<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
Date of Report (Date of earliest event reported): September 19, 1997
UGLY DUCKLING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 20841 86-0721358
(State or other (Commission (IRS Employer
jurisdiction of incorporation) File Number) Identification Number)
2525 East Camelback Road, Suite 1150, Phoenix, AZ 85016
(Address of principal executive offices)
Registrant's telephone number, including area code: (602) 852-6600
NONE
(Former name or former address, if changed since last report)
<PAGE> 2
This Current Report on Form 8-K/A1 amends the Current Report on Form 8-K of
Ugly Duckling Corporation ("Company") dated September 19, 1997 solely to add the
financial statements of the business acquired required by item 7 (a) and the pro
forma financial information required by item 7 (b).
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired.
The required financial statements of the business acquired are set forth
below.
<PAGE> 3
KARS-YES HOLDINGS INC.
CONSOLIDATED FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
AS OF JUNE 30, 1997 AND 1996 AND
FOR THE THREE YEARS ENDED JUNE 30, 1997
<PAGE> 4
TABLE OF CONTENTS
Pages
Report of Independent Accountants 2
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-28
1
<PAGE> 5
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
KARS-YES Holdings Inc.
We have audited the accompanying consolidated balance sheets of KARS-YES
Holdings Inc. (the "Company") and subsidiaries (formerly the YES Group, Inc.) as
of June 30, 1997 and 1996 and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended June 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company and
its subsidiaries as of June 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1997, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Notes 6 and 7 to the
consolidated financial statements, the Company defaulted on its debt obligations
during 1997. As discussed in Notes 1 and 13, the Company sold the majority of
its operating assets and facilities to the Ugly Duckling Corporation on
September 15, 1997. The remaining assets will be utilized to satisfy existing
liabilities as dictated by amended debt agreements. Based on management's
estimated cash flow projections from the remaining assets which have contractual
lives through 2002, it is extremely unlikely that cash collections will be
adequate to satisfy all existing liabilities or result in any distributions to
preferred or common shareholders. These factors raise substantial doubt about
the entity's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
November 6, 1997
2
<PAGE> 6
KARS-YES HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
June 30,
--------------------------
ASSETS 1997 1996
--------- ---------
Cash and cash equivalents
<S> <C> <C>
$ 1,455 $ 1,703
--------- ---------
Retail contracts, net of unearned finance charges (Note 2)
118,090 70,109
Allowance for losses
(30,179) (12,903)
--------- ---------
Retail contracts, net
87,911 57,206
Assets held for sale, net (Note 13) 5,520 --
Securitized receivables, retained interest
10,072 19,352
Excess servicing asset -- 3,929
Interest-only strip
535 --
Automobile inventory
3,805 16,294
Income tax refund receivable 1,005 246
Fixed assets, net
1,318 5,064
Other assets, net 372 4,534
--------- ---------
Total assets $ 111,993 $ 108,328
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 6,446 $ 4,815
Accrued liabilities 1,014 1,121
Servicing liability 823 --
Income taxes payable -- 404
Deferred income taxes, net -- 1,557
Subordinated notes payable
30,000 30,000
Senior line of credit 80,300 39,000
Mortgage payable 973 --
--------- ---------
Total liabilities 119,556 76,897
--------- ---------
Commitments and contingencies (Note 5)
Redeemable cumulative preferred stock of subsidiary
1,351 1,351
--------- ---------
Shareholders' equity:
Preferred stock, $.01 par value, 20,000,000 shares authorized, no shares issued
-- --
Class A common stock, $.01 par value, 500,000,000 shares authorized,
issued: 1997 - 120,017,180 shares; 1996 - 120,308,251 shares 1,200 1,203
Class B common stock, $ .01 par value, 20,000,000 shares authorized, no
shares issued -- --
Treasury stock, at cost: 30,000,000 shares (300) (300)
Additional paid-in capital 23,511 23,610
Unrealized loss on securitization assets (1,087) --
Retained earnings (deficit) (32,238) 5,567
--------- ---------
Total shareholders' equity (deficit) (8,914) 30,080
--------- ---------
Total liabilities and shareholders' equity (deficit) $ 111,993 $ 108,328
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 7
KARS-YES HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Automotive sales $ 144,129 $ 118,176 $ 81,832
Cost of automotive sales 98,433 73,969 50,939
--------- --------- ---------
Gross margin on automotive sales 45,696 44,207 30,893
Provision for losses on retail contracts 62,353 29,499 18,003
--------- --------- ---------
(16,657) 14,708 12,890
Gain on securitized retail contracts 4,888 8,090 --
Finance charge income 16,616 15,396 15,796
--------- --------- ---------
Operating profit before expenses 4,847 38,194 28,686
Expenses:
Selling and store 21,784 16,411 11,919
Finance operations 7,647 6,468 5,204
General and administrative 2,063 2,380 1,950
Depreciation and amortization 2,802 1,347 520
--------- --------- ---------
Operating earnings (loss) before interest,
income taxes (29,449) 11,588 9,093
Interest expense, net 10,586 6,991 5,536
--------- --------- ---------
Earnings (loss) before income taxes (40,035) 4,597 3,557
Provision (benefit) for income taxes (2,362) 1,839 1,388
--------- --------- ---------
Net earnings (loss) $ (37,673) $ 2,758 $ 2,169
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE> 8
KARS-YES HOLDINGS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Additional
Common Stock Treasury Stock Paid-In
-------------------------------- -------------------------------
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1994 120,056,587 $ 1,201 30,000,000 $ (300) $ 23,521
Common stock issued
under Managers Stock
Purchase Plan, net 108,857 1 -- -- 41
Dividends on preferred
stock of subsidiary -- -- -- -- --
Net earnings for the year
ended June 30, 1995 -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at June 30, 1995 120,165,444 1,202 30,000,000 (300) 23,562
Common stock issued
under Managers Stock
Purchase Plan, net 142,807 1 -- -- 48
Dividends on preferred
stock of subsidiary -- -- -- -- --
Net earnings for the year
ended June 30, 1996 -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at June 30, 1996 120,308,251 1,203 30,000,000 (300) 23,610
Common stock redeemed
under Managers Stock
Purchase Plan, net (291,071) (3) -- -- (99)
Dividends on preferred
stock of subsidiary -- -- -- -- --
Unrealized loss on
securitization assets -- -- -- -- --
Net loss for the year
ended June 30, 1997 -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at June 30, 1997 120,017,180 $ 1,200 30,000,000 $ (300) $ 23,511
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Loss on
Securitization Retained
Assets Earnings Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance at June 30, 1994 $ -- $ 824 $ 25,246
Common stock issued
under Managers Stock
Purchase Plan, net -- -- 42
Dividends on preferred
stock of subsidiary -- (26) (26)
Net earnings for the year
ended June 30, 1995 -- 2,169 2,169
------------ ------------ ------------
Balance at June 30, 1995 -- 2,967 27,431
Common stock issued
under Managers Stock
Purchase Plan, net -- -- 49
Dividends on preferred
stock of subsidiary -- (158) (158)
Net earnings for the year
ended June 30, 1996 -- 2,758 2,758
------------ ------------ ------------
Balance at June 30, 1996 -- 5,567 30,080
Common stock redeemed
under Managers Stock
Purchase Plan, net -- -- (102)
Dividends on preferred
stock of subsidiary -- (132) (132)
Unrealized loss on
securitization assets (1,087) -- (1,087)
Net loss for the year
ended June 30, 1997 -- (37,673) (37,673)
------------ ------------ ------------
Balance at June 30, 1997 $ (1,087) $ (32,238) $ (8,914)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE> 9
KARS-YES HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------
1997 1996 1995
--------- --------- ---------
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings (loss) $ (37,673) $ 2,758 $ 2,169
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 2,802 1,347 520
Loss on impairment of securitization assets 14,044 -- --
Loss on write-down of assets held for sale 1,309 -- --
Provision for losses on retail contracts 62,353 29,499 18,003
Gain on securitized retail contracts (4,888) (8,090) --
Deferred income taxes, net (1,577) 1,361 5,284
Decrease (Increase) in inventories 8,788 (7,745) (2,466)
(Increase) decrease in income tax refund receivable (759) 5,015 --
(Increase) decrease in other assets, net (7,506) (2,141) 465
Increase in accounts payable 1,631 552 1,431
(Decrease) increase in accrued liabilities (3,284) (156) (5,231)
(Decrease) increase in income taxes payable (404) 41 (958)
--------- --------- ---------
Net cash provided by operating activities 34,836 22,441 19,217
--------- --------- ---------
Cash flows from investing activities:
Retail installment contracts financed, net (122,476) (104,263) (75,621)
Principal collections on retail installment contracts 19,706 22,894 29,741
Proceeds from securitized receivables 27,224 61,126 --
Sale (purchase) of fixed assets, net (1,454) (3,638) (1,441)
--------- --------- ---------
Net cash used by investing activities (77,000) (23,881) (47,321)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from senior line of credit 68,895 63,150 27,500
Retirements to senior line of credit (27,595) (61,150) (30,000)
Proceeds from subordinated notes payable -- -- 30,000
Proceeds from mortgage payable 1,000 -- --
Proceeds from issuance of preferred stock of subsidiary -- -- 1,351
Payments on mortgage payable (27) -- --
Issuance cost on preferred stock of subsidiary -- -- (54)
Debt issuance costs (123) (4) (1,378)
Proceeds (redemptions) from Managers Stock Purchase Plan, net (102) 49 42
Dividends paid on preferred stock of subsidiary (132) (158) (26)
--------- --------- ---------
Net cash provided by financing activities 41,916 1,887 27,435
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (248) 447 (669)
Cash and cash equivalents at beginning of year 1,703 1,256 1,925
--------- --------- ---------
Cash and cash equivalents at end of year $ 1,455 $ 1,703 $ 1,256
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid (includes unused line of credit fees) $ 9,368 $ 6,707 $ 5,088
========= ========= =========
Income taxes paid $ 543 $ 665 $ 2,462
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE> 10
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
HISTORY OF OPERATIONS
KARS-YES Holdings Inc., formerly the YES Group Inc., (the "Company")
was formed on October 17, 1990. The Company operates through two
subsidiaries: KARS-YES Inc. (the "Retail Company"), incorporated on
October 23, 1990 and KARS-YES Financial Inc. (the "Finance Company"),
incorporated on October 23, 1990. The Retail Company sells used
automobiles and light trucks ("cars"). The Finance Company provides
financing to the Retail Company's customers who typically would be
unable to obtain financing from traditional sources. As of June 30,
1997, the Company operated fifteen retail stores, seven located in
Southern California, three located in South Florida, three located in
Atlanta, Georgia, and two located in Dallas, Texas.
On September 15, 1997 the Company entered into an agreement to sell the
majority of the operating assets and facilities of the finance and
retail operations (see Note 13) to the Ugly Duckling Corporation (the
"Buyer"). The Company retained all finance receivables, debt and
certain other related assets and liabilities. The finance receivables
will be utilized to satisfy existing liabilities. Concurrent with the
sale, the Company renegotiated its borrowing arrangements with the
Senior and Subordinated lending groups (see Notes 6 and 7). Under the
terms of the amended agreements, the outstanding securitized investor
principal will be repayable from future collections on the securitized
retail contracts. The senior line of credit will then be repayable from
future collections on the Company's retail contracts (non-securitized)
and any remaining collections associated with both (i) the
interest-only strip receivable and (ii) the retained interest in the
securitized receivables. The senior line of credit, as modified, earns
interest at a rate of prime plus 1.5%. The Subordinated notes will be
repayable from any remaining collections after both the securitized
investors and the senior obligations have been paid in full. Based upon
management's estimated cash flow projections from remaining assets
which have contractual lives through 2002, it is extremely unlikely
that cash collections will be adequate to satisfy all existing
liabilities and result in any distributions to preferred or common
shareholders. Management does not currently intend to actively operate
the Company beyond running off current assets and servicing the
outstanding debt.
7
<PAGE> 11
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its other majority-owned subsidiaries. YES Appliance &
Furniture Inc. ("A&F"), a wholly-owned subsidiary, was sold effective
the close of business on December 31, 1996 (see Note 9). The results of
A&F for the six months ended December 31, 1996 are included in the
Company's financial statements. The assets acquired and liabilities
assumed by Ugly Duckling Corporation have been reclassified to "Assets
held for sale" (see Note 13).
CASH AND CASH EQUIVALENTS
Investments in highly liquid, low risk, short-term instruments with
original maturities of less than 90 days are included in cash and cash
equivalents.
The Company maintains cash balances in banks which exceed federally
insured limits. The uninsured amounts as of June 30, 1997 and June 30,
1996 were $1,061,000 and $639,000, respectively.
INCOME RECOGNITION
Retail installment contracts are originated in connection with the sale
of cars and are collateralized by titles to the cars sold. Sales
revenue and the related cost of sales are recognized in operations at
the time of sale.
Finance charge income related to retail contracts is recognized using
the interest (actuarial) method. Finance charge income is not
recognized on retail contracts that are contractually delinquent in
excess of 60 days. It is the Company's policy to write-off retail
contracts that are 120 days contractually delinquent.
ALLOWANCE FOR LOSSES
A provision for losses is charged to operations in an amount sufficient
to maintain the allowance for losses at a level considered adequate to
cover anticipated losses in the existing retail contracts portfolio.
The allowance for losses is based upon periodic analysis of the
portfolio, economic conditions and trends, historical loss experience,
borrowers' ability to pay and collateral values. If the customer
defaults on the payment terms of the retail contract and the Company
repossesses the car, the remaining contract balance, less the unearned
finance charge and fair value of the car, is charged to the allowance
for losses.
8
<PAGE> 12
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
RETAIL CONTRACT SECURITIZATIONS
The Company adopted Statement of Financial Accounting Standards No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities ("FAS 125"), as amended by Statement of
Financial Accounting Standards No. 127, Deferral of the Effective Date
of Certain Provisions of FASB Statement No. 125 -- An Amendment of FASB
Statement No. 125 ("FAS 127"), on January 1, 1997. FAS 125 applies a
control-oriented, financial-components approach to
financial-asset-transfer transactions whereby the Company (1)
recognizes the financial and servicing assets it controls and the
liabilities it has incurred, (2) derecognizes financial assets when
control has been surrendered, and (3) derecognizes liabilities once
they are extinguished. Under FAS 125, control is considered to have
been surrendered only if: (i) the transferred assets have been isolated
from the transferor and its creditors, even in bankruptcy or other
receivership (ii) the transferee has the right to pledge or exchange
the transferred assets, or, is a qualifying special-purpose entity (as
defined) and the holders of the beneficial interests in that entity
have the right to pledge or exchange those interests; and (iii) the
transferor does not maintain effective control over the transferred
assets through an agreement which both entitles and obligates it to
repurchase or redeem those assets prior to maturity, or through an
agreement which both entitles and obligates it to repurchase or redeem
those assets if they were not readily obtainable elsewhere. If any of
these conditions are not met, the Company accounts for the transfer as
a secured borrowing.
In accordance with FAS 125, the Company records a separate asset or
liability representing the right or obligation, respectively, to
service loans (or other financial assets that are being serviced) for
others. Servicing liabilities are recorded at their fair value as a
reduction of the sale proceeds. The fair value of the servicing
liabilities is based on an analysis of discounted cash flows that
incorporates estimates of (1) market servicing costs, (2) projected
ancillary servicing revenue, (3) projected prepayment rates that are
based on changes in interest rates, and (4) market profit margins.
Servicing liabilities are amortized in proportion to, and over the
period of, estimated net servicing income. Increases in fair values of
servicing liabilities (above carrying values) are evaluated through an
assessment of the fair value of those liabilities via a discounted cash
flows method. The net carrying value of the liability is compared to
its discounted estimated future net cash flows to determine whether
adjustments should be made to carrying values or amortization
schedules. An increase in the fair value of a servicing liability above
its carrying value is recognized through an increase to the liability
and a charge to current-period earnings.
9
<PAGE> 13
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The rate of prepayment of loans serviced is one of the most significant
estimate involved in the measurement process. Estimates of prepayment
rates are based on management's expectations of future prepayment
rates, reflecting the company's historical rate of loan repayment,
industry trends, and other considerations. Actual prepayment rates
differ from those projected by management due to changes in a variety
of economic factors, including prevailing interest rates and the
availability of alternative financing sources to borrowers. If actual
prepayments of the loans being serviced were to occur more quickly than
projected, the carrying value of servicing assets and liabilities might
have to be written down through a credit to earnings in the current
period. Accordingly, the servicing assets and liabilities actually
incurred, could differ from the amounts initially recorded.
There were no unrecognized servicing liabilities or liabilities for
which it is not practicable to estimate fair value. The excess
servicing asset reported in the 1996 financial statements has been
reclassified as a net servicing liability and an interest-only strip to
conform to the current year's reporting requirements.
SECURITIZATION GAINS
The calculation of gains on securitized retail contracts embody
prepayment, default and interest rate assumptions that market
participants use for similar financial instruments subject to
prepayment, default and interest rate risks, and are discounted
assuming an estimated interest rate that a non-affiliated purchaser of
similar financial instruments would demand.
SECURITIZED RECEIVABLES
Securitized receivables are considered available-for-sale investments
and are carried at fair market value.
INVENTORIES
Inventories are carried at the lower of cost or market, using specific
identification. Cost of sales includes the purchase price plus buying,
delivery and reconditioning costs.
10
<PAGE> 14
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
FIXED ASSETS
Fixed assets are carried at cost. Depreciation expense is provided on a
straight-line basis over the estimated useful lives of the assets.
Leasehold improvements are amortized over the term of the related
lease. The cost of fixed assets sold or retired and the related
accumulated depreciation are removed from the accounts at the time of
disposition, and any resulting gain or loss is reflected in operations.
Maintenance, repairs, and minor replacements are charged to operations
as incurred; major replacements and betterments are capitalized.
RECLASSIFICATIONS
Certain items included in the prior years' consolidated financial
statements have been reclassified to conform with fiscal year 1997's
presentation.
INCOME TAXES
The Company accounts for income taxes pursuant to Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS No. 109"). Under SFAS No. 109, deferred income taxes are
recognized for the tax consequences of "temporary differences" by
applying enacted Federal and state tax rates, applicable to future
years, to differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities.
A valuation allowance is established to the extent that future taxable
income will not be sufficient to realize the deferred tax asset.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are utilized by the Company to manage
interest rate exposure. With interest rate swaps, the differentials to
be received or paid under contracts designated as hedges, are accrued
over the life of the contracts and are recognized as adjustments to
interest expense. Costs of interest rate caps are offset against the
gain on securitized retail contracts. The Company does not hold or
issue derivative financial instruments for trading purposes.
11
<PAGE> 15
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 amounts of revenues
and expenses during the reporting period. These estimates are
subjective in nature and involve matters of judgment. The most
significant estimates presented include the allowance for losses,
securitized receivables, interest-only strip, excess servicing asset,
and the servicing liability. Actual results could differ from these
estimates.
2. RETAIL CONTRACTS:
Retail contracts consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------
1997 1996
--------- ---------
<S> <C> <C>
Retail installment contracts $ 158,547 $ 94,759
Unearned finance charges (40,457) (24,772)
Allowance for losses (30,179) (12,847)
--------- ---------
Retail installment contracts, net 87,911 57,140
--------- ---------
Retail lease contracts -- 128
Unearned finance charges -- (6)
Allowance for losses -- (56)
--------- ---------
Retail lease contracts, net -- 66
--------- ---------
Retail contracts, net $ 87,911 $ 57,206
========= =========
</TABLE>
As of June 30, 1997, automobile retail installment contracts include
unearned finance charges at an average annual percentage rate of 20.8%
with original financing terms ranging from 14 to 54 months. The average
original financing term of automobile retail installment contracts is
43 months.
As of June 30, 1997 and June 30, 1996, there were 21,685 and 17,854
automobile retail installment contracts being serviced by the Company,
including contracts sold through securitization transactions.
12
<PAGE> 16
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Concentration of Risk - Retail contracts were originated in the
following markets:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------
1997 1996
---- ----
<S> <C> <C>
California 53% 63%
Florida 14 18
Georgia 23 19
Texas 10 --
--- ---
100% 100%
=== ===
</TABLE>
Contractual maturities of installment contracts (including unearned
finance charges) for years ending June 30 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Retail Installment
Contracts
---------
<S> <C>
1998 $ 53,466
1999 51,551
2000 41,861
2001 11,497
2002 172
---------
158,547
Less unearned finance charges (40,457)
---------
$ 118,090
=========
</TABLE>
A summary of the allowance for losses is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of period $ 12,903 $ 16,155 $ 14,274
Provision for losses 62,353 29,499 18,003
Charge-offs, net of recoveries (37,682) (20,398) (16,122)
Securitization of retail contracts (7,395) (12,353) --
-------- -------- --------
Balance at end of period $ 30,179 $ 12,903 $ 16,155
======== ======== ========
</TABLE>
Management provides an allowance for losses based on analysis of
historical loss results and consideration of current market conditions.
In the fourth quarter of fiscal year 1997 and after year end, loss
trends increased significantly. Based on these developments and trends
in the industry, management increased the allowance for losses by
approximately $30 million.
As of June 30, 1997 and 1996, 3.4% of the total retail installment
contracts serviced were greater than 60 days delinquent.
13
<PAGE> 17
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. SECURITIZATION OF AUTOMOBILE INSTALLMENT CONTRACTS:
In October 1995, the Company commenced selling automobile installment contracts
to investors through securitization transactions. Installment contracts
originated by the Finance Company are pooled and sold to KARS-YES Receivables
Inc. ("KYRI"), a wholly-owned, bankruptcy-remote subsidiary. KYRI retains a
subordinated interest in all loans pooled, with the remaining portion sold to
investors. The Company receives compensation monthly for performing servicing
functions on the entire pool of securitized installment contracts ("servicing
fees"). In addition to the servicing fees collected, the Company earns an
interest rate spread equal to the difference between the interest rate on the
underlying retail contracts and the interest paid to investors. The rights of
KYRI as holder of the retained interest ("securitized receivables") are
subordinated to the rights of the investors. In the event that 100% of the
installment contracts fail to perform and the underlying collateral proved to be
of no value, the Company would incur losses to the extent of the securitized
receivables and the related interest-only strip.
During the year ended June 30, 1997, KYRI completed three securitization
transactions with an aggregate principal balance of approximately $44,611,000.
In connection with the two securitization transactions completed before January
1, 1997, KYRI recorded securitized receivables of approximately $7,372,000 ,
recorded an excess servicing asset of approximately $2,374,000 , and recognized
a gain of $4,022,000. In connection with KYRI's third securitization which was
completed after January 1, 1997, KYRI recorded securitized receivables of
approximately $4,235,000, recorded a servicing liability of $282,000 , an
interest-only strip of $1,242,000 ,and recognized a gain of $ 866,000. During
the year ended June 30, 1996, KYRI completed three securitization transactions
with an aggregate principal balance of approximately $94,400,000. In connection
with these transactions, KYRI recorded securitized receivables of approximately
$24,000,000, recorded an excess servicing asset of approximately $5,800,000, and
recognized a gain of $8,090,000.
As noted in Note 1, the Company adopted FAS 125 on January 1, 1997. FAS 125
requires that the amounts carried previously as excess servicing assets be
reclassified between a servicing asset or liability and an interest-only strip
with the difference recognized as unrealized loss on securities, net of tax. On
January 1, 1997, in connection with the above reclassification, the Company
derecognized excess service asset of $4,399,000, recorded an interest-only strip
of $4,069,000, a servicing liability of $1,017,000, and an unrealized loss on
securities of $1,347,000.
14
<PAGE> 18
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Changes in the balances of servicing liabilities for the year ended
June 30, 1997 are as follows:
<TABLE>
<CAPTION>
Servicing
Liabilities
-----------
<S> <C>
Balance at January 1, 1997 $ 1,017,000
Servicing liability additions 283,000
Amortization (477,000)
-----------
Balance at June 30, 1997 $ 823,000
===========
</TABLE>
In connection with securitization transactions, for the years ended
June 30, 1997 and 1996, the Company received cash proceeds totaling
approximately $27,224,000 and $61,100,000, respectively. These funds
were used to pay down the senior line of credit. As of June 30, 1997
and 1996, the company serviced 9,349 and 9,643 installment contracts
respectively, with an aggregate principal balance of approximately
$61,413,000 and $69,091,000 under securitization transactions. These
contracts represent approximately 34% and 49% of the total outstanding
receivables serviced by the Company at June 30, 1997 and 1996,
respectively.
During the third and fourth quarter and after year-end, losses began to
increase significantly. Based on this and loss trends in the industry,
management recorded an impairment charge to finance income of $11
million on the securitized receivables and $3 million on the interest
only strip.
Pursuant to a September 15, 1997 Purchase and Sale Agreement (see Note
13) no further installment contracts will be securitized. The six
outstanding loan pools will be serviced by Ugly Duckling Corporation.
4. FIXED ASSETS:
Fixed assets consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------
1997 1996
------- -------
<S> <C> <C>
Leasehold improvements $ -- $ 3,596
Equipment -- 2,902
Furniture and fixtures -- 1,201
Construction in progress -- 223
Buildings 973 196
Vehicles -- 45
Land 371 371
Less: accumulated depreciation (26) (3,470)
------- -------
$ 1,318 $ 5,064
======= =======
</TABLE>
15
<PAGE> 19
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Fixed assets sold to Ugly Duckling Corporation have been reclassified
to "Assets held for sale" (see Note 13).
5. COMMITMENTS, CONTINGENCIES AND CONCENTRATION OF CREDIT RISK:
Leases - Retail store locations are generally leased for up to five
years with certain rights to extend or terminate without penalty.
Equipment leases are for periods from one to three years. Lease expense
was approximately $2,843,000 and $2,657,000 for the years ended June
30, 1997 and 1996, respectively. Lease commitments (excluding those
assumed by Ugly Duckling Corporation, see Note 13) for years ending
June 30 are as follows (dollars in thousands):
1998 $ 1,134
1999 606
2000 449
2001 25
--------
$ 2,214
========
As of September 15, 1997, a majority of leases were assumed by the Ugly
Duckling Corporation. Leases not assumed in the sales transaction are
reflected in the above schedule. Of the $2.2 million in lease
commitments not assumed by Ugly Duckling Corporation, $1.2 million are
being subleased.
Legal Proceedings - At June 30, 1997, the Company and its subsidiaries
in their normal course of business were involved in various legal
proceedings. In the opinion of management, the ultimate disposition of
such legal proceedings will not have a material effect upon the
Company's financial position, earnings or liquidity.
6. SENIOR LINE OF CREDIT:
The Company had an $85,000,000 revolving line of credit with several
lending institutions (the "Senior Lending Group") which expired on
April 30, 1997. The credit line was available for financing automobile
installment contracts and general corporate operations. Borrowings were
made at a fixed rate based on the Eurodollar Rate plus 3% (8.8% at June
30, 1997), or a variable rate based on the lender's prime rate plus 2%
(10.5% at June 30, 1997) at the Company's discretion. For the year
ended June 30, 1997, actual interest rates ranged from 8.37% to 10.50%.
The agreement required the Company to pay an annual commitment fee of
0.375% for the unfunded portion of the line of credit.
16
<PAGE> 20
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The line of credit is collateralized by the Company's retail
installment contracts, inventory, intangibles and equipment. The
agreement also contains various provisions, the most restrictive of
which require that the Company maintain certain tangible net worth,
leverage, and interest coverage ratios, as defined. It also restricts
the Company from declaring and paying dividends. As of June 30, 1997,
the Company had drawn $80,300,000 on the revolving line of credit and
incurred interest expense of approximately $6,060,000 for the year then
ended.
Effective April 30, 1997, the line of credit expired and was in
technical default. In addition, the Company was in violation of its
tangible net worth and earnings to fixed charges covenants at June 30,
1997. Pursuant to the September 15, 1997 Purchase and Sale Agreement
(see Note 13), the Senior Lending Group consented to the sale agreement
which provides that Ugly Duckling Corporation service the Company's
unsecuritized retail installment contracts. The senior line of credit
will be repayable from future collections on the Company's retail
contracts (non-securitized) and any remaining collections associated
with both (i) the interest-only strip receivable and (ii) the
securitized receivables. The senior line of credit, as modified, earns
interest at a rate of prime plus 1.5%. Under the amended agreement, the
Senior Lending Group retained the right to demand payment in full.
7. SUBORDINATED NOTES PAYABLE:
During October 1994, the Company entered into an agreement with two
financial institutions to borrow $30,000,000 through the issuance of
subordinated notes. The notes bear interest at an annual rate of
11.75%, payable quarterly. In connection with the notes, the Company
has issued detachable warrants to purchase 9,047,958 shares of "Class
B" common stock at an exercise price of $.38 per share which was the
estimated fair value at date of issuance. As of June 30, 1997, all of
these warrants were exercisable. For the year ended June 30, 1997, the
Company incurred interest expense related to the subordinated notes of
approximately $3,525,000.
As a result of the technical default of the senior line of credit (see
Note 6) and a cross-default provision, the subordinated notes were in
technical default as of April 30, 1997. The subordinated note holders
consented to the sale agreement which provides that Ugly Duckling
Corporation service the Company's unsecuritized retail installment
contracts with all future collections (net of servicing fees) going
first to pay down the Senior Line of Credit. Any remaining collections
will be applied to repay the subordinated note holders.
17
<PAGE> 21
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. CHANGE IN CAPITAL STRUCTURE:
On April 30, 1995, the Retail Company issued 13,500 shares of
cumulative preferred stock for cash. The preferred stock votes together
with the outstanding common stock as a single class on all actions to
be voted on by the stockholders of the Retail Company. The preferred
stock was issued to some, but not all existing shareholders of the
Company. The preferred stock has a par value of $100 per share, an
annual dividend rate equal to $11.75 per share, and is redeemable at
either the holder's or Retail Company's option on or after April 30,
2000 and April 30, 2001, respectively. The redemption price is set at
par unless the Retail Company elects to redeem all the shares at any
time prior to April 30, 2001, upon which the redemption price is set at
$101 per share. Cash proceeds from the issuance of the preferred stock
was $1,351,350. In connection with the preferred stock, the Retail
Company has issued detachable warrants to purchase 405,000 shares of
the Company's "Class A" common stock at an exercise price of $.38 per
share, which was fair value at date of issuance. The warrants expire if
not exercised prior to December 31, 2004. As of June 30, 1997 all of
these warrants were exercisable. Subsequent to year end the Company
discontinued dividends to the preferred shareholders.
9. RELATED PARTY TRANSACTIONS:
During fiscal year 1997, the Company's wholly-owned subsidiary, A&F,
commenced operations and incurred an operating loss of approximately
$1.1 million through December 31, 1996. On December 31, 1996, A&F was
purchased by the Edwin L. Cox Company (the "Acquirer"). A similar group
of shareholders hold a substantial ownership interest in both
companies. The Acquirer assumed all assets and liabilities of A&F which
resulted in a gain of $1.1 million. The net effect of these
transactions had no material effect on the Company's consolidated net
loss for the year ending June 30, 1997.
During 1997, the Company provided management services, including
payroll disbursement and customer payment collections for A&F. As of
June 30, 1997, the Company has a payable to A&F of approximately
$214,000.
18
<PAGE> 22
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. INCENTIVE PLANS:
The Company has a stock incentive plan (the "Plan") for key employees,
under which the maximum number of shares that may be granted in the
aggregate is 10% of the outstanding shares of the Company's common
stock subject to a cap of 12,000,000 shares. The Plan, which became
effective April 1, 1991, provides for the options to be granted, become
exercisable, and terminate upon terms established by the Board of
Directors. Shares provided under the Plan vest at a rate of one-sixth
per year beginning on the second anniversary of the grant date. Vested
shares become exercisable at the earlier of the fifth anniversary of
the grant date, liquidation or dissolution of the Company, or the
effective date of an initial public offering. The Plan terminates April
1, 2001.
A summary of stock option activity under this Plan is as follows:
<TABLE>
<CAPTION>
Options Options Outstanding
Available ---------------------------------
For Grant Shares Price Per Share
---------- ---------- ---------------
<S> <C> <C> <C>
Balance at June 30, 1994 3,654,000 8,346,000
Terminated 1,200,000 (1,200,000) $ 0.34
Terminated 54,000 (54,000) 0.38
Granted (1,551,600) 1,551,600 0.38
---------- ----------
Balance at June 30, 1995 3,356,400 8,643,600
Terminated 1,185,600 (1,185,600) $ 0.38
Granted (560,000) 560,000 0.41
---------- ----------
Balance at June 30, 1996 3,982,000 8,018,000
Terminated 108,000 (108,000) $ 0.38
Granted (290,000) 290,000 0.41
---------- ----------
Balance at June 30, 1997 3,800,000 8,200,000
========== ==========
</TABLE>
Of the options outstanding at June 30, 1997, 5,908,000 were
exercisable. The exercise price assigned on the grant date is
determined by the Board of Directors.
Given that a majority of the Company's operating assets were
subsequently sold (see Note 13), management believes the estimated fair
market value of the shares is minimal. As a result, the Company views
the potential for any option to be exercised as highly improbable.
19
<PAGE> 23
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In March 1994, the Company adopted a limited Managers Stock Purchase
Plan with respect to common stock of the Company for certain managers
of the Retail Company. The maximum number of shares of common stock
which may be purchased under this limited plan is 750,000 shares. This
limited plan will afford each manager to invest up to 50% of his or her
full monthly after tax store net profit bonus in common stock of the
Company. As of June 30, 1997, there were 17,180 shares of common stock
outstanding that have been issued pursuant to this plan at values
ranging from $.38 to $.41 per share. As a result of the sale mentioned
above, all remaining outstanding shares were repurchased in July 1997.
11. INCOME TAXES:
On April 30, 1995, the Retail Company issued 13,500 additional shares
of preferred stock which diluted the voting rights of its existing
shareholders. As a result, effective April 30, 1995, the Retail Company
ceased to be a member of the affiliated group ("deconsolidated" from
KARS-YES Holdings Inc. and subsidiaries) for Federal income tax
purposes. Pursuant to California tax laws, the Retail Company is
required to continue to file on a combined basis with the Company. The
primary tax effect of the deconsolidation is the immediate recognition
of a loss resulting from discounts that arise upon the Retail Company's
sale of retail contracts ("retail contract discounts") to the Finance
Company. Because of the combined California filing requirement, retail
contract discounts will continue to be deferred for California tax
purposes.
The provision for income taxes is as follows (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current tax provision (benefit) $ (785) $ 478 $(3,896)
Deferred tax provision (benefit) (1,577) 1,361 5,284
------- ------- -------
$(2,362) $ 1,839 $ 1,388
======= ======= =======
</TABLE>
20
<PAGE> 24
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Reconciliations of the differences between income taxes computed at the
federal statutory rate and the consolidated income tax
provision/(benefit) are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Provision/(benefit) at federal
statutory rate $(13,974) $ 1,563 $ 1,209
State taxes (2,465) 276 179
Change in deferred tax valuation allowance 13,512 -- --
Other nondeductible items 565 -- --
-------- -------- --------
Income tax provision/(benefit) $ (2,362) $ 1,839 $ 1,388
======== ======== ========
</TABLE>
The components of the deferred tax assets and liabilities are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
June 30,1997
------------------------------------------------
Federal State
---------------------- ---------------------- --------
Assets Liabilities Assets Liabilities Total
-------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Retail contracts $ -- $ (901) $ -- $ (289) $ (1,190)
Allowance for losses 10,261 -- 3,250 -- 13,511
Securitized receivables -- (3,424) -- -- (3,424)
Inventory 464 -- 28 -- 492
Fixed assets 708 -- 56 -- 764
Other 205 -- 88 -- 293
Net operating loss 3,217 -- 201 -- 3,418
-------- -------- -------- -------- --------
Deferred tax asset (liability) 14,855 (4,325) 3,623 (289) 13,864
Valuation allowance (10,530) -- (3,334) -- (13,864)
-------- -------- -------- -------- --------
Net deferred tax liability $ 0
========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996
--------------------------------------------
Federal State
-------------------- --------------------- -------
Assets Liabilities Assets Liabilities Total
------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
Retail contracts $ 672 $ -- $ 6 $ -- $ 678
Allowance for losses 4,387 -- 2,148 -- 6,535
Securitized receivables -- (6,298) -- (1,182) (7,480)
Excess servicing asset -- (1,336) -- (251) (1,587)
Inventory -- (146) -- (9) (155)
Fixed assets 318 -- 32 -- 350
Retail lease contracts -- (49) -- (9) (58)
Other 412 -- 100 -- 512
------- ------- ------- ------- -------
Deferred tax asset (liability) 5,789 (7,829) 2,286 (1,451) (1,205)
Valuation allowance -- -- (352) -- (352)
------- ------- ------- ------- -------
Net deferred tax liability $(1,557)
=======
</TABLE>
21
<PAGE> 25
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
As of June 30, 1997, the Company has a net operating loss of
approximately $10,900,000. This net operating loss will be carried
forward to offset future taxable income or if unused, will expire by
June 30, 2012. Management believes that given (i) the magnitude of the
Company's net operating loss carryforward and (ii) the Company's
limited ability to generate future taxable income sufficient to exceed
the net operating loss carryforward, it is highly probable that no
further taxes will be incurred by the Company as it winds down
operations. Therefore, no further deferred tax assets on liabilities
are recognized.
12. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS:
Risk Management - The Company utilizes an interest rate swap to hedge
portions of its variable-rate debt outstanding (including advances
under the revolving line of credit and amounts advanced against
securitized loan pools), thereby allowing the Company to lock-in a
fixed rate. As of June 30, 1997, the notional amount of the swap
contract was $50 million, upon which the Company pays a fixed rate
(5.77%) and receives the lesser of the quarterly beginning or ending
one-month commercial paper rate (5.45%) at June 30, 1997. The swap
agreement has no imbedded options or other terms that involve a higher
level of complexity or risk. In addition, the Company has interest rate
caps (strike at 11% one-month commercial paper rate) intended to
preserve the minimum spread associated with each securitized pool of
loans. As of June 30, 1997, the notional amount of the interest rate
caps was $61.4 million. The Company does not use derivative financial
instruments for trading or speculative purposes. The swap was
subsequently terminated on September 5, 1997, resulting in the Company
paying $258,700.
Financial Instruments - Statement of Financial Accounting Standards No.
107, "Disclosures about Fair Value of Financial Instruments" ("SFAS No.
107"), requires disclosure of fair value information about financial
instruments, whether or not recognized on the balance sheet. Fair
values are based on estimates using present value or other valuation
techniques in cases where quoted market prices are not available. These
techniques are significantly effected by the assumptions used,
including the discount rate and estimates of future cash flows. SFAS
No. 107 excludes certain financial instruments and all non-financial
instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented in the accompanying table do not
represent the underlying value of the Company.
22
<PAGE> 26
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The estimated fair values of the Company's financial instruments are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
June 30,
----------------------------------------------
1997 1996
-------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 1,455 $ 1,455 $ 1,703 $ 1,703
Securitized receivables 10,072 10,072 19,352 17,865
Excess servicing asset -- -- 3,929 3,410
Interest-only strip 535 535
Retail contracts, net 87,911 87,911 57,206 66,116
Financial Liabilities:
Subordinated notes payable $ 30,000 $ 18,569 $ 30,000 $ 33,166
Senior line of credit 80,300 79,035 39,000 39,000
Servicing liability 823 823
Off Balance Sheet Financial Instruments:
Interest rate swap $ -- $ (191) $ (9) $ (26)
Interest rate caps -- 2 -- 3
</TABLE>
The following fair value estimates, methods and assumptions were used
to measure each class of financial instruments for which it is
practical to estimate fair value:
Cash and cash equivalents: The carrying amount is considered to be a
reasonable estimate of fair value.
Securitized receivables, excess servicing asset, interest-only strip:
The fair value was estimated by discounting future cash flows using
rates available for instruments with similar risk and remaining
maturities. In determining fair value, the prepayment and loss factors
utilized were not significantly different from the Company's actual
prepayment and loss experience.
Retail contracts, net of unearned finance charges: Fair value was
estimated using investor yields associated with securitized sales
currently entered into by the Company, considering anticipated
prepayment, losses and other factors.
Subordinated notes payable: Fair value was estimated based on the net
cash flows (after repayment of Senior Line of Credit) ultimately
available for debt with similar terms and maturity. The net cash flows
were based on an estimate of future collections (net of servicing fees)
on the Company's outstanding retail contracts.
Senior line of credit: Fair value was estimated based on the net cash
flows ultimately available to pay down the line of credit, discounted
at rates available for debt with similar terms and maturity,
considering risks given the current status of the Company. The net cash
flows were based on an estimate of future collections (net of servicing
fees) on the Company's outstanding retail contracts.
23
<PAGE> 27
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Servicing liability: Fair value was estimated based on an analysis of
discounted cash flows that incorporates estimates of (1) market
servicing costs, (2) projected ancillary servicing revenue, (3)
projected prepayment rates that are based on changes in interest rates,
and (4) market profit margin.
13. SALE OF CERTAIN ASSETS AND LIABILITIES TO UGLY DUCKLING CORPORATION:
On September 15, 1997 the Company entered into an agreement with Ugly
Duckling Corporation (the "Buyer") to sell the majority of its
operating assets and facilities of the Finance and Retail operations.
The aggregate purchase price for the assets acquired and the assumption
of certain liabilities was approximately $5.5 million. The assets
acquired and liabilities assumed consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
Carrying Value Allowance Net Book Value
-------------- --------- --------------
<S> <C> <C> <C>
Automobile inventory $ 3,701 $(1,181) $ 2,520
Fixed assets 3,179 -- 3,179
Other assets 259 (128) 131
Accrued vacation (310) -- (310)
------- ------- -------
$ 6,829 $(1,309) $ 5,520
======= ======= =======
</TABLE>
Concurrent with the sale, the Company entered into an agreement whereby
the Buyer will service the outstanding retail contract portfolio (both
securitized and company owned) and remit all future collections (net of
servicing fees) to pay down the respective obligations. The Buyer is to
be reimbursed for all direct collection expenses in addition to a
monthly servicing fee. Two of the Company's existing retail stores were
not acquired: one in Baldwin Park, California and one in Atlanta,
Georgia. In addition, the Company's retail store in "Northeast Dallas"
was not acquired, however, the Buyer is operating out of this location
and is leasing the facilities from the Company. All other retail stores
were acquired, and their corresponding leases assumed. The Company will
not operate out of the remaining store locations, and will pursue
subleasing, conveying or terminating the existing leases.
24
<PAGE> 28
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. BUSINESS SEGMENT INFORMATION:
Operating results and other financial data are presented for the
principal business segments of the Company for the years ended June 30,
1997, 1996 and 1995, respectively. The Company has three distinct
business segments. These consist of retail car sales operations (Retail
Operations), the income generated from the finance receivables
generated at the Retail Operations (Finance Operations) and corporate
and other operations. Identifiable assets by business segment are those
assets used in each segment of Company operations (dollars in
thousands):
<TABLE>
<CAPTION>
Retail Finance
Operations Operations Corporate Consolidated
---------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Year ended or at June 30, 1997
Revenue $ 144,129 $ 21,504 - $ 165,633
Depreciation and amortization 2,162 640 - 2,802
Operating income (11,450) (28,585) - (40,035)
Identifiable assets 10,599 99,978 $ 1,416 111,993
Year ended or at June 30, 1996
Revenue $ 118,176 $ 23,486 - $ 141,662
Depreciation and amortization 968 379 - 1,347
Operating income 119 4,478 - 4,597
Identifiable assets 23,006 81,470 $ 3,852 108,328
Year ended or at June 30, 1995
Revenue $ 81,832 $ 15,796 - $ 97,628
Depreciation and amortization 474 46 - 520
Operating income 1,259 2,298 - 3,557
Identifiable assets 11,279 87,648 $ 2,954 101,881
</TABLE>
25
<PAGE> 29
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. QUARTERLY STATEMENT OF OPERATIONS:
CONSOLIDATED STATEMENT OF OPERATIONS: FISCAL YEAR ENDING JUNE 30, 1997
(UNAUDITED):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Automotive sales $ 37,724 $ 31,742 $ 41,042 $ 33,621 $ 144,129
Cost of automotive sales 23,996 21,242 25,129 28,066 98,433
--------- --------- --------- --------- ---------
Gross margin on automotive sales 13,728 10,500 15,913 5,555 45,696
Provision for losses on retail contracts 7,161 6,549 10,895 37,748(1) 62,353
--------- --------- --------- --------- ---------
6,567 3,951 5,018 (32,193) (16,657)
Gain on sale of receivables 1,746 2,276 866 - 4,888
Finance charge income 3,366 3,586 4,809 4,855 16,616
--------- --------- --------- --------- ---------
Operating profit (loss) before expenses 11,679 9,813 10,693 (27,338) 4,847
Expenses:
Selling and store 5,278 4,870 5,470 6,166 21,784
Finance operations 1,689 1,729 2,026 2,203 7,647
General and administrative 494 511 497 561 2,063
Depreciation and amortization 440 462 500 1,400 2,802
--------- --------- --------- --------- ---------
Earnings (loss) before interest and
income taxes 3,778 2,241 2,200 (37,668) (29,449)
Interest expense, net 1,923 2,366 2,425 3,872 10,586
--------- --------- --------- --------- ---------
Earnings (loss) before income taxes 1,855 (125) (225) (41,540) (40,035)
Provision (benefit) for income taxes 742 (50) 192 (3,246) (2,362)
--------- --------- --------- --------- ---------
Net earnings (loss) $ 1,113 $ (75) $ (417) $ (38,294) $ (37,673)
========= ========= ========= ========= =========
</TABLE>
(1) See Note 2 for discussion on changes in provision for losses.
26
<PAGE> 30
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
CONSOLIDATED STATEMENT OF OPERATIONS: FISCAL YEAR ENDING JUNE 30, 1996
(UNAUDITED):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Automotive sales $ 26,851 $ 24,615 $ 32,118 $ 34,592 $118,176
Cost of automotive sales 16,177 15,665 20,004 22,123 73,969
-------- -------- -------- -------- --------
Gross margin on automotive sales 10,674 8,950 12,114 12,469 44,207
Provision for losses on retail contracts 5,907 8,915 7,067 7,610 29,499
-------- -------- -------- -------- --------
4,767 35 5,047 4,859 14,708
Gain on sale of receivables - 5,183 1,109 1,798 8,090
Finance charge income 4,688 4,359 2,955 3,394 15,396
-------- -------- -------- -------- --------
Operating profit before expenses 9,455 9,577 9,111 10,051 38,194
Expenses:
Selling and store 3,434 4,047 4,248 4,682 16,411
Finance operations 1,497 2,174 1,571 1,226 6,468
General and administrative 429 519 623 809 2,380
Depreciation and amortization 286 363 539 159 1,347
-------- -------- -------- -------- --------
Operating earnings before interest
and income taxes 3,809 2,474 2,130 3,175 11,588
Interest expense 1,968 1,638 1,546 1,839 6,991
-------- -------- -------- -------- --------
Earnings before income taxes 1,841 836 584 1,336 4,597
Provision for income taxes 736 334 235 534 1,839
-------- -------- -------- -------- --------
Net earnings $ 1,105 $ 502 $ 349 $ 802 $ 2,758
======== ======== ======== ======== ========
</TABLE>
27
<PAGE> 31
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. KARS-YES HOLDINGS INC.:
The following are condensed balance sheets of KARS-YES Holdings Inc.
as of June 30 (dollars in thousands):
<TABLE>
<CAPTION>
ASSETS 1997 1996
-------- --------
<S> <C> <C>
Cash and cash equivalents $ 1,333 $ 1,452
Fixed assets, net - 612
Other assets, net 83 1,788
Intercompany receivable 27,744 24,506
Investments in subsidiaries (3,325) 35,567
-------- --------
Total assets $ 25,835 $ 63,925
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 4,107 $ 3,629
Accrued liabilities 641 215
Subordinated notes payable 30,000 30,000
-------- --------
Total liabilities 34,748 33,844
-------- --------
Redeemable cumulative preferred stock of subsidiary 1 1
-------- --------
Shareholders' equity (deficit):
Class A common stock 1,200 1,203
Treasury stock (300) (300)
Additional paid-in capital 23,511 23,610
Unrealized gain on investment (1,087)
Retained earnings (32,238) 5,567
-------- --------
Total shareholders' equity (deficit) (8,914) 30,080
-------- --------
Total liabilities and shareholders' equity (deficit) $ 25,835 $ 63,924
======== ========
</TABLE>
The ability of the Company's subsidiaries to transfer funds to the
Company in the form of dividends is restricted pursuant to the terms of
the senior line of credit entered into by the Company's Finance
Operation.
28
<PAGE> 32
(b) Pro Forma Financial Information.
The required pro forma financial information is set forth below.
<PAGE> 33
UGLY DUCKLING CORPORATION
PRO FORMA CONDENSED COMBINED BALANCE SHEET-UNAUDITED
JUNE 30, 1997
(in thousands)
<TABLE>
<CAPTION>
UGLY PRO FORMA PRO FORMA
DUCKLING KARS ADJUSTMENTS COMBINED
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Assets:
Cash and Cash Equivalents $ 41,149 $ 1,455 $ (1,455)(a) $ 35,629
-- -- (5,520)(a) --
Finance Receivables:
Held for Investment 22,746 -- -- 22,746
Held for Sale 50,000 118,090 (118,090)(a) 50,000
--------- --------- --------- ---------
Principal Balances, Net 72,746 118,090 (118,090) 72,746
Less: Allowance for Credit Losses (14,435) (30,179) (30,179)(a) (14,435)
--------- --------- --------- ---------
Finance Receivables, Net 58,311 87,911 (87,911) 58,311
--------- --------- --------- ---------
Residuals in Finance Receivables Sold 27,441 10,072 (10,072)(a) 27,441
Investments Held in Trust 8,807 -- -- 8,807
Inventory 16,576 3,805 (3,805)(a) 18,886
-- -- 2,310(c) --
Property and Equipment, Net 31,143 1,318 (1,318)(a) 33,694
-- -- 2,551(c) --
Goodwill and Trademarks, Net 13,705 -- 2,361(b) 16,066
Other Assets 20,878 7,681 (7,681)(a) 20,924
-- -- 46(c) --
Assets Held for Sale -- 5,520 (613)(c) --
-- -- (4,907)(c) --
--------- --------- --------- ---------
$ 218,010 $ 111,993 $(110,245) $ 219,758
========= ========= ========= =========
Liabilities and Stockholders' Equity:
Liabilities:
Accounts Payable $ 4,194 $ 6,446 $ (6,446)(a) $ 4,194
Accrued Expenses and Other 14,891 3,188 (3,188)(a) 16,639
-- -- 1,748(c) --
Notes Payable 8,328 81,273 (81,273)(a) 8,328
Subordinated Notes Payable 12,000 30,000 (30,000)(a) 12,000
--------- --------- --------- ---------
Total Liabilities 39,413 120,907 (119,159) 31,857
--------- --------- --------- ---------
Stockholders' Equity:
Common Stock 171,317 23,324 (23,324)(a) 171,317
Retained Earnings 7,280 (32,238) 32,238(a) 7,280
--------- --------- --------- ---------
Total Stockholders' Equity 178,597 (8,914) 8,914 178,597
--------- --------- --------- ---------
$ 218,010 $ 111,993 $(110,245) $ 219,758
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
condensed combined financial statements.
<PAGE> 34
UGLY DUCKLING CORPORATION
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS-UNAUDITED
SIX MONTHS ENDED JUNE 30, 1997
(in thousands, except earnings per share amounts)
<TABLE>
<CAPTION>
UGLY PRO FORMA PRO FORMA
DUCKLING KARS ADJUSTMENTS COMBINED
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Sales of Used Cars $ 46,013 $ 74,663 $ -- $ 120,676
Less:
Cost of Used Cars Sold 24,000 53,195 -- 77,195
Provision for Credit Losses 8,829 48,643 -- 57,472
--------- --------- --------- ---------
13,184 (27,175) -- (13,991)
--------- --------- --------- ---------
Interest Income 12,608 9,664 (9,664)(d) 12,608
Gain on Sale of Loans 12,810 866 (866)(e) 12,810
--------- --------- --------- ---------
25,418 10,530 (10,530) 25,418
--------- --------- --------- ---------
Other Income 3,574 -- 2,018(f) 5,592
--------- --------- --------- ---------
Income before Operating Expenses 42,176 (16,645) (8,512) 17,019
Operating Expenses 28,111 18,823 (1,173)(g) 45,809
-- -- (20)(h) --
-- -- 68(i) --
--------- --------- --------- ---------
Income (Loss) before Interest Expense 14,065 (35,468) (7,387) (28,790)
Interest Expense 1,336 6,297 (5,045)(j) 2,588
--------- --------- --------- ---------
Earnings (Loss) before Income Taxes 12,729 (41,765) (2,342) (31,378)
Income Taxes (Benefit) 5,156 (3,054) (5,156)(k) (3,054)
--------- --------- --------- ---------
Net Earnings (Loss) $ 7,573 $ (38,711) $ 2,814 $ (28,324)
========= ========= ========= =========
Earnings (Loss) per Share $ 0.43 $ (1.59)
========= =========
Shares Used in Computation 17,780 17,780
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
condensed combined financial statements.
<PAGE> 35
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>
UGLY PRO FORMA PRO FORMA
DUCKLING KARS ADJUSTMENTS COMBINED
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Sales of Used Cars $ 53,768 $ 136,176 $ -- $ 189,944
Less:
Cost of Used Cars Sold 29,890 87,365 -- 117,255
Provision for Credit Losses 9,811 28,387 -- 38,198
--------- --------- --------- ---------
14,067 20,424 -- 34,491
--------- --------- --------- ---------
Interest Income 15,856 13,301 (13,301)(d) 15,856
Gain on Sale of Loans 4,434 6,929 (6,929)(e) 4,434
--------- --------- --------- ---------
20,290 20,230 (20,230) 20,290
--------- --------- --------- ---------
Other Income 1,571 -- 3,150(f) 4,721
--------- --------- --------- ---------
Income before Operating Expenses 35,928 40,654 (17,080) 59,502
Operating Expenses 24,700 29,330 (1,581)(g) 52,545
-- -- (39)(h) --
-- -- 135(i) --
--------- --------- --------- ---------
Income (Loss) before Interest Expense 11,228 11,324 (15,595) 6,957
Interest Expense 5,262 7,674 (7,674)(j) 5,262
--------- --------- --------- ---------
Earnings (Loss) before Income Taxes 5,966 3,650 (7,921) 1,695
Income Taxes (Benefit) 100 1,461 (875)(j) 686
--------- --------- --------- ---------
Net Earnings (Loss) $ 5,866 $ 2,189 $ (7,046) $ 1,009
========= ========= ========= =========
Earnings (Loss) per Share $ 0.60(l) $ 0.01(l)
========= =========
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.
<PAGE> 36
UGLY DUCKLING CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(1) BASIS OF ACCOUNTING
On September 19, 1997, Ugly Duckling Corporation (the Company or "Ugly
Duckling") completed the acquisition of substantially all of the used car
dealership and loan servicing net assets of KARS-YES Holdings, Inc. ("Kars") in
exchange for approximately $5,520,000 in cash, net of the purchase price of
returned inventory.
The pro forma unaudited combined balance sheet gives effect to the acquisition
as if the transaction had taken place on June 30, 1997 and combines Ugly
Duckling's unaudited June 30, 1997 condensed consolidated balance sheet amounts
with Kars' June 30, 1997 audited balance sheet amounts.
The pro forma unaudited combined statement of operations for the year ended
December 31, 1996 is presented using Ugly Duckling's audited consolidated
statement of operations for the year ended December 31, 1996 combined with the
Kars' unaudited year ended December 31, 1996 statement of operations as if the
transaction had taken place on January 1, 1996.
The pro forma unaudited combined statement of operations for the six months
ended June 30, 1997 is presented using Ugly Duckling's unaudited consolidated
statement of operations for the six months ended June 30, 1997 combined with the
Kars unaudited statement of operations for the six months ended June 30, 1997 as
if the transaction had taken place on January 1, 1996.
The pro forma condensed combined financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
of Ugly Duckling Corporation as of December 31, 1996 and with the audited
financial statements and notes thereto of KARS-YES Holdings, Inc. as of June 30,
1997.
The pro forma combined statements of operations are 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 Kars been combined
during the periods 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 of $5,520,000 for the cash remitted to Kars, as well as
reduction for cash, finance receivables, residuals in finance
receivables sold, inventory, property and equipment, other assets,
and liabilities not acquired by Ugly Duckling. The common stock and
retained earnings of Kars were eliminated in their entirety as a
result of using the "purchase method" of accounting.
(b) Ugly Duckling paid a total of $5,520,000 for assets with a fair
value of $3,159,000 resulting in an excess of the purchase price
over the fair value of the net assets acquired (goodwill) of
$2,361,000. Property and equipment was considered to have been
purchased at a fair value based upon review of estimated replacement
costs for a sample of the acquired items. The fair value of
inventory was determined utilizing published listing of vehicle
values. The fair value of accrued liabilities was assumed to be book
value due to the current nature of the liability, and the fair value
of the servicing liability was determined based upon current market
rates.
<PAGE> 37
UGLY DUCKLING CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
A summary of the allocation of fair values follows:
<TABLE>
<CAPTION>
FAIR
DESCRIPTION VALUE
---------------------------------------- -----------
<S> <C>
Inventory $ 2,310,000
Property and Equipment 2,551,000
Deposits 46,000
Accrued Vacation (310,000)
Servicing Liability (1,438,000)
-----------
Total Fair Value 3,159,000
Consideration Exchanged 5,520,000
-----------
Excess of Purchase Price over Fair Value
of Net Assets Acquired $ 2,361,000
===========
</TABLE>
(c)Represents the fair value of purchased inventory of $2,310,000, property and
equipment of $2,551,000, and lease deposits of $46,000 for a total fair value
of $4,907,000 which exceeds Kars book value by $613,000.
(d)Adjustment to eliminate interest income on the Kars loan portfolio not
purchased by Ugly Duckling.
(e)Adjustment to eliminate gain on sale on the Kars loan portfolio, as the loan
portfolio was not purchased by Ugly Duckling.
(f)Adjustment to record servicing fee income for servicing fees generated by
Ugly Duckling for the servicing of the loan portfolio retained by Kars and
serviced by Ugly Duckling.
(g)Pursuant to the terms of the servicing agreement between Ugly Duckling and
Kars, Kars is responsible for bearing the collection costs of its retained
loan portfolio. Adjustment to decrease general and administrative expenses
for vehicle repossession and reconditioning expenses related to the Kars loan
portfolio not purchased by Ugly Duckling.
(h)Decrease in rent expense for difference in lease rates for two used car
dealerships.
(i)Amortization of goodwill over a period of twenty years.
(j)Adjustment to reduce interest expense for the carrying cost of the loan
portfolio retained by Kars.
(k)Adjust income tax expense for the impact of the pro forma adjustments.
(l)Earnings per share calculated after giving effect to payment of $916,000 in
preferred stock dividends in 1996.
<PAGE> 38
(c) Exhibits
EXHIBIT NUMBER DESCRIPTION
-------------- ----------------------------------
23.1 Consent of Independent Accountants
(Coopers & Lybrand LLP)
<PAGE> 39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
UGLY DUCKLING CORPORATION
(Registrant)
Dated: November 26, 1997 By: /s/ Steven P. Johnson
Senior Vice President and Secretary
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Ugly Duckling Corporation on Form S-3 (File No. 333-31531) filed as of July 18,
1997, as amended by pre-effective amendment no. 1 to Form S-3 filed as of July
30, 1997; Form S-3 (File No. 333-22237) filed as post-effective amendment no. 2
to Form S-1 as of July 18, 1997; Form S-8 (File No. 333-32313) for Ugly Duckling
Corporation Long-Term Incentive Plan filed as of July 29, 1997; Form S-8 (File
No. 333-08457) for Ugly Duckling Corporation Long-Term Incentive Plan filed as
of July 19, 1996; Form S-8 (File No. 333-06615) for Ugly Duckling Corporation
Director Incentive Plan filed as of June 21, 1996 of our report which includes
an explanatory paragraph concerning KARS-YES Holdings Inc.'s ability to continue
as a going concern, dated November 6, 1997, on our audits of the consolidated
financial statements of KARS-YES Holdings Inc. as of June 30, 1997 and 1996, and
for the years ended June 30, 1997, 1996, and 1995, which report is included in
this Current Report on Form 8-K.
Coopers & Lybrand L.L.P.
Dallas, Texas
November 25, 1997
