<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
February 10, 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.
Attached hereto as Exhibit 99 is a copy of the "Ugly Duckling Corporation
and Subsidiaries 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
(audited).
On February 12, 1998, the Company issued $15.0 million in aggregate
principal amount of its 12% Senior Subordinated Notes under a Loan Agreement
dated as of February 12, 1998 between the Company and each of the Lenders named
therein. The Notes provide for payments of interest on the principal balance at
12% per annum payable on March 31, June 30, September 30 and December 31 of each
year, and payment of the principal balance plus accrued interest on the Maturity
Date, which is February 12, 2001. The Company may prepay the Notes at any time
without penalty. The payment of principal and interest on the Notes is
subordinated to other debt of the Company, except certain other specified
subordinated debt. Under the Loan Agreement, the Company also agreed with the
Lenders not to permit its debt to tangible equity ratio to exceed 2.1 to 1.
In connection with the issuance of the Notes, the Company also issued
Warrants to acquire up to 500,000 shares of the Company's Common Stock at an
exercise price of $10 per share, exercisable at any time until the later of (i)
February 12, 2001, or (ii) such time as the Notes have been paid in full. The
exercise price may be paid in cash or pursuant to a cashless exercise as
described in the Warrant Agreement. The number of shares subject to the Warrant
and the exercise price may be adjusted in certain specified circumstances,
including the issuance of additional shares of Common Stock or securities
convertible into Common Stock at less than the current market price of the
Common Stock on the date of issuance. The outstanding Warrants may be redeemed
by the Company at $.10 per share at any time after the daily market price of
the shares has equaled or exceeded $16.00 for a period of 20 consecutive trading
days ending not more than 15 days prior to the date notice is given of such
redemption. The Company also has granted certain piggyback and demand
registration rights covering the resale of shares of Common Stock acquired
pursuant to the exercise of the Warrants.
The Notes and Warrants were issued by the Company to a group of accredited
investors in a private placement under Section 4(2) of the Securities Act of
1933.
The Loan Agreement, a form of Note, the Warrant Agreement and a form of
Warrant are each attached hereto as exhibits and incorporated herein by
reference in their entirety. The foregoing summaries of the Loan Agreement, the
Notes, the Warrant Agreement and the Warrants do not purport to be complete and
are qualified in their entirety by reference to such exhibits.
On February 19, 1998, the Company and certain of its subsidiaries and
affiliates entered into a Master Repurchase Agreement (the "Repurchase
Agreement") with Greenwich Capital Financial Products, Inc. ("Greenwich").
Pursuant to the Repurchase Agreement, together with related documents, Greenwich
agreed to purchase, subject to repurchase rights of the Company and its
subsidiaries, certain eligible sub-prime automobile finance receivables
originated and or purchased by the Company's affiliates for a purchase price
(and corresponding repurchase obligation) of no more than $30,000,000. On
February 19, 1998, Greenwich purchased $16,855,685.94 in contracts pursuant to
the Repurchase Agreement. The amounts due and owing Greenwich will accrue
interest at 9.5%, with the repurchase obligations being exercised no later than
March 31, 1998. The obligations of the Company and its affiliates under the
Repurchase Agreement are secured by a pledge of (a) all of the Company's rights
in and to the receivables being acquired by Greenwich; (b) a pledge by Duck
Ventures, Inc., a direct wholly-owned subsidiary of the Company ("DVI") of all
of the issued and outstanding common stock of Champion Receivables Corp. II, a
bankruptcy remote subsidiary wholly owned by DVI; and (c) all of the Company's
rights and interests (including all collateral) under that certain Loan and
Credit Agreement, dated July 17, 1997, between the Company and First Merchants
Acceptance Corporation ("FMAC") pursuant to which the Company is to provide,
subject to certain conditions, $18.5 million in debtor-in-possession financing
to FMAC.
***
THIS FORM 8-K INCLUDES STATEMENTS THAT MAY CONSTITUTE 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 "RISK FACTORS" IN THE COMPANY'S PROSPECTUS,
DATED FEBRUARY 11, 1998, AND IN THE SECTIONS ENTITLED "FACTORS THAT MAY AFFECT
FUTURE RESULTS AND FINANCIAL CONDITION" AND "FACTORS THAT MAY AFFECT FUTURE
STOCK PERFORMANCE" AND ELSEWHERE IN THE COMPANY'S MOST RECENT REPORTS ON FORM
10-K/A AND 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 Businesses Acquired
Not applicable.
(b) Pro Forma Financial Information
Not applicable.
(c) Exhibits
Exhibit Number Description
4(a) Form of 12% Senior Subordinated Note.
4(b) Warrant Agreement dated as of February 12, 1998 between the
Company and each of the Lenders named therein.
4(c) Form of Warrant.
10 Loan Agreement dated as of February 12, 1998 between the
Company and each of the Lenders named therein.
23 Independent Auditors' Consent
99 Ugly Duckling Corporation and Subsidiaries Consolidated
Financial Statements December 31, 1997 and 1996 (audited)
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: February 20, 1998
By /s/ STEVEN T. DARAK
---------------------------------
Steven T. Darak
Chief Financial Officer
3
<PAGE> 4
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C> <C>
4(a) Form of 12% Senior Subordinated Note.
4(b) Warrant Agreement dated as of February 12, 1998
between the Company and each of the Lenders named
therein.
4(c) Form of Warrant.
10 Loan Agreement dated as of February 12, 1998
between the Company and each of the Lenders named
therein.
23 Independent Auditors' Consent
99 Ugly Duckling Corporation and Subsidiaries
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. (audited)
</TABLE>
4
<PAGE> 1
Exhibit 4(a)
PROMISSORY NOTE
Original Face Amount: $____________
Maker: UGLY DUCKLING CORPORATION, a Delaware corporation
Dated as of: February 12, 1998
1. PROMISE TO REPAY. FOR VALUE RECEIVED, UGLY DUCKLING
CORPORATION, a Delaware corporation ("Maker"), promises to pay to
_____________________ ("Payee"), or order, the principal sum of
_________________ Dollars ($________) or such lesser amount as shall equal the
outstanding amount of the loan (the "Loan") made by Payee to Maker, pursuant to
Section 2.01 of that certain Loan Agreement, dated as of February 12, 1998,
entered into between Maker and each of Payee and the other Lenders named therein
(the "Loan Agreement").
2. DEFINED TERMS. Any and all initially capitalized terms used
herein shall have the meaning ascribed thereto in the Loan Agreement, unless
specifically defined herein. The term "or" as used in this Note has, except
where otherwise indicated, the inclusive meaning represented by the phrase
"and/or". This Promissory Note (this "Note") is one of the promissory notes
defined in the Loan Agreement as the "Notes" and is subject to, and entitled to
the benefits of, the terms and provisions of the Loan Agreement.
3. PAYMENTS OF PRINCIPAL AND INTEREST.
(a) Maker hereby promises to make payments of
principal and interest with respect to the Loan evidenced hereby at the rates
and times, and in the amounts, and in all other respects in the manner as
provided in the Loan Agreement.
(b) As more fully set forth in the Loan Agreement,
Maker shall not be obligated to pay, and the holder of this Note shall not be
obligated to charge, collect, receive, reserve, or take interest (it being
understood that interest shall be calculated as the aggregate of all charges
which constitute interest under applicable law that are contracted for, charged,
reserved, received, or paid) in excess of the maximum nonusurious interest rate,
as in effect from time to time, which may be charged, contracted for, reserved,
received, or collected by Payee in connection with the Loan Agreement, this
Note, the other Loan Documents, or any other documents executed in connection
herewith or therewith.
4. PREPAYMENTS. Maker may prepay the principal balance due
under this Note, in whole or in part, without penalty or premium, only in
accordance with the provisions of the Loan Agreement.
5. APPLICATION OF PAYMENTS. All payments (including
prepayments) made hereunder shall be applied first to accrued and unpaid
interest and then to principal.
6. TIME AND PLACE OF PAYMENTS. All principal and interest due
hereunder is payable in U.S. Dollars in immediately available funds at Payee's
office located at 1800 Avenue of the Stars, Suite 200, Los Angeles, CA 90067 (or
at such other office as may be designated from time to time by Payee), not later
than 1:30 p.m., Phoenix, Arizona time, on the date of payment.
1
<PAGE> 2
7. WAIVERS. Maker, for itself and its legal representatives,
successors, and assigns, expressly waives presentment, demand, protest, notice
(except as required by the Loan Agreement), and all other requirements of any
kind, in connection with the enforcement or collection of this Note.
8. ACCELERATION AND WAIVER. IT IS EXPRESSLY AGREED THAT, UPON
THE OCCURRENCE OF AN EVENT OF DEFAULT AS SPECIFIED IN SECTIONS 7.01(g) THROUGH
(L) OF THE LOAN AGREEMENT, THE UNPAID PRINCIPAL BALANCE OF AND ANY ACCRUED AND
UNPAID INTEREST UNDER THIS NOTE SHALL AUTOMATICALLY BECOME IMMEDIATELY DUE AND
PAYABLE PURSUANT TO THE TERMS OF THE LOAN AGREEMENT, AND, UPON THE OCCURRENCE OF
ANY OTHER EVENT OF DEFAULT SPECIFIED IN SECTION 7.01 OF THE LOAN AGREEMENT, THE
UNPAID PRINCIPAL BALANCE OF ANY ACCRUED AND UNPAID INTEREST UNDER THIS NOTE MAY,
BY NOTICE IN WRITING TO MAKER, BE DECLARED TO BE IMMEDIATELY DUE AND PAYABLE
PURSUANT TO THE TERMS OF THE LOAN AGREEMENT, WITHOUT PRESENTMENT, DEMAND,
PROTEST, NOTICE (EXCEPT AS REQUIRED THE LOAN AGREEMENT), OR OTHER REQUIREMENTS
OF ANY KIND, ALL OF WHICH ARE HEREBY EXPRESSLY WAIVED BY MAKER.
9. ATTORNEYS' FEES. In the event it should become necessary to
employ counsel to collect or enforce this Note, Maker agrees to pay the
reasonable attorneys' fees and costs (including those of in-house counsel) of
the holder hereof, irrespective of whether suit is brought, to the extent and as
provided in the Loan Agreement.
10. AMENDMENTS. This Note may not be changed, modified,
amended, or terminated except by a writing duly executed by Maker and the holder
hereof.
11. HEADINGS. Section headings used in this Note are solely
for convenience of reference, shall not constitute a part of this Note for any
other purpose, and shall not affect the construction of this Note.
12. GOVERNING LAW. EXCEPT AS OTHERWISE PROVIDED IN THE LOAN
AGREEMENT: (A) THIS NOTE SHALL BE DEEMED TO HAVE BEEN MADE IN THE STATE OF
CALIFORNIA; AND (B) THE VALIDITY OF THIS NOTE AND THE CONSTRUCTION,
INTERPRETATION AND ENFORCEMENT OF, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE
DETERMINED UNDER, GOVERNED BY, AND CONSTRUCTED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF CALIFORNIA.
13. WAIVER OF TRIAL BY JURY. MAKER, TO THE EXTENT IT MAY
LEGALLY DO SO, HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM,
DEMAND, ACTION, CAUSE OF ACTION, OR PROCEEDING ARISING UNDER OR WITH RESPECT TO
THIS NOTE, OR IN ANY WAY CONNECTED WITH, OR RELATED TO, OR INCIDENTAL TO, THE
DEALINGS OF MAKER, AND PAYEE, WITH RESPECT TO THIS NOTE, OR THE TRANSACTIONS
RELATED HERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND
IRRESPECTIVE OF WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE. TO THE EXTENT
IT MAY LEGALLY DO SO, MAKER HEREBY AGREES THAT ANY SUCH CLAIM, DEMAND, ACTION,
CAUSE OF ACTION, OR PROCEEDING SHALL BE DECIDED BY A COURT TRIAL WITHOUT A JURY
AND THAT
2
<PAGE> 3
PAYEE MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT
AS WRITTEN EVIDENCE OF THE CONSENT OF MAKER TO WAIVER OF ITS RIGHT TO TRIAL BY
JURY.
Dated as of February 12, 1998.
UGLY DUCKLING CORPORATION,
a Delaware corporation
By:_________________________________
Name: Steven P. Johnson
Title: Senior Vice President and
General Counsel
3
<PAGE> 1
Exhibit 4(b)
UGLY DUCKLING CORPORATION
WARRANT AGREEMENT
THIS WARRANT AGREEMENT (the "Agreement"), dated as of February 12,
1998, is between UGLY DUCKLING CORPORATION, a Delaware corporation (the
"Company"), and each of the Lenders (as defined below).
WHEREAS, the Company has entered into a Loan Agreement dated as of
February 12, 1998 (the "Loan Agreement"), by and among the Company and the
lenders named therein (the "Lenders"), pursuant to which the Lenders will make
term loans to the Company, all as set forth in, and subject to the terms and
conditions of, the Loan Agreement; and
WHEREAS, as a condition precedent to the execution and delivery of the
Loan Agreement, the Company has agreed to issue to the Lenders warrants (the
"Warrants") to purchase shares of common stock, $.001 par value per share
("Common Stock"), of the Company, subject to the terms and conditions of this
Agreement.
NOW, THEREFORE, in consideration of the promises and the mutual
agreements herein set forth, the parties agree as follows:
Section 1. ISSUANCE OF WARRANTS AND FORM OF WARRANTS.
(a) Subject to the terms and conditions hereof, the Company shall issue
to the Lenders and the Lenders shall accept from the Company, 500,000 Warrants
substantially in the form of Exhibit A hereto. Each Lender shall be issued the
number of Warrants set forth beside such Lender's name on Exhibit B hereto.
(b) Each Warrant shall entitle the registered holder of the certificate
representing such Warrant to purchase upon the exercise thereof one share of
Common Stock, subject to the adjustments provided for in Section 8 hereof, at
any time until the later of (i) 1:30 p.m., Phoenix, Arizona time, on February
12, 2001 or (ii) such time as the Notes issued pursuant to the Loan Agreement
have been paid in full, unless earlier redeemed pursuant to Section 10 hereof.
(c) The Warrant certificates shall be in registered form only. Each
Warrant certificate shall be dated as of the date of issuance thereof (whether
upon initial issuance or upon transfer or exchange), and shall be executed on
behalf of the Company by the manual signature of its President or a Vice
President, and attested to by the manual signature of its Secretary or an
Assistant Secretary. In case any officer of the Company who shall have signed
any Warrant certificate shall cease to be such officer of the Company prior to
the issuance thereof, such Warrant certificate may nevertheless be issued and
delivered with the same force and effect as though the person who signed the
same had not ceased to be such officer of the Company.
<PAGE> 2
Section 2. EXERCISE OF WARRANTS, DURATION AND WARRANT PRICE. Subject to
the provisions of this Agreement, each registered holder of one or more Warrant
certificates shall have the right, which may be exercised as provided in such
Warrant certificates, to purchase from the Company (and the Company shall issue
and sell to such registered holder) the number of shares of Common Stock or
other securities to which the Warrants represented by such certificates are at
the time entitled hereunder.
(a) Each Warrant not exercised by its expiration date shall become
void, and all rights thereunder and all rights in respect thereof under this
Agreement shall cease on such date.
(b) A Warrant may be exercised by the surrender of the certificate
representing such Warrant to the Company with the subscription form set forth on
the reverse thereof duly executed and properly endorsed with the signatures
properly guaranteed, and upon payment in full to the Company of the Warrant
Price (as hereinafter defined) for the number of shares of Common Stock or other
securities as to which the Warrant is exercised. Such Warrant Price shall be
paid in full in cash, or by certified check or bank draft payable in United
States currency to the order of the Company or by surrender of this Warrant to
the Company together with a notice of cashless exercise, in which event the
Company shall issue to the registered holder the number of shares of Common
Stock determined as follows:
X = Y x (A-B)/A
X = the number of shares of Common Stock to be issued
to the registered holder.
Y = the number of shares of Common Stock with respect
to which the Warrant is being exercised.
A = the Current Market Price determined as of the
date of exercise.
B = the Warrant Price.
(c) Subject to adjustment in accordance with Section 8 hereof, the
price per share of Common Stock at which each Warrant may be exercised (the
"Warrant Price") shall be Ten Dollars ($10.00).
(d) Subject to the further provisions of this Section 2 and of Section
5 hereof, upon surrender of Warrant certificates and payment of the Warrant
Price, the Company shall issue and cause to be delivered, as promptly as
practicable to or upon the written order of the registered holder of such
Warrants and in such name or names as such registered holder may designate,
subject to applicable securities laws, a certificate or certificates for the
number of securities so purchased upon the exercise of such Warrants, together
with cash, as provided in Section 9 of this Agreement, in respect of any
fraction of a share or security otherwise issuable upon such surrender. All
shares of
2
<PAGE> 3
Common Stock or other such securities issued upon the exercise of a Warrant
shall be duly authorized, validly issued, fully paid and nonassessable and free
and clear of all liens and other encumbrances.
(e) Certificates representing such securities shall be deemed to have
been issued and any person so designated to be named therein shall be deemed to
have become a holder of record of such securities as of the date of the
surrender of such Warrants and payment of the Warrant Price. The rights of
purchase represented by each Warrant certificate shall be exercisable, at the
election of the registered holder thereof, either as an entirety or from time to
time for part of the number of securities specified therein and, in the event
that any Warrant certificate is exercised in respect of less than all of the
securities specified therein at any time prior to the expiration date of the
Warrant certificate, a new Warrant certificate or certificates will be issued to
such registered holder for the remaining number of securities specified in the
Warrant certificate so surrendered.
Section 3. COUNTERSIGNATURE AND REGISTRATION.
(a) The Company shall maintain books (the "Warrant Register") for the
registration and the registration of transfer of the Warrants. Upon the initial
issuance of the Warrants, the Company shall issue and register the Warrants in
the names of the Lenders in accordance with Section 1 hereof.
(b) Prior to due presentment for registration of transfer of any
Warrant certificate, the Company may deem and treat the person in whose name
such Warrant certificate shall be registered upon the Warrant Register (the
"registered holder") as the absolute owner of such Warrant certificate and of
each Warrant represented thereby (notwithstanding any notation of ownership or
other writing on the Warrant certificate made by anyone other than the Company),
for the purpose of any exercise thereof, of any distribution or notice to the
holder thereof, and for all other purposes, and the Company shall not be
affected by any notice to the contrary.
Section 4. TRANSFER AND EXCHANGE OF WARRANTS.
(a) The Company shall register the transfer, from time to time, of any
outstanding Warrant or portion thereof upon the Warrant Register, upon surrender
of the certificate evidencing such Warrant for transfer, properly endorsed with
signatures properly guaranteed and accompanied by appropriate instructions for
transfer. Upon any such transfer, a new Warrant certificate representing an
equal aggregate number of Warrants so transferred shall be issued to the
transferee and the surrendered Warrant certificate shall be canceled by the
Company. In the event that only a portion of a Warrant is transferred at any
time, a new Warrant certificate representing the remaining portion of the
Warrant will also be issued to the transferring holder. Notwithstanding anything
to the contrary herein, no transfer or exchange may be made except in compliance
with applicable securities laws and Section 12 hereof.
3
<PAGE> 4
(b) Warrant certificates may be surrendered to the Company, together
with a written request for exchange, and thereupon the Company shall issue in
exchange therefor one or more new Warrant certificates as requested by the
registered holder of the Warrant certificate or certificates so surrendered,
representing an equal aggregate number of Warrants.
(c) The Company shall not be required to effect any registration of
transfer or exchange which will result in the issuance of a Warrant certificate
for a fraction of a Warrant.
(d) No service charge shall be made for any exchange or registration of
transfer of Warrant certificates.
Section 5. PAYMENT OF TAXES. The Company will pay any documentary stamp
taxes attributable to the initial issuance or delivery of the shares of Common
Stock or other securities issuable upon the exercise of Warrants; provided,
however, the Company shall not be required to pay any tax or taxes which may be
payable in respect of any transfer of the Warrants or involved in the issuance
or delivery of any Warrant certificate or certificates for shares of Common
Stock in a name other than registered holder of Warrants in respect of which
such shares are issued, and in such case the Company shall not be required to
issue or deliver any certificate for shares of Common Stock or any Warrant
certificate until the person requesting the same has paid to the Company the
amount of such tax or has established to the Company's satisfaction that such
tax has been paid.
Section 6. MUTILATED OR MISSING WARRANTS. In case any of the Warrant
certificates shall be mutilated, lost, stolen or destroyed, the Company may
issue and deliver in exchange and substitution for and upon cancellation of the
mutilated Warrant certificate, or in lieu of and substitution for the Warrant
certificate lost, stolen or destroyed, a new Warrant certificate representing an
equal aggregate number of Warrants, but only upon receipt of evidence
satisfactory to the Company of such loss, theft or destruction of such Warrant
certificate and reasonable indemnity, if requested, also satisfactory to it.
Applicants for such substitute Warrant certificates shall also comply with such
other reasonable conditions and pay such reasonable charges as the Company may
prescribe.
Section 7. RESERVATION OF COMMON STOCK.
(a) There have been reserved, and the Company shall at all times keep
reserved, out of its authorized and unissued shares of Common Stock, a number of
shares sufficient to provide for the exercise of the rights of purchase
represented by the Warrants then outstanding or issuable upon exercise, and the
transfer agent for the Common Stock and every subsequent transfer agent for any
shares of the Company's capital stock issuable upon the exercise of any of the
rights of purchase aforesaid are hereby irrevocably authorized and directed at
all times to reserve such number of authorized and unissued shares as shall be
requisite for such purpose. The Company will keep a copy of this Agreement on
file with the transfer agent for the Common Stock and with every subsequent
transfer agent for any shares of the Company's capital stock issuable upon the
exercise of the rights of purchase represented by the Warrants.
4
<PAGE> 5
(b) The Company will supply such transfer agent with duly executed
certificates and will provide or otherwise make available any cash as provided
in Section 9 of this Agreement. All Warrant certificates surrendered in the
exercise thereby evidenced shall be canceled by the Company. After the
expiration date of the Warrants, no shares of Common Stock shall be subject to
reservation in respect of such Warrants.
Section 8. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES OF COMMON
STOCK. The number and kind of securities purchasable upon the exercise of the
Warrants and the Warrant Price shall be subject to adjustment from time to time
upon the happening of certain events, as follows:
8.1 ADJUSTMENTS. The number of shares of Common Stock or other
securities purchasable upon the exercise of each Warrant and the Warrant Price
shall be subject to adjustment as follows:
(a) If the Company (i) pays a dividend in Common Stock or
makes a distribution in Common Stock or shares convertible in Common Stock, (ii)
subdivides its outstanding Common Stock into a greater number of shares, (iii)
combines its outstanding Common Stock into a smaller number of shares, or (iv)
issues, by reclassification of its Common Stock, other securities of the
Company, then the number and kind of shares of Common Stock or other securities
purchasable upon exercise of a Warrant immediately prior thereto will be
adjusted so that the holder of a Warrant will be entitled to receive the kind
and number of shares of Common Stock or other securities of the Company that
such holder would have owned and would have been entitled to receive immediately
after the happening of any of the events described above, had the Warrant been
exercised immediately prior to the happening of such event or any record date
with respect thereto. Any adjustment made pursuant to this subsection 8.1(a)
will become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.
(b) If the Company issues or sell any shares of Common Stock
or any rights or warrants to purchase shares of Common Stock or securities
convertible into Common Stock at a price per share of Common Stock that is less
than 90% of the Daily Market Price (as defined in Section 10(e) hereof) of the
Common Stock as of the trading day immediately preceding (or the same day if
trading has been completed for such day) of such issuance or sale, the Warrant
Price shall be reduced by multiplying the Warrant Price in effect on the date of
issuance of such shares, warrants, rights or convertible securities by a
fraction, the denominator of which shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding on the date of issuance of such
shares, rights, warrants or convertible securities plus the number of additional
shares of Common Stock offered for subscription or purchase or issuable on
conversion, and the numerator of which shall be the number of shares of Common
Stock (excluding treasury shares, if any) outstanding on the date of issuance of
such shares, rights, warrants or convertible securities plus the number of
shares which the aggregate offering price of the total number of shares so
offered, issued or issuable, or, with respect to convertible securities, the
aggregate consideration received or to be received by the Company for the
convertible securities, would purchase at such Daily Market Price. Such
5
<PAGE> 6
adjustment shall be made successively whenever such shares, rights, warrants or
convertible securities are issued and shall become effective immediately after
the date of such issuance. However, upon the expiration of any right or warrant
to purchase Common Stock or conversion right, the issuance of which resulted in
an adjustment in the Warrant Price, if any such right, warrant or conversion
right shall expire and shall not have been exercised, the Warrant Price shall
immediately upon such expiration be recomputed and effective immediately upon
such expiration be increased to the price which it would have been (but
reflecting any other adjustments in the Warrant Price made pursuant to the
provisions of this Section 8.1(b) after the issuance of such rights, warrants or
convertible securities) had the adjustment of the Warrant Price upon the
issuance of such rights, warrants or convertible securities been made on the
basis of offering for subscription or purchase only that number of shares of
Common Stock actually purchased upon the exercise of such rights or warrants
actually exercised or the conversion of the convertible securities actually
converted.
(c) If the Company distributes to all holders of Common Stock
evidences of its indebtedness or assets (excluding cash dividends or cash
distributions paid out of earned surplus and made in the ordinary course of
business) or rights to subscribe for or purchase any security, then in each such
case the Warrant Price shall be determined by multiplying the Warrant Price in
effect prior to the record date fixed for determination of stockholders entitled
to receive such distribution by a fraction, the denominator of which shall be
the Daily Market Price of Common Stock determined as of the record date
mentioned above, and the numerator of which shall be such Daily Market Price of
the Common Stock, less the then fair market value (as determined by the Board of
Directors of the Company in good faith, whose determination shall be conclusive
if made in good faith; provided, however, that in the event of a distribution or
series of related distributions exceeding 10% of the net assets of the Company,
then such fair market value shall be determined by a nationally recognized or
major regional investment banking firm or firm of independent certified public
accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Company) selected in good faith by the
Board of Directors of the Company, and in either case shall be described in a
statement provided to Warrant holders) of the portion of assets or evidences of
indebtedness so distributed or such subscription rights applicable to one share
of Common Stock. Such adjustment shall be made successively whenever any such
distribution is made and shall become effective immediately after the record
date mentioned above. In the event such distribution is not made, the Warrant
Price shall again be adjusted to the number that was in effect immediately prior
to such record date.
(d) No adjustment in the number of shares or securities
purchasable pursuant to the Warrants shall be required unless such adjustment
would require an increase or decrease of at least one percent in the number of
shares or securities then purchasable upon the exercise of the Warrants,
provided, however, that any adjustment which by reason of this subsection 8.1(d)
is not required to be made shall be carried forward and taken into account in
any subsequent adjustments.
6
<PAGE> 7
(e) The Company may, at its option, at any time during the
term of the Warrant, reduce the then current Warrant Price to any amount,
consistent with applicable law, deemed appropriate by the Board of Directors of
the Company.
(f) Whenever the number of shares or securities purchasable
upon the exercise of the Warrants is adjusted, as herein provided, the Warrant
Price for shares payable upon exercise of the Warrants shall be adjusted by
multiplying such Warrant Price immediately prior to such adjustment by a
fraction, the numerator of which shall be the number of shares purchasable upon
the exercise of the Warrant immediately prior to such adjustment, and the
denominator of which shall be the number of shares so purchasable immediately
thereafter.
(g) Whenever the number of shares or securities purchasable
upon the exercise of the Warrants and/or the Warrant Price is adjusted as herein
provided, the Company shall cause to be promptly mailed to each registered
holder of a Warrant by first class mail, postage prepaid, notice of such
adjustment and a certificate of the chief financial officer of the Company
setting forth the number of shares or securities purchasable upon the exercise
of the Warrants after such adjustment, the Warrant Price as adjusted, a brief
statement of the facts requiring such adjustment and the computation by which
such adjustment was made.
(h) For the purpose of this subsection 8.1, the term "Common
Stock" shall mean (i) the class of stock designated as the voting Common Stock
of the Company at the date of this Agreement, or (ii) any other class of stock
or securities resulting from successive changes or reclassifications of such
Common Stock consisting solely of changes in par value, or from par value to no
par value, or from no par value to par value. In the event that at any time, as
a result of an adjustment made pursuant to this Section 8, a registered holder
shall become entitled to purchase any securities of the Company other than
shares of Common Stock, thereafter the number of such other securities so
purchasable upon exercise of the Warrants shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the shares contained in this Section 8.
8.2 NO ADJUSTMENT FOR DIVIDENDS. Except as provided in subsection 8.1,
no adjustment in respect of any dividends or distributions shall be made during
the term of the Warrants or upon the exercise of the Warrants.
8.3 NO ADJUSTMENT IN CERTAIN CASES. No adjustments are required to be
made pursuant to Section 8 hereof in connection with the issuance of shares of
Common Stock or the Warrants (or the underlying shares of Common Stock) in the
transactions contemplated by this Agreement.
8.4 PRESERVATION OF PURCHASE RIGHTS UPON RECLASSIFICATION,
CONSOLIDATION, ETC. In case of any consolidation of the Company with or merger
of the Company into another corporation or in case of any sale or conveyance to
another corporation of the property, assets or business of the Company as an
entirety or substantially as an entirety, the Company or such successor or
purchasing corporation, as the case may be, shall execute an agreement with the
registered holders of the
7
<PAGE> 8
Warrants providing such holders with the right thereafter, upon payment of the
Warrant Price in effect immediately prior to such action, to purchase, upon
exercise of each Warrant, the kind and amount of shares and other securities and
property which it would have owned or have been entitled to receive after the
happening of such consolidation, merger, sale or conveyance had each Warrant
been exercised immediately prior to such action. Any such agreements referred to
in this subsection 8.4 shall provide for adjustments, which shall be as nearly
equivalent as may be practicable to the adjustments provided for in Section 8
hereof. The provisions of this subsection 8.4 shall similarly apply to
successive consolidations, mergers, sales, or conveyances.
8.5 PAR VALUE OF SHARES OF COMMON STOCK. Before taking any action that
would cause an adjustment reducing the Warrant Price below the then par value of
the Common Stock issuable upon exercise of the Warrants, the Company will take
any corporate action which may, in the opinion of its counsel, be necessary in
order that the Company may validly and legally issue fully paid and
nonassessable Common Stock at such adjusted Warrant Price.
8.6 INDEPENDENT PUBLIC ACCOUNTANTS. The Company may but shall not be
required to retain a firm of independent public accountants of recognized
regional or national standing (which may be any such firm regularly employed by
the Company) to make any computation required under this Section 8, and a
certificate signed by such firm shall be conclusive evidence of the correctness
of any computation made under this Section 8 and the Company shall cause to be
promptly mailed to each registered holder of a Warrant by first class mail,
postage prepaid, a copy of such certificate.
8.7 STATEMENT ON WARRANT CERTIFICATES. Irrespective of any adjustments
in the Warrant Price or the number of securities issuable upon exercise of
Warrants, Warrant certificates theretofore or thereafter issued may continue to
express the same price and number of securities as are stated in the similar
Warrant certificates initially issuable pursuant to this Agreement. However, the
Company may, at any time in its sole discretion (which shall be conclusive),
make any change in the form of Warrant certificate that it may deem appropriate
and that does not affect the substance thereof; and any Warrant certificate
thereafter issued, whether upon registration of, transfer of, or in exchange or
substitution for, an outstanding Warrant certificate, may be in the form so
changed.
8.8 NO RIGHTS AS STOCKHOLDER; NOTICES TO HOLDERS OF WARRANTS. If, at
any time prior to the expiration of a Warrant and prior to its exercise, any one
or more of the following events shall occur:
(a) any action that would require an adjustment pursuant to
subsection 8.1 or 8.4 hereof; or
(b) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation, merger or sale of its property,
assets and business as an entirety or substantially as an entirety) shall be
proposed; then the Company must give notice in writing of such event to the
registered holders of the Warrants, as provided in Section 14 hereof, at least
20 days, to the extent practicable, prior to the date fixed as a record date or
the date of closing the transfer
8
<PAGE> 9
books for the determination of the stockholders entitled to any relevant
dividend, distribution, subscription rights or other rights or for the
determination of stockholders entitled to vote on such proposed dissolution,
liquidation or winding up. Such notice must specify such record date or the date
of closing the transfer books, as the case may be. Failure to mail or receive
such notice or any defect therein will not affect the validity of any action
taken with respect thereto.
Section 9. FRACTIONAL INTERESTS. The Company is not required to issue
fractional shares of Common Stock on the exercise of a Warrant. If any fraction
of a share of Common Stock would, except for the provisions of this Section 9,
be issuable on the exercise of a Warrant (or specified portion thereof), the
Company will in lieu thereof pay an amount in cash equal to the then Current
Market Price multiplied by such fraction. For purposes of this Agreement, the
term "Current Market Price" means (i) if the Common Stock is listed for
quotation on the Nasdaq National Market or the Nasdaq SmallCap Market or on a
national securities exchange, the average for the 10 consecutive trading days
immediately preceding the date in question of the daily per share closing prices
of the Common Stock as quoted by the Nasdaq National Market or the Nasdaq
SmallCap Market or on the principal stock exchange on which it is listed, as the
case may be, whichever is the higher, or (ii) if the Common Stock is traded in
the over-the-counter market and is not listed for quotation on the Nasdaq
National Market or the Nasdaq SmallCap Market nor on any national securities
exchange, the average of the per share closing bid prices of the Common Stock on
the 10 consecutive trading days immediately preceding the date in question, as
reported by Nasdaq or an equivalent generally accepted reporting service. The
closing price referred to in clause (i) above shall be the last reported sale
price or, in case no such reported sale takes place on such day, the average of
the reported closing bid and asked prices, in either case as quoted by the
Nasdaq National Market or the Nasdaq SmallCap Market or on the national
securities exchange on which the Common Stock is then listed. For purposes of
clause (ii) above, if trading in the Common Stock is not reported by Nasdaq, the
bid price referred to in said clause shall be the lowest bid price as reported
on the OTC Bulletin Board or in the "pink sheets" published by National
Quotation Bureau, Incorporated.
Section 10. REDEMPTION.
(a) The then outstanding Warrants may be redeemed, at the option of the
Company, at $.10 per share of Common Stock purchasable upon exercise of such
Warrants, at any time after the average Daily Market Price per share of the
Common Stock for a period of at least 20 consecutive trading days ending not
more than fifteen (15) days prior to the date of the notice given pursuant to
Section 10(b) hereof has equaled or exceeded $16.00, and prior to expiration of
the Warrants. The Daily Market Price of the Common Stock will be determined by
the Company in the manner set forth in Section 10(e) as of the end of each
trading day (or, if no trading in the Common Stock occurred on such day, as of
the end of the immediately preceding trading day in which trading occurred). All
outstanding Warrants must be redeemed if any are redeemed, and any right to
exercise an outstanding Warrant shall terminate at 1:30 p.m. (Phoenix, Arizona
time) on the date fixed for redemption. Trading day means a day in which trading
of securities occurred on the Nasdaq National Market.
9
<PAGE> 10
(b) The Company may exercise its right to redeem the Warrants only by
giving the notice set forth in the following sentence. If the Company exercises
its right to redeem, it shall give notice to the registered holders of the
outstanding Warrants by mailing to such registered holders a notice of
redemption, first class, postage prepaid, at their addresses as they shall
appear on the records of the Company. Any notice mailed in the manner provided
herein will be conclusively presumed to have been duly given whether or not the
registered holder actually receives such notice.
(c) The notice of redemption must specify the redemption price, the
date fixed for redemption (which must be at least 30 days after the date such
notice is mailed), the place where the Warrant certificates must be delivered
and the redemption price paid, and that the right to exercise the Warrant will
terminate at 1:30 P.M. (Phoenix, Arizona time) on the date fixed for redemption.
(d) Appropriate adjustment shall be made to the redemption price and to
the minimum Daily Market Price prerequisite to redemption set forth in Section
10(a) hereof, in each case on the same basis as provided in Section 8 hereof
with respect to adjustment of the Warrant Price.
(e) For purposes of this Agreement, the term "Daily Market Price" means
(i) if the Common Stock is quoted on the Nasdaq National Market or the Nasdaq
SmallCap Market or on a national securities exchange, the daily per share
closing price of the Common Stock as quoted on the Nasdaq National Market or the
Nasdaq SmallCap Market or on the principal stock exchange on which it is listed
on the trading day in question, as the case may be, whichever is the higher, or
(ii) if the Common Stock is traded in the over-the-counter market and not quoted
on the Nasdaq National Market or the Nasdaq SmallCap Market nor on any national
securities exchange, the closing bid price of the Common Stock on the trading
day in question, as reported by Nasdaq or an equivalent generally accepted
reporting service. The closing price referred to in clause (i) above shall be
the last reported sale price or, in case no such reported sale takes place on
such day, the average of the reported closing bid and asked prices, in either
case on the Nasdaq National Market or the Nasdaq SmallCap Market or on the
national securities exchange on which the Common Stock is then listed. For
purposes of clause (ii) above, if trading in the Common Stock is not reported by
Nasdaq, the bid price referred to in said clause shall be the lowest bid price
as quoted on the OTC Bulletin Board or reported in the "pink sheets" published
by National Quotation Bureau, Incorporated.
(f) On the redemption date, each Warrant will be automatically
converted into the right to receive the redemption price and the Company will no
longer honor any purported exercise of a Warrant. On or before the redemption
date, the Company will deposit sufficient funds for the purpose of redeeming all
of the outstanding unexercised Warrants in an interest-bearing, segregated
account for payment to holders of Warrants upon surrender of Warrant
Certificates in exchange for the redemption price therefor. Funds remaining in
such account on the date three years from the redemption date will be returned
to the Company.
Section 11. RIGHTS AS WARRANTHOLDERS. Nothing contained in this
Agreement or in any of the Warrants shall be construed as conferring upon the
holders thereof, as such, any of the rights of stockholders of the Company,
including, without limitation, the right to receive dividends or other
10
<PAGE> 11
distributions, to exercise any preemptive rights, to vote or to consent or to
receive notice as stockholders in respect of the meetings of stockholders or the
election of directors of the Company or any other matter.
Section 12. RESTRICTIONS ON TRANSFER; REGISTRATION RIGHTS.
(a) Each holder of a Warrant agrees that prior to making any
disposition or transfer of the Warrants or shares issuable upon exercise of the
Warrants ("Shares"), unless a registration statement under the Securities Act of
1933, as amended (the "Securities Act"), is in effect with regard thereto and
the disposition may be effected in accordance therewith and with applicable
state securities laws, the holder shall give written notice to the Company
describing briefly the manner in which any such proposed disposition or transfer
is to be made; and no such disposition shall be made except pursuant to an
exemption from the registration requirements of all applicable federal and state
securities laws.
(b) Each certificate evidencing the Warrants shall bear a legend in
substantially the following form, and each certificate evidencing Shares
issuable upon exercise of the Warrants shall bear such a legend until such time
as such Shares have been sold pursuant to a registration statement contemplated
in subsection (c) or (d) below or unless, in the opinion of legal counsel to the
Company, such legend is not required in order to establish compliance with any
provisions of applicable security laws:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS AND MAY NOT BE SOLD, EXCHANGED, HYPOTHECATED
OR OTHERWISE TRANSFERRED IN ANY MANNER EXCEPT IN COMPLIANCE
WITH SECTION 12 OF THE WARRANT AGREEMENT DATED AS OF FEBRUARY
12, 1998, AS THE SAME MAY BE AMENDED FROM TIME TO TIME.
(c) Subject to the next sentence below, beginning on the date that the
Warrants are exercised, if the Company proposes to file with the Commission a
registration statement with respect to equity securities of the Company (other
than as to securities issued pursuant to an employee benefit plan or as to a
transaction subject to Rule 145 promulgated under the Securities Act or for
which a Form S-4 Registration Statement could be used), it shall, at least 30
days prior to such filing, give written notice of such proposed filing to the
holders of Warrants and Shares which bear a legend as contemplated in Section
12(b) above and which shall not have previously been included in a registration
statement filed under this Section 12(c) or Section 12(d), at their respective
addresses as they appear on the records of the Company or the Company, and shall
offer to include and shall include, subject to the provisions of this Section
12(c), in such filing any proposed disposition of such Shares upon receipt by
the Company, not less than 10 days prior to the proposed filing date, of a
request therefor setting forth the facts with respect to such proposed
disposition and all other
11
<PAGE> 12
information with respect to the holders of such Shares requested to be included
in such filing as shall be reasonably necessary to be included in such
Registration Statement. Notwithstanding the above, after such time as the
holders shall have been given two opportunities to include their Shares in a
Registration Statement of the Company pursuant to the immediately preceding
sentence, and all securities of holders who shall have requested such inclusion
in accordance herewith and who have not withdrawn such request prior to the
filing of such Registration Statement have been included in such a Registration
Statement which shall have become effective and such securities shall have been
effectively registered under the Securities Act, the Company will have no
further obligation to such holders under this Section 12(c) and the Shares of
such holders that have not been included previously in a Registration Statement
under this Section 12(c) will have no further registration rights under Section
12(c) of this Agreement. In the event that (i) the managing underwriter for any
such offering advises the Company in writing that the inclusion of such Shares
in the offering would be detrimental to the offering or (ii) in the event that
there is no managing underwriter, if, in the good faith judgment of the Board of
Directors of the Company, inclusion of the Shares in the registration would be
seriously detrimental to the Company, then, such Shares shall not be included in
the Registration Statement, provided that no other shares of the Company's
Common Stock are included in the registration pursuant to any other piggyback
registration rights granted to others. In the event that Shares requested to be
included in an offering are not included in accordance with the immediately
preceding sentence, any notice given to holders of Warrants and Shares hereunder
with respect to such offering shall not be counted against the limitation
provided for in the second sentence of this Section 12(c).
(d) In addition to any Registration Statement pursuant to Section 12(c)
hereof, after written notice upon exercise (the "Request") by the holders of at
least 50% of the shares of Common Stock which have been (or may be) issued upon
exercise of the Warrants, the Company will, as promptly as practicable (but in
any event within 60 days), prepare and file at its own expense a Registration
Statement with the Commission and appropriate Blue Sky authorities sufficient to
permit the public offering of the shares of Common Stock underlying the
Warrants, and will use reasonable efforts at its own expense through its
officers, directors, auditors and counsel, in all ways necessary or advisable,
to cause such Registration Statement to become effective as quickly as
practicable and to maintain such effectiveness so as to permit resale of the
shares of Common Stock covered by the Request until the earlier of the time that
all such shares of Common Stock has been sold or the expiration of 120 days from
the effective date of the Registration Statement; provided, however, that the
Company shall only be obligated to file one such Registration Statement under
this Section 12(d). The Company shall not be required to effect a registration
pursuant to this Section 12(d) if the Company shall furnish to holders
requesting a registration statement pursuant to this Section 12(d), a
certificate signed by the Chairman of the Board stating that in the good faith
judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its shareholders for such registration statement
to be effected at such time, in which event the Company shall have the right to
defer such filing for a period of not more than ninety (90) days after receipt
of the request of the initiating holders; provided that such right to delay a
request shall be exercised by the Company not more than once in any twelve (12)
month period.
12
<PAGE> 13
(e) All fees, disbursements, and out-of-pocket expenses incurred in
connection with the filing of any Registration Statement under Section 12(c)
hereof and in complying with applicable securities and Blue Sky laws shall be
borne by the Company, provided, however, that any expenses of the holders of the
Warrants or the Shares, including but not limited to attorneys' fees and
discounts and commissions, shall be borne by such holders. The Company at its
expense will supply the holders of the Shares included in a Registration
Statement with copies of such Registration Statement and the prospectus or
offering circular included therein in such quantities as may be reasonably
requested by such holders.
(f) Each holder of Shares to be included in a Registration Statement
pursuant to this Section 12 agrees to reasonably cooperate with the Company and
to provide the Company on its request with all information concerning such
holder and his Warrants and Shares that may reasonably be requested by the
Company in order for the Company to perform its obligations under this Section
12.
(g) The registration rights provided pursuant to Section 12(c) and
Section 12(d) above are subject to certain registration rights granted to
SunAmerica Life Insurance Company and its assignees pursuant to that certain
Amended and Restated Registration Rights Agreement entered into as of June 21,
1996 between the Company and SunAmerica Life Insurance Company. Specifically,
the Amended and Restated Registration Rights Agreement entered into as of June
21, 1996 provides that the holders of registrable securities under that
agreement shall have the right to have included in any piggyback registration by
the Company any registrable securities requested by them to be so included in
such piggyback registration prior to the inclusion of any securities requested
to be registered by any third parties entitled to any other registration rights,
including the registration rights granted hereunder.
Section 13. INDEMNIFICATION.
(a) In the event of the filing of any Registration Statement with
respect to the Shares pursuant to Section 12 above, the Company agrees to
indemnify and hold harmless the holders of such Shares (for purposes of this
Section 13, references to any holder of Shares shall refer only to such holders
who have agreed to be bound by this Section 13), and each person who controls
such holders within the meaning of the Securities Act and such holders'
officers, directors, managers, members, partners, and principle equity holders
(collectively, "Indemnitees") against all losses, claims, damages, expenses and
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees and expenses), to which such Indemnitees may become subject,
under the Securities Act or otherwise, insofar as such losses, claims, damages,
expenses or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material fact
contained in any such Registration Statement, or any related preliminary
prospectus, final prospectus, offering circular, notification or amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances in
which
13
<PAGE> 14
they were made, not misleading; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage,
expenses, or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in such
Registration Statement, preliminary prospectus, final prospectus, offering
circular, notification or amendment or supplement thereto in reliance upon, and
in conformity with, written information furnished to the Company by any such
holder specifically for use in the preparation thereof and, provided further,
that the indemnity agreement provided in this Section 13(a) with respect to any
preliminary prospectus shall not inure to the benefit of any holder of Warrants
or Shares from whom the person asserting any losses, claims, damages,
liabilities or actions based upon any untrue statement or alleged untrue
statement of material fact or omission or alleged omission to state therein a
material fact purchased Warrants or Shares, if a copy of the prospectus in which
such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Securities Act and the rules and regulations thereunder, unless
such failure is the result of non-compliance by the Company with the last
sentence of Section 12(f) hereof. This indemnity will be in addition to any
liability which the Company may otherwise have.
(b) Each holder of a Warrant and each holder of a Share agrees that he
will indemnify and hold harmless the Company, each other person referred to in
subparts (1), (2) and (3) of Section 11(a) of the Securities Act in respect of
the Registration Statement, each officer of the Company, and each person who
controls the Company within the meaning of the Securities Act, against any
losses, claims, damages or liabilities (which shall, for all purposes of this
Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys' fees) to which the Company or any such
director, officer or controlling person may become subject under the Securities
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in any such
Registration Statement, or any related preliminary prospectus, final prospectus,
offering circular, notification or amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but in each case only to the extent that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in such Registration Statement, preliminary prospectus, final prospectus,
offering circular, notification or amendment or supplement thereto in reliance
upon, and in conformity with, written information furnished to the Company by
such holder specifically for use in the preparation thereof. This indemnity will
be in addition to any liability which the holder may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
13 of notice of the commencement of any action, such indemnified party will, if
a claim in respect thereof is to be made against the indemnifying party under
this Section 13, notify the indemnifying party of the commencement thereof. No
indemnification provided for in this Section 13 shall be available to any party
who shall fail to give the notice to the extent the party to whom such notice
was not given was materially prejudiced by the failure to give the notice, but
the omission so to notify the indemnifying party will not relieve the
indemnifying party or parties from any liability which it may have to any
14
<PAGE> 15
indemnified party for contribution otherwise than as to the particular item as
to which indemnification is then being sought solely pursuant to this Section
13. In case any such action is brought against any indemnified party, and it
notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, reasonably assume
the defense thereof, subject to the provisions herein stated and after notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section 13 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation unless the indemnifying
party shall not pursue the action to its final conclusion. The indemnified party
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall not be at the expense of the indemnifying party. No settlement of any
action against an indemnified party shall be made without the consent of the
indemnifying party, which shall not be unreasonably withheld in light of all
factors of importance to such indemnified party.
Section 14. NOTICES. Notices or demands authorized by this Agreement to
be given or made by the holder of any Warrant certificate to or on the Company
shall be sufficiently given or made if sent by registered or certified mail,
addressed as follows (and shall be deemed given upon receipt):
Ugly Duckling Corporation
2525 East Camelback Road
Suite 1150
Phoenix, Arizona 85016
Attention: Steven P. Johnson, Senior Vice President,
General Counsel and Secretary
With a copy to:
Steven D. Pidgeon
Snell & Wilmer L.L.P.
One Arizona Center
Phoenix, Arizona 85004-0001
Notices or demands authorized by this Agreement to be given or made by the
Company to the holder of any Warrant certificate shall be sufficiently given or
made if sent by first class mail, postage prepaid, addressed to such holder at
the address of such holder as shown in the Warrant Register.
Section 15. SUPPLEMENTS AND AMENDMENTS. This Agreement may be amended
by the Company and the holder or holders of a majority of the outstanding
Warrants representing a majority of the shares of Common Stock underlying such
Warrants; provided, however, that without the
15
<PAGE> 16
consent of each holder of a Warrant, there can be no increase of the Warrant
Price or reduction of the exercise period for such holder's Warrants.
Section 16. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the registered holders of the
Warrants will bind and inure to the benefit of their respective successors and
assigns hereunder.
Section 17. GOVERNING LAW. This Agreement will be deemed to be a
contract made under the laws of the State of California and for all purposes
will be construed in accordance with the laws of said State.
Section 18. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement will
be construed to give to any person or corporation other than the Company and the
registered holders of the Warrants any legal or equitable right, remedy or claim
under this Agreement. This Agreement is for the sole and exclusive benefit of
the Company and the registered holders of the Warrants.
Section 19. COUNTERPARTS. This Agreement may be executed in
counterparts and each of such counterparts will for all purposes be deemed to be
an original, and all such counterparts will together constitute but one and the
same instrument.
Section 20. DESCRIPTIVE HEADINGS. The descriptive headings of the
several Sections of this Agreement are inserted for convenience only and do not
control or affect the meaning or construction of any of the provisions hereof.
16
<PAGE> 17
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, as of the day and year first above written.
UGLY DUCKLING CORPORATION
By: /s/ Steven P. Johnson
Name: Steven P. Johnson
Its: Senior Vice President and General Counsel
ARBCO ASSOCIATES, L.P.
By: KAIM Non-Traditional, L.P.
Its: General Partner
By: Kayne Anderson Investment Management, Inc.
Its: General Partner
By: /s/ Richard A. Kayne
___________________________________
Title: Authorized Officer
________________________________
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn:
Telephone: (310) 284-6483
Telecopy : (310) 284-6444
KAYNE ANDERSON NON-TRADITIONAL
INVESTMENTS, L.P.
By: Kayne Anderson Non-Traditional, L.P.
Its: General Partner
By: Kayne Anderson Investment Management, Inc.
Its: General Partner
By: /s/ Richard A. Kayne
___________________________________
Name: Richard A. Kayne
_________________________________
Title: Authorized Officer
________________________________
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn:
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
17
<PAGE> 18
OFFENSE GROUP ASSOCIATES, L.P.
By: Kayne Anderson Non-Traditional, L.P.
Its: General Partner
By: Kayne Anderson Investment Management, Inc.
Its: General Partner
By: /s/ RICHARD A. KAYNE
_________________________________
Name: Richard A. Kayne
______________________________
Title: Authorized Officer
________________________________
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn:
Telephone: (310) 284-6483
Telecopy : (310) 284-6444
OPPORTUNITY ASSOCIATES,
LIMITED PARTNERSHIP
By: Kayne Anderson Non-Traditional, L.P.
Its: General Partner
By: Kayne Anderson Investment Management, Inc.
Its: General Partner
By: /s/ RICHARD A. KAYNE
_____________________________
Name: Richard A. Kayne
__________________________
Title: Authorized Officer
____________________________
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn:
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
18
<PAGE> 19
KAYNE ANDERSON OFFSHORE LIMITED
By: /s/ John Sutlic
------------------------------
Name: John Sutlic
Title: Authorized Officer
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn:
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
GLACIER WATER SERVICES, INC.
By: /s/ Jerry Welch
------------------------------
Name: Jerry Welch
Title: Authorized Officer
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn:
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
PARADIGM INSURANCE COMPANY
By: /s/ Frank Arkfeld
------------------------------
Name: Frank Arkfeld
Title: Authorized Officer
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn:
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
FOREMOST INSURANCE COMPANY
By: /s/ Donald Welsh
------------------------------
Name: Donald Welsh
Title: Authorized Officer
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn:
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
TOPA INSURANCE COMPANY
By: /s/ Nosh Marfatia
------------------------------
Name: Nosh Marfatia
Title: Authorized Officer
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn:
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
19
<PAGE> 20
EXHIBIT A
Warrant No. ____
WARRANT TO PURCHASE ________ SHARES OF COMMON STOCK
VOID AFTER 1:30 P.M.,
PHOENIX, ARIZONA TIME, ON FEBRUARY 12, 2001
OR SUCH LATER DATE SET FORTH HEREIN
UGLY DUCKLING CORPORATION
This certifies that, for value received ________________________, the
registered holder hereof or assigns (the "Holder"), is entitled to purchase from
UGLY DUCKLING CORPORATION, a Delaware corporation (the "Company"), at any time
after February 12, 1998, and before the later of (i) 1:30 p.m., Phoenix, Arizona
time, on February 12, 2001 or (ii) such time as the Company has repaid in full
its Notes issued pursuant to that certain Loan Agreement dated as of February
12, 2001 between the Company and each of the Lenders named therein, at the
purchase price per share of $10.00 (the "Warrant Price"), the number of shares
of Common Stock, par value $0.001 per share, of the Company set forth above (the
"Shares"). The number of shares of Common Stock purchasable upon exercise of the
Warrant evidenced hereby and the Warrant Price is subject to adjustment from
time to time as set forth in the Warrant Agreement referred to below.
This Warrant may be redeemed, at the option of the Company and as more
specifically provided in the Warrant Agreement, at $.10 per share of Common
Stock purchasable upon exercise hereof, at any time after the average Daily
Market Price (as defined in Section 10 of the Warrant Agreement) per share of
the Common Stock for a period of at least twenty (20) consecutive trading days
ending not more than fifteen days prior to the date of the notice given pursuant
to Section 10(b) thereof has equaled or exceeded $16.00, and prior to expiration
of this Warrant. The Holder's right to exercise this Warrant terminates at 1:30
p.m. (Phoenix, Arizona time) on the date fixed for redemption in the notice of
redemption delivered by the Company in accordance with the Warrant Agreement.
The Warrants evidenced hereby may be exercised during the period
referred to above, in whole or in part, by presentation of this Warrant
certificate with the Purchase Form attached hereto duly executed and guaranteed
and simultaneous payment of the Warrant Price (as defined in the Warrant
Agreement and subject to adjustment as provided therein) at the principal office
of the Company. Payment of such price may be made at the option of the Holder in
cash or by certified check or bank draft, all as provided in the Warrant
Agreement.
The Warrants evidenced hereby are part of a duly authorized issue of
Warrants and are issued under and in accordance with the Warrant Agreement dated
as of February 12, 1998, between the
1
<PAGE> 21
Company and the Lenders party thereto, and are subject to the terms and
provisions contained in such Warrant Agreement, which Warrant Agreement is
hereby incorporated by reference herein and made a part hereof and is hereby
referred to for a description of the rights, limitations, duties and indemnities
thereunder of the Company and the Holder of the Warrants, and to all of which
the Holder of this Warrant certificate by acceptance hereof consents. A copy of
the Warrant Agreement may be obtained for inspection by the Holder hereof upon
written request to the Company.
Upon any partial exercise of the Warrants evidenced hereby, there will
be issued to the Holder a new Warrant certificate in respect of the Shares
evidenced hereby that have not been exercised. This Warrant certificate may be
exchanged at the office of the Company by surrender of this Warrant certificate
properly endorsed either separately or in combination with one or more other
Warrants for one or more new Warrants to purchase the same aggregate number of
Shares as evidenced by the Warrant or Warrants exchanged. No fractional Shares
will be issued upon the exercise of rights to purchase hereunder, but the
Company will pay the cash value of any fraction upon the exercise of one or more
Warrants, as provided in the Warrant Agreement.
The Warrant Price and the number of shares of Common Stock issuable
upon exercise of this Warrant is subject to adjustment as provided in Section 8
of the Warrant Agreement. The Warrant Agreement may be amended by the Company
and the holder or holders of a majority of the outstanding Warrants representing
a majority of the shares of Common Stock underlying such Warrants; provided that
without the consent of each holder of a Warrant certain specified changes cannot
be made to such holder's Warrants.
Neither the Warrants nor the shares of Common Stock underlying the
Warrants may be sold, assigned, or otherwise transferred except in accordance
with the provisions of the Warrant Agreement.
The Holder hereof may be treated by the Company and all other persons
dealing with this Warrant certificate as the absolute owner hereof for all
purposes and as the person entitled to exercise the rights represented hereby,
any notice to the contrary notwithstanding, and until any transfer is entered on
such books, the Company may treat the Holder hereof as the owner for all
purposes. Notices and demands to be given to the Company must be given by
certified or registered mail at the addresses provided in the Warrant Agreement.
All terms used in the Warrant Certificate that are defined in the
Warrant Agreement shall have the respective meanings ascribed to such terms in
the Warrant Agreement.
Dated: UGLY DUCKLING CORPORATION
By:
2
<PAGE> 22
\ UGLY DUCKLING CORPORATION
PURCHASE FORM
Mailing Address:
UGLY DUCKLING CORPORATION
2525 East Camelback Road
Suite 1150
Phoenix, Arizona 85016
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant certificate for, and to purchase
thereunder, _____________Shares of Common Stock provided for therein, and
requests that certificates for such Shares be issued in the name of:
(Please Print or Type Name, Address and Social Security Number)
and that such certificates be delivered to
whose address is
and, if said number of Shares shall not be all the Shares purchasable hereunder,
that a new Warrant certificate for the balance of the Shares purchasable under
the within Warrant certificate be registered in the name of the undersigned
Holder or his or her Assignee as below indicated and delivered to the address
stated below.
Dated:
Name of Holder or Assignee:
(Please Print)
Address:
Signature:
NOTE: The above signature must correspond with the name as it appears upon the
face of the within Warrant certificate in every particular, without alteration
or enlargement or any change whatever, unless these Warrants have been assigned.
Signature Guaranteed:
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(Banks, Stock Brokers, Savings and Loan Association, and Credit Unions) WITH
3
<PAGE> 23
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO
S.E.C. RULE 17Ad-15.
4
<PAGE> 24
ASSIGNMENT
(To be signed only upon assignment of Warrants)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
(Name and Address of Assignee Must Be Printed or Typewritten)
______________ Warrants, hereby irrevocably constituting and appointing _______
Attorney to transfer said Warrants on the books of the Company, with full power
of substitution in the premises.
Dated:
Signature of Registered Holder
Note: The signature on this assignment
must correspond with the name as it
appears upon the face of the within
Warrant certificate in every
particular, without alteration or
enlargement or any change whatever.
Signature Guaranteed:
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (Banks, Stock Brokers, Savings and Loan Association, and Credit
Unions) WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM
PURSUANT TO S.E.C. RULE 17Ad-15.
5
<PAGE> 25
EXHIBIT B
ALLOCATION OF WARRANTS
<TABLE>
<CAPTION>
Name of Lender Warrants
-------------- --------
<S> <C>
ARBCO Associates, L.P. 90,000
Kayne Anderson Non-Traditional
Investments, L.P. 100,000
Offense Group Associates, L.P. 80,000
Opportunity Associates, Limited
Partnership 30,000
Kayne Anderson Offshore Limited 10,000
Glacier Water Services, Inc. 70,000
Paradigm Insurance Company 40,000
Foremost Insurance Company 50,000
Topa Insurance Company 30,000
-------
500,000
</TABLE>
<PAGE> 1
Exhibit 4(c)
Warrant No. ___
WARRANT TO PURCHASE _________ SHARES OF COMMON STOCK
VOID AFTER 1:30 P.M.,
PHOENIX, ARIZONA TIME, ON FEBRUARY 12, 2001
OR SUCH LATER DATE SET FORTH HEREIN
UGLY DUCKLING CORPORATION
This certifies that, for value received, _____________________, the
registered holder hereof or assigns (the "Holder"), is entitled to purchase from
UGLY DUCKLING CORPORATION, a Delaware corporation (the "Company"), at any time
after February 12, 1998, and before the later of (i) 1:30 p.m., Phoenix, Arizona
time, on February 12, 2001 or (ii) such time as the Company has repaid in full
its Notes issued pursuant to that certain Loan Agreement dated as of February
12, 2001 between the Company and each of the Lenders named therein, at the
purchase price per share of $10.00 (the "Warrant Price"), the number of shares
of Common Stock, par value $0.001 per share, of the Company set forth above (the
"Shares"). The number of shares of Common Stock purchasable upon exercise of the
Warrant evidenced hereby and the Warrant Price is subject to adjustment from
time to time as set forth in the Warrant Agreement referred to below.
This Warrant may be redeemed, at the option of the Company and as more
specifically provided in the Warrant Agreement, at $.10 per share of Common
Stock purchasable upon exercise hereof, at any time after the average Daily
Market Price (as defined in Section 10 of the Warrant Agreement) per share of
the Common Stock for a period of at least twenty (20) consecutive trading days
ending not more than fifteen days prior to the date of the notice given pursuant
to Section 10(b) thereof has equaled or exceeded $16.00, and prior to expiration
of this Warrant. The Holder's right to exercise this Warrant terminates at 1:30
p.m. (Phoenix, Arizona time) on the date fixed for redemption in the notice of
redemption delivered by the Company in accordance with the Warrant Agreement.
The Warrants evidenced hereby may be exercised during the period
referred to above, in whole or in part, by presentation of this Warrant
certificate with the Purchase Form attached hereto duly executed and guaranteed
and simultaneous payment of the Warrant Price (as defined in the Warrant
Agreement and subject to adjustment as provided therein) at the principal office
of the Company. Payment of such price may be made at the option of the Holder in
cash or by certified check or bank draft, all as provided in the Warrant
Agreement.
The Warrants evidenced hereby are part of a duly authorized issue of
Warrants and are issued under and in accordance with the Warrant Agreement dated
as of February 12, 1998, between the Company and the Lenders party thereto, and
are subject to the terms and provisions
<PAGE> 2
contained in such Warrant Agreement, which Warrant Agreement is hereby
incorporated by reference herein and made a part hereof and is hereby referred
to for a description of the rights, limitations, duties and indemnities
thereunder of the Company and the Holder of the Warrants, and to all of which
the Holder of this Warrant certificate by acceptance hereof consents. A copy of
the Warrant Agreement may be obtained for inspection by the Holder hereof upon
written request to the Company.
Upon any partial exercise of the Warrants evidenced hereby, there will
be issued to the Holder a new Warrant certificate in respect of the Shares
evidenced hereby that have not been exercised. This Warrant certificate may be
exchanged at the office of the Company by surrender of this Warrant certificate
properly endorsed either separately or in combination with one or more other
Warrants for one or more new Warrants to purchase the same aggregate number of
Shares as evidenced by the Warrant or Warrants exchanged. No fractional Shares
will be issued upon the exercise of rights to purchase hereunder, but the
Company will pay the cash value of any fraction upon the exercise of one or more
Warrants, as provided in the Warrant Agreement.
The Warrant Price and the number of shares of Common Stock issuable
upon exercise of this Warrant is subject to adjustment as provided in Section 8
of the Warrant Agreement. The Warrant Agreement may be amended by the Company
and the holder or holders of a majority of the outstanding Warrants representing
a majority of the shares of Common Stock underlying such Warrants; provided that
without the consent of each holder of a Warrant certain specified changes cannot
be made to such holder's Warrants.
Neither the Warrants nor the shares of Common Stock underlying the
Warrants may be sold, assigned, or otherwise transferred except in accordance
with the provisions of the Warrant Agreement.
The Holder hereof may be treated by the Company and all other persons
dealing with this Warrant certificate as the absolute owner hereof for all
purposes and as the person entitled to exercise the rights represented hereby,
any notice to the contrary notwithstanding, and until any transfer is entered on
such books, the Company may treat the Holder hereof as the owner for all
purposes. Notices and demands to be given to the Company must be given by
certified or registered mail at the addresses provided in the Warrant Agreement.
All terms used in the Warrant Certificate that are defined in the
Warrant Agreement shall have the respective meanings ascribed to such terms in
the Warrant Agreement.
Dated: February 12, 1998 UGLY DUCKLING CORPORATION
By: __________________________
Steven P. Johnson
Senior Vice President and
General Counsel
2
<PAGE> 3
UGLY DUCKLING CORPORATION
PURCHASE FORM
Mailing Address:
UGLY DUCKLING CORPORATION
2525 East Camelback Road
Suite 1150
Phoenix, Arizona 85016
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant certificate for, and to purchase
thereunder, _____________Shares of Common Stock provided for therein, and
requests that certificates for such Shares be issued in the name of:
_______________________________________________________________________________
_______________________________________________________________________________
(Please Print or Type Name, Address and Social Security Number)
and that such certificates be delivered to ____________________________________
whose address is _______________________________________________________________
and, if said number of Shares shall not be all the Shares purchasable hereunder,
that a new Warrant certificate for the balance of the Shares purchasable under
the within Warrant certificate be registered in the name of the undersigned
Holder or his or her Assignee as below indicated and delivered to the address
stated below.
Dated: _________________________________
Name of Holder or Assignee:
_______________________________________________________________________________
(Please Print)
Address:_______________________________________________________________________
_______________________________________________________________________________
Signature:
____________________________________
NOTE: The above signature must correspond with the name as it appears upon the
face of the within Warrant certificate in every particular, without alteration
or enlargement or any change whatever, unless these Warrants have been assigned.
Signature Guaranteed:
3
<PAGE> 4
__________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (Banks, Stock Brokers, Savings and Loan Association, and Credit
Unions) WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM
PURSUANT TO S.E.C. RULE 17Ad-15.
4
<PAGE> 5
ASSIGNMENT
(To be signed only upon assignment of Warrants)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
_______________________________________________________________________________
(Name and Address of Assignee Must Be Printed or Typewritten)
_______________________________________________________________________________
______________ Warrants, hereby irrevocably constituting and appointing _______
Attorney to transfer said Warrants on the books of the Company, with full power
of substitution in the premises.
Dated:__________________________
__________________________________
Signature of Registered Holder
Note: The signature on this assignment
must correspond with the name as it
appears upon the face of the within
Warrant certificate in every
particular, without alteration or
enlargement or any change whatever.
Signature Guaranteed:
________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (Banks, Stock Brokers, Savings and Loan Association, and Credit
Unions) WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM
PURSUANT TO S.E.C. RULE 17Ad-15.
5
<PAGE> 1
Exhibit 10
LOAN AGREEMENT
DATED AS OF FEBRUARY 12, 1998
BETWEEN
UGLY DUCKLING CORPORATION
AND
EACH OF THE LENDERS NAMED HEREIN
$15,000,000 12% SENIOR SUBORDINATED LOAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE 1
<S> <C>
DEFINITIONS................................................................1
1.01 Defined Terms.....................................................1
1.02 Other Interpretive Provisions.....................................4
ARTICLE II.
THE LOAN...................................................................5
2.01 Amount and Notes..................................................5
2.02 Interest..........................................................6
2.03 Optional Prepayments..............................................6
2.04 Computation of Fees and Interest..................................6
2.05 Payments by the Company...........................................6
2.06 Sharing of Payments, Etc..........................................7
2.07 Priority of Payments; Subordination...............................7
ARTICLE III.
CONDITIONS PRECEDENT.......................................................7
3.01 Conditions of Loans to the Company................................7
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES.............................................8
4.01 Organization......................................................8
4.02 Financial Statements..............................................8
4.03 Actions Pending...................................................8
4.04 Outstanding Obligations...........................................8
4.05 Taxes.............................................................8
4.06 Conflicting Agreements and Other Matters..........................9
4.07 ERISA.............................................................9
4.08 Governmental Consent..............................................9
4.09 Disclosure........................................................9
4.10 Possession of Franchises, Licenses, etc..........................10
ARTICLE V.
AFFIRMATIVE COVENANTS.....................................................10
5.01 Financial Statements.............................................10
5.02 Certificates; Other Information..................................10
5.03 Default Disclosure...............................................11
ARTICLE VI.
NEGATIVE COVENANTS........................................................11
6.01 Debt to Tangible Equity Ratio....................................11
6.02 Terms of Subordinated Debt.......................................11
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
ARTICLE VII.
<S> <C>
EVENTS OF DEFAULT.........................................................11
7.01 Event of Default.................................................11
7.02 Other Remedies...................................................12
ARTICLE VIII.
MISCELLANEOUS.............................................................13
8.01 Amendments and Waivers...........................................13
8.02 Notices..........................................................13
8.03 No Waiver: Cumulative Remedies...................................13
8.04 Costs and Expenses...............................................13
8.05 Successors and Assigns...........................................14
8.06 Assignment, Participations, etc..................................14
8.07 Counterparts.....................................................14
8.08 Severability.....................................................14
8.09 No Third Parties Benefited.......................................15
8.10 Time.............................................................15
8.11 Governing Law....................................................15
8.12 Waiver of Jury Trial.............................................15
8.13 Entire Agreement.................................................15
8.14 Interpretation...................................................15
</TABLE>
ii
<PAGE> 4
EXHIBITS
Exhibit A Form of Promissory Note
Exhibit B Form of Warrant
iii
<PAGE> 5
SCHEDULES
Schedule 2.01 Disbursement of Loans
Schedule 4.04 Outstanding Obligations
iv
<PAGE> 6
LOAN AGREEMENT
This LOAN AGREEMENT is dated as of February 12, 1998, between UGLY
DUCKLING CORPORATION, a Delaware corporation (the "Company"); and each lender
signatory hereto (each a "Lender," and collectively the "Lenders").
WHEREAS, each Lender has agreed to make a loan to the Company in the
amount of its respective Commitment (as defined herein) upon the terms and
conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual agreements, provisions
and covenants contained herein, the parties agree as follows:
ARTICLE 1
DEFINITIONS
1.01 Defined Terms. In addition to the terms defined elsewhere in this
Agreement, the following terms have the following meanings:
"Affiliate" means, as to any Person, any other Person which,
directly or indirectly, is in control of, is controlled by, or is under
common control with, such Person. A Person shall be deemed to control
another Person if the controlling Person possesses, directly or
indirectly, the power to direct or cause the direction of the
management and policies of the other Person, whether through the
ownership of voting securities, by contract or otherwise.
"Aggregate Commitment" means the amount of Fifteen Million
Dollars ($15,000,000).
"Agreement" means this Loan Agreement, as amended,
supplemented or modified from time to time in accordance with the terms
hereof.
"Assignee" has the meaning specified in Section 8.06(a).
"Attorney Costs" means and includes all fees and disbursements
of any other external or in-house counsel.
"Business Day" means any day other than a Saturday, Sunday or
other day on which commercial banks in Phoenix, Arizona, New York,
Chicago or Los Angeles are authorized or required by law to close.
"Capital Lease" has the meaning specified in the definition of
"Capital Lease Obligations".
"Capital Lease Obligations" means any rental obligation which,
in accordance with GAAP, is or will be required to be capitalized on
the books of the Company (a "Capital Lease"), taken at the amount
thereof accounted for as indebtedness (net of interest expense) in
accordance with GAAP.
<PAGE> 7
"Closing Date" means the date on which all conditions
precedent set forth in Section 3.01 are satisfied or waived by all
Lenders, which is anticipated to be February 12, 1998.
"Code" means the Internal Revenue Code of 1986 and any
regulations promulgated thereunder.
"Commitment" means with respect to each Lender, the amount set
forth opposite its name on the signature pages to this Agreement.
"Debt" means any Obligation for borrowed money, including the
indebtedness portion of any Capitalized Lease Obligations.
"Debt to Tangible Net Worth Ratio" means the debt-to-equity
ratio of the Company, calculated in accordance with GAAP by comparing
total Debt to Tangible Net Worth.
"Default" means any event or circumstance which, with the
giving of notice, the lapse of time, or both, would (if not cured or
otherwise remedied) constitute an Event of Default.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and regulations promulgated
thereunder.
"Event of Default" means any of the events or circumstances
specified in Section 7.01.
"GAAP" means generally accepted accounting principles set
forth from time to time in the opinions and pronouncements of the
Accounting Principles Board and the American Institute of Certified
Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board (or agencies with similar functions of
comparable stature and authority within the accounting profession), or
in such other statements by such other entity as may be in general use
by significant segments of the U.S. accounting profession, which are
applicable to the circumstances as of the date of determination.
"Governmental Authority" means any nation or government, any
state or other political subdivision thereof, any central bank (or
similar monetary or regulatory authority) thereof, any entity
exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government, and any
corporation or other entity owned or controlled, through stock or
capital ownership or otherwise, by any of the foregoing.
"Insolvency Proceeding" means, with respect to any Person, (a)
any case, action or proceeding before any court or other Governmental
Authority relating to bankruptcy, reorganization, insolvency,
liquidation, receivership, dissolution, winding-up or relief of
debtors, or (b) any general assignment for the benefit of creditors,
composition, marshaling of assets for creditors or other, similar
arrangement in respect of its creditors generally or any substantial
portion of its creditors.
"Lender" and "Lenders" have the meanings specified in the
introductory clause hereto.
2
<PAGE> 8
"Lien" means any mortgage, deed of trust, pledge,
hypothecation, assignment, charge or deposit arrangement, encumbrance,
lien (statutory or other) or preference, priority or other security
interest or preferential arrangement of any kind or nature whatsoever
(including those created by, arising under, or evidenced by any
conditional sale or other title retention agreement, the interest of a
lessor under a Capital Lease Obligation, any financing lease having
substantially the same economic effect as any of the foregoing, or the
filing of any financing statement naming the owner of the asset to
which such lien relates as debtor, under the UCC or any comparable law)
and any contingent or other agreement to provide any of the foregoing,
but not including the interest of a lessor under an Operating Lease.
"Loan" means an individual term loan made by each Lender in
the amount of each Lender's respective Commitment pursuant to Article
II.
"Loans" mean all of the term loans by the Lenders to the
Company pursuant to Article II.
"Loan Documents" means this Agreement, the Notes, the Warrant
Agreement, the Warrants, and all other documents delivered to any of
the Lenders in connection therewith.
"Material Adverse Effect" means a material adverse change in,
or a material adverse effect upon, any of (a) the operations, business,
properties, condition (financial or otherwise) or prospects of the
Company taken as a whole, (b) the ability of the Company to perform
under any Loan Document and avoid any Event of Default, or (c) the
legality, validity, binding effect or enforceability of any Loan
Document.
"Maturity Date" means February 12, 2001.
"Notes" shall mean the promissory notes, dated as of the
Closing Date, substantially in the form of Exhibit A annexed hereto,
issued by the Company to the order of the Lenders evidencing the
obligation of the Company to repay the Loans.
"Obligations" mean all Loans and other Debt, advances, debts,
liabilities, obligations, covenants and duties owing by the Company to
any Person, of any kind or nature, present or future, whether or not
evidenced by any note, guaranty or other instrument, arising under this
Agreement or under any other loan document, or out of any other
agreement or understanding, whether or not for the payment of money,
whether arising by reason of an extension of credit, loan, guaranty,
indemnification or in any other manner, whether direct or indirect
(including those acquired by assignment), absolute or contingent, due
or to become due, now existing or hereafter arising and however
acquired.
"Operating Lease" means, as applied to any Person, any lease
of property which is not a Capital Lease.
"Ordinary Course of Business" means, in respect of any
transaction involving the Company, the ordinary course of the Company's
business, substantially as conducted by the Company prior to or as of
the Closing Date, and undertaken by the Company in good faith and not
for purposes of evading any covenant or restriction in any Loan
Document.
"Person" means an individual, partnership, corporation,
business trust, joint stock company, trust, unincorporated association,
joint venture or governmental authority.
3
<PAGE> 9
"Pro-Rata Basis" means pro-rata as to the Lenders based on the
unpaid principal balance of each Lender's Loan.
"Responsible Officer" means the chief executive officer or the
president of the Company, or any other officer having substantially the
same authority and responsibility or, with respect to financial
matters, the chief financial officer or the treasurer of the Company,
or any other officer having substantially the same authority and
responsibility.
"SEC" means the Securities and Exchange Commission, or any
successor thereto.
"Subordinated Debt" means the Obligation represented by that
certain 10% Subordinated Debenture of the Company dated as of June 21,
1996, as amended, payable to Verde Investments, Inc., and any other
unsecured Obligation which by its express terms is subordinated in
right of payment to any other unsecured Obligation of the Company.
"Tangible Net Worth" means the total of the Company's
shareholders' equity (including capital stock, additional paid-in
capital, and retained earnings), less (i) the total amount of loans and
debts due from Affiliates, shareholders, officers, or employees of the
Company, and (ii) the total amount of any intangible assets, including
without limitation unamortized discounts, deferred charges, and
goodwill as determined in accordance with GAAP.
"UCC" means the Uniform Commercial Code as in effect in any
jurisdiction.
"Warrant" means the warrant issued to each of the Lenders
pursuant to the Warrant Agreement substantially in the form of Exhibit
B to this Agreement.
"Warrant Agreement" means the Warrant Agreement dated as of
February 12, 1998 among the Company and each of the Lenders providing
for the issuance of warrants to the Lenders to acquire 500,000 shares
of the Company's Common Stock, exercisable at a price of $10.00 per
share for a period of three years.
1.02 Other Interpretive Provisions.
Defined Terms. Unless otherwise specified herein or
therein, all terms defined in this Agreement shall have the defined meanings
when used in any certificate or other document made or delivered pursuant
hereto. The meaning of defined terms shall be equally applicable to the singular
and plural forms of the defined terms. Terms (including uncapitalized terms) not
otherwise defined herein and that are defined in the UCC shall have the meanings
therein described.
(a) The Agreement. The words "hereof", "herein", "hereunder"
and words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this Agreement; and
section, schedule and exhibit references are to this Agreement unless otherwise
specified.
(b) Certain Common Terms.
(i) The term "documents" includes any and all
instruments, documents, agreements, certificates, indentures, notices and other
writings, however evidenced.
4
<PAGE> 10
(ii) The term "including" is not limiting and means
"including without limitation".
(iii) The term "or" has, except where otherwise
indicated, the inclusive meaning represented by the phrase "and/or".
(c) Performance; Time. Whenever any performance obligation
hereunder (other than a payment obligation) shall be stated to be due or
required to be satisfied on a day other than a Business Day, such performance
shall be made or satisfied on the next succeeding Business Day. In the
computation of periods of time from a specified date to a later specified date,
the word "from" means "from and including"; the words "to" and "until" each mean
"to but excluding", and the word "through" means "to and including". If any
provision of this Agreement refers to any action taken or to be taken by any
Person, or which such Person is prohibited from taking, such provision shall be
interpreted to encompass any and all means, direct or indirect, of taking, or
not taking, such action.
(d) Contracts. Unless otherwise expressly provided herein,
references to agreements and other contractual instruments shall be deemed to
include all subsequent amendments and other modifications thereto, but only to
the extent such amendments and other modifications are not prohibited by the
terms of any Loan Document.
(e) Laws. References to any statute or regulation are to be
construed as including all statutory and regulatory provisions consolidating,
amending, replacing, supplementing or interpreting the statute or regulation.
(f) Captions. The captions and headings of this Agreement are
for convenience of reference only and shall not affect the construction of this
Agreement.
(g) Independence of Provisions. The parties acknowledge that
this Agreement and other Loan Documents may use several different limitations,
tests or measurements to regulate the same or similar matters, and that such
limitations, tests and measurements are cumulative and must each be performed,
except as expressly stated to the contrary in this Agreement.
(h) Accounting Principles.
(i) Unless the context otherwise clearly requires,
all accounting terms not expressly defined herein shall be construed, and all
financial computations required under this Agreement shall be made, in
accordance with GAAP, consistently applied.
(ii) References herein to "fiscal year" and "fiscal
quarter" refer to such fiscal periods of the Company.
ARTICLE II.
THE LOAN
2.01 Amount and Notes.
Each Lender shall make its respective Loan to the Company in a
single advance to be disbursed pursuant to Schedule 2.01 on the Closing Date.
The Company has authorized the
5
<PAGE> 11
issuance of the Notes in the aggregate principal amount of Fifteen Million
Dollars ($15,000,000). On the Closing Date, the Company shall issue and deliver
to each Lender a Note in the principal amount equal to such Lender's Commitment,
payable to the order of such Lender, substantially in the form of Exhibit A to
this Agreement. The Notes will evidence the principal amount of each Loan
together with interest accrued and unpaid thereon.
2.02 Interest.
(a) Each Loan shall accrue interest on the outstanding
principal amount thereof for the period from and including the date of such Loan
to but excluding the date such Loan shall be paid in full at a rate per annum
equal to 12%.
(b) Accrued interest shall be paid quarterly in arrears on (i)
March 31, June 30, September 30 and December 31 of each year; and (ii) on the
Maturity Date. Accrued and unpaid interest shall also be paid on the date of any
prepayment of the Loans pursuant to Section 2.03 for the portion of the Loans so
prepaid and upon prepayment in full thereof.
(c) While any Event of Default exists and is continuing or
after acceleration, the Company shall pay interest (after as well as before
entry of judgment thereon to the extent permitted by law) on the principal
amount of the Loans then unpaid, at a rate per annum equal to 18%.
(d) The Company agrees to pay an effective contracted for rate
of interest equal to the rate of interest resulting from all interest payable as
provided herein, plus all other fees, charges and costs that may be deemed or
determined to be interest. Anything herein to the contrary notwithstanding, the
obligations of the Company hereunder shall be subject to the limitation that
payments of interest shall not be required, for any period for which interest is
computed hereunder, to the extent (but only to the extent) that contracting for
or receiving such payment by the respective Lender would be contrary to the
provisions of any law applicable to such Lender limiting the highest rate of
interest which may be lawfully contracted for, charged or received by such
Lender, and in such event the Company shall pay such Lender interest at the
highest rate permitted by applicable law.
2.03 Optional Prepayments. The Company may, at any time or from time to
time, upon at least 10 Business Days notice to each of the Lenders, prepay pro
rata the Loans in whole or in part, without penalty or premium. Such notice of
prepayment shall specify the date and amount of such prepayment. If such notice
is given by the Company, the Company shall make such prepayment on a Pro-Rata
Basis and each Lender's pro-rata share thereof and the payment amount specified
in such notice shall be due and payable on the date specified therein, together
with accrued interest to each such date on the amount prepaid.
2.04 Computation of Fees and Interest. All computations of fees and
interest under this Agreement shall be made on the basis of a 365-day year.
2.05 Payments by the Company.
(a) All payments (including prepayments) to be made by the
Company on account of principal, interest, fees and other amounts required
hereunder shall be made without set-off, deduction, recoupment or counterclaim
and shall, except as otherwise expressly provided herein, be made to the Lenders
at each of the Lender's respective offices as set forth on the applicable
signature pages hereof, in U.S. dollars and in immediately available funds, no
later than 1:30 p.m. Phoenix, Arizona time on the date specified herein. Any
payment which is received by
6
<PAGE> 12
the applicable Lender later than 1:30 p.m. (Phoenix, Arizona time) shall be
deemed to have been received on the immediately succeeding Business Day and any
applicable interest or fee shall continue to accrue.
(b) Whenever any payment hereunder shall be stated to be due
on a day other than a Business Day, such payment shall be made on the next
succeeding Business Day, and such extension of time shall in such case be
included in the computation of interest or fees, as the case may be.
2.06 Sharing of Payments, Etc. All principal payments shall be made to
the Lenders on a Pro-Rata Basis.
2.07 Priority of Payments; Subordination. Notwithstanding anything in
this Agreement to the contrary, the payment of principal and interest under this
Agreement on the Loans is expressly subordinated for all purposes to any
Obligations now in existence or later incurred by the Company other than
Subordinated Debt; and each of the Lenders will, upon request of any institution
or Person that is an obligee of any Obligation now in existence or incurred by
the Company in the future, execute and deliver an agreement of subordination in
form mutually satisfactory to each of the Lenders and such institution or
Person, the tenor of which shall be to effectuate the terms of this Section.
ARTICLE III.
CONDITIONS PRECEDENT
3.01 Conditions of Loans to the Company. The obligation of each Lender
to fund its Loan to the Company hereunder is subject to the condition that the
Lenders shall have received on or before February 12, 1998, in form and
substance satisfactory to each Lender and their respective counsel and in
sufficient copies for each Lender, all of the following:
(a) Loan Agreement. This Agreement executed by the Company and
each Lender;
(b) Resolutions: Incumbency.
(i) Copies of the resolutions of the board of
directors of the Company approving and authorizing the execution,
delivery and performance by the Company of this Agreement and the other
Loan Documents to be delivered hereunder, and authorizing the borrowing
of the Loans, certified as of the Closing Date by the Secretary or an
Assistant Secretary of the Company; and
(ii) A certificate of the Secretary or Assistant
Secretary of the Company certifying the names and true signatures of
the officers of the Company authorized to execute, deliver and perform,
as applicable, this Agreement, and all other Loan Documents to be
delivered hereunder;
(c) Articles of Incorporation: Bylaws and Good Standing. Each
of the following documents:
(i) the certificate of incorporation of the Company
as in effect on the Closing Date, certified by the Secretary of State
of the state of Delaware as of a recent date
7
<PAGE> 13
and by the Secretary or Assistant Secretary of the Company as of the
Closing Date, and the Bylaws of the Company as in effect on the Closing
Date, certified by the Secretary or Assistant Secretary of the Company
as of the Closing Date, and
(ii) a good standing certificate for the Company from
the Secretary of State of its state of incorporation.
(d) Notes. The Notes, executed by the Company.
(e) Warrants. The Warrant Agreement, executed by the Company
and each of the Lenders, together with the Warrants.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to each Lender that:
4.01 Organization. The Company is a corporation duly organized and
existing in good standing under the laws of the State of Delaware, the Company
has the corporate power to own its property and to carry on its business as now
being conducted, and the Company is duly qualified as a foreign corporation to
do business and is in good standing in each jurisdiction in which the nature of
the business conducted by it makes such qualification necessary.
4.02 Financial Statements. The Company has provided to the Lenders
copies of the following audited financial statements: a balance sheet of the
Company as of December 31, 1997, and statements of income and cash flows for the
fiscal year ended December 31, 1997. Such financial statements (including any
related schedules and/or notes) are true and correct in all material respects,
have been prepared in accordance with GAAP consistently followed throughout the
periods involved and show all liabilities, direct and contingent, of the Company
required to be shown in accordance with GAAP. The balance sheet fairly presents
the condition of the Company as at the date thereof, and the statements of
income and cash flows fairly present the results of the operations of the
Company for the periods indicated. There has been no change in the business,
condition (financial or otherwise) or operations of the Company since December
31, 1997, which could reasonably be expected to have a Material Adverse Effect.
4.03 Actions Pending. There is no action, suit, investigation or
proceeding pending or, to the knowledge of the Company, threatened against the
Company or any properties or rights of the Company, by or before any court,
arbitrator or administrative or governmental body which could reasonably be
expected to result in any Material Adverse Effect.
4.04 Outstanding Obligations. After giving effect to the transactions
contemplated hereby, the Company does not have any Obligations outstanding
except Obligations disclosed in the financial statements provided pursuant to
Section 4.02 and except as disclosed in Schedule 4.04 attached hereto. There
exists no default (or, to the knowledge of the Company, any event or condition
that, with the passage of time, would constitute a default) under the provisions
of any instrument evidencing such Obligations or of any agreement relating
thereto.
4.05 Taxes. The Company has filed all Federal, State and other income
tax returns which, to the best knowledge of the officers of the Company, are
required to be filed, and has paid all taxes
8
<PAGE> 14
as shown on such returns and on all assessments received by it to the extent
that such taxes have become due, except such taxes as are being contested in
good faith by appropriate proceedings for which adequate reserves have been
established in accordance with GAAP.
4.06 Conflicting Agreements and Other Matters. The Company is not a
party to any contract or agreement or subject to any charter or other corporate
restriction which materially and adversely affects its business, property or
assets, or financial condition. Neither the execution nor delivery of this
Agreement or the other Loan Documents, nor fulfillment of nor compliance with
the terms and provisions hereof and of the other Loan Documents will conflict
with, or result in a breach of the terms, conditions or provisions of, or
constitute a default under, or result in any violation of, or result in the
creation of any Lien upon any of the properties or assets of the Company
pursuant to, the Certificate of Incorporation or Bylaws of the Company, any
award of any arbitrator or any agreement (including any agreement with
stockholders), instrument, order, judgment, decree, statute, law, rule or
regulation to which the Company is subject. The Company is not a party to, or
otherwise subject to any provision contained in, any instrument evidencing
indebtedness of the Company, any agreement relating thereto or any other
contract or agreement (including its charter) which limits the amount of, or
otherwise imposes restrictions on the incurring of, Debt of the Company of the
type to be evidenced by this Agreement or the Notes.
4.07 ERISA. No accumulated funding deficiency (as defined in section
302 of ERISA and section 412 of the Code), whether or not waived, exists with
respect to any plan (other than a multiemployer plan). No liability to the
Pension Benefit Guaranty Corporation has been or is expected by the Company to
be incurred with respect to any plan (other than a multiemployer plan) by the
Company which could reasonably be expected to have a Material Adverse Effect.
The Company has not incurred or does not presently expect to incur any
withdrawal liability under Title IV of ERISA with respect to any multiemployer
plan which is or would be materially adverse to the Company. The execution and
delivery of this Agreement and the other Loan Documents will not involve any
transaction which is subject to the prohibitions of section 406 of ERISA or in
connection with which a tax could be imposed pursuant to section 4975 of the
Code. For the purpose of this Section 4.09, the term "plan" shall mean an
"employee pension benefit plan" (as defined in section 3 of ERISA) which is or
has been established or maintained, or to which contributions are or have been
made, by the Company or by any trade or business, whether or not incorporated,
which, together with the Company, is under common control, as described in
section 414(b) or (c) of the Code; and the term "multiemployer plan" shall mean
any plan which is a "multiemployer plan" (as such term is defined in section
4001(a)(3) of ERISA).
4.08 Governmental Consent. Neither the nature of the Company's
business, nor any of its respective properties, nor any relationship between the
Company and any other Person, nor any circumstance in connection with the making
of the Loans or delivery of the Notes is such as to require any authorization,
consent, approval, exemption or other action by or notice to or filing with any
Governmental Authority that has not previously been made or taken and to which
all applicable waiting periods have expired.
4.09 Disclosure. Neither this Agreement nor any other document,
certificate or statement furnished to any Lender by or on behalf of the Company
in connection herewith contains any untrue statement of a material fact or omits
to state a material fact necessary in order to make the statements contained
herein and therein not misleading. There is no fact peculiar to the Company
which has had a Material Adverse Effect or in the future could reasonably be
expected to have a Material Adverse Effect that has not been set forth in this
Agreement or disclosed in the Company's filings with the SEC, or in the other
documents, certificates and statements furnished to any Lender
9
<PAGE> 15
by or on behalf of the Company prior to the date hereof in connection with the
transactions contemplated hereby.
4.10 Possession of Franchises, Licenses, etc. The Company possesses all
franchises, certificates, licenses, permits and other authorizations from
governmental political subdivisions or regulatory authorities and all patents,
trademarks, service marks, trade names, copyrights, licenses and other rights,
free from burdensome restrictions, that are necessary in any material respect
for the ownership, maintenance and operation of its properties and assets, and
the Company is not in violation of any thereof in any material respect.
ARTICLE V.
AFFIRMATIVE COVENANTS
The Company covenants and agrees that, so long as any Loan or other
Obligation hereunder shall remain unpaid or unsatisfied, unless the Lenders
waive compliance in writing:
5.01 Financial Statements. The Company shall deliver to each of the
Lenders in form and detail satisfactory to each of the Lenders:
(a) promptly upon transmission thereof, copies of all
financial statements, proxy statements, notices and reports as it shall send to
its stockholders and copies of all registration statements (without exhibits)
and all reports which it files with the SEC (or any governmental body or agency
succeeding to the functions of the SEC); and
(b) with reasonable promptness, such other financial data as
the Lenders may reasonably request, subject to the Company's right to maintain
confidentiality of any financial information to the extent necessary to comply
with applicable securities laws.
5.02 Certificates; Other Information. Within 60 days after the end of
each quarterly period (other than the fourth quarterly period) in each fiscal
year and within 105 days after the end of each fiscal year, the Company shall
deliver to each Lender a certificate of a Responsible Officer setting forth
(except to the extent specifically set forth in any financial statements filed
within such periods with the SEC):
(a) sufficient information (including detailed calculations
reasonably satisfactory to the Lenders) to establish whether the Company is in
compliance with the requirements of Sections 6.01; and
(b) a statement that there exists no Event of Default or
Default, or, if any such Event of Default or Default exists, specifying:
(i) the nature thereof;
(ii) the period of existence thereof; and
(iii) what action the Company proposes to take with
respect thereto.
10
<PAGE> 16
5.03 Default Disclosure. The Company shall forthwith, upon a
Responsible Officer of the Company obtaining knowledge of an Event of Default or
Default, promptly deliver to each Lender a Certificate of a Responsible Officer
specifying the nature and period of existence thereof and what action the
Company proposes to take with respect thereto.
ARTICLE VI.
NEGATIVE COVENANTS
The Company hereby covenants and agrees that, so long as any Loan or
other Obligation hereunder shall remain unpaid or unsatisfied, unless the
Lenders waive compliance in writing:
6.01 Debt to Tangible Equity Ratio. The Company shall not permit the
Company's Debt to Tangible Equity Ratio to exceed 2.1 to 1, calculated as of the
end of each quarterly period in each fiscal year.
6.02 Terms of Subordinated Debt. The Company shall not enter into any
agreement (oral or written) which could in any way be construed as amending,
modifying, altering, changing or terminating any one or more provisions relating
to the Subordinated Debt to the extent that such amendment, modification,
alteration, change or termination would subordinate the payment of interest on
or principal of the Loans to the payment of principal and interest relating to
the Subordinated Debt.
ARTICLE VII.
EVENTS OF DEFAULT
7.01 Event of Default. Any of the following shall constitute an "Event
of Default":
(a) The Company defaults in the payment of any principal of
the Loan when the same shall become due, either by the terms thereof or
otherwise as herein provided; or
(b) The Company defaults in the payment of any interest on the
Loan when the same shall become due and such default continues for a period of
five Business Days; or
(c) The Company fails to make any payment when due with
respect to any Obligation of the Company (other than an obligation payable
hereunder), or any breach, default or event of default shall occur, or any other
conditions shall exist under any instrument, agreement or indenture pertaining
to such Obligation, if the holder or holders of such Obligation accelerate the
maturity of any such Obligation or require a redemption or other repurchase of
such Obligation and such failure relates to the acceleration or redemption of an
amount in excess of $10 million and such acceleration continues for a period of
five Business Days; or
(d) Any representation or warranty made by the Company herein
or by the Company or any of its officers in any writing furnished in connection
with or pursuant to this Agreement shall be false in any material respect on the
date as of which made; or
(e) The Company fails to perform or observe any covenant or
agreement contained in Article VI hereof; or
11
<PAGE> 17
(f) The Company fails to perform or observe any other
agreement, covenant, term or condition contained herein and such failure shall
not be remedied within 30 days after receipt of notice thereof from any Lender;
or
(g) The Company makes an assignment for the benefit of
creditors or is generally not paying its debts as such debts become due; or
(h) Any decree or order for relief in respect of the Company
is entered under any bankruptcy, reorganization, compromise, arrangement,
insolvency, readjustment of debt, dissolution or liquidation or similar law,
whether now or hereafter in effect (herein called the "Bankruptcy Law"), of any
jurisdiction; or
(i) The Company petitions or applies to any tribunal for, or
consents to, the appointment of, or taking possession by, a trustee, receiver,
custodian, liquidator or similar official of the Company, or of any substantial
part of the assets of the Company, or commences a voluntary case under the
Bankruptcy Law of the United States or any proceedings relating to the Company
under the Bankruptcy Law of any other jurisdiction; or
(j) Any such petition or application referenced in clause (i)
above is filed, or any such proceedings referenced in clause (i) above are
commenced against the Company, and the Company by any act indicates its approval
thereof, consent thereto or acquiescence therein, or an order, judgment or
decree is entered appointing any such trustee, receiver, custodian, liquidator
or similar official, or approving the petition in any such proceedings, and such
order, judgment or decree remains unstayed and in effect for more than 30 days;
or
(k) Any order, judgment or decree is entered in any
proceedings against the Company decreeing the dissolution of the Company and
such order, judgment or decree remains unstayed and in effect for more than 60
days; or
(l) Any order, judgment or decree is entered in any
proceedings against the Company decreeing a split-up of the Company which
requires the divestiture of assets representing a substantial part, and such
order, judgment or decree remains unstayed and in effect for more than 60 days.
then (a) if such event is an Event of Default specified in any of clauses (g)
through (l) of this Section 7.01 with respect to the Company, all of the Loans
at the time outstanding shall automatically become immediately due and payable
at par together with interest accrued thereon, without presentment, demand,
protest or notice of any kind, all of which are hereby waived by the Company,
and (b) if such event is any other Event of Default, any Lender may, by notice
in writing to the Company, declare all of such Lender's Loan to be, and all of
such Lender's Loan shall thereupon be and become, immediately due and payable
together with interest accrued thereon without presentment, demand, protest or
other notice of any kind, all of which are hereby waived by the Company.
7.02 Other Remedies. If any Event of Default or Default shall occur and
be continuing, each Lender may proceed to protect and enforce its rights under
this Agreement by exercising such remedies as are available to such Lender in
respect thereof under applicable law, either by suit in equity or by action at
law, or both, whether for specific performance of any covenant or other
agreement contained in this Agreement or in aid of the exercise of any power
granted in this Agreement. No remedy conferred in this Agreement upon the
Lenders is intended to be exclusive of any other remedy, and each and every such
remedy shall be cumulative and shall be in addition
12
<PAGE> 18
to every other remedy conferred herein or now or hereafter existing at law or in
equity or by statute or otherwise.
ARTICLE VIII.
MISCELLANEOUS
8.01 Amendments and Waivers. No amendment or waiver of any provision of
this Agreement or any other Loan Document, and no consent with respect to any
departure by the Company therefrom, shall be effective unless the same shall be
in writing and signed by the Lenders and the Company, and then such waiver shall
be effective only in the specific instance and for the specific purpose for
which given.
8.02 Notices.
(a) All notices, requests and other communications provided
for hereunder shall be in writing (including, unless the context expressly
otherwise provides, by facsimile transmission, provided that, any matter
transmitted by the Company by facsimile (i) shall be immediately confirmed by a
telephone call to the recipient at the number specified on the applicable
signature page hereof, and (ii) shall be followed promptly by a hard copy
original thereof) and mailed, faxed, telecopied or delivered, to the address or
facsimile number specified for notices on the applicable signature page hereof;
or, as to the Company or each of the Lenders, to such other address as shall be
designated by such party in a written notice to the other parties, and as
directed to each other party, at such other address as shall be designated by
such party in a written notice to the Company and each of the Lenders.
(b) All such notices, requests and communications shall, when
transmitted by overnight delivery or faxed, be effective when delivered for
overnight (next day) delivery, transmitted by facsimile machine, respectively,
or if delivered, upon delivery.
8.03 No Waiver: Cumulative Remedies. No failure to exercise and no
delay in exercising, on the part of any Lender, any right, remedy, power or
privilege hereunder, shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, remedy, power or privilege hereunder preclude any
other or further exercise thereof or the exercise of any other right, remedy,
power or privilege.
8.04 Costs and Expenses. The Company shall, following consummation of
the transactions contemplated hereby:
(a) pay or reimburse each Lender within 10 Business Days after
demand for all reasonable costs and expenses incurred by each Lender in
connection with any amendment, supplement, waiver or modification to this
Agreement, any other Loan Document and any other documents prepared in
connection therewith, including the reasonable Attorney Costs incurred by any
Lender with respect thereto; and
(b) pay or reimburse each Lender within 10 Business Days after
demand for all reasonable costs and expenses incurred by them in connection with
the enforcement, attempted enforcement, or preservation of any rights or
remedies (including in connection with any "workout" or restructuring regarding
the Loans, and including in any Insolvency Proceeding or appellate
13
<PAGE> 19
proceeding) under this Agreement, any other Loan Document, and any such other
documents, including reasonable Attorney Costs incurred by any Lender.
8.05 Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns, except that the Company may not assign or transfer any
of its rights or obligations under this Agreement without the prior written
consent of each Lender.
8.06 Assignment, Participations, etc.
(a) Any Lender may, with the written consent of the Company
(which consent shall be obtained prior to such Lender's delivery of any
information (including financial information) to any Assignee (as hereinafter
defined) relating to an assignment of such Lender's rights and obligations under
the Loan Documents, at all times other than during the existence of an Event of
Default, which consent shall not be unreasonably withheld, at any time assign
and delegate to one or more person or entity (provided, that, no written consent
of the Company shall be required in connection with any assignment and
delegation by a Lender to a Lender Affiliate of such Lender) (each an
"Assignee") all (but no less than all) of its interest in the Loan and the other
rights and obligations of such Lender hereunder, provided, however, that, the
Company and each other Lender may continue to deal solely and directly with such
Lender in connection with the interest so assigned to an Assignee until written
notice of such assignment, together with payment instructions, addresses and
related information with respect to the Assignee shall have been given to the
Company by such Lender and the Assignee.
(b) From and after the date that such Lender notifies the
Company of such assignment and the Company consents to such assignment, (i) the
Assignee thereunder shall be a party hereto and, to the extent that rights and
obligations hereunder have been assigned to it by such Lender, shall have the
rights and obligations of such Lender under the Loan Documents, and (ii) the
assignor Lender shall, to the extent that rights and obligations hereunder have
been assigned by it pursuant to such assignment, relinquish its rights and be
released from its obligations under the Loan Documents.
(c) Immediately after compliance with the conditions contained
in Sections 8.06(a) and (b) with respect to any Lenders making an assignment or
delegation to an eligible Assignee, this Agreement shall be deemed to be amended
to the extent, but only to the extent, necessary to reflect the addition of the
Assignee and the resulting adjustment of the Loans arising therefrom.
8.07 Counterparts. This Agreement may be executed by one or more of the
parties to this Agreement in any number of separate counterparts, each of which,
when so executed, shall be deemed an original, and all of said counterparts
taken together shall be deemed to constitute but one and the same instrument. A
set of the copies of this Agreement signed by all the parties shall be lodged
with the Company and the Lenders.
8.08 Severability. The illegality or unenforceability of any provision
of this Agreement or any instrument or agreement required hereunder shall not in
any way affect or impair the legality or enforceability of the remaining
provisions of this Agreement or any instrument or agreement required hereunder.
14
<PAGE> 20
8.09 No Third Parties Benefited. This Agreement is made and entered
into for the sole protection and legal benefit of the Company and the Lenders,
and their permitted successors and assigns, and no other Person shall be a
direct or indirect legal beneficiary of, or have any direct or indirect cause of
action or claim in connection with, this Agreement or any of the other Loan
Documents. No Lender shall have any obligation to any Person not a party to this
Agreement or other Loan Documents.
8.10 Time. Time is of the essence as to each term or provision of this
Agreement and each of the other Loan Documents.
8.11 Governing Law.
THIS AGREEMENT AND THE NOTES SHALL BE DEEMED TO HAVE BEEN MADE
IN THE STATE OF CALIFORNIA; AND (B) THE VALIDITY OF THIS AGREEMENT AND THE
NOTES, AND THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF,
ALL CLAIMS MADE IN CONNECTION THEREWITH, AND THE RIGHTS OF THE PARTIES THERETO
SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF CALIFORNIA.
8.12 Waiver of Jury Trial.
THE COMPANY AND THE LENDERS HEREBY AGREE TO WAIVE THEIR
RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON
OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY IN ANY ACTION, PROCEEDING OR OTHER
LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR
PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE
COMPANY AND THE LENDERS HEREBY AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION
SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT IN ANY WAY LIMITING THE
FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY
JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM, OR
OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR
ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION
HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS. A COPY OF THIS SECTION 8.12 MAY BE FILED WITH ANY COURT AS WRITTEN
EVIDENCE OF THE WAIVER OF THE RIGHT TO TRIAL BY JURY AND CONSENT TO TRIAL.
8.13 Entire Agreement. This Agreement, together with the other Loan
Documents, embodies the entire Agreement and understanding among the Company and
the Lenders and supersedes all prior or contemporaneous agreements and
understandings of such Persons, verbal or written, relating to the subject
matter hereof and thereof and any prior arrangements made with respect to the
payment by the Company (or any indemnification for) any fees, costs or expenses
payable to or incurred (or to be incurred) by or on behalf of the Lenders
pursuant to the Loan Documents.
8.14 Interpretation. This Agreement is the result of negotiations
between and has been reviewed by counsel to the Lenders, the Company and other
parties, and is the product of all parties hereto. Accordingly, this Agreement
and the other Loan Documents shall not be construed against
15
<PAGE> 21
the Company merely because of the Company's involvement in the preparation of
such documents and agreements.
[Balance of Page Intentionally Left Blank]
16
<PAGE> 22
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first above written.
UGLY DUCKLING CORPORATION
By: /s/ Steven P. Johnson
Steven P. Johnson
Senior Vice President and General Counsel
Address for notices:
Ugly Duckling Corporation
2525 East Camelback Road
Suite 1150
Phoenix, Arizona 85016
Attn: Steven P. Johnson
Senior Vice President and General Counsel
Telephone: (602) 852-6605
Telecopy: (602) 852-6696
Commitment: $2,700,000 ARBCO ASSOCIATES, L.P.
By: KAIM Non-Traditional, L.P.
Its: General Partner
By: Kayne Anderson Investment Management, Inc.
Its: General Partner
By: /s/ Richard A. Kayne
-----------------------------------
Title: Authorized Officer
--------------------------------
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn:
Telephone: (310) 284-6483
Telecopy : (310) 284-6444
17
<PAGE> 23
Commitment: $3,000,000 KAYNE ANDERSON NON-TRADITIONAL
INVESTMENTS, L.P.
By: Kayne Anderson Non-Traditional, L.P.
Its: General Partner
By: Kayne Anderson Investment Management, Inc.
Its: General Partner
By: /s/ RICHARD A. KAYNE
-------------------------------
Name: Richard A. Kayne
-----------------------------
Title: Authorized Officer
----------------------------
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn:
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
Commitment: $2,400,000 OFFENSE GROUP ASSOCIATES, L.P.
By: Kayne Anderson Non-Traditional, L.P.
Its: General Partner
By: Kayne Anderson Investment Management, Inc.
Its: General Partner
By: /s/ RICHARD A. KAYNE
-------------------------------
Name: Richard A. Kayne
-----------------------------
Title: Authorized Officer
----------------------------
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn:
Telephone: (310) 284-6483
Telecopy : (310) 284-6444
18
<PAGE> 24
Commitment: $900,000 OPPORTUNITY ASSOCIATES,
LIMITED PARTNERSHIP
By: Kayne Anderson Non-Traditional, L.P.
Its: General Partner
By: Kayne Anderson Investment Management, Inc.
Its: General Partner
By: /s/ RICHARD A. KAYNE
-------------------------------
Name: Richard A. Kayne
-----------------------------
Title: Authorized Officer
----------------------------
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn:
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
Commitment: $300,000 KAYNE ANDERSON OFFSHORE LIMITED
By: /s/ JOHN SUTLIC
-------------------------------
Name: John Sutlic
-----------------------------
Title: Authorized Officer
----------------------------
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn:
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
19
<PAGE> 25
Commitment: $2,100,000 GLACIER WATER SERVICES, INC.
By: /s/ JERRY WELCH
--------------------------------
Name: Jerry Welch
------------------------------
Title: Authorized Officer
-------------------------------
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn:
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
Commitment: $1,200,000 PARADIGM INSURANCE COMPANY
By: /s/ FRANK ARKFELD
--------------------------------
Name: Frank Arkfeld
------------------------------
Title: Authorized Officer
-------------------------------
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn:
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
Commitment: $1,500,000 FOREMOST INSURANCE COMPANY
By: /s/ DONALD WELSH
--------------------------------
Name: Donald Welsh
------------------------------
Title: Authorized Officer
-------------------------------
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn:
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
20
<PAGE> 26
Commitment: $900,000 TOPA INSURANCE COMPANY
By: /s/ NOSH MARFATIA
--------------------------------
Name: Nosh Marfatia
------------------------------
Title: Authorized Officer
-------------------------------
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn:
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
21
<PAGE> 27
EXHIBIT A
PROMISSORY NOTE
Original Face Amount: $____________
Maker: UGLY DUCKLING CORPORATION, a Delaware corporation
Dated as of: February 12, 1998
1. Promise to Repay. FOR VALUE RECEIVED, UGLY DUCKLING
CORPORATION, a Delaware corporation ("Maker"), promises to pay to
_____________________ ("Payee"), or order, the principal sum of
_________________ Dollars ($________) or such lesser amount as shall equal the
outstanding amount of the loan (the "Loan") made by Payee to Maker, pursuant to
Section 2.01 of that certain Loan Agreement, dated as of February 12, 1998,
entered into between Maker and each of Payee and the other Lenders named therein
(the "Loan Agreement").
2. Defined Terms. Any and all initially capitalized terms used
herein shall have the meaning ascribed thereto in the Loan Agreement, unless
specifically defined herein. The term "or" as used in this Note has, except
where otherwise indicated, the inclusive meaning represented by the phrase
"and/or". This Promissory Note (this "Note") is one of the promissory notes
defined in the Loan Agreement as the "Notes" and is subject to, and entitled to
the benefits of, the terms and provisions of the Loan Agreement.
3. Payments of Principal and Interest.
(a) Maker hereby promises to make payments of
principal and interest with respect to the Loan evidenced hereby at the rates
and times, and in the amounts, and in all other respects in the manner as
provided in the Loan Agreement.
(b) As more fully set forth in the Loan Agreement,
Maker shall not be obligated to pay, and the holder of this Note shall not be
obligated to charge, collect, receive, reserve, or take interest (it being
understood that interest shall be calculated as the aggregate of all charges
which constitute interest under applicable law that are contracted for, charged,
reserved, received, or paid) in excess of the maximum nonusurious interest rate,
as in effect from time to time, which may be charged, contracted for, reserved,
received, or collected by Payee in connection with the Loan Agreement, this
Note, the other Loan Documents, or any other documents executed in connection
herewith or therewith.
4. Prepayments. Maker may prepay the principal balance due
under this Note, in whole or in part, without penalty or premium, only in
accordance with the provisions of the Loan Agreement.
5. Application of Payments. All payments (including
prepayments) made hereunder shall be applied first to accrued and unpaid
interest and then to principal.
<PAGE> 28
6. Time and Place of Payments. All principal and interest due
hereunder is payable in U.S. Dollars in immediately available funds at Payee's
office located at 1800 Avenue of the Stars, Suite 200, Los Angeles, CA 90067 (or
at such other office as may be designated from time to time by Payee), not later
than 1:30 p.m., Phoenix, Arizona time, on the date of payment.
7. Waivers. Maker, for itself and its legal representatives,
successors, and assigns, expressly waives presentment, demand, protest, notice
(except as required by the Loan Agreement), and all other requirements of any
kind, in connection with the enforcement or collection of this Note.
8. Acceleration and Waiver. IT IS EXPRESSLY AGREED THAT, UPON
THE OCCURRENCE OF AN EVENT OF DEFAULT AS SPECIFIED IN SECTIONS 7.01(g) THROUGH
(l) OF THE LOAN AGREEMENT, THE UNPAID PRINCIPAL BALANCE OF AND ANY ACCRUED AND
UNPAID INTEREST UNDER THIS NOTE SHALL AUTOMATICALLY BECOME IMMEDIATELY DUE AND
PAYABLE PURSUANT TO THE TERMS OF THE LOAN AGREEMENT, AND, UPON THE OCCURRENCE OF
ANY OTHER EVENT OF DEFAULT SPECIFIED IN SECTION 7.01 OF THE LOAN AGREEMENT, THE
UNPAID PRINCIPAL BALANCE OF ANY ACCRUED AND UNPAID INTEREST UNDER THIS NOTE MAY,
BY NOTICE IN WRITING TO MAKER, BE DECLARED TO BE IMMEDIATELY DUE AND PAYABLE
PURSUANT TO THE TERMS OF THE LOAN AGREEMENT, WITHOUT PRESENTMENT, DEMAND,
PROTEST, NOTICE (EXCEPT AS REQUIRED THE LOAN AGREEMENT), OR OTHER REQUIREMENTS
OF ANY KIND, ALL OF WHICH AR HEREBY EXPRESSLY WAIVED BY MAKER.
9. Attorneys' Fees. In the event it should become necessary to
employ counsel to collect or enforce this Note, Maker agrees to pay the
reasonable attorneys' fees and costs (including those of in-house counsel) of
the holder hereof, irrespective of whether suit is brought, to the extent and as
provided in the Loan Agreement.
10. Amendments. This Note may not be changed, modified,
amended, or terminated except by a writing duly executed by Maker and the holder
hereof.
11. Headings. Section headings used in this Note are solely
for convenience of reference, shall not constitute a part of this Note for any
other purpose, and shall not affect the construction of this Note.
12. GOVERNING LAW. EXCEPT AS OTHERWISE PROVIDED IN THE LOAN
AGREEMENT: (a) THIS NOTE SHALL BE DEEMED TO HAVE BEEN MADE IN THE STATE OF
CALIFORNIA; AND (b) THE VALIDITY OF THIS NOTE AND THE CONSTRUCTION,
INTERPRETATION AND ENFORCEMENT OF, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE
DETERMINED UNDER, GOVERNED BY, AND CONSTRUCTED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF CALIFORNIA.
13. WAIVER OF TRIAL BY JURY. MAKER, TO THE EXTENT IT MAY
LEGALLY DO SO, HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM,
DEMAND, ACTION, CAUSE OF ACTION, OR PROCEEDING ARISING UNDER OR WITH RESPECT TO
THIS NOTE, OR IN ANY WAY CONNECTED WITH, OR RELATED TO, OR INCIDENTAL TO, THE
DEALINGS OF MAKER, AND PAYEE, WITH RESPECT TO THIS
2
<PAGE> 29
NOTE, OR THE TRANSACTIONS RELATED HERETO, IN EACH CASE WHETHER NOW EXISTING OR
HEREAFTER ARISING, AND IRRESPECTIVE OF WHETHER SOUNDING IN CONTRACT, TORT, OR
OTHERWISE. TO THE EXTENT IT MAY LEGALLY DO SO, MAKER HEREBY AGREES THAT ANY SUCH
CLAIM, DEMAND, ACTION, CAUSE OF ACTION, OR PROCEEDING SHALL BE DECIDED BY A
COURT TRIAL WITHOUT A JURY AND THAT PAYEE MAY FILE AN ORIGINAL COUNTERPART OR A
COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF MAKER
TO WAIVER OF ITS RIGHT TO TRIAL BY JURY.
Dated as of February 12, 1998.
UGLY DUCKLING CORPORATION,
a Delaware corporation
By:
--------------------------------
Name: Steven P. Johnson
-------------------------------
Title: Senior Vice President and
-------------------------------
General Counsel
3
<PAGE> 30
EXHIBIT B
Warrant No. ___
WARRANT TO PURCHASE _________ SHARES OF COMMON STOCK
VOID AFTER 1:30 P.M.,
PHOENIX, ARIZONA TIME, ON FEBRUARY 12, 2001
OR SUCH LATER DATE SET FORTH HEREIN
UGLY DUCKLING CORPORATION
This certifies that, for value received, _____________________, the
registered holder hereof or assigns (the "Holder"), is entitled to purchase from
UGLY DUCKLING CORPORATION, a Delaware corporation (the "Company"), at any time
after February 12, 1998, and before the later of (i) 1:30 p.m., Phoenix, Arizona
time, on February 12, 2001 or (ii) such time as the Company has repaid in full
its Notes issued pursuant to that certain Loan Agreement dated as of February
12, 2001 between the Company and each of the Lenders named therein, at the
purchase price per share of $10.00 (the "Warrant Price"), the number of shares
of Common Stock, par value $0.001 per share, of the Company set forth above (the
"Shares"). The number of shares of Common Stock purchasable upon exercise of the
Warrant evidenced hereby and the Warrant Price is subject to adjustment from
time to time as set forth in the Warrant Agreement referred to below.
This Warrant may be redeemed, at the option of the Company and as more
specifically provided in the Warrant Agreement, at $.10 per share of Common
Stock purchasable upon exercise hereof, at any time after the average Daily
Market Price (as defined in Section 10 of the Warrant Agreement) per share of
the Common Stock for a period of at least twenty (20) consecutive trading days
ending not more than fifteen days prior to the date of the notice given pursuant
to Section 10(b) thereof has equaled or exceeded $16.00, and prior to expiration
of this Warrant. The Holder's right to exercise this Warrant terminates at 1:30
p.m. (Phoenix, Arizona time) on the date fixed for redemption in the notice of
redemption delivered by the Company in accordance with the Warrant Agreement.
The Warrants evidenced hereby may be exercised during the period
referred to above, in whole or in part, by presentation of this Warrant
certificate with the Purchase Form attached hereto duly executed and guaranteed
and simultaneous payment of the Warrant Price (as defined in the Warrant
Agreement and subject to adjustment as provided therein) at the principal office
of the Company. Payment of such price may be made at the option of the Holder in
cash or by certified check or bank draft, all as provided in the Warrant
Agreement.
The Warrants evidenced hereby are part of a duly authorized issue of
Warrants and are issued under and in accordance with the Warrant Agreement dated
as of February 12, 1998, between the Company and the Lenders party thereto, and
are subject to the terms and provisions
<PAGE> 31
contained in such Warrant Agreement, which Warrant Agreement is hereby
incorporated by reference herein and made a part hereof and is hereby referred
to for a description of the rights, limitations, duties and indemnities
thereunder of the Company and the Holder of the Warrants, and to all of which
the Holder of this Warrant certificate by acceptance hereof consents. A copy of
the Warrant Agreement may be obtained for inspection by the Holder hereof upon
written request to the Company.
Upon any partial exercise of the Warrants evidenced hereby, there will
be issued to the Holder a new Warrant certificate in respect of the Shares
evidenced hereby that have not been exercised. This Warrant certificate may be
exchanged at the office of the Company by surrender of this Warrant certificate
properly endorsed either separately or in combination with one or more other
Warrants for one or more new Warrants to purchase the same aggregate number of
Shares as evidenced by the Warrant or Warrants exchanged. No fractional Shares
will be issued upon the exercise of rights to purchase hereunder, but the
Company will pay the cash value of any fraction upon the exercise of one or more
Warrants, as provided in the Warrant Agreement.
The Warrant Price and the number of shares of Common Stock issuable
upon exercise of this Warrant is subject to adjustment as provided in Section 8
of the Warrant Agreement. The Warrant Agreement may be amended by the Company
and the holder or holders of a majority of the outstanding Warrants representing
a majority of the shares of Common Stock underlying such Warrants; provided that
without the consent of each holder of a Warrant certain specified changes cannot
be made to such holder's Warrants.
Neither the Warrants nor the shares of Common Stock underlying the
Warrants may be sold, assigned, or otherwise transferred except in accordance
with the provisions of the Warrant Agreement.
The Holder hereof may be treated by the Company and all other persons
dealing with this Warrant certificate as the absolute owner hereof for all
purposes and as the person entitled to exercise the rights represented hereby,
any notice to the contrary notwithstanding, and until any transfer is entered on
such books, the Company may treat the Holder hereof as the owner for all
purposes. Notices and demands to be given to the Company must be given by
certified or registered mail at the addresses provided in the Warrant Agreement.
All terms used in the Warrant Certificate that are defined in the
Warrant Agreement shall have the respective meanings ascribed to such terms in
the Warrant Agreement.
Dated: February 12, 1998 UGLY DUCKLING CORPORATION
By:
------------------------------
Steven P. Johnson
Senior Vice President and
General Counsel
2
<PAGE> 32
UGLY DUCKLING CORPORATION
PURCHASE FORM
Mailing Address:
UGLY DUCKLING CORPORATION
2525 East Camelback Road
Suite 1150
Phoenix, Arizona 85016
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant certificate for, and to purchase
thereunder, _____________Shares of Common Stock provided for therein, and
requests that certificates for such Shares be issued in the name of:
________________________________________________________________________________
________________________________________________________________________________
(Please Print or Type Name, Address and Social Security Number)
and that such certificates be delivered to _____________________________________
whose address is _______________________________________________________________
and, if said number of Shares shall not be all the Shares purchasable hereunder,
that a new Warrant certificate for the balance of the Shares purchasable under
the within Warrant certificate be registered in the name of the undersigned
Holder or his or her Assignee as below indicated and delivered to the address
stated below.
Dated:___________
Name of Holder or Assignee:
________________________________________________________________________________
(Please Print)
Address: _______________________________________________________________________
________________________________________________________________________________
Signature:
________________________
Note: The above signature must correspond with the name as it appears upon the
face of the within Warrant certificate in every particular, without alteration
or enlargement or any change whatever, unless these Warrants have been assigned.
Signature Guaranteed:
________________________
3
<PAGE> 33
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(Banks, Stock Brokers, Savings and Loan Association, and Credit Unions) WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO
S.E.C. RULE 17Ad-15.
4
<PAGE> 34
ASSIGNMENT
(To be signed only upon assignment of Warrants)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
________________________________________________________________________________
(Name and Address of Assignee Must Be Printed or Typewritten)
______________ Warrants, hereby irrevocably constituting and appointing _______
Attorney to transfer said Warrants on the books of the Company, with full power
of substitution in the premises.
Dated:_______________________
__________________________________
Signature of Registered Holder
Note: The signature on this assignment
must correspond with the name as it
appears upon the face of the within
Warrant certificate in every
particular, without alteration or
enlargement or any change whatever.
Signature Guaranteed:
_____________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (Banks, Stock Brokers, Savings and Loan Association, and Credit
Unions) WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM
PURSUANT TO S.E.C. RULE 17Ad-15.
5
<PAGE> 35
SCHEDULE 2.01
DISBURSEMENT OF LOANS
<TABLE>
<CAPTION>
Name of Lender Commitment
-------------- ----------
<S> <C>
ARBCO Associates, L.P. $ 2,700,000
Kayne Anderson Non-Traditional
Investments, L.P. $ 3,000,000
Offense Group Associates, L.P. $ 2,400,000
Opportunity Associates, Limited
Partnership $ 900,000
Kayne Anderson Offshore Limited $ 300,000
Glacier Water Services, Inc. .. $ 2,100,000
Paradigm Insurance Company $ 1,200,000
Foremost Insurance Company $ 1,500,000
Topa Insurance Company $ 900,000
-----------
$15,000,000
</TABLE>
<PAGE> 36
SCHEDULE 4.04
OUTSTANDING OBLIGATIONS
On January 28, 1998, the Company borrowed $7 million from Greenwich
Capital Financial Products, Inc. ("Greenwich") pursuant to a Loan Agreement,
dated as of January 28, 1998 (the "Greenwich Loan"). The Greenwich Loan was used
to repay amounts owing to GE Capital under the Revolving Facility. The Greenwich
Loan is secured by (1) a pledge by Duck Ventures, Inc., a direct wholly-owned
subsidiary of the Company ("DVI") of all of the issued and outstanding common
stock of Champion Receivables Corp. II ("CRC II"), a bankruptcy remote
subsidiary wholly-owned by DVI, and (2) all of the Company's right, title and
interest in and to certain collateral arising from the bankruptcy of Fist
Merchants Acceptance Corporation. The Greenwich Loan is payable by the Company
on April 28, 1998 and bears interest at the rate of 9 1/2 percent per annum.
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
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, 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
February 20, 1998
<PAGE> 1
Exhibit 99
UGLY DUCKLING CORPORATION AND
SUBSIDIARIES
Consolidated Financial Statements
December 31, 1997 and 1996
<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
<PAGE> 3
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
---- ----
ASSETS (IN THOUSANDS)
<S> <C> <C>
Cash and Cash Equivalents $ 3,537 $ 18,455
Finance Receivables, Net 123,093 60,952
Investments Held in Trust 18,914 3,479
Notes Receivable, Net 22,773 1,063
Inventory 33,888 5,752
Property and Equipment, Net 41,252 20,652
Intangible Assets, Net 17,543 2,150
Other Assets 18,054 5,580
-------- ---------
$279,054 $ 118,083
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts Payable $ 3,004 $ 2,132
Accrued Expenses and Other Liabilities 17,105 6,728
Notes Payable 65,171 12,904
Subordinated Note Payable 12,000 14,000
-------- ---------
Total Liabilities 97,280 35,764
-------- ---------
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
-------- ---------
$279,054 $ 118,083
======== =========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<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 24,075 9,811 8,359
-------- ------- --------
33,230 14,067 11,501
-------- ------- --------
Other Income:
Interest Income 34,384 15,856 10,071
Gain on Sale of Loans 21,713 4,434 --
Servicing Income 7,230 921 --
Other Income 3,977 650 308
-------- ------- --------
67,304 21,861 10,379
-------- ------- --------
Income before Operating Expenses 100,534 35,928 21,880
Operating Expenses:
Selling and Marketing 10,567 3,585 3,856
General and Administrative 65,000 19,538 14,726
Depreciation and Amortization 3,683 1,577 1,314
-------- ------- --------
79,250 24,700 19,896
-------- ------- --------
Income before Interest Expense 21,284 11,228 1,984
Interest Expense 5,260 5,262 5,956
-------- ------- --------
Earnings (Loss) before Income Taxes 16,024 5,966 (3,972)
Income Taxes 6,579 100 --
-------- ------- --------
Net Earnings (Loss) $ 9,445 $ 5,866 $ (3,972)
======== ======= ========
Basic Earnings (Loss) per Share $ 0.53 $ 0.63 $ (0.72)
======== ======= ========
Diluted Earnings (Loss) per Share $ 0.52 $ 0.60 $ (0.72)
======== ======= ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<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
EARNINGS STOCKHOLDERS'
SHARES AMOUNT (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.
<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:
Provision for Credit Losses 24,075 9,811 8,359
Gain on Sale of Loans (13,581) (4,434) --
Issuance of Warrants for Notes Receivable 612 -- --
Decrease (Increase) in Deferred Income Taxes 1,394 249 449
Depreciation and Amortization 3,683 1,577 1,314
Decrease (Increase) in Inventory (21,821) 577 (1,500)
Purchase of Finance Receivables for Sale (301,116) (45,989) --
Proceeds from Sale of Finance Receivables 237,173 38,989 --
Collections of Finance Receivables 62,454 -- --
Increase in Other Assets (10,459) (3,150) (529)
Increase in Accounts Payable, Accrued Expenses,
and Other Liabilities 8,726 2,949 3,035
Increase (Decrease) in Income Taxes
Receivable/Payable (1,377) 534 (984)
Other, Net -- -- 169
--------- -------- --------
Net Cash Provided by (Used in) Operating
Activities (792) 6,979 6,341
--------- -------- --------
Cash Flows from Investing Activities:
Increase in Finance Receivables (29,100) (67,803) (53,023)
Collections of Finance Receivables -- 49,201 19,795
Increase in Investments Held in Trust (15,436) (3,479) --
Net (Increase) Decrease in Notes Receivable (13,487) 100 --
Purchase of Property and Equipment (19,373) (6,111) (3,195)
Payment for Acquisition of Assets (46,316) -- --
Other, Net -- (1,909) --
--------- -------- --------
Net Cash Used in Investing Activities (123,712) (30,001) (36,423)
--------- -------- --------
Cash Flows from Financing Activities:
Additions to Notes Payable 22,448 1,000 22,259
Repayments of Notes Payable (81) (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 (179) (1,214) 2,807
--------- -------- --------
Net Cash Provided by Financing Activities
109,586 40,058 31,333
--------- -------- --------
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
========= ======== ========
</TABLE>
<PAGE> 7
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Cash Flows, Continued
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
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.
<PAGE> 8
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 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 $16.0 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.
1
<PAGE> 9
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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
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 $ 47,857 $ 32,467
========= =========
Other Income $ 31,978 $ 12,244
========= =========
Total Revenues $ 305,717 $ 285,785
========= =========
Net Loss $ (34,777) $ (7,508)
========= =========
Basic Loss Per Share $ (1.95) $ (0.95)
========= =========
Diluted Loss Per Share $ (1.95) $ (0.95)
========= =========
</TABLE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
The Company, through its subsidiaries, owns and operates sales finance
companies, used car sales dealerships, a property and casualty insurance
company, and is a franchiser of rental car operations. Additionally,
Champion Receivables Corporation 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, 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 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.
2
<PAGE> 10
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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. CFS operated eighty-three,
thirty-five and five branch offices in twenty-one, twelve and one states
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. Pre-opening
and start-up costs incurred on third party dealer branch offices are
deferred and charged to expense over a twelve-month period. The accrual
of interest is suspended if collection becomes doubtful, 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.
3
<PAGE> 11
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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.
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
The Company originates installment sales contracts from its company
dealerships and purchases contracts from third party dealers. Finance
receivables consist of contractually scheduled payments from installment
sales contracts net of unearned finance charges, accrued interest
receivable, direct loan origination costs, and an allowance for credit
losses, including 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"
for contracts originated at its company dealerships. 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.
For contracts generated by the company dealerships, the allowance is
established by charging the provision for credit losses. Contracts
purchased from third party dealers are generally purchased with a
nonrefundable acquisition discount (discount). The discount is negotiated
with third party dealers pursuant to a financing program that bases the
discount on, among other things, the credit risk of the borrower and the
amount to be financed in relation to the car's wholesale value. The
discount is allocated between discount available for credit losses and
discount available for accretion to interest income. The portion of
discount allocated to the allowance is based upon historical performance
and write-offs of contracts acquired from third party dealers, as well as
the general credit worthiness of the borrowers and the wholesale value of
the vehicle. The remaining discount, if any, is deferred and accreted to
income using the interest method.
4
<PAGE> 12
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
To the extent that the allowance is considered insufficient to absorb
anticipated losses on the third party dealer portfolio, additions to the
allowance are established through a charge to the provision for credit
losses. The evaluation of the discount and allowance considers such
factors as the performance of each third party dealer's loan portfolio,
the Company's historical credit losses, the overall portfolio quality and
delinquency status, the review of specific problem loans, the value of
underlying collateral, and current economic conditions that may affect
the borrower's ability to pay.
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.
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. The
Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating
cash flows of the acquired operation. The amount of goodwill impairment,
if any, is measured based on projected discounted future operating cash
flows using a discount rate reflecting the Company's average cost of
funds. The assessment of the recoverability of goodwill will be impacted
if estimated future operating cash flows are not achieved.
5
<PAGE> 13
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 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.
6
<PAGE> 14
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of,
on January 1, 1996. The Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate the carrying amount of an
asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to future 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. Adoption of this
Statement did not have a materiel impact on the Company.
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.
7
<PAGE> 15
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
A summary of finance receivables as of December 31, 1997 and 1996 follows
(in thousands):
<TABLE>
<CAPTION>
THIRD
COMPANY PARTY CYGNET
December 31, 1997: DEALERSHIPS DEALERS PROGRAM TOTAL
----------- ------- ------- -----
<S> <C> <C> <C> <C>
Installment Sales Contract
Principal Balances $ 55,965 $ 29,965 $ 27,481 $ 113,411
Add: Accrued Interest Receivable 461 414 147 1,022
Loan Origination Costs, Net 1,430 -- -- 1,430
-------- -------- --------- ---------
Principal Balances, Net 57,856 30,379 27,628 115,863
Residuals in Finance Receivables
Sold 11,216 18,160 -- 29,376
-------- -------- --------- ---------
69,072 48,539 27,628 145,239
Allowance for Credit Losses (10,356) (3,600) (1,035) (14,991)
Discount on Finance Receivables -- -- (7,155) (7,155)
-------- -------- --------- ---------
Finance Receivables, net $ 58,716 $ 44,939 $ 19,438 $ 123,093
======== ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
THIRD
COMPANY PARTY CYGNET
December 31, 1997: DEALERSHIPS DEALERS PROGRAM TOTAL
----------- ------- ------- -----
<S> <C> <C> <C> <C>
Installment Sales Contract
Principal Balances $ 7,068 $ 51,213 $ -- $ 58,281
Add: Accrued Interest Receivable 42 676 -- 718
Loan Origination Costs, Net 189 -- -- 189
-------- -------- ------- --------
Principal Balances, Net 7,299 51,889 -- 59,188
Residuals in Finance Receivables
Sold 8,512 1,377 -- 9,889
-------- -------- ------- --------
15,811 53,266 -- 69,077
Allowance for Credit Losses (1,625) (6,500) -- (8,125)
-------- -------- ------- --------
Finance Receivables, net $ 14,186 $ 46,766 $ -- $ 60,952
======== ======== ======= ========
</TABLE>
8
<PAGE> 16
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The finance receivables are classified as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
Finance Receivables Held for Sale $ 79,763 $52,188
Finance Receivables Held for Investment 36,100 7,000
-------- -------
$115,863 $59,188
======== =======
</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>
THIRD
COMPANY PARTY CYGNET
December 31, 1997: DEALERSHIPS DEALERS PROGRAM TOTAL
----------- ------- ------- -----
<S> <C> <C> <C> <C>
Balances, Beginning of Year $ 1,625 $ 6,500 $ -- $ 8,125
Provision for Credit Losses 22,354 1,030 491 23,875
Allowance on Acquired Loans 15,309 25,571 550 41,430
Accretion of Discount to Interest Income -- (642) -- (642)
Net Charge Offs (7,524) (4,197) (6) (11,727)
Sale of Finance Receivables (21,408) (24,662) -- (46,070)
-------- -------- ------- --------
Balances, End of Year $ 10,356 $ 3,600 $ 1,035 $ 14,991
======== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
THIRD
COMPANY PARTY CYGNET
December 31, 1997: DEALERSHIPS DEALERS PROGRAM TOTAL
----------- ------- ------- -----
<S> <C> <C> <C> <C>
Balances, Beginning of Year $ 7,500 $ 1,000 $ -- $ 8,500
Provision for Credit Losses 9,658 153 -- 9,811
Allowance on Acquired Loans -- 8,963 -- 8,963
Net Charge Offs (9,331) (650) -- (9,981)
Sale of Finance Receivables (6,202) (2,966) -- (9,168)
------- ------- -------- -------
Balances, End of Year $ 1,625 $ 6,500 $ -- $ 8,125
======= ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
THIRD
COMPANY PARTY CYGNET
December 31, 1995: DEALERSHIPS DEALERS PROGRAM TOTAL
----------- ------- ------- -----
<S> <C> <C> <C> <C>
Balances, Beginning of Year $ 6,050 $ 159 $ -- $ 6,209
Provision for Credit Losses 8,359 -- -- 8,359
Allowance on Acquired Loans -- 1,660 -- 1,660
Net Charge Offs (6,909) (819) -- (7,728)
------- ------- --------- -------
Balances, End of Year $ 7,500 $ 1,000 $ -- $ 8,500
======= ======= ========= =======
</TABLE>
9
<PAGE> 17
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
The valuation of the Residual in Finance Receivables Sold as of December
31, 1997 totaled $29,376,000 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
transactions involving contracts originated at Company Dealerships
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. For contracts purchased from Third Party Dealers, net
losses were originally estimated using total expected cumulative net
losses at loan origination of approximately 13.5%, adjusted for actual
cumulative net losses prior to securitization. Prepayment rates were
estimated to be 1.5% per month of the beginning of month balances.
During the year ended December 31, 1997, the Company recorded a $10.0
million charge to write-down the residuals in finance receivables sold.
The charge had the effect of increasing the cumulative net loss
assumption for contracts originated at Company Dealerships to
approximately 27.5%, and for contracts purchased from Third Party Dealers
to approximately 17.5% for the securitization transactions that took
place prior to June 30, 1997. For the securitization transactions
involving contracts originated at Company Dealerships that took place
subsequent to June 30, 1997, net losses were estimated using total
expected cumulative net losses at loan origination of approximately
27.5%, adjusted for actual cumulative net losses prior to securitization,
and for contracts purchased from Third Party Dealers, net losses were
estimated using total expected cumulative net losses at loan origination
of approximately 17.5%, 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>
1997 1996
--------- --------
<S> <C> <C>
Retained interest in subordinated securities (B
certificates) $ 42,765 $ 10,900
Net interest spreads, less present value discount 22,935 6,839
Reduction for estimated credit losses (36,324) (7,850)
--------- --------
Residuals in finance receivables sold $ 29,376 $ 9,889
========= ========
Securitized principal balances outstanding $ 238,025 $ 51,663
========= ========
Estimated credit losses and allowances as a % of
securitized principal balances outstanding 15.3% 15.2%
========= ========
</TABLE>
10
<PAGE> 18
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
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>
1997 1996
-------- --------
<S> <C> <C>
Balance, Beginning of Year $ 9,889 $ --
Additions 37,320 10,704
Amortization (7,833) (815)
Write-down of Residual in Finance Receivables Sold (10,000) --
-------- --------
Balance, End of Year $ 29,376 $ 9,889
======== ========
</TABLE>
(4) 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
$14,100,000. Additional net deposits through the trustee during 1997
totaled $904,000 resulting in a total balance in the spread accounts of
$17,634,000 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 $18,780,000, resulting in additional funding requirements
from future cash flows as of December 31, 1997 of $1,146,000. 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
$2,630,000. Additional net deposits through the trustee during 1996
totaled $213,000 resulting in a total balance in the spread accounts of
$2,843,000 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 $3,941,000.
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.
11
<PAGE> 19
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
(5) NOTES RECEIVABLE
In July 1997, First Merchants Acceptance Corporation (FMAC) filed for
bankruptcy. Immediately subsequent to the bankruptcy filing, the Company
executed a loan agreement with FMAC to provide FMAC with up to $10.0
million in debtor in possession (the DIP facility) financing. The DIP
facility accrues interest at 12.0%, is scheduled to mature on February
28, 1998, and is secured by substantially all of FMAC's assets. The
Company and FMAC subsequently amended the DIP facility to increase the
maximum commitment to $16.5 million and decrease the interest rate to
10.0% per annum. In connection with the amendment, FMAC pledged the first
$10.0 million of income tax refunds receivable, which FMAC anticipates
collecting in 1998, to the Company. Once the proceeds from the income tax
refunds are remitted to the Company, such amounts permanently reduce the
maximum commitment under the DIP facility. Thereafter, the Company
anticipates collecting the balance of the DIP facility from distributions
to FMAC from FMAC's residual interests in certain securitization
transactions. The outstanding balance on the DIP facility totaled
$10,868,000 at December 31, 1997.
During the third and fourth fiscal quarters of 1997, the Company acquired
the senior bank debt of FMAC from the bank group members holding such
debt. In December 1997, a credit bid for the outstanding balance of the
senior bank debt plus certain fees and expenses (the credit bid purchase
price) was entered and approved in the bankruptcy court resulting in the
transfer of the senior bank debt for the loan portfolio which secured the
senior bank debt (the owned loans). Simultaneous with the transfer to the
Company, a third party purchased the owned loans for 86% of the principal
balance of the loan portfolio, and the Company retained a participation
in the loan portfolio. FMAC has guaranteed that the Company will receive
an 11.0% return on the credit bid purchase price from the cash flows
generated by the owned loans, and further collateralized by FMAC's
residual interests in certain securitization transactions. The balance of
the participation as of December 31, 1997 totaled $5,399,000.
Various revolving notes receivable from used car dealers with a total
commitment of $8,750,000 expiring through September 1999 with interest
rates ranging from prime plus 5.50% to prime plus 9.75% per annum (14.0%
to 18.25% at December 31, 1997), interest payable monthly. The respective
revolving notes subject the borrower to borrowing base requirements with
advances on eligible collateral ranging from sixty to sixty-five percent
of the value of the underlying collateral. The balance outstanding on
these revolving notes receivable totaled $4,802,000, net of an allowance
for credit losses of $200,000 at December 31, 1997.
The Company had other notes receivable totaling $1,704,000 and $1,063,000
as of December 31, 1997 and 1996, respectively.
A summary of the allowance for credit losses for notes receivable for the
year ended December 31, 1997 follows (in thousands):
<TABLE>
<CAPTION>
1997
----
<S> <C>
Balance, Beginning of Year $ --
Provision for Credit Losses 200
Net Charge Offs --
----
Balance, End of Year $200
====
</TABLE>
12
<PAGE> 20
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
(6) PROPERTY AND EQUIPMENT
A summary of Property and Equipment as of December 31, 1997 and 1996
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
-------- --------
<S> <C> <C>
Land $ 13,813 $ 7,811
Buildings and Leasehold Improvements 16,245 5,699
Furniture and Equipment 13,785 6,389
Vehicles 232 156
Construction in Process 2,816 3,536
-------- --------
46,891 23,591
Less Accumulated Depreciation and Amortization (5,639) (2,939)
-------- --------
Property and Equipment, Net $ 41,252 $ 20,652
======== ========
</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 $ 17,944 $ 1,944
Trademarks 581 581
Covenants not to Compete 250 --
-------- -------
18,775 2,525
Accumulated Amortization (1,232) (375)
-------- -------
Intangibles, Net $ 17,543 $ 2,150
======== =======
</TABLE>
Amortization expense relating to intangible assets totaled $857,000,
$63,000, and $63,000 for the years ended December 31 1997, 1996, and
1995, respectively.
13
<PAGE> 21
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>
Due from GE Capital Corporation $ 3,000 $ --
Pre-opening and Startup Costs 2,453 1,242
Prepaid Expenses 2,193 796
Income Taxes Receivable 1,693 316
Investment in Marketable Securities 1,451 --
Servicing Receivables 1,389 --
Deposits 956 753
Forced Place Insurance Receivables, net 931 --
Employee Advances 821 42
Escrow Deposits -- 900
Deferred Income Taxes -- 676
Other Assets 3,167 855
------- ------
$18,054 $5,580
======= ======
</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 2,806 637
Servicing Liability 2,380 695
Deferred Revenue 1,136 601
Accrued Advertising 850 50
Obligations under Capital Leases 775 742
Accrued Post Sale Support 771 250
Deferred Income Taxes 718 --
Others 3,760 849
------- ------
$17,105 $6,728
======= ======
</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.
14
<PAGE> 22
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>
15
<PAGE> 23
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
(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.
(12) INCOME TAXES
Income taxes amounted to $6,579,000, $100,000, and zero for the years
ended December 31, 1997, 1996 and 1995, respectively (an effective tax
rate of 41.1%, 1.7% 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) $5,608 $ 2,028 $(1,350)
State Income Taxes, Net of Federal Effect 906 41 --
Change in Valuation Allowance -- (2,315) 1,418
Other, Net 65 346 (68)
------ ------- -------
$6,579 $ 100 $ --
====== ======= =======
</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 $ 3,920 $1,265 $5,185
State 980 414 1,394
------- ------ ------
$ 4,900 $1,679 $6,579
======= ====== ======
1996:
Federal $ (149) $ 187 $ 38
State -- 62 62
------- ------ ------
$ (149) $ 249 $ 100
======= ====== ======
</TABLE>
16
<PAGE> 24
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
1995:
Federal $(449) $449 $ --
State -- -- --
----- ---- -----
$(449) $449 $ --
===== ==== =====
</TABLE>
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 $ 473 $ 131
Inventory 246 --
Federal and State Income Tax Net Operating Loss
Carryforwards 28 995
Residual in Finance Receivables -- 140
Accrued Post Sale Support 357 179
Other 395 100
------- -------
Total Gross Deferred Tax Assets 1,499 1,545
Less: Valuation Allowance -- --
------- -------
Net Deferred Tax Assets 1,499 1,545
------- -------
Deferred Tax Liabilities:
Acquisition Discount -- (112)
Software Development Costs (237) (192)
Pre-opening and Startup Costs (1,236) (490)
Loan Origination Fees (586) (75)
Other (158) --
------- -------
Total Gross Deferred Tax Liabilities (2,217) (869)
------- -------
Net Deferred Tax Asset (Liability) $ (718) $ 676
======= =======
</TABLE>
17
<PAGE> 25
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
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
$2,315,000. 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% (3.00% 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 $7,230,000 and
$921,000 in the years ended December 31, 1997 and 1996, respectively.
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 $113,411 $ 59,188
Securitized with servicing retained 238,025 51,663
-------- --------
Amounts originated by the Company 351,436 110,851
Servicing on behalf of others 127,322 --
-------- --------
Total serviced portfolios $478,758 $110,851
======== ========
</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.
The Company has executed agreements with FMAC and other interested
parties whereby the Company has agreed to replace FMAC as servicer on
loan portfolios which totaled approximately $525 million at December 31,
1997. The agreements are subject to bankruptcy court approval, which the
Company anticipates will be received during the first fiscal quarter of
1998.
18
<PAGE> 26
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
(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>
December 31, AMOUNT
------------ ------
<S> <C>
1998 $ 7,635
1999 6,895
2000 4,884
2001 2,810
2002 1,342
Thereafter 1,233
--------
Total $ 24,799
========
</TABLE>
(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.
19
<PAGE> 27
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
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.
(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) --
======== ======= =======
Income (Loss) available to Common
Stockholders $ 9,445 $ 4,950 $(3,972)
======== ======= =======
Basic EPS-Weighted Average
Shares Outstanding 17,832 7,887 5,522
======== ======= =======
Basic Earnings (Loss) Per Share $ 0.53 $ 0.63 $ (0.72)
======== ======= =======
</TABLE>
20
<PAGE> 28
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -----
<S> <C> <C> <C>
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 $ 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.
21
<PAGE> 29
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
The Company applies APB Opinion 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock
options in the consolidated financial statements. Had the Company
determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net earnings and
earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1997 1996
------------ ------------
<S> <C> <C> <C>
Net Earnings As reported $ 9,445,000 $ 4,950,000
Pro forma $ 8,567,000 $ 4,832,000
Earnings per Share-Basic As reported $ 0.53 $ 0.63
Pro forma $ 0.48 $ 0.61
Earnings per Share-Diluted As Reported $ 0.52 $ 0.60
Pro forma $ 0.48 $ 0.58
</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>
22
<PAGE> 30
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
NUMBER WEIGHTED-AVG. WEIGHTED-AVG. EXERCISABLE WEIGHTED-AVG.
RANGE OF OUTSTANDING REMAINING EXERCISE AT EXERCISE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE PRICE 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.
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.
23
<PAGE> 31
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
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.
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.
24
<PAGE> 32
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
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.
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) SUBSEQUENT EVENTS
Subsequent to December 31, 1997, the Company announced that it intended
to terminate its third party dealer branch network and record a pre-tax
restructuring charge of $6.0 million to $10.0 million in 1998. The
restructuring is expected to be complete by the end of the first quarter
of 1998 and include the termination of approximately 400 employees,
substantially all of whom are employed at the Companies 76 branches that
were in place on the date of the announcement. Approximately $1.0 million
of the restructuring charge is for termination benefits, $2.5 million for
writeoff 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.
(22) 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 five distinct
business segments. These consist of retail car sales operations (Company
dealerships), the income generated from the finance receivables generated
at the Company dealerships, finance income generated from third party
finance receivables, the Cygnet program 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.
25
<PAGE> 33
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
COMPANY THIRD
COMPANY DEALERSHIP PARTY CYGNET CORPORATE
DEALERSHIPS RECEIVABLES RECEIVABLES PROGRAM AND OTHER TOTAL
----------- ----------- ----------- ------- --------- -----
(IN THOUSANDS)
<S> <C> <C> <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 22,355 -- 1,030 690 -- 24,075
--------- -------- -------- -------- -------- --------
34,950 -- (1,030) (690) -- 33,230
--------- -------- -------- -------- -------- --------
Interest Income -- 12,613 14,352 3,655 3,764 34,384
Gain on Sale of Loans -- 6,721 6,861 -- 8,131 21,713
Other Income 1,498 7,305 33 355 2,016 11,207
--------- -------- -------- -------- -------- --------
Income before
Operating Expenses 36,448 26,639 20,216 3,320 13,911 100,534
--------- -------- -------- -------- -------- --------
Operating Expenses:
Selling and Marketing 10,499 -- -- 18 50 10,567
General and
Administrative 23,064 12,523 15,729 2,194 11,490 65,000
Depreciation and
Amortization 1,536 1,108 383 28 628 3,683
--------- -------- -------- -------- -------- --------
35,099 13,631 16,112 2,240 12,168 79,250
--------- -------- -------- -------- -------- --------
Income before Interest Expense $ 1,349 $ 13,008 $ 4,104 $ 1,080 $ 1,743 $ 21,284
========= ======== ======== ======== ======== ========
Capital Expenditures $ 13,571 $ 3,791 $ 1,090 $ 19 $ 902 $ 19,373
========= ======== ======== ======== ======== ========
Identifiable Assets $ 4,287 $ 78,514 $ 61,540 $ 27,539 $ 37,174 $279,054
========= ======== ======== ======== ======== ========
December 31, 1996:
Sales of Used Cars $ 53,768 $ -- $ -- $ -- $ -- $ 53,768
Less: Cost of Cars Sold 29,890 -- -- -- -- 29,890
Provision for Credit
Losses 9,658 -- 153 -- -- 9,811
--------- -------- -------- -------- -------- --------
14,220 -- (153) -- -- 14,067
--------- -------- -------- -------- -------- --------
Interest Income -- 8,426 7,259 -- 171 15,856
Gain on Sale of Loans -- 3,925 509 -- -- 4,434
Other Income 195 921 -- -- 455 1,571
--------- -------- -------- -------- -------- --------
Income before
Operating Expenses 14,415 13,272 7,615 -- 626 35,928
--------- -------- -------- -------- -------- --------
Operating Expenses:
Selling and Marketing 3,568 -- -- -- 17 3,585
General and
Administrative 8,295 3,042 3,955 -- 4,246 19,538
Depreciation and
Amortization 318 769 195 -- 295 1,577
--------- -------- -------- -------- -------- --------
12,181 3,811 4,150 -- 4,558 24,700
--------- -------- -------- -------- -------- --------
Income (loss) before
Interest Expense $ 2,234 $ 9,461 $ 3,465 $ -- $ (3,932) $ 11,228
========= ======== ======== ======== ======== ========
Capital Expenditures $ 4,530 $ 455 $ 621 $ -- $ 505 $ 6,111
========= ======== ======== ======== ======== ========
Identifiable Assets $ 20,698 $ 12,775 $ 45,558 $ -- $ 39,052 $118,083
========= ======== ======== ======== ======== ========
</TABLE>
26
<PAGE> 34
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
COMPANY THIRD
COMPANY DEALERSHIP PARTY CYGNET CORPORATE
DEALERSHIPS RECEIVABLES RECEIVABLES PROGRAM AND OTHER TOTAL
----------- ----------- ----------- ------- --------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1995:
Sales of Used Cars $ 47,824 $ -- $ -- $ -- $ -- $ 47,824
Less: Cost of Cars Sold 27,964 -- -- -- -- 27,964
Provision for Credit
Losses 8,359 -- -- -- -- 8,359
--------- -------- -------- -------- -------- --------
11,501 -- -- -- -- 11,501
--------- -------- -------- -------- -------- --------
Interest Income -- 8,227 1,844 -- -- 10,071
Other Income -- -- -- -- 308 308
--------- -------- -------- -------- -------- --------
Income before
Operating Expenses 11,501 8,227 1,844 -- 308 21,880
--------- -------- -------- -------- -------- --------
Operating Expenses:
Selling and Marketing 3,856 -- -- -- -- 3,856
General and
Administrative 8,210 2,681 1,163 -- 2,672 14,726
Depreciation and
Amortization 279 479 89 -- 467 1,314
--------- -------- -------- -------- -------- --------
12,345 3,160 1,252 -- 3,139 19,896
--------- -------- -------- -------- -------- --------
Income (loss) before
Interest Expense $ (844) $ 5,067 $ 592 $ -- $ (2,831) $ 1,984
========= ======== ======== ======== ======== ========
Capital Expenditures $ 1,195 $ 1,561 $ 216 $ -- $ 223 $ 3,195
========= ======== ======== ======== ======== ========
Identifiable Assets $ 11,452 $ 32,187 $ 13,419 $ -- $ 3,732 $ 60,790
========= ======== ======== ======== ======== ========
</TABLE>
27
<PAGE> 35
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements, Continued
(23) 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 $30,734 $ 44,271 $ 45,204 $70,909 $191,118
======= ======== ======== ======= ========
Income before Operating Expenses 17,589 24,587 20,129 38,229 100,534
======= ======== ======== ======= ========
Operating Expenses 11,406 16,705 21,517 29,622 79,250
======= ======== ======== ======= ========
Income (Loss) before Interest Expense 6,183 7,882 (1,388) 8,607 21,284
======= ======== ======== ======= ========
Net Earnings (Loss) $ 3,262 $ 4,311 $ (1,828) $ 3,700 $ 9,445
======= ======== ======== ======= ========
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 $19,396 $ 20,081 $ 18,259 $17,893 $ 75,629
======= ======== ======== ======= ========
Income before Operating Expenses 8,442 9,005 8,741 9,740 35,928
======= ======== ======== ======= ========
Operating Expenses 5,694 6,296 5,522 7,188 24,700
======= ======== ======== ======= ========
Income before Interest Expense 2,716 2,721 3,157 2,634 11,228
======= ======== ======== ======= ========
Net Earnings $ 1,065 $ 1,083 $ 1,967 $ 1,751 $ 5,866
======= ======== ======== ======= ========
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>
28
