of down payments on used car
purchases.
INFLATION
Increases in inflation generally result in higher interest rates. Higher
interest rates on the Company's borrowings would decrease the profitability of
the Company's existing portfolio. The Company will seek to limit this risk
through its Securitization Program and, to the extent market conditions permit,
for contracts originated at Company Dealerships, either by increasing the
interest rate charged, or the profit margin on, the cars sold, or for contracts
acquired from Third Party Dealers, either by acquiring contracts at a higher
discount or with a higher APR. To date, inflation has not had a significant
impact on the Company's operations.
ACCOUNTING MATTERS
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS No. 125), which the Company will adopt for its fiscal year beginning
January 1, 1997, establishes accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities. Management
has not determined the impact that adoption of SFAS No. 125 will have on the
Company.
30
<PAGE> 31
BUSINESS
GENERAL
Ugly Duckling Corporation (the "Company") operates the largest publicly
held chain of Buy Here-Pay Here used car dealerships in the United States and
underwrites, finances, and services retail installment contracts generated from
the sale of used cars by its Company Dealerships and by Third Party Dealers
located in selected markets throughout the country. As part of its financing
activities, the Company has initiated the Cygnet Dealer Program pursuant to
which it intends to provide qualified Third Party Dealers with operating credit
lines secured by the dealers' retail installment contract portfolios. The
Company targets its products and services to the sub-prime segment of the
automobile financing industry, which focuses on selling and financing the sale
of used cars to Sub-Prime Borrowers.
The rapidly growing used car sales and finance industry achieved record
sales in 1995 of 30.5 million units, representing approximately $290.0 billion
in sales. During this same period, more than $185.0 billion in retail
installment contracts were originated through the sale of used cars. Of these
totals, approximately 11.0 million units were sold to Sub-Prime Borrowers,
generating approximately $50.0 billion in retail installment contracts.
Consistent with the industry's growth, the Company has expanded
significantly in recent periods. From 1995 to 1996, total revenues increased by
55.2% from $48.7 million (pro forma) to $75.6 million. The Company's net
earnings grew to $5.9 million in 1996, or $0.60 per share, compared with a net
loss of $(4.0) million, or $(.67) per share in 1995.
The Company originated 6,929 contracts through its Company Dealerships with
an aggregate principal balance of $49.0 million and purchased 9,825 contracts
from Third Party Dealers with an aggregate principal balance of $56.8 million
during 1996. The principal balance of the Company's total contract portfolio
serviced as of December 31, 1996, was $109.9 million, including $51.7 million in
contracts serviced under the Securitization Program.
OVERVIEW OF USED CAR SALES AND FINANCE INDUSTRY
Used Car Sales. Used car retail sales typically occur through franchised
new car dealerships that sell used cars or independent used car dealerships. The
market for used car sales in the United States is significant and has steadily
increased over the past five years. The Company believes that the factors that
have led to growth in this industry include substantial increases in new car
prices, which have made new cars less affordable to the average consumer
relative to used cars, the greater reliability and durability of used cars
resulting from the production of higher quality cars, and the increasing number
of vehicles coming off-lease in recent years. Many analysts expect these trends
to continue, leading to further expansion of the used car sales market.
The used car sales industry is highly fragmented and, traditionally, sales
to customers have occurred through franchised and independent dealerships owned
by individuals, families, and small groups. According to industry sources, there
are over 23,000 franchised and 63,000 independent used car dealership locations
in the United States. Used car sales from franchised dealerships (or affiliated
used-only car lots) accounted for approximately 61.3% of used car sales during
1995, with the remaining 38.7% resulting from sales by independent dealerships.
The Company participates in the sub-prime segment of the independent used
car sales and finance market. This segment is serviced primarily by Buy Here-Pay
Here dealers that sell and finance the sale of used cars to Sub-Prime Borrowers.
Buy Here-Pay Here dealers typically offer their customers certain advantages
over more traditional financing sources, such as expanded credit opportunities,
flexible payment terms (including prorating customer payments due within one
month into several smaller payments and scheduling 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.
31
<PAGE> 32
Recently, the growth of the used car sales and finance market has attracted
significant attention from a number of large companies, including AutoNation,
U.S.A. and Driver's Mart, which have entered the used car sales business or
announced plans to develop large used car sales operations. The Company believes
that these companies are attracted by the relatively high gross margins that can
be earned in this business and the lack of consolidation in this market. None of
these companies have indicated an intention to focus on the Buy Here-Pay Here
segment.
Used Car Financing. The automobile financing industry is the third-largest
consumer finance market in the country, after mortgage debt and credit card
revolving debt, with more than $350.0 billion in contracts on new and used cars
originated in 1995. The sub-prime segment of this industry accounted for
approximately $50.0 billion of the overall market. Growth in automobile
financing has been fueled by the increasing prices of both new and used cars,
which has forced greater numbers of purchasers to seek financing when purchasing
a car. This industry is served by such traditional lending sources as banks,
savings and loans, and captive finance subsidiaries of automobile manufacturers,
as well as by independent finance companies and Buy Here-Pay Here dealers. In
general, the industry is categorized according to the type of car sold (new
versus used) and the credit characteristics of the borrower. With respect to the
borrowers, finance companies classify such individuals according to the
following generalized criteria:
- An "A" credit or "prime" borrower is a person who has a long credit
history with no defaults, has been employed in the same job for a period
of at least 18 months, and can easily finance a new car purchase through
a bank, a captive finance subsidiary of an automobile manufacturer, or an
independent finance company.
- A "B" credit or "non-prime" borrower is a person who has a substantial
credit history that includes late payments, an inconsistent employment
history, or significant or unresolved problems with credit in the past.
To finance a used car purchase, this borrower will generally not be able
to obtain a loan from a captive finance subsidiary or a bank, and will
have to obtain financing from an independent finance company that lends
into this market category.
- A "C" credit or "sub-prime" borrower generally has little or no credit
history or a credit history characterized by consistently late payments
and sporadic employment. Like "B" credit borrowers, "C" credit borrowers
generally are not able to obtain a loan from a captive finance subsidiary
or a bank, and have to obtain financing from an independent finance
company that lends into this market category.
- A "D" credit borrower is also referred to as a "sub-prime" borrower.
These persons, however, in addition to having an unfavorable employment
history, have also experienced debt charge offs, foreclosures, or
personal bankruptcy. In purchasing a car, this borrower's only choice is
to obtain financing from an independent finance company or through a Buy
Here-Pay Here dealer.
As with its used car 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. Many of the
traditional lending sources do not consistently provide financing to the
sub-prime consumer finance market. The Company believes traditional lenders
avoid this market because of its high credit risk and the associated collection
efforts.
Many of the 63,000 independent used car dealers are not able to obtain debt
financing from traditional lending sources such as banks, credit unions, or
major finance companies. These dealers typically finance their operations
through the sale of contract receivables at a substantial discount. The Company
believes that independent dealers prefer to finance their operations through
credit facilities that enable them to retain their receivables, thereby
increasing their finance income. Accordingly, the Company believes that there is
a substantial opportunity for a company capable of serving the needs of such
dealers to make significant penetration into this underdeveloped segment of the
sub-prime market.
The industry statistical information presented herein is derived from
information provided to the Company by CNW Marketing/Research of Bandon, Oregon.
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<PAGE> 33
RECENT ACQUISITIONS
In January 1997, the Company acquired selected assets of a group of
companies (the "Sellers") engaged in the business of selling and financing used
motor vehicles, including four dealerships located in the Tampa Bay/St.
Petersburg market. The acquired assets consist primarily of Sellers' inventory
of vehicles and a portfolio of installment sales contracts. The purchase price
for the assets acquired was approximately $32.4 million. In addition, the
Company leased certain facilities used in this business.
In connection with the acquisition, the Company made a commercial loan to
one of the Sellers in the amount of $891,000, secured by consumer loans and,
subject to certain conditions, committed to advance to an affiliate of Sellers
$1.5 million, secured by a second priority lien on certain real property. These
loans are guaranteed by the principal shareholders of Sellers. See "Seminole
Finance Corporation Combined Financial Statements" and "Pro Forma Financial
Information."
On April 1, 1997, the Company purchased substantially all of the assets of
a company engaged in the business of selling and financing used motor vehicles,
including seven dealerships in San Antonio and a contract portfolio of
approximately $24.3 million. The purchase price for the acquisition was $26.3
million, subject to adjustment. The seven dealerships had sales in 1996 of
approximately $22.5 million. The assets purchased have an unaudited book value
of $28.1 million, exclusive of reserves on approximately $26.2 million of
contract receivable principal balances.
BUSINESS STRATEGY
The Company intends to leverage its management team, collection facilities,
computer networks, and capital base to grow its Company Dealership operations,
Third Party Dealer operations, and Cygnet Dealer Program both in Arizona and in
other geographic locales.
Expand Company Dealership Operations. Since commencing its used car sales
and financing operations in 1992, the Company has pursued an aggressive growth
strategy through both internal development and acquisition. As of the date of
this Prospectus, the Company has developed or acquired twenty-one Company
Dealerships. The Company's strategy is to increase sales revenue and finance
income by acquiring or opening new dealerships and finance operations. In the
last several months, the Company has opened new Company Dealerships in Arizona
and Nevada and has three other dealerships (one in Arizona and two in New
Mexico) currently under development. The Company intends to continue the
aggressive development or acquisition of Company Dealerships throughout the
southwestern United States and in other locations where opportunities may arise.
See "-- Recent Acquisitions."
The Company distinguishes its direct sales and financing operations from
typical Buy Here-Pay Here dealers by providing multiple locations, upgraded
facilities, large inventories of used automobiles, and dedication to customer
service. The Company has designed and implemented a marketing program featuring
its animated duck mascot that promotes its image as a professional, yet
approachable, operation, in contrast to the generally unfavorable public image
of many Buy Here-Pay Here dealers. In addition, the Company has developed
flexible underwriting guidelines and techniques, which combine established
underwriting criteria with managerial discretion, to facilitate rapid credit
decisions, as well as an integrated, technology-based corporate infrastructure
that enables the Company to monitor and service large volumes of contracts.
Expand Third Party Dealer Operations. The Company has leveraged the
contract servicing experience and capabilities it acquired through its Company
Dealership activities by purchasing and servicing contracts originated by Third
Party Dealers. As of the date of this Prospectus, the Company has opened
forty-two Branch Offices in thirteen states. These Branch Offices service
approximately 1,800 Third Party Dealers. The Company continually evaluates
expansion of its Third Party Dealer operations into additional geographic areas.
Implement New Products and Services. The Company is in the process of
expanding its Third Party Dealer operations by implementing the Cygnet Dealer
Program. The Company believes that providing operating credit lines to qualified
Third Party Dealers will give such dealers a unique opportunity to obtain the
debt financing necessary to expand their businesses while enabling the Company
to earn additional finance income and diversify its earning asset base. The
Company also believes that the relationships established with
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these dealers will provide it with a preferred position to acquire retail
installment contracts from them. Such contract purchases would provide these
dealers with an additional source of financing and enable the Company to further
expand its contract portfolio. The Company began full-scale marketing of the
program during the first quarter of 1997.
The Company also intends to expand its insurance operations, which to date
consist of force placing casualty insurance on its Third Party Dealer contracts.
Among other things, the Company is evaluating the sale of other insurance
products to its customer base. See "-- Third Party Dealer Operations."
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 $32.5
million, $56.1 million ($46.6 million excluding sales at the Gilbert
Dealership), and $67.0 million for fiscal years 1994, 1995, and 1996,
respectively. See Note 20 to the Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Retail Car Sales. The Company distinguishes its Company Dealership
operations from those of typical Buy Here-Pay Here dealers through its network
of multiple locations, upgraded facilities, large inventories of used cars,
centralized purchasing, value-added marketing programs, and dedication to
customer service. All Company Dealerships are located in high visibility, high
traffic commercial areas, and generally are newer and cleaner in appearance than
other Buy Here-Pay Here dealers, which helps promote the Company's image as a
friendly and reputable business. The Company believes that these factors,
coupled with its widespread brand name recognition (achieved through extensive
promotion of its duck mascot and logo), enable it to attract customers who might
otherwise visit another Buy Here-Pay Here dealer.
Company Dealerships generally maintain an average inventory of 100 to 300
used cars and feature a wide selection of makes and models (with ages generally
ranging from 5 to 10 years) and a range of sale prices, all of which enables the
Company to meet the tastes and budgets of a broad range of potential customers.
The Company acquires its inventory from new or late-model used car dealers, used
car wholesalers, used car auctions, and customer trade-ins, as well as from
repossessions. The Company's size enables it to cut inventory costs by making
volume purchases for all Company Dealerships. In making its purchases, the
Company takes into account each car's retail value and the costs of buying,
reconditioning, and delivering the car for resale. After purchase, cars are
delivered to the individual dealerships, where they are inspected and
reconditioned for sale. Although the prices of used cars are subject to market
variance, the Company does not believe that it will encounter significant
difficulty in maintaining its current inventory levels.
The average sales price per car at Company Dealerships was $7,107 for the
fiscal year ended December 31, 1996, and $6,065 for the fiscal year ended
December 31, 1995 (exclusive of sales at the Company's Gilbert Dealership).
Company Dealerships use a standardized sales contract that typically provides
for down payments of approximately 10.0% to 15.0% of the purchase price with the
balance of the purchase price financed at fixed interest rates ranging from
21.0% to 29.9% over periods ranging from 12 to 48 months. The Company sells cars
on an "as is" basis, and requires its customers to sign an agreement at the date
of sale releasing the Company from any obligation with respect to
vehicle-related problems that subsequently occur. See "-- Legal Proceedings."
Used Car Financing. The Company finances approximately 90.0% of the used
car sales at its Company Dealerships through retail installment contracts that
the Company services. Subject to the discretion of its sales managers, potential
customers must meet the Company's underwriting guidelines, referred to as
minimum deal standards, before the Company will agree to finance the purchase of
a car. The Company created these minimum deal standards to control its exposure
to credit risk while providing its sales managers with sufficient flexibility to
consummate sales when appropriate. In connection with each sale, customers are
required to complete a credit application. Company personnel analyze and verify
customer application information, which contains employment and residence
histories, income information, and references, as well as the customer's
personal cash flow statement (taking into account the completion of the sale),
credit bureau reports, and other information regarding the customer's credit
history.
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The Company's credit underwriting process takes into account the ability of
its managers and other sales employees, who have extensive experience, to make
sound judgments regarding the extension of credit to Sub-Prime Borrowers and to
personalize financing terms to meet the needs of individual customers. For
example, contract payments may be scheduled to coincide with the customer's pay
days, whether weekly, biweekly, semi-monthly, or monthly. In addition, each
manager makes credit approvals only after a "face-to-face" interview with the
potential customer in which the manager gains firsthand information regarding
the customer's financial situation, sources of income, and past credit problems.
The Company believes that its customers value the expanded credit opportunities
that such flexibility provides and, consequently, will pay a higher price for
their cars. The Company believes that the higher prices it charges are necessary
to fund the high rate of credit losses incurred as a result of financing
Sub-Prime Borrowers. To the extent the Company is unable to charge such higher
prices or otherwise obtain acceptable margins, its results of operations will be
adversely affected.
Subsequent to each sale, all finance transactions are "audited" by the
Company's portfolio manager and reviewed for compliance with the Company's
underwriting standards. To the extent such audits reveal non-compliance, such
non-compliance is discussed with dealership management and, where appropriate,
remedial action is taken against the responsible manager, ranging from oral or
written reprimands to termination.
The Company's use of wide area and local area networks enables it to
service large volumes of contracts from its centralized servicing facilities
while allowing the customer the flexibility to make payments at and otherwise
deal with the individual dealerships. In addition, the Company has developed
comprehensive databases and sophisticated management tools, including static
pool analysis, to analyze customer payment history and contract performance and
to monitor underwriting effectiveness.
Advertising and Marketing. The Company believes that it maintains the
largest advertising budget of any Buy Here-Pay Here dealer in Arizona. In
general, the Company's advertising campaigns emphasize its multiple locations,
wide selection of quality used cars, and ability to provide financing to most
Sub-Prime Borrowers. The Company's advertising campaign revolves around a series
of television commercials that feature the Company's animated duck mascot, as
well as complementary radio, billboard, and print advertisements. The Company
believes that its marketing approach creates brand name recognition and promotes
its image as a professional, yet approachable, business, in contrast to the lack
of name recognition and generally unfavorable public image of many Buy Here-Pay
Here dealers. The Company believes that its advertising has helped establish it
as the most widely recognized Buy Here-Pay Here dealership network in Arizona.
A primary focus of the Company's marketing strategy is its ability to
finance consumers with poor credit histories. Under the slogan "Ugly Duckling
Car Sales -- Putting You on the Road to Good Credit," the Company has initiated
innovative marketing programs designed to attract Sub-Prime Borrowers, assist
such customers in reestablishing their credit, reward those customers who pay on
time, develop customer loyalty, and increase referral and repeat business. Among
these programs are:
- The Down Payment Back Program. This program encourages customers to make
timely payments on their contracts by enabling them to receive a refund
of their initial down payment (typically representing 10.0%-15.0% of the
initial purchase price of the car) at the end of the contract term if all
payments have been made by the scheduled due date.
- The Income Tax Refund Program. During the first quarter of each year,
the Company offers assistance to customers in the preparation of their
income tax returns, including forwarding customers' tax information to a
designated preparer, paying the preparation fee, and, if there is a
forthcoming tax refund, crediting such refund toward the required down
payment. This program enables customers to purchase cars without having
to wait to receive their income tax refund.
- Secured $250 Visa Card Program. Pursuant to this program, the Company
arranges for qualified applicants to obtain a Visa credit card secured by
a nonrefundable $250 payment made by the Company to the credit card
company. This program offers otherwise unqualified customers the chance
to obtain the convenience of a credit card and rebuild their credit
records.
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
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information regarding their experience while at a Company Dealership. In
addition, customers with satisfactory payment histories are contacted several
months before contract maturity and are offered an opportunity to purchase
another vehicle with a nominal down payment requirement. The Company also
maintains a loan-by-phone program utilizing its toll-free telephone number of
1-800-THE-DUCK.
Sales Personnel and Compensation. Each Company Dealership is run by a
general manager who has complete responsibility for the operations of the
dealership facility, including final approval of sales and contract
originations, inventory maintenance, the appearance and condition of the
facility, and the hiring, training, and performance of Company Dealership
employees. In addition to the general manager, the Company typically staffs each
dealership with, among others, up to three sales managers, an office manager, a
lot supervisor, five to twelve salespersons, and several mechanics.
The Company trains its managers to be contract underwriters. The Company
pays its managers a base salary and allows them to earn bonuses based upon a
variety of factors, including the overall performance of the contract portfolio
originated. Although sales persons are paid on commission, each sale must be
underwritten and approved by a manager. By giving its managers a strong
incentive to underwrite quality contracts, the Company believes that it can
maintain its current level of credit losses while continuing to achieve
significant growth in sales revenue.
THIRD PARTY DEALER OPERATIONS
Contract Purchasing. In 1994, the Company acquired Champion Financial
Services, Inc., an independent automobile finance company, primarily for its
management expertise and contract servicing software and systems. Champion had a
portfolio of approximately $1.9 million in sub-prime contracts averaging
approximately $2,000 in principal amount. For the balance of 1994, the Company
purchased an additional $1.7 million in contracts.
In April 1995, the Company initiated an aggressive plan for purchasing
contracts from Third Party Dealers and as of the date of this Prospectus has
opened forty-two Branch Offices in thirteen different states throughout the
country and entered into contract purchasing agreements with approximately 1,800
Third Party Dealers. The Company has hired experienced branch managers having
existing relationships with Third Party Dealers and opened Branch Offices near
its Third Party Dealers to better service their needs. The Company services the
Third Party Dealer contract portfolio from its centralized collection and
servicing centers. The expansion of its Third Party Dealer network enabled the
Company to leverage its existing infrastructure and increase its contract
portfolio much more quickly than it could through the planned expansion of its
Company Dealerships. The Company was also able to increase the socioeconomic and
geographic diversity of its contract portfolio by purchasing higher quality
contracts and contracts from areas where there are no Company Dealerships.
The Company generally purchases contracts from Third Party Dealers that are
originated with customers possessing financial characteristics superior to those
of Company Dealership customers and that reflect principal amounts closer to the
actual wholesale value of the underlying car. Consequently, its Third Party
Dealer contracts generally present a reduced credit and collateral risk. The
Company's total revenues from its Third Party Dealer operations were $1.8
million and $7.8 million in fiscal years 1995 and 1996, respectively. See Note
20 to the Consolidated Financial Statements.
The Company purchases contracts from Third Party Dealers at a nonrefundable
acquisition discount from the principal amount of the contract that generally
ranges from 5.0% to 20.0%, and averages approximately 11.0%. The Company
determines the appropriate discount needed to cover estimated losses on a
contract-by-contract basis, taking into account, among other things, the
principal amount of the contract in relation to the wholesale value of the
underlying car and the credit risk presented by the particular customer. The
Company generally will not purchase a contract from a Third Party Dealer if the
discounted price exceeds 120.0% of the Kelly Blue Book wholesale value of the
underlying car plus license and tax, although it will make exceptions on a
contract-by-contract basis. If the Company cannot negotiate an appropriate
discount, it will not purchase the contract.
When opening a new office, the Company hires experienced branch managers
having existing relationships with Third Party Dealers. The Company's branch
managers have an average of approximately nine years
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of experience in the sub-prime automobile finance industry. Upon the execution
of a dealer agreement with a Third Party Dealer, Branch Office employees will
introduce the dealer to the Company's systems and procedures. The Company
provides uniform contract buying criteria as well as expedient application
processing and funding. The Company expects its Branch Office employees to
develop and maintain excellent relationships with its Third Party Dealers.
Branch Office employees monitor and evaluate Third Party Dealer contracts
for conformity to established policies and procedures. Selected finance
transactions are examined each month and a written report on each Branch Office
is prepared. Included in the report is an evaluation of Branch Office decisions
and practices as well as the portfolio performance of individual Third Party
Dealers. Branch Office management is notified and counseled with respect to
variances from underwriting standards that are found. Branch Office management
monitors the first six months of contract performance. Substandard contract
performance during this period is discussed with the Third Party Dealers and
appropriate action taken.
Collateralized Dealer Financing. The Company believes that many Third
Party Dealers have difficulty obtaining traditional debt financing and, as a
result, are forced to sell the contracts that they originate through used car
sales at deep discounts in order to obtain the working capital necessary to
operate their businesses. To capitalize on this opportunity, the Company
initiated the Cygnet Dealer Program, pursuant to which it provides qualified
Third Party Dealers (generally, dealers that meet certain minimum net worth and
operating history criteria) with operating credit lines secured by the dealers'
retail installment contract portfolios. These lines will be for a specified
amount but will in all cases be subject to various collateral coverage ratios,
maximum advance rates, and performance measurements depending on the financial
condition of the dealer and the quality of the contracts originated. As a
condition to providing such financing, the Company will require each dealer to
upload its portfolio information to the Company's computer network on a daily
basis, utilize the Company's management information systems, and provide the
Company with periodic financial statements in a standardized format. These
controls will allow Company account officers, who will oversee the operations of
each dealer participating in the program, to maintain supervision over the
dealers, thereby enabling the account officers to ensure dealer compliance with
financial covenants and determine the appropriateness of continued credit
extensions.
The Company believes that the Cygnet Dealer Program will fulfill the need
of Third Party Dealers for debt financing to expand their businesses while
enabling the Company to earn finance income at favorable rates and diversify its
earning asset base. The Company also believes that the relationships established
with these dealers will provide it with a preferred position to acquire retail
installment contracts from them. Such contract purchases would provide these
dealers with an additional source of financing and enable the Company to further
expand its contract portfolio. The Company has hired a person with extensive
sub-prime finance industry experience to oversee the Cygnet Dealer Program and
began implementing the program with one Third Party Dealer during the fourth
quarter of 1996. The Company expects to begin full-scale marketing of the
program during the first quarter of 1997, although the program is not expected
to begin generating any substantial revenue before the second quarter of 1997.
Insurance Services. The retail installment contracts that the Company
purchases from Third Party Dealers generally require the customers to obtain
casualty insurance within 30 days of their vehicle purchase. While all customers
are free to obtain such coverage from an insurer of their choice, if a customer
fails to obtain the required coverage, the Company may purchase a policy on the
customer's behalf and charge back to the customer the cost of the premiums and
fees associated with such policy. The Company's ability to force place such
insurance has significantly increased the number of customers who have obtained
their own casualty insurance.
To facilitate its ability to force place mandated insurance coverage, the
Company has contracted with American Bankers Insurance Group ("ABIG"), a
licensed property, casualty, and life insurance company. Through its subsidiary,
Drake Insurance Agency, Inc., which acts as agent for ABIG, the Company places
casualty insurance policies issued by ABIG with Third Party Dealer customers.
These policies provide for a maximum payment on a claim equal to the current
contract principal balance. ABIG, in turn, reinsures the policies it issues with
Drake Property & Casualty Insurance Company, one of the Company's Turks and
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Caicos Islands-chartered and licensed reinsurance subsidiaries. Under the terms
of its relationship with ABIG, the Company earns commissions on each policy
issued by ABIG (which mitigate any credit loss the Company might suffer in the
event of an otherwise uninsured casualty), while ABIG administers all accounts
and claims and is responsible for regulatory compliance. As of December 31,
1996, the Company had placed casualty insurance policies with approximately
1,200 customers. The Company anticipates expanding its insurance services to
include the provision of credit life, disability, and unemployment insurance.
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 for the
twelve months ended November 30, 1996:
<TABLE>
<CAPTION>
COMPANY THIRD PARTY
------- -----------
<S> <C> <C>
Principal Amount of Contract................................... $ 7,071 $ 5,778
Annual Percentage Rate......................................... 29.9% 24.5%
Loan Term (Months)............................................. 37.5 33.4
Total Down Payment............................................. $ 858 $ 1,368
Company Cost or Third Party Dealer Advance..................... $ 3,304 $ 5,119
Blue Book Value (Wholesale).................................... $ 3,685 $ 4,983
Model Year..................................................... 88 89
Age of Borrower................................................ 34 34
Annual Income.................................................. $25,589 $30,559
Years at Current Residence..................................... 4.6 3.8
Years at Current Job........................................... 3.2 3.4
</TABLE>
The Company expects that approximately 35.0% to 40.0% of Company Dealership
contracts will ultimately default at some time prior to maturity for a net loss,
after charge offs and recoveries of approximately 20.0% to 25.0% of the original
principal amount financed. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Allowance for Credit
Losses -- Contracts Originated at Company Dealerships."
The Company expects that approximately 20.0% to 25.0% of Third Party Dealer
contracts will ultimately default at some time prior to maturity for a net loss,
after charge offs and recoveries of approximately 8.0% to 12.0% of the original
principal amount financed. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Allowance for Credit
Losses -- Contracts Purchased From Third Party Dealers."
MONITORING AND COLLECTIONS
The Company believes that its ability to minimize credit losses is due in
great part to the sophisticated manner in which it monitors the Company
Dealership and Third Party Dealer contracts in its portfolio.
Upon the origination or purchase of a contract, Company personnel enter all
terms of the contract into the Company's centralized computer system. The
Company's monitoring and collections staff then utilizes the Company's
collections software to monitor the performance of the contracts.
The collections software provides the Company with, among other things,
up-to-date activity reports, allowing immediate identification of customers
whose accounts have become past due. In accordance with Company policy,
collections personnel contact a customer with a past due account within three
days of delinquency (or in the case of first payment delinquencies, within one
day) to inquire as to the reasons for such delinquency and to suggest ways in
which the customer can resolve the underlying problem, thereby enabling the
customer to continue making payments and keep the car. The Company's early
detection of a customer's delinquent status, as well as its commitment to
working with its customers, allows it to identify and address payment problems
quickly, thereby reducing the amount of credit loss. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Allowance for Credit Losses."
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If the Company's efforts to work with a customer are unsuccessful and the
customer becomes seriously delinquent, the Company will take the necessary steps
to protect its collateral. Frequently, delinquent customers will recognize their
inability to honor their contractual obligations and will work with the Company
to coordinate "voluntary repossessions" of their cars. For cases involving
uncooperative customers, the Company retains independent firms to repossess the
cars pursuant to prescribed legal procedures. Upon repossession and after a
statutorily-mandated waiting period, the Company will recondition the car, if
necessary, and sell it in the wholesale market or at retail through its Company
Dealerships. The Company estimates that it recovers over 90.0% of the cars that
it attempts to repossess, approximately 90.0% of which are sold on a wholesale
basis and the remainder of which are sold through Company Dealerships. The
Company's access to a retail outlet for its repossessed collateral provides the
Company with additional flexibility with respect to the disposal of the
collateral and helps lessen its credit losses. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Allowance for
Credit Losses."
Unlike most other used car dealerships with multiple locations or
automobile finance companies, the Company permits its customers to make cash
payments on their contracts in person at Company Dealerships or at the Company's
collection facilities. Cash payments account for a significant portion of
monthly contract receipts on the Company Dealership portfolio. The Company's
computer technology enables it to process these payments on-line in real time
and its internal procedures enable it to verify that such cash receipts are
deposited and credited to the appropriate accounts.
COMPETITION
Although the used car industry has historically been highly fragmented, it
has attracted significant attention recently from a number of large companies,
including AutoNation, U.S.A. and Driver's Mart, which have entered the used car
sales business or announced plans to develop large used car sales operations.
Many franchised automobile dealers have increased their focus on the used car
market as well. The Company believes that these companies are attracted by the
relatively high gross margins that can be achieved in this market as well as the
industry's lack of consolidation. Many of these companies and franchised dealers
have significantly greater financial, marketing, and other resources than the
Company.
The Company's targeted competition for its Company Dealerships are the
numerous independent Buy Here-Pay Here dealers that sell and finance sales of
used cars to Sub-Prime Borrowers. The Company distinguishes its direct sales and
financing operations from those of typical Buy Here-Pay Here dealers by
providing multiple locations, upgraded facilities, large inventories of used
automobiles, centralized purchasing, value-added marketing programs, and
dedication to customer service. In addition, the Company has developed flexible
underwriting guidelines and techniques to facilitate rapid credit decisions, as
well as an integrated, technology-based corporate infrastructure that enables
the Company to monitor and service large volumes of contracts. The Company
believes that it is the largest Buy Here-Pay Here dealer in Arizona and one of
the largest in the United States. Of the numerous large companies that have
entered the used car business, none have announced an intention to focus on the
Buy Here-Pay Here segment.
The sub-prime segment of the used car financing business is also highly
fragmented and very competitive. In recent periods, several consumer finance
companies have completed public offerings in order to raise the
capital necessary to fund expansion and support increased purchases of used car
retail installment contracts. These companies have increased the competition for
the purchase of contracts, in many cases purchasing contracts at prices which
the Company believes are not commensurate with the associated risk. In addition,
there are numerous financial services companies serving, or capable of serving,
this market. While traditional financial institutions, such as commercial banks,
savings and loans, credit unions, and captive finance companies of major
automobile manufacturers, have not consistently serviced Sub-Prime Borrowers,
the high rates of return earned by companies involved in sub-prime financing
have encouraged certain of these traditional institutions to enter, or
contemplate entering, this market. Increased competition may cause downward
pressure on the interest rate the Company charges on contracts originated by its
Company Dealerships or cause the Company to reduce or eliminate the
nonrefundable acquisition discount on the contracts it purchases from Third
Party Dealers. Such events would have a material adverse affect on the Company's
profitability.
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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 fixed interest rates ranging from 21.0% to
29.9% on the contracts originated at Company Dealerships, while rates range from
17.6% to 29.9% on the Third Party Dealer contracts it purchases. As of December
31, 1996, a majority of the Company's used car sales activities were conducted
in, and a majority of the contracts the Company services were originated in,
Arizona, which does not impose limits on the interest rate that a lender may
charge. However, the Company has expanded, and will continue to expand, its
operations into states that impose usury limits, such as Florida and Texas. The
Company attempts to mitigate these rate restrictions by purchasing contracts
originated in these states at a higher discount.
The Company believes that it is currently in substantial compliance with
all applicable federal, state, and local laws and regulations. There can be no
assurance, however, that the Company will be able to remain in compliance with
such laws, and such failure could have a material adverse effect on the
operations of the Company. In addition, the adoption of additional statutes and
regulations, changes in the interpretation of existing statutes and regulations,
or the Company's entrance into jurisdictions with more stringent regulatory
requirements could have a material adverse effect on the Company's business.
TRADEMARKS AND PROPRIETARY RIGHTS
The Company has obtained federal trademark registrations on its duck mascot
and logo, as well as for the trade names "Ugly Duckling Car Sales," "Ugly
Duckling Rent-A-Car," and "America's Second Car." These registrations are
effective through 2002 and are renewable for additional terms of ten years. The
Company grants its Ugly Duckling Rent-a-Car franchisees the limited right to use
its duck mascot and logo in their used car rental operations. The Company has
also obtained a federal trademark registration for the slogan "Putting You On
the Road to Good Credit."
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 December 31, 1996, the Company employed 652 persons, of which 69 were
employed in the Company's executive and administrative offices, 242 were
employed in its Company Dealership operations, 155 were employed in the
Company's credit and collection activities, and 186 were employed in Third Party
Dealer operations. None of the Company's employees are covered by a collective
bargaining agreement. The Company considers its relations with its employees to
be good.
PROPERTIES
As of December 31, 1996, the Company owned the property in which six of its
dealerships, two of its collection facilities and one reconditioning facility
are located. In addition, the Company leased 47 other 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. Five of the Company's dealerships are leased from unrelated third
parties. The Company's other leased facilities at that date included a
monitoring and collection facility, two storage lots, and 38 Branch Offices (of
which 35 were
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open). The leases contain renewal options from one to ten years and require
aggregate monthly base rents of $136,000. See "Certain Relationships and Related
Transactions."
LEGAL PROCEEDINGS
The Company sells its cars on an "as is" basis, and requires all customers
to sign an agreement on the date of sale pursuant to which the Company disclaims
any obligation for vehicle-related problems that subsequently occur. Although
the Company believes that such disclaimers are enforceable under Arizona and
other applicable law, there can be no assurance that they will be upheld in
every instance. Despite obtaining these disclaimers, the Company, in the
ordinary course of business, receives complaints from customers relating to such
vehicle-related problems as well as alleged violations of federal and state
consumer lending or other similar laws and regulations. While most of these
complaints are made directly to the Company or to various consumer protection
organizations and are subsequently resolved, the Company is named occasionally
as a defendant in civil suits filed by customers in state, local, or small
claims courts. There can be no assurance that the Company will not be a target
of similar claims in the future. In the opinion of the Company, the ultimate
disposition of these matters on a cumulative basis will not have a material
adverse effect on the Company. However, there can be no assurance in this
regard.
In connection with the acquisition of the Florida dealerships and finance
operations (disclosed in "Business -- Business Strategy"), a purported creditor
of the sellers filed, on January 21, 1997, to enjoin the sale as a fraudulent
conveyance. Alternatively, the suit seeks to void any transfer of the assets
that has already occurred, to attach the assets that have been transferred, or
to appoint a receiver to take charge of the assets transferred. The Company has
not been named in this action, has received a specific indemnity from the
sellers relating to this action, and has been advised by the sellers that, in
their view, the claim is without merit. In the opinion of the Company the
ultimate disposition of this matter will not have a material effect on the
Company.
41
<PAGE> 42
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Information concerning the Company's directors and executive officers is
set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------------------------ --- ----------------------------------
<S> <C> <C>
Ernest C. Garcia, II...................... 39 Chairman of the Board and Chief
Executive Officer
Gregory B. Sullivan....................... 38 President and Chief Operating
Officer
Steven P. Johnson......................... 37 Senior Vice President and General
Counsel
Steven T. Darak........................... 49 Senior Vice President and Chief
Financial Officer
Walter T. Vonsh........................... 54 Vice President -- Credit
Donald L. Addink.......................... 47 Vice President -- Senior Analyst
Sheila A. Brandt.......................... 31 Vice President and Chief
Information Officer
Peter R. Fratt............................ 39 Vice President -- Real Estate
Eric J. Splaver........................... 34 Corporate Controller
Robert J. Abrahams........................ 70 Director
Christopher D. Jennings................... 43 Director
John N. MacDonough........................ 53 Director
Arturo R. Moreno.......................... 50 Director
Frank P. Willey........................... 44 Director
</TABLE>
Ernest C. Garcia, II, has served as the Chairman of the Board and Chief
Executive Officer of the Company since its founding in 1992, and served as
President from 1992 to 1996. Since 1991, Mr. Garcia has served as President of
Verde, a real estate investment corporation that is 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 "Certain Relationships and
Related Transactions."
Gregory B. Sullivan has served as President and Chief Operating Officer of
the Company since February 1996 after serving as a consultant to the Company
since 1995. Mr. Sullivan formerly served as President and principal stockholder
of National Sports Games, Inc., an amusement game manufacturing company that he
co-founded in 1989 and sold in 1994. Prior to 1989, Mr. Sullivan was involved in
the securities industry and practiced law with a large Arizona firm. He is a
member of the State Bar of Arizona.
Steven P. Johnson has served as 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. Prior to 1991, Mr.
Johnson practiced law in Tucson, Arizona. Mr. Johnson is licensed to practice
law in Arizona and Colorado and is married to the sister of Mr. Garcia.
Steven T. Darak has served as the Senior Vice President and Chief Financial
Officer of the Company since February 1994, 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.
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.
42
<PAGE> 43
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. From 1988 to
1995, Mr. Addink served as Executive Vice President of Pima Capital Co., a life
insurance holding company. Prior to 1988, Mr. Addink served in various
capacities with a variety of insurance companies. Mr. Addink is a Fellow of the
Society of Actuaries and a Member of the American Academy of Actuaries.
Sheila A. Brandt has served as Vice President and Chief Information Officer
of the Company since May 1996. Prior thereto, Ms. Brandt served as a Research
Scientist for the Center for the Management of Information at the University of
Arizona. From 1992 to 1995, Ms. Brandt earned an M.S. and Ph.D. in Management
Information Systems at the University of Arizona while practicing as an
independent systems consultant. Prior to 1992, Ms. Brandt held various positions
with Andersen Consulting and Eastman Kodak Company.
Peter R. Fratt has served as Vice President -- Real Estate of the Company
since October 1993. From 1989 to 1993, Mr. Fratt was an associate of CB
Commercial Real Estate Services. Prior to that time, Mr. Fratt was involved in
commercial real estate brokerage and investment.
Eric J. Splaver has served as Corporate Controller of the Company since May
1994. From 1985 to 1994, Mr. Splaver worked as a certified public accountant
with KPMG Peat Marwick LLP.
Robert J. Abrahams has served as a director of the Company since June 1996.
Mr. Abrahams has served since 1988 as a consultant to the financing industry,
including service as a consultant 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. Mr. Abrahams is also a director of HMI
Industries, a manufacturing company and Smart Choice Holdings, Inc., which is in
the automobile business. Mr. Abrahams serves as a member of the Audit Committee
of the Board of Directors.
Christopher D. Jennings has served as a director of the Company since June
1996. Mr. Jennings has served as a managing director of Cruttenden Roth
Incorporated, an investment banking firm, since 1995. From 1992 to 1994, Mr.
Jennings served as a Managing Director of investment banking at Sutro & Co., an
investment banking firm. From 1989 to 1992, Mr. Jennings served as a Senior
Managing Director at Maiden Lane Associates, Ltd., a private equity fund. Prior
to 1989, Mr. Jennings served in various positions with, among others, Dean
Witter Reynolds, Inc. and Warburg Paribas Becker, Inc., both of which are
investment banking firms. Mr. Jennings serves as a member of the Compensation
Committee of the Board of Directors.
John N. MacDonough has served as a director of the Company since June 1996.
Mr. MacDonough has served as Chairman and Chief Executive Officer of Miller
Brewing Company, a brewer and marketer of beer, since 1993, having previously
served from 1992 to 1993 as President and Chief Operating Officer. Prior to
1992, Mr. MacDonough was employed in various positions at Anheuser Busch, Inc.,
also a brewer and marketer of beer. Mr. MacDonough is also a director of M&I
Bank. Mr. MacDonough is married to the sister of Mr. Sullivan.
Arturo R. Moreno has served as a director of the Company since June 1996.
Mr. Moreno has served as the President and Chief Executive Officer of Outdoor
Systems, Inc., one of the largest outdoor media companies in the United States,
since 1984. Prior to 1984, Mr. Moreno held various executive positions in the
outdoor advertising industry. Mr. Moreno serves as a member of the Audit
Committee of the Board of Directors.
Frank P. Willey has served as a director of the Company since June 1996.
Mr. Willey has served as the President of Fidelity National Financial, Inc., one
of the nation's largest title insurance underwriters, since January 1995. From
1984 to 1994, 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,
Southern Pacific Funding Corporation, a specialty finance company that
originates, purchases and sells high-yield, non-conforming mortgage loans and
Fidelity National Financial, Inc. Mr. Willey serves as a member of the
Compensation Committee of the Board of Directors.
43
<PAGE> 44
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
In March 1987, Mr. Ernest C. Garcia, II, the Company's Chairman, Chief
Executive Officer, and principal stockholder, obtained $20 million in financing
from Lincoln Savings and Loan Association ("Lincoln") to repurchase stock in his
real estate development company held by a corporate investor. Subsequently, Mr.
Garcia agreed to facilitate the purchase of certain land from a Lincoln
subsidiary. The two transactions closed simultaneously. Soon thereafter, Lincoln
was placed into receivership and federal regulators from the RTC and other
government agencies began investigating numerous transactions involving Lincoln
and a variety of third parties, including Mr. Garcia.
Upon being notified of the RTC's investigation, Mr. Garcia met voluntarily
with RTC investigators, without counsel, for several months and provided full
disclosure concerning the details of his dealings with Lincoln. Nearly one year
later, the RTC asserted that the financing transaction and the land transaction,
though documented separately, were linked and that, as a result of the
transaction, Lincoln improperly recorded a gain in violation of certain
accounting rules applicable to Lincoln. As a result, in October 1990, the United
States, on behalf of the RTC, informed Mr. Garcia that it intended to charge him
with bank fraud. Mr. Garcia was never indicted for his role in the transaction,
but, facing severe financial pressures, agreed to plead guilty to one count of
bank fraud.
Prior to his sentencing in 1993, the RTC submitted a letter to the United
States District Court for the Central District of California urging that the
court take favorable account of Mr. Garcia's relative responsibility and
culpability, as well as his timely and honest cooperation, in determining an
appropriate sentence. In this letter, the RTC stated its belief that the chief
executive officer of Lincoln's parent company, Charles H. Keating, Jr., not Mr.
Garcia, devised the transaction and that Mr. Garcia was not even aware of the
existence of Mr. Keating's illegal schemes and had no reason to believe that the
transaction would enable Mr. Keating to defraud Lincoln. The RTC letter also
noted Mr. Garcia's extensive cooperation with federal investigators, which began
prior to the time he was charged and continued until his sentencing. In December
1993, the court, following the RTC's recommendation, sentenced Mr. Garcia to
three years of probation and fined him $50 (the minimum fine that the court
could assess). Under the terms of the probation, Mr. Garcia was barred from
affiliating in any way with a federally insured banking institution without
prior approval. In December 1996, Mr. Garcia completed his probation.
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 Commission commenced civil and administrative
actions against Mr. Garcia. Without admitting or denying any of the Commission's
allegations, Mr. Garcia consented to a court order permanently enjoining him and
his affiliates from violating the federal securities laws and to a Commission
order barring him (with a right to reapply upon the cessation of his probation)
from associating in any capacity with any broker, dealer, municipal securities
dealer, investment adviser, or investment company.
As a result of a decline in the Arizona real estate market in the late
1980s, changes in the tax laws affecting real estate, and the 1987 stock market
crash, in April 1990 a real estate investment company controlled by Mr. Garcia,
as well as several limited partnerships organized by that company, filed
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code (the "Bankruptcy Code"). All of these reorganization proceedings were
successfully concluded by 1993. Many of the obligations of these entities were
personally guaranteed by Mr. Garcia and his wife. As a result, Mr. Garcia and
his wife filed a petition under Chapter 7 of the Bankruptcy Code in 1990, which
was discharged in October 1991.
44
<PAGE> 45
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
two fiscal years ended December 31, 1996, of those persons who were, at December
31, 1996: (i) the chief executive officer of the Company and (ii) the four other
most highly compensated executive officers of the Company (collectively the
"Named Executive Officers"):
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION ----------------------------
------------------------- SECURITIES ALL OTHER
NAME AND SALARY BONUS UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) OPTIONS(#)(1) ($)(2)
- -------------------------------------------- ----- -------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Ernest C. Garcia, II........................ 1996 121,538 -- -- $ 3,873(3)
Chairman of the Board and Chief 1995 100,000 -- -- $ 3,151(3)
Executive Officer
Steven T. Darak............................. 1996 100,000 100,000 40,000 $ 9,250(4)
Senior Vice President and Chief Financial 1995 100,000 100,000 -- $ 12,500(4)
Officer
Walter T. Vonsh............................. 1996 126,923 30,000 50,000 $ 3,704(5)
Vice President -- Credit 1995 102,692 -- -- $ 5,277(5)
Donald L. Addink............................ 1996 122,142 10,000 42,000 485
Vice President -- Senior Analyst 1995 71,026 10,000 58,000 984
Steven P. Johnson........................... 1996 121,538 -- 25,000 566
Senior Vice President and General 1995 100,000 -- -- 177
Counsel................................
</TABLE>
- ---------------
(1) The amounts shown in this column represent stock options granted pursuant to
the Company's 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.
(3) This amount includes a $2,950 car allowance for Mr. Garcia.
(4) This amount includes $10,500 and $7,500 paid by the Company for a Phoenix
apartment for Mr. Darak during 1995 and 1996, respectively, while his full
time residence was in Tucson, Arizona, and a $1,750 car allowance.
(5) This amount includes a $5,000 and $2,850 car allowance for Mr. Vonsh during
1995 and 1996, respectively.
45
<PAGE> 46
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock options granted
pursuant to the Company's Long-Term Incentive Plan during the fiscal year ended
December 31, 1996, to the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
------------------------------------------------------- REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ------------------
NAME GRANTED(#)(1) FISCAL YEAR SHARE($/SH) DATE 5%($) 10%($)
- ------------------------------ ------------- ------------ ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Ernest C. Garcia, II.......... -- -- -- -- -- --
Steven T. Darak............... 10,000 1.9% 6.75 5/31/02 42,450 107,578
30,000 5.6% 17.69 12/01/02 333,754 845,799
Walter T. Vonsh............... 25,000 4.6% 6.75 5/31/02 106,126 268,944
25,000 4.6% 17.69 12/01/02 278,129 704,833
Donald L. Addink.............. 25,000 4.6% 6.75 5/31/02 106,126 268,944
17,000 3.2% 17.69 12/01/02 189,127 479,286
Steven P. Johnson............. 10,000 1.9% 6.75 5/31/02 42,450 107,578
15,000 2.9% 17.69 12/01/02 166,877 422,900
</TABLE>
- ---------------
(1) Generally, options are subject to vesting over a five-year period, with
20.0% of the options becoming exercisable on each successive anniversary of
the date of grant.
(2) 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 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.
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,
1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR END(#)(1) FISCAL YEAR END($)(2)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ernest C. Garcia, II....................... -- -- $ -- $ --
Steven T. Darak............................ -- 40,000 -- 181,800
Walter T. Vonsh............................ -- 50,000 -- 364,000
Donald L. Addink........................... 11,600 88,400 $ 206,248 $ 1,174,512
Steven P. Johnson.......................... -- 25,000 -- 154,650
</TABLE>
- ---------------
(1) Generally, options are subject to vesting over a five-year period, with
20.0% of the options becoming exercisable on each successive anniversary of
the date of grant.
(2) Based on a fair market value of $19.50 as of December 31, 1996, the closing
sale price of the Company's Common Stock on that date as reported by Nasdaq.
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 various stock-based awards, including incentive
stock options and non-qualified stock options to employees, consultants, and
advisors of the Company. The Incentive Plan is administered by the Compensation
Committee of the Board of Directors, which has the exclusive authority to
administer the Incentive Plan, including the power to
46
<PAGE> 47
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 December 31, 1996, the Company had granted options to purchase
911,620 shares of Common Stock to various of its employees.
CHANGE IN CONTROL ARRANGEMENTS
In the event of a "change of control" of the Company, all outstanding
options under the Incentive Plan will, unless otherwise determined by the Board
of Directors, become exercisable in full and all restrictions on outstanding
awards will lapse and all awards granted under the Director Incentive Plan shall
become immediately free of any restrictions. A "change in control" under the
Incentive Plan and the Director Incentive Plan may be any consolidation or
merger of the Company in which the Company is not the continuing or surviving
entity, or pursuant to which stock would be converted into cash, securities or
other property; any sale, lease, exchange or other transfer of more than 40% of
the assets or earning power of the Company; the approval by stockholders of any
plan or proposal for liquidation or dissolution of the Company; or any person,
other than a current stockholder, any affiliate thereof, any employee benefit
plan of the Company or subsidiary of the Company becomes beneficial owner of 20%
or more of the Company's outstanding stock.
401(k) PLAN
Under the Company's 401(k) plan, adopted in October 1995, eligible
employees may direct that a portion of their compensation, up to a legally
established maximum, be withheld by the Company and contributed to their
account. All 401(k) plan contributions are placed in a trust fund to be invested
by the 401(k) plan's trustee, except that the 401(k) plan may permit
participants to direct the investment of their account balances among mutual or
investment funds available under the plan. The 401(k) plan provides a matching
contribution of 10.0% of a participant's contributions. Amounts contributed to
participant accounts under the 401(k) plan and any earnings or interest accrued
on the participant accounts are generally not subject to federal income tax
until distributed to the participant and may not be withdrawn until death,
retirement, or termination of employment.
EMPLOYMENT CONTRACTS
On January 1, 1996, the Company entered into a three-year employment
agreement with Mr. Ernest C. Garcia, II, the Company's Chairman and Chief
Executive Officer. The agreement establishes Mr. Garcia's base salary for 1997
at $132,000 per year and provides a minimum 10.0% increase in the base salary
each year throughout the term of the agreement. In addition, the agreement
provides for the continuation of Mr. Garcia's base salary and certain benefits
for a period of one year in the event Mr. Garcia is terminated by the Company
without cause prior to that time. The agreement also contains confidentiality
and non-compete covenants.
On April 1, 1995, the Company entered into a three-year employment
agreement with Mr. Walter T. Vonsh, the Company's Vice President -- Credit. The
agreement establishes Mr. Vonsh's base salary for 1997 at $150,000 per year. In
addition, the agreement provides for the continuation of Mr. Vonsh's base salary
and certain benefits for the term of the agreement in the event Mr. Vonsh is
terminated by the Company without cause prior to that time. The agreement also
contains confidentiality and non-compete covenants.
On June 1, 1995, the Company entered into a five year employment agreement
with Mr. Donald L. Addink, the Company's Vice President -- Senior Analyst. The
agreement establishes Mr. Addink's base salary at $120,000 per year, adjusted
for inflation. In addition, the agreement provides for the continuation of Mr.
Addink's base salary and certain benefits for a period of one year in the event
Mr. Addink is terminated by the Company without cause prior to that time. The
agreement also contains confidentiality and non-compete covenants.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has established a Compensation Committee and an Audit
Committee. The Compensation Committee, which consists of Messrs. Jennings and
Willey, reviews executive salaries and administers any bonus, incentive
compensation, and stock option plans of the Company, including the Incentive
Plan. In addition, the Compensation Committee consults with management of the
Company regarding compensation policies and practices of the Company. The Audit
Committee, which consists of Messrs. Abrahams and
47
<PAGE> 48
Moreno, reviews the professional services provided by the Company's independent
auditors, the annual financial statements of the Company, and the Company's
system of internal controls.
DIRECTOR FEES
The Company's independent directors are compensated $1,000 for attendance
at meetings of the Board of Directors and at meetings of committees of the Board
of Directors of which they are members, and are reimbursed for reasonable travel
expenses incurred in connection with attendance at each Board and committee
meeting. In addition, pursuant to the Company's Director Incentive Plan, upon
appointment or election to the Board of Directors, each independent director of
the Company receives Common Stock of the Company valued at $30,000, which is
subject to vesting in equal annual increments over a three-year period.
Directors who are also officers of the Company are not compensated for their
services as directors.
48
<PAGE> 49
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 10, 1997, for: (i) each
director of the Company; (ii) the Named Executive Officers of the Company; (iii)
all directors and executive officers of the Company as a group; and (iv) each
beneficial owner of more than 5% of the outstanding Common Stock. To the
knowledge of the Company, all persons listed below have sole voting and
investment power with respect to their shares, except to the extent that
authority is shared by their respective spouses under applicable law.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
---------------------
NAME OF BENEFICIAL OWNER(2) NUMBER PERCENT
--------------------------------------------------------------- --------- -------
<S> <C> <C>
Ernest C. Garcia, II(3)........................................ 4,636,500 25.1%
Robert J. Abrahams............................................. 6,744 *
Christopher D. Jennings(4)..................................... 36,194 *
John N. MacDonough............................................. 4,444 *
Arturo R. Moreno............................................... 27,744 *
Frank P. Willey................................................ 9,444 *
Steven T. Darak................................................ 130,000 *
Walter T. Vonsh................................................ 72,000 *
Donald L. Addink(5)............................................ 16,600 *
Steven P. Johnson.............................................. 300,000 1.6%
Wellington Management Company, LLP(6).......................... 963,500 5.2%
John Hancock Advisors(7)....................................... 1,150,000 6.2%
All directors and executive officers as a group (14
persons)(8).................................................. 5,347,530 29.0%
</TABLE>
- ---------------
* Represents less than one percent of the outstanding Common Stock.
(1) A person is deemed to be the beneficial owner of securities that can be
acquired within 60 days 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 18,440,404 shares of Common Stock outstanding as
of the date of this Prospectus.
(2) Unless otherwise noted, the address of each of the listed stockholders is
2525 East Camelback Road, Suite 1150, Phoenix, Arizona 85016.
(3) Includes 36,500 shares held by The Garcia Family Foundation, Inc., an
Arizona nonprofit corporation.
(4) The total for Mr. Jennings includes 29,750 warrants held of record by
Cruttenden Roth, Inc., the investment banking firm of which he is managing
director.
(5) The total for Mr. Addink includes 11,600 shares of Common Stock subject to
immediately exercisable options, which have an exercise price of $1.72 per
share.
(6) The address of Wellington Management Company, LLP is 75 State Street,
Boston, Massachusetts 02109. According to the Schedule 13G dated January 24,
1997, Wellington Management Company, LLP has shared voting power over
570,000 of the shares and shared dispositive power over 963,500 of the
shares. The Company makes no representation as to the accuracy or
completeness of the information provided in this footnote, which is based
solely on Wellington Management Company, LLP's Schedule 13G filing.
(7) The address of John Hancock Advisors is 101 Huntington Street, Seventh
Floor, Boston, Massachusetts, 02199-7603.
(8) The total for all directors and executive officers as a group includes
73,830 shares subject to unexercised options that are exercisable on March
10, 1997 or within 60 days thereafter.
49
<PAGE> 50
SELLING SECURITYHOLDERS
The following table sets forth the name of each Selling Securityholder, the
aggregate number of shares of Common Stock beneficially owned by each Selling
Securityholder as of March 31, 1997, the aggregate number of shares of Common
Stock registered hereby that each Selling Securityholder may offer and sell
pursuant to this Prospectus, and the aggregate number of shares of Common Stock
that will be beneficially owned by each Selling Securityholder after completion
of the offering. However, because the Selling Securityholders may offer all or a
portion of the Common Stock at any time and from time to time after the date
hereof, the exact number of shares of Common Stock that each Selling
Securityholder may retain upon completion of the offering cannot be determined
at this time. All of the 5,413,144 shares of Common Stock offered are issued and
outstanding as of the date of this Prospectus. To the knowledge of the Company,
none of the Selling Stockholders has had within the past three years any
material relationship with the Company or any of its predecessors or affiliates,
except as set forth in the footnotes to the following table.
<TABLE>
<CAPTION>
SHARES TO BE OFFERED
SHARES BENEFICIALLY FOR THE SELLING SHARES BENEFICIALLY
OWNED PRIOR TO SECURITYHOLDER'S OWNED AFTER THE
SELLING SECURITYHOLDER THE OFFERING ACCOUNT OFFERING
- ------------------------------------------- ------------------- -------------------- -------------------
<S> <C> <C> <C>
SunAmerica Life Insurance Company.......... 458,667(1) 337,644 121,023(1)
Account 3 Special Growth Account........... 335,000 335,000 0
Alan W. Steinberg L.P. .................... 20,000 20,000 0
Andron Capital Mgmt. ...................... 10,000 10,000 0
Astrophel Ltd. ............................ 5,000 5,000 0
Balestra Capital Omnibus................... 10,000 10,000 0
Bank Clariden Zurich....................... 40,000 40,000 0
Barlow Partners, Inc. ..................... 19,000 19,000 0
Bay Pond Investors (Bermuda), L.P. ........ 94,500 94,500 0
Bay Pond Partners, L.P. ................... 185,500 185,500 0
Boston Provident Partners, L.P. ........... 546,700 105,700 441,000
BP Institutional Partners, L.P. ........... 67,500 12,000 55,500
BP Overseas Partners, Ltd. ................ 103,600 20,500 83,100
Brookside Corporation, Ltd. ............... 5,000 5,000 0
Charles Kleinow............................ 1,000 1,000 0
Chelsey Capital............................ 35,000 35,000 0
CI Global Financial Services............... 25,000 25,000 0
Closife Ltd. .............................. 1,500 1,500 0
Collins Non-Core Equity.................... 21,700 21,700 0
Cornerstone Partners....................... 20,000 20,000 0
Credit Suisse Fides........................ 20,000 20,000 0
David Hancock IRA.......................... 20,000 20,000 0
Drakes Landing Associates, L.P. ........... 12,500 12,500 0
EAG Enterprises Ltd. ...................... 12,000 12,000 0
E. Jane Rochester.......................... 10,000 10,000 0
EOS Partners............................... 25,000 25,000 0
Ernest M. Rochester........................ 10,000 10,000 0
FBR Ashton, L.P............................ 350,000 350,000 0
Financial Services Hedge Fund, L.P. ....... 15,500 15,500 0
First Financial Fund, Inc. ................ 185,500 185,500 0
Frorer Partners............................ 15,000 15,000 0
Fullcrum Associates, L.P. ................. 75,000 75,000 0
</TABLE>
- ---------------
<TABLE>
<S> <C> <C> <C>
(1) The total for SunAmerica includes 121,023 shares of Common Stock subject to 121,023 immediately exercisable
warrants, which have an exercise price of $6.75 per share. Affiliates of SunAmerica provide financing to the
Company. See "Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources."
</TABLE>
50
<PAGE> 51
<TABLE>
<CAPTION>
SHARES TO BE OFFERED
SHARES BENEFICIALLY FOR THE SELLING SHARES BENEFICIALLY
OWNED PRIOR TO SECURITYHOLDER'S OWNED AFTER THE
SELLING SECURITYHOLDER THE OFFERING ACCOUNT OFFERING
- ------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Fullerton Capital Partners, L.P. .......... 20,000 20,000 0
Gerlach & Co. ............................. 7,000 7,000 0
Glen T. Presley............................ 3,000 3,000 0
Goldsher Investment Co. ................... 4,000 4,000 0
Gordon V. and Helen C. Smith Foundation.... 40,000 40,000 0
Gorman & Co. .............................. 20,000 20,000 0
Hapna Foundation........................... 3,000 3,000 0
H.C. Lentz, Jr. ........................... 5,000 5,000 0
Hilltop Offshore Ltd. ..................... 25,000 25,000 0
Hilltop Partners, Ltd. .................... 59,000 59,000 0
Hunter Lipton.............................. 5,000 5,000 0
Innovative Investments..................... 15,000 15,000 0
International Charitable Interests II
Trust.................................... 58,000 13,000 45,000
Jack Barrish............................... 3,000 3,000 0
J.M. Hull Associates, L.P. ................ 25,000 25,000 0
John Hancock Advisers...................... 1,150,000 1,150,000 0
Jonathan G. Harrison and Karen M.
Harrison................................. 14,000 10,000 4,000
Kane & Co. ................................ 17,000 17,000 0
Kayne Anderson Offshore Ltd. .............. 10,000 10,000 0
Keegan Family Partnership.................. 12,000 12,000 0
Kodiak Capital, L.P. ...................... 30,000 30,000 0
Kodiak International Ltd. ................. 62,000 62,000 0
Kodiak Opportunity, L.P. .................. 4,000 4,000 0
Kodiak Opportunity Offshore................ 2,500 2,500 0
Krakover Family Trust, Stewart M. Krakover
and Grace W. Krakover, Trustees.......... 3,000 3,000 0
Lancaster Investment Partners.............. 25,000 25,000 0
Maple Partners Ltd. ....................... 10,000 10,000 0
Maritime Global Securities Sub G. ......... 15,000 15,000 0
Maritime Global Subsidiary I............... 69,900 12,500 57,400
Mark Rochester............................. 10,000 10,000 0
Marlin Capital Corp. ...................... 15,000 15,000 0
Mary Knoll Capital......................... 5,000 5,000 0
Maverick Fund LDC.......................... 151,000 151,000 0
Maverick Fund USA, Ltd. ................... 99,000 99,000 0
McColl Partners, L.P. ..................... 25,000 25,000 0
Mercury Bank............................... 5,000 5,000 0
Mesirow Equity Opportunity Fund, L.P. ..... 41,800 8,200 33,600
Moore Global Investments, Ltd. ............ 95,450 95,450 0
Newberger Berman Custodian, Zev W. Wolfson
IRA Rollover............................. 12,000 12,000 0
Nilovar Pahlavi............................ 1,500 1,500 0
Novante Communications..................... 5,000 5,000 0
Offense Group Associates, L.P. ............ 70,000 70,000 0
Omega Capital Partners, L.P. .............. 42,700 42,700 0
</TABLE>
51
<PAGE> 52
<TABLE>
<CAPTION>
SHARES TO BE OFFERED
SHARES BENEFICIALLY FOR THE SELLING SHARES BENEFICIALLY
OWNED PRIOR TO SECURITYHOLDER'S OWNED AFTER THE
SELLING SECURITYHOLDER THE OFFERING ACCOUNT OFFERING
- ------------------------------------------- ------------------- -------------------- -------------------
<S> <C> <C> <C>
Omega Institutional Partners, L.P. ........ 3,800 3,800 0
Omega Overseas Partners, Ltd. ............. 60,500 60,500 0
Oscar Capital Management .................. 15,000 15,000 0
Paces Partners............................. 10,000 10,000 0
PAM Investments Ltd. ...................... 2,000 2,000 0
Paul Berger................................ 3,500 1,000 2,500
Pine Boston Partners....................... 57,900 8,100 49,800
Pogue Capital International Ltd. .......... 24,000 24,000 0
Portland General........................... 10,700 10,700 0
Priority Investments, Inc. ................ 4,000 4,000 0
Prospect Street High Income Portfolio,
Inc. .................................... 25,000 25,000 0
Quota Fund/Cold Springs Partners........... 15,000 15,000 0
Rajnikant Kothari.......................... 15,000 5,000 10,000
Rajnikant Kothari and Saroj Kothari........ 10,000 10,000 0
Rath Foundation............................ 30,000 30,000 0
Redwood Asset Management, L.P. ............ 37,500 37,500 0
Redwood Fund Ltd. ......................... 7,800 7,800 0
Remington Investment Strategies, L.P. ..... 19,550 19,550 0
Richard A. Horstmann....................... 40,000 40,000 0
Richcourt Strategies, Inc. ................ 16,000 16,000 0
Roma & Co. ................................ 36,000 36,000 0
Sands Point Partners....................... 10,000 10,000 0
Stilwell Associates, L.P. ................. 20,000 20,000 0
Storie Partners, L.P. ..................... 265,000 60,000 205,000
Strategic Restructuring Partnership........ 15,000 15,000 0
Strome HedgeCap, Ltd....................... 1,500 1,500 0
Third Point Offshore Fund Ltd. ............ 5,250 5,250 0
Third Point Partners, L.P. ................ 29,750 29,750 0
Total Return Portfolio..................... 450,000 450,000 0
Veritas SG................................. 40,000 40,000 0
Warakirri Ltd. ............................ 12,300 12,300 0
Warren Kantor Profit Sharing Plan.......... 20,000 20,000 0
Westpointe Partners, L.P. ................. 5,000 5,000 0
Wolfson Equities........................... 9,000 9,000 0
York Capital Management L.P. .............. 17,500 17,500 0
York Investment Ltd. ...................... 32,500 32,500 0
Zweig-Dimenna International, Ltd. ......... 49,700 49,700 0
Zweig-Dimenna Partners, L.P. .............. 23,000 23,000 0
Zweig-Dimenna Special Opportunities,
L.P. .................................... 12,300 12,300 0
------------------- -------------------- -------------------
6,521,067 5,413,144 1,107,923
</TABLE>
52
<PAGE> 53
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since its inception, the Company has maintained business relationships and
engaged in certain transactions with the affiliated companies and parties
described below. Any future transactions between the Company and its affiliated
entities, executive officers, directors, or significant stockholders will
require the approval of a majority of the independent directors of the Company
and will be on terms no less favorable to the Company than the Company could
obtain from non-affiliated parties.
In prior periods, Verde leased or subleased several facilities to the
Company and lent the Company funds through subordinated note arrangements. Mr.
Ernest C. Garcia, II, the Company's Chairman, Chief Executive Officer, and
principal stockholder, is the President and sole stockholder of Verde. Pursuant
to an agreement (the "Modification Agreement") between the Company and Verde,
effective June 21, 1996, Verde agreed to sell to the Company at any time prior
to June 21, 1997, upon receipt of financing by the Company, six car lots, a
vehicle reconditioning center, and two office buildings owned by Verde and
leased to the Company at a price equal to the lower of $7.45 million or the
appraised value of the properties (as determined by an independent third party).
Verde also agreed to reduce the rents on such properties to an aggregate of
$745,000 per year subject to cost of living adjustments if the sale did not take
place. In addition, Verde assigned to the Company its leasehold interest in two
properties it sub-leased to the Company. Previously, the leases on the Verde
properties called for base monthly rents aggregating approximately $123,000 plus
contingent rents as well as all occupancy and maintenance costs, including real
estate taxes, insurance, and utilities. Rents paid to Verde pursuant to these
leases totaled $1.2 million, $1.9 million, and $1.5 million during fiscal years
1994, 1995, and 1996, respectively. On December 31, 1996, the Company purchased
the properties from Verde for $7.45 million pursuant to the Modification
Agreement. In connection with the purchase, Verde returned security deposits
which totaled $364,000. The security deposits are included in Other Assets in
the Consolidated Balance Sheet of the Company as of December 31, 1995.
Pursuant to the Modification Agreement, Verde also lowered the interest
rate on $14.0 million of the Company's subordinated debt payable to Verde from
18.0% to 10.0% per annum and lowered from 12.0% to 10.0% the dividend rate on
$10.0 million of the Company's Preferred Stock held by Verde effective June 21,
1996. The Preferred Stock was redeemed in November 1996. On February 28, 1997,
the Company prepaid a $2 million installment on the subordinated debt payable to
Verde that was due in June 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
In January 1996, in connection with the sale of the Gilbert Dealership, the
Company purchased the land for the Gilbert Dealership from Verde 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
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 an allowance was established as of
December 31, 1995.
Mr. Christopher D. Jennings, a managing director of Cruttenden Roth
Incorporated ("Cruttenden Roth"), is a director of the Company. Cruttenden Roth
served as the sole representative in the Company's initial public offering. In
its capacity as representative, Cruttenden Roth participated in the underwriting
discount and received a non-accountable expense allowance and warrants to
purchase Common Stock. See "Description of Capital Stock -- Other Securities and
Registration Rights."
53
<PAGE> 54
DESCRIPTION OF CAPITAL STOCK
The Company is a Delaware corporation and its affairs are governed by its
Certificate of Incorporation and Bylaws and the Delaware General Corporation
Law. The following description of the Company's capital stock, which is complete
in all material respects, is qualified in its entirety by reference to the
provisions of the Company's Certificate of Incorporation and Bylaws, as amended.
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, par value $.001 per share, and 10,000,000 shares of Preferred
Stock, par value $.001 per share. At the date of this Prospectus, 18,440,404
shares of Common Stock were issued and outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters on which stockholders are entitled to vote. Holders of
Common Stock do not have cumulative voting rights, and therefore holders of a
majority of the shares voting for the election of directors can elect all of the
directors. In such event, the holders of the remaining shares will not be able
to elect any directors.
Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The Company does not anticipate paying cash dividends in the
foreseeable future. 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 validly issued, fully paid, and
nonassessable.
PREFERRED STOCK
The Board of Directors of the Company has the authority, without further
action by the Company's stockholders, to issue from time to time up to
10,000,000 shares of Preferred Stock in one or more series and to fix the number
of shares, designations, voting powers, preferences, optional and other special
rights, and the restrictions or qualifications thereof. The rights, preferences,
privileges, and restrictions or qualifications of different series of Preferred
Stock may differ with respect to dividend rates, amounts payable on liquidation,
voting rights, conversion rights, redemption provisions, sinking fund
provisions, and other matters. The issuance of Preferred Stock could: (i)
decrease the amount of earnings and assets available for distribution to holders
of Common Stock; (ii) adversely affect the rights and powers, including voting
rights, of holders of Common Stock; and (iii) have the effect of delaying,
deferring, or preventing a change in control of the Company.
OTHER SECURITIES AND REGISTRATION RIGHTS
In connection with its initial public offering, the Company issued warrants
to SunAmerica to purchase 121,023 shares (as adjusted) of Common Stock at an
exercise price per share of $6.75 and to Cruttenden Roth to purchase 170,000
shares of Common Stock at an exercise price per share of $9.45. The agreements
with respect to the issuance of such warrants provide for certain registration
rights. The Company is required to use its best efforts to effect such
registrations, subject to certain conditions and limitations, and is required to
pay all expenses of SunAmerica and Cruttenden Roth in connection with any
registration of such securities, except for any underwriting discounts and
commissions.
In conjunction with its initial public offering, the Company registered the
warrants issued to Cruttenden Roth and the shares underlying such warrants.
Under the terms of such warrants, however, Cruttenden Roth may not exercise such
warrants and sell the underlying Common Stock until June 21, 1997, and only
pursuant to a currently effective registration statement.
54
<PAGE> 55
The Company has authorized for issuance 1,800,000 shares of Common Stock
under its Incentive Plan, as amended. See "Management -- Long-Term Incentive
Plan."
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by Delaware law, a director of the Company shall not be
personally liable to the Company or its stockholders for monetary damages for
breach of such director's fiduciary duty, except for liability: (i) for any
breach of the director's duty of loyalty to the Company or its stockholders;
(ii) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law; (iii) in respect of certain unlawful
dividend payments or stock redemptions or repurchases; and (iv) for any
transaction from which the director derives an improper benefit. The effect of
the provision of the Company's Certificate of Incorporation is to eliminate the
rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against a director
for breach of the fiduciary duty of care as a director (including breaches
resulting from negligent or grossly negligent behavior), except in the
situations described in clauses (i) through (iv) above. This provision does not
limit or eliminate the rights of the Company or any stockholder to seek
nonmonetary relief such as an injunction or recision in the event of a breach of
a director's duty of care. In addition, the Company's Certificate of
Incorporation provides that the Company shall indemnify any person who is or was
a director, officer, employee, or agent of the Company, or who is or was serving
at the request of the Company as a director, officer, employee, or agent of
another corporation or entity, against expenses, liabilities, and losses
incurred by any such person by reason of the fact that such person is or was
acting in such capacity. The Company has also obtained insurance on behalf of
its directors and officers for any liability arising out of such person's
actions in such capacity.
The Company has entered into agreements to indemnify its directors and
officers. These agreements, among other things, indemnify the Company's
directors and officers for certain expenses (including attorneys' fees),
judgments, fines, and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in the right of the Company,
arising out of such person's services as a director or officer of the Company,
any subsidiary of the Company, or any other company or enterprise to which such
person provides services at the request of the Company. To the extent that the
Board of Directors or the stockholders of the Company may in the future wish to
limit or repeal the ability of the Company to provide indemnification as set
forth in the Company's Certificate of Incorporation, such repeal or limitation
may not be effective as to directors or officers who are parties to the
indemnification agreements because their rights to full protection would be
contractually assured by such agreements. It is anticipated that similar
contracts may be entered into, from time to time, with future directors of the
Company. The Company believes that the indemnification provisions in its
Certificate of Incorporation and in the indemnification agreements are necessary
to attract and retain qualified persons as directors and officers.
CERTAIN BYLAW PROVISIONS
The Company's Bylaws, as amended, contain several provisions that regulate
the nomination of directors and the submission of proposals in connection with
stockholder meetings. The Company's Bylaws require that, subject to certain
exceptions, any stockholder desiring to propose business or nominate a person to
the Board of Directors at a stockholders meeting must give notice of any
proposals not less than 30 days nor more than 90 days prior to the meeting. Such
notice is required to contain certain information as set forth in the Bylaws. No
business matter shall be transacted nor shall any person be eligible for
election as a director of the Company unless proposed or nominated, as the case
may be, in strict accordance with this procedure set forth in the Company's
Bylaws.
Although the Bylaws do not give the Board of Directors any power to approve
or disapprove of stockholder nominations for the election of directors or of any
other business desired by stockholders to be conducted at an annual or any other
meeting, the Bylaws may have the effect of precluding a nomination for the
election of directors or the conduct of business at a particular annual meeting
if the proper procedures are not followed or may discourage or deter a third
party from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of the Company, even if the
conduct of such
55
<PAGE> 56
solicitation or such attempt might be beneficial to the Company and its
stockholders. The Company's procedures with respect to all stockholder proposals
and the nomination of directors will be conducted in accordance with Section 14
of the Exchange Act and the rules promulgated thereunder.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock of the Company is
Harris Trust Company of California, 601 S. Figueroa, Los Angeles, California
90017.
56
<PAGE> 57
PLAN OF DISTRIBUTION
The Selling Securityholders or their nominees or pledgees may sell or
distribute some or all of the Common Stock from time to time through
underwriters, dealers, brokers or other agents or directly to one or more
purchasers, including pledgees, in transactions (which may involve crosses and
block transactions) on Nasdaq, in privately negotiated transactions (including
sales pursuant to pledges) in the over-the-counter market, in transactions in
which shares of Common Stock may be delivered in connection with the issuance of
securities by issuers other than the Company that are exchangeable for (whether
optional or mandatory), or payable in, such shares (whether such securities are
listed on a national securities exchange or otherwise) or pursuant to which such
shares of Common Stock may be distributed (which securities issued by others
will, to the extent required by applicable law, be registered under the
Securities Act), in brokerage transactions, in a combination of such
transactions or by any other legally available means. Such transactions may be
effected by the Selling Securityholders at market prices prevailing at the time
of sale, at prices related to such prevailing market prices, at negotiated
prices, or at fixed prices, which may be changed. Brokers, dealers, agents or
underwriters participating in such transactions as agent may receive
compensation in the form of discounts, concessions or commissions from the
Selling Securityholders (and, if they act as agent for the purchaser of such
shares, from such purchaser). Such discounts, concessions or commissions as to a
particular broker, dealer, agent or underwriter might be in excess of those
customary in the type of transaction involved. This Prospectus also may be used,
with the Company's consent, by donees of the Selling Securityholders, or by
other persons acquiring shares of Common Stock and who wish to offer and sell
such shares under circumstances requiring or making desirable its use. To the
extent required, the Company will file, during any period in which offers or
sales are being made, one or more supplements to this Prospectus to set forth
the names of donees of Selling Stockholders and any other material information
with respect to the plan of distribution not previously disclosed. In addition,
any Common Stock which qualifies for sale pursuant to Section 4 of, or Rules 144
or 144A under, the Securities Act may be sold under such provisions rather than
pursuant to this Prospectus.
The Selling Securityholders and any such underwriters, brokers, dealers or
agents that participate in such distribution may be deemed to be "underwriters"
within the meaning of the Securities Act, and any discounts, commissions or
concessions received by any such underwriters, brokers, dealers or agents might
be deemed to be underwriting discounts and commissions under the Securities Act.
Neither the Company nor the Selling Securityholders can presently estimate the
amount of such compensation. The Company knows of no existing arrangements
between any Selling Securityholder and any other Selling Securityholder,
underwriter, broker, dealer or other agent relating to the sale or distribution
of the shares of Common Stock.
The Selling Securityholders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including without
limitation Regulation M, which provisions may limit the timing of purchases and
sales of any of the shares of Common Stock by the Selling Securityholders. All
of the foregoing may affect the marketability of the Common Stock.
The Company will pay substantially all of the expenses incident to this
offering of the shares of Common Stock by the Selling Securityholders to the
public other than commissions and discounts of underwriters, brokers, dealers or
agents. Each Selling Securityholder may indemnify any broker, dealer, agent or
underwriter that participates in transactions involving sales of the shares of
Common Stock against certain liabilities, including liabilities arising under
the Securities Act. The Company has agreed to indemnify the Selling
Securityholders against certain liabilities including certain liabilities under
the Securities Act. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company, the Company has been informed that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
If shares of Common Stock are sold in an underwritten offering, the shares
of Common Stock may be acquired by the underwriters for their own account and
may be further resold from time to time in one or more transactions, including
negotiated transactions, at market prices prevailing at the time of sale, at
prices related to such prevailing market prices, at negotiated prices, or at
fixed prices. The names of the underwriters with respect to any such offering
and the terms of the transactions, including any underwriting discounts,
concessions or commissions and other items constituting compensation of the
underwriters and broker-dealers,
57
<PAGE> 58
if any, will be set forth in a supplement to this Prospectus relating to such
offering. Any public offering price and any discounts, concessions or
commissions allowed or reallowed or paid to broker-dealers may be changed from
time to time. Unless otherwise set forth in a supplement to this Prospectus, the
obligations of the underwriters to purchase the shares of Common Stock will be
subject to certain conditions precedent and the underwriters will be obligated
to purchase all of the shares specified in such supplement if any such shares of
Common Stock are purchased.
If the shares of Common Stock are sold in an underwritten offering, the
underwriters and selling group members (if any) may engage in passive market
making transactions in the Common Stock on Nasdaq immediately prior to the
commencement of the sale of shares in such offering, in accordance with
Regulation M. Passive market making presently consists of displaying bids on
Nasdaq limited by the bid prices of market makers not connected with such
offering and purchases limited by such prices and effected in response to order
flow. Net purchases by a passive market maker on each day are limited in amount
to 30% of the passive market maker's average daily trading volume in the Common
Stock during the period of the two full consecutive calendar months prior to the
filing with the Commission of the Registration Statement of which this
Prospectus is a part and must be discontinued when such limit is reached.
Passive market making may stabilize the market price of the Common Stock at a
level above that which might otherwise prevail and, if commenced, may be
discontinued at any time.
LEGAL MATTERS
The validity of the shares offered hereby is being passed upon for the
Company by Snell & Wilmer L.L.P, Phoenix, Arizona.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996 and 1995 and for each of the years in the three-year period ended December
31, 1996, have been included herein and in the Registration Statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The combined balance sheet of Seminole Finance Corporation and Related
Companies as of December 31, 1996, and the related combined statements of
operations, stockholder's equity (deficit), and cash flows for the year then
ended have been included herein and in the Registration Statement in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
Our report dated March 18, 1997, contains an explanatory paragraph that
states: "the accompanying combined financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
7 to the combined financial statements, the Company is involved in a lawsuit
that involves a material amount of damages that, if there were an adverse
outcome, raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to this matter are also described in Note
7. The combined financial statements do not include any adjustments that might
result from the outcome of this uncertainty."
The combined balance sheet of Seminole Finance Corporation and Related
Companies as of December 31, 1995, and the related combined statements of
operations, stockholder's equity (deficit), and cash flows for the year then
ended have been included herein and in the Registration Statement in reliance
upon the report of Barton & Company, P.A., independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
58
<PAGE> 59
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus constitutes a part of the
Registration Statement and does not contain all of the information set forth
therein and in the exhibits thereto, certain portions of which have been omitted
as permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is hereby made to such Registration Statement and exhibits. The
Registration Statement, including the exhibits thereto, may be examined without
charge at the Commission's public reference facility at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, copies of
all or any part of the Registration Statement, including such exhibits thereto,
may be obtained from the Commission at its principal office in Washington, D.C.,
upon payment of the fees prescribed by the Commission.
The Company is subject to the reporting and informational requirements of
the Exchange Act and, in accordance therewith, files reports, proxy statements,
and other information with the Commission. Such reports, proxy statements, and
other information filed by the Company can be inspected and copied at the
principal office of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington D.C. 20549, and at the following regional offices of
the Commission: 7 World Trade Center, New York, NY 10048, and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, IL 60601. Copies of
such material may be obtained from the Public Reference Section of the
Commission at its principal office at 450 Fifth Street, N.W., Washington D.C.
20549, upon payment of the fees prescribed by the Commission. The Commission
maintains a World Wide Web site (http://www.sec.gov) that contains reports,
proxy statements, and other information regarding registrants, such as the
Company, that file electronically with the Commission.
The Company's Common Stock is traded on Nasdaq. Reports, proxy statements,
and other information filed by the Company may be inspected and copied at the
National Association of Securities Dealers, 1735 K Street, N.W., Washington,
D.C. 20007.
59
<PAGE> 60
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995........................ F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1995
and 1994......................................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1996, 1995 and 1994.............................................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995
and 1994......................................................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
SEMINOLE FINANCE CORPORATION AND RELATED COMPANIES
INDEX TO COMBINED FINANCIAL STATEMENTS
Independent Auditors' Reports......................................................... F-25
Combined Financial Statements:
Combined Balance Sheets as of December 31, 1996 and 1995............................ F-27
Combined Statements of Operations for the years ended December 31, 1996 and 1995.... F-28
Combined Statements of Stockholder's Equity (Deficit) for the years ended December
31, 1996 and 1995................................................................ F-29
Combined Statements of Cash Flows for the years ended December 31, 1996 and 1995.... F-30
Notes to Combined Financial Statements................................................ F-31
INDEX TO PRO FORMA FINANCIAL INFORMATION
Pro Forma Condensed Combined Balance Sheet (unaudited) as of December 31, 1996........ F-36
Pro Forma Condensed Combined Statement of Operations (unaudited) for the year ended
December 31, 1996................................................................... F-37
Notes to Unaudited Pro Forma Condensed Combined Financial Statements.................. F-38
</TABLE>
F-1
<PAGE> 61
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Ugly Duckling Corporation:
We have audited the accompanying consolidated balance sheets of Ugly
Duckling Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
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, 1996 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, 1996 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Phoenix, Arizona
January 31, 1997, except
for Note 19 to the Consolidated
Financial Statements which is
as of February 13, 1997
F-2
<PAGE> 62
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- -------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents............................................... $ 18,455 $ 1,419
Finance Receivables:
Held for Investment................................................... 52,188 49,226
Held for Sale......................................................... 7,000 --
-------- -------
Principal Balances, Net......................................... 59,188 49,226
Less: Allowance for Credit Losses..................................... (8,125) (8,500)
-------- -------
Finance Receivables, Net........................................ 51,063 40,726
-------- -------
Residuals in Finance Receivables Sold................................... 9,889 --
Investments Held in Trust............................................... 3,479 --
Inventory............................................................... 5,752 6,329
Property and Equipment, Net............................................. 20,652 7,797
Goodwill and Trademarks, Net............................................ 2,150 269
Other Assets............................................................ 6,643 4,250
-------- -------
$118,083 $60,790
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts Payable...................................................... $ 2,132 $ 595
Accrued Expenses and Other Liabilities................................ 6,728 5,557
Notes Payable......................................................... 12,904 35,201
Subordinated Notes Payable............................................ 14,000 14,553
-------- -------
Total Liabilities.................................................. 35,764 55,906
-------- -------
Stockholders' Equity:
Preferred Stock....................................................... -- 10,000
Common Stock.......................................................... 82,612 127
Accumulated Deficit................................................... (293) (5,243)
-------- -------
Total Stockholders' Equity......................................... 82,319 4,884
-------- -------
Commitments, Contingencies and Subsequent Events........................
-------- -------
$118,083 $60,790
======== =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-3
<PAGE> 63
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS, EXCEPT EARNINGS
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Sales of Used Cars............................................ $53,768 $47,824 $27,768
Less:
Cost of Used Cars Sold...................................... 29,890 27,964 12,577
Provision for Credit Losses................................. 9,811 8,359 8,140
------- ------- -------
14,067 11,501 7,051
------- ------- -------
Interest Income............................................... 15,856 10,071 5,449
Gain on Sale of Loans......................................... 4,434 -- --
------- ------- -------
20,290 10,071 5,449
------- ------- -------
Servicing Income.............................................. 921 -- --
Other Income.................................................. 650 308 556
------- ------- -------
1,571 308 556
------- ------- -------
Income before Operating Expenses.............................. 35,928 21,880 13,056
Operating Expenses:
Selling and Marketing....................................... 3,585 3,856 2,402
General and Administrative.................................. 19,538 14,726 9,141
Depreciation and Amortization............................... 1,577 1,314 777
------- ------- -------
24,700 19,896 12,320
------- ------- -------
Income before Interest Expense................................ 11,228 1,984 736
Interest Expense.............................................. 5,262 5,956 3,037
------- ------- -------
Earnings (Loss) before Income Taxes........................... 5,966 (3,972) (2,301)
Income Taxes (Benefit)........................................ 100 -- (334)
------- ------- -------
Net Earnings (Loss)........................................... $ 5,866 $(3,972) $(1,967)
======= ======= =======
Earnings (Loss) per Share..................................... $ 0.60 $ (0.67) $ (0.35)
======= ======= =======
Shares Used in Computation.................................... 8,283 5,892 5,584
======= ======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-4
<PAGE> 64
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
SHARES AMOUNT EARNINGS TOTAL
------------------ ------------------- (ACCUMULATED STOCKHOLDERS'
PREFERRED COMMON PREFERRED COMMON DEFICIT) EQUITY
--------- ------ --------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993....... -- 4,640 $ -- $ 1 $ 696 $ 697
Issuance of Common Stock for
Purchase of Subsidiary............ -- 174 -- 15 -- 15
Issuance of Common Stock for Cash... -- 708 -- 61 -- 61
Net Loss for the Year............... -- -- -- -- (1,967) (1,967)
------ ------ -------- ------- ------- --------
Balances at December 31, 1994....... -- 5,522 -- 77 (1,271) (1,194)
Issuance of Common Stock............ -- 58 -- 50 -- 50
Conversion of Subordinated Notes
Payable to Preferred Stock........ 1,000 -- 10,000 -- -- 10,000
Net Loss for the Year............... -- -- -- -- (3,972) (3,972)
------ ------ -------- ------- ------- --------
Balances at December 31, 1995....... 1,000 5,580 10,000 127 (5,243) 4,884
Issuance of Common Stock for Cash... -- 7,281 -- 79,335 -- 79,335
Conversion of Debt to Common
Stock............................. -- 444 -- 3,000 -- 3,000
Issuance of Common Stock to Board of
Directors......................... -- 22 -- 150 -- 150
Redemption of Preferred Stock....... (1,000) -- (10,000) -- -- (10,000)
Preferred Stock Dividend............ -- -- -- -- (916) (916)
Net Earnings for the Year........... -- -- -- -- 5,866 5,866
------ ------ -------- ------- ------- --------
Balances at December 31, 1996....... -- 13,327 $ -- $82,612 $ (293) $ 82,319
====== ====== ======== ======= ======= ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-5
<PAGE> 65
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Earnings (Loss)..................................... $ 5,866 $ (3,972) $ (1,967)
Adjustments to Reconcile Net Earnings (Loss) to Net
Cash Provided by Operating Activities:
Provision for Credit Losses.......................... 9,811 8,359 8,140
Gain on Sale of Finance Receivables.................. (4,434) -- --
Decrease (Increase) in Deferred Income Taxes......... 249 449 (461)
Depreciation and Amortization........................ 1,577 1,314 777
Decrease (Increase) in Inventory..................... 577 (1,500) (3,098)
Finance Receivables Held for Sale.................... (45,989) -- --
Proceeds from Sale of Finance Receivables............ 38,989 -- --
Increase in Other Assets............................. (3,150) (529) (294)
Increase in Accounts Payable, Accrued Expenses, and
Other Liabilities.................................. 2,949 3,035 1,064
Increase (Decrease) in Income Taxes
Receivable/Payable................................. 534 (984) (809)
Other, Net........................................... -- 169 25
-------- -------- --------
Net Cash Provided by Operating Activities....... 6,979 6,341 3,377
-------- -------- --------
Cash Flows from Investing Activities:
Increase in Finance Receivables......................... (67,803) (53,023) (27,196)
Collections of Finance Receivables...................... 49,201 19,795 12,202
Increase in Investments Held in Trust................... (3,479) -- --
Purchase of Property and Equipment...................... (6,111) (3,195) (5,334)
Other, Net.............................................. (1,809) -- (270)
-------- -------- --------
Net Cash Used in Investing Activities........... (30,001) (36,423) (20,598)
-------- -------- --------
Cash Flows from Financing Activities:
Additions to Notes Payable.............................. 1,000 22,259 9,942
Repayments of Notes Payable............................. (28,610) -- (2,027)
Net Issuance (Repayment) of Subordinated Notes
Payable.............................................. (553) 6,262 9,350
Redemption of Preferred Stock........................... (10,000) -- --
Proceeds from Issuance of Common Stock.................. 79,435 5 61
Other, Net.............................................. (1,214) 2,807 (16)
-------- -------- --------
Net Cash Provided by Financing Activities....... 40,058 31,333 17,310
-------- -------- --------
Net Increase in Cash and Cash Equivalents................. 17,036 1,251 89
Cash and Cash Equivalents at Beginning of Year............ 1,419 168 79
-------- -------- --------
Cash and Cash Equivalents at End of Year.................. $ 18,455 $ 1,419 $ 168
======== ======== ========
Supplemental Statement of Cash Flows Information:
Interest Paid........................................... $ 5,144 $ 5,890 $ 3,031
======== ======== ========
Income Taxes Paid....................................... $ 450 $ 535 $ 960
======== ======== ========
Conversion of Note Payable to Common Stock.............. $ 3,000 $ -- $ --
======== ======== ========
Purchase of Property and Equipment with Notes Payable... $ 8,313 $ -- $ --
======== ======== ========
Purchase of Property and Equipment with Capital
Leases............................................... $ 57 $ 792 $ 399
======== ======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-6
<PAGE> 66
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(1) ORGANIZATION AND PURPOSE
Ugly Duckling Corporation, a Delaware corporation (the Company), was
incorporated in April 1996 as the successor to Ugly Duckling Holdings, Inc.
(UDH), an Arizona corporation, formed in 1992. Contemporaneous with the
formation of the Company, UDH was merged into the Company with each share of
UDH's common stock exchanged for 1.16 shares of common stock in the Company and
each share of UDH's preferred stock exchanged for one share of preferred stock
in the Company under identical terms and conditions. UDH was effectively
dissolved in the merger. The resulting effect of the merger was a
recapitalization increasing the number of authorized shares of common stock to
20,000,000 and a 1.16-to-1 common stock split effective April 24, 1996. The
stockholders' equity section of the Consolidated Balance Sheets as of December
31, 1996 and 1995, reflects the number of authorized shares after giving effect
to the merger and common stock split. The Company's principal stockholder is
also the sole stockholder of Verde Investments, Inc. (Verde). The Company's
subordinated debt is held by, and the land for certain of its car dealerships
and loan servicing facilities was leased from, Verde until December 31, 1996,
see Note 13.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
The Company, through its subsidiaries, owns and operates sales finance
companies, used car sales dealerships, a property and casualty insurance
company, and is a franchiser of rental car operations. Additionally, Champion
Receivables Corporation, a "bankruptcy remote entity" is the Company's wholly-
owned special purpose securitization subsidiary. Its assets include residuals in
finance receivables sold, and investments held in trust, in the amounts of
$9,889,000 and $2,843,000, respectively, at December 31, 1996.
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
Champion Acceptance Corporation and Champion Financial Services (CFS)
provide sales finance services in connection with the sales of used cars to
individuals residing primarily in the metropolitan areas of Phoenix and Tucson,
Arizona. The Company operated three, three and two dealerships in the Tucson
metropolitan area in 1996, 1995 and 1994, respectively; and five, five, and
three dealerships in the Phoenix metropolitan area in 1996, 1995 and 1994,
respectively (company dealerships). As of December 31, 1996, CFS maintains
relationships with approximately 1,400 third party car dealers (third party
dealers) in twelve states from whom it purchases sales finance contracts from 35
branch offices.
Periodically during the year, the Company maintains cash in financial
institutions in excess of the amounts insured by the federal government.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents. Cash equivalents
generally consist of interest bearing money market accounts.
Revenue Recognition
Interest income is recognized using the interest method. Direct loan
origination costs related to contracts originated at company dealerships are
deferred and charged against finance income over the life of the related
F-7
<PAGE> 67
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
installment sales contract as an adjustment of yield. Pre-opening and start-up
costs incurred on third party dealer branch offices are deferred and charged to
expense over a twelve-month period. The accrual of interest is suspended if
collection becomes doubtful, generally 90 days past due, and is resumed when the
loan becomes current. Interest income also includes income on the Company's
residual interests from its securitization program.
Revenue from the sales of used cars is recognized upon delivery, when the
sales contract is signed and the agreed-upon down payment has been received.
Residuals in Finance Receivables Sold, Investments Held in Trust and Gain on
Sale of Loans
In 1996, the Company initiated a securitization program under which it
sells (securitizes), on a non-recourse basis, 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 certificates (A certificates) to third party
investors and retains subordinated certificates (B certificates). 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 A certificates sold to a third party or to pay associated
costs.
Residuals in finance receivables result from the sale of finance
receivables on which the Company retains servicing rights and the excess cash
flows on the A certificates, including any excess cash flows on the B
certificates. The residual is determined by computing the difference between the
weighted average yield of the finance receivables sold and the yield to the
certificate purchaser, adjusted for the normal servicing fee based on the
agreements between the Company and the investor and further adjusted for
anticipated prepayments, repossessions, liquidations, and charge offs.
The Company is required to make an initial 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 trustee in turn invests the cash in highly
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 receivable principal balances. These deposits are
classified as Investments Held in Trust.
To the extent that the performance of the underlying finance receivable
portfolio differs from the Company's original estimates, the Company's residual
will be adjusted quarterly, with corresponding charges against income in the
period in which the adjustment is made. Such evaluations are performed on a
security by security basis, for each certificate or spread account retained by
the Company.
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 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.
F-8
<PAGE> 68
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Finance Receivables, Allowance for Credit Losses and Nonrefundable Acquisition
Discount
The Company originates installment sales contracts from its company
dealerships and purchases contracts from third party dealers. Finance
receivables consist of contractually scheduled payments from installment sales
contracts net of unearned finance charges, accrued interest receivable, direct
loan origination costs, and an allowance for credit losses, including
nonrefundable acquisition discount.
Finance receivables held for investment represent finance receivables that
the Company expects to hold until they have matured. Finance receivables held
for sale represent finance receivables that the Company expects to securitize
within the next twelve months.
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" for contracts
originated at its company dealerships.
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 credit worthiness of the borrowers and the
wholesale value of the vehicle. The remaining discount, if any, is deferred and
accreted to income using the interest method. To the extent that the allowance
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 market value.
Property and Equipment
Property and Equipment are stated at cost. Depreciation is computed using
straight-line and accelerated methods over the estimated useful lives of the
assets which range from three to ten years for equipment and thirty years for
buildings. Leasehold and land improvements are amortized using straight-line and
accelerated methods over the shorter of the lease term or the estimated useful
lives of the related improvements.
The Company has capitalized costs related to the development of software
products for internal use. Capitalization of costs begins when technological
feasibility has been established and ends when the software
F-9
<PAGE> 69
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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," "America's Second Car," "Putting You on the Road to Good Credit"
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.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally fifteen years. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. The amount
of goodwill impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's average cost
of funds. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
Post Sale Customer Support Programs
A liability for the estimated cost of post sale customer support, including
car repairs and the Company's down payment back and credit card programs, is
established at the time the used car is sold by charging Cost of Used Cars Sold.
The liability is evaluated for adequacy through a separate analysis of the
various programs' historical performance.
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
All costs related to production and advertising are expensed in the period
incurred or ratably over the year in relation to revenues or certain other
performance measures. The Company had no advertising costs capitalized as of
December 31, 1996.
Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
F-10
<PAGE> 70
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net earnings and pro
forma earnings per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No.
123.
The Company uses one of the most widely used option pricing models, the
Black-Scholes model (the Model), for purposes of valuing its stock option
grants. The Model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, it requires the input of highly subjective assumptions including the
expected stock price volatility, expected dividend yields, the risk free
interest rate, and the expected life. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the value determined by the Model is
not necessarily indicative of the ultimate value of the granted options.
Earnings Per Share
Earnings per share is based upon the weighted average number of common
shares outstanding plus dilutive common stock equivalents after giving effect to
the payment of dividends on preferred stock.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of, on
January 1, 1996. The Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a materiel impact on the Company's
financial position, results of operations, or liquidity.
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996 and is to be applied prospectively. This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a financial-
components approach that focuses on control. It distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings.
Management of the Company does not expect that adoption of SFAS No. 125 will
have a material impact on the Company's financial position, results of
operations, or liquidity.
F-11
<PAGE> 71
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
A summary of Net Finance Receivables at December 31, 1996 and 1995 follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Contractually Scheduled Payments....................... $ 77,982 $ 66,425
Less: Unearned Finance Income.......................... (19,701) (18,394)
-------- --------
Installment Sales Contract Principal Balances.......... 58,281 48,031
Add: Accrued Interest Receivable....................... 718 613
Loan Origination Costs, Net...................... 189 582
-------- --------
Principal Balances, Net................................ 59,188 49,226
Less: Allowance for Credit Losses...................... (8,125) (8,500)
-------- --------
Finance Receivables, Net............................... $ 51,063 $ 40,726
======== ========
Held for Investment.................................... $ 52,188 $ 49,226
Held for Sale.......................................... 7,000 --
-------- --------
59,188 49,226
Less: Allowance for Credit Losses...................... (8,125) (8,500)
-------- --------
$ 51,063 $ 40,726
======== ========
</TABLE>
Allowance for Credit Losses as a percent of principal balances totaled
13.9% and 17.7% at December 31, 1996 and 1995, respectively.
The changes in the allowance for credit losses for the years ended December
31, 1996, 1995 and 1994 follow (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Balances, Beginning of Year................... $ 8,500 $ 6,209 $ 2,876
Provision for Credit Losses................. 9,811 8,359 8,140
Allowance Acquired from Discount............ 8,963 1,660 579
Net Charge Offs............................. (9,168) (7,728) (5,386)
Sale of Finance Receivables................. (9,981) -- --
------- ------- -------
Balances, End of Year......................... $ 8,125 $ 8,500 $ 6,209
======= ======= =======
</TABLE>
(4) RESIDUALS IN FINANCE RECEIVABLES SOLD
The valuation of the Residual in Finance Receivables Sold as of December
31, 1996 totaled $9,889,000 which represents the present value of the Company's
interest in the anticipated future cash flows of the underlying portfolio,
discounted at rates ranging from 16% to 25%, after taking into consideration
anticipated prepayments and net charge offs. For contracts originated at Company
Dealerships, net losses were estimated using total expected cumulative net
losses at loan origination of approximately 25.0%, adjusted for actual
cumulative net losses prior to securitization. For contracts purchased from
Third Party Dealers, net losses were estimated using total expected cumulative
net losses at loan origination of approximately 13.5%, adjusted for actual
cumulative net losses prior to securitization. Losses are discounted at an
assumed risk free rate. Prepayment rates were estimated to be 1.5% per month of
the beginning of month balance.
F-12
<PAGE> 72
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996, the Company serviced Finance Receivables totaling
$51,663,000 which serves as collateral on $40,770,000 in senior certificates
issued to one investor. Approximately 89% of these finance receivables were
originated in the state of Arizona.
The future net charge offs taken into consideration in arriving at the
residual of $9,889,000 totaled $7,593,000 at December 31, 1996. This represents
14.70% of the underlying finance receivables of $51,663,000 at December 31,
1996.
(5) INVESTMENTS HELD IN TRUST
In connection with its securitization transactions the Company is required
to provide a credit enhancement to the investor. The Company makes an initial
cash deposit, ranging from 3% to 4% of the initial underlying finance
receivables principal balance, of cash into an account held by the trustee
(spread account) and pledges this cash to the trust to which the finance
receivables were sold and then makes additional deposits from the residual cash
flow (through the trustee) to the spread account as necessary to attain and
maintain the spread account at a specified percentage, ranging from 6.0% to
8.0%, of the underlying finance receivables principal balance.
In the event that the cash flows generated by the Finance Receivables Sold
to the trust are insufficient to pay obligations of the trust, including
principal or interest due to certificate holders or expenses of the trust, the
trustee will draw funds from the spread account as necessary to pay the
obligations of the trust. The spread account must be maintained at a specified
percentage of the principal balances of the finance receivables held by the
trust, which can be increased in the event delinquencies or losses exceed
specified levels. If the spread account exceeds the specified percentage, the
trustee will release the excess cash to the Company from the pledged spread
account. Except for releases in this manner, the cash in the spread account is
restricted from use by the Company.
During 1996, the Company made initial spread account deposits totaling
$2,630,000. Additional net deposits through the trustee during 1996 totaled
$213,000 resulting in a total balance in the spread accounts of $2,843,000 as of
December 31, 1996. In connection therewith, the specified spread account balance
based upon the aforementioned specified percentages of the balances of the
underlying portfolios as of December 31, 1996 was $3,941,000, resulting in
additional funding requirements from future cash flows as of December 31, 1996
of $1,098,000. The additional funding requirement will decline as the trustee
deposits additional cash flows into the spread account and as the principal
balance of the underlying finance receivables declines.
In connection with certain other agreements, the Company has deposited a
total of $636,000 in an interest bearing trust account.
F-13
<PAGE> 73
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) PROPERTY AND EQUIPMENT
A summary of Property and Equipment as of December 31, 1996 and 1995
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
Land..................................................... $ 7,811 $ 15
Buildings and Leasehold Improvements..................... 5,699 5,143
Furniture and Equipment.................................. 5,696 3,401
Software Development Costs............................... 693 533
Vehicles................................................. 156 133
Construction in Process.................................. 3,536 11
------- -------
23,591 9,236
Less Accumulated Depreciation and Amortization........... (2,939) (1,439)
------- -------
Property and Equipment, Net.............................. $20,652 $ 7,797
======= =======
</TABLE>
No Interest Expense was capitalized in 1996. Interest Expense capitalized
in 1995 and 1994 totaled $54,000 and $142,000, respectively
(7) GOODWILL AND TRADEMARKS
In October, 1996, the Company acquired the operating lease and a loan
portfolio of a used car dealership. In connection with this acquisition, the
Company recorded goodwill totaling $1,944,000.
A summary of Trademarks as of December 31, 1996 and 1995 follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
----- -----
<S> <C> <C>
Original Cost............................................... $ 581 $ 581
Accumulated Amortization.................................... (375) (312)
----- -----
Trademarks, Net............................................. $ 206 $ 269
===== =====
</TABLE>
Amortization expense relating to Trademarks totaled $63,000 for each of the
years ended December 31, 1996, 1995 and 1994.
(8) OTHER ASSETS
A summary of other assets as of December 31, 1996 and 1995 follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Note Receivable............................................ $ 1,063 $ --
Pre-opening and Startup Costs.............................. 1,242 --
Escrow Deposits............................................ 900 --
Prepaid Expenses........................................... 796 643
Deferred Income Taxes...................................... 676 925
Income Taxes Receivable.................................... 316 850
Property and Equipment Held for Sale....................... -- 1,086
Other Assets............................................... 1,650 746
------ ------
$ 6,643 $ 4,250
====== ======
</TABLE>
F-14
<PAGE> 74
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) ACCRUED EXPENSES AND OTHER LIABILITIES
A summary of accrued expenses and other liabilities as of December 31, 1996
and 1995 follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------ ------
<S> <C> <C>
Sales Taxes................................................ $2,904 $2,258
Others..................................................... 3,824 3,299
------ ------
$6,728 $5,557
====== ======
</TABLE>
In connection with the retail sale of vehicles, the Company is required to
pay sales taxes to certain government jurisdictions. The Company has elected to
pay these taxes using the "cash basis", which requires the Company to pay the
sales tax obligation for a sale transaction as principal is collected over the
life of the related finance receivable contract.
(10) NOTES PAYABLE
A summary of Notes Payable at December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
$50,000,000 revolving loan with a finance company, interest payable daily
at 30 day LIBOR (5.40% at December 31, 1996) plus 3.60% through
September 1997, at which time the Company retains the right to extend
the loan for one additional year, secured by substantially all assets
of the Company......................................................... $ 4,602 $ 32,201
Two notes payable to a finance company totaling $7,450,000, monthly
interest payable at the prime rate (8.25% at December 31, 1996) plus
1.50% through January 1998; thereafter, monthly payments of $89,000
plus interest through January 2002 when balloon payments totaling
$3,282,000 are due, secured by first deeds of trust and assignments of
rents on certain real property......................................... 7,444 --
$3,000,000 note payable to an insurance company, interest payable
quarterly at 12.5% per annum. Converted to common stock concurrent with
the Company's initial public offering in 1996.......................... -- 3,000
Others bearing interest at rates ranging from 9% to 11% due through April
2007, secured by certain real property and certain property and
equipment.............................................................. 858 --
------- -------
Total.......................................................... $ 12,904 $ 35,201
======= =======
</TABLE>
The aforementioned revolving loan agreement contains various reporting and
performance covenants including the maintenance of certain ratios, limitations
on additional borrowings from other sources, restrictions on certain operating
activities and a restriction on the payment of dividends under certain
circumstances. The Company was in compliance with the covenants at December 31,
1996 and 1995.
F-15
<PAGE> 75
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of future minimum principal payments required (assuming the
Company exercises its right to extend the revolving loan through September 1998)
under the aforementioned notes payable as of December 31, 1996 follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
1997......................................................... $ 86
1998......................................................... 5,673
1999......................................................... 1,169
2000......................................................... 1,179
2001......................................................... 1,191
Thereafter................................................... 3,606
-------
$12,904
=======
</TABLE>
(11) SUBORDINATED NOTES PAYABLE
The Company has executed two subordinated notes payable with Verde. As
discussed in the following paragraphs, the balance outstanding under these notes
totaled $14,553,000 at December 31, 1995. There was no accrued interest payable
related to these notes at December 31, 1995.
In August 1993, the Company entered into a ten-year, subordinated note
payable agreement with Verde. This unsecured $15,000,000 note bears interest at
an annual rate of 18%, with interest payable monthly and is subordinated to all
other Company liabilities. The note also provides for suspension of interest
payments should the Company be in default with any other creditors. The Company
had $10,000,000 outstanding related to this note payable at December 31, 1995.
In December 1995, the Company amended its five-year junior subordinated
revolving note payable agreement with Verde. The note was increased from
$3,000,000 to $5,000,000, bears interest at an annual rate of 18%, with interest
payable monthly, and is scheduled to mature in December 1999. The Company had
$4,553,000 outstanding related to this note payable at December 31, 1995.
Interest expense related to the subordinated notes payable with Verde
totaled $1,933,000, $3,492,000 and $2,569,000 during the years ended December
31, 1996, 1995 and 1994, respectively.
On December 31, 1995, Verde converted $10,000,000 of subordinated notes
payable to preferred stock of the Company. Verde agreed to waive any prepayment
penalties associated with the reduction of the subordinated notes payable in
connection with the conversion.
In conjunction with the closing of the Company's initial public offering in
June 1996, the two previously outstanding subordinated notes payable were
exchanged for a new subordinated note payable. The new $14,000,000 unsecured
note bears interest at an annual rate of 10%, with interest payable monthly and
is subordinate to all other Company indebtedness. The note also calls for annual
principal payments of $2,000,000 through June 2003 when the loan will be paid in
full. The Company had $14,000,000 outstanding under this note payable at
December 31, 1996.
F-16
<PAGE> 76
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) INCOME TAXES
Income tax expense (benefit) amounted to $100,000, zero and $(334,000) for
the years ended December 31, 1996, 1995 and 1994, respectively (an effective tax
rate of 1.7%, 0% and 14.5%, respectively). A reconciliation between taxes
computed at the federal statutory rate of 34% and at the effective tax rate on
earnings (loss) before income taxes follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -----
<S> <C> <C> <C>
Computed "Expected" Tax Expense (Benefit)............... $ 2,028 $(1,350) $(782)
State Income Taxes, Net of Federal Effect............... 41 -- (30)
Change in Valuation Allowance........................... (2,315) 1,418 897
Other, Net.............................................. 346 (68) (419)
------- ------- -----
$ 100 $ -- $(334)
======= ======= =====
</TABLE>
Components of income tax expense (benefit) for the years ended December 31,
1996, 1995 and 1994 follow (in thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
1996:
Federal.............................................. $(149) $ 187 $ 38
State................................................ -- 62 62
----- ----- -----
$(149) $ 249 $ 100
===== ===== =====
1995:
Federal.............................................. $(449) $ 449 $ --
State................................................ -- -- --
----- ----- -----
$(449) $ 449 $ --
===== ===== =====
1994:
Federal.............................................. $ 79 $ (367) $(288)
State................................................ 48 (94) (46)
----- ----- -----
$ 127 $ (461) $(334)
===== ===== =====
</TABLE>
F-17
<PAGE> 77
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of December
31, 1996 and 1995 are presented below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------ -------
<S> <C> <C>
Deferred Tax Assets:
Finance Receivables, Principally Due to the Allowance for Credit
Losses....................................................... $ 131 $ 2,987
Federal and State Income Tax Net Operating Loss Carryforwards... 995 317
Residual in Finance Receivables................................. 140 --
Other........................................................... 279 443
----- -------
Total Gross Deferred Tax Assets................................. 1,545 3,747
Less: Valuation Allowance....................................... -- (2,315)
----- -------
Net Deferred Tax Assets................................. 1,545 1,432
----- -------
Deferred Tax Liabilities:
Acquisition Discount............................................ (112) --
Software Development Costs...................................... (192) (96)
Other Assets.................................................... (490) --
Loan Origination Fees........................................... (75) (198)
Inventory....................................................... -- (213)
----- -------
Total Gross Deferred Tax Liabilities......................... (869) (507)
----- -------
Net Deferred Tax Asset.................................. $ 676 $ 925
===== =======
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1996 and
1995 was zero and $2,315,000, respectively. The net change in the total
Valuation Allowance for the year ended December 31, 1996 was a decrease of
$2,315,000, and an increase of $1,418,000 for the year ended December 31, 1995.
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 December 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $2,249,000, which, subject to
annual limitations, are available to offset future taxable income, if any,
through 2011 and net operating loss carryforwards for state income tax purposes
of $3,543,000, which are available to offset future taxable income through 2001.
A summary of the net operating loss carryforwards follows (in thousands):
<TABLE>
<CAPTION>
YEAR OF
EXPIRATION FEDERAL STATE
------------------------------------------------------------------- ------- ------
<S> <C> <C>
2000.............................................................. $ -- $1,927
2001.............................................................. -- 1,616
2006.............................................................. 633 --
2011.............................................................. 1,616 --
------ ------
$ 2,249 $3,543
====== ======
</TABLE>
F-18
<PAGE> 78
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) LEASE COMMITMENTS
The Company leases an operating facility, offices, a vehicle and office
equipment from unrelated entities under operating leases which expire through
August 2001. The leases require monthly rental payments aggregating
approximately $155,000 and contain various renewal options from one to ten
years. In certain instances, the Company is also responsible for occupancy and
maintenance costs, including real estate taxes, insurance, and utility costs.
The Company purchased six car lots, a vehicle reconditioning center, and
two office buildings from Verde. These properties had previously been rented
from Verde pursuant to various leases which called for base monthly rents
aggregating approximately $123,000 plus contingent rents as well as all
occupancy and maintenance costs, including real estate taxes, insurance, and
utilities. In connection with the purchase, Verde returned security deposits
which totaled $364,000. The security deposits are included in Other Assets in
the accompanying Consolidated Balance Sheet as of December 31, 1995.
Rent expense for the year ended December 31, 1996 totaled $2,394,000. Rents
paid to Verde totaled $1,498,000 including contingent rents of $440,000. There
was no accrued rent payable to Verde at December 31, 1996.
Rent expense for the year ended December 31, 1995 totaled $2,377,000. Rents
paid to Verde totaled $1,889,000, including contingent rents of $465,000, and
$113,000 of rent capitalized during the construction period of a facility.
Accrued rent payable to Verde totaled $101,000 at December 31, 1995 and is
included in Accrued Expenses and Other Liabilities on the accompanying
Consolidated Balance Sheets.
Rent expense for the year ended December 31, 1994 totaled $1,400,000. Rents
paid to Verde totaled $1,221,000 including contingent rents of $310,000, and
$127,000 of rent capitalized during the construction period of two used car
dealership facilities.
A summary of future minimum lease payments required under noncancelable
operating leases with remaining lease terms in excess of one year as of December
31, 1996 follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
1997..................................................... $ 1,788
1998..................................................... 1,547
1999..................................................... 1,190
2000..................................................... 533
2001..................................................... 378
Thereafter............................................... 104
------
Total.......................................... $ 5,540
======
</TABLE>
(14) STOCKHOLDERS' EQUITY
On April 24, 1996, the Company effectuated a 1.16-to-1 stock split. The
effect of this stock split has been reflected for all periods presented in the
Consolidated Financial Statements.
The Company has authorized 20,000,000 shares of $.001 par value common
stock. There were 13,327,000 and 5,580,000 shares issued and outstanding at
December 31, 1996 and 1995, respectively. The common stock consists of $13,000
of common stock and $82,599,000 of additional paid-in capital at December 31,
1996. The common stock consists of $6,000 of common stock and $121,000 of
additional paid-in capital as of December 31, 1995.
During 1996, the Company completed two public offerings in which it issued
a total of 7,245,000 shares of common stock for approximately $79,435,000 cash
net of stock issuance costs.
F-19
<PAGE> 79
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Warrants to acquire 116,000 shares of the Company's common stock at $6.75
per share and 170,000 shares of the Company's common stock at $9.45 per share
were outstanding at December 31, 1996.
The Company has authorized 10,000,000 shares of $.001 par value preferred
stock. There were zero and 1,000,000 shares issued and outstanding at December
31, 1996, and 1995, respectively.
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.
Cumulative dividends were payable at a rate of 12% per annum through June 21,
1996, at which time the Series A preferred stock was exchanged on a share-for-
share basis for 1,000,000 shares of Series B preferred stock. The dividends were
payable quarterly upon declaration by the Company's Board of Directors. In
November 1996, the Company redeemed the 1,000,000 shares of Series B preferred
stock.
The Company's Board of Directors declared quarterly dividends on preferred
stock totaling approximately $916,000 during the year ended December 31, 1996.
There were no cumulative unpaid dividends at December 31, 1996.
(15) STOCK OPTION PLAN
In June, 1995, the Company adopted a long-term incentive plan (stock option
plan). The stock option plan, as amended, sets aside 1,300,000 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. The options generally vest over a period of five
years.
At December 31, 1996, there were 388,000 additional shares available for
grant under the Plan. The per share weighted-average fair value of stock options
granted during 1996 and 1995 was $8.39 and $1.10, respectively on the date of
grant using the Black-Scholes option-pricing model with the following weighted-
average assumptions: 1996 -- expected dividend yield 0%, risk-free interest rate
of 6.3%, expected volatility of 56.5% and an expected life of 7 years;
1995 -- expected dividend yield 0%, risk-free interest rate of 6.1%, expected
volatility of 56.5% and an expected life of 7 years.
The Company applies APB Opinion 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C> <C>
Net Earnings (Loss) As reported.................. $5,866,000 $(3,972,000)
Pro forma.................... $5,748,000 $(3,985,000)
Earnings (Loss) per Share As reported.................. $ 0.60 $ (0.67)
Pro forma.................... $ 0.58 $ (0.68)
</TABLE>
The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net earnings (loss) amounts
presented above because compensation cost is reflected over the options' vesting
period of five years.
F-20
<PAGE> 80
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the aforementioned stock plan follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PRICE PER
NUMBER SHARE
------- ---------
<S> <C> <C>
Balance December 31, 1994........................................ -- --
Granted.......................................................... 459,000 $1.72
Forfeited........................................................ (17,000) 2.16
------- ------
Balance, December 31, 1995....................................... 442,000 1.70
Granted.......................................................... 539,000 13.41
Forfeited........................................................ (30,000) 3.26
Exercised........................................................ (39,000) 1.00
------- ------
Balance, December 31, 1996....................................... 912,000 $8.60
======= ======
</TABLE>
A summary of stock options granted at December 31, 1996 follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -----------------------------
NUMBER WEIGHTED-AVG. WEIGHTED-AVG. NUMBER WEIGHTED-AVG.
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE PRICE AT 12/31/96 PRICE
- ----------------- ----------- ---------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$ .50 to $ 1.00 130,000 8.0 years $ 0.86 -- $ --
$ 1.50 to $ 2.60 247,000 8.5 years $ 2.16 51,000 2.15
$ 3.45 to $ 9.40 192,000 9.5 years $ 6.73 -- --
$11.88 to $17.69 343,000 10.0 years $ 17.22 -- --
------- ------ ------- ----
912,000 $ 8.60 51,000 $2.15
======= ====== ======= ====
</TABLE>
(16) COMMITMENTS AND CONTINGENCIES
The Company has executed an agreement to sell up to $50,000,000 in finance
receivable backed certificates through December 31, 1996 to an insurance
company. In addition, the purchaser has the right of first refusal to purchase
up to an additional $125,000,000 of finance receivables through December 31,
1998. The Company completed the sale of approximately $58,000,000 in
receivable-backed certificates during the year ended December 31, 1996.
The Company is involved in various claims and actions arising in the
ordinary course of business. In the opinion of management, based on consultation
with legal counsel, the ultimate disposition of these matters will not have a
materially adverse effect on the Company.
(17) RETIREMENT 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
$23,000 and $5,000 during the years ended December 31, 1996 and 1995,
respectively.
F-21
<PAGE> 81
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(18) 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, 1996 and 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 and Residuals in Finance Receivables Sold
The carrying amount is assumed to be the fair value because of the relative
short maturity and repayment terms of the portfolio as compared to similar
instruments.
Accounts Payable, Accrued Expenses, and Notes Payable
The carrying amount approximates fair value because of the short maturity
of these instruments. The terms of the Company's notes payable approximate the
terms in the market place at which they could be replaced. Therefore, the fair
market value approximates the carrying value of these financial instruments.
Subordinated Notes Payable
The terms of the Company's subordinated notes payable approximate the terms
in the market place at which they could be replaced. Therefore, the fair value
approximates the carrying value of these financial instruments.
(19) SUBSEQUENT EVENTS
Subsequent to year end, the Company acquired the operating assets of five
used car dealerships and a finance company for a total of approximately
$32,130,000. The acquisition, which was financed with cash and borrowings under
the Company's revolving loan will be accounted for as a purchase.
On February 13, 1997, the Company completed a private placement of
5,075,500 shares of unregistered common stock for approximately $88,850,000
cash, net of stock issuance costs.
(20) BUSINESS SEGMENTS
Operating results and other financial data are presented for the principal
business segments of the Company for the years ended December 31, 1996, 1995,
and 1994, respectively. The Company has four distinct business segments. These
consist of retail car sales operations (Company dealerships), the income
generated from the finance receivables generated at the Company dealerships,
finance income generated from third party finance receivables, and corporate and
other operations. In computing operating profit by business segment, the
following items were considered in the Corporate and Other category: portions of
administrative
F-22
<PAGE> 82
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expenses, interest expense and other items not considered direct operating
expenses. Identifiable assets by business segment are those assets used in each
segment of Company operations.
<TABLE>
<CAPTION>
COMPANY THIRD
COMPANY DEALERSHIP PARTY CORPORATE
DEALERSHIPS RECEIVABLES RECEIVABLES AND OTHER TOTAL
----------- ----------- ----------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
December 31, 1996:
Sales of Used Cars.................... $53,768 $ -- $ -- $ -- $ 53,768
Less: Cost of Cars Sold............... 29,890 -- -- -- 29,890
Provision for Credit Losses.... 9,658 -- 153 -- 9,811
------- ------- ------- ------- --------
14,220 -- (153) -- 14,067
Interest Income....................... -- 8,426 7,259 171 15,856
Gain on Sale of Loans................. -- 3,925 509 -- 4,434
Other Income.......................... 195 921 -- 455 1,571
------- ------- ------- ------- --------
Income before Operating Expenses... 14,415 13,272 7,615 626 35,928
------- ------- ------- ------- --------
Operating Expenses:
Selling and Marketing.............. 3,568 -- -- 17 3,585
General and Administrative......... 8,295 3,042 3,955 4,246 19,538
Depreciation and Amortization...... 318 769 195 295 1,577
------- ------- ------- ------- --------
12,181 3,811 4,150 4,558 24,700
------- ------- ------- ------- --------
Income before Interest Expense.......... $ 2,234 $ 9,461 $ 3,465 $(3,932) $ 11,228
======= ======= ======= ======= ========
Capital Expenditures.................... $ 4,530 $ 455 $ 621 $ 505 $ 6,111
======= ======= ======= ======= ========
Identifiable Assets..................... $20,698 $12,775 $45,558 $39,052 $118,083
======= ======= ======= ======= ========
December 31, 1995:
Sales of Used Cars.................... $47,824 $ -- $ -- $ -- $ 47,824
Less: Cost of Cars Sold............... 27,964 -- -- -- 27,964
Provision for Credit Losses.... 8,359 -- -- -- 8,359
------- ------- ------- ------- --------
11,501 -- -- -- 11,501
Interest Income....................... -- 8,227 1,844 -- 10,071
Other Income.......................... -- -- -- 308 308
------- ------- ------- ------- --------
Income before Operating Expenses... 11,501 8,227 1,844 308 21,880
------- ------- ------- ------- --------
Operating Expenses:
Selling and Marketing.............. 3,856 -- -- -- 3,856
General and Administrative......... 8,210 2,681 1,163 2,672 14,726
Depreciation and Amortization...... 279 479 89 467 1,314
------- ------- ------- ------- --------
12,345 3,160 1,252 3,139 19,896
------- ------- ------- ------- --------
Income before Interest Expense.......... $ (844) $ 5,067 $ 592 $(2,831) $ 1,984
======= ======= ======= ======= ========
Capital Expenditures.................... $ 1,195 $ 1,561 $ 216 $ 223 $ 3,195
======= ======= ======= ======= ========
Identifiable Assets..................... $11,452 $32,187 $13,419 $ 3,732 $ 60,790
======= ======= ======= ======= ========
</TABLE>
F-23
<PAGE> 83
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
COMPANY THIRD
COMPANY DEALERSHIP PARTY CORPORATE
DEALERSHIPS RECEIVABLES RECEIVABLES AND OTHER TOTAL
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
December 31, 1994:
Sales of Used Cars.................... $ 27,768 $ -- $ -- $ -- $ 27,768
Less: Cost of Cars Sold............... 12,577 -- -- -- 12,577
Provision for Credit Losses.... 7,190 834 116 -- 8,140
------- ------- ------- ------- --------
8,001 (834) (116) -- 7,051
Interest Income....................... -- 4,683 766 -- 5,449
Other Income.......................... -- -- -- 556 556
------- ------- ------- ------- --------
Income before Operating Expenses... 8,001 3,849 650 556 13,056
------- ------- ------- ------- --------
Operating Expenses:
Selling and Marketing.............. 2,263 -- -- 139 2,402
General and Administrative......... 5,069 1,631 240 2,201 9,141
Depreciation and Amortization...... 131 159 64 423 777
------- ------- ------- ------- --------
7,463 1,790 304 2,763 12,320
------- ------- ------- ------- --------
Income before Interest Expense.......... $ 538 $ 2,059 $ 346 $ (2,207) $ 736
======= ======= ======= ======= ========
Capital Expenditures.................... $ 3,905 $ 757 $ 302 $ 370 $ 5,334
======= ======= ======= ======= ========
Identifiable Assets..................... $ 8,788 $ 16,764 $ 1,558 $ 2,601 $ 29,711
======= ======= ======= ======= ========
</TABLE>
(21) QUARTERLY FINANCIAL DATA -- UNAUDITED
A summary of the quarterly data for the years ended December 31, 1996 and
1995 follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1996:
Total Revenue..................... $19,396 $20,081 $18,259 $17,893 $75,629
======= ======= ======= ======= =======
Income before Operating
Expenses....................... 8,442 9,005 8,741 9,740 35,928
======= ======= ======= ======= =======
Operating Expenses................ 5,694 6,296 5,522 7,188 24,700
======= ======= ======= ======= =======
Income before Interest Expense.... 2,716 2,721 3,157 2,634 11,228
======= ======= ======= ======= =======
Net Earnings...................... $ 1,065 $ 1,083 $ 1,967 $ 1,751 $ 5,866
======= ======= ======= ======= =======
Earnings Per Share................ $ 0.13 0.13 0.19 0.14 0.60
======= ======= ======= ======= =======
1995:
Total Revenues.................... $11,546 $14,975 $16,944 $14,738 $58,203
======= ======= ======= ======= =======
Income before Operating
Expenses....................... 4,628 5,601 5,858 5,793 21,880
======= ======= ======= ======= =======
Operating Expenses................ 3,970 4,646 5,366 5,914 19,896
======= ======= ======= ======= =======
Income before Interest Expense.... 658 955 492 (121) 1,984
======= ======= ======= ======= =======
Net Loss.......................... $ (465) $ (283) $(1,169) $(2,055) $(3,972)
======= ======= ======= ======= =======
Loss Per Share.................... $ (0.08) $ (0.05) $ (0.20) $ (0.35) $ (0.67)
======= ======= ======= ======= =======
</TABLE>
F-24
<PAGE> 84
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Seminole Finance Corporation:
We have audited the accompanying combined balance sheet of Seminole Finance
Corporation and Related Companies (the Company) as of December 31, 1996, and the
related combined statements of operations, stockholder's equity (deficit), and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Seminole Finance
Corporation and Related Companies as of December 31, 1996, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying combined financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 7 to the
combined financial statements, the Company is involved in a lawsuit that
involves a material amount of damages that, if there were an adverse outcome,
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to this matter are also described in Note 7. The
combined financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Tampa, Florida
March 18, 1997
F-25
<PAGE> 85
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Seminole Finance Corporation:
We have audited the accompanying combined balance sheet of Seminole Finance
Corporation and Related Companies (the Company) as of December 31, 1995, and the
related combined statements of operations, stockholder's equity (deficit), and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Seminole Finance
Corporation and Related Companies as of December 31, 1995, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
BARTON & COMPANY, P.A.
Tampa, Florida
February 10, 1997
F-26
<PAGE> 86
SEMINOLE FINANCE CORPORATION
AND RELATED COMPANIES
COMBINED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents....................................... $ 799,806 $ 24,903
Finance receivables:
Principal balance............................................. 34,126,855 62,347,472
Less allowance for credit losses.............................. (10,600,000) (12,247,949)
------------ ------------
Finance receivables, net...................................... 23,526,855 50,099,523
------------ ------------
Notes receivable................................................ 881,408 1,896,123
Inventories..................................................... 4,243,962 7,085,231
Prepaid expenses................................................ 13,930 50,799
Property and equipment, less accumulated depreciation of
$728,206 and $502,858 in 1996 and 1995, respectively.......... 1,451,891 1,501,002
Other assets.................................................... 1,185,924 556,484
------------ ------------
$ 32,103,776 $ 61,214,065
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Liabilities:
Accounts payable.............................................. $ 201,228 $ 1,322,403
Accrued expenses and other liabilities........................ 1,323,070 350,744
Due to affiliates............................................. 1,048,837 576,272
Obligations under capital leases.............................. 10,250 23,581
Notes payable................................................. 31,152,844 49,475,517
Subordinated note payable..................................... 1,000,000 --
------------ ------------
Total liabilities..................................... 34,736,229 51,748,517
------------ ------------
Stockholder's equity (deficit):
Common Stock.................................................. 30,100 30,100
Additional paid in capital.................................... 2,000,000 2,000,000
Retained earnings (accumulated deficit)....................... (4,662,553) 7,435,448
------------ ------------
Total stockholder's equity (deficit).................. (2,632,453) 9,465,548
Commitments, contingencies and subsequent events
------------ ------------
$ 32,103,776 $ 61,214,065
============ ============
</TABLE>
See accompanying notes to combined financial statements.
F-27
<PAGE> 87
SEMINOLE FINANCE CORPORATION
AND RELATED COMPANIES
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Dealership revenues:
Sales of used cars.............................................. $11,827,087 $57,584,506
Income on finance receivables................................... 10,193,024 18,941,403
----------- -----------
22,020,111 76,525,909
----------- -----------
Cost of dealership revenues:
Cost of used cars............................................... 9,416,749 47,367,031
Provision for credit losses..................................... 7,106,949 9,724,355
----------- -----------
16,523,698 57,091,386
----------- -----------
Net revenues from dealership activities................. 5,496,413 19,434,523
Other income...................................................... 1,618,549 2,524,834
----------- -----------
Income before operating expenses........................ 7,114,962 21,959,357
----------- -----------
Operating expenses:
Selling and marketing........................................... 3,316,874 3,670,667
General and administrative...................................... 7,108,540 10,489,390
Depreciation and amortization................................... 296,548 257,863
----------- -----------
10,721,962 14,417,920
----------- -----------
Operating income (loss)................................. (3,607,000) 7,541,437
----------- -----------
Other expenses:
Interest on subordinated note payable........................... 27,247 --
Interest, other................................................. 3,714,905 5,170,330
Loss on sale of finance receivables............................. 1,456,892 --
----------- -----------
5,199,044 5,170,330
----------- -----------
Net earnings (loss)..................................... $(8,806,044) $ 2,371,107
=========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-28
<PAGE> 88
SEMINOLE FINANCE CORPORATION
AND RELATED COMPANIES
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
RETAINED TOTAL
ADDITIONAL EARNINGS STOCKHOLDER'S
COMMON PAID-IN (ACCUMULATED EQUITY
STOCK CAPITAL DEFICIT) (DEFICIT)
------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Balances at December 31, 1994.................... $30,100 2,000,000 7,178,674 9,208,774
Net earnings..................................... -- -- 2,371,107 2,371,107
Distributions to shareholder..................... -- -- (2,114,333) (2,114,333)
------- --------- ---------- ----------
Balances at December 31, 1995.................... 30,100 2,000,000 7,435,448 9,465,548
Net loss......................................... -- -- (8,806,044) (8,806,044)
Distributions to shareholder..................... -- -- (3,291,957) (3,291,957)
------- --------- ---------- ----------
Balances at December 31, 1996.................... $30,100 2,000,000 (4,662,553) (2,632,453)
======= ========= ========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-29
<PAGE> 89
SEMINOLE FINANCE CORPORATION
AND RELATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)........................................... $ (8,806,044) $ 2,371,107
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Provision for credit losses................................ 7,106,949 9,724,355
Loss on sale of finance receivables........................ 1,456,892 --
Loss on sale of property and equipment..................... 17,744 34,239
Depreciation and amortization.............................. 296,548 257,863
Decrease in notes receivable............................... 1,014,715 --
Decrease in inventory...................................... 2,841,269 1,063,019
Decrease (increase) in prepaid expenses.................... 36,869 (14,395)
Decrease (increase) in other assets........................ (629,440) 221,442
Decrease in accounts payable............................... (1,121,175) (975,581)
Increase (decrease) in accrued expenses and other
liabilities.............................................. 972,326 (469,665)
------------- ------------
Net cash provided by operating activities............. 3,186,653 12,212,384
------------- ------------
Cash flows from investing activities:
Decrease (increase) in finance receivables.................... 18,008,827 (13,975,390)
Proceeds from sale of property, plant and equipment........... 73,106 --
Purchases of property, plant and equipment.................... (338,287) (1,063,584)
Loans to related parties...................................... -- (1,221,888)
Repayments from related parties............................... -- 387,372
Other......................................................... -- 264,731
------------- ------------
Net cash provided by (used in) investing activities... 17,743,646 (15,608,759)
------------- ------------
Cash flows from financing activities:
Repayment of obligations under capital leases................. (13,331) (12,243)
Advances (repayments)of notes payable......................... (17,273,836) 5,605,693
Advances on subordinated note payable......................... 1,000,000 --
Distributions to shareholder.................................. (3,291,957) (2,114,333)
Other......................................................... (576,272) (59,739)
------------- ------------
Net cash provided by (used in) financing activities... (20,155,396) 3,419,378
------------- ------------
Net increase in cash.................................. 774,903 23,003
Cash at beginning of year....................................... 24,903 1,900
------------- ------------
Cash at end of year............................................. $ 799,806 $ 24,903
============= ============
</TABLE>
See accompanying notes to combined financial statements.
F-30
<PAGE> 90
SEMINOLE FINANCE CORPORATION
AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Combination
The combined financial statements include the accounts of Seminole Finance
Corporation, Second Chance Finance, Inc., Second Chance Wholesale, Inc. and
Choice Auto Sales (collectively, the Company). These Companies operate used car
retail operations and a finance company in the state of Florida. All significant
intercompany balances and transactions have been eliminated in consolidation.
(b) Common Stock
<TABLE>
<CAPTION>
PAR AUTHORIZED SHARES
COMPANY VALUE SHARES OUTSTANDING
-------------------------------------------------- ------ ----------- -----------
<S> <C> <C> <C>
Seminole Finance Corporation...................... No 100 100
Second Chance Finance, Inc........................ No 100 100
Second Chance Wholesale, Inc...................... $1 10,000 100
Choice Auto Sales................................. $1 10,000 100
</TABLE>
(c) Cash Equivalents
The Company considers all cash and money market accounts, bank certificates
of deposits, and highly liquid debt instruments purchased with a maturity date
of three months or less to be cash equivalents.
(d) Income Recognition
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.
Income on finance receivables is recognized using the interest method.
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.
The Company has elected to suspend the accrual of interest income on
finance receivables when a loan has become delinquent generally after 90 days.
If one of these delinquent receivables becomes current, interest income is
recognized as if the account had not been delinquent. Late fees are charged on
these accounts and recognized when collected.
(e) Allowance for Credit Losses
The allowance for credit losses is primarily provided through discounts
charged by Seminole Finance Corporation when it purchases finance contracts from
third parties. Additional provisions for credit losses are charged against
income in amounts sufficient to maintain the allowance at a level considered
adequate to cover the losses of the existing loans. Seminole Finance Corporation
charges off loans based on a loan-by-loan review of the receivables. When a loan
is deemed uncollectible, the Company first seeks recovery by attempting to
repossess the vehicle financed. If the vehicle cannot be repossessed, then the
Company writes off the loan against the allowance account.
F-31
<PAGE> 91
SEMINOLE FINANCE CORPORATION
AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996 AND 1995
(f) Inventories
Inventories consist 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. The cost of used vehicles sold is determined on a
specific identification basis. Repossessed vehicles are valued at the estimated
net realizable value.
(g) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
using straight-line and accelerated methods over the estimated useful lives of
the assets. Leasehold improvements are amortized using straight-line and
accelerated methods over the shorter of the lease term or the estimated useful
lives of the related improvements. Expenditures that extend the useful lives of
property and equipment are capitalized. Maintenance and repair expenditures are
charged to expense when incurred.
(h) Income Taxes
Each Company, with consent of its shareholder, elected to be treated as an
S Corporation. As an S Corporation, the Company is generally not liable for
income taxes since all income, losses and credits are passed through to the
shareholder.
(i) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting period. Estimates by management that are critical to the accompanying
financial statements include the appropriate level of allowance for credit
losses which can be significantly impacted by future industry, market, and
economic trends and conditions. Actual results could differ significantly from
these estimates.
(j) Concentration of Credit Risk
The Company provides finance services in connection with used car
dealerships to individuals residing primarily in Hillsborough, Pinellas, Pasco
and Polk Counties, Florida.
(k) Reclassifications
Certain amounts in the 1995 combined financial statements have been
reclassified to conform with the 1996 presentation.
F-32
<PAGE> 92
SEMINOLE FINANCE CORPORATION
AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996 AND 1995
(2) FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
A summary of net finance receivables at December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Contractually scheduled payments................ $ 44,922,993 80,820,358
Less unearned finance income.................. (10,796,138) (18,131,041)
Less unearned discounts....................... -- (341,845)
------------ ------------
Principal balances, net.................... 34,126,855 62,347,472
Less allowance for credit losses.............. (10,600,000) (12,247,949)
------------ ------------
Finance receivables, net................... $ 23,526,855 50,099,523
============ ============
</TABLE>
Allowance for credit losses as a percent of principal balances totaled
31.06% and 19.6% as of December 31, 1996 and 1995, respectively.
The changes in the allowance for credit losses were as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Balances, beginning of year....................... $12,247,949 11,419,769
Provision for credit losses....................... 7,106,949 9,724,355
Discount acquired................................. -- 10,510,600
Net charge-offs................................... (8,754,898) (19,406,775)
----------- ----------
Balances, end of year............................. $10,600,000 12,247,949
=========== ==========
</TABLE>
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
1996 1995 (YEARS)
---------- --------- ------------
<S> <C> <C> <C>
Land.................................... $ 55,000 55,000 --
Buildings and improvements.............. 524,902 512,811 31.5
Furniture and equipment................. 1,600,195 1,436,049 5-10
====
---------- ---------
Total cost............................ $2,180,097 2,003,860
========== =========
</TABLE>
(4) NOTES PAYABLE
In May 1995, the Company amended its loan agreement for a revolving loan
with a credit corporation. The note calls for interest payable at an annual rate
of 30 day London Interbank Offered Rates (LIBOR) plus 3.00%. The note is secured
by certain assets of the Company. As of December 31, 1996, the Company had a
maximum commitment of $75,000,000 through May 1997, at which time the loan may
be extended through a one-year automatic renewal. The Company borrowed
$28,253,844 and $46,543,517 under this loan as of December 31, 1996 and December
31, 1995, respectively. (See note 8)
In May 1994, the Company executed a loan agreement for $2,500,000 with a
credit corporation. The note calls for interest at an annual rate of 30 day
LIBOR plus 6.75%. The note is secured by certain assets of the Company and
guaranteed by the owner of the Company. As of December 31, 1996, the Company had
a
F-33
<PAGE> 93
SEMINOLE FINANCE CORPORATION
AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996 AND 1995
maximum commitment of $2,500,000 through May 1996, at which time the loan was
extended through a one-year automatic renewal. The Company borrowed $2,500,000
under this loan as of December 31, 1996 and December 31, 1995. (See note 8)
The Company owes $1,048,837 and $576,272 as of December 31, 1996 and 1995,
respectively, on borrowings from related companies owned by the same shareholder
as the Company. These companies are offshore insurance companies that are liable
for the losses on the credit insurance claims that result from insurance
policies sold with the financing contracts. These loans have no specific terms
for repayment or interest. (See note 8)
On June 30, 1992, the Company purchased 50% of the office building it
occupied until the end of 1995 from the shareholder of the Company. The
shareholder of the Company purchased the office building on May 21, 1992 for
$550,000. The mortgage on the building is in the name of the Company; therefore,
100% of the mortgage is recorded on the books of the Company. As of December 31,
1996 and 1995, the balance on the mortgage payable was $399,000 and $432,000,
respectively, and the note bears interest at 9.25%.
Aggregate installments of the mortgage payable are due as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
------------------------------------------------------------------
<S> <C>
1997.............................................................. $ 36,000
1998.............................................................. 36,000
1999.............................................................. 36,000
2000.............................................................. 36,000
2001.............................................................. 36,000
Thereafter........................................................ 219,000
--------
$399,000
========
</TABLE>
(5) SUBORDINATED NOTES PAYABLE
In July 1996, the Company executed a senior subordinated note payable for
$1,000,000. The note calls for interest payable at an annual rate of the prime
rate plus 2.00%. The note is secured by certain assets of the Company and
guaranteed by the owner of the Company.
(6) LEASES
The Company has several noncancelable operating leases, primarily for a
computer system and office and warehouse space. Rent expense under these leases
amounted to approximately $122,085 and $888,218 in 1996 and 1995, respectively.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
------------------------------------------------------------------
<S> <C>
1997.............................................................. $ 61,573
1998.............................................................. 23,436
1999.............................................................. 19,311
2000.............................................................. 19,311
2001.............................................................. 14,483
Thereafter........................................................ --
--------
$138,114
========
</TABLE>
F-34
<PAGE> 94
SEMINOLE FINANCE CORPORATION
AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996 AND 1995
The Company's capital lease obligation is for computer equipment that is
recorded at a cost of $61,520 and has been depreciated by $54,343 through
December 31, 1996. Amortization expense related to the capital lease is included
in depreciation expense on the accompanying combined statements of operations.
The lease terminates in 1997.
(7) COMMITMENTS AND CONTINGENCIES
In 1996, four companies that were former dealers from which the Company
purchased retail installment contracts have filed suits and/or counterclaims
against the Company and its related companies. The dealers seek to recover
approximately $20,000,000 in damages for alleged usury and breach of contract,
and to be indemnified for certain claims that may be made against them by the
Florida Department of Revenue in connection with sales tax refunds previously
paid to them. The Company has not yet responded to these claims and is in the
process of providing discovery information to the dealers. Management of the
Company intends to vigorously defend itself against these claims and believes
these claims to be without merit. Because these cases are in the early stages,
it is not possible to provide an evaluation of the likelihood of an unfavorable
outcome, nor an estimate of the amount or range of any potential loss. Any
unaccrued liability will not, in the opinion of management, have a material
adverse effect on the Company's combined financial statements.
(8) SUBSEQUENT EVENTS
On January 10, 1997, Ugly Duckling Corporation purchased ninety-one
repossessed vehicles and certain new and used vehicle parts from the Company.
On January 15, 1997, Ugly Duckling Corporation purchased certain assets and
assumed certain liabilities of the Company. The Company sold substantially all
of its finance receivables, certain inventory held for retail sale by the
seller, and certain furniture, fixed assets and equipment for approximately
$32,130,000. The proceeds from the sale of the assets were used to repay in full
the Company's notes payable.
F-35
<PAGE> 95
UGLY DUCKLING CORPORATION
PRO FORMA CONDENSED COMBINED BALANCE SHEET -- UNAUDITED
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
UGLY PRO FORMA PRO FORMA
DUCKLING SEMINOLE ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Cash and Cash Equivalents................... $ 18,455 $ 800 $ (800)(a) $ 15,925
-- -- (2,530)(b,c)
Finance Receivables:
Held for Investment....................... 52,188 -- -- 52,188
Held for Sale............................. 7,000 34,127 (3,061)(a) 38,066
-------- -------- -------- ---------
Principal Balances, Net................ 59,188 34,127 (3,061) 90,254
Less: Allowance for Credit Losses......... (8,125) (10,600) 2,000(a) (16,725)
-------- -------- -------- ---------
Finance Receivables, Net............... 51,063 23,527 (1,061) 73,529
-------- -------- -------- ---------
Residuals in Finance Receivables Sold....... 9,889 9,889
Investments Held in Trust................... 3,479 3,479
Inventory................................... 5,752 4,244 (1,444)(a) 8,552
Property and Equipment, Net................. 20,652 1,452 (952)(a) 21,152
Goodwill and Trademarks, Net................ 2,150 -- 6,096(c) 8,246
Other Assets................................ 6,643 2,081 (2,081)(a) 7,211
-- -- 250(c)
-- -- 265(d)
-- -- 53(d)
-------- -------- -------- ---------
$118,083 $ 32,104 $ (2,204) $ 147,983
======== ======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts Payable............................ $ 2,132 $ 201 $ (201)(a) $ 2,132
Accrued Expenses and Other.................. 6,728 1,333 (433)(a) 6,728
-- -- (900)(d)
Notes Payable............................... 12,904 32,202 (2,302)(a,c,d) 42,804
-- -- 29,900(b)
-- -- (29,900)(b)
Subordinated Notes Payable.................. 14,000 1,000 (1,000)(a) 14,000
-------- -------- -------- ---------
Total Liabilities................. 35,764 34,736 (4,836) 65,664
-------- -------- -------- ---------
Stockholders' Equity (Deficit):
Common Stock.............................. 82,612 2,030 (2,030)(a) 82,612
Accumulated Deficit....................... (293) (4,662) 4,662(a) (293)
-------- -------- -------- ---------
Total Stockholders' Equity
(Deficit)....................... 82,319 (2,632) 2,632 82,319
-------- -------- -------- ---------
$118,083 $ 32,104 $ (2,204) $ 147,983
======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
condensed combined financial statements.
F-36
<PAGE> 96
UGLY DUCKLING CORPORATION
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS -- UNAUDITED
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO
UGLY PRO FORMA FORMA
DUCKLING SEMINOLE ADJUSTMENTS COMBINED
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
Sales of Used Cars............................... $ 53,768 $ 11,827 -- $65,595
Less:
Cost of Used Cars Sold......................... 29,890 9,417 -- 39,307
Provision for Credit Losses.................... 9,811 7,107 -- 16,918
------- ------- ----- --------
14,067 (4,697) -- 9,370
------- ------- ----- --------
Interest Income.................................. 15,856 10,193 -- 26,049
Gain (Loss) on Sale of Loans..................... 4,434 (1,457) -- 2,977
------- ------- ----- --------
20,290 8,736 -- 29,026
------- ------- ----- --------
Servicing Income................................. 921 -- -- 921
Other Income..................................... 650 1,620 -- 2,270
------- ------- ----- --------
1,571 1,620 -- 3,191
------- ------- ----- --------
Income before Operating Expenses................. 35,928 5,659 -- 41,587
Operating Expenses
Selling and Marketing.......................... 3,585 3,317 -- 6,902
General and Administrative..................... 19,538 7,109 291(f) 26,938
Depreciation and Amortization.................. 1,577 297 457(e) 2,331
------- ------- ----- --------
24,700 10,723 748 36,171
------- ------- ----- --------
Income (Loss) before Interest Expense............ 11,228 (5,064) (748) 5,416
Interest Expense................................. 5,262 3,742 -- 9,004
------- ------- ----- --------
Earnings (Loss) before Income Taxes.............. 5,966 (8,806) (748) (3,588)
Income Taxes (Benefit)........................... 100 -- (100)(g) --
------- ------- ----- --------
Net Earnings (Loss).............................. $ 5,866 $ (8,806) $ (648) $(3,588)
======= ======= ===== ========
Earnings (Loss) per Share........................ $ 0.60 $ (0.54)
======= ========
Shares Used in Computation....................... 8,283 8,283
======= ========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
condensed combined
financial statements.
F-37
<PAGE> 97
UGLY DUCKLING CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(1) BASIS OF ACCOUNTING
On January 15, 1997, Ugly Duckling Corporation ("Ugly Duckling") completed
the acquisition of substantially all of the net assets of Seminole Finance
Corporation and Related Companies (the Company or "Seminole") in exchange for
approximately $2,530,000 in cash and assumption of $29,900,000 in debt as
described in (2)(b) below.
The pro forma unaudited combined statement of operations is presented using
Ugly Duckling's audited consolidated statement of operations for the year ended
December 31, 1996 combined with the Company's audited year ended December 31,
1996 combined statement of operations as if the transaction had taken place on
January 1, 1996.
The pro forma unaudited combined balance sheet gives effect to the
acquisition as if the transaction had taken place on December 31, 1996 and
combines Ugly Duckling's audited December 31, 1996 consolidated balance sheet
amounts with the Company's audited December 31, 1996 combined balance sheet
amounts.
The pro forma condensed combined financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of Ugly
Duckling Corporation and with the combined financial statements and notes
thereto of Seminole Finance Corporation and Related Companies.
The following pro forma combined statement of operations is not necessarily
indicative of the future results of operations of Ugly Duckling or the results
of operations which would have resulted had Ugly Duckling and the Company been
combined during the period presented. In addition, the pro forma results are not
intended to be a projection of future results.
(2) PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS AND PRO FORMA
CONDENSED COMBINED BALANCE SHEET
The accompanying pro forma adjustments reflect adjustments for the
following items:
(a) Reduction for cash, finance receivables, inventory, other assets, and
liabilities not acquired by Ugly Duckling. The common stock and accumulated
deficit of Seminole were eliminated in their entirety as only assets were
purchased from Seminole, which continued to exist as a separate entity.
(b) Reduction of $2,530,000 for the cash remitted to Seminole. Ugly Duckling and
Seminole utilize the same finance company for their respective lines of
credit. Concurrent with the closing of the acquisition, the finance company
increased Ugly Duckling's note payable by $29,900,000 and applied a similar
amount against Seminole's note payable.
(c) Recognition of the excess of the purchase price over the net assets acquired
(goodwill) in the amount of $6,096,000 and covenant not to compete of
$250,000. Ugly Duckling paid a total of $32.4 million for assets with a fair
value of $26.3 million resulting in an excess of the purchase price over the
fair value of the net assets acquired of $6.1 million. The determination of
the fair value of the finance receivables was based upon review of the
weighted average yield of the purchased portfolio as well as the required
allowance for credit losses. The required allowance for credit losses was
determined utilizing static pool analysis. Property and equipment was
considered to have been purchased at a fair value based upon
F-38
<PAGE> 98
review of estimated replacement costs for a sample of the acquired items.
The fair value of inventory was determined utilizing published listings of
vehicle values.
A summary of the allocation of fair values follows:
<TABLE>
<CAPTION>
FAIR
DESCRIPTION VALUE
-------------------------------------------------------- -----------
<S> <C>
Finance Receivables..................................... $22,466,000
Inventory............................................... 2,800,000
Property and Equipment.................................. 500,000
Covenant not to Compete................................. 250,000
Prepaid Rent............................................ 265,000
Deposits................................................ 53,000
-----------
Total Fair Value................................... 26,334,000
Consideration Exchanged................................. 32,430,000
-----------
Excess of Purchase Price over Fair Value of Assets
Acquired.............................................. $ 6,096,000
===========
</TABLE>
(d) Represents the payment of $265,000 for one year of rent in advance for an
office building leased from Seminole, the purchase of lease deposits of
$53,000, and the elimination of the escrow deposit of $900,000 paid by Ugly
Duckling to the Company.
(e) Amortization of goodwill over a period of fifteen years and amortization of
a covenant not to compete over a period of five years.
(f) Increase in rent expense for difference in lease rates for used car
dealerships and an office building.
(g) Reduction in income taxes for the income tax effect of the operating loss of
the Company.
F-39
<PAGE> 99
======================================================
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY UNDERWRITER, OR ANY OTHER PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON
IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 8
The Company................................ 14
Use of Proceeds............................ 14
Price Range of Common Stock................ 14
Dividend Policy............................ 15
Capitalization............................. 15
Selected Consolidated Financial Data....... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 18
Business................................... 31
Management................................. 42
Principal Stockholders..................... 49
Selling Securityholders.................... 50
Certain Relationships and Related
Transactions............................. 53
Description of Capital Stock............... 54
Plan of Distribution....................... 57
Legal Matters.............................. 58
Experts.................................... 58
Available Information...................... 59
Index to Financial Statements.............. F-1
</TABLE>
======================================================
======================================================
5,413,144 Shares
LOGO
Common Stock
-----------------------
PROSPECTUS
-----------------------
April , 1997
======================================================
<PAGE> 100
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............................................. $ 31,146
Nasdaq Filing Fee................................................ 17,500
*Blue Sky Fees and Expenses (including legal fees)................ 3,000
*Accounting Fees and Expenses..................................... 55,000
*Legal Fees and Expenses.......................................... 90,000
*Printing and Engraving........................................... 50,000
*Registrar and Transfer Agent's Fees.............................. 3,000
*Miscellaneous Expenses........................................... 354
--------
Total................................................... $250,000
========
</TABLE>
- ---------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation provides that a director of the
Company shall not be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability for: (i) any breach of the director's duty of loyalty to the Company
or its stockholders; (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) liability for
payments of dividends or stock purchases or redemptions in violation of Section
174 of the Delaware General Corporation Law; or (iv) any transaction from which
the director derived an improper personal benefit. In addition, the Company's
Certificate of Incorporation provides that the Company shall to the fullest
extent authorized by the Delaware General Corporation Law, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the corporation to provide broader
indemnification rights than such law permitted the corporation to provide prior
to such amendment), indemnify and hold harmless any person who was or is a
party, or is threatened to be made a party to or is otherwise involved in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative by reason of the fact that such person
is or was a director or officer of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, including
service with respect to an employee benefit plan (hereinafter an "Indemnitee")
against expenses, liabilities and losses (including attorneys' fees, judgments,
fines, excise taxes or penalties paid in connection with the Employee Retirement
Income Security Act of 1974, as amended, and amounts paid in settlement)
reasonably incurred or suffered by such Indemnitee in connection therewith;
provided, however, that except as otherwise provided with respect to proceedings
to enforce rights to indemnification, the Company shall indemnify any such
Indemnitee in connection with a proceeding (or part thereof) initiated by such
Indemnitee only if such proceeding or part thereof was authorized by the board
of directors of the Company.
The right to indemnification set forth above includes the right to be paid
by the Company the expenses (including attorneys' fees) incurred in defending
any such proceeding in advance of its final disposition; provided, however,
that, if the Delaware General Corporation Law requires, an advancement of
expenses incurred by an Indemnitee in his capacity as a director or officer (and
not in any other capacity in which 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,
II-1
<PAGE> 101
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.
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 May 31, 1994: (i) Steven P. Johnson purchased 290,000 shares of Common
Stock from the Company for an aggregate purchase price of $25,000; (ii) Scott A.
Allen and Wm. Don Gray each purchased 116,000 shares of Common Stock from the
Company for an aggregate purchase price of $10,000; (iii) Steven T. Darak and
Nancy V. Young each purchased 58,000 shares of Common Stock from the Company for
an aggregate purchase price of $5,000; (iv) Peter R. Fratt purchased 46,400
shares of Common Stock from the Company for an aggregate purchase price of
$4,000; (v) and Eric J. Splaver and Mary E. Reiner each purchased 11,600 shares
of Common Stock from the Company for an aggregate purchase price of $1,000.
On March 22, 1995, Walter T. Vonsh purchased 58,000 shares of Common Stock
from the Company for an aggregate purchase price of $5,000.
On August 31, 1995, SunAmerica purchased $3 million of the Company's
convertible subordinated debt. This indebtedness was due December 31, 1998, and
bore interest at a per annum rate of 12.5%, payable quarterly. Effective June
21, 1996, SunAmerica converted the note into Common Stock of the Company at the
initial public offering price per share (444,444 shares at the initial public
offering price of $6.75 per share).
On December 31, 1995, Verde Investments converted $10,000,000 of
subordinated debt into 1,000,000 shares of the Company's Preferred Stock. In
November 1996, the Preferred Stock was redeemed by the Company.
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 figures set forth above give effect to this exchange
ratio.
On June 21, 1996, in connection with the Company's initial public offering,
the Company issued warrants to Cruttenden Roth to purchase 170,000 shares of
Common Stock at an exercise price per share of $9.45. The warrants were issued
in exchange for $1,700 pursuant to an Underwriting Agreement between the Company
and Cruttenden Roth, as the representative of the several underwriters in the
initial public offering, and pursuant to a Representative's Warrant Agreement
between the Company and Cruttenden Roth.
In connection with the Company's initial public offering, on June 21, 1996,
Sun America converted $3,000,000 of subordinated debt into Common Stock (444,444
shares at the initial public offering price of $6.75 per share) in accordance
with the terms of a Convertible Note, dated as of August 31, 1995. In addition,
in partial consideration for Sun America's agreement to convert the Convertible
Note, the Company issued
II-2
<PAGE> 102
warrants to Sun America, on June 21, 1996, to purchase 121,023 (as adjusted)
shares of Common Stock at an exercise price per share of $6.75.
On February 13, 1997, the Company sold 5,075,500 shares of Common Stock to
approximately 115 institutional purchasers for an aggregate purchase price of
$94,531,188. Friedman, Billings, Ramsey & Co., Inc. acted as placement agent in
the transaction. The total proceeds to the Company, net of discounts and
commissions, was $89,804,629 before deducting offering expenses.
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>
3.1 Certificate of Incorporation of the Registrant(1)
3.1(a) Amendment to Certificate of Incorporation of the Registrant(1)
3.2 Bylaws of the Registrant(1)
3.2(a) Amendment to Bylaws of the Registrant(1)
4.1 Certificate of Incorporation of the Registrant filed as Exhibit 3.1(1)
4.2 Series A Preferred Stock Agreement(1)
4.3 18% Subordinated Debenture of the Registrant issued to Verde Investments, Inc.(1)
4.4 18% Junior Subordinated Revolving Debenture of the Registrant issued to Verde
Investments, Inc., as amended(1)
4.5 Convertible Note of the Registrant issued to SunAmerica Life Insurance Company(1)
4.6 Form of Certificate representing Common Stock(1)
4.7 Form of Warrant issued to Cruttenden Roth Incorporated as Representative of the
several underwriters(1)
4.8 Form of Warrant issued to SunAmerica Life Insurance Company(1)
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(1)
10.1(a) Amendment to Motor Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation(1)
10.1(b) Amendment to Motor Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation(1)
10.1(c) Amendment No. 3 to Motor Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation(1)
10.1(d) Amendment No. 4 to Motor Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation(1)
10.1(e) Amendment No. 5 to Motor Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation(1)
10.1(f) Amendment No. 6 to Moter Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation(2)
10.1(g) Assumption and Amendment Agreement between the Registrant and General Electric
Capital Corporation(2)
10.1(h) Amendment No. 7 to Motor Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation(3)
10.2 Note Purchase Agreement between the Registrant and SunAmerica Life Insurance
Company(1)
10.2(a) First Amendment to Note Purchase Agreement between the Registrant and SunAmerica
Life Insurance Company(1)
10.2(b) Second Amendment to Note Purchase Agreement between the Registrant and SunAmerica
Life Insurance Company(1)
</TABLE>
II-3
<PAGE> 103
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- ----------------------------------------------------------------------------------
<S> <C>
10.2(c) Third Amendment to Note Purchase Agreement between the Registrant and SunAmerica
Life Insurance Company(1)
10.2(d) Fourth Amendment to Note Purchase Agreement between the Registrant and SunAmerica
Life Insurance Company(1)
10.2(e) Commitment Letter entered into between the Registrant and SunAmerica Life
Insurance Company(1)
10.2(f) Letter Agreement regarding Note Conversion between the Registrant and SunAmerica
Life Insurance Company(1)
10.3 Registration Rights Agreement between the Registrant and SunAmerica Life Insurance
Company(1)
10.3(a) Amended and Restated Registration Rights Agreement between the Registrant and
SunAmerica Life Insurance Company(1)
10.4 Form of Pooling and Servicing Agreement relating to SunAmerica securitization
program(1)
10.5 Form of Certificate Purchase Agreement relating to SunAmerica securitization
program(1)
10.6 Form of Origination Agreement and Assignment relating to SunAmerica securitization
program(1)
10.7 Form of Purchase Agreement and Assignment relating to SunAmerica securitization
program(1)
10.8 Form of Servicing Guaranty relating to SunAmerica securitization program(1)
10.9 Ugly Duckling Corporation Long-Term Incentive Plan(3)
10.10 Employment Agreement between the Registrant and Ernest C. Garcia, II(1)
10.11 Employment Agreement between the Registrant and Steven T. Darak(1)
10.12 Employment Agreement between the Registrant and Wally Vonsh(1)
10.13 Employment Agreement between the Registrant and Donald Addink(1)
10.14 Lease Agreement between the Registrant and Camelback Esplanade Limited Partnership
for corporate offices in Phoenix, Arizona(1)
10.15 Land Lease Agreement between the Registrant and Verde Investments, Inc. for
property located at 5104 West Glendale Avenue in Glendale, Arizona(1)
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(1)
10.17 Land Lease Agreement between the Registrant and Verde Investments, Inc. for
property located at 330 North 24th Street in Phoenix, Arizona(1)
10.18 Land Lease Agreement between the Registrant and Verde Investments, Inc. for
property located at 333 South Alma School Road in Mesa, Arizona(1)
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(1)
10.20 Real Property Lease between the Registrant and Peter and Alva Keesal for property
located at 3737 South Park Avenue in Tucson, Arizona(1)
10.21 Land Lease Agreement between the Registrant and Verde Investments, Inc. for
property located at 2301 North Oracle Road in Tucson, Arizona(1)
10.22 Related Party Transactions Modification Agreement between the Registrant and Verde
Investments, Inc.(1)
10.23 Sublease Agreement between the Registrant and Envirotest Systems Corp. for
corporate offices in Phoenix, Arizona(1)
10.24 Form of Indemnity Agreement between the Registrant and its directors and
officers(1)
10.25 Ugly Duckling Corporation 1996 Director Incentive Plan(1)
10.26 Purchase Agreement, dated February 10, 1997 between the Registrant and Friedman,
Billings, Ramsey & Co., Inc.+
10.27 Agreement of Purchase and Sale of Assets dated as of December 31, 1996(4)
10.28 Agreement of Purchase and Sale of Assets dated as of March 5, 1997(3)
11 Earnings (Loss) per Share Computation+
22 List of Subsidiaries+
24.1 Independent Auditors' Consent (Ugly Duckling Corporation)
</TABLE>
II-4
<PAGE> 104
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- ----------------------------------------------------------------------------------
<S> <C>
24.2 Independent Auditors' Consent (Seminole Finance Corporation and Related Companies)
24.3 Consent of Barton & Company, P.A.
24.4 Consent of Snell & Wilmer L.L.P. (included in Exhibit 5)+
</TABLE>
- ---------------
+ Previously filed.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-3998), effective June 18, 1996.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-13755), effective October 30, 1996.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(4) Incorporated by reference to the Company's Current Report on Form 8-K, filed
January 30, 1997.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table
in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled
II-5
<PAGE> 105
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes that:
(1) For 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(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 106
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 Pre-Effective
Amendment No. 2 to this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Phoenix, State of
Arizona, on April 11, 1997.
Ugly Duckling Corporation
By: /s/ GREGORY B. SULLIVAN
------------------------------------
Gregory B. Sullivan
President and
Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 2 to this Registration Statement has been signed by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------- -------------------
<C> <S> <C>
* Chief Executive Officer and April 11, 1997
- --------------------------------------------- Director (Principal
Ernest C. Garcia, II executive officer)
* Senior Vice President and April 11, 1997
- --------------------------------------------- Chief Financial Officer
Steven T. Darak (Principal financial and
accounting officer)
* Director April 11, 1997
- ---------------------------------------------
Robert J. Abrahams
* Director April 11, 1997
- ---------------------------------------------
Christopher D. Jennings
* Director April 11, 1997
- ---------------------------------------------
John N. MacDonough
* Director April 11, 1997
- ---------------------------------------------
Arturo R. Moreno
* Director April 11, 1997
- ---------------------------------------------
Frank P. Willey
</TABLE>
By: /s/ GREGORY B. SULLIVAN
--------------------------------
* Gregory B. Sullivan
(Attorney-in-fact)
II-7
<PAGE> 107
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- -------- --------------------------------------------------------------------------------- ------------
<S> <C> <C>
3.1 Certificate of Incorporation of the Registrant(1)
3.1(a) Amendment to Certificate of Incorporation of the Registrant(1)
3.2 Bylaws of the Registrant(1)
3.2(a) Amendment to Bylaws of the Registrant(1)
4.1 Certificate of Incorporation of the Registrant filed as Exhibit 3.1(1)
4.2 Series A Preferred Stock Agreement(1)
4.3 18% Subordinated Debenture of the Registrant issued to Verde Investments, Inc.(1)
4.4 18% Junior Subordinated Revolving Debenture of the Registrant issued to Verde
Investments, Inc., as amended(1)
4.5 Convertible Note of the Registrant issued to SunAmerica Life Insurance Company(1)
4.6 Form of Certificate representing Common Stock(1)
4.7 Form of Warrant issued to Cruttenden Roth Incorporated as Representative of the
several underwriters(1)
4.8 Form of Warrant issued to SunAmerica Life Insurance Company(1)
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(1)
10.1(a) Amendment to Motor Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation(1)
10.1(b) Amendment to Motor Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation(1)
10.1(c) Amendment No. 3 to Motor Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation(1)
10.1(d) Amendment No. 4 to Motor Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation(1)
10.1(e) Amendment No. 5 to Motor Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation(1)
10.1(f) Amendment No. 6 to Moter Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation(2)
10.1(g) Assumption and Amendment Agreement between the Registrant and General Electric
Capital Corporation(2)
10.1(h) Amendment No. 7 to Motor Vehicle Installment Contract Loan and Security Agreement
between the Registrant and General Electric Capital Corporation(3)
10.2 Note Purchase Agreement between the Registrant and SunAmerica Life Insurance
Company(1)
10.2(a) First Amendment to Note Purchase Agreement between the Registrant and SunAmerica
Life Insurance Company(1)
10.2(b) Second Amendment to Note Purchase Agreement between the Registrant and SunAmerica
Life Insurance Company(1)
10.2(c) Third Amendment to Note Purchase Agreement between the Registrant and SunAmerica
Life Insurance Company(1)
10.2(d) Fourth Amendment to Note Purchase Agreement between the Registrant and SunAmerica
Life Insurance Company(1)
10.2(e) Commitment Letter entered into between the Registrant and SunAmerica Life
Insurance Company(1)
10.2(f) Letter Agreement regarding Note Conversion between the Registrant and SunAmerica
Life Insurance Company(1)
10.3 Registration Rights Agreement between the Registrant and SunAmerica Life
Insurance Company(1)
10.3(a) Amended and Restated Registration Rights Agreement between the Registrant and
SunAmerica Life Insurance Company(1)
</TABLE>
<PAGE> 108
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- -------- --------------------------------------------------------------------------------- ------------
<S> <C> <C>
10.4 Form of Pooling and Servicing Agreement relating to SunAmerica securitization
program(1)
10.5 Form of Certificate Purchase Agreement relating to SunAmerica securitization
program(1)
10.6 Form of Origination Agreement and Assignment relating to SunAmerica
securitization program(1)
10.7 Form of Purchase Agreement and Assignment relating to SunAmerica securitization
program(1)
10.8 Form of Servicing Guaranty relating to SunAmerica securitization program(1)
10.9 Ugly Duckling Corporation Long-Term Incentive Plan(3)
10.10 Employment Agreement between the Registrant and Ernest C. Garcia, II(1)
10.11 Employment Agreement between the Registrant and Steven T. Darak(1)
10.12 Employment Agreement between the Registrant and Wally Vonsh(1)
10.13 Employment Agreement between the Registrant and Donald Addink(1)
10.14 Lease Agreement between the Registrant and Camelback Esplanade Limited
Partnership for corporate offices in Phoenix, Arizona(1)
10.15 Land Lease Agreement between the Registrant and Verde Investments, Inc. for
property located at 5104 West Glendale Avenue in Glendale, Arizona(1)
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(1)
10.17 Land Lease Agreement between the Registrant and Verde Investments, Inc. for
property located at 330 North 24th Street in Phoenix, Arizona(1)
10.18 Land Lease Agreement between the Registrant and Verde Investments, Inc. for
property located at 333 South Alma School Road in Mesa, Arizona(1)
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(1)
10.20 Real Property Lease between the Registrant and Peter and Alva Keesal for property
located at 3737 South Park Avenue in Tucson, Arizona(1)
10.21 Land Lease Agreement between the Registrant and Verde Investments, Inc. for
property located at 2301 North Oracle Road in Tucson, Arizona(1)
10.22 Related Party Transactions Modification Agreement between the Registrant and
Verde Investments, Inc.(1)
10.23 Sublease Agreement between the Registrant and Envirotest Systems Corp. for
corporate offices in Phoenix, Arizona(1)
10.24 Form of Indemnity Agreement between the Registrant and its directors and
officers(1)
10.25 Ugly Duckling Corporation 1996 Director Incentive Plan(1)
10.26 Purchase Agreement, dated February 10, 1997 between the Registrant and Friedman,
Billings, Ramsey & Co., Inc.+
10.27 Agreement of Purchase and Sale of Assets dated as of December 31, 1996(4)
10.28 Agreement of Purchase and Sale of Assets dated as of March 5, 1997(3)
11 Earnings (Loss) per Share Computation+
22 List of Subsidiaries+
24.1 Independent Auditors' Consent (Ugly Duckling Corporation)
24.2 Independent Auditors' Consent (Seminole Finance Corporation and Related
Companies)
24.3 Consent of Barton & Company, P.A.
24.4 Consent of Snell & Wilmer L.L.P. (included in Exhibit 5)+
</TABLE>
- ---------------
+ Previously filed.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-3998), effective June 18, 1996.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-13755), effective October 30, 1996.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(4) Incorporated by reference to the Company's Current Report on Form 8-K, filed
January 30, 1997.
<PAGE> 1
EXHIBIT 24.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Ugly Duckling Corporation:
We consent to the inclusion of our report dated January 31, 1997, except
for Note 19 to the Consolidated Financial Statements which is as of February 13,
1997, on the consolidated financial statements of Ugly Duckling Corporation
included herein and to the references to our firm under the headings "Selected
Consolidated Financial Data" and "Experts" in the prospectus.
KPMG Peat Marwick LLP
Phoenix, Arizona
April 11, 1997
<PAGE> 1
EXHIBIT 24.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Ugly Duckling Corporation:
We consent to the inclusion of our report dated March 18, 1997 with respect
to the combined balance sheet of Seminole Finance Corporation and Related
Companies as of December 31, 1996 and the related combined statements of
operations, stockholder's equity (deficit), and cash flows for the year ended
December 31, 1996, which report appears in the Amendment No. 2 to Form S-1 of
Ugly Duckling Corporation dated April 11, 1997.
Our report dated March 18, 1997, contains an explanatory paragraph that
states: "the accompanying combined financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
7 to the combined financial statements, the Company is involved in a lawsuit
that involves a material amount of damages that, if there were an adverse
outcome, raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to this matter are also described in Note
7. The combined financial statements do not include any adjustments that might
result from the outcome of this uncertainty."
KPMG PEAT MARWICK LLP
Tampa, Florida
April 11, 1997
<PAGE> 1
EXHIBIT 24.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Seminole Finance Corporation
We consent to the inclusion of our report dated February 10, 1997 with
respect to the combined balance sheet of Seminole Finance Corporation and
Related Companies as of December 31, 1995 and the related combined statements of
operations, stockholder's equity (deficit), and cash flows for the year ended
December 31, 1995, which report appears in the Form S-1 of Ugly Ducking
Corporation dated April 11, 1997.
/s/ BARTON & COMPANY, P.A.
--------------------------------------
Barton & Company, P.A.
Certified Public Accountants
St. Petersburg, Florida
April 11, 1997
