<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One) ------------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996.; or,
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to_________.
Commission File Number 0-20841
U G L Y D U C K L I N G C O R P O R A T I O N
(Exact name of registrant as specified in its charter)
DELAWARE 86-0721358
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2525 E. Camelback Road, Suite 1150
Phoenix, Arizona 85016
(Address of principal executive offices) (Zip Code)
(602) 852-6600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Class Name of each Exchange on which registered
COMMON STOCK, $.001 PAR VALUE NASDAQ NATIONAL MARKET
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
At March 24,1997, the aggregate market value of common stock held by
non-affiliates of the Registrant was approximately $327,146,274.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. YES [ ] NO [ ]
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 18,430,776.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to its
annual meeting of stockholders to be held on April 22, 1997, are incorporated
by reference in Part III hereof.
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TABLE OF CONTENTS
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PART I
Item 1 Business 3
Item 2 Properties 15
Item 3 Legal Proceedings 15
Item 4 Submission Of Matters To A Vote Of Security Holders 16
PART II
Item 5 Market For The Registrant's Common Equity Securities And Related Stockholder Matters 16
Item 6 Selected Consolidated Financial Data 19
Item 7 Management's Discussion And Analysis Of Financial Condition And Results Of Operations 21
Item 8 Consolidated Financial Statements And Supplementary Data 40
Item 9 Changes In And Disagreements With Accountants On Accounting And Financial Disclosures 64
PART III
Item 10 Directors And Executive Officers Of The Registrant 64
Item 11 Executive Compensation 64
Item 12 Security Ownership Of Certain Beneficial Owners And Management 64
Item 13 Certain Relationships And Related Transactions 64
PART IV
Item 14 Exhibits, Consolidated Financial Statement Schedules, And Reports On Form 8-K 65
SIGNATURES 68
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PART I
ITEM 1 -- 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 persons who have limited credit histories,
low incomes, or past credit problems ("Sub-Prime Borrowers").
The rapidly growing used car sales and finance industry achieved record
sales in 1995 of 30.5 million units, representing approximately $290.0 billion
in sales. During this same period, more than $185.0 billion in retail
installment contracts were originated through the sale of used cars. Of these
totals, approximately 11.0 million units were sold to Sub-Prime Borrowers,
generating approximately $50.0 billion in retail installment contracts.
Consistent with the industry's growth, the Company has expanded
significantly in recent periods. From 1995 to 1996, total revenues increased
by 55.2% from $48.7 million (pro forma) to $75.6 million. The Company's net
earnings grew to $5.9 million in 1996, or $0.60 per share, compared with a net
loss of $(4.0) million, or $(.67) per share in 1995. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Introduction."
The Company originated 6,929 contracts through wholly owned used car
dealerships ("Company Dealerships") with an aggregate principal balance of
$49.0 million and purchased 9,825 contracts from small independent used car
dealerships ("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
("Securitization Program") with SunAmerica Life Insurance Company ("SunAmerica")
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.
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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 small
independent used car dealerships that sell and finance the sale of used cars
to Sub-Prime Borrowers ("Buy Here-Pay Here dealers"). 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 o make payments by the due date through use of the mail because of the
timing of paychecks.
Recently, the growth of the used car sales and finance market has
attracted significant attention from a number of large companies, including
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.
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- - A "C" credit or "sub-prime" borrower generally has little or no credit
history or a credit history characterized by consistently late payments and
sporadic employment. Like "B" credit borrowers, "C" credit borrowers generally
are not able to obtain a loan from a captive finance subsidiary or a bank, and
have to obtain financing from an independent finance company that lends into
this market category.
- - A "D" credit borrower is also referred to as a "sub-prime" borrower. These
persons, however, in addition to having an unfavorable employment history,
have also experienced debt charge offs, foreclosures, or personal bankruptcy.
In purchasing a car, this borrower's only choice is to obtain financing from
an independent finance company or through a Buy Here-Pay Here dealer.
As with its used car sales operations, the Company's finance operations
are directed to the sub-prime segment of the market. In particular, the
finance operations of Company Dealerships are directed toward Sub-Prime
Borrowers classified in the "C" and "D" categories, while its Third Party
Dealer finance operations are generally directed to "C" credit borrowers. Many
of the traditional lending sources do not consistently provide financing to
the sub-prime consumer finance market. The Company believes traditional
lenders avoid this market because of its high credit risk and the associated
collection efforts.
Many of the 63,000 independent used car dealers are not able to obtain
debt financing from traditional lending sources such as banks, credit unions,
or major finance companies. These dealers typically finance their operations
through the sale of contract receivables at a substantial discount. The
Company believes that independent dealers prefer to finance their operations
through credit facilities that enable them to retain their receivables,
thereby increasing their finance income. Accordingly, the Company believes
that there is a substantial opportunity for a company capable of serving the
needs of such dealers to make significant penetration into this underdeveloped
segment of the sub-prime market.
The industry statistical information presented herein is derived from
information provided to the Company by CNW Marketing/Research of Bandon,
Oregon.
RECENT ACQUISITIONS
In January 1997, the Company acquired selected assets of a group of
companies (the "Sellers") engaged in the business of selling and financing
used motor vehicles, including four dealerships located in the Tampa Bay/St.
Petersburg market. The acquired assets consist primarily of Sellers' inventory
of vehicles and 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.
On March 5, 1997, the Company entered into an agreement to purchase
substantially all of the assets of a company engaged in the business of
selling and financing used motor vehicles, including seven dealerships in San
Antonio and a contract portfolio of approximately $27 million. The unaudited
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book value of assets to be acquired was approximately $40 million as of
December 31, 1996. The purchase, which is scheduled to close on or about
April 1, 1997, is subject to various conditions, including regulatory approval
No assurance can be given that such conditions will be satisfied or that the
purchase will be completed.
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 above). In addition, the Company has five other
dealerships (one in Arizona, two in New Mexico, one in Nevada, and one in
Florida) and two used car reconditioning facilities (in New Mexico and Florida)
currently under development. The Company intends to continue the aggressive
development or acquisition of Company Dealerships throughout the southwestern
United States and in other locations where opportunities may arise. See
"--Recent Acquisitions."
The Company distinguishes its direct sales and financing operations from
typical Buy Here-Pay Here dealers by providing multiple locations, upgraded
facilities, large inventories of used automobiles, and dedication to customer
service. The Company has designed and implemented a marketing program
featuring its animated duck mascot that promotes its image as a professional,
yet approachable, operation, in contrast to the generally unfavorable public
image of many Buy Here-Pay Here dealers. In addition, the Company has
developed flexible underwriting guidelines and techniques, which combine
established underwriting criteria with managerial discretion, to facilitate
rapid credit decisions, as well as an integrated, technology-based corporate
infrastructure that enables the Company to monitor and service large volumes
of contracts.
Expand Third Party Dealer Operations. The Company has leveraged the
contract servicing experience and capabilities it acquired through its Company
Dealership activities by purchasing and servicing contracts originated by Third
Party Dealers. As of 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
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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."
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. See Note 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Introduction."
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 Item 3.
"Legal Proceedings."
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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. 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 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
<PAGE> 9
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 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
<PAGE> 10
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 the financial condition of the dealer and the quality of the contracts
originated. As a condition to providing such financing, the Company will
require each dealer to upload its portfolio information to the Company's
computer network on a daily basis, utilize the Company's management
information systems, and provide the Company with periodic financial
statements in a standardized format. These controls will allow Company account
officers, who will oversee the operations of each dealer participating in the
program, to maintain supervision over the dealers, thereby enabling the
account officers to ensure dealer compliance with financial covenants and
determine the appropriateness of continued credit extensions.
The Company believes that the Cygnet Dealer Program will fulfill the need
of Third Party Dealers for debt financing to expand their businesses while
enabling the Company to earn finance income at favorable rates and diversify
its earning asset base. The Company also believes that the relationships
established with these dealers will provide it with a preferred position to
acquire retail installment contracts from them. Such contract purchases would
provide these dealers with an additional source of financing and enable the
Company to further expand its contract portfolio. The Company has hired a
person with extensive sub-prime finance industry experience to oversee the
Cygnet Dealer Program and began implementing the program with one Third Party
Dealer during the fourth quarter of 1996. The Company expects to begin
full-scale marketing of the program during the first quarter of 1997, although
the program is not expected to begin generating any substantial revenue before
the second quarter of 1997.
Insurance Services. The retail installment contracts that the Company
purchases from Third Party Dealers generally require the customers to obtain
casualty insurance within 30 days of their vehicle purchase. While all
customers are free to obtain such coverage from an insurer of their choice, if
a customer fails to obtain the required coverage, the Company may purchase a
policy on the customer's behalf and charge back to the customer the cost of
the premiums and fees associated with such policy. The Company's ability to
force place such insurance has significantly increased the number of customers
who have obtained their own casualty insurance.
To facilitate its ability to force place mandated insurance coverage, the
Company has contracted with American Bankers Insurance Group ("ABIG"), a
licensed property, casualty, and life insurance company. Through its
subsidiary, Drake Insurance Agency, Inc., which acts as agent for ABIG, the
Company places casualty insurance policies issued by ABIG with Third Party
<PAGE> 11
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.
COMPARISON OF CONTRACTS ORIGINATED AT COMPANY DEALERSHIPS AND THIRD PARTY
DEALERS
The chart below compares the characteristics of the average contract
originated by Company Dealerships and purchased from Third Party Dealers for
the twelve months ended November 30, 1996:
<TABLE>
<CAPTION>
COMPANY THIRD PARTY
--------- -------------
<S> <C> <C>
Principal Amount of Contract $ 7,071 $ 5,778
Annual Percentage Rate 29.9% 24.5%
Loan Term (Months) 37.5 33.4
Total Down Payment $ 858 $ 1,368
Company Cost or Third Party Dealer Advance $ 3,304 $ 5,119
Blue Book Value (Wholesale) $ 3,685 $ 4,983
Model Year 88 89
Age of Borrower 34 34
Annual Income $ 25,589 $ 30,559
Years at Current Residence 4.6 3.8
Years at Current Job 3.2 3.4
</TABLE>
The Company expects that approximately 35.0% to 40.0% of Company Dealership
contracts will ultimately default at some time prior to maturity for a net
loss, after charge offs and recoveries of approximately 20.0% to 25.0% of the
original principal amount financed. See Item 7. "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 Item 7. "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.
<PAGE> 12
Upon the origination or purchase of a contract, Company personnel enter
all terms of the contract into the Company's centralized computer system. The
Company's monitoring and collections staff then utilizes the Company's
collections software to monitor the performance of the contracts.
The collections software provides the Company with, among other things,
up-to-date activity reports, allowing immediate identification of customers
whose accounts have become past due. In accordance with Company policy,
collections personnel contact a customer with a past due account within three
days of delinquency (or in the case of first payment delinquencies, within one
day) to inquire as to the reasons for such delinquency and to suggest ways in
which the customer can resolve the underlying problem, thereby enabling the
customer to continue making payments and keep the car. The Company's early
detection of a customer's delinquent status, as well as its commitment to
working with its customers, allows it to identify and address payment problems
quickly, thereby reducing the amount of credit loss. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Allowance for Credit Losses."
If the Company's efforts to work with a customer are unsuccessful and the
customer becomes seriously delinquent, the Company will take the necessary
steps to protect its collateral. Frequently, delinquent customers will
recognize their inability to honor their contractual obligations and will work
with the Company to coordinate "voluntary repossessions" of their cars. For
cases involving uncooperative customers, the Company retains independent firms
to repossess the cars pursuant to prescribed legal procedures. Upon
repossession and after a statutorily-mandated waiting period, the Company will
recondition the car, if necessary, and sell it in the wholesale market or at
retail through its Company Dealerships. The Company 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 Item 7. "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.
<PAGE> 13
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.
REGULATION, SUPERVISION, AND LICENSING
The Company's operations are subject to ongoing regulation, supervision,
and licensing under various federal, state, and local statutes, ordinances,
and regulations. Among other things, these laws require that the Company
obtain and maintain certain licenses and qualifications, limit or prescribe
terms of the contracts that the Company originates and/or purchases, require
specified disclosures to customers, limit the Company's right to repossess and
sell collateral, and prohibit the Company from discriminating against certain
customers. The Company is also subject to federal and state franchising and
insurance laws.
The Company typically charges fixed interest rates ranging from 21.0% to
29.9% on the contracts originated at Company Dealerships, while rates range
from 17.6% to 29.9% on the Third Party Dealer contracts it purchases. As of
December 31, 1996, a majority of the Company's used car sales activities were
conducted in, and a majority of the contracts the Company services were
originated in, Arizona, which does not impose limits on the interest rate
that a lender may charge. However, the Company has expanded, and will continue
to expand, its operations into states that impose usury limits, such as Florida
and Texas. The Company attempts to mitigate these rate restrictions by
purchasing contracts originated in these states at a higher discount.
<PAGE> 14
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.
ITEM 2 - 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.
ITEM 3 - 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
<PAGE> 15
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 Item 1. "Business-Recent Acquisitions"), 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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of its security holders
during the fourth quarter of 1996.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY SECURITIES
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq National Market tier under the
symbol "UGLY." The Company's initial public offering was June 17, 1996. The
high and low sales prices of the Common Stock, as reported by Nasdaq since
that date are reported below.
<TABLE>
<CAPTION>
MARKET PRICE
----------------------
FISCAL YEAR 1996 HIGH LOW
- -------------------------------------- ------------- -------
<S> <C> <C>
Second Quarter (from June 18, 1996) $ 10.00 $ 8.50
Third Quarter $ 15.50 $ 8.13
Fourth Quarter $ 21.63 $ 13.00
FISCAL YEAR 1997
- --------------------------------------
First Quarter (through March 15, 1997) $ 25.75 $ 17.50
</TABLE>
On March 10, 1997 there were 127 record owners of the Company's Common
Stock. The Company estimates that as of such date there were 1,600 beneficial
owners of the Company's Common Stock.
<PAGE> 16
Dividend Policy. The Company has never paid cash dividends on its 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 Company's 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 Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources - Revolving Facility.
Reincorporation. On April 24, 1996, the Company reincorporated from
Arizona to Delaware by way of a merger in which the Company, an Arizona
corporation, merged with and into a newly created Delaware subsidiary of the
Company. In the merger, each share of the Arizona corporation's issued and
outstanding common stock was exchanged for 1.16 shares of the Delaware
corporation's common stock and each option to purchase shares of the Arizona
corporation's common stock was exchanged for 1.16 options to purchase shares
of the Delaware corporation's common stock. All share figures set forth above
give effect to this exchange ratio.
Warrant Issuance. In connection with the Company's initial public
offering, the Company issued warrants to Cruttenden Roth to purchase 170,000
shares of Common Stock at an exercise price per share of $9.45. The warrants
were issued in exchange for $1,700 pursuant to an Underwriting Agreement
between the Company and Cruttenden Roth, as the representative of the several
underwriters in the initial public offering, and pursuant to a Representative's
Warrant Agreement between the Company and Cruttenden Roth.
Subordinated Debt Conversion. In connection with the Company's initial
public offering, on June 21, 1996, SunAmerica converted $3,000,000 of
subordinated debt into Common Stock (444,444 shares at the initial public
offering price of $6.75 per share) in accordance with the terms of a
Convertible Note, dated as of August 31, 1995. In addition, in partial
consideration for SunAmerica's agreement to convert the Convertible Note, the
Company issued warrants to SunAmerica, on June 21, 1996, to purchase 116,000
shares of Common Stock at an exercise price per share of $6.75.
Private Placement. 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 the reincorporation, the warrant issuances,
the subordinated debt conversions, and the private placement 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.
FACTORS THAT MAY AFFECT FUTURE STOCK PERFORMANCE
The performance of the Company's Common Stock is dependent upon several
factors including those set forth below and in Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Factors That May Affect Future Results and Financial Condition."
<PAGE> 17
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.
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.
Shares Eligible for Future Sale. Approximately 10,535,600 shares of
Common Stock outstanding as of the date of this report 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, substantially all of these shares have
either been held for the two-year holding period required under Rule 144 or
will be registered for resale under the Securities Act of 1933, as amended
(the "Securities Act") in the near future, including 5,075,500 shares sold
in the private placement discussed above. 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.
<PAGE> 18
ITEM 6 - 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 report. The following table should be read
in conjunction with Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
STATEMENT OF OPERATIONS DATA: 1996 1995 1994 1993 1992
-------- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C>
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
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE><CAPTION>
YEARS ENDED 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
======== ======== ======== ======== =======
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% - -
(1) n/a - not available
</TABLE>
<PAGE> 20
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This report contains forward looking statements. Additional written or
oral forward looking statements may be made by the Company from time to time
in filings with the Securities and Exchange Commission or otherwise. Such for-
ward 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, estimates of capital expendi-
tures, plans for future operations, products or services, and financing needs
or plans, as well as assumptions relating to the foregoing. The words
"believe," "expect," "anticipate," "estimate," "project," and similar expres-
sions 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. The following
disclosures, as well as other statements in the Company's report, including
those contained below in Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations," in Item 5. "Market for the
Registrant's Common Equity Securities and Related Stockholders Matters," and
in the Notes to the Company's Consolidated Financial Statements, describe
factors, among others, that could contribute to or cause such differences, or
that could affect the Company's stock price.
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. 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
<PAGE> 21
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. By the end
of 1996 the Company had 35 branch offices in 12 states. This expansion
enabled the Company to leverage its existing infrastructure and increase its
contract portfolio much more quickly than it could through the expansion of
its Company Dealerships. The Company is in the process of further expanding
its Third Party Dealer operations and diversifying its earning asset base by
implementing the Cygnet Dealer Program pursuant to which the Company will
provide Third Party Dealers with operating credit lines secured by the
dealers' retail installment contract portfolios.
In 1996 the Company completed an initial public offering and a secondary
offering in which it sold common stock for a total of $82.3 million.
The following discussion and analysis provides information regarding the
Company's consolidated financial position as of December 31, 1996, and 1995,
and its results of operations for the years ended December 31, 1996, 1995 and
1994.
Growth in Finance Receivables. As a result of the Company's rapid
expansion, contract receivables serviced increased by 129.0% to $109.9 million
at December 31, 1996 (including $51.7 million in contracts serviced under the
Company's Securitization Program) from $48.0 million at December 31, 1995,
which was an increase of 123.3% from $21.5 million at December 31, 1994.
The following tables reflect the growth in contract originations by
Company Dealerships and contract purchases from Third Party Dealers as well as
the period end balances measured in terms of the principal amount and the
number of contracts.
<TABLE>
<CAPTION>
TOTAL CONTRACTS ORIGINATED/PURCHASED
(IN THOUSANDS, EXCEPT NUMBER OF CONTRACTS)
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>
<PAGE> 22
<TABLE>
<CAPTION>
TOTAL CONTRACTS OUTSTANDING
(IN THOUSANDS, EXCEPT NUMBER OF CONTRACTS)
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1996 1995 1994
----------------------- --------------------- --------------------
PRINCIPAL NO. OF PRINCIPAL NO. OF PRINCIPAL NO. OF
AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT CONTRACTS
----------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Company Dealerships $ 49,066 9,615 $ 34,226 8,049 $ 19,881 5,515
Third Party Dealers 60,878 12,942 13,805 2,733 1,620 726
----------- ---------- ---------- --------- ---------- ---------
Total Portfolio Serviced $ 109,944 22,557 $ 48,031 10,782 $ 21,501 6,241
----------- ---------- ---------- --------- ---------- ---------
Less Portfolio Securitized
and Sold (51,663) (10,612) - - - -
----------- ---------- ---------- --------- ---------- ---------
Company Total $ 58,281 11,945 $ 48,031 10,782 $ 21,501 6,241
=========== ========== ========== ========= ========== =========
</TABLE>
The first table, reflecting Third Party Dealer purchases excludes $5.6
million in principal balances (2,095 contracts) acquired in a single bulk
purchase in late December 1996 and also excludes $1.6 million in lease
contracts acquired in October 1996 as part of a purchase of certain assets of
a used car dealership in Las Vegas, Nevada. The second table, reflecting Third
Party Dealer principal balances, includes $5.5 million in principal balances
related to this bulk purchase and includes $1.4 million (375 contracts) in
balances related to these leases. There were no material bulk purchases in
1995 or 1994.
RESULTS OF OPERATIONS
The prices at which the Company sells its cars and the interest rates
that it charges to finance these sales take into consideration that the
Company's primary customers are high-risk borrowers, many of whom ultimately
default. The Provision for Credit Losses reflects these factors and is treated
by the Company as a cost of both the future interest income derived on the
contract receivables originated at Company Dealerships as well as a cost of
the sale of the cars themselves. Accordingly, unlike traditional car
dealerships, the Company does not present gross profits in its Statements of
Operations calculated as Sales of Used Cars less Cost of Used Cars Sold.
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Sales of Used Cars. Sales of Used Cars increased by 40.1% to $53.8
million for the year ended December 31, 1996 from $38.4 million (pro forma)
for the year ended December 31, 1995 and by 38.1% for the year ended December
31, 1995 from $27.8 million for the year ended December 31, 1994. This growth
reflects increases in the average unit sales price and the average number of
units sold by each Company Dealership.
The average sales price per car increased by 17.2% to $7,107 for the year
ended December 31, 1996 from $6,065 (pro forma) for the year ended December
31, 1995 compared to 15.1% from $5,269 in 1994. This increase reflects
management's decision to sell higher quality vehicles at its Company
<PAGE> 23
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 for Credit Losses averaged 19.7%, 22.8% (pro forma), and 34.5%
in 1996, 1995, and 1994, respectively. This decrease reflects the Company's
strengthened underwriting requirements, the higher quality of the cars sold,
and the Company's improved collection efforts.
The Company charges its Provision for Credit Losses to current operations
and does not recognize any portion of the unearned interest income as a
component of its Allowance for Credit Losses. Accordingly, the Company's
unearned finance income is comprised of the full annual percentage rate
("APR") on its contracts less amortization of loan origination costs.
<PAGE> 24
Interest Income. Interest Income consists primarily of interest on both
finance receivables from Company Dealership sales and interest on Third Party
Dealer finance receivables.
Company Dealership Sales - Interest Income increased by 2.4% to $8.4
million for the year ended December 31, 1996 from $8.2 million for the year
ended December 31, 1995, which increased by 74.5% compared to $4.7 million in
the year ended December 31, 1994. Interest Income during the year ended
December 31, 1996 was affected by the sale of $58.2 million in contract
principal balances pursuant to the Securitization Program, and will continue
to be affected in future periods by additional securitizations. A primary
element of the Company's sales strategy is to provide financing to customers
with poor credit histories who are unable to obtain automobile financing
through traditional sources. The Company financed 91.1% of sales revenue and
91.6% of the used cars sold at Company Dealerships for the year ended December
31, 1996 compared to 89.7% (pro forma) of sales revenue and 91.2% (pro forma)
of the used cars sold for the year ended December 31, 1995, and 85.0% of sales
revenue and 89.8% of used cars sold in the year ended December 31, 1994. The
average amount financed increased to $7,071 for the year ended December 31,
1996 from $5,966 for the year ended December 31, 1995 which had increased from
$4,986 for the year ended December 31, 1994. The effective yield on Finance
Receivables from Company Dealerships was 29.2%, 28.0%, and 28.2% for the years
ended December 31, 1996, 1995, and 1994, respectively. The Company operated 8,
7 (pro forma), and 8 dealerships at December 31, 1996, 1995, and 1994,
respectively.
Third Party Dealers - Interest Income increased by 305.6% to $7.3 million
for the year ended December 31, 1996 from $1.8 million in 1995, which was an
increase of 153.5% from $710,000 in 1994. Interest Income during the year
ended December 31, 1996 was effected by the sale of $10.0 million in contract
principal balances pursuant to the Securitization Program, and will continue
to be effected in future periods by additional securitizations. Interest
income has increased in conjunction with the increases in Third Party Dealer
contracts purchased and outstanding. As noted above, the Company began to
significantly expand its Third Party Dealer branch office operations in April
1995. Further, subsequent to June 30, 1995, as a result of its migration to
higher quality contracts and expansion into markets with interest rate limits,
the Company's yield on its Third Party Dealer contract portfolio has trended
downward. Portfolio yield was approximately 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
<PAGE> 25
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.
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
<PAGE> 26
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 Receiv-
ables which the Company utilized to pay down debt. Further, concurrent with the
Company's initial public offering on June 21, 1996, the Company restructured
its Subordinated Notes Payable reducing the borrowing rate on that debt from
18% to 10% per annum.
Income Taxes. Income tax expense totaled $100,000 in 1996, up from zero
in 1995. In 1994, the Company realized a tax benefit of $334,000. In 1996, the
Company utilized all of the Valuation Allowance that existed against its
deferred income tax assets as of December 31, 1995. Therefore, the Company
anticipates incurring income tax expense in the future at the statutory income
tax rates.
ALLOWANCE FOR CREDIT LOSSES
The Company has established an Allowance for Credit Losses ("Allowance")
to cover anticipated credit losses on the contracts currently in its
portfolio. The Allowance has been established through the Provision for Credit
Losses on contracts originated at Company Dealerships, and through
nonrefundable acquisition discounts and Provision for Credit Losses on
contracts purchased from Third Party Dealers. The Allowance on contracts
originated at Company Dealerships increased to 23.0% of outstanding principal
balances as of December 31, 1996 compared to 21.9% as of December 31, 1995.
The Allowance as a percentage of Third Party Dealer contracts increased to
12.7% from 7.2% over the same period. However, the Allowance as a percentage
of the Company's combined contract portfolio decreased to 13.9% at December
31, 1996 from 17.7% at December 31, 1995 reflecting the fact that a greater
portion of the Company's overall contract portfolio, represented by contracts
purchased from Third Party Dealers, for which a lower level of Allowance is
required.
<PAGE> 27
The following table reflects activity in the Allowance, as well as
information regarding charge off activity, for the years ended December 31,
1996 and 1995, in thousands.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
COMPANY DEALERSHIPS THIRD PARTY DEALERS
------------------- -------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Allowance Activity:
Balance, Beginning of Period $ 7,500 $ 6,050 $ 1,000 $ 159
Provision for Credit Losses 9,658 8,359 153 -
Discount Acquired - - 8,963 1,660
Reduction Attributable to Loans Sold (9,331) - (650) -
Net Charge Offs (6,202) (6,909) (2,966) (819)
------- ------- ------ -------
Balance, End of Period $ 1,625 $ 7,500 $ 6,500 $ 1,000
======= ======= ======= ==-====
Allowance as Percent of Period Ended Principal Balance 23.0% 21.9% 12.7% 7.2%
======= ======= ======= =======
Charge off Activity:
Principal Balances:
Collateral Recovered $ 6,256 $ 6,686 $ 3,618 $ 806
Collateral Not Recovered 1,859 2,478 717 220
------- ------- ------- -------
Total Principal Balances 8,115 9,164 4,335 $ 1,026
Accrued Interest 487 653 123 59
Recoveries, Net (2,400) (2,908) (1,492) (266)
------- ------- ------ -------
Net Charge Offs $ 6,202 $ 6,909 $ 2,966 $ 819
======= ======= ======= =======
Net Charge Offs as % of Average Principal Outstanding 23.0% 24.0% 10.7% 11.9%
======= ======= ======= =======
</TABLE>
The Company's policy is to charge off contracts when they are deemed
uncollectible, but in any event at such time as a contract is delinquent for
90 days.
Net Charge Offs - Company Dealerships. Net Charge Offs for contracts
originated at Company dealerships in 1996 were 23.0% of the average principal
balance outstanding compared to 24.0% in 1995. As discussed above, beginning
in 1995 and continuing in 1996 the Company has migrated to selling higher
quality cars at its dealerships. Accordingly, repossessions have less
frequently met Company standards for resale and, therefore, have been sold
primarily at wholesale auction.
Recoveries averaged 29.6% of principal balances charged off in 1996
compared to 31.7% in 1995, primarily reflecting reductions in the percentage
of repossessed cars sold at Company Dealerships of 11.0% in 1996 compared to
33.6% in 1995.
The Company's net charge offs on contracts generated through Company
Dealerships are favorably affected by a reduction in sales tax liability as a
result of loan defaults.
<PAGE> 28
Net Charge Offs - Third Party Dealers. Net Charge Offs for contracts
purchased from Third Party Dealers in 1996 were 10.7% of the average principal
balance outstanding compared to 11.9% in 1995. Prior to April 1995, the
Company purchased from Third Party Dealers, at discounts of approximately
15.0% to 25.0%, contracts with average principal balances of approximately
$4,000 bearing a typical APR of 29.9%. In April 1995 the Company significantly
revised and expanded its Third Party Dealer program. Under the current
program, which is aimed at more creditworthy borrowers, it purchases from
Third Party Dealers, at discounts averaging approximately 11.0%, contracts
with average principal balances of approximately $5,800 bearing an average APR
of 24.5%.
Recoveries averaged 34.4% of principal balances charged off on contracts
purchased from Third Party Dealers in 1996 compared to 25.9% for the year
ended December 31, 1995. The increase is due to both an 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 Item 1. "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
tables herein set forth the cumulative net charge offs as a percentage of
original contract cumulative balances, based on the quarter of origination and
segmented by the number of payments made prior to charge off. For periods
denoted by "x", the pools have not seasoned sufficiently to allow for
computation of cumulative losses. For periods denoted by "-", the pools have
not yet attained the indicated cumulative age. While the Company monitors its
static pools on a monthly basis, for presentation purposes the information in
the tables are presented on a quarterly basis.
<PAGE> 29
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.
In accordance with the Company's charge off policy, there are no accounts more
than 90 days delinquent as of December 31, 1996 and 1995.
CONTRACTS PURCHASED FROM THIRD PARTY DEALERS
Non-refundable acquisition discount ("Discount") acquired totaled $9.0
million and $1.7 million for the years ended December 31, 1996 and 1995,
respectively. The Discount, attributable to Third Party Dealer branch
purchases, averaged 11.4% as a percentage of principal balances purchased in
1996, compared to 10.1% in 1995. Beginning in 1996, the Company expanded into
markets with interest rate limits. While contractual interest rates on these
contracts are limited by law, the Company has been able to purchase these
contracts at a reasonably consistent effective yield and therefore Discounts
<PAGE> 30
have trended upward. To date, the Company has credited the Allowance for
Credit Losses all Discount acquired with the purchase of contracts from Third
Party Dealers.
The following table sets forth the cumulative net charge offs as a per-
centage 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.
In accordance with the Company's charge off policy, there are no Third Party
Dealer contracts more than 90 days delinquent as of December 31, 1996 and
1995.
At December 31, 1995 the average number of days a customer was delinquent
when repossession took place was under 30 days for both contracts originated
at Company Dealerships and those purchased from Third Party Dealers. In 1996,
<PAGE> 31
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.
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).
<PAGE> 32
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 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
provides the Company with a source of funding in addition to the Revolving
Facility. At the closing of each securitization, the Company receives payment
from SunAmerica for the certificates sold (net of Investments Held in Trust).
The Company also generates cash flow under this program from ongoing servicing
fees and excess cash flow distributions resulting from the difference between
the payments received from customers on the contracts and the payments paid to
SunAmerica. In addition, securitization allows the Company to fix its
<PAGE> 33
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 lease-
hold 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 vehicles,
including four dealerships located in the Tampa Bay/St. Petersburg market.
See Item 1. "Business - Recent Acquisitions."
On March 5, 1997, the Company entered into an agreement to purchase
substantially all of the assets of a company engaged in the business of
selling and financing used motor vehicles, including seven dealerships in San
Antonio and a contract portfolio of approximately $27 million. The unaudited
book value of the assets to be acquired was approximately $40 million as of
December 31, 1996. The purchase, which is scheduled to close on or about April
1, 1997, is subject to various conditions, including regulatory approval. No
assurance can be given that such conditions will be satisfied or that the
purchase 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 approximately $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 and
Securitization Program.
SEASONALITY
Historically, the Company has experienced higher revenues in the first
two quarters of the year than in the latter half of the year. The Company
believes that these results are due to seasonal buying patterns resulting in
part from the fact that many of its customers receive income tax refunds
during the first half of the year, which are a primary source of down payments
on used car purchases.
INFLATION
Increases in inflation generally result in higher interest rates. Higher
interest rates on the Company's borrowings would decrease the profitability of
the Company's existing portfolio. The Company will seek to limit this risk
through its Securitization Program and, to the extent market conditions
permit, for contracts originated at Company Dealerships, either by increasing
the interest rate charged, or the profit margin on, the cars sold, or for
contracts acquired from Third Party Dealers, either by acquiring contracts at
a higher discount or with a higher APR. To date, inflation has not had a
significant impact on the Company's operations.
<PAGE> 34
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.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
The Company's future operating results and financial condition are
dependent upon, among other things, the Company's ability to implement its
business strategy. 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. Potential risks and
uncertainties that could affect the Company's profitability are set forth
below.
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.
Poor Creditworthiness of Borrowers; High Risk of Credit Losses. Substan-
tially 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 13.9% and 17.7% of contract principal
balances for 1996 and 1995, respectively, to cover anticipated credit losses
on the contracts currently in its portfolio. At December 31, 1996 and 1995,
the principal balance of delinquent contracts as a percentage of total
outstanding contract principal balances was 3.7% and 4.2%, respectively. The
Company's net charge offs as a percentage of average principal outstanding for
the years ended December 31, 1996 and 1995 were 16.7% and 21.7%, 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
<PAGE> 35
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 - Allowance for Credit
Losses" and Item 1. "Business - Monitoring and Collections."
Risks Associated with Growth Strategy and New Product Offerings. The
Company's business strategy calls for aggressive growth in its sales and
financing activities through the development and acquisition of new Company
Dealerships and Branch Offices and the expansion of its existing operations to
include additional financing and insurance services. The Company's ability to
remain profitable as it pursues this business strategy will depend upon its
ability to: (i) expand its revenue generating operations while not
proportionately increasing its administrative overhead; (ii) originate and
purchase 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 Item 1.
"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 Item 1. "Business - Third Party Dealer
Operations - Collateralized Dealer Financing" and Item 1. "Business - Third
Party Dealer Operations - Insurance Services."
No Assurance of Successful Acquisitions. The Company intends to consider
acquisitions of and alliances with other companies that could complement the
Company's existing business. There can be no assurance that suitable acquisi-
tion or joint venture candidates can be identified, or that if identified, any
such transactions will be consummated. Furthermore, there can be no assurance
that the Company will be able to integrate successfully such acquired companies
into its existing operations, which could increase the Company's operating
expenses in the short-term and materially and adversely affect the Company's
results of operations. Moreover, any acquisition by the Company may result in
potentially dilutive issuances of equity securities, the incurrence of addi-
tional debt, and amortization of expenses related to goodwill and intangible
assets, all of which could adversely affect the Company's profitability. Acqui-
sitions involve numerous risks, such as the diversion of the attention of the
Company's management from other business concerns, the entrance of the Company
<PAGE> 36
into markets in which it has had no or only limited experience, and the poten-
tial loss of key employees of the acquired company, all of which could have a
material adverse effect on the Company's business, financial condition, and
results of operations. See Item 1. "Business - Recent Acquisitions."
Highly Competitive Industry. Although the used car sales industry has
historically been highly fragmented, it has attracted significant attention
recently from a number of large companies, including AutoNation, U.S.A. and
Driver's Mart, which have entered the used car sales business or announced
plans to develop large used car sales operations. Many franchised new car
dealerships have also increased their focus on the used car market. The
Company believes that these companies are attracted by the relatively high
gross margins that can be achieved in this market and the industry's lack of
consolidation. Many of these companies and franchised dealers have signifi-
cantly 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 sig-
nificantly greater financial and other resources than the Company. Increased
competition may cause downward pressure on the interest rates the Company
Dealerships charges on contracts originated by its Company 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 Item 1. "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 Item 1. "Business
- - Overview of Used Car Sales and Finance Industry."
General Economic Conditions. The Company's business is directly related
to sales of used cars, which are affected by employment rates, prevailing
interest rates, and other general economic conditions. While the Company
believes that current economic conditions favor continued growth in the
markets it serves and those in which it seeks to expand, a future economic
slowdown or recession could lead to decreased sales of used cars and increased
delinquencies, repossessions, and credit losses that could hinder the
Company's business. Because of the Company's focus on the sub-prime segment of
the automobile financing industry, its actual rate of delinquencies,
repossessions, and credit losses could be higher under adverse conditions than
those experienced in the used car sales and finance industry in general. See
Item 1. "Business - Company Dealership Operations" and Item 1. "Business -
Third Party Dealer Operations."
Industry Considerations. In recent periods, several major used car
finance companies have announced major downward adjustments to their financial
<PAGE> 37
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 & 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 Item 1.
"Business - Third Party Dealer Operations" and Item 1. "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 Item 1. "Business - Company Dealership Operations" and
Item 1. "Business - Third Party Dealer Operations."
Dependence on External Financing. The Company has borrowed, and will
continue to borrow, substantial amounts to fund its operations from financing
companies and other lenders, some of which are affiliated with the Company.
Currently, the Company receives financing pursuant to the Revolving Facility
with GE Capital, which has a maximum commitment of $50.0 million. Under the
Revolving Facility, the Company may borrow up to 65.0% of the principal
balance of eligible Company Dealership contracts and up to 90.0% of the
principal balance of eligible Third Party Dealer contracts. The Revolving
Facility expires in September 1997, at which time the Company has the option
to renew it for one additional year. The Revolving Facility is secured by
substantially all of the Company's assets. In addition, the Revolving Facility
contains various covenants that limit, among other things, the Company's
ability to engage in mergers and acquisitions, incur additional indebtedness,
and pay dividends or make other distributions, and also requires the Company
to meet certain financial tests. As of December 31, 1996, the aggregate
principal amount outstanding under the Revolving Facility was $4.6 million,
and the amount available to be borrowed was $45.4 million. Although the
<PAGE> 38
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 "- 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 Item 1. "Business - Regulation,
Supervision, and Licensing."
Dependence Upon Key Personnel. The Company's future success will depend
upon the continued services of the Company's senior management as well as the
Company's ability to attract additional members to its management team with
experience in the used car sales and financing industry. The unexpected loss
of the services of any of the Company's key management personnel, or its
inability to attract new management when necessary, could have a material
adverse effect upon the Company. The Company has entered into employment
agreements (which include non-competition provisions) with certain of its
officers.
<PAGE> 39
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 Item 1. "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.
ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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
<PAGE> 40
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- --------
(in thousands)
ASSETS
<S> <C> <C>
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
========= ========
See accompanying notes to Consolidated Financial Statements.
<PAGE> 41
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
</TABLE>
<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.
<PAGE> 42
<TABLE>
<CAPTION>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(in thousands)
RETAINED TOTAL
SHARES AMOUNT EARNINGS STOCKHOLDERS'
------------------- ----------------- (ACCUMULATED EQUITY
PREFERRED COMMON PREFERRED COMMON DEFICIT) (DEFICIT)
--------- ------ --------- ------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 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 Dividends - - - - (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.
<PAGE> 43
<TABLE><CAPTION> UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS 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.
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.
<PAGE> 45
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
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.
<PAGE> 46
Finance receivables held for investment represent finance receivables
that the Company expects to hold until they have matured. Finance receivables
held for sale represent finance receivables that the Company expects to
securitize within the next twelve months.
Unearned finance charges represent the balance of finance income
(interest) remaining from the capitalization of the total interest to be
earned over the original term of the related installment sales contract.
Direct loan origination costs represent the unamortized balance of costs
incurred in the origination of contracts at the Company's dealerships.
The Company follows the provisions of Statement of Financial Accounting
Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases" for
contracts originated at its company dealerships.
An allowance for credit losses (allowance) is established by charging the
provision for credit losses and the allocation of nonrefundable acquisition
discount. For contracts generated by the company dealerships, the allowance is
established by charging the provision for credit losses. Contracts purchased
from third party dealers are generally purchased with a nonrefundable
acquisition discount (discount). The discount is negotiated with third party
dealers pursuant to a financing program that bases the discount on, among
other things, the credit risk of the borrower and the amount to be financed in
relation to the car's wholesale value. The discount is allocated between
discount available for credit losses and discount available for accretion to
interest income. The portion of discount allocated to the allowance is based
upon historical performance and write-offs of contracts acquired from third
party dealers, as well as the general credit worthiness of the borrowers and
the wholesale value of the vehicle. The remaining discount, if any, is
deferred and accreted to income using the interest method. To the extent that
the allowance is considered insufficient to absorb anticipated losses on the
third party dealer portfolio, additions to the allowance are established
through a charge to the provision for credit losses. The evaluation of the
discount and allowance considers such factors as the performance of each third
party dealer's loan portfolio, the Company's historical credit losses, the
overall portfolio quality and delinquency status, the review of specific
problem loans, the value of underlying collateral, and current economic
conditions that may affect the borrower's ability to pay.
Inventory
Inventory consists of used vehicles held for sale and is valued at the
lower of cost or market. Vehicle reconditioning costs are capitalized as a
component of inventory cost. The cost of used vehicles sold is determined on a
specific identification basis. Repossessed vehicles are valued at market
value.
Property and Equipment
Property and Equipment are stated at cost. Depreciation is computed using
straight-line and accelerated methods over the estimated useful lives of the
assets which range from three to ten years for equipment and thirty years for
buildings. Leasehold and land improvements are amortized using straight-line
and accelerated methods over the shorter of the lease term or the estimated
useful lives of the related improvements.
The Company has capitalized costs related to the development of software
products for internal use. Capitalization of costs begins when technological
feasibility has been established and ends when the software is available for
<PAGE> 47
general use. Amortization is computed using the straight-line method over the
estimated economic life of five years.
Trademarks, Trade Names, Logos, and Contract Rights
The registered trade names, "Ugly Duckling Car Sales," "Ugly Duckling
Rent-A-Car," "America's Second Car," "Putting You on the Road to Good Credit"
and related trademarks, logos, and contract rights are stated at cost. The
cost of trademarks, trade names, logos, and contract rights is amortized on a
straight-line basis over their estimated economic lives of ten years.
Goodwill
Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized on a straight-line basis over the
expected periods to be benefited, generally fifteen years. The Company
assesses the recoverability of this intangible asset by determining whether
the amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operation. The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future operating cash
flows are not achieved.
Post Sale Customer Support Programs
A liability for the estimated cost of post sale customer support,
including car repairs and the Company's down payment back and credit card
programs, is established at the time the used car is sold by charging Cost of
Used Cars Sold. The liability is evaluated for adequacy through a separate
analysis of the various programs' historical performance.
Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Advertising
All costs related to production and advertising are expensed in the
period incurred or ratably over the year in relation to revenues or certain
other performance measures. The Company had no advertising costs capitalized
as of December 31, 1996.
Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the date
<PAGE> 48
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.
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.
<PAGE> 49
(3) FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
A summary of Net Finance Receivables at December 31, 1996 and 1995
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- ---------
<S> <C> <C>
Contractually Scheduled Payments $ 77,982 $ 66,425
Less: Unearned Finance Income (19,701) (18,394)
-------- --------
Installment Sales Contract Principal Balances 58,281 48,031
Add: Accrued Interest Receivable 718 613
Loan Origination Costs, Net 189 582
-------- --------
Principal Balances, Net 59,188 49,226
Less: Allowance for Credit Losses (8,125) (8,500)
--------- --------
Finance Receivables, Net $ 51,063 $ 40,726
======== ========
Held for Investment $ 52,188 $ 49,226
Held for Sale 7,000 -
-------- --------
59,188 49,226
Less: Allowance for Credit Losses (8,125) (8,500)
-------- --------
$ 51,063 $ 40,726
======== ========
</TABLE>
Allowance for Credit Losses as a percent of principal balances totaled
13.9% and 17.7% at December 31, 1996 and 1995, respectively.
The changes in the Allowance for Credit Losses for the years ended
December 31, 1996, 1995 and 1994 follow (in thousands):
<TABLE><CAPTION>
DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Balances, Beginning of Year $ 8,500 $ 6,209 $ 2,876
Provision for Credit Losses 9,811 8,359 8,140
Allowance Acquired from Discount 8,963 1,660 579
Net Charge Offs (9,168) (7,728) (5,386)
Sale of Finance Receivables (9,981) - -
------- ------- -------
Balances, End of Year $ 8,125 $ 8,500 $ 6,209
======= ======= =======
</TABLE>
(4) RESIDUALS IN FINANCE RECEIVABLES SOLD
The valuation of the Residual in Finance Receivables Sold as of December
31, 1996 totaled $9,889,000 which represents the present value of the
Company's interest in the anticipated future cash flows of the underlying
portfolio, discounted at rates ranging from 16% to 25%, after taking into
consideration anticipated prepayments and net charge offs.
<PAGE> 50
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.
(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>
<PAGE> 51
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>
<PAGE> 52
(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>
<PAGE> 53
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.
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.
<PAGE> 54
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.
(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>
<PAGE> 55
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.
<PAGE> 56
(13) LEASE COMMITMENTS
The Company leases an operating facility, offices, a vehicle and office
equipment from unrelated entities under operating leases which expire through
August 2001. The leases require monthly rental payments aggregating
approximately $155,000 and contain various renewal options from one to ten
years. In certain instances, the Company is also responsible for occupancy and
maintenance costs, including real estate taxes, insurance, and utility costs.
The Company purchased six car lots, a vehicle reconditioning center, and
two office buildings from Verde. These properties had previously been rented
from Verde pursuant to various leases which called for base monthly rents
aggregating approximately $123,000 plus contingent rents as well as all
occupancy and maintenance costs, including real estate taxes, insurance, and
utilities. In connection with the purchase, Verde returned security deposits
which totaled $364,000. The security deposits are included in Other Assets in
the accompanying Consolidated Balance Sheet as of December 31, 1995.
Rent expense for the year ended December 31, 1996 totaled $2,394,000.
Rents paid to Verde totaled $1,498,000 including contingent rents of $440,000.
There was no accrued rent payable to Verde at December 31, 1996.
Rent expense for the year ended December 31, 1995 totaled $2,377,000.
Rents paid to Verde totaled $1,889,000, including contingent rents of
$465,000, and $113,000 of rent capitalized during the construction period of a
facility. Accrued rent payable to Verde totaled $101,000 at December 31, 1995
and is included in Accrued Expenses and Other Liabilities on the accompanying
Consolidated Balance Sheets.
Rent expense for the year ended December 31, 1994 totaled $1,400,000.
Rents paid to Verde totaled $1,221,000 including contingent rents of $310,000,
and $127,000 of rent capitalized during the construction period of two used
car dealership facilities.
A summary of future minimum lease payments required under noncancelable
operating leases with remaining lease terms in excess of one year as of
December 31, 1996 follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------
<S> <C>
1997 $ 1,788
1998 1,547
1999 1,190
2000 533
2001 378
Thereafter 104
-------
Total $ 5,540
=======
</TABLE>
(14) STOCKHOLDERS' EQUITY
On April 24, 1996, the Company effectuated a 1.16-to-1 stock split. The
effect of this stock split has been reflected for all periods presented in the
Consolidated Financial Statements.
<PAGE> 57
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.
On December 31, 1995, the Company exchanged 1,000,000 shares of Series A
preferred stock for $10,000,000 of subordinated notes payable with Verde.
Cumulative dividends were payable at a rate of 12% per annum through June 21,
1996, at which time the Series A preferred stock was exchanged on a
share-for-share basis for 1,000,000 shares of Series B preferred stock. The
dividends were payable quarterly upon declaration by the Company's Board of
Directors. In November 1996, the Company redeemed the 1,000,000 shares of
Series B preferred stock.
The Company's Board of Directors declared quarterly dividends on
preferred stock totaling approximately $916,000 during the year ended December
31, 1996. There were no cumulative unpaid dividends at December 31, 1996.
(15) STOCK OPTION PLAN
In June, 1995, the Company adopted a long-term incentive plan (stock
option plan). The stock option plan, as amended, sets aside 1,300,000 shares
of common stock to be granted to employees at a price not less than fair
market value of the stock at the date of grant. Options are to vest over a
period to be determined by the Board of Directors upon grant and will
generally expire ten years after the date of grant. The options generally vest
over a period of five years.
At December 31, 1996, there were 388,000 additional shares available for
grant under the Plan. The per share weighted-average fair value of stock
options granted during 1996 and 1995 was $8.39 and $1.10, respectively on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: 1996 - expected dividend yield 0%, risk-free
interest rate of 6.3%, expected volatility of 56.5%, and an expected life of 7
years; 1995 - expected dividend yield 0%, risk-free interest rate of 6.1%,
expected volatility of 56.5% and an expected life of 7 years.
The Company applies APB Opinion 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under
SFAS No. 123, the Company's net earnings and earnings per share would have
been reduced to the pro forma amounts indicated below:
<PAGE> 58
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
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.
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>
<PAGE> 59
(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.
(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.
<PAGE> 60
Finance Receivables and Residuals in Finance Receivables Sold
The carrying amount is assumed to be the fair value because of the
relative short maturity and repayment terms of the portfolio as compared to
similar instruments.
Accounts Payable, Accrued Expenses, and Notes Payable
The carrying amount approximates fair value because of the short maturity
of these instruments. The terms of the Company's notes payable approximate the
terms in the market place at which they could be replaced. Therefore, the fair
market value approximates the carrying value of these financial instruments.
Subordinated Notes Payable
The terms of the Company's subordinated notes payable approximate the
terms in the market place at which they could be replaced. Therefore, the fair
value approximates the carrying value of these financial instruments.
(19) SUBSEQUENT EVENTS
Subsequent to year end, the Company acquired the operating assets of five
used car dealerships and a finance company for a total of approximately
$32,130,000. The acquisition, which was financed with cash and borrowings
under the Company's revolving loan will be accounted for as a purchase.
On February 13, 1997, the Company completed a private placement of
5,075,500 shares of unregistered common stock for approximately $88,850,000
cash, net of stock issuance costs.
(20) BUSINESS SEGMENTS
Operating results and other financial data are presented for the
principal business segments of the Company for the years ended December 31,
1996, 1995, and 1994, respectively. The Company has four distinct business
segments. These consist of retail car sales operations (Company dealerships),
the income generated from the finance receivables generated at the Company
dealerships, finance income generated from third party finance receivables,
and corporate and other operations. In computing operating profit by business
segment, the following items were considered in the Corporate and Other
category: portions of administrative 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.
<PAGE> 61
<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
<PAGE> 62
<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
=============== ========= ========= ========= ========
<PAGE> 63
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>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES
The Company has had no disagreements with its independent accountants in
regard to accounting and financial disclosure and has not changed its
independent accountants during the two most recent fiscal years.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding (i) directors and executive officers of the Company
is set forth under the caption "Information Concerning Directors and Executive
Officers" and (ii) compliance with Section 16(a) is set forth under the
caption "Section 16(a) Beneficial Ownership Reporting Compliance," in the
Company's Proxy Statement relating to its 1997 Annual Meeting of Stockholders
(the "1997 Proxy Statement") incorporated by reference into this Form 10-K
Report, which has been filed with the Commission in accordance with Rule 14a-6
promulgated under the Exchange Act. With the exception of the foregoing
information and other information specifically incorporated by reference into
this report, the Company's 1997 Proxy Statement is not being filed as a part
hereof.
ITEM 11 - EXECUTIVE COMPENSATION
Information regarding executive compensation is set forth under the caption
"Executive Compensation" in the 1997 Proxy Statement, which information is
incorporated herein by reference; provided, however, that the "Compensation
Committee Report on Executive Compensation" and the "Stock Price Performance
Graph" contained in the 1997 Proxy Statement are not incorporated by reference
herein.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the 1997 Proxy Statement, which
information is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions of
management is set forth under the caption "Certain Transactions and Relation-
ships" in the 1997 Proxy Statement, which information is incorporated herein
by reference.
<PAGE> 64
PART IV
ITEM 14 - EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(A) CONSOLIDATED FINANCIAL STATEMENTS.
The following consolidated financial statements of Ugly Duckling
Corporation, are filed as part of this Form 10-K.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report 40
Consolidated Financial Statements and Notes thereto of Ugly Duckling Corporation:
Consolidated Balance Sheets - December 31, 1996 and 1995 41
Consolidated Statements of Operations - for the years ended December 31, 1996,
1995, and 1994 42
Consolidated Statements of Stockholders' Equity - for the years ended
December 31, 1996, 1995, and 1994 43
Consolidated Statements of Cash Flows - for the years ended December 31, 1996,
1995, and 1994 44
Notes to Consolidated Financial Statements 45
</TABLE>
All schedules have been omitted because they are not applicable, not required,
or the information has been disclosed in the consolidated financial statements
and related notes or otherwise in the Form 10K.
(b) REPORTS ON FORM 8-K.
No report on Form 8-K was filed during the last quarter of the period
covered by this report.
(c) Exhibits.
The following exhibits are filed as part of this Form 10-K.
<TABLE><CAPTION>
<S> <C>
EXHIBIT
NUMBER DESCRIPTION
- -------------------------------------------------------------------------------------------------------------------
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)
<PAGE> 65
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)
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 Motor Vehicle Installment Contract Loan and Security Agreement between the Registrant
and General Electric Capital Corporation(2)
10.1(g) Assumption and Amendment Agreement between the Registrant and General Electric Capital Corporation(2)
10.1(h) Amendment No. 7 to Motor Vehicle Installment Contract Loan and Security Agreement between the Registrant
and General Electric Capital Corporation
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)
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*
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)
<PAGE> 66
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.(4)
10.27 Agreement of Purchase and Sale of Assets dated as of December 31, 1996 (3)
10.28 Agreement of Purchase and Sale of Assets dated as of March 5, 1997
11 Earnings (Loss) per Share Computation (4)
22 List of Subsidiaries (4)
23 Independent Auditors' Consent
24.1 Power of Attorney of Robert J. Abrahams
24.2 Power of Attorney of Christopher D. Jennings
24.3 Power of Attorney of John N. MacDonough
24.4 Power of Attorney of Arturo R. Moreno
24.5 Power of Attorney of Frank P. Willey
27 Financial Data Schedule
</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.
(4) Incorporated by reference to the Company's Registration Statement on
Form S-1 (Registration No. 333-22237).
* Indicates a management contract or compensation plan.
<PAGE> 67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
UGLY DUCKLING CORPORATION
a Delaware corporation
By: /s/ Ernest C. Garcia, II
Ernest C. Garcia, II
Chairman of the Board and
Chief Executive Officer
Date: March ___, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE><CAPTION>
<S> <C> <C>
Name and Signature Title Date
- ------------------------- ---------------------------- ---------------
/s/ ERNEST C. GARCIA, II Chief Executive Officer and March 26, 1997
- -------------------------
Ernest C. Garcia, II Director (Principal
/s/ STEVEN T. DARAK Senior Vice President and March 26, 1997
- -------------------------
Steven T. Darak Chief Financial Officer
(Principal financial and
accounting officer)
* Director March 26, 1997
- -------------------------
Robert J. Abrahams
* Director March 26, 1997
- -------------------------
Christopher D. Jennings
* Director March 26, 1997
- -------------------------
John N. MacDonough
* Director March 26, 1997
- -------------------------
Arturo R. Moreno
* Director March 26, 1997
- -------------------------
Frank P. Willey
</TABLE>
* By: /s/ Ernest C. Garcia, II
Ernest C. Garcia, II
Attorney-in-Fact
<PAGE> 68
AMENDMENT NO. 7 TO MOTOR VEHICLE INSTALLMENT CONTRACT
LOAN AND SECURITY AGREEMENT
This Amendment (the "Amendment") is entered into by and between General
Electric Capital Corporation, a New York corporation ("Lender") and Ugly
Duckling Corporation successor in interest to Ugly Duckling Holdings, Inc.
("Ugly Duckling") a Delaware corporation, Duck Ventures, Inc. ("Ventures"),
Champion Acceptance Corporation formerly known as Ugly Duckling Credit
Corporation ("Credit"), Ugly Duckling Car Sales, Inc. ("Sales"), UDRAC, Inc.
("UDRAC"), Champion Financial Services, Inc. ("Champion") all Arizona
corporations, and Ugly Duckling Car Sales Florida, Inc., a Florida corporation
("UDCSF"), ("Ugly Duckling Ventures, Credit, Sales, Champion, UDRAC, and UDCSF
hereinafter collectively and individually referred to as "Borrower").
RECITALS
A. Borrower and Lender entered into a Motor Vehicle Installment Contract
Loan and Security Agreement dated as of June 1, 1994, as amended ("the
"Agreement") pursuant to which Lender agreed to make Advances to Borrower on
the terms and conditions set forth in the Agreement.
B. Borrower and Lender desire to amend certain provisions of the
Agreement pursuant to the terms set forth in this Amendment.
In consideration of the premises and other good and valuable
consideration, the receipt of which is hereby acknowledged by each of the
parties hereto, the parties agree as follows:
1. Defined Terms. Unless otherwise specified herein, all capitalized
terms used in this Amendment shall have the same meaning given to such term(s)
in the Agreement.
2. Amendments to Agreement. Effective as of the date hereof, the
Agreement is hereby amended as follows:
Financial Condition The second sentence of Section 13.6 "Financial
Condition", is hereby deleted and replaced with the following:
"Borrower shall maintain a Net Worth of at least Seventy-Five Million
Dollars ($75,000,000)."
(b) Borrowing Base. The definition of "Borrowing Base" in Section 1.0
of the Amendment is hereby amended in its entirety to read as follows:
"BORROWING BASE: the amount equal to the lesser of (i) Fifty Million
Dollars ($50,000,000.00), or (ii) the sum of (a) sixty-five percent (65%) of
the Outstanding Principal Balance of all Eligible Contracts during the time
they are included in the Borrowing Base pursuant to Section 3.1, which
Eligible Contracts are originated by any Affiliate of Borrower which is a
captive Dealer to Borrower, (b) Seventy-five percent (75%) of the Outstanding
Principal Balance of all Eligible Contracts which are contracts purchased from
Seminole Finance Company ("Seminole Contracts") as part of a liquidating bulk
purchase which occurred in December 1996 and January 1997, and (c)
ninety-eight percent (98%) of, the Outstanding Principal Balance less unearned
<PAGE> 118
discount of all Eligible Contracts, not to exceed one hundred seven percent
(107%) of wholesale Kelly Blue Book for all such Eligible Contracts in the
aggregate during the time they are included in the Borrowing Base pursuant to
Section 3.1 which Eligible Contracts are purchased by Borrower from Dealers
who are not Affiliates of Borrower through Champion Financial Services, Inc."
(c) Capital Structure. The final sentence of Section 14.4 "Capital
Structure", is hereby deleted and replaced with the following:
"Borrower shall not allow a transfer of ownership of Borrower which
results in less than fifteen percent (15%) of the voting stock of Borrower
being owned by Ernest C. Garcia II."
3. Incorporation of Amendment. The parties acknowledge and agree that
this Amendment is incorporated into and made a part of the Agreement, the
terms and provisions of which, unless expressly modified herein, or unless no
longer applicable by their terms, are hereby affirmed and ratified and remain
in full force and effect. To the extent that any term or provision of this
Amendment is or may be deemed expressly inconsistent with any term or
provision of the Agreement, the terms and provisions of this Amendment shall
control. Each reference to the Agreement shall be a reference to the
Agreement as amended by this Amendment. This Amendment, taken together with
the unamended provisions of the Agreement which are affirmed and ratified by
Borrower, contains the entire agreement among the parties regarding the
transactions described herein and supersedes all prior agreement, written or
oral, with respect thereto.
4. Borrower Remains Liable. Borrower hereby confirms that the Agreement
and each document executed by Borrower in connection therewith continue
unimpaired and in full force and effect and shall cover and secure all of
Borrower's existing and future obligations to Lender.
5. Headings. The paragraph headings contained in this Amendment are for
convenience of reference only and shall not be considered a part of this
Amendment in any respect.
6. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of Arizona. Nothing herein shall
preclude Lender from bringing suit or taking other legal action in any
jurisdiction.
7. Execution in Counterparts. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to
be an original and all of which taken together shall constitute one and the
same instrument.
<PAGE> 119
IN WITNESS WHEREOF, the undersigned have entered into this Amendment as of
February 10, 1997.
GENERAL ELECTRIC CAPITAL
CORPORATION UGLY DUCKLING CAR SALES, INC.
By: /s/ Farhan Hassan By: /s/ Steven P. Johnson
-------------------------- ---------------------------------
Title: Account Executive Title: Secretary
UGLY DUCKLING CORPORATION UDRAC, INC.
By: /s/ Steven P. Johnson By: /s/ Steven P. Johnson
-------------------------- ---------------------------------
Title: Secretary Title: Secretary
DUCK VENTURES, INC. CHAMPION FINANCIAL SERVICES, INC.
By: /s/ Steven P. Johnson By: /s/ Steven P. Johnson
-------------------------- ---------------------------------
Title: Secretary Title: Secretary
CHAMPION ACCEPTANCE UGLY DUCKLING CAR SALES FLORIDA
CORPORATION formerly known as UGLY INC.
DUCKLING CREDIT CORPORATION
By: /s/ Steven P. Johnson
By: /s/ Steven P. Johnson ---------------------------------
-------------------------- Title: Secretary
Title: Secretary
<PAGE> 120
RESTATED
UGLY DUCKLING CORPORATION
LONG-TERM INCENTIVE PLAN
ARTICLE 1 PURPOSE
1.1. GENERAL. The purpose of the Ugly Duckling Corporation Long-Term
Incentive Plan (the "Plan") is to promote the success, and enhance the value,
of Ugly Duckling Corporation and its subsidiaries (collectively, the
"Company") by linking the personal interests of its employees, consultants and
advisors to those of Company shareholders and by providing its employees,
consultants and advisors with an incentive for outstanding performance. The
Plan is further intended to provide flexibility to the Company in its ability
to motivate, attract, and retain the services of employees, consultants and
advisors upon whose judgment, interest, and special effort the successful
conduct of the Company's operation is largely dependent. Accordingly, the
Plan permits the grant of incentive awards from time to time to selected
employees, consultants and advisors of the Company and any Subsidiary.
ARTICLE 2 EFFECTIVE DATE
2.1. EFFECTIVE DATE. The Plan is effective as of June 30, 1995 (the
"Effective Date). Within one year after the Effective Date, the Plan shall
be submitted to the shareholders of the Company for their approval. The Plan
will be deemed to be approved by the shareholders if it receives the
affirmative vote of the holders of a majority of the shares of stock of the
Company present, or represented, and entitled to vote at a meeting duly held
(or by the written consent of the holders of a majority of the shares of stock
of the Company entitled to vote) in accordance with the applicable provisions
of the Arizona General Corporation Law and the Company's Bylaws and Articles
of Incorporation. Any Awards granted under the Plan prior to shareholder
approval are effective when made (unless the Committee specifies otherwise at
the time of grant), but no Award may be exercised or settled and no restric-
tions relating to any Award may lapse before shareholder approval. If the
shareholders fail to approve the Plan, any Award previously made shall be
automatically canceled without any further act.
ARTICLE 3 DEFINITIONS AND CONSTRUCTION.
3.1. DEFINITIONS. When a word or phrase appears in this Plan with the
initial letter capitalized, and the word or phrase does not commence a
sentence, the word or phrase shall generally be given the meaning ascribed to
it in this Section or in Sections 1.1 or 2.1 unless a clearly different
meaning is required by the context. The following words and phrases shall
have the following meanings:
(a) "Award" means any Option, Stock Appreciation Right, Restricted
Stock Award, Performance Share Award, Dividend Equivalent Award, or Other
Stock-Based Award, or any other right or interest relating to Stock or cash,
granted to a Participant under the Plan.
(b) "Award Agreement" means any written agreement, contract, or other
instrument or document evidencing an Award.
<PAGE> 69
(c) "Board" means the Board of Directors of the Company or a
Committee thereof formed under Section 4, as the case may be.
(d) "Cause" means (except as otherwise provided in on Option
Agreement) if the Board, in its reasonable and good faith discretion,
determines that the employee, consultant or advisor (i) has developed or
pursued interests substantially adverse to the Company, (ii) materially
breached any employment, engagement or confidentiality agreement or otherwise
failed to satisfactorily discharge his or her duties, (iii) has not devoted
all or substantially all of his or her business time, effort and attention to
the affairs of the Company (or such lesser amount as has been agreed to in
writing by the Company), (iv) is convicted of a felony involving moral
turpitude, or (v) has engaged in activities or omissions that are detrimental
to the well-being of the Company.
(e) "Change of Control" means and includes each of the following
(except as otherwise provided in an Option Agreement):
(1) there shall be consummated any consolidation or merger of the Company in
which the Company is not the continuing or surviving entity, or pursuant to
which Stock would be converted into cash, securities or other property, other
than a merger of the Company in which the holders of the Company's Stock
immediately prior to the merger have the same proportionate ownership of
beneficial interest of common stock or other voting securities of the
surviving entity immediately after the merger;
(2) there shall be consummated any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of assets or earning
power aggregating more than 40% of the assets or earning power of the Company
and its subsidiaries (taken as a whole), other than pursuant to a sale-
leaseback, structured finance or other form of financing transaction;
(3) the shareholders of the Company shall approve any plan or proposal for
liquidation or dissolution of the Company;
(4) any person (as such term is used in Section 13(d) and 14(d)(2) of the
Exchange Act), other than any current shareholder of the Company or affiliate
thereof or any employee benefit plan of the Company or any subsidiary of the
Company or any entity holding shares of capital stock of the Company for or
pursuant to the terms of any such employee benefit plan in its role as an
agent or trustee for such plan, shall become the beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act) of 20% or more of the Company's
outstanding Stock; or
(5) during any period of two consecutive years, individuals who at the
beginning of such period shall fail to constitute a majority thereof, unless
the election, or the nomination for election by the Company's shareholders, of
each new director was approved by a vote of at least two-thirds of the
directors then still in office who were directors at the beginning of the
period.
(f) "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
(g) "Committee" means the committee of the Board described in Article
4.
(h) "Disability" shall mean any illness or other physical or mental
condition of a Participant which renders the Participant incapable of
<PAGE> 70
performing his customary and usual duties for the Company, or any medically
determinable illness or other physical or mental condition resulting from a
bodily injury, disease or mental disorder which in the judgment of the
Committee is permanent and continuous in nature. The Committee may require
such medical or other evidence as it deems necessary to judge the nature and
permanency of the Participant's condition.
(i) "Dividend Equivalent" means a right granted to a Participant
under Article 11.
(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
(k) "Fair Market Value" means with respect to Stock or any other
property, the fair market value of such Stock or other property as determined
by the Board in its discretion, under one of the following methods: (i) the
average of the closing bid and asked prices for the Stock as reported on any
national securities exchange on which the Stock is then listed (which shall
include the Nasdaq National Market) for that date or, if no prices are so
reported for that date, such prices on the next preceding date for which
closing bid and asked prices were reported; or (ii) the price as determined by
such methods or procedures as may be established from time to time by the
Board.
(l) "Incentive Stock Option" means an Option that is intended to meet
the requirements of Section 422 of the Code or any successor provision
thereto.
(m) "Non-Qualified Stock Option" means an Option that is not intended
to be an Incentive Stock Option.
(n) "Option" means a right granted to a Participant under Article 7
of the Plan to purchase Stock at a specified price during specified time
periods. An Option may be either an Incentive Stock Option or a Non-Qualified
Stock Option.
(o) "Other Stock-Based Award" means a right, granted to a Participant
under Article 12, that relates to or is valued by reference to Stock or other
Awards relating to Stock.
(p) "Participant" means a person who, as an employee of or consultant
or advisor to the Company or any Subsidiary, has been granted an Award under
the Plan. A "Participant" shall not include any Director of the Company or
any Subsidiary who is not also an employee of or consultant to the Company or
any Subsidiary.
(q) "Performance Share" means a right granted to a Participant under
Article 9, to receive cash, Stock, or other Awards, the payment of which is
contingent upon achieving certain performance goals established by the
Committee.
(r) "Plan" means the Ugly Duckling Corporation Long-Term Incentive
Plan, as amended from time to time.
(s) "Restricted Stock Award" means Stock granted to a Participant
under Article 10 that is subject to certain restrictions and to risk of
forfeiture.
<PAGE> 71
(t) "Stock" means the common stock of the Company and such other
securities of the Company that may be substituted for Stock pursuant to
Article 13.
(u) "Stock Appreciation Right" or "SAR" means a right granted to a
Participant under Article 8 to receive a payment equal to the difference
between the Fair Market Value of a share of Stock as of the date of exercise
of the SAR over the grant price of the SAR, all as determined pursuant to
Article 8.
(v) "Subsidiary" means any corporation, domestic or foreign, of which
a majority of the outstanding voting stock or voting power is beneficially
owned directly or indirectly by the Company.
ARTICLE 4 ADMINISTRATION
4.1. BOARD/COMMITTEE. The Plan shall be administered by the Board of
Directors or, to the extent required to comply with Rule 16b-3 promulgated
under the Exchange Act, a Committee that is appointed by, and serves at the
discretion of, the Board. Any Committee shall consist of at least two
individuals who are members of the Board and are "disinterested persons," as
such term is defined in Rule 16b-3 promulgated under Section 16 of the
Exchange Act or any successor provision, except as may be otherwise permitted
under Section 16 of the Exchange Act and the regulations and rules promulgated
thereunder. For purposes of this Plan, the "Board" shall mean the Board of
Directors or the Committee, as the case may be.
4.2. ACTION BY THE BOARD. A majority of the Board shall constitute a
quorum. The acts of a majority of the members present at any meeting at which
a quorum is present and acts approved in writing by a majority of the Board in
lieu of a meeting shall be deemed the acts of the Board. Each member of the
Board is entitled to, in good faith, rely or act upon any report or other
information furnished to that member by any officer or other employee of the
Company or any Subsidiary, the Company's independent certified public
accountants, or any executive compensation consultant or other professional
retained by the Company to assist in the administration of the Plan.
4.3. AUTHORITY OF BOARD. The Board has the exclusive power, authority
and discretion to:
(b) Designate Participants;
(c) Determine the type or types of Awards to be granted to each
Participant;
(d) Determine the number of Awards to be granted and the number of
shares of Stock to which an Award will relate;
(e) Determine the terms and conditions of any Award granted under the
Plan including but not limited to, the exercise price, grant price, or
purchase price, any restrictions or limitations on the Award, any schedule for
lapse of forfeiture restrictions or restrictions on the exercisability of an
Award, and accelerations or waivers thereof, based in each case on such
considerations as the Board in its sole discretion determines;
(f) Determine whether, to what extent, and under what circumstances
an Award may be settled in, or the exercise price of an Award may be paid in,
cash, Stock, other Awards, or other property, or an Award may be canceled,
forfeited, or surrendered;
<PAGE> 72
(g) Prescribe the form of each Award Agreement, which need not be
identical for each Participant;
(h) Decide all other matters that must be determined in connection
with an Award;
(i) Establish, adopt or revise any rules and regulations as it may
deem necessary or advisable to administer the Plan; and
(j) Make all other decisions and determinations that may be required
under the Plan or as the Board deems necessary or advisable to administer the
Plan.
4.4. DECISIONS BINDING. The Board's interpretation of the Plan, any
Awards granted under the Plan, any Award Agreement and all decisions and
determinations by the Board with respect to the Plan are final, binding, and
conclusive on all parties.
ARTICLE 5 SHARES SUBJECT TO THE PLAN
5.1. NUMBER OF SHARES. Subject to adjustment provided in Section 15.1,
the aggregate number of shares of Stock reserved and available for Awards or
which may be used to provide a basis of measurement for or to determine the
value of an Award (such as with a Stock Appreciation Right or Performance
Share Award) shall be 1,800,000.
5.2. LAPSED AWARDS. To the extent that an Award terminates, expires or
lapses for any reason, any shares of Stock subject to the Award will again be
available for the grant of an Award under the Plan and shares subject to SARs
or other Awards settled in cash will be available for the grant of an Award
under the Plan, in each case to the full extent available pursuant to the
rules and interpretations of the Securities and Exchange Commission under
Section 16 of the Exchange Act, if applicable.
5.3. STOCK DISTRIBUTED. Any Stock distributed pursuant to an Award may
consist, in whole or in part, of authorized and unissued Stock, treasury Stock
or Stock purchased on the open market.
5.4. LIMITATIONS ON AWARDS TO ANY SINGLE PARTICIPANT. No single
Participant may receive Awards covering in the aggregate more than 250,000
shares of Stock during any single calendar year.
ARTICLE 6 ELIGIBILITY
6.1. GENERAL. Awards may be granted only to individuals who are
employees (including employees who also are directors or officers) of the
Company or a Subsidiary or to consultants or advisors thereto, as determined
by the Board.
ARTICLE 7 STOCK OPTIONS
7.1. GENERAL. The Board is authorized to grant Options to Participants
on the following terms and conditions:
(b) EXERCISE PRICE. The exercise price per share of Stock under an Option
shall be determined by the Board.
<PAGE> 73
(c) TIME AND CONDITIONS OF EXERCISE. The Board shall determine the time
or times at which an Option may be exercised in whole or in part, provided
that no Option may be exercisable prior to six months following the date of
the grant of such Option. The Board also shall determine the performance or
other conditions, if any, that must be satisfied before all or part of an
Option may be exercised.
(d) PAYMENT. The Board shall determine the methods by which the
exercise price of an Option may be paid, the form of payment, including,
without limitation, cash, shares of Stock, or other property (including net
issuance or other "cashless exercise" arrangements), and the methods by which
shares of Stock shall be delivered or deemed to be delivered to Participants.
Without limiting the power and discretion conferred on the Board pursuant to
the preceding sentence, the Board may, in the exercise of its discretion, but
need not, allow a Participant to pay the Option price by directing the Company
to withhold from the shares of Stock that would otherwise be issued upon
exercise of the Option that number of shares having a Fair Market Value on the
exercise date equal to the Option price, all as determined pursuant to rules
and procedures established by the Board.
(e) EVIDENCE OF GRANT. All Options shall be evidenced by a written
Award Agreement between the Company and the Participant. The Award Agreement
shall include such provisions as may be specified by the Board.
7.2 INCENTIVE STOCK OPTIONS. The terms of any Incentive Stock
Options granted under the Plan must comply with the following additional
rules:
(b) EXERCISE PRICE. The exercise price per share of Stock shall be set
by the Board, provided that the exercise price for any Incentive Stock Option
may not be less than the Fair Market Value as of the date of the grant.
(c) EXERCISE. In no event, may any Incentive Stock Option be
exercisable for more than ten years from the date of its grant.
(d) LAPSE OF OPTION. An Incentive Stock Option shall lapse under the
following circumstances:
(1) The Incentive Stock Option shall lapse ten (10) years after it is
granted, unless an earlier time is set in the Award Agreement.
(2) The Incentive Stock Option shall lapse upon termination of
employment for Cause or for any other reason, other than the Participant's
death or Disability, unless the Committee determines in its discretion to
extend the exercise period for no more than ninety (90) days after the
Participant's termination of employment.
(3) In the case of the Participant's termination of employment due to
Disability or death, the Incentive Stock Option shall lapse upon termination
of employment, unless the Committee determines in its discretion to extend the
exercise period of the Incentive Stock Option for no more than twelve (12)
months after the date the Participant terminates employment. Upon the
Participant's death, any vested and otherwise exercisable Incentive Stock
Options may be exercised by the Participant's legal representative or
representatives, by the person or persons entitled to do so under the
Participant's last will and testament, or, if the Participant shall fail to
make testamentary disposition of such Incentive Stock Option or shall die
intestate, by the person or persons entitled to receive said Incentive Stock
Option under the applicable laws of descent and distribution.
<PAGE> 74
(e) INDIVIDUAL DOLLAR LIMITATION. The aggregate Fair Market Value
(determined as of the time an Award is made) of all shares of Stock with
respect to which Incentive Stock Options are first exercisable by a
Participant in any calendar year may not exceed One Hundred Thousand Dollars
($100,000.00).
(f) TEN PERCENT OWNERS. An Incentive Stock Option shall be granted to
any individual who, at the date of grant, owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of Stock of
the Company only if, at the time such Option is granted, the Option price is
at least one hundred ten percent (110%) of the Fair Market Value of the Stock
and such Option by its terms is not exercisable after the expiration of five
(5) years from the date the Option is granted.
(g) EXPIRATION OF INCENTIVE STOCK OPTIONS. No Award of an Incentive
Stock Option may be made pursuant to this Plan after the tenth anniversary of
the Effective Date.
(h) RIGHT TO EXERCISE. During a Participant's lifetime, an Incentive
Stock Option may be exercised only by the Participant.
(i) EMPLOYEES ONLY. Incentive Stock Options may be granted only to
Participants who are employees of the Company or any Subsidiary.
ARTICLE 8 STOCK APPRECIATION RIGHTS
8.1. GRANT OF SARs. The Board is authorized to grant SARs to
Participants on the following terms and conditions:
(b) RIGHT TO PAYMENT. Upon the exercise of a Stock Appreciation Right,
the Participant to whom it is granted has the right to receive the excess, if
any, of:
(1) The Fair Market Value of one share of Stock on the date of exercise;
over
(2) The grant price of the Stock Appreciation Right as determined by the
Board, which shall not be less than the Fair Market Value of one share of
Stock on the date of grant in the case of any SAR related to any Incentive
Stock Option.
(c) OTHER TERMS. All awards of Stock Appreciation Rights shall be
evidenced by an Award Agreement. The terms, methods of exercise, methods of
settlement, form of consideration payable in settlement, and any other terms
and conditions of any Stock Appreciation Right shall be determined by the
Board at the time of the grant of the Award and shall be reflected in the
Award Agreement.
ARTICLE 9 PERFORMANCE SHARES
9.1. GRANT OF PERFORMANCE SHARES. The Board is authorized to grant
Performance Shares to Participants on such terms and conditions as may be
selected by the Board. The Board shall have the complete discretion to
determine the number of Performance Shares granted to each Participant. All
Awards of Performance Shares shall be evidenced by an Award Agreement.
<PAGE> 75
9.2. RIGHT TO PAYMENT. A grant of Performance Shares gives the
Participant rights, valued as determined by the Board, and payable to, or
exercisable by, the Participant to whom the Performance Shares are granted, in
whole or in part, as the Board shall establish at grant or thereafter. The
Board shall set performance goals and other terms or conditions to payment of
the Performance Shares in its discretion which, depending on the extent to
which they are met, will determine the number and value of Performance Shares
that will be paid to the Participant, provided that the time period during
which the performance goals must be met shall, in all cases, exceed six
months.
9.3. OTHER TERMS. Performance Shares may be payable in cash, Stock, or
other property, and have such other terms and conditions as determined by the
Board and reflected in the Award Agreement.
ARTICLE 10 RESTRICTED STOCK AWARDS
10.1. GRANT OF RESTRICTED STOCK. The Board is authorized to make Awards
of Restricted Stock to Participants in such amounts and subject to such terms
and conditions as may be selected by the Board. All Awards of Restricted
Stock shall be evidenced by a Restricted Stock Award Agreement.
10.2. ISSUANCE AND RESTRICTIONS. Restricted Stock shall be subject to
such restrictions on transferability and other restrictions as the Board may
impose (including, without limitation, limitations on the right to vote
Restricted Stock or the right to receive dividends on the Restricted Stock).
These restrictions may lapse separately or in combination at such times, under
such circumstances, in such installments, or otherwise, as the Board
determines at the time of the grant of the Award or thereafter.
10.3. FORFEITURE. Except as otherwise determined by the Board at the
time of the grant of the Award or thereafter, upon termination of employment
during the applicable restriction period, Restricted Stock that is at that
time subject to restrictions shall be forfeited and reacquired by the Company,
provided, however, that the Board may provide in any Award Agreement that
restrictions or forfeiture conditions relating to Restricted Stock will be
waived in whole or in part in the event of terminations resulting from
specified causes, and the Board may in other cases waive in whole or in part
restrictions or forfeiture conditions relating to Restricted Stock.
10.4. CERTIFICATES FOR RESTRICTED STOCK. Restricted Stock granted under
the Plan may be evidenced in such manner as the Board shall determine. If
certificates representing shares of Restricted Stock are registered in the
name of the Participant, certificates must bear an appropriate legend
referring to the terms, conditions, and restrictions applicable to such
Restricted Stock, and the Company shall retain physical possession of the
certificate until such time as all applicable restrictions lapse.
ARTICLE 11 DIVIDEND EQUIVALENTS
11.1. GRANT OF DIVIDEND EQUIVALENTS. The Board is authorized to grant
Dividend Equivalents to Participants subject to such terms and conditions as
may be selected by the Board. Dividend Equivalents shall entitle the
Participant to receive payments equal to dividends with respect to all or a
portion of the number of shares of Stock subject to an Option Award or SAR
Award, as determined by the Board. The Board may provide that Dividend
Equivalents be paid or distributed when accrued or be deemed to have been
reinvested in additional shares of Stock, or otherwise reinvested.
<PAGE> 76
ARTICLE 12 OTHER STOCK-BASED AWARDS
12.1. GRANT OF OTHER STOCK-BASED AWARDS. The Board is authorized,
subject to limitations under applicable law, to grant to Participants such
other Awards that are payable in, valued in whole or in part by reference to,
or otherwise based on or related to shares of Stock, as deemed by the Board to
be consistent with the purposes of the Plan, including without limitation
shares of Stock awarded purely as a "bonus" and not subject to any
restrictions or conditions, convertible or exchangeable debt securities, other
rights convertible or exchangeable into shares of Stock, and Awards valued by
reference to book value of shares of Stock or the value of securities of or
the performance of specified Subsidiaries. The Board shall determine the
terms and conditions of such Awards.
ARTICLE 13 PROVISIONS APPLICABLE TO AWARDS
13.1. STAND-ALONE, TANDEM, AND SUBSTITUTE AWARDS. Awards granted under
the Plan may, in the discretion of the Board, be granted either alone or in
addition to, in tandem with, or in substitution for, any other Award granted
under the Plan. If an Award is granted in substitution for another Award, the
Board may require the surrender of such other Award in consideration of the
grant of the new Award. Awards granted in addition to or in tandem with other
Awards may be granted either at the same time as or at a different time from
the grant of such other Awards.
13.2. EXCHANGE PROVISIONS. The Board may at any time offer to exchange
or buy out any previously granted Award for a payment in cash, Stock, or
another Award (subject to Section 13.1), based on the terms and conditions the
Board determines and communicates to the Participant at the time the offer is
made.
13.3. TERM OF AWARD. The term of each Award shall be for the period as
determined by the Board, provided that in no event shall the term of any
Incentive Stock Option or a Stock Appreciation Right granted in tandem with
the Incentive Stock Option exceed a period of ten years from the date of its
grant.
13.4. FORM OF PAYMENT FOR AWARDS. Subject to the terms of the Plan and
any applicable law or Award Agreement, payments or transfers to be made by the
Company or a Subsidiary on the grant or exercise of an Award may be made in
such forms as the Board determines at or after the time of grant, including
without limitation, cash, Stock, other Awards, or other property, or any
combination, and may be made in a single payment or transfer, in installments,
or on a deferred basis, in each case determined in accordance with rules
adopted by, and at the discretion of, the Board. The Board may also authorize
payment in the exercise of an Option by net issuance or other cashless
exercise methods.
13.5. LIMITS ON TRANSFER. No right or interest of a Participant in any
Award may be pledged, encumbered, or hypothecated to or in favor of any party
other than the Company or a Subsidiary, or shall be subject to any lien,
obligation, or liability of such Participant to any other party other than the
Company or a Subsidiary. Except as otherwise provided below, no Award shall
be assignable or transferable by a Participant other than by will or the laws
of descent and distribution or, with the consent of the Board in its sole
discretion and except in the case of an Incentive Stock Option, pursuant to a
court order that would otherwise satisfy the requirements to be a domestic
relations order as defined in Section 414(p)(1)(B) of the Code, if the order
satisfies Section 414(p)(1)(A) of the Code notwithstanding that such an order
<PAGE> 77
relates to the transfer of a stock option rather than an interest in an
employee benefit plan. In the Award Agreement for any Award other than an
Award that includes an Incentive Stock Option, the Board may allow a
Participant to assign or otherwise transfer all or a portion of the rights
represented by the Award to specified individuals or classes of individuals,
or to a trust benefiting such individuals or classes of individuals, subject
to such restrictions, limitations, or conditions as the Board deems to be
appropriate.
13.6 BENEFICIARIES. Notwithstanding Section 13.5, a Participant may, in
the manner determined by the Board, designate a beneficiary to exercise the
rights of the Participant and to receive any distribution with respect to any
Award upon the Participant's death. A beneficiary, legal guardian, legal
representative, or other person claiming any rights under the Plan is subject
to all terms and conditions of the Plan and any Award Agreement applicable to
the Participant, except to the extent the Plan and Award Agreement otherwise
provide, and to any additional restrictions deemed necessary or appropriate by
the Board. If the Participant is married and resides in a jurisdiction in
which community property laws apply, a designation of a person other than the
Participant's spouse as his beneficiary with respect to more than 50 percent
of the Participant's interest in the Award shall not be effective without the
written consent of the Participant's spouse. If no beneficiary has been
designated or survives the Participant, payment shall be made to the person
entitled thereto under the Participant's will or the laws of descent and
distribution. Subject to the foregoing, a beneficiary designation may be
changed or revoked by a Participant at any time provided the change or
revocation is filed with the Board.
13.7. STOCK CERTIFICATES. All Stock certificates delivered under the
Plan are subject to any stop-transfer orders and other restrictions as the
Board deems necessary or advisable to comply with federal or state securities
laws, rules and regulations and the rules of any national securities exchange
or automated quotation system on which the Stock is listed, quoted, or traded.
The Board may place legends on any Stock certificate to reference restrictions
applicable to the Stock.
13.8. TENDER OFFERS. In the event of a public tender for all or any
portion of the Stock, or in the event that a proposal to merge, consolidate,
or otherwise combine with another company is submitted for shareholder
approval, the Board may in its sole discretion declare previously granted
Options to be immediately exercisable. To the extent that this provision
causes Incentive Stock Options to exceed the dollar limitation set forth in
Section 7.2(d), the excess Options shall be deemed to be Non-Qualified Stock
Options.
13.9. CHANGE OF CONTROL. A Change of Control shall, in the sole
discretion of the Board:
(a) Cause every Award outstanding hereunder to become fully
exercisable and all restrictions on outstanding Awards to lapse and allow each
Participant the right to exercise Awards prior to the occurrence of the event
otherwise terminating the Awards over such period as the Board, in its sole
and absolute discretion, shall determine. To the extent that this provision
causes Incentive Stock Options to exceed the dollar limitation set forth in
Section 7.2(d), the excess Options shall be deemed to be Non-Qualified Stock
Options; or
(b) Cause every Award outstanding hereunder to terminate, provided
that the surviving or resulting corporation shall tender an option or options
<PAGE> 78
to purchase its shares or exercise such rights on terms and conditions, as to
the number of shares, rights or otherwise, which shall substantially preserve
the rights and benefits of any Award then outstanding hereunder.
ARTICLE 14 CHANGES IN CAPITAL STRUCTURE
14.1. GENERAL. In the event a stock dividend is declared upon the
Stock, the shares of Stock then subject to each Award (and the number of
shares subject thereto) shall be increased proportionately without any change
in the aggregate purchase price therefor. Subject to Section 13.9, in the
event the Stock shall be changed into or exchanged for a different number or
class of shares of Stock or of shares of another corporation, whether through
reorganization, recapitalization, stock split-up or combination of shares,
there shall be substituted for each such share of Stock then subject to each
Award (and for each share of Stock then subject thereto) the number and class
of shares of Stock into which each outstanding share of Stock shall be so
exchanged, all without any change in the aggregate purchase price for the
shares then subject to each Award.
ARTICLE 15 AMENDMENT, MODIFICATION AND TERMINATION
15.1. AMENDMENT, MODIFICATION AND TERMINATION. With the approval of the
Board, at any time and from time to time, the Board may terminate, amend or
modify the Plan. However, without approval of the shareholders of the Company
or other conditions (as may be required by the Code, by the insider trading
rules of Section 16 of the Exchange Act, by any national securities exchange
or system on which the Stock is listed or reported, or by a regulatory body
having jurisdiction), no such termination, amendment, or modification may:
(b) Materially increase the total number of shares of Stock that may be
issued under the Plan, except as provided in Section 14.1;
(c) Materially modify the eligibility requirements for participation in
the Plan; or
(d) Materially increase the benefits accruing to Participants under the
Plan.
15.2. AWARDS PREVIOUSLY GRANTED. No termination, amendment, or
modification of the Plan shall adversely affect in any material way any Award
previously granted under the Plan, without the written consent of the
Participant.
ARTICLE 16 GENERAL PROVISIONS
16.1. NO RIGHTS TO AWARDS. No Participant or employee or consultant
shall have any claim to be granted any Award under the Plan, and neither the
Company nor the Board is obligated to treat Participants and employees or
consultants uniformly.
16.2. NO STOCKHOLDERS RIGHTS. No Award gives the Participant any of the
rights of a shareholder of the Company unless and until shares of Stock are in
fact issued to such person in connection with such Award.
16.3. WITHHOLDING. The Company or any Subsidiary shall have the
authority and the right to deduct or withhold, or require a Participant to
remit to the Company, an amount sufficient to satisfy United States Federal,
state, and local taxes (including the Participant's FICA obligation and any
<PAGE> 79
withholding obligation imposed by any country other than the United States in
which the Participant resides) required by law to be withheld with respect to
any taxable event arising as a result of this Plan. With respect to
withholding required upon any taxable event under the Plan, Participants may
elect, subject to the Board's approval, to satisfy the withholding
requirement, in whole or in part, by having the Company or any Subsidiary
withhold shares of Stock having a Fair Market Value on the date of withholding
equal to the amount to be withheld for tax purposes in accordance with such
procedures as the Board establishes. The Board may, at the time any Award is
granted, require that any and all applicable tax withholding requirements be
satisfied by the withholding of shares of Stock as set forth above.
16.4. NO RIGHT TO EMPLOYMENT. Nothing in the Plan or any Award
Agreement shall interfere with or limit in any way the right of the Company or
any Subsidiary to terminate any Participant's employment at any time, nor
confer upon any Participant any right to continue in the employ of the Company
or any Subsidiary.
16.5. UNFUNDED STATUS OF AWARDS. The Plan is intended to be an
"unfunded" plan for incentive and deferred compensation. With respect to any
payments not yet made to a Participant pursuant to an Award, nothing contained
in the Plan or any Award Agreement shall give the Participant any rights that
are greater than those of a general creditor of the Company or any Subsidiary.
16.6. INDEMNIFICATION. To the extent allowable under applicable law,
each member of the Committee or of the Board shall be indemnified and held
harmless by the Company from any loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by such member in connection with or
resulting from any claim, action, suit, or proceeding to which he or she may
be a party or in which he or she may be involved by reason of any action or
failure to act under the Plan and against and from any and all amounts paid by
him or her in satisfaction of judgment in such action, suit, or proceeding
against him or her provided he or she gives the Company an opportunity, at its
own expense, to handle and defend the same before he or she undertakes to
handle and defend it on his or her own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights of indemnification
to which such persons may be entitled under the Company's Articles of
Incorporation or By-Laws, as a matter of law, or otherwise, or any power that
the Company may have to indemnify them or hold them harmless.
16.7. RELATIONSHIP TO OTHER BENEFITS. No payment under the Plan shall
be taken into account in determining any benefits under any pension,
retirement, savings, profit sharing, group insurance, welfare or other benefit
plan of the Company or any Subsidiary.
16.8. EXPENSES. The expenses of administering the Plan shall be borne
by the Company and its Subsidiaries.
16.9. TITLES AND HEADINGS. The titles and headings of the Sections in
the Plan are for convenience of reference only, and in the event of any
conflict, the text of the Plan, rather than such titles or headings, shall
control.
16.10. FRACTIONAL SHARES. No fractional shares of stock shall be issued
and the Board shall determine, in its discretion, whether cash shall be given
in lieu of fractional shares or whether such fractional shares shall be
eliminated by rounding up.
<PAGE> 80
16.11. SECURITIES LAW COMPLIANCE. With respect to any person who is, on
the relevant date, obligated to file reports under Section 16 of the Exchange
Act, transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Exchange Act. To the
extent any provision of the Plan or action by the Board fails to so comply, it
shall be void to the extent permitted by law and voidable as deemed advisable
by the Board, and such provision or action shall be deemed to be modified so
as to comply with Rule 16b-3.
16.12. GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company
to make payment of awards in Stock or otherwise shall be subject to all
applicable laws, rules, and regulations, and to such approvals by government
agencies as may be required. The Company shall be under no obligation to
register under the Securities Act of 1933, as amended, any of the shares of
Stock paid under the Plan. If the shares paid under the Plan may in certain
circumstances be exempt from registration under such act, the Company may
restrict the transfer of such shares in such manner as it deems advisable to
ensure the availability of any such exemption.
16.13. GOVERNING LAW. The Plan and all Award Agreements shall be
construed in accordance with and governed by the laws of the State of Arizona.
<PAGE> 81
AGREEMENT OF PURCHASE AND SALE OF ASSETS
BY AND AMONG
UGLY DUCKLING CORPORATION
AND
E-Z PLAN, INC.
MCCOMBS FAMILY, L.L.C.
MCCOMBS HFC LIMITED, D/B/A MCCOMBS AUTOMOTIVE CENTER
LYNDA G. MCCOMBS
MARSHA M. SHIELDS,
AND
CONNIE M. MCNAB
DATED AS OF
MARCH 5, 1997
<PAGE> 82
AGREEMENT OF PURCHASE AND SALE OF ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE 1.PURCHASE AND SALE OF ASSETS 1
1.1 Purchase and Sale of the Assets 1
1.2 Assets Not Being Transferred 2
1.3 Assumed Liabilities 3
1.4 Liabilities Not Being Assumed 3
1.5 Purchase Price 4
1.6 Payment 4
1.7 Allocation of Purchase Price; Accounting Treatment 4
1.8 Lease Agreements 5
1.9 Transfer Fees and Taxes 6
1.10 Special Provisions relating to Contracts 6
ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF PURCHASER 7
2.1 Organization and Qualification 7
2.2 Authority Relative to this Agreement 8
2.3 No Conflicts 8
2.4 No Consents 8
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF
SELLER, SHAREHOLDERS AND LESSORS 8
3.1 Organization and Qualification 8
3.2 Authority Relative to this Agreement 9
3.3 No Conflicts 9
3.4 No Consents 10
3.5 Capitalization 10
3.6 Financial Statements 10
3.7 Subsidiaries 10
3.8 Absence of Undisclosed Liabilities 10
3.9 No Material Adverse Changes 10
3.10 Absence of Certain Developments 10
3.11 Real Estate 12
3.12 Good Title to and Condition of Inventory and Acquired
Assets 13
3.13 Title and Condition of Contracts 14
3.14 Solvency; Bulk Sales 16
3.15 Tax Matters 17
3.16 Contracts and Commitments 17
3.17 Restrictions on Business Activities 19
3.18 Intellectual Property 19
3.19 Litigation 19
3.20 Brokers' Fees 20
3.21 Employment Matters 20
3.22 Employee Benefit Plans 20
3.23 Permitted Liens 20
3.24 Insurance 21
3.25 Affiliate Transactions 21
3.26 Compliance with Laws; Permits 21
3.27 Warranties 22
3.28 Disclosure 22
ARTICLE 4 CONDUCT OF SELLER PENDING THE CLOSING 22
4.1 Conduct of Business Pending the Closing 22
4.2 Business Relationships 23
<PAGE> 83
4.3 Access to Information 23
4.4 Tax on Prior Sales 24
4.5 Notification of Certain Matters 24
4.6 Transfer of Permits 24
4.7 Closing 24
ARTICLE 5 ADDITIONAL AGREEMENTS 24
5.1 Employment 24
5.2 Expenses 25
5.3 No Negotiations 25
5.4 Public Announcements 25
5.5 Confidentiality 25
5.6 Books and Records 26
5.7 H-S-R Act 26
5.8 Additional Agreements 26
ARTICLE 6 CONDITIONS 27
6.1 Conditions to Obligations of Each Party 27
6.2 Additional Conditions to Obligation of Seller 28
6.3 Additional Conditions to Obligation of Purchaser 28
ARTICLE 7 THE CLOSING 30
7.1 Closing 30
7.2 Seller's, Shareholders' and Lessors' Obligations 30
7.3 Purchaser's Obligations 32
ARTICLE 8 INDEMNITIES 32
8.1 Survival of Representations and Warranties 32
8.2 Nature of Statements 32
8.3 Indemnification of Purchaser by Seller, Shareholders,
and Lessors 32
8.4 Indemnification of Seller, Shareholders, and Lessors by
Purchaser 33
8.5 Procedure for Indemnification 34
ARTICLE 9 TERMINATION 35
9.1 Termination 35
9.2 Effect of Termination 35
ARTICLE 10 GENERAL PROVISIONS 35
10.1 Notices 35
10.2 Counterparts 36
10.3 Governing Law 36
10.4 Assignment 36
10.5 Further Assurances 37
10.6 Gender and Number 37
10.7 Schedules and Exhibits 37
10.8 Waiver of Provisions 37
10.9 Litigation Costs 37
10.10 Section and Paragraph Headings 37
10.11 Amendment 37
10.12 Transaction Expenses 38
10.13 Severability 38
10.14 Extent of Obligations 38
</TABLE>
<PAGE> 84
INDEX OF SCHEDULES
<TABLE>
<CAPTION>
<S> <C>
Schedule 1.1(a) Contracts
Schedule 1.1(b) Inventory
Schedule 1.1(c) Acquired FFE
Schedule 1.1(d) Acquired Permits
Schedule 1.1(f) Assumed Agreements
Schedule 1.2(a) Excluded Leases; Excluded Facilities; Excluded FFE
Schedule 1.2(b) Excluded Policies
Schedule 1.3 Assumed Liabilities
Schedule l.8(a) Independent Facilities
Schedule 1.8(b) Related Facilities
Schedule 1.10(a)(4) Affiliated Contracts
Schedule 3.3 Conflicts
Schedule 3.4 Required Consents
Schedule 3.5 Capitalization
Schedule 3.6 Financial Statements
Schedule 3.9 No Material Adverse Changes
Schedule 3.10 Certain Developments
Schedule 3.11(b) Leases
Schedule 3.12 Title and Condition of Assets
Schedule 3.16 Contracts and Commitments
Schedule 3.18 Intellectual Property
Schedule 3.19 Litigation
Schedule 3.21 Employment
Schedule 3.23 Permitted Liens
Schedule 3.24 Insurance
Schedule 3.25 Affiliate Transactions
Schedule 3.26 Compliance with Law; Permits
</TABLE>
<PAGE> 85
AGREEMENT OF PURCHASE AND SALE OF ASSETS
This AGREEMENT OF PURCHASE AND SALE OF ASSETS (the "Agreement") is made
as of March 5, 1997, by and among UGLY DUCKLING CORPORATION, a Delaware
corporation ("Purchaser"); E-Z PLAN, INC., a Texas corporation ("Seller");
MCCOMBS FAMILY, L.L.C., a Texas limited liability company ("McCombs L.L.C.");
MCCOMBS HFC LIMITED, a Texas limited partnership d/b/a MCCOMBS AUTOMOTIVE
CENTER ("McCombs Automotive" and collectively with McCombs L.L.C., "Lessors");
and LYNDA G. MCCOMBS, MARSHA M. SHIELDS, and CONNIE M. MCNAB, as shareholders
of Seller (the "Shareholders").
RECITALS
A. Seller engages in the business (the "Business") of selling and
financing used motor vehicles ("Vehicles") at dealerships located in the state
of Texas (the "Dealerships").
B. Upon the terms and subject to the conditions set forth herein,
Seller desires to sell to Purchaser, and Purchaser desires to purchase from
Seller, selected assets of Seller related to its Business, all to be completed
on or before the date set forth in Section 7.1 of this Agreement (the "Closing
Date").
NOW, THEREFORE, in consideration of the covenants and mutual agreements
set forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and in reliance upon the
representations and warranties contained herein, the parties hereto do hereby
agree as follows:
ARTICLE 1.
PURCHASE AND SALE OF ASSETSARTICLE
1.1 Purchase and Sale of the Assets. Upon the terms and subject to
the conditions set forth herein, and in reliance on the respective
representations and warranties of the parties, Seller agrees to sell,
transfer, assign, and deliver to Purchaser, and Purchaser agrees to purchase
from Seller, all of Seller's right, title, and interest in and to those
assets, rights, and properties of the Seller relating to the Business, as
specified below (the "Acquired Assets"):
(a) The portfolio of installment sales contracts held by Seller and
secured by Vehicles sold by Seller or affiliates of Seller (the "Contracts"),
as specified on a Schedule 1.1(a) to be prepared by Seller and delivered to
Purchaser on or before determination of the Purchase Price pursuant to Section
1.5 hereof;
(b) The inventory of Vehicles held for retail sale by Seller (but
excluding repossessions) (the "Inventory"), as specified on a Schedule 1.1(b)
to be prepared by Seller and delivered to Purchaser on or before determination
of the Purchase Price pursuant to Section 1.5 hereof;
(c) All furniture, leasehold improvements, fixtures, equipment,
supplies, tools for maintenance and repair, other goods, and all other
appurtenances in and to the premises utilized by Seller in the operation of
the Business at the Acquired Facilities (defined below) ("Acquired FFE"), as
specified on a Schedule 1.1(c) to be prepared by Seller and delivered to
Purchaser on or before determination of the Purchase Price pursuant to Section
1.5 hereof;
<PAGE> 86
(d) All assignable title, claims, and rights under Permits (as
defined in Section 3.26), but excluding any Permits relating solely to
Excluded Assets (defined below) ("Acquired Permits"), as specified on a
Schedule 1.1(d) to be prepared by Seller and delivered to Purchaser on or
before determination of the Purchase Price pursuant to Section 1.5 hereof;
(e) Any additional items of tangible or intangible property used or
owned by Seller related to the Business, the Acquired Assets or the Acquired
Facilities, which are not included above, including, without limitation,
software, trademarks, tradenames, service marks and licenses thereto and
goodwill, provided, however, that Seller may continue to use software it has
developed in its continuing business operations; and
(f) All Agreements (as defined in Section 3.16) relating to the
Business, the Acquired Assets, or the Acquired Facilities that Purchaser
agrees to assume and that are listed in a Schedule 1.1(f) ("Assumed
Agreements"), to be prepared by Seller and delivered to Purchaser on or before
determination of the Purchase Price pursuant to Section 1.5 hereof;
(g) All books of account, records, files, invoices, customer lists
and information, supplier lists and information, employee files, operating
manuals, catalogs, technical information sheets, pricing sheets, advertising
and display materials, and brochures and other materials and data associated
with, used, or employed by Seller in the operation of the Business and
ownership of the Acquired Assets.
1.2 Assets Not Being Transferred. Anything contained in Section 1.1
or elsewhere herein to the contrary notwithstanding, there are expressly
excluded from the assets, properties, interests in properties and rights of
the Seller to be sold, transferred, assigned, and delivered to the Purchaser
at the Closing (as defined below) the following (the "Excluded Assets"):
(a) All leasehold interests of Seller ("Excluded Leases") in
facilities not included within the Acquired Facilities (the "Excluded
Facilities"), all as listed in Schedule 1.2(a), and all furniture, leasehold
improvements, fixtures, equipment, supplies, and tools for maintenance and
repair located at the Excluded Facilities ("Excluded FFE"), as listed on
Schedule 1.2(a), which Schedule shall be updated as of the Closing Date;
(b) Individual life insurance policies on executives of Seller, as
listed in Schedule 1.2(b) ("Excluded Policies"), which Schedule shall be
updated as of the Closing Date;
(c) Accounts receivable from affiliates of Seller;
(d) Unamortized loan origination fees and prepayments of insurance
premiums;
(e) All of Seller's right, title and interest under or related to
this Agreement, including, without limitation, the consideration delivered to
Seller pursuant to this Agreement;
(f) The minute books, stock transfer books, seals, blank share
certificates, and other documents and things relating to organizational
matters and the existence of Seller as a corporation and the corporate tax
returns of Seller (the "Excluded Records");
(g) Cash, real estate loans, stockholder loans, and any other loans
not specifically purchased hereunder; and
<PAGE> 87
(h) Seller's right, title, and interest relating to any assets,
rights, and properties of Seller, wherever located, whether tangible or
intangible, unrelated to the Business.
1.3 Assumed Liabilities. From and after the Closing Date, Purchaser
shall assume only those liabilities of Seller (the "Assumed Liabilities") as
specified in Schedule 1.3 hereto. It is expressly understood and agreed that
Purchaser shall not be liable for any of the obligations or liabilities of
Seller of any kind or nature other than those specifically assumed by
Purchaser under this Section 1.3.
1.4 Liabilities Not Being Assumed. Anything contained herein to the
contrary notwithstanding, the Purchaser is expressly not assuming any of the
following liabilities or obligations, whether fixed or contingent, known or
unknown, matured or unmatured, executory or non-executory, of Seller (the
"Excluded Liabilities"), which liabilities and obligations shall at and after
the Closing remain the exclusive responsibility of Seller:
(a) All liabilities and obligations of Seller under this Agreement or
with respect to or arising out of the consummation of the transactions
contemplated by this Agreement;
(b) All liabilities and obligations of Seller for Seller's fees and
expenses and taxes incurred by Seller in connection with, relating to, or
arising out of the consummation of the transactions contemplated by this
Agreement;
(c) All liabilities and obligations of Seller secured by any Acquired
Assets or that are payable upon transfer of the Acquired Assets; and
(d) All other liabilities that are not specifically assumed by
Purchaser under Section 1.3 hereof, including but not limited to any
liabilities not so expressly assumed that are reflected on any balance sheet
of Seller provided to Purchaser at or prior to the Closing or that should be
so reflected under generally accepted accounting procedures ("GAAP").
Seller shall discharge all Excluded Liabilities on or before the Closing Date.
1.5 Purchase Price. The purchase price to be paid by Purchaser to
Seller for the Acquired Assets (the "Purchase Price") shall be an amount equal
to the book value of the Acquired Assets plus the book value of the Excluded
FFE, excluding leasehold improvements at the Excluded Facilities, as
determined as of the Closing Date under the same policies and procedures used
in the audited financial statements of Seller for the year ended December 31,
1996 (the "1996 Audited Financials"). The Purchase Price will be determined
within five days prior to the Closing Date (the "Closing Purchase Price") and
will be subject to approval by Seller and Purchaser prior to the Closing Date.
Within thirty (30) days after the Closing Date, the Seller and Purchaser shall
again determine the Purchase Price based on the financial statements of Seller
as of the Closing Date (the "Final Purchase Price"), such Final Purchase Price
to be subject to approval by Seller and Purchaser within thirty (30) days
after the Closing Date. If the Final Purchase Price is more than the Closing
Purchase Price, Purchaser shall pay the difference to Seller. If the Final
Purchase Price is less than the Closing Purchase Price, Seller shall refund
the difference to Purchaser.
<PAGE> 88
1.6 Payment. The Purchase Price shall be paid in cash on the Closing
Date by wire transfer of immediately available funds to the bank account
designated by Seller. The total amount of the Assumed Liabilities shall be
applied to payment of the Purchase Price. The Purchase Price shall not be
reduced by any liabilities disclosed in the 1996 Audited Financials and/or in
the most recent financial statements of Seller as of the Closing Date (the
"Disclosed Liabilities"). Purchaser is not assuming and shall not be required
to pay the Disclosed Liabilities at any time and Seller shall remain solely
liable for and shall discharge the Disclosed Liabilities and any other
Excluded Liabilities on or before the Closing Date.
1.7 Allocation of Purchase Price; Accounting Treatment. Upon
approval of the Closing Purchase Price and again upon approval of the Final
Purchase Price, the Purchase Price will be allocated among the Acquired Assets
by both Seller and Purchaser in a manner determined by Purchaser (the
"Purchase Price Allocation"). The Purchase Price Allocation will include a
reduction of the book value of the Vehicles by an amount equal to 167% of the
LIFO reserve therefor and a reduction to the book value of the Contracts by an
amount equal to 167% of the accrued but unpaid Texas sales taxes on the
Contracts (collectively, the "Book Value Reductions"). In the event that
Purchaser determines that certain Acquired Assets should be reported on the
financial statements of Purchaser using accounting policies and procedures at
amounts different than those determined under Seller's accounting policies and
procedures, then Seller will make such adjustments on its books prior to the
Closing Date (the "Accounting Adjustments"). The Book Value Reductions and
Accounting Adjustments shall not change the Purchase Price. Seller and
Purchaser hereby agree to report this transaction for federal tax purposes in
accordance with the allocation of the Purchase Price described above. Such
allocation shall be reported by Purchaser and Seller on Internal Revenue
Service Form 8594, Asset Acquisition Statement, which will be filed with
Purchaser's and Seller's Federal Income Tax Return for the tax year that
includes the Closing Date. To the extent not specified above, the parties
further agree to coordinate their accounting for the transaction.
1.8 Lease Agreements. Purchaser, Seller and Lessors further agree
that as of the Closing Date Purchaser shall:
(a) assume all of the existing leases entered into by Seller for
facilities used in the Business and owned by non-affiliates of Seller as
described on Schedule 1.8(a) ("Independent Facilities") for the remaining term
of such leases and under their existing terms and provisions (the "Acquired
Third-Party Leases");
(b) enter into new leases for facilities used in the Business and
owned by Seller or affiliates of Seller as described on Schedule 1.8(b)
("Related Facilities") at the rental rates stated in Schedule 1.8(b) on a
triple net basis for a period of ten years, including one ten-year extension
option, upon terms and subject to conditions mutually acceptable to the
parties (the "Acquired Related Party Leases"); provided, however, that the
Acquired Related Party Leases will provide that they are terminable at any
time by Purchaser upon three months notice and payment of a termination fee
equal to three months rent; and
(c) enter into a new month-to-month lease for Seller's principal
office facility (the "Principal Facility" and together with the Independent
Facilities and the Related Facilities, the "Acquired Facilities"), located at
9000 Tesoro Drive, #104, San Antonio, Texas 78217 at the rental rate stated in
Schedule 1.8(b) on a triple net basis, upon terms and subject to conditions
mutually acceptable to the parties (the "Acquired Principal Facility Lease"
<PAGE> 89
and together with the Acquired Third-Party Leases and the Acquired Related
Party Leases, the "Acquired Leases").
Each of the Acquired Related Party Leases will include an option granted
by the Lessor to Purchaser to acquire at any time within the term of the
applicable lease any or all of the Related Facilities at fair market value
determined as provided in the applicable lease.
1.9 Transfer Fees and Taxes. Seller shall pay any and all transfer
and assumption fees and expenses and sales and use taxes arising out of the
transfer of the Acquired Assets and shall pay its portion, prorated as of the
Closing Date, of state and local real and personal property taxes relating to
the Acquired Assets. Purchaser shall not be responsible for any payroll,
excise, income, business, occupation, withholding, or similar tax, or any
taxes of any kind related to any period prior to the Closing Date.
1.10 Special Provisions relating to Contracts.
(a) The term "Contracts" shall be deemed to include, and Seller shall
convey to Purchaser:
1. any and all monies and payments (including in kind collections)
received or due or to become due with respect to the Contracts and all other
rights and benefits thereunder due as of the Closing Date;
2. the security interests in the Vehicles granted by the retail
consumers ("Customers") pursuant to the Contracts and any other interest of
Seller in the Vehicles, including, without limitation, the certificates of
title with respect to Vehicles, and in and to all other security, warranties,
guaranties and credit support with respect to the Contracts;
3. except as provided in Section 1.2(b), any proceeds from claims on
any physical damage, credit life and credit accident and health insurance
policies or other insurance (including vendor's single interest insurance) or
certificates relating to the Vehicles or the Customers;
4. all of Seller's rights of recourse against any dealers under any
dealer agreements relating to the Contracts or otherwise, including all
guarantees made by affiliates of Seller as to those Contracts originated by
affiliates of Seller and described on Schedule 1.10(a)(4) (the "Affiliated
Contracts") and Seller and Shareholders hereby guarantee all amounts due under
the Affiliated Contracts, including all deficiency amounts and charge off
amounts.
5. refunds for the costs of extended service contracts with respect
to Vehicles, refunds of unearned premiums with respect to credit life and
credit accident and health insurance policies or other insurance certificates
covering any Customer or Vehicle or the Customer's obligations with respect to
a Vehicle and any recourse to dealers for any of the forgoing;
6. all documents, records, instruments and files related to each
Contract; and
7. the proceeds of any and all of the foregoing.
(b) Subject to the guarantees of the Affiliated Contracts and the
representations, warranties and covenants of Seller and Shareholders stated in
this Agreement, the Contracts are being conveyed to Purchaser without
recourse.
<PAGE> 90
(c) The parties intend that the transfer of the Contracts pursuant to
this Agreement be a true sale of the Contracts from the Seller to Purchaser
and not a financing secured by the Contracts, and the beneficial interest in
and title to the Contracts shall not be a part of the Seller's estate in the
event of the filing of a bankruptcy petition by or against Seller under any
bankruptcy law. However, if under any bankruptcy law, this transaction is
deemed to be a financing arrangement, or it is otherwise determined that any
conveyance hereunder is for any reason not considered a sale and that the
beneficial interest in and title to the Contracts remain part of Seller's
estate, the parties intend that with respect to any such Contracts this
Agreement shall constitute a security agreement (as defined in the UCC as in
effect in the State of Texas) under the UCC, and Seller hereby grants to
Purchaser a first priority perfected security interest in and against all of
the Seller's right, title and interest in and to the Contracts.
(d) Within two days after the Closing Date, Seller and Purchaser
shall mail to the Customers written notice of the transfer of the Contracts to
Purchaser (the "Customer Notice"). The Customer Notice shall provide the name,
address and telephone number of Purchaser, shall instruct Customers to make
all payments to Purchaser and shall be in a form mutually agreed upon.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF PURCHASER
As of the date hereof and as of the Closing Date, Purchaser hereby
represents and warrants to Seller each of the following:
2.1 Organization and Qualification. Purchaser is a corporation duly
organized, validly existing, and in good standing under the laws of the State
of Delaware, and has the requisite corporate power and authority to own and
operate its properties and to carry on its business as now conducted in every
jurisdiction where the failure to do so would have a material adverse effect
on its business, properties, or ability to conduct the business currently
conducted by it.
2.2 Authority Relative to this Agreement. Purchaser has the
requisite corporate power and authority to enter into this Agreement and to
carry out its obligations hereunder. The execution and delivery of this
Agreement by Purchaser and the consummation by Purchaser of the transactions
contemplated hereby have been duly authorized by Purchaser, and no other
corporate proceedings on the part of Purchaser are necessary to authorize this
Agreement and such transactions, subject to Section 6.3(f). This Agreement
has been duly executed and delivered by Purchaser and constitutes a valid and
binding obligation of Purchaser, enforceable in accordance with its terms,
except as the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, or other similar laws relating to the enforcement of
creditors' rights generally and by general principles of equity.
2.3 No Conflicts. Purchaser is not subject to, or obligated under,
any provision of (a) its Certificate of Incorporation or Bylaws, (b) any
material agreement, arrangement, or understanding, (c) any material license,
franchise, or permit, or (d) any law, regulation, order, judgment, or decree,
which would be breached or violated, or in respect of which a right of
termination or acceleration would arise, or pursuant to which any encumbrance
on any of its or any of its subsidiaries' material assets would be created, by
its execution, delivery, and performance of this Agreement and the
consummation by it of the transactions contemplated hereby.
<PAGE> 91
2.4 No Consents. Except for such filings to be made pursuant to
federal or state securities or other laws and regulations, including any
required filing under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations thereunder (the "H-S-R Act")
or for Permits necessary to own the Acquired Assets or operate the Business,
no authorization, consent, or approval of, or filing with, any public body,
court, or authority is necessary on the part of Purchaser for the consummation
by Purchaser of the transactions contemplated by this Agreement.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLER,
SHAREHOLDERS AND LESSORS
As of the date hereof and as of the Closing Date, the Seller and each
Shareholder, and each Lessor with respect to Sections 3.1 through 3.4, 3.11
and 3.16 (as applicable to each Lessor or Acquired Lease to which it is a
party and the associated Related Facility or Principal Facility), hereby
jointly and severally represent and warrant to Purchaser each of the
following:
3.1 Organization and Qualification. Seller is a corporation duly
organized, validly existing, and in good standing under the laws of the State
of Texas, and has the requisite corporate power and authority to own and
operate its properties and to carry on its business as now conducted. Each
Lessor is duly organized and validly existing and has the requisite power and
authority to own and operate its properties and to carry on its business as
now conducted. Seller and each Lessor is duly qualified to do business and is
in good standing in the State of Texas, the only jurisdiction where the
failure to be so qualified would have a material adverse effect on its
business, properties, or ability to conduct the business currently conducted
by it.
3.2 Authority Relative to this Agreement. Seller has the requisite
corporate power and authority and each Lessor has the requisite power and
authority to enter into this Agreement and each other agreement contemplated
hereby to which Seller or such Lessor is a party, to carry out its obligations
hereunder and thereunder, and to consummate the transactions contemplated
hereby and thereby. The execution and delivery of this Agreement and of each
such other agreement by Seller and each Lessor and the consummation by Seller
and each Lessor of the transactions contemplated hereby and thereby has been
duly authorized by the Board of Directors of Seller or comparable body of
each Lessor, and has been duly approved by all of the shareholders of Seller
and by the members or partners of Lessors, as required, and no other corporate
proceedings on the part of Seller or other proceedings on the part of Lessors
are necessary to authorize this Agreement, such other agreements, and such
transactions. Seller has delivered to Purchaser complete and correct copies
of its Articles of Incorporation and Bylaws, each as amended to the date
hereof, and all recorded actions and minutes of the shareholders and the Board
of Directors of Seller and the committees thereof. Each Lessor has delivered
to Purchaser complete and correct copies of its operating or partnership
agreement, as amended to the date hereof, and all recorded actions and minutes
of its members or partners, as the case may be. Each Shareholder possesses
the legal capacity to execute and deliver this Agreement and each other
agreement contemplated hereby to which he or she is a party, to perform his or
her obligations hereunder and thereunder, and to consummate the transactions
contemplated hereby and thereby, without obtaining any approval,
authorization, consent, or waiver or giving any notice. This Agreement and
each other agreement contemplated hereby to which Seller, Lessors or any of
<PAGE> 92
the Shareholders is a party has been duly executed and delivered by Seller,
Lessors and/or Shareholders, as the case may be, and constitutes a valid and
binding obligation of Seller, Lessors and/or Shareholders, enforceable in
accordance with its terms, except as the enforceability thereof may be limited
by bankruptcy, insolvency, reorganization, or other similar laws relating to
the enforcement of creditors' rights generally and by general principles of
equity.
3.3 No Conflicts. Except as set forth in Schedule 3.3 hereto,
neither Seller nor any Lessor is subject to, or obligated under, any provision
of (a) its Articles of Incorporation or Bylaws or, in the case of Lessors, its
operating agreement or partnership agreement, (b) any agreement, arrangement,
or understanding, (c) any license, franchise, or permit or (d) any law,
regulation, order, judgment, or decree, which would be breached or violated,
or in respect of which a right of termination or acceleration would arise, or
pursuant to which any encumbrance on any of its assets would be created, by
its execution, delivery, and performance of this Agreement, each other
Agreement contemplated hereby to which it is a party and the consummation by
it of the transactions contemplated hereby and thereby.
3.4 No Consents. Except as set forth on Schedule 3.4 hereto, no
authorization, consent, or approval of, or filing with, any public body,
court, or authority is necessary on the part of Seller or any Lessor for the
consummation by Seller or any Lessor of the transactions contemplated by this
Agreement.
3.5 Capitalization. All of the issued and outstanding shares of
capital stock of Seller are owned free and clear by the Shareholders as listed
in Schedule 3.5 and there are no other shares of capital stock of Seller
outstanding. There are no outstanding subscriptions, options, rights,
warrants, convertible securities, or other agreements or commitments
obligating Seller to issue or to transfer from treasury any additional shares
of its capital stock.
3.6 Financial Statements. The 1996 Audited Financials and Seller's
unaudited balance sheet as of January 31, 1997 and the related unaudited
statements of income and cash flow for the one-month period then ended (the
"Current Financial Statements") and any subsequent financial statements
presented to Purchaser pursuant to this Agreement, including but not limited
to unaudited financial statements as of and for the month ended February 28,
1997, have been prepared in accordance with GAAP applied on a consistent basis
throughout the periods involved and fairly present the financial position of
Seller as of the dates thereof and the results of its operations and cash
flows for the periods then ended. The 1996 Audited Financials and the Current
Financial Statements are attached hereto as Schedule 3.6.
3.7 Subsidiaries. Seller does not have, nor has it ever had, any
Subsidiaries and Seller does not own, and has never otherwise owned, any
stock, partnership interest, joint venture interest, or any other security
issued by or equity interest in any other corporation, organization,
association, or entity. For purposes of this Agreement, the term "Subsidiary"
means any corporation of which securities having a majority of the ordinary
voting power in electing directors are owned by Seller directly or through
another Subsidiary.
3.8 Absence of Undisclosed Liabilities. Seller has no obligations or
liabilities (whether accrued, absolute, contingent, liquidated, unliquidated,
or otherwise, whether due or to become due and regardless of when asserted),
except (a) liabilities reflected on the unaudited balance sheet included in
<PAGE> 93
the Current Financial Statements, (b) liabilities which have arisen in the
ordinary course of business after the date of the Current Financial Statements
(none of which is an uninsured liability for breach of contract, breach of
warranty, tort, infringement, claim, or lawsuit), and (c) liabilities
specifically disclosed in any Schedule to this Agreement.
3.9 No Material Adverse Changes. Except as set forth in Schedule 3.9
hereto, since the date of the Current Financial Statements, there has not been
any material adverse change in the assets, financial condition, or operating
results, customer, employee, or supplier relations, business condition or
prospects, or financing arrangements of Seller.
3.10 Absence of Certain Developments:
(a) Changed its accounting methods or practices (including any change
in loan reserve or write off policies) or revalued any of its assets;
(b) Borrowed any amount under existing lines of credit, or otherwise
incurred or become subject to any indebtedness, except as is reasonably
necessary for the ordinary operation of its business and in a manner and in
amounts that are in keeping with its historical practice;
(c) Mortgaged, pledged, or subjected to any lien, charge, or other
encumbrance, any of its assets with an aggregate fair market value in excess
of $5,000, except liens for current property taxes not yet due and payable;
(d) Sold, assigned, or transferred (including, without limitation,
transfers to any Insiders as defined in Section 3.25) any assets, except in
the ordinary course of business;
(e) Disclosed any proprietary or confidential information to any
person other than Purchaser;
(f) Modified, waived, canceled or written off any receivable, note,
right or claim, including any write-off or compromise of any Contract, other
than in the ordinary course of business and consistent with past practice;
(g) Entered into any transaction with any Insider;
(h) Suffered any extraordinary financial or other loss or suffered
any material theft, damage, destruction, or loss of or to any property or
properties owned or used by it, whether or not covered by insurance;
(i) Increased the annualized level of compensation of or granted any
extraordinary bonuses, benefits, or other forms of direct or indirect
compensation to any employee, officer, director, or consultant, or increased,
terminated, or amended or otherwise modified any plans for the benefit of
employees, except in the ordinary course of business and consistent with
historical adjustments to such compensation and benefits;
(j) Made any capital expenditures or commitments therefor that
aggregate in excess of $25,000;
(k) Taken any other action or entered into any other transaction
other than in the ordinary course of business and in accordance with past
custom and practice, or entered into or modified any transaction with any
Insider or any contract, written or oral, that involves consideration or
performance by it of a value exceeding $25,000 or a term exceeding six months;
<PAGE> 94
(l) Made any loans or advances to, or guarantees for the benefit of,
any persons;
(m) Acquired (by merger, exchange, consolidation, acquisition of
stock or assets, or otherwise) any corporation, partnership, joint venture, or
other business organization or division or material assets thereof;
(n) Redeemed or purchased, directly or indirectly, any shares of its
capital stock, or declared or paid any dividends or distributions with respect
to any shares of its capital stock;
(o) Issued or sold any equity securities, securities convertible into
or exchangeable for equity securities, warrants, options, or other rights to
acquire equity securities, or bonds or other debt securities;
(p) Discharged or satisfied any lien or encumbrance or paid any
liability, other than current liabilities (or current installments due on
intermediate or long-term liabilities) paid in the ordinary course of
business;
(q) Revalued any of its assets;
(r) Sold, assigned, or transferred (including, without limitation,
transfers to any employees, shareholders, or affiliates) any patents,
trademarks, trade names, copyrights, trade secrets, or other intangible assets,
except in the ordinary course of business, or disclosed any proprietary
or confidential information to any person other than Purchaser; or
(s) made charitable contributions or pledges which in the aggregate
exceed $1,000.
3.11 Real Estate.
(a) Seller does not own any real estate.
(b) Schedule 3.11(b) sets forth a list of all leases of real property
and improvements relating to the Business ("Leases"), specifying whether or
not such Leases are Acquired Leases, in each case, setting forth (i) the
lessor and lessee thereof and the date and term of each of the Leases, (ii)
the street address of each property covered thereby, and (iii) a brief
description (including size and function) of the principal improvements and
buildings thereon (the "Leased Premises"). The Leases are in full force and
effect and have not been amended, Seller has a valid and existing leasehold
interest under each such Lease for the term set forth therein, and neither
Seller, any Lessor, or any other party thereto is in material default or
material breach under any such Lease. No event has occurred which, with the
passage of time or the giving of notice or both, would cause a breach of or
default under any of such Leases, except for breaches or defaults which in the
aggregate could not reasonably be expected to have a material adverse effect
on Seller's business, financial condition, or results of operations. True and
correct copies of the Acquired Third-Party Leases have been delivered to
Purchaser and have not been amended.
(c) The properties set forth on Schedules 1.8(a), (b) and (c) and
3.11 (b) constitute all of the real estate used or occupied by Seller in
connection with the Business, and each such property has access, sufficient
for the conduct of the business conducted thereon, to public roads and to all
utilities, including electricity, sanitary and storm sewer, potable water,
natural gas and other utilities, used in the operations of the Business.
<PAGE> 95
(d) Neither Seller nor any Lessor is in violation of any applicable
zoning ordinance or other law, regulation, or requirement relating to the
operation of any of the properties used in the Business, including, without
limitation, applicable environmental protection and occupational health and
safety laws and regulations, and neither Seller nor any Lessor has received
any notice of any such violation, or of the existence of any condemnation
proceeding with respect to any such properties owned or leased by it.
(e) On the Closing Date, all Acquired Facilities shall be surrendered
to Purchaser in a clean and fully-operating condition. Prior to the Closing
Date, Seller shall lawfully remove and dispose of all waste, refuse and
rubbish from the Acquired Facilities, including without limitation, all waste
oils, fuels and solvents, all empty containers and containers holding waste
or unknown items, inoperable batteries, tires and other vehicle parts, and any
item that is not an Acquired Asset. Prior to the Closing Date, Seller shall
lawfully clean all drains and waste traps at the Acquired Facilities and all
such drains and waste traps shall be in full operating condition, all as
certified by a licensed drain and waste trap service company. On the Closing
Date, the condition of the Acquired Facilities and the activities conducted
thereat shall comply fully with all applicable environmental, occupational,
zoning, fire, health and safety laws, rules and regulations.
3.12 Good Title to and Condition of Inventory and Acquired Assets.
(a) The Inventory of Vehicles recorded on the balance sheet included
in the Current Financial Statements, and the Inventory purchased since the
date thereof, is saleable in the ordinary course of business, is not
slow-moving, obsolete, damaged or defective, and is carried at a value
determined in accordance with GAAP. Seller has good and marketable title to
the Vehicles, free and clear of liens, encumbrances and security interests.
(b) The other Acquired Assets that are tangible assets are in good
condition and repair, ordinary wear and tear excepted, and are usable in the
ordinary course of business. Seller has good and marketable title to all
machinery, equipment, and other tangible assets necessary for the conduct of
the Business (which it is conveying hereby), free and clear of all liens,
encumbrances and security interests, except as disclosed in Schedule 3.12, all
of which shall be released as of the Closing, or leases such equipment under
valid leases, all of which are listed on Schedule 3.12. Seller is not in
default, and no circum-stances exist which could result in such default, under
any of such equipment leases, nor is any other party to any of such equipment
leases in default.
3.13 Title and Condition of Contracts:
(a) Seller and each affiliate of Seller and the Dealerships have
fully complied with all federal, state and municipal laws, rules and
regulations applicable to the transaction creating each Contract, including
the Federal Truth In Lending Act, the Federal Equal Credit Opportunity Act and
the Texas Motor Vehicle Installments Sales Law.
(b) Seller and each affiliate of Seller and the Dealerships have all
required licenses, permits and authority to sell used Vehicles, finance the
sale of used Vehicles and, in the case of affiliates of Seller and the
Dealerships, to assign the Contracts to Seller, and Seller has all required
licenses, permits and authority to acquire, hold, collect and assign the
Contracts to Purchaser.
<PAGE> 96
(c) Seller or any affiliate of Seller or the Dealerships, as
appropriate, has received the down payment amount stated in each Contract in
cash or its equivalent and no part of the down payment on any Contract has
been loaned directly or indirectly to the Customer by Seller, any affiliate of
Seller, or the Dealerships other than "pick-up" payments disclosed in the
Contracts.
(d) All Vehicles and any other goods and services sold by Seller, any
affiliate of Seller, or the Dealerships pursuant to each Contract are free of
all liens and claims of any kind other than those in favor of Seller and the
description of the Vehicle in each Contract is true, complete and accurate.
(e) The Vehicle sold to the Customer pursuant to each Contract has
been delivered to the Customer named in the Contract and application to the
appropriate agency of the State of Texas has been filed in accordance with
applicable law for registration of the Vehicle showing the Customer as the
owner and Seller as the only lien holder.
(f) The Customer named in each Contract has full legal capacity to
make the Contract and the name of the Customer stated in the Contract is the
true and actual name of the Customer and said Customer named in the Contracts
has executed the Contract.
(g) No Customer of any Contract being sold to Purchaser has put
Seller or any affiliate of Seller on notice of any claim, offset, defense,
dispute or claim of rescission or cancellation of any type, including any
claim or defense relating to the Vehicle sold by Seller, any affiliate of
Seller or the Dealerships, the performance or non-performance by Seller or any
affiliate of Seller of its obligations under any Contract, warranty or
guarantee, or arising from any act, error, omission, representation or
warranty of Seller or any affiliate of Seller or its or their officers, agents
or employees. Seller and each affiliate of Seller has fully and in good faith
performed and discharged all of its obligations to the Customer arising under
each Contract or relating to the Contract accrued as of the date of the
assignment of the Contract to Purchaser.
(h) If required by applicable law at the time of the origination of
each Contract, the Vehicle securing the Contract was insured for liability of
the Customer in accordance with applicable law at the time of the origination
of the Contract.
(i) All sales taxes assessed in connection with the sale of the
Vehicle to the Customer have been paid in full, or if not paid in full, will
be paid in full when due by Seller.
(j) Each Contract has created a valid and enforceable first priority
perfected security interest in favor of Seller in the Vehicle, which security
interest will be or has been validly assigned and transferred by Seller to
Purchaser on the Closing Date.
(k) Each Contract is in the form attached hereto as an Exhibit and
does not include any amendments, modifications or supplements other than in
the form attached hereto.
(l) Each Contract provides for level payments not less frequently
than monthly, in amounts that fully amortize the amount financed stated
therein over the original term (except for the last payment, which may be less
than the level payment) and yield interest at the annual percentage rate
stated in the Contract.
<PAGE> 97
(m) Each Contract accurately reflects the actual terms and conditions
of the Customer's purchaser of the Vehicle and the financing thereof and there
are no terms and conditions not expressly stated in the Contract.
(n) No Vehicle shall have been repossessed or designated for
repossession and no investigation has been initiated by Seller, any affiliate
of Seller or any Dealership to determine the whereabouts of a Vehicle or
Customer for the purposes of the repossession of the Vehicle, except as
disclosed to Purchaser prior to the Closing Date.
(o) Within the most recent ninety (90) days, a payment in an amount
not less than the regularly-scheduled installment has been received and
applied to each such Contract.
(p) Each Contract is free of all liens and encumbrances.
(q) Except for the conveyances hereunder, Seller will not sell,
pledge, assign or transfer to any other person, or grant, create, incur,
assume or suffer to exist any lien on any Contract, or Vehicle securing the
Contract, whether now existing or hereafter created, or any interest therein.
(r) Seller shall defend the right, title and interest of Purchaser
in, to and under the Contracts, whether now existing or hereafter created,
against all claims of third parties claiming through or under Seller or the
Dealerships and Seller and Shareholders shall indemnify and hold harmless
Purchaser from and against any loss, liability, expense or damage suffered or
sustained by reason of third party claims which may be asserted against or
incurred by Purchaser at any time as a result of the sale of the Contracts by
Seller to Purchaser.
(s) If any of the foregoing representations, warranties or covenants
of Seller as to the Contracts are materially false, breached or violated, and
Purchaser actually incurs a loss as a result thereof, then Purchaser may
demand and Seller shall immediately pay a refund in an amount equal to the
outstanding principal balance of the Contracts for which the representation,
warranties or covenants are materially false, breached or violated and upon
such refund Purchaser shall transfer said Contracts back to Seller without
recourse, representation, warranty or covenant, but free of all liens and
encumbrances created by Purchaser.
3.14 Solvency; Bulk Sales. Seller is solvent and able to pay its
outstanding debts as they mature. Seller shall not be rendered insolvent by
the transfer of the Contracts pursuant to this Agreement, and the transfer of
the Contracts is not fraudulent to any creditor or equity interest holder of
Seller. There is no Texas bulk sales or bulk transfer law applicable to the
sale of the Acquired Assets hereunder.
3.15 Tax Matters. Seller and Shareholders have filed all federal,
foreign, state, county, and local income, excise, property, sales,
employment-related wages and benefits and other tax returns which are required
to be filed by it or them, as the case may be, in respect of Seller, the
Business or the Acquired Assets, and all such returns are true and correct;
all taxes due and payable by Seller or by any Shareholders in respect of
Seller, the Business or the Acquired Assets have been paid; Seller's
provisions for taxes on the balance sheet included in the Current Financial
Statements and any other financial statements delivered hereunder are
sufficient for all accrued and unpaid taxes as of the dates of such balance
sheets; Seller has paid all taxes due and payable by it or which it is
obligated to withhold from amounts owing to any employee, creditor, or third
<PAGE> 98
party; Seller has not waived any statute of limitations in respect of taxes or
agreed to any extension of time with respect to a tax assessment or
deficiency; the assessment of any additional taxes relating to or for periods
for which returns have been filed is not expected; and Seller has not received
notice of any unresolved questions or claims concerning its tax liability.
Seller has not filed any consent agreement under or made an election under
341(f) of the Internal Revenue Code of 1986, as amended (the "Code"). Seller
is not a party to a tax sharing or allocation agreement nor does Seller owe
any amount under any such agreement. Neither Seller nor the Acquired Assets
are subject to any federal sales tax upon sale or other disposition of the
Acquired Assets.
3.16 Contracts and Commitments.
(a) Except as set forth in Schedule 3.16 hereto or any other Schedule
hereto, Seller is not a party to any: (i) collective bargaining agreement or
contract with any labor union; (ii) bonus, pension, profit sharing,
retirement, or other form of deferred compensation plan; (iii) hospitalization
insurance, or similar plan or practice, whether formal or informal; (iv)
contract for the employment or compensation of any officer, individual
employee, or other person on a full-time or consulting basis or relative to
severance pay or change-in-control benefits for any such person; (v) agreement
or indenture relating to the borrowing of money in excess of $5,000 relating
to the Business or Acquired Assets or to mortgaging, pledging, or otherwise
placing a lien on any of the Acquired Assets; (vi) guaranty of any obligation
for borrowed money or otherwise, other than endorsements made for collection;
(vii) lease or agreement under which it is lessor or lessee of, or permits any
third party to hold or operate, any Acquired Assets; (viii) other agreement
material to the Business or (ix) agreement not entered into in the ordinary
course of business (collectively, the "Agreements"). Schedule 3.16 sets forth
the material terms of each such Agreement and identifies each such Agreement
which is not terminable at will by Seller. Purchaser is not assuming any
obligations of Seller under the Agreements unless the Agreement is an Assumed
Agreement identified in Schedule 1.1(f).
(b) Seller has furnished Purchaser with a true and correct copy of
each written Agreement, and a written description of each oral Agreement,
referred to in Schedule 3.16, together with all amendments, waivers, or other
changes thereto.
(c) Except as specifically disclosed in Schedule 3.16 hereto: (i) no
customer or supplier has indicated that it will stop or decrease the rate of
business done with Seller, except for changes in the ordinary course of the
Business; (ii) Seller and each Lessor has performed in all material respects
the obligations required to be performed by it in connection with the
Agreements and neither Seller nor any Lessor has been advised of or received
any claim of default or threatened claim of default or any other claim
relating to any Agreement; (iii) Seller and each Lessor has no present
expectation or intention of not fully performing any obligation pursuant to
any Agreement; and (iv) there has been no breach and there is no anticipated
breach by any other party to any Agreement.
(d) Each Assumed Agreement is valid, binding, and in full force and
effect. Except as set forth on Schedule 3.16, no Assumed Agreement has been
amended or supplemented in any way and no party thereto has assigned any of
its rights or delegated any of its duties thereunder. True and complete
copies of the Assumed Agreements have been delivered to the Purchaser.
<PAGE> 99
(e) No breach of default exists under any Assumed Agreement and no
event has occurred with respect thereto that with the lapse of time or action
or inaction by Seller or, to the best knowledge of the Seller, any other party
thereto, would result in a breach thereof or a default thereunder.
(f) Upon the assignment of each Assumed Agreement to the Purchaser
pursuant hereto, all rights of the Seller with respect to the Assumed
Agreements will inure to the Purchaser and the Assumed Agreements will be
enforceable by the Purchaser in accordance with their terms.
(g) The assignment to Purchaser of all of Seller's right, title, and
interest in, to and under each Assumed Agreement pursuant hereto will be free
and clear of any lien.
(h) As of the Closing, Seller will not owe any amount (whether
absolute, contingent, or otherwise) with respect to any Assumed Agreement ,
other than amounts incurred in the ordinary course of business consistent with
past practices and this Agreement, which amounts will be properly recorded in
the accounts payable ledger of Seller.
(i) No Assumed Agreement (i) requires Seller to make purchases or pay
for services in excess of the requirements of its Business, or (ii) except as
specified on Schedule 3.16, guarantees any obligation of another person or
provides any type of indemnification whatsoever.
(j) Seller has paid all rental and other payments due under each
lease (including each Lease) under which Seller is the lessee, in accordance
with its terms. With respect to each such lease, the Seller has been in
peaceable possession of the buildings, equipment, machinery, real property,
vehicles, or other tangible property covered thereby since the commencement of
the original term of such lease. Moreover, no indulgence, postponement, or
waiver of Seller's obligations under any such lease has been granted by the
lessor. Seller possesses full right and power to occupy or possess, as the
case may be, all of the buildings, equipment, machinery, real property,
vehicles, and other tangible property covered by such leases.
3.17 Restrictions on Business Activities. There is no agreement
(noncompete or otherwise), commitment, judgment, injunction, order, or decree
to which Seller is a party or otherwise binding on Seller or its property
which has or reasonably could be expected to have the effect of prohibiting or
impairing any business practice of Seller, any acquisition of property
(tangible or intangible) by Seller, or the conduct of the Business.
3.18 Intellectual Property. Seller has the full legal, right, title,
and interest in and to all trademarks, service marks, trade names, copyrights,
know-how, patents, trade secrets, licenses (including licenses for the use of
computer software programs), and other intellectual property used in and
material to the conduct of the Business (the "Intellectual Property"). The
conduct of Seller's Business as presently conducted and the unrestricted
conduct and the unrestricted use and exploitation of the Intellectual Property
does not infringe or misappropriate any rights held or asserted by any person,
and no person is infringing on the Intellectual Property. No payments are
required for the continued use of the Intellectual Property. None of the
Intellectual Property has ever been declared invalid or unenforceable, or is
the subject of any pending or threatened action for opposition, cancellation,
declaration, infringement, invalidity, unenforceability, or misappropriation
or like claim, action, or proceeding. Schedule 3.18 sets forth a list of all
material Intellectual Property owned by or licensed to Seller and lists all
trademark, trade name, and patent applications that are currently pending.
<PAGE> 100
3.19 Litigation. Except as set forth on Schedule 3.19, there are no
suits, claims, actions, arbitrations, investigations, or proceedings entered
against, now pending, or threatened against Seller before any court,
arbitration, administrative or regulatory body, or any governmental agency
which may result in any judgment, order, award, decree, liability, or other
determination which will or could reasonably be expected to have any effect
upon Seller, the Acquired Assets, the Acquired Leases or the Business. Seller
is not subject to any continuing court or administrative order, writ,
injunction, or decree applicable to it or the Business, or to its property or
employees, and Seller is not in default with respect to any order, writ,
injunction, or decree of any court or federal, state, municipal, or other
governmental department, commission, board, agency, or instrumentality.
3.20 Brokers' Fees. Neither Seller nor Shareholders have dealt with
any broker, finder, or other person entitled to any brokerage commissions,
finders' fees, or similar compensation in connection with the transactions
contemplated by this Agreement.
3.21 Employment Matters. Attached hereto as Schedule 3.21 is a list
of names, current annual rates of salary, bonus, employee benefits, accrued
vacation and sick time, sick pay, and other compensation and benefits and
perquisites, including the provision of company-owned automobiles, of all the
employees and agents of Seller whose work relates, directly or indirectly, to
the operation of the Business at the Acquired Facilities. No key employee of
Seller, and no group of Seller's other employees, has any plans to terminate
his, her, or its employment. Seller is not a party to any collective
bargaining agreement. There are no discussions, negotiations, demands, or
proposals that are pending or that have been conducted or made with or by any
labor union or association, and there are no pending or threatened labor
disputes, strikes, or work stoppages that may have a material and adverse
effect upon Seller, the Acquired Assets, or the Business. Seller has no
material labor relations problems pending, and Seller's labor relations are
satisfactory in all material respects. Seller has complied with all laws
relating to the employment of labor, terms and conditions of employment, and
wages and hours, including provisions thereof relating to wages, hours, equal
opportunity, collective bargaining, and the payment of social security and
other taxes, and is not engaged in any unfair labor practices. Seller may
terminate any employee, with or without cause, without liability or obligation
other than for salary accrued through the date of any such termination. None
of Seller's employee benefit plans will need to be assumed by Purchaser as a
matter of law or otherwise.
3.22 Employee Benefit Plans. With respect to all employees and former
employees of Seller, Seller does not presently maintain, contribute to, or have
any liability (including current or potential multi-employer plan withdrawal
liability under Title IV of the Employee Retirement Income Security Act of
1974, as amended ("ERISA")) under any: (i) non-qualified deferred compensation
or retirement plan or arrangement which is an "employee pension benefit plan"
as such term is defined in Section 3(2) of ERISA; (ii) defined contribution
retirement plan or arrangement designed to satisfy the requirements of section
401(a) of the Code, which is an employee pension benefit plan, (iii) defined
benefit pension plan or arrangement designed to satisfy the requirements of
section 401(a) of the Code, which is an employee pension benefit plan; (iv)
"multi-employer plan" as such term is defined in Section 3(37) of ERISA; (v)
unfunded or funded medical, health, or life insurance plan or arrangement for
present or future retirees or present or future terminated employees which is
an "employee welfare benefit plan" as such term is defined in Section 3(1) of
ERISA, except as required by section 4980B of the Code or sections 601 through
609 of ERISA; or (vi) any other employee welfare benefit plan.
<PAGE> 101
3.23 Permitted Liens. Seller's title to the Acquired Assets is free
and clear of all liens, other than the liens listed on Schedule 3.23 hereto
and approved by Purchaser (collectively, the "Permitted Liens").
3.24 Insurance3.24. Schedule 3.24 hereto lists and briefly describes
each insurance policy and fidelity bond maintained by Seller with respect to
its respective properties, assets, employees, officers, and directors and sets
forth the date of expiration of each such insurance policy. All of such
insurance policies are in full force and effect and Seller is not in default
with respect to its obligations under any of such insurance policies. There
is no claim of Seller pending under any of such policies or bonds as to which
coverage has been questioned, denied, or disputed by the underwriters of such
policies or bonds and there has been no threatened termination of, or material
premium increase with respect to, any of such policies. To the best knowledge
of Seller, the insurance coverage is customary for corporations of similar
size engaged in similar lines of business.
3.25 Affiliate Transactions. Except as set forth on Schedule 3.25,
no officer, director, or shareholder of Seller or any member of the immediate
family of any such officer, director, or shareholder, or any entity in which
any of such persons owns any beneficial interest (other than a publicly held
corporation whose stock is traded on a national securities exchange or in the
over-the-counter market and less than 1% of the stock of which is beneficially
owned by any of such persons) (collectively "Insiders"), has any agreement
with Seller or any interest in any property (real, personal, or mixed,
tangible or intangible) used in or pertaining to the Business. For purposes
of the preceding sentence, the members of the immediate family of an officer,
director, or, shareholder shall consist of the spouse, parents, children,
siblings, mothers- and fathers-in-law, sons- and daughters-in-law, and
brothers- and sisters-in-law of such officer, director, or shareholder.
3.26 Compliance with Laws; Permits. Seller and its officers,
directors, agents, and employees have complied with all applicable laws and
regulations of foreign, federal, state, and local governments and all agencies
thereof which affect the Business or any of Seller's assets and to which
Seller may be subject, and no claims have been filed or threatened against
Seller alleging a violation of any such law or regulation, except as set forth
in Schedule 3.26 hereto. Without limiting the generality of the foregoing,
Seller has not violated, or received a notice or charge asserting any
violation of any state or federal acts (including rules and regulations
thereunder) regulating or otherwise affecting employee health and safety, the
discharge of pollutants or wastes, or employee benefit plans. Neither Seller
nor any of the Shareholders has given or agreed to give any money, gift, or
similar benefit (other than incidental gifts of articles of nominal value) to
any actual or potential customer, supplier, governmental employee, or any
other person in a position to assist or hinder Seller in connection with any
actual or proposed transaction. Seller possesses all approvals,
authorizations, certificates, consents, registrations, franchises, licenses,
permits, rights, variances, and waivers necessary for the lawful conduct of
the Business and the ownership or operation of the Acquired Assets and the
Acquired Facilities (collectively, the "Permits"). All Permits are in full
force and effect, no violations have occurred with respect thereto, and no
basis exists for any limitation, revocation, or withdrawal thereof or any
denial of any extension or renewal with respect thereto. A list of all
Permits (including the expiration dates thereof) is set forth in Schedule 3.26
hereto. Except as indicated on Schedule 3.26, each Permit is transferable to
the Purchaser. Seller has made available to Buyer each Permit for Buyer's
review.
<PAGE> 102
3.27 Warranties. Seller is not responsible for any express
warranties to third parties with respect to any products sold or services
performed by Seller. Seller has no knowledge of any state of facts or the
occurrence of any event forming the basis of any present claim against Seller
for liability due to any express or implied warranty.
3.28 Disclosure. Neither this Agreement nor any of the Schedules or
Exhibits hereto or documents or agreements to be delivered hereunder contains
any untrue statement of a material fact or omits to state a material fact
necessary to make the statements contained herein or therein, in light of the
circumstances in which they were made, not misleading, and there is no fact
which has not been disclosed to Purchaser which materially adversely affects
or could reasonably be anticipated to materially adversely affect the assets,
including the Acquired Assets, financial condition or results of operations,
customer, employee or supplier relations, business condition, prospects, or
financing arrangements of Seller.
ARTICLE 4
CONDUCT OF SELLER PENDING THE CLOSINGARTICLE
Seller and Shareholders, and as to the Acquired Leases, the Related
Facilities, and the Principal Facility, each Lessor, hereby covenant and agree
that from the date hereof to the Closing Date, unless Purchaser shall
otherwise agree in writing or except as otherwise expressly contemplated or
permitted by this Agreement:
4.1 Conduct of Business Pending the Closing. Except as specifically
contemplated in this Agreement, from the date hereof to the Closing Date, the
Business of Seller shall be conducted only in, and Seller shall take no action
except in, the ordinary course, on an arm's length basis, and in accordance
with all applicable laws, rules, and regulations and past custom and practice,
including, without limitation, making any loans, making any cash payments, or
transferring any other assets or properties of Seller to any employee,
officer, shareholder, or director of Seller; and Seller shall maintain its
facilities in good operating condition, ordinary wear and tear excepted; and
Seller will not, directly or indirectly, do or permit to occur any of the
following:
(a) Breach any material contract, agreement, commitment, or
undertaking, including this Agreement;
(b) Knowingly violate or fail to comply with any laws applicable to
it, the Acquired Assets, the Acquired Leases, or the Business;
(c) Commit any act or permit the occurrence of any event or the
existence of any condition of the type described in Section 3.10 hereof;
(d) Cancel or terminate or permit to be canceled or terminated its
current insurance (or reinsurance) policies or permit any of the coverage
thereunder to lapse, unless simultaneous with such termination, cancellation,
or lapse, replacement policies providing coverage equal to or greater than the
coverage under the canceled, terminated, or lapsed policies for substantially
similar premiums are in full force and effect;
(e) Fail to maintain and repair its assets and properties in
accordance with good standards of maintenance and as required in any leases or
other agreements pertaining thereto;
<PAGE> 103
(f) Enter into or modify any employment, severance, or similar
agreements or arrangements with, or grant any bonuses, salary increases, or
severance or termination pay to, any officers, directors, employees, or
consultants, or adopt or amend any bonus, profit sharing, compensation, stock
option, pension, retirement, deferred compensation, employment, or other
benefit plan, trust, fund, or group arrangement for the benefit or welfare of
any officers, directors, or employees;
(g) Amend its Articles of Incorporation or Bylaws;
(h) Create or acquire any Contracts that do not satisfy and comply
fully with the underwriting and origination requirements used by Seller during
the previous 180 days; or
(i) Agree to do any of the actions described in the preceding clauses
(a) through (h).
4.2 Business Relationships. Seller and Shareholders will preserve
intact Seller's business organization and goodwill, keep available the
services of its officers and employees as a group, and maintain satisfactory
relationships with suppliers, distributors, customers, and others having
business relationships with it.
4.3 Access to Information. Purchaser and its counsel, accountants,
and other representatives shall have the opportunity to make a complete due
diligence review of the books, records, business, and affairs of Seller,
including, without limitation, the Acquired Assets, Independent Facilities,
Related Facilities, Principal Facility, and all other matters relating
thereto. In the event Purchaser, in its reasonable business discretion,
determines that prior to the Closing Date there has been any material change
in or material misrepresentation about the Business, Acquired Assets, Acquired
Facilities or matters relating thereto, Purchaser shall have no further
obligation to proceed with the transaction, and the parties shall have no
further liability to one another, except as expressly provided herein. To
facilitate the due diligence review, Seller shall provide to Purchaser and its
agents complete access to all of Seller's records and documents, shall provide
Purchaser with personal, bank, and professional references, and shall make
available for consultation employees, suppliers, and distribution channels.
4.4 Tax on Prior Sales. Seller agrees to furnish to Purchaser
certificates from the state taxing authorities and any related certificates
that Purchaser may reasonably request as evidence that all sales and use tax
liabilities of Seller accruing before the Closing Date have been fully
satisfied or provided for, to the extent such certificates are prepared by the
applicable state taxing authority.
4.5 Notification of Certain Matters. Seller, Shareholders and
Lessors shall (i) confer on a regular basis with representatives of Purchaser
and report operational matters and the general status of ongoing operations,
(ii) notify Purchaser of any material adverse change in the normal course of
its business or in the operation of its properties and of any governmental or
third party complaints, investigations, or hearings (or communications
indicating that the same may be contemplated); (iii) not take any action which
would render, or which reasonably may be expected to render, any
representation or warranty made by it in this Agreement untrue at, or at any
time prior to, the Closing; and (v) promptly notify Purchaser if Seller shall
discover that any representation or warranty made by it in this Agreement was
when made, or has subsequently become, untrue.
<PAGE> 104
4.6 Transfer of Permits. Seller, Shareholders, and Lessors will use
their best efforts to assist Purchaser to effect the assignment or other
transfer of Permits from Seller to Purchaser as of or as soon as practicable
after the Closing Date.
4.7 Closing. Seller, Shareholders, and Lessors shall use their best
efforts to cause the conditions specified in Section 6.3 hereof to be
satisfied at or prior to the Closing Date hereof.
ARTICLE 5
ADDITIONAL AGREEMENTS
5.1 Employment. After the Closing Date, except for up to six
management employees who may be designated by Seller and listed in Schedule
5.1 (the "Designated Employees"), Purchaser will agree to hire such employees
of Seller currently employed at the Acquired Facilities on an "at will" basis
or on other terms and conditions acceptable to Purchaser and such employees as
Purchaser determines in its sole discretion, and Seller will cooperate with
Purchaser to that end. All employees of Seller currently employed at the
Acquired Facilities to be hired by Purchaser will be terminated by Seller on
or before the Closing Date. Seller shall be responsible for any severance
and/or other payments, including, but not limited to, accrued vacation and
sick time, sick pay, and other compensation, benefits, and perquisites,
incurred in connection therewith and during the period prior to the Closing
Date. Seller and Shareholders agree not to solicit any of the employees
currently employed at the Acquired Facilities to be hired by Purchaser for a
period of three years after the Closing Date. The Designated Employees may be
employed by Purchaser in its discretion for a period of up to 90 days
following the Closing Date in order to assist with the transition of the
Business to Purchaser.
5.2 Expenses. Seller, Shareholders, and Lessors shall pay the costs
and expenses of Seller, Shareholders and Lessors, and Purchaser shall pay the
costs and expenses of Purchaser, incurred in connection with this Agreement
and the transactions contemplated hereby. Notwithstanding the foregoing, in
the event any party breaches the terms of this Agreement prior to the Closing,
and the transactions contemplated hereby are not consummated, the breaching
party agrees to pay the non-breaching party an amount equal to all of the
expenses incurred by the non-breaching party in connection with this
Agreement, and otherwise related to the transactions contemplated hereby,
including, but not limited to, all fees and expenses incurred by the
non-breaching party to accountants, attorneys, and finders, brokers or
consultants. Nothing herein shall be deemed to limit the right or remedy of a
party in the event of a breach of this Agreement by the other party.
5.3 No Negotiations. Neither Seller nor Shareholders shall, directly
or indirectly, through any officer, director, agent, or otherwise, solicit,
initiate, or encourage submission of any proposal or offer from any person or
entity (including any of its or their officers or employees) relating to any
liquidation, dissolution, recapitalization, merger, consolidation, or
acquisition or purchase of all or a material portion of the assets of, or any
equity interest in, Seller or other similar transaction or business
combination involving Seller, or participate in any negotiations regarding, or
furnish to any other person any information with respect to, or otherwise
cooperate in any way with, or assist, participate in, facilitate, or
encourage, any effort or attempt by any other person or entity to do or seek
any of the foregoing. Seller or Shareholders shall promptly notify Purchaser
if any such proposal or offer, or any inquiry from or contact with any person
with respect thereto, is made and shall promptly provide Purchaser with such
<PAGE> 105
information regarding such proposal, offer, inquiry, or contact as Purchaser
may request.
5.4 Public Announcements. The parties hereto shall not issue any
press release or public announcement, including announcements by any party for
general reception by or dissemination to employees, agents, or customers, with
respect to this Agreement and the other transactions contemplated by this
Agreement without the prior written consent of the other parties hereto
(which consent shall not be withheld unreasonably); provided, however, that
Purchaser may make any disclosure or announcement that, in the opinion of its
counsel, it is obligated to make pursuant to applicable law or regulation of
the Nasdaq Stock Market, Inc. or any national securities exchange, as
applicable, in which case Purchaser shall reasonably consult with Seller prior
to making such disclosure or announcement; and provided further, that, upon
execution of this Agreement, Purchaser may make a public announcement of such
occurrence in a press release reviewed and reasonably approved by Seller prior
to publication.
5.5 Confidentiality. Each party hereto, and its officers, directors,
agents, and affiliates, will hold in strict confidence, and will not divulge,
communicate, use to the detriment of any other party hereto or for the benefit
of any other person or persons, or misuse in any way, any financial
information or other data obtained in connection with this Agreement,
including, without limitation, any confidential information or trade secrets
of such other party, personnel information, secret processes, know how,
cus-tomer lists, formulas, or other technical data; and if the transactions
contemplated by this Agreement are not consummated, each party hereto, and its
officers, directors, agents, and affiliates, will return to each other party
all such data and information as such other party may reasonably request,
including, without limitation, work sheets, test reports, manuals, lists,
memoranda, and other documents prepared by or made available in connection
with this transaction. The parties hereto may disclose such information to
their respective attorneys and accountants so long as they agree to keep such
information confidential.
5.6 Books and Records. Seller will make available to Purchaser, at
Purchaser's request and expense, from time to time, all books and records of
Seller relating, directly or indirectly, to the Business which are reasonably
necessary with respect to Purchaser's ongoing operations for inspection or
copying by Purchaser at any reasonable time for a six (6) year period after
the Closing Date, and to offer same to Purchaser, from time to time, at
Purchaser's expense, prior to the destruction of all or any part thereof. In
addition, the parties shall make reasonably available to one another any
records or documents that they maintain with respect to the Acquired Assets or
the Business for purposes of compliance with applicable tax laws or in
defending any third party litigation arising in respect of this Agreement.
5.7 H-S-R Act. To the extent required by law, Seller and
Shareholders on the one hand and Purchaser on the other shall each file or
cause to be filed with the Federal Trade Commission (the "FTC") and the United
States Department of Justice (the "DOJ") any notifications required to be
filed by their respective "ultimate parent entities" under the H-S-R Act, with
respect to the transactions contemplated herein. Each party shall be
responsible for all expenses incurred in the preparation of their respective
H-S-R Act filings and the filing fees to be paid in connection with the H-S-R
Act filings. The parties shall use their reasonable best efforts to make such
filings promptly, to respond to any requests for additional information made
by either the FTC or DOJ, to cause the waiting periods under the H-S-R Act to
terminate or expire at the earliest possible date and to resist vigorously, at
<PAGE> 106
their respective cost and expense (including, without limitation, the
institution or defense of legal proceedings) any assertion that the
transactions contemplated herein constitute a violation of the antitrust laws,
all to the end of expediting consummation of the transactions contemplated
herein.
5.8 Additional Agreements. Subject to the terms and conditions
herein provided, each of the parties hereto agrees to take, or cause to be
taken, all action and to do, or cause to be done, all things necessary,
proper, or advisable to consummate and make effective as promptly as
practicable the transactions contemplated by this Agreement, including
obtaining all necessary waivers, consents, and approvals and effecting all
necessary registrations and filings and submissions of information requested
by governmental authorities.
ARTICLE 6
CONDITIONS
6.1 Conditions to Obligations of Each Party. The respective
obligations of each party to effect the transactions contemplated hereby shall
be subject to the fulfillment at or prior to the Closing of the following
conditions:
(a) There shall not be threatened, instituted, or pending any action
or proceeding, before any court or governmental authority or agency, domestic
or foreign: (i) challenging or seeking to make illegal, or to delay or
otherwise directly or indirectly to restrain or prohibit, the consummation of
the transactions contemplated hereby, or seeking to obtain damages in
connection therewith; (ii) seeking to prohibit direct or indirect ownership or
operation by Purchaser or any of its subsidiaries of all or a material portion
of the Business or the Acquired Assets of Seller, or to compel Purchaser or
any of its subsidiaries to divest of or to hold separately all or a material
portion of the Business or the Acquired Assets of Seller as a result of the
transactions contemplated hereby; (iii) seeking to impose or confirm
limitations on the ability of Purchaser effectively to exercise directly or
indirectly full rights of ownership of any of the Acquired Assets or
properties of Seller; (iv) seeking or causing any material diminution in the
direct or indirect benefits expected to be derived by Purchaser as a result of
the transactions contemplated by this Agreement; (v) invalidating or rendering
unenforceable any material provision of this Agreement (including without
limitation any of the documents or agreements to be delivered hereunder); or
(vi) which otherwise might materially adversely affect Purchaser or any of its
subsidiaries or the Acquired Assets or Business;
(b) There shall not be any action taken, or any statute, rule,
regulation, judgment, order, or injunction proposed, enacted, entered,
enforced, promulgated, issued, or deemed applicable to the transactions
contemplated hereby by any federal, state, or foreign court, government, or
governmental authority or agency, which may, directly or indirectly, result in
any of the consequences referred to in (a) above or otherwise prohibit
consummation of the transactions contemplated hereby;
(c) No party hereto shall have terminated this Agreement as permitted
herein; and
(d) There shall not have occurred any of the following events that
could have a material adverse effect on Purchaser or Seller: (i) a
declaration of a banking moratorium or any suspension of payments in respect
of banks in the United States or any limitation by United States authorities
<PAGE> 107
on the extension of credit by lending institutions; (ii) a commencement of
war, armed hostilities, or other international or national calamity directly
or indirectly involving the United States; or (iii) in the case of any of the
foregoing existing at the date hereof, a material acceleration or worsening
thereof.
6.2 Additional Conditions to Obligation of Seller. The obligation of
Seller to effect the transactions contemplated hereby is also subject to the
fulfillment at or prior to the Closing of the following conditions:
(a) The representations and warranties of Purchaser set forth in
Article 2 shall be true and correct as of the Closing Date as if made at and
as of the Closing Date, and Purchaser shall in all material respects have
performed each obligation and agreement and complied with each covenant to be
performed and complied with by it hereunder at or prior to the Closing; and
(b) Purchaser shall have furnished to Seller: (i) a copy of the text
of the resolutions by which the corporate action on the part of Purchaser
necessary to approve this Agreement and the transactions contemplated herein
were taken; and (ii) a certificate executed on behalf of Purchaser by its
corporate secretary or one of its assistant corporate secretaries certifying
to Seller that such copy is a true, correct, and complete copy of such
resolutions and that such resolutions were duly adopted and have not been
amended or rescinded.
6.3 Additional Conditions to Obligation of Purchaser. The
obligations of Purchaser to effect the transactions contemplated herein are
also subject to the fulfillment at or prior to the Closing of the following
conditions:
(a) The representations and warranties of Seller, Shareholders, and
Lessors in this Agreement and in any certificate or other instrument delivered
pursuant to the provisions hereof or in connection with the transactions
contemplated hereby shall be true and correct as of the Closing Date as if
made at and as of the Closing Date, and Seller shall in all material respects
have performed each obligation and agreement and complied with each covenant
to be performed and complied with by them hereunder at or prior to the
Closing;
(b) Seller, Shareholders and Lessors shall have furnished to
Purchaser a certificate in which they shall certify that the conditions set
forth in Section 6.3(a) have been fulfilled;
(c) Seller, Shareholders, and Lessors shall have furnished to
Purchaser: (i) copies of the texts of the resolutions by which the corporate
action on the part of Seller and its shareholders and any comparable action on
the part of any Lessor and its members or partners necessary to approve this
Agreement and the transactions contemplated hereby were taken; and (ii)
certificates of Seller or Lessors certifying to Purchaser that such copies are
true, correct, and complete copies of such resolutions and that such
resolutions were duly adopted and have not been amended or rescinded;
(d) Purchaser shall have received from the chief financial officer of
Seller a letter, dated the Closing Date, that on the basis of a review (not an
audit) of the latest available accounting records of Seller, consultations
with other responsible officers of Seller, and other pertinent inquiries that
he may deem necessary, he has no reason to believe that during the period from
the date of the Current Financial Statements to the Closing Date, except as
may otherwise be set forth on any Schedule hereto, there has been any change
<PAGE> 108
in the financial condition or results of operations of the Business, except
changes incurred in the ordinary and usual course of business during that
period that in the aggregate are not materially adverse, and other changes or
transactions, if any, contemplated by this Agreement;
(e) Purchaser shall have received an opinion letter addressed to
Purchaser from counsel for Seller, Shareholders, and Lessors based on
customary reliance and subject to customary qualifications, in a form mutually
agreed upon;
(f) This Agreement and the transactions contemplated hereby shall
have been approved by Purchaser's Board of Directors;
(g) Seller shall have obtained all necessary consents to this
Agreement and the transactions contemplated hereby and Purchaser shall have
obtained or assumed all permits or licenses necessary to ownership of the
Acquired Assets and operation of the Business, including, without limitation,
the following: (i) the approval of the transaction by all governmental
authorities exercising jurisdiction over the ownership of the Acquired Assets;
(ii) the approval by all governmental authorities with respect to the issuance
to, or assumption by, Purchaser of all Acquired Permits; and (iii) each other
consent and approval necessary in order that the transactions contemplated
herein not constitute a breach or violation of, or result in a right of
termination or acceleration with respect to, or result in any encumbrance on
any of Seller's assets, including the Acquired Assets, pursuant to the
provisions of any agreement, arrangement, or understanding or any license,
franchise, or Permit;
(h) Purchaser shall have accepted, in its sole discretion, the
results of its inspections, investigations, studies, assessments and evalua-
tions of the Acquired Assets, Assumed Liabilities, Assumed Contracts,
Independent Facilities, Related Facilities, Principal Facility, the Business
and all matters relating thereto;
(i) Purchaser and Seller shall have agreed to the terms of leases
with respect to the Related Facilities and the Principal Facility, and
Purchaser shall have agreed to the terms relating to its assumption of leases
with respect to the Independent Facilities and Purchaser shall have completed
to its satisfaction any assessment of such facilities;
(j) There shall have been no damage, destruction, or loss of or to
any property or properties owned or used by Seller, whether or not covered by
insurance, which in the aggregate may have a material adverse effect on the
Business, financial condition, results of operations or prospects of Seller;
(k) All Insider agreements shall have been terminated;
(l) Receipt and approval of the Schedules to be prepared by Seller,
Shareholders, and Lessors, all updated as of the Closing Date, and preparation
of and agreement as to all closing documents, agreements and procedures
required under this Agreement;
(m) Purchaser shall have received such non-disturbance, subordination
and other agreements from Seller's lenders and third party lessors as
Purchaser shall reasonably request; and
(n) The form and substance of all certificates, instruments,
opinions, and other documents delivered to Purchaser under this Agreement
shall be satisfactory in all respects to Purchaser and its counsel.
<PAGE> 109
ARTICLE 7
THE CLOSING ARTICLE
7.1 Closing. The closing (the "Closing") of the transactions
contemplated herein shall be held on or before April 1, 1997 (the "Closing
Date"), at a time and place as the parties shall mutually agree.
7.2 Seller's, Shareholders' and Lessors' Obligations. In addition to
any other documents required to be delivered by Seller, Shareholders, or
Lessors at Closing, Seller, Shareholders or Lessors, as appropriate, shall
deliver to Purchaser at Closing the following documents:
(a) An executed Bill of Sale and Assumption and other instruments of
transfer, with full warranties of title, dated as of the Closing Date,
conveying to Purchaser all of Seller's right, title, and interest in and to
the Acquired Assets, all in form and substance satisfactory to Purchaser;
(b) Executed assignments of all Contracts (with consents if
required), the Contracts themselves, certificates of title to all Vehicles,
and a UCC-1 Financing Statement (in accordance with Section 1.10(c));
(c) Releases of all liens, encumbrances and security interests in
respect of the Acquired Assets, except Permitted Liens;
(d) The Acquired Leases contemplated by Section 1.8 and lease
assignments with respect to each item of personal property which is leased by
Seller and which is to be assumed by Purchaser hereunder, properly executed
and acknowledged by Seller, and accompanied by all consents of lessors
required by this Agreement and the leases being assigned, and such
subordination agreements, non-disturbance certificates and other documents as
Purchaser shall have reasonably requested;
(e) Executed assignments of all assignable Acquired Permits and
executed assignment and assumption agreements with respect to all Assumed
Agreements, with all necessary consents thereto;
(f) All books, records, and other data relating to the Acquired
Assets and the Business (other than corporate records);
(g) The certificate(s) as provided for in Section 6.3(b) hereof;
(h) Certified resolutions and the certificates provided for in
Section 6.3(c) hereof;
(i) The letter provided for in Section 6.3(d) hereof;
(j) The consents as provided for in Section 6.3(g) hereof;
(k) An executed opinion of Seller's, Shareholders', and Lessors'
counsel, as contemplated by Section 6.3(e); and
(l) Such other documents as Purchaser or its counsel or any lender or
lessor of Purchaser may reasonably request in order to effectuate the
transactions contemplated under this Agreement. Seller, Shareholders, and
Lessors, at any time before or after the Closing, will execute, acknowledge,
and deliver any further deeds, assignments, conveyances, and other assurances,
documents, and instruments of transfer reasonably requested by Purchaser, and
will take any other action consistent with the terms of this Agreement that
may reasonably be requested by Purchaser, for the purpose of assigning,
<PAGE> 110
transferring, granting, conveying, and confirming to Purchaser, or reducing to
possession, any or all property to be conveyed and transferred by this
Agreement. If requested by Purchaser, Seller further agrees to prosecute or
otherwise enforce in its own name for the benefit of Purchaser, any claims,
rights, or benefits that are transferred to Purchaser by this Agreement and
that require prosecution or enforcement in Seller's name. Any prosecution or
enforcement of claims, rights, or benefits under this Section shall be solely
at Purchaser's expense, unless the prosecution or enforcement is made
necessary by a breach of this Agreement by Seller.
7.3 Purchaser's Obligations. Purchaser shall deliver to Seller at
Closing the following documents:
(a) Wire transfer in the amount of the Purchase Price, payable as
provided in Section 1.5 hereof;
(b) Executed counterparts of such of the closing documents of Seller
as shall require acceptance by Purchaser; and
(c) Certified resolutions of the Board of Directors of Purchaser as
provided for in Section 6.2(b) hereof.
ARTICLE 8
INDEMNITIES ARTICLE
8.1 Survival of Representations and Warranties. Regardless of any
investigation at any time made by or on behalf of any party hereto, or of any
information any party may have in respect thereof, all covenants, agreements,
representations, and warranties made hereunder or pursuant hereto or in
connection with the transactions contemplated hereby shall survive the
Closing.
8.2 Nature of Statements. All statements contained herein, in any
Schedule or Exhibit hereto, or in any certificate or other written instrument
delivered by or on behalf of Seller, Shareholders, Lessors, or Purchaser
pursuant to this Agreement, or in connection with the transactions
contemplated hereby, shall be deemed representations and warranties by Seller,
Shareholders, Lessors, or Purchaser, as the case may be.
8.3 Indemnification of Purchaser by Seller, Shareholders, and
Lessors. Seller, Shareholders, and Lessors (for purposes of this Section 8.3
only, the "Indemnifying Parties") each, jointly and severally, shall
indemnify, defend, and hold harmless Purchaser and its direct and indirect
parent companies, subsidiaries, and affiliates, and their respective officers,
directors, and shareholders, successors and assigns, from and against any and
all costs, expenses, losses, damages, fines, penalties, or liabilities
(including, without limitation, interest which may be imposed in connection
therewith, court costs, litigation expenses, and reasonable attorneys' and
accounting fees) ("Actual Loss") incurred by Purchaser, directly or
indirectly, with respect to, in connection with, arising from, or alleged to
result from, arise out of, or be in connection with:
(a) A breach by any of the Indemnifying Parties or any affiliate of
any representation or warranty made by such parties or affiliate and contained
in this Agreement or in any certificate or other document delivered by said
parties to Purchaser or any affiliate hereunder or thereunder;
(b) A breach by any of the Indemnifying Parties or any affiliate of
any covenant, restriction, or agreement made by or applicable to such parties
<PAGE> 111
or affiliate and contained in this Agreement or in any certificate or other
document delivered by said parties or affiliate to Purchaser or any affiliate
hereunder or thereunder (including without limitation, the breach of any Lease
by any Lessor);
(c) Except for any Assumed Liabilities, any other liability,
obligation, claim, complaint, debt, suit, cause of action, investigation, or
proceeding of any kind whatsoever, including, without limitation, any
liability for sales, use or other taxes and any liability under any
environmental, pollution control, health or safety law, rule or regulation,
including actions or proceedings in respect thereof, against or relating to
Seller, the Business, the Acquired Assets, or the Leased Premises, whether
instituted or commenced prior to or after the Closing Date and which relates
to or arises from the business or assets of Seller on or before the Closing
Date or, with respect to the continuing business activities of Seller, after
the Closing Date; and
(d) Any scheduled contingency or item pertaining to Seller,
Shareholders, any Lessor, the Business, the Acquired Assets, or the Leased
Premises.
8.4 Indemnification of Seller, Shareholders, and Lessors by
Purchaser8. Purchaser shall indemnify, defend, and hold Seller, Shareholders,
and Lessors (for purposes of this Section 8.4 only, the "Indemnified Parties")
harmless from and against any Actual Losses incurred by the Indemnified
Parties with respect to, in connection with, arising from, or alleged to
result from, arise out of, or be in connection with:
(a) A breach by Purchaser of any representation or warranty made by
Purchaser and contained in this Agreement or in any certificate or other
document delivered by Purchaser to the Indemnified Parties hereunder or
thereunder;
(b) A breach by Purchaser of any covenant, restriction, or agreement
made by or applicable to Purchaser and contained in this Agreement or in any
certificate or other document delivered by Purchaser to the Indemnified
Parties hereunder or thereunder;
(c) All loss, expense, or damage suffered as the direct result of
Purchaser's failure to pay the Assumed Liabilities in accordance with the
terms of this Agreement; and
(d) Any other claim, suit, cause of action, investigation, or
proceeding of any kind whatsoever instituted or commenced after the Closing
Date which relates to or arises from Purchaser's operation of its separate and
independent business after the Closing Date, except for any claims arising out
of Seller's liabilities to Purchaser or obligations to Purchaser.
8.5 Procedure for Indemnification.
(a) The party which is entitled to be indemnified hereunder (the
"Indemnified Party") shall promptly give notice hereunder to the party
required to indemnify (the "Indemnifying Party") after obtaining written
notice of any claim as to which recovery may be sought against the
indemnifying party because of the indemnity in Section 8.3 and Section 8.4
hereof and, if such indemnity shall arise from the claim of a third party,
shall permit the Indemnifying Party to assume the defense of any such claim
and any litigation resulting from such claim. Notwithstanding the foregoing,
the right to indemnification hereunder shall not be affected by any failure of
<PAGE> 112
an Indemnified Party to give such notice, or delay by an Indemnified Party in
giving such notice, unless, and then only to the extent that, the rights and
remedies of the Indemnifying Party shall have been prejudiced as a result of
the failure to give, or delay in giving, such notice. Failure by an
Indemnifying Party to notify an Indemnified Party of its election to defend
any such claim or action by a third party within 15 days after notice thereof
shall have been given to the Indemnifying Party shall be deemed a waiver by
the Indemnifying Party of its right to defend such claim or action.
(b) If the Indemnifying Party assumes the defense of such claim or
litigation resulting therefrom, the obligations of the Indemnifying Party
hereunder as to such claim shall include taking all steps necessary in the
defense or settlement of such claim or litigation and holding the Indemnified
Party harmless from and against any and all damages caused by or arising out
of any settlement approved by the Indemnifying Party or any judgment in
connection with such claim or litigation. The Indemnifying Party shall not,
in the defense of such claim or any litigation resulting therefrom, consent to
entry of any judgment (other than a judgment of dismissal on the merits
without costs) except with the written consent of the Indemnified Party, or
enter into any settlement (except with the written consent of the Indemnified
Party) which does not include as an unconditional term thereof the giving by
the claimant or the plaintiff to the Indemnified Party a release from all
liability in respect of such claim or litigation. Anything in this Section
8.5 to the contrary notwithstanding, the Indemnified Party may, with counsel
of its choice and at its expense, participate in the defense of any such claim
or litigation.
(c) If the Indemnifying Party shall not assume the defense of any
such claim by a third party or litigation resulting therefrom after receipt of
notice from such Indemnified Party, the Indemnified Party may defend against
such claim or litigation in such manner as it deems appropriate, and unless
the Indemnifying Party shall deposit with the Indemnified Party a sum
equivalent to the total amount demanded in such claim or litigation plus the
Indemnified Party's estimate of the costs of defending the same, the
Indemnified Party may settle such claim or litigation on such terms as it may
deem appropriate and the Indemnifying Party shall promptly reimburse the
Indemnified Party for the amount of such settlement and for all damages
incurred by the Indemnified Party in connection with the defense against or
settlement of such claim or litigation.
(d) The Indemnifying Party shall promptly reimburse the Indemnified
Party for the amount of any judgment rendered with respect to any claim by a
third party in such litigation and for all damage incurred by the Indemnified
Party in connection with the defense against such claim or litigation, whether
or not resulting from, arising out of, or incurred with respect to, the act of
a third party.
ARTICLE 9
TERMINATION ARTICLE
9.1 Termination. This Agreement may be terminated at any time prior
to the Closing:
(a) By mutual written consent of duly authorized officers of
Purchaser and Seller;
(b) By Purchaser if, from the date of this Agreement to the Closing
Date there has been any material change in or material misrepresentation about
the Business, Acquired Assets, Acquired Facilities or matters relating
thereto;
<PAGE> 113
(c) By either Purchaser or Seller if the other party breaches any of
its material representations, warranties, or covenants contained herein and,
if such breach is curable, such breach is not cured within five (5) business
days after notice thereof;
(d) By either Purchaser or Seller if the transactions contemplated
herein shall not have been consummated on or before April 1, 1997 or such
later date as may be mutually agreed upon by the parties; provided, however,
that no party shall have the right to terminate this Agreement unilaterally if
the event giving rise to such right is primarily attributable to such party or
to any affiliated party.
9.2 Effect of Termination. In the event of termination of this
Agreement as provided in Section 9.1, this Agreement shall become void and
there shall be no liability or further obligation hereunder on the part of
Purchaser or Seller or their respective shareholders, officers, or directors,
except as set forth in Article 10 and Sections 5.2 and 5.5 hereof, and except
for liability arising from a breach of this Agreement.
ARTICLE 10
GENERAL PROVISIONS
10.1 . All notices, consents, and other communications hereunder
shall be in writing and deemed to have been duly given when (i) delivered by
hand, (ii) sent by telecopier (with receipt confirmed), provided that a copy
is mailed by registered mail, postage pre-paid return receipt requested, or
(iii) when received by the addressee, if sent by Express Mail, Federal
Express, or other express delivery service (postage pre-paid return receipt
requested), in each case to the appropriate addresses and telecopier numbers
set forth below (or to such other addresses and telecopier numbers as a party
may designate as to itself by notice to the other):
<TABLE>
<CAPTION>
<S> <C>
If to Purchaser: Ugly Duckling Corporation
2525 East Camelback Road, Suite 1150
Phoenix, Arizona 85016
Phone: (602) 852-6600
FAX: (602) 852-6656
Attn.: Steven P. Johnson, Esq.
With a copy to: Snell & Wilmer L.L.P.
One Arizona Center
Phoenix, Arizona 85004-0001
Phone: (602) 382-6252
FAX: (602) 382-6070
Attn.: Steven D. Pidgeon, Esq.
If to Seller: E-Z Plan, Inc.
9000 Tesoro Drive, Suite 122
San Antonio, Texas 78217
Phone: (210) 821-6523
Fax: (210) 930-3856
Attn.: Gary V. Woods
</TABLE>
<PAGE> 114
10.2 Counterparts. This Agreement may be executed in any number of
counterparts, and each counterpart shall constitute an original instrument,
but all such separate counterparts shall constitute one and the same
agreement.
10.3 Governing Law. The validity, construction, and enforceability
of this Agreement shall be governed in all respects by the laws of the State
of Texas, without regard to its conflict of laws rules.
10.4 Assignment. This Agreement shall not be assigned by operation
of law or otherwise, except that Purchaser may assign all or any portion of
its rights under this Agreement to any wholly owned subsidiary, but no such
assignment shall relieve Purchaser of its obligations hereunder, and except
that this Agreement may be assigned by operation of law to any corporation or
entity with or into which Purchaser may be merged or consolidated or to which
Purchaser transfers all or substantially all of its assets, and such
corporation or entity assumes this Agreement and all obligations and
undertakings of Purchaser hereunder.
10.5 Further Assurances. At any time on or after the date hereof,
the parties hereto shall each perform such acts, execute and deliver such
instruments, assignments, endorsements and other documents and do all such
other things consistent with the terms of this Agreement as may be reasonably
necessary to accomplish the transaction contemplated in this Agreement or
otherwise carry out the purpose of this Agreement.
10.6 Gender and Number. The masculine, feminine, or neuter pronouns
used herein shall be interpreted without regard to gender, and the use of the
singular or plural shall be deemed to include the other whenever the context
so requires.
10.7 Schedules and Exhibits. The Schedules and Exhibits referred to
herein are incorporated herein by such reference as if fully set forth in the
text hereof. Any Schedules and Exhibits referred to herein that are not
attached hereto upon execution of this Agreement shall be prepared and
attached to this Agreement as soon as reasonably possible after execution of
this Agreement and on or before the Closing Date. All Schedules shall be
updated as of the Closing Date. All documents and agreements delivered to
Purchaser in connection with its investigation of Seller shall be complete and
accurate and reflect all amendments thereto.
10.8 Waiver of Provisions. The terms, covenants, representations,
warranties, and conditions of this Agreement may be waived only by a written
instrument executed by the party waiving compliance. The failure of any party
at any time to require performance of any provisions hereof shall, in no
manner, affect the right at a later date to enforce the same. No waiver by
any party of any condition, or breach of any provision, term, covenant,
representation, or warranty contained in this Agreement, whether by conduct or
otherwise, in any one or more instances, shall be deemed to be or construed as
a further or continuing waiver of any such condition or of the breach of any
other provision, term, covenant, representation, or warranty of this
Agreement.
10.9 Litigation Costs. If any legal action or any arbitration or
other proceeding is brought for the enforcement of this Agreement, or because
of an alleged dispute, breach, default, or misrepresentation in connection
with any of the provisions of this Agreement, the successful or prevailing
party or parties shall be entitled to recover reasonable attorneys' fees,
accounting fees, and other costs incurred in that action or proceeding, in
<PAGE> 115
addition to any other relief to which it or they may be entitled.
10.10 Section and Paragraph Headings. The Article and Section
headings in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement.
10.11 Amendment. This Agreement may not be amended except by an
instrument in writing approved by the parties to this Agreement and signed on
behalf of each of the parties hereto.
10.12 Transaction Expenses. Except as otherwise expressly provided
herein, each party shall bear its own expenses incident to this Agreement and
the transactions contemplated hereby, including without limitation, all fees
of counsel, consultants, and accountants.
10.13 Severability. If any term, provision, covenant, or restriction
of this Agreement is held by a court of competent jurisdiction to be invalid,
void, or unenforceable, the remainder of the terms, provisions, covenants, and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired, or invalidated and the court shall modify
this Agreement or, in the absence thereof, the parties shall negotiate in good
faith to modify this Agreement to preserve each party's anticipated benefits
under this Agreement.
10.14 Extent of Obligations. All covenants, representations,
warranties, indemnities, and agreements made by Seller, Shareholders, and
Lessors herein shall be deemed joint and several as to each of them.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 116
IN WITNESS WHEREOF, Purchaser, Seller, Shareholders and Lessors have
caused this Agreement to be executed on the date first written above by their
respective officers thereunder duly authorized.
<TABLE>
<CAPTION>
<S> <C>
UGLY DUCKLING CORPORATION,
a Delaware corporation
By: /s/ Gregory B. Sullivan
Name: Gregory B. Sullivan
Title: President
E-Z PLAN, INC.
a Texas corporation
By: /s/ Gary V. Woods
Name: Gary V. Woods
Title: President
MCCOMBS FAMILY, L.L.C.,
a Texas limited liability company
By: /s/ Gary V. Woods
Name: Gary V. Woods
Title: President
MCCOMBS HFC LIMITED,
a Texas limited partnership d/b/a
MCCOMBS AUTOMOTIVE CENTER,
By: /s/ Gary V. Woods
Name: Gary V. Woods
Title: President
*
---------------------------------
Lynda G. McCombs
*
---------------------------------
Marsha M. Shields
*
---------------------------------
Connie M. McNab
</TABLE>
* By: /s/ Gary V. Woods
Gary V. Woods
Attorney-in-Fact
<PAGE> 117
<TABLE>
<CAPTION>
UGLY DUCKLING CORPORATION
SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON SHARE
Year Ended December 31,
----------------------------------------------------------------------------------
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 common 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> 121
Independent Auditors' Consent
The Board of Directors
Ugly Duckling Corporation:
We consent to incorporation by reference in the registration statements (No.
33-06615 and No. 33-08457) on Form S-8 of Ugly Duckling Corporation of our
report dated January 31, 1997, except for note 19 to the consolidated
financial statements which are as of February 13, 1997, relating to the
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, which report appears in the
December 31, 1996 annual report on Form 10-K of Ugly Duckling Corporation.
KPMG Peat Marwick LLP
Phoenix, Arizona
March 26, 1997
<PAGE> 122
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Ernest C. Garcia, Gregory B. Sullivan, Steven T. Darak and Steven P. Johnson,
and each of them, his true and lawful attorney-in-fact and agent with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign the Annual Report on Form 10-K for
the fiscal year ended December 31, 1996, for filing with the Securities and
Exchange Commission by Ugly Duckling Corporation, a Delaware corporation,
together with any and all amendments to such Form 10-K, and to file the same
with all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting to such attorneys-in-fact and
agents, and each of them, 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 all that such attorneys-in-fact and
agents, or each of them, may lawfully do or cause to be done by virtue hereof.
DATED: February 14, 1997
/s/ Robert J. Abrahams
STATE OF ARIZONA )
) ss.
County of Maricopa )
On this 17th day of February, 1997, before me, the undersigned Notary Public,
personally appeared Robert J. Abrahams, known to me to be the person whose
name is subscribed to the within instrument and acknowledged that he executed
the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ Mary E. Reiner
Notary Public
My commission expires: 12/18/2002 {official seal}
<PAGE> 123
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Ernest C. Garcia, Gregory B. Sullivan, Steven T. Darak and Steven P. Johnson,
and each of them, his true and lawful attorney-in-fact and agent with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign the Annual Report on Form 10-K for
the fiscal year ended December 31, 1996, for filing with the Securities and
Exchange Commission by Ugly Duckling Corporation, a Delaware corporation,
together with any and all amendments to such Form 10-K, and to file the same
with all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting to such attorneys-in-fact and
agents, and each of them, 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 all that such attorneys-in-fact and
agents, or each of them, may lawfully do or cause to be done by virtue hereof.
DATED: February 13, 1997
/s/ Christopher D. Jennings
STATE OF CALIFORNIA )
) ss.
County of Los Angeles )
On this 13th day of February, 1997, before me, the undersigned Notary Public,
personally appeared Christopher D. Jennings, known to me to be the person
whose name is subscribed to the within instrument and acknowledged that he
executed the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ Shanin Lonsway
Notary Public
My commission expires: 07/05/1997 {official seal}
<PAGE> 124
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Ernest C. Garcia, Gregory B. Sullivan, Steven T. Darak and Steven P. Johnson,
and each of them, his true and lawful attorney-in-fact and agent with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign the Annual Report on Form 10-K for
the fiscal year ended December 31, 1996, for filing with the Securities and
Exchange Commission by Ugly Duckling Corporation, a Delaware corporation,
together with any and all amendments to such Form 10-K, and to file the same
with all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting to such attorneys-in-fact and
agents, and each of them, 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 all that such attorneys-in-fact and
agents, or each of them, may lawfully do or cause to be done by virtue hereof.
DATED: February 14th, 1997
/s/ John N. MacDonough
STATE OF ARIZONA )
) ss.
County of Maricopa )
On this 14th day of February, 1997, before me, the undersigned Notary Public,
personally appeared John N. MacDonough, known to me to be the person whose
name is subscribed to the within instrument and acknowledged that he executed
the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ Mary E. Reiner
Notary Public
My commission expires: 12/18/2000 {official seal}
<PAGE> 125
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Ernest C. Garcia, Gregory B. Sullivan, Steven T. Darak and Steven P. Johnson,
and each of them, his true and lawful attorney-in-fact and agent with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign the Annual Report on Form 10-K for
the fiscal year ended December 31, 1996, for filing with the Securities and
Exchange Commission by Ugly Duckling Corporation, a Delaware corporation,
together with any and all amendments to such Form 10-K, and to file the same
with all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting to such attorneys-in-fact and
agents, and each of them, 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 all that such attorneys-in-fact and
agents, or each of them, may lawfully do or cause to be done by virtue hereof.
DATED: February 18th 1997
/s/ Arturo R. Moreno
STATE OF ARIZONA )
) ss.
County of Maricopa )
On this 18th day of February, 1997, before me, the undersigned Notary Public,
personally appeared Arturo R. Moreno, known to me to be the person whose name
is subscribed to the within instrument and acknowledged that he executed the
same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ Kimberly K. Halvorsen
Notary Public
My commission expires: 10/01/1999 {official seal}
<PAGE> 126
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Ernest C. Garcia, Gregory B. Sullivan, Steven T. Darak and Steven P. Johnson,
and each of them, his true and lawful attorney-in-fact and agent with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign the Annual Report on Form 10-K for
the fiscal year ended December 31, 1996, for filing with the Securities and
Exchange Commission by Ugly Duckling Corporation, a Delaware corporation,
together with any and all amendments to such Form 10-K, and to file the same
with all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting to such attorneys-in-fact and
agents, and each of them, 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 all that such attorneys-in-fact and
agents, or each of them, may lawfully do or cause to be done by virtue hereof.
DATED: February 14th, 1997
/s/ Frank P. Willey
STATE OF CALIFORNIA )
) ss.
County of Orange )
On this 14th day of February, 1997, before me, the undersigned Notary Public,
personally appeared Frank P. Willey, known to me to be the person whose name
is subscribed to the within instrument and acknowledged that he executed the
same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ JoAnn H. Campbell
Notary Public
My commission expires: 01/20/2001 {official seal}
<PAGE> 127
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's unaudited financial statements as of and for the year ended
December 31, 1996, and is qualified in its entirety by reference to such
statements.
</LEGEND>
<CIK> 0001012704
<NAME> UGLY DUCKLING CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 18,455
<SECURITIES> 13,368
<RECEIVABLES> 59,188
<ALLOWANCES> 8,125
<INVENTORY> 5,752
<CURRENT-ASSETS> 0<F1>
<PP&E> 23,591
<DEPRECIATION> (2,939)
<TOTAL-ASSETS> 118,063
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 82,612
<OTHER-SE> (293)
<TOTAL-LIABILITY-AND-EQUITY> 118,063
<SALES> 53,768
<TOTAL-REVENUES> 75,629
<CGS> 29,890
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 24,700
<LOSS-PROVISION> 9,811
<INTEREST-EXPENSE> 5,262
<INCOME-PRETAX> 5,866
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,866
<EPS-PRIMARY> .60
<EPS-DILUTED> .60
<FN>
<F1>UNCLASSIFIEDBALANCESHEET
</FN>
</TABLE>
