<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 5, 1998
REGISTRATION NO. 333-42973
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
UGLY DUCKLING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 5521 86-0721358
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
(602) 852-6600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
STEVEN P. JOHNSON, ESQ.
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
UGLY DUCKLING CORPORATION
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
(602) 852-6600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPY TO:
STEVEN D. PIDGEON, ESQ.
SNELL & WILMER L.L.P.
ONE ARIZONA CENTER
PHOENIX, ARIZONA 85004-0001
(602) 382-6000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM
SECURITIES TO BE REGISTERED AGGREGATE OFFERING AMOUNT OF
PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value........................................... $33,437,500 $ 9,864.06
Warrants................................................................ 0 0
Common Stock underlying Warrants(2)(3).................................. $15,527,800 $ 4,580.70
Total......................................................... $14,444.76(4)
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) and (g) under the Securities Act of 1933, as
amended.
(2) Pursuant to Rule 416, there are also being registered such additional shares
as may be issuable pursuant to anti-dilution provisions of the Warrants.
(3) Consists of shares of Common Stock issuable upon exercise of the Warrants.
(4) $13,947.97 of this amount was paid on the initial filing of this
Registration Statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED FEBRUARY 5, 1998
[UGLY DUCKLING LOGO]
5,666,190 SHARES OF COMMON STOCK
AND
666,190 COMMON STOCK PURCHASE WARRANTS
This Prospectus relates to (i) warrants (the "Warrants") to purchase up to
325,000 shares of Common Stock, par value $.001 per share ("Common Stock"), of
Ugly Duckling Corporation, a Delaware corporation (the "Company"), which may be
issued to First Merchants Acceptance Corporation ("FMAC") for the benefit of its
unsecured creditors and/or existing equity holders in connection with a plan of
reorganization of FMAC (the "Plan of Reorganization") filed by FMAC in the
Bankruptcy Case (defined below), and the shares of Common Stock underlying the
Warrants (the "Warrant Shares"), and (ii) up to 5,000,000 shares of Common Stock
of the Company (the "Stock Option Shares") that may be issued in the future one
time only at the election of the Company in lieu of making cash distributions
otherwise payable to FMAC from proceeds of certain residual interests in
securities held by FMAC or certain subsidiaries of FMAC. See "FMAC Transaction"
and "Plan of Distribution." On July 11, 1997, FMAC filed for reorganization
under the Federal Bankruptcy Code in the United States District Court for the
District of Delaware (the "Bankruptcy Court") and such petition is currently
pending as Case No. 97-1500 (JJF) (the "Bankruptcy Case").
The Warrants will be exercisable at any time within three years from the
date of issuance to purchase an aggregate of 325,000 shares of the Company's
Common Stock at a price of $20.00 per share and will be redeemable by the
Company for $.10 per Warrant if the market price of the Common Stock closes at
or above $28.50 per share during any 10 consecutive trading days. The number of
shares of Common Stock purchaseable upon exercise of the Warrants and the
exercise price of the Warrants are subject to adjustment in certain events. See
"Description of Capital Stock -- Warrants." All or a portion of the Stock Option
Shares will be issued one time only, if at all, at an assigned value of 98% of
the average of the closing prices of the Company's Common Stock for the ten
trading days prior to the date of issuance, provided that the Company's Common
Stock is then trading at, and the closing price of the Common Stock on each day
during the 10 previous trading days was equal to, at least $8.00 per share and
certain other requirements are satisfied. See "FMAC Transaction."
FMAC will be deemed to be an underwriter (as such term is defined in
Section 2(11) of the Securities Act of 1933) of the Warrants, the related
Warrant Shares, and the Stock Option Shares to the extent that it participates,
directly or indirectly, in the distribution of such securities.
(Continued on following page)
SEE "RISK FACTORS" AT PAGE 10 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES
OFFERED HEREBY.
IN DETERMINING WHETHER TO VOTE IN FAVOR OF THE PLAN OF REORGANIZATION, THIS
PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE PLAN OF REORGANIZATION AND THE
DISCLOSURE STATEMENT (DEFINED BELOW) OF FMAC. SEE "PROSPECTUS SUMMARY" AND "FMAC
TRANSACTION."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is February , 1998.
<PAGE> 3
(Continued from previous page)
This Prospectus also relates to warrants (the "Bank Group Warrants") to
purchase up to 341,190 shares of Common Stock of the Company which may be
offered for sale from time to time by persons (the "Selling Securityholders")
who previously acquired such Bank Group Warrants in a private transaction in
connection with the Bankruptcy Case, and the shares of Common Stock underlying
the Bank Group Warrants (the "Warrant Shares"). See "FMAC Transaction" and
"Selling Securityholders." The Bank Group Warrants will be exercisable at any
time through February 20, 2000 at a price of $20.00 per share and will be
redeemable by the Company for $.10 per Bank Group Warrant if the market price of
the Common Stock closes at or above $27.00 per share during any five consecutive
trading days. The number of shares of Common Stock purchaseable upon exercise of
the Bank Group Warrants and the exercise price thereof are subject to adjustment
in certain events. See "Description of Capital Stock -- Bank Group Warrants."
The Bank Group Warrants and related Warrant Shares may be sold or
distributed from time to time by or for the account of the Selling
Securityholders or their nominees or pledgees through dealers, brokers or other
agents, or directly to one or more purchasers, including pledgees, at market
prices prevailing at the time of sale or at prices otherwise negotiated. None of
the proceeds from the sale of the Bank Group Warrants and related Warrant Shares
offered by the Selling Securityholders will be received by the Company (except
proceeds of the exercise of such Bank Group Warrants) or by FMAC or its
creditors or interest holders. The Bank Group Warrants are not being offered to
FMAC or to or for the benefit of creditors or interest holders of FMAC as part
of its Plan of Reorganization. See "Plan of Distribution."
Substantially all of the expenses in connection with the registration of
the securities offered hereby will be borne by the Company. See "Plan of
Distribution."
The Common Stock is quoted on the Nasdaq National Market ("Nasdaq") under
the symbol "UGLY." On February 2, 1998, the last reported price of the Common
Stock was $6.50 per share.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Investors should carefully consider the
information set forth under the heading "Risk Factors."
As used herein, amounts followed by "(pro forma)" do not include revenues
or sales derived from one Company dealership which was sold December 31, 1995.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Introduction."
In determining whether to vote in favor of the Plan of Reorganization, this
Prospectus should be read in conjunction with the Plan of Reorganization and
FMAC's Joint Disclosure Statement Of Debtors In Connection With Solicitation Of
Ballots With Respect To Joint Plan Under Chapter 11 Of The United States
Bankruptcy Code (the "Disclosure Statement"). The Plan of Reorganization and/or
Disclosure Statement sets forth a description of the rights of various classes
of creditors and equity holders of FMAC, as well as a liquidation analysis of
FMAC, and certain information concerning the residual interests in
securitizations of FMAC and projected cash flows therefrom, anticipated
recoveries estimated by FMAC for each of FMAC's significant asset categories,
and certain estimated ranges of potential creditor recoveries. The Company makes
no representations with respect to the information included in the Plan of
Reorganization and Disclosure Statement or any exhibits thereto (other than this
Prospectus) and assumes no responsibility for the accuracy or adequacy thereof.
THE COMPANY
The Company operates the largest publicly-held chain of "Buy Here-Pay Here"
used car dealerships in the United States and underwrites, finances, and
services retail installment contracts generated from the sale of used cars by
its dealerships and by third party used car dealers located in selected markets
throughout the country. As part of its financing activities, the Company has
initiated a collateralized dealer financing program pursuant to which it
provides qualified independent used car dealers with operating credit lines
secured by the dealers' retail installment contract portfolios. The Company
targets its products and services to the sub-prime segment of the automobile
financing industry, which focuses on selling and financing used cars to persons
who have limited credit histories, low incomes, or past credit problems
("Sub-Prime Borrowers").
The Company has expanded significantly in recent periods. From 1995 to
1996, total revenues increased by 55.2%, from $48.7 million (pro forma) to $75.6
million. The Company's net income grew to $5.9 million in 1996 (including $4.4
million in gains recognized from the sale of contract receivables pursuant to a
securitization program (the "Securitization Program")), or $.60 per share,
compared with a net loss of $(4.0) million, or $(.67) per share in 1995. During
the nine month period ended September 30, 1997, total revenues increased by
108.3% to $120.2 million from $57.7 million in the comparable period in 1996.
The Company's net income was $5.7 million during the nine month period ended
September 30, 1997 (including $10.3 million in gains recognized from the sale of
contract receivables under the Securitization Program), or $0.32 per share,
compared to $4.1 million (including $2.6 million in gains recognized from the
sale of contract receivables under the Securitization Program), or $0.46 per
share in the comparable period in 1996.
During the nine month period ended September 30, 1997, the Company
originated 10,208 contracts with an aggregate principal balance of $76.1 million
at its used car dealerships ("Company Dealerships") and purchased 26,147
contracts from third party used car dealers ("Third Party Dealers") with an
aggregate principal balance of $144.2 million, compared to 5,413 contracts
originated at Company Dealerships with an aggregate principal balance of $38.2
million and 5,781 contracts purchased from Third Party Dealers with an aggregate
principal balance of $32.9 million during the comparable period in 1996. In
addition, during the nine month period ended September 30, 1997, the Company
purchased a total of 13,250 contracts with an aggregate principal balance of
$55.4 million from E-Z Plan, Inc. and Seminole Finance Company in connection
with the acquisition of substantially all of the assets related to their
respective dealership and loan servicing operations. The principal balance of
the Company's total contract portfolio managed as of September 30, 1997 was
$270.7 million, including $229.0 million in contracts serviced under the
Securitization Program. Substantially all of the contracts the Company services
are with Sub-Prime Borrowers.
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Company Dealership Operations. The Company sells used cars through 43
wholly-owned used car dealerships in Arizona, California, Georgia, Texas,
Florida, Nevada, and New Mexico and finances such sales through retail
installment contracts that the Company services. The Company's competition for
its Company Dealerships are the numerous small independent used car dealerships
that sell and finance used cars to Sub-Prime Borrowers ("Buy Here-Pay Here
Dealers"). The Company estimates that there are over 63,000 independent used car
dealers in the United States, a substantial portion of which are Buy Here-Pay
Here Dealers. The Company distinguishes its Company Dealership operations from
those of typical Buy Here-Pay Here Dealers by providing multiple locations,
upgraded facilities, large inventories of used automobiles, centralized
purchasing on a regional basis, value-added marketing programs, and dedication
to customer service. Many Company Dealerships maintain extensive inventories of
100 to 300 used cars and feature a wide selection of makes and models (with ages
generally ranging from five to ten years). The average sales price per car at
Company Dealerships was $7,107 for 1996 and $7,364 during the nine month period
ended September 30, 1997. The Company has developed flexible underwriting
guidelines and techniques, which combine established underwriting criteria with
managerial discretion to facilitate rapid credit decisions.
The Company believes it has achieved wide-spread brand name recognition
through extensive television, radio, and billboard advertising featuring its
widely-recognized animated duck mascot and logo. The Company emphasizes its
large network of Company Dealerships, its wide selection of quality used cars,
and its ability to finance most Sub-Prime Borrowers. The Company has also
established several innovative marketing programs that are designed to attract
Sub-Prime Borrowers by assisting them in re-establishing their credit, offering
rewards for timely payment on contracts, and promoting customer loyalty.
Third Party Dealer Operations. The Company also purchases and services
contracts originated by Third Party Dealers. Through its acquisition of Champion
Financial Services, Inc. in 1994, the Company entered the Third Party Dealer
financing market in order to leverage the contract servicing expertise it had
acquired through its Company Dealership activities. Since that time, the Company
has significantly expanded its Third Party Dealer contract purchasing operations
and, as of the date of this Prospectus, has 76 Third Party Dealer contract
buying offices ("Branch Offices") in 21 states and has entered into contract
purchasing agreements with approximately 4,000 Third Party Dealers.
The Company is in the process of expanding its Third Party Dealer
operations by expanding its collateralized dealer financing program (the "Cygnet
Dealer Program"). The Company believes that providing operating credit lines to
qualified Third Party Dealers will give such dealers a unique opportunity to
obtain the debt financing necessary to expand their businesses while enabling
the Company to earn additional finance income and to diversify its earning asset
base. The Company also believes that the relationships established with these
dealers will provide it with a preferred position to acquire retail installment
contracts from them. Such contract purchases would provide these dealers with an
additional source of financing and enable the Company to further expand its
contract portfolio.
In spite of the expansion of its Third Party Dealer operations, the Company
is undertaking a strategic evaluation that will consider, among other
alternatives, a sale or spin-off of these operations. See "Strategic Review"
below.
The Company has also established insurance operations directed to the
sub-prime market. Its initial activities in this area have focused primarily on
force placing casualty insurance on its Third Party Dealer contracts.
Loan Servicing and Collections. The Company services loans that are
originated at its Company Dealerships, purchased from Third Party Dealers, and
securitized with servicing retained. In addition, in conjunction with the
acquisition of the Kars-Yes Holdings Inc. ("Kars") dealership and servicing
operations in September 1997, the Company began servicing the Kars loan
portfolio, which was retained by the prior owner of these dealerships. The
Company currently maintains loan servicing and collection facilities in Phoenix,
Arizona; San Antonio, Texas; Dallas, Texas and Tampa, Florida. Pursuant to the
terms of various servicing agreements, the Company generally receives monthly
servicing fees for servicing the securitized portfolios and the Kars portfolio
ranging from .25% to .33% of principal balances (3.00% to 4.00% per annum).
Under the terms of the servicing agreements, the portfolios must meet certain
performance criteria. Failure to
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meet the specified performance measures could result in penalties, including
withdrawal of servicing from the Company. In connection with the FMAC
transaction (described below), the Company has executed or anticipates executing
certain agreements which, among other things, provide for the Company to service
the FMAC loan portfolio that has been acquired by an unrelated third party as
well as the receivables contained in certain securitized pools of FMAC. See
"FMAC Transaction."
Recent Acquisitions. The Company has expanded its Company Dealership and
loan servicing and collections operations through several recent acquisitions.
On January 15, 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. On April 1, 1997, the Company purchased substantially all of the
assets of E-Z Plan, Inc. ("E-Z Plan"), a Company engaged in the business of
selling and financing used motor vehicles, including seven dealerships in San
Antonio and a contract portfolio of approximately $24.3 million. On September
19, 1997, the Company purchased substantially all of the dealership and loan
servicing assets (but not the loan portfolio) of 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. The Company expects to continue to grow the
Company Dealership portion of its business through strategic acquisitions in the
future.
FMAC Transaction. In recent periods, the Company has been actively
involved in the reorganization proceeding of First Merchants Acceptance
Corporation ("FMAC"). FMAC was in the business of purchasing and securitizing
loans made primarily to Sub-Prime Borrowers by various third party used car
dealers. FMAC filed for reorganization under Title 11 of the United States Code
(the "Bankruptcy Code") on July 11, 1997 (the "Petition Date"). Concurrent with
the filing of the Chapter 11 petition, the Company, which owns approximately
2.5% of FMAC's common stock, agreed to provide up to $10.0 million in
debtor-in-possession financing to FMAC, of which $3.8 million was outstanding at
September 30, 1997. During the pendency of the proceeding, the Company acquired
FMAC's senior bank debt (the "Senior Bank Debt") aggregating $103.0 million in
principal amount as of the Petition Date. In connection with the acquisition of
the Senior Bank Debt, the Company issued the Bank Group Warrants plus certain
additional warrants not being registered hereby to members of the bank group
previously holding such debt. On December 15, 1997, the Bankruptcy Court entered
an order approving a transfer whereby the agent for the holders of the Senior
Bank Debt credit bid this debt and purchased the contracts which secured the
debt (the "Owned Contracts"), and sold the Owned Contracts to a third party
purchaser (the "Contract Purchaser") for approximately $78.9 million. Of the
proceeds, approximately $60.4 million were used to acquire or to repay loans to
acquire the Senior Bank Debt, approximately $15.5 million have been added to
working capital and approximately $3.0 million were placed in a holdback account
for a period of sixty days. The Company expects to record a gain of
approximately $6.0 to $7.0 million ($3.6 to $4.2 million after income taxes)
from this transaction. The Company has guaranteed to the Contract Purchaser a
10.35% return on the transaction subject to a maximum guarantee of $10.0
million. In connection with the proposed FMAC Plan of Reorganization, the
Company has agreed to provide additional debtor-in-possession financing (up to a
total of $16.5 million), to increase such financing to $18.5 million if certain
conditions are satisfied, to issue the Warrants and to provide FMAC an interest
in any returns in respect of the Owned Contracts in excess of a formularized
amount. FMAC has agreed to guarantee such formularized amount and to grant a
lien on certain of its assets to secure the same. In addition, it is
contemplated that the Company will obtain certain servicing rights and FMAC's
servicing platform with respect to such rights, and an interest in distributions
to be made under the residual interests held by FMAC in various securitization
transactions. The Plan of Reorganization also contemplates that the Company may
increase its interest in the cash distributions to be made in connection with
the residual interests by issuing the Stock Option Shares, all as more fully
provided in "FMAC Transaction" below. Substantially all of the Company's rights
as described above are subject to certain limitations and conditions. See "FMAC
Transaction" and "Risk Factors -- Risks Relating to FMAC Transaction."
Strategic Review. The Company has begun an evaluation of strategic
alternatives for certain of its business segments. Specifically, the Company is
reviewing, among other alternatives, the potential sale or spin-off to third
parties or shareholders of the Company's Third Party Dealer operations,
including its Branch Office network and Cygnet Dealer Program, and related
portfolios. No change in the Company's primary
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business of selling and financing used cars through its dealership network is
being considered. Among other matters, the evaluation will consider whether the
Company should focus on its core dealership operations, and whether this focus
would facilitate the ability of investors to evaluate the Company. The strategic
evaluation is expected to take several months, with a recommendation to the
Board of Directors anticipated in the first half of 1998. Any sale or spinoff
would be subject to a number of factors, including satisfactory resolution of
relevant business, accounting, regulatory, legal and tax issues. See "Risk
Factors -- Potential Change in Business Strategy."
Capital Resources. The Company finances its operations through the
issuance of equity securities and borrowings pursuant to various credit
arrangements, including a revolving credit facility (the "Revolving Facility")
with General Electric Capital Corporation ("GE Capital"), and its Securitization
Program which through September 30, 1997 has included the sale of $170.4 million
in Class A Certificates to SunAmerica Life Insurance Company ("SunAmerica") and
$85.1 million in Class A Certificates through Greenwich Capital Markets, Inc.
("Greenwich"). Through September 30, 1997, the Company had securitized an
aggregate of $155.9 million in contracts originated through Company Dealerships
and $157.8 million in contracts originated at Third Party Dealers and purchased
by the Company. Standard & Poor's has given ratings ranging from "BBB" to "A" to
the $170.4 million in securities issued to SunAmerica, and a "AAA" rating to the
$85.1 million in securities issued to Greenwich (which are insured by MBIA
Insurance Corporation), in connection with the Securitization Program. Moody's
Investors Service has given the $85.1 million in securities issued to Greenwich
an "Aaa" rating. The Company believes that the securitizations consummated with
SunAmerica are the only "investment grade" ratings given to certificates
collateralized by used car installment contracts originated at Buy Here-Pay Here
dealerships without any external credit enhancement. The Standard & Poor's and
Moody's Investors Service ratings are unrelated to an investment in the
Warrants, Bank Group Warrants, Warrant Shares, or Stock Option Shares being
offered pursuant to this Prospectus. In the fourth quarter of 1997, the Company
completed a securitization transaction with private investors through Greenwich
in the amount of $43.6 million.
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 the Retained Assets including the Tax Refunds (as defined below under the
heading "FMAC Transactions -- Senior Bank Debt Claims"). 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.
THE OFFERING
Warrants offered.............. 325,000 Warrants offered by the Company,
each to purchase
one share of Common Stock at $20.00 per
share, at any time within 36 months
following the date of issuance, and subject
to redemption by the Company for $.10 per
Warrant if the Common Stock closes at or
above $28.50 per share during any ten
consecutive trading days. The number of
shares of Common Stock purchaseable upon
exercise of the Warrants and the exercise
price of the Warrants is subject to
adjustment in certain events.
Bank Group Warrants offered... 341,190 Bank Group Warrants offered by the
Selling Securityholders, each to purchase
one share of Common Stock at $20.00 per
share, at any time on or prior to February
20, 2000, and subject to redemption by the
Company for $.10 per Bank Group Warrant if
the Common Stock closes at or above $27.00
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<PAGE> 8
per share during any five consecutive
trading days. The number of shares of Common
Stock purchaseable upon exercise of the Bank
Group Warrants and the exercise price of the
Bank Group Warrants is subject to adjustment
in certain events. The Bank Group Warrants
are not being offered to FMAC or to or for
the benefit of creditors or interest holders
of FMAC as part of the Plan of
Reorganization. See "Plan of Distribution."
Common Stock offered.......... Up to 5,666,190 shares, including 5,000,000
Stock Option Shares and 666,190 Warrant
Shares.
Common Stock outstanding(1)... 18,548,961
Use of Proceeds............... The Warrants, related Warrant Shares and
Stock Option Shares are being distributed
hereunder in connection with the Plan of
Reorganization. The Warrants would be and
the Stock Option Shares may be issued in
consideration for certain rights in the
Bankruptcy Case, including a reduction in
cash distributions that may otherwise be
payable to FMAC in respect of retained
assets of FMAC and an increase in cash
payments to the Company in respect of
certain of FMAC's assets. Distributions or
payments to the Company in connection with
the FMAC reorganization will be used for
general corporate purposes. See "FMAC
Transaction". The Bank Group Warrants and
related Warrant Shares may be offered from
time to time in the future by the Selling
Securityholders. None of the proceeds from
the sale of the Bank Group Warrants and
related Warrant Shares offered hereby by the
Selling Securityholders will be received by
the Company (except proceeds of the exercise
of such Bank Group Warrants) or by FMAC or
its creditors or interest holders. See "Plan
of Distribution."
Nasdaq Symbol................. "UGLY"
- ---------------
(1) As of January 31, 1998; excludes: (i) 1,290,568 shares of Common Stock
issuable upon exercise of stock options outstanding at December 31, 1997
under the Company's Long-Term Incentive Plan with a weighted average
exercise price of $11.74 per share; (ii) 291,023 shares of Common Stock
issuable upon exercise of warrants issued in connection with the Company's
initial public offering with a weighted average exercise price of $8.33 per
share; and (iii) 389,800 shares of Common Stock issuable upon exercise of
certain warrants issued in connection with the FMAC Senior Bank Debt
purchase, including the Bank Group Warrants, all of which have an exercise
price of $20.00 per share. See "Management -- Long-Term Incentive Plan,"
"Description of Capital Stock," and "FMAC Transaction."
RISK FACTORS AND FORWARD LOOKING STATEMENTS
Prospective purchasers of Warrants, Bank Group Warrants, Warrant Shares or
Stock Option Shares should carefully consider all of the information contained
in this Prospectus, particularly each of the factors set forth in "Risk Factors"
beginning on page 10. The Company has incurred, and may incur in the future,
losses from operations and negative cash flows during various periods. Factors
that may affect the Company's business, results of operations and financial
condition, and the price and market for its securities, include, among others,
the following:
- The Company focuses on selling and financing used cars to persons who
have limited credit histories, low incomes or past credit problems, and
pose a high risk of defaulting on their loans.
7
<PAGE> 9
- The Company's operations are significantly dependent on its continuing
ability to secure external financing. In recent periods, a number of
companies in the business of financing used cars for sub-prime borrowers
have incurred significant credit losses, and in some cases filed for
bankruptcy, which has resulted in a tightening of credit to participants
in this market. In recent periods, the Company's needs for additional
capital resources have increased in connection with the growth of its
business. While to date the Company has met liquidity requirements as
needed, there can be no assurance that it will be able to continue to do
so in the future.
- A significant source of funding for the Company has been the sale of
receivables through securitization transactions, which the Company
remains dependent upon. Securitization transactions have also been
significant contributors to profits in certain periods. More recently,
however, the Company took a charge to earnings when it revalued its
Residuals in Finance Receivables Sold based upon actual net charge off
experience.
- The charge to earnings was largely attributable to collection
difficulties that the Company attributes to a system conversion earlier
this year. While the conversion is substantially complete and operations
are at normal levels generally, certain issues are still being resolved.
Moreover, as a result of its various acquisitions, the Company's
servicing operations are conducted on several different software
platforms which are not fully compatible.
- The Company has rapidly increased its dealership operations through
acquisitions and its success is substantially dependent on its ability to
integrate and improve acquired operations. The Company has also rapidly
increased its network of Branch Offices and invested significant capital
in its Cygnet Dealer Program. The success of the Company is dependent on
its ability to manage these related but diverse operations.
- In light of the diverse nature of its current operations, the Company is
evaluating the potential sale or spin-off of its Third Party Dealer
operations, including its Cygnet Dealer Program and Branch Office
network. There can be no assurance that any such sale or spin-off will
take place, if implemented will be successful, or that the failure to
implement any such sale or spin-off will not adversely affect the
Company's operations or the price for its securities. The Warrants and
Bank Group Warrants do not provide for any adjustment or participation
(except upon exercise prior to the transaction) in the event of a
spin-off or sale of any subsidiary or business operation to a third party
or stockholders.
- The Company holds common stock in, and has made loans to or acquired
loans from, FMAC, which filed for bankruptcy in July 1997. In connection
with the reorganization, the Company has issued certain warrants in
connection with the FMAC Senior Bank Debt purchase, including the Bank
Group Warrants, to bank group members and may issue the Warrants, related
Warrant Shares and Stock Option Shares to FMAC or its other creditors or
equity holders. The Company's financial condition and results of
operations are partially dependent on the successful resolution of
various matters relating to FMAC's reorganization proceedings.
This Prospectus contains forward looking statements. Additional written or
oral forward looking statements may be made by the Company from time to time in
filings with the Securities and Exchange Commission or otherwise. Such forward
looking statements are within the meaning of that term in Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such
statements may include, but not be limited to, projections of revenues, income,
or loss, capital expenditures, plans for future operations, financing needs or
plans, and plans relating to products or services of the Company, as well as
assumptions relating to the foregoing. The words "believe," "expect,"
"anticipate," "estimate," "project," and similar expressions identify forward
looking statements. Forward looking statements are inherently subject to risks
and uncertainties, some of which cannot be predicted or quantified. Future
events and actual results could differ materially from those set forth in,
contemplated by, or underlying the forward looking statements. Statements in
this Prospectus, including those contained in the section entitled "Risk
Factors," in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and in the Notes to the
Company's Consolidated Financial Statements, describe factors, among others,
that could contribute to or cause such differences. The Company undertakes no
obligation to update any forward looking statements.
8
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------------- -----------------------------
1997 1996 1996 1995 1994
----------- ----------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total Revenues........................... $ 120,209 $57,736 $75,629 $58,203 $33,773
Sales of Used Cars..................... 79,543 42,497 53,768 47,824 27,768
Interest Income........................ 23,390 11,881 15,856 10,071 5,449
Gain on Sale of Loans.................. 10,323 2,578 4,434 -- --
Other Income........................... 6,953 780 1,571 308 556
Cost of Used Cars Sold................... 42,537 23,835 29,890 27,964 12,577
Provision for Credit Losses.............. 15,367 7,713 9,811 8,359 8,140
Income before Operating Expenses......... 62,305 26,188 35,928 21,880 13,056
Total Operating Expenses................. 49,628 17,594 24,700 19,896 12,320
Income Before Interest Expense........... 12,677 8,594 11,228 1,984 736
Interest Expense......................... 2,914 4,479 5,262 5,956 3,037
Net Earnings (Loss)...................... $ 5,745 $ 4,115 $ 5,866 $(3,972) $(1,967)
Earnings (Loss) per Share................ $ 0.32 $ 0.46 $ 0.60 $ (0.67) $ (0.35)
Shares used in Computation............... 18,200 7,230 8,283 5,892 5,584
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------------- ----------------------------
1997 1996 1996 1995 1994
----------- ----------- -------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents.................... $ 4,401 $ 684 $ 18,455 $ 1,419 $ 168
Finance Receivables, Net..................... 36,346 46,304 51,063 40,726 15,858
Total Assets................................. 271,285 77,397 118,083 60,790 29,711
Subordinated Notes Payable................... 12,000 14,000 14,000 14,553 18,291
Total Debt................................... 70,781 44,622 26,904 49,754 28,233
Preferred Stock.............................. -- 10,000 -- 10,000 --
Common Stock................................. 171,943 18,120 82,612 127 77
Total Stockholders' Equity (Deficit)(1)...... $ 177,395 $26,176 $ 82,319 $ 4,884 $(1,194)
Principal Balances Outstanding:
Dealership Portfolio......................... $ 16,545 $15,433 $ 7,068 $34,226 $19,881
Third Party Dealer Portfolio................. 25,182 36,711 51,213 13,805 1,620
Total Retained Portfolio..................... 41,727 52,144 58,281 48,031 21,501
------- ------ ------- ------ ------
Securitized with Servicing Retained:
Dealership Loans 103,762 32,633 41,998 -- --
Third Party Dealer Loans 125,234 -- 9,665 -- --
------- ------ ------- ------ ------
Total Securitized with Servicing Retained.... 228,996 32,633 51,663 -- --
------- ------ ------- ------ ------
Total Managed Portfolio...................... $ 270,723 $84,777 $109,944 $48,031 $21,501
======= ====== ======= ====== ======
</TABLE>
- ---------------
(1) As of January 31, 1998; excludes (i) 1,290,568 shares of Common Stock
issuable upon exercise of stock options outstanding at December 31, 1997
under the Company's Long-Term Incentive Plan with a weighted average price
of $11.74 per share; (ii) 291,023 shares of Common Stock issuable upon
exercise of warrants issued in connection with the Company's initial public
offering of Common Stock with a weighted average exercise price of $8.33 per
share; and (iii) 389,800 shares of Common Stock issuable upon exercise of
certain warrants issued in connection with the FMAC Senior Bank Debt
purchase, including the Bank Group Warrants, all of which have an exercise
price of $20.00 per share.
9
<PAGE> 11
RISK FACTORS
Investment in the Warrants, Bank Group Warrants, Warrant Shares, and Stock
Option Shares offered hereby involves certain risks. In addition to the other
information included elsewhere in the Prospectus, prospective investors should
give careful consideration to the following factors before purchasing the
Warrants, Bank Group Warrants, Warrant Shares, and Stock Option Shares offered
hereby.
NO ASSURANCE OF PROFITABILITY
The Company began operations in 1992 and incurred significant operating
losses in 1994 and 1995. The Company recorded net earnings of $5.9 million in
1996 and net earnings for the nine month period ended September 30, 1997 of $5.7
million. However, the Company incurred a net loss for the three month period
ended September 30, 1997 due in large part to a charge of $10.0 million
(approximately $6.0 million, net of income taxes) against Residuals in Finance
Receivables Sold. There can be no assurance that the Company will regain
profitability in future periods. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company's ability to regain and sustain profitability will depend
primarily upon its ability to: (i) expand its revenue generating operations
while not proportionately increasing its administrative overhead; (ii) originate
and purchase contracts with an acceptable level of credit risk; (iii)
effectively collect payments due on the contracts in its portfolio; (iv) locate
sufficient financing, with acceptable terms, to fund the expansion of used car
sales and the origination and purchase of additional contracts; and (v) adapt to
the increasingly competitive market in which it operates. Outside factors, such
as the economic, regulatory, and judicial environments in which it operates,
will also have an effect on the Company's business. The Company's inability to
achieve or maintain any or all of these objectives could have a material adverse
effect on the Company.
DEPENDENCE ON SECURITIZATIONS
In recent periods, the Company's income (loss) from operations has been
significantly impacted by the sales of contract receivables and the earnings
(loss) recorded by the Company on the Residuals in Finance Receivables Sold. The
Company's ability to successfully complete securitizations in the future may be
affected by several factors, including the condition of securities markets
generally, conditions in the asset-backed securities markets specifically, and
the credit quality of the Company's portfolio.
The amount of any gain on sale in connection with securitizations is based
upon certain estimates and assumptions, which may not subsequently be realized.
To the extent that actual cash flows on a securitization differ materially from
the original securitization assumptions, and in the opinion of management those
differences appear to be other than temporary in nature, the Company is required
to revalue the Residuals in Finance Receivables Sold, and record a charge to
earnings based upon the reduction. In addition, the Company records ongoing
income based upon the cash flows on Residuals in Finance Receivables Sold. The
income recorded on the Residuals in Finance Receivables Sold will vary from
quarter to quarter based upon cash flows received in a given period. To the
extent that cash flows are deficient, charge-offs of finance receivables exceed
estimates, or assumptions that were applied to the underlying portfolio are not
realized, and in the opinion of management those differences appear to be other
than temporary in nature, the Company is required to revalue the Residuals in
Finance Receivables Sold, and record a charge to earnings.
During the nine month period ended September 30, 1997, the Company recorded
a charge of $10.0 million ($6.0 million after taxes) against the Residuals in
Finance Receivables Sold. The charge resulted from an upward revision in the
Company's net charge off assumptions related to the underlying contract
portfolios supporting the Company's Residuals in Finance Receivables Sold.
Although the Company believes the charge is adequate to adjust the assumptions
to a level which will more closely approximate future net losses in the
underlying contract portfolio, there can be no assurance in that regard.
Champion Receivables Corporation ("CRC") and CRC II (collectively referred
to as "Securitization Subsidiaries"), are the Company's wholly-owned special
purpose "bankruptcy remote entities". Their assets
10
<PAGE> 12
include Residuals in Finance Receivables Sold and Investments Held in Trust, in
the amounts of $25.8 million and $15.1 million, respectively, at September 30,
1997, which amounts would not be available to satisfy claims of creditors of the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
DEPENDENCE ON EXTERNAL FINANCING; CASH POSITION
The Company has borrowed, and will continue to borrow, substantial amounts
to fund its operations. In this regard, the Company's operations, including its
recently initiated Cygnet Dealer Program, are highly capital intensive.
Currently, the Company receives financing pursuant to the Revolving Facility
with GE Capital, which has a maximum commitment of $100.0 million. Under the
Revolving Facility, the Company may borrow up to 65.0% of the principal balance
of eligible Company Dealership contracts and up to 86.0% of the principal
balance of eligible Third Party Dealer contracts. The Revolving Facility expires
in December 1998. The Revolving Facility is secured by substantially all of the
Company's assets. In addition, the Revolving Facility contains various covenants
that limit, among other things, the Company's ability to engage in mergers and
acquisitions, incur additional indebtedness, and pay dividends or make other
distributions, and also requires the Company to meet certain financial tests.
Although the Company believes it is currently in compliance with the terms and
conditions of the Revolving Facility, there can be no assurance that the Company
will be able to continue to satisfy such terms and conditions or that the
Revolving Facility will be extended beyond its current expiration date. In
addition, the Company has established a Securitization Program pursuant to which
the Company is subject to numerous terms and conditions. Pursuant to the
Securitization Program, the Company and SunAmerica entered into an agreement
under which SunAmerica would purchase $175.0 million of certificates secured by
contracts. As of June 30, 1997, SunAmerica had purchased $170.4 million in Class
A Certificates, thereby substantially utilizing the maximum commitment from
SunAmerica. During the three month periods ended September 30, 1997 and December
31, 1997, the Company completed securitization transactions with private
investors in the amounts of $85.1 million and $43.6 million, respectively.
The Company's cash and cash equivalents decreased from $18.5 million at
December 31, 1996 to $4.4 million at September 30, 1997. This decrease is due in
large part to the purchase of senior debt and the making of debtor-in-possession
loans in connection with the reorganization of FMAC (see "FMAC Transaction"
below), as well as the growth of the Cygnet Dealer Program loan portfolio. The
Company is currently evaluating its alternatives for the future financing of the
Cygnet Dealer Program. On January 28, 1998, the Company borrowed $7 million from
Greenwich in order to repay GE Capital certain amounts then owing under the
Revolving Facility. See "Prospectus Summary -- The Company -- Capital
Resources." The Greenwich Loan is repayable on April 28, 1998. There can be no
assurance that the Company will have the liquidity to repay the Greenwich Loan
when due. The Company is currently evaluating other longer term financing
options.
There can be no assurance that any further securitizations will be
completed or that the Company will be able to secure additional financing when
and as needed in the future, or on terms acceptable to the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
POOR CREDITWORTHINESS OF BORROWERS; HIGH RISK OF CREDIT LOSSES
Substantially all of the contracts that the Company services are with
Sub-Prime Borrowers. Due to their poor credit histories and/or low incomes,
Sub-Prime Borrowers are generally unable to obtain credit from traditional
financial institutions, such as banks, savings and loans, credit unions, or
captive finance companies owned by automobile manufacturers. The Company has
established an Allowance for Credit Losses, which approximated 13.9% and 17.7%
of contract principal balances as of December 31, 1996 and 1995, respectively,
and 15.2% of contract principal balances as of September 30, 1997, to cover
anticipated credit losses on the contracts currently in its portfolio. At
December 31, 1996 and 1995, the principal balance of delinquent contracts as a
percentage of total outstanding contract principal balances was 3.7% and 4.2%,
respectively. The principal balance of delinquent contracts as a percentage of
total outstanding contract principal balances at September 30, 1997 was 5.6%.
The Company's net charge offs as a percentage of average principal
11
<PAGE> 13
outstanding for the years ended December 31, 1996 and 1995 were 16.7% and 21.7%,
respectively. The Company's annualized net charge offs as a percentage of
average principal outstanding for the nine month period ended September 30, 1997
were 19.7%. The Company believes its current Allowance for Credit Losses is
adequate to absorb anticipated credit losses. However, there is no assurance
that the Company has adequately provided for, or will adequately provide for,
such credit risks or that credit losses in excess of its Allowance for Credit
Losses will not occur in the future. A significant variation in the timing of or
increase in credit losses on the Company's portfolio would have a material
adverse effect on the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company has initiated its Cygnet Dealer Program, pursuant to which the
Company provides qualified Third Party Dealers with operating lines of credit
secured by such dealers' retail installment contract portfolios and/or
inventory. While the Company requires Third Party Dealers to meet certain
minimum net worth and operating history criteria to be considered for inclusion
in the Cygnet Dealer Program, the Company will, nevertheless, be extending
credit to dealers who may not otherwise be able to obtain debt financing from
traditional lending institutions such as banks, credit unions, and major finance
companies. Consequently, similar to its other financing activities, the Company
will be subject to a high risk of credit losses that could have a material
adverse effect on the Company and on the Company's ability to meet its own
financing obligations.
POTENTIAL CHANGE IN BUSINESS STRATEGY
The Company has begun an evaluation of strategic alternatives for certain
of its business segments. Specifically, the Company is reviewing the potential
sale or spin-off to third parties or shareholders of the Company's Third Party
Dealer operations, including its Branch Office network and Cygnet Dealer
Program, and related portfolios and servicing operations. No change in the
Company's primary business of selling and financing used cars through its
dealership network is being considered. Among other matters, the evaluation will
consider whether the Company should focus on its core dealership operations, and
whether this focus would facilitate the ability of investors to evaluate the
Company. The strategic evaluation is expected to take several months, with a
recommendation to the Board of Directors anticipated in the first half of 1998.
Any sale or spin-off would be subject to a number of factors, including
satisfactory resolution of appropriate business, accounting, regulatory, legal
and tax issues. There can be no assurance that the Company will effect a sale or
spin-off of any business operation; what form that such a transaction would take
if implemented, including whether stockholders will receive or be able to
acquire equity interests in any operation sold or spun-off; or that any sale or
spin-off would prove successful or economically beneficial to the Company or its
stockholders. Further, failure to implement a sale or spin-off could adversely
affect the Company's operations and financial condition, as well as the market
for its common stock and warrants. In addition, under the Company's most recent
securitization, a sale or spin-off of its servicing operations would constitute
a "termination event," under which the insurer in respect of the securitization
could terminate the Company's servicing rights. Further, upon a termination
event, distributions in connection with the Company's residual interest in such
securitization effectively would be suspended until the interest of third party
holders are paid in full. The Warrants and the Bank Group Warrants do not
provide for any adjustment or participation (except upon exercise prior to the
transaction) in the event of a spin-off or sale of any subsidiary or business
operation to a third party or stockholders.
DATA PROCESSING AND TECHNOLOGY AND YEAR 2000
The success of any participant in the sub-prime industry, including the
Company, depends in part on its ability to continue to adapt its technology, on
a timely and cost-effective basis, to meet changing customer and industry
standards and requirements. The Company recently converted to a new loan
servicing and collection data processing system at its Gilbert, Arizona facility
which services the Company's Arizona, Nevada, and New Mexico Company Dealership
loan portfolios as well as substantially all of the Third Party Dealer loan
portfolio. In connection with the conversion, the Company confronted various
implementation and integration issues, which management believes have resulted
in increases in both contract delinquencies and charge offs.
12
<PAGE> 14
Although many of these issues have been resolved, failure to promptly and fully
resolve all issues could have a material adverse effect on the Company.
The Company services its loan portfolios on loan servicing and collection
data processing systems on various platforms. In the future the Company may
migrate and convert all of its Company Dealership loan servicing and collection
data processing to a single loan servicing and collection data processing
system. Failure to successfully migrate and convert to a single loan servicing
and data processing system could have a material adverse affect on the Company.
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. However, there can be no assurance that costs and
expenses or other matters relating to year 2000 issues will not have a material
adverse effect on the Company.
The Company is dependent on its loan servicing and collection facilities as
well as long-distance and local telecommunications access in order to transmit
and process information among its various facilities. The Company maintains a
standard program whereby it prepares and stores off site back ups of its main
system applications and data files on a routine basis. Due primarily to the
Company's recent acquisitions and significant growth, the Company believes that
its current disaster response plan will need to be revised. Although management
intends to update the disaster response plan during 1998, there can be no
assurance a failure will not occur in the interim or that the plan as revised
will prevent or enable timely resolution of any systems failure. Further, a
natural disaster, calamity or other significant event that causes long-term
damage to any of these facilities or that interrupts its telecommunications
networks could have a material adverse effect on the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RISKS RELATING TO FMAC TRANSACTION
In recent periods, the Company has been actively involved in the
reorganization proceeding of FMAC. See "FMAC Transaction" herein.
There can be no assurance that the proposed FMAC Plan of Reorganization as
described herein will be approved, or that if approved the servicing rights and
interests in the residual interests in securitizations to be obtained by the
Company will prove valuable or profitable. Neither the issuance of the Warrants
nor any other consideration to be given by the Company is conditioned upon the
profit ultimately achieved by the Company. Further, the Warrants, Bank Group
Warrants, Warrant Shares, and Stock Option Shares will further dilute the
Company's equity and could adversely affect the market and price for the Common
Stock. The Company has guaranteed a 10.35% return on certain Owned Contracts
acquired from FMAC and sold to the Contract Purchaser, subject to a maximum
guarantee of $10.0 million. Although FMAC has provided a similar guarantee to
the Company payable out of certain distributions from residual interests held by
FMAC in securitization transactions, the guarantee is subject to certain
conditions and there can be no assurance that there will be sufficient
distributions from the residual interests to support the guarantee. The
Company's debtor-in-possession loans to FMAC and certain fees payable to the
Company would also be payable out of certain expected tax refunds of FMAC and/or
distributions from residual interests in FMAC's securitization transactions and
there can be no assurance that these loans or fees will be paid. Payments
pursuant to the residual interests may not be made until the senior certificates
in the securitization transactions are paid in full. In addition, the Company's
ability to obtain certain servicing rights and the related servicing platform of
FMAC is subject to negotiation between the parties and to consents of certain
parties that have not yet been obtained. Moreover, certain benefits to the
Company in the transaction would be contingent on the Company, a wholly-owned
subsidiary of the Company or other affiliate or assignee of the Company that
meets certain specified conditions (an "Authorized Servicer") servicing the
Owned Contracts and/or certain other receivables currently serviced by FMAC. See
"FMAC Transaction." In the event that the Company, its subsidiary or an
Authorized Servicer does not obtain or retain such servicing rights, the Company
could be
13
<PAGE> 15
materially adversely affected. In addition, ALLTEL Financial Information
Services Inc. ("Alltel") is the licensor of certain software utilized by FMAC in
its servicing platform. FMAC is currently in default under the licensing
agreement for such software and Alltel claims that the cost to cure such default
is approximately $525,000. At such time as the Company takes over servicing of
receivables currently serviced by FMAC and obtains the FMAC servicing platform,
the Company would be required to enter into a new licensing agreement or obtain
an assignment of the existing licensing agreement with Alltel. In the event that
for any reason the Alltel software cannot be utilized to service the
receivables, FMAC or the Company may be required to convert to new servicing and
collections software. This could result in integration and implementation issues
and could disrupt and delay certain servicing functions that may have a material
adverse effect on the Company or its ability to effectively service the Owned
Contracts and various securitized loan pools ("Securitized Pools") of FMAC.
Collections under the Owned Contracts and Securitized Pools could also be
materially adversely affected. Other contracts may also have to be assigned and
necessary consents obtained in connection with the transfer of servicing
functions to the Company in order to maintain uninterrupted servicing on the
FMAC receivables.
NO ASSURANCE OF SUCCESSFUL ACQUISITIONS
The Company has recently completed three significant acquisitions
(Seminole, E-Z Plan, and Kars) and intends to consider additional acquisitions,
alliances and transactions involving other companies that could complement the
Company's existing business. There can be no assurance that suitable acquisition
parties, joint venture candidates, or transaction counterparties can be
identified, or that, if identified, any such transactions will be consummated on
terms favorable to the Company, or at all. Furthermore, there can be no
assurance that the Company will be able to integrate successfully such acquired
businesses, including those recently acquired, into its existing operations,
which could increase the Company's operating expenses in the short-term and
adversely affect the Company. Moreover, these types of transactions by the
Company may result in potentially dilutive issuances of equity securities, the
incurrence of additional debt, and amortization of expenses related to goodwill
and intangible assets, all of which could adversely affect the Company's
profitability. As of September 30, 1997, the Company had goodwill totaling
approximately $17.2 million, the components of which will be amortized over a
period of 15 to 20 years. These transactions involve numerous risks, such as the
diversion of the attention of the Company's management from other business
concerns, the entrance of the Company into markets in which it has had no or
only limited experience, and the potential loss of key employees of the acquired
company, all of which could have a material adverse effect on the Company.
HIGHLY COMPETITIVE INDUSTRY
Although the used car sales industry has historically been highly
fragmented, it has attracted significant attention from a number of large
companies, including AutoNation, U.S.A. and Driver's Mart, which have entered
the used car sales business or announced plans to develop large used car sales
operations. Many franchised new car dealerships have also increased their focus
on the used car market. The Company believes that these companies are attracted
by the relatively high gross margins that can be achieved in this market and the
industry's lack of consolidation. Many of these companies and franchised dealers
have significantly greater financial, marketing, and other resources than the
Company. Among other things, increased competition could result in increased
wholesale costs for used cars, decreased retail sales prices, and lower margins.
Like the sale of used cars, the business of purchasing and servicing
contracts originated from the sale of used cars to Sub-Prime Borrowers is highly
fragmented and very competitive. In recent years, several consumer finance
companies have completed public offerings in order to raise the capital
necessary to fund expansion and support increased purchases of contracts. These
companies have increased the competition for the purchase of contracts, in many
cases purchasing contracts at prices that the Company believes are not
commensurate with the associated risk. There are numerous financial services
companies serving, or capable of serving, this market, including traditional
financial institutions such as banks, savings and loans, credit unions, and
captive finance companies owned by automobile manufacturers, and other
non-traditional consumer finance companies, many of which have significantly
greater financial and other resources than the Company. Increased competition
may cause downward pressure on the interest rates the Company charges on
14
<PAGE> 16
contracts originated by its Company Dealerships or cause the Company to reduce
or eliminate the nonrefundable acquisition discount on the contracts it
purchases from Third Party Dealers, which could have a material adverse effect
on the Company. Similarly, increased competition may be a reason for a potential
Company sale or spin-off to third parties or shareholders of Third Party Dealer
operations, including its Branch Office network and Cygnet Dealer Program, and
related portfolios and servicing operations.
GENERAL ECONOMIC CONDITIONS
The Company's business is directly related to sales of used cars, which are
affected by employment rates, prevailing interest rates, and other general
economic conditions. While the Company believes that current economic conditions
favor continued growth in the markets it serves and those in which it seeks to
expand, a future economic slowdown or recession could lead to decreased sales of
used cars and increased delinquencies, repossessions, and credit losses that
could hinder the Company's business. Because of the Company's focus on the
sub-prime segment of the automobile financing industry, its actual rate of
delinquencies, repossessions, and credit losses could be higher under adverse
conditions than those experienced in the used car sales and finance industry in
general.
INDUSTRY CONSIDERATIONS AND LEGAL CONTINGENCIES
In recent periods, several major used car finance companies have announced
major downward adjustments to their financial statements, violations of loan
covenants, related litigation, and other events. In addition, certain of these
companies have filed for bankruptcy protection. These announcements have had a
disruptive effect on the market for securities of sub-prime automobile finance
companies, have resulted in a tightening of credit to the sub-prime markets, and
could lead to enhanced regulatory oversight. Furthermore, companies in the used
vehicle financing market have been named as defendants in an increasing number
of class action lawsuits brought by customers alleging violations of various
federal and state consumer credit and similar laws and regulations. Although the
Company is not currently a named defendant in any such lawsuits, no assurance
can be given that such claims will not be asserted against the Company in the
future or that the Company's operations will not be subject to enhanced
regulatory oversight.
NEED TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH THIRD PARTY DEALERS
The Company enters into nonexclusive agreements with Third Party Dealers,
which may be terminated by either party at any time, pursuant to which the
Company purchases contracts originated by such dealers that meet the Company's
established terms and conditions. Pursuant to the Cygnet Dealer Program, the
Company enters into financing agreements with qualified Third Party Dealers. The
Company's Third Party Dealer financing activities depend in large part upon its
ability to establish and maintain relationships with such dealers. While the
Company believes that it has been successful in developing and maintaining
relationships with Third Party Dealers in the markets that it currently serves,
there can be no assurance that the Company will be successful in maintaining or
increasing its existing Third Party Dealer base, that such dealers will continue
to generate a volume of contracts comparable to the volume of contracts
historically generated by such dealers, or that a sufficient number of qualified
dealers will become involved in the Cygnet Dealer Program.
GEOGRAPHIC CONCENTRATION
Company Dealership operations are currently located in Arizona, Georgia,
California, Texas, Florida, Nevada, and New Mexico. In addition, a majority of
the Company's Branch Offices are located in Arizona, Texas, Florida, and
Indiana. Because of this concentration, the Company's business may be adversely
affected in the event of a downturn in the general economic conditions existing
in the Company's primary markets.
SENSITIVITY TO INTEREST RATES
A substantial portion of the Company's financing income results from the
difference between the rate of interest it pays on the funds it borrows and the
rate of interest it earns on the contracts in its portfolio. While
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the contracts the Company owns bear interest at a fixed rate, the indebtedness
that the Company incurs under its Revolving Facility bears interest at a
floating rate. In the event the Company's interest expense increases, it would
seek to compensate for such increases by raising the interest rates on its
Company Dealership contracts, increasing the acquisition discount at which it
purchases Third Party Dealer contracts, or raising the retail sales prices of
its used cars. To the extent the Company were unable to do so, the Company's net
interest margins would decrease, thereby adversely affecting the Company's
profitability.
IMPACT OF USURY LAWS
Historically, a significant portion of the Company's used car sales
activities were conducted in, and a significant portion of the contracts the
Company services were originated in, Arizona, which does not impose limits on
the interest rate that a lender may charge. However, the Company has expanded,
and will continue to expand, its operations into states that impose usury
limits, such as Florida and Texas. The Company attempts to mitigate these rate
restrictions by raising the retail prices of its used cars or purchasing
contracts originated in these states at a higher discount. The Company's
inability to achieve higher sales prices or adequate discounts in states
imposing usury limits would adversely affect the Company's planned expansion and
its results of operations. There can be no assurance that the usury limitations
to which the Company is or may become subject or that additional laws, rules,
and regulations that may be adopted in the future will not adversely affect the
Company's business.
DEPENDENCE UPON KEY PERSONNEL
The Company's future success will depend upon the continued services of the
Company's senior management as well as the Company's ability to attract
additional members to its management team with experience in the used car sales
and financing industry. The unexpected loss of the services of any of the
Company's key management personnel, or its inability to attract new management
when necessary, could have a material adverse effect upon the Company. The
Company has entered into employment agreements (which include non-competition
provisions) with certain of its officers. The Company does not currently
maintain any key person life insurance on any of its executive officers.
CONTROL BY PRINCIPAL STOCKHOLDER
Mr. Ernest C. Garcia, II, the Company's Chairman, Chief Executive Officer,
and principal stockholder, holds approximately 25.1% of the outstanding Common
Stock, including 136,500 shares held by The Garcia Family Foundation, Inc., an
Arizona non-profit corporation, and 20,000 shares held by Verde Investments,
Inc., a real estate investment corporation, controlled by Mr. Garcia. As a
result, Mr. Garcia has a significant influence upon the activities of the
Company, as well as on all matters requiring approval of the stockholders,
including electing or removing members of the Company's Board of Directors,
causing the Company to engage in transactions with affiliated entities, causing
or restricting the sale or merger of the Company, and changing the Company's
dividend policy.
POTENTIAL ANTI-TAKEOVER EFFECT OF PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the Company to issue
"blank check" Preferred Stock, the designation, number, voting powers,
preferences, and rights of which may be fixed or altered from time to time by
the Board of Directors. Accordingly, the Board of Directors has the authority,
without stockholder approval, to issue Preferred Stock with dividend,
conversion, redemption, liquidation, sinking fund, voting, and other rights that
could adversely affect the voting power or other rights of the holders of the
Common Stock. The Preferred Stock could be utilized, under certain
circumstances, to discourage, delay, or prevent a merger, tender offer, or
change in control of the Company that a stockholder might consider to be in its
best interests. Although the Company has no present intention of issuing any
shares of its authorized Preferred Stock, there can be no assurance that the
Company will not do so in the future.
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REGULATION, SUPERVISION, AND LICENSING
The Company's operations are subject to ongoing regulation, supervision,
and licensing under various federal, state, and local statutes, ordinances, and
regulations. Among other things, these laws require that the Company obtain and
maintain certain licenses and qualifications, limit or prescribe terms of the
contracts that the Company originates and/or purchases, require specified
disclosures to customers, limit the Company's right to repossess and sell
collateral, and prohibit the Company from discriminating against certain
customers. The Company is also subject to federal and state franchising and
insurance laws.
The Company believes that it is currently in substantial compliance with
all applicable material federal, state, and local laws and regulations. There
can be no assurance, however, that the Company will be able to remain in
compliance with such laws, and such failure could result in fines or
interruption or cessation of certain of the business activities of the Company
and could have a material adverse effect on the operations of the Company. In
addition, the adoption of additional statutes and regulations, changes in the
interpretation of existing statutes and regulations, or the Company's entrance
into jurisdictions with more stringent regulatory requirements could have a
material adverse effect on the Company.
SHARES ELIGIBLE FOR FUTURE SALE
At January 31, 1998, 18,548,961 shares of common stock were outstanding. Of
these, approximately 13,217,861 shares are not subject to any restrictions on
resale or are registered for resale under the Securities Act. The Common Stock
covered by this Prospectus, if and when issued, will also be freely tradeable.
The remaining approximately 5,331,100 shares of Common Stock outstanding as of
January 31, 1998 are "restricted securities," as that term is defined under Rule
144 promulgated under the Securities Act. In general, under Rule 144 as
currently in effect, subject to the satisfaction of certain other conditions, if
one year has elapsed since the later of the date of acquisition of restricted
shares from an issuer or an affiliate of an issuer, the acquiror or subsequent
holder is entitled to sell in the open market, within any three-month period, a
number of shares that does not exceed the greater of one percent of the
outstanding shares of the same class or the average weekly trading volume during
the four calendar weeks preceding the filing of the required notice of sale. (A
person who has not been an affiliate of the Company for at least the three
months immediately preceding the sale and who has beneficially owned shares of
Common Stock as described above for at least two years is entitled to sell such
shares under Rule 144 without regard to any of the limitations described above.)
Of the "restricted securities" outstanding, substantially all of these shares
have been held for the one-year holding period required under Rule 144. The
possibility that substantial amounts of Common Stock may be sold in the public
market may adversely affect prevailing market prices for the Common Stock.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock has been and may continue to be
volatile in response to such factors as, among others, variations in the
anticipated or actual results of operations of the Company or other companies in
the used car sales and finance industry, changes in conditions affecting the
economy generally, analyst reports, or general trends in the industry.
ABSENCE OF A PUBLIC MARKET
The Warrants and the Bank Group Warrants are new securities for which there
is currently no public market. The Company does not intend to list the Warrants
or the Bank Group Warrants on any national securities exchange or to seek the
admission thereof to trading on Nasdaq. There can be no assurance that any
active trading market for the Warrants or the Bank Group Warrants will ever
develop. Accordingly, prospective investors in the Warrants or the Bank Group
Warrants may be required to bear the financial risks of such investment for an
indefinite period of time.
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THE COMPANY
The Company operates the largest publicly-held chain of Buy Here-Pay Here
used car dealerships in the United States and underwrites, finances and services
retail installment contracts generated from the sale of used cars by its Company
Dealerships and Third Party Dealers located in selected markets throughout the
country. As part of its financing activities, the Company has initiated the
Cygnet Dealer Program, which is a collateralized dealer financing program
pursuant to which the Company provides qualified independent used car dealers
with operating credit lines secured by the dealers' retail installment contract
portfolio. The Company began its used car sales and financing operations in 1992
and has pursued an aggressive growth strategy since that time. As of September
30, 1997, the Company had developed or acquired 36 Company Dealerships and had
opened 83 Branch Offices located in twenty-one states.
The Company operates through numerous direct and indirect wholly-owned
subsidiaries including: Duck Ventures, Inc., which provides all administrative
services to the Company, such as corporate finance and accounting, personnel
administration, data processing, communication systems, maintenance, and
software development; Ugly Duckling Car Sales, Inc., which operates the Company
Dealerships; Champion Acceptance Corp., which services contracts originated by
Company Dealerships and contracts purchased from Third Party Dealers; Champion
Financial Services, Inc., which purchases contracts originated by Third Party
Dealers; UDRAC, Inc., which provides administrative services to Ugly Duckling
Rent-A-Car franchisees; Champion Receivables Corp. and Champion Receivables
Corp. II, which are the Company's special purpose "bankruptcy remote"
corporations that facilitate the Securitization Program; Cygnet Finance, Inc.
and Cygnet Finance Alabama, Inc., which operate the Cygnet Dealer Program; Ugly
Duckling Car Sales Florida, Inc., which operates the Company Dealerships in
Florida; Ugly Duckling Car Sales Texas, LLP, which operates the Company
Dealerships in Texas; Ugly Duckling Car Sales Georgia, Inc., which operates the
Company Dealerships in Georgia; Ugly Duckling Car Sales California, Inc., which
operates the Company Dealerships in California; Ugly Duckling Car Sales New
Mexico, Inc., which operates the Company Dealerships in New Mexico; Drake
Insurance Services, Inc., which serves as a holding company for Drake Insurance
Agency, Inc., an Arizona licensed insurance agency, Drake Property and Casualty
Insurance Company and Drake Life Insurance Company, which are Turks and Caicos
Islands chartered and licensed reinsurance companies; and other inactive
subsidiaries.
The Company was formed in Arizona in 1992 for the purpose of purchasing
Duck Ventures, Inc., and operating other subsidiaries and was reincorporated in
Delaware in 1996. Except as otherwise specified, all references in this
Prospectus to the "Company" refer to Ugly Duckling Corporation and its
subsidiaries. The Company's principal executive offices are located at and its
mailing address is 2525 East Camelback Road, Suite 1150, Phoenix, Arizona 85016.
The telephone number of the Company is 1-800-THE-DUCK.
FMAC TRANSACTION
The following describes certain aspects of the involvement of the Company
in the Bankruptcy Case of FMAC and in FMAC's proposed Plan of Reorganization.
The Company owns approximately 2 1/2% of the outstanding common stock of FMAC.
In determining whether to vote in favor of the Plan of Reorganization, this
Prospectus should be read in conjunction with the FMAC Disclosure Statement and
Plan of Reorganization. The Plan and/or Disclosure Statement sets forth a
description of the rights of various classes of creditors and equity holders of
FMAC, as well as a liquidation analysis of FMAC, and certain information
concerning the residual interests in securitizations of FMAC and projected cash
flows therefrom, anticipated recoveries estimated by FMAC for each of FMAC's
significant asset categories, and certain estimated ranges of potential creditor
recoveries. The Company makes no representations with respect to the information
included in the Plan of Reorganization and Disclosure Statement or any of the
exhibits thereto (other than this Prospectus) and assumes no responsibility for
the accuracy or adequacy thereof.
Senior Bank Debt Claims. On August 21, 1997, the Company purchased
approximately 78% of the Senior Bank Debt of FMAC held by seven members (the
"Selling Banks") of FMAC's original nine-member
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bank group for approximately $69 million, which represents a discount of 10% of
the outstanding principal amount of such debt (the "Purchased Claims"). The
Company paid 20% of the purchase price at the closing of the purchase and the
remainder of the purchase price was financed through a loan to the Company by
the Selling Banks (the "Selling Bank Loan") for a term of six months, with
interest accruing at LIBOR plus 2%. The Selling Bank Loan was secured by the
Company's interest in the Collateral described below that also secured the
Purchased Claims. In connection with the purchase, the Company also issued to
the Selling Banks warrants to purchase up to 389,800 shares of the Company's
Common Stock (including the Bank Group Warrants) at an exercise price of $20.00
per share at any time through February 20, 2000, and subject to a call feature
by the Company if the closing market price of the Company's Common Stock equals
or exceeds $27.00 per share for a period of five consecutive trading days.
In November of 1997, the Company entered into an agreement allowing the
Company to purchase the remaining 22% of FMAC's Senior Bank Debt (the "Remaining
Interest"), subject to certain conditions precedent. Pursuant to such agreement,
on December 18, 1997, the Company purchased the Remaining Interest at 95% of the
outstanding principal balance of the Remaining Interest, plus interest at
approximately 8% per annum on such purchase price from November 12, 1997, less
all payments received by the sellers with respect to the Remaining Interest
through the date of closing (an aggregate amount of approximately
$16,974,000 -- excluding an amount equal to approximately $749,000 (the
"Disputed Amount") which was in dispute between the parties). On that same day,
the Company issued warrants to the sellers to purchase up to 110,200 shares of
the Company's Common Stock, which warrants were subsequently returned to the
Company and cancelled pursuant to a negotiated settlement of the dispute between
the parties described above. The Company also received approximately one half of
the Disputed Amount as part of such settlement.
The Senior Bank Debt was originally secured by (1) the Owned Contracts, (2)
all personal property of FMAC, (3) accounts, accounts receivable, including tax
refunds, contract rights and other general intangibles, and (4) the common stock
of FMARC (defined below) (collectively, the "Collateral").
On December 15, 1997, LaSalle National Bank, as Agent (the "Agent") for the
holders of the Senior Bank Debt (the "Bank Group"), credit bid the entire amount
of the Senior Bank Debt plus certain interest and fees, costs and expenses
relating to the Owned Contracts (collectively, the "Credit Bid Purchase Price"),
and the Bankruptcy Court approved the proposed purchase subject to execution by
FMAC of appropriate transfer documents. On December 18, 1997, FMAC executed the
necessary transfer documents assigning the Owned Contracts to the Agent (the
"Transfer"), and the Agent then sold the Owned Contracts to the Contract
Purchaser for 86% of the principal balance of certain eligible Owned Contracts
(approximately $78.9 million) (the "Base Price") plus a residual interest in the
Owned Contracts. The Company has guaranteed to the Contract Purchaser a return
on the Owned Contracts equal to the Base Price plus interest at the rate of
10.35% per annum, subject to a maximum guarantee amount of $10 million. The
Company has the option to purchase the Owned Contracts from the Contract
Purchaser at certain times upon certain events, including at any time after
three years and if the principal balance on the remaining contracts is less than
10% of the balance of the Owned Contracts on the date of purchase, for a price
to yield the Contact Purchaser 10.35%. The cash proceeds from the sale of the
Owned Contracts to the Contract Purchaser were distributed by the Agent at the
direction of the Company to (i) pay the purchase price of the Remaining Interest
as described above, and (ii) pay in full the Selling Bank Loan described above,
with proceeds of approximately $15.5 million being distributed to the Company.
The Company expects to record a gain (net of income taxes) of between $3.6
million and $4.2 million from the Senior Bank Debt transaction for the fourth
quarter of 1997.
Concurrently with the Transfer, the Agent released the lien of the Bank
Group on the Collateral, allowing FMAC to retain all assets constituting any
part of the Collateral other than the Owned Contracts (the "Retained Assets"),
including but not limited to uncollected state and federal income tax refunds
for 1996 and prior years (the "Tax Refunds"), certain receivables and related
vehicles pledged to Greenwich (the "Greenwich Collateral"), and FMAC's
furniture, fixtures, equipment, general intangibles and causes of action.
Pursuant to that certain Binding Agreement to Propose and Support Modified Plan
Agreement (the "Plan Agreement"), dated as of December 15, 1997 among the
Company, FMAC, and the Official Committee of Unsecured Creditors of FMAC (the
"Committee"), in consideration for the Bank Group's release of its liens on the
Retained Assets, FMAC subsequently (A) guaranteed on a non-recourse basis full
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and timely payment to the Agent and the Company of any shortfall between (i) the
Credit Bid Purchase Price of the Owned Contracts plus interest thereon at the
rate of 11% per annum from December 15, 1997, plus an additional charge for
servicing the Owned Contracts (the "Owned Contracts Servicing Fee"), calculated
on a monthly basis, of the greater of 1/12 of 3 1/4% of the outstanding
principal balance of the Owned Contracts or $15.00 per Owned Contract, applied
only to Owned Contracts that are less than 120 days past due and for which the
related vehicle has not been repossessed and (ii) collections and proceeds of
the Owned Contracts (collectively, the "Secured Claim Recovery Amount"), and (B)
granted a lien (the "Replacement Lien") on the stock of First Merchants Auto
Receivables Corporation ("FMARC") and First Merchants Auto Receivables
Corporation II ("FMARC II"), the holders of the residual interests and certain
equity certificates (collectively, the "B Pieces") of the various Securitized
Pools of FMAC, to secure the Secured Claim Recovery Amount and the Modified UDC
Fee (defined below under "DIP Facility"). In the event that the Owned Contracts
are not being serviced by the Company, a wholly-owned subsidiary of the Company,
or an Authorized Servicer, without the prior written consent of FMAC (an "Owned
Loan Servicing Change"), which consent will not be unreasonably withheld, the
Secured Claim Recovery Amount will be limited to $10 million. However, in the
event that the Company withdraws its support for or is unable or unwilling to
consummate the proposed Plan of Reorganization for any reason, the Replacement
Lien will be null and void and no distribution on the B Pieces will cover any
shortfalls on the Secured Claim Recovery Amount. Conversely, in the event that
FMAC or the Committee is unable or unwilling to consummate the proposed Plan of
Reorganization, the Agent and Company will retain the Replacement Lien.
Any recovery on the Owned Contracts in excess of the Secured Claim Recovery
Amount will be shared with FMAC on the basis of 82 1/2% for the benefit of FMAC
and 17 1/2% for the benefit of the Company (the "Excess Collections Split").
After payment in full of the Secured Claim Recovery Amount, the DIP Facility
(defined below), the Modified UDC Fee (defined below), and any indemnity amounts
payable by FMAC under any Indemnification Agreement (defined below under
"Additional Matters"), any further distributions from the B Pieces will be
shared between the Company and FMAC on the same basis as the Excess Collections
Split. In the event that an Owned Loan Servicing Change occurs, the Excess
Collections Split will change to 85% for the benefit of FMAC and 15% to the
Company with respect to the B Pieces and, subject to certain adjustments, 100%
for the benefit of FMAC and 0% to the Company with respect to the Owned
Contracts. The Company will not be entitled to receive any share of the Excess
Collections Split relating to a Securitized Pool for any period during which it
is not acting as servicer for such Securitized Pool.
The Plan of Reorganization contemplates that, at the option of the Company,
the Company may distribute the Stock Option Shares to FMAC or at the request of
FMAC and pursuant to its instructions directly to the unsecured creditors of
FMAC, in lieu of FMAC's right to receive all or a portion of distributions under
the Excess Collections Split (including both recoveries under the Excess
Collections Split from the Owned Contracts and the B Pieces) in cash (the "Stock
Option"). If the Company decides to exercise the Stock Option, the Company must
give FMAC at least 15 days advance written notice (the "Option Notice") (and
make a public announcement on the same date as the giving of the notice) of the
date on which the Company will exercise the Stock Option (the "Exercise Date")
and the number of Stock Option Shares that the Company will issue on the
Exercise Date. The Company may exercise the Stock Option one time only, with
exercise being the actual delivery of the Stock Option Shares. Revocation of the
Option Notice shall not be deemed to be an exercise of the Stock Option by the
Company. On the Exercise Date, the aggregate value of the distribution shall be
determined by multiplying the Stock Option Shares by 98% of the average of the
closing prices for the previous 10 trading days of Company Common Stock on
Nasdaq or such other market on which such stock may be traded (the "Stock Option
Value"). After issuance and delivery of the Stock Option Shares, the Company
will be entitled to receive FMAC's share of cash distributions under the Excess
Collections Split (including both recoveries under the Excess Collections Split
from the Owned Contracts and the B Pieces) from and after the Exercise Date
until the Company has received cash distributions equal to the Stock Option
Value. This would be in addition to the Company's right to receive its share
under the Excess Collections Split. Once the Company has received cash
distributions equal to the Stock Option Value, FMAC will retain the remaining
portion of its share of cash distributions under the Excess Collections Split,
if any, in excess of the Stock Option Value. The Company will not be entitled to
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exercise the Stock Option unless (i) the value of its Common Stock on the
Exercise Date and the closing price for its Common Stock on each day during the
previous ten trading days shall be at least $8.00 per share, (ii) the Company
shall have caused (at its sole cost and expense) the Stock Option Shares to be
registered under the Securities Act, and be unrestricted and fully transferable,
and shall have taken all steps necessary to allow FMAC to distribute the Stock
Option Shares to its unsecured creditors, and (iii) the Company shall not have
purchased any of its common stock (except upon the exercise of previously issued
and outstanding options, warrants, stock appreciation rights or other rights) or
announced any stock repurchase programs from and after the delivery of the
Option Notice through the Exercise Date.
DIP Facility. At the commencement of the Bankruptcy Case, the Company
agreed to provide up to $10 million of "debtor-in-possession" financing (the
"DIP Facility"), approximately $9.5 million of which was outstanding as of
December 15, 1997. Borrowings under the DIP Facility originally were to mature
on February 28, 1998 and accrue interest at the rate of 12% per annum. The DIP
Facility was originally secured by super priority liens on all of FMAC's assets
then existing or thereafter acquired. The DIP Facility was subsequently amended
(i) to provide for additional advances to pay administrative and post-plan
confirmation operating expenses of FMAC, provided that total advances under the
DIP Facility may not exceed $16.5 million, (ii) to be secured by the Retained
Assets, including the Tax Refunds, (iii) to reduce the interest rate on
borrowings outstanding under the DIP Facility (effective on the date of
confirmation of the Plan of Reorganization) to 10% per annum; and (iv) to waive
the maturity date of the DIP Facility. The first $10 million of Tax Refunds will
be used to pay down the DIP Facility and will permanently reduce the amount of
the DIP Facility. Thereafter, the DIP Facility will be permanently paid down
from distributions on the B Pieces, after payment of the Secured Claim Recovery
Amount. Payments made from other sources on the DIP Facility will not
permanently reduce the amount thereof and FMAC will be allowed to reborrow such
amounts under the facility. The Company has agreed to increase the DIP Facility
to $18.5 million conditional on the sale of receivables in the Securitized Pools
that were charged-off prior to or on December 31, 1997 to the Company or a
higher or better bidder. In the event that the Company is not the successful
bidder for such charged-off receivables, 50% of the proceeds in excess of the
Company's initial bid will be paid to the Company, up to a ceiling of $350,000.
The Plan Agreement contemplates that FMAC will pay the Company on a
non-recourse basis a fee of $450,000 payable prior to any payments pursuant to
the Excess Collections Split solely from collections on the B Pieces and secured
by a pledge of the stock of FMARC and FMARC II, subordinate only to the DIP
Facility, the Secured Claim Recovery Amount and prior pledges of the FMARC II
stock (the "Modified UDC Fee"). Pursuant to the Plan Agreement, the Company will
also be entitled to reimbursement of out-of-pocket expenses related to the DIP
Facility not to exceed $100,000 on the effective date of the proposed Plan of
Reorganization.
Servicing. The Company has entered into a Servicing Agreement dated
December 18, 1997 (the "Owned Contracts Servicing Agreement") between the
Company and the Contract Purchaser, pursuant to which the Owned Contracts will
be serviced by the Company in the event that FMAC ceases to service the Owned
Contracts. The Company will receive a servicing fee under the Owned Contracts
Servicing Agreement.
It is contemplated that the Company will enter into agreements pursuant to
which it will acquire, following confirmation of the Plan of Reorganization,
certain servicing rights of FMAC in the Securitized Pools and the Greenwich
Collateral. The Company would also acquire the servicing platform to allow
servicing of such receivables. The acquisition of such servicing rights would
likely be effected by an assignment by FMAC to the Company of the existing
servicing agreements pursuant to which FMAC currently services the receivables
in the Securitized Pools and constituting the Greenwich Collateral. The Company
is currently negotiating an agreement whereby the servicing fee payable under
such servicing agreements would be increased and, in connection therewith, the
Company would pay to the insurer of such Securitized Pools a portion, currently
anticipated to be approximately 10%, of its share of the Excess Collections
Split.
Additional Matters. Under the Plan Agreement, upon confirmation of the
Plan of Reorganization, the Company will contribute to FMAC all of its shares of
FMAC Common Stock in consideration for the
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acquisition of the servicing platform, will issue the Warrants to FMAC for the
benefit of the unsecured creditors of FMAC and its equity holders, and will
waive certain fees to which it may otherwise be entitled.
Pursuant to the Plan of Reorganization, existing equity holders of FMAC
(prior to the effective date of the Plan of Reorganization) will receive the
benefit of the greater of (i) Warrants to purchase up to 32,500 shares of Common
Stock or (ii) the allocation resulting in the circumstances below. Alltel is the
licensor of certain software utilized by FMAC in its servicing platform. FMAC is
currently in default under the licensing agreement for such software (the
"Alltel Licensing Agreement") and Alltel claims that the cost to cure such
default is $524,782.32 (the "Requested Cure Cost"). To the extent that the cure
cost actually paid to Alltel is less than the Requested Cure Cost, a percentage
of the Warrants equal to the percentage reduction in the Requested Cure Cost, if
any, so paid (the "Alltel Cure Reallocation"), would be allocated to or for the
benefit of such existing equity holders of FMAC but only if such allocation
would exceed the 32,500 Warrants otherwise allocable to such existing equity
holders of FMAC. Any remaining Warrants will be held by FMAC for the benefit of
unsecured creditors of FMAC, distributed to such unsecured creditors, or
utilized for other purposes. See "Plan of Distribution."
UDC anticipates that it may enter into an indemnification agreement with
FMAC (the "Indemnification Agreement") pursuant to which UDC would agree to
indemnify FMAC against material misrepresentations and omissions in this
Prospectus, except as to certain information relating to FMAC, the Plan of
Reorganization, the Bankruptcy Case, and transactions relating thereto, and FMAC
would agree to indemnify UDC against material representations and omissions in
the Disclosure Statement (excluding this Prospectus which will be attached as an
exhibit to the Disclosure Statement, other than as to certain FMAC information)
and as to certain other matters relating to the Disclosure Statement and this
Prospectus. FMAC's obligations under the Indemnification Agreement would be
payable from the B Pieces prior to the Excess Collections Split.
No portion of the Bank Group Warrants will be issued or sold to FMAC or to
or for the benefit of creditors or interest holders of FMAC pursuant to the Plan
of Reorganization. The Bank Group Warrants and related Warrant Shares are being
included herein solely for sale into the public markets from time to time in the
future by the Selling Securityholders. See "Plan of Distribution."
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<PAGE> 24
USE OF PROCEEDS
The Warrants, related Warrant Shares and Stock Option Shares are being
distributed hereunder in connection with the reorganization of FMAC. Pursuant to
the Plan of Reorganization, the Company will issue to FMAC the Warrants for the
benefit of its equity holders and unsecured creditors. See "FMAC Transaction"
and "Plan of Distribution."
The Stock Option Shares may be issued at the Company's option in lieu of
making distributions in cash to FMAC from collections on the Owned Contracts and
B Pieces pursuant to the Excess Collections Split. The Stock Option Shares are
being registered in anticipation of such a Common Stock distribution. The
Company's ability to issue the Stock Option Shares is subject to certain
conditions. If the Company chooses and is able to issue the Stock Option Shares,
the Company would retain the cash distributions otherwise payable to FMAC
pursuant to the Excess Collections Split up to the Stock Option Value. See "FMAC
Transaction."
Distributions or payments to the Company in connection with the issuance of
the Warrants, Warrant Shares and Stock Option Shares and payments made to the
Company upon the exercise of the Warrants will be used for general corporate
purposes.
The Bank Group Warrants and related Warrant Shares may be offered from time
to time in the future by the Selling Securityholders. None of the proceeds from
the sale of the Bank Group Warrants and related Warrant Shares offered hereby by
the Selling Securityholders will be received by the Company (except proceeds
from the exercise of such Bank Group Warrants) or by FMAC or its creditors or
interest holders. See "Plan of Distribution." Payments made to the Company upon
the exercise of the Bank Group Warrants will be used for general corporate
purposes.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on Nasdaq under the symbol "UGLY." The
following table sets forth the high and low closing sale prices of the Common
Stock, as reported by Nasdaq, for the periods indicated:
<TABLE>
<CAPTION>
MARKET PRICE
-----------------
FISCAL YEAR 1996 HIGH LOW
----------------------------------------------------------- ------ ------
<S> <C> <C>
Second Quarter (from June 18, 1996)........................ $10.00 $ 8.50
Third Quarter.............................................. $15.50 $ 8.13
Fourth Quarter............................................. $21.63 $13.00
FISCAL YEAR 1997
-----------------------------------------------------------
First Quarter.............................................. $25.75 $16.25
Second Quarter............................................. $18.06 $13.13
Third Quarter.............................................. $17.00 $12.50
Fourth Quarter............................................. $21.00 $13.00
</TABLE>
On February 2, 1998, the last reported sale price of the Common Stock on
Nasdaq was $6.50 per share. The Company estimates that there were approximately
2,400 beneficial holders of the Company's Common Stock as of February 2, 1998.
DIVIDEND POLICY
The Company has never paid cash dividends on the Common Stock and does not
anticipate doing so in the foreseeable future. It is the current policy of the
Company's Board of Directors to retain any earnings to finance the operation and
expansion of the Company's business. In addition, the terms of the Revolving
Facility prevent the Company from declaring or paying dividends in excess of
15.0% of each year's net earnings available for distribution. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Revolving Facility."
23
<PAGE> 25
CAPITALIZATION
The following table sets forth: (i) the actual capitalization of the
Company as of September 30, 1997, and (ii) the pro forma capitalization of the
Company giving effect to the issuance of the 5,000,000 Stock Option Shares at an
assumed issuance price of $8.00 per share (the floor price) plus the issuance of
666,190 Warrant Shares upon exercise of the Warrants and Bank Group Warrants
being registered herein at the stated exercise price of $20.00 per share, and
the initial application of the net proceeds therefrom. The table should be read
in conjunction with the Company's Consolidated Financial Statements and the
related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------
ACTUAL PRO FORMA
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Debt:
Revolving Facility................................................... $ 128 $ 128
Notes Payable, Other................................................. 58,653 58,653
Subordinated Notes Payable........................................... 12,000 12,000
-------- ---------
Total Debt................................................... 70,781 70,781
-------- ---------
Stockholders' Equity:
Common Stock......................................................... 171,943 224,957
Retained Earnings.................................................... 5,452 5,452
-------- ---------
Total Stockholders' Equity(1)................................ 177,395 230,409
-------- ---------
Total Capitalization.................................... $248,176 $ 301,190
======== ========
</TABLE>
- ---------------
(1) As of January 31, 1998; excludes (i) 1,290,568 shares of Common Stock
issuable upon exercise of stock options outstanding at December 31, 1997
under the Company's Long-Term Incentive Plan with a weighted average price
of $11.74 per share; (ii) 291,023 shares of Common Stock issuable upon
exercise of warrants issued in connection with the Company's initial public
offering of Common Stock with a weighted average exercise price of $8.33 per
share; and (iii) 389,800 shares of Common Stock issuable upon exercise of
certain warrants issued in connection with the FMAC Senior Bank Debt
purchase, including the Bank Group Warrants, all of which have an exercise
price of $20.00 per share.
24
<PAGE> 26
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
The following table sets forth selected historical consolidated financial
data of the Company for the nine-month periods ended September 30, 1997 and
1996, and for each of the years in the five-year period ended December 31, 1996.
The selected annual historical consolidated financial data for 1993, 1994, 1995,
and 1996 are derived from the Company's Consolidated Financial Statements
audited by KPMG Peat Marwick LLP, independent certified public accountants. The
selected annual historical consolidated financial data for 1992 are derived from
the Company's Consolidated Financial Statements audited by Toback & Co.,
independent certified public accountants. Information for the nine months ended
September 30, 1997 and 1996 is derived from unaudited interim consolidated
financial statements which reflect, in the opinion of the Company, all
adjustments, which include only normal recurring adjustments, necessary for fair
presentation of the financial data for such periods. For additional information,
see the Consolidated Financial Statements of the Company included elsewhere in
this Prospectus. The following table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------- -----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ----------- ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales of Used Cars........... $79,543 $42,497 $53,768 $47,824 $27,768 $13,969 $ 2,136
Less:
Cost of Used Cars Sold..... 42,537 23,835 29,890 27,964 12,577 6,089 1,010
Provision for Credit
Losses.................. 15,367 7,713 9,811 8,359 8,140 3,292 826
------- ------- ------- ------- ------ ------- -------
21,639 10,949 14,067 11,501 7,051 4,588 300
------- ------- ------- ------- ------ ------- -------
Interest Income.............. 23,390 11,881 15,856 10,071 5,449 1,629 148
Gain on Sale of Loans........ 10,323 2,578 4,434 -- -- -- --
------- ------- ------- ------- ------ ------- -------
33,713 14,459 20,290 10,071 5,449 1,629 148
------- ------- ------- ------- ------ ------- -------
Other Income................. 6,953 780 1,571 308 556 879 982
------- ------- ------- ------- ------ ------- -------
Income before Operating
Expenses................... 62,305 26,188 35,928 21,880 13,056 7,096 1,430
Operating Expenses:
Selling and Marketing........ 6,680 2,915 3,585 3,856 2,402 1,293 656
General and Administrative... 40,489 13,551 19,538 14,726 9,141 3,625 828
Depreciation and
Amortization............... 2,459 1,128 1,577 1,314 777 557 429
------- ------- ------- ------- ------ ------- -------
49,628 17,594 24,700 19,896 12,320 5,475 1,913
------- ------- ------- ------- ------ ------- -------
Income before Interest
Expense.................... 12,677 8,594 11,228 1,984 736 1,621 (483)
Interest Expense............. 2,914 4,479 5,262 5,956 3,037 893 12
------- ------- ------- ------- ------ ------- -------
Earnings (Loss) before Income
Taxes...................... 9,763 4,115 5,966 (3,972) (2,301) 728 (495)
Income Taxes (Benefit)....... 4,018 -- 100 -- (334) 30 --
------- ------- ------- ------- ------ ------- -------
Net Earnings (Loss).......... $ 5,745 $ 4,115 $ 5,866 $(3,972) $(1,967) $ 698 $ (495)
======= ======= ======= ======= ====== ======= =======
Earnings (Loss) per Share.... $ 0.32 $ 0.46 $ 0.60 $ (0.67) $ (0.35) $ 0.14 $ (0.11)
======= ======= ======= ======= ====== ======= =======
Shares used in Computation... 18,200 7,230 8,283 5,892 5,584 5,011 4,640
======= ======= ======= ======= ====== ======= =======
</TABLE>
25
<PAGE> 27
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------------- -----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ----------- -------- ------- ------- ------- ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents.... $ 4,401 $ 684 $ 18,455 $ 1,419 $ 168 $ 79 $ 415
Finance Receivables, Net..... 36,346 46,304 51,063 40,726 15,858 7,089 1,758
Total Assets................. 271,285 77,397 118,083 60,790 29,711 11,936 4,392
Subordinated Notes Payable... 12,000 14,000 14,000 14,553 18,291 8,941 93
Total Debt................... 70,781 44,622 26,904 49,754 28,233 9,380 4,189
Preferred Stock.............. -- 10,000 -- 10,000 -- -- --
Common Stock................. 171,943 18,120 82,612 127 77 1 1
Total Stockholders' Equity
(Deficit).................. 177,395 26,176 82,319 4,884 (1,194) 697 (1)
Principal Balances
Outstanding:
Dealership Sales
Portfolio............... 16,545 15,433 7,068 34,226 19,881 9,588 2,492
Third Party Dealer
Portfolio............... 25,182 36,711 51,213 13,805 1,620 -- --
Portfolio Securitized with
Servicing Retained...... 228,996 32,633 51,663 -- -- -- --
-------- ------- -------- ------- ------- ------- ------
Total................... $ 270,723 $84,777 $109,944 $48,031 $21,501 $ 9,588 $2,492
======== ======= ======== ======= ======= ======= ======
</TABLE>
26
<PAGE> 28
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS INFORMATION
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
COMPANY SEMINOLE EZ PLAN KARS ADJUSTMENTS COMBINED
------- -------- ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales of Used Cars......... $46,013 $4,430 $10,730 $ 84,993 $ -- $ 146,166
Less:
Cost of Used Cars Sold... 24,000 4,392 7,675 60,382 291(a) 96,740
Provision for Credit
Losses................ 8,829 -- 5,316 50,914 -- 65,059
------- ------- ------- ------- ------- --------
13,184 38 (2,261) (26,303) (291) (15,633)
------- ------- ------- ------- ------- --------
Interest Income............ 12,608 307 1,357 12,957 (12,957)(b) 14,272
Gain (Loss) on Sale of
Loans.................... 12,810 -- -- 866 (866)(c) 12,810
------- ------- ------- ------- ------- --------
25,418 307 1,357 13,823 (13,823) 27,082
------- ------- ------- ------- ------- --------
Other income............... 3,574 20 977 -- 2,806(d) 7,377
------- ------- ------- ------- ------- --------
Income (Loss) before
Operating Expenses....... 42,176 365 73 (12,480) (11,308) 18,826
Operating Expenses......... 28,111 374 3,561 22,576 (1,465)(e) 53,119
------- ------- ------- ------- --------
(155)(f)
(37)(g)
154(h)
Income (Loss) before
Interest Expense......... 14,065 (9) (3,488) (35,056) (9,805) (34,293)
Interest Expense........... 1,336 -- 359 8,303 169(i) 3,116
------- ------- ------- ------- ------- --------
(7,051)(j)
Earnings (Loss) before
Income Taxes............. 12,729 (9) (3,847) (43,359) (2,923) (39,141)
Income Taxes (Benefit)..... 5,156 -- -- (3,054) (2,102)(k) --
------- ------- ------- ------- ------- --------
Net Earnings (Loss)........ $ 7,573 $ (9) $(3,847) $(40,305) $ (821) $ (37,409)
======= ======= ======= ======= ======= ========
Earnings (Loss) per
Share.................... $0.43 $(2.10)
======= ========
Shares Used in
Computation.............. 17,780 17,780
======= ========
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
condensed combined statement of operations information.
27
<PAGE> 29
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
COMPANY SEMINOLE EZ PLAN KARS ADJUSTMENTS COMBINED
------- -------- ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales of Used Cars.......... $53,768 $ 11,827 $42,303 $136,176 $ -- $ 244,074
Less:
Cost of Used Cars Sold.... 29,890 9,417 30,800 87,365 (2)(a) 157,470
Provision for Credit
Losses................. 9,811 7,107 4,512 28,387 -- 49,817
------- ------- ------- -------- ------- --------
14,067 (4,697) 6,991 20,424 2 36,787
------- ------- ------- -------- ------- --------
Interest Income............. 15,856 10,193 6,418 13,301 (13,301)(b) 32,467
Gain (Loss) on Sale of
Loans..................... 4,434 (1,457) -- 6,929 (6,929)(c) 2,977
------- ------- ------- -------- ------- --------
20,290 8,736 6,418 20,230 (20,230) 35,444
------- ------- ------- -------- ------- --------
Other income................ 1,571 1,620 2,926 -- 3,150(d) 9,267
------- ------- ------- -------- ------- --------
Income (Loss) before
Operating Expenses........ 35,928 5,659 16,335 40,654 (17,078) 81,498
Operating Expenses.......... 24,700 10,723 14,253 29,330 (1,581)(e) 77,645
------- ------- ------- -------- --------
211(f)
705(g)
(696)(h)
Income (Loss) before
Interest Expense.......... 11,228 (5,064) 2,082 11,324 (15,717) 3,853
Interest Expense............ 5,262 3,742 1,880 7,674 477(i) 11,361
------- ------- ------- -------- --------
(7,674)(j)
Earnings (Loss) before
Income Taxes.............. 5,966 (8,806) 202 3,650 (8,520) (7,508)
Income Taxes (Benefit)...... 100 -- -- 1,461 (1,561)(k) --
------- ------- ------- -------- ------- --------
Net Earnings (Loss)......... $ 5,866 $ (8,806) $ 202 $ 2,189 $ (6,959) $ (7,508)
======= ======= ======= ======== ======= ========
Earnings (Loss) per Share... $0.60(l) $(1.02)(1)
======= ========
Shares Used in
Computation............... 8,283 8,283
======= ========
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
condensed combined statement of operations information.
28
<PAGE> 30
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
OF OPERATIONS INFORMATION
(1) BASIS OF ACCOUNTING
The following unaudited pro forma condensed combined financial information
of the Company presents the pro forma combined statements of operations for the
nine months ended September 30, 1997, and the year ended December 31, 1996. The
pro forma combined statement of operations for the year ended December 31, 1996
has been adjusted to give effect to (i) the Company's acquisition of Seminole
Finance Corporation and related companies ("Seminole"), (ii) E-Z Plan, Inc.
("E-Z Plan") and (iii) Kars-Yes Holdings Inc. ("Kars"), in each case as if the
transactions had occurred on January 1, 1996 (collectively referred to as the
"1997 Acquisitions" or "Acquired Companies"). The pro forma combined statement
of operations for the nine months ended September 30, 1997 gives effect to the
1997 Acquisitions as if the 1997 Acquisitions had occurred on January 1, 1997.
The combination of the Company's audited statement of operations for the
year ended December 31, 1996 with the audited statements of operations of
Seminole and E-Z Plan and the unaudited statement of operations of Kars for the
same period results in a combined loss of $7.5 million. In addition, the
combination of the Company's unaudited statement of operations for the nine
month period ended September 30, 1997 with the unaudited statements of
operations of the 1997 Acquisitions for the same period results in a combined
loss of $37.4 million. These pro forma results are not necessarily indicative of
the future results of operations of the Company or the results of operations
which would have resulted had the Company and the Acquired Companies been
combined during the periods presented. In addition, the pro forma results are
not intended to be a projection of future results.
The unaudited pro forma condensed combined financial information should be
read in conjunction with the historical Consolidated Financial Statements of the
Company and the Notes thereto and Management's Discussion and Analysis contained
elsewhere in this Prospectus, and the respective audited financial statements of
the 1997 Acquisitions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and Notes thereto.
(2) PROFORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(a) Adjustment to convert E-Z Plan inventory from last-in, first-out (LIFO) to
specific identification basis of accounting.
(b) Adjustment to eliminate interest income on the Kars loan portfolio not
purchased by Ugly Duckling.
(c) Adjustment to eliminate gain on sale on the Kars loan portfolio, as the loan
portfolio was not purchased by Ugly Duckling.
(d) Adjustment to record servicing fee income for servicing fees generated by
Ugly Duckling for the servicing of the loan portfolio retained by Kars and
serviced by Ugly Duckling.
(e) Pursuant to the terms of the servicing agreement between Ugly Duckling and
Kars, Kars is responsible for bearing the collection costs of its retained
loan portfolio. Adjustment to decrease general and administrative expenses
for vehicle repossession and reconditioning expenses related to the Kars
loan portfolio not purchased by Ugly Duckling.
(f) Adjustment to rent expense for difference in lease rates for certain
properties.
(g) Amortization of goodwill over a period ranging from 15 years to 20 years.
(h) Adjustment to reverse key man life insurance expense for policies retained
by E-Z Plan.
(i) The former stockholders of E-Z Plan had provided financing to E-Z Plan for
use in purchasing and reconditioning its inventory and in funding operating
expenses. No interest was charged, except for advances related to inventory
purchases. This pro forma adjustment is to charge interest at Ugly
Duckling's average borrowing rate as if the entire balance of the advances
from the shareholders had been charged interest.
(j) Adjustment to reduce interest expense for the carrying cost of the loan
portfolio retained by Kars.
(k) Adjust income taxes for the impact of the pro forma adjustments.
(l) Earnings per share calculated after giving effect to payment of $916,000 in
preferred stock dividends in 1996.
29
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information regarding the
Company's consolidated financial position as of September 30, 1997 and December
31, 1996 and 1995, and the results of operations for the nine months ended
September 30, 1997 and 1996 and for the years ended December 31, 1996, 1995 and
1994. This discussion should be read in conjunction with the preceding "Selected
Consolidated Financial Data" and the Company's Consolidated Financial Statements
and related Notes thereto and other consolidated financial data appearing
elsewhere in this Prospectus. In the opinion of management, such unaudited
interim data reflect all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the Company's financial position and
results of operations for the periods presented. The results of operations for
any interim period are not necessarily indicative of results to be expected for
a full fiscal year. For information relating to factors that could affect future
operating results, see "Risk Factors." Any forward-looking statements included
in this Prospectus should be considered in light of such factors, as well as the
information set forth below.
INTRODUCTION
General. The Company operates the largest publicly held chain of "Buy
Here-Pay Here" used car dealerships in the United States and underwrites,
finances, and services retail installment contracts generated from the sale of
used cars by its Company Dealerships and by Third Party Dealers located in
selected markets throughout the country. As part of its financing activities,
the Company has initiated the Cygnet Dealer Program pursuant to which it
provides qualified independent used car dealers with operating lines of credit
secured by the dealers' retail installment contract portfolios. The Company
targets its products and services to the sub-prime segment of the automobile
financing industry, which focuses on selling and financing the sale of used cars
to persons who have limited credit histories, low incomes, or past credit
problems.
The Company commenced its used car sales and finance operations with the
acquisition of two Company Dealerships in 1992. During 1993, the Company
acquired three additional Company Dealerships. In 1994, the Company constructed
and opened four new Company Dealerships that were built specifically to meet the
Company's new standards of appearance, reconditioning capabilities, size, and
location. During 1994, the Company closed one Company Dealership because the
facility failed to satisfy these new standards and, at the end of 1995, closed
its Gilbert, Arizona dealership. In January 1997, the Company acquired selected
assets of a group of companies engaged in the business of selling and financing
used motor vehicles, including four dealerships located in the Tampa Bay/St.
Petersburg market (Seminole). In March 1997, the Company opened its first used
car dealership in the Las Vegas market. In April 1997, the Company acquired
selected assets of a company in the business of selling and financing used motor
vehicles, including seven dealerships located in the San Antonio market (E-Z
Plan). In addition, the Company opened two additional dealerships in the
Albuquerque market and one additional dealership in the Phoenix market during
the second quarter of 1997. In August 1997, the Company closed a dealership in
Prescott, Arizona. In September 1997, the Company acquired selected assets of a
company in the business of selling used motor vehicles, including six
dealerships in the Los Angeles market, two in the Miami market, two in the
Atlanta market and two in the Dallas market (Kars). The Company currently
operates 43 dealerships and 76 Branch Offices.
In 1994, the Company acquired Champion Financial Services, Inc., an
independent automobile finance company. In April 1995, the Company initiated an
aggressive plan to expand the number of contracts purchased from its Third Party
Dealer network. This expansion enabled the Company to leverage its existing
infrastructure and increase its contract portfolio much more quickly than it
could through the expansion of its Company Dealerships. The Company operated 83
and 22 Branch Offices at September 30, 1997 and 1996, respectively.
The Company has expanded its Company Dealership and loan servicing and
collections operations through several recent acquisitions. On January 15, 1997,
the Company acquired substantially all of the assets of Seminole, including four
dealerships in Tampa/St. Petersburg and a contract portfolio of approximately
$31.1 million. On April 1, 1997, the Company purchased substantially all of the
assets of E-Z Plan, a
30
<PAGE> 32
Company engaged in the business of selling and financing used motor vehicles,
including seven dealerships in San Antonio and a contract portfolio of
approximately $24.3 million. On September 19, 1997, the Company purchased
substantially all of the dealership and loan servicing assets (but not the loan
portfolio) of 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.
The combination of the Company's audited statement of operations for the
year ended December 31, 1996 with the audited statements of operations of
Seminole and E-Z Plan and the unaudited statement of operations of Kars for the
same period results in a combined loss of $7.5 million. In addition, the
combination of the Company's unaudited statement of operations for the nine
month period ended September 30, 1997 with the unaudited statements of
operations of Seminole, E-Z Plan and Kars for the same period results in a
combined loss of $37.4 million. These pro forma results are not necessarily
indicative of the future results of operations of the Company or the results of
operations which would have resulted had the Company and Seminole, E-Z Plan and
Kars been combined during the periods presented. In addition, the pro forma
results are not intended to be a projection of future results.
In 1996, the Company completed an initial public offering and a secondary
offering in which it sold Common Stock for a total of $82.3 million. In February
1997, the Company completed a private placement of Common Stock for a total of
$88.7 million, net of expenses. The registration of the resale of the shares
sold in the private placement was effective in April 1997.
The Company owns approximately 2 1/2% of the outstanding common stock of
FMAC with a cost basis of approximately $1.5 million. FMAC filed for
reorganization under Chapter 11 of the Federal Bankruptcy Code on July 11, 1997.
For information concerning the Company's involvement in the FMAC Bankruptcy
Case, see "FMAC Transaction."
Growth in Finance Receivables. As a result of the Company's rapid
expansion, contract receivables managed increased to $270.7 million at September
30, 1997 (including $229.0 million in contracts serviced under the Company's
Securitization Program) from $109.9 million at December 31, 1996 (including
$51.7 million in contracts serviced under the Company's Securitization Program)
and from $48.0 million at December 31, 1995.
The following tables reflect the growth in period end balances measured in
terms of the principal amount and the number of contracts.
<TABLE>
<CAPTION>
TOTAL CONTRACTS OUTSTANDING
(IN THOUSANDS, EXCEPT NUMBER OF CONTRACTS)
SEPTEMBER 30, DECEMBER 31,
--------------------------------------------- ---------------------------------------------
1997 1996 1996 1995
--------------------- --------------------- --------------------- ---------------------
PRINCIPAL NO. OF PRINCIPAL NO. OF PRINCIPAL NO. OF PRINCIPAL NO. OF
AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT CONTRACTS
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Company Dealerships............. $ 120,307 24,567 $ 48,066 9,632 $ 49,066 9,615 $ 34,226 8,049
Third Party Dealers............. 150,416 31,483 36,711 8,041 60,878 12,942 13,805 2,733
-------- ------ ------ ------ ------- ------ ------- ------
Total Portfolio Managed......... 270,723 56,050 84,777 17,673 109,944 22,557 $ 48,031 10,782
-------- ------ ------ ------ ------- ------ ------- ------
Less Portfolios Securitized and
Sold:
Company Dealerships............. 103,762 21,912 32,633 7,226 41,998 8,570 -- --
Third Party Dealers............. 125,234 25,028 -- -- 9,665 2,042 -- --
-------- ------ ------ ------ ------- ------ ------- ------
Total Portfolios Securitized and
Sold.......................... 228,996 46,940 32,633 7,226 51,663 10,612 -- --
-------- ------ ------ ------ ------- ------ ------- ------
Company Total................. $ 41,727 9,110 $ 52,144 10,447 $ 58,281 11,945 $ 48,031 10,782
======== ====== ====== ====== ======= ====== ======= ======
</TABLE>
In addition to the Company Dealership and Third Party Dealer loan portfolios
summarized above, the Company also services loan portfolios for Kars totaling
approximately $154.8 million as of September 30, 1997.
31
<PAGE> 33
The following tables reflect the growth in contract originations by Company
Dealerships and contract purchases from Third Party Dealers measured in terms of
the principal amount and the number of contracts.
<TABLE>
<CAPTION>
TOTAL CONTRACTS ORIGINATED/PURCHASED
(IN THOUSANDS, EXCEPT NUMBER OF CONTRACTS)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
1997 1996
------------------------------------- -------------------------------------
PRINCIPAL NO. OF AVERAGE PRINCIPAL NO. OF AVERAGE
AMOUNT CONTRACTS PRINCIPAL AMOUNT CONTRACTS PRINCIPAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Company Dealerships........... $ 131,526 23,458 $ 5,607 $ 38,179 5,413 $ 7,053
Third Party Dealers........... 144,237 26,147 5,516 32,919 5,781 5,694
-------- ------ ------- ------
Total....................... $ 275,763 49,605 5,559 $ 71,098 11,194 6,351
======== ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1996 1995
------------------------------------- -------------------------------------
PRINCIPAL NO. OF AVERAGE PRINCIPAL NO. OF AVERAGE
AMOUNT CONTRACTS PRINCIPAL AMOUNT CONTRACTS PRINCIPAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Company Dealerships........... $ 48,996 6,929 $ 7,071 $ 36,568 6,129 $ 5,966
Third Party Dealers........... 56,770 9,825 5,778 16,456 3,012 5,463
-------- ------ ------- ------
Total....................... $ 105,766 16,754 6,313 $ 53,024 9,141 5,801
======== ====== ======= ======
</TABLE>
For the nine month period ended September 30, 1997, Finance Receivable Principal
Balances originated/purchased increased to $275.8 million, including $55.4
million from the Seminole and E-Z Plan acquisitions (13,250 contracts).
RESULTS OF OPERATIONS
The prices at which the Company sells its cars and the interest rates that
it charges to finance these sales take into consideration that the Company's
primary customers are high-risk borrowers, many of whom ultimately default. The
Provision for Credit Losses reflects these factors and is treated by the Company
as a cost of both the future interest income derived on the contract receivables
originated at Company Dealerships as well as a cost of the sale of the cars
themselves. Accordingly, unlike traditional car dealerships, the Company does
not present gross profits in its Statements of Operations calculated as Sales of
Used Cars less Cost of Used Cars Sold.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Sales of Used Cars. Sales of Used Cars increased by 87.2% to $79.5 million
for the nine month period ended September 30, 1997 from $42.5 million for the
nine month period ended September 30, 1996. This growth reflects increases in
the number of used car dealerships in operation, and average unit sales price.
Units sold increased by 75.9% to 10,801 units in the nine month period ended
September 30, 1997 from 6,141 units in the nine month period ended September 30,
1996. Same store unit sales declined by 13.4% in the nine month period ended
September 30, 1997 compared to the nine month period ended September 30, 1996.
This is due to the increased emphasis on underwriting at the Company
Dealerships, particularly one dealership where unit sales decreased by 619
units, which represents 77.0% of the decrease for the nine month period ended
September 30, 1997 compared to the same period in 1996.
The average sales price per car increased by 6.4% to $7,364 for the nine
month period ended September 30, 1997 from $6,920 for the nine month period
ended September 30, 1996.
Cost of Used Cars Sold and Gross Margin. The Cost of Used Cars Sold
increased by 78.5% to $42.5 million for the nine month period ended September
30, 1997 from $23.8 million for the nine month period ended September 30, 1996.
On a per unit basis, the Cost of Used Cars Sold increased by 1.5% to $3,938 for
the nine month period ended September 30, 1997 from $3,881 for the nine month
period ended September 30, 1996. The gross margin on used car sales (Sales of
Used Cars less Cost of Used Cars Sold excluding Provision for Credit Losses)
increased by 98.3% to $37.0 million for the nine month period ended
32
<PAGE> 34
September 30, 1997 from $18.7 million for the nine month period ended September
30, 1996. As a percentage of sales, the gross margin was 46.5% and 43.9% for the
nine month periods ended September 30, 1997 and 1996, respectively. On a per
unit basis, the gross margin per car sold was $3,426 and $3,039 for the nine
month periods ended September 30, 1997 and 1996, respectively.
Provision for Credit Losses. The Provision for Credit Losses increased by
99.2% to $15.4 million in the nine month period ended September 30, 1997 from
$7.7 million for the nine month period ended September 30, 1996. This includes
an increase of $1.2 million in the Provision for Credit Losses in the nine month
period ended September 30, 1997 for third party receivables and the Cygnet
dealer notes receivable over the nine month period ended September 30, 1996 when
the Company recorded no Provision for Credit losses for third party receivables
or the Cygnet dealer notes receivable. On a percentage basis, the Provision for
Credit Losses per unit originated at Company Dealerships increased by 12.8% to
$1,505 per unit in the nine month period ended September 30, 1997 from $1,334
per unit in the nine month period ended September 30, 1996. This increase is
primarily due to an increase in the average amount financed in the nine months
ended September 30, 1997 to $7,457 per unit from $6,604 per unit in the nine
month period ended September 30, 1996. As a percentage of contract balances
originated, the Provision for Credit Losses averaged 20.2% and 20.2%, for the
nine month periods ended September 30, 1997 and 1996, respectively.
Interest Income. Interest Income consists primarily of interest on finance
receivables from Company Dealership sales, interest on Third Party Dealer
finance receivables, income from Residuals in Finance Receivables Sold, income
from the Cygnet Dealer Program, and other interest income from the FMAC Senior
Bank Debt.
Company Dealership Receivables -- Interest Income increased by 30.0% to
$9.6 million for the nine month period ended September 30, 1997 from $7.4
million for the nine month period ended September 30, 1996. Interest Income was
reduced as a result of sales of $155.9 million in Company Dealership contract
principal balances since inception of the Securitization Program, including
sales of $95.7 million in Company Dealership contract principal balances in the
nine month period ended September 30, 1997, and will continue to be affected in
future periods by additional securitizations. The Company financed 95.7% of
sales revenue and 94.5% of the used cars sold at Company Dealerships for the
nine month period ended September 30, 1997 compared to 89.8% of sales revenue
and 94.1% of the used cars sold for the nine month period ended September 30,
1996. The average amount financed increased to $7,457 for the nine month period
ended September 30, 1997 from $6,604 for the nine month period ended September
30, 1996. As a result of its expansion into markets with interest rate limits,
the Company's yield on its Company Dealership Receivable contract portfolio has
trended downward. The effective yield on Finance Receivables from Company
Dealerships was 27.7% and 29.2%, for the nine month periods ended September 30,
1997 and 1996, respectively. The Company's policy is to charge 29.9% per annum
on its Company Dealership contracts. However, in those states that impose usury
limits the Company charges the maximum interest rate permitted.
Third Party Dealer Receivables -- Interest Income increased by 135.5% to
$10.6 million for the nine month period ended September 30, 1997 from $4.5
million in the nine month period ended September 30, 1996. Interest Income was
reduced as a result of sales of $157.9 million in Third Party Dealer contract
principal balances since inception of the Securitization Program, including
sales of $147.9 million in Third Party Dealer contract principal balances in the
nine months ended September 30, 1997, and will continue to be effected in future
periods by additional securitizations. Interest income has increased in
conjunction with the increases in Third Party Dealer contracts purchased and
outstanding. Primarily as a result of its expansion into markets with interest
rate limits, the Company's yield on its Third Party Dealer portfolio has trended
downward. Portfolio yield was 23.2% and 24.7%, for the nine month periods ended
September 30, 1997 and 1996, respectively.
Cygnet Dealer Program and Other Interest Income -- Interest income
increased by 100.0% to $3.2 million for the nine month period ended September
30, 1997. This income consisted of $1.3 million in interest income from the
Cygnet Dealer Program and $1.8 million in interest income from the FMAC Senior
Bank Debt.
33
<PAGE> 35
Gain on Sale of Finance Receivables. Champion Receivables Corporation
("CRC") and Champion Receivables Corporation II ("CRC II") (collectively
referred to as "Securitization Subsidiaries"), are the Company's wholly-owned
special purpose "bankruptcy remote entities". During the first quarter of 1996,
the Company initiated a Securitization Program under which CRC sold securities
backed by contracts to SunAmerica. Beginning with the third fiscal quarter of
1997, the Company expanded the Securitization Program to include CRC II and
sales of CRC II securities through private placement of securities to investors
other than Sun America. Under the Securitization Program, the Securitization
Subsidiaries assign and transfer the contracts to separate trusts ("Trusts")
pursuant to Pooling and Servicing Agreements (the "Pooling Agreements").
Pursuant to the Pooling Agreements, Class A Certificates and subordinated Class
B Certificates are issued to the Securitization Subsidiaries. The Securitization
Subsidiaries then sell the Class A Certificates to unrelated investors. The
transferred contracts are serviced by Champion Acceptance Corporation ("CAC"),
another subsidiary of the Company. Prior to the Company's securitization in the
three month period ended September 30, 1997, the Company's Class A Certificates
received ratings from Standard & Poors ranging from "BBB" to "A". To obtain
these ratings from Standard & Poors, CRC was required to provide a credit
enhancement by establishing and maintaining a cash spread account for the
benefit of the certificate holders. For the securitization transaction that was
consummated during the three month period ended September 30, 1997, the
Company's Class A Certificates received a "AAA" rating from Standard & Poors,
and a "Aaa" rating from Moody's Investors Service. To obtain these ratings, CRC
II (1) obtained an insurance policy from MBIA Insurance Corporation which
unconditionally and irrevocably guaranteed full and complete payment of the
Class A guaranteed distribution (as defined), and (2) provided a credit
enhancement by establishing and maintaining a cash spread account for the
benefit of the certificate holders. The Securitization Subsidiaries make an
initial cash deposit into the spread account, ranging from 3% to 4% of the
initial underlying finance receivables principal balance and pledges this cash
to the Trusts. The Securitization Subsidiaries are also required to then make
additional deposits to the spread account from the residual cash flow (through
the trustees) as necessary to attain and maintain the spread account at a
specified percentage, ranging from 6.0% to 8.0%, of the underlying finance
receivables principal balance. Distributions are not made to the Securitization
Subsidiaries on the Class B Certificates unless the spread account has the
required balance, the required periodic payments to the Class A Certificate
holders are current, and the trustee, servicer and other administrative costs
are current.
The contracts transferred to the Trusts were purchased by the
Securitization Subsidiaries from either CAC, Champion Financial Services, Inc.
("CFS"), Ugly Duckling Car Sales Florida, Inc. ("UDCSF"), or Ugly Duckling Cars
Sales Texas, LLP ("UDCST"), in "true sale" transactions pursuant to separate
purchase agreements. The obligations of CAC, as servicer, pursuant to the
Pooling Agreements are guaranteed by the Company and certain other subsidiaries
of the Company, other than CRC, CRC II, CAC, CFS, UDCSF, and UDCST.
The Company recognizes a Gain on Sale of Finance Receivables equal to the
difference between the yield earned on the contract portfolio securitized and
the return on the securities sold plus the release of Allowance for Credit
Losses. The amount of any Gain on Sale of Loans is based on certain estimates,
which may not subsequently be realized. The amount of Gain on Sale of Loans
recognized is a function of a number of items including, but not limited to, the
net sales proceeds, the seasoning, remaining term, the weighted average net
interest rate spread of the portfolio sold, and the net book value of the loans
sold. 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, those differences appear to be
other than temporary in nature, the Company would be required to revalue the
Residuals in Finance Receivables Sold, and record a charge to earnings based
upon the reduction. During the nine month period ended September 30, 1997, the
Company recorded a $10.0 million charge (approximately $6.0 million, net of
income taxes) to write down the Residuals in Finance Receivables Sold.
The Company utilizes a number of estimates in arriving at the Gain on Sale
of Loans. With the exception of the Company's first two securitization
transactions which took place during the first six months of 1996, the estimated
cash flows into the Trusts were discounted with a rate of 16%. The two
securitization transactions that took place during the first six months of 1996
were discounted with a rate of 25%. For securitization
34
<PAGE> 36
transactions between June 30, 1996 and June 30, 1997, for contracts originated
at Company Dealerships, 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.
The $10.0 million charge (approximately $6.0 million, net of income taxes) in
the nine month period ended September 30, 1997, which resulted in a reduction in
the carrying value of the Residuals in Finance Receivables Sold, had the effect
of increasing the cumulative net loss assumptions 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 the three month period ended September 30, 1997.
For the securitization transaction that took place during the three month
period ended September 30, 1997, for contracts originated at Company
Dealerships, 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.
The assumptions utilized in prior securitizations may not necessarily be
the same as those utilized in future securitizations. The Company classifies the
residuals as "held-to-maturity" securities in accordance with SFAS No. 115.
During the nine month period ended September 30, 1997, the Company
securitized an aggregate of $245.5 million in contracts, issuing $202.0 million
in securities. Pursuant to these transactions, the Company allocated $39.5
million of its Allowance for Credit Losses to the sold finance receivables
during the nine month period ended September 30, 1997. The Company recorded Gain
on Sale of Loans during the nine month period ended September 30, 1997 of $10.3
million, which consisted of a Gain on Sale of Loans of $20.3 million from
securitization transactions during the nine month period ended September 30,
1997, net of the $10.0 million charge (approximately $6.0 million, net of income
taxes) to revalue the Residuals in Finance Receivables Sold. The Company
recognized Gain on Sale of Loans of $2.6 million during the nine month period
ended September 30, 1996. The Gain on Sale of Loans as a percentage of principal
balances securitized was 8.6% and 8.1% respectively, for the Company Dealership
and Third Party Dealer portfolios securitized in the nine month period ended
September 30, 1997, compared to 6.2% for the Company Dealership portfolios
securitized in the nine month period ended September 30, 1996. No Third Party
Dealer contracts were securitized in the nine month period ended September 30,
1996. The difference in the gain percentage on the Company Dealership portfolios
is due to the fact that the portfolios securitized in the first nine months of
1996 were more seasoned, resulting in a much shorter remaining life than the
portfolios securitized in the first nine months of 1997, and lower "A"
certificate coupon rates, which results in an increase in gain on sale, net of
the impact of increasing the cumulative net credit loss assumptions.
During the nine month period ended September 30, 1997, the Company made
initial spread account deposits totaling $7.4 million. Additional net deposits
to the spread accounts during the nine month period ended September 30, 1997
totaled $4.9 million resulting in a total balance in the spread accounts of
$15.1 million as of September 30, 1997. In addition to the spread account
balance of $15.1 million, the Company had deposited a total of $1.1 million in
trust accounts in conjunction with certain other agreements.
During the nine month period ended September 30, 1997, the Trusts issued
certificates at a weighted average yield of 7.5% with the yields ranging from
6.3% to 8.2%, resulting in net spreads, before net credit losses and after
servicing, insurance and trustee fees, ranging from 12.5% to 17.8%, and
averaging 15.0%.
Other Income. Other Income which consists primarily of servicing income,
insurance premiums earned on force placed insurance policies, earnings on
investments from the Company's cash and cash equivalents, and franchise fees
from the Company's rent-a-car franchisees increased by 791.4% to $7.0 million
for the nine months ended September 30, 1997 from $780,000 for the nine month
period ended September 30, 1996. The
35
<PAGE> 37
Company services the $229.0 million in securitized contract principal balances
for monthly fees ranging from .25% to .33% of the beginning of period principal
balances (3.0% to 4.0% annualized). In addition, in conjunction with the Kars
acquisition in September 1997, the Company recognizes income from servicing the
Kars portfolio at a rate of approximately .33% (4.0% annualized) of beginning of
period principal balances. Servicing income for the nine months ended September
30, 1997 increased to $3.8 million from $487,000 in the nine month period ended
September 30, 1996. The significant increase is due to the increase in the
principal balance of contracts being serviced pursuant to the Securitization
Program and the addition of servicing of the Kars portfolio. The increase is
also due to an increase in insurance premium income of $607,000 over the same
period in the prior year when the Company recognized no insurance premium income
and an increase in earnings on investments of $1.2 million compared to no
investment earnings in the nine month period ended September 30, 1996. The
Company no longer actively engages in the rent-a-car franchise business.
Income before Operating Expenses. As a result of the Company's continued
expansion, Income before Operating Expenses grew by 137.9% to $62.3 million for
the nine month period ended September 30, 1997 from $26.2 million for the nine
month period ended September 30, 1996. Growth of Sales of Used Cars, Interest
Income on the loan portfolios, Gain on Sale of Loans, and Other Income were the
primary contributors to the increase.
Operating Expenses. Operating Expenses consist of Selling and Marketing
Expenses, General and Administrative Expenses, and Depreciation and
Amortization.
The Company has five distinct business segments. These consist of retail
car sales operations (Company Dealerships), operations attributable to the
administration and collection of finance receivables generated at the Company
Dealerships (Company Dealership Receivables), activities associated with the
origination, administration and collection of finance receivables purchased from
Third Party Dealers (Third Party Dealers), financing activities related to the
collateralized dealer financing program (Cygnet), and corporate and other
operations.
A summary of Operating Expenses by business segment for the nine month
periods ended September 30, 1997 and 1996, respectively, follows:
<TABLE>
<CAPTION>
COMPANY THIRD
COMPANY DEALERSHIP PARTY CORPORATE
DEALERSHIP RECEIVABLES RECEIVABLES CYGNET & OTHER TOTAL
---------- ----------- ----------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
1997:
Selling and Marketing................ $ 6,670 $ -- $ -- $ 9 $ 1 $ 6,680
General and Administrative........... 14,196 7,563 10,076 896 7,758 40,489
Depreciation and Amortization........ 984 785 261 7 422 2,459
------- ------ ------- ---- ------ -------
$ 21,850 $ 8,348 $10,337 $912 $ 8,181 $49,628
======= ====== ======= ==== ====== =======
</TABLE>
<TABLE>
<CAPTION>
COMPANY THIRD
COMPANY DEALERSHIP PARTY CORPORATE
DEALERSHIP RECEIVABLES RECEIVABLES CYGNET & OTHER TOTAL
---------- ----------- ----------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
1996:
Selling and Marketing................ $ 2,898 $ -- $ -- $ -- $ 17 $ 2,915
General and Administrative........... 6,225 2,067 2,470 -- 2,789 13,551
Depreciation and Amortization........ 235 567 131 -- 195 1,128
------- ------ ------- ---- ------ -------
$ 9,358 $ 2,634 $ 2,601 $ -- $ 3,001 $17,594
======= ====== ======= ==== ====== =======
</TABLE>
Selling and Marketing Expenses. For the nine month periods ended September
30, 1997 and 1996, Selling and Marketing Expenses were comprised almost entirely
of advertising costs and commissions relating to Company Dealership operations.
Selling and Marketing Expenses increased by 129.2% to $6.7 million for the nine
month period ended September 30, 1997 from $2.9 million for the nine month
period ended September 30, 1996. As a percentage of Sales of Used Cars, these
expenses averaged 8.4% and 6.9% for the
36
<PAGE> 38
nine month periods ended September 30, 1997, and 1996, respectively. On a per
unit sold basis, Selling and Marketing Expenses of Company Dealerships increased
by 30.3% to $618 per unit for the nine month period ended September 30, 1997
from $475 per unit for the nine month period ended September 30, 1996. This
increase is primarily due to increased marketing production costs, and an
increase in marketing efforts in the Tampa Bay/St. Petersburg, San Antonio, Las
Vegas, and Albuquerque markets where the Company initially commenced operations
in 1997, combined with a decrease in same store unit sales.
General and Administrative Expenses. General and Administrative Expenses
increased by 198.8% to $40.5 million for the nine month period ended September
30, 1997 from $13.6 million for the nine month period ended September 30, 1996.
These expenses represented 33.7% and 23.5% of total revenues for the nine month
periods ended September 30, 1997, and 1996, respectively. The increase in
General and Administrative Expenses is primarily a result of the Company's
increased number of used car dealerships and significant expansion of its Third
Party Dealer financing operations as well as continued expansion of
infrastructure to administer growth.
Depreciation and Amortization. Depreciation and Amortization consists of
depreciation and amortization on the Company's property and equipment and
amortization of the Company's goodwill and trademarks. Depreciation and
amortization increased by 118.0% to $2.5 million for the nine month period ended
September 30, 1997 from $1.1 million for the nine month period ended September
30, 1996. The increase was due primarily to the increase in amortization of
goodwill associated with the Company's recent acquisitions, and increased
depreciation expense from the addition of used car dealerships and Third Party
Dealer Branch offices.
Interest Expense. Interest expense decreased by 34.9% to $2.9 million from
$4.5 million in the nine month period ended September 30, 1996. The decrease in
1997, despite significant growth in Company assets, is primarily the result of
the two public offerings that were completed in 1996, a private placement that
was completed in February of 1997 which generated, in the aggregate,
approximately $168.1 million in cash, and the Company's Securitization Program
which generated cash from the sale of Finance Receivables which the Company
utilized to pay down debt. Further, concurrent with the Company's initial public
offering on June 21, 1996, the Company restructured its Subordinated Notes
Payable reducing the borrowing rate on that debt from 18% to 10% per annum.
Income Taxes. Income taxes totaled $4.0 million in the nine month period
ended September 30, 1997, an effective tax rate of 41.2%. In the nine month
period ended September 30, 1996, no income tax was incurred due to income tax
benefits realized from the Company's reduction in its valuation allowance for
deferred income tax assets.
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
During 1994, the Company closed one Company Dealership because the facility
failed to satisfy certain new standards and, at the end of 1995, closed its
Gilbert, Arizona dealership (the "Gilbert Dealership"). For substantially all of
1995, the Gilbert Dealership was used by the Company to evaluate the sale of
later model used cars. These cars had an average age of approximately three
years, which is two to seven years newer than the cars typically sold at Company
Dealerships, and cost more than twice that of typical Company Dealership cars.
The Company determined that its standard financing program could not be
implemented on these higher cost cars. Furthermore, operation of this dealership
required additional corporate infrastructure to support its market niche, such
as distinct advertising and marketing programs, which the Company was unable to
leverage across its other operations. Accordingly, the Company terminated this
program, and sold the land, dealership building, and other improvements to a
third party for $1.7 million. Pursuant to this sale and the disposition of other
assets, the Company recognized a loss of approximately $221,000. During fiscal
year 1995, the Gilbert Dealership produced sales of $9.5 million (average of
$8,946 per car sold) and gross profits (Sales of Used Cars less Cost of Used
Cars Sold) of $2.2 million (average of $2,060 per car sold), and the Company
incurred selling and marketing expenses of $627,000 (average of $593 per car
sold). The results of operations discussed below have been adjusted as if the
Gilbert Dealership had been terminated as of December 31,
37
<PAGE> 39
1994, as management believes these pro forma results are more indicative of
ongoing operations. Accordingly, 1995 amounts followed by "(pro forma)" have
been adjusted to eliminate Gilbert Dealership operations.
Sales of Used Cars. Sales of Used Cars increased by 40.1% to $53.8 million
for the year ended December 31, 1996 from $38.4 million (pro forma) for the year
ended December 31, 1995 and by 38.1% for the year ended December 31, 1995 from
$27.8 million for the year ended December 31, 1994. This growth reflects
increases in the average unit sales price and the average number of units sold
by each Company Dealership.
The average sales price per car increased by 17.2% to $7,107 for the year
ended December 31, 1996 from $6,065 (pro forma) for the year ended December 31,
1995 compared to 15.1% from $5,269 in 1994. This increase reflects management's
decision to sell higher quality vehicles at its Company Dealerships. Units sold
per Company Dealership averaged 946, 904 (pro forma), and 659 for the years
ended December 31, 1996, 1995, and 1994, respectively. The Company attributes
the increase in units sold per Company Dealership to the success of the
Company's business strategy, most notably its advertising and marketing
programs.
Cost of Used Cars Sold and Gross Margin. The Cost of Used Cars Sold
increased by 44.4% to $29.9 million for the year ended December 31, 1996 from
$20.7 million (pro forma) for the year ended December 31, 1995, which was an
increase of 64.3% from $12.6 million for the year ended December 31, 1994. On a
per unit basis, the Cost of Used Cars Sold increased by 20.8% to $3,951 for the
year ended December 31, 1996 from $3,270 (pro forma) for the year ended December
31, 1995, which was an increase of 37.0% from $2,387 for the year ended December
31, 1994, largely due to management's determination to sell higher quality cars
throughout its operations. The gross margin on used car sales (Sales of Used
Cars less Cost of Used Cars Sold excluding Provision for Credit Losses)
increased by 35.0% to $23.9 million for the year ended December 31, 1996 from
$17.7 million (pro forma) for the year ended December 31, 1995, which was an
increase of 16.4% from $15.2 million for the year ended December 31, 1994. As a
percentage of sales, the gross margin was 44.4%, 46.1% (pro forma), and 54.7%
for the years ended December 31, 1996, 1995, and 1994, respectively. The Company
attributes the decline in the gross margin percentage to management's strategy
of increasing the quality and, therefore, the cost, of cars sold at Company
Dealerships while maintaining a consistent dollar gross margin per unit sold.
The decline in the gross margin percentage was offset by corresponding increases
in the quality of finance contracts generated (resulting in a lower Provision
for Credit Losses) and greater unit sales per Company Dealership. On a per unit
basis, the gross margin per car sold was $3,156, $2,795 (pro forma), and $2,882
for the years ended December 31, 1996, 1995, and 1994, respectively.
Provision for Credit Losses. A high percentage of Company Dealership
customers ultimately do not make all of their contractually scheduled payments,
requiring the Company to charge off the remaining principal balance due. As a
result, the Company recognizes a provision for credit losses in order to
establish an allowance for credit losses sufficient to absorb anticipated future
losses. The provision for credit losses increased by 25.6% to $9.8 million in
1996 over $7.8 million (pro forma) in 1995, which was a decrease of $300,000 or
3.7% from $8.1 million in 1994. This includes an increase of $153,000 in the
provision for credit losses in 1996 for third party receivables over 1995 when
the Company recorded no provision for credit losses for third party receivables.
In 1994, the Company recorded provision for credit losses totaling $116,000 for
its third party loan portfolio. On a percentage basis, the provision for credit
losses per unit originated at Company Dealerships increased by 3.1% to $1,277
per unit in 1996 over $1,239 (pro forma) per unit in 1995, which was a decrease
of 18.7% from 1994 when the average was $1,523 per unit. As a percentage of
contract balances originated, the provision averaged 19.7%, 22.8% (pro forma),
and 34.5% in 1996, 1995, and 1994, respectively. This decrease reflects the
Company's strengthened underwriting requirements, the higher quality of the cars
sold, and the Company's improved collection efforts.
The Company charges its Provision for Credit Losses to current operations
and does not recognize any portion of the unearned interest income as a
component of its Allowance for Credit Losses. Accordingly, the Company's
unearned finance income is comprised of the full annual percentage rate ("APR")
on its contracts less amortization of loan origination costs.
38
<PAGE> 40
Interest Income. Interest income consists primarily of interest on both
finance receivables from Company Dealership sales and interest on Third Party
Dealer finance receivables.
Company Dealership Receivables -- Interest income increased by 2.4% to $8.4
million for the year ended December 31, 1996 from $8.2 million for the year
ended December 31, 1995, which increased by 74.5% compared to $4.7 million in
the year ended December 31, 1994. Interest income during the year ended December
31, 1996 was affected by the sale of $58.2 million in contract principal
balances pursuant to the Securitization Program, and will continue to be
affected in future periods by additional securitizations. A primary element of
the Company's sales strategy is to provide financing to customers with poor
credit histories who are unable to obtain automobile financing through
traditional sources. The Company financed 91.1% of sales revenue and 91.6% of
the used cars sold at Company Dealerships for the year ended December 31, 1996
compared to 89.7% (pro forma) of sales revenue and 91.2% (pro forma) of the used
cars sold for the year ended December 31, 1995, and 85.0% of sales revenue and
89.8% of used cars sold in the year ended December 31, 1994. The average amount
financed increased to $7,071 for the year ended December 31, 1996 from $5,966
for the year ended December 31, 1995 which had increased from $4,986 for the
year ended December 31, 1994. The effective yield on finance receivables from
Company Dealerships was 29.2%, 28.0%, and 28.2% for the years ended December 31,
1996, 1995, and 1994, respectively. The Company operated 8, 7 (pro forma), and 8
dealerships at December 31, 1996, 1995, and 1994, respectively.
Third Party Receivables -- Interest income increased by 305.6% to $7.3
million for the year ended December 31, 1996 from $1.8 million in 1995, which
was an increase of 153.5% from $710,000 in 1994. Interest income during the year
ended December 31, 1996 was effected by the sale of $10.0 million in contract
principal balances pursuant to the Securitization Program, and will continue to
be effected in future periods by additional securitizations. Interest income has
increased in conjunction with the increases in Third Party Dealer contracts
purchased and outstanding. As noted above, the Company began to significantly
expand its Third Party Dealer branch office operations in April 1995. Further,
subsequent to June 30, 1995, as a result of its migration to higher quality
contracts and expansion into markets with interest rate limits, the Company's
yield on its Third Party Dealer contract portfolio has trended downward.
Portfolio yield was approximately 25.8%, 26.7%, and 30.9% for the years ended
December 31, 1996, 1995, and 1994, respectively. The Company operated 35, 8 and
1 branch office(s) at December 31, 1996, 1995, and 1994, respectively.
Through December 31, 1996, the Company had securitized an aggregate of
$68.2 million in contracts, issuing $53.5 million in securities to SunAmerica.
Pursuant to these transactions, the Company allocated $10.0 million of its
Allowance for Credit Losses to the sold finance receivables during 1996 and
retained a Residual in Finance Receivables Sold of $9.9 million at December 31,
1996. The Company also recorded gain on sale of loans during 1996 of $4.4
million, net of expenses.
Other Income. Other Income consists primarily of servicing income,
franchise fees from the Company's rent-a-car franchisees and insurance premiums
earned on force placed insurance policies. The Company services the $51.7
million in contracts sold in the securitization for monthly fees ranging from
.33% to .42% of beginning of period principal balances (4% to 5% annualized).
Servicing Income for the year ended December 31, 1996 totaled $921,000. In
addition, income from rent-a-car franchisees and insurance premiums earned on
force placed insurance policies increased by 111.0% to $650,000 for the year
ended December 31, 1996 from $308,000 for the year ended December 31, 1995,
which was a decrease of 44.6% from the $556,000 in 1994. The Company no longer
actively engages in the rent-a-car franchise business.
Income before Operating Expenses. As a result of the Company's continued
expansion, Income before Operating Expenses grew by 77.7% to $35.9 million for
the year ended December 31, 1996 from $20.2 million (pro forma) for the year
ended December 31, 1995, which was an increase of 54.2% from $13.1 million in
1994. Interest income on the loan portfolios and Gain on Sale of Loans were the
primary contributors to the increase. The increase also reflects the growth of
Sales of Used Cars.
39
<PAGE> 41
Operating Expenses. Operating Expenses consist of Selling and Marketing
Expenses, General and Administrative Expenses, and Depreciation and
Amortization. The allocation of these expenses to each of the Company's business
segments for the years ended December 31, 1996, 1995 and 1994 follows:
<TABLE>
<CAPTION>
COMPANY THIRD
COMPANY DEALERSHIP PARTY CORPORATE
DEALERSHIP RECEIVABLES RECEIVABLES AND OTHER TOTAL
---------- ----------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
1996:
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
======= ====== ====== ====== =======
1995:
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
======= ====== ====== ====== =======
1994:
Selling and Marketing.............. $ 2,263 $ -- $ -- $ 139 $ 2,402
General and Administrative......... 5,069 1,631 240 2,201 9,141
Depreciation and Amortization...... 131 159 64 423 777
------- ------ ------ ------ -------
$ 7,463 $ 1,790 $ 304 $ 2,763 $ 12,320
======= ====== ====== ====== =======
</TABLE>
Selling and Marketing Expenses. For the years ended December 31, 1996,
1995, and 1994, Selling and Marketing Expenses were comprised almost entirely of
advertising costs and commissions relating to Company Dealership operations.
Selling and Marketing Expenses increased by 12.5% to $3.6 million for the year
ended December 31, 1996 from $3.2 million (pro forma) for the year ended
December 31, 1995, which was an increase of 33.3% from $2.4 million in 1994. As
a percentage of Sales of Used Cars, these expenses averaged 6.7%, 8.3% (pro
forma), and 8.6% for the years ended December 31, 1996, 1995, and 1994,
respectively. On a per unit sold basis, Selling and Marketing Expenses of
Company Dealerships decreased by 7.1% to $474 per unit for the year ended
December 31, 1996 from $510 (pro forma) per unit for the year ended December 31,
1995, which was an increase of 18.9% from $429 per unit in 1994.
General and Administrative Expenses. General and Administrative Expenses
increased by 45.5% to $19.5 million for the year ended December 31, 1996 from
$13.4 million (pro forma) for the year ended December 31, 1995, which was an
increase of 47.3% from $9.1 million in 1994. These expenses represented 25.8%,
27.5%, and 27.0% of total revenues for the years ended December 31, 1996, 1995,
and 1994, respectively. For the year ended December 31, 1996, 42.5% of General
and Administrative Expenses were attributable to Company Dealership sales, 15.6%
to the Company Dealership receivables' financing activities, 20.2% to Third
Party Dealer activities and 21.7% to Corporate overhead. For the year ended
December 31, 1995, 55.8% of General and Administrative Expenses were
attributable to Company Dealership sales, 18.2% to the Company Dealership
receivables' financing activities, 7.9% to Third Party Dealer activities and
18.1% to Corporate overhead. The increase in General and Administrative Expenses
is a direct result of the Company's significant expansion of its Third Party
Dealer financing operations as well as continued expansion of infrastructure to
administer growth.
Depreciation and Amortization. Depreciation and Amortization consists of
depreciation and amortization on the Company's property and equipment and
amortization of the Company's trademarks. Depreciation and amortization
increased by 23.1% to $1.6 million for the year ended December 31, 1996 from
$1.3 million for the year ended December 31, 1995, which was an increase of
62.5% from $777,000 in 1994 . The increase was due primarily to the construction
of Company servicing facilities, which opened in June 1995, and the purchase of
associated equipment. For the year ended December 31, 1996, 20.2% of these
expenses were
40
<PAGE> 42
attributable to Company Dealership sales, 48.7% to the Company Dealership
receivables' financing activities, 12.4% to Third Party Dealer activities and
18.7% to Corporate overhead. For the year ended December 31, 1995, 21.2% of
these expenses were attributable to Company Dealership sales, 36.5% to the
Company Dealership receivables' financing activities, 6.8% to Third Party Dealer
activities and 35.5% to Corporate overhead. Amortization of covenants was
$296,000 and $296,000 for the years ended December 31, 1995, and 1994
respectively. As of December 31, 1995, all existing covenants had been fully
amortized.
Interest Expense. Interest expense decreased by 11.7% to $5.3 million in
1996 from $6.0 million in 1995, which was an increase of 100.0% from $3.0
million in 1994. The decrease in 1996, despite significant growth in Company
assets, is the direct result of the two public offerings that were completed in
1996 which generated $79.4 million in cash, and the Company's Securitization
Program which generated $39.0 million in cash from the sale of finance
receivables which the Company utilized to pay down debt. Further, concurrent
with the Company's initial public offering on June 21, 1996, the Company
restructured its Subordinated Notes Payable reducing the borrowing rate on that
debt from 18% to 10% per annum.
Income Taxes. Income taxes totaled $100,000 in 1996, up from zero in 1995.
In 1994, the Company realized a tax benefit of $334,000. In 1996, the Company
utilized all of the valuation allowance that existed against its deferred income
tax assets as of December 31, 1995. Therefore, the Company anticipates incurring
income tax expense in the future at the statutory income tax rates.
ALLOWANCE FOR CREDIT LOSSES
The Company has established an Allowance for Credit Losses ("Allowance") to
cover anticipated credit losses on the contracts currently in its portfolio. The
Allowance has been established through the Provision for Credit Losses, and
through nonrefundable acquisition discounts on contracts purchased from Third
Party Dealers. The Allowance on contracts originated at Company Dealerships
decreased to 20.0% of outstanding principal balances as of September 30, 1997
compared to 23.0% as of December 31, 1996. The Allowance as a percentage of
Third Party Dealer contracts decreased to 12.0% from 12.7% over the same period.
The Allowance as a percentage of the Company's combined contract portfolio
increased to 15.2% at September 30, 1997 from 13.9% at December 31, 1996. The
increase in the Allowance percentage is primarily due to the composition of the
total portfolio with an increase in the Company Dealership Receivable portfolio
relative to the total portfolio compared to December 31, 1996.
41
<PAGE> 43
The following table reflects activity in the Allowance, as well as
information regarding charge off activity, for the nine month periods ended
September 30, 1997 and 1996, in thousands.
<TABLE>
<CAPTION>
COMPANY DEALERSHIPS THIRD PARTY DEALERS
-------------------- --------------------
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Allowance Activity:
Balance, Beginning of Period...................... $ 1,625 $ 7,500 $ 6,500 $ 1,000
Provision for Credit Losses....................... 14,193 7,713 948 --
Discount Acquired................................. 15,309 -- 17,713 3,646
Discount accreted to interest income.............. -- -- (642) --
Reduction Attributable to Loans Sold.............. (21,407) (6,187) (18,096) --
Net Charge Offs................................... (6,411) (5,455) (3,401) (1,591)
-------- ------- -------- --------
Balance, End of Period............................ $ 3,309 $ 3,571 $ 3,022 $ 3,055
======== ======= ======== ========
Allowance as Percent of Period End Principal
Balance......................................... 20.0% 23.1% 12.0% 8.3%
======== ======= ======== ========
Ended Principal Balance
Charge off Activity:
Principal Balances:
Collateral Recovered............................ $ (6,865) $(5,260) $ (3,873) $(2,070)
Collateral Not Recovered........................ (1,490) (1,619) (858) (416)
-------- ------- -------- --------
Total Principal Balances........................ (8,355) (6,879) (4,731) (2,486)
Accrued Interest................................ -- (486) -- (123)
Recoveries, Net................................. 1,944 1,910 1,330 1,018
-------- ------- -------- --------
Net Charge Offs................................... $ (6,411) $(5,455) $ (3,401) $(1,591)
======== ======= ======== ========
Net Charge Offs as % of Average Principal
Outstanding..................................... 23.9% 25.3% 15.8% 9.2%
======== ======= ======== ========
</TABLE>
During the nine month period ended September 30, 1997, the Company
experienced rapid growth in the number of states in which it operated Company
Dealerships and Third Party Dealer branches. As a result, the Company's loan
base was more geographically diversified throughout the country, which in turn
led to the Company repossessing significantly more vehicles throughout the
country than it historically had, in markets where it did not operate
reconditioning centers or repossession lots. The Company, therefore, relied
extensively on third parties to dispose of its repossessed collateral. This led
to the Company not realizing its expected recovery amount on the liquidation of
these repossessions. The Company has taken several actions to reverse this trend
including consolidation of auction locations through which repossessed vehicles
are liquidated, expansion of its repossession administration department,
development of an enhanced repossession tracking and monitoring system, hiring
of staff whose primary responsibility is to represent the Company at auctions,
and expansion of efforts to better recondition repossessions prior to
liquidation. The Company believes these actions will improve recovery rates to
levels it historically experienced prior to the nine month period ended
September 30, 1997. For loans originated at Company Dealerships, recoveries as a
percentage of principal balances charged off where collateral has been recovered
averaged 28.3% for the nine month period ended September 30, 1997 compared to
36.3% for the nine month period ended September 30, 1996. Company Dealership
loan recoveries in Arizona are positively affected by the Company's ability to
receive a sales tax benefit for charged off loans that it does not receive in
other markets. As a result of the Company's expansion outside of the Arizona
market in 1997, recovery rates for the Company Dealership loan portfolio were
negatively affected. For Third Party Dealer loans, recoveries as a percentage of
principal balances charged off where collateral has been recovered averaged
34.3% for the nine months period ended September 30, 1997 compared to 49.2% for
the nine month period ended September 30, 1996.
The Company's Net Charge Offs on its Third Party Dealer contract portfolio
are lower than those incurred on its Company Dealership contract portfolio. This
is attributable to the relationship of the average
42
<PAGE> 44
amount financed to the underlying collateral's wholesale value and to a lesser
degree the generally more creditworthy customers served by Third Party Dealers.
In its Third Party Dealer portfolio, the Company generally limits the amount
financed to not more than 120.0% of the wholesale value of the underlying car,
although the Company will make exceptions on a case-by-case basis.
The following table reflects activity in the Allowance, as well as
information regarding charge off activity, for the years ended December 31, 1996
and 1995, in thousands.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
COMPANY DEALERSHIPS THIRD PARTY DEALERS
------------------- -------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Allowance Activity:
Balance, Beginning of Period........................ $ 7,500 $ 6,050 $ 1,000 $ 159
Provision for Credit Losses......................... 9,658 8,359 153 --
Discount Acquired................................... -- -- 8,963 1,660
Reduction Attributable to Loans Sold................ (9,331) -- (650) --
Net Charge Offs..................................... (6,202) (6,909) (2,966) (819)
------- ------ ------- -----
Balance, End of Period.............................. $ 1,625 $ 7,500 $ 6,500 $ 1,000
======= ====== ======= =====
Allowance as Percent of Period End Principal
Balance........................................... 23.0% 21.9% 12.7% 7.2%
======= ====== ======= =====
Charge off Activity:
Principal Balances:
Collateral Recovered.............................. $(6,256) $(6,686) $(3,618) $ (806)
Collateral Not Recovered.......................... (1,859) (2,478) (717) (220)
------- ------ ------- -----
Total Principal Balances.......................... (8,115) (9,164) (4,335) (1,026)
Accrued Interest.................................. (487) (653) (123) (59)
Recoveries, Net................................... 2,400 2,908 1,492 266
------- ------ ------- -----
Net Charge Offs..................................... $(6,202) $(6,909) $(2,966) $ (819)
======= ====== ======= =====
Net Charge Offs as % of Average Principal
Outstanding....................................... 23.0% 24.0% 10.7% 11.9%
======= ====== ======= =====
</TABLE>
The Company's policy is to charge off contracts when they are deemed
uncollectible, but in any event at such time as a contract is delinquent for 90
days.
Net Charge Offs - Company Dealership Portfolio. Net Charge Offs for
contracts originated at Company Dealerships in 1996 were 23.0% of the average
principal balance outstanding compared to 24.0% in 1995. As discussed above,
beginning in 1995 and continuing in 1996 the Company has migrated to selling
higher quality cars at its dealerships. Accordingly, repossessions have less
frequently met Company standards for resale and, therefore, have been sold
primarily at wholesale auction.
Recoveries averaged 29.6% of principal balances charged off in 1996
compared to 31.7% in 1995, primarily reflecting reductions in the percentage of
repossessed cars sold at Company Dealerships of 11.0% in 1996 compared to 33.6%
in 1995.
Net Charge Offs - Third Party Dealers. Net Charge Offs for contracts
purchased from Third Party Dealers in 1996 were 10.7% of the average principal
balance outstanding compared to 11.9% in 1995. Prior to April 1995, the Company
purchased from Third Party Dealers, at discounts of approximately 15.0% to
25.0%, contracts with average principal balances of approximately $4,000 bearing
a typical APR of 29.9%. In April 1995, the Company significantly revised and
expanded its Third Party Dealer program. Under the current program, which is
aimed at more creditworthy borrowers, it purchases from Third Party Dealers, at
discounts averaging approximately 11.0%, contracts with average principal
balances of approximately $5,800 bearing an average APR of 24.5%.
43
<PAGE> 45
Recoveries averaged 34.4% of principal balances charged off on contracts
purchased from Third Party Dealers in 1996 compared to 25.9% for the year ended
December 31, 1995. The increase is due to both an increase in the percent of
charged off collateral actually recovered to 83.5% in 1996 from 78.6% in 1995
and an increase in the percent realized from the resale of recovered collateral
to 41.2% in 1996 from 33.0% in 1995.
Net Charge Off percentage trends for the respective portfolios are
considered by management in determining the adequacy of the Allowance as a
percentage of contract principal balances outstanding.
Static Pool Analysis. To monitor contract performance, beginning in June
1995, the Company implemented "static pool" analysis for contracts originated
since January 1, 1993. Static pool analysis is a monitoring methodology by which
each month's originations and subsequent charge offs are assigned a unique pool
and the pool performance is monitored separately. Improving or deteriorating
performance is measured based on cumulative gross and net charge offs as a
percentage of original principal balances, based on the number of complete
payments made by the customer before charge off. The table below sets forth the
cumulative net charge offs as a percentage of original contract cumulative
balances, based on the quarter of origination and segmented by the number of
payments made prior to charge off. For periods denoted by "x", the pools have
not seasoned sufficiently to allow for computation of cumulative losses. For
periods denoted by "--", the pools have not yet attained the indicated
cumulative age. While the Company monitors its static pools on a monthly basis,
for presentation purposes the information in the tables are presented on a
quarterly basis.
Effective January 1, 1997, the Company modified its methodology to reflect
additional historical experience in computing "Monthly Payments Completed by
Customer Before Charge Off" as it relates to loan balances charged off after
final insurance settlements and on loans modified from their original terms.
Resulting adjustments affect the timing of previously reported interim
cumulative losses, but do not impact ending cumulative losses. For loan balances
charged off after insurance settlement principal reductions, the revised
calculation method only gives credit for payments actually made by the customer
and excludes credit for reductions arising from insurance proceeds. For modified
loans, completed payments now reflect customer payments made both before and
after the loan was modified. The numbers presented below reflect the adoption of
the revised calculation method.
Currently reported cumulative losses may also vary from those previously
reported due to ongoing collection efforts on charged off accounts and the
difference between final proceeds on the liquidation of repossessed collateral
versus original accounting estimates. Management believes that such variation
will not be material.
44
<PAGE> 46
CONTRACTS ORIGINATED AT COMPANY DEALERSHIPS
The following table sets forth the cumulative net charge offs as a
percentage of original contract cumulative (pool) balances, based on the quarter
of origination and segmented by the number of monthly payments completed by
customer before charge off. Additionally, set forth is the percent of principal
reduction for each pool since inception and cumulative total net losses incurred
(TLI).
POOL'S CUMULATIVE NET LOSSES AS PERCENTAGE OF POOL'S ORIGINAL
AGGREGATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
MONTHLY PAYMENTS COMPLETED BY CUSTOMER BEFORE CHARGE OFF
--------------------------------------------------------- PERCENT
0 3 6 12 18 24 TLI REDUCED
--- ---- ---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1993:
1st Quarter....................... 6.9% 18.7% 26.5% 31.8% 33.9% 35.1% 35.4% 100.0%
2nd Quarter....................... 7.2% 18.9% 25.1% 29.4% 31.7% 32.1% 32.4% 100.0%
3rd Quarter....................... 8.6% 19.6% 23.7% 28.5% 30.7% 31.6% 31.9% 100.0%
4th Quarter....................... 6.3% 16.1% 21.6% 27.0% 28.9% 29.5% 29.6% 100.0%
1994:
1st Quarter....................... 3.4% 10.0% 13.4% 18.1% 20.5% 21.2% 21.3% 100.0%
2nd Quarter....................... 2.8% 10.5% 14.2% 19.7% 21.9% 22.4% 22.5% 100.0%
3rd Quarter....................... 2.8% 8.2% 12.2% 16.5% 18.6% 19.5% 19.6% 100.0%
4th Quarter....................... 2.4% 7.7% 11.3% 16.9% 20.0% 21.0% 21.1% 100.0%
1995:
1st Quarter....................... 1.1% 7.4% 12.5% 17.8% 20.3% 21.3% 21.5% 97.6%
2nd Quarter....................... 1.7% 7.1% 12.1% 16.7% 19.6% 21.1% 21.1% 93.0%
3rd Quarter....................... 2.0% 7.0% 11.1% 18.1% 21.7% x 22.8% 86.6%
4th Quarter....................... 1.2% 5.7% 10.8% 17.8% 22.3% -- 22.6% 81.7%
1996:
1st Quarter....................... 1.4% 7.6% 13.2% 20.6% x -- 23.6% 74.4%
2nd Quarter....................... 2.2% 9.2% 14.1% 22.6% -- -- 23.1% 64.4%
3rd Quarter....................... 1.6% 7.2% 12.9% x -- -- 18.9% 53.1%
4th Quarter....................... 1.6% 8.7% 16.0% -- -- -- 17.6% 44.5%
1997:
1st Quarter....................... 2.5% 10.4% x -- -- -- 12.7% 34.0%
2nd Quarter....................... 1.8% x -- -- -- -- 4.7% 15.4%
3rd Quarter....................... x -- -- -- -- -- 0.2% 1.8%
</TABLE>
Trends set forth in the table above indicate a deterioration in the
performance of the associated loan portfolio. Management believes the
deterioration is primarily attributable to less effective collection procedures
resulting from a loan servicing and collection data processing system conversion
during 1997 rather than from any fundamental change in loan quality or
underwriting. As a result of this trend, the Company recorded a charge against
its Residuals in Finance Receivables Sold during the nine month period ended
September 30, 1997.
45
<PAGE> 47
The following table sets forth the principal balances 31 to 60 days
delinquent, and 61 to 90 days delinquent as a percentage of total outstanding
Company Dealership contract principal balances.
<TABLE>
<CAPTION>
RETAINED SECURITIZED MANAGED
-------- ----------- -------
<S> <C> <C> <C>
September 30, 1997:
31 to 60 days............................... 1.5% 3.9% 3.6%
61 to 90 days............................... 2.8% 1.4% 1.6%
December 31, 1996:
31 to 60 days............................... 2.3% 5.4% 5.0%
61 to 90 days............................... 0.6% 1.9% 1.7%
December 31, 1995:
31 to 60 days............................... 4.2% -- 4.2%
61 to 90 days............................... 1.1% -- 1.1%
</TABLE>
In accordance with the Company's charge off policy, there are no accounts more
than 90 days delinquent as of September 30, 1997, or December 31, 1996, and
1995.
CONTRACTS PURCHASED FROM THIRD PARTY DEALERS
Non-refundable acquisition discount ("Discount") acquired totaled $17.7
million and $3.6 million for the nine month periods ended September 30, 1997 and
1996, respectively. The Discount, attributable to Third Party Dealer purchases,
averaged approximately 12.2% as a percentage of principal balances purchased in
the nine month period ended September 30, 1997, compared to 11.1% in the nine
month period ended September 30, 1996.
Discount acquired totaled $9.0 million and $1.7 million for the years ended
December 31, 1996 and 1995, respectively. The Discount, attributable to Third
Party Dealer Branch purchases, averaged 11.4% as a percentage of principal
balances purchased in 1996, compared to 10.1% in 1995. Beginning in 1996, the
Company expanded into markets with interest rate limits. While contractual
interest rates on these contracts are limited by law, the Company has been able
to purchase these contracts at a reasonably consistent effective yield and
therefore Discounts have trended upward. To date, the Company has credited to
the Allowance for Credit Losses all Discount acquired with the purchase of
contracts from Third Party Dealers.
The following table sets forth the cumulative net charge offs as a
percentage of original contract cumulative (pool) balances, based on the quarter
of origination and segmented by the number of monthly payments completed by
customer before charge off. Additionally, set forth is the percent of principal
reduction for each pool since inception and cumulative total net losses incurred
(TLI).
46
<PAGE> 48
<TABLE>
<CAPTION>
POOL'S CUMULATIVE NET LOSSES AS PERCENTAGE OF POOL'S
ORIGINAL AGGREGATE PRINCIPAL BALANCE
MONTHLY PAYMENTS COMPLETED BY CUSTOMER BEFORE CHARGE OFF
-------------------------------------------------------- PERCENT
0 3 6 12 18 24 TLI REDUCED
--- --- ---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995:
2nd Quarter........................ 0.9% 4.1% 5.7% 7.7% 9.4% 10.6% 10.6% 90.1%
3rd Quarter........................ 1.2% 3.7% 4.6% 6.3% 7.5% x 8.1% 82.4%
4th Quarter........................ 1.0% 4.3% 6.7% 9.3% 11.0% -- 11.2% 82.5%
1996:
1st Quarter........................ 0.8% 3.7% 6.9% 10.8% x -- 12.1% 74.5%
2nd Quarter........................ 1.6% 6.2% 9.7% 13.6% -- -- 13.6% 67.8%
3rd Quarter........................ 1.3% 6.0% 9.2% x -- -- 14.7% 56.2%
4th Quarter........................ 1.4% 7.4% 12.0% -- -- -- 15.2% 45.6%
1997:
1st Quarter........................ 1.4% 7.6% x -- -- -- 8.2% 30.9%
2nd Quarter........................ 1.5% x -- -- -- -- 2.4% 14.3%
3rd Quarter........................ x -- -- -- -- -- 0.1% 2.6%
</TABLE>
Trends set forth in the table above indicate a deterioration in the performance
of the associated loan portfolio. Management believes the deterioration is
primarily attributable to less effective collection procedures resulting from a
loan servicing and collection data processing system conversion during 1997
rather than from any fundamental change in loan quality or underwriting. As a
result of this trend, the Company recorded a charge against its Residuals in
Finance Receivables Sold during the nine month period ended September 30, 1997.
Beginning April 1, 1995, the Company initiated a new purchasing program for
Third Party Dealer contracts which included an emphasis on higher quality
contracts. As of March 31, 1995, the Third Party Dealer portfolio originated
under the prior program had a principal balance of $2.0 million which are paid
in full. Therefore, contract performance under this prior program has been
excluded from the table above.
While the static pool information is developing, management augments its
evaluation of the adequacy of the Allowance for Third Party Dealers through
comparisons in the characteristics of collateral ratios and borrowers on Third
Party Dealer contracts versus those of the Company Dealership contracts, as well
as through comparisons of portfolio delinquency, actual contract performance
and, to the extent information is available, industry statistics.
The following table sets forth the principal balances 31 to 60 days
delinquent, and 61 to 90 days delinquent as a percentage of total outstanding
Third Party Dealer contract principal balances.
<TABLE>
<CAPTION>
RETAINED SECURITIZED MANAGED
-------- ----------- -------
<S> <C> <C> <C>
September 30, 1997:
31 to 60 days............................... 1.7% 4.7% 4.2%
61 to 90 days............................... 2.5% 1.6% 1.8%
December 31, 1996:
31 to 60 days............................... 3.1% 4.3% 3.3%
61 to 90 days............................... 1.1% 1.0% 1.1%
December 31, 1995:
31 to 60 days............................... 1.2% -- 1.2%
61 to 90 days............................... 0.4% -- 0.4%
</TABLE>
In accordance with the Company's charge off policy there are no Third Party
Dealer contracts more than 90 days delinquent as of September 30, 1997, or
December 31, 1996 and 1995.
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<PAGE> 49
During 1996 and continuing throughout 1997, the Company elected to extend
the time period before repossession is ordered with respect to those customers
who exhibit a willingness and capacity to bring their contracts current. As a
result of this revised repossession policy, delinquencies increased as expected.
RESIDUALS IN FINANCE RECEIVABLES SOLD
Residuals in Finance Receivables Sold represent the Company's retained
portion of the securitization assets. The Company utilizes a number of estimates
in arriving at the initial valuation of the Residuals in Finance Receivables
Sold, which represent the expected present value of net cash flows into the
Trusts in excess of those required to pay principal and interest on the Class A
certificates. The present value of expected cash flows are a function of a
number of items including, but not limited to, charge off rates, repossession
recovery rates, portfolio delinquency, prepayment rates, and Trust expenses.
Subsequent to the initial recording of the Residuals in Finance Receivables
Sold, the carrying value is adjusted for the actual cash flows into the
respective Trusts in order to maintain a carrying value which approximates the
present value of the expected net cash flows into the Trust in excess of those
required to pay all obligations of the respective Trust other than the
obligations to the Class B certificates. 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, those
differences appear to be other than temporary in nature, the Company would be
required to revalue the Residuals in Finance Receivables Sold, and record a
charge to earnings based upon the reduction. During the three month period ended
September 30, 1997, the Company recorded a $10.0 million charge (approximately
$6.0 million, net of income taxes) to write down the Residuals in Finance
Receivables Sold. The Company determined a write down in the Residuals in
Finance Receivables Sold was necessary due to an increase in net losses in the
securitized loan portfolio, particularly the Third Party Dealer portfolio. For
securitization transactions between June 30, 1996 and June 30, 1997, for
contracts originated at Company Dealerships, 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 balance. The $10.0 million charge (approximately $6.0
million, net of income taxes) in the three month period ended September 30, 1997
which resulted in a reduction in the carrying value of the Company's Residuals
in Finance Receivables Sold 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 the three
month period ended September 30, 1997. As a result of this charge, the remaining
Allowance for Credit Losses inherent in the securitization assumptions as a
percentage of the remaining principal balances of securitized contracts was
approximately 19.7% as of September 30, 1997, compared to 15.2% as of December
31, 1996. There can be no assurance that the charge taken by the Company is
sufficient and that the Company will not record additional charges in the future
in order to write down the Residuals in Finance Receivables Sold.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to support increases in its contract
portfolio, expansion of Company Dealerships, Branch Offices, the Cygnet Dealer
Program, the purchase of inventories, the purchase of property and equipment,
loan servicing and collection operations, and for working capital and general
corporate purposes. The Company funds its capital requirements through equity
offerings, operating cash flow, the sale of finance receivables, and
supplemental borrowings.
The Company's Net Cash Provided by Operating Activities increased by $39.7
million to $41.3 million for the nine month period ended September 30, 1997 from
$1.6 million in the nine month period ended September 30, 1996. The increase was
primarily due to an increase in proceeds from sales of finance receivables,
provision for credit losses, and increases in Accounts Payable, Accrued
Liabilities and Other Liabilities offset by increases in Finance Receivables
Held for Sale, Gain on Sale of Finance Receivables, and increases in Inventory
and Other Assets.
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<PAGE> 50
The Net Cash Used in Investing Activities increased by $90.1 million to
$103.0 million in the nine months ended September 30, 1997 from $12.9 million in
the nine months ended September 30, 1996. The increase was due to an increase in
notes receivable of $29.6 million, an increase in the purchase of property and
equipment of $11.5 million, and the purchase of the assets of Seminole, EZ Plan,
and Kars, for $45.3 million.
The Company's Net Cash Provided by Financing Activities increased by $37.1
million to $47.6 million in the nine month period ended September 30, 1997 from
$10.5 million in the nine month period ended September 30, 1996. This increase
was primarily the result of the $88.7 million in proceeds from the Company's
sale of common stock, net of the $39.1 million of repayment of Notes Payable and
the repayment of Subordinated Notes Payable of $2.0 million.
The Company's Net Cash Provided by Operating Activities increased by 10.1%
from $6.3 million for 1995 to $7.0 million in 1996, compared to an increase of
87.8% from $3.4 million in 1994. The increase was primarily due to increases in
Net Earnings, proceeds from the sale of finance receivables, and the Provision
for Credit Losses, net of increases in Finance Receivables Held for Sale, Other
Assets, and the Gain on Sale of Finance Receivables. The increase in 1995 over
1994 was primarily a result of a smaller increase in inventory of $1.5 million,
and an increase in accounts payable, accrued expenses and other liabilities of
$2.0 million.
The Net Cash Used in Investing Activities decreased by 17.6% from $36.4
million in the year ended December 31, 1995 to $30.0 million in the year ended
December 31, 1996. The $29.4 million increase provided by collections on finance
receivables was offset by the $25.2 million increase in cash used in the
increase in finance receivables, $3.5 million used for the increase in
Investments Held in Trust, and $2.9 million increase used for the purchases of
property and equipment. Cash used in investing activities increased from 1994 to
1995 by $15.8 million or 76.7%, primarily as a result of an increase in finance
receivables of $25.8 million net of increased collections of $7.6 million.
The Company's Net Cash Provided by Financing Activities increased by 28.1%
from $31.3 million in the year ended December 31, 1995 to $40.1 million in the
year ended December 31, 1996. This increase was the result of the $79.4 million
in proceeds from the Company's public offerings of common stock, net of the
$28.6 million of repayment of notes payable and the redemption of $10.0 million
of preferred stock. The Company's Net Cash Provided by Financing Activities
increased by 80.9% or $14.0 million from 1994 to 1995 due primarily to a net
increase in notes payable of $12.3 million.
Revolving Facility. The Company maintains a Revolving Facility with GE
Capital that has a maximum commitment of up to $100.0 million. Under the
Revolving Facility, the Company may borrow up to 65.0% of the principal balance
of eligible Company Dealership contracts and up to 86.0% of the principal
balance of eligible Third Party Dealer contracts. The Revolving Facility expires
in December 1998. The facility is secured by substantially all of the Company's
assets. As of September 30, 1997, the Company's borrowing capacity under the
Revolving Facility was $19.0 million, the aggregate principal amount outstanding
under the Revolving Facility was approximately $128,000, and the amount
available to be borrowed under the facility was $18.9 million. The Revolving
Facility bears interest at the 30-day LIBOR plus 3.15%, payable daily (total
rate of 8.8% as of September 30, 1997).
The Revolving Facility contains covenants that, among other things, limit
the Company's ability to, without GE Capital's consent: (i) incur additional
indebtedness; (ii) make unsecured loans or other advances of money to officers,
directors, employees, stockholders or affiliates in excess of $25,000 in total;
(iii) engage in securitization transactions; (iv) merge with, consolidate with,
acquire or otherwise combine with any other person or entity, transfer any
division or segment of its operations to another person or entity, or form new
subsidiaries; (v) make any change in its capital structure; (vi) declare or pay
dividends except in accordance with all applicable laws and not in excess of
fifteen percent (15%) of each year's net earnings available for distribution;
(vii) make certain investments and capital expenditures; and (viii) engage in
certain transactions with affiliates. These covenants also require the Company
to maintain specified financial ratios, including a debt ratio of 2.1 to 1 and a
net worth of at least $75,000,000, and to comply with all laws relating to the
Company's business. The Revolving Facility also provides that a transfer of
ownership of the Company that
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<PAGE> 51
results in less than 15.0% of the Company's voting stock being owned by Mr.
Ernest C. Garcia II, will result in an event of default under the Revolving
Facility.
FMAC Senior Bank Debt. In conjunction with the acquisition of the Senior
Bank Debt from the Bank Group, the Company executed a note payable of
approximately $55.1 million payable to the Bank Group with a balance at
September 30, 1997 of approximately $50.4 million. This indebtedness was paid in
full on December 18, 1997.
Subordinated Indebtedness and Preferred Stock. Prior to its public
offering in June 1996, the Company historically borrowed substantial amounts
from Verde Investments Inc. ("Verde"), an affiliate of the Company. The
Subordinated Notes Payable balances outstanding to Verde totaled $12.0 million
and $14.0 million as of September 30, 1997 and December 31, 1996, respectively.
Prior to June 21, 1996, these borrowings accrued interest at an annual rate of
18.0%. Effective June 21, 1996, the annual interest rate on these borrowings was
reduced to 10.0%. The Company is required to make monthly payments of interest
and annual payments of principal in the amount of $2.0 million. This debt is
junior to all of the Company's other indebtedness and the Company may suspend
interest and principal payments in the event it is in default on obligations to
any other creditors. In July 1997, the Company's Board of Directors approved the
prepayment of the $12.0 million in subordinated debt subject to various
conditions. See "Certain Relationships and Related Transactions."
On December 31, 1995, Verde converted $10.0 million of subordinated debt to
Preferred Stock of the Company. Prior to June 21, 1996, the Preferred Stock
accrued a dividend of 12.0% annually, increasing one percent per year up to a
maximum of 18.0%. Effective June 21, 1996, the dividend on the Preferred Stock
was decreased from 12.0% to 10.0%. During the nine month period ended September
30, 1996, the Company paid a total of $817,000 in dividends to Verde on the
Preferred Stock which was redeemed in November 1996. As the preferred stock was
redeemed in 1996, there were no dividends paid in 1997.
Securitizations. Pursuant to the Company's Securitization Program, the
Company and SunAmerica entered into an agreement under which SunAmerica would
purchase $175.0 million of certificates secured by contracts. As of June 30,
1997, the Company had substantially utilized its maximum commitment from, and
does not expect to complete any further securitizations with SunAmerica under
the existing Securitization Program. The Securitization Program has provided the
Company with a source of funding in addition to the Revolving Facility. At the
closing of each securitization, the Securitization Subsidiaries receive payment
for the certificates sold (net of Investments Held in Trust). The Company also
generates cash flow under this program from ongoing servicing fees and excess
cash flow distributions resulting primarily from the difference between the
payments received from customers on the contracts and the payments paid on the
Class A Certificates. In addition, securitization allows the Company to fix its
cost of funds for a given contract portfolio, and broadens the Company's capital
source alternatives. The Company sold its securitization that was consummated
during the three month period ended September 30, 1997 to private investors.
Failure to periodically engage in securitization transactions will adversely
affect the Company.
In connection with its securitization transactions, the Securitization
Subsidiaries are required to make an initial cash deposit into an account held
by the trustee (spread account) and to pledge this cash to the Trust to which
the finance receivables were sold. The Trust in turn invests the cash in high
quality liquid investment securities. In addition, the cash flows due to the B
Certificates first are deposited into the spread account as necessary to attain
and maintain the spread account at a specified percentage of the underlying
finance receivables principal balance. In the event that the cash flows
generated by the finance receivables sold to the Trust are insufficient to pay
obligations of the Trust, including principal or interest due to certificate
holders or expenses of the Trust, the trustee will draw funds from the spread
account as necessary to pay the obligations of the Trust. The spread account
must be maintained at a specified percentage of the principal balances of the
finance receivables held by the Trust, which can be increased in the event
delinquencies or losses exceed specified levels. If the spread account exceeds
the specified percentage, the trustee will release the excess cash to the
Securitization Subsidiaries from the pledged spread account.
Debt Shelf Registration. 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
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<PAGE> 52
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.
Transactions regarding First Merchants Acceptance Corporation. FMAC filed
for reorganization under Chapter 11 of the Federal Bankruptcy Code on July 11,
1997. For a description of the Company's involvement in the FMAC Bankruptcy
Case, see "FMAC Transaction."
Capital Expenditures and Commitments. The Company has had an aggressive
growth strategy. In the fourth quarter of 1996, the Company acquired the
leasehold rights to an existing dealership in Las Vegas, Nevada, which commenced
operations in March 1997, and has opened two new dealerships in Phoenix, Arizona
and two new dealerships in Albuquerque, New Mexico. In addition, the Company has
two dealerships in Phoenix, Arizona, one in San Antonio, two in Dallas, one in
Miami and one in Tampa currently under development. Further, the Company opened
48 new Branch Offices during the nine month period ended September 30, 1997, and
recently completed expansion of its contract servicing and collection facility.
On September 19, 1997, the Company purchased substantially all of the
dealership and loan servicing assets of Kars, a Company in the business of
selling and financing used motor vehicles, 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 $5.2 million in cash. In
addition, effective October 31, 1997, the Company purchased certain assets and
assumed certain leasehold interests of World Auto, Inc. relating to four
dealerships in Georgia for approximately $50,000. Further, on July 11, 1997, the
Company entered into an agreement to provide "debtor-in-possession" financing to
FMAC in an amount up to $10.0 million. The Company had advanced $3.8 million
against this commitment as of September 30, 1997 and subsequently committed to
increase the debtor-in-possession financing to up to $16.5 million. The Company
intends to finance these expenditures through operating cash flows and
supplemental borrowings, including amounts available under the Revolving
Facility and the Securitization Program, if any.
Common Stock Repurchase Program. 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. As of the date of filing of this Prospectus, the
Company had not repurchased any shares of Common Stock. In September 1997, the
Company's Board of Directors approved a Company director and senior officer
stock purchase program ("Director and Officer Stock Purchase Program"). The
Director and Officer Stock Purchase Program includes the providing of loans of
up to $1.0 million in total to the directors and senior officers under the
program to assist directors' and officers' purchases of Company Common Stock on
the open market. The program provides for loans, which are unsecured by the
related common stock, at arms-length terms and conditions. During November 1997,
senior officers purchased 50,000 shares of Company Common Stock under the
Director and Officer Stock Purchase Program and the Company advanced $500,000 to
the senior officers for these purchases.
Year 2000. 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. However, there can be no assurance that year 2000 costs
and expenses will not have a material adverse affect on the Company.
SEASONALITY
Historically, the Company has experienced higher revenues in the first two
quarters of the year than in the latter half of the year. The Company believes
that these results are due to seasonal buying patterns resulting in part from
the fact that many of its customers receive income tax refunds during the first
half of the year, which are a primary source of down payments on used car
purchases.
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<PAGE> 53
INFLATION
Increases in inflation generally result in higher interest rates. Higher
interest rates on the Company's borrowings would decrease the profitability of
the Company's existing portfolio. The Company will seek to limit this risk
through its Securitization Program and, to the extent market conditions permit,
for contracts originated at Company Dealerships, either by increasing the
interest rate charged, or the profit margin on, the cars sold, or for contracts
acquired from Third Party Dealers, either by acquiring contracts at a higher
discount or with a higher APR. To date, inflation has not had a significant
impact on the Company's operations.
ACCOUNTING MATTERS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128).
This statement is effective for both interim and annual periods ending after
December 15, 1997, and replaces the presentation of "primary" earnings per share
with "basic" earnings per share and the presentation of "fully diluted" earnings
per share with "diluted" earnings per share. Earlier application is not
permitted. When adopted, all previously reported earnings per common share
amounts must be restated based upon the provisions of the new standard.
Management of the Company does not expect that adoption of SFAS No. 128 will
have a material impact on the Company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
No. 130). This statement is effective for interim and fiscal periods beginning
after December 15, 1997, and requires the Company to classify items of other
comprehensive income by their nature in a financial statement, and to display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the statement
of financial position. Management of the Company does not expect that the
adoption of SFAS No. 130 will have a material impact on the Company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). This statement is effective
for fiscal years beginning after December 15, 1997, and requires the Company to
report information about operating segments in its annual financial statements
and further requires the Company to disclose selected information about
operating segments in interim reports to stockholders. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. Management of the Company does not expect that the adoption
of SFAS No. 131 will have a material impact on the Company.
The Securities and Exchange Commission has adopted a rule to clarify and
expand existing disclosure requirements for derivative financial instruments.
The rule requires enhanced disclosure of accounting policies for derivative
financial instruments in the footnotes to the financial statements. In addition,
the amendments expand existing disclosure requirements to include quantitative
and qualitative information about market risk inherent in market risk sensitive
instruments. The required quantitative and qualitative information are to be
disclosed outside the financial statements and related notes thereto. For the
Company, the enhanced accounting policy disclosure requirements are effective
for Company financial statements for fiscal years ending after June 15, 1998.
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BUSINESS
GENERAL
The Company operates the largest publicly-held chain of "Buy Here-Pay Here"
used car dealerships in the United States and underwrites, finances, and
services retail installment contracts generated from the sale of used cars by
its dealerships and by third party used car dealers located in select markets
throughout the country. As part of its financing activities, the Company has
initiated a collateralized dealer financing program pursuant to which it
provides qualified independent used car dealers with operating credit lines
secured by the dealers' retail installment contract portfolios. The Company
targets its products and services to the sub-prime segment of the automobile
financing industry, which focuses on selling and financing used cars to
Sub-Prime Borrowers. As used herein, amounts followed by "(pro forma)" do not
include revenues or sales derived from one Company Dealership which was sold on
December 31, 1995.
The rapidly growing used car sales and finance industry achieved record
sales in 1995 of 30.5 million units, representing approximately $290.0 billion
in sales. During this same period, more than $185.0 billion in retail
installment contracts were originated through the sale of used cars. Of these
totals, approximately 11.0 million units were sold to Sub-Prime Borrowers,
generating approximately $50.0 billion in retail installment contracts.
The Company has expanded significantly in recent periods. From 1995 to
1996, total revenues increased by 55.2%, from $48.7 million (pro forma) to $75.6
million. The Company's net earnings grew to $5.9 million in 1996 (including $4.4
million in gains recognized from the sale of contract receivables pursuant to
the Company's Securitization Program), or $.60 per share, compared with a net
loss of $(4.0) million, or $(.67) per share in 1995. During the nine month
period ended September 30, 1997, total revenues increased by 108.3% to $120.2
million from $57.7 million in the comparable period in 1996. The Company's net
earnings grew to $5.7 million during the nine month period ended September 30,
1997 (including $10.3 million in gains recognized from the sale of contract
receivables under the Securitization Program), or $0.32 per share, from $4.1
million (including $2.6 million in gains recognized from the sale of contract
receivables under the Securitization Program), or $0.46 per share in the
comparable period in 1996.
The Company originated 6,929 contracts through its dealerships with an
aggregate principal balance of $49.0 million and purchased 9,825 contracts
originated by Third Party Dealers with an aggregate principal balance of $56.8
million during 1996. The principal balance of the Company's total contract
portfolio managed as of September 30, 1997 was $270.7 million, including $229.0
million in contracts serviced under the Securitization Program. Substantially
all of the contracts the Company services are with Sub-Prime Borrowers. During
the nine month period ended September 30, 1997, the Company originated 10,208
contracts with an aggregate principal balance of $76.1 million at its
dealerships and purchased 26,147 contracts from Third Party Dealers with an
aggregate principal balance of $144.2 million, compared to 5,413 contracts
originated at Company Dealerships with an aggregate principal balance of $38.2
million and 5,781 contracts purchased from Third Party Dealers with an aggregate
principal balance of $32.9 million during the comparable period in 1996. In
addition, during the nine month period ended September 30, 1997, the Company
purchased a total of 13,250 contracts with an aggregate principal balance of
$55.4 million from E-Z Plan and Seminole in connection with the acquisition of
substantially all of the assets related to their dealership and loan servicing
operations.
For a description of the general development of the Company's business
during the past five years, and a description of the Company's financial
information over the past three years, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
OVERVIEW OF USED CAR SALES AND FINANCE INDUSTRY
Used Car Sales. Used car retail sales typically occur through franchised
new car dealerships that sell used cars or independent used car dealerships. The
market for used car sales in the United States is significant and has steadily
increased over the past five years. The Company believes that the factors that
have led to growth in this industry include substantial increases in new car
prices, which have made new cars less affordable to the average
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<PAGE> 55
consumer relative to used cars, the greater reliability and durability of used
cars resulting from the production of higher quality cars, and the increasing
number of vehicles coming off-lease in recent years. Many analysts expect these
trends to continue, leading to further expansion of the used car sales market.
The used car sales industry is highly fragmented and, traditionally, sales
to customers have occurred through franchised and independent dealerships owned
by individuals, families, and small groups. According to industry sources, there
are over 23,000 franchised and 63,000 independent used car dealership locations
in the United States. Used car sales from franchised dealerships (or affiliated
used-only car lots) accounted for approximately 61.3% of used car sales during
1995, with the remaining 38.7% resulting from sales by independent dealerships.
The Company participates in the sub-prime segment of the independent used
car sales and finance market. This segment is serviced primarily by Buy Here-Pay
Here dealers that sell and finance the sale of used cars to Sub-Prime Borrowers.
Buy Here-Pay Here dealers typically offer their customers certain advantages
over more traditional financing sources, such as expanded credit opportunities,
flexible payment terms (including prorating customer payments due within one
month into several smaller payments and scheduling payments to coincide with a
customer's pay days), and the ability to make payments in person, an important
feature to many Sub-Prime Borrowers who may not have checking accounts or are
otherwise unable to make payments by the due date through use of the mail
because of the timing of paychecks.
Recently, the growth of the used car sales and finance market has attracted
significant attention from a number of large companies, including AutoNation,
U.S.A. and Driver's Mart, which have entered the used car sales business or
announced plans to develop large used car sales operations. The Company believes
that these companies are attracted by the relatively high gross margins that can
be earned in this business and the lack of consolidation in this market.
Used Car Financing. The automobile financing industry is the third-largest
consumer finance market in the country, after mortgage debt and credit card
revolving debt, with more than $350.0 billion in contracts on new and used cars
originated in 1995. The sub-prime segment of this industry accounted for
approximately $50.0 billion of the overall market. Growth in automobile
financing has been fueled by the increasing prices of both new and used cars,
which has forced greater numbers of purchasers to seek financing when purchasing
a car. This industry is served by such traditional lending sources as banks,
savings and loans, and captive finance subsidiaries of automobile manufacturers,
as well as by independent finance companies and Buy Here-Pay Here dealers. In
general, the industry is categorized according to the type of car sold (new
versus used) and the credit characteristics of the borrower. With respect to the
borrowers, finance companies classify such individuals according to the
following generalized criteria:
- An "A" credit or "prime" borrower is a person who has a long credit
history with no defaults, has been employed in the same job for a period
of at least 18 months, and can easily finance a new car purchase through
a bank, a captive finance subsidiary of an automobile manufacturer, or an
independent finance company.
- A "B" credit or "non-prime" borrower is a person who has a substantial
credit history that includes late payments, an inconsistent employment
history, or significant or unresolved problems with credit in the past.
To finance a used car purchase, this borrower will generally not be able
to obtain a loan from a captive finance subsidiary or a bank, and will
have to obtain financing from an independent finance company that lends
into this market category.
- A "C" credit or "sub-prime" borrower generally has little or no credit
history or a credit history characterized by consistently late payments
and sporadic employment. Like "B" credit borrowers, "C" credit borrowers
generally are not able to obtain a loan from a captive finance subsidiary
or a bank, and have to obtain financing from an independent finance
company that lends into this market category.
- A "D" credit borrower is also referred to as a "sub-prime" borrower.
These persons, however, in addition to having an unfavorable employment
history, have also experienced debt charge offs, foreclosures, or
personal bankruptcy. In purchasing a car, this borrower's only choice is
to obtain financing from an independent finance company or through a Buy
Here-Pay Here lot.
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As with its used car sales operations, the Company's finance operations are
directed to the sub-prime segment of the market. In particular, the finance
operations of Company Dealerships are directed toward Sub-Prime Borrowers
classified in the "C" and "D" categories, while its Third Party Dealer finance
operations are generally directed to "C" credit borrowers. Many of the
traditional lending sources do not consistently provide financing to the
sub-prime consumer finance market. The Company believes traditional lenders
avoid this market because of its high credit risk and the associated collection
efforts.
Many of the 63,000 independent used car dealers are not able to obtain debt
financing from traditional lending sources such as banks, credit unions, or
major finance companies. These dealers typically finance their operations
through the sale of contract receivables at a substantial discount. The Company
believes that independent dealers prefer to finance their operations through
credit facilities that enable them to retain their receivables, thereby
increasing their finance income. Accordingly, the Company believes that there is
a substantial opportunity for a company capable of serving the needs of such
dealers to make significant penetration into this underdeveloped segment of the
sub-prime market.
The industry statistical information presented herein is derived from
information provided to the Company by CNW Marketing/Research of Bandon, Oregon.
BUSINESS STRATEGY
The Company intends to consider alternative strategies to grow its Company
Dealership and Third Party Dealer operations, both in Arizona and in other
geographic locales.
Expand Company Dealership Operations. Since commencing its used car sales
and financing operations in 1992, the Company has pursued an aggressive growth
strategy through both internal development and acquisition. As of September 30,
1997, the Company had developed or acquired 36 Company Dealerships. The
Company's strategy is to increase sales revenue and finance income by acquiring
or opening new dealerships and finance operations. In 1997, the Company opened
or acquired new Company Dealerships in Florida, Texas, Arizona, Nevada, and New
Mexico. The Company acquired a contract portfolio of approximately $31.1
million, four operating used car dealership locations and a used car
reconditioning facility in Florida on January 15, 1997 and has since opened one
additional location in Florida. On April 1, 1997, the Company acquired seven
operating used car dealerships in San Antonio, Texas, and a contract portfolio
of approximately $24.3 million. On September 19, 1997, the Company acquired the
operations and inventory of Kars, a used car sales and finance operation with 12
dealerships located in California, Florida, Georgia, and Texas. Additionally,
effective October 31, 1997, the Company purchased certain assets and assumed
certain leasehold interests of four dealerships of World Auto, Inc. in Georgia.
The Company distinguishes its direct sales and financing operations from
typical Buy Here-Pay Here dealers by providing multiple locations, upgraded
facilities, large inventories of used automobiles, and dedication to customer
service. The Company has designed and implemented a marketing program featuring
its animated duck mascot that promotes its image as a professional, yet
approachable, operation, in contrast to the generally unfavorable public image
of many Buy Here-Pay Here dealers. In addition, the Company has developed
flexible underwriting guidelines and techniques, which combine established
underwriting criteria with managerial discretion, to facilitate rapid credit
decisions, as well as a technology-based corporate infrastructure that enables
the Company to monitor and service large volumes of contracts.
Expand Third Party Dealer Operations. The Company has leveraged the
contract servicing experience and capabilities it acquired through its Company
Dealership activities by purchasing and servicing contracts originated by Third
Party Dealers. As of September 30, 1997, the Company had opened 83 Branch
Offices in 21 states. These Branch Offices service approximately 4,000 Third
Party Dealers. The Company has also established insurance operations directed to
the sub-prime market.
Newer Products and Services. The Company has expanded its Third Party
Dealer operations through its Cygnet Dealer Program, the Company's
collateralized dealer financing program. The Company believes that providing
operating credit lines to qualified Third Party Dealers gives such dealers a
unique opportunity to obtain the debt financing necessary to expand their
businesses while enabling the Company to earn additional
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finance income and to diversify its earning asset base. The Company also
believes that the relationships established with these dealers provides a
preferred position to acquire retail installment contracts from them. Such
contract purchases could provide these dealers with an additional source of
financing and enable the Company to further expand its contract portfolio.
The Company also intends to expand its insurance operations, which to date
consist primarily of force placing casualty insurance on its Third Party Dealer
contracts. Among other things, the Company is evaluating the sale of other
insurance products to its customer base.
COMPANY DEALERSHIP OPERATIONS
Company Dealership operations include the retail sale of used cars and the
underwriting, financing, and servicing of contracts originated from such sales.
The Company's total used car sales revenue from its Company Dealership
operations were $27.8 million, $47.8 million ($44.1 million excluding sales at
the Gilbert Dealership), and $53.8 million for fiscal years 1994, 1995, and
1996, respectively, and $79.5 million for the nine month period ended September
30, 1997.
Retail Car Sales. The Company distinguishes its Company Dealership
operations from those of typical Buy Here-Pay Here dealers through its network
of multiple locations, upgraded facilities, large inventories of used cars,
centralized purchasing, value-added marketing programs, and dedication to
customer service. All Company Dealerships are located in high visibility, high
traffic commercial areas, and generally are newer and cleaner in appearance than
other Buy Here-Pay Here dealers, which helps promote the Company's image as a
friendly and reputable business. The Company believes that these factors,
coupled with its widespread brand name recognition (achieved through extensive
promotion of its duck mascot and logo), enable it to attract customers who might
otherwise visit another Buy Here-Pay Here dealer.
Company Dealerships generally maintain an average inventory of 100 to 300
used cars and feature a wide selection of makes and models (with ages generally
ranging from 5 to 10 years) and a range of sale prices, all of which enables the
Company to meet the tastes and budgets of a broad range of potential customers.
The Company acquires its inventory from new or late-model used car dealers, used
car wholesalers, used car auctions, and customer trade-ins, as well as from
repossessions. The Company's size enables it to cut inventory costs by making
volume purchases for all Company Dealerships. In making its purchases, the
Company takes into account each car's retail value and the costs of buying,
reconditioning, and delivering the car for resale. After purchase, cars are
delivered to the individual dealerships or reconditioning centers, where they
are inspected and reconditioned for sale. Although the prices of used cars are
subject to market variance, the Company does not believe that it will encounter
significant difficulty in maintaining its current inventory levels.
The average sales price per car at Company Dealerships was $7,107 for the
fiscal year ended December 31, 1996, $6,065 for the fiscal year ended December
31, 1995 (exclusive of sales at the Company's Gilbert Dealership) and $7,364 for
the nine month period ended September 30, 1997. Company Dealerships use a
standardized sales contract that typically provides for down payments of
approximately 10.0% to 15.0% of the purchase price with the balance of the
purchase price financed at fixed interest rates ranging from 21.0% to 29.9% over
periods ranging from 12 to 48 months. The Company sells cars on an "as is"
basis, and requires its customers to sign an agreement at the date of sale
releasing the Company from any obligation with respect to vehicle-related
problems that subsequently occur. See "-- Legal Proceedings."
Used Car Financing. The Company finances approximately 95.0% of the used
car sales at its Company Dealerships through retail installment contracts that
the Company services. Subject to the discretion of its sales managers, potential
customers must meet the Company's underwriting guidelines, referred to as
minimum deal standards, before the Company will agree to finance the purchase of
a car. The Company created these minimum deal standards to control its exposure
to credit risk while providing its sales managers with sufficient flexibility to
consummate sales when appropriate. In connection with each sale, customers are
required to complete a credit application. Company personnel analyze and verify
customer application information, which contains employment and residence
histories, income information, and references, as well
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as the customer's personal cash flow statement (taking into account the
completion of the sale), credit bureau reports, and other information regarding
the customer's credit history.
The Company's credit underwriting process takes into account the ability of
its managers and other sales employees, who have extensive experience, to make
sound judgments regarding the extension of credit to Sub-Prime Borrowers and to
personalize financing terms to meet the needs of individual customers. For
example, contract payments may be scheduled to coincide with the customer's pay
days, whether weekly, biweekly, semi-monthly, or monthly. In addition, each
manager makes credit approvals only after a "face-to-face" interview with the
potential customer in which the manager gains firsthand information regarding
the customer's financial situation, sources of income, and past credit problems.
The Company believes that its customers value the expanded credit opportunities
that such flexibility provides and, consequently, will pay a higher price for
their cars. The Company believes that the higher prices it charges are necessary
to fund the high rate of credit losses incurred as a result of financing
Sub-Prime Borrowers. To the extent the Company is unable to charge such higher
prices or otherwise obtain acceptable margins, its results of operations will be
adversely affected.
Subsequent to each sale, all finance transactions are "audited" by the
Company's portfolio manager and reviewed for compliance with the Company's
underwriting standards. To the extent such audits reveal non-compliance, such
non-compliance is discussed with dealership management and, where appropriate,
remedial action is taken against the responsible manager, ranging from oral or
written reprimands to termination.
The Company's use of wide area and local area networks enables it to
service large volumes of contracts from its centralized servicing facilities
while allowing the customer the flexibility to make payments at and otherwise
deal with the individual dealerships. In addition, the Company has developed
comprehensive databases and sophisticated management tools, including static
pool analysis, to analyze customer payment history and contract performance and
to monitor underwriting effectiveness.
Advertising and Marketing. The Company maintains a large advertising
budget for its Buy Here-Pay Here dealers. In general, the Company's advertising
campaigns emphasize its multiple locations, wide selection of quality used cars,
and ability to provide financing to most Sub-Prime Borrowers. The Company's
advertising campaign revolves around a series of television commercials that
feature the Company's animated duck mascot, as well as complementary radio,
billboard, and print advertisements. The Company believes that its marketing
approach creates brand name recognition and promotes its image as a
professional, yet approachable, business, in contrast to the lack of name
recognition and generally unfavorable public image of many Buy Here-Pay Here
dealers. The Company believes that its advertising has helped establish it as
one of the most widely recognized Buy Here-Pay Here dealership networks in
Arizona.
A primary focus of the Company's marketing strategy is its ability to
finance consumers with poor credit histories. Under the slogan "Ugly Duckling
Car Sales -- Putting You on the Road to Good Credit," the Company has initiated
innovative marketing programs designed to attract Sub-Prime Borrowers, assist
such customers in reestablishing their credit, reward those customers who pay on
time, develop customer loyalty, and increase referral and repeat business. Among
these programs are:
- The Down Payment Back Program. This program encourages customers to make
timely payments on their contracts by enabling them to receive a refund
of their initial down payment (typically representing 10.0%-15.0% of the
initial purchase price of the car) at the end of the contract term if all
payments have been made by the scheduled due date.
- The Income Tax Refund Program. During the first quarter of each year,
the Company offers assistance to customers in the preparation of their
income tax returns, including forwarding customers' tax information to a
designated preparer, paying the preparation fee, and, if there is a
forthcoming tax refund, crediting such refund toward the required down
payment. This program enables customers to purchase cars without having
to wait to receive their income tax refund.
- Secured $250 Visa Card Program. Pursuant to this program, the Company
arranges for qualified applicants to obtain a Visa credit card secured by
a nonrefundable $250 payment made by the
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Company to the credit card company. This program offers otherwise
unqualified customers the chance to obtain the convenience of a credit
card and rebuild their credit records.
The Company also utilizes various telemarketing programs. For example,
potential customers are contacted within several days of their visit to a
Company Dealership to follow up on leads and obtain information regarding their
experience while at a Company Dealership. In addition, customers with
satisfactory payment histories are contacted several months before contract
maturity and are offered an opportunity to purchase another vehicle with a
nominal down payment requirement. The Company also maintains a loan-by-phone
program utilizing its toll-free telephone number of 1-800-THE-DUCK.
Sales Personnel and Compensation. Each Company Dealership is run by a
general manager who has complete responsibility for the operations of the
dealership facility, including final approval of sales and contract
originations, inventory maintenance, the appearance and condition of the
facility, and the hiring, training, and performance of Company Dealership
employees. In addition to the general manager, the Company typically staffs each
dealership with, among others, up to three sales managers, an office manager, a
lot supervisor, five to twelve salespersons, and several mechanics.
The Company trains its managers to be contract underwriters. The Company
pays its managers a base salary and allows them to earn bonuses based upon a
variety of factors, including the overall performance of the contract portfolio
originated. Although sales persons are paid on commission, each sale must be
underwritten and approved by a manager.
THIRD PARTY DEALER OPERATIONS
Contract Purchasing. In 1994, the Company acquired Champion Financial
Services, Inc., an independent automobile finance company, primarily for its
management expertise and contract servicing software and systems. Champion had a
portfolio of approximately $1.9 million in sub-prime contracts averaging
approximately $2,000 in principal amount. For the balance of 1994, the Company
purchased an additional $1.7 million in contracts.
In April 1995, the Company initiated an aggressive plan for purchasing
contracts from Third Party Dealers and by September 30, 1997 had opened 83
Branch Offices in 21 different states throughout the country and entered into
contract purchasing agreements with approximately 4,000 Third Party Dealers. The
Company has hired experienced branch managers having existing relationships with
Third Party Dealers and opened Branch Offices near its Third Party Dealers to
better service their needs. The Company services the Third Party Dealer contract
portfolio from its collection and servicing centers. The expansion of its Third
Party Dealer network has enabled the Company to leverage its existing
infrastructure and increase its contract portfolio much more quickly than it
could through the planned expansion of its Company Dealerships. The Company was
also able to increase the socioeconomic and geographic diversity of its contract
portfolio by purchasing higher quality contracts and contracts from areas where
there are no Company Dealerships.
The Company generally purchases contracts from Third Party Dealers that are
originated with customers possessing financial characteristics superior to those
of Company Dealership customers and that reflect principal amounts closer to the
actual wholesale value of the underlying car. Consequently, its Third Party
Dealer contracts generally present a reduced credit and collateral risk. The
Company's total revenues from its Third Party Dealer operations were $7.8
million and $1.8 million in fiscal years 1996 and 1995, respectively, and $14.8
million for the nine month period ended September 30, 1997. See Note 20 to the
Consolidated Financial Statements.
The Company purchases contracts from Third Party Dealers at a nonrefundable
acquisition discount from the principal amount of the contract that generally
ranges from 5.0% to 20.0%, and averages approximately 12.0%. The Company
determines the appropriate discount needed to cover estimated losses on a
contract-by-contract basis, taking into account, among other things, the
principal amount of the contract in relation to the wholesale value of the
underlying car and the credit risk presented by the particular customer. The
Company generally will not purchase a contract from a Third Party Dealer if the
discounted price exceeds 120.0% of the Kelly Blue Book wholesale value of the
underlying car plus license and tax, although it will make exceptions on a
contract-by-contract basis. If the Company cannot negotiate an appropriate
discount, it will not purchase the contract.
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When opening a new office, the Company hires experienced branch managers
having existing relationships with Third Party Dealers. Upon the execution of a
dealer agreement with a Third Party Dealer, Branch Office employees will
introduce the dealer to the Company's systems and procedures. The Company
provides uniform contract buying criteria as well as expedient application
processing and funding. The Company expects its Branch Office employees to
develop and maintain excellent relationships with its Third Party Dealers.
Branch Office employees monitor and evaluate Third Party Dealer contracts
for conformity to established policies and procedures. Selected finance
transactions are examined each month and a written report on each Branch Office
is prepared. Included in the report is an evaluation of Branch Office decisions
and practices as well as the portfolio performance of individual Third Party
Dealers. Branch Office management is notified and counseled with respect to
variances from underwriting standards that are found. Branch Office management
monitors the first six months of contract performance. Substandard contract
performance during this period is discussed with the Third Party Dealers and
appropriate action taken.
Collateralized Dealer Financing. The Company believes that many Third
Party Dealers have difficulty obtaining traditional debt financing and, as a
result, are forced to sell the contracts that they originate through used car
sales at deep discounts in order to obtain the working capital necessary to
operate their businesses. To capitalize on this opportunity, the Company
initiated the Cygnet Dealer Program, pursuant to which it provides qualified
Third Party Dealers (generally, dealers that meet certain minimum net worth and
operating history criteria) with operating credit lines secured by the dealers'
retail installment contract portfolios. These lines are for a specified amount
but are generally subject to various collateral coverage ratios, maximum advance
rates, and performance measurements depending on the financial condition of the
dealer and the quality of the contracts originated. The Company generally
requires dealers to upload their portfolio information to the Company's computer
network on a daily basis, utilize the Company's management information systems,
and provide the Company with periodic financial statements in a standardized
format. These controls allow Company account officers to monitor the operations
of each dealer participating in the program, thereby enabling account officers
to monitor dealer compliance with financial covenants and determine the
appropriateness of continued credit extensions.
The Company believes that the Cygnet Dealer Program fulfills the need of
Third Party Dealers for debt financing to expand their businesses while enabling
the Company to earn finance income at favorable rates and diversify its earning
asset base. The Company also believes that the relationships established with
these dealers provides it with a preferred position to acquire retail
installment contracts from them. Such contract purchases would provide these
dealers with an additional source of financing and enable the Company to further
expand its contract portfolio. The Company has hired management with sub-prime
finance industry experience to oversee the Cygnet Dealer Program and began
implementing the program during the fourth quarter of 1996. The Company began
full-scale marketing of the program during the first quarter of 1997.
Insurance Services. The retail installment contracts that the Company
purchases from Third Party Dealers generally require the customers to obtain
casualty insurance within 30 days of their vehicle purchase. While all customers
are free to obtain such coverage from an insurer of their choice, if a customer
fails to obtain the required coverage, the Company may purchase a policy on the
customer's behalf and charge back to the customer the cost of the premiums and
fees associated with such policy. The Company's ability to force place such
insurance has significantly increased the number of customers who have obtained
their own casualty insurance.
To facilitate its ability to force place mandated insurance coverage, the
Company has contracted with American Bankers Insurance Group ("ABIG"), a
licensed property, casualty, and life insurance company. Through its subsidiary,
Drake Insurance Agency, Inc., which acts as agent for ABIG, the Company places
casualty insurance policies issued by ABIG with Third Party Dealer customers.
These policies provide for a maximum payment on a claim equal to the current
contract principal balance. ABIG, in turn, reinsures the policies it issues with
Drake Property & Casualty Insurance Company, one of the Company's Turks and
Caicos Islands-chartered and licensed reinsurance subsidiaries. Under the terms
of its relationship with ABIG, the Company earns commissions on each policy
issued by ABIG (which mitigate any credit loss the Company
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might suffer in the event of an otherwise uninsured casualty), while ABIG
administers all accounts and claims and is responsible for regulatory
compliance. As of the end of December 1997, the Company had placed casualty
insurance policies with approximately 1,500 customers. In July 1997, the Company
expanded its insurance services to include the provision of credit life,
disability, and unemployment insurance on a test basis at its Arizona based
Company Dealerships (i.e., the "Golden Wing Program").
COMPARISON OF CONTRACTS ORIGINATED AT COMPANY DEALERSHIPS AND THIRD PARTY
DEALERS
The Company expects that approximately 30.0% to 40.0% of Company Dealership
contracts will ultimately default at some time prior to maturity for a net loss,
after charge offs and recoveries, of approximately 25.0% to 30.0% of the
original principal amount financed. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Allowance for Credit Losses"
and "-- Contracts Originated at Company Dealerships."
The Company expects that approximately 20.0% to 30.0% of Third Party Dealer
contracts will ultimately default at some time prior to maturity for a net loss,
after charge offs and recoveries, of approximately 10.0% to 18.0% of the
original principal amount financed. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Allowance for Credit Losses"
and "-- Contracts Purchased From Third Party Dealers."
MONITORING AND COLLECTIONS
One of the Company's goals is to minimize credit losses through close
monitoring of contracts in its portfolio. Relating to this, upon the origination
or purchase of a contract, Company personnel enter all terms of the contract
into the Company's computer systems. The Company's monitoring and collections
staff then utilizes the Company's collections software to monitor the
performance of the contracts.
The collections software provides the Company with, among other things,
up-to-date activity reports, allowing prompt identification of customers whose
accounts have become past due. In accordance with Company policy, collections
personnel contact a customer with a past due account within three days of
delinquency (or in the case of first payment delinquencies, within one day) to
inquire as to the reasons for such delinquency and to suggest ways in which the
customer can resolve the underlying problem, thereby enabling the customer to
continue making payments and keep the car. The Company's early detection of a
customer's delinquent status, as well as its commitment to working with its
customers, allows it to identify and address payment problems quickly, thereby
reducing the chance of credit loss. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Allowance for Credit Losses."
If the Company's efforts to work with a customer are unsuccessful and the
customer becomes seriously delinquent, the Company will take the necessary steps
to protect its collateral. Frequently, delinquent customers will recognize their
inability to honor their contractual obligations and will work with the Company
to coordinate "voluntary repossessions" of their cars. For cases involving
uncooperative customers, the Company retains independent firms to repossess the
cars pursuant to prescribed legal procedures. Upon repossession and after a
statutorily-mandated waiting period, the Company will recondition the car, if
necessary, and sell it in the wholesale market or at retail through its Company
Dealerships. The Company estimates that it recovers approximately 90.0% of the
cars that it attempts to repossess, approximately 95.0% of which are sold on a
wholesale basis and the remainder of which are sold through Company Dealerships.
The Company's access to a retail outlet for its repossessed collateral provides
the Company with additional flexibility with respect to the disposal of the
collateral and helps lessen its credit losses. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Allowance for
Credit Losses."
Unlike most other used car dealerships with multiple locations or
automobile finance companies, the Company permits its customers to make cash
payments on their contracts in person at Company Dealerships or at the Company's
collection facilities. Cash payments account for a significant portion of
monthly contract receipts on the Company Dealership portfolio. The Company's
computer technology enables it to process these payments on-line in real time
and its internal procedures enable it to verify that such cash receipts are
subseqently deposited and credited to the appropriate accounts.
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COMPETITION
Although the used car industry has historically been highly fragmented, it
has attracted significant attention recently from a number of large companies,
including AutoNation, U.S.A. and Driver's Mart, which have entered the used car
sales business or announced plans to develop large used car sales operations.
Many franchised automobile dealers have increased their focus on the used car
market as well. The Company believes that these companies are attracted by the
relatively high gross margins that can be achieved in this market as well as the
industry's lack of consolidation. Many of these companies and franchised dealers
have significantly greater financial, marketing, and other resources than the
Company.
The Company's competition for its Company Dealerships are the numerous
independent Buy Here-Pay Here dealers that sell and finance sales of used cars
to Sub-Prime Borrowers. The Company distinguishes its direct sales and financing
operations from those of typical Buy Here-Pay Here dealers by providing multiple
locations, upgraded facilities, large inventories of used automobiles,
centralized purchasing, value-added marketing programs, and dedication to
customer service. In addition, the Company has developed flexible underwriting
guidelines and techniques to facilitate rapid credit decisions, as well as an
integrated, technology-based corporate infrastructure that enables the Company
to monitor and service large volumes of contracts. The Company operates the
largest publicly-held chain of Buy Here-Pay Here used car dealerships in the
United States. Of the numerous large companies that have entered the used car
business, none have announced an intention to focus on the Buy Here-Pay Here
segment.
The sub-prime segment of the used car financing business is also highly
fragmented and very competitive. In recent periods, several consumer finance
companies have completed public offerings in order to raise the capital
necessary to fund expansion and support increased purchases of used car retail
installment contracts. These companies have increased the competition for the
purchase of contracts, in many cases purchasing contracts at prices which the
Company believes are not commensurate with the associated risk. In addition,
there are numerous financial services companies serving, or capable of serving,
this market. While traditional financial institutions, such as commercial banks,
savings and loans, credit unions, and captive finance companies of major
automobile manufacturers, have not consistently serviced Sub-Prime Borrowers,
the high rates of return earned by companies involved in sub-prime financing
have encouraged certain of these traditional institutions to enter, or
contemplate entering, this market. Increased competition may cause downward
pressure on the interest rate the Company charges on contracts originated by its
Company Dealerships or cause the Company to reduce or eliminate the
nonrefundable acquisition discount on the contracts it purchases from Third
Party Dealers. Such events would have a material adverse affect on the Company.
Similarly, increased competition may be a possible reason for a Company sale or
spin-off of certain of its business segments, including Champion Financial
Services Inc. and Cygnet Finance Corporation. See "Prospectus Summary -- The
Company -- Strategic Review."
REGULATION, SUPERVISION, AND LICENSING
The Company's operations are subject to ongoing regulation, supervision,
and licensing under various federal, state, and local statutes, ordinances, and
regulations. Among other things, these laws require that the Company obtain and
maintain certain licenses and qualifications, limit or prescribe terms of the
contracts that the Company originates and/or purchases, require specified
disclosures to customers, limit the Company's right to repossess and sell
collateral, and prohibit the Company from discriminating against certain
customers. The Company is also subject to federal and state franchising and
insurance laws.
The Company typically charges fixed interest rates significantly in excess
of traditional finance companies on the contracts originated at Company
Dealerships, and on Third Party Dealer contracts it purchases. Currently, a
significant portion of the Company's used car sales activities are conducted in,
and a significant portion of the contracts the Company services were originated
in, Arizona, which does not impose limits on the interest rate that a lender may
charge. However, the Company has expanded, and will continue to expand, its
operations into states that impose usury limits, such as Florida and Texas. The
Company attempts to mitigate these rate restrictions by purchasing contracts
originated in these states at a higher discount.
The Company believes that it is currently in substantial compliance with
all applicable federal, state, and local laws and regulations. There can be no
assurance, however, that the Company will be able to remain in
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compliance with such laws, and such failure could have a material adverse effect
on the operations of the Company. In addition, the adoption of additional
statutes and regulations, changes in the interpretation of existing statutes and
regulations, or the Company's entrance into jurisdictions with more stringent
regulatory requirements could have a material adverse effect on the Company's
business.
TRADEMARKS AND PROPRIETARY RIGHTS
The Company has obtained federal trademark registrations on its duck mascot
and logo, as well as for the trade names "Ugly Duckling Car Sales," "Ugly
Duckling Rent-A-Car," and "America's Second Car." These registrations are
effective through 2002 and are renewable for additional terms of ten years. The
Company grants its Ugly Duckling Rent-a-Car franchisees the limited right to use
its duck mascot and logo in their used car rental operations. The Company has
also obtained a federal trademark registration for the slogan "Putting You On
the Road to Good Credit."
The Company licenses software from various third parties. It has also
developed and copyrighted customized software to facilitate its sales and
financing activities. Although the Company believes it takes appropriate
measures to protect its proprietary rights and technology, there can be no
assurance that such efforts will be successful. The Company believes it is in
material compliance with all third party licensing requirements.
EMPLOYEES
At September 30, 1997, the Company employed approximately 2,000 persons.
None of the Company's employees are covered by a collective bargaining
agreement.
PROPERTIES
As of September 30, 1997, the Company owned the property in which eight of
its dealerships, two of its collection facilities and three of its
reconditioning facilities are located. In addition, the Company leased 119 other
facilities (32 dealerships, 3 collection facilities, one reconditioning
facility, and 83 Branch Offices). The Company's corporate headquarters are
located in leased space at 2525 E. Camelback Rd., Phoenix, Arizona.
LEGAL PROCEEDINGS
Except for vehicles sold under the Golden Wing Program, the Company sells
its cars on an "as is" basis, and requires all customers to sign an agreement on
the date of sale pursuant to which the Company disclaims any obligation for
vehicle-related problems that subsequently occur. Although the Company believes
that such disclaimers are enforceable under Arizona and other applicable law,
there can be no assurance that they will be upheld in every instance. Despite
obtaining these disclaimers, the Company, in the ordinary course of business,
receives complaints from customers relating to such vehicle-related problems as
well as alleged violations of federal and state consumer lending or other
similar laws and regulations. While most of these complaints are made directly
to the Company or to various consumer protection organizations and are
subsequently resolved, the Company is named occasionally as a defendant in civil
suits filed by customers in state, local, or small claims courts. There can be
no assurance that the Company will not be a target of similar claims in the
future. In the opinion of the Company, the ultimate disposition of these matters
on an individual basis will not have a material adverse effect on the Company.
However, there can be no assurance in this regard.
In connection with the acquisition of the Florida dealerships and finance
operations (disclosed in "Business -- Business Strategy"), a purported creditor
of the sellers filed, on January 21, 1997, a complaint to enjoin the sale as a
fraudulent conveyance. Alternatively, the suit sought to void any transfer of
the assets that has already occurred, to attach the assets that have been
transferred, or to appoint a receiver to take charge of the assets transferred.
The Company was not named in this action, received a specific indemnity from the
sellers relating to this action, and was advised by the sellers that, in their
view, the claim was without merit. The action has now been dismissed with
prejudice.
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<PAGE> 64
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Information concerning the Company's directors and executive officers of
the Company is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------------------------ --- ----------------------------------
<S> <C> <C>
Ernest C. Garcia, II...................... 40 Chairman of the Board and Chief
Executive Officer
Gregory B. Sullivan....................... 39 President and Chief Operating
Officer
Russell J. Grisanti....................... 51 Executive Vice
President -- Operations
Steven P. Johnson......................... 38 Senior Vice President and General
Counsel
Steven T. Darak........................... 50 Senior Vice President and Chief
Financial Officer
Steven A. Tesdahl......................... 38 Senior Vice President and Chief
Information Officer
Walter T. Vonsh........................... 55 Senior Vice President -- Credit
Donald L. Addink.......................... 48 Vice President -- Senior Analyst
Peter R. Fratt............................ 40 Vice President -- Real Estate
Eric J. Splaver........................... 34 Corporate Controller
Robert V. Sicina.......................... 53 Executive Officer of the Company,
as Chairman and Chief Executive
Officer of Champion Financial
Services, Inc.
Robert J. Abrahams........................ 71 Director
Christopher D. Jennings................... 44 Director
John N. MacDonough........................ 53 Director
Arturo R. Moreno.......................... 51 Director
Frank P. Willey........................... 45 Director
</TABLE>
Ernest C. Garcia, II has served as the Chairman of the Board and Chief
Executive Officer of the Company since its founding in 1992, and served as
President from 1992 to 1996. In 1990, Mr. Garcia founded Duck Ventures, Inc.,
currently a subsidiary of the Company, to buy the assets of the Ugly Duckling
Rent-a-Car System. Since 1991, Mr. Garcia has served as President of Verde
Investments, a real estate investment corporation that is also an affiliate of
the Company. Prior to 1990, when he founded the Company, Mr. Garcia was involved
in various real estate, securities, and banking ventures. See "Certain
Relationships and Related Transactions."
Gregory B. Sullivan has served as President and Chief Operating Officer of
the Company since February 1996 after serving as a consultant to the Company
since 1995. Mr. Sullivan formerly served as President and principal stockholder
of National Sports Games, Inc., an amusement game manufacturing company that he
co-founded in 1989 and sold in 1994. Prior to 1989, Mr. Sullivan was involved in
the securities industry and practiced law with a large Arizona firm. He is a
member of the State Bar of Arizona.
Russell J. Grisanti has served as the Executive Vice
President -- Operations of the Company and President of Champion Acceptance
Corporation since June of 1997. From 1989 to 1991, Mr. Grisanti served as the
President of Brookland Financial; from 1991 to 1994, Mr. Grisanti served as the
President of Kars-Yes Financial, Inc.; and from 1995 to 1996, Mr. Grisanti
served as President of Central Auto Sales. From 1996 to June 1997, Mr. Grisanti
provided consulting services to various companies in the automobile sales and
financing industry. Mr. Grisanti has also held positions as Chief Financial
Officer of various savings and loan associations and real estate firms and was
an Audit Manager with Coopers & Lybrand. Mr. Grisanti is a CPA and has an MBA.
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<PAGE> 65
Steven P. Johnson has served as the Senior Vice President, Secretary, and
General Counsel of the Company since its founding in 1992. Since 1991, Mr.
Johnson has also served as the General Counsel of Verde Investments, an
affiliate of the Company. Prior to 1991, Mr. Johnson practiced law in Tucson,
Arizona. Mr. Johnson is licensed to practice law in Arizona and Colorado and is
married to the sister of Mr. Garcia.
Steven T. Darak has served as the Senior Vice President and Chief Financial
Officer of the Company since February 1995, having joined the Company in 1994 as
Vice President and Chief Financial Officer. From 1989 to 1994, Mr. Darak owned
and operated Champion Financial Services, Inc., a used car finance company that
the Company acquired in early 1994. Prior to 1989, Mr. Darak served in various
positions in the banking industry and in public accounting.
Steven A. Tesdahl has served as Senior Vice President and Chief Information
Officer since September 1997. From 1993 to 1997, Mr. Tesdahl was a Partner with
Andersen Consulting, a leading global provider of business integration
consulting services. Prior to 1993, Mr. Tesdahl was an Associate Partner with
Andersen Consulting.
Walter T. Vonsh has served as the Senior Vice President -- Credit of the
Company since August 1997. From April 1995 to August 1997, Mr. Vonsh was the
Vice-President -- Credit of the Company. Mr. Vonsh joined the Company in March
1995 as the President of Champion Financial Services, Inc., the Company's Third
Party Dealer financing subsidiary, and also serves as the President of Champion
Acceptance Corp. From 1992 to 1995, Mr. Vonsh served as a Regional Director for
Mercury Finance Co., a consumer finance company. Prior to 1992, Mr. Vonsh was
President of Gemini Leasing Corp., an equipment leasing company, and held
various positions at other finance companies.
Donald L. Addink has served as the Vice President -- Senior Analyst of the
Company since 1995 and also serves as the Vice President of Verde Investments.
From 1988 to 1995, Mr. Addink served as Executive Vice President of Pima Capital
Co., a life insurance holding company. Prior to 1988, Mr. Addink served in
various capacities with a variety of insurance companies. Mr. Addink is a Fellow
of the Society of Actuaries and a Member of the American Academy of Actuaries.
Peter R. Fratt has served as Vice President -- Real Estate of the Company
since October 1993. From 1989 to 1993, Mr. Fratt was an associate of CB
Commercial Real Estate Services. Prior to that time, Mr. Fratt was involved in
commercial real estate brokerage and investment.
Eric J. Splaver has served as Corporate Controller of the Company since May
1994. From 1985 to 1994, Mr. Splaver worked as a certified public accountant
with KPMG Peat Marwick LLP.
Robert V. Sicina has served as Chairman and Chief Executive Officer of
Champion Financial Services, Inc. since January of 1998. Mr. Sicina was employed
at various positions at American Express Company from 1992 through 1996
including President of the Latin American and Caribbean Division of Travel
Related Services and President of American Express Bank, Ltd. Previously, Mr.
Sicina served in various positions with Citibank both domestically and
internationally in its retail financial services activities including Chief
Financial Officer of its U.S. Credit Card Products Group.
Robert J. Abrahams has served as a director of the Company since June 1996.
Mr. Abrahams has served since 1988 as a consultant to the financing industry,
including service as a consultant to the Company from 1994 to 1995. From 1960 to
1988, Mr. Abrahams was an executive officer of Heller Financial, Inc., a finance
company. Prior to joining Heller Financial, Inc., Mr. Abrahams co-founded
Financial Acceptance Company in 1948. Mr. Abrahams also serves as a member of
the Audit Committee of the Board of Directors.
Christopher D. Jennings has served as a director of the Company since June
1996. Mr. Jennings has served as a managing director of Cruttenden Roth
Incorporated, an investment banking firm, since 1995. From 1992 to 1994, Mr.
Jennings served as a Managing Director of investment banking at Sutro & Co., an
investment banking firm. From 1989 to 1992, Mr. Jennings served as a Senior
Managing Director at Maiden Lane Associates, Ltd., a private equity fund. Prior
to 1989, Mr. Jennings served in various positions with, among others, Dean
Witter Reynolds, Inc. and Warburg Paribas Becker, Inc., both of which are
investment
64
<PAGE> 66
banking firms. Mr. Jennings also serves as a member of the Compensation
Committee of the Board of Directors.
John N. MacDonough has served as a director of the Company since June 1996.
Mr. MacDonough has served as Chairman and Chief Executive Officer of Miller
Brewing Company, a brewer and marketer of beer, since 1993, having previously
served from 1992 to 1993 as President and Chief Operating Officer. Prior to
1992, Mr. MacDonough was employed in various positions at Anheuser Busch, Inc.,
also a brewer and marketer of beer. Mr. MacDonough is married to the sister of
Mr. Sullivan.
Arturo R. Moreno has served as a director of the Company since June 1996.
Mr. Moreno has served as the President and Chief Executive Officer of Outdoor
Systems, Inc., one of the largest outdoor media companies in the United States,
since 1984. Prior to 1984, Mr. Moreno held various executive positions in the
outdoor advertising industry. Mr. Moreno also serves as a member of the Audit
Committee of the Board of Directors.
Frank P. Willey has served as a director of the Company since June 1996.
Mr. Willey has served as the President of Fidelity National Financial, Inc., one
of the nation's largest title insurance underwriters, since January 1995. From
1984 to 1995, Mr. Willey served as the Executive Vice President and General
Counsel of Fidelity National Title. Mr. Willey is also a director of CKE
Restaurants, Inc., an operator of various quick-service restaurant chains, and
Southern Pacific Funding Corporation, a specialty finance company that
originates, purchases and sells high-yielding, non-conforming mortgage loans.
Mr. Willey also serves as a member of the Compensation Committee of the Board of
Directors.
Directors of the Company are elected for one year terms. Each director of
the Company serves until the following annual meeting of the Company or until
his successor is duly elected and qualified. Executive officers of the Company
serve at the discretion of the Board of Directors.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
In March 1987, Mr. Ernest C. Garcia, II, the Company's Chairman, Chief
Executive Officer, and principal stockholder, obtained $20 million in financing
from Lincoln Savings and Loan Association ("Lincoln") to repurchase stock in his
real estate development company held by a corporate investor. Subsequently, Mr.
Garcia agreed to facilitate the purchase of certain land from a Lincoln
subsidiary. The two transactions closed simultaneously. Soon thereafter, Lincoln
was placed into receivership and federal regulators from the RTC and other
government agencies began investigating numerous transactions involving Lincoln
and a variety of third parties, including Mr. Garcia.
Upon being notified of the RTC's investigation, Mr. Garcia met voluntarily
with RTC investigators, without counsel, for several months and provided full
disclosure concerning the details of his dealings with Lincoln. Nearly one year
later, the RTC asserted that the financing transaction and the land transaction,
though documented separately, were linked and that, as a result of the
transaction, Lincoln improperly recorded a gain in violation of certain
accounting rules applicable to Lincoln. As a result, in October 1990, the United
States, on behalf of the RTC, informed Mr. Garcia that it intended to charge him
with bank fraud. Mr. Garcia was never indicted for his role in the transaction,
but, facing severe financial pressures, agreed to plead guilty to one count of
bank fraud.
Prior to his sentencing in 1993, the RTC submitted a letter to the United
States District Court for the Central District of California urging that the
court take favorable account of Mr. Garcia's relative responsibility and
culpability, as well as his timely and honest cooperation, in determining an
appropriate sentence. In this letter, the RTC stated its belief that the chief
executive officer of Lincoln's parent company, Charles H. Keating, Jr., not Mr.
Garcia, devised the transaction and that Mr. Garcia was not even aware of the
existence of Mr. Keating's illegal schemes and had no reason to believe that the
transaction would enable Mr. Keating to defraud Lincoln. The RTC letter also
noted Mr. Garcia's extensive cooperation with federal investigators, which began
prior to the time he was charged and continued until his sentencing. In December
1993, the court, following the RTC's recommendation, sentenced Mr. Garcia to
three years of probation and fined him $50 (the minimum fine that the court
could assess). Under the terms of the probation, Mr. Garcia
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<PAGE> 67
was barred from affiliating in any way with a federally insured banking
institution without prior approval. In December 1996, Mr. Garcia completed his
probation.
In connection with the criminal action, the RTC filed a civil suit against
Mr. Garcia, which the parties settled after Mr. Garcia agreed to cooperate fully
with the RTC in its investigation and prosecution of Lincoln-related matters.
Pursuant to the terms of his settlement agreement, and in light of Mr. Garcia's
cooperation, the RTC released Mr. Garcia from civil liability. Also in
connection with this action, the Commission commenced civil and administrative
actions against Mr. Garcia. Without admitting or denying any of the Commission's
allegations, Mr. Garcia consented to a court order permanently enjoining him and
his affiliates from violating the federal securities laws and to a Commission
order barring him (with a right to reapply upon the cessation of his probation)
from associating in any capacity with any broker, dealer, municipal securities
dealer, investment adviser, or investment company.
As a result of a decline in the Arizona real estate market in the late
1980s, changes in the tax laws affecting real estate, and the 1987 stock market
crash, in April 1990 a real estate investment company controlled by Mr. Garcia,
as well as several limited partnerships organized by that company, filed
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code. All of these reorganization proceedings were successfully concluded by
1993. Many of the obligations of these entities were personally guaranteed by
Mr. Garcia and his wife. As a result, Mr. Garcia and his wife filed a petition
under Chapter 7 of the Bankruptcy Code in 1990, and a discharge was granted in
October 1991.
SUMMARY OF EXECUTIVE COMPENSATION
The table below sets forth information concerning the annual and long-term
compensation for services rendered in all capacities to the Company during the
three fiscal years ended December 31, 1997, of those persons who were, at
December 31, 1997: (i) the chief executive officer of the Company and (ii) the
four other most highly compensated executive officers of the Company (the "Named
Executive Officers"):
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------------
ANNUAL COMPENSATION SECURITIES
---------------------------- UNDERLYING ALL OTHER
NAME AND SALARY BONUS OPTIONS-- COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) AWARDS(#)(1) ($)(2)
- ------------------------------------------------ ----- -------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Ernest C. Garcia, II............................ 1997 $131,677 -- -- $ 3,935(3)
Chairman and Chief Executive 1996 121,538 -- -- 3,873(3)
Officer 1995 100,000 -- -- 3,151(3)
Gregory B. Sullivan............................. 1997 197,846 -- -- 554
President and Chief Operating Officer 1996 97,385 -- 125,000 --
1995 --(4) -- 116,000(4) --
Steven T. Darak................................. 1997 148,654 $ 25,000 -- 1,750(5)
Senior Vice President, Chief 1996 100,000 100,000 40,000 9,250(5)
Financial Officer, and Treasurer 1995 100,000 100,000 -- 12,250(5)
Walter T. Vonsh................................. 1997 150,000 -- -- 3,439(6)
Senior Vice President -- Credit 1996 126,923 30,000 50,000 5,277(6)
(position as of current date) 1995 97,692 -- -- 3,704(6)
Donald L. Addink................................ 1997 139,671 10,000 -- 950
Vice President -- Senior Analyst 1996 122,142 10,000 42,000 485
1995 71,026 10,000 58,000 984
</TABLE>
- ---------------
(1) The amounts shown in this column represent stock options granted pursuant to
the Company's Long-Term Incentive Plan ("Incentive Plan"). Generally,
options are subject to vesting over a five-year period, with 20.0% of the
options becoming exercisable on each successive anniversary of the date of
grant. See "Long-Term Incentive Plan" for a discussion of the Incentive
Plan.
(2) The amounts shown in this column represent the dollar value of 401(k) plan
contributions made by the Company for the benefit of the Named Executive
Officers.
(3) This amount includes a $2,985 and $2,950 car allowance during 1997, and
during both 1996 and 1995, respectively, for Mr. Garcia.
(4) Mr. Sullivan became an executive officer of the Company during 1996. For all
of 1995 and a portion of 1996, Mr. Sullivan was employed as an independent
contractor by the Company and was not an
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<PAGE> 68
employee. Therefore, the above table does not reflect the compensation paid to
Mr. Sullivan while he was an independent contractor for the Company in 1995 and
1996, respectively. The table does, however, reflect stock options granted to
Mr. Sullivan under the Incentive Plan during both 1995 and 1996.
(5) This amount includes $10,500 and $7,500 paid by the Company for a Phoenix
apartment for Mr. Darak during 1996 and 1995, respectively, while his full
time residence was in Tucson, Arizona, and a $1,750 car allowance during
1997, 1996 and 1995.
(6) This amount includes a $2,550, $5,000 and $2,850 car allowance for Mr. Vonsh
during 1997, 1996 and 1995, respectively.
OPTION GRANTS IN LAST FISCAL YEAR
There were no stock options granted pursuant to the Company's Incentive
Plan or otherwise during the fiscal year ended December 31, 1997 to the Named
Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND OPTION VALUES AS OF DECEMBER
31, 1997
The table below sets forth information with respect to option exercises and
the number and value of options outstanding at December 31, 1997 held by the
Named Executive Officers. The Company has never issued any other forms of stock
based awards.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARE FISCAL YEAR END(#)(1) FISCAL YEAR END($)(2)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ernest C. Garcia, II....... -- -- -- -- -- --
Gregory B. Sullivan........ -- -- 71,400 169,000 $ 282,974 $ 446,336
Steven T. Darak............ -- -- 8,000 32,000 3,500 14,000
Walter T. Vonsh............ -- -- 10,000 40,000 8,750 35,000
Donald L. Addink(3)........ 63,000 $622,490(4) 17,000 20,000 -- 35,000
</TABLE>
- ---------------
(1) Generally, options are subject to vesting over a five-year period, with
20.0% of the options becoming exercisable on each successive anniversary of
the date of grant.
(2) In-the-money options are options for which the option exercise price (the
fair market value on the date of grant) was lower than the market price of
the Company's Common Stock on December 31, 1997, which market price of $8.50
per share was based on the closing price of the Common Stock on that date as
reported by Nasdaq. The values in the last two columns have not been, and
may never be, received by the Named Executive Officers. Actual gains, if
any, on option exercises will depend on the value of the Common Stock on the
exercise dates. Accordingly, there can be no assurance that the values shown
in the last two columns will be realized. The closing price of the Company's
Common Stock on February 2, 1998 was $6.50 per share.
(3) Subsequent to December 31, 1997 and during January 1998, Mr. Addink
exercised 20,000 stock options at an exercise price of approximately $6.75
per share. As discussed herein, these options were subject to accelerated
vesting pursuant to Mr. Addink's restated employment agreement with the
Company.
(4) The value realized represents the value of stock options exercised by Mr.
Addink during the last fiscal year. During this period, he exercised options
to acquire 63,000 shares of the Company's Common Stock. The value realized
was calculated by subtracting the exercise price of Mr. Addink's options
from the fair market value of the Common Stock underlying the options as of
the exercise date. The fair market value of the Company's Common Stock was
based on the closing price of the stock on the date of exercise as reported
by Nasdaq. Pursuant to the Incentive Plan's documents, the exercise date was
the date Mr. Addink provided notice of his exercise to the Company and
method of payment.
LONG-TERM INCENTIVE PLAN
In June 1995, the Company's stockholders approved the Ugly Duckling
Corporation Long-Term Incentive Plan (the "Incentive Plan"). Under the Incentive
Plan, the Company may grant incentive stock
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<PAGE> 69
options, non-qualified stock options, stock appreciation rights, performance
shares, restricted stock, dividend equivalents, and other Common Stock-based
awards to employees, consultants, and advisors of the Company. The Company
believes that the Incentive Plan promotes the success and enhances the value of
the Company by linking the personal interests of participants to those of the
Company's stockholders and providing participants with an incentive for
outstanding performance. The total number of shares of Common Stock originally
available for awards under the Incentive Plan, as amended, is 1,800,000, subject
to a proportionate increase or decrease in the event of a stock split, reverse
stock split, stock dividend, or other adjustment to the Company's total number
of issued and outstanding shares of Common Stock. As of December 31, 1997, the
Company had granted options to purchase approximately 1,558,210 shares of Common
Stock to various of its employees of which 1,290,568 were outstanding. There are
351,432 shares that remain available for grant under the Incentive Plan.
The Incentive Plan is administered by the Compensation Committee of the
Board of Directors, which has the exclusive authority to administer the
Incentive Plan, including the power to determine eligibility, the type and
number of awards to be granted, and the terms and conditions of any award
granted, including the price and timing of awards, vesting, and acceleration of
such awards. The exercise price of all options granted under the Incentive Plan
is the fair market value of the Common Stock on the date of grant. Generally,
such options are subject to vesting over a five-year period, with 20.0% of the
options becoming exercisable by the holder thereof on each successive
anniversary date of the grant. However, during 1997, the Compensation Committee
exercised its discretion and accelerated the vesting of certain stock option
awards previously granted to Mr. Addink under the Incentive Plan. See
"Employment Contracts" below.
401(k) PLAN
Under the Company's 401(k) plan, adopted in October 1995, eligible
employees may direct that a portion of their compensation, up to a legally
established maximum, be withheld by the Company and contributed to their
account. All 401(k) plan contributions are placed in a trust fund to be invested
by the 401(k) plan's trustee, except that the 401(k) plan permits participants
to direct the investment of their account balances among mutual or investment
funds available under the plan. The 401(k) plan provides a matching contribution
of 10.0% of a participant's contributions. Amounts contributed to participant
accounts under the 401(k) plan and any earnings or interest accrued on the
participant accounts are generally not subject to federal income tax until
distributed to the participant and may not be withdrawn until death, retirement,
or termination of employment.
EMPLOYMENT CONTRACTS
On January 1, 1996, the Company entered into a three-year employment
agreement with Mr. Ernest C. Garcia, II, the Company's Chairman and Chief
Executive Officer. The agreement establishes Mr. Garcia's base salary for 1997
at $132,000 per year and provides a minimum 10.0% increase in the base salary
each year throughout the term of the agreement. In addition, the agreement
provides for the continuation of Mr. Garcia's base salary and certain benefits
for a period of one year in the event Mr. Garcia is terminated by the Company
without cause prior to that time. The agreement also contains confidentiality
and non-compete covenants.
On April 1, 1995, the Company entered into a three-year employment
agreement with Mr. Walter T. Vonsh, the Company's Senior Vice
President -- Credit, that was modified on or about August 6, 1997. The modified
agreement provides for a base salary of $150,000 per year for 1997, with a
commitment to review Mr. Vonsh's salary and, subject to certain conditions,
increase it up to $200,000 per year on or before April 1, 1998. The modified
agreement also provides for an extension of Mr. Vonsh's employment agreement to
April 2002 and a grant, on or before April 1, 1998, of 50,000 stock options
under the Incentive Plan. In addition, the modified agreement provides for the
continuation of Mr. Vonsh's base salary and certain benefits for the term of the
agreement in the event Mr. Vonsh is terminated by the Company without cause
prior to that time. The modified agreement also contains confidentiality and
non-compete covenants.
On June 1, 1995, the Company entered into a five year employment agreement
with Mr. Donald L. Addink, the Company's Vice President -- Senior Analyst, that
was amended and restated effective August 1, 1997. The restated employment
agreement establishes Mr. Addink's base salary at $165,000 per year,
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<PAGE> 70
beginning on or around the effective date of the restated employment agreement,
a $10,000 bonus payment upon execution of the restated employment agreement,
certain benefits, and the continuation of Mr. Addink's base salary for a period
of one year in the event Mr. Addink is terminated by the Company without cause
prior to expiration of the restated employment agreement. The restated
employment agreement also contains confidentiality and non-compete covenants.
Further, the restated employment agreement accelerated, pursuant to a vesting
scheduling found in the agreement, the vesting of Mr. Addink's 100,000 stock
options previously granted under the Incentive Plan. The accelerated vesting
does not effect any other options of Mr. Addink presently held or thereafter
acquired by him. Originally, the 100,000 stock options were granted: (1)
pursuant to the Incentive Plan's general five-year vesting schedule with 20%
vesting each year; and (2) on the following dates, in the following numbers and
for the following exercise prices.
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
DATE SHARES PER SHARE
------------------------------------------------------------- --------- ---------------
<S> <C> <C>
June 1995.................................................... 58,000 $ 1.72
June 1996.................................................... 25,000 6.75
December 1996................................................ 17,000 17.69
</TABLE>
In recognition of Mr. Addink's performance for the Company, the Board of
Directors of the Company and the Board's Compensation Committee, approved the
acceleration of the above options, such that they became fully vested on the
following dates: (1) the June 1995 and December 1996 options vested on August 1,
1997 (the date of the restated employment agreement), and (2) the June 1996
options vested on January 15, 1998.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has established a Compensation Committee and an Audit
Committee. The Compensation Committee, which consists of Messrs. Jennings and
Willey, reviews executive salaries and administers any bonus, incentive
compensation, and stock option plans of the Company, including the Long-Term
Incentive Plan. In addition, the Compensation Committee consults with management
of the Company regarding compensation policies and practices of the Company. The
Audit Committee, which consists of Messrs. Abrahams and Moreno, reviews the
professional services provided by the Company's independent auditors, the annual
financial statements of the Company, and the Company's system of internal
controls.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors during 1997 consisted
of Mr. Jennings and Mr. Willey, neither of whom was an employee of the Company
during 1997. However, as discussed below, Mr. Jennings is also a managing
director of Cruttenden Roth Incorporated ("Cruttenden Roth"). Cruttenden Roth
served as the sole representative in the Company's initial public offering. In
its capacity as representative, Cruttenden Roth participated in the underwriting
discount and received a non-accountable expense allowance and warrants to
purchase Common Stock. See "Description of Capital Stock -- Other Securities and
Registration Rights" and "Security Ownership of Certain Beneficial Owners and
Management."
DIRECTOR FEES AND DIRECTOR'S INCENTIVE PLAN
The Company's independent directors are compensated $1,000 for physical
attendance at meetings of the Board of Directors and at meetings of committees
of the Board of Directors of which they are members, and are reimbursed for
reasonable travel expenses incurred in connection with attendance at each Board
and committee meeting. Board and committee members are not compensated for their
telephonic attendance at meetings. If a Board and committee meeting are held on
the same day, a member who attends both meetings will receive combined total
compensation of only $1,000. In addition, pursuant to the Company's Director
Incentive Plan, upon initial appointment or initial election to the Board of
Directors, each independent director of the Company receives Common Stock of the
Company valued at $30,000, which is subject to vesting in equal annual
increments over a three-year period as provided for under the plan. Directors
who are also officers of the Company are not compensated for their services as
directors.
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<PAGE> 71
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of January 31, 1998, for: (i) each
director of the Company; (ii) the Named Executive Officers of the Company at
December 31, 1997; (iii) all directors and executive officers of the Company as
a group; and (iv) each other beneficial owner of more than 5% of the outstanding
Common Stock at December 31, 1997, unless otherwise indicated. To the knowledge
of the Company, all persons listed below have sole voting and investment power
with respect to their shares, except to the extent that authority is shared by
their respective spouses under applicable law.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
-----------------------------------------------------
NUMBER PERCENT
----------------------------------------- -------
NAME OF BENEFICIAL OWNER(2)(11) COMMON STOCK OPTIONS TOTAL
----------------------------------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Ernest C. Garcia, II(3)(12)........ 4,656,500 -- 4,656,500 25.1%
Robert J. Abrahams(4).............. 6,744 -- 6,744 *
Christopher D. Jennings(4)(5)...... 36,194 -- 36,194 *
John N. MacDonough(4).............. 4,444 -- 4,444 *
Arturo R. Moreno(4)................ 24,444 -- 24,444 *
Frank P. Willey(4)................. 9,444 -- 9,444 *
Gregory B. Sullivan(6)............. 20,000 71,400 91,400 *
Steven T. Darak(6)................. 140,000 8,000 148,000 *
Walter T. Vonsh(6)................. 72,000 10,000 82,000 *
Donald L. Addink(7)................ 98,000 67,000 165,000 *
Merrill Lynch & Co., Inc.(8)(12)... 1,615,000 -- 1,615,000 8.8%
Wellington Management Company,
LLP(9)(12)....................... 963,500 -- 963,500 7.6%
Firstar Corporation(10)(12)........ 882,500 -- 882,500 6.9%
All directors and executive
officers as a group (16
persons)......................... 5,581,875 30.1%
</TABLE>
- ---------------
* Represents less than one percent of the outstanding Common Stock.
(1) A person is deemed to be the beneficial owner of securities that can be
acquired within 60 days from the date set forth above through the exercise
of any option, warrant, or right. Shares of Common Stock subject to
options, warrants, or rights which are currently exercisable or exercisable
within 60 days are deemed outstanding for computing the percentage of the
person holding such options, warrants, or rights, but are not deemed
outstanding for computing the percentage of any other person. The amounts
and percentages are based upon 18,548,961 shares of Common Stock
outstanding as of January 31, 1998, unless otherwise indicated.
(2) Unless otherwise noted, the address of each of the listed stockholders is
2525 East Camelback Road, Suite 1150, Phoenix, Arizona 85016.
(3) Includes 136,500 shares and 20,000 shares of Common Stock held by The
Garcia Family Foundation, Inc., an Arizona nonprofit corporation, and Verde
Investments, Inc., a real estate investment corporation, respectively.
Also, includes 50,000 shares of Common Stock that Mr. Garcia presently
owns, but to which he has provided an option to purchase to Donald L.
Addink. The Option Agreement was entered into on August 18, 1997 and allows
Mr. Addink to exercise the option at any time through May 31, 2000 at an
exercise price of $15.00 per share. As of January 31, 1998, Mr. Addink had
not exercised his option right to purchase any of these shares of Common
Stock from Mr. Garcia. Until the option is exercised by Mr. Addink, Mr.
Garcia retains voting and investment power with respect to the 50,000
shares of Common Stock.
(4) The total for each independent Board of Director member includes 4,444
shares of Common Stock of the Company granted under the Company's Director
Incentive Plan. Shares having a value of $30,000 on or about the date of
grant (i.e., 4,444 shares of Common Stock) were granted and issued to each
independent Board member upon their appointment or election to the Board of
Directors in June 1996. Pursuant to the Director Incentive Plan, these
shares vest over a three-year period at an annual rate of 33%, beginning on
the first anniversary of the grant date.
(5) The total for Mr. Jennings includes 6,444 shares of Common Stock of the
Company. The total also includes 29,750 warrants to purchase Common Stock
held of record by Cruttenden Roth, the
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<PAGE> 72
investment banking firm of which Mr. Jennings is managing director. The warrants
are convertible into Common Stock at an exercise price of $9.45 per share and
vest over a three-year period at an annual rate of 33%, beginning in June 1996.
(6) The options listed for Messrs. Sullivan, Darak and Vonsh include their
respective options granted under the Incentive Plan that are exercisable
pursuant to the plan on January 31, 1998 or within 60 days thereafter. The
options are exercisable at various prices, established in accordance with
the provisions of the Incentive Plan.
(7) The total of Common Stock for Mr. Addink includes 20,000 options granted
under the Incentive Plan, which subsequently vested and were exercised by
Mr. Addink in January 1998. As stated previously in this Prospectus,
generally options issued pursuant to the Incentive Plan vest over a
five-year period, with 20% of the options becoming exercisable by a holder
on each successive anniversary date of the grant. During 1997, the
Compensation Committee of the Board of Directors of the Company and the
Board approved an accelerated vesting schedule for Mr. Addink's existing
options under the Incentive Plan. The remaining option to acquire 50,000
shares of Common Stock is an option directly from Mr. Garcia, pursuant to
their Option Agreement dated August 18, 1997. As of January 31, 1998, Mr.
Addink had not exercised any of his option rights under this agreement.
However, the Option Agreement does provide Mr. Addink the right to exercise
his option at any time through May 31, 2000 at an exercise price of $15.00
per share. Until the option is exercised by Mr. Addink, Mr. Garcia retains
voting and investment power with respect to these 50,000 shares of Common
Stock.
(8) Based on a Schedule 13G filing as of December 31, 1997, by Merrill Lynch &
Co., Inc. ("Merrill Parent") and four (4) of its subsidiaries and/or
affiliates, including Merrill Lynch Global Allocation Fund, Inc. ("Merrill
Global"). Merrill Parent and one of its subsidiary/affiliates that is
included within this Merrill Schedule 13G filing are located at 250 Vesey
Street, New York, New York 10281. Merrill Global and the other two (2)
subsidiaries/affiliates that are included within this Merrill Schedule 13G
filing are located at 800 Scudders Mill Rd., Plainsboro, New Jersey 08536.
According to the Schedule 13G, Merrill Global has shared voting and
dispositive power over 1,530,000 of the shares and Merrill Parent along
with each of its other three subsidiaries and/or affiliates have shared
voting and dispositive power over 1,615,000 of the shares. The Company
makes no representation as to the accuracy or completeness of the
information provided in this footnote or the above beneficial ownership
table, which is based solely on the Merrill Schedule 13G.
(9) Based on a Schedule 13G filing as of December 31, 1996, by Wellington
Management Company, LLP at 75 State Street, Boston, Massachusetts 02109.
According to the Schedule 13G, Wellington Management Company, LLP has
shared voting power over 570,000 of the shares and shared dispositive power
over 963,500 of the shares. The Company makes no representation as to the
accuracy or completeness of the information provided in this footnote or
the above beneficial ownership table, which is based solely on Wellington
Management Company LLP's Schedule 13G filing.
(10) Based on two (2) Schedule 13G filings as of December 31, 1996, by Firstar
Corporation ("Firstar") and Firstar Investment Research & Management
Company ("Firstar Investment") both at 777 E. Wisconsin Avenue, Milwaukee,
Wisconsin 53202. According to the Schedule 13Gs, Firstar and Firstar
Investment have shared voting power over 98,800 and 426,500 of the shares,
respectively. The Company makes no representation as to the accuracy or
completeness of the information provided in this footnote or the above
beneficial ownership table, which is based solely on Firstar's and Firstar
Investment's respective Schedule 13G filings.
(11) Based on a Schedule 13D (Amendment No. 2) ("Amendment") filing as of
November 26, 1997, by Kramer Spellman, L.P. and other related parties at
2050 Center Avenue, Fort Lee, New Jersey 07024. According to the Amendment,
Kramer Spellman, L.P. no longer is the beneficial owner of more than 5% of
the Company's outstanding Common Stock. The Company makes no representation
as to the accuracy or completeness of the information provided in this
footnote or the above beneficial ownership table, which is based solely on
the Kramer Spellman, L.P. Amendment filing.
(12) The Company knows of no other person who beneficially owned more than five
percent of Company's Common Stock as of January 31, 1998.
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<PAGE> 73
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since its inception, the Company has maintained business relationships and
engaged in certain transactions with the affiliated companies and parties
described below. Any future transactions between the Company and its affiliated
entities, executive officers, directors, or significant stockholders will
require the approval of a majority of the independent directors of the Company
and will be on terms no less favorable to the Company than the Company could
obtain from non-affiliated parties.
Pursuant to an agreement (the "Modification Agreement") between the Company
and Verde, effective June 21, 1996, Verde agreed to sell to the Company at any
time prior to June 21, 1997, subject to financing, six car lots, a vehicle
reconditioning center, and two office buildings which were owned by Verde and
leased to the Company at the lower of $7.45 million or the appraised value (as
determined by an independent third party), and to lower the rents on such
properties to an aggregate of $745,000 per year subject to cost of living
adjustments if the sale did not take place. These properties had previously been
rented from Verde pursuant to various leases which called for base monthly rents
aggregating approximately $123,000 plus contingent rents as well as all
occupancy and maintenance costs, including real estate taxes, insurance, and
utilities. Rents paid to Verde pursuant to these leases totaled $1.5 million in
1996. The Company believes the reduced rental rates approximate the financing
costs to be incurred in connection with the purchase of such properties. In
addition, Verde assigned to the Company its leasehold interest in two properties
it sub-leased to the Company. These transactions (the reduction in rental rates
and/or the purchase of property) would have resulted in savings to the Company
of approximately $626,000 for 1996. Also pursuant to the Modification Agreement,
Verde lowered the interest rate on $14.0 million of the Company's subordinated
debt payable to Verde from 18.0% to 10.0% per annum and lowered from 12.0% to
10.0% the dividend rate on $10.0 million of the Company's Preferred Stock held
by Verde. For the nine months ended September 30, 1997 and the year ended
December 31, 1996, the Company paid Verde $2.0 million and $553,000 of
principal, and $930,000 and $1.9 million of interest, respectively, in
connection with the Verde subordinated debt. In July 1997, the Company's Board
of Directors approved the prepayment of the $12.0 million in subordinated debt
after the earlier of (1) the Company's completion of a debt offering; or (2) at
such time as (a) the FMAC transactions described under the heading "FMAC
Transaction" herein have been completed or the cash requirements for completion
of said transactions are known, and (b) the Company either has cash in excess of
its current needs or has funds available under its financing sources in excess
of its current needs. On December 31, 1996, the Company purchased the properties
listed above from Verde pursuant to the Modification Agreement. Mr. Ernest C.
Garcia, II, the Company's Chairman, Chief Executive Officer, and principal
stockholder, is the President and sole stockholder of Verde. In connection with
the purchase, Verde returned security deposits which totaled $364,000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
In January 1996, in connection with the sale of the Gilbert Dealership, the
Company purchased the land for the Gilbert Dealership from Verde for a total
price of $750,000, which the Company believes approximated fair market value.
Simultaneous with such purchase, the Company sold the land purchased from Verde
together with the dealership building and other improvements (which had been
constructed by the Company) to a third party for $512,500 in cash and a
promissory note in the principal amount of $1.2 million. The Company recognized
a loss on the sale of $120,000, for which an allowance was established as of
December 31, 1995.
Mr. Christopher D. Jennings, a managing director of Cruttenden Roth, is a
director of the Company. Cruttenden Roth served as the sole representative in
the Company's initial public offering. In its capacity as representative,
Cruttenden Roth participated in the underwriting discount and received a
non-accountable expense allowance and warrants to purchase Common Stock. See
"Description of Capital Stock -- Other Securities and Registration Rights" and
"Security Ownership of Certain Beneficial Owners and Management."
In September 1997, the Company's Board of Directors approved the Ugly
Duckling Director and Officer Stock Purchase Program. The Director and Officer
Stock Purchase Program includes the providing of loans of up to $1.0 million in
total to the directors and senior officers under the program to assist
directors' and officers' purchases of Company common stock on the open market.
The program provides for loans, which are unsecured by the related common stock,
at arms-length terms and conditions. During November 1997, senior officers
purchased 50,000 shares of Ugly Duckling common stock under the Director and
Officer Stock Purchase Program and the Company advanced $500,000 to the senior
officers for these purchases.
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<PAGE> 74
DESCRIPTION OF CAPITAL STOCK
The Company is a Delaware corporation and its affairs are governed by its
Certificate of Incorporation and Bylaws and the Delaware General Corporation
Law. The following description of the Company's capital stock, which is complete
in all material respects, is qualified in its entirety by reference to the
provisions of the Company's Certificate of Incorporation and Bylaws, as amended.
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, par value $.001 per share, and 10,000,000 shares of Preferred
Stock, par value $.001 per share. At January 31, 1998, 18,548,961 shares of
Common Stock were issued and outstanding. As of January 31, 1998, there were no
issued and outstanding shares of Preferred Stock.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters on which stockholders are entitled to vote. Holders of
Common Stock do not have cumulative voting rights, and therefore holders of a
majority of the shares voting for the election of directors can elect all of the
directors. In such event, the holders of the remaining shares will not be able
to elect any directors.
Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The Company does not anticipate paying cash dividends in the
foreseeable future. See "Dividend Policy." In the event of liquidation,
dissolution, or winding up of the Company, the holders of Common Stock are
entitled to share ratably in any corporate assets remaining after payment of all
debts, subject to any preferential rights of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, conversion, or redemption
rights and are not subject to further calls or assessments by the Company. All
of the outstanding shares of Common Stock are validly issued, fully paid, and
nonassessable.
PREFERRED STOCK
The Board of Directors of the Company has the authority, without further
action by the Company's stockholders, to issue from time to time up to
10,000,000 shares of Preferred Stock in one or more series and to fix the number
of shares, designations, voting powers, preferences, optional and other special
rights, and the restrictions or qualifications thereof. The rights, preferences,
privileges, and restrictions or qualifications of different series of Preferred
Stock may differ with respect to dividend rates, amounts payable on liquidation,
voting rights, conversion rights, redemption provisions, sinking fund
provisions, and other matters. The issuance of Preferred Stock could: (i)
decrease the amount of earnings and assets available for distribution to holders
of Common Stock; (ii) adversely affect the rights and powers, including voting
rights, of holders of Common Stock; and (iii) have the effect of delaying,
deferring, or preventing a change in control of the Company.
WARRANTS
The Warrants will be governed by the Warrant Agreement to be dated at or
about the date of initial issuance of the Warrants (the "Warrant Agreement")
between the Company and Harris Trust Company of California, as warrant agent
(the "Warrant Agent"). Holders of Warrants are referred to the Warrant Agreement
which is included as an exhibit to the Registration Statement of which this
Prospectus is a part for a complete statement of the terms of the Warrants. The
following summary does not purport to be complete and is qualified in its
entirety by reference to all of the provisions of the Warrant Agreement.
Capitalized terms used in this description of the Warrants and not defined
herein have the meanings given to them in the Warrant Agreement.
Each Warrant entitles the holder to purchase one share of the Company's
Common Stock for $20.00 per share, subject to adjustment as described herein
(the "Warrant Price"). The Warrants will be exercisable upon issuance thereof
and will continue to be exercisable through the date that is three years from
the date of initial issuance of the Warrants.
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<PAGE> 75
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 (defined below) per
share of the Common Stock for a period of at least 10 consecutive trading days
ending not more than fifteen days prior to the date of the redemption notice
described below has equaled or exceeded $28.50. The Daily Market Price of the
Common Stock will be determined by the Company 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) and verified to
the Warrant Agent before the Company may give notice of redemption. All
outstanding Warrants must be redeemed if any are redeemed, and any right to
exercise an outstanding Warrant shall terminate at 5:00 p.m. (New York City
time) on the date fixed for redemption. Trading day means a day in which trading
of securities occurred on Nasdaq. Appropriate adjustment shall be made to the
redemption price and to the minimum Daily Market Price prerequisite to
redemption described herein, in each case on the same basis as provided with
respect to adjustment of the Warrant Price.
If the Company exercises its right to redeem, it shall give notice to the
Warrant Agent and the registered holders of the outstanding Warrants by mailing
or causing the Warrant Agent to mail to such registered holders a notice of
redemption, first class, postage prepaid, at their addresses as they shall
appear on the records of the Warrant Agent. 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 5:00 P.M. (New York City time) on the
date fixed for redemption.
The term "Daily Market Price" means (i) if the Common Stock is quoted on
Nasdaq or the Nasdaq SmallCap Market or on a national securities exchange, the
daily per share closing price of the Common Stock as quoted on Nasdaq 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 Nasdaq 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 Nasdaq 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.
The Warrants may be exercised in whole or in part by surrendering at the
office of the Warrant Agent in Los Angeles, California, or at the office of any
successor to the Warrant Agent, the Warrant certificate evidencing such
Warrants, together with the subscription form set forth on the reverse of the
Warrant Certificate, duly executed and endorsed, with signatures properly
guaranteed, and accompanied by payment of the Warrant Price in cash or by
certified or bank draft, payable in U.S. dollars to the order of the Warrant
Agent. As soon as practicable after such exercise, the Company will cause to be
issued and delivered to the holder or upon his order, in such name or names as
may be directed by him, a certificate or certificates for the number of full
shares of Common Stock to which he is entitled.
If fewer than all of the Warrants evidenced by a Warrant certificate are
exercised, the Warrant Agent will deliver to the exercising Warrant holder a new
Warrant certificate representing the unexercised portion of the Warrant
certificate. Fractional shares will not be issued upon exercise of a Warrant,
and in lieu thereof, the Company will pay to the holder an amount in cash equal
to such fraction multiplied by the then Current Market Price per share,
determined in accordance with the Warrant Agreement.
The person in whose name the stock certificate is to be issued will be
deemed to have become the holder of record of the stock represented thereby on
the date when the Warrant certificate with the subscription duly executed and
completed is surrendered and payment of the Warrant Price is made, unless the
stock transfer
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<PAGE> 76
books of the Company are closed on such date, in which case, the certificates
for the securities in respect of which the Warrants are exercised shall be
issuable as of the date on which such books shall next be opened.
No service charge will be made for registration of transfer or exchange of
any Warrant certificate. The Company may require payment of a sum sufficient to
cover any stamp or other tax or governmental charge that may be imposed in
connection with any registration of transfer of Warrant certificates or the
issuance of a Warrant certificate in a name other than that of the registered
holder of the Warrants.
The number of shares of Common Stock issuable upon the exercise of the
Warrants and/or the Warrant Price are subject to adjustment if the Company pays
a dividend or makes a distribution in Common Stock, subdivides its outstanding
Common Stock into a greater number of shares, combines its Common Stock into a
smaller number of shares or issues by reclassification of its Common Stock,
other securities of the Company. For purposes of these adjustment mechanisms,
"Common Stock" means the Common Stock of the Company as of the date of execution
and delivery of the Warrant Agreement or 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. Upon any adjustment of the number of shares
issuable upon exercise of the Warrants, the Warrant Price will also be adjusted
proportionately.
In the event that the Company consolidates with, merges into, or sells or
conveys its property, assets, or business as an entirety or substantially as an
entirety to, another corporation, the Company and such successor or purchasing
corporation shall execute with the Warrant Agent an agreement that the
registered holders of the Warrants shall have the right thereafter, upon payment
of the Warrant Price in effect immediately prior to the action, to purchase,
upon exercise of a Warrant, the kind and amount of shares and other securities
and property which it would have owned or been entitled to receive after the
happening of such action had the Warrant been exercised immediately prior to the
consolidation, merger, or sale of assets.
In the event a bankruptcy or reorganization is commenced by or against the
Company, a bankruptcy court may hold that unexercised Warrants are executory
contracts which may be subject to rejection by the Company with approval of the
bankruptcy court. As a result, holders of the Warrants may not be entitled to
receive any consideration or may receive an amount less than they would be
entitled to if they had exercised their Warrants prior to the commencement of
any such bankruptcy or reorganization.
The holders of unexercised Warrants are not entitled, by virtue of being
holders, to exercise any rights as stockholders of the Company.
Subject to certain requirements, from time to time the Company and the
Warrant Agent, without the consent of the holders of the Warrants, may amend or
supplement the Warrant Agreement for certain purposes, including curing
ambiguities, defects, or inconsistencies, or to make other provisions in regard
to matters or questions arising under the Warrant Agreement which shall not be
inconsistent with the provisions of the Warrants, or which shall not adversely
affect the interests of holders of the Warrants (including reducing the Warrant
Price or extending the redemption or exercise date). In any situation where the
Warrant Agreement cannot be amended by the Company and the Warrant Agent as
described above, the Warrant Agreement can be amended by the Company, the
Warrant Agent, and the holders of a majority of the outstanding Warrants
representing a majority of the shares of Common Stock underlying such Warrants,
provided that, among other exceptions, without the consent of each holder of a
Warrant, except pursuant to the adjustment mechanisms of the Warrant Agreement,
there can be no increase of the Warrant Price, reduction of the number of shares
of Common Stock purchasable on exercise of the Warrants, or reduction of the
exercise period for the Warrants.
BANK GROUP WARRANTS
The Bank Group Warrants are governed by a Warrant Agreement dated as of
August 20, 1997 (the "Bank Group Warrant Agreement") between the Company and
Harris Trust Company of California, as Warrant Agent. Holders of Bank Group
Warrants are referred to the Bank Group Warrant Agreement which is included as
an exhibit to the Registration Statement of which this Prospectus is a part for
a complete
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<PAGE> 77
statement of the terms of the Bank Group Warrants. The summary contained herein
does not purport to be complete and is qualified in its entirety by reference to
all of the provisions of the Bank Group Warrant Agreement.
Except as described below, the Bank Group Warrants and the Bank Group
Warrant Agreement are substantially similar to the Warrants and the Warrant
Agreement relating to the Warrants described herein under "Description of
Capital Stock -- Warrants." The Bank Group Warrants differ substantially from
the Warrants as follows:
- The Bank Group Warrants are exerciseable only through February 20, 2000.
- The outstanding Bank Group Warrants are redeemable at the option of the
Company at $.10 per share of Common Stock purchaseable upon exercise of
such Bank Group Warrants, at any time after the average Daily Market
Price per share of the Common Stock for a period of at least five
consecutive trading days ending not more than fifteen days prior to the
date of the required redemption notice has equaled or exceeded $27.00.
The method of determining the Daily Market Price per share of the Common
Stock and for giving the required redemption notice are as described with
respect to the Warrants under the heading "Description of Capital
Stock -- Warrants."
OTHER SECURITIES AND REGISTRATION RIGHTS
In connection with its initial public offering, the Company issued warrants
to SunAmerica to purchase 121,023 shares, as adjusted, of Common Stock at an
exercise price per share of $6.75 and to Cruttenden Roth to purchase 170,000
shares of Common Stock at an exercise price per share of $9.45. The agreements
with respect to the issuance of such warrants provide for certain registration
rights. The Company is required to use its best efforts to effect such
registrations, subject to certain conditions and limitations, and is required to
pay all expenses of SunAmerica and Cruttenden Roth in connection with any
registration of such securities, except for any underwriting discounts and
commissions.
In conjunction with its initial public offering, the Company registered the
warrants issued to Cruttenden Roth and the shares underlying such warrants.
Under the terms of such warrants, however, Cruttenden Roth could not exercise
such warrants and sell the underlying Common Stock until June 21, 1997, and only
pursuant to a currently effective registration statement.
In connection with the FMAC Senior Bank Debt purchase, the Company issued
warrants (including the Bank Group Warrants) to the Bank Group members to
purchase a total of 500,000 shares of Common Stock at an exercise price of
$20.00 per share, through February 20, 2000, subject to a call provision by the
Company and containing certain registration rights. 110,200 of these warrants
were subsequently returned to the Company and cancelled in connection with the
settlement of a disputed issue with certain of the Bank Group members.
The Company has authorized for issuance 1,800,000 shares of Common Stock
under its Incentive Plan, as amended. See "Management -- Long-Term Incentive
Plan." The Company has also authorized for issuance 50,000 shares of Common
Stock under its Director Incentive Plan. See "Management -- Director Fees and
Director's Incentive Plan."
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by Delaware law, a director of the Company shall not be
personally liable to the Company or its stockholders for monetary damages for
breach of such director's fiduciary duty, except for liability: (i) for any
breach of the director's duty of loyalty to the Company or its stockholders;
(ii) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law; (iii) in respect of certain unlawful
dividend payments or stock redemptions or repurchases; and (iv) for any
transaction from which the director derives an improper benefit. The effect of
the provision of the Company's Certificate of Incorporation is to eliminate the
rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against a director
for breach of the fiduciary duty of care as a director (including
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<PAGE> 78
breaches resulting from negligent or grossly negligent behavior), except in the
situations described in clauses (i) through (iv) above. This provision does not
limit or eliminate the rights of the Company or any stockholder to seek
nonmonetary relief such as an injunction or recision in the event of a breach of
a director's duty of care. In addition, the Company's Certificate of
Incorporation provides that the Company shall indemnify any person who is or was
a director, officer, employee, or agent of the Company, or who is or was serving
at the request of the Company as a director, officer, employee, or agent of
another corporation or entity, against expenses, liabilities, and losses
incurred by any such person by reason of the fact that such person is or was
acting in such capacity. The Company has also obtained insurance on behalf of
its directors and officers for any liability arising out of such person's
actions in such capacity.
The Company has entered into agreements to indemnify its directors and
officers. These agreements, among other things, indemnify the Company's
directors and officers for certain expenses (including attorneys' fees),
judgments, fines, and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in the right of the Company,
arising out of such person's services as a director or officer of the Company,
any subsidiary of the Company, or any other company or enterprise to which such
person provides services at the request of the Company. To the extent that the
Board of Directors or the stockholders of the Company may in the future wish to
limit or repeal the ability of the Company to provide indemnification as set
forth in the Company's Certificate of Incorporation, such repeal or limitation
may not be effective as to directors or officers who are parties to the
indemnification agreements because their rights to full protection would be
contractually assured by such agreements. It is anticipated that similar
contracts may be entered into, from time to time, with future directors of the
Company. The Company believes that the indemnification provisions in its
Certificate of Incorporation and in the indemnification agreements are necessary
to attract and retain qualified persons as directors and officers.
CERTAIN BYLAW PROVISIONS
The Company's Bylaws, as amended, contain several provisions that regulate
the nomination of directors and the submission of proposals in connection with
stockholder meetings. The Company's Bylaws require that, subject to certain
exceptions, any stockholder desiring to propose business or nominate a person to
the Board of Directors at a stockholders meeting must give notice of any
proposals not less than 60 days nor more than 90 days prior to the meeting. Such
notice is required to contain certain information as set forth in the Bylaws. No
business matter shall be transacted nor shall any person be eligible for
election as a director of the Company unless proposed or nominated, as the case
may be, in strict accordance with this procedure set forth in the Company's
Bylaws.
Although the Bylaws do not give the Board of Directors any power to approve
or disapprove of stockholder nominations for the election of directors or of any
other business desired by stockholders to be conducted at an annual or any other
meeting, the Bylaws may have the effect of precluding a nomination for the
election of directors or the conduct of business at a particular annual meeting
if the proper procedures are not followed or may discourage or deter a third
party from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of the Company, even if the
conduct of such solicitation or such attempt might be beneficial to the Company
and its stockholders. The Company's procedures with respect to all stockholder
proposals and the nomination of directors will be conducted in accordance with
Section 14 of the Exchange Act and the rules promulgated thereunder.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock of the Company is
Harris Trust Company of California, 601 S. Figueroa, Los Angeles, California
90017.
77
<PAGE> 79
SELLING SECURITYHOLDERS
The following table sets forth the name of each Selling Securityholder, the
aggregate number of shares of Common Stock beneficially owned by each Selling
Securityholder as of January 9, 1998 (except as described below), the aggregate
number of Bank Group Warrants and related Warrant Shares registered hereby that
each Selling Securityholder may offer and sell pursuant to this Prospectus, and
the aggregate number of shares of Common Stock that will be beneficially owned
by each Selling Securityholder after completion of the offering. However,
because the Selling Securityholders may offer all or a portion of the Bank Group
Warrants and related Warrant Shares at any time and from time to time after the
date hereof, the exact number of shares of Common Stock that each Selling
Securityholder may retain upon completion of the offering cannot be determined
at this time. All of the Bank Group Warrants are issued and outstanding as of
the date of this Prospectus. To the knowledge of the Company, none of the
Selling Securityholders has had within the past three years any material
relationship with the Company or any of its predecessors or affiliates, except
as set forth in the footnotes to the following table.
<TABLE>
<CAPTION>
BANK GROUP WARRANTS
AND RELATED
WARRANT SHARES
TO BE OFFERED
SHARES BENEFICIALLY FOR THE SELLING SHARES BENEFICIALLY
OWNED PRIOR TO SECURITYHOLDER'S OWNED AFTER THE
SELLING SECURITYHOLDER THE OFFERING ACCOUNT OFFERING
- ---------------------------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
LaSalle National Bank................... 72,916 72,916 0
Fleet Bank, National Association........ 60,763 60,763 0
NBD Bank................................ 61,680 61,680 0
Nations Bank, N.A. ..................... 36,458 36,458 0
U.S. Bank National Association
(successor by merger to First Bank
National Association)(1).............. 60,763 60,763 0
Mellon Bank, N.A. (or its potential
assignee APT Holdings
Corporation)(2)....................... 117,664(3) 48,610 69,054
------- ------- -------
410,244 341,190 69,054
</TABLE>
- ---------------
(1) U.S. Bank National Association is a lender to the Company.
(2) Mellon Bank, N.A. has been a lender to the Company from time to time.
(3) As of December 31, 1997.
PLAN OF DISTRIBUTION
WARRANTS, RELATED WARRANT SHARES, AND STOCK OPTION SHARES
Following confirmation of the Plan of Reorganization of FMAC in its
Bankruptcy Case, on the effective date of the Plan of Reorganization, the
Warrants will be issued to FMAC. The term "equity holders," when used herein,
will mean the equity holders of FMAC prior to the effective date of the Plan of
Reorganization. The Plan of Reorganization currently provides that the equity
holders will receive the benefit of the greater of 32,500 Warrants or the Alltel
Cure Reallocation. See "FMAC Transactions -- Additional Consideration." FMAC may
(i) distribute that portion of the Warrants allocable to its equity holders (the
"Equity Warrants") directly to such holders, (ii) hold the Equity Warrants until
exercise and either distribute the Warrant Shares to its equity holders or sell
the Warrant Shares and distribute the proceeds thereof to such holders, or (iii)
sell the Equity Warrants and distribute the proceeds to its equity holders. With
respect to any remaining Warrants not allocated to the equity holders of FMAC,
FMAC may (i) distribute such Warrants to its unsecured creditors, (ii) hold such
Warrants until exercise and either distribute the Warrant Shares to its
unsecured creditors or sell the Warrant Shares and distribute the proceeds
thereof to its unsecured creditors or (iii) sell such Warrants and distribute
the proceeds to its unsecured creditors, or if necessary, use the proceeds of
the sale of Warrants or Warrant Shares to pay ongoing administrative and
operating expenses. The Warrant Shares relating to the Warrants will be issued
from time to time upon exercise of the Warrants by the holders thereof in
accordance with the Warrant Agreement. See "Description of Capital
Stock -- Warrants."
78
<PAGE> 80
The Stock Option Shares will be issued by the Company, if at all, at such
time as collections under the Owned Contracts and B Pieces become distributable
under the Plan of Reorganization to FMAC or, if FMAC so directs, to the
unsecured creditors of FMAC pursuant to the Excess Collections Split. See "FMAC
Transactions -- Senior Bank Debt Claims." At the option of the Company, the
Company may distribute the Stock Option Shares to FMAC, or at the request of
FMAC and pursuant to its instructions, directly to the unsecured creditors of
FMAC, in lieu of FMAC's right to receive a portion of the distributions pursuant
to the Excess Collections Split in cash (the "Stock Option"). If the Company
decides to exercise the Stock Option, the Company must give FMAC at least 15
days advance written notice (the "Option Notice") (and make a public
announcement on the same date as the giving of the notice) of the date on which
the Company will exercise the Stock Option (the "Exercise Date") and the number
of Stock Option Shares that the Company will issue on the Exercise Date. The
Company may exercise the Stock Option one time only, with exercise being the
actual delivery of the Stock Option Shares. Revocation of the Option Notice
shall not be deemed to be an exercise of the Stock Option by the Company. On the
Exercise Date, the aggregate value of the Stock Option Shares shall be
determined by multiplying the Stock Option Shares by 98% of the average of the
closing prices for the previous 10 trading days of Company Common Stock on
Nasdaq or such other market on which such stock may be traded (the "Stock Option
Value"). After issuance and delivery of the Stock Option Shares, the Company is
entitled to receive FMAC's share of cash distributions under the Excess
Collections Split from and after the Exercise Date until the Company has
received cash distributions equal to the Stock Option Value. This is in addition
to the Company's right to receive its share under the Excess Collections Split.
Once the Company has received cash distributions equal to the Stock Option
Value, FMAC will retain the remaining portion of its share of cash distributions
under the Excess Collections Split, if any, in excess of the Stock Option Value.
The Company shall not be entitled to exercise the Stock Option unless (i) the
value of its Common Stock on the Exercise Date and the closing price for its
Common Stock on each day during the previous ten trading days shall be at least
$8.00 per share, (ii) the Company shall have caused (at its sole cost and
expense) the Stock Option Shares to be registered under the Securities Act,
unrestricted and fully transferable and shall have taken all steps necessary to
allow FMAC to distribute the Stock Option Shares to its unsecured creditors, and
(ii) the Company shall not have purchased any of its common stock (except upon
the exercise of previously issued and outstanding options, warrants, SARs or
other rights) or announced any stock repurchase programs from and after the
delivery of the Option Notice through the Exercise Date. If the Company issues
the Stock Option Shares directly to FMAC, FMAC may either distribute such shares
to its unsecured creditors or sell such Stock Option Shares and distribute the
proceeds to its unsecured creditors, or if necessary, use the proceeds of the
sale of the Stock Option Shares to pay ongoing administrative and operating
expenses.
FMAC or its nominees or pledgees may sell or distribute some or all of the
Warrants and/or related Warrant Shares and/or Stock Option Shares from time to
time through dealers, brokers or other agents or directly to one or more
purchasers, including pledgees, in transactions (which may involve crosses and
block transactions) on Nasdaq (as to the Warrant Shares and/or Stock Option
Shares only), in privately negotiated transactions (including sales pursuant to
pledges), in the over-the-counter market, in brokerage transactions, in a
combination of such transactions or by any other legally available means. Such
transactions may be effected by FMAC or its nominees or pledgees at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, at negotiated prices, or at fixed prices, which may be changed.
Brokers, dealers, or agents participating in such transactions may receive
compensation in the form of discounts, concessions or commissions from FMAC or
its nominees or pledgees (and, if they act as agent for the purchaser of such
shares, from such purchaser). Such discounts, concessions or commissions as to a
particular broker, dealer, or agent might be in excess of those customary in the
type of transaction involved. To the extent required, the Company will file,
during any period in which offers or sales are being made, one or more
supplements to this Prospectus to set forth any other material information with
respect to the plan of distribution not previously disclosed.
FMAC will be deemed to be an underwriter, as such term is defined in
Section 2(11) of the Securities Act, of the Warrants, Warrant Shares, and Stock
Option Shares to the extent that it participates, directly or indirectly, in the
distribution of such securities. Each of UDC and FMAC may agree to indemnify the
other
79
<PAGE> 81
against certain liabilities including certain liabilities under the Securities
Act. See "FMAC Transactions -- Additional Matters."
BANK GROUP WARRANTS AND RELATED WARRANT SHARES
The Selling Securityholders or their nominees or pledgees may sell or
distribute some or all of the Bank Group Warrants and/or related Warrant Shares
from time to time through dealers, brokers or other agents or directly to one or
more purchasers, including pledgees, in transactions (which may involve crosses
and block transactions) on Nasdaq (as to the Warrant Shares only), in privately
negotiated transactions (including sales pursuant to pledges), in the
over-the-counter market, in brokerage transactions, in a combination of such
transactions or by any other legally available means. Such transactions may be
effected by the Selling Securityholders at market prices prevailing at the time
of sale, at prices related to such prevailing market prices, at negotiated
prices, or at fixed prices, which may be changed. Brokers, dealers or agents
participating in such transactions may receive compensation in the form of
discounts, concessions or commissions from the Selling Securityholders (and, if
they act as agent for the purchaser of such shares, from such purchaser). Such
discounts, concessions or commissions as to a particular broker, dealer or agent
might be in excess of those customary in the type of transaction involved. This
Prospectus also may be used, with the Company's consent, by donees of the
Selling Securityholders or by other persons acquiring Bank Group Warrants and
related Warrant Shares and who wish to offer and sell such shares under
circumstances requiring or making desirable its use. To the extent required, the
Company will file, during any period in which offers or sales are being made,
one or more supplements to this Prospectus to set forth the names of donees of
Selling Securityholders and any other material information with respect to the
plan of distribution not previously disclosed. In addition, any Bank Group
Warrants and related Warrant Shares which qualify for sale pursuant to Section 4
of, or Rules 144 or 144A under, the Securities Act may be sold under such
provisions rather than pursuant to this Prospectus.
The Selling Securityholders and any such brokers, dealers or agents that
participate in such distribution may be deemed to be "underwriters" within the
meaning of the Securities Act with regard to the Bank Group Warrants and related
Warrant Shares, and any discounts, commissions or concessions received by any
such brokers, dealers or agents might be deemed to be underwriting discounts and
commissions under the Securities Act. Neither the Company nor the Selling
Securityholders can presently estimate the amount of such compensation. The
Company knows of no existing arrangements between any Selling Securityholder and
any other Selling Securityholder, broker, dealer or other agent relating to the
sale or distribution of the Bank Group Warrants and related Warrant Shares.
The Selling Securityholders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including without
limitation Regulation M, which provisions may limit the timing of purchases and
sales of any of the Bank Group Warrants and related Warrant Shares by the
Selling Securityholders. All of the foregoing may affect the marketability of
the Bank Group Warrants and related Warrant Shares.
The Company will pay substantially all of the expenses incident to this
offering of the Bank Group Warrants and related Warrant Shares by the Selling
Securityholders to the public other than commissions and discounts of brokers,
dealers or agents. Each Selling Securityholder may indemnify any broker, dealer,
or agent that participates in transactions involving sales of the Bank Group
Warrants and related Warrant Shares against certain liabilities, including
liabilities arising under the Securities Act. The Company has agreed to
indemnify the Selling Securityholders against certain liabilities including
certain liabilities under the Securities Act. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers or persons controlling the Company, the Company has been informed that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
80
<PAGE> 82
GENERAL
The Common Stock of the Company is traded on Nasdaq under the symbol
"UGLY." Neither the Warrants nor the Bank Group Warrants will be listed on any
national securities exchange or admitted for trading on Nasdaq.
The Company is bearing the expenses of registration of the Warrants, Bank
Group Warrants, Warrant Shares, and Stock Option Shares offered hereby, which
the Company estimates will be approximately $310,000.
LEGAL MATTERS
The validity of the securities offered hereby is being passed upon for the
Company by Snell & Wilmer L.L.P., Phoenix, Arizona.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996 and 1995 and for each of the years in the three-year period ended December
31, 1996, have been included herein and in the Registration Statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The combined balance sheet of Seminole Finance Corporation and Related
Companies as of December 31, 1996, and the related combined statements of
operations, stockholder's equity (deficit), and cash flows for the year then
ended have been included herein and in the Registration Statement in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
KPMG Peat Marwick LLP's report dated March 18, 1997 on the combined
financial statements of Seminole Financial Corporation, contains an explanatory
paragraph that states: "the accompanying combined financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 7 to the combined financial statements, the Company is
involved in a lawsuit that involves a material amount of damages that, if there
were an adverse outcome, raise substantial doubt about its ability to continue
as a going concern. Management's plans in regard to this matter are also
described in Note 7. The combined financial statements do not include any
adjustments that might result from the outcome of this uncertainty."
The combined financial statements of Seminole Finance Corporation as of
December 31, 1995 and for the year ended December 31, 1995, have been included
herein and in the Registration Statement in reliance upon the report of Barton &
Company, P.A., independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The financial statements of E-Z Plan, Inc. at December 31, 1996, and for
the year ended December 31, 1996, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of KARS-YES Holdings Inc. as of June
30, 1997 and 1996 and for each of the three years in the period ended June 30,
1997, included in this Prospectus and Registration Statement have been included
herein in reliance on the report, which includes an explanatory paragraph
(discussed below), of Coopers & Lybrand L.L.P., independent accountants, given
on the authority of that firm as experts in accounting and auditing.
Coopers & Lybrand L.L.P.'s report dated November 6, 1997 on the
consolidated financial statements of KARS-YES Holdings, Inc., contains an
explanatory paragraph that states: "the accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. As
described in
81
<PAGE> 83
Notes 6 and 7 to the consolidated financial statements, the Company defaulted on
its debt obligations during 1997. As discussed in Notes 1 and 13, the Company
sold the majority of its operating assets and facilities to the Ugly Duckling
Corporation on September 15, 1997. The remaining assets will be utilized to
satisfy existing liabilities as dictated by amended debt agreements. Based on
management's estimated cash flow projections from the remaining assets which
have contractual lives through 2002, it is extremely unlikely that cash
collections will be adequate to satisfy all existing liabilities or result in
any distributions to preferred or common shareholders. These factors raise
substantial doubt about the entity's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty."
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the Warrants, Bank Group
Warrants, Warrant Shares, and Stock Option Shares offered hereby. This
Prospectus constitutes a part of the Registration Statement and does not contain
all of the information set forth therein and in the exhibits thereto, certain
portions of which have been omitted as permitted by the rules and regulations of
the Commission. For further information with respect to the Company and the
Warrants, Bank Group Warrants, Warrant Shares, and Stock Option Shares offered
hereby, reference is hereby made to such Registration Statement and exhibits.
Statements contained in this Prospectus as to the contents of any document are
not necessarily complete and in each instance are qualified in their entirety by
reference to the copy of the appropriate document filed with the Commission. The
Registration Statement, including the exhibits thereto, may be examined without
charge at the Commission's public reference facility at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, copies of
all or any part of the Registration Statement, including such exhibits thereto,
may be obtained from the Commission at its principal office in Washington, D.C.,
upon payment of the fees prescribed by the Commission.
The Company is subject to the reporting and informational requirements of
the Exchange Act and, in accordance therewith, files reports, proxy statements,
and other information with the Commission. Such reports, proxy statements, and
other information filed by the Company can be inspected and copied at the
principal office of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington D.C. 20549, and at the following regional offices of
the Commission: 7 World Trade Center, New York, NY 10048, and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, IL 60601. Copies of
such material may be obtained from the Public Reference Section of the
Commission at its principal office at 450 Fifth Street, N.W., Washington D.C.
20549, upon payment of the fees prescribed by the Commission. The Commission
maintains a World Wide Web site (http://www.sec.gov) that contains reports,
proxy statements, and other information regarding registrants, such as the
Company, that file electronically with the Commission.
The Company's Common Stock is traded on Nasdaq. Reports, proxy statements,
and other information filed by the Company may be inspected and copied at the
National Association of Securities Dealers, 1735 K Street, N.W., Washington,
D.C. 20007.
82
<PAGE> 84
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.......................................................... F-3
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995........................ F-4
Consolidated Statements of Operations for the years ended December 31, 1996, 1995
and 1994......................................................................... F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1996, 1995 and 1994.............................................................. F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995
and 1994......................................................................... F-7
Notes to Consolidated Financial Statements............................................ F-8
</TABLE>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets -- September 30, 1997 and December 31, 1996... F-26
Condensed Consolidated Statements of Operations -- Three Months and Nine Months
ended September 30, 1997 and September 30, 1996.................................. F-27
Condensed Consolidated Statements of Cash Flows -- Nine Months ended September 30,
1997 and September 30, 1996...................................................... F-28
Notes to Condensed Consolidated Financial Statements.................................. F-29
</TABLE>
SEMINOLE FINANCE CORPORATION AND RELATED COMPANIES
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Reports......................................................... F-32
Combined Financial Statements:
Combined Balance Sheets as of December 31, 1996 and 1995............................ F-34
Combined Statements of Operations for the years ended December 31, 1996 and 1995.... F-35
Combined Statements of Stockholder's Equity (Deficit) for the years ended December
31, 1996 and 1995................................................................ F-36
Combined Statements of Cash Flows for the years ended December 31, 1996 and 1995.... F-37
Notes to Combined Financial Statements................................................ F-38
</TABLE>
F-1
<PAGE> 85
E-Z PLAN, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors........................................................ F-43
Financial Statements:
Balance Sheet as of December 31, 1996............................................... F-44
Statement of Operations for the year ended December 31, 1996........................ F-45
Statement of Stockholders' Equity for the year ended December 31, 1996.............. F-46
Statement of Cash Flows for the year ended December 31, 1996........................ F-47
Notes to Financial Statements......................................................... F-48
</TABLE>
KARS-YES HOLDINGS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants..................................................... F-52
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 1997 and 1996............................ F-53
Consolidated Statements of Operations for the years ended June 30, 1997, 1996 and
1995............................................................................. F-54
Consolidated Statements of Stockholders' Equity for the years ended June 30, 1997,
1996 and 1995.................................................................... F-55
Consolidated Statements of Cash Flows for the years ended June 30, 1997, 1996 and
1995............................................................................. F-56
Notes to Consolidated Financial Statements............................................ F-57
</TABLE>
INDEX TO PRO FORMA FINANCIAL INFORMATION
<TABLE>
<S> <C>
Pro Forma Condensed Combined Statement of Operations (unaudited) for the nine months
ended September 30, 1997............................................................ F-73
Pro Forma Condensed Combined Statement of Operations (unaudited) for the year ended
December 31, 1996................................................................... F-74
Notes to Unaudited Pro Forma Condensed Combined Statements of Operations.............. F-75
</TABLE>
F-2
<PAGE> 86
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Ugly Duckling Corporation:
We have audited the accompanying consolidated balance sheets of Ugly
Duckling Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ugly
Duckling Corporation and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Phoenix, Arizona
January 31, 1997, except
for Note 19 to the Consolidated
Financial Statements which is
as of February 13, 1997
F-3
<PAGE> 87
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- -------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents............................................... $ 18,455 $ 1,419
Finance Receivables:
Held for Investment................................................... 52,188 49,226
Held for Sale......................................................... 7,000 --
-------- -------
Principal Balances, Net......................................... 59,188 49,226
Less: Allowance for Credit Losses..................................... (8,125) (8,500)
-------- -------
Finance Receivables, Net........................................ 51,063 40,726
-------- -------
Residuals in Finance Receivables Sold................................... 9,889 --
Investments Held in Trust............................................... 3,479 --
Inventory............................................................... 5,752 6,329
Property and Equipment, Net............................................. 20,652 7,797
Goodwill and Trademarks, Net............................................ 2,150 269
Other Assets............................................................ 6,643 4,250
-------- -------
$118,083 $60,790
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts Payable...................................................... $ 2,132 $ 595
Accrued Expenses and Other Liabilities................................ 6,728 5,557
Notes Payable......................................................... 12,904 35,201
Subordinated Notes Payable............................................ 14,000 14,553
-------- -------
Total Liabilities.................................................. 35,764 55,906
-------- -------
Stockholders' Equity:
Preferred Stock....................................................... -- 10,000
Common Stock.......................................................... 82,612 127
Accumulated Deficit................................................... (293) (5,243)
-------- -------
Total Stockholders' Equity......................................... 82,319 4,884
Commitments, Contingencies and Subsequent Events........................
-------- -------
$118,083 $60,790
======== =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-4
<PAGE> 88
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS, EXCEPT EARNINGS
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Sales of Used Cars............................................ $53,768 $47,824 $27,768
Less:
Cost of Used Cars Sold...................................... 29,890 27,964 12,577
Provision for Credit Losses................................. 9,811 8,359 8,140
------- ------- -------
14,067 11,501 7,051
------- ------- -------
Interest Income............................................... 15,856 10,071 5,449
Gain on Sale of Loans......................................... 4,434 -- --
------- ------- -------
20,290 10,071 5,449
------- ------- -------
Servicing Income.............................................. 921 -- --
Other Income.................................................. 650 308 556
------- ------- -------
1,571 308 556
------- ------- -------
Income before Operating Expenses.............................. 35,928 21,880 13,056
Operating Expenses:
Selling and Marketing....................................... 3,585 3,856 2,402
General and Administrative.................................. 19,538 14,726 9,141
Depreciation and Amortization............................... 1,577 1,314 777
------- ------- -------
24,700 19,896 12,320
------- ------- -------
Income before Interest Expense................................ 11,228 1,984 736
Interest Expense.............................................. 5,262 5,956 3,037
------- ------- -------
Earnings (Loss) before Income Taxes........................... 5,966 (3,972) (2,301)
Income Taxes (Benefit)........................................ 100 -- (334)
------- ------- -------
Net Earnings (Loss)........................................... $ 5,866 $(3,972) $(1,967)
======= ======= =======
Earnings (Loss) per Share..................................... $ 0.60 $ (0.67) $ (0.35)
======= ======= =======
Shares Used in Computation.................................... 8,283 5,892 5,584
======= ======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-5
<PAGE> 89
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
SHARES AMOUNT EARNINGS TOTAL
------------------ ------------------- (ACCUMULATED STOCKHOLDERS'
PREFERRED COMMON PREFERRED COMMON DEFICIT) EQUITY (DEFICIT)
--------- ------ --------- ------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993.... -- 4,640 $ -- $ 1 $ 696 $ 697
Issuance of Common Stock for
Purchase of Subsidiary......... -- 174 -- 15 -- 15
Issuance of Common Stock for
Cash........................... -- 708 -- 61 -- 61
Net Loss for the Year............ -- -- -- -- (1,967) (1,967)
------ ------ ------ ------- ------ -------
Balances at December 31, 1994.... -- 5,522 -- 77 (1,271) (1,194)
Issuance of Common Stock......... -- 58 -- 50 -- 50
Conversion of Subordinated Notes
Payable to Preferred Stock..... 1,000 -- 10,000 -- -- 10,000
Net Loss for the Year............ -- -- -- -- (3,972) (3,972)
------ ------ ------ ------- ------ -------
Balances at December 31, 1995.... 1,000 5,580 10,000 127 (5,243) 4,884
Issuance of Common Stock for
Cash........................... -- 7,281 -- 79,335 -- 79,335
Conversion of Debt to Common
Stock.......................... -- 444 -- 3,000 -- 3,000
Issuance of Common Stock to Board
of Directors................... -- 22 -- 150 -- 150
Redemption of Preferred Stock.... (1,000) -- (10,000) -- -- (10,000)
Preferred Stock Dividend......... -- -- -- -- (916) (916)
Net Earnings for the Year........ -- -- -- -- 5,866 5,866
------ ------ ------ ------- ------ -------
Balances at December 31, 1996.... -- 13,327 $ -- $82,612 $ (293) $ 82,319
====== ====== ====== ======= ====== =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-6
<PAGE> 90
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Earnings (Loss)..................................... $ 5,866 $ (3,972) $ (1,967)
Adjustments to Reconcile Net Earnings (Loss) to Net
Cash Provided by Operating Activities:
Provision for Credit Losses.......................... 9,811 8,359 8,140
Gain on Sale of Finance Receivables.................. (4,434) -- --
Decrease (Increase) in Deferred Income Taxes......... 249 449 (461)
Depreciation and Amortization........................ 1,577 1,314 777
Decrease (Increase) in Inventory..................... 577 (1,500) (3,098)
Finance Receivable Held for Sale..................... (45,989) -- --
Proceeds from Sale of Finance Receivables............ 38,989 -- --
Increase in Other Assets............................. (3,150) (529) (294)
Increase in Accounts Payable, Accrued Expenses, and
Other Liabilities.................................. 2,949 3,035 1,064
Increase (Decrease) in Income Taxes
Receivable/Payable................................. 534 (984) (809)
Other, Net........................................... -- 169 25
-------- -------- --------
Net Cash Provided by Operating Activities....... 6,979 6,341 3,377
-------- -------- --------
Cash Flows from Investing Activities:
Increase in Finance Receivables......................... (67,803) (53,023) (27,196)
Collections of Finance Receivables...................... 49,201 19,795 12,202
Increase in Investments Held in Trust................... (3,479) -- --
Purchase of Property and Equipment...................... (6,111) (3,195) (5,334)
Other, Net.............................................. (1,809) -- (270)
-------- -------- --------
Net Cash Used in Investing Activities........... (30,001) (36,423) (20,598)
-------- -------- --------
Cash Flows from Financing Activities:
Additions to Notes Payable.............................. 1,000 22,259 9,942
Repayments of Notes Payable............................. (28,610) -- (2,027)
Net Issuance (Repayment) of Subordinated Notes
Payable.............................................. (553) 6,262 9,350
Redemption of Preferred Stock........................... (10,000) -- --
Proceeds from Issuance of Common Stock.................. 79,435 5 61
Other, Net.............................................. (1,214) 2,807 (16)
-------- -------- --------
Net Cash Provided by Financing Activities....... 40,058 31,333 17,310
-------- -------- --------
Net Increase in Cash and Cash Equivalents................. 17,036 1,251 89
Cash and Cash Equivalents at Beginning of Year............ 1,419 168 79
-------- -------- --------
Cash and Cash Equivalents at End of Year.................. $ 18,455 $ 1,419 $ 168
======== ======== ========
Supplemental Statement of Cash Flows Information:
Interest Paid........................................... $ 5,144 $ 5,890 $ 3,031
======== ======== ========
Income Taxes Paid....................................... $ 450 $ 535 $ 960
======== ======== ========
Conversion of Note Payable to Common Stock.............. $ 3,000 $ -- $ --
======== ======== ========
Purchase of Property and Equipment with Notes Payable... $ 8,313 $ -- $ --
======== ======== ========
Purchase of Property and Equipment with Capital
Leases............................................... $ 57 $ 792 $ 399
======== ======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-7
<PAGE> 91
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(1) ORGANIZATION AND PURPOSE
Ugly Duckling Corporation, a Delaware corporation (the Company), was
incorporated in April 1996 as the successor to Ugly Duckling Holdings, Inc.
(UDH), an Arizona corporation, formed in 1992. Contemporaneous with the
formation of the Company, UDH was merged into the Company with each share of
UDH's common stock exchanged for 1.16 shares of common stock in the Company and
each share of UDH's preferred stock exchanged for one share of preferred stock
in the Company under identical terms and conditions. UDH was effectively
dissolved in the merger. The resulting effect of the merger was a
recapitalization increasing the number of authorized shares of common stock to
20,000,000 and a 1.16-to-1 common stock split effective April 24, 1996. The
stockholders' equity section of the Consolidated Balance Sheets as of December
31, 1996 and 1995, reflects the number of authorized shares after giving effect
to the merger and common stock split. The Company's principal stockholder is
also the sole stockholder of Verde Investments, Inc. (Verde). The Company's
subordinated debt is held by, and the land for certain of its car dealerships
and loan servicing facilities was leased from, Verde until December 31, 1996,
see note 13.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
The Company, through its subsidiaries, owns and operates sales finance
companies, used car sales dealerships, a property and casualty insurance
company, and is a franchiser of rental car operations. Additionally, Champion
Receivables Corporation, a "bankruptcy remote entity" is the Company's wholly-
owned special purpose securitization subsidiary. Its assets include residuals in
finance receivables sold, and investments held in trust, in the amounts of
$9,889,000 and $2,843,000, respectively, at December 31, 1996.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company
and its subsidiaries. Significant intercompany accounts and transactions have
been eliminated in consolidation.
Concentration of Credit Risk
Champion Acceptance Corporation and Champion Financial Services (CFS)
provide sales finance services in connection with the sales of used cars to
individuals residing primarily in the metropolitan areas of Phoenix and Tucson,
Arizona. The Company operated three, three and two dealerships in the Tucson
metropolitan area in 1996, 1995 and 1994, respectively; and five, five, and
three dealerships in the Phoenix metropolitan area in 1996, 1995 and 1994,
respectively (company dealerships). As of December 31, 1996, CFS maintains
relationships with approximately 1,400 third party car dealers (third party
dealers) in twelve states from whom it purchases sales finance contracts from 35
branch offices.
Periodically during the year, the Company maintains cash in financial
institutions in excess of the amounts insured by the federal government.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents. Cash equivalents
generally consist of interest bearing money market accounts.
Revenue Recognition
Interest income is recognized using the interest method. Direct loan
origination costs related to contracts originated at company dealerships are
deferred and charged against finance income over the life of the related
F-8
<PAGE> 92
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
installment sales contract as an adjustment of yield. Pre-opening and start-up
costs incurred on third party dealer branch offices are deferred and charged to
expense over a twelve-month period. The accrual of interest is suspended if
collection becomes doubtful 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) 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.
Residuals in finance receivables result from the sale of finance
receivables on which the Company retains servicing rights and the excess cash
flows on the A certificates, including any excess cash flows on the B
certificates. The residual is determined by computing the difference between the
weighted average yield of the finance receivables sold and the yield to the
certificate purchaser, adjusted for the normal servicing fee based on the
agreements between the Company and the investor and further adjusted for
anticipated prepayments, repossessions, liquidations, and charge offs.
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 the performance of the underlying finance receivable
portfolio differs from the Company's original estimates, the Company's residual
will be adjusted quarterly, 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.
Gains or losses are determined based upon the difference between the sales
proceeds for the portion of finance receivables sold and the Company's recorded
investment in the finance receivables sold. The Company allocates the recorded
investment in the finance receivables between the portion of the finance
receivables sold and the portion retained based on the relative fair values on
the date of sale.
Servicing Income
Servicing income is recognized when earned. Servicing costs are charged to
expense as incurred. In the event delinquencies and/or losses on the portfolio
serviced exceed specified levels, the trustee may require the transfer of
servicing of the portfolio to another servicer.
F-9
<PAGE> 93
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Finance Receivables, Allowance for Credit Losses and Nonrefundable Acquisition
Discount
The Company originates installment sales contracts from its company
dealerships and purchases contracts from third party dealers. Finance
receivables consist of contractually scheduled payments from installment sales
contracts net of unearned finance charges, accrued interest receivable, direct
loan origination costs, and an allowance for credit losses, including
nonrefundable acquisition discount.
Finance receivables held for investment represent finance receivables that
the Company expects to hold until they have matured. Finance receivables held
for sale represent finance receivables that the Company expects to securitize
within the next twelve months.
Unearned finance charges represent the balance of finance income (interest)
remaining from the capitalization of the total interest to be earned over the
original term of the related installment sales contract. Direct loan origination
costs represent the unamortized balance of costs incurred in the origination of
contracts at the Company's dealerships.
The Company follows the provisions of Statement of Financial Accounting
Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases" for contracts
originated at its company dealerships.
An allowance for credit losses (allowance) is established by charging the
provision for credit losses and the allocation of nonrefundable acquisition
discount. For contracts generated by the company dealerships, the allowance is
established by charging the provision for credit losses. Contracts purchased
from third party dealers are generally purchased with a nonrefundable
acquisition discount (discount). The discount is negotiated with third party
dealers pursuant to a financing program that bases the discount on, among other
things, the credit risk of the borrower and the amount to be financed in
relation to the car's wholesale value. The discount is allocated between
discount available for credit losses and discount available for accretion to
interest income. The portion of discount allocated to the allowance is based
upon historical performance and write-offs of contracts acquired from third
party dealers, as well as the general credit worthiness of the borrowers and the
wholesale value of the vehicle. The remaining discount, if any, is deferred and
accreted to income using the interest method. To the extent that the allowance
is considered insufficient to absorb anticipated losses on the third party
dealer portfolio, additions to the allowance are established through a charge to
the provision for credit losses. The evaluation of the discount and allowance
considers such factors as the performance of each third party dealer's loan
portfolio, the Company's historical credit losses, the overall portfolio quality
and delinquency status, the review of specific problem loans, the value of
underlying collateral, and current economic conditions that may affect the
borrower's ability to pay.
Inventory
Inventory consists of used vehicles held for sale and is valued at the
lower of cost or market. Vehicle reconditioning costs are capitalized as a
component of inventory cost. The cost of used vehicles sold is determined on a
specific identification basis. Repossessed vehicles are valued at market value.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
straight-line and accelerated methods over the estimated useful lives of the
assets which range from three to ten years for equipment and thirty years for
buildings. Leasehold and land improvements are amortized using straight-line and
accelerated methods over the shorter of the lease term or the estimated useful
lives of the related improvements.
The Company has capitalized costs related to the development of software
products for internal use. Capitalization of costs begins when technological
feasibility has been established and ends when the software
F-10
<PAGE> 94
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
is available for general use. Amortization is computed using the straight-line
method over the estimated economic life of five years.
Trademarks, Trade Names, Logos, and Contract Rights
The registered trade names, "Ugly Duckling Car Sales," "Ugly Duckling
Rent-A-Car," "America's Second Car," "Putting You on the Road to Good Credit"
and related trademarks, logos, and contract rights are stated at cost. The cost
of trademarks, trade names, logos, and contract rights is amortized on a
straight-line basis over their estimated economic lives of ten years.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally fifteen years. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. The amount
of goodwill impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's average cost
of funds. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
Post Sale Customer Support Programs
A liability for the estimated cost of post sale customer support, including
car repairs and the Company's down payment back and credit card programs, is
established at the time the used car is sold by charging Cost of Used Cars Sold.
The liability is evaluated for adequacy through a separate analysis of the
various programs' historical performance.
Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Advertising
All costs related to production and advertising are expensed in the period
incurred or ratably over the year in relation to revenues or certain other
performance measures. The Company had no advertising costs capitalized as of
December 31, 1996.
Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
F-11
<PAGE> 95
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net earnings and pro
forma earnings per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No.
123.
The Company uses one of the most widely used option pricing models, the
Black-Scholes model (the Model), for purposes of valuing its stock option
grants. The Model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, it requires the input of highly subjective assumptions, including the
expected stock price volatility, expected dividend yields, the risk free
interest rate, and the expected life. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the value determined by the Model is
not necessarily indicative of the ultimate value of the granted options.
Earnings per Share
Earnings per share is based upon the weighted average number of common
shares outstanding plus dilutive common stock equivalents after giving effect to
the payment of dividends on preferred stock.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of, on
January 1, 1996. The Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a materiel impact on the Company's
financial position, results of operations, or liquidity.
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996 and is to be applied prospectively. This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a financial-
components approach that focuses on control. It distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings.
Management of the Company does not expect that adoption of SFAS No. 125 will
have a material impact on the Company's financial position, results of
operations, or liquidity.
F-12
<PAGE> 96
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
A summary of net finance receivables at December 31, 1996 and 1995 follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Contractually Scheduled Payments....................... $ 77,982 $ 66,425
Less: Unearned Finance Income.......................... (19,701) (18,394)
-------- --------
Installment Sales Contract Principal Balances.......... 58,281 48,031
Add: Accrued Interest Receivable....................... 718 613
Loan Origination Costs, Net...................... 189 582
-------- --------
Principal Balances, Net................................ 59,188 49,226
Less: Allowance for Credit Losses...................... (8,125) (8,500)
-------- --------
Finance Receivables, Net............................... $ 51,063 $ 40,726
======== ========
Held for Investment.................................... $ 52,188 $ 49,226
Held for Sale.......................................... 7,000 --
-------- --------
59,188 49,226
Less: Allowance for Credit Losses...................... (8,125) (8,500)
-------- --------
$ 51,063 $ 40,726
======== ========
</TABLE>
Allowance for credit losses as a percent of principal balances totaled
13.9% and 17.7% at December 31, 1996 and 1995, respectively.
The changes in the allowance for credit losses for the years ended December
31, 1996, 1995 and 1994 follow (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Balances, Beginning of Year................... $ 8,500 $ 6,209 $ 2,876
Provision for Credit Losses................. 9,811 8,359 8,140
Allowance Acquired from Discount............ 8,963 1,660 579
Net Charge Offs............................. (9,168) (7,728) (5,386)
Sale of Finance Receivables................. (9,981) -- --
------- ------- -------
Balances, End of Year......................... $ 8,125 $ 8,500 $ 6,209
======= ======= =======
</TABLE>
(4) RESIDUALS IN FINANCE RECEIVABLES SOLD
The valuation of the residual in finance receivables sold as of December
31, 1996 totaled $9,889,000 which represents the present value of the Company's
interest in the anticipated future cash flows of the underlying portfolio,
discounted at rates ranging from 16% to 25%, after taking into consideration
anticipated prepayments and net charge offs. For contracts originated at Company
Dealerships, net losses were estimated using total expected cumulative net
losses at loan origination of approximately 25.0%, adjusted for actual
cumulative net losses prior to securitization. For contracts purchased from
Third Party Dealers, net losses were estimated using total expected cumulative
net losses at loan origination of approximately 13.5%, adjusted for actual
cumulative net losses prior to securitization. Losses are discounted at an
assumed risk free rate. Prepayment rates were estimated to be 1.5% per month of
the beginning of month balance.
At December 31, 1996, the Company serviced finance receivables totaling
$51,663,000 which serves as collateral on $40,770,000 in senior certificates
issued to one investor. Approximately 89% of these finance
F-13
<PAGE> 97
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
receivables were originated in the state of Arizona. The future net charge offs
taken into consideration in arriving at the residual of $9,889,000 totaled
$7,593,000 at December 31, 1996. This represents 14.70% of the underlying
finance receivables of $51,663,000 at December 31, 1996.
(5) INVESTMENTS HELD IN TRUST
In connection with its securitization transactions, the Company is required
to provide a credit enhancement to the investor. The Company makes an initial
cash deposit, ranging from 3% to 4% of the initial underlying finance
receivables principal balance, of cash into an account held by the trustee
(spread account) and pledges this cash to the trust to which the finance
receivables were sold and then makes additional deposits from the residual cash
flow (through the trustee) to the spread account as necessary to attain and
maintain the spread account at a specified percentage, ranging from 6.0% to
8.0%, of the underlying finance receivables principal balance.
In the event that the cash flows generated by the finance receivables sold
to the trust are insufficient to pay obligations of the trust, including
principal or interest due to certificate holders or expenses of the trust, the
trustee will draw funds from the spread account as necessary to pay the
obligations of the trust. The spread account must be maintained at a specified
percentage of the principal balances of the finance receivables held by the
trust, which can be increased in the event delinquencies or losses exceed
specified levels. If the spread account exceeds the specified percentage, the
trustee will release the excess cash to the Company from the pledged spread
account. Except for releases in this manner, the cash in the spread account is
restricted from use by the Company. Investments Held in Trust, which are funds
deposited in an interest-bearing, money market account, totaled $2,843,000 at
December 31, 1996.
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, resulting in
additional funding requirements from future cash flows as of December 31, 1996
of $1,098,000. 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.
In connection with certain other agreements, the Company has deposited a
total of $636,000 in an interest bearing trust account.
(6) PROPERTY AND EQUIPMENT
A summary of property and equipment as of December 31, 1996 and 1995
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
Land..................................................... $ 7,811 $ 15
Buildings and Leasehold Improvements..................... 5,699 5,143
Furniture and Equipment.................................. 5,696 3,401
Software Development Costs............................... 693 533
Vehicles................................................. 156 133
Construction in Process.................................. 3,536 11
------- -------
23,591 9,236
Less Accumulated Depreciation and Amortization........... (2,939) (1,439)
------- -------
Property and Equipment, Net.............................. $20,652 $ 7,797
======= =======
</TABLE>
F-14
<PAGE> 98
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No interest expense was capitalized in 1996. Interest expense capitalized
in 1995 and 1994 totaled $54,000 and $142,000, respectively
(7) GOODWILL AND TRADEMARKS
In October, 1996, the Company acquired the operating lease of a used car
dealership. In connection with this acquisition, the Company recorded goodwill
totaling $1,944,000.
A summary of trademarks as of December 31, 1996 and 1995 follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
----- -----
<S> <C> <C>
Original Cost............................................... $ 581 $ 581
Accumulated Amortization.................................... (375) (312)
----- -----
Trademarks, Net............................................. $ 206 $ 269
===== =====
</TABLE>
Amortization expense relating to trademarks totaled $63,000 for each of the
years ended December 31, 1996, 1995 and 1994.
(8) OTHER ASSETS
A summary of other assets as of December 31, 1996 and 1995 follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Note Receivable............................................ $ 1,063 $ --
Pre-opening and Startup Costs.............................. 1,242 --
Escrow Deposits............................................ 900 --
Prepaid Expenses........................................... 796 643
Deferred Income Taxes...................................... 676 925
Income Taxes Receivable.................................... 316 850
Property and Equipment Held for Sale....................... -- 1,086
Other Assets............................................... 1,650 746
------ ------
$ 6,643 $ 4,250
====== ======
</TABLE>
(9) ACCRUED EXPENSES AND OTHER LIABILITIES
A summary of accrued expenses and other liabilities as of December 31, 1996
and 1995 follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------ ------
<S> <C> <C>
Sales Taxes................................................ $2,904 $2,258
Others..................................................... 3,824 3,299
------ ------
$6,728 $5,557
====== ======
</TABLE>
In connection with the retail sale of vehicles, the Company is required to
pay sales taxes to certain government jurisdictions. The Company has elected to
pay these taxes using the "cash basis", which requires the Company to pay the
sales tax obligation for a sale transaction as principal is collected over the
life of the related finance receivable contract.
F-15
<PAGE> 99
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) NOTES PAYABLE
A summary of notes payable at December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
$50,000,000 revolving loan with a finance company, interest payable daily
at 30 day LIBOR (5.40% at December 31, 1996) plus 3.60% through
September 1997, at which time the Company retains the right to extend
the loan for one additional year, secured by substantially all assets
of the Company......................................................... $ 4,602 $ 32,201
Two notes payable to a finance company totaling $7,450,000, monthly
interest payable at the prime rate (8.25% at December 31, 1996) plus
1.50% through January 1998; thereafter, monthly payments of $89,000
plus interest through January 2002 when balloon payments totaling
$3,282,000 are due, secured by first deeds of trust and assignments of
rents on certain real property......................................... 7,444 --
$3,000,000 note payable to an insurance company, interest payable
quarterly at 12.5% per annum. Converted to common stock concurrent with
the Company's initial public offering in 1996.......................... -- 3,000
Others bearing interest at rates ranging from 9% to 11% due through April
2007, secured by certain real property and certain property and
equipment.............................................................. 858 --
------- -------
Total.......................................................... $ 12,904 $ 35,201
======= =======
</TABLE>
The aforementioned revolving loan agreement contains various reporting and
performance covenants including the maintenance of certain ratios, limitations
on additional borrowings from other sources, and a restriction on the payment of
dividends under certain circumstances. The Company was in compliance with the
covenants at December 31, 1996 and 1995.
A summary of future minimum principal payments required (assuming the
Company exercises its right to extend the revolving loan through September 1998)
under the aforementioned notes payable as of December 31, 1996 follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
1997......................................................... $ 86
1998......................................................... 5,673
1999......................................................... 1,169
2000......................................................... 1,179
2001......................................................... 1,191
Thereafter................................................... 3,606
-------
$12,904
=======
</TABLE>
(11) SUBORDINATED NOTES PAYABLE
The Company has executed two subordinated notes payable with Verde. As
discussed in the following paragraphs, the balance outstanding under these notes
totaled $14,553,000 at December 31, 1995. There was no accrued interest payable
related to these notes at December 31, 1995.
In August 1993, the Company entered into a ten-year, subordinated note
payable agreement with Verde. This unsecured $15,000,000 note bears interest at
an annual rate of 18%, with interest payable monthly and is subordinated to all
other Company liabilities. The note also provides for suspension of interest
payments should the Company be in default with any other creditors. The Company
had $10,000,000 outstanding related to this note payable at December 31, 1995.
F-16
<PAGE> 100
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1995, the Company amended its five-year junior subordinated
revolving note payable agreement with Verde. The note was increased from
$3,000,000 to $5,000,000, bears interest at an annual rate of 18%, with interest
payable monthly, and is scheduled to mature in December 1999. The Company had
$4,553,000 outstanding related to this note payable at December 31, 1995.
Interest expense related to the subordinated notes payable with Verde
totaled $1,933,000, $3,492,000 and $2,569,000 during the years ended December
31, 1996, 1995 and 1994, respectively.
On December 31, 1995, Verde converted $10,000,000 of subordinated notes
payable to preferred stock of the Company. Verde agreed to waive any prepayment
penalties associated with the reduction of the subordinated notes payable in
connection with the conversion.
In conjunction with the closing of the Company's initial public offering in
June 1996, the two previously outstanding subordinated notes payable were
exchanged for a new subordinated note payable. The new $14,000,000 unsecured
note bears interest at an annual rate of 10%, with interest payable monthly and
is subordinate to all other Company indebtedness. The note also calls for annual
principal payments of $2,000,000 through June 2003 when the loan will be paid in
full. The Company had $14,000,000 outstanding under this note payable at
December 31, 1996.
(12) INCOME TAXES
Income tax expense (benefit) amounted to $100,000, zero and $(334,000) for
the years ended December 31, 1996, 1995 and 1994, respectively (an effective tax
rate of 1.7%, 0% and 14.5%, respectively). A reconciliation between taxes
computed at the federal statutory rate of 34% and at the effective tax rate on
earnings (loss) before income taxes follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -----
<S> <C> <C> <C>
Computed "Expected" Tax Expense (Benefit)............... $ 2,028 $(1,350) $(782)
State Income Taxes, Net of Federal Effect............... 41 -- (30)
Change in Valuation Allowance........................... (2,315) 1,418 897
Other, Net.............................................. 346 (68) (419)
------- ------- -----
$ 100 $ -- $(334)
======= ======= =====
</TABLE>
F-17
<PAGE> 101
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Components of income tax expense (benefit) for the years ended December 31,
1996, 1995 and 1994 follow (in thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
1996:
Federal.............................................. $(149) $ 187 $ 38
State................................................ -- 62 62
----- ----- -----
$(149) $ 249 $ 100
===== ===== =====
1995:
Federal.............................................. $(449) $ 449 $ --
State................................................ -- -- --
----- ----- -----
$(449) $ 449 $ --
===== ===== =====
1994:
Federal.............................................. $ 79 $ (367) $(288)
State................................................ 48 (94) (46)
----- ----- -----
$ 127 $ (461) $(334)
===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of December
31, 1996 and 1995 are presented below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------ -------
<S> <C> <C>
Deferred tax assets:
Finance Receivables, Principally Due to the Allowance for Credit
Losses....................................................... $ 131 $ 2,987
Federal and State Income Tax Net Operating Loss Carryforwards... 995 317
Residual in Finance Receivables................................. 140 --
Other........................................................... 279 443
----- -------
Total Gross Deferred Tax Assets................................. 1,545 3,747
Less: Valuation Allowance....................................... -- (2,315)
----- -------
Net Deferred Tax Assets................................. 1,545 1,432
----- -------
Deferred Tax Liabilities:
Acquisition Discount............................................ (112) --
Software Development Costs...................................... (192) (96)
Other Assets.................................................... (490) --
Loan Origination Fees........................................... (75) (198)
Inventory....................................................... -- (213)
----- -------
Total Gross Deferred Tax Liabilities......................... (869) (507)
----- -------
Net Deferred Tax Asset.................................. $ 676 $ 925
===== =======
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1996 and
1995 was zero and $2,315,000, respectively. The net change in the total
valuation allowance for the year ended December 31, 1996 was a decrease of
$2,315,000, and an increase of $1,418,000 for the year ended December 31, 1995.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax
F-18
<PAGE> 102
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets is dependent upon generation of future taxable income during the periods
in which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods in which the deferred tax assets are deductible, management believes it
is more likely than not that the Company will realize the benefits of these
deductible differences, net of the existing valuation allowance.
At December 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $2,249,000, which, subject to
annual limitations, are available to offset future taxable income, if any,
through 2011 and net operating loss carryforwards for state income tax purposes
of $3,543,000, which are available to offset future taxable income through 2001.
A summary of the net operating loss carryforwards follows (in thousands):
<TABLE>
<CAPTION>
YEAR OF EXPIRATION FEDERAL STATE
------------------------------------------------------------------- ------- -------
<S> <C> <C>
2000............................................................... $ -- $ 1,927
2001............................................................... -- 1,616
2006............................................................... 633 --
2011............................................................... 1,616 --
------- -------
$ 2,249 $ 3,543
====== ======
</TABLE>
(13) LEASE COMMITMENTS
The Company leases an operating facility, offices, a vehicle and office
equipment from unrelated entities under operating leases which expire through
April 2001. The leases require monthly rental payments aggregating approximately
$155,000 and contain various renewal options from one to ten years. In certain
instances, the Company is also responsible for occupancy and maintenance costs,
including real estate taxes, insurance, and utility costs.
The Company purchased six car lots, a vehicle reconditioning center, and
two office buildings from Verde. These properties had previously been rented
from Verde pursuant to various leases which called for base monthly rents
aggregating approximately $123,000 plus contingent rents as well as all
occupancy and maintenance costs, including real estate taxes, insurance, and
utilities. In connection with the purchase, Verde returned security deposits
which totaled $364,000. The security deposits are included in Other Assets in
the accompanying Consolidated Balance Sheets as of December 31, 1995.
Rent expense for the year ended December 31, 1996 totaled $2,394,000. Rents
paid to Verde totaled $1,498,000 including contingent rents of $440,000. There
was no accrued rent payable to Verde at December 31, 1996.
Rent expense for the year ended December 31, 1995 totaled $2,377,000. Rents
paid to Verde totaled $1,889,000, including contingent rents of $465,000, and
$113,000 of rent capitalized during the construction period of a facility.
Accrued rent payable to Verde totaled $101,000 at December 31, 1995 and is
included in Accrued Expenses and Other Liabilities on the accompanying
Consolidated Balance Sheets.
Rent expense for the year ended December 31, 1994 totaled $1,400,000. Rents
paid to Verde totaled $1,221,000 including contingent rents of $310,000, and
$127,000 of rent capitalized during the construction period of two used car
dealership facilities.
F-19
<PAGE> 103
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of future minimum lease payments required under noncancelable
operating leases with remaining lease terms in excess of one year as of December
31, 1996 follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
1997..................................................... $ 1,788
1998..................................................... 1,547
1999..................................................... 1,190
2000..................................................... 533
2001..................................................... 378
Thereafter............................................... 104
------
Total.......................................... $ 5,540
======
</TABLE>
(14) STOCKHOLDERS' EQUITY
On April 24, 1996, the Company effectuated a 1.16-to-1 stock split. The
effect of this stock split has been reflected for all periods presented in the
Consolidated Financial Statements.
The Company has authorized 20,000,000 shares of $.001 par value common
stock. There were 13,327,000 and 5,580,000 shares issued and outstanding at
December 31, 1996 and 1995, respectively. The common stock consists of $13,000
of common stock and $82,599,000 of additional paid-in capital at December 31,
1996. The common stock consists of $6,000 of common stock and $121,000 of
additional paid-in capital as of December 31, 1995.
During 1996, the Company completed two public offerings in which it issued
a total of 7,245,000 shares of common stock for approximately $79,435,000 cash
net of stock issuance costs.
Warrants to acquire 116,000 shares of the Company's common stock at $6.75
per share and 170,000 shares of the Company's common stock at $9.45 per share
were outstanding at December 31, 1996.
The Company has authorized 10,000,000 shares of $.001 par value preferred
stock. There were zero and 1,000,000 shares issued and outstanding at December
31, 1996, and 1995, respectively.
On December 31, 1995, the Company exchanged 1,000,000 shares of Series A
preferred stock for $10,000,000 of subordinated notes payable with Verde.
Cumulative dividends were payable at a rate of 12% per annum through June 21,
1996, at which time the Series A preferred stock was exchanged on a share-for-
share basis for 1,000,000 shares of Series B preferred stock. The dividends were
payable quarterly upon declaration by the Company's Board of Directors. In
November 1996, the Company redeemed the 1,000,000 shares of Series B preferred
stock.
The Company's Board of Directors declared quarterly dividends on preferred
stock totaling approximately $916,000 during the year ended December 31, 1996.
There were no cumulative unpaid dividends at December 31, 1996.
(15) STOCK OPTION PLAN
In June, 1995, the Company adopted a long-term incentive plan (stock option
plan). The stock option plan, as amended, set aside 1,300,000 shares of common
stock to be granted to employees at a price not less than fair market value of
the stock at the date of grant. Options are to vest over a period to be
determined by the Board of Directors upon grant and will generally expire ten
years after the date of grant. The options generally vest over a period of five
years.
At December 31, 1996, there were 388,000 additional shares available for
grant under the Plan. The per share weighted-average fair value of stock options
granted during 1996 and 1995 was $8.39 and $1.10,
F-20
<PAGE> 104
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions: 1996 -- expected dividend yield
0%, risk-free interest rate of 6.3%, expected volatility of 56.5% and an
expected life of 7 years; 1995 -- expected dividend yield 0%, risk-free interest
rate of 6.1%, expected volatility of 56.5% and an expected life of 7 years.
The Company applies APB Opinion 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C> <C>
Net Earnings (Loss) As reported.................. $5,866,000 $(3,972,000)
Pro forma.................... $5,748,000 $(3,985,000)
Earnings (Loss) per Share As reported.................. $ 0.60 $ (0.67)
Pro forma.................... $ 0.58 $ (0.68)
</TABLE>
The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net earnings (loss) amounts
presented above because compensation cost is reflected over the options' vesting
period of five years.
A summary of the aforementioned stock plan follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PRICE PER
NUMBER SHARE
------- ---------
<S> <C> <C>
Balance December 31, 1994........................................ -- --
Granted.......................................................... 459,000 $1.72
Forfeited........................................................ (17,000) 2.16
------- ------
Balance, December 31, 1995....................................... 442,000 1.70
Granted.......................................................... 539,000 13.41
Forfeited........................................................ (30,000) 3.26
Exercised........................................................ (39,000) 1.00
------- ------
Balance, December 31, 1996....................................... 912,000 $8.60
======= ======
</TABLE>
A summary of stock options granted at December 31, 1996 follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -----------------------------
NUMBER WEIGHTED-AVG. WEIGHTED-AVG. NUMBER WEIGHTED-AVG.
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE PRICE AT 12/31/96 PRICE
- ----------------- ----------- ---------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$ .50 to $ 1.00 130,000 8.0 years $ 0.86 -- $ --
$ 1.50 to $ 2.60 247,000 8.5 years $ 2.16 51,000 2.15
$ 3.45 to $ 9.40 192,000 9.5 years $ 6.73 -- --
$11.88 to $17.69 343,000 10.0 years $ 17.22 -- --
------- ------ ------- ----
912,000 $ 8.60 51,000 $2.15
======= ====== ======= ====
</TABLE>
(16) COMMITMENTS AND CONTINGENCIES
The Company has executed an agreement to sell up to $50,000,000 in finance
receivable backed certificates through December 31, 1996 to an insurance
company. In addition, the purchaser has the right of
F-21
<PAGE> 105
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
first refusal to purchase up to an additional $125,000,000 of finance
receivables through December 31, 1998. The Company completed the sale of
approximately $58,000,000 in receivable-backed certificates during the year
ended December 31, 1996.
The Company is involved in various claims and actions arising in the
ordinary course of business. In the opinion of management, based on consultation
with legal counsel, the ultimate disposition of these matters will not have a
materially adverse effect on the Company.
(17) RETIREMENT PLAN
During 1995, the Company established a qualified 401(k) retirement plan
(defined contribution plan) which became effective on October 1, 1995. The plan
covers substantially all employees having no less than one year of service, have
attained the age of 21, and work at least 1,000 hours per year. Participants may
voluntarily contribute to the plan up to the maximum limits established by
Internal Revenue Service regulations. The Company will match 10% of the
participants' contributions. Participants are immediately vested in the amount
of their direct contributions and vest over a five-year period, as defined by
the plan, with respect to the Company's contribution. Pension expense totaled
$23,000 and $5,000 during the years ended December 31, 1996 and 1995,
respectively.
(18) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that the Company disclose
estimated fair values for its financial instruments. The following summary
presents a description of the methodologies and assumptions used to determine
such amounts.
Limitations
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument; they
are subjective in nature and involve uncertainties, matters of judgment and,
therefore, cannot be determined with precision. These estimates do not reflect
any premium or discount that could result from offering for sale at one time the
Company's entire holdings of a particular instrument. Changes in assumptions
could significantly affect these estimates.
Since the fair value is estimated as of December 31, 1996 and 1995, the
amounts that will actually be realized or paid in settlement of the instruments
could be significantly different.
Cash and Cash Equivalents and Investments Held in Trust
The carrying amount is assumed to be the fair value because of the
liquidity of these instruments.
Finance Receivables and Residuals in Finance Receivables Sold
The carrying amount is assumed to be the fair value because of the relative
short maturity and repayment terms of the portfolio as compared to similar
instruments.
Accounts Payable, Accrued Expenses, and Notes Payable
The carrying amount approximates fair value because of the short maturity
of these instruments. The terms of the Company's notes payable approximate the
terms in the market place at which they could be replaced. Therefore, the fair
market value approximates the carrying value of these financial instruments.
F-22
<PAGE> 106
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subordinated Notes Payable
The terms of the Company's subordinated notes payable approximate the terms
in the market place at which they could be replaced. Therefore, the fair value
approximates the carrying value of these financial instruments.
(19) SUBSEQUENT EVENTS
Subsequent to year end, the Company acquired the operating assets of five
used car dealerships and a finance company for a total of approximately
$32,130,000. The acquisition, which was financed with cash and borrowings under
the company's revolving loan will be accounted for as a purchase.
On February 13, 1997, the Company completed a private placement of
5,075,500 shares of unregistered common stock for approximately $88,850,000
cash, net of stock issuance costs.
(20) BUSINESS SEGMENTS
Operating results and other financial data are presented for the principal
business segments of the Company for the years ended December 31, 1996, and
1995, and 1994, respectively. The Company has four distinct business segments.
These consist of retail car sales operations (Company dealerships), the income
generated from the finance receivables generated at the Company dealerships,
finance income generated from third party finance receivables, and corporate and
other operations. In computing operating profit by business segment, the
following items were considered in the Corporate and Other category: portions of
administrative 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.
F-23
<PAGE> 107
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
COMPANY THIRD
COMPANY DEALERSHIP PARTY CORPORATE
DEALERSHIPS RECEIVABLES RECEIVABLES AND OTHER TOTAL
----------- ----------- ----------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
December 31, 1996:
Sales of Used Cars.................... $53,768 $ -- $ -- $ -- $ 53,768
Less: Cost of Cars Sold............... 29,890 -- -- -- 29,890
Provision for Credit Losses.... 9,658 -- 153 -- 9,811
------- ------- ------- ------- --------
14,220 -- (153) -- 14,067
Interest Income....................... -- 8,426 7,259 171 15,856
Gain on Sale of Loans................. -- 3,925 509 -- 4,434
Other Income.......................... 195 921 -- 455 1,571
------- ------- ------- ------- --------
Income before Operating Expenses... 14,415 13,272 7,615 626 35,928
------- ------- ------- ------- --------
Operating Expenses:
Selling and Marketing.............. 3,568 -- -- 17 3,585
General and Administrative......... 8,295 3,042 3,955 4,246 19,538
Depreciation and Amortization...... 318 769 195 295 1,577
------- ------- ------- ------- --------
12,181 3,811 4,150 4,558 24,700
------- ------- ------- ------- --------
Income before Interest Expense.......... $ 2,234 $ 9,461 $ 3,465 $(3,932) $ 11,228
======= ======= ======= ======= ========
Capital Expenditures.................... $ 4,530 $ 455 $ 621 $ 505 $ 6,111
======= ======= ======= ======= ========
Identifiable Assets..................... $20,698 $12,775 $45,558 $39,052 $118,083
======= ======= ======= ======= ========
December 31, 1995:
Sales of Used Cars.................... $47,824 $ -- $ -- $ -- $ 47,824
Less: Cost of Cars Sold............... 27,964 -- -- -- 27,964
Provision for Credit Losses.... 8,359 -- -- -- 8,359
------- ------- ------- ------- --------
11,501 -- -- -- 11,501
Interest Income....................... -- 8,227 1,844 -- 10,071
Other Income.......................... -- -- -- 308 308
------- ------- ------- ------- --------
Income before Operating Expenses... 11,501 8,227 1,844 308 21,880
------- ------- ------- ------- --------
Operating Expenses:
Selling and Marketing.............. 3,856 -- -- -- 3,856
General and Administrative......... 8,210 2,681 1,163 2,672 14,726
Depreciation and Amortization...... 279 479 89 467 1,314
------- ------- ------- ------- --------
12,345 3,160 1,252 3,139 19,896
------- ------- ------- ------- --------
Income before Interest Expense.......... $ (844) $ 5,067 $ 592 $(2,831) $ 1,984
======= ======= ======= ======= ========
Capital Expenditures.................... $ 1,195 $ 1,561 $ 216 $ 223 $ 3,195
======= ======= ======= ======= ========
Identifiable Assets..................... $11,452 $32,187 $13,419 $ 3,732 $ 60,790
======= ======= ======= ======= ========
</TABLE>
F-24
<PAGE> 108
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
COMPANY THIRD
COMPANY DEALERSHIP PARTY CORPORATE
DEALERSHIPS RECEIVABLES RECEIVABLES AND OTHER TOTAL
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
December 31, 1994:
Sales of Used Cars.................... $ 27,768 $ -- $ -- $ -- $ 27,768
Less: Cost of Cars Sold............... 12,577 -- -- -- 12,577
Provision for Credit Losses.... 7,190 834 116 -- 8,140
------- ------- ------- ------- --------
8,001 (834) (116) -- 7,051
Interest Income....................... -- 4,683 766 -- 5,449
Other Income.......................... -- -- -- 556 556
------- ------- ------- ------- --------
Income before Operating Expenses... 8,001 3,849 650 556 13,056
------- ------- ------- ------- --------
Operating Expenses:
Selling and Marketing.............. 2,263 -- -- 139 2,402
General and Administrative......... 5,069 1,631 240 2,201 9,141
Depreciation and Amortization...... 131 159 64 423 777
------- ------- ------- ------- --------
7,463 1,790 304 2,763 12,320
------- ------- ------- ------- --------
Income before Interest Expense.......... $ 538 $ 2,059 $ 346 $ (2,207) $ 736
======= ======= ======= ======= ========
Capital Expenditures.................... $ 3,905 $ 757 $ 302 $ 370 $ 5,334
======= ======= ======= ======= ========
Identifiable Assets..................... $ 8,788 $ 16,764 $ 1,558 $ 2,601 $ 29,711
======= ======= ======= ======= ========
</TABLE>
(21) QUARTERLY FINANCIAL DATA -- UNAUDITED
A summary of the quarterly data for the years ended December 31, 1996 and
1995 follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1996:
Total Revenue..................... $19,396 $20,081 $18,259 $17,893 $75,629
======= ======= ======= ======= =======
Income before Operating
Expenses....................... 8,442 9,005 8,741 9,740 35,928
======= ======= ======= ======= =======
Operating Expenses................ 5,694 6,296 5,522 7,188 24,700
======= ======= ======= ======= =======
Income before Interest Expense.... 2,716 2,721 3,157 2,634 11,228
======= ======= ======= ======= =======
Net Earnings...................... $ 1,065 $ 1,083 $ 1,967 $ 1,751 $ 5,866
======= ======= ======= ======= =======
Earnings Per Share................ $ 0.13 0.13 0.19 0.14 0.60
======= ======= ======= ======= =======
1995:
Total Revenues.................... $11,546 $14,975 $16,944 $14,738 $58,203
======= ======= ======= ======= =======
Income before Operating
Expenses....................... 4,628 5,601 5,858 5,793 21,880
======= ======= ======= ======= =======
Operating Expenses................ 3,970 4,646 5,366 5,914 19,896
======= ======= ======= ======= =======
Income before Interest Expense.... 658 955 492 (121) 1,984
======= ======= ======= ======= =======
Net Loss.......................... $ (465) $ (283) $(1,169) $(2,055) $(3,972)
======= ======= ======= ======= =======
Loss Per Share.................... $ (0.08) $ (0.05) $ (0.20) $ (0.35) $ (0.67)
======= ======= ======= ======= =======
</TABLE>
F-25
<PAGE> 109
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents.......................................... $ 4,401 $ 18,455
Finance Receivables, net........................................... 36,346 51,063
Residuals in Finance Receivables Sold.............................. 25,755 9,889
Investments Held in Trust.......................................... 16,192 3,479
Notes Receivable................................................... 93,833 1,063
Income Taxes Receivable............................................ 3,760 315
Inventory.......................................................... 20,936 5,752
Property and Equipment, net........................................ 37,892 20,652
Goodwill and Trademarks, net....................................... 17,181 2,150
Other Assets....................................................... 14,989 5,265
-------- --------
$ 271,285 $118,083
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts Payable................................................. $ 3,765 $ 2,132
Accrued Expenses and Other Liabilities........................... 19,344 6,728
Notes Payable.................................................... 58,781 12,904
Subordinated Notes Payable....................................... 12,000 14,000
-------- --------
Total Liabilities........................................ 93,890 35,764
-------- --------
Stockholders' Equity:
Common Stock..................................................... 171,943 82,612
Retained Earnings (Accumulated Deficit).......................... 5,452 (293)
-------- --------
Total Stockholders' Equity............................... 177,395 82,319
-------- --------
$ 271,285 $118,083
======== ========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
F-26
<PAGE> 110
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - IN THOUSANDS, EXCEPT EARNINGS PER COMMON SHARE)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE NINE
ENDED ENDED MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales of Used Cars........................... $ 33,530 $12,320 $ 79,543 $ 42,497
Cost of Used Cars Sold....................... (18,537) (6,977) (42,537) (23,835)
Provision for Credit Losses.................. (6,538) (2,541) (15,367) (7,713)
-------- ------- -------- --------
8,455 2,802 21,639 10,949
-------- ------- -------- --------
Interest Income.............................. 10,645 4,190 23,390 11,881
Gain (Loss) on Sale of Finance Receivables... (2,487) 1,400 10,323 2,578
-------- ------- -------- --------
8,158 5,590 33,713 14,459
-------- ------- -------- --------
Other Income................................. 3,516 349 6,953 780
-------- ------- -------- --------
Income before Operating Expenses............. 20,129 8,741 62,305 26,188
Operating Expenses:
Selling and Marketing...................... 2,887 652 6,680 2,915
General and Administrative................. 17,629 4,505 40,489 13,551
Depreciation and Amortization.............. 1,001 427 2,459 1,128
-------- ------- -------- --------
21,517 5,584 49,628 17,594
-------- ------- -------- --------
Operating Income (Loss)...................... (1,388) 3,157 12,677 8,594
Interest Expense............................. 1,578 1,190 2,914 4,479
-------- ------- -------- --------
Earnings (Loss) before Income Taxes.......... (2,966) 1,967 9,763 4,115
Income Taxes (Benefit)....................... (1,138) -- 4,018 --
-------- ------- -------- --------
Net Earnings (Loss).......................... $ (1,828) $ 1,967 $ 5,745 $ 4,115
======== ======= ======== ========
Earnings (Loss) per Common Share............. $ (0.10) $ 0.19 $ 0.32 $ 0.46
======== ======= ======== ========
Shares Used in Computation................... 19,000 9,205 18,200 7,230
======== ======= ======== ========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
F-27
<PAGE> 111
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED - IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Earnings........................................................ $ 5,745 $ 4,115
Adjustments to Reconcile Net Earnings to Net Cash Provided by
Operating Activities:
Provision for Credit Losses...................................... 15,367 7,713
Gain on Sale of Finance Receivables.............................. (10,323) (2,578)
Purchase of Finance Receivables.................................. (195,127) (70,847)
Proceeds from Sale of Finance Receivables........................ 193,823 29,029
Collections of Finance Receivables............................... 37,157 31,107
Decrease in Deferred Income Taxes................................ 1,500 --
Depreciation and Amortization.................................... 2,459 1,128
Decrease (Increase) in Inventory................................. (8,869) 440
Increase in Other Assets......................................... (8,478) (584)
Increase in Accounts Payable, Accrued Expenses, and Other
Liabilities..................................................... 11,497 1,430
Increase (Decrease) in Income Taxes Receivable/Payable........... (3,445) 684
--------- --------
Net Cash Provided by Operating Activities................... 41,306 1,637
--------- --------
Cash Flows Used In Investing Activities:
Increase in Investments Held in Trust............................... (12,713) (8,963)
Net Decrease (Increase) in Notes Receivable......................... (29,485) 100
Purchase of Property and Equipment.................................. (15,481) (4,013)
Payment for Acquisition of Assets................................... (45,260) --
--------- --------
Net Cash Used in Investing Activities....................... (102,939) (12,876)
--------- --------
Cash Flows from Financing Activities:
Issuance of Notes Payable, net...................................... (39,084) (2,824)
Net Repayment of Subordinated Notes Payable......................... (2,000) (553)
Proceeds from Issuance of Common Stock.............................. 88,719 14,844
Other, Net.......................................................... (56) (963)
--------- --------
Net Cash Provided by Financing Activities................... 47,579 10,504
--------- --------
Net Decrease in Cash and Cash Equivalents............................. (14,054) (735)
Cash and Cash Equivalents at Beginning of Period...................... 18,455 1,419
--------- --------
Cash and Cash Equivalents at End of Period............................ $ 4,401 $ 684
========= ========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
F-28
<PAGE> 112
UGLY DUCKLING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Ugly Duckling Corporation (Company) have been prepared in accordance with
generally accepted accounting principles for interim financial information and
pursuant to rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for a complete financial statement
presentation. In the opinion of management, such unaudited interim information
reflects all adjustments, consisting only of normal recurring adjustments,
necessary to present the Company's financial position and results of operations
for the periods presented. The results of operations for interim periods are not
necessarily indicative of the results to be expected for a full fiscal year. The
Condensed Consolidated Balance Sheet as of December 31, 1996 was derived from
audited consolidated financial statements as of that date but does not include
all the information and footnotes required by generally accepted accounting
principles. It is suggested that these condensed consolidated financial
statements be read in conjunction with the Company's audited consolidated
financial statements included in the Company's Annual Report on Form 10-K, as
amended, for the year ended December 31, 1996.
NOTE 2. SUMMARY OF FINANCE RECEIVABLES, NET
Following is a summary of Finance Receivables, net, as of September 30,
1997 and December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Principal Balances.................................... $41,727 $ 58,281
Add: Accrued Interest................................. 447 718
Loan Origination Costs.......................... 503 189
------- -------
Finance Receivables................................... 42,677 59,188
Less Allowance for Credit Losses...................... (6,331) (8,125)
------- -------
Finance Receivables, net.............................. $36,346 $ 51,063
======= =======
Finance Receivables Held for Sale..................... $42,677 $ 7,000
Finance Receivables Held for Investment............... -- 52,188
------- -------
$42,677 $ 59,188
======= =======
</TABLE>
NOTE 3. RESIDUALS IN FINANCE RECEIVABLES SOLD
As of September 30, 1997 and December 31, 1996, the Residuals in Finance
Receivables Sold were comprised of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Retained interest in subordinated securities (B
Certificates)....................................... $ 41,700 $ 10,900
Net interest spreads, less present value discount..... 29,055 6,839
Reduction for estimated credit losses................. (45,000) (7,850)
-------- --------
Residuals in finance receivables sold................. $ 25,755 $ 9,889
======== ========
Securitized principal balances outstanding............ $ 228,996 $ 51,663
======== ========
Estimated credit losses as a % of securitized
principal balances outstanding...................... 19.7% 15.2%
======== ========
</TABLE>
F-29
<PAGE> 113
UGLY DUCKLING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table reflects a summary of activity for the Residuals in
Finance Receivables Sold for the three and nine month periods ended September
30, 1997 and 1996, respectively (in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1997 1996 1997 1996
------- ------ ------- ------
<S> <C> <C> <C> <C>
Balance, Beginning of Period.................. $27,441 $5,001 $ 9,889 $ --
Additions..................................... 12,377 2,313 34,599 7,445
Amortization.................................. (4,063) (410) (8,733) (541)
Write-down of Residual in Finance Receivables
Sold........................................ (10,000) -- (10,000) --
------- ------ ------- ------
Balance, End of Period........................ $25,755 $6,904 $25,755 $6,904
======= ====== ======= ======
</TABLE>
NOTE 4. NOTES RECEIVABLE
Following is a summary of Notes Receivable as of September 30, 1997 and
December 31, 1996 (in thousands).
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
FMAC secured debt.................................. $63,599 $ --
FMAC debtor in possession loan..................... 3,878 --
Cygnet Dealer Program notes receivable............. 23,664 --
Others............................................. 2,692 1,063
------- ------
$93,833 $1,063
======= ======
</TABLE>
NOTE 5. NOTES PAYABLE
Following is a summary of Notes Payable as of September 30, 1997 and
December 31, 1996 (in thousands).
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Revolving Facility with GE Capital................. $ 128 $ 4,602
Mortgage loan with finance company................. 7,450 7,450
Note with Bank Group secured by FMAC secured
debt............................................. 50,429 --
Other.............................................. 774 852
------- ------
$58,781 $ 12,904
======= ======
</TABLE>
NOTE 6. COMMON STOCK EQUIVALENTS
Net Earnings (Loss) per common share amounts are based on the weighted
average number of common shares and common stock equivalents outstanding.
NOTE 7. 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
statement and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-30
<PAGE> 114
UGLY DUCKLING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8. BANKRUPTCY REMOTE ENTITIES
Champion Receivables Corporation ("CRC") and Champion Receivables
Corporation II ("CRC II") (collectively referred to as "Securitization
Subsidiaries"), are the Company's wholly-owned special purpose "bankruptcy
remote entities". Their assets include Residuals in Finance Receivables Sold and
Investments Held In Trust, in the amounts of $25.8 million and $16.2 million,
respectively, at September 30, 1997, which amounts would not be available to
satisfy claims of creditors of the Company on a consolidated basis.
NOTE 9. RECLASSIFICATIONS
Certain reclassifications have been made to previously reported information
to conform to the current presentation.
F-31
<PAGE> 115
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Seminole Finance Corporation:
We have audited the accompanying combined balance sheet of Seminole Finance
Corporation and Related Companies (the Company) as of December 31, 1996, and the
related combined statements of operations, stockholder's equity (deficit), and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Seminole Finance
Corporation and Related Companies as of December 31, 1996, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying combined financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 7 to the
combined financial statements, the Company is involved in a lawsuit that
involves a material amount of damages that, if there were an adverse outcome,
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to this matter are also described in Note 7. The
combined financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
Tampa, Florida
March 18, 1997
F-32
<PAGE> 116
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Seminole Finance Corporation:
We have audited the accompanying combined balance sheet of Seminole Finance
Corporation and Related Companies (the Company) as of December 31, 1995, and the
related combined statements of operations, stockholder's equity (deficit), and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Seminole Finance
Corporation and Related Companies as of December 31, 1995, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Barton & Company, P.A.
Tampa, Florida
February 10, 1997
F-33
<PAGE> 117
SEMINOLE FINANCE CORPORATION
AND RELATED COMPANIES
COMBINED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents....................................... $ 799,806 $ 24,903
Finance receivables:
Principal balance............................................. 34,126,855 62,347,472
Less allowance for credit losses.............................. (10,600,000) (12,247,949)
------------ -----------
Finance receivables, net...................................... 23,526,855 50,099,523
------------ -----------
Notes receivable................................................ 881,408 1,896,123
Inventories..................................................... 4,243,962 7,085,231
Prepaid expenses................................................ 13,930 50,799
Property and equipment, less accumulated depreciation of
$728,206 and $502,858 in 1996 and 1995, respectively.......... 1,451,891 1,501,002
Other assets.................................................... 1,185,924 556,484
------------ -----------
$ 32,103,776 $ 61,214,065
============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Liabilities:
Accounts payable.............................................. $ 201,228 $ 1,322,403
Accrued expenses and other liabilities........................ 1,323,070 350,744
Due to affiliates............................................. 1,048,837 576,272
Obligations under capital leases.............................. 10,250 23,581
Notes payable................................................. 31,152,844 49,475,517
Subordinated note payable..................................... 1,000,000 --
------------ -----------
Total liabilities..................................... 34,736,229 51,748,517
------------ -----------
Stockholder's equity (deficit):
Common Stock.................................................. 30,100 30,100
Additional paid-in capital.................................... 2,000,000 2,000,000
Retained earnings (accumulated deficit)....................... (4,662,553) 7,435,448
------------ -----------
Total stockholder's equity (deficit).................. (2,632,453) 9,465,548
Commitments, contingencies and subsequent events................
------------ -----------
$ 32,103,776 $ 61,214,065
============ ===========
</TABLE>
See accompanying notes to combined financial statements.
F-34
<PAGE> 118
SEMINOLE FINANCE CORPORATION
AND RELATED COMPANIES
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Dealership revenues:
Sales of used cars.............................................. $11,827,087 $57,584,506
Income on finance receivables................................... 10,193,024 18,941,403
----------- ----------
22,020,111 76,525,909
----------- ----------
Cost of dealership revenues:
Cost of used cars............................................... 9,416,749 47,367,031
Provision for credit losses..................................... 7,106,949 9,724,355
----------- ----------
16,523,698 57,091,386
----------- ----------
Net revenues from dealership activities................. 5,496,413 19,434,523
Other income...................................................... 1,618,549 2,524,834
----------- ----------
Income before operating expenses........................ 7,114,962 21,959,357
----------- ----------
Operating expenses:
Selling and marketing........................................... 3,316,874 3,670,667
General and administrative...................................... 7,108,540 10,489,390
Depreciation and amortization................................... 296,548 257,863
----------- ----------
10,721,962 14,417,920
----------- ----------
Operating income (loss)................................. (3,607,000) 7,541,437
----------- ----------
Other expenses:
Interest on subordinated note payable........................... 27,247 --
Interest, other................................................. 3,714,905 5,170,330
Loss on sale of finance receivables............................. 1,456,892 --
----------- ----------
5,199,044 5,170,330
----------- ----------
Net earnings (loss)..................................... $(8,806,044) $ 2,371,107
=========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-35
<PAGE> 119
SEMINOLE FINANCE CORPORATION
AND RELATED COMPANIES
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
RETAINED TOTAL
ADDITIONAL EARNINGS STOCKHOLDER'S
COMMON PAID-IN (ACCUMULATED EQUITY
STOCK CAPITAL DEFICIT) (DEFICIT)
------- ---------- ------------ -----------------
<S> <C> <C> <C> <C>
Balances at December 31, 1994............. $30,100 $2,000,000 $ 7,178,674 $ 9,208,774
Net earnings.............................. -- -- 2,371,107 2,371,107
Distributions to shareholder.............. -- -- (2,114,333) (2,114,333)
------- --------- ---------- ----------
Balances at December 31, 1995............. 30,100 2,000,000 7,435,448 9,465,548
Net loss.................................. -- -- (8,806,044) (8,806,044)
Distributions to shareholder.............. -- -- (3,291,957) (3,291,957)
------- --------- ---------- ----------
Balances at December 31, 1996............. $30,100 $2,000,000 $(4,662,553) $ (2,632,453)
======= ========= ========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-36
<PAGE> 120
SEMINOLE FINANCE CORPORATION
AND RELATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)............................................ $(8,806,044) $ 2,371,107
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Provision for credit losses................................. 7,106,949 9,724,355
Loss on sale of finance receivables......................... 1,456,892 --
Loss on sale of property and equipment...................... 17,744 34,239
Depreciation and amortization............................... 296,548 257,863
Decrease in notes receivable................................ 1,014,715 --
Decrease in inventory....................................... 2,841,269 1,063,019
Decrease (increase) in prepaid expenses..................... 36,869 (14,395)
Decrease (increase) in other assets......................... (629,440) 221,442
Decrease in accounts payable................................ (1,121,175) (975,581)
Increase (decrease) in accrued expenses and other
liabilities............................................... 972,326 (469,665)
------------ ------------
Net cash provided by operating activities.............. 3,186,653 12,212,384
------------ ------------
Cash flows from investing activities:
Decrease (increase) in finance receivables..................... 18,008,827 (13,975,390)
Proceeds from sale of property, plant and equipment............ 73,106 --
Purchases of property, plant and equipment..................... (338,287) (1,063,584)
Loans to related parties....................................... -- (1,221,888)
Repayments from related parties................................ -- 387,372
Other.......................................................... -- 264,731
------------ ------------
Net cash provided by (used in) investing activities.... 17,743,646 (15,608,759)
------------ ------------
Cash flows from financing activities:
Repayment of obligations under capital leases.................. (13,331) (12,243)
Advances (repayments)of notes payable.......................... (17,273,836) 5,605,693
Advances on subordinated note payable.......................... 1,000,000 --
Distributions to shareholder................................... (3,291,957) (2,114,333)
Other.......................................................... (576,272) (59,739)
------------ ------------
Net cash provided by (used in) financing activities.... (20,155,396) 3,419,378
------------ ------------
Net increase in cash................................... 774,903 23,003
Cash at beginning of year........................................ 24,903 1,900
------------ ------------
Cash at end of year.............................................. $ 799,806 $ 24,903
============ ============
</TABLE>
See accompanying notes to combined financial statements.
F-37
<PAGE> 121
SEMINOLE FINANCE CORPORATION
AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Combination
The combined financial statements include the accounts of Seminole Finance
Corporation, Second Chance Finance, Inc., Second Chance Wholesale, Inc. and
Choice Auto Sales (collectively, the Company). These Companies operate used car
retail operations and a finance company in the state of Florida. All significant
intercompany balances and transactions have been eliminated in consolidation.
(b) Common Stock
<TABLE>
<CAPTION>
PAR AUTHORIZED SHARES
COMPANY VALUE SHARES OUTSTANDING
---------------------------------------------- ----- ---------- -----------
<S> <C> <C> <C>
Seminole Finance Corporation.................. No 100 100
Second Chance Finance, Inc.................... No 100 100
Second Chance Wholesale, Inc.................. $1 10,000 100
Choice Auto Sales............................. $1 10,000 100
</TABLE>
(c) Cash Equivalents
The Company considers all cash and money market accounts, bank certificates
of deposits, and highly liquid debt instruments purchased with a maturity date
of three months or less to be cash equivalents.
(d) Income Recognition
Revenue from the sale of cars is recognized upon delivery, when the sales
contract is signed and the agreed-upon down payment has been received.
Income on finance receivables is recognized using the interest method.
Unearned finance charges represent the balance of finance income (interest)
remaining from the capitalization of the total interest to be earned over the
original term of the related installment sales contract.
The Company has elected to suspend the accrual of interest income on
finance receivables when a loan has become delinquent generally after 90 days.
If one of these delinquent receivables becomes current, interest income is
recognized as if the account had not been delinquent. Late fees are charged on
these accounts and recognized when collected.
(e) Allowance for Credit Losses
The allowance for credit losses is primarily provided through discounts
charged by Seminole Finance Corporation when it purchases finance contracts from
third parties. Additional provisions for credit losses are charged against
income in amounts sufficient to maintain the allowance at a level considered
adequate to cover the losses of the existing loans. Seminole Finance Corporation
charges off loans based on a loan-by-loan review of the receivables. When a loan
is deemed uncollectible, the Company first seeks recovery by attempting to
repossess the vehicle financed. If the vehicle cannot be repossessed, then the
Company writes off the loan against the allowance account.
F-38
<PAGE> 122
SEMINOLE FINANCE CORPORATION
AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(f) Inventories
Inventories consist of used vehicles held for sale and is valued at the
lower of cost or market. Vehicle reconditioning costs are capitalized as a
component of inventory. The cost of used vehicles sold is determined on a
specific identification basis. Repossessed vehicles are valued at the estimated
net realizable value.
(g) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
using straight-line and accelerated methods over the estimated useful lives of
the assets. Leasehold 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. Expenditures that extend the useful lives of
property and equipment are capitalized. Maintenance and repair expenditures are
charged to expense when incurred.
(h) Income Taxes
Each Company, with consent of its shareholder, elected to be treated as an
S Corporation. As an S Corporation, the Company is generally not liable for
income taxes since all income, losses and credits are passed through to the
shareholder.
(i) 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 amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting period. Estimates by management that are critical to the accompanying
financial statements include the appropriate level of allowance for credit
losses which can be significantly impacted by future industry, market, and
economic trends and conditions. Actual results could differ significantly from
these estimates.
(j) Concentration of Credit Risk
The Company provides finance services in connection with used car
dealerships to individuals residing primarily in Hillsborough, Pinellas, Pasco
and Polk Counties, Florida.
(k) Reclassifications
Certain amounts in the 1995 combined financial statements have been
reclassified to conform with the 1996 presentation.
F-39
<PAGE> 123
SEMINOLE FINANCE CORPORATION
AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(2) FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
A summary of net finance receivables at December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Contractually scheduled payments................ $ 44,922,993 $ 80,820,358
Less unearned finance income.................. (10,796,138) (18,131,041)
Less unearned discounts....................... -- (341,845)
------------ -----------
Principal balances, net.................... 34,126,855 62,347,472
Less allowance for credit losses.............. (10,600,000) (12,247,949)
------------ -----------
Finance receivables, net.............. $ 23,526,855 $ 50,099,523
============ ===========
</TABLE>
Allowance for credit losses as a percent of principal balances totaled
31.06% and 19.6% as of December 31, 1996 and 1995, respectively.
The changes in the allowance for credit losses were as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
Balances, beginning of year...................... $12,247,949 $ 11,419,769
Provision for credit losses...................... 7,106,949 9,724,355
Discount acquired................................ -- 10,510,600
Net charge-offs.................................. (8,754,898) (19,406,775)
----------- -----------
Balances, end of year............................ $10,600,000 $ 12,247,949
=========== ===========
</TABLE>
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
1996 1995 (YEARS)
---------- ---------- ------------
<S> <C> <C> <C>
Land................................... $ 55,000 $ 55,000 --
Buildings and improvements............. 524,902 512,811 31.5
Furniture and equipment................ 1,600,195 1,436,049 5-10
---------- ---------
Total cost................... $2,180,097 $2,003,860
========== =========
</TABLE>
(4) NOTES PAYABLE
In May 1995, the Company amended its loan agreement for a revolving loan
with a credit corporation. The note calls for interest payable at an annual rate
of 30 day London Interbank Offered Rates (LIBOR) plus 3.00%. The note is secured
by certain assets of the Company. As of December 31, 1996, the Company had a
maximum commitment of $75,000,000 through May 1997, at which time the loan may
be extended through a one-year automatic renewal. The Company borrowed
$28,253,844 and $46,543,517 under this loan as of December 31, 1996 and December
31, 1995, respectively. (See note 8)
In May 1994, the Company executed a loan agreement for $2,500,000 with a
credit corporation. The note calls for interest at an annual rate of 30 day
LIBOR plus 6.75%. The note is secured by certain assets of the Company and
guaranteed by the owner of the Company. As of December 31, 1996, the Company had
a maximum commitment of $2,500,000 through May 1996, at which time the loan was
extended through a one-
F-40
<PAGE> 124
SEMINOLE FINANCE CORPORATION
AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
year automatic renewal. The Company borrowed $2,500,000 under this loan as of
December 31, 1996 and December 31, 1995. (See note 8)
The Company owes $1,048,837 and $576,272 as of December 31, 1996 and 1995,
respectively, on borrowings from related companies owned by the same shareholder
as the Company. These companies are offshore insurance companies that are liable
for the losses on the credit insurance claims that result from insurance
policies sold with the financing contracts. These loans have no specific terms
for repayment or interest. (See note 8)
On June 30, 1992, the Company purchased 50% of the office building it
occupied until the end of 1995 from the shareholder of the Company. The
shareholder of the Company purchased the office building on May 21, 1992 for
$550,000. The mortgage on the building is in the name of the Company; therefore,
100% of the mortgage is recorded on the books of the Company. As of December 31,
1996 and 1995, the balance on the mortgage payable was $399,000 and $432,000,
respectively, and the note bears interest at 9.25%.
Aggregate installments of the mortgage payable are due as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31
----------------------------------------------------------
<S> <C>
1997...................................................... $ 36,000
1998...................................................... 36,000
1999...................................................... 36,000
2000...................................................... 36,000
2001...................................................... 36,000
Thereafter................................................ 219,000
--------
$399,000
========
</TABLE>
(5) SUBORDINATED NOTE PAYABLE
In July 1996, the Company executed a senior subordinated note payable for
$1,000,000. The note calls for interest payable at an annual rate of the prime
rate plus 2.00%. The note is secured by certain assets of the Company and
guaranteed by the owner of the Company.
(6) LEASES
The Company has several noncancelable operating leases, primarily for a
computer system and office and warehouse space. Rent expense under these leases
amounted to approximately $122,085 and $888,218 in 1996 and 1995, respectively.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
----------------------------------------------------------
<S> <C>
1997...................................................... $ 61,573
1998...................................................... 23,436
1999...................................................... 19,311
2000...................................................... 19,311
2001...................................................... 14,483
Thereafter................................................ --
--------
$138,114
========
</TABLE>
The Company's capital lease obligation is for computer equipment that is
recorded at a cost of $61,520 and has been depreciated by $54,343 through
December 31, 1996. Amortization expense related to the capital
F-41
<PAGE> 125
SEMINOLE FINANCE CORPORATION
AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
lease is included in depreciation expense on the accompanying combined
statements of operations. The lease terminates in 1997.
(7) COMMITMENTS AND CONTINGENCIES
In 1996, four companies that were former dealers from which the Company
purchased retail installment contracts have filed suits and/or counterclaims
against the Company and its related companies. The dealers seek to recover
approximately $20,000,000 in damages for alleged usury and breach of contract,
and to be indemnified for certain claims that may be made against them by the
Florida Department of Revenue in connection with sales tax refunds previously
paid to them. The Company has not yet responded to these claims and is in the
process of providing discovery information to the dealers. Management of the
Company intends to vigorously defend itself against these claims and believes
these claims to be without merit. Because these cases are in the early stages,
it is not possible to provide an evaluation of the likelihood of an unfavorable
outcome, nor an estimate of the amount or range of any potential loss. Any
unaccrued liability will not, in the opinion of management, have a material
adverse effect on the Company's combined financial statements.
(8) SUBSEQUENT EVENTS
On January 10, 1997, Ugly Duckling Corporation purchased ninety-one
repossessed vehicles and certain new and used vehicle parts from the Company.
On January 15, 1997, Ugly Duckling Corporation purchased certain assets and
assumed certain liabilities of the Company. The Company sold substantially all
of its finance receivables, certain inventory held for retail sale by the
seller, and certain furniture, fixed assets and equipment for approximately
$32,130,000. The proceeds from the sale of the assets were used to repay in full
the Company's notes payable.
F-42
<PAGE> 126
REPORT OF INDEPENDENT AUDITORS
Board of Directors
E-Z Plan, Inc.
We have audited the accompanying balance sheet of E-Z Plan, Inc. as of
December 31, 1996, and the related statements of operations, stockholders'
equity, and cash flows for the year then ended. The financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of E-Z Plan, Inc. at December
31, 1996, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
San Antonio, Texas
February 24, 1997, except for
Note 8, as to which the date is
February 28, 1997
F-43
<PAGE> 127
E-Z PLAN, INC.
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents ($320,580 restricted at December 31, 1996)............ $ 630,938
Contracts in process of being collected from finance companies.................. 1,374,072
Notes receivable under retail sales contracts................................... 27,891,311
Less allowance for repossession losses.......................................... 1,964,108
-----------
Notes receivable under retail sales contracts, net.............................. 25,927,203
Inventories -- used automobiles................................................. 5,402,706
Equipment and leasehold improvements:
Furniture and equipment....................................................... 513,677
Computer equipment............................................................ 405,254
Leasehold improvements........................................................ 730,532
-----------
1,649,463
Less accumulated depreciation................................................. 760,935
-----------
Net equipment and leasehold improvements........................................ 888,528
Other assets.................................................................... 1,048,272
-----------
Total assets.................................................................... $35,271,719
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable................................................................. $13,132,959
Due to stockholders........................................................... 8,765,351
Accounts payable and accrued expenses......................................... 3,079,959
-----------
Total liabilities............................................................... 24,978,269
Commitments
Stockholders' equity:
Common stock, no par value, 10,000,000 shares authorized; 1,000 issued and
outstanding................................................................ 1,000
Additional paid-in capital.................................................... 3,250,000
Retained earnings............................................................. 7,042,450
-----------
Total stockholders' equity...................................................... 10,293,450
-----------
Total liabilities and stockholders' equity...................................... $35,271,719
===========
</TABLE>
See accompanying notes.
F-44
<PAGE> 128
E-Z PLAN, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Sales.......................................................................... $ 42,302,699
Cost of sales.................................................................. 30,799,966
------------
Gross profit before provision for repossession losses.......................... 11,502,733
Provision for repossession losses.............................................. 4,512,400
------------
Gross profit................................................................... 6,990,333
Other operating income (expenses):
Finance charge income........................................................ 6,417,753
Selling, general, and administrative expenses................................ (13,556,705)
Other, net................................................................... 2,882,867
------------
Income from operations......................................................... 2,734,248
Other income (expense):
Interest expense............................................................. (1,880,125)
Interest income.............................................................. 43,370
Key man life insurance expense............................................... (695,776)
------------
Total other expense............................................................ (2,532,531)
------------
Net income..................................................................... $ 201,717
============
</TABLE>
See accompanying notes.
F-45
<PAGE> 129
E-Z PLAN, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995................ $1,000 $3,250,000 $6,840,733 $10,091,733
Net income................................ -- -- 201,717 201,717
------ ---------- ---------- -----------
Balance at December 31, 1996................ $1,000 $3,250,000 $7,042,450 $10,293,450
====== ========== ========== ===========
</TABLE>
See accompanying notes.
F-46
<PAGE> 130
E-Z PLAN, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income..................................................................... $ 201,717
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for repossession losses............................................ 4,512,400
Depreciation................................................................. 226,760
Decrease in cash surrender value of key man life insurance................... 64,021
Loss from sale of property and equipment..................................... 13,434
Changes in assets and liabilities:
Contracts in process of being collected from finance companies............ 485,077
Inventories............................................................... 287
Other assets.............................................................. 49,414
Accounts payable and accrued expenses..................................... 94,424
------------
Net cash provided by operating activities...................................... 5,647,534
INVESTING ACTIVITIES
Retail sales and other costs financed.......................................... (22,758,165)
Collections on notes receivable under retail sales contracts................... 21,611,941
Proceeds from sale of property and equipment................................... 99,790
Purchases of property and equipment............................................ (432,595)
------------
Net cash used in investing activities.......................................... (1,479,029)
FINANCING ACTIVITIES
Proceeds from notes payable.................................................... 21,147,893
Payments on notes payable...................................................... (21,494,913)
Due to stockholders, net....................................................... (3,400,000)
------------
Net cash used in financing activities.......................................... (3,747,020)
------------
Net change in cash and cash equivalents........................................ 421,485
Cash and cash equivalents at beginning of year................................. 209,453
------------
Cash and cash equivalents at end of year....................................... $ 630,938
============
Supplementary cash flow information:
Interest paid................................................................ $ 1,789,537
</TABLE>
See accompanying notes.
F-47
<PAGE> 131
E-Z PLAN, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) SIGNIFICANT ACCOUNTING POLICIES
Operations
E-Z Plan, Inc. (the Company) began operations in January 1990 with the
opening of its first used automobile retail sales facility in San Antonio,
Texas. As of December 31, 1996, fourteen retail sales facilities were operating
under the names E-Z Motors, Red McCombs Superstores, and Red McCombs Star Cars
primarily in the San Antonio and central Texas areas. In addition to automobile
sales, the Company provides financing to its retail customers with terms
generally averaging 24-36 months at annual interest rates ranging from 18% to
26%. The Company retains a security interest in the related vehicles. During
1995 the Company also served as a financing source for motor vehicle contracts
arising from automobile sales by affiliated dealerships. Consideration paid by
the Company to these dealerships for such contracts was either 90% of the
principal financed on a non-recourse basis; or 100% of the principal financed
less a $200 fee on a recourse basis.
Income Recognition
The sales price and the related cost of the automobile are recognized in
the Company's operations at the time of sale. Notes receivable under retail
sales contracts arise from those sales for which the Company provides financing
and are collateralized by the titles to the automobiles sold. Finance charge
income related to these notes receivable is recognized using the interest method
over the term of the contract.
Repossession Losses
An allowance for repossession losses is maintained based on the Company's
loss experience and other factors. Upon customer default and repossession, the
remaining net note receivable balance, less the fair value or wholesale price of
the automobile, is charged to the allowance for repossession losses.
Inventories
The inventories of used automobiles are stated at the lower of cost, using
the last-in, first-out (LIFO) method, or market. If the first-in, first-out
(FIFO) method of inventory accounting had been used by the Company, inventories
would have been approximately $1,264,000 higher than reported at December 31,
1996.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation on
furniture and equipment and computer equipment is provided on straight-line and
accelerated methods over the estimated useful lives of the related assets, which
generally range from three to seven years. Amortization of leasehold
improvements is provided on an accelerated method over the estimated lives of
the related assets, which range from 1 to 39 years.
Advertising
The Company expenses advertising costs as they are incurred. Total
advertising expenditures were approximately $1,160,000 in 1996.
Federal Income Taxes
No provision for federal income tax has been made since the Company elected
to be treated as an S Corporation as prescribed by the Internal Revenue Service
Code. Under the terms of this election, the
F-48
<PAGE> 132
E-Z PLAN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company generally pays no income tax and all stockholders will report their
proportionate share of the Company's tax items on their individual income tax
returns.
Cash Flow
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to be
cash equivalents.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
(2) NOTES RECEIVABLE UNDER RETAIL SALES CONTRACTS
Future contractual maturities of notes receivable under retail sales
contracts at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997.................................................... $14,587,156
1998.................................................... 7,976,915
1999.................................................... 4,072,131
2000.................................................... 1,255,109
-----------
$27,891,311
===========
</TABLE>
A summary of the allowance for repossession losses is as follows:
<TABLE>
<S> <C>
Balance at December 31, 1995............................. $1,586,801
Provision for repossession losses...................... 4,512,400
Charge-offs............................................ (4,135,093)
----------
Balance at December 31, 1996............................. $1,964,108
==========
</TABLE>
(3) BORROWINGS
Notes payable at December 31, 1996 consist of five separate notes with a
remaining balance totaling $13,132,959. Three of the notes are due in 1997 and
the other two are due in 1998. Generally, payments are dependent on collections
of notes receivable under retail sales contracts. Based on expected collections,
approximately $11,619,509 of principal repayments are due in 1997, with the
remainder due in 1998. The notes carry fixed or variable interest rates of 8.75%
to 9.75% and are collateralized by notes receivable under retail sales
contracts.
Certain of the note agreements contain covenants restricting the issuance
of additional debt obligations and prohibiting the payment of dividends, among
other matters. The note agreements also require the Company to maintain an
escrow deposit with the lenders which approximates the previous month's
collections on the notes receivable that collateralize the notes payable. The
amounts of these escrow deposits are disclosed as restricted cash on the balance
sheets. A former stockholder of the Company has personally guaranteed
substantially all of the debt obligations.
The fair value of the Company's borrowings is estimated at the current rate
offered the Company for debt of the same approximate terms. The carrying value
of the Company's borrowings approximates fair value.
F-49
<PAGE> 133
E-Z PLAN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) COMMITMENTS
The Company leases land and facilities at each of its retail sales
facilities and its corporate office under operating leases. Rental expense for
the year ended December 31, 1996 was approximately $1,061,000. Future lease
commitments as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997..................................................... $ 990,586
1998..................................................... 701,467
1999..................................................... 370,640
2000..................................................... 242,640
----------
$2,305,333
==========
</TABLE>
(5) RELATED PARTY TRANSACTIONS
Entities in which the Company's stockholders and a related individual own a
controlling interest provided the Company with finance, accounting, and
management services for the year ended December 31, 1996. In addition, the
Company leases four retail sales facilities and its corporate office from
entities related to the stockholders by common ownership and other factors. The
accompanying statement of operations includes the following charges related to
these arrangements:
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Finance, accounting, and management fees.................. $180,000
Lease expense............................................. 400,875
</TABLE>
At December 31, 1996, the Company has receivables from affiliates totaling
$391,410 included in other assets.
The stockholders have provided financing to the Company for use in
purchasing and reconditioning its used automobile inventory and in funding
operating expenses. The amounts due are unsecured, bear no interest except for
advances related to inventory purchases, and are payable on demand. Included in
interest expense in 1996 is $447,393, which the Company paid to stockholders for
advances related to inventory purchases.
(6) RETIREMENT PLAN
The Company has a 401(k) plan in which all employees who have completed one
year of service are eligible for participation. Employees may make contributions
to the plan in an amount equal to 1% to 15% of their salary. The Company's
matching contributions are made based on years of participation in the plan with
the maximum employer contribution equal to 100% of a maximum participant
contribution of $1,500. Employees are 100% vested in their own contributions at
all times and vest in employer contributions as follows:
<TABLE>
<S> <C>
Years 1 and 2................................................ 0%
Year 3....................................................... 50%
Year 4....................................................... 75%
Year 5....................................................... 100%
</TABLE>
The Company made annual contributions to the plan of $27,336 during the
1996 plan year.
F-50
<PAGE> 134
E-Z PLAN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(7) KEY MAN LIFE INSURANCE
The Company owns certain life insurance which insure the lives of the
Company's current and former owners and key officers with a combined benefit
value of $56,725,000. During 1996 premiums of $631,755 were paid and net cash
value decreased by $64,021 for a total expense of $695,776.
(8) SUBSEQUENT EVENT
The Company has entered into a Letter of Intent dated February 28, 1997 to
sell substantially all the operating assets of the Company. The Letter of Intent
is subject to the execution of a definitive agreement. This transaction is
expected to close by March 31, 1997.
F-51
<PAGE> 135
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
KARS-YES Holdings Inc.
We have audited the accompanying consolidated balance sheets of KARS-YES
Holdings Inc. (the "Company") and subsidiaries (formerly the YES Group, Inc.) as
of June 30, 1997 and 1996 and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended June 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company and
its subsidiaries as of June 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1997, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Notes 6 and 7 to the
consolidated financial statements, the Company defaulted on its debt obligations
during 1997. As discussed in Notes 1 and 13, the Company sold the majority of
its operating assets and facilities to the Ugly Duckling Corporation on
September 15, 1997. The remaining assets will be utilized to satisfy existing
liabilities as dictated by amended debt agreements. Based on management's
estimated cash flow projections from the remaining assets which have contractual
lives through 2002, it is extremely unlikely that cash collections will be
adequate to satisfy all existing liabilities or result in any distributions to
preferred or common shareholders. These factors raise substantial doubt about
the entity's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ COOPERS & LYBRAND L.L.P.
Dallas, Texas
November 6, 1997
F-52
<PAGE> 136
KARS-YES HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents.............................................. $ 1,455 $ 1,703
-------- --------
Retail contracts, net of unearned finance charges (Note 2)............. 118,090 70,109
Allowance for losses................................................... (30,179) (12,903)
-------- --------
Retail contracts, net............................................. 87,911 57,206
Assets held for sale, net (Note 13).................................... 5,520 --
Securitized receivables, retained interest............................. 10,072 19,352
Excess servicing asset................................................. -- 3,929
Interest-only strip.................................................... 535 --
Automobile inventory................................................... 3,805 16,294
Income tax refund receivable........................................... 1,005 246
Fixed assets, net...................................................... 1,318 5,064
Other assets, net...................................................... 372 4,534
-------- --------
Total assets................................................. $111,993 $108,328
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Accounts payable....................................................... $ 6,446 $ 4,815
Accrued liabilities.................................................... 1,014 1,121
Servicing liability.................................................... 823 --
Income taxes payable................................................... -- 404
Deferred income taxes, net............................................. -- 1,557
Subordinated notes payable............................................. 30,000 30,000
Senior line of credit.................................................. 80,300 39,000
Mortgage payable....................................................... 973 --
-------- --------
Total liabilities............................................ 119,556 76,897
-------- --------
Commitments and contingencies (Note 5)
Redeemable cumulative preferred stock of subsidiary.................... 1,351 1,351
-------- --------
Shareholders' equity:
Preferred stock, $.01 par value, 20,000,000 shares authorized, no
shares issued..................................................... -- --
Class A common stock, $.01 par value, 500,000,000 shares authorized,
issued: 1997 -- 120,017,180 shares; 1996 -- 120,308,251 shares.... 1,200 1,203
Class B common stock, $.01 par value, 20,000,000 shares authorized,
no shares issued.................................................. -- --
Treasury stock, at cost: 30,000,000 shares........................... (300) (300)
Additional paid-in capital........................................... 23,511 23,610
Unrealized loss on securitization assets............................. (1,087) --
Retained earnings (deficit).......................................... (32,238) 5,567
-------- --------
Total shareholders' equity (deficit)............................ (8,914) 30,080
-------- --------
Total liabilities and shareholders' equity (deficit)......... $111,993 $108,328
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-53
<PAGE> 137
KARS-YES HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Automotive sales.......................................... $144,129 $118,176 $81,832
Cost of automotive sales.................................. 98,433 73,969 50,939
-------- ------- -------
Gross margin on automotive sales..................... 45,696 44,207 30,893
Provision for losses on retail contracts.................. 62,353 29,499 18,003
-------- ------- -------
(16,657) 14,708 12,890
Gain on securitized retail contracts...................... 4,888 8,090 --
Finance charge income..................................... 16,616 15,396 15,796
-------- ------- -------
Operating profit before expenses..................... 4,847 38,194 28,686
Expenses:
Selling and store....................................... 21,784 16,411 11,919
Finance operations...................................... 7,647 6,468 5,204
General and administrative.............................. 2,063 2,380 1,950
Depreciation and amortization........................... 2,802 1,347 520
-------- ------- -------
Operating earnings (loss) before interest, income
taxes.............................................. (29,449) 11,588 9,093
Interest expense, net..................................... 10,586 6,991 5,536
-------- ------- -------
Earnings (loss) before income taxes.................. (40,035) 4,597 3,557
Provision (benefit) for income taxes...................... (2,362) 1,839 1,388
-------- ------- -------
Net earnings (loss)............................. $(37,673) $ 2,758 $ 2,169
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-54
<PAGE> 138
KARS-YES HOLDINGS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK TREASURY STOCK ADDITIONAL LOSS ON
-------------------- ------------------- PAID-IN SECURITIZATION RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL ASSETS EARNINGS TOTAL
----------- ------ ---------- ------ ---------- -------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1994................ 120,056,587 $1,201 30,000,000 $(300) $ 23,521 $ -- $ 824 $ 25,246
Common stock issued
under Managers Stock
Purchase Plan,
net................. 108,857 1 -- -- 41 -- -- 42
Dividends on preferred
stock of
subsidiary.......... -- -- -- -- -- -- (26) (26)
Net earnings for the
year ended June 30,
1995................ -- -- -- -- -- -- 2,169 2,169
----------- ------ ---------- ----- ------- ------- -------- -------
Balance at June 30,
1995................ 120,165,444 1,202 30,000,000 (300) 23,562 -- 2,967 27,431
Common stock issued
under Managers Stock
Purchase Plan,
net................. 142,807 1 -- -- 48 -- -- 49
Dividends on preferred
stock of
subsidiary.......... -- -- -- -- -- -- (158) (158)
Net earnings for the
year ended June 30,
1996................ -- -- -- -- -- -- 2,758 2,758
----------- ------ ---------- ----- ------- ------- -------- -------
Balance at June 30,
1996................ 120,308,251 1,203 30,000,000 (300) 23,610 -- 5,567 30,080
Common stock redeemed
under Managers Stock
Purchase Plan,
net................. (291,071) (3) -- -- (99) -- -- (102)
Dividends on preferred
stock of
subsidiary.......... -- -- -- -- -- -- (132) (132)
Unrealized loss on
securitization
assets.............. -- -- -- -- -- (1,087) -- (1,087)
Net loss for the year
ended June 30,
1997................ -- -- -- -- -- -- (37,673) (37,673)
----------- ------ ---------- ----- ------- ------- -------- -------
Balance at June 30,
1997................ 120,017,180 $1,200 30,000,000 $(300) $ 23,511 $ (1,087) $(32,238) $ (8,914)
=========== ====== ========== ===== ======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-55
<PAGE> 139
KARS-YES HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
1997 1996 1995
--------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)...................................... $ (37,673) $ 2,758 $ 2,169
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization......................... 2,802 1,347 520
Loss on impairment of securitization assets........... 14,044 -- --
Loss on write-down of assets held for sale............ 1,309 -- --
Provision for losses on retail contracts.............. 62,353 29,499 18,003
Gain on securitized retail contracts.................. (4,888) (8,090) --
Deferred income taxes, net............................ (1,577) 1,361 5,284
Decrease (Increase) in inventories.................... 8,788 (7,745) (2,466)
(Increase) decrease in income tax refund receivable... (759) 5,015 --
(Increase) decrease in other assets, net.............. (7,506) (2,141) 465
Increase in accounts payable.......................... 1,631 552 1,431
(Decrease) increase in accrued liabilities............ (3,284) (156) (5,231)
(Decrease) increase in income taxes payable........... (404) 41 (958)
-------- ------- -------
Net cash provided by operating activities........ 34,836 22,441 19,217
-------- ------- -------
Cash flows from investing activities:
Retail installment contracts financed, net............... (122,476) (104,263) (75,621)
Principal collections on retail installment contracts.... 19,706 22,894 29,741
Proceeds from securitized receivables.................... 27,224 61,126 --
Sale (purchase) of fixed assets, net..................... (1,454) (3,638) (1,441)
-------- ------- -------
Net cash used by investing activities............ (77,000) (23,881) (47,321)
-------- ------- -------
Cash flows from financing activities:
Proceeds from senior line of credit...................... 68,895 63,150 27,500
Retirements to senior line of credit..................... (27,595) (61,150) (30,000)
Proceeds from subordinated notes payable................. -- -- 30,000
Proceeds from mortgage payable........................... 1,000 -- --
Proceeds from issuance of preferred stock of
subsidiary............................................ -- -- 1,351
Payments on mortgage payable............................. (27) -- --
Issuance cost on preferred stock of subsidiary........... -- -- (54)
Debt issuance costs...................................... (123) (4) (1,378)
Proceeds (redemptions) from Managers Stock Purchase Plan,
net................................................... (102) 49 42
Dividends paid on preferred stock of subsidiary.......... (132) (158) (26)
-------- ------- -------
Net cash provided by financing activities........ 41,916 1,887 27,435
-------- ------- -------
Net (decrease) increase in cash and cash equivalents....... (248) 447 (669)
Cash and cash equivalents at beginning of year............. 1,703 1,256 1,925
-------- ------- -------
Cash and cash equivalents at end of year................... $ 1,455 $ 1,703 $ 1,256
======== ======= =======
Supplemental disclosure of cash flow information:
Interest paid (includes unused line of credit fees)...... $ 9,368 $ 6,707 $ 5,088
======== ======= =======
Income taxes paid........................................ $ 543 $ 665 $ 2,462
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-56
<PAGE> 140
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
History of Operations
KARS-YES Holdings Inc., formerly the YES Group Inc., (the "Company") was
formed on October 17, 1990. The Company operates through two subsidiaries:
KARS-YES Inc. (the "Retail Company"), incorporated on October 23, 1990 and
KARS-YES Financial Inc. (the "Finance Company"), incorporated on October 23,
1990. The Retail Company sells used automobiles and light trucks ("cars"). The
Finance Company provides financing to the Retail Company's customers who
typically would be unable to obtain financing from traditional sources. As of
June 30, 1997, the Company operated fifteen retail stores, seven located in
Southern California, three located in South Florida, three located in Atlanta,
Georgia, and two located in Dallas, Texas.
On September 15, 1997 the Company entered into an agreement to sell the
majority of the operating assets and facilities of the finance and retail
operations (see Note 13) to the Ugly Duckling Corporation (the "Buyer"). The
Company retained all finance receivables, debt and certain other related assets
and liabilities. The finance receivables will be utilized to satisfy existing
liabilities. Concurrent with the sale, the Company renegotiated its borrowing
arrangements with the Senior and Subordinated lending groups (see Notes 6 and
7). Under the terms of the amended agreements, the outstanding securitized
investor principal will be repayable from future collections on the securitized
retail contracts. The senior line of credit will then be repayable from future
collections on the Company's retail contracts (non-securitized) and any
remaining collections associated with both (i) the interest-only strip
receivable and (ii) the retained interest in the securitized receivables. The
senior line of credit, as modified, earns interest at a rate of prime plus 1.5%.
The Subordinated notes will be repayable from any remaining collections after
both the securitized investors and the senior obligations have been paid in
full. Based upon management's estimated cash flow projections from remaining
assets which have contractual lives through 2002, it is extremely unlikely that
cash collections will be adequate to satisfy all existing liabilities and result
in any distributions to preferred or common shareholders. Management does not
currently intend to actively operate the Company beyond running off current
assets and servicing the outstanding debt.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its other majority-owned subsidiaries. YES Appliance & Furniture Inc.
("A&F"), a wholly-owned subsidiary, was sold effective the close of business on
December 31, 1996 (see Note 9). The results of A&F for the six months ended
December 31, 1996 are included in the Company's financial statements. The assets
acquired and liabilities assumed by Ugly Duckling Corporation have been
reclassified to "Assets held for sale" (see Note 13).
Cash and Cash Equivalents
Investments in highly liquid, low risk, short-term instruments with
original maturities of less than 90 days are included in cash and cash
equivalents.
The Company maintains cash balances in banks which exceed federally insured
limits. The uninsured amounts as of June 30, 1997 and June 30, 1996 were
$1,061,000 and $639,000, respectively.
Income Recognition
Retail installment contracts are originated in connection with the sale of
cars and are collateralized by titles to the cars sold. Sales revenue and the
related cost of sales are recognized in operations at the time of sale.
F-57
<PAGE> 141
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Finance charge income related to retail contracts is recognized using the
interest (actuarial) method. Finance charge income is not recognized on retail
contracts that are contractually delinquent in excess of 60 days. It is the
Company's policy to write-off retail contracts that are 120 days contractually
delinquent.
Allowance for Losses
A provision for losses is charged to operations in an amount sufficient to
maintain the allowance for losses at a level considered adequate to cover
anticipated losses in the existing retail contracts portfolio. The allowance for
losses is based upon periodic analysis of the portfolio, economic conditions and
trends, historical loss experience, borrowers' ability to pay and collateral
values. If the customer defaults on the payment terms of the retail contract and
the Company repossesses the car, the remaining contract balance, less the
unearned finance charge and fair value of the car, is charged to the allowance
for losses.
Retail Contract Securitizations
The Company adopted Statement of Financial Accounting Standards No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities ("FAS 125"), as amended by Statement of Financial Accounting
Standards No. 127, Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125 -- An Amendment of FASB Statement No. 125 ("FAS 127"), on
January 1, 1997. FAS 125 applies a control-oriented, financial-components
approach to financial-asset-transfer transactions whereby the Company (1)
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, (2) derecognizes financial assets when control has been
surrendered, and (3) derecognizes liabilities once they are extinguished. Under
FAS 125, control is considered to have been surrendered only if: (i) the
transferred assets have been isolated from the transferor and its creditors,
even in bankruptcy or other receivership (ii) the transferee has the right to
pledge or exchange the transferred assets, or, is a qualifying special-purpose
entity (as defined) and the holders of the beneficial interests in that entity
have the right to pledge or exchange those interests; and (iii) the transferor
does not maintain effective control over the transferred assets through an
agreement which both entitles and obligates it to repurchase or redeem those
assets prior to maturity, or through an agreement which both entitles and
obligates it to repurchase or redeem those assets if they were not readily
obtainable elsewhere. If any of these conditions are not met, the Company
accounts for the transfer as a secured borrowing.
In accordance with FAS 125, the Company records a separate asset or
liability representing the right or obligation, respectively, to service loans
(or other financial assets that are being serviced) for others. Servicing
liabilities are recorded at their fair value as a reduction of the sale
proceeds. The fair value of the servicing liabilities is based on an analysis of
discounted cash flows that incorporates estimates of (1) market servicing costs,
(2) projected ancillary servicing revenue, (3) projected prepayment rates that
are based on changes in interest rates, and (4) market profit margins.
Servicing liabilities are amortized in proportion to, and over the period
of, estimated net servicing income. Increases in fair values of servicing
liabilities (above carrying values) are evaluated through an assessment of the
fair value of those liabilities via a discounted cash flows method. The net
carrying value of the liability is compared to its discounted estimated future
net cash flows to determine whether adjustments should be made to carrying
values or amortization schedules. An increase in the fair value of a servicing
liability above its carrying value is recognized through an increase to the
liability and a charge to current-period earnings.
The rate of prepayment of loans serviced is one of the most significant
estimate involved in the measurement process. Estimates of prepayment rates are
based on management's expectations of future prepayment rates, reflecting the
company's historical rate of loan repayment, industry trends, and other
considerations. Actual prepayment rates differ from those projected by
management due to changes in a variety of economic factors, including prevailing
interest rates and the availability of alternative financing sources to
borrowers. If actual prepayments of the loans being serviced were to occur more
quickly than
F-58
<PAGE> 142
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
projected, the carrying value of servicing assets and liabilities might have to
be written down through a credit to earnings in the current period. Accordingly,
the servicing assets and liabilities actually incurred, could differ from the
amounts initially recorded.
There were no unrecognized servicing liabilities or liabilities for which
it is not practicable to estimate fair value. The excess servicing asset
reported in the 1996 financial statements has been reclassified as a net
servicing liability and an interest-only strip to conform to the current year's
reporting requirements.
Securitization Gains
The calculation of gains on securitized retail contracts embody prepayment,
default and interest rate assumptions that market participants use for similar
financial instruments subject to prepayment, default and interest rate risks,
and are discounted assuming an estimated interest rate that a non-affiliated
purchaser of similar financial instruments would demand.
Securitized Receivables
Securitized receivables are considered available-for-sale investments and
are carried at fair market value.
Inventories
Inventories are carried at the lower of cost or market, using specific
identification. Cost of sales includes the purchase price plus buying, delivery
and reconditioning costs.
Fixed Assets
Fixed assets are carried at cost. Depreciation expense is provided on a
straight-line basis over the estimated useful lives of the assets. Leasehold
improvements are amortized over the term of the related lease. The cost of fixed
assets sold or retired and the related accumulated depreciation are removed from
the accounts at the time of disposition, and any resulting gain or loss is
reflected in operations. Maintenance, repairs, and minor replacements are
charged to operations as incurred; major replacements and betterments are
capitalized.
Reclassifications
Certain items included in the prior years' consolidated financial
statements have been reclassified to conform with fiscal year 1997's
presentation.
Income Taxes
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
Under SFAS No. 109, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted Federal and state
tax rates, applicable to future years, to differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities.
A valuation allowance is established to the extent that future taxable
income will not be sufficient to realize the deferred tax asset.
Derivative Financial Instruments
Derivative financial instruments are utilized by the Company to manage
interest rate exposure. With interest rate swaps, the differentials to be
received or paid under contracts designated as hedges, are accrued over the life
of the contracts and are recognized as adjustments to interest expense. Costs of
interest rate caps
F-59
<PAGE> 143
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are offset against the gain on securitized retail contracts. The Company does
not hold or issue derivative financial instruments for trading purposes.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts 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. These estimates are subjective in nature and involve matters
of judgment. The most significant estimates presented include the allowance for
losses, securitized receivables, interest-only strip, excess servicing asset,
and the servicing liability. Actual results could differ from these estimates.
(2) RETAIL CONTRACTS
Retail contracts consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Retail installment contracts........................... $158,547 $ 94,759
Unearned finance charges............................... (40,457) (24,772)
Allowance for losses................................... (30,179) (12,847)
-------- --------
Retail installment contracts, net.................... 87,911 57,140
-------- --------
Retail lease contracts................................. -- 128
Unearned finance charges............................... -- (6)
Allowance for losses................................... -- (56)
-------- --------
Retail lease contracts, net.......................... -- 66
-------- --------
Retail contracts, net........................ $ 87,911 $ 57,206
======== ========
</TABLE>
As of June 30, 1997, automobile retail installment contracts include
unearned finance charges at an average annual percentage rate of 20.8% with
original financing terms ranging from 14 to 54 months. The average original
financing term of automobile retail installment contracts is 43 months.
As of June 30, 1997 and June 30, 1996, there were 21,685 and 17,854
automobile retail installment contracts being serviced by the Company, including
contracts sold through securitization transactions.
Concentration of Risk -- Retail contracts were originated in the following
markets:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
-------------
1997 1996
---- ----
<S> <C> <C>
California..................................................... 53% 63%
Florida........................................................ 14 18
Georgia........................................................ 23 19
Texas.......................................................... 10 --
--- ---
100% 100%
=== ===
</TABLE>
F-60
<PAGE> 144
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Contractual maturities of installment contracts (including unearned finance
charges) for years ending June 30 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
RETAIL INSTALLMENT
CONTRACTS
------------------
<S> <C>
1998................................................. $ 53,466
1999................................................. 51,551
2000................................................. 41,861
2001................................................. 11,497
2002................................................. 172
--------
158,547
Less unearned finance charges........................ (40,457)
--------
$118,090
========
</TABLE>
A summary of the allowance for losses is as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of period............. $ 12,903 $ 16,155 $ 14,274
Provision for losses....................... 62,353 29,499 18,003
Charge-offs, net of recoveries............. (37,682) (20,398) (16,122)
Securitization of retail contracts......... (7,395) (12,353) --
-------- -------- --------
Balance at end of period................... $ 30,179 $ 12,903 $ 16,155
======== ======== ========
</TABLE>
Management provides an allowance for losses based on analysis of historical
loss results and consideration of current market conditions. In the fourth
quarter of fiscal year 1997 and after year end, loss trends increased
significantly. Based on these developments and trends in the industry,
management increased the allowance for losses by approximately $30 million.
As of June 30, 1997 and 1996, 3.4% of the total retail installment
contracts serviced were greater than 60 days delinquent.
(3) SECURITIZATION OF AUTOMOBILE INSTALLMENT CONTRACTS
In October 1995, the Company commenced selling automobile installment
contracts to investors through securitization transactions. Installment
contracts originated by the Finance Company are pooled and sold to KARS-YES
Receivables Inc. ("KYRI"), a wholly-owned, bankruptcy-remote subsidiary. KYRI
retains a subordinated interest in all loans pooled, with the remaining portion
sold to investors. The Company receives compensation monthly for performing
servicing functions on the entire pool of securitized installment contracts
("servicing fees"). In addition to the servicing fees collected, the Company
earns an interest rate spread equal to the difference between the interest rate
on the underlying retail contracts and the interest paid to investors. The
rights of KYRI as holder of the retained interest ("securitized receivables")
are subordinated to the rights of the investors. In the event that 100% of the
installment contracts fail to perform and the underlying collateral proved to be
of no value, the Company would incur losses to the extent of the securitized
receivables and the related interest-only strip.
During the year ended June 30, 1997, KYRI completed three securitization
transactions with an aggregate principal balance of approximately $44,611,000.
In connection with the two securitization transactions completed before January
1, 1997, KYRI recorded securitized receivables of approximately $7,372,000,
recorded an excess servicing asset of approximately $2,374,000, and recognized a
gain of $4,022,000. In
F-61
<PAGE> 145
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
connection with KYRI's third securitization which was completed after January 1,
1997, KYRI recorded securitized receivables of approximately $4,235,000,
recorded a servicing liability of $282,000, an interest-only strip of
$1,242,000, and recognized a gain of $866,000. During the year ended June 30,
1996, KYRI completed three securitization transactions with an aggregate
principal balance of approximately $94,400,000. In connection with these
transactions, KYRI recorded securitized receivables of approximately
$24,000,000, recorded an excess servicing asset of approximately $5,800,000, and
recognized a gain of $8,090,000.
As noted in Note 1, the Company adopted FAS 125 on January 1, 1997. FAS 125
requires that the amounts carried previously as excess servicing assets be
reclassified between a servicing asset or liability and an interest-only strip
with the difference recognized as unrealized loss on securities, net of tax. On
January 1, 1997, in connection with the above reclassification, the Company
derecognized excess service asset of $4,399,000, recorded an interest-only strip
of $4,069,000, a servicing liability of $1,017,000, and an unrealized loss on
securities of $1,347,000.
Changes in the balances of servicing liabilities for the year ended June
30, 1997 are as follows:
<TABLE>
<CAPTION>
SERVICING
LIABILITIES
-----------
<S> <C>
Balance at January 1, 1997............................... $ 1,017,000
Servicing liability additions............................ 283,000
Amortization............................................. (477,000)
----------
Balance at June 30, 1997................................. $ 823,000
==========
</TABLE>
In connection with securitization transactions, for the years ended June
30, 1997 and 1996, the Company received cash proceeds totaling approximately
$27,224,000 and $61,100,000, respectively. These funds were used to pay down the
senior line of credit. As of June 30, 1997 and 1996, the company serviced 9,349
and 9,643 installment contracts respectively, with an aggregate principal
balance of approximately $61,413,000 and $69,091,000 under securitization
transactions. These contracts represent approximately 34% and 49% of the total
outstanding receivables serviced by the Company at June 30, 1997 and 1996,
respectively.
During the third and fourth quarter and after year-end, losses began to
increase significantly. Based on this and loss trends in the industry,
management recorded an impairment charge to finance income of $11 million on the
securitized receivables and $3 million on the interest only strip.
Pursuant to a September 15, 1997 Purchase and Sale Agreement (see Note 13)
no further installment contracts will be securitized. The six outstanding loan
pools will be serviced by Ugly Duckling Corporation.
F-62
<PAGE> 146
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) FIXED ASSETS
Fixed assets consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE
30,
------------------
1997 1996
------ -------
<S> <C> <C>
Leasehold improvements.................................... $ -- $ 3,596
Equipment................................................. -- 2,902
Furniture and fixtures.................................... -- 1,201
Construction in progress.................................. -- 223
Buildings................................................. 973 196
Vehicles.................................................. -- 45
Land...................................................... 371 371
Less: accumulated depreciation............................ (26) (3,470)
------ ------
$1,318 $ 5,064
====== ======
</TABLE>
Fixed assets sold to Ugly Duckling Corporation have been reclassified to
"Assets held for sale" (see Note 13).
(5) COMMITMENTS, CONTINGENCIES AND CONCENTRATION OF CREDIT RISK
Leases -- Retail store locations are generally leased for up to five years
with certain rights to extend or terminate without penalty. Equipment leases are
for periods from one to three years. Lease expense was approximately $2,843,000
and $2,657,000 for the years ended June 30, 1997 and 1996, respectively. Lease
commitments (excluding those assumed by Ugly Duckling Corporation, see Note 13)
for years ending June 30 are as follows (dollars in thousands):
<TABLE>
<S> <C>
1998........................................................ $1,134
1999........................................................ 606
2000........................................................ 449
2001........................................................ 25
------
$2,214
======
</TABLE>
As of September 15, 1997, a majority of leases were assumed by the Ugly
Duckling Corporation. Leases not assumed in the sales transaction are reflected
in the above schedule. Of the $2.2 million in lease commitments not assumed by
Ugly Duckling Corporation, $1.2 million are being subleased.
Legal Proceedings -- At June 30, 1997, the Company and its subsidiaries in
their normal course of business were involved in various legal proceedings. In
the opinion of management, the ultimate disposition of such legal proceedings
will not have a material effect upon the Company's financial position, earnings
or liquidity.
(6) SENIOR LINE OF CREDIT
The Company had an $85,000,000 revolving line of credit with several
lending institutions (the "Senior Lending Group") which expired on April 30,
1997. The credit line was available for financing automobile installment
contracts and general corporate operations. Borrowings were made at a fixed rate
based on the Eurodollar Rate plus 3% (8.8% at June 30, 1997), or a variable rate
based on the lender's prime rate plus 2% (10.5% at June 30, 1997) at the
Company's discretion. For the year ended June 30, 1997, actual interest rates
ranged from 8.37% to 10.50%. The agreement required the Company to pay an annual
commitment fee of 0.375% for the unfunded portion of the line of credit.
F-63
<PAGE> 147
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The line of credit is collateralized by the Company's retail installment
contracts, inventory, intangibles and equipment. The agreement also contains
various provisions, the most restrictive of which require that the Company
maintain certain tangible net worth, leverage, and interest coverage ratios, as
defined. It also restricts the Company from declaring and paying dividends. As
of June 30, 1997, the Company had drawn $80,300,000 on the revolving line of
credit and incurred interest expense of approximately $6,060,000 for the year
then ended.
Effective April 30, 1997, the line of credit expired and was in technical
default. In addition, the Company was in violation of its tangible net worth and
earnings to fixed charges covenants at June 30, 1997. Pursuant to the September
15, 1997 Purchase and Sale Agreement (see Note 13), the Senior Lending Group
consented to the sale agreement which provides that Ugly Duckling Corporation
service the Company's unsecuritized retail installment contracts. The senior
line of credit will be repayable from future collections on the Company's retail
contracts (non-securitized) and any remaining collections associated with both
(i) the interest-only strip receivable and (ii) the securitized receivables. The
senior line of credit, as modified, earns interest at a rate of prime plus 1.5%.
Under the amended agreement, the Senior Lending Group retained the right to
demand payment in full.
(7) SUBORDINATED NOTES PAYABLE
During October 1994, the Company entered into an agreement with two
financial institutions to borrow $30,000,000 through the issuance of
subordinated notes. The notes bear interest at an annual rate of 11.75%, payable
quarterly. In connection with the notes, the Company has issued detachable
warrants to purchase 9,047,958 shares of "Class B" common stock at an exercise
price of $.38 per share which was the estimated fair value at date of issuance.
As of June 30, 1997, all of these warrants were exercisable. For the year ended
June 30, 1997, the Company incurred interest expense related to the subordinated
notes of approximately $3,525,000.
As a result of the technical default of the senior line of credit (see Note
6) and a cross-default provision, the subordinated notes were in technical
default as of April 30, 1997. The subordinated note holders consented to the
sale agreement which provides that Ugly Duckling Corporation service the
Company's unsecuritized retail installment contracts with all future collections
(net of servicing fees) going first to pay down the Senior Line of Credit. Any
remaining collections will be applied to repay the subordinated note holders.
(8) CHANGE IN CAPITAL STRUCTURE
On April 30, 1995, the Retail Company issued 13,500 shares of cumulative
preferred stock for cash. The preferred stock votes together with the
outstanding common stock as a single class on all actions to be voted on by the
stockholders of the Retail Company. The preferred stock was issued to some, but
not all existing shareholders of the Company. The preferred stock has a par
value of $100 per share, an annual dividend rate equal to $11.75 per share, and
is redeemable at either the holder's or Retail Company's option on or after
April 30, 2000 and April 30, 2001, respectively. The redemption price is set at
par unless the Retail Company elects to redeem all the shares at any time prior
to April 30, 2001, upon which the redemption price is set at $101 per share.
Cash proceeds from the issuance of the preferred stock was $1,351,350. In
connection with the preferred stock, the Retail Company has issued detachable
warrants to purchase 405,000 shares of the Company's "Class A" common stock at
an exercise price of $.38 per share, which was fair value at date of issuance.
The warrants expire if not exercised prior to December 31, 2004. As of June 30,
1997 all of these warrants were exercisable. Subsequent to year end the Company
discontinued dividends to the preferred shareholders.
F-64
<PAGE> 148
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) RELATED PARTY TRANSACTIONS
During fiscal year 1997, the Company's wholly-owned subsidiary, A&F,
commenced operations and incurred an operating loss of approximately $1.1
million through December 31, 1996. On December 31, 1996, A&F was purchased by
the Edwin L. Cox Company (the "Acquirer"). A similar group of shareholders hold
a substantial ownership interest in both companies. The Acquirer assumed all
assets and liabilities of A&F which resulted in a gain of $1.1 million. The net
effect of these transactions had no material effect on the Company's
consolidated net loss for the year ended June 30, 1997.
During 1997, the Company provided management services, including payroll
disbursement and customer payment collections for A&F. As of June 30, 1997, the
Company has a payable to A&F of approximately $214,000.
(10) INCENTIVE PLANS
The Company has a stock incentive plan (the "Plan") for key employees,
under which the maximum number of shares that may be granted in the aggregate is
10% of the outstanding shares of the Company's common stock subject to a cap of
12,000,000 shares. The Plan, which became effective April 1, 1991, provides for
the options to be granted, become exercisable, and terminate upon terms
established by the Board of Directors. Shares provided under the Plan vest at a
rate of one-sixth per year beginning on the second anniversary of the grant
date. Vested shares become exercisable at the earlier of the fifth anniversary
of the grant date, liquidation or dissolution of the Company, or the effective
date of an initial public offering. The Plan terminates April 1, 2001.
A summary of stock option activity under this Plan is as follows:
<TABLE>
<CAPTION>
OPTIONS OPTIONS OUTSTANDING
AVAILABLE ------------------------------
FOR GRANT SHARES PRICE PER SHARE
---------- ---------- ---------------
<S> <C> <C> <C>
Balance at June 30, 1994............. 3,654,000 8,346,000
Terminated........................... 1,200,000 (1,200,000) $0.34
Terminated........................... 54,000 (54,000) 0.38
Granted.............................. (1,551,600) 1,551,600 0.38
---------- ----------
Balance at June 30, 1995............. 3,356,400 8,643,600
Terminated........................... 1,185,600 (1,185,600) $0.38
Granted.............................. (560,000) 560,000 0.41
---------- ----------
Balance at June 30, 1996............. 3,982,000 8,018,000
Terminated........................... 108,000 (108,000) $0.38
Granted.............................. (290,000) 290,000 0.41
---------- ----------
Balance at June 30, 1997............. 3,800,000 8,200,000
========== ==========
</TABLE>
Of the options outstanding at June 30, 1997, 5,908,000 were exercisable.
The exercise price assigned on the grant date is determined by the Board of
Directors.
Given that a majority of the Company's operating assets were subsequently
sold (see Note 13), management believes the estimated fair market value of the
shares is minimal. As a result, the Company views the potential for any option
to be exercised as highly improbable.
In March 1994, the Company adopted a limited Managers Stock Purchase Plan
with respect to common stock of the Company for certain managers of the Retail
Company. The maximum number of shares of common stock which may be purchased
under this limited plan is 750,000 shares. This limited plan will afford each
manager to invest up to 50% of his or her full monthly after tax store net
profit bonus in common stock of
F-65
<PAGE> 149
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company. As of June 30, 1997, there were 17,180 shares of common stock
outstanding that have been issued pursuant to this plan at values ranging from
$.38 to $.41 per share. As a result of the sale mentioned above, all remaining
outstanding shares were repurchased in July 1997.
(11) INCOME TAXES
On April 30, 1995, the Retail Company issued 13,500 additional shares of
preferred stock which diluted the voting rights of its existing shareholders. As
a result, effective April 30, 1995, the Retail Company ceased to be a member of
the affiliated group ("deconsolidated" from KARS-YES Holdings Inc. and
subsidiaries) for Federal income tax purposes. Pursuant to California tax laws,
the Retail Company is required to continue to file on a combined basis with the
Company. The primary tax effect of the deconsolidation is the immediate
recognition of a loss resulting from discounts that arise upon the Retail
Company's sale of retail contracts ("retail contract discounts") to the Finance
Company. Because of the combined California filing requirement, retail contract
discounts will continue to be deferred for California tax purposes.
The provision for income taxes is as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
1997 1996 1995
------- ------ -------
<S> <C> <C> <C>
Current tax provision (benefit)............ $ (785) $ 478 $(3,896)
Deferred tax provision (benefit)........... (1,577) 1,361 5,284
------- ------ ------
$(2,362) $1,839 $ 1,388
======= ====== ======
</TABLE>
Reconciliations of the differences between income taxes computed at the
federal statutory rate and the consolidated income tax provision/(benefit) are
as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------
1997 1996 1995
-------- ------ ------
<S> <C> <C> <C>
Provision/(benefit) at federal statutory
rate......................................... $(13,974) $1,563 $1,209
State taxes.................................... (2,465) 276 179
Change in deferred tax valuation allowance..... 13,512 -- --
Other nondeductible items...................... 565 -- --
-------- ------ ------
Income tax provision/(benefit)....... $ (2,362) $1,839 $1,388
======== ====== ======
</TABLE>
The components of the deferred tax assets and liabilities are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------------------------------
FEDERAL STATE
------------------------ -----------------------
ASSETS LIABILITIES ASSETS LIABILITIES TOTAL
-------- ----------- ------- ----------- --------
<S> <C> <C> <C> <C> <C>
Retail contracts.............. $ -- $ (901) $ -- $ (289) $ (1,190)
Allowance for losses.......... 10,261 -- 3,250 -- 13,511
Securitized receivables....... -- (3,424) -- -- (3,424)
Inventory..................... 464 -- 28 -- 492
Fixed assets.................. 708 -- 56 -- 764
Other......................... 205 -- 88 -- 293
Net operating loss............ 3,217 -- 201 -- 3,418
-------- ------- ------- ----- --------
Deferred tax asset
(liability)................. 14,855 (4,325) 3,623 (289) 13,864
Valuation allowance........... (10,530) -- (3,334) -- (13,864)
-------- ------- ------- ----- --------
Net deferred tax liability.... $ 0
========
</TABLE>
F-66
<PAGE> 150
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------------------------------
FEDERAL STATE
------------------------ -----------------------
ASSETS LIABILITIES ASSETS LIABILITIES TOTAL
-------- ----------- ------- ----------- --------
<S> <C> <C> <C> <C> <C>
Retail contracts.............. $ 672 $ -- $ 6 $ -- $ 678
Allowance for losses.......... 4,387 -- 2,148 -- 6,535
Securitized receivables....... -- (6,298) -- (1,182) (7,480)
Excess servicing asset........ -- (1,336) -- (251) (1,587)
Inventory..................... -- (146) -- (9) (155)
Fixed assets.................. 318 -- 32 -- 350
Retail lease contracts........ -- (49) -- (9) (58)
Other......................... 412 -- 100 -- 512
-------- ------- ------- ----- --------
Deferred tax asset
(liability)................. 5,789 (7,829) 2,286 (1,451) (1,205)
Valuation allowance........... -- -- (352) -- (352)
-------- ------- ------- ----- --------
Net deferred tax liability.... $ (1,557)
========
</TABLE>
As of June 30, 1997, the Company has a net operating loss of approximately
$10,900,000. This net operating loss will be carried forward to offset future
taxable income or if unused, will expire by June 30, 2012. Management believes
that given (i) the magnitude of the Company's net operating loss carryforward
and (ii) the Company's limited ability to generate future taxable income
sufficient to exceed the net operating loss carryforward, it is highly probable
that no further taxes will be incurred by the Company as it winds down
operations. Therefore, no further deferred tax assets on liabilities are
recognized.
(12) RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
Risk Management -- The Company utilizes an interest rate swap to hedge
portions of its variable-rate debt outstanding (including advances under the
revolving line of credit and amounts advanced against securitized loan pools),
thereby allowing the Company to lock-in a fixed rate. As of June 30, 1997, the
notional amount of the swap contract was $50 million, upon which the Company
pays a fixed rate (5.77%) and receives the lesser of the quarterly beginning or
ending one-month commercial paper rate (5.45%) at June 30, 1997. The swap
agreement has no imbedded options or other terms that involve a higher level of
complexity or risk. In addition, the Company has interest rate caps (strike at
11% one-month commercial paper rate) intended to preserve the minimum spread
associated with each securitized pool of loans. As of June 30, 1997, the
notional amount of the interest rate caps was $61.4 million. The Company does
not use derivative financial instruments for trading or speculative purposes.
The swap was subsequently terminated on September 5, 1997, resulting in the
Company paying $258,700.
Financial Instruments -- Statement of Financial Accounting Standards No.
107, "Disclosures about Fair Value of Financial Instruments" ("SFAS No. 107"),
requires disclosure of fair value information about financial instruments,
whether or not recognized on the balance sheet. Fair values are based on
estimates using present value or other valuation techniques in cases where
quoted market prices are not available. These techniques are significantly
effected by the assumptions used, including the discount rate and estimates of
future cash flows. SFAS No. 107 excludes certain financial instruments and all
non-financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented in the accompanying table do not
represent the underlying value of the Company.
F-67
<PAGE> 151
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The estimated fair values of the Company's financial instruments are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------
1997 1996
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------- ------- ------- -------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents............... $ 1,455 $ 1,455 $ 1,703 $ 1,703
Securitized receivables................. 10,072 10,072 19,352 17,865
Excess servicing asset.................. -- -- 3,929 3,410
Interest-only strip..................... 535 535
Retail contracts, net................... 87,911 87,911 57,206 66,116
Financial Liabilities:
Subordinated notes payable.............. $30,000 $18,569 $30,000 $33,166
Senior line of credit................... 80,300 79,035 39,000 39,000
Servicing liability..................... 823 823
Off Balance Sheet Financial Instruments:
Interest rate swap...................... $ -- $ (191) $ (9) $ (26)
Interest rate caps...................... -- 2 -- 3
</TABLE>
The following fair value estimates, methods and assumptions were used to
measure each class of financial instruments for which it is practical to
estimate fair value:
Cash and cash equivalents: The carrying amount is considered to be a
reasonable estimate of fair value.
Securitized receivables, excess servicing asset, interest-only strip: The
fair value was estimated by discounting future cash flows using rates available
for instruments with similar risk and remaining maturities. In determining fair
value, the prepayment and loss factors utilized were not significantly different
from the Company's actual prepayment and loss experience.
Retail contracts, net of unearned finance charges: Fair value was estimated
using investor yields associated with securitized sales currently entered into
by the Company, considering anticipated prepayment, losses and other factors.
Subordinated notes payable: Fair value was estimated based on the net cash
flows (after repayment of Senior Line of Credit) ultimately available for debt
with similar terms and maturity. The net cash flows were based on an estimate of
future collections (net of servicing fees) on the Company's outstanding retail
contracts.
Senior line of credit: Fair value was estimated based on the net cash flows
ultimately available to pay down the line of credit, discounted at rates
available for debt with similar terms and maturity, considering risks given the
current status of the Company. The net cash flows were based on an estimate of
future collections (net of servicing fees) on the Company's outstanding retail
contracts.
Servicing liability: Fair value was estimated based on an analysis of
discounted cash flows that incorporates estimates of (1) market servicing costs,
(2) projected ancillary servicing revenue, (3) projected prepayment rates that
are based on changes in interest rates, and (4) market profit margin.
(13) SALE OF CERTAIN ASSETS AND LIABILITIES TO UGLY DUCKLING CORPORATION
On September 15, 1997 the Company entered into an agreement with Ugly
Duckling Corporation (the "Buyer") to sell the majority of its operating assets
and facilities of the Finance and Retail operations. The
F-68
<PAGE> 152
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
aggregate purchase price for the assets acquired and the assumption of certain
liabilities was approximately $5.5 million. The assets acquired and liabilities
assumed consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
CARRYING VALUE ALLOWANCE NET BOOK VALUE
-------------- --------- --------------
<S> <C> <C> <C>
Automobile inventory............... $3,701 $(1,181) $2,520
Fixed assets....................... 3,179 -- 3,179
Other assets....................... 259 (128) 131
Accrued vacation................... (310) -- (310)
------ ------- ------
$6,829 $(1,309) $5,520
====== ======= ======
</TABLE>
Concurrent with the sale, the Company entered into an agreement whereby the
Buyer will service the outstanding retail contract portfolio (both securitized
and company owned) and remit all future collections (net of servicing fees) to
pay down the respective obligations. The Buyer is to be reimbursed for all
direct collection expenses in addition to a monthly servicing fee. Two of the
Company's existing retail stores were not acquired: one in Baldwin Park,
California and one in Atlanta, Georgia. In addition, the Company's retail store
in "Northeast Dallas" was not acquired, however, the Buyer is operating out of
this location and is leasing the facilities from the Company. All other retail
stores were acquired, and their corresponding leases assumed. The Company will
not operate out of the remaining store locations, and will pursue subleasing,
conveying or terminating the existing leases.
(14) BUSINESS SEGMENT INFORMATION
Operating results and other financial data are presented for the principal
business segments of the Company for the years ended June 30, 1997, 1996 and
1995, respectively. The Company has three distinct business segments. These
consist of retail car sales operations (Retail Operations), the income generated
from the finance receivables generated at the Retail Operations (Finance
Operations) and corporate and other operations. Identifiable assets by business
segment are those assets used in each segment of Company operations (dollars in
thousands):
<TABLE>
<CAPTION>
RETAIL FINANCE
OPERATIONS OPERATIONS CORPORATE CONSOLIDATED
---------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Year ended or at June 30, 1997
Revenue............................ $ 144,129 $ 21,504 -- $165,633
Depreciation and amortization...... 2,162 640 -- 2,802
Operating income................... (11,450) (28,585) -- (40,035)
Identifiable assets................ 10,599 99,978 $ 1,416 111,993
Year ended or at June 30, 1996
Revenue............................ $ 118,176 $ 23,486 -- $141,662
Depreciation and amortization...... 968 379 -- 1,347
Operating income................... 119 4,478 -- 4,597
Identifiable assets................ 23,006 81,470 $ 3,852 108,328
Year ended or at June 30, 1995
Revenue............................ $ 81,832 $ 15,796 -- $ 97,628
Depreciation and amortization...... 474 46 -- 520
Operating income................... 1,259 2,298 -- 3,557
Identifiable assets................ 11,279 87,648 $ 2,954 101,881
</TABLE>
F-69
<PAGE> 153
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) QUARTERLY STATEMENT OF OPERATIONS
CONSOLIDATED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Automotive sales.......................... $37,724 $31,742 $41,042 $ 33,621 $144,129
Cost of automotive sales.................. 23,996 21,242 25,129 28,066 98,433
------- ------- ------- -------- --------
Gross margin on automotive sales..... 13,728 10,500 15,913 5,555 45,696
Provision for losses on retail
contracts............................... 7,161 6,549 10,895 37,748(1) 62,353
------- ------- ------- -------- --------
6,567 3,951 5,018 (32,193) (16,657)
Gain on sale of receivables............... 1,746 2,276 866 -- 4,888
Finance charge income..................... 3,366 3,586 4,809 4,855 16,616
------- ------- ------- -------- --------
Operating profit (loss) before
expenses........................... 11,679 9,813 10,693 (27,338) 4,847
Expenses:
Selling and store....................... 5,278 4,870 5,470 6,166 21,784
Finance operations...................... 1,689 1,729 2,026 2,203 7,647
General and administrative.............. 494 511 497 561 2,063
Depreciation and amortization........... 440 462 500 1,400 2,802
------- ------- ------- -------- --------
Earnings (loss) before interest and
income taxes....................... 3,778 2,241 2,200 (37,668) (29,449)
Interest expense, net..................... 1,923 2,366 2,425 3,872 10,586
------- ------- ------- -------- --------
Earnings (loss) before income
taxes.............................. 1,855 (125) (225) (41,540) (40,035)
Provision (benefit) for income taxes...... 742 (50) 192 (3,246) (2,362)
------- ------- ------- -------- --------
Net earnings (loss)............. $ 1,113 $ (75) $ (417) $(38,294) $(37,673)
======= ======= ======= ======== ========
</TABLE>
- ---------------
(1) See Note 2 for discussion on changes in provision for losses.
F-70
<PAGE> 154
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Automotive sales........................ $26,851 $24,615 $32,118 $34,592 $118,176
Cost of automotive sales................ 16,177 15,665 20,004 22,123 73,969
------- ------- ------- ------- -------
Gross margin on automotive sales... 10,674 8,950 12,114 12,469 44,207
Provision for losses on retail
contracts............................. 5,907 8,915 7,067 7,610 29,499
------- ------- ------- ------- -------
4,767 35 5,047 4,859 14,708
Gain on sale of receivables............. -- 5,183 1,109 1,798 8,090
Finance charge income................... 4,688 4,359 2,955 3,394 15,396
------- ------- ------- ------- -------
Operating profit before expenses... 9,455 9,577 9,111 10,051 38,194
Expenses:
Selling and store..................... 3,434 4,047 4,248 4,682 16,411
Finance operations.................... 1,497 2,174 1,571 1,226 6,468
General and administrative............ 429 519 623 809 2,380
Depreciation and amortization......... 286 363 539 159 1,347
------- ------- ------- ------- -------
Operating earnings before interest
and income taxes................. 3,809 2,474 2,130 3,175 11,588
Interest expense........................ 1,968 1,638 1,546 1,839 6,991
------- ------- ------- ------- -------
Earnings before income taxes....... 1,841 836 584 1,336 4,597
Provision for income taxes.............. 736 334 235 534 1,839
------- ------- ------- ------- -------
Net earnings.................. $ 1,105 $ 502 $ 349 $ 802 $ 2,758
======= ======= ======= ======= =======
</TABLE>
F-71
<PAGE> 155
KARS-YES HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) KARS-YES HOLDINGS INC.
The following are condensed balance sheets of KARS-YES Holdings Inc. as of
June 30 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................. $ 1,333 $ 1,452
Fixed assets, net..................................................... -- 612
Other assets, net..................................................... 83 1,788
Intercompany receivable............................................... 27,744 24,506
Investments in subsidiaries........................................... (3,325) 35,567
-------- -------
Total assets................................................ $ 25,835 $63,925
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Accounts payable...................................................... $ 4,107 $ 3,629
Accrued liabilities................................................... 641 215
Subordinated notes payable............................................ 30,000 30,000
-------- -------
Total liabilities........................................... 34,748 33,844
-------- -------
Redeemable cumulative preferred stock of subsidiary................... 1 1
-------- -------
Shareholders' equity (deficit):
Class A common stock................................................ 1,200 1,203
Treasury stock...................................................... (300) (300)
Additional paid-in capital.......................................... 23,511 23,610
Unrealized gain on investment....................................... (1,087)
Retained earnings................................................... (32,238) 5,567
-------- -------
Total shareholders' equity (deficit)........................ (8,914) 30,080
-------- -------
Total liabilities and shareholders' equity (deficit)........ $ 25,835 $63,924
======== =======
</TABLE>
The ability of the Company's subsidiaries to transfer funds to the Company
in the form of dividends is restricted pursuant to the terms of the senior line
of credit entered into by the Company's Finance Operation.
F-72
<PAGE> 156
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
COMPANY SEMINOLE EZ PLAN KARS ADJUSTMENTS COMBINED
------- -------- ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales of Used Cars......... $46,013 $4,430 $10,730 $ 84,993 $ -- $ 146,166
Less:
Cost of Used Cars Sold... 24,000 4,392 7,675 60,382 291(a) 96,740
Provision for Credit
Losses................ 8,829 -- 5,316 50,914 -- 65,059
------- ------- ------- ------- ------- --------
13,184 38 (2,261) (26,303) (291) (15,633)
------- ------- ------- ------- ------- --------
Interest Income............ 12,608 307 1,357 12,957 (12,957)(b) 14,272
Gain (Loss) on Sale of
Loans.................... 12,810 -- -- 866 (866)(c) 12,810
------- ------- ------- ------- ------- --------
25,418 307 1,357 13,823 (13,823) 27,082
------- ------- ------- ------- ------- --------
Other income............... 3,574 20 977 -- 2,806(d) 7,377
------- ------- ------- ------- ------- --------
Income before Operating
Expenses................. 42,176 365 73 (12,480) (11,308) 18,826
Operating Expenses......... 28,111 374 3,561 22,576 (1,465)(e) 53,119
------- ------- ------- ------- --------
(155)(f)
(37)(g)
154(h)
Income (Loss) before
Interest Expense......... 14,065 (9) (3,488) (35,056) (9,805) (34,293)
Interest Expense........... 1,336 -- 359 8,303 169(i) 3,116
------- ------- ------- ------- ------- --------
(7,051)(j)
Earnings (Loss) before
Income Taxes............. 12,729 (9) (3,847) (43,359) (2,923) (37,409)
Income Taxes (Benefit)..... 5,156 -- -- (3,054) (2,102)(k) --
------- ------- ------- ------- ------- --------
Net Earnings (Loss)........ $ 7,573 $ (9) $(3,847) $(40,305) $ (821) $ (37,409)
======= ======= ======= ======= ======= ========
Earnings (Loss) per
Share.................... $0.43 $(2.10)
======= ========
Shares Used in
Computation.............. 17,780 17,780
======= ========
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
condensed combined statement of operations.
F-73
<PAGE> 157
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
COMPANY SEMINOLE EZ PLAN KARS ADJUSTMENTS COMBINED
------- -------- ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales of Used Cars........ $53,768 $ 11,827 $42,303 $136,176 $ -- $ 244,074
Less:
Cost of Used Cars
Sold................. 29,890 9,417 30,800 87,365 (2)(a) 157,470
Provision for Credit
Losses............... 9,811 7,107 4,512 28,387 -- 49,817
------- ------- ------- -------- ------- --------
14,067 (4,697) 6,991 20,424 2 36,787
------- ------- ------- -------- ------- --------
Interest Income........... 15,856 10,193 6,418 13,301 (13,301)(b) 32,467
Gain (Loss) on Sale of
Loans................... 4,434 (1,457) -- 6,929 (6,929)(c) 2,977
------- ------- ------- -------- ------- --------
20,290 8,736 6,418 20,230 (20,230) 35,444
------- ------- ------- -------- ------- --------
Other income.............. 1,571 1,620 2,926 -- 3,150(d) 9,267
------- ------- ------- -------- ------- --------
Income before Operating
Expenses................ 35,928 5,659 16,335 40,654 (17,078) 81,498
Operating Expenses........ 24,700 10,723 14,253 29,330 (1,581)(e) 77,645
------- ------- ------- -------- --------
211(f)
705(g)
(696)(h)
Income (Loss) before
Interest Expense........ 11,228 (5,064) 2,082 11,324 (15,717) 3,853
Interest Expense.......... 5,262 3,742 1,880 7,674 477(i) 11,361
------- ------- ------- -------- --------
(7,674)(j)
Earnings (Loss) before
Income Taxes............ 5,966 (8,806) 202 3,650 (8,520) (7,508)
Income Taxes (Benefit).... 100 -- -- 1,461 (1,561)(k) --
------- ------- ------- -------- ------- --------
Net Earnings (Loss)....... $ 5,866 $ (8,806) $ 202 $ 2,189 $ (6,959) $ (7,508)
======= ======= ======= ======== ======= ========
Earnings (Loss) per
Share................... $0.60(l) $(1.02)(1)
======= ========
Shares Used in
Computation............. 8,283 8,283
======= ========
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
condensed combined statement of operations.
F-74
<PAGE> 158
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS OF OPERATIONS
(1) BASIS OF ACCOUNTING
The following unaudited pro forma condensed combined financial information
of the Company presents the pro forma combined statements of operations for the
nine months ended September 30, 1997, and the year ended December 31, 1996. The
pro forma combined statement of operations for the year ended December 31, 1996
has been adjusted to give effect to (i) the Company's acquisition of Seminole
Finance Corporation and related companies ("Seminole"), (ii) E-Z Plan, Inc.
("E-Z Plan") and (iii) Kars-Yes Holdings Inc. ("Kars"), in each case as if the
transactions had occurred on January 1, 1996 (collectively referred to as the
"1997 Acquisitions" or "Acquired Companies"). The pro forma combined statement
of operations for the nine months ended September 30, 1997 gives effect to the
1997 Acquisitions as if the 1997 Acquisitions had occurred on January 1, 1997.
The combination of the Company's audited statement of operations for the
year ended December 31, 1996 with the audited statements of operations of
Seminole and E-Z Plan and the unaudited statement of operations of Kars for the
same period results in a combined loss of $7.5 million. In addition, the
combination of the Company's unaudited statement of operations for the nine
month period ended September 30, 1997 with the unaudited statements of
operations of the 1997 Acquisitions for the same period results in a combined
loss of $37.4 million. These pro forma results are not necessarily indicative of
the future results of operations of the Company or the results of operations
which would have resulted had the Company and the Acquired Companies been
combined during the periods presented. In addition, the pro forma results are
not intended to be a projection of future results.
The unaudited pro forma condensed combined financial information should be
read in conjunction with the historical Consolidated Financial Statements of the
Company and the Notes thereto and management's discussion and analysis contained
elsewhere in this Prospectus, and the respective audited financial statements of
the 1997 Acquisitions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and Notes thereto.
(2) PROFORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(a) Adjustment to convert E-Z Plan inventory from last-in, first-out (LIFO) to
specific identification basis of accounting.
(b) Adjustment to eliminate interest income on the Kars loan portfolio not
purchased by Ugly Duckling.
(c) Adjustment to eliminate gain on sale on the Kars loan portfolio, as the loan
portfolio was not purchased by Ugly Duckling.
(d) Adjustment to record servicing fee income for servicing fees generated by
Ugly Duckling for the servicing of the loan portfolio retained by Kars and
serviced by Ugly Duckling.
(e) Pursuant to the terms of the servicing agreement between Ugly Duckling and
Kars, Kars is responsible for bearing the collection costs of its retained
loan portfolio. Adjustment to decrease general and administrative expenses
for vehicle repossession and reconditioning expenses related to the Kars
loan portfolio not purchased by Ugly Duckling.
(f) Adjustment to rent expense for difference in lease rates for certain
properties.
(g) Amortization of goodwill over a period ranging from 15 years to 20 years.
(h) Adjustment to reverse key man life insurance expense for policies retained
by E-Z Plan.
(i) The former stockholders of E-Z Plan had provided financing to E-Z Plan for
use in purchasing and reconditioning its inventory and in funding operating
expenses. No interest was charged, except for
F-75
<PAGE> 159
advances related to inventory purchases. This pro forma adjustment is to
charge interest at Ugly Duckling's average borrowing rate as if the entire
balance of the advances from the shareholders had been charged interest.
(j) Adjustment to reduce interest expense for the carrying cost of the loan
portfolio retained by Kars.
(k) Adjust income tax expense for the impact of the pro forma adjustments.
(l) Earnings per share calculated after giving effect to payment of $916,000 in
preferred stock dividends in 1996.
F-76
<PAGE> 160
======================================================
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 10
The Company................................ 18
FMAC Transaction........................... 18
Use of Proceeds............................ 23
Price Range of Common Stock................ 23
Dividend Policy............................ 23
Capitalization............................. 24
Selected Consolidated Financial Data....... 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 30
Business................................... 53
Management................................. 63
Security Ownership of Certain Beneficial
Owners and Management.................... 70
Certain Relationships and Related
Transactions............................. 72
Description of Capital Stock............... 73
Selling Securityholders.................... 78
Plan of Distribution....................... 78
Legal Matters.............................. 81
Experts.................................... 81
Available Information...................... 82
Index to Financial Statements.............. F-1
</TABLE>
======================================================
======================================================
5,666,190 Shares
Common Stock
666,190
Common Stock Purchase Warrants
[UGLY DUCKLING LOGO]
-----------------------
PROSPECTUS
-----------------------
February , 1998
======================================================
<PAGE> 161
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Other expenses in connection with the issuance and distribution of the
securities to be registered hereunder, all of which will be paid by the
registrant, will be substantially as follows:
<TABLE>
<CAPTION>
ITEM AMOUNT
------------------------------------------------------------------ --------
<S> <C>
SEC Registration Fee............................................. $ 14,445
Nasdaq Filing Fee................................................ 17,500
*Blue Sky Fees and Expenses (including legal fees)................ 10,000
*Accounting Fees and Expenses..................................... 90,000
*Legal Fees and Expenses.......................................... 90,000
*Printing and Engraving........................................... 70,000
*Registrar and Transfer Agent's Fees.............................. 5,000
*Miscellaneous Expenses........................................... 13,055
--------
Total................................................... $310,000
========
</TABLE>
- ---------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation provides that a director of the
Company shall not be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability for: (i) any breach of the director's duty of loyalty to the Company
or its stockholders; (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) liability for
payments of dividends or stock purchases or redemptions in violation of Section
174 of the Delaware General Corporation Law; or (iv) any transaction from which
the director derived an improper personal benefit. In addition, the Company's
Certificate of Incorporation provides that the Company shall to the fullest
extent authorized by the Delaware General Corporation Law, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the corporation to provide broader
indemnification rights than such law permitted the corporation to provide prior
to such amendment), indemnify and hold harmless any person who was or is a
party, or is threatened to be made a party to or is otherwise involved in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative by reason of the fact that such person
is or was a director or officer of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, including
service with respect to an employee benefit plan (hereinafter an "Indemnitee")
against expenses, liabilities and losses (including attorneys' fees, judgments,
fines, excise taxes or penalties paid in connection with the Employee Retirement
Income Security Act of 1974, as amended, and amounts paid in settlement)
reasonably incurred or suffered by such Indemnitee in connection therewith;
provided, however, that except as otherwise provided with respect to proceedings
to enforce rights to indemnification, the Company shall indemnify any such
Indemnitee in connection with a proceeding (or part thereof) initiated by such
Indemnitee only if such proceeding or part thereof was authorized by the board
of directors of the Company.
The right to indemnification set forth above includes the right to be paid
by the Company the expenses (including attorneys' fees) incurred in defending
any such proceeding in advance of its final disposition; provided, however,
that, if the Delaware General Corporation Law requires, an advancement of
expenses incurred by an Indemnitee in his capacity as a director or officer (and
not in any other capacity in which service was or is rendered by such
Indemnitee, including, without limitation, service to an employee benefit plan)
shall be made only upon delivery to the Company of an undertaking, by or on
behalf of such Indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is not
further right to appeal that such Indemnitee is not entitled to be indemnified
for such expenses
II-1
<PAGE> 162
under this section or otherwise. The rights to indemnification and to the
advancement of expenses conferred herewith are contract rights and continue as
to an Indemnitee who has ceased to be a director, officer, employee or agent and
inure to the benefit of the Indemnitee's heirs, executors and administrators.
The Delaware General Corporation Law provides that indemnification is
permissible only when the director, officer, employee, or agent acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the conduct was unlawful. The
Delaware General Corporation Law also precludes indemnification in respect of
any claim, issue, or matter as to which an officer, director, employee, or agent
shall have been adjudged to be liable to the Company unless and only to the
extent that the Court of Chancery or the court in which such action or suit was
brought shall determine that, despite such adjudication of liability but in view
of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
For information regarding the Company's undertaking to submit to
adjudication the issue of indemnification for violation of the securities laws,
see Item 17 hereof.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On May 31, 1994: (i) Steven P. Johnson purchased 290,000 shares of Common
Stock from the Company for an aggregate purchase price of $25,000; (ii) Scott A.
Allen and Wm. Don Gray each purchased 116,000 shares of Common Stock from the
Company for an aggregate purchase price of $10,000; (iii) Steven T. Darak and
Nancy V. Young each purchased 58,000 shares of Common Stock from the Company for
an aggregate purchase price of $5,000; (iv) Peter R. Fratt purchased 46,400
shares of Common Stock from the Company for an aggregate purchase price of
$4,000; (v) and Eric J. Splaver and Mary E. Reiner each purchased 11,600 shares
of Common Stock from the Company for an aggregate purchase price of $1,000.
On March 22, 1995, Walter T. Vonsh purchased 58,000 shares of Common Stock
from the Company for an aggregate purchase price of $5,000.
On August 31, 1995, SunAmerica purchased $3 million of the Company's
convertible subordinated debt. This indebtedness was due December 31, 1998, and
bore interest at a per annum rate of 12.5%, payable quarterly. Effective June
21, 1996, SunAmerica converted the note into Common Stock of the Company at the
initial public offering price per share (444,444 shares at the initial public
offering price of $6.75 per share).
On December 31, 1995, Verde Investments converted $10,000,000 of
subordinated debt into 1,000,000 shares of the Company's Preferred Stock. In
November 1996, the Preferred Stock was redeemed by the Company.
On April 24, 1996, the Company reincorporated from Arizona to Delaware by
way of a merger in which the Company, an Arizona corporation, merged with and
into a newly created Delaware subsidiary of the Company. In the merger, each
share of the Arizona corporation's issued and outstanding common stock was
exchanged for 1.16 shares of the Delaware corporation's common stock and each
option to purchase shares of the Arizona corporation's common stock was
exchanged for 1.16 options to purchase shares of the Delaware corporation's
common stock. All share figures set forth above give effect to this exchange
ratio.
On February 13, 1997, the Company sold 5,075,500 shares of Common Stock to
approximately 115 institutional purchasers for an aggregate purchase price of
$94,531,188. Friedman, Billings, Ramsey & Co., Inc. acted as placement agent in
the transaction. The total proceeds to the Company, net of discounts and
commissions, was $89,804,629 before deducting offering expenses.
On August 6, 1997, the Company entered into an employment agreement with
Steven A. Tesdahl, Senior Vice President -- Chief Information Officer of the
Company, which agreement contains a commitment to grant on January 15, 1998 a
number of shares of unregistered Common Stock of the Company valued at $100,000
as of September 1, 1997. On or about January 15, 1998, the Company issued a net
amount of 4,565 shares of Common Stock to Mr. Tesdahl.
In two separate transactions in August and December, 1997, the Company
issued warrants to purchase 389,800 and 110,200 shares of Common Stock,
respectively, to members of the Bank Group in connection with the Company's
purchase of the Senior Bank Debt in the FMAC Bankruptcy Case. The warrants to
II-2
<PAGE> 163
purchase 110,200 shares of Common Stock were subsequently returned to the
Company and cancelled pursuant to a negotiated settlement of a dispute with the
purchasers thereof.
Exemption from registration for each transaction described above was
claimed pursuant to Section 4(2) of the Securities Act regarding transactions by
an issuer not involving any public offering and/or pursuant to Rule 145 under
the Securities Act regarding transactions the sole purpose of which is to change
an issuer's domicile solely within the United States.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- ----------------------------------------------------------------------------------
<S> <C>
3.1 Certificate of Incorporation of the Registrant Amended and Restated as of May 15,
1997(5)
3.2 Bylaws of the Registrant(5)
4.1 Certificate of Incorporation of the Registrant (filed as Exhibit 3.1)
4.2 Form of Warrant Agreement between the Registrant and Harris Trust Company of
California, as warrant agent, with respect to the Warrants
4.3 Form of Certificate representing Common Stock(1)
4.4 10% Subordinated Debenture of the Registrant issued to Verde Investments, Inc.
(previously filed)
4.5 Form of Warrant issued to Cruttenden Roth Incorporated as Representative of the
several underwriters(1)
4.6 Form of Warrant issued to SunAmerica Life Insurance Company(1)
4.7 Warrant Agreement between the Registrant and Harris Trust Company of California,
as warrant agent, with respect to Bank Group Warrants and certain additional
warrants issued in August of 1997(6)
5 Opinion of Snell & Wilmer L.L.P. regarding the legality of the securities being
registered
10.1 Amended and Restated Motor Vehicle Installment Contract Loan and Security
Agreement between Registrant and General Electric Capital Corporation(8)
10.1(a) Assumption and Amendment Agreement between the Registrant and General Electric
Capital Corporation(2)
10.1(b) Amendment No. 1 to Amended and Restated Motor Vehicle Installment Contract Loan
and Security Agreement between Registrant and General Electric Capital Corporation
dated December 22, 1997 (previously filed)
10.2 Note Purchase Agreement between the Registrant and SunAmerica Life Insurance
Company(1)
10.2(a) First Amendment to Note Purchase Agreement between the Registrant and SunAmerica
Life Insurance Company(1)
10.2(b) Second Amendment to Note Purchase Agreement between the Registrant and SunAmerica
Life Insurance Company(1)
10.2(c) Third Amendment to Note Purchase Agreement between the Registrant and SunAmerica
Life Insurance Company(1)
10.2(d) Fourth Amendment to Note Purchase Agreement between the Registrant and SunAmerica
Life Insurance Company(1)
10.2(e) Commitment Letter entered into between the Registrant and SunAmerica Life
Insurance Company(1)
10.2(f) Letter Agreement regarding Note Conversion between the Registrant and SunAmerica
Life Insurance Company(1)
</TABLE>
II-3
<PAGE> 164
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- ----------------------------------------------------------------------------------
<S> <C>
10.3 Amended and Restated Registration Rights Agreement between the Registrant and
SunAmerica Life Insurance Company(1)
10.4 Loan Purchase Agreement dated as of August 20, 1997 among the Registrant and
certain banks(6)
10.4(a) Assignment of Loan and Bank Claim dated as of August 20, 1997 among the Registrant
and certain banks, as assignors(6)
10.4(b) Security Agreement dated as of August 20, 1997 among the Registrant, as obligor,
and certain banks(6)
10.4(c) Payment Guaranty dated as of August 20, 1997 of certain affiliates of the
Registrant, as guarantors(6)
10.5 Restated (as of March 14, 1997) Ugly Duckling Corporation Long-Term Incentive
Plan(5)
10.6 Employment Agreement between the Registrant and Ernest C. Garcia, II(1)
10.7 Employment Agreement between the Registrant and Steven T. Darak(1)
10.8 Employment Agreement between the Registrant and Wally Vonsh(1)
10.8(a) Modification of Employment Agreement between Registrant and Wally Vonsh
(previously filed)
10.9 Amended and Restated Employment Agreement between the Registrant and Donald L.
Addink(8)
10.10 Employment Agreement between the Registrant and Russell Grisanti(5)
10.11 Employment Agreement between the Registrant and Steven A. Tesdahl(8)
10.12 Land Lease Agreement between the Registrant and Verde Investments, Inc. for
property located at 5104 West Glendale Avenue in Glendale, Arizona(1)
10.13 Building Lease Agreement between the Registrant and Verde Investments, Inc. for
property and buildings located at 9630 and 9650 North 19th Avenue in Phoenix,
Arizona(1)
10.14 Land Lease Agreement between the Registrant and Verde Investments, Inc. for
property located at 330 North 24th Street in Phoenix, Arizona(1)
10.15 Land Lease Agreement between the Registrant and Verde Investments, Inc. for
property located at 333 South Alma School Road in Mesa, Arizona(1)
10.16 Lease Agreements between the Registrant and Blue Chip Motors, the Registrant and S
& S Holding Corporation, and the Registrant and Edelman Brothers for certain
properties located at 3901 East Speedway Boulevard in Tucson, Arizona(1)
10.17 Real Property Lease between the Registrant and Peter and Alva Keesal for property
located at 3737 South Park Avenue in Tucson, Arizona(1)
10.18 Land Lease Agreement between the Registrant and Verde Investments, Inc. for
property located at 2301 North Oracle Road in Tucson, Arizona(1)
10.19 Related Party Transactions Modification Agreement between the Registrant and Verde
Investments, Inc.(1)
10.20 Form of Indemnity Agreement between the Registrant and its directors and
officers(1)
10.21 Ugly Duckling Corporation 1996 Director Incentive Plan(1)
10.22 Purchase Agreement, dated February 10, 1997 between the Registrant and Friedman,
Billings, Ramsey & Co., Inc. (10)
10.23 Agreement of Purchase and Sale of Assets dated as of December 31, 1996(3)
10.23(a) First Amendment to Agreement of Purchase and Sale of Assets dated as of June 6,
1997(5)
10.24 Agreement of Purchase and Sale of Assets among the Registrant E-Z Plan, Inc.,
shareholders of E-Z Plan, Inc., and certain lessors, dated as of March 5, 1997(4)
10.25 Agreement for Purchase and Sale of Certain Assets among Registrant, Kars-Yes
Holdings Inc. and certain other parties, dated as of September 15, 1997(7)
10.26(a) Portfolio Servicing Agreement among Registrant, Kars-Yes Financial, Inc., and
certain other parties, dated as of September 15, 1997(7)
</TABLE>
II-4
<PAGE> 165
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- ----------------------------------------------------------------------------------
<S> <C>
10.26(b) Subservicing Agreement among Registrant, Kars-Yes Financial, Inc., and certain
other parties, dated as of September 15, 1997(7)
10.27 Binding Agreement to Propose and Support Modified Plan Agreement dated as of
December 15, 1997 among the Registrant, FMAC and the Official Committee of
Unsecured Creditors of FMAC(11)
10.28 Purchase Agreement dated as of December 18, 1997 by and among Contract Purchaser,
Registrant and Lasalle National Bank as Agent(11)
10.29 Guaranty dated as of December 18, 1997 by Registrant in favor of Contract
Purchaser(11)
10.30 Servicing Agreement dated as of December 18, 1997 between Registrant and Contract
Purchaser(11)
10.31 FMAC Guaranty and Stock Pledge Agreement among FMAC, Registrant and certain banks
10.32 Contribution Agreement between Registrant and FMAC
10.33 Form of Indemnification Agreement between the Company and FMAC (to be filed by
Pre-Effective Amendment)
11 Earnings (Loss) per Share Computation (8)
21 List of Subsidiaries (previously filed)
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Barton & Company, P.A.
23.4 Consent of Ernst & Young LLP.
23.5 Consent of Coopers & Lybrand L.L.P.
23.6 Consent of Snell & Wilmer L.L.P. (included in Exhibit 5)
24 Power of Attorney (included in signature pages)
27 Financial Data Schedule (previously filed)
</TABLE>
- ---------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-3998), effective June 18, 1996.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-13755), effective October 30, 1996.
(3) Incorporated by reference to the Company's Current Report on Form 8-K,
filed January 30, 1997.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K,
filed March 31, 1997.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
filed August 14, 1997.
(6) Incorporated by reference to the Company's Current Report on Form 8-K,
filed September 5, 1997.
(7) Incorporated by reference to the Company's Current Report on Form 8-K,
filed October 3, 1997.
(8) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
filed November 14, 1997.
(9) Incorporated by reference to the Company's Current Report on Form 8-K,
filed November 20, 1997.
(10) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-22237).
(11) Incorporated by reference to the Company's Current Report on Form 8-K,
filed January 2, 1998.
II-5
<PAGE> 166
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table
in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4), or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 167
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Pre-Effective Amendment No. 1 to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Phoenix, State of
Arizona, on February 4, 1998.
Ugly Duckling Corporation
By: /s/ ERNEST C. GARCIA II
--------------------------------------
Ernest C. Garcia, II
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Ernest C. Garcia, II, Gregory B. Sullivan, Steven
P. Johnson and Steven T. Darak, and each of them, in his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Form S-1 Registration
Statement and to sign any registration statement for the same offering that is
to be effective upon filing pursuant to Rule 462(b) of the Securities Act, and
to file the same, with all exhibits thereto, and all documents in connection
therewith, with the Commission, granting unto said attorneys-in-fact and agents,
and each of them, in full power and authority to do and perform each and every
act and thing requisite and necessary to be done in and about the premises, as
fully and to all intents and purposes as he might or could do in person hereby
ratifying and confirming that all said attorneys-in-fact and agents, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------- ------------------
<C> <S> <C>
/s/ ERNEST C. GARCIA, II Chief Executive Officer and February 4, 1998
- --------------------------------------------- Director (Principal
Ernest C. Garcia, II executive officer)
* Senior Vice President and February 4, 1998
- --------------------------------------------- Chief Financial Officer
Steven T. Darak (Principal financial and
accounting officer)
* Director February 4, 1998
- ---------------------------------------------
Robert J. Abrahams
* Director February 4, 1998
- ---------------------------------------------
Christopher D. Jennings
* Director February 4, 1998
- ---------------------------------------------
John N. MacDonough
* Director February 4, 1998
- ---------------------------------------------
Arturo R. Moreno
* Director February 4, 1998
- ---------------------------------------------
Frank P. Willey
By: /s/ ERNEST C. GARCIA, II
- ---------------------------------------------
*Ernest C. Garcia, II
(Attorney-in-fact)
</TABLE>
II-7
<PAGE> 168
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
- -------- ---------------------------------------------------------------------------- -----
<S> <C> <C>
3.1 Certificate of Incorporation of the Registrant Amended and Restated as of
May 15, 1997(5).............................................................
3.2 Bylaws of the Registrant(5).................................................
4.1 Certificate of Incorporation of the Registrant (filed as Exhibit 3.1).......
4.2 Form of Warrant Agreement between the Registrant and Harris Trust Company of
California, as warrant agent, with respect to the Warrants..................
4.3 Form of Certificate representing Common Stock(1)............................
4.4 10% Subordinated Debenture of the Registrant issued to Verde Investments,
Inc. (previously filed).....................................................
4.5 Form of Warrant issued to Cruttenden Roth Incorporated as Representative of
the several underwriters(1).................................................
4.6 Form of Warrant issued to SunAmerica Life Insurance Company(1)..............
4.7 Warrant Agreement between the Registrant and Harris Trust Company of
California, as warrant agent, with respect to Bank Group Warrants and
certain additional warrants issued in August of 1997(6).....................
5 Opinion of Snell & Wilmer L.L.P. regarding the legality of the securities
being registered............................................................
10.1 Amended and Restated Motor Vehicle Installment Contract Loan and Security
Agreement between Registrant and General Electric Capital Corporation(8)....
10.1(a) Assumption and Amendment Agreement between the Registrant and General
Electric Capital Corporation(2).............................................
10.1(b) Amendment No. 1 to Amended and Restated Motor Vehicle Installment Contract
Loan and Security Agreement between Registrant and General Electric Capital
Corporation dated December 22, 1997 (previously filed)......................
10.2 Note Purchase Agreement between the Registrant and SunAmerica Life Insurance
Company(1)..................................................................
10.2(a) First Amendment to Note Purchase Agreement between the Registrant and
SunAmerica Life Insurance Company(1)........................................
10.2(b) Second Amendment to Note Purchase Agreement between the Registrant and
SunAmerica Life Insurance Company(1)........................................
10.2(c) Third Amendment to Note Purchase Agreement between the Registrant and
SunAmerica Life Insurance Company(1)........................................
10.2(d) Fourth Amendment to Note Purchase Agreement between the Registrant and
SunAmerica Life Insurance Company(1)........................................
10.2(e) Commitment Letter entered into between the Registrant and SunAmerica Life
Insurance Company(1)........................................................
10.2(f) Letter Agreement regarding Note Conversion between the Registrant and
SunAmerica Life Insurance Company(1)........................................
10.3 Amended and Restated Registration Rights Agreement between the Registrant
and SunAmerica Life Insurance Company(1)....................................
10.4 Loan Purchase Agreement dated as of August 20, 1997 among the Registrant and
certain banks(6)............................................................
10.4(a) Assignment of Loan and Bank Claim dated as of August 20, 1997 among the
Registrant and certain banks, as assignors(6)...............................
</TABLE>
<PAGE> 169
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
- -------- ---------------------------------------------------------------------------- -----
<S> <C> <C>
10.4(b) Security Agreement dated as of August 20, 1997 among the Registrant, as
obligor, and certain banks(6)...............................................
10.4(c) Payment Guaranty dated as of August 20, 1997 of certain affiliates of the
Registrant, as guarantors(6)................................................
10.5 Restated (as of March 14, 1997) Ugly Duckling Corporation Long-Term
Incentive Plan(5)...........................................................
10.6 Employment Agreement between the Registrant and Ernest C. Garcia, II(1).....
10.7 Employment Agreement between the Registrant and Steven T. Darak(1)..........
10.8 Employment Agreement between the Registrant and Wally Vonsh(1)..............
10.8(a) Modification of Employment Agreement between Registrant and Wally Vonsh
(previously filed)..........................................................
10.9 Amended and Restated Employment Agreement between the Registrant and Donald
L. Addink(8)................................................................
10.10 Employment Agreement between the Registrant and Russell Grisanti(5).........
10.11 Employment Agreement between the Registrant and Steven A. Tesdahl(8)........
10.12 Land Lease Agreement between the Registrant and Verde Investments, Inc. for
property located at 5104 West Glendale Avenue in Glendale, Arizona(1).......
10.13 Building Lease Agreement between the Registrant and Verde Investments, Inc.
for property and buildings located at 9630 and 9650 North 19th Avenue in
Phoenix, Arizona(1).........................................................
10.14 Land Lease Agreement between the Registrant and Verde Investments, Inc. for
property located at 330 North 24th Street in Phoenix, Arizona(1)............
10.15 Land Lease Agreement between the Registrant and Verde Investments, Inc. for
property located at 333 South Alma School Road in Mesa, Arizona(1)..........
10.16 Lease Agreements between the Registrant and Blue Chip Motors, the Registrant
and S & S Holding Corporation, and the Registrant and Edelman Brothers for
certain properties located at 3901 East Speedway Boulevard in Tucson,
Arizona(1)..................................................................
10.17 Real Property Lease between the Registrant and Peter and Alva Keesal for
property located at 3737 South Park Avenue in Tucson, Arizona(1)............
10.18 Land Lease Agreement between the Registrant and Verde Investments, Inc. for
property located at 2301 North Oracle Road in Tucson, Arizona(1)............
10.19 Related Party Transactions Modification Agreement between the Registrant and
Verde Investments, Inc.(1)..................................................
10.20 Form of Indemnity Agreement between the Registrant and its directors and
officers(1).................................................................
10.21 Ugly Duckling Corporation 1996 Director Incentive Plan(1)...................
10.22 Purchase Agreement, dated February 10, 1997 between the Registrant and
Friedman, Billings, Ramsey & Co., Inc. (10).................................
10.23 Agreement of Purchase and Sale of Assets dated as of December 31, 1996(3)...
10.23(a) First Amendment to Agreement of Purchase and Sale of Assets dated as of June
6, 1997(5)..................................................................
10.24 Agreement of Purchase and Sale of Assets among the Registrant E-Z Plan,
Inc., shareholders of E-Z Plan, Inc., and certain lessors, dated as of March
5, 1997(4)..................................................................
10.25 Agreement for Purchase and Sale of Certain Assets among Registrant, Kars-Yes
Holdings Inc. and certain other parties, dated as of September 15,
1997(7).....................................................................
10.26(a) Portfolio Servicing Agreement among Registrant, Kars-Yes Financial, Inc.,
and certain other parties, dated as of September 15, 1997(7)................
10.26(b) Subservicing Agreement among Registrant, Kars-Yes Financial, Inc., and
certain other parties, dated as of September 15, 1997(7)....................
</TABLE>
<PAGE> 170
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
- -------- ---------------------------------------------------------------------------- -----
<S> <C> <C>
10.27 Binding Agreement to Propose and Support Modified Plan Agreement dated as of
December 15, 1997 among the Registrant, FMAC and the Official Committee of
Unsecured Creditors of FMAC(11).............................................
10.28 Purchase Agreement dated as of December 18, 1997 by and among Contract
Purchaser, Registrant and LaSalle National Bank, as Agent (11)..............
10.29 Guaranty dated as of December 18, 1997 by Registrant in favor of Contract
Purchaser (11)..............................................................
10.30 Servicing Agreement dated as of December 18, 1997 between Registrant and
Contract Purchaser (11).....................................................
10.31 FMAC Guaranty and Stock Pledge Agreement among FMAC, Registrant and certain
banks.......................................................................
10.32 Contribution Agreement between Registrant and FMAC..........................
10.33 Form of Indemnification Agreement between the Company and FMAC (to be filed
by Pre-Effective Amendment)
11 Earnings (Loss) per Share Computation (8)...................................
21 List of Subsidiaries (previously filed).....................................
23.1 Consent of KPMG Peat Marwick LLP. ..........................................
23.2 Consent of KPMG Peat Marwick LLP. ..........................................
23.3 Consent of Barton & Company, P.A. ..........................................
23.4 Consent of Ernst & Young LLP. ..............................................
23.5 Consent of Coopers & Lybrand L.L.P. ........................................
23.6 Consent of Snell & Wilmer L.L.P. (included in Exhibit 5)....................
24 Power of Attorney (included in signature pages).............................
27 Financial Data Schedule (previously filed)..................................
</TABLE>
- ---------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-3998), effective June 18, 1996.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-13755), effective October 30, 1996.
(3) Incorporated by reference to the Company's Current Report on Form 8-K,
filed January 30, 1997.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K,
filed March 31, 1997.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
filed August 14, 1997.
(6) Incorporated by reference to the Company's Current Report on Form 8-K,
filed September 5, 1997.
(7) Incorporated by reference to the Company's Current Report on Form 8-K,
filed October 3, 1997.
(8) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
filed November 14, 1997.
(9) Incorporated by reference to the Company's Current Report on Form 8-K,
filed November 20, 1997.
(10) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 333-22237).
(11) Incorporated by reference to the Company's Current Report on Form 8-K,
filed January 2, 1998.
<PAGE> 1
Exhibit 4.2
UGLY DUCKLING CORPORATION
WARRANT AGREEMENT
THIS WARRANT AGREEMENT (the "Agreement"), dated as of _______ __, 1998,
is between UGLY DUCKLING CORPORATION, a Delaware corporation (the "Company"),
and HARRIS TRUST COMPANY OF CALIFORNIA, as warrant agent (the "Warrant Agent").
WHEREAS, on July 11, 1997, First Merchants Acceptance Corporation, a
Delaware corporation ("FMAC"), filed a Chapter 11 petition under the provisions
of Title 11, United States Code, as amended, in the United States District Court
for the District of Delaware and such petition is currently pending as Case No.
97-1500 (JJF) (the "Bankruptcy Case");
WHEREAS, the Company has entered into a Binding Agreement to Propose
and Support Modified Plan Agreement dated as of December 15, 1997 (the "Letter
Agreement"), by and among the Company, FMAC, and The Official Committee of
Unsecured Creditors of First Merchants Acceptance Corporation, in connection
with the Bankruptcy Case, pursuant to which the parties agreed to jointly
support a plan of reorganization of FMAC in compliance with the Letter Agreement
(the "Plan");
WHEREAS, pursuant to the Letter Agreement, the Company has agreed to
issue to FMAC warrants (the "Warrants") to purchase up to an aggregate of
325,000 shares of common stock, $.001 par value per share ("Common Stock"), of
the Company, subject to the terms and conditions of this Agreement;
WHEREAS, FMAC may, but is under no obligation to, redistribute the
Warrants, to its creditors or interest holders in the manner provided for in the
Plan; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance, registration, transfer, exchange, exercise, and redemption of the
Warrants.
NOW, THEREFORE, in consideration of the promises and the mutual
agreements herein set forth, the parties agree as follows:
Section 1. APPOINTMENT OF WARRANT AGENT. The Company hereby appoints
the Warrant Agent to act as agent of the Company in accordance with the terms
and conditions set forth in this Agreement, and the Warrant Agent hereby accepts
such appointment.
<PAGE> 2
Section 2. ISSUANCE OF WARRANTS AND FORM OF WARRANTS.
(a) Subject to the terms and conditions hereof, the Company shall issue
to FMAC and FMAC shall accept from the Company, 325,000 Warrants substantially
in the form attached hereto as Exhibit A.
(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 9 hereof, at
any time until 5:00 p.m., New York City time, on __________ ___, 200__ [three
years from date of issuance], unless earlier redeemed pursuant to Section 11
hereof.
(c) The Warrant certificates shall be in registered form only. Each
Warrant certificate shall be dated by the Warrant Agent 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 or facsimile
signature of its President or a Vice President, and attested to by the manual or
facsimile 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 before such Warrant Certificate has been
countersigned by the Warrant Agent or 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.
Section 3. 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, at the office of the Warrant Agent, or
at the office of a successor to the Warrant Agent, 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 Warrant Agent
for the account of 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
Warrant Agent.
2
<PAGE> 3
(c) The price per share of Common Stock at which each Warrant may be
exercised (the "Warrant Price") shall be Twenty Dollars ($20.00) (subject to
adjustment in accordance with Section 9 hereof).
(d) Subject to the further provisions of this Section 3 and of Section
6 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 a current Prospectus meeting the requirements of Section 10 of the
Securities Act of 1933 and cash, as provided in Section 10 of this Agreement, in
respect of any fraction of a share or security otherwise issuable upon such
surrender. All shares of 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; provided, however,
that if, at the date of surrender of such Warrants and payment of such Warrant
Price, the transfer books for the Common Stock or other securities purchasable
upon the exercise of such Warrants shall be closed, the certificates for the
securities in respect of which such Warrants are then exercised shall be
issuable as of the date on which such books shall next be opened and until such
date the Company shall be under no duty to deliver any certificate for such
securities and the person to whom such securities are issuable shall not be
deemed to have became a holder of record of such securities. 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 4. COUNTERSIGNATURE AND REGISTRATION.
(a) The Warrant Agent 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 Warrant Agent shall issue and register the
Warrants in the name of FMAC in accordance with Section 2 hereof. The Warrant
certificates shall be countersigned manually or by facsimile by the Warrant
Agent (or by any successor to the Warrant Agent then acting as such under this
Agreement) and shall not be valid for any purpose unless so countersigned.
Warrant certificates may be so countersigned, however, by the Warrant Agent and
delivered by the Warrant Agent, notwithstanding
3
<PAGE> 4
that the persons whose manual or facsimile signatures appear thereon as proper
officers of the Company shall have ceased to be such officers at the time of
such countersignature or delivery.
(b) Prior to due presentment for registration of transfer of any
Warrant certificate, the Company and the Warrant Agent 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 or the Warrant Agent), for the purpose of any exercise
thereof, of any distribution or notice to the holder thereof, and for all other
purposes, and neither the Company nor the Warrant Agent shall be affected by any
notice to the contrary.
Section 5. TRANSFER AND EXCHANGE OF WARRANTS.
(a) The Warrant Agent 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 Warrant Agent. 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. The
Warrant certificates so canceled shall be delivered by the Warrant Agent to the
Company from time to time upon request. Notwithstanding the foregoing, no
transfer or exchange may be made except in compliance with applicable securities
laws and Section 14 hereof.
(b) Warrant certificates may be surrendered to the Warrant Agent,
together with a written request for exchange, and thereupon the Warrant Agent
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 Warrant Agent 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.
(e) The Warrant Agent is hereby authorized to countersign and to
deliver, in accordance with the terms of this Agreement, the new Warrant
certificates required to be issued pursuant to the provisions hereof, and the
Company, whenever required by the Warrant Agent, will supply the Warrant Agent
with certificates duly executed on behalf of the Company for such purpose.
4
<PAGE> 5
Section 6. 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 neither the Company nor the Warrant
Agent shall 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 7. MUTILATED OR MISSING WARRANTS. In case any of the Warrant
certificates shall be mutilated, lost, stolen or destroyed, the Company may
issue, and the Warrant Agent shall countersign 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 and the
Warrant Agent of such loss, theft or destruction of such Warrant certificate and
reasonable indemnity, if requested, also satisfactory to them. Applicants for
such substitute Warrant certificates shall also comply with such other
reasonable conditions and pay such reasonable charges as the Company or the
Warrant Agent may prescribe.
Section 8. 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.
(b) The Warrant Agent is hereby irrevocably authorized to requisition
from time to time from such transfer agent stock certificates required to honor
outstanding Warrants. The Company will supply such transfer agent with duly
executed certificates for such purpose and will itself provide or otherwise make
available any cash as provided in Section 10 of this Agreement. All Warrant
certificates surrendered in the exercise of the rights thereby evidenced shall
be canceled by the Warrant Agent and shall thereafter be delivered to the
Company. Promptly after the expiration date of the Warrants, the Warrant Agent
shall certify to the Company the aggregate number of such
5
<PAGE> 6
Warrants which expired unexercised, and after the expiration date of the
Warrants, no shares of Common Stock shall be subject to reservation in respect
of such Warrants.
Section 9. 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:
9.1 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, (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 9.1(a) will become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event.
(b) 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.
(c) 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.
(d) 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 the Warrant Agent and
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
6
<PAGE> 7
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. The Warrant Agent shall be fully protected in
relying on any such certificate and any adjustment therein contained, and shall
not be obligated or responsible for calculating any adjustment nor shall it be
deemed to have knowledge of such an adjustment unless and until it shall have
received such certificate.
(e) For the purpose of this subsection 9.1, 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 9, 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 9.
9.2 NO ADJUSTMENT FOR DIVIDENDS. Except as provided in subsection 9.1,
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.
9.3 NO ADJUSTMENT IN CERTAIN CASES. No adjustments are required to be
made pursuant to Section 9 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.
9.4 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 with the Warrant Agent
an agreement that the registered holders of the Warrants shall have 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 9.4 shall provide for
adjustments, which shall be as nearly equivalent as may be practicable to the
adjustments provided for in Section 9 hereof. The provisions of this subsection
9.4 shall similarly apply to successive consolidations, mergers, sales, or
conveyances.
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9.5 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.
9.6 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 9, and a
certificate signed by such firm shall be conclusive evidence of the correctness
of any computation made under this Section 9 and the Company shall cause to be
promptly mailed to the Warrant Agent and each registered holder of a Warrant by
first class mail, postage prepaid, a copy of such certificate.
9.7 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.
9.8 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 9.1 or 9.4 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 21 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 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.
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Section 10. 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 10,
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 11. 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 10 consecutive trading days ending not
more than fifteen days prior to the date of the notice given pursuant to Section
11(b) hereof has equaled or exceeded $28.50, 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 11(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) and verified
to the Warrant Agent before the Company may give notice of redemption. All
outstanding Warrants must be redeemed if any are redeemed, and any right to
exercise an outstanding Warrant shall terminate at 5:00 p.m. (New York City
time) on the date fixed for redemption. Trading day means a day in which trading
of securities occurred on the Nasdaq National Market.
(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 Warrant Agent and the
registered holders of the outstanding Warrants by mailing or causing
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<PAGE> 10
the Warrant Agent to mail to such registered holders a notice of redemption,
first class, postage prepaid, at their addresses as they shall appear on the
records of the Warrant Agent. 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 5:00 P.M. (New York City 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
11(a) hereof, in each case on the same basis as provided in Section 9 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 Warrant Agent
will no longer honor any purported exercise of a Warrant. On or before the
redemption date, the Company will deposit with the Warrant Agent sufficient
funds for the purpose of redeeming all of the outstanding unexercised Warrants.
All such funds shall be maintained by the Warrant Agent 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. Any Warrants thereafter submitted to the Warrant Agent for
redemption will be forwarded for redemption by the Warrant Agent to the Company,
and the Warrant Agent will have no further responsibility with respect thereto.
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Section 12. 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
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 13. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANTS. The
Warrant Agent must account promptly to the Company with respect to Warrants
exercised, and must promptly pay to the Company all monies received by it upon
the exercise of such Warrants, and agrees to keep copies of this Agreement
available for inspection by holders of Warrants during normal business hours.
Section 14. REGISTRATION OF WARRANTS.
(a) Insert when true - [The Company has registered the Warrants and the
Common Stock issuable upon exercise of the Warrants under the Securities Act of
1933, as amended (the "Securities Act"). The Company agrees to use its best
efforts to maintain such registration for the period during which the Warrants
are exercisable. If at any time during the continuance of such registration, the
Company shall determine that the applicable registration statement contains an
untrue statement of a material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances then existing, or if for any other reason as
required by law it is necessary to amend or supplement the registration
statement or to discontinue trading in or exercise of the Warrants, the Company
may request the Warrant Agent in writing to discontinue effecting the
registration of transfer and/or exercise of the Warrants, as appropriate, until
such time as the Company subsequently advises the Warrant Agent in writing that
trading and/or exercises, as applicable, of the Warrants may be continued. The
Company will use best efforts to promptly amend or supplement its registration
statement to permit trading and exercise.]
(b) All fees, disbursements, and out-of-pocket expenses incurred in
connection with the filing of any registration statement under Section 14(a)
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 their attorneys' fees,
shall be borne by such holders.
Section 15. [Intentionally Left Blank]
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Section 16. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT.
(a) Any corporation into which the Warrant Agent may be merged or with
which it may be consolidated, or any corporation resulting from any merger or
consolidation to which the Warrant Agent shall be a party, or any corporation
succeeding to the corporate trust business of the Warrant Agent, shall be the
successor to the Warrant Agent hereunder without the execution or filing of any
paper or any further act on the part of any of the parties hereto, provided that
such corporation would be eligible for appointment as a successor Warrant Agent
under the provisions of Section 19 of this Agreement. In case at the time such
successor to the Warrant Agent shall succeed to the agency created by this
Agreement and any of the Warrant certificates shall have been countersigned but
not delivered, any such successor to the Warrant Agent may adopt the
countersignature of the original Warrant Agent and deliver such Warrant
certificates so countersigned; and in case at that time any of the Warrant
certificates shall not have been countersigned, any successor to the Warrant
Agent may countersign such Warrant certificates either in the name of the
predecessor Warrant Agent or in the name of the successor Warrant Agent, and in
all such cases the Warrants represented by such Warrant certificates shall have
the full force provided in the Warrant certificates and in this Agreement. Any
such successor Warrant Agent shall promptly give notice of its succession as
Warrant Agent to the Company and to the registered holder of each Warrant
certificate.
(b) If at any time the name of the Warrant Agent is changed and at such
time any of the Warrant certificates have been countersigned but not delivered,
the Warrant Agent may adopt the countersignature under its prior name and
deliver Warrant certificates so countersigned; and if at that time any of the
Warrant certificates have not been countersigned, the Warrant Agent may
countersign such Warrant certificates either in its prior name or in its changed
name; and in all such cases the Warrants represented by such Warrant
certificates will have the full force provided in the Warrant certificates and
in this Agreement.
Section 17. CONCERNING THE WARRANT AGENT. The Company agrees to pay to
the Warrant Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Warrant Agent, its reasonable
expenses and counsel fees and other disbursements incurred in the administration
and execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Warrant Agent, and its
officers, agents and directors for, and to hold each of them harmless against,
any loss, liability, or expense incurred without negligence or willful
misconduct on the part of the Warrant Agent, for anything done or omitted by the
Warrant Agent or such indemnified party in connection with the acceptance or
administration of this Agreement or the exercise or performance of its duties
hereunder, including the costs and expenses of defending against any claim of
liability in the premises. The indemnification provided for hereunder shall
survive the expiration of the Warrant, the termination of this Agreement and the
resignation or removal of the Warrant Agent. The costs and expenses of enforcing
this right of indemnification shall also be paid by the Company.
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The Warrant Agent may conclusively rely upon and shall be protected by
the Company and shall incur no liability for, or in respect of any action taken,
suffered or omitted by it in connection with, its administration of this
Agreement or the exercise or performance of its duties hereunder in reliance
upon any Warrant certificate or certificate for the Common Stock or for other
securities of the Company, instrument of assignment or transfer, power of
attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement, or other paper or document believed by it to be genuine
and to be signed, executed and, where necessary, verified or acknowledged, by
the proper person or persons, or otherwise upon the advice of counsel as set
forth herein.
Notwithstanding anything in this Agreement to the contrary, in no event
shall the Warrant Agent be liable for special, indirect or consequential loss or
damage of any kind whatsoever (including but not limited to lost profits), even
if the Warrant Agent has been advised of the likelihood of such loss or damage
and regardless of the form of the action.
Section 18. DUTIES OF WARRANT AGENT. The Warrant Agent undertakes the
duties and obligations expressly imposed by this Agreement, and no implied
duties or obligations shall be read into this Agreement against the Warrant
Agent, upon the following terms and conditions, by all of which the Company and
the holders of Warrant certificates, by their acceptance thereof, shall be
bound:
(a) Before the Warrant Agent acts or refrains from acting, the Warrant
Agent may consult with legal counsel (who may be legal counsel for the Company)
and the opinion of such counsel shall be full and complete authorization and
protection to the Warrant Agent as to any action taken or omitted by it in good
faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the
Warrant Agent shall deem it necessary or desirable that any fact or factual
matter be proved or established by the Company prior to taking or suffering any
action hereunder, such fact or matter (unless other evidence in respect thereof
be herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by any person believed in good faith by the
Warrant Agent to be one of the Chairman of the Board, the Chief Executive
Officer, the President, any Vice President, the Treasurer or the Secretary of
the Company and delivered to the Warrant Agent; and such certificate shall be
full authorization to the Warrant Agent for any action taken or suffered in good
faith by it under the provisions of this Agreement in reliance upon such
certificate.
(c) The Warrant Agent shall be liable hereunder to the Company and any
other Person only for its own negligence, bad faith or wilful misconduct.
(d) The Warrant Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the Warrant
certificates (except its countersignature
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thereof) or be required to verify the same, but all such statements and recitals
are and shall be deemed to have been made by the Company only.
(e) The Warrant Agent is serving as an administrative agent and,
accordingly, shall not be under any responsibility in respect of the validity of
any provision of this Agreement or the execution and delivery hereof (except the
due execution hereof by the Warrant Agent) or in respect of the validity or
execution of any Warrant certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Warrant certificate; nor shall
it be responsible for any change in the exercisability of the Warrant (including
the Warrant becoming void) or any adjustment in the terms of the Warrant
(including the manner, method or amount thereof) provided for herein, or the
ascertaining of the existence of facts that would require any such change or
adjustment (except with respect to the exercise of any Warrant evidenced by a
Warrant certificate after actual notice to the Warrant Agent that such change or
adjustment is required); nor shall it by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any shares
of Common stock to be issued pursuant to this Agreement or any Warrant
certificate or as to whether any shares of Common stock will, when issued, be
validly authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Warrant Agent for the carrying out or performing by the Warrant Agent of
the provisions of this Agreement.
(g) The Warrant Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
person believed in good faith by the Warrant Agent to be one of the Chairman of
the Board, the Chief Executive Officer, the President, any Vice President, the
Treasurer, or the Secretary of the Company, and to apply to such officers for
advice or instructions in connection with its duties, and it shall not be liable
for any action taken or suffered by it in good faith in accordance with
instructions of any such officer of for any delay in acting while waiting for
those instructions.
Any application by the Warrant Agent for written instructions
from the Company may, at the option of the Warrant Agent, set forth in writing
any action proposed to be taken or omitted by the Warrant Agent under this
Agreement and the date on or after which such action shall be taken or such
omission shall be effective. The Warrant Agent shall not be liable for any
action taken by, or omission of, the Warrant Agent in accordance with a proposal
included in any such application on or after the date specified in such
application (which date shall not be less than ten Business Days after the date
any officer of the Company actually receives such application, unless any such
officer shall have consented in writing to an earlier date) unless, prior to
taking any such action (or the effective date in the case of an omission), the
Warrant Agent shall have received
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written instructions in response to such application subject to the proposed
action or omission and/or specifying the action to be taken or omitted.
(h) Subject to applicable law, the Warrant Agent and any stockholder,
director, officer or employee of the Warrant Agent may buy, sell or deal in any
of the Warrants or other securities of the Company or become pecuniarily
interested in any transaction in which the Company may be interested, or
contract with or lend money to the Company or otherwise act as fully and freely
as though it were not Warrant Agent under this Agreement. Nothing herein shall
preclude the Warrant Agent from acting in any other capacity for the Company or
for any other legal entity.
(i) The Warrant Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Warrant Agent shall not be answerable
or accountable for any act, default, neglect or misconduct of any such attorneys
or agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct, provided that reasonable care was exercised in the
selection and continued employment thereof.
(j) No provision of this Agreement shall require the Warrant Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
(k) The Warrant Agent shall not be required to take notice or be deemed
to have notice of any fact, event or determination (including, without
limitation, any dates or events defined in this Agreement) under this Agreement
unless and until the Warrant Agent shall be specifically notified in writing by
the Company of such fact, event or determination.
Section 19. CHANGE OF WARRANT AGENT. The Warrant Agent may
resign and be discharged from its duties under this Agreement by giving the
Company at least 30 days prior notice in writing, and by mailing notice in
writing to the registered holders at the expense of the Company at their
addresses appearing on the Warrant Register, of such resignation, at least 15
days prior to the date such resignation shall take effect and specifying a date
when such resignation shall take effect. The Warrant Agent may be removed by
like notice to the Warrant Agent from the Company and by like mailing of notice
to the registered holders of the Warrants. If the Warrant Agent resigns or is
removed or otherwise becomes incapable of acting, the Company shall appoint a
successor to the Warrant Agent. If the Company fails to make such appointment
within 30 days after such removal or after it has been notified in writing of
such resignation or incapacity by the resigning or incapacitated Warrant Agent
or by the registered holder of a Warrant (who shall, with such notice, submit
his Warrant certificate for inspection by the Company), then the registered
holder of any Warrant may apply to any court of competent jurisdiction for the
appointment of a successor to the Warrant Agent. Pending appointment of a
successor to the Warrant Agent, either by the Company
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or such a court, the Company shall carry out the duties of the Warrant Agent.
Any successor Warrant Agent, whether appointed by the Company or by such a
court, must be registered and otherwise authorized to serve as a transfer agent
pursuant to the Securities Exchange Act of 1934, as amended. If at any time the
Warrant Agent ceases to be eligible in accordance with the provisions of this
Section 19, it will resign immediately in the manner and with the effect
specified in this Section 19. After acceptance in writing of the appointment,
the successor Warrant Agent will be vested with the same powers, rights, duties
and responsibilities as if it had been originally named as Warrant Agent without
further act or deed; but the former Warrant Agent will deliver and transfer to
the successor Warrant Agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for
this purpose. Upon request of any successor Warrant Agent, the Company will
make, execute, acknowledge and deliver any and all instruments in writing for
more fully and effectually vesting in and confirming to such successor Warrant
Agent all such powers, rights, duties and responsibilities. Failure to file or
mail any notice provided in this Section 19, however, or any defect therein,
will not affect the legality or validity of the resignation or removal of the
Warrant Agent or the appointment of the successor Warrant Agent, as the case may
be.
Section 20. IDENTITY OF TRANSFER AGENT. Following the appointment of
any transfer agent for the Common Stock or of any subsequent transfer agent for
shares of the Common Stock or other shares of the Company's capital stock
issuable upon the exercise of the rights of purchase represented by the
Warrants, the Company will file with the Warrant Agent a statement setting forth
the name and address of such transfer agent.
Section 21. NOTICES. Notices or demands authorized by this Agreement to
be given or made by the Warrant Agent or 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 (until another address is filed in
writing with the Warrant Agent) 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
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Notices or demands authorized by this Agreement to be given or made by the
Company or by the holder of any Warrant certificate to or on the Warrant Agent
shall be sent by registered or certified mail, addressed (until another address
is filed in writing with the Company) as follows (and shall be deemed given upon
receipt):
Harris Trust Company of California
601 South Figueroa
49th Floor
Los Angeles, CA 90017
Attention: Neil Rosso, Corporate Trust
Notices or demands authorized by this Agreement to be given or made by the
Company or the Warrant Agent 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. The Company shall deliver a copy of any notice or demand it delivers
to the holder of any Warrant certificate to the Warrant Agent.
Section 22. SUPPLEMENTS AND AMENDMENTS. The Company and the Warrant
Agent may from time to time supplement or amend this Agreement without the
approval of any holders of Warrants in order to cure any ambiguity or to correct
or supplement any provision contained herein which may be defective or
inconsistent with any other provision herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and the
Warrant Agent may deem necessary or desirable and which shall not be
inconsistent with the provisions of the Warrants, or which shall not adversely
affect the interests of the holders of Warrants (including reducing the Warrant
Price or extending the redemption or expiration date). In any situation in which
this Agreement cannot be amended pursuant to the next sentence above, this
Agreement may be amended by the Company, the Warrant Agent 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 consent of each holder of a Warrant, except as otherwise provided in Section
9, there can be no increase of the Warrant Price, reduction of the number of
shares of Common Stock purchasable or reduction of the exercise period for such
holder's Warrants and provided, further, that no such supplement or amendment
may affect the rights or duties of the Warrant Agent under this Agreement
without the written consent of the Warrant Agent. Notwithstanding anything in
this Agreement to the contrary, no supplement or amendment that changes the
rights and duties of the Warrant Agent under this Agreement shall be effective
without the written consent of the Warrant Agent.
Section 23. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company, or the Warrant Agent or the
registered holders of the Warrants will bind and inure to the benefit of their
respective successors and assigns hereunder.
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Section 24. GOVERNING LAW. This Agreement will be deemed to be a
contract made under the laws of the State of Arizona and for all purposes will
be construed in accordance with the laws of said State, except as to Sections
17, 18 and 22, which shall be governed by and construed in accordance with the
laws of the State of Illinois. Each holder of a Warrant by its acceptance
thereof agrees to submit to the jurisdiction of a court of competent
jurisdiction in the State of Arizona, but to the State of Illinois as to
Sections 17, 18 and 22, for the purpose of resolving any disputes arising with
respect to the rights and obligations of the Warrant Agent.
Section 25. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement will
be construed to give to any person or corporation other than the Company, the
Warrant Agent 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, the Warrant Agent and the registered holders
of the Warrants.
Section 26. 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 27. 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.
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:_________________________
Name:_______________________
Its:________________________
HARRIS TRUST COMPANY
OF CALIFORNIA
By:_________________________
Name:_______________________
Its:________________________
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Warrant No. ____
EXHIBIT A
WARRANT TO PURCHASE ________ SHARES OF COMMON STOCK
VOID AFTER 5:00 P.M.,
NEW YORK CITY TIME, ON ____________ __, 200__
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
before 5:00 p.m., New York City time, on ___________ __, 200__, at the purchase
price per share of $20 (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 11 of the Warrant Agreement) per share of
the Common Stock for a period of at least 10 consecutive trading days ending not
more than fifteen days prior to the date of the notice given pursuant to Section
11(b) thereof has equaled or exceeded $28.50, and prior to expiration of this
Warrant. The Holder's right to exercise this Warrant terminates at 5:00 p.m.
(New York City 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 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 in Los Angeles, California, of Harris Trust Company of
California (the "Warrant Agent"). 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 _________ ___, 1998, between the Company and the Warrant Agent, and are
subject to the terms and provisions contained in such
19
<PAGE> 20
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
Warrant Agent.
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 Warrant Agent 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 9
of the Warrant Agreement. The Warrant Agreement may be amended by 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 and no amendment may affect the rights and duties of the
Warrant Agent without the consent of the Warrant Agent. Pursuant to the Warrant
Agreement, by acceptance of a Warrant, each holder consents to the jurisdiction
of a court of competent jurisdiction in the State of Arizona for the purpose of
resolving any disputes arising with respect to the Warrants or the Warrant
Agreement.
The Holder hereof may be treated by the Company, the Warrant Agent 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 or
the Warrant Agent 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:_____________________________
President
20
<PAGE> 21
ATTEST:
____________________________
Secretary
This is one of the Warrants referred to in
the within mentioned Warrant Agreement.
HARRIS TRUST COMPANY OF CALIFORNIA
By: __________________________________________
Authorized Representative
21
<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
22
<PAGE> 23
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO
S.E.C. RULE 17Ad-15.
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)
the within 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.
23
<PAGE> 1
EXHIBIT 5
February 5, 1998
Ugly Duckling Corporation
2525 East Camelback Road
Suite 1150
Phoenix, AZ 85016
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel to Ugly Duckling Corporation, a Delaware
corporation (the "Company"), in connection with the preparation and filing with
the United States Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Securities Act"), of the Company's Registration Statement
on Form S-1 and Pre-Effective Amendment No. 1 thereto (the "Registration
Statement"), relating to the registration of (i) 5,000,000 shares of the
Company's Common Stock, par value $.001 per share (the "Stock Option Shares"),
(ii) 325,000 Common Stock Purchase Warrants (the "Warrants"), which may be
issued to First Merchants Acceptance Corporation ("FMAC"), and the shares of
Common Stock underlying the Warrants (the "Warrant Shares"), and (iii) 341,190
Common Stock Purchase Warrants (the "Bank Group Warrants"), which may be offered
for sale by certain institutions ("Selling Securityholders"), and the shares of
Common Stock underlying the Bank Group Warrants (the "Warrant Shares"). We have
reviewed the Registration Statement and the exhibits thereto. In addition, we
have reviewed the originals or copies certified or otherwise identified to our
satisfaction, of all such corporate records of the Company and such other
instruments and other certificates of public officials, officers, and
representatives of the Company and other persons, and we have made such
investigation of law, as we have deemed appropriate as a basis for the opinions
expressed below. In rendering the opinions expressed below, we have assumed (i)
the genuineness of signatures not witnessed, the authenticity of documents
submitted as originals, and the conformity to originals of documents submitted
as copies, (ii) the legal capacity of all natural persons executing
<PAGE> 2
Ugly Duckling Corporation
February 5, 1998
Page 2
the documents discussed herein, (iii) that such documents accurately describe
and contain the mutual understanding of the parties and that there are no oral
or written statements or agreements that modify, amend, or vary or purport to
modify, amend, or vary any of the terms of such documents, (iv) that, as to
documents executed by entities other than the Company, such entity had the power
to enter into and perform its obligations under such documents, and that such
documents have been duly authorized, executed, and delivered by, and are valid,
binding upon, and enforceable against, such entities, and (v) that the Stock
Option Shares, Warrants, Bank Group Warrants, and Warrant Shares will conform in
all material respects to the description thereof set forth in the Registration
Statement.
Based upon the foregoing, we advise you that, in our opinion, when the
following events have occurred:
(a) The Registration Statement has become effective under the
Securities Act;
(b) With respect to the Warrants and related Warrant Shares:
(i) the due authorization, execution, and delivery of the
Warrant Agreement pursuant to which the Warrants will be issued;
(ii) the due authorization, registration, and delivery of the
certificate or certificates evidencing the Warrants and the related Warrant
Shares;
(iii) the Warrants and related Warrant Shares are issued and
sold and consideration has been received therefor in the manner specified in the
Registration Statement and the exhibits thereto; and
(iv) the compliance with all applicable contracts, agreements,
and instruments in respect of the issuance of the Warrants and related Warrant
Shares has occurred;
(c) With respect to the Stock Option Shares:
(i) the due authorization, registration, and delivery of the
certificate or certificates evidencing the Stock Option Shares;
(ii) the Stock Option Shares are issued and sold and
consideration has been received therefor in the manner specified in the
Registration Statement and the exhibits thereto; and
<PAGE> 3
Ugly Duckling Corporation
February 5, 1998
Page 3
(iii) the compliance with all applicable contracts,
agreements, and instruments in respect of the issuance of the Stock Option
Shares has occurred; and
(d) With respect to the Bank Group Warrants and related Warrant Shares:
(i) the due authorization, registration and delivery of the
certificate or certificates evidencing the Warrant Shares related to the Bank
Group Warrants;
(ii) the Warrant Shares related to the Bank Group Warrants are
issued and sold and consideration has been received therefor in the manner
specified in the Registration Statement and the exhibits thereto; and
(iii) the compliance with all applicable contracts,
agreements, and instruments in respect of the issuance of the Warrant Shares
related to the Bank Group Warrants has occurred; then
1. The Stock Option Shares to be issued by you will
be legally issued, fully paid, and non-assessable.
2. The Warrants to be issued by you will be legally
issued and will constitute the valid and binding obligation of the Company
enforceable in accordance with their terms, except as enforceability thereof may
be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium,
or other similar laws relating to or affecting the rights of creditors
generally, (ii) the application of general principals of equity (whether such
enforceability is considered in a proceeding in equity or at law), and (iii) the
qualification that certain waivers, procedures, remedies, and other provisions
of the Warrant Agreement relating to the Warrants and the Warrants may be
unenforceable under or limited by the law of the State of Arizona; however, such
law does not, in our opinion, substantially prevent the practical realization of
the benefits intended by such agreements. The Warrant Shares issuable upon
exercise of the Warrants, upon receipt by the Company of the consideration for
such shares in accordance with the terms thereof, will be legally issued, fully
paid, and non-assessable.
3. The Bank Group Warrants are legally issued and
constitute the valid and binding obligation of the Company enforceable in
accordance with their terms, except as enforceability thereof may be limited by
(i) applicable bankruptcy, insolvency, reorganization, moratorium, or other
similar laws relating to or affecting the rights of creditors generally, (ii)
the application of general principals of equity (whether such enforceability is
considered in a proceeding in equity or at law), and (iii) the qualification
that certain waivers, procedures,
<PAGE> 4
Ugly Duckling Corporation
February 5, 1998
Page 4
remedies, and other provisions of the Warrant Agreement relating to the Bank
Group Warrants and the Bank Group Warrants may be unenforceable under or limited
by the law of the State of Arizona; however, such law does not, in our opinion,
substantially prevent the practical realization of the benefits intended by such
agreements. The Warrant Shares issuable upon exercise of the Bank Group
Warrants, upon receipt by the Company of the consideration for such shares in
accordance with the terms thereof, will be legally issued, fully paid, and
non-assessable.
The foregoing opinions are limited to the federal law of the United
States of America, the laws of the State of Arizona, and the General Corporation
Law of the State of Delaware. We express no opinion as to the application of the
various state securities laws to the offer, sale, issuance, or delivery of the
Stock Option Shares, Warrants, Bank Group Warrants, and Warrant Shares.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Registration Statement and in the Prospectus included therein.
Very truly yours,
SNELL & WILMER L.L.P.
<PAGE> 1
Exhibit 10.31
GUARANTY AND PLEDGE AGREEMENT
(STOCK)
THIS GUARANTY AND PLEDGE AGREEMENT dated as of December 15, 1997
(the "Pledge Agreement") is made by and among First Merchants Acceptance
Corporation, a Delaware corporation (the "Pledgor") (as owner of all of the
outstanding capital stock in First Merchants Auto Receivables Corporation, a
Delaware corporation ("FMARC") and First Merchants Auto Receivables Corporation
II, a Delaware corporation ("FMARC II")), LaSalle National Bank, as Agent under
the Warehouse Facility, Ugly Duckling Corporation ("UDC") and Harris Trust and
Savings Bank, an Illinois banking corporation, as collateral agent (the
"Collateral Agent") on behalf of the Agent. Capitalized terms not otherwise
defined herein are used as defined in Schedule I attached hereto.
INTRODUCTORY STATEMENTS
A. The Pledgor is the sole shareholder of FMARC and FMARC II.
B. Pursuant to a Stock Pledge Agreement dated as of March 1, 1996, among
the Pledgor, FSA and the Collateral Agent (as the same may be amended,
supplemented or otherwise modified from time to time, the "FSA Pledge
Agreement"), the Pledgor has pledged all of its interest as sole shareholder of
FMARC II to the Collateral Agent on behalf of FSA. All such interest is
represented by a single stock certificate (the "FMARC II Certificate"). The
FMARC II Certificate has been delivered to the Collateral Agent by the Pledgor
pursuant to the FSA Pledge Agreement.
C. Pursuant to a Stock Pledge Agreement dated as of June 9, 1997, among
the Pledgor, Greenwich and the Collateral Agent (as the same may be amended,
supplemented or otherwise modified from time to time, the "Greenwich Pledge
Agreement"), the Pledgor has further pledged its interest as sole shareholder of
FMARC II to the Collateral Agent on behalf of Greenwich, subject to the rights
of FSA under the FSA Pledge Agreement and pursuant to an Intercreditor Agreement
dated as of June 9, 1997 by and between FSA and Greenwich (the "Intercreditor
Agreement").
D. Pursuant to that certain Pledge Agreement (Stock) dated as of July 17,
1997, among Pledgor, UDC, and the Collateral Agent (the "DIP Pledge"), the
Pledgor has pledged all of its interest as sole shareholder of FMARC II to the
Collateral Agent to secure its obligations to UDC under the DIP Facility and
Overadvance Cap subject to the limitations set forth in the DIP Pledge. UDC has
elected to subordinate the DIP Pledge to the liens granted hereunder.
<PAGE> 2
E. The Pledgor has entered into the Modified Plan Agreement. Pursuant to
the Modified Plan Agreement, the Pledgor has agreed to sell the Owned Loans to
the Agent.
F. In order to acquire the Owned Loans free and clear of any interests,
liens or encumbrances, the Agent, at the direction of UDC, has agreed to credit
bid the Purchase Price for the Owned Loans. The Pledgor, UDC and the Committee
have recognized that a cash sale of the Owned Loans would not provide sufficient
proceeds to satisfy, in full, all amounts due the Bank Group under the Warehouse
Facility. Moreover, the Pledgor and the Committee have requested that the Agent
release its lien on the Retained Property. As consideration for the Agent's (1)
credit bid of the Purchase Price for the Owned Loans and (2) release of its lien
on the Retained Property, the Pledgor has agreed to execute a non-recourse
guaranty guaranteeing to the Agent on behalf of the Current Bank Group
satisfaction in full of the Secured Claim Recovery Amount and to secure the
guaranty with a pledge of the FMARC Certificate and the FMARC II Certificate
(collectively the "Pledged Shares").
AGREEMENTS
In consideration of the premises and of the agreements herein
contained, the Pledgor, the Agent and the Collateral Agent agree as follows:
Section 1. Definitions. As used herein, the term "Final Date" shall
mean the earlier of (i) the date upon which the Agent has fully recovered and
received the Secured Claim Recovery Amount and, if the Chapter 11 Plan is
confirmed, UDC has received the Modified UDC Fee or (ii) the date on which all
of Pledgor's obligations under the Contribution Agreement have been satisfied.
The term "Senior Creditors" shall mean with respect to FMARC II individually
and/or collectively FSA and Greenwich. The term "Senior Pledge Agreements" shall
mean individually and/or collectively the FSA Pledge Agreement and the Greenwich
Pledge Agreement. The term "Senior Obligations" shall mean individually and/or
collectively the obligations of Pledgor to the Senior Creditors secured by the
Senior Pledge Agreements. The term "Senior Security Interests" shall mean any
and all properly perfected, valid and enforceable liens existing as of July 11,
1997, of Pledgor to the Senior Creditors securing the Senior Obligations. The
term "Responsible Officer" shall mean when used with respect to the Collateral
Agent any officer within its principal corporate trust office located at 311
West Monroe Street, Chicago, Illinois 60606, including any Vice President,
Managing Director, Assistant Vice President, Secretary, Assistant Secretary or
Assistant Treasurer or any other officer of the Collateral Agent customarily
performing functions similar to those performed by any of the above designated
officers and also, with respect to a particular matter, any other officer to
whom such matter is referred because of such officer's knowledge and familiarity
with
<PAGE> 3
the particular subject.
Section 2. Guaranty. Pledgor guarantees, absolutely and irrevocably,
the full and timely receipt and recovery by the Agent (and the successors or
assigns of Agent) and/or UDC (collectively, the "Secured Party"), in the
aggregate of the Secured Claim Recovery Amount and, if the Chapter 11 Plan is
confirmed, the Modified UDC Fee. Pledgor's guaranty obligations hereunder
(collectively, the "Obligations") shall be non-recourse to the Pledgor or any
assets of the Pledgor other than the FMARC Collateral (as defined below). The
Secured Party agrees to satisfy any claim arising hereunder against Pledgor only
from the proceeds of the FMARC Collateral.
Section 3. Pledge of Stock and Grant of Security Interest. As
security for the full and complete performance of all of the Obligations, the
Pledgor hereby delivers, pledges and assigns to the Collateral Agent for the
benefit of the Secured Party, and grants in favor of the Collateral Agent for
the benefit of the Secured Party, a security interest in all of the Pledgor's
right, title and interest in and to the Pledged Shares, together with all of the
Pledgor's rights and privileges with respect thereto, all proceeds, dividends,
distributions (including specifically, without limitation, all distributions or
dividends in any way related to Pledgor's interest in FMARC and FMARC II),
income and profits therefrom and all property received in exchange or in
substitution therefor (the "FMARC Collateral"); provided, however, that such
security interest of the Secured Party shall be subordinate to the Senior
Security Interests of the Senior Creditors in and to such FMARC Collateral
granted pursuant to the Senior Pledge Agreements for so long as any Senior
Obligations shall be outstanding and for so long as such Senior Security
Interests shall continue.
Section 4. Stock Dividends, Options, or Other Adjustments. Until the
Final Date, the Pledgor shall deliver to the Collateral Agent, as FMARC
Collateral, any and all additional shares of stock or any other property of any
kind distributable on or by reason of the FMARC Collateral, whether in the form
of or by way of stock dividends, warrants, total or partial liquidation,
conversion, prepayments, redemptions or otherwise, with the sole exception of
cash dividends or cash interest payments, as the case may be. If any additional
shares of capital stock, instruments, or other property, a security interest in
which can only be perfected by possession, which are distributable on or by
reason of the FMARC Collateral pledged hereunder, shall come into the possession
or control of the Pledgor, the Pledgor shall forthwith transfer and deliver such
property to the Collateral Agent, as FMARC Collateral hereunder. The security
interest of the Secured Party in and to such additional FMARC Collateral shall
be subordinate to the Senior Security Interests for so long as any Senior
Obligation shall be outstanding, and for as long as such Senior Security
Interests
<PAGE> 4
shall continue.
Section 5. Delivery of Share Certificates; Stock Powers. Pursuant to
the FSA Pledge Agreement and the pledge of the FMARC stock herein, the Pledgor
has previously delivered to the Collateral Agent all instruments and stock
certificates representing the FMARC Collateral, together with stock powers duly
executed in blank by the Pledgor. The Pledgor shall promptly deliver to the
Collateral Agent, or cause FMARC and FMARC II (collectively, the "FMARC
Entities") or any other entity issuing the FMARC Collateral, to deliver directly
to the Collateral Agent share certificates or other instruments representing any
FMARC Collateral issued to, acquired or received by the Pledgor after the date
of this Pledge Agreement with a stock or bond power duly executed by the
Pledgor. Subject to the rights of the Senior Creditors for so long as the Senior
Security Interests shall continue, if, at any time, either the Collateral Agent
acting on behalf of the Secured Party or the Secured Party notifies the Pledgor
that it requires additional stock powers endorsed in blank, the Pledgor shall
promptly execute in blank and deliver the requested power to the requesting
party.
Section 6. Power of Attorney. Subject to the rights of the Senior
Creditors for so long as any Senior Obligations shall be outstanding and the
Senior Security Interests shall continue, and subject further to the provisions
of Title 11 of the United States Code (the "Bankruptcy Code"), the Pledgor
hereby constitutes and irrevocably appoints the Collateral Agent on behalf of
the Secured Party and the Secured Party, or either one acting alone, exercisable
at any time after the Senior Obligations shall have been paid in full, with full
power of substitution and revocation, as the Pledgor's true and lawful
attorney-in-fact, with the power, upon the failure of Pledgor to satisfy its
obligations under Section 2 hereof, and a failure to cure as provided in Section
12(a) hereof, to the full extent permitted by law, to affix to any certificates
and documents representing the FMARC Collateral, the stock or bond powers
delivered with respect thereto, and to transfer or cause the transfer of the
FMARC Collateral, or any part thereof, on the books of the FMARC Entities or any
other entity issuing such FMARC Collateral, to the name of the Collateral Agent
or the Secured Party or any nominee thereof, and thereafter to exercise with
respect to such FMARC Collateral all the rights, powers and remedies of an
owner. Subject to the rights of the Senior Creditors for so long as the Senior
Security Interests shall continue, the power of attorney granted pursuant to
this Pledge Agreement and all authority hereby conferred are granted and
conferred solely to protect the Secured Party's interest in the FMARC Collateral
and shall not impose any duty upon the Collateral Agent or the Secured Party to
exercise any power. This power of attorney shall be irrevocable as one coupled
with an interest until the Final Date.
<PAGE> 5
Section 7. Inducing Representations of the Pledgor.
The Pledgor represents and warrants to UDC that:
(a) The Pledged Shares are validly issued, fully paid for and
nonassessable.
(b) The Pledged Shares represent all of the issued and outstanding
capital stock of FMARC and FMARC II.
(c) The Pledgor is the sole legal and beneficial owner of, and has
good and marketable title to, the Pledged Shares, free and clear of all pledges,
liens, security interests and other encumbrances, except the security interests
created by this Pledge Agreement, the Senior Security Interests and the DIP
Pledge, and the Pledgor has the unqualified right and authority to execute and
perform this Pledge Agreement, subject to (e) below.
(d) No options, warrants or other agreements with respect to the
FMARC Collateral are outstanding, except with respect to the Senior Security
Interests and the DIP Pledge.
(e) Any necessary consent, approval or authorization of or
designation or filing with any authority on the part of the Pledgor which is
required in connection with the Pledge and security interest granted under this
Pledge Agreement has been obtained or effected by Court approval of this Pledge
Agreement in the Bankruptcy Case after notice and an opportunity to be heard.
(f) Once approved by the Court in the Bankruptcy Case, neither the
execution and delivery of this Pledge Agreement by the Pledgor, the consummation
of the transaction contemplated hereby nor the satisfaction of the terms and
conditions of this Pledge Agreement:
(i) conflicts with or results in any breach or violation of
any provision of the articles of incorporation or bylaws of the Pledgor or any
law, rule, regulation, order, writ, judgment, injunction, decree, determination
or award currently in effect having applicability to the Pledgor or any of its
properties, including regulations issued by an administrative agency or other
governmental authority having supervisory powers over the Pledgor;
(ii) conflicts with, constitutes a default (or an event which
with the giving of notice or the passage of time, or both, would constitute a
default) by the Pledgor under, or a breach of or contravenes any provision of,
any agreement to which the Pledgor or any of its subsidiaries is a party or by
which it or any of their properties is or may be bound or affected, including
without limitation any loan agreement, mortgage, indenture or other agreement or
instrument except where such consent has been obtained or is effected by entry
of an order approving this Pledge
<PAGE> 6
Agreement; or
(iii) results in or requires the creation of any lien upon or
in respect of any of the Pledgor's assets except the lien created by this Pledge
Agreement.
(g) With respect to all Pledged Shares heretofore delivered to and
currently held by the Collateral Agent, and upon delivery to the Collateral
Agent of any Pledged Shares hereafter issued to, acquired or received by the
Pledgor, the Secured Party will have a valid, perfected security interest in and
to the FMARC Collateral, enforceable as such against all other creditors of the
Pledgor and against all persons purporting to purchase any of the FMARC
Collateral from the Pledgor, except that such security interest of the Secured
Party in the FMARC Collateral is subordinate to the Senior Security Interests
for so long as such Senior Security Interests shall continue and the right of
the Secured Party to enforce such security interest is limited by the rights of
the Senior Creditors under the Senior Pledge Agreements and the Intercreditor
Agreement for so long as the Senior Security Interests shall continue.
Section 8. Obligations of the Pledgor. The Pledgor further
represents, warrants and covenants to the Secured Party that:
(a) The Pledgor will not sell, transfer or convey any interest in,
or suffer or permit any lien or encumbrance to be created upon or with respect
to, any of the FMARC Collateral (other than the Senior Security Interests or the
security interests created under this Pledge Agreement and the DIP Pledge)
during the term of this Pledge Agreement, without the prior written consent of
the Secured Party.
(b) On and after the date hereof, the Pledgor will not, and will not
cause or permit the FMARC Entities or any affiliate of the Pledgor or of the
FMARC Entities to, enter into any new agreement or arrangement with FSA for the
insurance of any securitization by FSA or the cross-collateralization of any
such securitization with the presently existing securitizations, without the
prior written consent of the Secured Party.
(c) The Pledgor will, at its own expense, at any time and from time
to time at the request of the Collateral Agent on behalf of the Secured Party or
the Secured Party, at such time as the Senior Obligations shall have been paid
in full, do, make, procure, execute and deliver all acts, things, writings,
assurances and other documents as may be reasonably proposed by the Collateral
Agent or the Secured Party to preserve, establish, demonstrate or enforce the
rights, interests and remedies of the Collateral Agent or the Secured Party as
created by, provided in, or emanating from this Pledge Agreement, in each case
subject to the rights of the
<PAGE> 7
Senior Creditors for so long as the Senior Security Interests shall continue.
(d) The Pledgor will not take any action which would cause the FMARC
Entities to issue any other capital stock without the prior written consent of
the Secured Party, subject to the rights of the Senior Creditors for so long as
the Senior Security Interests shall continue. Any such issuance shall be subject
to the rights of the Secured Party under this Pledge Agreement and the Senior
Creditors under the Senior Pledge Agreements for so long as the Senior Security
Interests shall continue.
(e) The Pledgor will not consent to any amendment to the articles of
incorporation of the FMARC Entities without the prior written consent of the
Secured Party, which consent shall not be unreasonably withheld or delayed.
Section 9. Dividends. Pledgor agrees that, until the Final Date, it
shall not cause the FMARC Entities to declare or make payment of (i) any
dividend or other distribution on any shares of its capital stock, or (ii) any
payment on account of the purchase, redemption, retirement or acquisition of any
option, warrant or other right to acquire shares of its capital stock, unless
such dividends, distribution or proceeds are paid to Agent or UDC hereunder to
be applied to reduce the Secured Claim Recovery Amount and, if a Chapter 11 Plan
is confirmed, the Modified UDC Fee, or to the Senior Creditors.
Section 10. Voting Proxy. Subject to the rights of the Senior
Creditors for so long as the Senior Security Interests shall continue, the
Pledgor hereby grants to the Collateral Agent on behalf of the Secured Party an
irrevocable proxy, exercisable at such time as the Senior Obligations shall have
been paid in full, to vote, upon the occurrence of an Event of Default (as
hereinafter defined), the Pledged Shares with respect to the matters contained
in Article XII of the Articles of Incorporation of the FMARC Entities, which
proxy shall continue until the Final Date, subject to the rights of the Senior
Creditors for so long as the Senior Security Interests shall continue. UDC will
provide written notice to the Collateral Agent and the Pledgor in the event that
(i) the Senior Obligations are paid in full, (ii) the Final Date has occurred or
(iii) an Event of Default has occurred. The Pledgor represents and warrants that
it has directed the FMARC Entities, in accordance with Section 217 of the
Delaware General Corporation Law, to reflect on their respective books the right
of the Collateral Agent to vote the FMARC Collateral, as applicable, on behalf
of the Secured Party, exercisable at such time as the Senior Obligations shall
have been paid in full, and only on the occurrence of an Event of Default (as
defined below). Upon the request of the Collateral Agent or the Secured Party,
the Pledgor shall deliver to the Collateral Agent such further evidence of such
irrevocable proxy or such further irrevocable proxy exercisable at
<PAGE> 8
such time as the Senior Obligations shall have been paid in full, and only on
the occurrence of an Event of Default (as defined below), to vote the FMARC
Collateral as the Collateral Agent or the Secured Party may request pursuant
hereto. The Collateral Agent shall exercise all such rights to vote the FMARC
Collateral granted hereunder in accordance with the written directions given by
the Secured Party.
Section 11. Rights of the Collateral Agent and the Secured Party.
Subject to the rights of the Senior Creditors for so long as the Senior Security
Interests shall continue, the Secured Party may, at any time and without notice,
upon providing the Collateral Agent with the full amount necessary to carry out
such direction, direct the Collateral Agent in writing to discharge any taxes,
liens, security interests or other encumbrances levied or placed on the FMARC
Collateral, pay for the maintenance and preservation of the FMARC Collateral, or
pay for insurance on the FMARC Collateral; the amount of such payments, plus any
and all reasonable fees, costs and expenses of the Collateral Agent and the
Secured Party (including reasonable attorneys' fees and disbursements) in
connection therewith, shall, at the option of the Collateral Agent or the
Secured Party, as appropriate, be reimbursed by the Pledgor on demand, with
interest thereon from the date paid at a rate of ten (10) percent per annum. The
Collateral Agent shall have no duty or obligation to follow any direction
provided in this Section 11 unless the Secured Party has provided the Collateral
Agent with the full amount necessary to carry out such direction.
Section 12. Remedies Upon Event of Default under this Pledge
Agreement. Subject to the rights of the Senior Creditors for so long as the
Senior Security Interests shall continue, at such time as the Senior Obligations
shall have been paid in full and/or the Senior Creditors rights under the Senior
Pledge Agreements have been released or discharged, and subject further to the
provisions of the Bankruptcy Code, the Collateral Agent, on behalf of the
Secured Party, or the Secured Party may exercise any one or more of the
following remedies upon an Event of Default under this Pledge Agreement:
(a) Upon the failure by Pledgor to satisfy its obligations under
Section 2 hereof, the Secured Party may, directly or through the Collateral
Agent, with at least five (5) business days prior written notice to the Pledgor
(during which period Pledgor may cure such default) (such failure to satisfy and
failure to cure, collectively, an "Event of Default"),
(i) cause the FMARC Collateral to be transferred to the
Collateral Agent's name or the Secured Party's name, or to the name of a nominee
of either, and thereafter exercise as to such FMARC Collateral all of the
rights, powers and remedies of an owner;
<PAGE> 9
(ii) collect by legal proceedings or otherwise all dividends,
interest, principal payments, capital distributions and other sums now or
hereafter payable on account of the FMARC Collateral, and hold all such sums as
part of the FMARC Collateral, or apply such sums to the payment of the
Obligations in such manner and order as the Secured Party may decide, in its
sole discretion; or
(iii) enter into any extension, subordination, reorganization,
deposit, merger, or consolidation agreement, or any other agreement relating to
or affecting the FMARC Collateral, and in connection therewith deposit or
surrender control of the FMARC Collateral thereunder, and accept other property
in exchange therefor and hold and apply such property or money so received in
accordance with the provisions hereof; or
(b) In addition to all the rights and remedies of a secured party
under the Uniform Commercial Code as in effect in any applicable jurisdiction,
upon the occurrence of an Event of Default, the Secured Party shall have the
right, without demand of performance or other demand, advertisement or notice of
any kind, except as specified below and subject to the rights of the Senior
Creditors for so long as the Senior Security Interests shall continue, to or
upon the Pledgor or any other person (all and each of which demands,
advertisements and/or notices are hereby expressly waived to the extent
permitted by law), to proceed forthwith or direct the Collateral Agent in
writing to proceed forthwith, to collect, receive, appropriate and realize upon
the FMARC Collateral, or any part thereof and to proceed forthwith to sell,
assign, give an option or options to purchase, contract to sell, or otherwise
dispose of and deliver the FMARC Collateral or any part thereof in one or more
parcels in accordance with applicable securities laws and in a manner designed
to ensure that such sale will not result in a distribution of the Pledged Shares
in violation of Section 5 of the Securities Act of 1933, as amended (the
"Securities Act") (it being understood and agreed that the Collateral Agent will
have no liability with respect thereto) and on such terms (including, without
limitation, a requirement that any purchaser of all or any part of the FMARC
Collateral shall be required to purchase any securities constituting the FMARC
Collateral solely for investment and without any intention to make a
distribution thereof) as the Secured Party, in its sole and absolute discretion,
deems appropriate without any liability for any loss due to a decrease in the
market value of the FMARC Collateral during the period held. If any notification
to the Pledgor of intended disposition of the FMARC Collateral is required by
law, such notification shall be deemed reasonable and properly given if hand
delivered or express mailed to the Pledgor at least ten (10) days before any
such disposition at the address in Section 22 hereof. Any disposition of the
FMARC Collateral or any part thereof may be for cash or on credit or for future
delivery without assumption of any credit risk, with the right of the Secured
Party
<PAGE> 10
to purchase all or any part of the FMARC Collateral so sold at any such sale or
sales, public or private, free of any equity or right of redemption in the
Pledgor, which right of equity is, to the extent permitted by applicable law,
hereby expressly waived or released by the Pledgor; or
(c) The Agent, in its sole and absolute discretion, may elect to
obtain or cause the Collateral Agent to obtain the advice of any independent
nationally known investment banking firm, which is a member firm of the New York
Stock Exchange, with respect to the method and manner of sale or other
disposition of any of the FMARC Collateral, the best price reasonably obtainable
therefor, the consideration of cash and/or credit terms, or any other details
concerning such sale or disposition; costs and expenses of obtaining such advice
shall be for the account of the Secured Party. Subject to the rights of the
Senior Creditors, for so long as the Senior Security Interests shall continue,
the Secured Party, with the prior written consent of the Senior Creditors, or,
at such time as the Senior Obligations shall have been paid in full, in its sole
and absolute discretion, may elect to sell or cause the Collateral Agent to
sell, the FMARC Collateral on any credit terms which it deems reasonable. The
out-of-pocket costs and expenses of such sale shall be for the account of the
Secured Party, except that, where such sale is effected with the prior written
consent of the Senior Creditors, such costs and expenses shall be allocated pro
rata between the Senior Creditors and the Secured Party to the extent, if any,
that the proceeds of such sale are paid to each of the Senior Creditors and the
Secured Party. The sale of any of the FMARC Collateral on credit terms shall not
relieve the Pledgor of its liability with respect to the Obligations. All
payments received in respect of any sale of the FMARC Collateral by the
Collateral Agent or the Secured Party shall be applied to the Obligations as and
when such payments are received, subject to the rights of the Senior Creditors
for so long as the Senior Security Interests shall continue and any price
received by the Collateral Agent in respect of such sale shall be conclusive and
binding upon the Secured Party; or
(d) The Pledgor recognizes that it may not be feasible to effect a
public sale of all or a part of the FMARC Collateral by reason of certain
prohibitions contained in the Securities Act, and that it may be necessary to
sell privately to a restricted group of purchasers who will be obliged to agree,
among other things, to acquire the FMARC Collateral for their own account, for
investment and not with a view for the distribution or resale thereof. The
Pledgor agrees that private sales may be at prices and other terms less
favorable to the seller than if the FMARC Collateral were sold at public sale,
and that neither the Collateral Agent nor the Secured Party has any obligation
to delay the sale of any FMARC Collateral for the period of time necessary to
permit the registration of the FMARC Collateral for public sale under the
Securities Act. The Pledgor agrees that a private sale or sales
<PAGE> 11
made under the foregoing circumstances shall be deemed to have been made in a
commercially reasonable manner; or
(e) If any consent, approval or authorization of any state,
municipal or other governmental department, agency or authority shall be
necessary to effectuate any sale or other disposition of the FMARC Collateral,
or any partial disposition of the FMARC Collateral, the Pledgor will execute all
such applications and other instruments as may be reasonably required in
connection with securing any such consent, approval or authorization, and will
otherwise use reasonable efforts to secure the same; or
(f) Subject to the rights of the Senior Creditors for so long as the
Senior Security Interests shall continue, upon any sale or other disposition
with the prior written consent of the Senior Creditors or, at such time as the
Senior Obligations shall have been paid in full, the Collateral Agent, acting at
the written direction of the Secured Party, or the Secured Party shall have the
right to deliver, assign and transfer to the purchaser thereof (including the
Secured Party) the FMARC Collateral so sold or disposed of, subject to the
Senior Security Interests if such sale or disposition is made prior to the
payment in full of the Senior Obligations, and free from any other claim or
right of whatever kind, including any equity or right of redemption of the
Pledgor. The Pledgor specifically waives, to the extent permitted by applicable
law, all rights of redemption, stay or appraisal which it may have under any
rule of law or statute now existing or hereafter adopted; or
(g) Neither the Collateral Agent nor the Secured Party shall be
obligated to make any sale or other disposition of the FMARC Collateral
permitted under this Pledge Agreement, unless the terms thereof shall be
satisfactory to the Secured Party. The Collateral Agent or the Secured Party
may, without notice or publication, adjourn any such private or public sale,
and, upon five (5) days' prior written notice to the Pledgor, hold such sale at
any time or place to which the same may be so adjourned. In case of any such
sale of all or any part of the FMARC Collateral on credit or future delivery,
the FMARC Collateral so sold may be retained by the Collateral Agent or the
Secured Party until the selling price is paid by the purchaser thereof, but
neither the Collateral Agent nor the Secured Party shall incur any liability in
case of the failure of such purchaser to take up and pay for the property so
sold and, in case of any such failure, such property may again be sold as herein
provided.
(h) All of the rights and remedies granted to the Collateral Agent
and the Secured Party, including but not limited to the foregoing, shall be
cumulative and not exclusive and shall be enforceable alternatively,
successively or concurrently as the Secured Party may deem expedient.
<PAGE> 12
(i) Notwithstanding anything to the contrary in this Section 12, the
security interest of the Collateral Agent and the Agent shall secure only the
guaranty of the Secured Claim Recovery Amount. Any excess value or proceeds in
or from the FMARC Collateral shall accrue to Pledgor except as otherwise agreed
in writing by the Pledgor.
Section 13. Limitation on Liability.
(a) Neither the Collateral Agent nor the Secured Party, nor any of
their respective directors, officers, employees or agents, shall be liable to
the Pledgor or to the FMARC Entities for any action taken or omitted to be taken
by it or them hereunder, or in connection herewith, except that the Collateral
Agent and the Secured Party shall each be liable for its own gross negligence,
bad faith or willful misconduct.
(b) The Collateral Agent shall incur no liability to the Secured
Party except for the Collateral Agent's negligence, bad faith or willful
misconduct in carrying out its duties hereunder.
(c) The Collateral Agent shall be protected and shall incur no
liability to any party in relying upon the accuracy, acting in reliance upon the
contents, and assuming the genuineness of any notice, demand, certificate,
signature, instrument or other document a Responsible Officer of the Collateral
Agent reasonably believes to be genuine and to have been duly executed by the
appropriate signatory, and (absent actual knowledge to the contrary of any
Responsible Officer of the Collateral Agent) the Collateral Agent shall not be
required to make any independent investigation with respect thereto. The
Collateral Agent shall at all times be free to establish independently to its
reasonable satisfaction, but shall have no duty to independently verify, the
existence or nonexistence of facts that are a condition to the exercise or
enforcement of any right or remedy hereunder.
(d) The Collateral Agent may consult with qualified counsel,
financial advisors or accountants and shall not be liable for any action taken
or omitted to be taken by it hereunder in good faith and in accordance with the
advice of such counsel, financial advisors or accountants.
(e) The Collateral Agent shall not be under any obligation to
exercise any of the rights, powers or duties vested in it by this Pledge
Agreement unless it shall have received reasonable security or indemnity
satisfactory to the Collateral Agent against the costs, expenses and liabilities
which it might incur.
(f) Whenever in the administration of this Agreement, the Collateral
Agent shall deem it necessary or desirable that a matter be proved or
established prior to taking or suffering or
<PAGE> 13
omitting to take any action hereunder, such matter (unless other evidence in
respect thereof be herein specifically prescribed) may, in the absence of gross
negligence, bad faith or wilful misconduct on the part of the Collateral Agent,
be deemed to be conclusively proved and established by an officers' certificate
of the Secured Party delivered to the Collateral Agent, and such certificate, in
the absence of gross negligence, bad faith or wilful misconduct on the part of
the Collateral Agent, shall be a warranty to the Collateral Agent for any action
taken, suffered or omitted to be taken by the Collateral Agent under the
provisions of this Agreement in reliance on such certificate.
Section 14. Performance of Duties. The Collateral Agent shall have
no duties or responsibilities with respect to the Secured Party except those
expressly set forth in this Pledge Agreement or as directed in writing by the
Secured Party pursuant to this Pledge Agreement.
Section 15. Appointment of and Powers of Collateral Agent. Subject
to the rights of the Senior Creditors for so long as the Senior Security
Interests shall continue, the Secured Party appoints Harris Trust and Savings
Bank as its Collateral Agent and Harris Trust and Savings Bank accepts such
appointment and agrees to act as Collateral Agent on behalf of the Secured Party
to maintain custody and possession of the FMARC Collateral and to perform the
other duties of the Collateral Agent in accordance with the provisions of this
Pledge Agreement. The Collateral Agent shall, subject to the other terms and
provisions of this Pledge Agreement and subject to the rights of the Senior
Creditors for so long as the Senior Security Interests shall continue, act upon
and in compliance with the Secured Party's written instructions delivered
pursuant to this Pledge Agreement as promptly as possible following receipt of
such written instructions. Receipt of written instructions shall not be a
condition to the exercise by the Collateral Agent of its express duties
hereunder, unless this Pledge Agreement provides that the Collateral Agent is
permitted to act only following receipt of such written instructions.
Section 16. Successor Collateral Agent.
(a) Merger. Any Person into which the Collateral Agent may be
converted or merged, or with which it may be consolidated, or to which it may
sell or transfer its trust business and assets as a whole or substantially as a
whole, or any person resulting from any such conversion, merger, consolidation,
sale or transfer to which the Collateral Agent is a party, shall (provided it is
otherwise qualified to serve as the Collateral Agent hereunder) be and become a
successor Collateral Agent hereunder and, subject to the rights of the Senior
Creditors for so long as the Senior Security Interests shall continue, be vested
with all of the title to and interest in the FMARC Collateral, all of the duties
and obligations provided herein and all of the trusts, powers, immunities,
privileges and other matters as was its predecessor at
<PAGE> 14
the time of such conversion, merger or consolidation, without the execution or
filing of any instrument or any further act, deed or conveyance on the part of
any of the parties hereto, anything herein to the contrary notwithstanding.
(b) Resignation. Subject to the rights of the Senior Creditors for
so long as the Senior Security Interests shall continue, the Collateral Agent
and any successor Collateral Agent may not resign (i) without the prior written
consent of both the Senior Creditors and the Secured Party (which consent will
not be unreasonably withheld) or, at such time as the Senior Obligations shall
have been paid in full, of the Secured Party (ii) unless the Collateral Agent is
unable to perform its duties hereunder as a matter of law as evidenced by an
opinion of counsel acceptable to both the Senior Creditors and the Secured Party
or, at such time as the Senior Obligations shall have been paid in full, the
Secured Party. Upon the occurrence of (i) or (ii) above, the Collateral Agent
shall give notice of its resignation by registered or certified mail to the
Pledgor (with a copy to the Secured Party, and to the Senior Creditors for so
long as the Senior Security Interests shall continue). Any resignation by the
Collateral Agent shall take effect only upon the date which is the later of (x)
the effective date of the appointment pursuant hereto of a successor Collateral
Agent, and the acceptance in writing by such successor Collateral Agent of such
appointment and (y) the date on which the FMARC Collateral is delivered to the
successor Collateral Agent. Notwithstanding the preceding sentence, if by the
contemplated date of resignation specified in the written notice of resignation
delivered as described above, no successor Collateral Agent has been appointed
or becomes the Collateral Agent pursuant to subsection (d) below, the resigning
Collateral Agent may petition a court of competent jurisdiction for the
appointment of a successor. In the event of any resignation pursuant to this
Section 16(b), the Pledgor shall pay to the Collateral Agent its fees and
expenses then due and owing in accordance with Section 20 hereof.
(c) Removal. The Collateral Agent may be removed (i) by the Senior
Creditors for so long as the Senior Security Interests shall continue, and (ii)
at such time as the Senior Obligations shall have been paid in full, by the
Secured Party, at any time, with or without cause, by an instrument or
concurrent instruments in writing delivered to the Collateral Agent and a
written copy thereof shall be promptly furnished to the Pledgor. The Collateral
Agent shall provide the Secured Party and the Pledgor with a copy of any such
notice received from the Senior Creditors by the Collateral Agent pursuant to
(i) above. Any removal pursuant to the provisions of this subsection (c) shall
take effect only upon the later to occur of (i) the effective date of the
appointment of a successor Collateral Agent and the acceptance in writing by
such successor Collateral Agent of such appointment and of its obligation to
perform its duties hereunder in accordance with the
<PAGE> 15
provisions hereof and (ii) the date on which the FMARC Collateral is delivered
to a successor Collateral Agent. In the event of any removal pursuant to this
Section 16(c), the Pledgor shall pay the Collateral Agent its fees and expenses
then due and owing in accordance with Section 20 hereof.
(d) Appointment of and Acceptance by Successor.
(i) For so long as the Senior Security Interests shall
continue, the Senior Creditors shall have the right to appoint any successor
Collateral Agent and, at such time as the Senior Obligations shall have been
paid in full, the Secured Party shall have the sole right, pursuant to this
Pledge Agreement, to appoint any successor Collateral Agent. Every successor
Collateral Agent appointed or approved hereunder shall execute, acknowledge and
deliver to its predecessor, to the Pledgor, to the Senior Creditors for so long
as the Senior Security Interests shall continue and, at such time as the Senior
Obligations shall have been paid in full, to the Secured Party, an instrument in
writing accepting such appointment hereunder, and the relevant predecessor shall
execute, acknowledge and deliver such other documents and instruments as will
effectuate the delivery of all FMARC Collateral to the successor Collateral
Agent, whereupon such successor, without any further act, deed or conveyance,
shall become fully vested with all the estates, properties, rights, powers,
duties and obligations of its predecessor. Such predecessor shall, nevertheless,
on the written request of the Secured Party, and, at such time as the Senior
Obligations shall have been paid in full, execute and deliver an instrument
transferring to such successor all the estates, properties, rights and powers of
such predecessor hereunder.
(ii) Every predecessor Collateral Agent shall assign, transfer
and deliver all FMARC Collateral held by it as Collateral Agent hereunder to its
successor as Collateral Agent.
(iii) Should any instrument in writing from the Pledgor be
reasonably required by a successor Collateral Agent for the purpose of more
fully and certainly vesting in such successor the estates, properties, rights,
powers, duties and obligations vested or intended to be vested hereunder in the
Collateral Agent, any and all such written instruments shall, at the request of
the successor Collateral Agent, be forthwith executed, acknowledged and
delivered by the Pledgor.
(iv) The designation of any successor Collateral Agent and the
instrument or instruments removing any Collateral Agent and appointing a
successor hereunder, together with all other instruments provided for herein,
shall be maintained with the records relating to the FMARC Collateral and, to
the extent required by applicable law, filed or recorded by the successor
Collateral Agent in each place where such filing or recording is
<PAGE> 16
necessary to effect the transfer of the FMARC Collateral to the successor
Collateral Agent or to protect and preserve the security interest granted
hereunder.
(v) Neither the original Collateral Agent nor any successor
Collateral Agent named under this Section 16 shall be liable for the acts or
omissions of any successor Collateral Agent named under this Section 16 in
connection with fulfilling its duties as Collateral Agent hereunder.
Section 17. Indemnification. The Pledgor shall indemnify solely from
the FMARC Collateral each of the Secured Party, its affiliates and subsidiaries,
the Collateral Agent, and their respective directors, officers, employees and
agents, for, and hold each of the Secured Party, its affiliates and
subsidiaries, the Collateral Agent, and their respective directors, officers,
employees and agents harmless against, any loss, liability or reasonable expense
(including the reasonable costs and expenses of defending against any claim of
liability) arising out of or in connection with this Pledge Agreement and the
transactions contemplated hereby, except any such loss, liability or expense as
shall result from the respective gross negligence, bad faith or willful
misconduct of each of the Secured Party, its affiliates and subsidiaries, the
Collateral Agent or their respective directors, officers, employees or agents.
The obligation of the Pledgor under this Section shall survive the resignation
or removal of the Collateral Agent and the satisfaction of all of the
Obligations. The Secured Party shall indemnify the Collateral Agent for the
foregoing on a recourse basis.
Section 18. Representations and Warranties of the Collateral Agent.
The Collateral Agent represents and warrants to Pledgor and to the Secured Party
as follows:
(a) Due Organization. The Collateral Agent is an Illinois banking
corporation, duly organized, validly existing and in good standing under the
laws of the State of Illinois and is duly authorized and licensed under
applicable law to conduct its business as presently conducted.
(b) Corporate Power. The Collateral Agent has all requisite right,
power and authority to execute and deliver this Pledge Agreement and to perform
all of its duties as Collateral Agent hereunder and thereunder.
(c) Due Authorization. The execution and delivery by the Collateral
Agent of this Pledge Agreement and the performance by the Collateral Agent of
its duties hereunder, have been duly authorized by all necessary corporate
proceedings and no further approvals or filings, including any governmental
approvals, are required for the valid execution and delivery by the Collateral
Agent, or the performance by the Collateral Agent, of this Pledge
<PAGE> 17
Agreement.
(d) Valid and Binding Agreement. The Collateral Agent has duly
executed and delivered this Pledge Agreement and this Pledge Agreement
constitutes the legal, valid and binding obligation of the Collateral Agent,
enforceable against the Collateral Agent in accordance with its respective
terms, except as (i) such enforceability may be limited by bankruptcy,
insolvency, reorganization and similar laws relating to or affecting the
enforcement of creditors' rights generally and (ii) rights of acceleration and
the availability of equitable remedies may be limited by equitable principles of
general applicability.
Section 19. Termination. This Pledge Agreement shall continue in
full force and effect until the Final Date. Subject to any sale or other
disposition of the FMARC Collateral pursuant to and in accordance with this
Pledge Agreement or the Senior Pledge Agreements, and subject further to the
rights of the Senior Creditors for so long as the Senior Security Interests
shall continue, the FMARC Collateral shall be returned to the Pledgor on the
Final Date.
Section 20. Compensation and Reimbursement. The Pledgor agrees for
the benefit of the Secured Party and as part of the Obligations (a) to pay to
the Collateral Agent, from time to time, reasonable compensation for all
services rendered by it hereunder not to exceed $2,500 per annum and (b) to
reimburse the Collateral Agent upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Collateral Agent in
accordance with any provision of, or carrying out its duties and obligations
under, this Pledge Agreement (including the reasonable compensation and fees and
the reasonable expenses and disbursements of its agents, any independent
certified public accountants and independent counsel), except any expense,
disbursement or advances as may be attributable to negligence, bad faith or
willful misconduct on the part of the Collateral Agent. Such fees and expenses
shall be considered administrative expenses of Pledgor entitled to priority
under 11 U.S.C. section 503.
Section 21. Foreclosure Expenses of the Collateral Agent and the
Secured Party. All reasonable expenses (including reasonable fees and
disbursements of counsel) incurred in compliance with this Pledge Agreement, by
the Collateral Agent on behalf of the Secured Party or by the Secured Party in
connection with any actual or attempted sale, exchange of, or any enforcement,
collection, compromise or settlement respecting this Pledge Agreement or the
FMARC Collateral, or any other action taken in compliance with this Pledge
Agreement, by the Collateral Agent on behalf of the Secured Party or by the
Secured Party hereunder, whether directly or as attorney-in-fact pursuant to a
power of attorney or other authorization herein conferred, for the purpose of
satisfaction of the Obligations shall be deemed an Obligation
<PAGE> 18
for all purposes of this Pledge Agreement and the Collateral Agent (with the
consent of the Secured Party) and the Secured Party may apply the FMARC
Collateral to payment of or reimbursement of itself for such liability;
provided, however, that any fees, expenses or disbursements incurred in
connection with this Pledge Agreement which are attributable to the gross
negligence, bad faith or willful misconduct of the Secured Party or the
Collateral Agent shall not be considered an Obligation hereunder and shall not
be subject to payment or reimbursement from the FMARC Collateral.
Section 22. Notices. Any notice or other communication given
hereunder shall be in writing and shall be sent to the recipient as follows:
If to UDC, to:
Ugly Duckling Corporation
2525 E. Camelback Road, Suite 1150
Phoenix, Arizona 85016
Attention: Steven P. Johnson, Esq.
Facsimile No.: (602) 852-6696
With a copy to:
Snell & Wilmer L.L.P.
One Arizona Center
Phoenix, Arizona 85004
Attention: Timothy W. Moser, Esq.
Facsimile No.: (602) 382-6070
If to the Pledgor, to:
First Merchants Acceptance Corporation
570 Lake Cook Road, Suite 126
Deerfield, Illinois 60015
Attention: Howard Adamski
Facsimile No.: (847) 945-2556
With a copy to:
Sonnenschein Nath & Rosenthal
Suite 8000 Sears Tower
233 S. Wacker Drive
Chicago, Illinois 60606
Attention: Robert E. Richards, Esq.
Facsimile No.: (312) 876-7934
If to the Agent, to:
LaSalle National Bank
120 South LaSalle Street
Chicago, Illinois 60603
<PAGE> 19
Attention: Commercial Lending Department
With a copy to:
Jenner & Block
One IBM Plaza
Chicago, Illinois 60611
Attention: Jeffrey Elegant, Esq.
Telecopy No.: (312) 527-0484
With a copy to:
Snell & Wilmer L.L.P.
One Arizona Center
400 East Van Buren
Phoenix, Arizona 85004-0001
Attention: Timothy W. Moser, Esq.
Telephone: (602) 382-6000
Telecopy No.: (602) 382-6070
If to FSA, to:
Financial Security Assurance, Inc.
350 Park Avenue
New York, New York 10022
Attention: Surveillance Department
Facsimile No.: (212) 339-3518
With a copy to:
Paul Hastings Janofsky & Walker, L.L.P.
555 S. Flower Street
Los Angeles, California 90071
Attention: Carl Anderson
Facsimile No.: (213) 627-0705
<PAGE> 20
If to Greenwich, to:
Greenwich Capital Financial Products, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: Craig Eckes
Telephone: (203) 622-5651
Telecopy No.: (203) 629-9640
With a copy to:
Office of the General Counsel
Greenwich Capital Financial Products, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
Telephone: (203) 622-5651
Telecopy No.: (203) 629-9640
If to Collateral Agent, to:
Harris Trust and Savings Bank
311 West Monroe Street
Chicago, Illinois 60606
Attention: Indenture Trust Department
Telephone: (312) 461-6030
Facsimile No.: (312) 461-3525
Each such notice or other communication, together with appropriate copies,
shall be (a) mailed by United States registered or certified mail, return
receipt requested, postage prepaid, (b) delivered by overnight delivery service
such as Federal Express, providing for signed receipts, (c) delivered by
personal service in the manner provided for service of legal process, or (d)
transmitted by facsimile at the above facsimile numbers, with a copy by United
States mail as provided in subsection (a) hereof. Counsel to a party may give
notice for its client provided such notice is otherwise made in accordance with
the provisions of this Section. Notices shall be effective on the first business
day following the date of mailing or transmission, or upon receipt or personal
service.
Section 23. General Provisions.
(a) The Collateral Agent on behalf of the Secured Party and its
successors and permitted assigns shall have no obligation in respect of the
FMARC Collateral, except to use reasonable care in holding the FMARC Collateral
and to hold and dispose of the same in accordance with the terms of this Pledge
Agreement.
(b) The failure of the Collateral Agent or the Secured Party to
exercise, or delay in exercising, any right, power or remedy hereunder, shall
not operate as a waiver thereof, nor shall
<PAGE> 21
any single or partial exercise by the Collateral Agent or the Secured Party of
any right, power or remedy hereunder preclude any other or future exercise
thereof, or the exercise of any other right, power or remedy. The remedies
herein provided are cumulative and are not exclusive of any remedies provided by
law or any other agreement.
(c) The representations, covenants and agreements of the Pledgor
herein contained shall survive until the Final Date.
(d) Neither this Pledge Agreement nor the provisions hereof can be
changed, waived or terminated unless any such change, waiver or termination
shall be in writing, signed by the parties hereto; no modification that would be
adverse to the Senior Creditors shall be made without the prior written consent
of the Senior Creditors for so long as the Senior Security Interests shall
continue and any Senior Obligations are unpaid. This Pledge Agreement, subject
to the rights of the Senior Creditors for so long as the Senior Security
Interests shall continue, shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors, legal representatives and
permitted assigns. If any provision of this Pledge Agreement shall be invalid or
unenforceable in any respect or in any jurisdiction, the remaining provisions
shall remain in full force and effect and shall be enforceable to the maximum
extent permitted by law.
(e) This Pledge Agreement may be executed in counterparts, each of
which shall constitute an original but all of which, when taken together, shall
constitute one instrument.
(f) This Pledge Agreement is fully assignable by the Secured Party,
including, but not limited to, assignment to any subsequent purchaser of the
Owned Loans or to UDC, any affiliate of UDC, or any successor-in-interest,
assign or purchaser of the assets of UDC or any affiliate of UDC. Any assignee,
successor or transferee of the Secured Party shall have the right to enforce all
the provisions of this Agreement as though such assignee were a signatory
hereto.
(g) THE VALIDITY OF THIS PLEDGE AGREEMENT, THE CONSTRUCTION,
INTERPRETATION, AND ENFORCEMENT HEREOF, AND THE RIGHTS OF THE PARTIES HERETO
WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR RELATED HERETO SHALL BE
DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
ARIZONA.
THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION
WITH THIS PLEDGE AGREEMENT MAY BE TRIED AND LITIGATED IN THE UNITED STATES
DISTRICT COURT FOR THE DISTRICT OF DELAWARE. PLEDGOR, COLLATERAL AGENT AND THE
SECURED PARTY WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT
EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO
VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS
<PAGE> 22
SECTION.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Pledge Agreement on the date first above written.
FIRST MERCHANTS ACCEPTANCE CORPORATION, a
Delaware corporation
By:
Name:
Title:
LaSALLE NATIONAL BANK, as Agent
By:
Name:
Title:
HARRIS TRUST AND SAVINGS BANK, as
Collateral Agent
By:
Name:
Title:
UGLY DUCKLING CORPORATION
By:
Name:
Title:
<PAGE> 23
SCHEDULE I
DEFINITIONS
"1997-2 Securitized Pool" means the pool of contracts the Debtor
securitized through FMARC II on May 1, 1997.
"Acquisition Date" means August 21, 1997.
"Agent" means LaSalle National Bank in its capacity as agent under the
Warehouse Facility, or any successor agent thereunder.
"Bank Group" means the Current Bank Group and the Original Bank Group.
"Bank Group Claim" means all amounts owed to the Bank Group under the
Warehouse Facility.
"Bankruptcy Case" means the Debtor's chapter 11 bankruptcy case pending in
the United States District Court for the District of Delaware entitled In re
First Merchants Acceptance Corporation, Case No. 97-1500(JJF)(D. Del., July 11,
1997).
"B Pieces" means all of the residual interests and certificates in the
Securitized Pools held by FMARC or FMARC II.
"Chapter 11 Plan" means a chapter 11 plan of the Debtor containing terms
consistent with the terms of the Modified Plan Agreement.
"Committee" means the Official Committee of Unsecured Creditors of First
Merchants Acceptance Corporation.
"Contracts" means retail installment automobile loan contacts originated
or purchased by the Debtor.
"Contribution Agreement" means that certain Contribution Agreement dated
as of December 15, 1997 between FMAC and UDC.
"Court" means the United States District Court for the District of
Delaware.
"Current Bank Group" means as of December 15, 1997, UDC, Cerberus
Partners, L.P., and Bear, Stearns Co., Inc., solely in their capacities as
assignees of the Original Bank Group and as the current holders of the Bank
Group Claim.
"Debtor" means First Merchants Acceptance Corporation.
<PAGE> 24
"DIP Facility" means that certain Final Order (1) Authorizing Debtor in
Possession Financing; (2) Granting Liens and Superpriority Administrative
Claims; (3) Modifying the Automatic Stay; (4) Specifying Use of Cash
Collateral; and (5) Granting Adequate Protection Therefor Pursuant to Sections
361 and 363 of the Bankruptcy Code dated August 28, 1997, as amended by that
Stipulation and Agreed Order to Amend DIP Facility dated as of December 15,
1997.
"Exercise Date" means the date on which UDC will exercise the Stock Option.
"Excess Collections Split" means the sharing arrangement between the
Debtor and UDC on the proceeds and collections of the Owned Loans and the B
Pieces whereby, after payment in full of the Secured Claim Recovery Amount, the
DIP Facility and the Modified UDC Fee, the Debtor and UDC will share all excess
collections and proceeds on the Owned Loans and the B Pieces, with 82 1/2% of
such excess collections and proceeds to be paid to the Debtor and 17 1/2% of
such excess collections and proceeds to be paid to UDC, as more particularly
described in and subject to the terms of the Contribution Agreement (including
adjustments in the sharing percentages upon the occurrence of certain events as
set forth in the Contribution Agreement).
"FMAC" means First Merchants Acceptance Corporation.
"FMARC" means First Merchants Auto Receivables Corporation.
"FMARC II" means First Merchants Auto Receivables Corporation II.
"FSA" means Financial Security Assurance, Inc.
"GE" means General Electric Capital Corporation.
"Greenwich" means Greenwich Financial Products, Inc.
"Greenwich Collateral" means all Contracts and related collateral securing
repayment of the Debtor's obligations to Greenwich.
"Modified Plan Agreement" means that certain Binding Agreement To Propose
and Support Modified Plan Agreement dated as of December 15, 1997, by and among
the Debtor, UDC and the Committee.
"Modified UDC Fee" means a $450,000.00, non-recourse, flat fee, payable by
the Debtor to UDC prior to initiation of the Excess Collections Split on the B
Pieces and solely from collections from and proceeds of the B Pieces and
secured by a pledge of the B Pieces subordinate only to the DIP Facility and
the Secured Claim Recovery Amount.
<PAGE> 25
"Option Notice" means 15 days' advance written notice to be delivered by
UDC to the Debtor, and a public announcement by UDC on the same date as the
giving of the notice, specifying the Exercise Date and the Stock Option Shares.
"Original Bank Group" means LaSalle National Bank; NBD Bank; Firstar Bank
Milwaukee, N.A.; Harris Trust and Savings Bank; Nationsbank, N.A.; First Bank,
National Association; CoreStates Bank, N.A.; Fleet Bank, National Association,
f/k/a Natwest Bank, N.A.; and Mellon Bank, N.A.; solely in their capacity as
lenders to FMAC pursuant to the terms of the Warehouse Facility.
"Overadvance Cap" means additional advances under the DIP Facility (in
excess of the prior limit of $10,000,000 on such advances) to pay
administrative and post-Plan Confirmation operating expenses of the Debtor as
set forth in that certain Stipulation and Agreed Order to Amend DIP Facility
dated as of December 15, 1997 and the Modified Plan Agreement; provided,
however, that the total amount of advances outstanding at any time under the
DIP Facility shall not exceed $16,500,000.00.
"Owned Loans" means all of the Debtor's owned Contracts, other than the
Greenwich Collateral, whether current, delinquent, or charged off, together
with all of the Debtor's rights in the collateral securing such Contracts and
all related repossessed vehicles.
"Owned Loan Servicing Fee" means a charge, calculated on a monthly basis
for each such Contract, from and after the date on which UDC or its permitted
assigns begin to service the Owned Loans, of the greater of (i) 1/12 of 3-1/4%
of the then outstanding principal balance of the applicable Contracts, or (ii)
$15.00 per Contract, in each case applied only to Contracts which constitute
part of the Owned Loans and are less than 120 days past due at the end of such
month and for which the related vehicle has not been repossessed.
"Petition Date" means July 11, 1997.
"Plan Confirmation" means confirmation of the Chapter 11 Plan.
"Purchase Price" means the entire amount of the Bank Group Claim as of the
Sale Date, including, but not limited to, any and all outstanding principal,
plus accrued and unpaid interest through the Sale Date (including default
interest from and after the Petition Date through and including the Sale Date),
plus an agreed amount of $150,000.00 of attorneys' fees, costs and expenses of
the Original Bank Group incurred through the Acquisition Date and stipulated as
allowable under 11 U.S.C. Section 506(b), plus all attorneys fees, costs and
expenses of the Bank Group incurred after the Acquisition Date allowable under
11 U.S.C. Section 506(b); provided, that, attorneys fees, costs and expenses of
the Bank Group incurred after the Acquisition Date will be assumed to be
$450,000 for purposes of determining the Purchase Price; and provided further,
that, if
<PAGE> 26
(i) there are objections by the Debtor, the Committee or any other
party-in-interest to the attorneys' fees, costs and expenses of the Bank Group
incurred after the Acquisition Date after review of detailed supporting invoices
provided by the Bank Group, and (ii) at a subsequent hearing, the Court reduces
or increases the amount of such attorneys' fees, costs and expenses allowable
under 11 U.S.C. Section 506(b), the Purchase Price will be reduced or increased
by an amount equal to the reduction or increase in such fees, costs and
expenses.
"Replacement Lien" means the lien granted by the Debtor to the Agent on the
stock of FMARC and FMARC II to secure the Debtor's non-recourse guaranty of the
Secured Claim Recovery Amount.
"Retained Property" means all assets of the Debtor other than the Owned
Loans, including, but not limited to, the Tax Refunds and other tax attributes
of the Debtor, the Greenwich Collateral, and the Debtor's furniture, fixtures,
equipment, general intangibles and causes of action.
"Sale" means the sale of the Owned Loans by the Debtor to the Agent.
"Sale Date" means December 15, 1997.
"Secured Claim Recovery Amount" means any shortfall between (i) collections
on, net proceeds from sales of charged off Contracts constituting, and net
proceeds of collateral securing payment of, the Owned Loans after the Sale Date,
and (ii) the Purchase Price plus interest at the rate of 11% from and after the
Sale Date until paid in full plus the Owned Loan Servicing Fee, provided,
however, that in the event the servicing of the Owned Loans is transferred to an
entity other than UDC or a wholly-owned subsidiary of UDC or an entity agreed
upon by the Debtor, UDC and the Committee in the Chapter 11 Plan without the
prior written consent of the Debtor, which consent will not be unreasonably
withheld, the Secured Claim Recovery Amount shall be limited to $10,000,000.
"Securitized Pools" means the pools of Contracts the Debtor securitized
through FMARC and FMARC II, but excluding the 1997-2 Securitized Pool, unless
the Debtor or UDC becomes the servicer for the 1997-2 Securitized Pool.
"Securitized Pools Servicing Fee" means, subject to FSA approval (or any
other consents required pursuant to governing documents), the base servicing fee
UDC and/or the Debtor will receive after the Sale Date for servicing and
collection of the Securitized Pools, equal to the greater of 1/12 of 3 1/4%, or
$15.00 per Contract, calculated on a monthly basis, on the outstanding principal
balance of the Securitized Pools, applied only to Contracts in the Securitized
Pools which are less than 120 days past due at the end of such month, and for
which the related vehicle has not been repossessed, together with all
<PAGE> 27
other amounts, fees, costs and expenses payable under the servicing agreements
for the Securitized Pools.
"Stock Option" means UDC's option to distribute Stock Option Shares to the
Debtor for the benefit of the Debtor's unsecured creditors (and, if applicable,
stockholders), or if the Debtor so requests, at the Debtor's expense and solely
in accordance with the Debtor's instructions (and UDC shall have no liability
to any party in connection with any distribution made in accordance with such
instructions), to make direct distribution to the Debtor's unsecured creditors
(and if applicable, stockholders), in lieu of the Debtor's right to retain a
portion of the Debtor's share of the Excess Collections Split in cash, which
UDC may exercise by giving the Option Notice, subject to the following
conditions:
(a) UDC may exercise the Stock Option one time only, with exercise being
the actual delivery of the Stock Option Shares;
(b) Revocation of the Option Notice shall not be deemed to be an exercise
of the Stock Option by UDC;
(c) In the event that UDC exercises the Stock Option, and delivers the
Stock Option Shares to the Debtor for the benefit of the Debtor's
unsecured creditors (and, if applicable, stockholders), UDC shall be
entitled to receive the Debtor's share of cash distributions under
the Excess Collections Split from and after the Exercise Date until
UDC has received cash distributions equal to the Stock Option Value
(this is in addition to UDC's right to receive its share of cash
distributions under the Excess Collections Split);
(d) Once UDC has received cash distributions equal to the Stock Option
Value (without regard to any post-issuance change in the market value
of the issued Stock Option Shares), the Debtor shall be entitled to
and shall retain the remaining portion of the Debtor's share of cash
distributions under the Excess Collections Split, if any, in excess
of the Stock Option Value;
(e) In no event shall UDC be entitled to receive any portion of the
Debtor's share of cash distributions under the Excess Collections
Split in excess of the Stock Option Value, nor shall UDC be entitled
to recover any portion of the Stock Option Value from any source
other than the Debtor's share of the Excess Collections Split; and
(f) UDC shall not be entitled to exercise the Stock Option unless and
until (i) the value of UDC common stock on the Exercise Date and the
closing price for UDC common stock on each day during the previous
ten trading days shall be at least $8.00 per share, (ii) UDC shall
have caused (at UDC's sole cost and expense) the Stock Option Shares
to be (x) registered under the
<PAGE> 28
Securities Act of 1933, as amended, (y) unrestricted and (z) fully
transferable and shall have taken all steps necessary to allow the
Debtor to distribute the Stock Option Shares to the Debtor's
unsecured creditors, and if applicable, shareholders, and (iii) UDC
shall not have purchased any of its common stock (except upon the
exercise of previously issued and outstanding options, warrants,
stock appreciation rights or other rights) or announced any stock
repurchase programs from and after the delivery of the Option Notice
to the Debtor through the Exercise Date.
"Stock Option Shares" means the number of shares of UDC common stock that
UDC will issue to the Debtor on the Exercise Date.
"Stock Option Value" means that aggregate value of the Stock Option
Shares, determined by multiplying the Stock Option Shares by 98% of the average
of the closing prices of UDC common stock on the NASDAQ National Market or on
such other market as such stock may be traded, for the 10 trading days
immediately preceding the Exercise Date.
"Tax Refunds" means the Debtor's uncollected state and federal income tax
refunds for 1996 and prior years.
"UDC" means Ugly Duckling Corporation.
"UDC Warrants" means 3-year warrants to purchase 325,000 shares of UDC
common stock at a price of $20.00 per share which will be callable by UDC when
UDC common stock trades at a price of $28.50 per share, or greater, for 10
consecutive trading days, which UDC will issue to the Debtor pursuant to the
terms of the Warrant Agreement.
"Warehouse Facility" means the Debtor's warehouse loan facility pursuant
to that certain Fourth Amended and Restated Loan and Security Agreement, dated
as of February 28, 1996, as subsequently amended, by and among FMAC, the Agent
and the Original Bank Group.
"Warrant Agreement" means that certain Warrant Agreement to be entered
into between UDC and Harris Trust Company of California, as warrant agent.
<PAGE> 1
Exhibit 10.32
CONTRIBUTION AGREEMENT
THIS AGREEMENT, dated as of December 15, 1997, is made between First Merchants
Acceptance Corporation, debtor and debtor-in-possession (the "Debtor") and Ugly
Duckling Corporation ("UDC"). Capitalized terms not otherwise defined herein are
used as defined in Schedule 1.
RECITALS
WHEREAS, on the Sale Date, the Agent, on behalf of the Bank Group, credit bid
the Purchase Price and acquired the Owned Loans.
WHEREAS, in addition to the Debtor's receipt of the Purchase Price, UDC has
agreed to become involved in all servicing of collections of the Owned Loans,
the Greenwich Collateral and the Securitized Pools.
WHEREAS, to facilitate UDC's agreement to service the Owned Loans, the Greenwich
Collateral and the Securitized Pools, UDC will enter into agreements whereby UDC
will assume the full, separate and independent rights, duties and
responsibilities for servicing the Owned Loans, the Greenwich Collateral and
Securitized Pools after the confirmation and effective date of the Chapter 11
Plan ("UDC Servicing Agreements").
WHEREAS, the Debtor and UDC wish to enter into such UDC Servicing Agreements,
inter alia, to create a procedure and format to enable the Debtor and
reorganized Debtor through the sale of the Owned Loans and a confirmed Chapter
11 Plan to: (a) maximize recovery of the Secured Claim Recovery Amount and all
amounts due UDC under the DIP Facility, and (b) more efficiently administer the
collection of the Owned Loans, the Greenwich Collateral and the Securitized
Pools for the benefit of the Debtor.
AGREEMENTS
NOW, THEREFORE, the parties hereto agree as follows:
1. SERVICING OF OWNED LOANS AND SECURITIZED POOLS AND PAYMENT OF SECURED
CLAIM RECOVERY AMOUNT AND DIP FACILITY. Prior to the effective date of the
Chapter 11 Plan (the "Effective Date"), UDC will consult with the Debtor in its
continued servicing of the Owned Loans, the Greenwich Collateral and the
Securitized Pools as agreed by UDC and the Debtor without compensation to UDC.
After the Effective Date, UDC, as servicer (in such capacity, the "Servicer"),
will expressly assume the rights, duties and responsibilities of servicing the
Owned Loans, the Greenwich
<PAGE> 2
Collateral and the Securitized Pools pursuant to the UDC Servicing Agreements.
UDC may assign its obligations as servicer to a wholly-owned subsidiary of UDC
or to such successor or assignee as set forth in the Chapter 11 Plan (such
parties are referred to herein as an "Authorized Assignee").
Any and all proceeds received by the Servicer from the Owned Loans will be
applied as follows: (a) first, to the Secured Claim Recovery Amount until paid
in full; and (b) second, if any amounts remain, then 82.5% of such amount (the
"Debtor Excess Amount") shall be paid by UDC to the Debtor in accordance with
paragraph 2 below, and the balance of such amount will be paid to UDC.
All proceeds and distributions from the B Pieces will be utilized to (a)
first, retire the Secured Claim Recovery Amount to the extent the Secured Claim
Recovery Amount remains outstanding; then (b) the next distributions will be
used to satisfy in full the remaining indebtedness to UDC under the DIP
Facility; then (c) if the Chapter 11 Plan is confirmed, the next distributions
will be used to satisfy in full the Modified UDC Fee; and (d) finally, if any
amount remains, 17.5% of such amount (the "UDC Excess Amount") shall be paid by
the Debtor to UDC in accordance with paragraph 2 below, and the balance of such
amount shall be retained by the Debtor.
All proceeds to the Debtor from collections on the Greenwich Collateral
(after payment in full of the obligations to Greenwich) will be utilized to (a)
first satisfy in full the remaining indebtedness to UDC under the DIP Facility,
if any, and then (b) be retained by the Debtor.
2. PAYMENT AND ACCOUNTING OF EXCESS.
(a) In the event that the Owned Loans are not being
serviced by the Servicer or an Authorized Assignee
without the prior written consent of the Debtor (an
"Owned Loan Servicing Change"), which consent will
not be unreasonably withheld, the Debtor's share of
excess collections on the B Pieces shall be 85% and
the UDC Excess Amount will be 15% with respect to
the B Pieces. In the event of an Owned Loan
Servicing Change,
(i) UDC will receive a 15% share (with 85% to the
Debtor) of the eligible proceeds and collections
received by the Servicer with respect to the Owned
Loans (after satisfaction in full of the Secured
Claim Recovery Amount); provided, however, that
for purposes of the foregoing calculation, the
amount of such proceeds
<PAGE> 3
and collections with respect to the Owned Loans
(after satisfaction in full of the Secured Claim
Recovery Amount) shall be limited to an amount
equal to the amount of any B Pieces that have been
applied to satisfy the Secured Claim Recovery
Amount during the period when UDC or an Authorized
Assignee was servicing the Owned Loans, and
(ii) the Debtor will receive 100% of any proceeds and
collections on the Owned Loans in excess of such
amount.
Except as specifically set forth above, UDC's rights to
payment and obligations hereunder are absolute and shall not
be affected by any subsequent transfer or sale of the Owned
Loans to GE or any other party.
(b) In no event will UDC be entitled to receive any of the UDC
Excess Amount related to a Securitized Pool for any period of
time during which UDC or an Authorized Assignee shall not be
acting as servicer for that Securitized Pool.
(c) On the 15th calendar day of each month, the Servicer shall
provide the Debtor with a written summary of the information
set forth in Paragraph 3(a) below, in sufficient detail to
permit the Debtor to confirm the accuracy thereof.
(d) The Debtor Excess Amount and UDC Excess Amount shall be
payable on the 20th calendar day of each month for amounts
payable with respect to the immediately preceding month.
3. REPORTING AND AUDIT.
(a) From and after the earlier of (i) confirmation of the Chapter
11 Plan, or (ii) that time at which the Servicer becomes the
servicer of any of the Owned Loans, the Greenwich Collateral
or the Securitized Pools, the Servicer will provide to the
Debtor monthly reports no later than the 15th day after the
end of each calendar month (each such month being a
"Collection Period" disclosing with respect to such Collection
Period, (i) the total amount of proceeds and collections from
the Owned Loans, Greenwich Collateral, the B Pieces and/or the
Securitized Pools, as applicable, (ii) the amount
<PAGE> 4
of Owned Loans collections applied to the Secured Claim
Recovery Amount, the amount of Greenwich Collateral applied to
the DIP Facility, the amount of the B Pieces applied to the
Secured Claim Recovery Amount, the DIP Facility and the
Modified UDC Fee (as applicable), as well as an accounting of
subsequent payments made from such proceeds, and (iii) any
Debtor Excess Amount and UDC Excess Amount payable with
respect to the applicable Collection Period (the "Monthly
Reports"). The Servicer shall also deliver to the Debtor
copies of all monthly, quarterly and annual reports which the
Servicer provides to any party under the UDC Servicing
Agreements at the time such reports are delivered to such
parties.
(b) Debtor and its agents shall have the right, upon 3 business
days prior written notice to the Servicer, to inspect, audit
and make copies of and abstracts from the records of the
Servicer with respect to servicing and proceeds of the Owned
Loans, the Greenwich Collateral and the Securitized Pools and
payments made or received with respect thereto.
(c) Within 15 days of the later to occur of paying off or writing
off of (i) the final Owned Loan outstanding, (ii) the final
loan outstanding in the pool of loans constituting the
Greenwich Collateral, and (iii) the final securitized loan
outstanding in the Securitized Pools (the "Final Outstanding
Loan Date"), UDC (or its successor or agent) shall deliver to
the Debtor a computation of both the total Debtor Excess
Amount and the total UDC Excess Amount. The Debtor will advise
UDC within ten (10) business days after delivery of such final
computation if it disagrees with the computation. If the
Debtor notifies UDC of such disagreement within such ten (10)
business day period, the parties agree in good faith to try to
reconcile their differences on such computation. If after a
subsequent ten (10) business day period they cannot agree on
the calculation, UDC and the Debtor will submit the disputed
elements to the Court for a resolution of those disputed
matters.
4. TRANSITION OF SERVICING. The Debtor and UDC will coordinate an orderly
and prompt transition of servicing of the Owned Loans, the Greenwich
Collateral and the Securitized Pools, as applicable, from the Debtor to
the Servicer during the pendency of the Bankruptcy Case to enable UDC (or
an Authorized Assignee) to begin such servicing activities on the
<PAGE> 5
Effective Date pursuant to the UDC Servicing Agreements. UDC (and where
applicable, the Debtor) will negotiate, enter into and, to the extent
required, agree to seek Court approval of the UDC Servicing Agreements.
5. TERMINATION. Notwithstanding anything herein to the contrary, UDC shall
not be entitled to any payment of the UDC Excess Amount attributable to
any Securitized Pool which Servicer is not then servicing.
6. UDC STOCK OPTION. Nothing herein shall modify the UDC Stock Option.
7. NOTICES. Any notice or other communication under this Agreement shall
be in writing to the party for whom intended at the following address (or
at such other address as such party may have previously specified by
notice to the other parties at the address to which notice shall be given
to such party):
If to UDC or the Servicer, to:
Ugly Duckling Corporation
2525 E. Camelback Road, Suite 1150
Phoenix, Arizona 85016
Attention: Steven P. Johnson, Esq.
Facsimile No.: (602) 852-6696
With a copy to:
Snell & Wilmer L.L.P.
One Arizona Center
Phoenix, Arizona 85004
Attention: Christopher H. Bayley, Esq.
Facsimile No.: (602) 382-6070
If to the Debtor, to:
First Merchants Acceptance Corporation
570 Lake Cook Road, Suite 126
Deerfield, Illinois 60015
Attention: William Plamondon
Facsimile No.: (847) 945-2556
With a copy to:
Sonnenschein Nath & Rosenthal
Suite 8000 Sears Tower
233 S. Wacker Drive
Chicago, Illinois 60606
Attention: Robert E. Richards
<PAGE> 6
Facsimile No.: (312) 876-7934
Each such notice or other communication, together with appropriate copies,
shall be (a) mailed by United States registered or certified mail, return
receipt requested, postage prepaid, (b) delivered by overnight delivery
service such as Federal Express, providing for signed receipts, (c)
delivered by personal service in the manner provided for service of legal
process, or (d) transmitted by facsimile at the above facsimile numbers,
with a copy by United States mail as provided in subsection (a) hereof.
Counsel to a party may give notice for its client provided such notice is
otherwise made in accordance with the provisions of this Section. Notices
shall be effective on the first business day following the date of mailing
or transmission, or upon receipt or personal service.
8. CHOICE OF LAW. Irrespective of the place of execution or performance,
this Agreement shall be governed by and construed in accordance with the
law of Delaware, without giving effect to choice of law principles.
9. BINDING EFFECT. The Agreement shall be binding upon, and shall inure to
the benefit of, the parties hereto, and their respective heirs,
beneficiaries, legal representatives, successors and permitted assigns,
including any successor trustee. Servicer cannot assign its servicing
obligations hereunder, except as set forth herein or as consented to in
writing by the Debtor, such consent not to be unreasonably withheld.
10. ATTORNEYS' FEES. If any action is brought by either party in respect
to its rights under this Agreement, the prevailing party shall be entitled
to reasonable attorneys' fees and court costs as determined by the court.
11. WAIVERS. No waiver of any of the provisions of this Agreement shall
constitute a waiver of any other provision, whether or not similar, nor
shall any waiver be a continuing waiver. Except as expressly provided in
this Agreement, no waiver shall be binding unless executed in writing by
the party making the waiver. Either party may waive any provisions of this
Agreement intended for its benefit; provided, however, that any such
waiver shall in no way excuse the other party from the performance of any
of its other obligations under this Agreement.
12. HEADINGS AND COUNTERPARTS. The headings of this Agreement are for
purposes of reference only and shall not limit or define the meaning of
any provision of this Agreement. This Agreement may be executed in any
number of
<PAGE> 7
counterparts, each of which shall be an original but all of which shall
constitute one and the same instrument.
13. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties pertaining to the subject matter contained in this
Agreement. All prior and contemporaneous agreements, representations and
understandings of the parties, oral or written, are superseded by and
merged in this Agreement. No supplement, modification or amendment of this
Agreement shall be binding unless in writing and executed by each of the
parties hereto.
14. SEVERABILITY. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
15. ASSIGNMENT. UDC may assign its rights to receive amounts hereunder to
any subsidiary, affiliate or any successor, assign or transferee of any
such successor or affiliate. UDC shall remain liable for payment of the
Debtor Excess Amount owed to the Debtor hereunder in the event that the
Servicer fails to do so. This agreement shall bind any successors and
assigns to the parties hereto.
Agreed as of the date set forth above:
UGLY DUCKLING CORPORATION
By: Donald L. Addink
"UDC" or "SERVICER"
FIRST MERCHANTS ACCEPTANCE
CORPORATION,
Debtor and Debtor-in-Possession
By: William Plamondon
"DEBTOR"
<PAGE> 8
EXHIBIT A
CONTRACTS
[SEE ATTACHED]
<PAGE> 9
SCHEDULE I
DEFINITIONS
"1997-2 Securitized Pool" means the pool of contracts the Debtor
securitized through FMARC II on May 1, 1997.
"Acquisition Date" means August 21, 1997.
"Agent" means LaSalle National Bank in its capacity as agent under the
Warehouse Facility, or any successor agent thereunder.
"Bank Group" means the Current Bank Group and the Original Bank Group.
"Bank Group Claim" means all amounts owed to the Bank Group under the
Warehouse Facility.
"Bankruptcy Case" means the Debtor's chapter 11 bankruptcy case pending in
the United States District Court for the District of Delaware entitled In re
First Merchants Acceptance Corporation, Case No. 97-1500(JJF)(D. Del., July 11,
1997).
"B Pieces" means all of the residual interests and certificates in the
Securitized Pools held by FMARC or FMARC II.
"Chapter 11 Plan" means a chapter 11 plan of the Debtor containing terms
consistent with the terms of the Modified Plan Agreement.
"Committee" means the Official Committee of Unsecured Creditors of First
Merchants Acceptance Corporation.
"Contracts" means retail installment automobile loan contacts originated
or purchased by the Debtor.
"Contribution Agreement" means that certain Contribution Agreement dated
as of December 15, 1997 between FMAC and UDC.
"Court" means the United States District Court for the District of
Delaware.
"Current Bank Group" means as of December 15, 1997, UDC, Cerberus
Partners, L.P., and Bear, Stearns Co., Inc., solely in their capacities as
assignees of the Original Bank Group and as the current holders of the Bank
Group Claim.
"Debtor" means First Merchants Acceptance Corporation.
<PAGE> 10
"DIP Facility" means that certain Final Order (1) Authorizing Debtor in
Possession Financing; (2) Granting Liens and Superpriority Administrative
Claims; (3) Modifying the Automatic Stay; (4) Specifying Use of Cash
Collateral; and (5) Granting Adequate Protection Therefor Pursuant to Sections
361 and 363 of the Bankruptcy Code dated August 28, 1997, as amended by that
Stipulation and Agreed Order to Amend DIP Facility dated as of December 15,
1997.
"Exercise Date" means the date on which UDC will exercise the Stock Option.
"Excess Collections Split" means the sharing arrangement between the
Debtor and UDC on the proceeds and collections of the Owned Loans and the B
Pieces whereby, after payment in full of the Secured Claim Recovery Amount, the
DIP Facility and the Modified UDC Fee, the Debtor and UDC will share all excess
collections and proceeds on the Owned Loans and the B Pieces, with 82 1/2% of
such excess collections and proceeds to be paid to the Debtor and 17 1/2% of
such excess collections and proceeds to be paid to UDC, as more particularly
described in and subject to the terms of the Contribution Agreement (including
adjustments in the sharing percentages upon the occurrence of certain events as
set forth in the Contribution Agreement).
"FMAC" means First Merchants Acceptance Corporation.
"FMARC" means First Merchants Auto Receivables Corporation.
"FMARC II" means First Merchants Auto Receivables Corporation II.
"FSA" means Financial Security Assurance, Inc.
"GE" means General Electric Capital Corporation.
"Greenwich" means Greenwich Financial Products, Inc.
"Greenwich Collateral" means all Contracts and related collateral securing
repayment of the Debtor's obligations to Greenwich.
"Modified Plan Agreement" means that certain Binding Agreement To Propose
and Support Modified Plan Agreement dated as of December 15, 1997, by and among
the Debtor, UDC and the Committee.
"Modified UDC Fee" means a $450,000.00, non-recourse, flat fee, payable by
the Debtor to UDC prior to initiation of the Excess Collections Split on the B
Pieces and solely from collections from and proceeds of the B Pieces and
secured by a pledge of the B Pieces subordinate only to the DIP Facility and
the Secured Claim Recovery Amount.
<PAGE> 11
"Option Notice" means 15 days' advance written notice to be delivered by
UDC to the Debtor, and a public announcement by UDC on the same date as the
giving of the notice, specifying the Exercise Date and the Stock Option Shares.
"Original Bank Group" means LaSalle National Bank; NBD Bank; Firstar Bank
Milwaukee, N.A.; Harris Trust and Savings Bank; Nationsbank, N.A.; First Bank,
National Association; CoreStates Bank, N.A.; Fleet Bank, National Association,
f/k/a Natwest Bank, N.A.; and Mellon Bank, N.A.; solely in their capacity as
lenders to FMAC pursuant to the terms of the Warehouse Facility.
"Overadvance Cap" means additional advances under the DIP Facility (in
excess of the prior limit of $10,000,000 on such advances) to pay
administrative and post-Plan Confirmation operating expenses of the Debtor as
set forth in that certain Stipulation and Agreed Order to Amend DIP Facility
dated as of December 15, 1997 and the Modified Plan Agreement; provided,
however, that the total amount of advances outstanding at any time under the
DIP Facility shall not exceed $16,500,000.00.
"Owned Loans" means all of the Debtor's owned Contracts, other than the
Greenwich Collateral, whether current, delinquent, or charged off, together
with all of the Debtor's rights in the collateral securing such Contracts and
all related repossessed vehicles.
"Owned Loan Servicing Fee" means a charge, calculated on a monthly basis
for each such Contract, from and after the date on which UDC or its permitted
assigns begin to service the Owned Loans, of the greater of (i) 1/12 of 3-1/4%
of the then outstanding principal balance of the applicable Contracts, or (ii)
$15.00 per Contract, in each case applied only to Contracts which constitute
part of the Owned Loans and are less than 120 days past due at the end of such
month and for which the related vehicle has not been repossessed.
"Petition Date" means July 11, 1997.
"Plan Confirmation" means confirmation of the Chapter 11 Plan.
"Purchase Price" means the entire amount of the Bank Group Claim as of the
Sale Date, including, but not limited to, any and all outstanding principal,
plus accrued and unpaid interest through the Sale Date (including default
interest from and after the Petition Date through and including the Sale Date),
plus an agreed amount of $150,000.00 of attorneys' fees, costs and expenses of
the Original Bank Group incurred through the Acquisition Date and stipulated as
allowable under 11 U.S.C. Section 506(b), plus all attorneys fees, costs and
expenses of the Bank Group incurred after the Acquisition Date allowable under
11 U.S.C. Section 506(b); provided, that, attorneys fees, costs and expenses of
the Bank Group incurred after the Acquisition Date will be assumed to be
$450,000 for purposes of determining the Purchase Price; and provided further,
that, if
<PAGE> 12
(i) there are objections by the Debtor, the Committee or any other
party-in-interest to the attorneys' fees, costs and expenses of the Bank Group
incurred after the Acquisition Date after review of detailed supporting invoices
provided by the Bank Group, and (ii) at a subsequent hearing, the Court reduces
or increases the amount of such attorneys' fees, costs and expenses allowable
under 11 U.S.C. Section 506(b), the Purchase Price will be reduced or increased
by an amount equal to the reduction or increase in such fees, costs and
expenses.
"Replacement Lien" means the lien granted by the Debtor to the Agent on the
stock of FMARC and FMARC II to secure the Debtor's non-recourse guaranty of the
Secured Claim Recovery Amount.
"Retained Property" means all assets of the Debtor other than the Owned
Loans, including, but not limited to, the Tax Refunds and other tax attributes
of the Debtor, the Greenwich Collateral, and the Debtor's furniture, fixtures,
equipment, general intangibles and causes of action.
"Sale" means the sale of the Owned Loans by the Debtor to the Agent.
"Sale Date" means December 15, 1997.
"Secured Claim Recovery Amount" means any shortfall between (i) collections
on, net proceeds from sales of charged off Contracts constituting, and net
proceeds of collateral securing payment of, the Owned Loans after the Sale Date,
and (ii) the Purchase Price plus interest at the rate of 11% from and after the
Sale Date until paid in full plus the Owned Loan Servicing Fee, provided,
however, that in the event the servicing of the Owned Loans is transferred to an
entity other than UDC or a wholly-owned subsidiary of UDC or an entity agreed
upon by the Debtor, UDC and the Committee in the Chapter 11 Plan without the
prior written consent of the Debtor, which consent will not be unreasonably
withheld, the Secured Claim Recovery Amount shall be limited to $10,000,000.
"Securitized Pools" means the pools of Contracts the Debtor securitized
through FMARC and FMARC II, but excluding the 1997-2 Securitized Pool, unless
the Debtor or UDC becomes the servicer for the 1997-2 Securitized Pool.
"Securitized Pools Servicing Fee" means, subject to FSA approval (or any
other consents required pursuant to governing documents), the base servicing fee
UDC and/or the Debtor will receive after the Sale Date for servicing and
collection of the Securitized Pools, equal to the greater of 1/12 of 3 1/4%, or
$15.00 per Contract, calculated on a monthly basis, on the outstanding principal
balance of the Securitized Pools, applied only to Contracts in the Securitized
Pools which are less than 120 days past due at the end of such month, and for
which the related vehicle has not been repossessed, together with all
<PAGE> 13
other amounts, fees, costs and expenses payable under the servicing agreements
for the Securitized Pools.
"Stock Option" means UDC's option to distribute Stock Option Shares to the
Debtor for the benefit of the Debtor's unsecured creditors (and, if applicable,
stockholders), or if the Debtor so requests, at the Debtor's expense and solely
in accordance with the Debtor's instructions (and UDC shall have no liability
to any party in connection with any distribution made in accordance with such
instructions), to make direct distribution to the Debtor's unsecured creditors
(and if applicable, stockholders), in lieu of the Debtor's right to retain a
portion of the Debtor's share of the Excess Collections Split in cash, which
UDC may exercise by giving the Option Notice, subject to the following
conditions:
(a) UDC may exercise the Stock Option one time only, with exercise being
the actual delivery of the Stock Option Shares;
(b) Revocation of the Option Notice shall not be deemed to be an exercise
of the Stock Option by UDC;
(c) In the event that UDC exercises the Stock Option, and delivers the
Stock Option Shares to the Debtor for the benefit of the Debtor's
unsecured creditors (and, if applicable, stockholders), UDC shall be
entitled to receive the Debtor's share of cash distributions under
the Excess Collections Split from and after the Exercise Date until
UDC has received cash distributions equal to the Stock Option Value
(this is in addition to UDC's right to receive its share of cash
distributions under the Excess Collections Split);
(d) Once UDC has received cash distributions equal to the Stock Option
Value (without regard to any post-issuance change in the market value
of the issued Stock Option Shares), the Debtor shall be entitled to
and shall retain the remaining portion of the Debtor's share of cash
distributions under the Excess Collections Split, if any, in excess
of the Stock Option Value;
(e) In no event shall UDC be entitled to receive any portion of the
Debtor's share of cash distributions under the Excess Collections
Split in excess of the Stock Option Value, nor shall UDC be entitled
to recover any portion of the Stock Option Value from any source
other than the Debtor's share of the Excess Collections Split; and
(f) UDC shall not be entitled to exercise the Stock Option unless and
until (i) the value of UDC common stock on the Exercise Date and the
closing price for UDC common stock on each day during the previous
ten trading days shall be at least $8.00 per share, (ii) UDC shall
have caused (at UDC's sole cost and expense) the Stock Option Shares
to be (x) registered under the
<PAGE> 14
Securities Act of 1933, as amended, (y) unrestricted and (z) fully
transferable and shall have taken all steps necessary to allow the
Debtor to distribute the Stock Option Shares to the Debtor's
unsecured creditors, and if applicable, shareholders, and (iii) UDC
shall not have purchased any of its common stock (except upon the
exercise of previously issued and outstanding options, warrants,
stock appreciation rights or other rights) or announced any stock
repurchase programs from and after the delivery of the Option Notice
to the Debtor through the Exercise Date.
"Stock Option Shares" means the number of shares of UDC common stock that
UDC will issue to the Debtor on the Exercise Date.
"Stock Option Value" means that aggregate value of the Stock Option
Shares, determined by multiplying the Stock Option Shares by 98% of the average
of the closing prices of UDC common stock on the NASDAQ National Market or on
such other market as such stock may be traded, for the 10 trading days
immediately preceding the Exercise Date.
"Tax Refunds" means the Debtor's uncollected state and federal income tax
refunds for 1996 and prior years.
"UDC" means Ugly Duckling Corporation.
"UDC Warrants" means 3-year warrants to purchase 325,000 shares of UDC
common stock at a price of $20.00 per share which will be callable by UDC when
UDC common stock trades at a price of $28.50 per share, or greater, for 10
consecutive trading days, which UDC will issue to the Debtor pursuant to the
terms of the Warrant Agreement.
"Warehouse Facility" means the Debtor's warehouse loan facility pursuant
to that certain Fourth Amended and Restated Loan and Security Agreement, dated
as of February 28, 1996, as subsequently amended, by and among FMAC, the Agent
and the Original Bank Group.
"Warrant Agreement" means that certain Warrant Agreement to be entered
into between UDC and Harris Trust Company of California, as warrant agent.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Ugly Duckling Corporation:
We consent to the use of our report dated January 31, 1997, except for Note
19 to the Consolidated Financial Statements which is as of February 13, 1997, on
the consolidated financial statements of Ugly Duckling Corporation included in
Pre-Effective Amendment No. 1 to the Form S-1 Registration Statement (No.
333-42973) of Ugly Duckling Corporation and the related Prospectus and to the
references to our firm under the headings "Selected Consolidated Financial Data"
and "Experts" therein.
/s/ KPMG PEAT MARWICK LLP
Phoenix, Arizona
February 4, 1998
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Ugly Duckling Corporation:
We consent to the inclusion of our report dated March 18, 1997 with respect
to the combined balance sheet of Seminole Finance Corporation and Related
Companies as of December 31, 1996 and the related combined statements of
operations, stockholder's equity (deficit), and cash flows for the year ended
December 31, 1996, included in Pre-Effective Amendment No. 1 to the Form S-1
Registration Statement (No. 333-42973) of Ugly Duckling Corporation and the
related Prospectus, and to the reference to our firm under the heading "Experts"
therein.
Our report dated March 18, 1997, contains an explanatory paragraph that
states: "the accompanying combined financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
7 to the combined financial statements, the Company is involved in a lawsuit
that involves a material amount of damages that, if there were an adverse
outcome, raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to this matter are also described in Note
7. The combined financial statements do not include any adjustments that might
result from the outcome of this uncertainty."
/s/ KPMG Peat Marwick LLP
Tampa, Florida
February 4, 1998
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Ugly Duckling Corporation:
We consent to the use of our report dated February 10, 1997 on the combined
financial statements of Seminole Finance Corporation and Related Companies as of
December 31, 1995 included in Pre-Effective Amendment No. 1 to the Form S-1
Registration Statement (No. 333-42973) of Ugly Duckling Corporation and the
related Prospectus and to the reference to our firm under the heading "Experts"
therein.
/s/ Barton & Company, P.A.
St. Petersburg, Florida
February 4, 1998
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 24, 1997, except for Note 8, as to which
the date is February 28, 1997, with respect to the financial statements of E-Z
Plan, Inc. included in Pre-Effective Amendment No. 1 to the Registration
Statement (Form S-1 No. 333-42973) and related Prospectus of Ugly Duckling
Corporation for the registration of 5,666,190 shares of common stock and 666,190
common stock purchase warrants.
/s/ Ernst & Young L.L.P.
San Antonio, Texas
February 4, 1998
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Pre-Effective Amendment No. 1 to the
registration statement on Form S-1 (File No. 333-42973) and the related
Prospectus of our report, which includes an explanatory paragraph concerning
KARS-YES Holdings Inc.'s ability to continue as a going concern, dated November
6, 1997, on our audits of the consolidated financial statements of KARS-YES
Holdings Inc. as of June 30, 1997 and 1996, and for the years ended June 30,
1997, 1996, and 1995. We also consent to the reference to our Firm under the
caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
Dallas, Texas
February 4, 1998
