<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
June 11, 1998
------------------------------------------------------
(Date of earliest event reported)
Ugly Duckling Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 000-20841 86-0721358
- -------------------------------------------------------------------------------
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification Number)
Ugly Duckling Corporation
2525 East Camelback, Suite 1150
Phoenix, Arizona 85016
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
602-852-6600
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
1
<PAGE> 2
Item 5. Other Events.
As part of an ongoing overall strategic evaluation begun late last year, in
February 1998, the Company announced its intention to close its branch office
network (the "Branch Offices") through which the Company purchased retail
installment contracts, and exit this line of business. The closure was
substantially complete as of March 31, 1998, although the Company is continuing
to negotiate lease settlements and terminations with respect to its Branch
Office network closure.
In April 1998, the Company announced the culmination of its strategic
evaluation: the separation of its operations into two publicly-held companies.
The Company's continuing operations will focus on the retail sale of used cars
through its chain of dealerships, as well as the collection and servicing of
the resulting loans. The Company will also retain its existing securitization
program and residual interests in all securitization transactions previously
effected by the Company and its rent-a-car franchise business (which is
generally inactive). It is anticipated that a newly-formed company (Cygnet
Financial Corporation) will operate all non-dealership operations (the
"split-up businesses").
As a result of these two announcements, the historical consolidated financial
statements of the Company have been retroactively restated to reflect the
Company's discontinued operations, including the split-up businesses and the
closure of the Company's Branch Office network, in accordance with the
Accounting Principles Board Opinion No. 30 "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
Included within the Company's discontinued operations is a collateralized dealer
financing program, pursuant to which the Company provides qualified independent
used car dealers with warehouse purchase facilities and operating credit lines
primarily secured by the dealers' retail installment contract portfolio.
Discontinued operations also include the bulk purchase and/or servicing of
contracts originated by other subprime lenders. These operations will be
transferred to the newly-formed company. Further, discontinued operations
include the Branch Office network which the Company closed in February 1998 and
which will not be included in the anticipated split-up. There can be no
assurance that a viable plan for the split-up can be effected; that all of the
conditions to the split-up will be satisfied or that the split-up will be
favorably concluded.
Attached hereto as Exhibit 99 is a copy of the Ugly Duckling Corporation and
subsidiaries audited consolidated financial statements as of December 31, 1997
and 1996 and for each of the years in the three-year period ended December 31,
1997.
* * *
This Form 8-K may include statements constituting forward-looking statements,
usually containing the words "believe," "estimate," "project," "expect" or
similar expressions. These statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. By making
these forward-looking statements, the Company undertakes no obligation to update
these statements for revisions or changes after the date of this release.
Forward-looking statements inherently involve risks and uncertainties that could
cause actual results to differ materially from the forward-looking statements.
Investors should also consider factors that would cause or contribute to such
differences, which include, but are not limited to, factors detailed in this
Form 8-K, in the sections entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Risk Factors," "Factors That
May Affect Future Results and Financial Condition" and "Factors That Might
Affect Future Stock Performance" and elsewhere in the Company's most recent
reports on Form 10-K and Form 10-Q, including Exhibit 99 to such Form 10-Q, and
in Ugly Duckling Corporation's other Securities and Exchange Commission filings.
Item 7. Financial Statements, Pro Forma
Financial Information and Exhibits.
(a) Financial Statements of Business Acquired
Not applicable.
(b) Pro Forma Financial Information
Not applicable.
(c) Exhibits
Exhibit Number Description
- -------------- -----------
23 Independent Auditors' Consent
99 Ugly Duckling Corporation and subsidiaries audited
consolidated financial statements as of December 31,
1997 and 1996 and for each of the years in the
three-year period ended December 31, 1997.
2
<PAGE> 3
SIGNATURES
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
------------------------
(Registrant)
Date: June 15, 1998
By: /s/ STEVEN P. JOHNSON
-----------------------------
Steven P. Johnson
Senior Vice President and
General Counsel
3
<PAGE> 4
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
<S> <C>
23 Independent Auditors' Consent
99 Ugly Duckling Corporation and subsidiaries audited
consolidated financial statements as of December 31, 1997
and 1996 and for each of the years in the three-year period
ended December 31, 1997.
</TABLE>
4
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Ugly Duckling Corporation:
We consent to the incorporation by reference in the registration statements of
Ugly Duckling Corporation on Form S-3 (File No. 333-31531) filed as of July
18, 1997, as amended by pre-effective amendment no. 1 to Form S-3 filed as of
July 30, 1997, Form S-3 (File No. 333-22237) filed as post-effective amendment
no. 2 to Form S-1 as of July 18, 1997; Form S-8 (File No. 333-32313) for Ugly
Duckling Corporation Long-Term Incentive Plan filed as of July 29, 1997; Form
S-8 (File No. 333-08457) for Ugly Duckling Corporation Long-Term Incentive Plan
filed as of July 19, 1996; Form S-8 (File No. 333-06615) for Ugly Duckling
Corporation Director Incentive Plan filed as of June 21, 1996 of our report
dated February 10, 1998, except for Note 2 to the consolidated financial
statements which is as of April 27, 1998, relating to the consolidated balance
sheets of Ugly Duckling Corporation and subsidiaries as of December 31, 1997
and 1996 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997, which report is included in this report on Form 8-K of Ugly
Duckling Corporation.
/s/ KPMG Peat Marwick LLP
-------------------------
Phoenix, Arizona
June 15, 1998
<PAGE> 1
EXHIBIT 99
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... F-3
Consolidated Statements of Operations for the years ended
December 31,
1997, 1996 and 1995.................................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31,
1997, 1996 and 1995.................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31,
1997, 1996 and 1995.................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Ugly Duckling Corporation:
We have audited the accompanying consolidated balance sheets of Ugly
Duckling Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ugly
Duckling Corporation and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
Phoenix, Arizona
February 10, 1998, except for Note 2 to the consolidated financial statements
which is as of April 27, 1998
F-2
<PAGE> 3
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents................................... $ 3,537 $ 18,455
Finance Receivables, Net.................................... 60,778 14,186
Investments Held in Trust................................... 11,637 3,162
Inventory................................................... 32,372 5,464
Property and Equipment, Net................................. 39,182 19,942
Intangible Assets, Net...................................... 16,366 2,150
Other Assets................................................ 9,350 5,328
Net Assets of Discontinued Operations....................... 102,411 48,942
-------- --------
$275,633 $117,629
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts Payable.......................................... $ 2,867 $ 1,379
Accrued Expenses and Other Liabilities.................... 13,821 7,027
Notes Payable............................................. 65,171 12,904
Subordinated Note Payable................................. 12,000 14,000
-------- --------
Total Liabilities................................. 93,859 35,310
-------- --------
Stockholders' Equity
Preferred Stock........................................... -- --
Common Stock.............................................. 172,622 82,612
Retained Earnings (Accumulated Deficit)................... 9,152 (293)
-------- --------
Total Stockholders' Equity........................ 181,774 82,319
Commitments, Contingencies and Subsequent Events
-------- --------
$275,633 $117,629
======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-3
<PAGE> 4
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- ------- -------
(IN THOUSANDS, EXCEPT EARNINGS
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Sales of Used Cars.......................................... $123,814 $53,768 $47,824
Less:
Cost of Used Cars Sold.................................... 66,509 29,890 27,964
Provision for Credit Losses............................... 22,354 9,657 8,359
-------- ------- -------
34,951 14,221 11,501
-------- ------- -------
Other Income:
Interest Income........................................... 12,559 8,597 8,227
Gain on Sale of Loans..................................... 6,721 3,925 --
Servicing Income.......................................... 8,738 1,887 --
Other Income.............................................. 3,587 650 308
-------- ------- -------
31,605 15,059 8,535
-------- ------- -------
Income before Operating Expenses............................ 66,556 29,280 20,036
-------- ------- -------
Operating Expenses:
Selling and Marketing..................................... 10,538 3,585 3,856
General and Administrative................................ 45,261 14,210 13,446
Depreciation and Amortization............................. 3,150 1,382 1,225
-------- ------- -------
58,949 19,177 18,527
-------- ------- -------
Income before Interest Expense.............................. 7,607 10,103 1,509
Interest Expense............................................ 706 2,429 5,328
-------- ------- -------
Earnings (Loss) before Income Taxes......................... 6,901 7,674 (3,819)
Income Taxes................................................ 2,820 694 --
-------- ------- -------
Earnings (Loss) from Continuing Operations.................. 4,081 6,980 (3,819)
Discontinued Operations:
Earnings (Loss) from Operations of Discontinued
Operations, net of income taxes (benefit) of $3,759,
($594), and $0......................................... 5,364 (1,114) (153)
-------- ------- -------
Net Earnings (Loss)......................................... $ 9,445 $ 5,866 $(3,972)
======== ======= =======
Earnings (Loss) per Common Share from Continuing Operations:
Basic..................................................... $ 0.23 $ 0.77 $ (0.69)
======== ======= =======
Diluted................................................... $ 0.22 $ 0.73 $ (0.69)
======== ======= =======
Net Earnings (Loss) per Common Share:
Basic..................................................... $ 0.53 $ 0.63 $ (0.72)
======== ======= =======
Diluted................................................... $ 0.52 $ 0.60 $ (0.72)
======== ======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-4
<PAGE> 5
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED TOTAL
SHARES AMOUNT EARNINGS STOCKHOLDERS'
------------------- --------------------- (ACCUMULATED EQUITY
PREFERRED COMMON PREFERRED COMMON DEFICIT) (DEFICIT)
--------- ------ --------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1994... -- 5,522 $ -- $ 77 $(1,271) $ (1,194)
Issuance of Common Stock........ -- 58 -- 50 -- 50
Conversion of Subordinated Notes
Payable to Preferred Stock.... 1,000 -- 10,000 -- -- 10,000
Net Loss for the Year........... -- -- -- -- (3,972) (3,972)
------ ------ -------- -------- ------- --------
BALANCES AT DECEMBER 31, 1995... 1,000 5,580 10,000 127 (5,243) 4,884
Issuance of Common Stock for
Cash.......................... -- 7,281 -- 79,335 -- 79,335
Conversion of Debt to Common
Stock......................... -- 444 -- 3,000 -- 3,000
Issuance of Common Stock to
Board of Director's........... -- 22 -- 150 -- 150
Redemption of Preferred Stock... (1,000) -- (10,000) -- -- (10,000)
Preferred Stock Dividends....... -- -- -- -- (916) (916)
Net Earnings for the Year....... -- -- -- -- 5,866 5,866
------ ------ -------- -------- ------- --------
BALANCES AT DECEMBER 31, 1996... -- 13,327 -- 82,612 (293) 82,319
Issuance of Common Stock for
Cash.......................... -- 5,194 -- 89,398 -- 89,398
Issuance of Common Stock
Warrants...................... -- -- -- 612 -- 612
Net Earnings for the Year....... -- -- -- -- 9,445 9,445
------ ------ -------- -------- ------- --------
BALANCES AT DECEMBER 31, 1997... -- 18,521 $ -- $172,622 $ 9,152 $181,774
====== ====== ======== ======== ======= ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-5
<PAGE> 6
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
--------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Earnings (Loss)....................................... $ 9,445 $ 5,866 $(3,972)
Adjustments to Reconcile Net Earnings (Loss) to Net Cash
Provided by (Used in) Operating Activities from
Continuing Operations:
Loss (Earnings) from Discontinued Operations.............. (5,364) 1,114 153
Provision for Credit Losses............................... 22,354 9,657 8,359
Gain on Sale of Loans..................................... (6,721) (3,925) --
Decrease in Deferred Income Taxes......................... 510 498 500
Depreciation and Amortization............................. 3,150 1,382 1,225
Purchase of Finance Receivables for Sale.................. (116,830) (48,996) --
Proceeds from Sale of Finance Receivables................. 81,098 30,259 --
Collections of Finance Receivables........................ 15,554 26,552 --
Decrease (Increase) in Inventory.......................... (20,592) 778 (1,394)
Increase in Other Assets.................................. (1,252) (2,155) (507)
Increase in Accounts Payable, Accrued Expenses, and Other
Liabilities............................................. 6,345 2,571 2,937
Increase (Decrease) in Income Taxes Receivable/Payable.... (1,377) 535 (983)
Other, Net................................................ -- -- 169
--------- -------- -------
Net Cash Provided by (Used in) Operating Activities
of Continuing Operations.............................. (13,680) 24,136 6,487
--------- -------- -------
Cash Flows from Investing Activities:
Increase in Finance Receivables........................... -- -- (38,606)
Collections of Finance Receivables........................ -- -- 18,373
Increase in Investments Held in Trust..................... (8,475) (3,162) --
Net Decrease in Notes Receivable.......................... 151 137 --
Purchase of Property and Equipment........................ (18,764) (5,549) (2,882)
Payment for Acquisition of Assets......................... (35,841) -- --
Other, Net................................................ -- (1,944) 60
--------- -------- -------
Net Cash Used in Investing Activities of Continuing
Operations............................................. (62,929) (10,518) (23,055)
--------- -------- -------
Cash Flows from Financing Activities:
Additions to Notes Payable................................ 22,578 1,000 22,259
Repayments of Notes Payable............................... -- (28,610) --
Net Issuance (Repayment) of Subordinated Notes Payable.... (2,000) (553) 6,262
Redemption of Preferred Stock............................. -- (10,000) --
Proceeds from Issuance of Common Stock.................... 89,398 79,435 5
Other, Net................................................ (180) (1,158) 2,807
--------- -------- -------
Net Cash Provided by Financing Activities of Continuing
Operations............................................. 109,796 40,114 31,333
--------- -------- -------
Net Cash Used in Discontinued Operations.................... (48,105) (36,696) (13,514)
--------- -------- -------
Net Increase (Decrease) in Cash and Cash Equivalents........ (14,918) 17,036 1,251
Cash and Cash Equivalents at Beginning of Year.............. 18,455 1,419 168
--------- -------- -------
Cash and Cash Equivalents at End of Year.................... $ 3,537 $ 18,455 $ 1,419
========= ======== =======
Supplemental Statement of Cash Flows Information:
Interest Paid............................................. $ 5,382 $ 5,144 $ 5,890
========= ======== =======
Income Taxes Paid......................................... $ 6,570 $ 450 $ 535
========= ======== =======
Assumption of Debt in Connection with Acquisition of
Assets.................................................. $ 29,900 $ -- $ --
========= ======== =======
Conversion of Note Payable to Common Stock................ $ -- $ 3,000 $ --
========= ======== =======
Conversion of Subordinated Debt to Preferred Stock........ $ -- $ -- $10,000
========= ======== =======
Purchase of Property and Equipment with Notes Payable..... $ -- $ 8,313 $ --
========= ======== =======
Purchase of Property and Equipment with Capital Leases.... $ 357 $ 57 $ 792
========= ======== =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-6
<PAGE> 7
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND ACQUISITIONS
Ugly Duckling Corporation, a Delaware corporation (the Company), was
incorporated in April 1996 as the successor to Ugly Duckling Holdings, Inc.
(UDH), an Arizona corporation, formed in 1992. Contemporaneous with the
formation of the Company, UDH was merged into the Company with each share of
UDH's common stock exchanged for 1.16 shares of common stock in the Company and
each share of UDH's preferred stock exchanged for one share of preferred stock
in the Company under identical terms and conditions. UDH was effectively
dissolved in the merger. The resulting effect of the merger was a
recapitalization increasing the number of authorized shares of common stock to
20,000,000 and a 1.16-to-1 common stock split effective April 24, 1996. The
stockholders' equity section of the Consolidated Balance Sheets and the
Statements of Stockholders' Equity reflect the number of authorized shares after
giving effect to the merger and common stock split. The Company's principal
stockholder is also the sole stockholder of Verde Investments, Inc. (Verde). The
Company's subordinated debt is held by, and the land for certain of its car
dealerships and loan servicing facilities was leased from Verde until December
31, 1996, see Note 14.
During 1997, the Company completed several acquisitions. In January 1997,
the Company acquired substantially all of the assets of Seminole Finance
Corporation and related companies (Seminole) including four dealerships in
Tampa/St. Petersburg and a contract portfolio of approximately $31.1 million in
exchange for approximately $2.5 million in cash and assumption of $29.9 million
in debt. In April 1997, the Company purchased substantially all of the assets of
E-Z Plan, Inc. (EZ Plan), including seven dealerships in San Antonio and a
contract portfolio of approximately $24.3 million in exchange for approximately
$26.3 million in cash. In September 1997, the Company acquired substantially all
of the dealership and loan servicing assets (but not the loan portfolio) of
Kars-Yes Holdings Inc. and related companies (Kars), including six dealerships
in the Los Angeles market, two in the Miami market, two in the Atlanta market
and two in the Dallas market, in exchange for approximately $5.5 million in
cash. These acquisitions were recorded in accordance with the "purchase method"
of accounting, and, accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based upon the estimated fair
values at the date of acquisition. The excess of the purchase price over the
fair values of the net assets acquired was approximately $14.8 million and has
been recorded as goodwill, which is being amortized over periods ranging from
fifteen to twenty years. The results of operations of the acquired operations
have been included in the accompanying statements of operations from the
respective acquisition dates.
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations (unaudited) as if the acquisitions had taken
place on January 1, 1996. Such pro forma amounts are not
F-7
<PAGE> 8
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
necessarily indicative of what the actual results of operations might have been
if the acquisitions had been effective on January 1, 1996, (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996
-------- --------
<S> <C> <C>
Sales of Used Cars................................. $225,882 $244,074
======== ========
Interest Income.................................... $ 26,907 $ 32,467
======== ========
Other Income....................................... $ 16,595 $ 12,244
======== ========
Total Revenues..................................... $268,510 $285,785
======== ========
Earnings (Loss) From Continuing Operations......... $ 29,399 $ (6,682)
======== ========
Net Loss........................................... $(29,325) $ (7,508)
======== ========
Basic Loss Per Share From Continuing Operations.... $ (1.64) $ (0.74)
======== ========
Diluted Loss Per Share From Continuing
Operations....................................... $ (1.64) $ (0.74)
======== ========
Basic Loss Per Share............................... $ (1.95) $ (0.95)
======== ========
Diluted Loss Per Share............................. $ (1.95) $ (0.95)
======== ========
</TABLE>
(2) DISCONTINUED OPERATIONS
In February 1998, the Company announced its intention to close its branch
office network (the "Branch Offices") through which the Company purchased retail
installment contracts, and exit this line of business in the first quarter of
1998. The Company recorded a pre-tax charge to discontinued operations of $9.1
million (approximately $5.4 million, net of income taxes) in the quarter ended
March 31, 1998. The closure was substantially complete as of March 31, 1998 and
included the termination of approximately 400 employees, substantially all of
whom are employed at the Company's 76 branches that were in place on the date of
the announcement. Approximately $1.0 million of the discontinued operations
charge is for termination benefits, $2.5 million for write-off of pre-opening
and start-up costs, and the remainder for lease payments on idle facilities,
writedowns of leasehold improvements, data processing and other equipment. In
April 1998, the Company announced that its Board of Directors had directed
management to proceed with separating current operations into two publicly held
companies. The Company's continuing operations will focus exclusively on the
retail sale of used cars through its chain of dealerships, as well as the
collection and servicing of the resulting loans. It is anticipated that a new
company will be formed to operate all non-dealership operations. As a result of
these two announcements, the Company has restated the accompanying consolidated
balance sheets and consolidated statements of operations to reflect the
Company's discontinued operations, including the split-up businesses and the
Company's third party dealer Branch Office network in accordance with Accounting
Principles Board Opinion No. 30 "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
Included within the Company's discontinued operations is a collateralized
dealer financing program ("Cygnet Dealer Program"), pursuant to which the
Company provides qualified independent used car dealers ("Third Party Dealers")
with warehouse purchase facilities and operating credit lines primarily secured
by the dealers' retail installment contract portfolio. Discontinued operations
also include the bulk purchase and/or servicing of contracts originated by other
subprime lenders, which the Company believes is a more efficient method of
purchasing or obtaining servicing rights to sub-prime automobile contracts than
through the closed Branch Office network. The Company intends to split-up the
Cygnet Dealer Program and the operations that
F-8
<PAGE> 9
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
bulk purchase and/or service contracts by other subprime lenders. Further,
discontinued operations include the Branch Office network, which the Company
closed in February 1998 and which will not be included in the anticipated
split-up.
The components of Net Assets of Discontinued Operations as of December 31,
1997 and December 31, 1996 follow (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- -------
<S> <C> <C>
Finance Receivables, net................................ $ 46,218 $44,978
Residuals in Finance Receivables Sold................... 16,099 1,377
Investments Held in Trust............................... 7,277 316
Notes Receivable........................................ 25,686 --
Property and Equipment.................................. 2,070 710
Capitalized Start-up Costs.............................. 2,453 --
Other Assets, net of Accounts Payable and Accrued
Liabilities........................................... 2,608 1,561
-------- -------
$102,411 $48,942
======== =======
</TABLE>
Following is a summary of the operating results of the Discontinued
Operations for the years ended December 31, 1997, 1996, and 1995 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Revenues............................................. $ 37,207 $ 7,768 $ 1,845
Expenses............................................. (28,084) (9,477) (1,998)
-------- ------- -------
Earnings (Loss) before Income Taxes (Benefit)........ 9,123 (1,708) (153)
Income Taxes (Benefit)............................... 3,759 (594) --
-------- ------- -------
Earnings (Loss) from Discontinued Operations......... $ 5,364 $(1,114) $ (153)
======== ======= =======
</TABLE>
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
The Company, through its subsidiaries, owns and operates used car sales
dealerships, a property and casualty insurance company, and is a franchisor of
rental car operations. Additionally, Champion Receivables Corporation and
Champion Receivables Corporation II, "bankruptcy remote entities" are the
Company's wholly-owned special purpose securitization subsidiaries. Their assets
include residuals in finance receivables sold and investments held in trust,
including amounts classified as discontinued operations, in the amounts of
$29,376,000 and $17,600,000 respectively, at December 31, 1997 and in the
amounts of $9,889,000 and $2,843,000, respectively at December 31, 1996, which
amounts would not be available to satisfy claims of creditors of the Company.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company
and its subsidiaries. Significant intercompany accounts and transactions have
been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and
F-9
<PAGE> 10
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
The Company provides sales finance services in connection with the sales of
used cars to individuals residing primarily in several metropolitan areas. The
Company operated a total of forty-one, eight, and eight used car dealerships
(company dealerships) in ten, two and two metropolitan markets in 1997, 1996 and
1995, respectively.
Periodically during the year, the Company maintains cash in financial
institutions in excess of the amounts insured by the federal government.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents. Cash equivalents
generally consist of interest bearing money market accounts.
Revenue Recognition
Interest income is recognized using the interest method. Direct loan
origination costs related to contracts originated at company dealerships are
deferred and charged against finance income over the life of the related
installment sales contract as an adjustment of yield. The accrual of interest is
suspended if collection becomes doubtful, generally 90 days past due, and is
resumed when the loan becomes current. Interest income also includes income on
the Company's residual interests from its Securitization Program.
Revenue from the sales of used cars is recognized upon delivery, when the
sales contract is signed and the agreed-upon down payment has been received.
Residuals in Finance Receivables Sold, Investments Held in Trust, and Gain on
Sale of Loans
In 1996, the Company initiated a Securitization Program under which it
sells (securitizes), on a non-recourse basis, finance receivables to a trust
which uses the finance receivables to create asset backed securities (A
certificates) which are remitted to the Company in consideration for the sale.
The Company then sells senior certificates to third party investors and retains
subordinated certificates (B certificates). In consideration of such sale, the
Company receives cash proceeds from the sale of certificates collateralized by
the finance receivables and the right to future cash flows under the
subordinated certificates (residual in finance receivables sold, or residual)
arising from those receivables to the extent not required to make payments on
the A certificates sold to a third party or to pay associated costs.
Gains or losses are determined based upon the difference between the sales
proceeds for the portion of finance receivables sold and the Company's recorded
investment in the finance receivables sold. The Company allocates the recorded
investment in the finance receivables between the portion of the finance
receivables sold and the portion retained based on the relative fair values on
the date of sale.
The Company is required to make an initial deposit into an account held by
the trustee (spread account) and to pledge this cash to the trust to which the
finance receivables were sold. The trustee in turn invests the cash in highly
liquid investment securities. In addition, the Company (through the trustee)
deposits additional cash flows from the residual to the spread account as
necessary to attain and maintain the spread account at a specified percentage of
the underlying finance receivable principal balances. These deposits are
classified as Investments Held in Trust.
F-10
<PAGE> 11
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
To the extent that actual cash flows on a securitization are below original
estimates and differ materially from the original securitization assumptions,
and in the opinion of management if those differences appear to be other than
temporary in nature, the Company's residual will be adjusted, with corresponding
charges against income in the period in which the adjustment is made. Such
evaluations are performed on a security by security basis, for each certificate
or spread account retained by the Company.
Residuals in finance receivables sold are classified as "held-to-maturity"
securities in accordance with SFAS No. 115.
Servicing Income
Servicing Income is recognized when earned. Servicing costs are charged to
expense as incurred. In the event delinquencies and/or losses on the portfolio
serviced exceed specified levels, the Company may be required to transfer the
servicing of the portfolio to another servicer.
Finance Receivables and Allowance for Credit Losses
Finance receivables consist of contractually scheduled payments from
installment sales contracts net of unearned finance charges, accrued interest
receivable, direct loan origination costs, and an allowance for credit losses,
including acquired allowances.
Finance receivables held for investment represent finance receivables that
the Company expects to hold until they have matured. Finance receivables held
for sale represent finance receivables that the Company expects to securitize.
The Company follows the provisions of Statement of Financial Accounting
Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases." Direct loan
origination costs represent the unamortized balance of costs incurred in the
origination of contracts at the Company's dealerships.
An allowance for credit losses (allowance) is established by charging the
provision for credit losses and the allocation of acquired allowances.
Notes Receivable
Notes receivable are recorded at cost, less related allowance for impaired
notes receivable. Management, considering information and events regarding the
borrowers ability to repay their obligations, including an evaluation of the
estimated value of the related collateral, considers a note to be impaired when
it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the note agreement. When a loan is
considered to be impaired, the amount of impairment is measured based on the
present value of expected future cash flows discounted at the note's effective
interest rate. Impairment losses are included in the allowance for credit losses
through a charge to provision for credit losses. Cash receipts on impaired notes
receivable are applied to reduce the principal amount of such notes until the
principal has been received and are recognized as interest income, thereafter.
Inventory
Inventory consists of used vehicles held for sale which is valued at the
lower of cost or market, and repossessed vehicles which are valued at market
value. Vehicle reconditioning costs are capitalized as a component of inventory
cost. The cost of used vehicles sold is determined on a specific identification
basis.
F-11
<PAGE> 12
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Property and Equipment are stated at cost. Depreciation is computed using
straight-line and accelerated methods over the estimated useful lives of the
assets which range from three to ten years for equipment and thirty years for
buildings. Leasehold and land improvements are amortized using straight-line and
accelerated methods over the shorter of the lease term or the estimated useful
lives of the related improvements.
The Company has capitalized costs related to the development of software
products for internal use. Capitalization of costs begins when technological
feasibility has been established and ends when the software is available for
general use. Amortization is computed using the straight-line method over the
estimated economic life of five years.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally fifteen to twenty years.
Trademarks, Trade Names, Logos, and Contract Rights
The registered trade names, "Ugly Duckling Car Sales," "Ugly Duckling
Rent-A-Car," "America's Second Car," "Putting You on the Road to Good Credit"
and related trademarks, logos, and contract rights are stated at cost. The cost
of trademarks, trade names, logos, and contract rights is amortized on a
straight-line basis over their estimated economic lives of ten years.
Post Sale Customer Support Programs
A liability for the estimated cost of post sale customer support, including
car repairs and the Company's down payment back and credit card programs, is
established at the time the used car is sold by charging Cost of Used Cars Sold.
The liability is evaluated for adequacy through a separate analysis of the
various programs' historical performance.
Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Advertising
All costs related to production and advertising are expensed in the period
incurred or ratably over the year in relation to revenues or certain other
performance measures. Advertising costs capitalized as of December 31, 1997 were
immaterial. The Company had no advertising costs capitalized as of December 31,
1996.
Stock Option Plan
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation
expense is recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On January 1, 1996, the Company
adopted the
F-12
<PAGE> 13
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
which permits entities to provide pro forma net earnings and pro forma earnings
per share disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method as defined in SFAS No. 123 had been
applied.
The Company uses one of the most widely used option pricing models, the
Black-Scholes model (the Model), for purposes of valuing its stock option
grants. The Model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, it requires the input of highly subjective assumptions, including the
expected stock price volatility, expected dividend yields, the risk free
interest rate, and the expected life. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the value determined by the Model is
not necessarily indicative of the ultimate value of the granted options.
Earnings Per Share
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
Long-Lived Assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to
future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
The Company adopted the provisions of SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
(SFAS No. 125) on January 1, 1997. This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. Adoption of SFAS No. 125 did not have a material impact on the
Company.
Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statement amounts to conform to the current year presentation.
F-13
<PAGE> 14
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
A summary of finance receivables as of December 31, 1997 and 1996 follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- -------
<S> <C> <C>
Installment Sales Contract Principal Balances........... $ 55,965 $ 7,068
Add: Accrued Interest Receivable........................ 461 42
Loan Origination Costs, Net............................. 1,431 189
-------- -------
Principal Balances, Net................................. 57,857 7,299
Residuals in Finance Receivables Sold................... 13,277 8,512
-------- -------
71,134 15,811
Allowance for Credit Losses............................. (10,356) (1,625)
-------- -------
Finance Receivables, net................................ $ 60,778 $14,186
======== =======
</TABLE>
The finance receivables are classified as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
------- ------
<S> <C> <C>
Finance Receivables Held for Sale......................... $52,000 $6,400
Finance Receivables Held for Investment................... 5,857 899
------- ------
$57,857 $7,299
======= ======
</TABLE>
A summary of allowance for credit losses on finance receivables for the
years ended December 31, 1997, 1996 and 1995 follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996 1995
-------- ------ ------
<S> <C> <C> <C>
Balances, Beginning of Year.................... $ 1,625 $7,500 $6,050
Provision for Credit Losses.................... 22,354 9,657 8,359
Allowance on Acquired Loans.................... 15,309 -- --
Net Charge Offs................................ (7,524) (6,202) (6,909)
Sale of Finance Receivables.................... (21,408) (9,330) --
-------- ------ ------
Balances, End of Year.......................... $ 10,356 $1,625 $7,500
======== ====== ======
</TABLE>
The valuation of the Residual in Finance Receivables Sold as of December
31, 1997 totaled $13,277,000 which represents the present value of the Company's
interest in the anticipated future cash flows of the underlying portfolio. 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 securitization between June 30, 1996 and June 30, 1997, net losses
were originally estimated using total expected cumulative net losses at loan
origination of approximately 26.0%, adjusted for actual cumulative net losses
prior to securitization. Prepayment rates were estimated to be 1.5% per month of
the beginning of month balances.
During the year ended December 31, 1997, the Company recorded a $5.7
million charge to write-down the residuals in finance receivables sold. The
charge had the effect of increasing the cumulative net loss assumption to
approximately 27.5%, for the securitization transactions that took place prior
to June 30, 1997. For the securitization transactions that took place subsequent
to June 30, 1997, net losses were estimated
F-14
<PAGE> 15
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
using total expected cumulative net losses at loan origination of approximately
27.5%, adjusted for actual cumulative net losses prior to securitization.
Prepayment rates were estimated to be 1.5% per month of the beginning of month
balance.
As of December 31, 1997 and 1996, the Residuals in Finance Receivables Sold
were comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- -------
<S> <C> <C>
Retained interest in subordinated securities (B
certificates)......................................... $ 25,483 $ 9,747
Net interest spreads, less present value discount....... 10,622 5,590
Reduction for estimated credit losses................... (22,828) (6,825)
-------- -------
Residuals in finance receivables sold................... $ 13,277 $ 8,512
======== =======
Securitized principal balances outstanding.............. $127,356 $41,998
======== =======
Estimated credit losses and allowances as a % of
securitized principal balances outstanding............ 17.9% 16.2%
======== =======
</TABLE>
The following table reflects a summary of activity for the Residuals in
Finance Receivables Sold for the years ended December 31, 1997 and 1996,
respectively (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Balance, Beginning of Year............................... $ 8,512 $ --
Additions................................................ 17,734 10,119
Amortization............................................. (7,242) (1,607)
Write-down of Residual in Finance Receivables Sold....... (5,727) --
------- -------
Balance, End of Year..................................... $13,277 $ 8,512
======= =======
</TABLE>
(5) INVESTMENTS HELD IN TRUST
In connection with its securitization transactions, the Company is required
to provide a credit enhancement to the investor. The Company makes an initial
cash deposit, ranging from 3% to 4% of the initial underlying finance
receivables principal balance, of cash into an account held by the trustee
(spread account) and pledges this cash to the trust to which the finance
receivables were sold and then makes additional deposits from the residual cash
flow (through the trustee) to the spread account as necessary to attain and
maintain the spread account at a specified percentage, ranging from 6.0% to
8.0%, of the underlying finance receivables principal balance.
In the event that the cash flows generated by the Finance Receivables sold
to the trust are insufficient to pay obligations of the trust, including
principal or interest due to certificate holders or expenses of the trust, the
trustee will draw funds from the spread account as necessary to pay the
obligations of the trust. The spread account must be maintained at a specified
percentage of the principal balances of the finance receivables held by the
trust, which can be increased in the event delinquencies or losses exceed
specified levels. If the spread account exceeds the specified percentage, the
trustee will release the excess cash to the Company from the pledged spread
account. Except for releases in this manner, the cash in the spread account is
restricted from use by the Company.
During 1997, the Company made initial spread account deposits totaling
$6,068,000. Additional net deposits through the trustee during 1997 totaled
$1,763,000. The total balance in the spread accounts was
F-15
<PAGE> 16
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$10,357,000 as of December 31, 1997. In connection therewith, the specified
spread account balance based upon the aforementioned specified percentages of
the balances of the underlying portfolios as of December 31, 1997 was
$10,458,000, resulting in additional funding requirements from future cash flows
as of December 31, 1997 of $101,000. The additional funding requirement will
decline as the trustee deposits additional cash flows into the spread account
and as the principal balance of the underlying finance receivables declines.
During 1996, the Company made initial spread account deposits totaling
$2,330,000. Additional net deposits through the trustee during 1996 totaled
$196,000 resulting in a total balance in the spread accounts of $2,526,000 as of
December 31, 1996. In connection therewith, the specified spread account balance
based upon the aforementioned specified percentages of the balances of the
underlying portfolios as of December 31, 1996 was $3,361,000.
In connection with certain other agreements, the Company has deposited a
total of $1,280,000, and $636,000 in an interest bearing trust account as of
December 31, 1997 and 1996, respectively.
(6) PROPERTY AND EQUIPMENT
A summary of Property and Equipment as of December 31, 1997 and 1996
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Land..................................................... $13,813 $ 7,811
Buildings and Leasehold Improvements..................... 16,234 5,690
Furniture and Equipment.................................. 10,932 5,268
Vehicles................................................. 224 156
Construction in Process.................................. 2,817 3,536
------- -------
44,020 22,461
Less Accumulated Depreciation and Amortization........... (4,838) (2,519)
------- -------
Property and Equipment, Net.............................. $39,182 $19,942
======= =======
</TABLE>
Interest Expense capitalized in 1997, 1996 and 1995 totaled $229,000, zero,
and $54,000, respectively.
(7) INTANGIBLE ASSETS
A summary of intangible assets as of December 31, 1997 and 1996 follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
------- ------
<S> <C> <C>
Original Cost:
Goodwill.................................................. $16,741 $1,944
Trademarks................................................ 581 581
Covenants not to Compete.................................. 250 --
------- ------
17,572 2,525
Accumulated Amortization.................................. (1,206) (375)
------- ------
Intangibles, Net.......................................... $16,366 $2,150
======= ======
</TABLE>
Amortization expense relating to intangible assets totaled $831,000,
$63,000, and $63,000 for the years ended December 31 1997, 1996, and 1995,
respectively.
F-16
<PAGE> 17
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) OTHER ASSETS
A summary of Other Assets as of December 31, 1997 and 1996 follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------ ------
<S> <C> <C>
Note Receivable............................................ $ 912 $1,063
Prepaid Expenses........................................... 1,957 790
Income Taxes Receivable.................................... 1,693 316
Servicing Receivables...................................... 1,389 --
Deposits................................................... 829 687
Employee Advances.......................................... 821 --
Escrow Deposits............................................ -- 900
Deferred Income Taxes...................................... -- 376
Other Assets............................................... 1,749 1,196
------ ------
$9,350 $5,328
====== ======
</TABLE>
(9) ACCRUED EXPENSES AND OTHER LIABILITIES
A summary of Accrued Expenses and Other Liabilities as of December 31, 1997
and 1996 follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
------- ------
<S> <C> <C>
Sales Taxes............................................... $ 3,909 $2,904
Accrued Payroll, Benefits & Taxes......................... 2,366 486
Servicing Liability....................................... 1,503 695
Deferred Revenue.......................................... 840 601
Accrued Advertising....................................... 850 50
Obligations under Capital Leases.......................... 775 742
Accrued Post Sale Support................................. 771 250
Deferred Income Taxes..................................... 133 --
Others.................................................... 2,674 1,299
------- ------
$13,821 $7,027
======= ======
</TABLE>
In connection with the retail sale of vehicles, the Company is required to
pay sales taxes to certain government jurisdictions. In certain of these
jurisdictions, the Company has elected to pay these taxes using the "cash
basis", which requires the Company to pay the sales tax obligation for a sale
transaction as principal is collected over the life of the related finance
receivable contract.
F-17
<PAGE> 18
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) NOTES PAYABLE
A summary of Notes Payable at December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
$100,000,000 revolving loan with a finance company, interest
payable daily at 30 day LIBOR (5.70% at December 31, 1997)
plus 3.15% through December 1998, secured by substantially
all assets of the Company................................. $56,950 $ 4,602
Two notes payable to a finance company totaling $7,450,000,
monthly interest payable at the prime rate (8.50% at
December 31, 1997) plus 1.50% through January 1998;
thereafter, monthly payments of $89,000 plus interest
through January 2002 when balloon payments totaling
$3,282,000 are due, secured by first deeds of trust and
assignments of rents on certain real property............. 7,450 7,450
Others bearing interest at rates ranging from 9% to 11% due
through April 2007, secured by certain real property and
certain property and equipment............................ 771 852
------- -------
Total............................................. $65,171 $12,904
======= =======
</TABLE>
The aforementioned revolving loan agreement contains various reporting and
performance covenants including the maintenance of certain ratios, limitations
on additional borrowings from other sources, restrictions on certain operating
activities, and a restriction on the payment of dividends under certain
circumstances. The Company was in compliance with the covenants at December 31,
1997 and 1996.
A summary of future minimum principal payments required under the
aforementioned notes payable after December 31, 1997 follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, AMOUNT
- ------------ -------
<S> <C>
1998..................................................... $58,021
1999..................................................... 1,169
2000..................................................... 1,179
2001..................................................... 1,191
2002..................................................... 3,296
Thereafter............................................... 315
-------
$65,171
=======
</TABLE>
(11) SUBORDINATED NOTE PAYABLE
During 1996, the Company amended its previous subordinated notes payable
with Verde and executed a single $14,000,000 unsecured note payable with Verde.
The note bears interest at an annual rate of 10%, with interest payable monthly
and is subordinate to all other Company indebtedness. The note also calls for
annual principal payments of $2,000,000 through June 2003 when the loan will be
paid in full. The Company had $12,000,000 and $14,000,000 outstanding under this
note payable at December 31, 1997 and 1996, respectively.
Interest expense related to the subordinated note payable with Verde
totaled $1,232,000, $1,933,000, and $3,492,000 during the years ended December
31, 1997, 1996 and 1995, respectively.
F-18
<PAGE> 19
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) INCOME TAXES
Income taxes amounted to $2,820,000, $694,000, and zero for the years ended
December 31, 1997, 1996 and 1995, respectively (an effective tax rate of 40.9%,
9.0% and 0.0%, respectively). A reconciliation between taxes computed at the
federal statutory rate of 35% in 1997 and 34% in 1996 and 1995 at the effective
tax rate on earnings (loss) before income taxes follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
Computed "Expected" Income Taxes (Benefit)..... $2,415 $ 2,609 $(1,298)
State Income Taxes, Net of Federal Effect...... 425 143 --
Change in Valuation Allowance.................. -- (2,251) 1,354
Other, Net..................................... (20) 193 (56)
------ ------- -------
$2,820 $ 694 $ --
====== ======= =======
</TABLE>
Components of income taxes (benefit) for the years ended December 31, 1997,
1996 and 1995 follow (in thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ------
<S> <C> <C> <C>
1997:
Federal........................................ $1,751 $ 424 $2,175
State.......................................... 560 85 645
------ ------ ------
2,311 509 2,820
Discontinued operations........................ 2,589 1,170 3,759
------ ------ ------
$4,900 $1,679 $6,579
====== ====== ======
1996:
Federal........................................ $ 152 $ 326 $ 478
State.......................................... 44 172 216
------ ------ ------
196 498 694
Discontinued operations........................ (345) (249) (594)
------ ------ ------
$ (149) $ 249 $ 100
====== ====== ======
1995:
Federal........................................ $ (500) $ 500 $ --
State.......................................... -- -- --
------ ------ ------
(500) 500 --
Discontinued operations........................ 51 (51) --
------ ------ ------
$ (449) $ 449 $ --
====== ====== ======
</TABLE>
F-19
<PAGE> 20
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of December
31, 1997 and 1996 are presented below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Deferred Tax Assets:
Finance Receivables, Principally Due to the Allowance for
Credit Losses.......................................... $ 192 $ 233
Inventory................................................. 246 73
Federal and State Income Tax Net Operating Loss
Carryforwards.......................................... 28 --
Residual in Finance Receivables........................... -- 154
Accrued Post Sale Support................................. 357 138
Other..................................................... 25 45
------- -------
Total Gross Deferred Tax Assets........................... 848 643
Less: Valuation Allowance................................. -- --
------- -------
Net Deferred Tax Assets........................... 848 643
------- -------
Deferred Tax Liabilities:
Software Development Costs................................ (158) (192)
Loan Origination Fees..................................... (586) (75)
Other..................................................... (237) --
------- -------
Total Gross Deferred Tax Liabilities................... (981) (267)
------- -------
Net Deferred Tax Asset (Liability)................ $ (133) $ 376
======= =======
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1997 and
1996 was zero. There was no change in the Valuation Allowance for the year ended
December 31, 1997. The net change in the total Valuation Allowance for the year
ended December 31, 1996 was a decrease of $2,251,000. In assessing the
realizability of Deferred Tax Assets, management considers whether it is more
likely than not that some portion or all of the Deferred Tax Assets will not be
realized. The ultimate realization of Deferred Tax Assets is dependent upon
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the reversal of Deferred Tax
Liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the Deferred Tax
Assets are deductible, management believes it is more likely than not that the
Company will realize the benefits of these deductible differences.
At December 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $91,000, which, subject to annual
limitations, are available to offset future taxable income, if any, through
2110.
(13) SERVICING
Pursuant to the Company's securitization program which began in 1996, the
Company securitizes loan portfolios with servicing retained. The Company
services the securitized portfolios for a monthly fee ranging from .25% to .33%
(3.0% to 4.0% per annum) of the beginning of month principal balance of the
serviced portfolios. During 1997, the Company began servicing a loan portfolio
for an unaffiliated party and recognizes servicing fee income of approximately
.33% (4.0% annualized) of beginning of month balances, generally subject to a
minimum fee of $15 per contract per month. The Company recognized servicing
income of $8,738,000 and $1,887,000 in the years ended December 31, 1997 and
1996, respectively.
F-20
<PAGE> 21
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of portfolios serviced by the Company as of December 31, 1997 and
1996 follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Finance receivables from continuing operations.............. $ 55,965 $ 7,068
Securitized with servicing retained......................... 127,356 41,998
-------- --------
Amounts originated by the Company........................... 183,321 49,066
Finance receivables from Discontinued operations:
Finance Receivables....................................... 29,965 49,772
Securitized with servicing retained....................... 110,669 9,664
Servicing on behalf of other................................ 127,322 --
-------- --------
Total serviced portfolios......................... $451,277 $108,502
======== ========
</TABLE>
Pursuant to the terms of the various servicing agreements, the serviced
portfolios are subject to certain performance criteria. In the event the
serviced portfolios do not satisfy such criteria the servicing agreements
contain various remedies up to and including the removal of servicing rights
from the Company.
(14) LEASE COMMITMENTS
The Company leases used car sales facilities, offices, and certain office
equipment from unrelated entities under various operating leases which expire
through March 2007. The leases require monthly rental payments aggregating
approximately $580,000 and contain various renewal options from one to ten
years. In certain instances, the Company is also responsible for occupancy and
maintenance costs, including real estate taxes, insurance, and utility costs.
Rent expense for the year ended December 31, 1997 totaled $5,345,000.
During 1996, the Company purchased six car lots, a vehicle reconditioning
center, and two office buildings from Verde. These properties had previously
been rented from Verde pursuant to various leases which called for base monthly
rents aggregating approximately $123,000 plus contingent rents as well as all
occupancy and maintenance costs, including real estate taxes, insurance, and
utilities. In connection with the purchase, Verde returned security deposits
which totaled $364,000. Rent expense for the year ended December 31, 1996
totaled $2,394,000 which included rents paid to Verde totaling $1,498,000
including contingent rents of $440,000. There was no accrued rent payable to
Verde at December 31, 1996.
Rent expense for the year ended December 31, 1995 totaled $2,377,000. Rents
paid to Verde totaled $1,889,000, including contingent rents of $465,000, and
$113,000 of rent capitalized during the construction period of a facility.
Accrued rent payable to Verde totaled $101,000 at December 31, 1995.
A summary of future minimum lease payments required under noncancelable
operating leases with remaining lease terms in excess of one year as of December
31, 1997 follows (in thousands):
<TABLE>
<CAPTION>
CONTINUING DISCONTINUED
DECEMBER 31, OPERATIONS OPERATIONS AMOUNT
- ------------ ---------- ------------ -------
<S> <C> <C> <C>
1998....................................... $ 6,203 $1,432 $ 7,635
1999....................................... 5,668 1,227 6,895
2000....................................... 4,396 488 4,884
2001....................................... 2,728 82 2,810
2002....................................... 1,314 28 1,342
Thereafter................................. 1,233 -- 1,233
------- ------ -------
Total............................ $21,542 $3,257 $24,799
======= ====== =======
</TABLE>
F-21
<PAGE> 22
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) STOCKHOLDERS' EQUITY
On April 24, 1996, the Company effectuated a 1.16-to-1 stock split. The
effect of this stock split has been reflected for all periods presented in the
Consolidated Financial Statements.
The Company has authorized 100,000,000 shares of $.001 par value common
stock. There were approximately 18,521,000 and 13,327,000 shares issued and
outstanding at December 31, 1997 and 1996, respectively. The common stock
consists of $18,000 of common stock and $172,604,000 of additional paid-in
capital at December 31, 1997. The common stock consists of $13,000 of common
stock and $82,599,000 of additional paid-in capital as of December 31, 1996.
During 1997, the Company completed a private placement of 5,075,500 shares
of common stock for a total of approximately $89,156,000 cash, net of stock
issuance costs. The registration of the shares sold in the private placement was
effective in April 1997. During 1996, the Company completed two public offerings
in which it issued a total of 7,245,000 shares of common stock for approximately
$79,435,000 cash, net of stock issuance costs.
During 1997, the Company issued warrants for the right to purchase 389,800
shares of the Company's common stock for $20.00 per share. The warrants were
valued at approximately $612,000. These warrants remained outstanding at
December 31, 1997. In addition, warrants to acquire 116,000 shares of the
Company's common stock at $6.75 per share and 170,000 shares of the Company's
common stock at $9.45 per share were outstanding at December 31, 1997.
The Company has authorized 10,000,000 shares of $.001 par value preferred
stock. There were zero shares issued and outstanding at December 31, 1997 and
1996, respectively.
On December 31, 1995, the Company exchanged 1,000,000 shares of Series A
preferred stock for $10,000,000 of subordinated notes payable with Verde.
Cumulative dividends were payable at a rate of 12% per annum through June 21,
1996, at which time the Series A preferred stock was exchanged on a share-for-
share basis for 1,000,000 shares of Series B preferred stock. The dividends were
payable quarterly upon declaration by the Company's Board of Directors. In
November 1996, the Company redeemed the 1,000,000 shares of Series B preferred
stock.
The Company's Board of Directors declared quarterly dividends on preferred
stock totaling approximately $916,000 during the year ended December 31, 1996.
There were no cumulative unpaid dividends at December 31, 1996.
F-22
<PAGE> 23
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) EARNINGS (LOSS) PER SHARE
A summary of the reconciliation from basic earnings (loss) per share to
diluted earnings (loss) per share for the years ended December 31, 1997, 1996,
and 1995 follows (in thousands, except for per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ -------
<S> <C> <C> <C>
Net Earnings (Loss)....................................... $ 9,445 $5,866 $(3,972)
Less: Preferred Stock Dividends........................... -- (916) --
------- ------ -------
Earnings (Loss) available to Common Stockholders.......... $ 9,445 $4,950 $(3,972)
======= ====== =======
Earnings (Loss) From Continuing Operations................ $ 4,081 $6,980 $(3,819)
Less: Preferred Stock Dividends........................... -- (916) --
------- ------ -------
Earnings (Loss) available to Common Stockholders.......... $ 4,081 $6,064 $(3,819)
======= ====== =======
Basic EPS-Weighted Average Shares Outstanding............. 17,832 7,887 5,522
======= ====== =======
Basic Earnings (Loss) Per Share From Continuing
Operations.............................................. $ 0.23 $ 0.77 $ (0.69)
======= ====== =======
Basic Earnings (Loss) Per Share........................... $ 0.53 $ 0.63 $ (0.72)
======= ====== =======
Basic EPS-Weighted Average Shares Outstanding............. 17,832 7,887 5,522
Effect of Diluted Securities:
Warrants................................................ 98 71 --
Stock Options........................................... 304 340 --
------- ------ -------
Dilutive EPS-Weighted Average Shares Outstanding.......... 18,234 8,298 5,522
======= ====== =======
Diluted Earnings (Loss) Per Share From Continuing
Operations.............................................. $ 0.22 $ 0.73 $ (0.69)
======= ====== =======
Diluted Earnings (Loss) Per Share......................... $ 0.52 $ 0.60 $ (0.72)
======= ====== =======
Warrants Not Included in Diluted EPS Since Antidilutive... 390 -- --
======= ====== =======
Stock Options Not Included in Diluted EPS Since
Antidilutive............................................ 828 -- --
======= ====== =======
</TABLE>
(17) STOCK OPTION PLAN
In June, 1995, the Company adopted a long-term incentive plan (stock option
plan). The stock option plan, as amended, sets aside 1,800,000 shares of common
stock to be granted to employees at a price of not less than fair market value
of the stock at the date of grant. Options are to vest over a period to be
determined by the Board of Directors upon grant and will generally expire six
years after the date of grant. The options generally vest over a period of five
years.
At December 31, 1997, there were 344,000 additional shares available for
grant under the Plan. The per share weighted-average fair value of stock options
granted during 1997 and 1996 was $6.54 and $8.39, respectively on the date of
grant using the Black-Scholes option-pricing model with the following weighted-
average assumptions: 1997 -- expected dividend yield 0%, risk-free interest rate
of 5.53%, expected volatility of 40.0%, and an expected life of 5 years;
1996 -- expected dividend yield 0%, risk-free interest rate of 6.4%, expected
volatility of 56.5% and an expected life of 7 years.
The Company applies APB Opinion 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
F-23
<PAGE> 24
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No. 123, the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
------------ -----------
<S> <C> <C>
Net Earnings from Continuing Operations available to Common Stockholders............ $ 4,081,000 $ 6,064,000
Pro Forma Net Earnings from Continuing Operations available to Common Stockholders.. $ 4,081,000 $ 6,064,000
Net Earnings available to Common Stockholders....................................... $ 9,445,000 $ 4,950,000
Pro forma Net Earnings available to Common Stockholders............................. $ 8,567,000 $ 3,916,000
Earnings per Share -- Basic
Continuing Operations............................................................. $ 0.23 $ 0.77
Continuing Operations Pro Forma................................................... $ 0.23 $ 0.77
Net Earnings ..................................................................... $ 0.53 $ 0.63
Pro Forma Net Earnings............................................................ $ 0.48 $ 0.50
Earnings per Share -- Diluted
Continuing Operations ............................................................ $ 0.22 $ 0.73
Continuing Operations Pro Forma................................................... $ 0.22 $ 0.73
Net Earnings ..................................................................... $ 0.52 $ 0.60
Net Earnings Pro Forma............................................................ $ 0.47 $ 0.47
</TABLE>
The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net earnings amounts presented
above because compensation cost is reflected over the options' vesting period of
five years.
A summary of the aforementioned stock plan activity follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PRICE PER
NUMBER SHARE
--------- ----------
<S> <C> <C>
Balance, December 31, 1995.................................. 442,000 $ 1.70
Granted................................................... 539,000 13.41
Forfeited................................................. (30,000) 3.26
Exercised................................................. (39,000) 1.00
--------- ------
Balance, December 31, 1996.................................. 912,000 8.60
--------- ------
Granted................................................... 582,000 15.07
Forfeited................................................. (78,000) 14.00
Exercised................................................. (118,000) 2.04
--------- ------
Balance, December 31, 1997.................................. 1,298,000 $11.76
========= ======
</TABLE>
F-24
<PAGE> 25
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of stock options granted at December 31, 1997 follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ----------------------------
NUMBER WEIGHTED-AVG. WEIGHTED-AVG. NUMBER WEIGHTED-AVG.
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE PRICE AT 12/31/97 PRICE
- --------------- ----------- ---------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$ .50 to $1.00....... 97,000 6.4 years $ 0.86 -- $ --
$1.50 to $2.60....... 169,000 3.7 years 2.36 58,000 2.45
$3.45 to $9.40....... 162,000 4.4 years 6.80 24,000 6.86
$11.88 to $20.75..... 870,000 5.3 years 15.73 75,000 17.28
--------- ------ ------- ------
1,298,000 $11.76 157,000 $10.21
========= ====== ======= ======
</TABLE>
(18) COMMITMENTS AND CONTINGENCIES
During 1997, the Company acquired certain notes receivable collateralized
by a loan portfolio. Thereafter, the Company exchanged the notes receivable for
the underlying collateral (the acquired collateral) and received a guarantee
from the borrower of an 11.0% return on the acquired collateral. An unrelated
third party purchased the collateral and the Company guaranteed the purchaser, a
return of 10.35%, not to exceed $10,000,000. No accruals have been made by the
Company related to this guarantee.
The Company has commenced a study of its computer systems in order to
assess its exposure to year 2000 issues. The Company expects to make the
necessary modifications or changes to its computer information systems to enable
proper processing of transactions relating to the year 2000 and beyond. The
Company will evaluate appropriate courses of action, including replacement of
certain systems whose associated costs would be recorded as assets and
subsequently amortized or modification of its existing systems which costs would
be expensed as incurred.
In October 1997 the Company's Board of Directors authorized a stock
repurchase program by which the Company may acquire up to one million shares of
its common stock from time to time on the open market. Under the program,
purchases may be made depending on market conditions, share price and other
factors. The stock repurchase program will terminate on December 31, 1998,
unless extended by the Company's Board of Directors, and may be discontinued at
any time. The Company had not repurchased any shares of common stock related to
this program as of December 31, 1997.
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 has been declared effective by the Securities and
Exchange Commission and is available for future debt offerings.
During 1997, the Company acquired approximately 2.5% of the outstanding
common stock of FMAC with a cost of approximately $1,450,000. In connection with
FMAC's proposed plan of reorganization, and subject to bankruptcy court
approval, the Company and FMAC have agreed to exchange the Company's common
stock in FMAC for the property and equipment that constitute FMAC's loan
servicing platform. The Company anticipates receiving bankruptcy court approval
for the plan of reorganization during the first fiscal quarter of 1998.
The Company is involved in various claims and actions arising in the
ordinary course of business. In the opinion of management, based on consultation
with legal counsel, the ultimate disposition of these matters will not have a
material adverse effect on the Company. No provision has been made in the
accompanying consolidated financial statements for losses, if any, that might
result from the ultimate disposition of these matters.
F-25
<PAGE> 26
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to year end, the Company executed a commitment letter with a
finance company for the Company to obtain a short term $30.0 million standby
repurchase credit facility and a $150.0 million surety-enhanced revolving credit
facility. The commitment letter also provides for the finance company to be the
exclusive securitization agent of the Company for $1.0 billion of AAA-rated
surety wrapped securities as part of the Company's ongoing securitization
program.
(19) RETIREMENT PLAN
During 1995, the Company established a qualified 401(k) retirement plan
(defined contribution plan) which became effective on October 1, 1995. The plan,
as amended, covers substantially all employees having no less than three months
of service, have attained the age of 21, and work at least 1,000 hours per year.
Participants may voluntarily contribute to the plan up to the maximum limits
established by Internal Revenue Service regulations.
The Company will match 10% of the participants' contributions. Participants
are immediately vested in the amount of their direct contributions and vest over
a five-year period, as defined by the plan, with respect to the Company's
contribution. Pension expense totaled $49,000, $23,000 and $5,000 during the
years ended December 31, 1997, 1996, and 1995, respectively.
(20) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that the Company disclose
estimated fair values for its financial instruments. The following summary
presents a description of the methodologies and assumptions used to determine
such amounts.
Limitations
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument; they
are subjective in nature and involve uncertainties, matters of judgment and,
therefore, cannot be determined with precision. These estimates do not reflect
any premium or discount that could result from offering for sale at one time the
Company's entire holdings of a particular instrument. Changes in assumptions
could significantly affect these estimates.
Since the fair value is estimated as of December 31, 1997 and 1996, the
amounts that will actually be realized or paid in settlement of the instruments
could be significantly different.
Cash and Cash Equivalents and Investments Held in Trust
The carrying amount is estimated to be the fair value because of the
liquidity of these instruments.
Finance Receivables, Residuals in Finance Receivables Sold, and Notes
Receivable
The carrying amount is estimated to be the fair value because of the
relative short maturity and repayment terms of the portfolio as compared to
similar instruments.
Accounts Payable, Accrued Expenses, and Notes Payable
The carrying amount approximates fair value because of the short maturity
of these instruments. The terms of the Company's notes payable approximate the
terms in the market place at which they could be replaced. Therefore, the fair
market value approximates the carrying value of these financial instruments.
F-26
<PAGE> 27
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subordinated Notes Payable
The terms of the Company's subordinated notes payable approximate the terms
in the market place at which they could be replaced. Therefore, the fair value
approximates the carrying value of these financial instruments.
(21) BUSINESS SEGMENTS
Operating results and other financial data are presented for the principal
business segments of the Company for the years ended December 31, 1997, 1996,
and 1995, respectively. The Company has three distinct business segments. These
consist of retail car sales operations (Company dealerships), the income
generated from the finance receivables generated at the Company dealerships, and
corporate and other operations.
In computing operating profit by business segment, the following items were
considered in the Corporate and Other category: portions of administrative
expenses, interest expense and other items not considered direct operating
expenses. Identifiable assets by business segment are those assets used in each
segment of Company operations.
<TABLE>
<CAPTION>
COMPANY
COMPANY DEALERSHIP CORPORATE
DEALERSHIPS RECEIVABLES AND OTHER TOTAL
----------- ----------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1997:
Sales of Used Cars............................. $123,814 $ -- $ -- $123,814
Less: Cost of Cars Sold........................ 66,509 -- -- 66,509
Provision for Credit Losses.................... 22,354 -- -- 22,354
-------- -------- -------- --------
34,951 -- -- 34,951
Interest Income................................ -- 12,559 -- 12,559
Gain on Sale of Loans.......................... -- 6,721 -- 6,721
Other Income................................... 1,498 8,814 2,013 12,325
-------- -------- -------- --------
Income before Operating Expenses............... 36,449 28,094 2,013 66,556
-------- -------- -------- --------
Operating Expenses:
Selling and Marketing.......................... 10,499 -- 39 10,538
General and Administrative..................... 23,064 12,303 9,894 45,261
Depreciation and Amortization.................. 1,536 1,108 506 3,150
-------- -------- -------- --------
35,099 13,411 10,439 58,949
-------- -------- -------- --------
Income before Interest Expense................. $ 1,350 $ 14,683 $ (8,426) $ 7,607
======== ======== ======== ========
Capital Expenditures........................... $ 13,571 $ 3,791 $ 1,402 $ 18,764
======== ======== ======== ========
Identifiable Assets............................ $ 74,287 $ 78,514 $122,832 $275,633
======== ======== ======== ========
</TABLE>
F-27
<PAGE> 28
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
COMPANY
COMPANY DEALERSHIP CORPORATE
DEALERSHIPS RECEIVABLES AND OTHER TOTAL
----------- ----------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1996:
Sales of Used Cars............................. $ 53,768 $ -- $ -- $ 53,768
Less: Cost of Cars Sold........................ 29,890 -- -- 29,890
Provision for Credit Losses.................... 9,657 -- -- 9,657
-------- -------- -------- --------
14,221 -- -- 14,221
Interest Income................................ -- 8,426 171 8,597
Gain on Sale of Loans.......................... -- 3,925 -- 3,925
Other Income................................... 195 1,887 455 2,537
-------- -------- -------- --------
Income before Operating Expenses............... 14,416 14,238 626 29,280
-------- -------- -------- --------
Operating Expenses:
Selling and Marketing.......................... 3,568 -- 17 3,585
General and Administrative..................... 8,295 2,859 3,056 14,210
Depreciation and Amortization.................. 318 769 295 1,382
-------- -------- -------- --------
12,181 3,628 3,368 19,177
-------- -------- -------- --------
Income (loss) before Interest Expense.......... $ 2,235 $ 10,610 $ (2,742) $ 10,103
======== ======== ======== ========
Capital Expenditures........................... $ 4,530 $ 455 $ 564 $ 5,549
======== ======== ======== ========
Identifiable Assets............................ $ 20,698 $ 12,775 $ 84,156 $117,629
======== ======== ======== ========
December 31, 1995:
Sales of Used Cars............................. $ 47,824 $ -- $ -- $ 47,824
Less: Cost of Cars Sold........................ 27,964 -- -- 27,964
Provision for Credit Losses.................... 8,359 -- -- 8,359
-------- -------- -------- --------
11,501 -- -- 11,501
Interest Income................................ -- 8,227 -- 8,227
Other Income................................... -- -- 308 308
-------- -------- -------- --------
Income before Operating Expenses............... 11,501 8,227 308 20,036
-------- -------- -------- --------
Operating Expenses:
Selling and Marketing.......................... 3,856 -- -- 3,856
General and Administrative..................... 8,210 2,562 2,673 13,446
Depreciation and Amortization.................. 279 479 467 1,225
-------- -------- -------- --------
12,345 3,041 3,140 18,527
-------- -------- -------- --------
Income (loss) before Interest Expense.......... $ (844) $ 5,186 $ (2,832) $ 1,509
======== ======== ======== ========
Capital Expenditures........................... $ 1,195 $ 1,561 $ 126 $ 2,882
======== ======== ======== ========
Identifiable Assets............................ $ 11,452 $ 32,187 $ 17,151 $ 60,790
======== ======== ======== ========
</TABLE>
F-28
<PAGE> 29
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(22) QUARTERLY FINANCIAL DATA -- UNAUDITED
A summary of the quarterly data for the years ended December 31, 1997 and
1996 follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1997:
Total Revenue......................... $22,296 $36,147 $44,821 $52,155 $155,419
======= ======= ======= ======= ========
Income before Operating Expenses...... 9,871 16,463 20,201 20,021 66,556
======= ======= ======= ======= ========
Operating Expenses.................... 8,440 12,538 15,576 22,395 58,949
======= ======= ======= ======= ========
Income (Loss) before Interest
Expense............................ 1,431 3,893 4,625 (2,342) 7,607
======= ======= ======= ======= ========
Earnings (Loss) from Continuing
Operations......................... $ 755 $ 3,082 $ 2,559 $(2,315) $ 4,081
======= ======= ======= ======= ========
Earnings (Loss) from Discontinued
Operations......................... 2,507 1,229 (4,387) 6,015 5,364
======= ======= ======= ======= ========
Net Earnings (Loss)................... $ 3,262 $ 4,311 $(1,828) $ 3,700 $ 9,445
======= ======= ======= ======= ========
Basic Earnings (Loss) Per Share from
Continuing Operations.............. $ 0.05 $ 0.17 $ 0.14 $ (0.12) $ 0.23
======= ======= ======= ======= ========
Diluted Earnings (Loss) Per Share from
Continuing Operations.............. $ 0.05 $ 0.16 $ 0.14 $ (0.12) $ 0.22
======= ======= ======= ======= ========
Basic Earnings (Loss) Per Share....... $ 0.21 $ 0.23 $ (0.10) $ 0.20 $ 0.53
======= ======= ======= ======= ========
Diluted Earnings (Loss) Per Share..... $ 0.20 $ 0.23 $ (0.10) $ 0.20 $ 0.52
======= ======= ======= ======= ========
1996:
Total Revenues........................ $18,327 $18,628 $16,204 $15,668 $ 68,827
======= ======= ======= ======= ========
Income before Operating Expenses...... 7,374 7,552 6,685 7,669 29,280
======= ======= ======= ======= ========
Operating Expenses.................... 4,790 5,250 3,925 5,212 19,177
======= ======= ======= ======= ========
Income before Interest Expense........ 2,584 2,302 2,760 2,457 10,103
======= ======= ======= ======= ========
Earnings from Continuing Operations... $ 1,334 $ 1,210 $ 2,353 $ 2,083 $ 6,980
======= ======= ======= ======= ========
Earnings (Loss) from Discontinued
Operations......................... (269) (127) 386 (1,104) (1,114)
======= ======= ======= ======= ========
Net Earnings.......................... $ 1,065 $ 1,083 $ 1,967 $ 1,751 $ 5,866
======= ======= ======= ======= ========
Basic Earnings Per Share from
Continuing Operations.............. $ 0.18 $ 0.16 $ 0.24 $ 0.17 $ 0.77
======= ======= ======= ======= ========
Diluted Earnings Per Share from
Continuing Operations.............. $ 0.18 $ 0.15 $ 0.23 $ 0.16 $ 0.73
======= ======= ======= ======= ========
Basic Earnings Per Share.............. $ 0.13 $ 0.14 $ 0.20 $ 0.15 $ 0.63
======= ======= ======= ======= ========
Diluted Earnings Per Share............ $ 0.13 $ 0.13 $ 0.19 $ 0.14 $ 0.60
======= ======= ======= ======= ========
</TABLE>
F-29
