<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 24, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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>
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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. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
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<S> <C> <C> <C> <C>
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE FEE(1)
- ---------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value.......... 5,413,144 $20.25 $109,616,166 $31,146
===============================================================================================================
</TABLE>
(1) 337,644 shares of Common Stock included above in the amount to be registered
are being carried forward from the Registration Statement on Form S-1 of the
Company (Registration No. 333-13755) pursuant to Rule 429(a). A filing fee
of $1,842 was paid to register such securities in connection with such
earlier Registration Statement and, accordingly, $31,146 is being paid in
connection with the 5,075,500 new shares of Common Stock being registered
under this Registration Statement. In the event any such previously
registered shares of Common Stock are offered prior to the effective date of
this Registration Statement, they will not be included in any Prospectus
hereunder.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended based
on the last reported price of the Common Stock on February 20, 1997.
------------------------
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 FEBRUARY 24, 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 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 February 20, 1997, the last reported price of the Common Stock
was $20.25 per share.
SEE "RISK FACTORS" AT PAGE 7 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 February , 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.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Introduction."
THE COMPANY
Ugly Duckling Corporation (the "Company") operates one of the largest
chains of "buy here-pay here" used car dealerships in the United States and
underwrites, finances, and services retail installment contracts generated from
the sale of used cars by its dealerships and by third party used car dealers
located in selected markets throughout the country. As part of its financing
activities, the Company has initiated a collateralized dealer financing program
pursuant to which it 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, 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 Company's securitization program. Substantially all of the
contracts the Company services are with Sub-Prime Borrowers.
Company Dealership Operations. The Company sells used cars through twelve
wholly owned used car dealerships ("Company Dealerships") in Arizona and Florida
and finances such sales through retail installment contracts that the Company
services. The Company anticipates opening two dealerships (one each in Nevada
and Florida) in February and 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 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 January 31, 1997,
3
<PAGE> 4
had opened 39 Third Party Dealer contract buying offices ("Branch Offices") in
12 states and entered into contract purchasing agreements with approximately
1,400 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'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 one new Company Dealership in
Arizona and has acquired four dealerships and a reconditioning facility in
Florida. In addition, the Company has five other dealerships (one in Arizona,
two in New Mexico, one in Nevada, and one in Florida) and a used car
reconditioning facility (in New Mexico) currently under development. In recent
periods, the Company has also rapidly expanded its Branch Office network. Since
December 31, 1995 the Company has opened 31 Branch Offices. Furthermore, on
January 31, 1997, the Company entered into a letter of intent setting forth
preliminary terms of a potential acquisition of a business engaged in the sale
and financing of used motor vehicles in a market with no current Company
dealerships. The Company has recently commenced its due diligence investigation
of the seller and its assets. The unaudited book value of the assets at December
31, 1996 was approximately $40 million. Consummation of the transaction is
contingent upon a number of conditions, including satisfactory completion of due
diligence, negotiation of final terms and execution of definitive agreements,
and the approval of regulatory authorities and the Board of Directors of the
Company. No assurance can be given that such conditions will be satisfied or
that the acquisition will be completed. As an additional element of its growth
strategy, the Company intends to expand its insurance services and its Cygnet
Dealer Program.
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 a securitization
program (the "Securitization Program") with SunAmerica Life Insurance Company
("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 this 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
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<S> <C>
Common Stock offered............... 5,413,144 shares.
Common Stock outstanding(1)........ 18,407,460 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. See
"Use of Proceeds."
Nasdaq Symbol...................... "UGLY"
</TABLE>
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(1) Excludes: (i) 906,400 shares of Common Stock issuable upon exercise of stock
options outstanding at February 20, 1997 under the Company's Long-Term
Incentive Plan with a weighted average exercise price of $8.64 per share;
and (ii) 286,000 shares of Common Stock issuable upon exercise of warrants
issued in connection with the Company's initial public offering with a
weighted average exercise price of $8.36 per share. See
"Management -- Long-Term Incentive Plan" and "Description of Capital Stock."
4
<PAGE> 5
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 price of $8.60 per share; and (ii)
286,000 shares of Common Stock issuable upon exercise of warrants issued in
connection with the Company's initial public offering of Common Stock with a
weighted average exercise price of $8.36 per share.
5
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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>
6
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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
7
<PAGE> 8
profitable as it pursues this business strategy will depend upon its ability to:
(i) expand its revenue generating operations while not proportionately
increasing its administrative overhead; (ii) originate and purchase contracts
with an acceptable level of credit risk; (iii) effectively collect payments due
on the contracts in its portfolio; (iv) locate sufficient financing, with
acceptable terms, to fund the expansion of used car sales and the origination
and purchase of additional contracts; and (v) adapt to the increasingly
competitive market in which it operates. Outside factors, such as the economic,
regulatory, and judicial environments in which it operates, will also have an
effect on the Company's business. The Company's inability to achieve or maintain
any or all of these goals could have a material adverse effect on the Company's
operations, profitability, and growth. See "Business -- Business Strategy."
The Company has initiated its Cygnet Dealer Program, pursuant to which the
Company intends to provide qualified Third Party Dealers with operating lines of
credit secured by such dealers' retail installment contract portfolios. While
the Company will require Third Party Dealers to meet certain minimum net worth
and operating history criteria to be considered for inclusion in the Cygnet
Dealer Program, the Company will, nevertheless, be extending credit to dealers
who are not otherwise able to obtain debt financing from traditional lending
institutions such as banks, credit unions, and major finance companies.
Consequently, as with its other financing activities, the Company will be
subject to a high risk of credit losses that could have a material adverse
effect on the Company's financial condition and results of operations and on the
Company's ability to meet its own financing obligations. Further, there can be
no assurance that the Company will be able to obtain the financing necessary to
fully implement the Cygnet Dealer Program. In addition, there can be no
assurance that the Company will be successful in its efforts to expand its
insurance services. See "Business -- Third Party Dealer Operations --
Collateralized Dealer Financing" and "Business -- Third Party Dealer
Operations -- Insurance Services."
HIGHLY COMPETITIVE INDUSTRY
Although the used car sales industry has historically been highly
fragmented, it has attracted significant attention recently from a number of
large companies, including 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 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."
8
<PAGE> 9
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 will also enter into financing agreements with qualified Third Party
Dealers. The Company's Third Party Dealer financing activities depend in large
part upon its ability to establish and maintain relationships with such dealers.
While the Company believes that it has been successful in developing and
maintaining relationships with Third Party Dealers in the markets that it
currently serves, there can be no assurance that the Company will be successful
in maintaining or increasing its existing Third Party Dealer base, that such
dealers will continue to generate a volume of contracts comparable to the volume
of contracts historically generated by such dealers, or that any such dealers
will become involved in the Cygnet Dealer Program. See "Business -- Third Party
Dealer Operations" and "Business -- Collateralized Dealer Program."
GEOGRAPHIC CONCENTRATION
Company Dealership operations are currently concentrated in Arizona and
Florida. 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 $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
9
<PAGE> 10
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 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
10
<PAGE> 11
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 5,460,100 shares of Common Stock outstanding as of the date
of this Prospectus (excluding the 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 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,
11
<PAGE> 12
substantially all of these shares have been held for the two-year holding period
required under Rule 144. No predictions can be made with respect to the effect,
if any, that sales of Common Stock in the market or the availability of shares
of Common Stock for sale under Rule 144 will have on the market price of Common
Stock prevailing from time to time. Nevertheless, the possibility that
substantial amounts of Common Stock may be sold in the public market may
adversely affect prevailing market prices for the Common Stock.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock could be subject to significant
fluctuations in response to such factors as, among others, variations in the
anticipated or actual results of operations of the Company or other companies in
the used car sales and finance industry, changes in conditions affecting the
economy generally, analyst reports, or general trends in the industry.
PRIOR LEGAL ACTIONS INVOLVING CHIEF EXECUTIVE OFFICER
In October 1990, Mr. Garcia pled guilty to one felony count of bank fraud
brought by the United States, on behalf of the Resolution Trust Corporation
("RTC"), for his participation in a real estate transaction involving Lincoln
Savings and Loan Association, a federally insured savings and loan institution
that later went into receivership. In connection with this matter, Mr. Garcia
also settled civil lawsuits filed against him by the RTC and the Securities and
Exchange Commission (the "Commission"), and consented to an administrative order
imposed by the Commission. In addition, a real estate investment company owned
by Mr. Garcia, as well as several limited partnerships organized by that
company, filed petitions for reorganization under Chapter 11 of the United
States Bankruptcy Code in 1990 and 1991. Mr. Garcia and his wife filed a
petition for discharge under Chapter 7 of the United States Bankruptcy Code in
June 1990. Mr. Garcia's company and the related partnerships were successfully
reorganized in the period from 1990 to 1993 and Mr. Garcia was fully discharged
in 1991. See "Management -- Involvement in Certain Legal Proceedings."
FORWARD LOOKING STATEMENTS
This Prospectus contains forward looking statements. Additional written or
oral forward looking statements may be made by the Company from time to time in
filings with the 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, which speak only as of the date the statement was
made. Forward looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying the forward looking statements. Statements in this Prospectus,
including those contained in this section entitled "Risk Factors," in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and in the Notes to the Company's Consolidated
Financial Statements, describe factors, among others, that could contribute to
or cause such differences.
12
<PAGE> 13
THE COMPANY
The Company operates one of the largest chains of Buy Here-Pay Here used
car dealerships in the United States and underwrites, finances, and services
retail installment contracts generated from the sale of used cars by its Company
Dealerships and Third Party Dealers located in selected markets throughout the
country. As part of its financing activities, the Company has initiated the
Cygnet Dealer Program pursuant to which it will provide qualified Third Party
Dealers with operating credit lines secured by the dealers' retail installment
contract portfolios. The Company began its used car sales and financing
operations in 1992 and has pursued an aggressive growth strategy since that
time. As of January 31, 1996, the Company had developed or acquired eight
Company Dealerships in Arizona and had opened thirty-nine Branch Offices located
in twelve 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; 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 is traded on Nasdaq under the symbol "UGLY." The
following table sets forth the high and low closing 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........................................... $21.00 $13.00
FISCAL YEAR 1997
---------------------------------------------------------
First Quarter (through February 21, 1997)................ $24.88 $18.75
</TABLE>
13
<PAGE> 14
On February 20, 1997, the last reported sale price of the Common Stock on
Nasdaq was $20.25 per share. The Company estimates that there are approximately
1,200 beneficial holders of the Company's Common Stock.
DIVIDEND POLICY
The Company has never paid cash dividends on the Common Stock and does not
anticipate doing so in the foreseeable future. It is the current policy of the
Company's Board of Directors to retain any earnings to finance the 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, and (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. The
table should be read in conjunction with the Company's Consolidated Financial
Statements and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------
ACTUAL PRO FORMA
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Debt:
Revolving Facility................................................... $ 4,602 $ --
Notes Payable, Other................................................. 8,302 8,302
Subordinated Notes Payable........................................... 14,000 14,000
-------- ---------
Total Debt................................................... 26,904 22,302
-------- ---------
Stockholders' Equity:
Common Stock......................................................... 82,612 171,467
Accumulated Deficit.................................................. (293) (293)
-------- ---------
Total Stockholders' Equity(1)................................ 82,319 171,174
-------- ---------
Total Capitalization.................................... $109,223 $ 193,476
======== ========
</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)
286,000 shares of Common Stock issuable upon exercise of warrants issued in
connection with the Company's initial public offering of Common Stock with a
weighted average exercise price of $8.36 per share.
14
<PAGE> 15
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>
15
<PAGE> 16
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
16
<PAGE> 17
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.
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. 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.
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.
17
<PAGE> 18
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>
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
18
<PAGE> 19
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 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 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
19
<PAGE> 20
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 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. During the first quarter of 1996, the Company
initiated a Securitization Program with SunAmerica under which the Company sells
securities backed by contracts to SunAmerica. The Company retains a residual in
the contracts sold and records a gain on the sale. The amount of the gain on
sale reflects the difference between the yield earned on the contract portfolio
securitized and the return on the securities sold. The amount of any gain on
sale is based upon certain estimates, which may not subsequently be realized. To
the extent that actual cash flows on a securitization are materially below
estimates, the Company would be required to revalue the residual portion of the
securitization which it retains, and record a charge to earnings based upon the
reduction.
Through 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.
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.
20
<PAGE> 21
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,
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
21
<PAGE> 22
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 due to the greater portion of the combined
contract portfolio represented by contracts purchased from Third Party Dealers,
for which a lower level of Allowance is required.
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 Dealership Portfolio. 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
22
<PAGE> 23
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 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 table is
presented on a quarterly basis.
23
<PAGE> 24
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
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. The
Company has no account 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.
24
<PAGE> 25
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.
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. The
Company has 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 122.2% from $6.3 million for 1995 to $14.0 in 1996, compared to an
increase of 85.3% from $3.4 million in 1994. The increase was primarily due to
increases in Net Earnings, and the Provision for Credit Losses, net of increases
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.
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The Net Cash Used in Investing Activities increased by 1.6% from $36.4
million in the year ended December 31, 1995 to $37.0 million in the year ended
December 31, 1996. The $39.0 million increase provided by the sale of finance
receivables and the $29.4 million increase provided by collections on finance
receivables were offset by the $60.8 million increase in cash used in the
increase in finance receivables, $3.5 million used for the increase in
Investments Held in Trust, and $2.9 million increase used for the purchases of
property and equipment. Cash used in investing activities increased from 1994 to
1995 by $15.8 million or 76.7% primarily as a result of an increase in finance
receivables of $25.8 million net of increased collections of $7.6 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 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) engage in securitization transactions; (iii) merge with,
consolidate with, acquire, or otherwise combine with any other person or entity,
transfer any division or segment of its operations to another person or entity,
or form new subsidiaries; (iv) make changes in its capital structure; (v) pay
dividends or make certain other distributions; (vi) make certain investments and
capital expenditures; and (vii) engage in certain transactions with affiliates.
These covenants also require the Company to maintain specified financial ratios
and comply with all laws relating to the Company's business. The Revolving
Facility also provides that a transfer of ownership of the Company that results
in less than 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
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<PAGE> 27
convertible note, which was due June 30, 1998, bore interest at a rate of 12.5%,
payable quarterly, and was secured by a pledge of the Common Stock of the
Company held by the Company's Chairman, Chief Executive Officer and principal
stockholder. Effective June 21, 1996, SunAmerica converted the note into Common
Stock (444,444 shares at the initial public offering price of $6.75 per share).
In return for the conversion, the Company granted SunAmerica a ten-year warrant
to purchase 116,000 shares of Common Stock at the initial public offering price
per share and paid fees to SunAmerica totaling $150,000.
Securitizations. SunAmerica and the Company have entered into the
Securitization Program under which SunAmerica may purchase up to $175.0 million
of certificates secured by contracts. The Securitization Program is intended to
provide the Company with an additional source of funding to the Revolving
Facility. At the closing of each securitization, the Company receives payment
from SunAmerica for the certificates sold (net of investments held in trust).
The Company also generates cash flow under this program from ongoing servicing
fees and excess cash flow distributions resulting from the difference between
the payments received from customers on the contracts and the payments paid to
SunAmerica. In addition, securitization allows the Company to fix its borrowing
cost for a given contract portfolio, broadens the Company's capital source
alternatives, and provides a higher advance rate than that available under the
Revolving Facility.
Capital Expenditures and Commitments. The Company 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
four other dealerships (one in Phoenix, Arizona, two in Albuquerque, New Mexico,
and one in Tampa, Florida) and a reconditioning facility (in Albuquerque, New
Mexico) currently under development. In addition, the Company opened thirteen
new Branch Offices during the fourth quarter of 1996, and has substantially
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 motor
vehicles, including four dealerships located in the Tampa Bay/St. Petersburg
market. On January 31, 1997, the Company entered into a letter of intent setting
forth preliminary terms of a potential acquisition of a business engaged in the
sale and financing of used motor vehicles in a market with no current Company
Dealerships. The Company has recently commenced its due diligence investigation
of the seller and its assets. The unaudited book value of the assets at December
31, 1996 was approximately $40 million. Consummation of the transaction is
contingent upon a number of conditions, including satisfactory completion of due
diligence, negotiation of final terms and execution of definitive agreements,
and the approval of regulatory authorities and the Board of Directors of the
Company. No assurance can be given that such conditions will be satisfied or
that the acquisition will be completed. 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 on the order of $1.5 to $1.7 million to construct
(excluding inventory). The Company intends to finance these expenditures through
equity offerings, operating cash flows and supplemental borrowings, including
amounts available under the Revolving Facility.
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.
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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.
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BUSINESS
GENERAL
Ugly Duckling Corporation (the "Company") operates one of the largest
chains of Buy Here-Pay Here used car dealerships in the United States and
underwrites, finances, and services retail installment contracts generated from
the sale of used cars by its Company Dealerships and by Third Party Dealers
located in selected markets throughout the country. As part of its financing
activities, the Company has initiated the Cygnet Dealer Program pursuant to
which it intends to provide qualified Third Party Dealers with operating credit
lines secured by the dealers' retail installment contract portfolios. The
Company targets its products and services to the sub-prime segment of the
automobile financing industry, which focuses on selling and financing the sale
of used cars to Sub-Prime Borrowers.
The rapidly growing used car sales and finance industry achieved record
sales in 1995 of 30.5 million units, representing approximately $290.0 billion
in sales. During this same period, more than $185.0 billion in retail
installment contracts were originated through the sale of used cars. Of these
totals, approximately 11.0 million units were sold to Sub-Prime Borrowers,
generating approximately $50.0 billion in retail installment contracts.
Consistent with the industry's growth, the Company has expanded
significantly in recent periods. From 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, or $0.60 per share, compared with a net loss of
$(4.0) million, or $(.67) per share in 1995.
The Company originated more than 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.
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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 lot.
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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BUSINESS STRATEGY
The Company intends to leverage its management team, collection facilities,
computer networks, and capital base to grow its Company Dealership and Third
Party Dealer operations, both in Arizona and in other geographic locales.
Expand Company Dealership Operations. Since commencing its used car sales
and financing operations in 1992, the Company has pursued an aggressive growth
strategy through both internal development and acquisition. As of January 31,
1997, the Company had developed or acquired twelve 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 one new Company Dealership in Arizona and has acquired
four dealerships and a reconditioning facility in Florida (as discussed below).
In addition, the Company has five other dealerships (one in Arizona, two in New
Mexico, one in Nevada, and one in Florida) and a used car reconditioning
facility (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.
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 portfolio of installment sales contracts. The purchase price for
the assets acquired was approximately $32.1 million in cash. In addition, the
Company leased certain facilities used in this business. The Company also
assumed selected liabilities of Sellers.
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.
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 January 31, 1997, the Company had opened thirty-nine Branch
Offices in twelve states. These Branch Offices service approximately 1,400 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 these dealers will
provide it with a preferred position to acquire retail installment contracts
from them. Such contract purchases would provide these dealers with an
additional source of financing and enable the Company to further expand its
contract portfolio. The Company anticipates that it will begin 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."
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COMPANY DEALERSHIP OPERATIONS
Company Dealership operations include the retail sale of used cars and the
underwriting, financing, and servicing of contracts originated from such sales.
The Company's total revenues from its Company Dealership operations were $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.
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.
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.
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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 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
33
<PAGE> 34
Company typically staffs each dealership with, among others, up to three sales
managers, an office manager, a lot supervisor, five to twelve salespersons, and
several mechanics.
The Company trains its managers to be contract underwriters. The Company
pays its managers a base salary and allows them to earn bonuses based upon a
variety of factors, including the overall performance of the contract portfolio
originated. Although sales persons are paid on commission, each sale must be
underwritten and approved by a manager. By giving its managers a strong
incentive to underwrite quality contracts, the Company believes that it can
maintain its current level of credit losses while continuing to achieve
significant growth in sales revenue.
THIRD PARTY DEALER OPERATIONS
Contract Purchasing. In 1994, the Company acquired Champion Financial
Services, Inc., an independent automobile finance company, primarily for its
management expertise and contract servicing software and systems. Champion had a
portfolio of approximately $1.9 million in sub-prime contracts averaging
approximately $2,000 in principal amount. For the balance of 1994, the Company
purchased an additional $1.7 million in contracts.
In April 1995, the Company initiated an aggressive plan for purchasing
contracts from Third Party Dealers and by January 31, 1997 had opened
thirty-nine Branch Offices in twelve different states throughout the country and
entered into contract purchasing agreements with approximately 1,400 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 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
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<PAGE> 35
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 will provide qualified
Third Party Dealers (generally, dealers that meet certain minimum net worth and
operating history criteria) with operating credit lines secured by the dealers'
retail installment contract portfolios. These lines will be for a specified
amount but will in all cases be subject to various collateral coverage ratios,
maximum advance rates, and performance measurements depending on financial
condition of the dealer and the quality of the contracts originated. As a
condition to providing such financing, the Company will require each dealer to
upload its portfolio information to the Company's computer network on a daily
basis, utilize the Company's management information systems, and provide the
Company with periodic financial statements in a standardized format. These
controls will allow Company account officers, who will oversee the operations of
each dealer participating in the program, to maintain supervision over the
dealers, thereby enabling the account officers to ensure dealer compliance with
financial covenants and determine the appropriateness of continued credit
extensions.
The Company believes that the Cygnet Dealer Program will fulfill the need
of Third Party Dealers for debt financing to expand their businesses while
enabling the Company to earn finance income at favorable rates and diversify its
earning asset base. The Company also believes that the relationships established
with these dealers will provide it with a preferred position to acquire retail
installment contracts from them. Such contract purchases would provide these
dealers with an additional source of financing and enable the Company to further
expand its contract portfolio. The Company has hired a person with extensive
sub-prime finance industry experience to oversee the Cygnet Dealer Program and
began implementing the program with one or more selected Third Party Dealers
during the fourth quarter of 1996. The Company expects to begin full-scale
marketing of the program during the first quarter of 1997, although the program
is not expected to begin generating any substantial revenue before the second
quarter of 1997.
Insurance Services. The retail installment contracts that the Company
purchases from Third Party Dealers generally require the customers to obtain
casualty insurance within 30 days of their vehicle purchase. While all customers
are free to obtain such coverage from an insurer of their choice, if a customer
fails to obtain the required coverage, the Company may purchase a policy on the
customer's behalf and charge back to the customer the cost of the premiums and
fees associated with such policy. The Company's ability to force place such
insurance has significantly increased the number of customers who have obtained
their own casualty insurance.
To facilitate its ability to force place mandated insurance coverage, the
Company has contracted with American Bankers Insurance Group ("ABIG"), a
licensed property, casualty, and life insurance company. Through its subsidiary,
Drake Insurance Agency, Inc., which acts as agent for ABIG, the Company places
casualty insurance policies issued by ABIG with Third Party Dealer customers.
These policies provide for a maximum payment on a claim equal to the current
contract principal balance. ABIG, in turn, reinsures the policies it issues with
Drake Property & Casualty Insurance Company, one of the Company's Turks and
Caicos Islands-chartered and licensed reinsurance subsidiaries. Under the terms
of its relationship with ABIG, the Company earns commissions on each policy
issued by ABIG (which mitigate any credit loss the Company might suffer in the
event of an otherwise uninsured casualty), while ABIG administers all accounts
and claims and is responsible for regulatory compliance. As of 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.
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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.................................................. $26,242 $42,515
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 chance of credit loss. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Allowance for Credit Losses."
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<PAGE> 37
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. 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 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 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."
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<PAGE> 39
LEGAL PROCEEDINGS
The Company sells its cars on an "as is" basis, and requires all customers
to sign an agreement on the date of sale pursuant to which the Company disclaims
any obligation for vehicle-related problems that subsequently occur. Although
the Company believes that such disclaimers are enforceable under Arizona and
other applicable law, there can be no assurance that they will be upheld in
every instance. Despite obtaining these disclaimers, the Company, in the
ordinary course of business, receives complaints from customers relating to such
vehicle-related problems as well as alleged violations of federal and state
consumer lending or other similar laws and regulations. While most of these
complaints are made directly to the Company or to various consumer protection
organizations and are subsequently resolved, the Company is named occasionally
as a defendant in civil suits filed by customers in state, local, or small
claims courts. There can be no assurance that the Company will not be a target
of similar claims in the future. In the opinion of the Company, the ultimate
disposition of these matters on an individual basis will not have a material
adverse effect on the Company. However, there can be no assurance in this
regard.
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.
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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........................... 33 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. In 1990, Mr. Garcia founded Duck Ventures, Inc.,
currently a subsidiary of the Company, to buy the assets of the Ugly Duckling
Rent-a-Car System. Since 1991, Mr. Garcia has served as President of Verde
Investments, a real estate investment corporation that is also an affiliate of
the Company. Prior to 1990, when he founded the Company, Mr. Garcia was involved
in various real estate, securities, and banking ventures. See "Certain
Relationships and Related Transactions."
Gregory B. Sullivan has served as President and Chief Operating Officer of
the Company since February 1996 after serving as a consultant to the Company
since 1995. Mr. Sullivan formerly served as President and principal stockholder
of National Sports Games, Inc., an amusement game manufacturing company that he
co-founded in 1989 and sold in 1994. Prior to 1989, Mr. Sullivan was involved in
the securities industry and practiced law with a large Arizona firm. He is a
member of the State Bar of Arizona.
Steven P. Johnson has served as the Senior Vice President, Secretary, and
General Counsel of the Company since its founding in 1992. Since 1991, Mr.
Johnson has also served as the General Counsel of Verde Investments, an
affiliate of the Company. Prior to 1991, Mr. Johnson practiced law in Tucson,
Arizona. Mr. Johnson is licensed to practice law in Arizona and Colorado and is
married to the sister of Mr. Garcia.
Steven T. Darak has served as the Senior Vice President and Chief Financial
Officer of the Company since February 1995, having joined the Company in 1994 as
Vice President and Chief Financial Officer. From 1989 to 1994, Mr. Darak owned
and operated Champion Financial Services, Inc., a used car finance company that
the Company acquired in early 1994. Prior to 1989, Mr. Darak served in various
positions in the banking industry and in public accounting.
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
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<PAGE> 41
company. Prior to 1992, Mr. Vonsh was President of Gemini Leasing Corp., an
equipment leasing company, and held various positions at other finance
companies.
Donald L. Addink has served as the Vice President -- Senior Analyst of the
Company since 1995 and also serves as the Vice President of Verde Investments.
From 1988 to 1995, Mr. Addink served as Executive Vice President of Pima Capital
Co., a life insurance holding company. Prior to 1988, Mr. Addink served in
various capacities with a variety of insurance companies. Mr. Addink is a Fellow
of the Society of Actuaries and a Member of the American Academy of Actuaries.
Sheila A. Brandt has served as Vice President and Chief Information Officer
of the Company since May 1996. Prior thereto, Ms. Brandt served as a Research
Scientist for the Center for the Management of Information at the University of
Arizona. From 1992 to 1995, Ms. Brandt earned an M.S. and Ph.D. in Management
Information Systems at the University of Arizona while practicing as an
independent systems consultant. Prior to 1992, Ms. Brandt held various positions
with Andersen Consulting and Eastman Kodak Company.
Peter R. Fratt has served as Vice President -- Real Estate of the Company
since October 1993. From 1989 to 1993, Mr. Fratt was an associate of CB
Commercial Real Estate Services. Prior to that time, Mr. Fratt was involved in
commercial real estate brokerage and investment.
Eric J. Splaver has served as Corporate Controller of the Company since May
1994. From 1985 to 1994, Mr. Splaver worked as a certified public accountant
with KPMG Peat Marwick LLP.
Robert J. Abrahams has served as a director of the Company since June 1996.
Mr. Abrahams has served since 1988 as a consultant to the financing industry,
including service as a 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 also serves as a member of
the Audit Committee of the Board of Directors.
Christopher D. Jennings has served as a director of the Company since June
1996. Mr. Jennings has served as a managing director of Cruttenden Roth
Incorporated, an investment banking firm, since 1995. From 1992 to 1994, Mr.
Jennings served as a Managing Director of investment banking at Sutro & Co., an
investment banking firm. From 1989 to 1992, Mr. Jennings served as a Senior
Managing Director at Maiden Lane Associates, Ltd., a private equity fund. Prior
to 1989, Mr. Jennings served in various positions with, among others, Dean
Witter Reynolds, Inc. and Warburg Paribas Becker, Inc., both of which are
investment banking firms. Mr. Jennings also serves as a member of the
Compensation Committee of the Board of Directors.
John N. MacDonough has served as a director of the Company since June 1996.
Mr. MacDonough has served as Chairman and Chief Executive Officer of Miller
Brewing Company, a brewer and marketer of beer, since 1993, having previously
served from 1992 to 1993 as President and Chief Operating Officer. Prior to
1992, Mr. MacDonough was employed in various positions at Anheuser Busch, Inc.,
also a brewer and marketer of beer. Mr. MacDonough is married to the sister of
Mr. Sullivan.
Arturo R. Moreno has served as a director of the Company since June 1996.
Mr. Moreno has served as the President and Chief Executive Officer of Outdoor
Systems, Inc., one of the largest outdoor media companies in the United States,
since 1984. Prior to 1984, Mr. Moreno held various executive positions in the
outdoor advertising industry. Mr. Moreno also serves as a member of the Audit
Committee of the Board of Directors.
Frank P. Willey has served as a director of the Company since June 1996.
Mr. Willey has served as the President of Fidelity National Financial, Inc., one
of the nation's largest title insurance underwriters, since January 1995. From
1984 to 1995, Mr. Willey served as the Executive Vice President and General
Counsel of Fidelity National Title. Mr. Willey is also a director of CKE
Restaurants, Inc., an operator of various quick-service restaurant chains, and
Southern Pacific Funding Corporation, a specialty finance company that
originates, purchases and sells high-yielding, non-conforming mortgage loans.
Mr. Willey also serves as a member of the Compensation Committee of the Board of
Directors.
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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.
42
<PAGE> 43
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 (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 -- -- 923
Chairman and Chief Executive Officer 1995 100,000 -- -- 201
Steven T. Darak............................. 1996 100,000 100,000 40,000 --
Senior Vice President, Chief Financial 1995 100,000 100,000 -- --
Officer, and Treasurer
Walter T. Vonsh............................. 1996 126,923 30,000 50,000 854
Vice President -- Credit 1995 102,692 -- -- 277
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.
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>
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%($)
- ------------------------------ ------------- ------------ ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Ernest C. Garcia, II.......... -- -- -- -- -- --
Steven T. Darak............... 10,000 1.9% 6.75 5/31/02 18,649 41,209
30,000 5.6% 17.69 12/01/02 146,623 323,998
Walter T. Vonsh............... 25,000 4.6% 6.75 5/31/02 46,623 103,024
25,000 4.6% 17.69 12/01/02 122,186 269,998
Donald L. Addink.............. 25,000 4.6% 6.75 5/31/02 46,623 103,024
17,000 3.2% 17.69 12/01/02 83,086 183,599
Steven P. Johnson............. 10,000 1.9% 6.75 5/31/02 18,649 41,209
15,000 2.9% 17.69 12/01/02 73,331 161,999
</TABLE>
- ---------------
(1) Generally, options are subject to vesting over a five-year period, with
20.0% of the options becoming exercisable on each successive anniversary of
the date of grant.
(2) Gains are reported net of the option exercise price, but before taxes
associated with exercise. These amounts represent certain assumed rates of
appreciation. Actual gains, if any, on stock option exercises are dependent
on the future performance of the Common Stock and overall stock market
conditions, as well as the option holder's continued employment with the
Company throughout the vesting period. The amounts reflected in this table
will not necessarily be achieved.
43
<PAGE> 44
FISCAL YEAR END OPTION VALUES
The following table sets forth information concerning the value of
unexercised options held by the Named Executive Officers as of December 31,
1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR END(#)(1) FISCAL YEAR END($)(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 incentive stock options, non-qualified stock
options, stock appreciation rights, performance shares, restricted stock,
dividend equivalents, and other Common Stock-based awards to employees,
consultants, and advisors of the Company. The Company believes that the
Incentive Plan promotes the success and enhances the value of the Company by
linking the personal interests of participants to those of the Company's
stockholders and providing participants with an incentive for outstanding
performance. The total number of shares of Common Stock available for awards
under the Incentive Plan, as amended, is 1,300,000, subject to a proportionate
increase or decrease in the event of a stock split, reverse stock split, stock
dividend, or other adjustment to the Company's total number of issued and
outstanding shares of Common Stock.
The Incentive Plan is administered by the Compensation Committee of the
Board of Directors, which has the exclusive authority to administer the
Incentive Plan, including the power to determine eligibility, the type and
number of awards to be granted, and the terms and conditions of any award
granted, including the price and timing of awards. As of December 31, 1996, the
Company had granted options to purchase 912,000 shares of Common Stock to
various of its employees. Generally, such options are subject to vesting over a
five-year period, with 20.0% of the options becoming exercisable by the holder
thereof on each successive anniversary date of the grant. The exercise price of
all options granted under the Incentive Plan is the fair market value of the
Common Stock on the date of grant.
401(K) PLAN
Under the Company's 401(k) plan, adopted in October 1995, eligible
employees may direct that a portion of their compensation, up to a legally
established maximum, be withheld by the Company and contributed to their
account. All 401(k) plan contributions are placed in a trust fund to be invested
by the 401(k) plan's trustee, except that the 401(k) plan may permit
participants to direct the investment of their account balances among mutual or
investment funds available under the plan. The 401(k) plan provides a matching
contribution of 10.0% of a participant's contributions. Amounts contributed to
participant accounts under the 401(k) plan and any earnings or interest accrued
on the participant accounts are generally not subject to federal income tax
until distributed to the participant and may not be withdrawn until death,
retirement, or termination of employment.
44
<PAGE> 45
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 Long-Term
Incentive Plan. In addition, the Compensation Committee consults with management
of the Company regarding compensation policies and practices of the Company. The
Audit Committee, which consists of Messrs. Abrahams and Moreno, reviews the
professional services provided by the Company's independent auditors, the annual
financial statements of the Company, and the Company's system of internal
controls.
DIRECTOR FEES
The Company's independent directors are compensated $1,000 for attendance
at meetings of the Board of Directors and at meetings of committees of the Board
of Directors of which they are members, and are reimbursed for reasonable travel
expenses incurred in connection with attendance at each Board and committee
meeting. In addition, pursuant to the Company's Director Incentive Plan, upon
appointment or election to the Board of Directors, each independent director of
the Company receives Common Stock of the Company valued at $30,000, which is
subject to vesting in equal annual increments over a three-year period.
Directors who are also officers of the Company are not compensated for their
services as directors.
45
<PAGE> 46
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of February 20, 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 25.2%
Robert J. Abrahams............................................. 6,744 *
Christopher D. Jennings........................................ 6,444 *
John N. MacDonough............................................. 4,444 *
Arturo R. Moreno............................................... 4,444 *
Frank P. Willey................................................ 4,444 *
Steven T. Darak................................................ 130,000 *
Walter T. Vonsh................................................ 72,000 *
Donald L. Addink(5)............................................ 16,600 *
Steven P. Johnson.............................................. 300,000 1.6
All directors and executive officers as a group (14
persons)(4).................................................. 5,292,780 28.8%
</TABLE>
- ---------------
* Represents less than one percent of the outstanding Common Stock.
(1) A person is deemed to be the beneficial owner of securities that can be
acquired within 60 days from the date set forth above through the exercise
of any option, warrant, or right. Shares of Common Stock subject to options,
warrants, or rights which are currently exercisable or exercisable within 60
days are deemed outstanding for computing the percentage of the person
holding such options, warrants, or rights, but are not deemed outstanding
for computing the percentage of any other person. The amounts and
percentages are based upon 18,407,460 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 all directors and executive officers as a group includes
44,080 shares subject to unexercised options that are exercisable on
December 31, 1996 or within 60 days thereafter.
(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.
46
<PAGE> 47
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 February 20, 1996, 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.......... 453,644(1) 337,644 116,000(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. ........... 85,700 85,700 0
BP Institutional Partners, L.P. ........... 12,000 12,000 0
BP Overseas Partners, Ltd. ................ 20,500 20,500 0
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>
- ---------------
(1) The total for SunAmerica Life Insurance Company includes 116,000 shares of
Common Stock subject to 116,000 immediately exercisable warrants, which
have an exercise price of $6.75 per share. Affiliates of SunAmerica
Life Insurance Company provide financing to the Company. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Liquidity and Capital Resources."
47
<PAGE> 48
<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.................................... 13,000 13,000 0
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............... 12,500 12,500 0
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. ..... 8,200 8,200 0
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>
48
<PAGE> 49
<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 Investment Fund L.P. ................ 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....................... 8,100 8,100 0
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. ..................... 60,000 60,000 0
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.......... 40,000 40,000 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
------------------- -------------------- -------------------
5,545,644 5,413,144 132,500
</TABLE>
49
<PAGE> 50
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.
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, subject to financing, six car lots, a vehicle
reconditioning center, and two office buildings which were owned by Verde and
leased to the Company at the lower of $7.45 million or the appraised value (as
determined by an independent third party), and to lower the rents on such
properties to an aggregate of $745,000 per year subject to cost of living
adjustments if the sale did not take place. 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. 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. The Company believes the reduced rental rates approximate the
financing costs to be incurred in connection with the purchase of such
properties. In addition, Verde assigned to the Company its leasehold interest in
two properties it sub-leased to the Company. These transactions (the reduction
in rental rates and/or the purchase of property) would have resulted in savings
to the Company of approximately $730,000 for 1995 and $626,000 for 1996. Also
pursuant to the Modification Agreement, Verde 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. On December 31, 1996, the Company
purchased the properties listed above from Verde pursuant to the Modification
Agreement. Mr. Ernest C. Garcia, II, the Company's Chairman, Chief Executive
Officer, and principal stockholder, is the President and sole stockholder of
Verde. 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. 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 Investments for
a total price of $750,000, which the Company believes approximated fair market
value. Simultaneous with such purchase, the Company sold the land purchased from
Verde Investments together with the dealership building and other improvements
(which had been constructed by the Company) to a third party for $512,500 in
cash and a promissory note in the principal amount of $1.2 million. The Company
recognized a loss on the sale of $120,000, for which 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."
50
<PAGE> 51
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 February 20, 1997, 18,407,460 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 116,000 shares of Common Stock at an exercise price
per share of $6.75 and to Cruttenden Roth to purchase 170,000 shares of Common
Stock at an exercise price per share of $9.45. The agreements with respect to
the issuance of such warrants provide for certain registration rights. The
Company is required to use its best efforts to effect such registrations,
subject to certain conditions and limitations, and is required to pay all
expenses of SunAmerica and Cruttenden Roth in connection with any registration
of such securities, except for any underwriting discounts and commissions.
In conjunction with its initial public offering, the Company registered the
warrants issued to Cruttenden Roth and the shares underlying such warrants.
Under the terms of such warrants, however, Cruttenden Roth may not exercise such
warrants and sell the underlying Common Stock until June 21, 1997, and only
pursuant to a currently effective registration statement.
51
<PAGE> 52
The Company has authorized for issuance 1,300,000 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
52
<PAGE> 53
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.
53
<PAGE> 54
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 Rule 10b-5 and Rules 10b-6 and 10b-7 (prior to March 4, 1997, and
Regulation M thereafter), 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,
54
<PAGE> 55
concessions or commissions and other items constituting compensation of the
underwriters and broker-dealers, 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 Rule
10b-6A under the Exchange Act (prior to March 4, 1997, and Regulation M
thereafter). 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 and schedule 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.
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. Statements
contained in this Prospectus as to the contents of any document are not
necessarily complete and in each instance are qualified in their entirety by
reference to the copy of the appropriate document filed with the Commission. The
Registration Statement, including the exhibits thereto, may be examined without
charge at the Commission's public reference facility at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, copies of
all or any part of the Registration Statement, including such exhibits thereto,
may be obtained from the Commission at its principal office in Washington, D.C.,
upon payment of the fees prescribed by the Commission.
The Company is subject to the reporting and informational requirements of
the Exchange Act and, in accordance therewith, files reports, proxy statements,
and other information with the Commission. Such reports, proxy statements, and
other information filed by the Company can be inspected and copied at the
principal office of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington D.C. 20549, and
55
<PAGE> 56
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.
56
<PAGE> 57
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
</TABLE>
F-1
<PAGE> 58
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> 59
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> 60
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> 61
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> 62
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)
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....... 13,979 6,341 3,377
--------- -------- --------
Cash Flows from Investing Activities:
Increase in Finance Receivables......................... (113,792) (53,023) (27,196)
Collections of Finance Receivables...................... 49,201 19,795 12,202
Proceeds from Sale of Finance Receivables............... 38,989 -- --
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........... (37,001) (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> 63
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> 64
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 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.
Gain on Sale of Loans
In 1996, the Company initiated a securitization program under which it
sells (securitizes) 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 to third party investors and retains subordinated 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 senior certificates sold to a third party or to pay
associated costs.
Gains or losses are determined based upon the difference between the sales
proceeds for the portion of finance receivables sold and the Company's recorded
investment in the finance receivables sold. The Company allocates the recorded
investment in the finance receivables between the portion of the finance
receivables sold and the portion retained based on the relative fair values on
the date of sale.
Servicing Income
Servicing income is recognized when earned. Servicing costs are charged to
expense as incurred. In the event delinquencies and/or losses on the portfolio
serviced exceed specified levels, the trustee may require the transfer of
servicing of the portfolio to another servicer.
Finance Receivables, Allowance for Credit Losses and Nonrefundable Acquisition
Discount
The Company originates installment sales contracts from its company
dealerships and purchases contracts from third party dealers. Finance
receivables consist of contractually scheduled payments from installment sales
contracts net of unearned finance charges, accrued interest receivable, direct
loan origination costs, and an allowance for credit losses, including
nonrefundable acquisition discount.
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
F-8
<PAGE> 65
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-9
<PAGE> 66
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
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.
F-10
<PAGE> 67
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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.
F-11
<PAGE> 68
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
(5) INVESTMENTS HELD IN TRUST
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 receivables
were sold. The trust in turn invests the cash in high quality liquid investment
securities. In addition, the Company (through the trustee) deposits additional
cash flows from the residual to the spread account as necessary to attain and
maintain the spread account at a specified percentage of the underlying finance
receivables principal balance.
In the event that the cash flows generated by the finance receivables sold
to the trust are insufficient to pay obligations of the trust, including
principal or interest due to certificate holders or expenses of the trust, the
trustee will draw funds from the spread account as necessary to pay the
obligations of the trust. The spread account must be maintained at a specified
percentage of the principal balances of the finance receivables held by the
trust, which can be increased in the event delinquencies or losses exceed
specified levels. If the spread account exceeds the specified percentage, the
trustee will release the excess cash to the Company from the pledged spread
account. Except for releases in this manner, the cash in the spread account is
restricted from use by the Company. Investments Held in Trust, which are funds
deposited in an interest-bearing, money market account, totaled $2,843,000 at
December 31, 1996.
In connection with certain other agreements, the Company has deposited a
total of $636,000 in an interest bearing trust account.
F-12
<PAGE> 69
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 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-13
<PAGE> 70
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, 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-14
<PAGE> 71
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-15
<PAGE> 72
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-16
<PAGE> 73
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.
(13) LEASE COMMITMENTS
The Company leases an operating facility, offices, a vehicle and office
equipment from unrelated entities under operating leases which expire through
April 2000. 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.
F-17
<PAGE> 74
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Sheets 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.
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.
F-18
<PAGE> 75
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, set 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-19
<PAGE> 76
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-20
<PAGE> 77
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, and
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-21
<PAGE> 78
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-22
<PAGE> 79
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-23
<PAGE> 80
======================================================
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............................... 7
The Company................................ 13
Use of Proceeds............................ 13
Price Range of Common Stock................ 13
Dividend Policy............................ 14
Capitalization............................. 14
Selected Consolidated Financial Data....... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 17
Business................................... 29
Management................................. 40
Principal Stockholders..................... 46
Selling Securityholders.................... 47
Certain Relationships and Related
Transactions............................. 50
Description of Capital Stock............... 51
Plan of Distribution....................... 54
Legal Matters.............................. 55
Experts.................................... 55
Available Information...................... 55
Index to Consolidated Financial
Statements............................... F-1
Independent Auditors' Report............... F-2
Consolidated Financial Statements.......... F-3
</TABLE>
======================================================
======================================================
5,413,144 Shares
LOGO
Common Stock
-----------------------
PROSPECTUS
-----------------------
February , 1997
======================================================
<PAGE> 81
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> 82
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 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.
II-2
<PAGE> 83
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)
10.2 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)
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)
</TABLE>
II-3
<PAGE> 84
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- ----------------------------------------------------------------------------------
<S> <C>
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(1)
10.9(a) Amendment to Ugly Duckling Corporation Long-Term Incentive Plan(1)
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(3)
11 Earnings (Loss) per Share Computation
22 List of Subsidiaries
24.1 Independent Auditors' Consent
24.2 Consent of Snell & Wilmer L.L.P. (included in Exhibit 5)
</TABLE>
- ---------------
(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 Current Report on Form 8-K, filed
January 30, 1997.
II-4
<PAGE> 85
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 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-5
<PAGE> 86
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Phoenix, State of Arizona, on February 21, 1997.
Ugly Duckling Corporation
By: /s/ ERNEST C. GARCIA, II
------------------------------------
Ernest C. Garcia, II
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Ernest C. Garcia, II, Gregory B. Sullivan, Steven
P. Johnson and Steven T. Darak, and each of them, in his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Form S-1 Registration
Statement and to sign any registration statement for the same offering that is
to be effective upon filing pursuant to Rule 462(b) of the Securities Act, and
to file the same, with all exhibits thereto, and all documents in connection
therewith, with the Commission, granting unto said attorneys-in-fact and agents,
and each of them, in full power and authority to do and perform each and every
act and thing requisite and necessary to be done in and about the premises, as
fully and to all intents and purposes as he might or could do in person hereby
ratifying and confirming that all said attorneys-in-fact and agents, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------- -------------------
<C> <S> <C>
/s/ ERNEST C. GARCIA, II Chief Executive Officer and February 21, 1997
- --------------------------------------------- Director (Principal
Ernest C. Garcia, II executive officer)
/s/ STEVEN T. DARAK Senior Vice President and February 21, 1997
- --------------------------------------------- Chief Financial Officer
Steven T. Darak (Principal financial and
accounting officer)
/s/ ROBERT J. ABRAHAMS Director February 21, 1997
- ---------------------------------------------
Robert J. Abrahams
/s/ CHRISTOPHER D. JENNINGS Director February 21, 1997
- ---------------------------------------------
Christopher D. Jennings
/s/ JOHN N. MACDONOUGH Director February 21, 1997
- ---------------------------------------------
John N. MacDonough
/s/ ARTURO R. MORENO Director February 21, 1997
- ---------------------------------------------
Arturo R. Moreno
/s/ FRANK P. WILLEY Director February 21, 1997
- ---------------------------------------------
Frank P. Willey
</TABLE>
II-6
<PAGE> 1
Exhibit 5
February 21, 1997
Ugly Duckling Corporation
2525 East Camelback Road, Suite 1150
Phoenix, Arizona 85016
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel to Ugly Duckling Corporation, a Delaware
corporation (the "Company"), in connection with the preparation and filing with
the United States Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Securities Act"), of the Company's Registration Statement
on Form S-1 (the "Registration Statement"), relating to the registration of
5,413,144 shares of the Company's Common Stock, par value $.001 per share (the
"Common Stock"). In arriving at the opinions expressed below, we have reviewed
the Registration Statement and the exhibits thereto. In addition, we have
reviewed the originals or copies certified or otherwise identified to our
satisfaction of all such corporate records of the Company and such other
instruments and other certificates of public officials, officers and
representatives of the Company and such other persons, and we have made such
investigation of law, as we have deemed appropriate as a basis for the opinions
expressed below. In rendering the opinions expressed below, we have assumed that
the signatures on all documents that we have reviewed are genuine and that the
Common Stock conforms in all material respects to the description thereof set
forth in the Registration Statement.
Based upon the foregoing, we advise you that in our opinion, the Common
Stock is legally issued, fully paid and non-assessable.
The foregoing opinion is limited to the federal law of the United
States of America and the General Corporation Law of the State of Delaware. We
express no opinion as to the application of the various state securities laws to
the offer, sale, issuance or delivery of the Common Stock.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Registration Statement and in the Prospectus included therein.
Very truly yours,
SNELL & WILMER L.L.P.
<PAGE> 1
Exhibit 10.26
UGLY DUCKLING CORPORATION
5,000,000 Shares(1)
Common Stock
Purchase Agreement
February 10, 1997
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209
Dear Sirs:
Ugly Duckling Corporation, a Delaware corporation (the "Company"), hereby
confirms its agreement with you in connection with a private placement of equity
securities as set forth below.
1. Securities. Subject to the terms and conditions herein contained, the
Company proposes to issue and sell to you an aggregate of 5,000,000 shares (the
"Firm Securities") of the Company's Common Stock, $.001 par value per share (the
"Common Stock"). The Company also proposes to issue and sell to you not more
than 750,000 additional shares of Common Stock if requested by you as provided
in Section 3 of this Agreement. Any and all shares of Common Stock to be
purchased by you pursuant to such option are referred to herein as the "Option
Securities," and the Firm Securities and any Option Securities are collectively
referred to herein as the "Securities."
2. Representations and Warranties.
(a) The Company represents and warrants to, and agrees with, you that:
(i) The Confidential Private Placement Memorandum, subject to
completion dated February 4, 1997 (the "Preliminary Memorandum") and the
Confidential Private Placement Memorandum dated as of even date (the "Final
Memorandum"; the Preliminary Memorandum and the Final Memorandum are
sometimes collectively referred to herein as the "Memorandums"), which
relate to the offer and sale of the Securities, including without limitation
all exhibits attached thereto and all documents incorporated therein by
reference (collectively, the "Additional Materials"), do not include any
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading, except to the
extent that statements in the Preliminary Memorandum, the Final
- --------
(1) Plus an option to purchase up to 750,000 additional shares of Common Stock.
<PAGE> 2
Memorandum and any Additional Materials have been supplemented or amended by
the Final Memorandum or any Additional Materials bearing a later date.
(ii) The Company and each of its subsidiaries have been duly organized
and are validly existing as corporations in good standing under the laws of
their respective jurisdictions of incorporation and are duly qualified to
transact business as foreign corporations and are in good standing under the
laws of all other jurisdictions where the ownership or leasing of their
respective properties or the conduct of their respective businesses requires
such qualification, except where the failure to be so qualified does not
result in a material adverse effect in the condition (financial or
otherwise), business, net worth or results of operations of the Company and
its subsidiaries, taken as a whole (a "Material Adverse Effect").
(iii) The Company and the subsidiaries have full power (corporate and
other) to own or lease their respective properties and conduct their
respective businesses as described in the Memorandums; and the Company has
full power (corporate and other) to enter into this Agreement and to carry
out all the terms and provisions hereof to be carried out by it.
(iv) The Company has an authorized, issued and outstanding
capitalization as set forth in the Memorandums. All of the issued shares of
capital stock of the Company have been duly authorized and validly issued
and are fully paid and nonassessable. The Firm Securities and the Option
Securities have been duly authorized and at the Firm Closing Date (as
defined below) or the related Option Closing Date (as defined below), as the
case may be, after payment therefor in accordance herewith, will be validly
issued, fully paid and nonassessable.
(v) The consolidated financial statements and schedules of the Company
and its consolidated subsidiaries included in the Memorandums fairly present
the financial position of the Company and its consolidated subsidiaries and
the results of operations and cash flows as of the dates and periods therein
specified. Such financial statements and schedules have been prepared in
accordance with generally accepted accounting principles ("GAAP")
consistently applied throughout the periods involved (except as otherwise
noted therein). The selected financial data set forth under the captions
"Summary Consolidated Financial Information," "Capitalization" and "Selected
Consolidated Financial Data" in the Memorandums fairly present, in
accordance with GAAP, as applicable, on the basis stated in the Memorandums,
the information included therein.
(vi) KPMG Peat Marwick LLP, which has audited certain financial
statements of the Company and its consolidated subsidiaries and delivered
their reports with respect to the audited consolidated financial statements
included in the Memorandums, are independent public accountants as required
by the Securities Act of 1933, as amended (the "Act") and the applicable
rules and regulations thereunder.
(vii) The execution and delivery of this Agreement has been duly
authorized by the Company and this Agreement has been duly executed and
delivered by the Company, and is the valid and binding agreement of the
Company, enforceable against the Company
2
<PAGE> 3
in accordance with its terms, except as such enforceability may be limited
by the effect of bankruptcy, insolvency, reorganization, moratorium and
other similar laws relating to rights and remedies of creditors or by
general equitable principles.
(viii) The issuance, offering and sale of the Securities to you by the
Company pursuant to this Agreement, the execution and delivery of this
Agreement by the Company, the compliance by the Company with the other
provisions of this Agreement and the consummation of the other transactions
herein contemplated do not (A) require the consent, approval, authorization,
registration or qualification of or with any court, government or
governmental authority, domestic or foreign, except such as have been
obtained and such as may be required under state securities or blue sky
laws, as to which the Company makes no representation, or (B) conflict with
or result in a breach or violation of any of the terms and provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, lease or
other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries
or any of their respective properties are bound, or the charter documents or
by-laws of the Company or any of its subsidiaries, or any statute or any
judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator applicable to the Company or any of
its subsidiaries, in each case, which would have a Material Adverse Effect.
(ix) Subsequent to December 31, 1996, neither the Company nor any of
its subsidiaries has sustained any loss or interference with their
respective businesses or properties having or resulting in a Material
Adverse Effect from fire, flood, hurricane, accident or other calamity,
whether or not covered by insurance, or from any labor dispute or any legal
or governmental proceeding and there has not been any event, circumstance,
or development that results in, or that the Company believes would result
in, a Material Adverse Effect, except in each case as described in or
contemplated by the Memorandum.
(x) The Company has not, directly or indirectly, in violation of any
law, rule or regulation (i) taken any action designed to cause or to result
in, or that has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of any security
of the Company to facilitate the sale or resale of the Securities or (ii)
since the respective dates of the Memorandums (A) sold, bid for, purchased,
or paid anyone any compensation (except under this Agreement) for soliciting
purchases of, the Securities or (B) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other securities of the
Company.
(xi) The Company has not distributed and, prior to the later of (A)
the Firm Closing Date or any Option Closing Date and (B) the completion of
the distribution of the Securities, will not distribute any written offering
material in connection with the offering and sale of the Securities other
than the Memorandums or any amendments or supplements thereto, or other
materials, if any, permitted by the Act.
(xii) The Company has not offered to sell the Securities by any form
of general solicitation or general advertising, including, but not limited
to, any advertisement, article, notice, or other communication published in
any newspaper, magazine, or similar media or
3
<PAGE> 4
broadcast over television or radio, or any seminar or meeting whose
attendees have been invited by any general solicitation or general
advertising.
(xiii) The press release relating to the offering of the Securities
issued by the Company complied with the requirements of Rule 135C of the Act
and did not constitute an offer within the meaning of Section 5 of the Act.
(b) You represent and warrant to, and agree with, the Company that:
(i) You either (i) have a reasonable basis for determining that
all of the purchasers of Securities in the offering will be accredited
investors within the meaning of subparagraph (a) of Rule 501 under the Act,
or (ii) will sell the Securities to foreign persons in offshore transactions
under Regulation S of the Act.
(ii) In your capacity as Initial Purchaser (as defined in the
Memorandums) of the Securities, you have complied with all laws, rules and
regulations applicable to you in connection with the private placement of
the Securities, including without limitation Rule 10b-6 under the Act.
(iii) You have not, directly or indirectly, in violation of any
law, rule or regulation (i) taken any action designed to cause or result in,
or that has constituted or which might reasonably be expected to constitute,
the stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities or (ii) since the
respective dates of the Memorandums (A) sold, bid for, purchased, or paid
anyone any compensation for soliciting purchases of, the Securities or (B)
paid or agreed to pay to any person any compensation for soliciting another
to purchase any other securities of the Company.
(iv) You have not offered to sell the Securities by any form of
general solicitation or general advertising, including, but not limited to,
any advertisement, article, notice, or other communication published in any
newspaper, magazine, or similar media or broadcast over television or radio,
or any seminar or meeting whose attendees have been invited by any general
solicitation or general advertising.
3. Purchase, Sale and Delivery of the Securities.
(a) On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to you, and you agree to purchase from the
Company, at a purchase price of $17.69375 per share, the Firm Securities on the
Firm Closing Date. One or more certificates in definitive form for the Firm
Securities that you have agreed to purchase hereunder, in such denomination or
denominations and registered in such name or names as you request upon notice to
the Company at least 48 hours prior to the Firm Closing Date, shall be delivered
by or on behalf of the Company to you, against payment by you of the aggregate
purchase price therefor by wire transfer in same day funds (the "Wired Funds")
to the account of the Company. Such delivery of and payment for the Firm
Securities shall be made at the offices of Snell & Wilmer L.L.P.,
4
<PAGE> 5
One Arizona Center, Phoenix, Arizona 85004-0001 at 8:00 A.M., Phoenix, Arizona
time, on February 13, 1997, or at such other place, time or date as we may agree
upon, such time and date of delivery against payment being herein referred to as
the "Firm Closing Date." The Company will make such certificate or certificates
for the Firm Securities available for checking and packaging by you at the
offices of the Company's transfer agent or registrar at least 24 hours prior to
the Firm Closing Date or, if available, will coordinate the transfer of the Firm
Securities to you through the facilities of the Depository Trust Company.
(b) For the sole purpose of covering any over-allotments in connection
with the distribution and sale of the Firm Securities as contemplated by the
Memorandum, the Company hereby grants to you an option to purchase the Option
Securities. The purchase price to be paid for any Option Securities shall be the
same price per share as the price per share for the Firm Securities set forth
above in paragraph (a) of this Section 3. The option granted hereby may be
exercised as to all or any part of the Option Securities from time to time
within thirty days after the date of the Final Memorandum (or, if such 30th day
shall be a Saturday or Sunday or a holiday, on the next business day thereafter
when the Nasdaq National Market is open). You shall not be under any obligation
to purchase any of the Option Securities prior to the exercise of such option.
You may from time to time exercise the option granted hereby by giving notice in
writing or by telephone (confirmed within 24 hours in writing) to the Company
setting forth the aggregate number of Option Securities as to which you are then
exercising the option and the date and time for delivery of and payment for such
Option Securities. Any such date of delivery shall be determined by you but
shall not be earlier than two business days or later than five business days
after such exercise of the option and, in any event, shall not be earlier than
the Firm Closing Date. The time and date set forth in such notice, or such other
time on such other date as you and the Company may agree upon, is herein called
the "Option Closing Date" with respect to such Option Securities. Upon exercise
of the option as provided herein, the Company shall become obligated to sell
you, and, subject to the terms and conditions herein set forth, you shall become
obligated to purchase from the Company, the Option Securities. If the option is
exercised as to all or any portion of the Option Securities, one or more
certificates in definitive form for such Option Securities, and payment
therefor, shall be delivered on the related Option Closing Date in the manner,
and upon the terms and conditions, set forth in paragraph (a) of this Section 3,
except that reference therein to the Firm Securities and the Firm Closing Date
shall be deemed, for purposes of this paragraph 3(b), to refer to such Option
Securities and Option Closing Date, respectively.
(c) The Company hereby acknowledges that the wire transfer by you of the
purchase price for any Securities does not constitute closing of a purchase and
sale of the Securities. Only execution and delivery of a receipt (by facsimile
or otherwise) for the Securities by you indicates completion of the closing of a
purchase of the Securities from the Company. Furthermore, in the event that you
wire funds to the Company prior to the completion of the closing of a purchase
of Securities, the Company hereby acknowledges that until you execute and
deliver a receipt for the Securities, by facsimile or otherwise, the Company
will not be entitled to the wired funds and shall return the wired funds to you
as soon as practicable (by wire transfer of same-day funds) upon demand. In the
event that the closing of a purchase of Securities is not completed and the wire
funds are not returned by the Company to you on the same day the wired funds
were received by the Company, the Company agrees to pay to you in respect of
5
<PAGE> 6
each day the wire funds are not returned by it, in same-day funds, interest at
the Prime Rate as stated in the Wall Street Journal on the date hereof on the
amount of such wire funds.
4. Offering of Securities. Upon your authorization of the release of the
Firm Securities, the Company understands that you propose to offer the Firm
Securities for sale in a private placement upon the terms set forth in the Final
Memorandum.
5. Covenants of the Company. The Company covenants and agrees with you that:
(a) If, at any time prior to the Option Closing Date, any event occurs as
a result of which the Memorandums, as then amended or supplemented, would
include any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, the Company will
promptly notify you thereof and will prepare, at the Company's expense, an
amendment or supplement to the Memorandums that corrects such statement or
omission or effects such compliance.
(b) The Company will apply the net proceeds from the sale of the
Securities as set forth under "Use of Proceeds" in the Memorandums.
(c) The Company will not, directly or indirectly, (i) take any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (ii) (A) sell, bid for, purchase, or pay anyone any compensation
(except under this Agreement) for soliciting purchases of, the Securities or (B)
pay or agree to pay to any person any compensation for soliciting another to
purchase any other securities of the Company.
6. Expenses. The Company will pay all costs and expenses incident to the
performance of its obligations under this Agreement, whether or not the
transactions contemplated herein are consummated or this Agreement is terminated
pursuant to Section 11 hereof, including all costs and expenses incident to (i)
the printing or other production of documents with respect to the transactions,
including any costs of printing the Memorandums and any amendments or
supplements thereto, this Agreement and any blue sky memoranda, (ii) all
arrangements relating to the delivery to you of copies of the foregoing
documents, (iii) the fees and disbursements of the counsel, the accountants and
any other experts or advisors retained by the Company, (iv) preparation,
issuance and delivery to you of any certificates evidencing the Securities,
including transfer agent's and registrar's fees, (v) the filing for exemptions
of the Securities from state securities and blue sky laws, including filing fees
and fees and disbursements of counsel for you relating thereto, and (vi) any
additional listing of the Securities on the Nasdaq National Market. If the sale
of the Securities provided for herein is not consummated because any condition
to your obligations set forth in Section 7 hereof is not satisfied, because this
Agreement is terminated pursuant to Section 11 hereof or because of any failure,
refusal or inability on the part of the Company to perform all obligations and
satisfy all conditions on its part to be performed or satisfied hereunder other
than by reason of a default by you, the Company will reimburse you upon demand
for all reasonable out-of-pocket expenses (including counsel fees
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<PAGE> 7
and disbursements) that shall have been incurred by you in connection with the
proposed purchase and sale of the Securities. The Company shall not in any event
be liable to you for the loss of anticipated profits from the transactions
covered by this Agreement. If the sale of the Securities provided for herein is
consummated, you shall pay all of your own out-of-pocket expenses (including
fees and disbursements of counsel) and the Company shall have no obligation
therefor.
7. Conditions of Your Obligations. Your obligation to purchase and pay for
the Firm Securities shall be subject to the accuracy of the representations and
warranties of the Company contained herein as of the date hereof and as of the
Firm Closing Date, as if made on and as of the Firm Closing Date, to the
accuracy of the statements of the Company's officers made pursuant to the
provisions hereof, to the performance by the Company of its covenants and
agreements hereunder, in each case in all material respects, and to the
following additional conditions:
(a) You shall have received an opinion, dated the Firm Closing Date, of
Snell & Wilmer L.L.P., counsel for the Company, dated the Firm Closing Date to
the effect that:
(i) the Company and each of its subsidiaries listed in Schedule 1
hereto (the "Subsidiaries") have been duly organized and are validly
existing as corporations in good standing under the laws of their respective
jurisdictions of incorporation and are duly qualified to transact business
as foreign corporations and are in good standing under the laws of all other
jurisdictions where, to counsel's knowledge, the ownership or leasing of
their respective properties or the conduct of their respective businesses
requires such qualification, except where the failure to be so qualified
does not or would not have a Material Adverse Effect;
(ii) the Company and each of the Subsidiaries have corporate power to
own or lease their respective properties and conduct their respective
businesses as described in the Memorandums, and the Company has the
corporate power to enter into this Agreement and to carry out all the terms
and provisions hereof to be carried out by it;
(iii) the issued and outstanding shares of capital stock of each of
the Subsidiaries have been duly authorized and validly issued, are fully
paid and nonassessable and, to counsel's knowledge, are owned by the Company
free and clear of any perfected security interests (other than security
interests relating to debt described in the Memorandum);
(iv) the Company has an authorized, issued and outstanding
capitalization as set forth in the Memorandums; all of the issued and
outstanding shares of capital stock of the Company have been duly authorized
and validly issued and are fully paid and nonassessable, and, to counsel's
knowledge, were not issued in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase securities; the Firm
Securities have been duly authorized by all necessary corporate action of
the Company and, when issued and delivered to and paid for by you pursuant
to this Agreement, will be validly issued, fully paid and nonassessable;
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<PAGE> 8
(v) the execution and delivery of this Agreement has been duly
authorized by all necessary corporate action of the Company and this
Agreement has been duly executed and delivered by the Company and, assuming
due authorization, execution and delivery by you, is a valid and binding
agreements of the Company, enforceable in accordance with their terms,
except insofar as indemnification provisions may be limited by applicable
law as to which counsel need not express any opinion and except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or affecting creditors' rights
generally or by general equitable principles;
(vi) the issuance, offering and sale of the Securities to you by the
Company pursuant to this Agreement, the compliance by the Company with the
other provisions of this Agreement and the consummation of the other
transactions herein contemplated do not (A) require the consent, approval,
authorization, registration or qualification of or with any governmental
authority, except such as have been obtained and such as may be required
under state securities or blue sky laws, or (B) conflict with or result in a
breach or violation of any of the terms and provisions of, or constitute a
default under, any material contract, indenture, mortgage, deed of trust,
lease or other agreement or instrument known to such counsel to which the
Company or any of the Subsidiaries is a party or by which the Company or any
of the Subsidiaries or any of their respective properties are bound, or the
charter documents or by-laws of the Company or any of the Subsidiaries, or,
so far as it is known to such counsel, any statute or any judgment, decree,
order, rule or regulation of any court or other governmental authority or
any arbitrator having jurisdiction over the Company or any of the
Subsidiaries, in each case, where such conflict, breach, violation or
default would have a Material Adverse Effect;
(vii) the Company is not, and the transactions contemplated by this
Agreement will not cause the Company to become, an investment company
subject to registration under the 1940 Act;
(viii) the stock certificate of the Company to be issued to you is in
due and proper form to evidence Securities, has been duly authorized and
approved by the Board of Directors of the Company and complies with all
legal requirements applicable under the Delaware General Corporation Law;
and
(ix) the issuance and sale of the Securities is exempt from
registration under the Act.
Such counsel shall also state that they have no reason to believe that the Final
Memorandum, as of its date and the date of such opinion, included or includes
any untrue statement of a material fact or omitted or omits to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading (except such counsel
need express no view as to the financial statements and notes thereto, schedules
and reports thereon, and other financial and statistical data included or
incorporated by reference in the Final Memorandum).
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<PAGE> 9
In rendering any such opinion, such counsel may rely, as to matters of fact, to
the extent such counsel deem(s) proper, on certificates or opinions of
responsible officers of the Company and public officials and the representations
and warranties of you and the Company contained herein, and may limit its
opinions to the laws of the United States of America and the States of Arizona
and Delaware, as appropriate.
References to the Final Memorandum in this paragraph (a) shall include any
amendment or supplement thereto at the date of such opinion.
(b) You shall have received from KPMG Peat Marwick LLP a letter or
letters dated, respectively, the date hereof and the Firm Closing Date, in form
and substance satisfactory to you, to the effect that:
(i) they are independent accountants with respect to the Company and
its consolidated subsidiaries within the meaning of the Act and the
applicable rules and regulations thereunder;
(ii) in their opinion, the audited consolidated financial statements
examined by them and included in the Memorandums comply in form in all
material respects with the applicable accounting requirements of the Act and
the related published rules and regulations;
(iii) on the basis of carrying out certain specified procedures (which
do not constitute an examination made in accordance with generally accepted
auditing standards) that would not necessarily reveal matters of
significance with respect to the comments set forth in this paragraph (iii),
a reading of the minute books of the shareholders, the board of directors
and any committees thereof of the Company and each of its consolidated
subsidiaries, and inquiries of certain officials of the Company and its
consolidated subsidiaries who have responsibility for financial and
accounting matters, nothing came to their attention that caused them to
believe that at a specific date not more than five business days prior to
the date of such letter, there were any changes in the capital stock or
total debt of the Company and its consolidated subsidiaries or any decreases
in total assets or stockholders' equity of the Company and its consolidated
subsidiaries, in each case compared with amounts shown on the December 31,
1996 consolidated balance sheet included in the Final Memorandum, or for the
period from January 1, 1997 to such specified date there were any decreases,
as compared with the same period in the prior year, in total revenues, net
income or net income per share, respectively, of the Company and its
consolidated subsidiaries, except in all instances for changes, decreases or
increases set forth in such letter; and
(iv) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information that are derived from the general accounting records
of the Company and its consolidated subsidiaries and are included in the
Memorandums, and have compared such amounts, percentages and financial
information with such records of the Company and its consolidated
subsidiaries and with
9
<PAGE> 10
information derived from such records and have found them to be in
agreement, excluding any questions of legal interpretation.
In the event that the letters referred to above set forth any such changes,
decreases or increases which, in your reasonable discretion, are likely to
result in a Material Adverse Effect, it shall be a further condition to your
obligations that such letters shall be accompanied by a written explanation of
the Company as to the significance thereof, unless you deem such explanation
unnecessary.
References to the Memorandums in this paragraph (b) with respect to either
letter referred to above shall include any amendment or supplement thereto by
the date of such letter.
(c) You shall have received a certificate, dated the Firm Closing Date,
of Gregory B. Sullivan and Steven T. Darak in their capacities as the President
and the Chief Financial Officer, respectively, of the Company to the effect
that:
(i) the representations and warranties of the Company in this
Agreement are true and correct in all material respects as if made on and as
of the Firm Closing Date; the Final Memorandum, as amended or supplemented
as of the Firm Closing Date, does not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading; and the Company has performed in all material
respects all covenants and agreements and satisfied all conditions on its
part to be performed or satisfied at or prior to the Firm Closing Date; and
(ii) subsequent to the dates as of which information is given in the
Final Memorandum, neither the Company nor any of its subsidiaries has
sustained any loss or interference with their respective businesses or
properties having or resulting in a Material Adverse Effect from fire,
flood, hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or governmental
proceeding, and there has not been any event, circumstance, or development
that results in, or that the Company reasonably believes will result in, a
Material Adverse Effect, except in each case as described in or contemplated
by the Final Memorandum.
(d) On or before the Firm Closing Date, you and your legal counsel shall
have received such further certificates, documents or other information as they
may have reasonably requested from the Company, including a certificate of the
Company's Secretary which states that the Company has not amended any charter of
any subsidiary since October 29, 1996.
All opinions, certificates, letters and documents delivered pursuant to this
Agreement will comply with the provisions hereof only if they are reasonably
satisfactory in all material respects to you and your legal counsel. The Company
shall furnish to you such conformed copies of such opinions, certificates,
letters and documents in such quantities as you and your legal counsel shall
reasonably request.
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<PAGE> 11
Your obligation to purchase and pay for any Option Securities shall be
subject, in your discretion, to each of the foregoing conditions to purchase the
Firm Securities, except that all references to the Firm Securities and the Firm
Closing Date shall be deemed to refer to such Option Securities and the related
Option Closing Date, respectively.
8. Registration Rights.
(a) The Company hereby agrees to use its best efforts to file with the
Securities and Exchange Commission (the "Commission") within thirty days after
the date of this Agreement a registration statement (a "Registration Statement")
for the benefit of the holders of the Securities. The Company further agrees
that it will use its best efforts to cause such Registration Statement to be
declared effective under the Act as soon as reasonably practicable after such
filing. The Company shall further use its best efforts to qualify or register
the Securities under such blue sky and other state securities laws as the
holders of such Securities shall reasonably request; provided, however, that the
Company shall not be obligated to effect any such qualification or registration
in any state in which, as a condition thereto, the Company would be required to
qualify as a foreign corporation to conduct business in such state or to file a
general consent to the service or process.
(b) If any holder of Securities desires to sell its or his Securities
included in the Registration Statement through an underwriter, it may do so
provided that the underwriter is reasonably acceptable to the Company. The
Company agrees to enter into an underwriting agreement in customary form with
the representative of the underwriter or underwriters selected for such
underwriting. The holders of Securities shall not be required to make any
representations or warranties to the Company or the underwriter other than those
relating to such holders, their Securities and their intended method of
distribution for use in the Registration Statement. Other than Sun America Life
Insurance Company or its affiliates, transferees or nominees, neither the
Company nor any other shareholders of the Company shall be entitled to
participate in such registration.
(c) All registration expenses (exclusive of underwriting discounts and
commissions, if any) incurred in connection with any registration, qualification
or compliance pursuant to this Section 8 shall be borne by the Company. The
Company shall also bear the reasonable fees and expenses of one special counsel
of the holders of Securities in connection with such matters.
(d) The Company will notify each participating holder in writing upon the
effectiveness of the registration statement and will, at its expense (i) keep
such registration effective until the holders have completed the distribution
described in the registration statement relating thereto or until Securities may
be sold without restriction or limitation in compliance with federal securities
laws, whichever first occurs; and (ii) furnish such number of prospectuses and
other documents incident thereto as a holder from time to time may reasonably
request.
(e) The rights to cause the Company to register Securities pursuant to
this Agreement may be exercised by any person who purchases Securities from the
Initial Purchaser (a "Purchaser") or any permitted assignee of the Purchaser;
provided that the Company is, within a reasonable time after such transfer or
assignment, furnished with written notice of the name
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<PAGE> 12
and address of such permitted transferee or assignee and the Securities with
respect to which such Securities are being assigned. The Company shall, at its
expense, update the registration periodically (no more often than quarterly) to
substitute transferees as appropriate.
(f) The Company agrees to indemnify and hold harmless each holder of
Securities included in the Registration Statement and each person, if any, who
controls such holder within the meaning of Section 15 of the Act or Section 20
of the Securities Exchange Act of 1934 (the "Exchange Act"), against any losses,
claims, damages or liabilities to which such holder or such controlling person
(collectively "Indemnified Parties") may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation"): (i) any untrue statement
or alleged untrue statement of a material fact contained in such Registration
Statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto; (ii) the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary to make the statements therein not misleading; or (iii) any violation
or alleged violation by the Company of the Act, the Exchange Act, any state
securities law or any rule or regulation promulgated under the Act, the Exchange
Act or any state securities law; and the Company will reimburse, as incurred,
the Indemnified Parties for any legal or other expenses reasonably incurred by
such Indemnified Parties in connection with investigating or defending against
any such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon any untrue statement
or alleged untrue statement or omission or alleged omission made in such
Registration Statement, including any preliminary prospectus or final prospectus
contained therein or any amendment or supplement thereto in reliance upon and in
conformity with written information furnished to the Company by any Indemnified
Party specifically for use therein. This indemnity agreement will be in addition
to any liability that the Company may otherwise have. The Company shall not,
without the consent of the Indemnified Parties who have notified the Company of
a potential claim of indemnification hereunder, settle or compromise or consent
to the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification is available hereunder (whether
or not any Indemnified Parties are a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of the Indemnified Parties from all liability arising out
of such claim, action, suit or proceeding.
(g) Each holder of Securities included in the Registration Statement
shall agree to indemnify and hold harmless the Company, each of its directors,
each of its officers, and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act against
any losses, claims, damages or liabilities to which the Company or any such
director, officer of the Company, or controlling person of the Company may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any Violation, in each case to the extent, and only to the extent, such
violation was made in reliance upon and in conformity with written information
furnished to the Company by such holder specifically for use therein; and,
subject to the limitation set forth immediately preceding this clause, will
reimburse, as incurred, any legal or other expenses reasonably incurred by the
Company or any
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<PAGE> 13
such director, officer or controlling person in connection with investigating or
defending any such loss, claim, damage, liability or any action in respect
thereof. This indemnity agreement will be in addition to any liability which any
such holder may otherwise have.
(h) Promptly after receipt by an indemnified party under this Section 8
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party of the commencement thereof, but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section .
(i) In case any such action is brought against any indemnified party, and
it notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel reasonably satisfactory to such indemnified
party; provided, however, that if the defendants in any such action include both
the indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded or shall have been advised by its counsel that there
may be one or more legal defenses available to it and/or other indemnified
parties that conflict with those available to the indemnifying party, the
indemnifying party shall not have the right to direct the defense of such action
on behalf of such indemnified party or parties and such indemnified party or
parties shall have the right to select separate counsel to defend such action on
behalf of such indemnified party or parties. After notice from the indemnifying
party to such indemnified party of its election so to assume the defense thereof
and approval by such indemnified party of counsel appointed to defend such
action, the indemnifying party will not be liable to such indemnified party
under this Section 8 for any legal or other expenses, other than reasonable
costs of investigation, subsequently incurred by such indemnified party in
connection with the defense thereof, unless (i) the indemnified party shall have
employed separate counsel in accordance with the proviso to the next preceding
sentence (it being understood, however, that in connection with such action the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (in addition to local counsel) in any one action or separate
but substantially similar actions in the same jurisdiction arising out of the
same general allegations or circumstances), or (ii) the indemnifying party does
not promptly retain counsel reasonably satisfactory to the indemnified party or
(iii) the indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party. After such notice
from the indemnifying party to such indemnified party, the indemnifying party
will not be liable for the costs and expenses of any settlement of such action
effected by such indemnified party without the consent of the indemnifying
party.
9. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold you harmless and each
person, if any, who controls you within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, against any losses, claims, damages or
liabilities to which you or such controlling person may become subject under the
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon:
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<PAGE> 14
(i) any breach by the Company of the representations or warranties set
forth in Section 2(a) of this Agreement;
(ii) any untrue statement or alleged untrue statement of any material
fact contained in the Memorandums or any amendments or supplements thereto;
(iii) the omission or alleged omission to state in the Memorandums or
any amendments or supplements thereto, a material fact required to be stated
therein or necessary to make the statements therein not misleading; or
(iv) any untrue statement or alleged untrue statement of any material
fact contained in any audio or visual materials produced by the Company and
used in connection with the marketing of the Securities, including without
limitation, slides, videos, films, tape recordings, and, such party or
parties, as the case may be, will reimburse, as incurred, you and each such
controlling person for any legal or other expenses reasonably incurred by
you or such controlling person in connection with investigating or defending
against any such loss, claim, damage, liability or action; provided,
however, that the Company will not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based
upon (i) any untrue statement or alleged untrue statement or omission or
alleged omission made in such Memorandums, or any amendments or supplements
thereto in reliance upon and in conformity with written information
furnished to the Company by you specifically for use therein, or (ii) any
breach of Section 2(b) hereof. This indemnity agreement will be in addition
to any liability that the Company may otherwise have. The Company shall not,
without your prior written consent, settle or compromise or consent to the
entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification is available hereunder
(whether or not you or any person who controls you within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act is a party to such
claim, action, suit or proceeding), unless such settlement, compromise or
consent includes an unconditional release of you and all of such controlling
persons from all liability arising out of such claim, action, suit or
proceeding.
(b) You agree to indemnify and hold harmless the Company, each of its
directors, each of its officers, and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act against any losses, claims, damages or liabilities to which the
Company or any such director, officer of the Company, or controlling person of
the Company or may become subject under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the Memorandums or any amendments or supplements
thereto, (ii) the omission or the alleged omission to state therein a material
fact required to be stated in the Memorandums or any amendments or supplements
thereto, or necessary to make the statements therein not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by you
specifically for use therein, or (iii) any breach of Section 2(b) hereof; and,
subject to the limitation set forth immediately preceding this clause, will
reimburse, as incurred, any legal or other expenses reasonably incurred by the
14
<PAGE> 15
Company or any such director, officer or controlling person in connection with
investigating or defending any such loss, claim, damage, liability or any action
in respect thereof. This indemnity agreement will be in addition to any
liability which you may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section 9
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 9, notify the indemnifying party of the commencement thereof, but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section .
(d) In case any such action is brought against any indemnified party, and
it notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel reasonably satisfactory to such indemnified
party; provided, however, that if the defendants in any such action include both
the indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded or shall have been advised by its counsel that there
may be one or more legal defenses available to it and/or other indemnified
parties that conflict with those available to the indemnifying party, the
indemnifying party shall not have the right to direct the defense of such action
on behalf of such indemnified party or parties and such indemnified party or
parties shall have the right to select separate counsel to defend such action on
behalf of such indemnified party or parties. After notice from the indemnifying
party to such indemnified party of its election so to assume the defense thereof
and approval by such indemnified party of counsel appointed to defend such
action, the indemnifying party will not be liable to such indemnified party
under this Section 9 for any legal or other expenses, other than reasonable
costs of investigation, subsequently incurred by such indemnified party in
connection with the defense thereof, unless (i) the indemnified party shall have
employed separate counsel in accordance with the proviso to the next preceding
sentence (it being understood, however, that in connection with such action the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (in addition to local counsel) in any one action or separate
but substantially similar actions in the same jurisdiction arising out of the
same general allegations or circumstances, designated by you in the case of
paragraph (a) of this Section 9, representing the indemnified parties under such
paragraph (a) who are parties to such action or actions) or (ii) the
indemnifying party does not promptly retain counsel reasonably satisfactory to
the indemnified party or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. After such notice from the indemnifying party to such
indemnified party, the indemnifying party will not be liable for the costs and
expenses of any settlement of such action effected by such indemnified party
without the consent of the indemnifying party.
(e) In circumstances in which the indemnity agreement provided for in the
preceding paragraphs of this Section 9 is unavailable or insufficient, for any
reason, to hold harmless an indemnified party in respect of any losses, claims,
damages or liabilities (or actions in respect thereof), each indemnifying party,
in order to provide for just and equitable contribution, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate
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<PAGE> 16
to reflect (i) the relative benefits received by the indemnifying party or
parties on the one hand and the indemnified party on the other from the offering
of the Securities or (ii) if the allocation provided by the foregoing clause (i)
is not permitted by applicable law, not only such relative benefits but also the
relative fault of the indemnifying party or parties on the one hand and the
indemnified party on the other in connection with the statements or omissions or
alleged statements or omissions that resulted in such losses, claims, damages or
liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and you on the other shall be deemed to be in the same proportion as
the total proceeds from the offering (before deducting expenses) received by the
Company bear to the total commissions or discounts received by you. The relative
fault of the parties shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or you, the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or omission,
and any other equitable considerations appropriate in the circumstances. The
Company and you agree that it would not be equitable if the amount of such
contribution were determined by pro rata or per capita allocation or by any
other method of allocation that does not take into account the equitable
considerations referred to above in this paragraph (d). Notwithstanding any
other provision of this paragraph (e), you shall not be obligated to make
contributions hereunder that in the aggregate exceed the total price of the
Securities purchased by you under this Agreement, less the aggregate amount of
any damages that you have otherwise been required to pay in respect of the same
or any substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
10. Survival. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company, its officers, and
you set forth in this Agreement or made by or on behalf of them, respectively,
pursuant to this Agreement shall remain in full force and effect, regardless of
(i) any investigation made by or on behalf of the Company, any of its officers
or directors, you or any controlling person referred to in Section 9 hereof and
(ii) delivery of and payment for the Securities. The respective agreements,
covenants, indemnities and other statements set forth in Sections 6 and 9 hereof
shall remain in full force and effect, regardless of any termination or
cancellation of this Agreement.
11. Termination.
(a) This Agreement may be terminated with respect to the Firm Securities
or any Option Securities in your sole discretion by notice to the Company given
prior to the Firm Closing Date or the related Option Closing Date, respectively,
in the event that the Company shall have failed, refused or been unable to
perform all obligations and satisfy all conditions on its part to be performed
or satisfied hereunder at or prior thereto or, if at or prior to the Firm
Closing Date or, such Option Closing Date, respectively,
(i) the Company or any of its Subsidiaries shall have, in your
reasonable judgment, sustained any loss or interference with their
respective businesses or properties having or resulting in a Material
Adverse Effect from fire, flood, hurricane, accident or
16
<PAGE> 17
other calamity, whether or not covered by insurance, or from any labor
dispute or any legal or governmental proceeding or there shall have been any
event, circumstance of development that results in, or that you reasonably
believe would result in, a Material Adverse Effect, except in each case as
described in or contemplated by the Final Memorandum;
(ii) trading in the Common Stock shall have been suspended by the
Commission or the Nasdaq National Market or minimum or maximum prices shall
have been established on the Nasdaq National Market;
(iii) a banking moratorium shall have been declared by New York or
United States authorities; or
(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an outbreak
or escalation of any other insurrection or armed conflict involving the
United States or (C) any other calamity or crisis or material adverse change
in general economic, political or financial conditions having an effect on
the U.S. financial markets that, in your reasonable judgment, makes it
impractical or inadvisable to proceed with the public offering or the
delivery of the Securities as contemplated by the Memorandum, as amended as
of the date hereof.
(b) Termination of this Agreement pursuant to this Section 11 shall be
without liability of any party to any other party.
12. Information Supplied by You. The statements set forth in the second
paragraph of the Plan of Distribution constitute the only information furnished
by you to the Company for the purposes of Section 9 hereof. You confirm that
such statements are correct.
13. Notices. All communications hereunder shall be in writing and, if sent
to you, shall be delivered or sent by mail, telex or facsimile transmission and
confirmed in writing to Friedman, Billings, Ramsey & Co., Inc., Potomac Tower,
1001 Nineteenth Street North, Arlington, Virginia 22209, Attention: Edward M.
Wheeler; and if sent to the Company, shall be delivered or sent by mail, telex
or facsimile transmission and confirmed in writing to the Company at 2525 East
Camelback Road, Suite 1150, Phoenix, Arizona 85016, Attention: Chief Executive
Officer.
14. Successors. This Agreement shall inure to the benefit of and shall be
binding upon you, the Company and our respective successors and legal
representatives, and nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any other person any legal or equitable
right, remedy or claim under or in respect of this Agreement, or any provisions
herein contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person except that (i) the indemnities of the
Company contained in Section 9 of this Agreement shall also be for the benefit
of any person or persons who controls you within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act, (ii) your indemnities contained in
Section 9 of this Agreement shall also be for the benefit of the directors and
officers of the Company, and any person or persons who control the Company
within the meaning of
17
<PAGE> 18
Section 15 of the Act or Section 20 of the Exchange Act, and (iii) the provision
of Section 8 shall be for the benefit of permitted transferees of you and
purchasers to the extent provided therein. No purchaser of Securities from you
shall be deemed a successor because of such purchase.
15. Applicable Law. The validity and interpretation of this Agreement, and
the terms and conditions set forth herein, shall be governed by and construed in
accordance with the laws of the State of Arizona, without giving effect to any
provisions relating to conflicts of laws.
16. Consent to Jurisdiction and Service of Process. All judicial proceedings
arising out of or relating to this Agreement may be brought in any state or
federal court of competent jurisdiction in the State of Virginia, and by
execution and delivery of this Agreement, the Company accepts for itself and in
connection with their respective properties, generally and unconditionally, the
nonexclusive jurisdiction of the aforesaid courts and waives any defense of
forum non conveniens and irrevocably agree to be bound by any judgment rendered
thereby in connection with this Agreement. The Company designates and appoints
Ernest C. Garcia, II and such other persons as may hereafter be selected by the
Company irrevocably agreeing in writing to so serve, as its agent to receive on
its behalf service of all process in any such proceedings in any such court,
such service being hereby acknowledged by the Company to be effective and
binding service in every respect. A copy of any such process so served shall be
mailed by registered mail to the Company at its address provided in Section 13
hereof; provided, however, that, unless otherwise provided by applicable law,
any failure to mail such copy shall not affect the validity of service of such
process. If any agent appointed by the Company refuses to accept service, the
Company hereby agrees that service of process sufficient for personal
jurisdiction in any action against the Company in the State of Virginia may be
made by registered or certified mail, return receipt requested, to the Company
at its address provided in Section 12 hereof, and the Company hereby
acknowledges that such service shall be effective and binding in every respect.
Nothing herein shall affect the right to serve process in any other manner
permitted by law or shall limit your right to bring proceedings against the
Company in the courts of any other jurisdiction.
17. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
18
<PAGE> 19
If the foregoing correctly sets forth our understanding please indicate your
acceptance thereof in the space provided below for that purpose, whereupon this
letter shall constitute an agreement binding the Company and you.
Very truly yours,
UGLY DUCKLING CORPORATION
By:_______________________________
Gregory B. Sullivan
President
The foregoing Agreement is hereby
confirmed and accepted as of the date
first above written.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
By:________________________________
Name:__________________________
Title:_________________________
19
<PAGE> 20
Schedule 1
SUBSIDIARIES
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
- ---- -----------------------------
<S> <C>
Duck Ventures, Inc. Arizona
Ugly Duckling Car Sales, Inc. Arizona
Champion Acceptance Corp. Arizona
Champion Financial Services, Inc. Arizona
Champion Receivables Corp. Delaware
Cygnet Finance, Inc. Arizona
Drake Insurance Services, Inc. Arizona
Drake Insurance Agency, Inc. Arizona
Udrac Rentals, Inc. Arizona
Ugly Duckling Car Sales Florida, Inc. Florida
Ugly Duckling Car Sales New Mexico, Inc. New Mexico
Udrac, Inc. Arizona
</TABLE>
<PAGE> 1
Exhibit 11
Ugly Duckling Corporation
Schedule of Computation of Earnings (Loss) Per Share
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- ------------------------ -------------------------
FULLY FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net earnings (loss) $5,866,000 $5,866,000 $(3,972,000) $(3,972,000) $(1,967,000) $(1,967,000)
Preferred dividends (916,000) (916,000) 0 0 0 0
---------- ---------- ----------- ----------- ----------- -----------
Net earnings (loss) available to
common shares $4,950,000 $4,950,000 $(3,972,000) $(3,972,000) $(1,967,000) $(1,967,000)
========== ========== =========== =========== =========== ===========
Earnings (loss) per share $ 0.60 $ 0.60(a) $ (0.67) $ (0.67) $ (0.35) $ (0.35)
========== ========== =========== =========== =========== ===========
Weighted average common shares
outstanding $7,887,000 $7,887,000 $ 5,522,000 $ 5,522,000 $ 5,214,000 $ 5,214,000
Common equivalent shares outstanding
using the treasury stock method 396,000 430,000 370,000 370,000 370,000 370,000
Weighted average common and common ---------- ---------- ----------- ----------- ----------- -----------
equivalent shares outstanding $8,283,000 $8,317,000 $ 5,892,000 $ 5,892,000 $ 5,584,000 $ 5,584,000
========== ========== =========== =========== =========== ===========
</TABLE>
(a) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
<PAGE> 1
EXHIBIT 22
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
<S> <C>
Duck Ventures, Inc. Arizona
Ugly Duckling Car Sales, Inc. Arizona
Champion Acceptance Corp. Arizona
Champion Financial Services, Inc. Arizona
Cygnet Financial, Inc. Arizona
UDRAC, Inc. Arizona
Champion Receivables Corp. Delaware
UDRAC Rentals, Inc. Arizona
Drake Insurance Services, Inc. Arizona
Drake Insurance Agency, Inc. Arizona
Drake Property & Casualty Insurance Company Turks and Caicos Islands
Drake Life Insurance Company Turks and Caicos Islands
Ugly Duckling Car Sales Florida, Inc. Florida
Ugly Duckling Car Sales New Mexico, Inc. New Mexico
</TABLE>
<PAGE> 1
EXHIBIT 24.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Ugly Duckling Corporation:
We consent to the use 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
February 21, 1997
