<PAGE>
- -----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 1997
Commission File Number 000-20841
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
incorporation or organization) identification no.)
2525 E. Camelback Road,
Suite 1150
Phoenix, Arizona 85016
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 852-6600
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 THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE:
At August 13, 1997, there were 18,453,080 shares of Common Stock, $0.001 par
value, outstanding.
This document serves both as a resource for analysts, shareholders, and other
interested persons, and as the quarterly report on Form 10-Q of Ugly Duckling
Corporation (Company) to the Securities and Exchange Commission, which has
taken no action to approve or disapprove the report or pass upon its accuracy
or adequacy. Additionally, this document is to be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K, as amended, for the year ended December
31, 1996.
<PAGE>
UGLY DUCKLING CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Part I. - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Page
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets - June 30, 1997 and
December 31, 1996 3
Condensed Consolidated Statements of Operations -Three Months and Six
Months Ended June 30, 1997 and June 30, 1996 4
Condensed Consolidated Statements of Cash Flows -Three Months and Six
Months Ended June 30, 1997 and June 30, 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
Part II. - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 21
Item 2. CHANGES IN SECURITIES 21
Item 3. DEFAULTS UPON SENIOR SECURITIES 21
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
Item 5. OTHER INFORMATION 21
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURES S-1
Exhibit 3.a. i
Exhibit 3.b. ii
Exhibit 10.a. iii
Exhibit 10.b. iv
Exhibit 10.c. v
Exhibit 11 vi
Exhibit 27 vii
Exhibit 99 viii
</TABLE>
<PAGE>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------------- --------------
(UNAUDITED- IN THOUSANDS)
ASSETS
<S> <C> <C>
Cash and Cash Equivalents $ 41,149 $ 18,455
Finance Receivables:
Held for Investment 22,746 52,188
Held for Sale 50,000 7,000
---------------- --------------
Principal Balances, Net 72,746 59,188
Less: Allowance for Credit Losses (14,435) (8,125)
---------------- --------------
Finance Receivables, Net 58,311 51,063
---------------- --------------
Residuals in Finance Receivables Sold 27,441 9,889
Investments Held in Trust 8,807 3,479
Notes Receivable 9,263 1,063
Inventory 16,576 5,752
Property and Equipment, Net 31,143 20,652
Goodwill and Trademarks, Net 13,705 2,150
Other Assets 11,615 5,580
---------------- --------------
$ 218,010 $ 118,083
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts Payable $ 4,194 $ 2,132
Accrued Expenses and Other Liabilities 14,891 6,728
Notes Payable 8,328 12,904
Subordinated Notes Payable 12,000 14,000
---------------- --------------
Total Liabilities 39,413 35,764
---------------- --------------
Stockholders' Equity:
Common Stock 171,317 82,612
Retained Earnings (Accumulated Deficit) 7,280 (293)
---------------- --------------
Total Stockholders' Equity 178,597 82,319
---------------- --------------
$ 218,010 $ 118,083
================ ==============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except earnings per common share - Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Sales of Used Cars $ 27,802 $ 15,096 $ 46,013 $ 30,177
Less:
Cost of Used Cars Sold 14,836 8,510 24,000 16,858
Provision for Credit Losses 4,848 2,566 8,829 5,172
-------------- -------------- --------------- --------------
8,118 4,020 13,184 8,147
-------------- -------------- --------------- --------------
Interest Income 6,168 4,029 12,608 7,691
Gain on Sale of Finance Receivables 8,231 639 12,810 1,178
-------------- -------------- --------------- --------------
14,399 4,668 25,418 8,869
-------------- -------------- --------------- --------------
Other Income 2,070 317 3,574 431
-------------- -------------- --------------- --------------
Income before Operating Expenses 24,587 9,005 42,176 17,447
Operating Expenses 16,705 6,284 28,111 12,010
-------------- -------------- --------------- --------------
Operating Income 7,882 2,721 14,065 5,437
Interest Expense 567 1,638 1,336 3,289
-------------- -------------- --------------- --------------
Earnings before Income Taxes 7,315 1,083 12,729 2,148
Income Taxes 3,004 - 5,156 -
-------------- -------------- --------------- --------------
Net Earnings $ 4,311 $ 1,083 $ 7,573 $ 2,148
============== ============== =============== ==============
Earnings per Share $ 0.23 $ 0.13 $ 0.43 $ 0.26
============== ============== =============== ==============
Shares Used in Computation 18,980 6,380 17,780 6,136
============== ============== =============== ==============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------------- ---------
(UNAUDITED - IN THOUSANDS)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Earnings $ 7,573 $ 2,148
Adjustments to Reconcile Net Earnings to Net
Cash Provided by Operating Activities:
Provision for Credit Losses 8,829 5,172
Gain on Sale of Finance Receivables (12,810) (1,178)
Finance Receivables Held for Sale (91,252) (579)
Proceeds from Sale of Finance Receivables 113,785 -
Decrease (Increase) in Deferred Income Taxes 105 (226)
Depreciation and Amortization 1,458 701
Increase in Inventory (6,820) (57)
Decrease (Increase) in Other Assets (5,189) 136
Increase in Accounts Payable, Accrued Expenses, and
Other Liabilities 7,997 2,710
Increase in Income Taxes Receivable/Payable 2,302 1,360
--------------- ---------
Net Cash Provided by Operating Activities 25,978 10,187
--------------- ---------
Cash Flows from Investing Activities:
Increase in Finance Receivables (26,160) (44,300)
Collections of Finance Receivables 24,855 19,010
Proceeds from Sale of Finance Receivables - 18,410
Increase in Investments Held in Trust (5,328) (5,995)
Increase in Notes Receivable (8,853) -
Collections of Notes Receivable 652 75
Purchase of Property and Equipment (10,600) (2,056)
Payment for Purchase of Assets of Seminole Finance Co.
and EZ Plan, Inc. (29,920) -
Other, Net - (12)
--------------- ---------
Net Cash Used in Investing Activities (55,354) (14,868)
--------------- ---------
Cash Flows from Financing Activities:
Repayments of Notes Payable (34,476) (79)
Net Repayment of Subordinated Notes Payable (2,000) (10,221)
Proceeds from Issuance of Common Stock 88,705 14,945
Other, Net (159) (1,120)
--------------- ---------
Net Cash Provided by Financing Activities 52,070 3,525
--------------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 22,694 (1,156)
Cash and Cash Equivalents at Beginning of Period 18,455 1,419
--------------- ---------
Cash and Cash Equivalents at End of Period $ 41,149 $ 263
=============== =========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
UGLY DUCKLING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
-----------------------
The accompanying unaudited condensed consolidated financial statements of Ugly
Duckling Corporation (Company) have been prepared in accordance with generally
accepted accounting principles for interim financial information and pursuant
to rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for a complete financial statement
presentation. In the opinion of management, such unaudited interim
information reflects all adjustments, consisting only of normal recurring
adjustments, necessary to present the Company's financial position and results
of operations for the periods presented. The results of operations for
interim periods are not necessarily indicative of the results to be expected
for a full fiscal year. The Condensed Consolidated Balance Sheet as of
December 31, 1996 was derived from audited consolidated financial statements
as of that date but does not include all the information and footnotes
required by generally accepted accounting principles. It is suggested that
these condensed consolidated financial statements be read in conjunction with
the Company's audited consolidated financial statements included in the
Company's Annual Report on Form 10-K, as amended, for the year ended December
31, 1996.
NOTE 2. SUMMARY OF FINANCE RECEIVABLES PRINCIPAL BALANCES, NET
------------------------------------------------------------
Following is a summary of Finance Receivables Principal Balances, Net, as of
June 30, 1997 and December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- -------------
<S> <C> <C>
Principal Balances $ 71,663 $ 58,281
Add: Accrued Interest 642 718
Loan Origination Costs 441 189
--------- -------------
Principal Balances, Net $ 72,746 $ 59,188
========= =============
</TABLE>
NOTE 3. COMMON STOCK EQUIVALENTS
--------------------------
Net Earnings per common share amounts are based on the weighted average number
of common shares and common stock equivalents outstanding as reflected on
Exhibit 11 to this Quarterly Report on Form 10-Q.
<PAGE>
NOTE 4. ACQUISITIONS
------------
On January 15, 1997, the Company acquired substantially all of the assets of
Seminole Finance Corporation and related companies ("Seminole"), including
five dealerships in Tampa/St. Petersburg and a contract portfolio of
approximately $31.1 million (6,953 contracts) in exchange for approximately
$2.5 million in cash and assumption of $29.9 million in debt. The combination
of the Company's audited consolidated statement of operations for the year
ended December 31, 1996 and Seminole's audited combined statement of
operations for the same period (as if the Seminole acquisition had taken place
on January 1, 1996) results in a combined net loss for the year ended December
31, 1996 of $(3.6) million. These pro forma results are not necessarily
indicative of the future results of operations of the Company or the results
that would have been obtained had the Seminole acquisition occurred on January
1, 1996. In addition, the pro forma results are not intended to be a
projection of future results. The Company expects the results of operations in
1997 for the assets acquired from Seminole to differ materially from 1996
results because the Company's management intends to significantly alter the
type of vehicles sold at the newly acquired car dealerships, the methodology
by which the acquired operations acquire, recondition, and market used cars,
and the methodology by which the related finance receivables are underwritten
and collected, which management believes will result in the acquired
operations being profitable in 1997. Furthermore, Seminole's audited combined
statement of operations for 1996 was impacted by several factors that are not
expected to have an impact on future operations. Such factors were related to
the deterioration of its loan portfolio, which the Company believes resulted
from poor underwriting and ineffective collection efforts. First, due to the
deterioration of its loan portfolio in 1996, Seminole recorded a total of $7.1
million in provision for credit losses. Second, the deterioration of its loan
portfolio also reduced its borrowing capacity, thereby reducing Seminole's
liquidity. As a result, in order to raise cash, Seminole sold vehicles at
substantially lower margins and sold a portfolio of notes in December 1996 for
a loss of approximately $1.5 million.
On April 1, 1997, the Company purchased substantially all of the assets of EZ
Plan, Inc. (EZ Plan), a Company engaged in the business of selling and
financing used motor vehicles, including seven dealerships in San Antonio and
a contract portfolio of approximately $24.3 million (6,297 contracts) in
exchange for $26.3 million in cash. The combination of the Company's audited
consolidated statement of operations for the year ended December 31, 1996 and
EZ Plan's audited combined statement of operations for the same period (as if
the EZ Plan acquisition had taken place on January 1, 1996) results in
combined net earnings for the year ended December 31, 1996 of $5.9 million.
These pro forma results are not necessarily indicative of the future results
of operations of the Company or the results that would have been obtained had
the EZ Plan acquisition occurred on January 1, 1996. In addition, the pro
forma results are not intended to be a projection of future results. The
Company expects the results of operations in 1997 for the assets acquired from
EZ Plan to differ materially from 1996 results because the Company's
management intends to alter the type of vehicles sold at the newly acquired
car dealerships, the methodology by which the acquired operations acquire,
recondition, and market used cars, and the methodology by which the related
finance receivables are underwritten and collected.
The following summary, prepared on a pro forma basis combines the consolidated
results of operations (unaudited) for the six months ended June 30, 1997 as if
the acquisitions had been consummated as of January 1, 1997. Comparative
information for 1996 for the acquired businesses is not available (in
thousands, except per share data).
<TABLE>
<CAPTION>
<S> <C>
Six Months Ended
June 30, 1997
-----------------
Sales of Used Cars $ 61,173
Interest Income 27,082
Other Income 4,571
-----------------
Total Revenues $ 92,826
=================
Net Earnings $ 4,971
=================
Earnings per Share $ 0.28
=================
</TABLE>
NOTE 5. USE OF ESTIMATES
----------------
The preparation of financial statements 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
statement and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 6. RECLASSIFICATIONS
-----------------
Certain reclassifications have been made to previously reported information to
conform to the current presentation.
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q 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 forward looking statements are within the
meaning of that term in Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934 as, amended. Such
statements may include, but not be limited to, projections of revenues,
income, or loss, capital expenditures, plans for future operations, financing
needs or plans, and plans relating to products or services of the Company, as
well as assumptions relating to the foregoing. The words "believe," "expect,"
"anticipate," "estimate," "project," and similar expressions identify forward
looking statements. Forward looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified.
Future events and actual results could differ materially from those set forth
in, contemplated by, or underlying the forward looking statements. The Company
undertakes no obligation to publicly update or revise any forward looking
statements, whether as a result of new information, future events, or other-
wise. Statements in this Quarterly Report, including the Notes to the Condensed
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," describe factors, among others,
that could contribute to or cause such differences. Additional risk factors
that could cause actual results to differ materially from those expressed in
such forward looking statements are set forth in Exhibit 99 which is attached
hereto and incorporated by reference into this Quarterly Report of Form 10-Q.
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. In January 1997, the
Company acquired selected assets of a group of companies engaged in the
business of selling and financing used motor vehicles, including four
dealerships located in the Tampa Bay/St. Petersburg market (Seminole). In
March 1997, the Company opened its first used car dealership in the Las Vegas
market. In April 1997, the Company acquired selected assets of a Company in
the business of selling and financing used motor vehicles, including seven
dealerships located in the San Antonio market (EZ Plan). In addition, the
Company opened two additional dealerships in the Albuquerque market and one
additional dealership in the Phoenix market during the second quarter of 1997.
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 June 30, 1997,
the Company had 72 branch offices in 19 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 provides
Third Party Dealers with operating credit lines primarily secured by the
dealers' retail installment contract portfolios and inventory.
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. In
February 1997, the Company completed a private placement of common stock for a
total of $88.7 million, net of expenses. The registration of the resale of
the shares sold in the private placement was effective in April 1997.
On July 11, 1997, the Company entered into an agreement in principle with the
senior bank group of First Merchants Acceptance Corporation ("FMAC") to
purchase the secured debt of FMAC held by such group. The debt totals approx-
imately $103 million. FMAC filed for reorganization under Chapter 11 of the
Federal Bankruptcy Code on that date. In connection with the bankruptcy
proceedings, the Company, which owns approximately 2 1/2% of FMAC's outstanding
common stock with a cost basis of approximately $1.5 million, agreed to provide
up to $10 million of "debtor in possession" financing to FMAC, of which approx-
imately $3.0 million was outstanding at August 14, 1997. The more significant
terms of the proposed purchase of senior debt provide, among other things, for
(i) purchase by the Company of the debt at a 10% discount of the outstanding
principal amount; (ii) short-term financing by the bank group to the Company
for the purchase, with interest accruing at LIBOR plus 2% and an up-front
payment by the Company to the bank group equal to 20% of the purchase price;
and (iii) issuance of stock warrants to the bank group to purchase up to
500,000 shares of the Company's common stock at an exercise price of $20 per
share over a thirty-month term and subject to a call feature by the Company.
The purchase is subject to certain conditions, including, but not limited to,
bankruptcy court approval, unless waived by the bank group, and execution of
definitive agreements.
The following discussion and analysis provides information regarding the
Company's consolidated financial position as of June 30, 1997 and December 31,
1996, and its results of operations for the three month periods ended June 30,
1997 and 1996, respectively, and the six month periods ended June 30, 1997
and 1996, respectively.
Growth in Finance Receivables. As a result of the Company's rapid expansion,
contract receivables serviced increased by 111% to $231.7 million at June 30,
1997 (including $160.0 million in contracts serviced under the Company's
Securitization Program) from $109.9 million at December 31, 1996 (including
$51.7 million in contracts serviced under the Company's Securitization
Program). The Company operated 24 and 7 dealerships at June 30, 1997 and
1996, respectively, and 72 and 13 branch offices at June 30, 1997 and 1996,
respectively.
<PAGE>
The following tables reflect the growth in period end balances measured in
terms of the principal amount and the number of contracts.
<TABLE><CAPTION>
TOTAL CONTRACTS OUTSTANDING
(IN THOUSANDS, EXCEPT NUMBER OF CONTRACTS)
JUNE 30, DECEMBER 31,
----------------------- -----------------------
1997 1996
----------------------- -----------------------
PRINCIPAL NO. OF PRINCIPAL NO. OF
AMOUNT CONTRACTS AMOUNT CONTRACTS
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Company Dealerships $ 110,972 23,904 $ 49,066 9,615
Third Party Dealers 120,734 25,188 60,878 12,942
----------- ---------- ----------- ----------
Total Portfolio Serviced 231,706 49,092 109,944 22,557
----------- ---------- ----------- ----------
Less Portfolio Securitized and Sold (160,043) (32,638) (51,663) (10,612)
----------- ---------- ----------- ----------
Company Total $ 71,663 16,454 $ 58,281 11,945
=========== ========== =========== ==========
</TABLE>
The following tables reflect the growth in contract originations by Company
Dealerships and contract purchases from Third Party Dealers measured in terms
of the principal amount and the number of contracts.
<TABLE><CAPTION>
TOTAL CONTRACTS ORIGINATED/PURCHASED
(IN THOUSANDS, EXCEPT NUMBER OF CONTRACTS)
THREE MONTHS ENDED JUNE 30,
------------------------------------------
1997 1996
--------------------- ---------------------
PRINCIPAL NO. OF PRINCIPAL NO. OF
AMOUNT CONTRACTS AMOUNT CONTRACTS
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Company Dealerships $ 52,034 10,006 $ 13,462 1,852
Third Party Dealers 50,139 9,374 10,017 1,844
---------- --------- ---------- ---------
Total $ 102,173 19,380 $ 23,479 3,696
========== ========= ========== =========
</TABLE>
<TABLE><CAPTION>
TOTAL CONTRACTS ORIGINATED/PURCHASED
(IN THOUSANDS, EXCEPT NUMBER OF CONTRACTS)
SIX MONTHS ENDED JUNE 30,
--------------------------------------------
1997 1996
--------------------- ---------------------
PRINCIPAL NO. OF PRINCIPAL NO. OF
AMOUNT CONTRACTS AMOUNT CONTRACTS
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Company Dealerships $ 99,379 19,069 $ 27,097 3,838
Third Party Dealers 91,649 16,911 17,203 3,112
---------- --------- ---------- ---------
Total $ 191,028 35,980 $ 44,300 6,950
========== ========= ========== =========
</TABLE>
Finance Receivable Principal Balances originated/purchased during the three
months ended June 30, 1997 increased by 335.2% to $102.2 million, including
$24.3 million in conjunction with the EZ Plan acquisition, from $23.5 million
in the three month period ended June 30, 1996. For the six month period ended
June 30, 1997, Finance Receivable Principal Balances originated/purchased
increased by 331.2% to $191.0 million, including $55.4 million from the
Seminole and EZ Plan acquisitions, from $44.3 million in the six month period
ended June 30, 1996.
<PAGE>
RESULTS OF OPERATIONS
FOR THREE MONTHS ENDED JUNE 30, 1997
COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
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.
Sales of Used Cars. Sales of Used Cars increased by 84.2% to $27.8 million
for the three month period ended June 30, 1997 from $15.1 million for the
three month period ended June 30, 1996. This growth reflects a significant
increase in the number of used car dealerships in operation. Units sold
increased by 84.0% to 3,806 units in the three month period ended June 30,
1997 from 2,069 units in the three month period ended June 30, 1996. Same
store unit sales declined by 21.1% in the three months ended June 30, 1997
compared to the three months ended June 30, 1996. This is primarily due to
the increased emphasis on underwriting at the Company Dealerships,
particularly one dealership where unit sales decreased by 252 units, which
represents 55.9% of the decrease for the three month period ended June 30,
1997 compared to the same period in 1996.
The average sales price per car increased slightly to $7,305 for the three
month period ended June 30, 1997 from $7,296 for the three month period ended
June 30, 1996.
Cost of Used Cars Sold and Gross Margin. The Cost of Used Cars Sold increased
by 74.3% to $14.8 million for the three month period ended June 30, 1997 from
$8.5 million for the three month period ended June 30, 1996. On a per unit
basis, the Cost of Used Cars Sold decreased by 5.2% to $3,898 for the three
month period ended June 30, 1997 from $4,113 for the three month period ended
June 30, 1996. The gross margin on used car sales (Sales of Used Cars less
Cost of Used Cars Sold excluding Provision for Credit Losses) increased by
96.9% to $13.0 million for the three month period ended June 30, 1997 from
$6.6 million for the three month period ended June 30, 1996. As a percentage
of sales, the gross margin was 46.6% and 43.6% for the three month periods
ended June 30, 1997 and 1996, respectively. On a per unit basis, the gross
margin per car sold was $3,407 and $3,183 for the three month periods ended
June 30, 1997 and 1996, 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 88.9%
to $4.8 million in the three month period ended June 30, 1997 from $2.6
million for the three month period ended June 30, 1996. On a percentage basis,
the Provision for Credit Losses per unit originated at Company Dealerships
decreased by 2.0% to $1,358 per unit in the three month period ended June 30,
1997 from $1,386 per unit in the three month period ended June 30, 1996. As a
percentage of contract balances originated, the Provision for Credit Losses
averaged 18.7% and 19.1%, for the for the three month periods ended June 30,
1997 and 1996, respectively.
The Company charges its Provision for Credit Losses to current operations and
does not recognize any portion of the unearned interest income as a component
of its Allowance for Credit Losses. Accordingly, the Company's unearned
finance income is comprised of the full annual percentage rate ("APR") on its
contracts less amortization of loan origination costs.
Interest Income. Interest Income consists primarily of interest on finance
receivables from Company Dealership sales , interest on Third Party Dealer
finance receivables, and income from Residuals in Finance Receivables Sold.
Company Dealership Receivables - Interest Income increased by 10.1% to $2.8
million for the three month period ended June 30, 1997 from $2.6 million for
the three month period ended June 30, 1996. Interest Income was adversely
affected by sales of $104.0 million in Company Dealership contract principal
balances since inception of the Securitization Program, including sales of
$30.7 million in Company Dealerships contract principal balances in the
quarter ended June 30, 1997, 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 93.1% of sales revenue and 95.4% of the used cars sold at
Company Dealerships for the three month period ended June 30, 1997 compared to
89.2% of sales revenue and 89.5% of the used cars sold for the three month
period ended June 30, 1996. The average amount financed decreased to $7,246
for the three month period ended June 30, 1997 from $7,269 for the three month
period ended June 30, 1996. Primarily as a result of its expansion into
markets with interest rate limits, the Company's yield on its Company Dealer-
ship Receivable contract portfolio has trended downward. The effective yield
on Finance Receivables from Company Dealerships was 26.0% and 28.9%, for the
three month periods ended June 30, 1997 and 1996, respectively. The Company
charges the maximum interest rate permitted in those states that impose usury
limits.
Third Party Dealer Receivables - Interest Income increased by 129.3% to $3.3
million for the three month period ended June 30, 1997 from $1.5 million in
the three month period ended June 30, 1996. Interest Income was adversely
affected by sales of $106.0 million in Third Party Dealer contract principal
balances since inception of the Securitization Program, including sales of
$50.4 million in Third Party Dealer contract principal balances in the quarter
ended June 30, 1997, 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.
Primarily as a result of its expansion into markets with interest rate limits,
the Company's yield on its Third Party Dealer contract portfolio has trended
downward. Portfolio yield was 24.1% and 26.2%, for the three month periods
ended June 30, 1997 and 1996, respectively.
Interest income is effected by the impact of the Company's Residuals in
Finance Receivables Sold. To the extent that cash flows are deficient,
charge-offs of finance receivables exceed original estimates, or assumptions
that were applied at the time of the securitization to the underlying
portfolio are not realized, the Company is required to revalue the residual
portion of the securitization which it retains, and record a charge to
operations. During the three months ended June 30, 1997, the Company recorded
a loss on its Residuals in Finance Receivables Sold of $661,000 due to the
level of charge offs in the underlying portfolios. As of June 30, 1997,
management does not believe that there is an impairment in the valuation of
the Residuals in Finance Receivables Sold.
<PAGE>
Gain on Sale of Finance Receivables. Champion Receivables Corporation
("CRC"), a "bankruptcy remote entity" is the Company's wholly-owned special
purpose securitization subsidiary. During the first quarter of 1996, the
Company initiated a Securitization Program under which CRC sells securities
backed by contracts to SunAmerica Life Insurance Company ("SunAmerica"). Under
the Securitization Program, CRC assigns and transfers the contracts to
separate trusts (the "Trusts") pursuant to Pooling and Servicing Agreements
(the "Pooling Agreements"). Pursuant to the Pooling Agreements, Class A
Certificates and subordinated Class B Certificates are issued to CRC. CRC then
sells the Class A Certificates to SunAmerica or its nominees. The transferred
contracts are serviced by Champion Acceptance Corporation ("CAC"), another
subsidiary of the Company. To obtain a "BBB" rating from Standard & Poors,
CRC is required to provide a credit enhancement by establishing and
maintaining a cash spread account for the benefit of the certificate holders.
CRC makes an initial cash deposit into the spread account, ranging from 3% to
4% of the initial underlying finance receivables principal balance and pledges
this cash to the Trusts. CRC is also required to then make additional deposits
to the spread account from the residual cash flow (through the trustees) as
necessary to attain and maintain the spread account at a specified percentage,
ranging from 6.0% to 8.0%, of the underlying finance receivables principal
balance. Distributions are not made to CRC on the Class B Certificates unless
the spread account has the required balance, the required periodic payments to
the Class A Certificate holders are current, and the trustee, servicer and
other administrative costs are current.
During the three months ended June 30, 1997, CRC made initial spread account
deposits totaling $3.2 million. Additional net deposits through the trustees
during the three months ended June 30, 1997 totaled $739,000 resulting in a
total balance in the spread accounts of $7.9 million as of June 30, 1997. In
connection therewith, the specified spread account balance, based upon the
aforementioned specified percentages of the balances of the underlying port-
folios, as of June 30, 1997 was $11.9 million, resulting in additional funding
requirements from future cash flows as of June 30, 1997 of $4.0 million. The
additional funding requirements will decline as the trustees deposit additional
cash flows into the spread account and as the principal balance of the under-
lying finance receivables declines.
The contracts transferred to the Trusts were purchased by CRC from either CAC,
Champion Financial Services ("CFS"), or Ugly Duckling Car Sales Florida, Inc.
("UDCSF"), other subsidiaries of the Company in "true sale" transactions
pursuant to separate purchase agreements. The obligations of CAC, as servicer,
pursuant to the Pooling Agreements are guaranteed by the Company and certain
other subsidiaries of the Company, other than CRC, CAC, CFS, and UDCSF.
The Company recognizes a Gain on Sale of Finance Receivables equal to the
difference between the yield earned on the contract portfolio securitized and
the return on the securities sold. The amount of any Gain on Sale of Loans is
based upon certain estimates, which may not subsequently be realized. The
amount of Gain on Sale of Loans recognized is a function of a number of items
including, but not limited to, the seasoning, remaining term, and weighted
average net interest rate spread of the portfolio sold, as well as the amount
of Allowance for Credit Losses available for release. The amount of Allowance
for Credit Losses available for release is evaluated in light of the adequacy
of the Allowance for Credit Losses as a percentage of contract principal
balances outstanding. 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.
<PAGE>
The Company utilizes a number of estimates in arriving at the Gain on Sale of
Loans. With the exception of the Company's first two securitization
transactions which took place during the first six months of 1996, the
estimated cash flows into the Trusts were discounted with a rate of 16%. The
two securitization transactions that took place during the first six months of
1996 were discounted with a rate of 25%. For contracts originated at Company
Dealerships, net losses were estimated using total expected cumulative net
losses at loan origination of approximately 26.0%, adjusted for actual
cumulative net losses prior to securitization. For contracts purchased from
Third Party Dealers, net losses were estimated using total expected cumulative
net losses at loan origination of approximately 13.5%, adjusted for actual
cumulative net losses prior to securitization. Losses are discounted at an
assumed risk free rate. Prepayment rates were estimated to be 1.5% per month
of the beginning of month balance. The assumptions utilized in prior
securitizations may not necessarily be the same as those utilized in future
securitizations, if any. The Company classifies the residuals as
"held-to-maturity" securities in accordance with SFAS No. 115.
The Company securitized an aggregate of $81.1 million in contracts, issuing
$65.2 million in securities to SunAmerica during the three months ended June
30, 1997. Pursuant to these transactions, the Company reduced its Allowance
for Credit Losses by $14.9 million during the three months ended June 30, 1997
and retained a residual in the contracts sold of $27.4 million at June 30,
1997. The Company also recorded Gain on Sale of Loans during the three months
ended June 30, 1997 of $8.2 million, net of expenses, compared to $639,000 for
the same period in 1996. The gain on sale of loans as a percentage of
principal balance securitized in the three month period ended June 30, 1997
was 9.8% and 10.4% for the Company Dealership and Third Party Dealer
portfolios securitized, respectively, compared to 5.7% for the Company
Dealership portfolio securitized in the three month period ended June 30,
1996. The significant difference in the gain percentage is primarily due to
the fact that the portfolios securitized in the three month period ended June
30, 1996 were much more seasoned, resulting in a much shorter remaining life
than the portfolios securitized in the three month period ended June 30, 1997.
During the three months ended June 30, 1997, the Trusts issued certificates to
Sun America at a weighted average yield of 7.46% with the yields ranging from
7.13% to 7.71%, resulting in net spreads, after servicing and trustee fees,
ranging from 13.4% to 17.8%, and averaging 14.2%.
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.
As of June 30, 1997, the Company has substantially utilized its maximum commit-
ment from, and does not expect to complete any further securitizations with
SunAmerica under the Securitization Program.
Other Income. Other Income consists primarily of servicing income, insurance
premiums earned on force placed insurance policies, earnings on investments
from the Company's cash and cash equivalents, and franchise fees from the
Company's rent-a-car franchisees. This income increased by 553.0% to $2.0
million for three months ended June 30, 1997 from $317,000 for the three
months ended June 30, 1996. The Company services the $210.0 million in
contracts sold for monthly fees ranging from .25% to .33% of beginning of
period principal balances (3% to 4% annualized). Servicing Income for the
three months ended June 30, 1997 increased to $1.1 million from $194,000 in
the three month period ended June 30, 1996. The significant increase is due
to the increase in the principal balance of contracts being serviced pursuant
to the Securitization Program. The increase is also due to an increase in
earnings on investments of $500,000, compared to no investment earnings in the
three month period ended June 30, 1996. 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 173.0% to $24.6 million
for the three month period ended June 30, 1997 from $9.0 million for the three
month period ended June 30, 1996. Growth of Sales of Used Cars, Interest
Income on the loan portfolios and Gain on Sale of Loans were the primary
contributors to the increase.
Operating Expenses. Operating Expenses consist of Selling and Marketing
Expenses, General and Administrative Expenses, and Depreciation and
Amortization.
Selling and Marketing Expenses. For the three month periods ended June 30,
1997 and 1996, Selling and Marketing Expenses were comprised almost entirely
of advertising costs and commissions relating to Company Dealership
operations. Selling and Marketing Expenses increased by 84.8% to $2.3 million
for the three month period ended June 30, 1997 from $1.2 million for the three
month period ended June 30, 1996. As a percentage of Sales of Used Cars, these
expenses averaged 8.1% for each of the three month periods ended June 30,
1997 and 1996. On a per unit sold basis, Selling and Marketing Expenses of
Company Dealerships increased marginally to $593 per unit for the three month
period ended June 30, 1997 from $591 per unit for the three month period ended
June 30, 1996.
General and Administrative Expenses. General and Administrative Expenses
increased by 189.6% to $13.6 million for the three month period ended June 30,
1997 from $4.7 million for the three month period ended June 30, 1996. These
expenses represented 30.7% and 23.4% of total revenues for three month periods
ended June 30, 1997, and 1996, respectively. For the three month period ended
June 30, 1997 approximately 36.0% of General and Administrative Expenses were
attributable to Company Dealership sales, approximately 21.9% to portfolio
servicing activities, approximately 23.1% to Third Party Dealer activities,
and approximately 19.0% to corporate overhead. For the three month period
ended June 30, 1996, approximately 45.0% of General and Administrative
Expenses were attributable to Company Dealership sales, approximately 19.6% to
portfolio servicing activities, approximately 13.8% to Third Party Dealer
activities, and approximately 21.6% to corporate overhead. The increase in
General and Administrative Expenses is a result of the Company's increased
number of used car dealerships, and 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 goodwill and trademarks. Depreciation and
amortization increased by 131.7% to $855,000 for the three month period ended
June 30, 1997 from $369,000 for the three month period ended June 30, 1996.
The increase was due primarily to the increase in amortization of goodwill
associated with the Company's recent acquisitions, and increased depreciation
expense from the addition of used car dealerships and Third Party Dealer
Branch offices. For the three month period ended June 30, 1997, approximately
41.9% of these expenses were attributable to Company Dealership sales,
approximately 30.5% to portfolio servicing activities, approximately 10.2% to
Third Party Dealer activities, and approximately 17.4% to corporate overhead.
For the three month period ended June 30, 1996, approximately 20.6% of these
expenses were attributable to Company Dealership sales, approximately 51.5% to
portfolio servicing activities, approximately 11.2% to Third Party Dealer
activities, and approximately 16.7% to corporate overhead.
Interest Expense. Interest expense decreased by 65.4% to $567,000 in the
three month period ended June 30, 1997 from $1.6 million in the three month
period ended June 30, 1996. The decrease in 1997, despite significant growth
in Company assets, is the direct result of the two public offerings that were
completed in 1996, and a private placement that was completed in February of
1997 which generated, in the aggregate, approximately $168.1 million in cash,
and the Company's Securitization Program which generated cash from the sale of
Finance Receivables which the Company utilized to pay down debt. Further,
concurrent with the Company's initial public offering on June 21, 1996, the
Company restructured its Subordinated Notes Payable reducing the borrowing
rate on that debt from 18% to 10% per annum.
Income Taxes. Income taxes totaled $3.0 million in the three month period
ended June 30, 1997, an effective rate of 41.1%. In the three month period
ended June 30, 1996, no income tax was incurred due to income tax benefits
realized from the Company's reduction in its valuation allowance for deferred
income tax assets.
<PAGE>
RESULTS OF OPERATIONS
FOR SIX MONTHS ENDED JUNE 30, 1997
COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Sales of Used Cars. Sales of Used Cars increased by 52.5% to $46.0 million
for the six month period ended June 30, 1997 from $30.2 million for the six
month period ended June 30, 1996. This growth reflects increases in the number
of used car dealerships in operation, and average unit sales price. Units sold
increased by 49.9% to 6,278 units in the six month period ended June 30, 1997
from 4,188 units in the six month period ended June 30, 1996. Same store unit
sales declined by 18.1% in the six months ended June 30, 1997 compared to the
six months ended June 30, 1996. This is due to the increased emphasis on
underwriting at the Company Dealerships, particularly one dealership where
unit sales decreased by 562 units, which represents 71.0% of the decrease for
the six month period ended June 30, 1997 compared to the same period in 1996.
The average sales price per car increased by 1.7% to $7,329 for the six month
period ended June 30, 1997 from $7,205 for the six month period ended June 30,
1996.
Cost of Used Cars Sold and Gross Margin. The Cost of Used Cars Sold increased
by 42.4% to $24.0 million for the six month period ended June 30, 1997 from
$16.9 million for the six month period ended June 30, 1996. On a per unit
basis, the Cost of Used Cars Sold decreased by 5.0% to $3,823 for the six
month period ended June 30, 1997 from $4,025 for the six month period ended
June 30, 1996. The gross margin on used car sales (Sales of Used Cars less
Cost of Used Cars Sold excluding Provision for Credit Losses) increased by
65.3% to $22.0 million for the six month period ended June 30, 1997 from $13.3
million for the six month period ended June 30, 1996. As a percentage of
sales, the gross margin was 47.8% and 44.1% for the six month periods ended
June 30, 1997 and 1996, respectively. On a per unit basis, the gross margin
per car sold was $3,506 and $3,180 for the six month periods ended June 30,
1997 and 1996, respectively.
Provision for Credit Losses. The Provision for Credit Losses increased by
70.7% to $8.8 million in the six month period ended June 30, 1997 over $5.2
million for the six month period ended June 30, 1996. This includes an
increase of $720,000 in the Provision for Credit Losses in the six month
period ended June 30, 1997 for Third Party Dealer Finance Receivables over the
six month period ended June 30, 1996 when the Company recorded no Provision
for Credit Losses for Third Party Dealer Finance Receivables. On a percentage
basis, the Provision for Credit Losses per unit originated at Company
Dealerships increased by 12.6% to $1,517 per unit in the six month period
ended June 30, 1997 over $1,348 per unit in the six month period ended June
30, 1996. As a percentage of contract balances originated, the Provision for
Credit Losses averaged 17.5% and 19.1%, for the six month periods ended June
30, 1997 and 1996, respectively.
Interest Income. Interest Income consists primarily of interest on finance
receivables from Company Dealership sales, interest on Third Party Dealer
finance receivables, and income from Residuals and Finance Receivables Sold.
Company Dealership Receivables - Interest Income increased by 13.9% to $5.9
million for the six month period ended June 30, 1997 from $5.2 million for the
six month period ended June 30, 1996. Interest Income was adversely affected
by sales of $104.0 million in Company Dealership contract principal balances
since inception of the Securitization Program, including sales of $45.8
million in Company Dealership contract principal balances in the six months
ended June 30, 1997, and will continue to be affected in future periods by
additional securitizations. The Company financed 91.6% of sales revenue and
92.7% of the used cars sold at Company Dealerships for the six month period
ended June 30, 1997 compared to 89.8% of sales revenue and 91.6% of the used
cars sold for the six month period ended June 30, 1996. The average amount
financed increased to $7,244 for the six month period ended June 30, 1997 from
$7,060 for the six month period ended June 30, 1996. As a result of its expan-
sion into markets with interest rate limits, the Company's yield on its Company
Dealership Receivable contract portfolio has trended downward. The effective
yield on Finance Receivables from Company Dealerships was 27.9% and 28.9%, for
the six month periods ended June 30, 1997 and 1996, respectively. The Company
charges the maximum interest rate permitted in those states that impose usury
limits.
Third Party Dealer Receivables - Interest Income increased by 166.4% to $6.7
million for the six month period ended June 30, 1997 from $2.5 million in the
six month period ended June 30, 1996. Interest Income was adversely affected
by sales of $106.0 million in Third Party Dealer contract principal balances
since inception of the Securitization Program, including sales of $96.0 million
in Third Party Dealer contract principal balances in the six months ended June
30, 1997, 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 a
result of its expansion into markets with interest rate limits, the Company's
yield on its Third Party Dealer contract portfolio has trended downward.
Portfolio yield was 25.1%, and 26.5%, for the six month periods ended June 30,
1997 and 1996, respectively.
Gain on Sale of Finance Receivables. Through June 30, 1997, the Company had
securitized an aggregate of $210.0 million in contracts, issuing $170.4
million in securities to SunAmerica. Pursuant to these transactions, the
Company reduced its Allowance for Credit Losses by $21.8 million during the
six months ended June 30, 1997. The Company also recorded Gain on Sale of
Loans during the six months ended June 30, 1997 of $12.8 million, net of
expenses, compared to $1.2 million for the same period in 1996. The Gain on
Sale of Loans as a percentage of principal balance securitized was 9.0% for
each of the Company Dealership and Third Party Dealer portfolios securitized
in the six month period ended June 30, 1997, compared to 4.9% for the Company
Dealership portfolio securitized in the six month period ended June 30, 1996.
The significant difference in the gain percentage is due to the fact that the
portfolios securitized in the first six months of 1996 were more seasoned,
resulting in a much shorter remaining life than the portfolios securitized in
the first six months of 1997.
During the six months ended June 30, 1997, the Company made initial spread
account deposits totaling $3.2 million. Additional net deposits through the
trustees during the six months ended June 30, 1997 totaled $1.9 million
resulting in a total balance in the spread accounts of $7.9 million as of June
30, 1997.
Since inception of the securitization program with Sun America, the Trusts have
issued certificates to Sun America at a weighted average yield of 7.95% with
the yields ranging from 7.13% to 8.62%, resulting in net spreads, after
servicing and trustee fees, ranging from 12.5% to 17.8%, and averaging 14.7%.
Other Income. Other Income which consists primarily of servicing income,
insurance premiums earned on force placed insurance policies, earnings on
investments from the Company's cash and cash equivalents, and franchise fees
from the Company's rent-a-car franchisees increased by 729.2% to $3.6 million
for six months ended June 30, 1997 from $431,000 for the six months ended June
30, 1996. The Company services the $210.0 million in contracts sold for
monthly fees ranging from .25% to .33% of beginning of period principal
balances (3% to 4% annualized). Servicing Income for the six months ended
June 30, 1997 increased to $1.7 million from $248,000 in the six month period
ended June 30, 1996. The significant increase is due to the increase in the
principal balance of contracts being serviced pursuant to the Securitization
Program. The increase is also due to an increase in earnings on investments
of $1.2 million compared to no investment earnings in the six month period
ended June 30, 1996. 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 141.7% to $42.2 million
for the six month period ended June 30, 1997 from $17.4 million for the six
month period ended June 30, 1996. Growth of Sales of Used Cars, Interest
Income on the loan portfolios and Gain on Sale of Loans were the primary
contributors to the increase.
Operating Expenses. Operating Expenses consist of Selling and Marketing
Expenses, General and Administrative Expenses, and Depreciation and
Amortization.
Selling and Marketing Expenses. For the six month periods ended June 30, 1997
and 1996, Selling and Marketing Expenses were comprised almost entirely of
advertising costs and commissions relating to Company Dealership operations.
Selling and Marketing Expenses increased by 67.6% to $3.8 million for the six
month period ended June 30, 1997 from $2.3 million for the six month period
ended June 30, 1996. As a percentage of Sales of Used Cars, these expenses
averaged 8.2% and 7.5% for the six month periods ended June 30, 1997, and
1996, respectively. On a per unit sold basis, Selling and Marketing Expenses
of Company Dealerships increased by 11.8% to $604 per unit for the six month
period ended June 30, 1997 from $540 per unit for the six month period ended
June 30, 1996. This increase is primarily due to increased marketing
production costs, and an increase in marketing in the Tampa Bay/St.
Petersburg, San Antonio, Las Vegas, and Albuquerque markets where the Company
initially commenced operations in the six month period ended June 30, 1997,
combined with a decrease in same store unit sales.
General and Administrative Expenses. General and Administrative Expenses
increased by 152.7% to $22.9 million for the six month period ended June 30,
1997 from $9.0 million for the six month period ended June 30, 1996. These
expenses represented 30.5% and 22.9% of total revenues for six month periods
ended June 30, 1997, and 1996, respectively. For the six month period ended
June 30, 1997 approximately 35.6% of General and Administrative Expenses were
attributable to Company Dealership sales, approximately 20.0% to portfolio
servicing activities, approximately 23.8% to Third Party Dealer activities,
and approximately 20.6% to corporate overhead. For the six month period ended
June 30, 1996, approximately 46.7% of General and Administrative Expenses were
attributable to Company Dealership sales, approximately 19.1% to portfolio
servicing activities, approximately 13.4% to Third Party Dealer activities,
and approximately 20.8% to corporate overhead. The increase in General and
Administrative Expenses is a result of the Company's increased number of used
car dealerships and 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 goodwill and trademarks. Depreciation and
amortization increased by 108.0% to $1.5 million for the six month period
ended June 30, 1997 from $701,000 for the six month period ended June 30,
1996. The increase was due primarily to the increase in amortization of
goodwill associated with the Company's recent acquisitions, and increased
depreciation expense from the addition of used car dealerships and Third Party
Dealer offices. For the six month period ended June 30, 1997, approximately
38.3% of these expenses were attributable to Company Dealership sales,
approximately 32.0% to portfolio servicing activities, approximately 11.0% to
Third Party Dealer activities, and approximately 18.7% to corporate overhead.
For the six month period ended June 30, 1996, approximately 21.4% of these
expenses were attributable to Company Dealership sales, approximately 52.4% to
portfolio servicing activities, approximately 10.7% to Third Party Dealer
activities, and approximately 15.5% to corporate overhead.
Interest Expense. Interest expense decreased by 59.4% to $1.3 million in the
six month period ended June 30, 1997 from $3.3 million in the six month period
ended June 30, 1996. The decrease in 1997, despite significant growth in
Company assets, is the direct result of the two public offerings that were
completed in 1996, and a private placement that was completed in February of
1997 which generated, in the aggregate, approximately $168.1 million in cash,
and the Company's Securitization Program which generated cash from the sale of
Finance Receivables which the Company utilized to pay down debt. Further,
concurrent with the Company's initial public offering on June 21, 1996, the
Company restructured its Subordinated Notes Payable reducing the borrowing
rate on that debt from 18% to 10% per annum.
Income Taxes. Income taxes totaled $5.2 million in the six month period ended
June 30, 1997, an effective rate of 40.5%. In the six month period ended June
30, 1996, no income tax was incurred due to income tax benefits realized from
the Company's reduction in its valuation allowance for deferred income tax
assets.
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,
and through nonrefundable acquisition discounts on contracts purchased from
Third Party Dealers. The Allowance on contracts originated at Company
Dealerships increased to 23.3% of outstanding principal balances as of June
30, 1997 compared to 23.0% as of December 31, 1996. The Allowance as a
percentage of Third Party Dealer contracts increased to 15.5% from 12.7% over
the same period. The Allowance as a percentage of the Company's combined
contract portfolio increased to 20.1% at June 30, 1997 from 13.9% at December
31, 1996. The increase in the Allowance percentage is primarily due to the
composition of the total portfolio with an increase in the Company Dealership
Receivable portfolio relative to the total portfolio compared to December 31,
1996.
<PAGE>
The following table reflects activity in the Allowance, as well as information
regarding charge off activity, for the three month periods ended June 30, 1997
and 1996, in thousands.
<TABLE>
<CAPTION>
COMPANY DEALERSHIPS THIRD PARTY DEALERS
------------------------ -------------------
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------
1997 1996 1997 1996
----------- ----------- --------- -------
<S> <C> <C> <C> <C>
Allowance Activity:
Balance, Beginning of Period $ 9,223 $ 6,400 $ 6,219 $1,350
Provision for Credit Losses 4,848 2,566 - -
Discount Acquired 6,708 - 5,782 1,109
Reduction Attributable to Loans Sold (8,414) (1,265) (6,509) -
Net Charge Offs (2,436) (1,727) (986) (385)
----------- ---------- --------- -------
Balance, End of Period $ 9,929 $ 5,974 $ 4,506 $2,074
=========== ========== ========= =======
Charge off Activity:
Principal Balances:
Collateral Recovered $ (2,406) $ (1,342) $ (1,210) $ (525)
Collateral Not Recovered (548) (815) (196) (134)
----------- ---------- --------- -------
Total Principal Balances (2,954) (2,157) (1,406) (659)
Accrued Interest - (205) - (29)
Recoveries, Net 518 635 420 303
----------- ---------- --------- -------
Net Charge Offs $ (2,436) $ (1,727) $ (986) $ (385)
=========== ========== ========== =======
Net Charge Offs as % of Average
Principal Outstanding 4.2% 5.8% 2.0% 2.9%
=========== ========== ========== =======
</TABLE>
<PAGE>
The following table reflects activity in the Allowance, as well as information
regarding charge off activity, for the six month periods ended June 30, 1997
and 1996, in thousands.
<TABLE>
<CAPTION>
COMPANY DEALERSHIPS THIRD PARTY DEALERS
------------------------ ---------------------
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ---------------------
1997 1996 1997 1996
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Allowance Activity:
Balance, Beginning of Period $ 1,625 $ 7,500 $ 6,500 $ 1,000
Provision for Credit Losses 8,109 5,172 720 -
Discount Acquired 15,309 - 11,132 1,830
Discount accreted to interest income - - (642) -
Reduction Attributable to Loans Sold (11,082) (2,924) (10,742) -
Net Charge Offs (4,032) (3,774) (2,462) (756)
----------- ----------- ----------- --------
Balance, End of Period $ 9,929 $ 5,974 $ 4,506 $ 2,074
=========== =========== =========== ========
Allowance as Percent of Period
Ended Principal Balance 23.3% 23.6% 15.5% 8.1%
=========== =========== =========== ========
Charge off Activity:
Principal Balances:
Collateral Recovered $ (4,546) $ (3,596) $ (2,807) $(1,067)
Collateral Not Recovered (670) (1,277) (660) (225)
----------- ----------- ----------- --------
Total Principal Balances (5,216) (4,873) (3,467) (1,292)
Accrued Interest - (372) - (59)
Recoveries, Net 1,184 1,471 1,005 595
----------- ----------- ----------- --------
Net Charge Offs $ (4,032) $ (3,774) $ (2,462) $ (756)
=========== =========== =========== ========
Net Charge Offs as % of Average
Principal Outstanding 10.4% 11.7% 3.7% 4.0%
=========== =========== =========== ========
</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 the three month period ended June 30,
1997 were 4.2% of the average principal balance outstanding compared to 5.8%
in the three month period ended June 30, 1996.
Recoveries as a percentage of principal balances charged off where collateral
has been recovered averaged 26.0% for the six month period ended June 30, 1997
compared to 40.9% for the six month period ended June 30, 1996. The decrease
is primarily due to a decrease in the amounts received upon disposition of
collateral.
Net Charge Offs - Third Party Dealers. Net Charge Offs for contracts
purchased from Third Party Dealers in the three month period ended June 30,
1997 were 2.0% of the average principal balance outstanding compared to 2.9%
in the three month period ended June 30, 1996. The Company purchases contracts
from Third Party Dealers, at discounts averaging approximately 11.6%,
contracts with average principal balances of approximately $5,550 and bearing
an average APR of 24.1%.
Recoveries as a percentage of principal balances charged off where collateral
has been recovered averaged 35.8% for the six month period ended June 30, 1997
compared to 55.8% for the six month period ended June 30, 1996. The decrease
is primarily due to a decrease in the amounts received upon disposition of
collateral.
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.
Static Pool Analysis. To monitor contract performance, beginning in June
1995, the Company implemented "static pool" analysis for contracts originated
since January 1, 1993. Static pool analysis is a monitoring methodology by
which each month's originations and subsequent charge offs are assigned a
unique pool and the pool performance is monitored separately. Improving or
deteriorating performance is measured based on cumulative gross and net charge
offs as a percentage of original principal balances, based on the number of
complete payments made by the customer before charge off. The table below sets
forth the cumulative net charge offs as a percentage of original contract
cumulative balances, based on the quarter of origination and segmented by the
number of payments made prior to charge off. For periods denoted by "x", the
pools have not seasoned sufficiently to allow for computation of cumulative
losses. For periods denoted by "-", the pools have not yet attained the
indicated cumulative age. While the Company monitors its static pools on a
monthly basis, for presentation purposes the information in the tables are
presented on a quarterly basis.
Effective January 1, 1997, the Company retroactively implemented a methodology
to more reasonably compute "Monthly Payments Completed by Customer Before
Charge Off" as it relates to loan balances charged off after final insurance
settlements and on loans modified from their original terms. Resulting
adjustments affect the timing of previously reported interim cumulative losses
and do not impact ending cumulative losses. For loan balances charged off
after insurance settlement principal reductions, the revised calculation
method only gives credit for payments actually made by the customer and
excludes credit for reductions arising from insurance proceeds. For modified
loans, completed payments now reflect customer payments made both before and
after the loan was modified. The numbers presented below reflect the adoption
of the revised calculation method.
Currently reported cumulative losses may also vary from those previously
reported due to ongoing collection efforts on charged off accounts and the
difference between final proceeds on the liquidation of repossessed collateral
versus original accounting estimates. Management believes that such variation
will be insignificant.
<PAGE>
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 completed by customer before
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 6.9% 18.7% 26.5% 31.8% 33.9% 35.1%
2nd Quarter 7.2% 18.9% 25.1% 29.4% 31.7% 32.1%
3rd Quarter 8.6% 19.6% 23.7% 28.5% 30.7% 31.6%
4th Quarter 6.3% 16.1% 21.6% 27.0% 28.9% 29.5%
1994:
1st Quarter 3.4% 10.0% 13.4% 18.1% 20.5% 21.2%
2nd Quarter 2.8% 10.5% 14.2% 19.7% 21.9% 22.4%
3rd Quarter 2.8% 8.2% 12.2% 16.5% 18.6% 19.5%
4th Quarter 2.4% 7.7% 11.3% 16.9% 20.0% 21.0%
1995:
1st Quarter 1.1% 7.4% 12.5% 17.8% 20.3% 21.4%
2nd Quarter 1.7% 7.1% 12.1% 16.7% 19.6% x
3rd Quarter 2.0% 7.0% 11.1% 18.1% 21.7%. -
4th Quarter 1.2% 5.6% 10.8% 17.7% x -
1996:
1st Quarter 1.4% 7.6% 13.2% 20.5% - -
2nd Quarter 2.2% 9.2% 14.0% x - -
3rd Quarter 1.6% 7.2% 12.9% - - -
4th Quarter 1.6% 8.7% x - - -
1997:
1st Quarter 2.5% x - - - -
2nd Quarter x - - - - -
</TABLE>
Trends set forth in the table above indicate a deterioration in the
performance of the associated loan portfolio. Management believes the
deterioration is primarily attributable to less effective collection
procedures resulting from a loan servicing and collection data processing
system conversion in the first and second quarters of 1997 rather than from
any fundamental change in loan quality or underwriting. However, should the
trend continue, an increase in the Allowance for Credit Losses may be
necessary via a charge to the Provision for Credit Losses, and a write-down in
the Residual in Finance Receivables Sold may also be necessary.
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 4.0% and
2.3% as of June 30, 1997 and December 31, 1996, respectively. Principal
balances 61 to 90 days delinquent as a percentage of total outstanding
contract principal balances totaled 1.4% and 0.6% as of June 30, 1997 and
December 31, 1996, respectively. In accordance with the Company's charge off
policy, there are no accounts more than 90 days delinquent as of June 30, 1997
and December 31, 1996.
CONTRACTS PURCHASED FROM THIRD PARTY DEALERS
Non-refundable acquisition discount ("Discount") acquired totaled $5.8 million
and $1.1 million for the three month periods ended June 30, 1997 and 1996,
respectively. The Discount, attributable to Third Party Dealer branch
purchases, averaged approximately 11.6% as a percentage of principal balances
purchased in the three month period ended June 30, 1997, compared to 11.1% in
the three month period ended June 30, 1996. For the six months ended June 30,
1997 and 1996, Discount acquired totaled $11.1 million and $1.8 million,
respectively. As a percentage of contracts purchased, Discount averaged 11.6%
and 10.6% during the same periods, respectively. Beginning in 1996, the
Company expanded into markets with interest rate limits. While contractual
interest rates on these contracts are limited by law, the Company has been
able to purchase these contracts at a reasonably consistent effective yield
and, therefore, Discounts have trended upward.
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 completed by customer before
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% 7.7% 9.4% 10.2%
3rd Quarter 1.2% 3.7% 4.6% 6.3% 7.5% x
4th Quarter 1.0% 4.3% 6.7% 9.2% x -
1996:
1st Quarter 0.8% 3.7% 6.9% 10.8% - -
2nd Quarter 1.6% 6.2% 9.7% x - -
3rd Quarter 1.3% 6.1% 9.4% - - -
4th Quarter 1.5% 7.5% x - - -
1997:
1st Quarter 1.3% x - - - -
2nd Quarter x - - - - -
</TABLE>
Trends set forth in the table above indicate a deterioration in the
performance of the associated loan portfolio. Management believes the
deterioration is primarily attributable to less effective collection
procedures resulting from a loan servicing and collection data processing
system conversion in the first and second quarters of 1997 rather than from
any fundamental change in loan quality or underwriting. However, should the
trend continue, an increase in the Allowance for Credit Losses may be
necessary via a charge to the Provision for Credit Losses, and a write-down in
the Residual in Finance Receivables Sold may also be necessary.
Beginning April 1, 1995, the Company initiated a new purchasing program for
Third Party Dealer contracts which included an emphasis on 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 are not a
material consideration for management's evaluation of the current Third Party
Dealer portfolio. Therefore, 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 3.8% and
3.1% as of June 30, 1997 and December 31, 1996, respectively. Principal
balances 61 to 90 days delinquent as a percentage of total outstanding
contract principal balances totaled 1.7% and 1.1% as June 30, 1997 and
December 31, 1996, respectively. In accordance with the Company's charge off
policy there are no Third Party Dealer contracts more than 90 days delinquent
as of June 30, 1997 and December 31, 1996.
During 1996 and continuing throughout 1997, 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 as
expected. Further, the Company underwent a conversion of its loan servicing
system on February 1, 1997. In the opinion of management, delinquencies were
adversely effected by the conversion process due to the need for employees to
completely acquaint themselves with the Company's new systems.
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 155.0% to
$26.0 million for the six month period ended June 30, 1997 from $10.2 million
in the six month period ended June 30, 1996. The increase was primarily due to
an increase in proceeds from sales of finance receivables, provision for
credit losses, and increases in Accounts Payable, Accrued Liabilities and
Other Liabilities offset by increases in Finance Receivables Held for Sale,
Gain on Sale of Finance Receivables, and increases in Inventory and Other
Assets.
The Net Cash Used in Investing Activities increased by 272.3% to $55.4 million
in the six months ended June 30, 1997 from $14.9 million in the six months
ended June 30, 1996. The increase was due to an increase in notes receivable
of $8.9 million, an increase in the purchase of property and equipment of $8.5
million, and the purchase of the assets of Seminole and EZ Plan for $29.9
million.
The Company's Net Cash Provided by Financing Activities increased to $52.1
million in the six months ended June 30, 1997 from $3.5 million in the six
months ended June 30, 1996. This increase was primarily the result of the
$88.7 million in proceeds from the Company's sale of common stock, net of the
$34.5 million of repayment of Notes Payable and the repayment of subordinated
notes payable of $2.0 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 June 30, 1997, the Company's borrowing capacity
under the Revolving Facility was $49.9 million, the aggregate principal amount
outstanding under the Revolving Facility was approximately $100,000, and the
amount available to be borrowed under the facility was $35.5 million. The
Revolving Facility bears interest at the 30-day LIBOR plus 3.60%, payable daily
(total rate of 9.30% as of June 30, 1997).
The Revolving Facility contains covenants that, among other things, limit the
Company's ability to, without GE Capital's consent: (i) incur additional
indebtedness; (ii) make unsecured loans or other advances of money to
officers, directors, employees, stockholders or affiliates in excess of
$25,000 in total; (iii) engage in securitization transactions (other than the
Securitization Program with Sun America, for which GE Capital has consented);
(iv) merge with, consolidate with, acquire or otherwise combine with any other
person or entity, transfer any division or segment of its operations to
another person or entity, or form new subsidiaries; (v) make any change in its
capital structure; (vi) declare or pay dividends except in accordance with all
applicable laws and not in excess of fifteen percent (15%) of each year's net
earnings available for distribution; (vii) make certain investments and
capital expenditures; and (viii) engage in certain transactions with
affiliates. These covenants also require the Company to maintain specified
financial ratios, including a debt ratio of 2.0 to 1 and a net worth of at
least $75,000,000, and to comply with all laws relating to the Company's
business. The Revolving Facility also provides that a transfer of ownership of
the Company that results in less than 15.0% of the Company's voting stock
being owned by Mr. Ernest C. Garcia II, will result in an event of default
under the Revolving Facility.
The Company recently completed negotiations to modify the terms of its
Revolving Facility, and expects to execute a definitive agreement in the near
future. Under the modified terms of the agreement, the commitment will be
raised from $50 million to $100 million, the Company may borrow up to 65.0% of
the principal balance of eligible Company Dealership contracts and up to 86.0%
of the principal balance of eligible Third Party Dealer contracts, the interest
rate will be reduced to 30-day LIBOR plus 3.15%, payable daily, and the
Revolving Facility will expire in December 1998. Certain of the definitive
terms may vary from those set forth herein. No assurance can be given that
definitive agreements will ultimately be executed.
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 $12.0 and $14.0 million as of June 30, 1997 and December 31,
1996, respectively. 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. Subsequent to June 30,
1997, the Company's Board of Directors approved the prepayment of the $12.0
million in subordinated debt subject to certain conditions including the
Company's completion of a debt offering. No such prepayment has been made as
of the date of filing of this form 10-Q.
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 the six month period ended June 30,
1996, the Company paid a total of $567,000 in dividends to Verde on the
Preferred Stock which was redeemed in November 1996. As the preferred stock
was redeemed in 1996, there were no dividends paid in 1997.
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
has provided the Company with a source of funding in addition to the Revolving
Facility. At the closing of each securitization, CRC 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
cost of funds 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. As of June 30, 1997, the Company had
substantially utilized its maximum commitment from, and does not expect to
complete any further securitizations with SunAmerica under the Securitization
Program. The Company is actively seeking to identify alternative securitization
participants. Failure to identify new securitization participants and to
periodically engage in securitization transactions will adversely affect the
Company.
In connection with its securitization transactions with SunAmerica, CRC 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 per-
centage 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 princi-
pal 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 CRC from the pledged spread account.
On July 18, 1997, the Company filed a Form S-3 registration statement for the
purpose of registering up to $200 million of its debt securities in one or
more series at prices and on terms to be determined at the time of sale. The
registration statement was declared effective by the Securities and Exchange
Commission in July 1997.
Capital Expenditures and Commitments. The Company is pursuing an aggressive
growth strategy. In the fourth quarter of 1996, the Company acquired the
leasehold rights to an existing dealership in Las Vegas, Nevada, which
commenced operations in March 1997, and has opened a new dealership in
Phoenix, Arizona and two new dealerships in Albuquerque, New Mexico, and has
three other dealerships in Phoenix, Arizona currently under development. In
addition, the Company opened 30 new Branch Offices during the second quarter
of 1997, and recently completed expansion of its contract servicing and
collection facility.
On April 1, 1997, the Company completed the purchase of substantially all of
the assets of a Company engaged in the business of selling and financing used
motor vehicles, including seven dealerships in San Antonio and a contract
portfolio of approximately $24.3 million for a purchase price of $26.3 million
in cash. In addition, the Company intends to open 10 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). Further, on July 11, 1997, the
Company entered into an agreement to provide "debtor in possession" financing
to First Merchants Acceptance Corporation in an amount up to $10.0 million.
The Company intends to finance these expenditures through operating cash flows
and supplemental borrowings, including amounts available under the Revolving
Facility and Securitization Program, if any.
SEASONALITY
Historically, the Company has experienced higher revenues in the first two
quarters of the year than in the latter half of the year. The Company believes
that these results are due to seasonal buying patterns resulting in part from
the fact that many of its customers receive income tax refunds during the
first half of the year, which are a primary source of down payments on used
car purchases.
INFLATION
Increases in inflation generally result in higher interest rates. Higher
interest rates on the Company's borrowings would decrease the profitability of
the Company's existing portfolio. The Company will seek to limit this risk
through its Securitization Program and, to the extent market conditions
permit, for contracts originated at Company Dealerships, either by increasing
the interest rate charged, or the profit margin on, the cars sold, or for
contracts acquired from Third Party Dealers, either by acquiring contracts at
a higher discount or with a higher APR. To date, inflation has not had a
significant impact on the Company's operations.
ACCOUNTING MATTERS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128).
This statement is effective for both interim and annual periods ending after
December 15, 1997, and replaces the presentation of "primary" earnings per
share with "basic" earnings per share and the presentation of "fully diluted"
earnings per share with "diluted" earnings per share. Earlier application is
not permitted. When adopted, all previously reported earnings per common
share amounts must be restated based upon the provisions of the new standard.
Management of the Company does not expect that adoption of SFAS No. 128 will
have a material impact on the Company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
No. 130). This statement is effective for interim and fiscal periods
beginning after December 15, 1997, and requires the Company to classify items
of other comprehensive income by their nature in a financial statement, and to
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of the
statement of financial position. Management of the Company does not expect
that the adoption of SFAS No. 130 will have a material impact on the Company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). This statement is
effective for fiscal years beginning after December 15, 1997, and requires the
Company to report information about operating segments in its annual financial
statements and further requires the Company to disclose selected information
about operating segments in interim reports to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Management of the Company does not
expect that the adoption of SFAS No. 131 will have a material impact on the
Company.
<PAGE>
PART II. OTHER INFORMATION
Item 1. 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 applicable state, federal and other laws and regulations,
there can be no assurance that they will be upheld in every instance. Despite
obtaining these disclaimers, the Company, in the ordinary course of business,
receives complaints from customers relating to such vehicle-related problems
as well as alleged violations of federal and state consumer lending or other
similar laws and regulations. While most of these complaints are made directly
to the Company or to various consumer protection organizations and are
subsequently resolved, the Company is named as a defendant in civil suits
filed by customers in state, local, or small claims courts. Additionally, in
the ordinary course of business, the Company is a defendant in various other
types of legal proceedings. There can be no assurance that the Company will
not be a target of similar claims and legal proceedings in the future. The
Company believes that the ultimate disposition of these matters on a cumulative
basis will not have a material adverse effect on the Company. However, there
can be no assurance in this regard.
In connection with the Seminole acquisition, 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. The Company believes that the
ultimate disposition of this matter will not have a material adverse effect
on the Company.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 3.a - Certification of Incorporation of the Company
Amended and Restated as of May 15, 1997
Exhibit 3.b - By-laws of the Company
Exhibit 10.a - Employment Agreement between the Company and
Russell Grisanti
Exhibit 10.b - Company's Long-Term Incentive Plan Restated as of
March 14, 1997
Exhibit 10.c - First Amendment to Agreement of Purchase and Sale of
Assets dated June 6, 1997 to agreement dated December
31, 1996.
Exhibit 11 - Statement Regarding Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
Exhibit 99 - Cautionary Statement Regarding Forward Looking
Statements
(b) Reports on Form 8-K.
During the second quarter of 1997, the Company filed, pursuant to Items 5
and 7, four reports on Form 8-K or Form 8-K/A. The first report on Form 8-K
dated April 1, 1997 and filed April 15, 1997, reported the closing of the
acquisition of certain assets from third parties (referred to as E-Z Plan),
indicated that financial information in connection with the E-Z Plan acqui-
sition will be filed later when it is available and incorporated by reference
the previously filed agreement of purchase and sale of assets for the acqui-
sition. The second report on Form 8-K dated April 21, 1997 and filed April 22,
1997, reported that the Company's registration statement relating to the
resale of the common stock issued in a private placement had been declared
effective. The third report on Form 8-K/A2 dated January 15, 1997 and filed
May 14, 1997, revised certain financial statements related to the Seminole
acquisition by the Company. The fourth report on Form 8-K/A1 dated April 1,
1997 and filed June 11, 1997, amended an earlier Form 8-K to add financial
statements and pro forma information related to the E-Z Plan acquisition by
the Company. After the second quarter 1997, the Company filed, pursuant to
Items 5 and 7, one report on Form 8-K. This report on Form 8-K dated July 17,
1997 and filed July 18, 1997, included a copy of the Company's press release
entitled "Ugly Duckling Corporation to Purchase Secured Bank Debt of First
Merchants Acceptance Corporation."
<PAGE>
SIGNATURE
---------
Pursuant to the requirements 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
Date: August 14, 1997
-----------------
/s/ Steven T. Darak
- ----------------------
Steven T. Darak
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.a Certification of Incorporation of the Company Amended and
Restated as of May 15, 1997
3.b By-Laws of the Company
10.a Employment Agreement Between the Company and Russell Grisanti
10.b Company's Long-Term Incentive Plan Restated as of March 14, 1997
10.c First Amendment to Agreement of Purchase and Sale of Assets
Dated June 6, 1997 to Agreement Dated December 31, 1996.
11 Statement Regarding Computation of Earnings Per Share
27 Financial Data Schedule
99 Cautionary Statement Regarding Forward Looking Statements
</TABLE>
Exhibit 3.a
CERTIFICATE OF INCORPORATION
OF
UGLY DUCKLING CORPORATION
AMENDED AND RESTATED AS OF MAY 15, 1997
ARTICLE ONE
The name of the corporation is UGLY DUCKLING CORPORATION.
ARTICLE TWO
The address of the corporation's registered office in the State of Delaware is
1209 Orange Street, in the City of Wilmington, County of New Castle. The name
of its registered agent at such address is Corporation Trust Company.
ARTICLE THREE
The purpose of the corporation is to engage in any lawful act or activity for
which corporations may be organized under the General Corporation Law of the
State of Delaware.
ARTICLE FOUR
The Corporation shall have perpetual existence.
ARTICLE FIVE
A. The corporation shall be authorized to issue two classes of shares of
stock to be designated, respectively, "Common Stock" and "Preferred Stock";
the total number of shares of Common Stock that the corporation shall have
authority to issue shall be 100,000,000, and each of such shares shall have a
par value of $.001; and the total number of shares of Preferred Stock that the
corporation shall have the authority to issue shall be 10,000,000, and each of
such shares shall have a par value of $.001.
B. Shares of Preferred Stock may be issued from time to time in one or
more series as may from time to time be determined by the Board of Directors
of the corporation, each of said series to be distinctly designated. The
voting powers, preferences and relative, participating, optional, and other
special rights, and the qualifications, limitations, or restrictions thereof,
if any, of each such series may differ from those of any and all other series
of Preferred Stock at any time outstanding, and the Board of Directors is
hereby expressly granted authority to fix or alter, by resolution or
resolutions, the designation, number, voting powers, preferences, and
relative, participating, optional, and other special rights, and the
qualifications, limitations, and restrictions thereof, of each such series.
C. The corporation hereby designates 1,000,000 shares of Preferred Stock
as Series A Preferred Stock, which shares shall have the following rights,
powers, privileges, preferences, designations and limitations:
1. Designation and Rank.
The Series A Preferred Stock shall rank prior to the Common Stock and to all
other classes and series of equity securities of the corporation now or
hereafter authorized, issued or outstanding (such other classes and series of
equity securities collectively may be referred to herein as the "Junior
Stock"), other than any classes or series of equity securities of the
corporation ranking on a parity with (the "Parity Stock") or senior to (the
"Senior Stock") the Series A Preferred Stock as to dividend rights and rights
upon liquidation, winding up or dissolution of the corporation. The Series A
Preferred Stock shall be junior to all outstanding debt of the corporation.
The Series A Preferred Stock shall be subject to creation of Senior Stock,
Parity Stock and Junior Stock to the extent not expressly prohibited herein,
and the provisions hereof.
2. Dividends.
a. The holders of record of shares of the Series A Preferred Stock shall
be entitled to receive, when, as and if declared by the Board of Directors of
the corporation, out of any funds of the corporation legally available
therefor, cumulative cash dividends ("Dividends") at the per annum rates set
forth below, which shall accrue from December 31, 1995, and be payable
quarterly in arrears on the last day of March, June, September and December,
in each year, commencing March 31, 1996, or, if such day is a non-business
day, on the next business day, without interest (each of such dates, a
"Dividend Payment Date").
January 1, 1996 - December 31, 1996 12%
January 1, 1997 - December 31, 1997 13%
January 1, 1998 - December 31, 1998 14%
January 1, 1999 - December 31, 1999 15%
January 1, 2000 - December 31, 2000 16%
January 1, 2001 - December 31, 2001 17%
January 1, 2002 and thereafter 18%
Each declared Dividend shall be payable to holders of record as they appear on
the stock books of the corporation at the close of business on the applicable
record date, which shall be not more than 30 nor less than 10 calendar days
preceding the Dividend Payment Date therefor, as determined by the Board or a
duly authorized committee thereof (each of such dates, a "Record Date").
Dividends on each share of Series A Preferred Stock shall accrue and be
cumulative from the date of issuance thereof, whether or not there shall be
profits, surplus or other funds of the corporation legally available for the
payment of such Dividends at the time such Dividends shall accrue or become
due and whether or not such Dividends are declared. Accrued and unpaid
Dividends for any prior Dividend periods may be declared and paid at any time,
without reference to any regular Dividend Payment Date, to holders of record
on such date, not exceeding 45 days preceding the payment date thereof, as may
be fixed by the Board.
b. Unless full Dividends on the Series A Preferred Stock at the rates set
forth in paragraph C.2a above shall have been paid or declared and a sum
sufficient for the payment thereof set apart: (i) no dividend whatsoever
shall be paid or declared, and no distribution shall be made, on any Common
Stock or any other Junior Stock and (ii) no Common Stock shall be purchased,
redeemed or acquired by the corporation and no monies shall be paid into or
set aside or made available for a sinking fund for the purchase, redemption or
acquisition thereof; provided, however, that this restriction shall not apply
to the repurchase of shares of Common Stock or any other Junior Stock from
directors, officers or employees of the corporation pursuant to agreements
under which the corporation has the option to repurchase such shares upon the
occurrence of certain events, including the termination of employment.
<PAGE>
3. Liquidation Preference.
a. In the event of any liquidation, dissolution or winding up of the
corporation, either voluntarily or involuntarily, the holders of Series A
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the corporation to the
holders of Common Stock of the corporation or any other Junior Stock, an
amount equal to the Issuance Price for each share of Series A Preferred Stock
plus all Dividends due and not paid on such shares (the "Liquidation
Payment"). If upon such liquidation, dissolution or winding up of the
corporation the assets of the corporation are insufficient to pay the
Liquidation Payment in full on each share of Series A Preferred Stock, then
such assets as are available for distribution to the holders of the Series A
Preferred Stock shall be distributed ratably among such holders. Unless
specifically designated as Junior Stock or Senior Stock with respect to the
distribution of assets, all other series or classes of Preferred Stock shall
rank on a parity with the Series A Preferred Stock with respect to the
distribution of assets. All of the preferential amounts to be paid to the
holders of the Series A Preferred Stock and any Parity Stock under this
paragraph shall be paid or set apart for payment before the payment or setting
apart for payment of any amount for or the distribution of any assets of the
corporation to the holders of the Common Stock in connection with such
liquidation, dissolution or winding up.
b. A consolidation or merger of the corporation with or into any other
corporation where less than 50% of the outstanding voting securities of the
surviving corporation are held by the shareholders of the corporation existing
immediately prior to the consolidation or merger or a sale of all or
substantially all of the assets of the corporation, shall be deemed to be a
liquidation, dissolution or winding up of the corporation within the meaning
of this paragraph C.3.
4. Voting Rights.
a. Except as provided in C.4.b. below, or as otherwise from time to time
required by applicable law, the shares of Series A Preferred Stock shall not
entitle the holder thereof to any voting rights in the corporation.
b. The approval of 66 2/3% of the outstanding shares of the Series A
Preferred Stock, voting separately as a class, shall be required to authorize
any action of the corporation which (i) changes the rights, preferences or
privileges of the shares of the Series A Preferred Stock, or (ii) creates any
new class of stock having preference over or being on a parity with the shares
of the Series A Preferred Stock as to distributions upon the liquidation,
winding up or dissolution of the corporation. If Dividends for an entire
calendar year have not been declared and paid within 30 days after the end of
the calendar year, then until said Dividends are paid, holders of Series A
Preferred Stock shall be entitled to vote in the election of members of the
Board of Directors of the corporation. In such event, each share of Series A
Preferred Stock shall entitle the holder thereof to ten votes in the election
of members of the Board of Directors and said votes may be cumulated in
accordance with applicable law. At any time that holders of Series A
Preferred Stock are entitled to vote in the election of members of the Board
of Directors, the holders of 25% of the outstanding shares of the interest of
Series A Preferred Stock may call a special meeting of the Board of Directors
in accordance with the Bylaws of the corporation.
5. Right of Redemption. The corporation shall have the right to redeem
the Series A Preferred Stock, in whole or in part, from time to time at any
time, except as otherwise prohibited by law, at the Issuance Price per share,
plus an amount equal to all accrued and unpaid Dividends (whether or not any
such Dividend has been declared, but without interest thereon) to the date
such payment is made available in full to holder of shares of Series A
Preferred Stock (the "Redemption Price"). If fewer than all of the shares of
Series A Preferred Stock are to be redeemed at any time, selection of shares
for redemption shall be made by the Board of Directors of the corporation on a
pro rata basis or in such other equitable manner as the Board shall determine.
The corporation shall cause a notice of the record date set by the Board of
Directors for the payment of the Redemption Price (the "Redemption Date") to
be mailed to the holders of the Series A Preferred Stock to be redeemed at
least 30 days prior to the Redemption Date. Following the Redemption Date,
unless this corporation defaults in payment the Redemption Price on the
Redemption Date, the holders of the shares of Series A Preferred Stock called
for redemption shall cease to have any rights as stockholders of the
corporation with respect to such shares called for redemption except the right
to receive the Redemption Price upon surrender of the certificate or
certificates representing the shares of Series A Preferred Stock called for
redemption, endorsed for transfer to the corporation, and such shares shall
not be deemed to be outstanding for any purpose whatsoever.
6. Transfer. The corporation shall keep a register in which the
corporation shall register the transfer of any shares of Series A Preferred
Stock. Upon presentment for registration of transfer of a certificate
representing shares of Series A Preferred Stock (accompanied by such stock
assignments or stock powers as the corporation may require), the corporation
shall cancel such certificate and shall execute and issue to the transferor
and/or transferee new certificates aggregating a number of shares of Series A
Preferred Stock as is equal to the number represented by the canceled
certificate.
ARTICLE SIX
The power to adopt, amend, and repeal any or all of the Bylaws of the
corporation is reserved to the Board of Directors of the corporation.
ARTICLE SEVEN
Election of members to the Board of Directors need not be by written ballot
unless the Bylaws of the corporation shall so provide.
Meetings of the stockholders of the corporation may be held within or without
the State of Delaware, as the Bylaws may provide. The books of the
corporation may be kept (subject to any provision contained in the Delaware
General corporation Law) outside the State of Delaware at such place or places
as may be designated from time to time by the Board of Directors or in the
Bylaws of the corporation.
ARTICLE EIGHT
A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) under Section 174 of the Delaware General
Corporation Law; or (iv) for any transaction from which the director derived
an improper personal benefit. If the Delaware General Corporation Law is
amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
corporation shall be eliminated or limited to the fullest extent permitted by
the Delaware General Corporation Law, as so amended. Any repeal or
modification of this provision shall not adversely affect any right or
protection of a director of the corporation existing at the time of such
repeal or modification. The limitation of liability provided herein shall
continue after a director has ceased to occupy such position as to acts or
omissions occurring during such director's term of terms of office.
ARTICLE NINE
A. The corporation shall to the fullest extent authorized by the Delaware
General Corporation Law, as the same exists or may hereafter be amended (but,
in the case of any such amendment, only to the extent that such amendment
permits the corporation to provide broader indemnification rights than such
law permitted the corporation to provide prior to such amendment), indemnify
and hold harmless any person who was or is a party, or is threatened to be
made a party to or is otherwise involved in any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative by reason of the fact that such person is or was a director
or officer of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan (hereinafter an "Indemnitee") against
expenses, liabilities and losses (including attorneys' fees, judgments, fines,
excise taxes or penalties paid in connection with the Employee Retirement
Income Security Act of 1974, as amended, and amounts paid in settlement)
reasonably incurred or suffered by such Indemnitee in connection therewith;
provided, however, that except as provided in this section with respect to
proceedings to enforce rights to indemnification, the corporation shall
indemnify any such Indemnitee in connection with a proceeding (or part
thereof) initiated by such Indemnitee only if such proceeding or part thereof
was authorized by the board of directors of this corporation.
B. The right to indemnification conferred in this section shall include
the right to be paid by the corporation the expenses (including attorneys'
fees) incurred in defending any such proceeding in advance of its final
disposition; provided, however, that, if the Delaware General Corporation Law
requires, an advancement of expenses incurred by an Indemnitee in his capacity
as a director or officer (and not in any other capacity in which service was
or is rendered by such Indemnitee, including, without limitation, service to
an employee benefit plan) shall be made only upon delivery to the corporation
of an undertaking, by or on behalf of such Indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is not further right to appeal that such Indemnitee is not
entitled to be indemnified for such expenses under this section or otherwise.
The rights to indemnification and to the advancement of expenses conferred in
this section shall be contract rights and such rights shall continue as to an
Indemnitee who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the Indemnitee's heirs, executors and
administrators.
C. If a claim under the two preceding paragraphs of this section is not
paid in full by the corporation within sixty (60) days after a written claim
has been received by the corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period shall be twenty
(20) days, the Indemnitee may at any time thereafter bring suit against the
corporation to recover the unpaid amount of the claim. If successful in whole
or in part in any such suit, or in a suit brought by the corporation to
recover an advancement of expenses pursuant to the terms of an undertaking,
the Indemnitee shall be entitled to be paid also the expense of prosecuting or
defending such suit. In (i) any suit brought by the Indemnitee to enforce a
right to indemnification hereunder (but not in a suit brought by the
Indemnitee to enforce a right to an advancement of expenses) and (ii) in any
suit brought by the corporation to recover an advancement of expenses pursuant
to the terms of an undertaking, the corporation shall be entitled to recover
such expenses upon a final adjudication that the Indemnitee has not met any
applicable standard for indemnification set forth in the Delaware General
Corporation Law. Neither the failure of the corporation (including its board
of directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification of
the Indemnitee is proper in the circumstances because the Indemnitee has met
the applicable standard of conduct set forth in the Delaware General
Corporation Law, nor an actual determination by the corporation (including its
board of directors, independent legal counsel, or its stockholders) that the
Indemnitee has not met such applicable standard of conduct, shall create a
presumption that the Indemnitee has not met the applicable standard of conduct
or, in the case of such a suit brought by the Indemnitee, be a defense to such
suit. In any suit brought by the Indemnitee to enforce a right to
indemnification or to an advancement of expenses hereunder, or brought by the
corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the burden of proving that the Indemnitee is not entitled to be
indemnified, or to such advancement of expenses under this section or
otherwise shall be on the corporation.
D. The rights to indemnification and advancement of expenses conferred in
this section shall not be exclusive of any other rights which any person may
have or hereafter acquire under any statute, the corporation's certificate of
incorporation, as it may be amended or restated from time-to-time, any
agreement, vote of stockholders or disinterested directors, or otherwise. No
amendment or repeal of this Article Eight shall apply to or have any effect on
any right to indemnification provided hereunder with respect to any acts or
omissions occurring prior to such amendment or repeal.
E. The corporation shall have the power to purchase and maintain
insurance, at its expense, to protect itself and any director, officer,
employee or agent of the corporation or another corporation, partnership,
joint venture, trust or other enterprise (including an employee benefit plan)
against any expense, liability or loss, whether or not the corporation would
have the power to indemnify such person against such expense, liability or
loss under the Delaware General Corporation Law. The corporation may also
create a trust fund, grant a security interest and/or use other means
(including, but not limited to letters of credit, surety bonds and/or similar
arrangements), as well as enter into contracts providing indemnification to
the full extent authorized or permitted by law and including as part thereof
provisions with respect to any or all of the foregoing, to ensure the payment
of such amounts as may become necessary to effect indemnification as provided
therein, or elsewhere.
F. For purposes of this section, references to the "corporation" shall
include any subsidiary of this corporation from and after the acquisition
thereof by this corporation, so that any person who is a director, officer,
employee or agent of such subsidiary after the acquisition thereof by this
corporation shall stand in the same position under the provisions of this
section as such person would have had such person served in such position for
this corporation.
G. The corporation may, to the extent authorized from time to time by the
board of directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the corporation to the fullest extent of
the provisions of this section with respect to the indemnification and
advancement of expenses of directors and officers of the corporation.
ARTICLE TEN
The name and mailing address of the incorporator is Steven P. Johnson, 2525
East Camelback Road, Phoenix, Arizona 85016.
ARTICLE ELEVEN
The number of directors constituting the initial Board of Directors of the
corporation is one (1). The size of the Board of Directors may be increased
or decreased in the manner provided in the Bylaws of the corporation. All
corporate powers of the corporation shall be exercised by or under the
direction of the Board of Directors except as otherwise provided herein or by
law. The name and address of the persons who are to serve as directors until
the first annual meeting of stockholders or until their successors are elected
and qualified are:
<TABLE>
<CAPTION>
<S> <C>
Name Address
- ---------------------- -----------------------------------
Ernest C. Garcia, II 2525 East Camelback Road, Suite 510
Phoenix, Arizona 85016
</TABLE>
ARTICLE TWELVE
Subject to any conditions imposed by law, the corporation expressly denies the
application of the Arizona Corporate Takeover Laws, Arizona Revised Statutes
10-2701 et seq., or any successor thereto.
ARTICLE THIRTEEN
The corporation reserves the right to amend, alter, change, or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by the Delaware General corporation Law.
[udc.om.artincrp2.doc]
EXHIBIT 3.b
BY-LAWS
OF
UGLY DUCKLING CORPORATION
(the "Corporation")
ARTICLE 1
OFFICES
Section 1.1 Registered Office. The registered office of the Corporation
shall be in the City of Wilmington, County of New Castle, State of Delaware.
Section 1.2 Other Offices. The Corporation may also have offices at
such other places both within and without the State of Delaware as the Board
of Directors or the officers may from time to time determine.
ARTICLE 2
MEETINGS OF STOCKHOLDERS
Section 2.1 Place of Meetings. Meetings of the stockholders for the
election of directors or for any other purpose shall be held at such time and
place, either within or without the State of Delaware, as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
Section 2.2 Annual Meetings. The annual meetings of stockholders shall
be held on such date and at such time as shall be designated from time to time
by the Board of Directors and stated in the notice of the meeting, at which
meetings the stockholders shall elect by a plurality vote members of the Board
of Directors in the class whose term shall expire at such annual meeting, and
transact such other business as may properly be brought before the meeting.
Written notice of the annual meeting stating the place, date and hour of the
meeting shall be given to each stockholder entitled to vote at such meeting
not less than ten nor more than sixty days before the date of the meeting.
Section 2.3 Special Meetings. Unless otherwise prescribed by law or by
the Certificate of Incorporation, special meetings of stockholders, for any
purpose or purposes, may be called by either the Chairman, the President, or
the holders of 10% or more of the issued and outstanding shares of capital
stock entitled to vote thereat and shall be called by either such officer at
the request in writing of a majority of the Board of Directors. Such request
shall state the purpose or purposes of the proposed meeting. Written notice
of a special meeting stating the place, date and hour of the meeting and the
purpose or purposes for which the meeting is called shall be given not less
than ten nor more than sixty days before the date of the meeting to each
stockholder entitled to vote at such meeting.
Section 2.4 Quorum. Except as otherwise provided by law or by the
Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. If, however, such quorum shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present
or represented. At such adjourned meeting at which a quorum shall be present
or represented, any business may be transacted which might have been
transacted at the meeting as originally noticed. If the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given
not less than ten nor more than sixty days before the date of the adjourned
meeting to each stockholder entitled to vote at the meeting.
Section 2.5 Voting. Unless otherwise required by law, the Certificate
of Incorporation or these By-laws, any question brought before any meeting of
stockholders shall be decided by the vote of the holders of a majority of the
stock represented and entitled to vote thereat. Each stockholder represented
at a meeting of stockholders shall be entitled to cast one vote for each share
of the capital stock entitled to vote thereat held by such stockholder. Such
votes may be cast in person or by proxy but no proxy shall be voted on or
after three years from its date, unless such proxy provides for a longer
period. The Board of Directors, in its discretion, or the officer of the
Corporation presiding at a meeting of stockholders, in such officer's
discretion, may require that any votes cast at such meeting shall be cast by
written ballot.
Section 2.6 List of Stockholders Entitled to Vote. The officer of the
Corporation who has charge of the stock ledger of the Corporation shall
prepare and make, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also
be produced and kept at the time and place of the meeting during the whole
time thereof, and may be inspected by any stockholder of the Corporation who
is present.
Section 2.7 Stock Ledger. The stock ledger of the Corporation shall be
the only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 2.6 or the books of the Corporation, or
to vote in person or by proxy at any meeting of stockholders. Any good faith
decision in regard to such matters by the officer of the Corporation who has
charge of the stock ledger of the Corporation, which may be the Secretary, any
Assistant Secretary or any other appropriate officer of the Corporation, shall
be final.
Section 2.8 Nomination of Directors. Only persons who are nominated in
accordance with the following procedures shall be eligible for election as
directors of the Corporation. Nominations of persons for election to the
Board of Directors may be made at any annual meeting of stockholders (a) by or
at the direction of the Board of Directors (or any duly authorized committee
thereof) or (b) by any stockholder of the Corporation (i) who is a stockholder
of record on the date of the giving of the notice provided for in this Section
2.8 and on the record date for the determination of stockholders entitled to
vote at such annual meeting and (ii) who complies with the notice procedures
set forth in this Section 2.8.
In addition to any other applicable requirements, for a nomination to be made
by a stockholder, such stockholder must have given timely notice thereof in
proper written form to the Secretary of the Corporation, as prescribed below.
No person shall be elected to the Board of Directors of this Corporation
at an annual meeting of the stockholders, or at a special meeting called for
that purpose, unless, with respect to a person nominated by a stockholder of
the Corporation, a written notice of nomination of such person by the
stockholder shall have been received by the Secretary of the Corporation at
least ninety (90) days prior to the anniversary date of the immediately
preceding annual meeting if an annual meeting, or seven (7) days after notice
of the meeting is mailed to stockholders if a special meeting. Each such
notice shall set forth: (a) the name and address of the stockholder who
intends to make the nomination and of the person or persons to be nominated;
(b) a representation that the stockholder is a holder of record of stock of
the Corporation entitled to vote at such meeting (including the number of
shares of stock of the Corporation owned beneficially or of record by such
stockholder and the nominee or nominees) and intends to appear in person or by
proxy at the meeting to nominate the person or persons specified in the
notice; (c) a description of all arrangements or understandings between the
stockholders and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by the stockholder; (d) such other information regarding each nominee
proposed by such stockholder as would have been required to be included in a
proxy statement filed pursuant to the proxy rules of the Securities and
Exchange Commission had each nominee been nominated, or intended to be
nominated, by the Board of Directors; and (e) the consent of each nominee to
serve as a director of the Corporation if so elected.
No person shall be eligible for election as a director of the Corporation
unless nominated in accordance with the procedures set forth in this Section
2.8. If the Chairman of the meeting determines that a nomination was not made
in accordance with the foregoing procedures, the Chairman shall declare to the
meeting that the nomination was defective and such defective nomination shall
be disregarded.
Notwithstanding compliance with the foregoing provisions, the Board of
Directors shall not be obligated to include information as to any stockholder
nominee for director in any proxy statement or other communication sent to
stockholders.
Section 2.9 Business at Annual Meetings. No business may be transacted
at an annual meeting of stockholders, other than business that is either (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors (or any duly authorized committee
thereof), (b) otherwise properly brought before the annual meeting by or at
the direction of the Board of Directors (or any duly authorized committee
thereof) or (c) otherwise properly brought before the annual meeting by any
stockholder of the Corporation (i) who is a stockholder of record on the date
of the giving of the notice provided for in this Section 2.9 and on the record
date for the determination of stockholders entitled to vote at such annual
meeting and (ii) who complies with the notice procedures set forth in this
Section 2.9.
In addition to any other applicable requirements, for business to be
properly brought before an annual meeting by a stockholder, such stockholder
must have given timely notice thereof in proper written form to the Secretary
of the Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered
to or mailed and received at the principal executive offices of the Company
not less than sixty (60) days nor more than ninety (90) days prior to the
anniversary date of the immediately preceding annual meeting of stockholders;
provided, however, that in the event that the annual meeting is called for a
date that is not within thirty (30) days before or after such anniversary
date, notice by the stockholder in order to be timely must be so received not
later than the close of business on the tenth day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure of the date of the annual meeting was made, whichever first occurs.
To be in proper written form, a stockholder's notice to the Secretary
must set forth as to each matter such stockholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (ii) the name and record address of such stockholder, (iii)
the class or series and number of shares of capital stock of the Corporation
that are owned beneficially or of record by such stockholder, (iv) a
description of all arrangements or understandings between such stockholder and
any other person or persons (including their names) in connection with the
proposal of such business by such stockholder and any material interest of
such stockholder in such business and (v) a representation that such
stockholder intends to appear in person or by proxy at the annual meeting to
bring such business before the meeting.
No business shall be conducted at the annual meeting of stockholders
except business brought before the annual meeting in accordance with the
procedures set forth in this Section 2.9, provided, however, that, once
business has been properly brought before the annual meeting in accordance
with such procedures, nothing in this Section 2.9 shall be deemed to preclude
discussion by any stockholder of any such business. If the Chairman of an
annual meeting determines that business was not properly brought before the
annual meeting in accordance with the foregoing procedures, the Chairman shall
declare to the meeting that the business was not properly brought before the
meeting and such business shall not be transacted.
ARTICLE 3
DIRECTORS
Section 3.1 Duties and Powers. The business and affairs of the
Corporation shall be managed and controlled by a Board of Directors, which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or by the Certificate of Incorporation or by
these By-laws directed or required to be exercised or done by the
stockholders.
Section 3.2 Number. The first Board of Directors shall consist of the
persons named in the Certificate of Incorporation. Thereafter, the Board
shall consist of not less than one (1) nor more than nine (9) members. The
Board of Directors will have the power to increase or decrease its size within
the aforesaid limits and to fill any vacancies that may occur in its
membership, whether resulting from an increase in the size of the Board or
otherwise.
Section 3.3 Election of Directors. Directors shall be elected by a
plurality of the votes cast at annual meetings of stockholders. Any director
may resign at any time upon notice to the Corporation. Directors need not be
stockholders. Each director elected shall hold office until his or her
successor is duly elected and qualified.
Section 3.4 Meetings. The Board of Directors of the Corporation may
hold meetings both regular and special, either within or without the State of
Delaware. Regular meetings of the Board of Directors may be held without
notice at such time and at such place as may from time to time be determined
by the Board of Directors. Special meetings of the Board of Directors may be
called by the Chairman or the President or by a majority of the directors then
in office. Notice thereof stating the place, date and hour of the meeting
shall be given to each director either by mail not less than forty-eight hours
before the date of the meeting, by telephone, facsimile or telegram on
twenty-four hours' notice, or on such shorter notice as the person or persons
calling such meeting may deem necessary or appropriate in the circumstances.
Section 3.5 Quorum. Except as may be otherwise specifically provided by
law, the Certificate of Incorporation or these By-laws, at all meetings of the
Board of Directors, a majority of the entire Board of Directors shall
constitute a quorum for the transaction of business and the act of a majority
of the directors present at any meeting at which there is a quorum shall be
the act of the Board of Directors. If a quorum shall not be present at any
meeting of the Board of Directors, the directors present thereat may adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
Section 3.6 Actions of Board. Unless otherwise provided by the
Certificate of Incorporation or these By-laws, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all the members of the
Board of Directors or committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of proceedings
of the Board of Directors or committee.
Section 3.7 Meetings by Means of Conference Telephone. Unless otherwise
provided by the Certificate of Incorporation or these By-laws, members of the
Board of Directors of the Corporation, or any committee designated by the
Board of Directors, may participate in a meeting of the Board of Directors or
such committee by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this Section 3.6 shall
constitute presence in person at such meeting.
Section 3.8 Committees. The Board of Directors may, by resolution
passed by a majority of the entire Board of Directors, designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of any such committee. In the absence or
disqualification of a member of a committee, and in the absence of a
designation by the Board of Directors of an alternate member to replace the
absent or disqualified member, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or they constitute
a quorum, may unanimously appoint another member of the Board of Directors to
act at the meeting in the place of any absent or disqualified member. A
majority of the members of a committee, including any alternate members, shall
constitute a quorum of such committee. Any committee, to the extent allowed
by law and provided in the resolution establishing such committee, shall have
and may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation. Each committee
shall keep regular minutes and report to the Board of Directors when required.
Section 3.9 Compensation. The directors may be paid their expenses, if
any, of attendance at each meeting of the Board of Directors and may be paid a
fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving
the Corporation in any other capacity and receiving compensation therefor.
Members of special or standing committees may be allowed like compensation for
attending committee meetings. In addition, the Board of Directors may adopt
one or more director compensation plans using securities of the Corporation.
Section 3.10 Interested Directors. No contract or transaction between
the Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors
or officers, or have a financial interest, shall be void or voidable solely
for this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof
which authorizes the contract or transaction, or solely because such
director's vote is counted for such purpose if (i) the material facts as to
such director's relationship or interest and as to the contract or transaction
are disclosed or are known to the Board of Directors or the committee, and the
Board of Directors or committee in good faith authorizes the contract or
transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or
(ii) the material facts as to such director's relationship or interest and as
to the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or (iii) the contract or
transaction is fair as to the Corporation as of the time it is authorized,
approved or ratified, by the Board of Directors, a committee thereof or the
stockholders. Interested directors may be counted in determining the presence
of a quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
ARTICLE 4
OFFICERS
Section 4.1 General. The officers of the Corporation shall be chosen by
the Board of Directors and may include a President, a Secretary and a
Treasurer. The Board of Directors, in its discretion, may also choose a
Chairman of the Board of Directors (who must be a director) and one or more
Vice Presidents, Assistant Secretaries, Assistant Treasurers and other
officers. Any number of offices may be held by the same person, unless
otherwise prohibited by law, the Certificate of Incorporation or these
By-laws. The officers of the Corporation need not be stockholders of the
Corporation nor, except in the case of the Chairman of the Board of Directors,
need such officers be directors of the Corporation. The officers of the
Corporation may sign and execute documents on behalf of the Corporation,
whether requiring a seal or otherwise, when authorized by these By-laws, the
Board of Directors, the Chairman or President.
Section 4.2 Election. The Board of Directors at its first meeting held
after each annual meeting of stockholders shall elect the officers of the
Corporation who shall hold their offices for such terms and shall exercise
such powers and perform such duties as shall be determined from time to time
by the Board of Directors; and all officers of the Corporation shall hold
office until their successors are chosen and qualified, or until their earlier
resignation or removal. Any officer elected by the Board of Directors may be
removed at any time by the affirmative vote of a majority of the Board of
Directors. Any vacancy occurring in any office of the Corporation shall be
filled by the Board of Directors. The salaries of all officers of the
Corporation shall be fixed by the Board of Directors or by a committee
thereof.
Section 4.3 Voting Securities Owned by the Corporation. Powers of
attorney, proxies, waivers of notice of meeting, consents and other
instruments relating to securities owned by the Corporation may be executed in
the name of and on behalf of the Corporation by the Chairman, President or any
Vice President and any such officer may, in the name of and on behalf of the
Corporation, take all such action as any such officer may deem advisable to
vote in person or by proxy at any meeting of security holders of any
corporation in which the Corporation may own securities and at any such
meeting shall possess and may exercise any and all rights and power incident
to the ownership of such securities and which, as the owner thereof, the
Corporation might have exercised and possessed if present. The Board of
Directors may, by resolution, from time to time confer like powers upon any
other person or persons.
Section 4.4 Chairman of the Board of Directors. The Chairman of the
Board of Directors, if there be one, shall preside at all meetings of the
stockholders and of the Board of Directors. The Chairman shall be the Chief
Executive Officer of the Corporation, and except where by law the signature of
the President is required, the Chairman of the Board of Directors shall
possess the same power as the President to sign all contracts, certificates
and other instruments of the Corporation which may be authorized by the Board
of Directors. During the absence or disability of the President, the Chairman
of the Board of Directors shall exercise all the powers and discharge all the
duties of the President. The Chairman of the Board of Directors shall also
perform such other duties and may exercise such other powers as from time to
time may be assigned to the Chairman by these By-laws or by the Board of
Directors. All officers of the Corporation shall be under the supervision of
the Chairman, if there be one, and shall perform all such duties as shall be
assigned by the Chairman.
Section 4.5 President. The President, if there shall be one, shall,
subject to the control of the Board of Directors and, if there be one, the
Chairman of the Board of Directors, have general supervision of the business
of the Corporation and shall see that all orders and resolutions of the Board
of Directors are carried into effect. In the absence or disability of the
Chairman of the Board of Directors, or if there be none, the President shall
preside at all meetings of the stockholders and the Board of Directors. If
there be no Chairman of the Board of Directors, the President shall be the
Chief Executive Officer of the Corporation. The President shall also perform
such other duties and may exercise such other powers as from time to time may
be assigned to the President by these By-laws, by the Board of Directors or by
the Chairman.
Section 4.6 Vice Presidents. At the request of the President or in the
President's absence or in the event of the President's inability or refusal to
act (and if there be no Chairman of the Board of Directors), the Vice
President or the Vice Presidents if there is more than one (in the order
designated by the Board of Directors) shall perform the duties of the
President, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the President. Each Vice President shall perform
such other duties and have such other powers as the Board of Directors,
Chairman and/or the President from time to time may prescribe.
Section 4.7 Secretary. The Secretary shall attend all meetings of the
Board of Directors and all meetings of stockholders and record all the
proceedings thereat in a book or books to be kept for that purpose; the
Secretary shall also perform like duties for the standing committees when
requested or appropriate. The Secretary shall give, or cause to be given,
notice of all meetings of the stockholders and special meetings of the Board
of Directors, and shall perform such other duties as may be prescribed by the
Board of Directors, Chairman or President. If the Secretary shall be unable
or shall refuse to cause to be given notice of all meetings of the
stockholders and special meetings of the Board of Directors, and if there be
no Assistant Secretary, then either the Board of Directors or the President
may choose another officer to cause such notice to be given. The Secretary
shall have custody of the seal of the Corporation, if there is one, and the
Secretary or any Assistant Secretary, shall have authority to affix the same
to any instrument requiring it and when so affixed, it may be attested by the
signature of the Secretary or by the signature of any Assistant Secretary.
The Board of Directors may give general authority to any other officer to
affix the seal of the Corporation and to attest the affixing by such officer's
signature. The Secretary shall see that all books, reports, statements,
certificates and other documents and records required by law to be kept or
filed are properly kept or filed, as the case may be.
Section 4.8 Treasurer. The Treasurer shall supervise the maintenance of
the corporate funds and securities and shall keep full and accurate accounts
of receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors or Chairman. The Treasurer shall disburse the funds of the
Corporation as may be ordered by the Board of Directors, Chairman or President
for such disbursements, and shall render to the Chairman, President and the
Board of Directors, at its regular meetings, or when the Board of Directors or
Chairman so requires, an account of all transactions as Treasurer and of the
financial condition of the Corporation. The Treasurer shall perform such
other duties and have such powers as the Board of Directors, Chairman and/or
President from time to time may prescribe. If required by the Board of
Directors or Chairman, the Treasurer shall give the Corporation a bond in such
sum and with such surety or sureties as shall be satisfactory to the Board of
Directors or Chairman for the faithful performance of the duties of such
office and for the restoration to the Corporation, in case of the Treasurer's
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in the Treasurer's
possession or under such officer's control belonging to the Corporation.
Section 4.9 Assistant Secretaries. Assistant Secretaries, if there be
any, shall perform such duties and have such powers as from time to time may
be assigned to them by the Board of Directors, the Chairman, the President,
any Vice President, if there be one, or the Secretary, and in the absence of
the Secretary or in the event of such officer's disability or refusal to act,
shall perform the duties of the Secretary, and when so acting, shall have all
the powers of and be subject to all the restrictions upon the Secretary.
Section 4.10 Assistant Treasurers. Assistant Treasurers, if there be
any, shall perform such duties and have such powers as from time to time may
be assigned to them by the Board of Directors, the Chairman, the President,
any Vice President, if there be one, or the Treasurer, and in the absence of
the Treasurer or in the event of such officer's disability or refusal to act,
shall perform the duties of the Treasurer, and when so acting, shall have all
the powers of and be subject to all the restrictions upon the Treasurer. If
required by the Board of Directors or Chairman, an Assistant Treasurer shall
give the Corporation a bond in such sum and with such surety or sureties as
shall be satisfactory to the Board of Directors or Chairman for the faithful
performance of the duties of such officer's office and for the restoration to
the Corporation, in case of the Assistant Treasurer's death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in such officer's possession or under such
officer's control belonging to the Corporation.
Section 4.11 Other Officers. Such other officers as the Board of
Directors may choose shall perform such duties and have such powers as from
time to time may be assigned to them by the Board of Directors, Chairman, or
President. The Board of Directors may delegate to any other officer of the
Corporation the power to choose such other officers and to prescribe their
respective duties and powers.
ARTICLE 5
STOCK
Section 5.1 Form of Certificates. Every holder of stock in the
Corporation shall be entitled to have a certificate signed, in the name of the
Corporation (i) by the Chairman of the Board of Directors, the President or a
Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary of the Corporation, certifying the number
of shares owned by such holder in the Corporation.
Section 5.2 Signatures. Where a certificate is countersigned by (i) a
transfer agent other than the Corporation or its employee, or (ii) a registrar
other than the Corporation or its employee, any other signature on the
certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with
the same effect as if such person were such officer, transfer agent or
registrar at the date of issue.
Section 5.3 Lost Certificates. The Secretary may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to
be lost, stolen or destroyed. When authorizing such issue of a new
certificate, the Secretary may, in such officer's discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate, or such owner's legal representative, to
advertise the same in such manner as the Secretary shall require and/or to
give the Corporation a bond in such sum as it may direct as indemnity against
any claim that may be made against the Corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
Section 5.4 Transfers. Stock of the Corporation shall be transferable
in the manner prescribed by law and in these By-laws. Transfers of stock
shall be made on the books of the Corporation only by the person named in the
certificate or by such person's attorney lawfully constituted in writing and
upon the surrender of the certificate therefor, which shall be canceled before
a new certificate shall be issued.
Section 5.5 Record Date. In order that the Corporation may determine
the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock,
or for the purpose of any other lawful action, the Board of Directors may fix,
in advance, a record date, which shall not be more than sixty days nor less
than ten days before the date of such meeting, nor more than sixty days prior
to any other action. A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
Section 5.6 Beneficial Owners. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise
provided by law.
ARTICLE 6
NOTICES
Section 6.1 Notices. Whenever written notice is required by law, the
Certificate of Incorporation or these By-laws, to be given to any director,
member of a committee or stockholder, such notice may be given by mail,
addressed to such director, member of a committee or stockholder, at such
person's address as it appears on the records of the Corporation, with postage
thereon prepaid or such notice may be given personally, by facsimile,
overnight delivery, telegram, telex, or cable at such address. Such notice
shall be deemed to be given at the earlier of receipt of such notice or at the
time when the same shall be deposited in the United States mail or otherwise
transmitted.
Section 6.2 Waivers of Notice. Whenever any notice is required by law,
the Certificate of Incorporation or these By-laws, to be given to any
director, member of a committee or stockholder, a waiver thereof in writing,
signed by the person or persons entitled to said notice, whether before or
after the time stated therein, shall be deemed equivalent thereto.
ARTICLE 7
GENERAL PROVISIONS
Section 7.1 Dividends. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, and may be paid in cash, in property, or in shares of the capital
stock. Before payment of any dividend, there may be set aside out of any
funds of the Corporation available for dividends such sum or sums as the Board
of Directors from time to time, in its absolute discretion, deems proper as a
reserve or reserves for any proper purpose, and the Board of Directors may
modify or abolish any such reserve.
Section 7.2 Disbursements. All checks or demands for money and notes of
the Corporation shall be signed by such officer or officers or such other
person or persons as the Board of Directors may from time to time designate.
Section 7.3 Fiscal Year. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
Section 7.4 Corporate Seal. The Corporation may have a corporate seal,
which shall have inscribed thereon the words "Corporate Seal". The seal may
be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise. However, nothing in these By-laws or in the
Certificate of Incorporation of the Corporation shall be construed to require
a corporate seal to be affixed to any document.
ARTICLE 8
AMENDMENTS
Section 8.1 These By-laws may be altered, amended or repealed, in whole
or in part, or new By-laws may be adopted by the stockholders or by the Board
of Directors; provided, however, that notice of such alteration, amendment,
repeal or adoption of new By-laws be contained in the notice of such meeting
of stockholders or Board of Directors as the case may be. All such amendments
must be approved by either the holders of a majority of the outstanding
capital stock entitled to vote thereon or by a majority of the entire Board of
Directors then in office.
Section 8.2 Entire Board of Directors. As used in this Article and in
these By-laws generally, the term "entire Board of Directors" means the total
number of directors which the Corporation would have if there were no
vacancies.
[udc.om.bylaws.doc]
EXHIBIT 10.a
EMPLOYMENT AGREEMENT
--------------------
This EMPLOYMENT AGREEMENT ("Agreement") is made as of this 12th day of
June, 1997 by and between Duck Ventures, Inc., an Arizona corporation, ("DV")
and Russell Grisanti, an individual, ("Grisanti").
RECITALS
A. DV is an Arizona corporation wholly owned by Ugly Duckling
Corporation, a Delaware corporation, ("UDC").
B. DV and UDC directly or indirectly own entities engaged in sales
and financing of used vehicles ("Vehicle Businesses").
C. One or more affiliates of DV and UDC ("Affiliates") may engage in
other businesses from time to time ("Affiliate Businesses").
D. DV and UDC seek to develop and expand their Vehicle Businesses and
Affiliate Businesses (collectively, "Businesses").
E. Grisanti has professional expertise and experience in the area of
the Businesses, including business operations, finance, consumer lending and
other commercial activities and seeks to use his professional expertise and
experience as an employee of DV and UDC and an officer of UDC for the benefit
of the Businesses.
F. DV seeks to employ Grisanti to work full-time for DV and UDC as an
employee and officer and to utilize his professional expertise and experience
in the Businesses under the terms and conditions stated herein.
NOW THEREFORE, in consideration of the mutual covenants, agreements,
representations, and warranties contained herein and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereby agree as follows:
1. Definitions. Unless otherwise defined above or herein, capitalized
terms used in this Agreement will have the meanings set forth below:
(a) "Company" shall mean DV, UDC, Champion Acceptance Corporation and/or
any of its or their current, former, or future, subsidiaries or affiliates.
(b) "Company Client(s)" shall mean those actual clients and customers of
Company and those active prospective clients or customers of Company handled,
serviced, or solicited at any time during the Term (as defined in Section 2).
(c) "Company Confidential Information" shall mean confidential, proprietary
information or trade secrets of Company, including, without limitation, the
following: (1) customer lists and customer information as compiled by Company,
including pricing, sale and contract terms and conditions, contract expirations,
and other compiled customer information; (2) Company's internal practices and
procedures; (3) Company's financial condition and financial results of
operation to the extent not generally available to the public; (4) information
relating to Company's strategic planning, sales, financing, insurance,
purchasing, marketing, promotion, distribution, and selling activities, whether
now existing, or acquired, developed, or made available anytime in the future
to or by Company; (5) all information which Company has a reasonable basis to
consider confidential or which is treated by Company as confidential; and (6)
any and all information having independent economic value to Company that is
not generally known to, and not readily ascertainable by proper means by,
persons who can obtain economic value from its disclosure or use. Grisanti
acknowledges that such information is Company Confidential Information whether
disclosed to or learned by Grisanti or originated by Grisanti during his
employment by Company. In the event that information is not clearly and
obviously publicly available, all information about Company and shall be
presumed to be confidential.
(d) "Termination" shall mean termination of Grisanti's employment with
Company pursuant to any of Sections 18 to 22 hereof.
2. Term of Agreement. This Agreement will be deemed to commence as
of June 15, 1997 and shall continue until the date that is two (2) years from
the date hereof, subject to the other provisions hereof ("Term"). Neither
party has any obligation to extend this Agreement beyond its Term. If a party
does not intend to extend this Agreement beyond its Term, then said party
shall notify the other of its intention not to extend by delivery of written
notice of its intention not to extend the Term by delivery of written notice
thereof twelve (12) months or more prior to the expiration date. If neither
party gives written notice of its intention not to extend this Agreement, then
this Agreement shall automatically extended for one additional year each June
15 and the Term shall continue on a year-to-year basis but subject to the
other provisions, including termination by either party, hereof.
3. Position with Company. During the Term, Grisanti shall serve as
Executive Vice President of Operations of UDC and shall hold such other
positions, responsibilities, duties and authorities as the board of directors
or officers of Company (collectively or singly, "Board") shall from time to
time direct. Grisanti shall devote his full time to the affairs of Company,
and shall faithfully and diligently perform all duties commensurate with such
position, including, without limitation, those duties reasonably requested by
the Board.
Grisanti shall be subject to and comply with all of Company's policies and
procedures, and shall comply with all applicable laws and the highest
standards of ethics.
4. Salary. Grisanti shall be entitled to receive an annual salary in
the amount of $170,000, payable in equal installments in accordance with
Company's general salary payment policies in effect during the Term
("Salary").
5. Vehicle Allowance. Grisanti shall receive a monthly vehicle
allowance in the amount of $500 per month payable in equal installments in
accordance with Company's general payment policy for allowances of this nature
for the period Grisanti is actually employed by Company (i.e., not for any
period of time after Grisanti's effective termination date of employment).
6. Option. Company shall grant Grisanti a non-qualified stock option
to acquire 100,000 shares of UDC's common stock, par value $.001 per share, in
accordance with the stock option agreement attached hereto as Exhibit A. Such
option shall be granted pursuant to UDC's Long-Term Incentive Plan ("Plan"), a
copy of which is attached hereto as Exhibit B. The option shall be granted by
the Compensation Committee of the Board at its next regularly scheduled
meeting to be held within the next 60 days and shall be granted at the closing
market price on the day before the meeting.
7. Moving Expense. Company shall pay for or reimburse Grisanti for
all reasonable and necessary actual expenses of moving the Grisanti personal
residence from California to the Phoenix, Arizona area; provided, however,
that said moving expenses shall not exceed $16,000.
8. Purchase of California Personal Residence. Company shall purchase
Grisanti's existing personal residence located in California ("Residence"),
including the real property and all fixtures and improvements thereon and
appurtenances incident thereto. The full purchase price paid by Company shall
equal Grisanti's "Basis" in the Residence. "Basis" as used herein means
Grisanti's original cost of purchasing the Residence, plus the cost of any
capital improvements hereto (provided any such improvement is evidenced by an
invoice or other appropriate supporting documentation). At close of escrow on
the Residence, Grisanti shall be paid the full purchase price by Company and
Company shall pay all costs of the sale, excluding any brokerage commissions.
The close of escrow shall occur on or before August 1, 1997, or on such later
date mutually agreed to between the parties. Company and Grisanti agree and
acknowledge that Company plans to resell the Residence after it purchases the
Residence from Grisanti. The parties further agree and acknowledge that upon
the purchase of the Residence by Company, all rights, interests and
obligations associated with the Residence shall be with Company, free and
clear of all liens. These rights, interests and obligations of Company,
include without limitation, the right of Company to resell the Residence for a
gain or a loss. Company and Grisanti agree that upon the resale of the
Residence in no event shall Grisanti have any (1) right or interest in any
gain or (2) obligation as to any loss.
9. Benefit Plans. Except as stated in this Section 9, Grisanti shall
be afforded the benefits identified in the Schedule of Benefits attached
hereto as Exhibit C (which shall be a summary of benefits only, the actual
benefits so summarized to be as stated in the relevant Company benefit
handbook, documents, etc.) and shall be entitled to participate in the Plan.
Commencing on July 1, 1997, Grisanti shall be insured by and included in the
group medical benefit plan, and the group life and accidental death &
dismemberment benefits policy maintained by Company for its employees. All
insurance benefits shall be provided under the terms and conditions stated in
the policies therefor and all deductibles, co-payments and other charges
payable by the insured thereunder shall be paid by Grisanti. Nothing herein
shall restrict Company's ability to terminate or modify any benefit plan or
arrangement.
10. Expenses. Company shall pay for or reimburse Grisanti for all
ordinary and necessary business expenses incurred or paid by Grisanti in
furtherance of Company's Businesses, subject to and in accordance with
Company's policies and procedures of general application in effect from time
to time.
11. Covenants of Employee. Grisanti hereby covenants and agrees
that, during the term of this Agreement and for a period of three (3) years
after the termination of Grisanti's employment with Company, Grisanti will
not:
(a) Engage, directly or indirectly, either as principal, partner,
joint venturer, consultant, agent, or proprietor or in any other manner
participate in the ownership (excluding ownership of less than 3% of the
outstanding capital stock of any publicly-held entity), management, operation,
or control of any person, firm, partnership, limited liability company,
corporation, or other entity which engages in the business of selling any
products or services, which are competitive with those products or services
offered or sold by Company within any state in which Company does business at
the point and time of Grisanti's termination from Company. The parties
acknowledge that Company's business is sub-prime financing and collection
activities related to used vehicles. Company acknowledges that this Section
11 does not prohibit or restrict Grisanti from working in: (1) other types of
businesses after his termination from Company (other types of businesses other
than the sub-prime financing and collection businesses related to used
vehicles, (e.g., the mortgage business, securities activities, collection work
in the manufacturing industry, etc.)); or (2) any other states that at the
time of Grisanti's termination Company is not doing business.
(b) Directly or indirectly solicit for employment any person who is
an employee of Company or any successor of Company, or directly or indirectly
solicit for employment any person who, as of the date hereof, is an employee
of Company or who thereafter becomes an employee of Company, unless Company
first terminates the employment of such employee or Company gives its written
consent to such employment or offer of employment.
(c) Call on or directly or indirectly solicit or divert or take away
from Company (including, without limitation, by divulging to any competitor or
potential competitor of Company) any person, firm, corporation, or other
entity who is or was a Company Client or whose identity is known to Grisanti
as one whom Company intends to solicit.
12. Confidentiality and Nondisclosure. It is understood that in the
course of Grisanti's employment with Company, Grisanti will become acquainted
with Company Confidential Information. Grisanti recognizes that Company
Confidential Information has been developed or acquired at great expense, is
proprietary to Company, and is and shall remain the exclusive property of
Company. Accordingly, Grisanti hereby covenants and agrees that he will not,
without the express written consent of Company, during Grisanti's employment
with Company and thereafter, disclose to others, copy, make any use of, or
remove from Company's premises any Company Confidential Information, except as
Grisanti's duties for Company may specifically require.
13. Acknowledgment; Relief for Violation. Grisanti hereby agrees
that the period of time provided for in Sections 11 and 12 and the territorial
restrictions and other provisions and restrictions set forth therein are
reasonable and necessary to protect Company and its successors and assigns in
the use and employment of the goodwill of the business conducted by Company.
Grisanti further agrees that damages cannot adequately or fully compensate
Company in the event of a violation of Section 11 or 12, and that, if such
violation should occur, injunctive relief shall be essential for the
protection of Company and its successors and assigns. Accordingly, Grisanti
hereby covenants and agrees that, in the event any of the provisions of
Sections 11 and 12 shall be violated or breached, Company shall be entitled to
obtain injunctive relief against Grisanti, without bond but upon due notice,
in addition to such further or other relief as may be available at equity or
law. Obtainment of such an injunction by Company shall not be considered an
election of remedies or a waiver of any right to assert any other remedies
which Company has at law or in equity. No waiver of any breach or violation
hereof shall be implied from forbearance or failure by Company to take action
thereon.
14. Extension During Breach. Grisanti agrees that the time period
described in Sections 11 and 12 shall be extended for a period equal to the
duration of any breach of this Agreement by Grisanti.
15. No Conflicts of Interest.
(a) During the period of Grisanti's employment with Company, Grisanti
will not engage in the same or a similar line of business as Company, or
directly or indirectly, serve, advise, or be employed by any individual, firm,
partnership, association, corporation, or other entity engaged in the same or
similar line of business.
(b) Grisanti is not a promoter, director, employee, or officer of, or
consultant to, nor will Grisanti become a promoter, director, employee, or
officer of, or consultant to, another company or other type of entity engaged
in the same business while employed by Company without first obtaining the
prior written approval of Company. Grisanti disclaims any such relationship
or position with any such business. Should Grisanti become a promoter,
director, employee, or officer of, or a consultant to, a business organized
for profit upon obtaining such prior written approval, Grisanti understands
that Grisanti has a continuing obligation to advise Company at such time of
any activity of Company or such other business that presents Grisanti with a
conflict of interest as an employee of Company.
(c) Should any matter of dealing in which Grisanti is involved, or
hereafter becomes involved, on his own behalf or as an employee of Company,
appear to present a possible conflict of interest under any Company policy
then in effect, Grisanti will promptly disclose the facts to Company's Chief
Executive Officer or President so that a determination can be made as to
whether a conflict of interest does exist. Grisanti will take whatever action
is requested of Grisanti by Company to resolve any conflict which it finds to
exist.
16. Return of Company Materials and Company Confidential Information.
Upon Termination, Grisanti shall promptly deliver to Company the originals and
all copies of any and all materials, documents, notes, manuals, or lists
(whether in hard copy or electronic or other form) containing or embodying
Company Confidential Information or relating directly or indirectly to the
business of Company in the possession or control of Grisanti.
17. No Agreement With Others. Grisanti represents, warrants, and
agrees that Grisanti is not a party to any agreement with any other person or
business entity, including former employers, that in any way affects
Grisanti's employment by Company or relates to the same subject matter of this
Agreement or conflicts with his obligations under this Agreement, or restricts
Grisanti's services to Company.
18. Termination for Cause. Either Company's Chief Executive Officer
or President shall have the right to terminate Grisanti for "Cause." "Cause"
as used herein means the occurrence of any of the following events, as
determined by the Board or Company's Chief Executive Officer or President, in
its or his reasonable discretion:
(a) Grisanti engages in gross misconduct or otherwise materially
breaches this Agreement;
(b) Grisanti fails to perform his duties, fails to follow any lawful
direction of the Board, or Company's Chief Executive Officer or President, or
violates any lawful rule or regulation established by Company from time to
time regarding the conduct of its business;
(c) Grisanti knowingly violates any law, rule or regulation
applicable to the business of Company;
(d) Grisanti is charged with or convicted of committing any felony or
any crime involving moral turpitude, or engages in conduct involving fraud,
dishonesty, embezzlement, theft, or engages in other conduct that is
detrimental to Company or that could reasonably be expected to have an adverse
impact on the standing or reputation of Grisanti, Company or the Businesses;
or
(e) Grisanti breached any material representation, warranty,
covenant, or agreement in this Agreement.
Upon a termination for Cause, Grisanti shall be entitled to receive only
such compensation and benefits as are due Grisanti through the effective
date of such termination.
19. Termination Upon Voluntary Resignation. In the event Grisanti
voluntarily resigns his employment with Company, Grisanti shall be entitled to
receive only such compensation and benefits as are due Grisanti through the
effective date of such resignation.
20. Termination Upon Death of Grisanti. If during the term of this
Agreement Grisanti dies, then this Agreement shall terminate and Company shall
pay to the estate of Grisanti only the compensation and benefits (including
any life insurance benefits provided to Grisanti's estate under Company's
standard policies as in effect) due Grisanti through the date of his death.
21. Termination Upon Disability of Grisanti. If during the term of
this Agreement Grisanti is unable to perform the services required of Grisanti
pursuant to this Agreement, with or without reasonable accommodation, for a
continuous period of thirty (30) days due to "Disability" (as defined below),
then Company shall have the right to terminate this Agreement at the end of
such thirty (30) day period by giving at least ten (10) days written notice to
Grisanti. Grisanti shall be entitled to receive only such compensation and
benefits as are due Grisanti through the effective date of such termination.
Grisanti shall be deemed to have a "Disability" for purposes of this Agreement
if Grisanti has any illness or other physical or mental condition which
renders him incapable of performing his customary and usual duties for
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 Board is permanent and continuous in nature. The Board
may require such medical or other evidence as it deems necessary to judge the
nature and permanency of Grisanti's condition.
22. Termination by Company Other than for Cause, Death, Disability,
or Voluntary Resignation. At any time after one (1) year Company, shall have
the right to terminate Grisanti's employment other than for Cause, death,
disability, or voluntary resignation upon thirty (30) days prior written
notice to Grisanti. In the event Company elects to terminate Grisanti for any
reason other than for Cause, death, disability, or voluntary resignation of
Grisanti, Grisanti shall be entitled to receive, as severance, an amount equal
to Grisanti's Salary for twelve (12) months after termination of Grisanti,
payable in equal installments in accordance with Company's general salary
payment policies, plus medical insurance/coverage under COBRA or otherwise.
The continuation of the Salary plus medical coverage for a limited time after
termination of Grisanti pursuant to this Section shall constitute a severance
or termination fee ("Termination Fee") and shall be the exclusive remedy of
Grisanti in connection with his termination of employment with Company. In
the event of termination of Grisanti under this Section, Grisanti shall not
receive nor be entitled to any additional compensation, bonus, or other form
of employee benefits from and after Grisanti's termination date.
23. Arbitration. Other than a breach or threatened breach of Sections
11 or 12 hereof, any dispute, controversy, or claim, whether contractual or non-
contractual, between the parties hereto arising directly or indirectly out of
or connected with Grisanti's employment by Company, this Agreement, or relating
to the breach or alleged breach of any representation, warranty, agreement, or
covenant under this Agreement, unless mutually settled by the parties hereto,
shall be resolved by binding arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association ("AAA"). Any
arbitration shall be conducted by arbitrators approved by the AAA and mutually
acceptable to Company and Grisanti. All such disputes, controversies, or claims
shall be conducted by a single arbitrator, unless the dispute involves more
than $50,000 in the aggregate in which case the arbitration shall be conducted
by a panel of three arbitrators. If the parties hereto are unable to agree on
the arbitrator(s), then the AAA shall select the arbitrator(s). The resolution
of the dispute by the arbitrator(s) shall be final, binding, nonappealable,
and fully enforceable by a court of competent jurisdiction under the Federal
Arbitration Act. The arbitrator(s) shall award compensatory damages to the
prevailing party. Except as otherwise required by law, the arbitrator(s) shall
have no authority to award consequential or punitive or statutory damages, and
the parties hereby waive any claim to those damages to the fullest extent
allowed by law. The arbitration award shall be in writing and shall include
a statement of the reasons for the award. The arbitration shall be held in
Phoenix, Arizona. The arbitrator(s) shall award reasonable attorneys' fees
and costs to the prevailing party.
24. Severability; Reformation. In the event any court or arbiter
determines that any of the restrictive covenants in this Agreement, or any
part thereof, is or are invalid or unenforceable, the remainder of the
restrictive covenants shall not thereby be affected and shall be given full
effect, without regard to invalid portions. If any of the provisions of this
Agreement should ever be deemed to exceed the temporal, geographic, or
occupational limitations permitted by applicable laws, those provisions shall
be and are hereby reformed to the maximum temporal, geographic, or
occupational limitations permitted by law. In the event any court or arbiter
refuses to reform this Agreement as provided above, the parties hereto agree
to modify the provisions held to be unenforceable to preserve each party's
anticipated benefits thereunder.
25. Notices. All notices and other communications hereunder shall be
in writing and shall be sufficiently given if made by hand delivery, by
telecopier, or by registered or certified mail (postage prepaid and return
receipt requested) to the parties at the following addresses (or at such other
address for a party as shall be specified by it by like notice):
<TABLE><CAPTION>
<S> <C>
If to Company: Duck Ventures, Inc.
c/o -- 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.
<PAGE>
If to Grisanti: Mr. Russell Grisanti
28931 Glen Ridge
Mission Viejo, CA 92692
Phone: (714) 588-7470
FAX: (714) 837-9844
</TABLE>
All such notices and other communications shall be deemed to have been
duly given: when delivered by hand, if personally delivered; three business
days after being deposited in the mail, postage prepaid, if delivered by mail;
and when receipt is acknowledged, if telecopied.
26. 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.
27. Governing Law. The validity, construction, and enforceability of
this Agreement shall be governed in all respects by the laws of the State of
Arizona, without regard to its conflict of laws rules. All judicial actions
relating to this Agreement shall be prosecuted in the Superior Courts of
Arizona as the court of exclusive jurisdiction and venue and the parties
hereby submit themselves to the personal jurisdiction of said court.
28. Assignment. This Agreement shall not be assigned by operation of
law or otherwise, except that Company may assign all or any portion of its
rights under this Agreement to any wholly-owned subsidiary or other
wholly-owned entity, but no such assignment shall relieve Company of its
obligations hereunder, and that this Agreement may be assigned by operation of
law to any corporation or entity with or into which Company may be merged or
consolidated or to which Company transfers all or substantially all of its
assets, if such corporation or entity assumes this Agreement and all
obligations and undertakings of Company hereunder.
29. 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.
30. Gender, Number and Headings. 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.
31. 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.
32. Attorneys' Fees and 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 addition to any other relief to which it or they may be entitled.
33. 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.
34. Amendment. This Agreement may be amended only by an instrument
in writing executed by all parties hereto.
35. 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.
36. Entire Agreement. This Agreement constitutes and embodies the
full and complete understanding and agreement of the parties hereto with
respect to the subject matter hereof, and supersedes all prior understandings
or agreements, whether oral or in writing.
37. Withholding. Grisanti acknowledges and agrees that payments made
to Grisanti by Company pursuant to the terms of this Agreement may be subject
to tax withholding and that Company may withhold against payments due Grisanti
any such amounts as well as any other amounts payable by Grisanti to Company.
38. Release. Receipt of any of the benefits to be provided to Grisanti
under this Agreement following termination of Grisanti's employment hereunder
shall be subject to Grisanti's compliance with any reasonable and lawful
policies or procedures of Company relating to employee severance including the
execution and delivery by Grisanti of a release reasonably satisfactory to
Company of any and all claims that Grisanti may have against Company or any
related person, except for the continuing obligations provided herein, and an
agreement that Grisanti shall not disparage Company.
39. Negotiations and Integration. The terms and provisions of this
Agreement represent the results of negotiations between the parties, neither
of which have acted under duress or compulsion, whether legal, economic or
otherwise. This Agreement is entered into after full investigation, neither
party relying upon any statements or representations made by the other not
embodied in this Agreement. Except for the specific terms, conditions,
covenants and agreements found herein, the terms and conditions of Grisanti's
employment and related relationship with Company shall be the same as those
generally applicable to all employees of Company who do not have separate
employment agreements with Company.
40. Indemnification. Grisanti shall indemnify and hold harmless
Company and its officers, directors and shareholders for and against any
liability, loss or damage incurred by Company or its officers, directors or
shareholders as a result of Grisanti's breach of or default under this
Agreement. Company shall indemnify and hold harmless Grisanti for and against
any liability, loss or damage incurred by Grisanti as a result of Company's,
breach of or default under this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement or
caused this Agreement to be duly executed on their respective behalf, by their
respective officers thereunto duly authorized, all as of the day and year
first above written.
<TABLE>
<CAPTION>
<S> <C>
EMPLOYEE
By: /s/ Russell Grisanti
Name: Russell Grisanti
Its: Employee
DUCK VENTURES, INC.
By: /s/Ernest Garcia II
Name: Ernest Garcia II
Its: Director
UGLY DUCKLING CORPORATION
(In approval of Sections 3 and 6, only)
By: /s/Ernest Garcia II
Name: Ernest Garcia II
Its: CEO
</TABLE>
[Exhibits to this Agreement not included]
[dv.pm.grisanti.doc]
Exhibit 10.b
RESTATED
(as of March 14, 1997)
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
restrictions 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.
(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
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.
(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 shall have the full and, except as
otherwise provided below, exclusive power to interpret the Plan and to adopt
such rules, regulations, and guidelines for carrying out the Plan as may be
necessary or proper, all of which power shall be executed in the best
interests of the Company and in keeping with the objectives of the Plan. This
power includes, but is not limited to, the following:
(a) Designate Participants;
(b) Determine the type or types of Awards to be granted to each
Participant;
(c) Determine the number of Awards to be granted and the number of shares
of Stock to which an Award will relate;
(d) 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;
(e) 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>
(f) Prescribe the form of each Award Agreement, which need not be
identical for each Participant;
(g) Decide all other matters that must be determined in connection with
an Award;
(h) Establish, adopt or revise any rules and regulations as it may deem
necessary or advisable to administer the Plan; and
(i) 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.
Notwithstanding the above or anything else in the Plan to the contrary,
the Chief Executive Officer and the President of the Company, acting together,
also have the authority, subject to the terms, conditions, and parameters set
forth by the Board from time to time, to select Award recipients and establish
the terms and conditions of Awards, provided, however, that any such Award
recipient must not be a person who, at the time the Award is granted, is
subject to the restrictions imposed by Section 16 of the Exchange Act.
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.
<PAGE>
ARTICLE 7 STOCK OPTIONS
7.1. GENERAL. The Board is authorized to grant Options to Participants
on the following terms and conditions:
(a) EXERCISE PRICE. The exercise price per share of Stock under an Option
shall be determined by the Board.
(b) 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.
(c) 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.
(d) 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:
(a) 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.
(b) EXERCISE. In no event, may any Incentive Stock Option be exercisable for
more than ten years from the date of its grant.
(c) 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.
(d) 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).
(e) 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.
(f) 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.
(g) RIGHT TO EXERCISE. During a Participant's lifetime, an Incentive Stock
Option may be exercised only by the Participant.
(h) 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:
(a) 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.
(b) 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.
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.
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
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 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:
(a) Materially increase the total number of shares of Stock that may be
issued under the Plan, except as provided in Section 14.1;
(b) Materially modify the eligibility requirements for participation in the
Plan; or
(c) 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
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.
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.
[F:\LEGAL\UDC.SOP\LTPLANAG.DOC]
Exhibit 10.c
FIRST AMENDMENT TO AGREEMENT OF PURCHASE AND SALE OF ASSETS
This First Amendment to Agreement of Purchase and Sale of Assets (this
"First Amendment") is made as of June 6, 1997 (the "First Amendment Date")
to amend that certain Agreement of Purchase and Sale of Assets dated December
31, 1996 (the "Agreement") made by and among the parties identified in the
Agreement as Purchaser, Seller and MK. Unless otherwise defined herein, all
capitalized words shall have the meanings established in the Agreement. In
consideration of the covenants of the parties stated herein, the performances
of the parties required hereby and other valuable consideration received,
Purchaser, Seller and MK hereby mutually agree to amend the Agreement as
follows, all effective as of the First Amendment Date:
1. SEMINOLE LOAN. Pursuant to Section 5.5 of the Agreement, Purchaser
made the Seminole Loan to Seller in the original principal amount of
$891,316.00 and the Seminole Loan is secured by the Consumer Paper and
guaranteed by MK pursuant to the Payment Guaranty. Seller hereby agrees to
convey the Consumer Paper to Purchaser and Purchaser hereby agrees to acquire
the Consumer Paper from Seller for a purchase price equal to the outstanding
balance of the Seminole Loan. The Consumer Paper shall be conveyed by Seller
to Purchaser pursuant to the Agreement for Purchase and Sale of Contracts
attached hereto as Exhibit A (the "Consumer Paper Purchase Agreement"). Upon
conveyance of the Consumer Paper, the Payment Guaranty shall be released and
returned to MK by Purchaser's execution and delivery to MK of the Release of
Guaranty attached hereto as Exhibit B (the "Release of Guaranty"). The UCC-1
Financing Statement filed in the State of Florida to perfect the security
interest in the Consumer Paper shall be released by Purchaser's execution and
delivery to Seller of the UCC-2 Termination Statement attached hereto as
Exhibit C (the "Termination Statement").
2. KMH LOAN. Section 5.5(b) of the Agreement is hereby deleted in its
entirety. Seller acknowledges that Purchaser has no obligation to make the
KMH Loan or any other loans relating to the KMH Real Estate at any time.
3. INDEMNIFICATION. Section 8 of the Agreement is amended by the deletion
of subsection 8.3(e), and the deletion of Section 8.6. The mortgage securing
the covenants of indemnity granted pursuant to Section 8.6 of the Agreement
shall be terminated and released by Purchaser's execution and delivery to
Seller of the Release of Mortgage attached hereto as Exhibit D (the "Release
of Mortgage"). The elimination of the obligation of Seller to indemnify
Purchaser for certain Losses on Contracts pursuant to subsection 8.3(e) and
the elimination of the security for the indemnities pursuant to Section 8.6
does not release or modify any other covenants of indemnity of Seller and MK
set forth in the Agreement and all such other covenants of indemnity of Seller
and MK are hereby ratified and affirmed.
Except as amended by this First Amendment, the Agreement remains in full force
and effect and is hereby ratified and affirmed by Purchaser, Seller and MK.
<PAGE>
IN WITNESS WHEREOF, Purchaser, Seller, and MK acknowledge their receipt,
review, understanding an acceptance of this First Amendment, all effective as
of the First Amendment Date.
<TABLE>
<CAPTION>
<S> <C>
Ugly Duckling Corporation, Seminole Finance Corporation
a Delaware corporation a Florida corporation
By: /s/Steven P. Johnson By: /s/ Michael Krizmanich
Name: Steven P. Johnson Name: Michael Krizmanich
Its: Sr. Vice President Its: President
Second Chance Finance, Inc.
a Florida corporation
By: /s/ Michael Krizmanich
Name: Michael Krizmanich
Its: President
Second Chance Wholesale, Inc.
a Florida corporation
By: /s/ Michael Krizmanich
Name: Michael Krizmanich
Its: President
Michael Krismanich
By: /s/ Michael Krizmanich
Name: Michael Krizmanich
Its: President
</TABLE>
<PAGE>
EXHIBITS (Not Included)
A. Consumer Paper Purchase Agreement
B. Release of Guaranty
C. Termination Statement
D. Release of Mortgage
[cac.ps:agreement.doc]
<TABLE>
<CAPTION>
EXHIBIT 11
-----------
UGLY DUCKLING CORPORATION
SCHEDULE OF COMPUTATION OF EARNINGS PER COMMON SHARE
Three Months Ended Three Months Ended
June 30, 1997 June 30, 1996
------------------------------ ------------------------
Fully Fully
Primary Diluted Primary Diluted
-------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Net earnings $ 4,311,000 $ 4,311,000 $1,083,000 $1,083,000
Preferred dividends - - (267,000) (267,000)
Net earnings available to common shares $ 4,311,000 $ 4,311,000 $ 816,000 $ 816,000
============== ============== =========== ===========
Earnings per share $ 0.23 $ 0.23 $ 0.13 $ 0.13
============== ============== =========== ===========
Weighted average common shares outstanding 18,447,000 18,447,000 5,984,000 5,984,000
Common equivalent shares outstanding
using the treasury stock method 533,000 539,000 396,000 414,000
-------------- -------------- ----------- -----------
Weighted average common and common
equivalent shares outstanding 18,980,000 18,986,000 6,380,000 6,398,000
============== ============== =========== ===========
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
------------------------------ ------------------------
Fully Fully
Primary Diluted Primary Diluted
-------------- -------------- ----------- -----------
Net earnings $ 7,573,000 $ 7,573,000 $2,148,000 $2,148,000
Preferred dividends - - (567,000) (567,000)
Net earnings available to common shares $ 7,573,000 $ 7,573,000 $1,581,000 $1,581,000
============== ============== =========== ===========
Earnings per share $ 0.43 $ 0.43 $ 0.26 $ 0.26
============== ============== =========== ===========
Weighted average common shares
outstanding 17,176,000 17,176,000 5,753,000 5,753,000
Common equivalent shares outstanding
using the treasury stock method 604,000 607,000 383,000 392,000
-------------- -------------- ----------- -----------
Weighted average common and common
equivalent shares outstanding 17,780,000 17,783,000 6,136,000 6,145,000
============== ============== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This financial data schedule on form 10-Q for the quarter ended June 30, 1997
contains summary financial information which is incorporated by reference from
the 1997 quarterly report and extracted from the Condensed Consolidated
Balance Sheets, Condensed Consolidated Statements of Operations, and Condensed
Consolidated Statements of Cash Flows, and is qualified in its entirety by
reference to the financial statement within the report on form 10-Q filing.
Any item provided in the schedule, in accordance with the rules governing the
schedule, will not be subject to liability under the federal securities laws,
except to the extent that the financial statements and other information from
which the data were extracted violate the federal securities laws. Also,
pursuant to item 601(c)(1)(iv) of Regulation S-K promulgated by the Securities
and Exchange Commission (SEC), the schedule shall not be deemed filed for
purposes of Section 11 of the Securities Act of 1933, Section 18 of the
Exchange Act of 1934 and Section 323 of the Trust Indenture Act, or otherwise
be subject to the liabilities of such sections, nor shall it be deemed a part
of any registration statement to which it relates.
</LEGEND>
<CIK> 0001012704
<NAME> UGLY DUCKLING CORP
<MULTIPLIER> 1,000
<CAPTION>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> MAR-31-1997 JUN-30-1997
<CASH> 41,149 41,149
<SECURITIES> 36,248 36,248
<RECEIVABLES> 72,746 72,746
<ALLOWANCES> 14,435 14,435
<INVENTORY> 16,576 16,576
<CURRENT-ASSETS> 0<F1> 0<F1>
<PP&E> 35,379 35,379
<DEPRECIATION> (4,236) (4,236)
<TOTAL-ASSETS> 218,010 218,010
<CURRENT-LIABILITIES> 0<F1> 0<F1>
<BONDS> 0 0
0 0
0 0
<COMMON> 171,317 171,317
<OTHER-SE> 7,280 7,280
<TOTAL-LIABILITY-AND-EQUITY> 218,010 218,010
<SALES> 27,802 46,013
<TOTAL-REVENUES> 44,271 75,005
<CGS> 14,836 24,000
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 16,705 28,111
<LOSS-PROVISION> 4,848 8,829
<INTEREST-EXPENSE> 567 1,336
<INCOME-PRETAX> 7,315 12,729
<INCOME-TAX> 3,004 5,156
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,311 7,573
<EPS-PRIMARY> .23 .43
<EPS-DILUTED> .23 .43
<FN>
<F1>UNCLASSIFIED BALANCE SHEET
</FN>
</TABLE>
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
- --------------------------------------------------------------
The Company wishes to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 and is filing this cautionary
statement in connection with such safe harbor legislation. The Company's Form
10-K, Form 10-K/A, this Form 10-Q, any other Form 10-Q, any Form 8-K, Form
8-K/A, other SEC filings, or any other written or oral statements made by or
on behalf of the Company may include forward looking statements which reflect
the Company's current views with respect to future events and financial
performance. The words "believe," "expect," "anticipate," "intend," "forecast,"
"project," and similar expressions identify forward looking statements.
The Company wishes to caution investors that any forward looking statements
made by or on behalf of the Company are subject to uncertainties and other
factors that could cause actual results to differ materially from such
statements. These uncertainties and other factors include, but are not
limited to, the Risk Factors listed below (many of which have been discussed
in prior SEC filings by the Company). Though the Company has attempted to
list comprehensively these important factors, the Company wishes to caution
investors that other factors may in the future prove to be important in
affecting the Company's results of operations. New factors emerge from time
to time and it is not possible for management to predict all of such factors,
nor can it assess the impact of each such factor on the business or the extent
to which any factor, or combination of factors, may cause actual results to
differ materially from forward looking statements.
Investors are further cautioned not to place undue reliance on such forward
looking statements as they speak only of the Company's views as of the date
the statement was made. The Company undertakes no obligation to publicly
update or revise any forward looking statements, whether as a result of new
information, future events, or otherwise.
RISK FACTORS
- -------------
Investing in the stock of the Company involves certain risks. In addition to
the other information included elsewhere in this From 10-Q, investors should
give careful consideration to the following risk factors which may impact the
Company's performance and the price of its stock.
NO ASSURANCE OF CONTINUED PROFITABILITY; FLUCTUATIONS IN OPERATING RESULTS
- ------------------------------------------------------------------------------
The Company began operations in 1992 and incurred significant losses in 1994
and 1995. In 1996, however, the Company achieved profitability with net
earnings of approximately $5.9 million (including $4.4 million of gains
recognized from the sale of contract receivables pursuant to the
Securitization Program) on total revenues of $75.6 million. There can be no
assurance that the Company will remain profitable. Historically, the Company
has experienced higher car sales 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 part of
the year, which are a primary source of down payments on used car purchases.
See Part 1, Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE ON SECURITIZATIONS
- -------------------------------
In recent periods, a significant portion of the Company's net earnings have
been attributable to gains on sales of contract receivables under its
Securitization Program. To date, all of the Company's securitization
transactions have been completed under the Securitization Program with
SunAmerica. Under this program, SunAmerica was granted the right to purchase
$175.0 million of Certificates. As of June 30, 1997, the Company had
substantially utilized its maximum commitment from SunAmerica under the
Securitization Program. The Company is actively seeking to identify
alternative securitization participants. Failure to identify new
securitization participants and to periodically engage in securitization
transactions will adversely affect the Company's cash flows and net earnings.
The Company's ability to successfully complete securitizations in the future
may also 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. In addition,
with respect to securitization transactions that have closed in the past, the
amount of any gain on sale is based upon certain estimates and assumptions,
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 subordinate certificate 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
subordinate certificate portion. The income recorded on the subordinate
certificate portion will vary from quarter to quarter based upon cash flows
received in a given period. To the extent that cash flows are deficient,
charge-offs of finance receivables exceed original estimates, or assumptions
that were applied at the time of the securitization to the underlying
portfolio are not realized, the Company is required to revalue the residual
portion of the securitization which it retains, and record a charge to
operations. Champion Receivables Corporation ("CRC"), a bankruptcy remote
entity, is the Company's wholly-owned special purpose securitization
subsidiary. Its assets include residuals in finance receivables and
investments held in trust, in the amounts of $27.4 million and $7.2 million,
respectively, at June 30, 1997, which amounts would not be available to
satisfy claims of creditors of the Company on a consolidated basis. See Part
1, Item 2. "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
POOR CREDITWORTHINESS OF BORROWERS; HIGH RISK OF CREDIT LOSSES
- ----------------------------------------------------------------------
Substantially all of the contracts that the Company services are with
Sub-Prime Borrowers. Due to their poor credit histories and/or low incomes,
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 approximately 21.0% to
29.9% on contracts originated at Company Dealerships, while rates range from
approximately 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 as of December 31,
1996 and 1995, respectively, and 20.1% of contract principal balances as of
June 30, 1997, 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 principal balance of delinquent
contracts as a percentage of total outstanding contract principal balances at
June 30, 1997 was 5.5%. 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's annualized net charge offs
as a percentage of average principal outstanding for the six months ended June
30, 1997 were 20.3%. The Company believes its current Allowance for Credit
Losses is adequate to absorb anticipated credit losses. However, no assurance
can be given that the Company has adequately provided for, or will adequately
provide for, such credit risks or that credit losses in excess of its
Allowance for Credit Losses will not occur in the future. A significant
variation in the timing of or increase in credit losses on the Company's
portfolio would have a material adverse effect on the Company. See Part 1,
Item 2. "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Allowance for Credit Losses."
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 primarily
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.
The Company has initiated its Cygnet Dealer Program, pursuant to which the
Company provides qualified Third Party Dealers with operating lines of credit
secured by such dealers' retail installment contract portfolios and/or
inventory. 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, similar to 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.
NO ASSURANCE OF SUCCESSFUL ACQUISITIONS
- -------------------------------------------
The Company has recently completed two acquisitions and intends to consider
additional acquisitions, alliances and transactions involving other companies
that could complement the Company's existing business. There can be no
assurance that suitable acquisition parties, joint venture candidates, or
transaction counterparties can be identified, or that, if identified, any such
transactions will be consummated on terms favorable to the Company, or at all.
Furthermore, there can be no assurance that the Company will be able to
integrate successfully such acquired businesses, including those recently
acquired, into its existing operations, which could increase the Company's
operating expenses in the short-term and materially and adversely affect the
Company's results of operations. Moreover, these types of transactions by the
Company may result in potentially dilutive issuances of equity securities, the
incurrence of additional debt, and amortization of expenses related to
goodwill and intangible assets, all of which could adversely affect the
Company's profitability. These transactions involve numerous risks, such as
the diversion of the attention of the Company's management from other business
concerns, the entrance of the Company into markets in which it has had no or
only limited experience, and the potential loss of key employees of the
acquired company, all of which could have a material adverse effect on the
Company.
HIGHLY COMPETITIVE INDUSTRY
- -----------------------------
Although the used car sales industry has historically been highly fragmented,
it 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. Many franchised new car dealerships have also increased their
focus on the used car market. The Company believes that these companies are
attracted by the relatively high gross margins that can be achieved in this
market and the industry's lack of consolidation. Many of these companies and
franchised dealers have significantly greater financial, marketing, and other
resources than the Company. Among other things, increased competition could
result in increased wholesale costs for used cars, decreased retail sales
prices, and lower margins.
Like the sale of used cars, the business of purchasing and servicing contracts
originated from the sale of used cars to Sub-Prime Borrowers is highly
fragmented and very competitive. In recent years, several consumer finance
companies have completed public offerings in order to raise the capital
necessary to fund expansion and support increased purchases of contracts.
These companies have increased the competition for the purchase of contracts,
in many cases purchasing contracts at prices that the Company believes are not
commensurate with the associated risk. There are numerous financial services
companies serving, or capable of serving, this market, including traditional
financial institutions such as banks, savings and loans, credit unions, and
captive finance companies owned by automobile manufacturers, and other
non-traditional consumer finance companies, many of which have significantly
greater financial and other resources than the Company. Increased competition
may cause downward pressure on the interest rates the Company charges on
contracts originated by its Company Dealerships or cause the Company to reduce
or eliminate the nonrefundable acquisition discount on the contracts it
purchases from Third Party Dealers, which could have a material adverse effect
on the Company.
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.
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.
INDUSTRY CONSIDERATIONS AND LEGAL CONTINGENCIES
- ---------------------------------------------------
In recent periods, several major used car finance companies have announced
major downward adjustments to their financial statements, violations of loan
covenants, related litigation, and other events. In addition, certain of these
companies have 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 class action 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.
NEED TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH THIRD PARTY DEALERS
- ------------------------------------------------------------------------------
The Company enters into nonexclusive agreements with Third Party Dealers,
which may be terminated by either party at any time, pursuant to which the
Company purchases contracts originated by such dealers that meet the Company's
established terms and conditions. Pursuant to the Cygnet Dealer Program, the
Company enters into financing agreements with qualified Third Party Dealers.
The Company's Third Party Dealer financing activities depend in large part
upon its ability to establish and maintain relationships with such dealers.
While the Company believes that it has been successful in developing and
maintaining relationships with Third Party Dealers in the markets that it
currently serves, there can be no assurance that the Company will be
successful in maintaining or increasing its existing Third Party Dealer base,
that such dealers will continue to generate a volume of contracts comparable
to the volume of contracts historically generated by such dealers, or that any
such dealers will become involved in the Cygnet Dealer Program.
GEOGRAPHIC CONCENTRATION
- -------------------------
Company Dealership operations are currently located in Arizona, Texas,
Florida, Nevada, and New Mexico. In addition, a majority of the Company's
Branch Offices are located in Arizona, Texas, Florida, and Indiana. 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.
<PAGE>
DEPENDENCE ON EXTERNAL FINANCING AND SECURITIZATION PROGRAM
- -----------------------------------------------------------------
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 the Revolving Facility 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. Although the Company believes it is currently in compliance
with the terms and conditions of the Revolving Facility, there can be no
assurance that the Company will be able to continue to satisfy such terms and
conditions or that the Revolving Facility will be extended beyond its current
expiration date. For a discussion of certain possible amendments to the
Revolving Facility, see Part 1, Item 2. "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources - Revolving Facility. In addition, the Company and SunAmerica have
entered into the Securitization Program pursuant to which SunAmerica may
purchase up to $175.0 million of Class A certificates. The Securitization
Program is subject to numerous terms and conditions, including the Company's
ability to achieve investment -grade ratings on Class A Certificates. As of
June 30, 1997, the Company had securitized an aggregate of $210.0 million in
contracts, and SunAmerica had purchased $170.4 million in Class A
Certificates, thereby substantially utilizing the maximum commitment from
SunAmerica. There can be no assurance 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
Part 1, Item 2. "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
SENSITIVITY TO INTEREST RATES
- --------------------------------
A substantial portion of the Company's financing income results from the
difference between the rate of interest it pays on the funds it borrows and
the rate of interest it earns on the contracts in its portfolio. While the
contracts the Company owns 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.
<PAGE>
IMPACT OF USURY LAWS
- -----------------------
The Company typically charges fixed interest rates ranging from approximately
21.0% to 29.9% on the contracts originated at Company Dealerships, while rates
range from approximately 17.6% to 29.9% on the Third Party Dealer contracts it
purchases. Currently, a significant portion of the Company's used car sales
activities are conducted in, and a significant portion 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 raising the retail prices of its used cars or purchasing
contracts originated in these states at a higher discount. The Company's
inability to achieve higher sales prices or 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.
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. The Company does not
currently maintain any key person life insurance on any of its executive
officers.
CONTROL BY PRINCIPAL STOCKHOLDER
- -----------------------------------
Mr. Ernest C. Garcia, II, the Company's Chairman, Chief Executive Officer, and
principal stockholder, holds approximately 25.1% of the outstanding Common
Stock, including 136,000 shares held by The Garcia Family Foundation, Inc., an
Arizona non-profit corporation. As a result, Mr. Garcia has 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.
REGULATION, SUPERVISION, AND LICENSING
- -----------------------------------------
The Company's operations are subject to ongoing regulation, supervision, and
licensing under various federal, state, and local statutes, ordinances, and
regulations. Among other things, these laws require that the Company obtain
and maintain certain licenses and qualifications, limit or prescribe terms of
the contracts that the Company originates and/or purchases, require specified
disclosures to customers, limit the Company's right to repossess and sell
collateral, and prohibit the Company from discriminating against certain
customers. The Company is also subject to federal and state franchising and
insurance laws.
The Company believes that it is currently in substantial compliance with all
applicable material 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 result in fines or
interruption or cessation of certain of the business activities of the Company
and 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.
SHARES ELIGIBLE FOR FUTURE SALE
- -----------------------------------
Approximately 5.0 million shares of Common Stock outstanding as of the date
of this Quarterly 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 one year has 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
two years is entitled to sell such shares under Rule 144 without regard to any
of the limitations described above.) Of the "restricted securities"
outstanding, substantially all of these shares have been held for the one-year
holding period required under Rule 144. In addition, approximately 3.4
million shares of common stock were recently registered for resale under the
Securities Act of 1933, as amended (the "Securities Act"). No predictions can
be made with respect to the effect, if any, that sales of the 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.
<PAGE>
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.
TRANSACTIONS WITH FIRST MERCHANTS ACCEPTANCE CORPORATION
- -------------------------------------------------------------
On July 11, 1997, the Company entered into an agreement in principle with the
senior bank group of First Merchants Acceptance Corporation ("FMAC") to
purchase the secured debt of FMAC held by such group. The debt totals
approximately $103 million. FMAC filed for reorganization under Chapter 11 of
the Federal Bankruptcy Code on that date. In connection with the bankruptcy
proceedings, the Company, which owns approximately 2 1/2% of FMAC's
outstanding common stock with a cost basis of $1.5 million, agreed to provide
up to $10 million of "debtor in possession" financing to FMAC, of which $3
million was outstanding at August 14, 1997. The more significant terms of the
proposed purchase of senior debt provide, among other things, for (i) purchase
by the Company of the debt at a 10% discount of the outstanding principal
amount; (ii) short-term financing by the bank group to the Company for the
purchase, with interest accruing at LIBOR plus 2% and an up-front payment by
the Company to the bank group equal to 20% of the purchase price; and (iii)
issuance of stock warrants to the bank group to purchase up to 500,000 shares
of the Company's common stock at an exercise price of $20 per share over a
thirty-month term and subject to a call feature by the Company. The purchase
is subject to certain conditions, including, but not limited to, bankruptcy
court approval, unless waived by the bank group, and execution of definitive
agreements. No assurance can be given that the foregoing transactions will be
consummated. Furthermore, no assurance can be given that the secured debt to
be purchased by the Company or the "debtor in possession" financing will be
repaid in full or that the Company will not be required to write off its $1.5
million investment in FMAC common stock as well as the professional fees
incurred in pursuing the foregoing transactions. See Part 1, Item 2.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Introduction."
DATA PROCESSING AND TECHNOLOGY
- ------------------------------
The Company has dedicated significant resources to data processing and related
technologies, which management expects will enhance the Company's ability
to service loan portfolios, meet the Company's operational requirements, and
eventually reduce costs. The Company believes that its continuing investment
in data processing and technology will allow it to remain competitive in the
industry. The success of any competitor in the Sub-Prime industry, including
the Company, depends in part on its ability to continue to adapt its technology,
on a timely and cost-effective basis, to meet changing customer and industry
standards and requirements. Related to the preceding, the Company recently
converted to a new loan servicing and collection data processing system at its
Gilbert, Arizona facility which services the Company's Arizona, Nevada, and
New Mexico Company Dealership loan portfolios as well as the Third Party
Dealer loan portfolio. The system became operational in the first quarter of
1997; however, the Company continues to confront various implementation and
integration issues for the new loan servicing and collection data processing
system, which management believes have resulted in increases in both contract
delinquencies and charge offs. Delay or failure to resolve these issues could
have a material adverse affect on the Company.
The Company also services its loan portfolios on different loan servicing and
collection data processing systems in Tampa/St. Petersburg and San Antonio
which are also different from the loan servicing and collection data processing
system utilized at the Gilbert , Arizona facility. The Company expects to
migrate and convert all of its loan servicing and collection data processing
to a single loan servicing and collection data processing system which has
yet to be identified. Failure to identify and successfully migrate and
convert to a single loan servicing and data processing system could have a
material adverse affect on the Company.
The Company is dependent on its main processing facilities as well as long-
distance and local telecommunications access in order to transmit and process
information among its various facilities. The Company maintains a disaster
response plan, but a natural disaster, calamity or other significant event
that causes long-term damage to any of these facilities or that interrupts its
telecommunications networks could have a material adverse effect on the
Company. See Part 1, Item 2. "Management's Discussion and Analysis of
Financial Condition and Results of Operations": "Allowance for Credit Losses
- - Net Charge Offs - Company Dealerships", "Net Charge Offs - Third Party
Dealerships", and "Static Pool Analysis", "Contracts Originated at Company
Dealerships", and "Contracts Purchased From Third Party Dealers."
