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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 0-20841
UGLY DUCKLING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 86-0721358
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2525 E. Camelback Road, Suite 500,
Phoenix, Arizona 85016
(Address of principal executive (Zip Code)
offices)
(Registrant's telephone number, including area code) (602) 852-6600
Securities registered pursuant to Section 12(b) of the Act:
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Title of Class Name of each Exchange on which registered
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Cumulative 12% Subordinated Debentures Due 2003 American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
Title of Class Name of each Exchange on which registered
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Common Stock, $.001 par value The Nasdaq Stock Market
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At March 15, 1999, the aggregate market value of common stock held by
non-affiliates of the registrant was approximately $60,652,000.
Applicable Only to Registrants Involved in Bankruptcy
Proceedings During the Preceding Five Years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
(Applicable Only to Corporate Registrants)
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of March 24, 1999: 14,948,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the June 2, 1999 Annual Meeting of
Stockholders are incorporated by reference into Part III
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TABLE OF CONTENTS
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PART I
Item 1 Business........................................................................ 3
Item 2 Properties...................................................................... 11
Item 3 Legal Proceedings............................................................... 11
Item 4 Submission Of Matters To A Vote Of Security Holders............................. 11
Item 4A Executive Officers Of The Registrant............................................ 12
PART II
Item 5 Market For The Registrant's Common Equity Securities And Related
Stockholder Matters............................................................. 13
Item 6 Selected Consolidated Financial Data............................................ 14
Item 7 Management's Discussion And Analysis Of Financial Condition And
Results Of Operations........................................................... 15
Item 7A Quantitative And Qualitative Disclosures About Market Risk...................... 39
Item 8 Consolidated Financial Statements And Supplementary Data........................ 41
Item 9 Changes In And Disagreements With Accountants On Accounting And
Financial Disclosures........................................................... 67
PART III
Item 10 Directors And Executive Officers Of The Registrant.............................. 67
Item 11 Executive Compensation.......................................................... 67
Item 12 Security Ownership Of Certain Beneficial Owners And Management.................. 67
Item 13 Certain Relationships And Related Transactions.................................. 67
PART IV
Item 14 Exhibits, Consolidated Financial Statement Schedules, And Reports On
Form 8-K....................................................................... 68
Signatures..................................................................................... 73
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PART I
ITEM 1 -- BUSINESS
General
We operate the largest chain of buy here-pay here car dealerships in the
United States. We sell and finance our used vehicles to customers within the
sub-prime segment of the used car market. Our customers will typically have
limited credit histories, low incomes or past credit problems. At December 31,
1998, we operated 56 dealerships located in several large markets, including Los
Angeles, Phoenix, Dallas, San Antonio, Atlanta, and Tampa.
In addition to our own dealership and financing operations, we also
o provide financing to other independent used car dealers through our Cygnet
dealer program,
o service and collect large portfolios of finance receivables owned by
others, and
o manage selected financial assets that we acquire from financially
distressed third parties.
From 1994 through the first quarter of 1998, we maintained a national branch
office network that acquired and serviced retail installment contracts from
numerous independent third party dealers. We discontinued these operations in
1998.
We direct your attention to note 24 to the Consolidated Financial
Statements, which begin at page 41, where we summarize the results of operations
of our business segments.
Below is a summary of our businesses by segment:
[OBJECT OMITTED - DESCRIBED IN FOLLOWING PARAGRAPH]
The chart above shows Ugly Duckling with two operating divisions. Dealership
operations is the first division. Dealership operations has three distinct
segments. Retail sales is its first segment. This is the segment that operates
our chain of Ugly Duckling Car Sales dealerships. Portfolio and loan servicing
is the second segment of dealership operations. This segment holds and services
the loan portfolios originated or acquired by our dealership operations.
Finally, dealership operations has an administration segment that provides
corporate administration to the division. Our non-dealership operations division
also contains three segments. The first non-dealership operations segment is the
bulk purchasing/loan servicing segment. In this segment, we acquire loan
portfolios from third parties and provide loan servicing for third parties. The
second segment of non-dealership operations is the Cygnet dealer program under
which we provide various credit facilities to independent used car dealers.
Finally, the non-dealership operations also have an administration segment that
provides corporate administration to the non-dealership operations. Lastly, the
chart shows our discontinued operations, which contains our branch office
network that we closed in February 1998 and the loans we acquired through that
network.
We commenced operations through various entities beginning in 1989. Ugly
Duckling Corporation was formed in 1992 and was reincorporated in Delaware in
1996.
Overview of Used Car Sales and Finance Industry
Used Car Sales. Used car retail sales typically occur through either
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manufacturer's franchised new car dealerships that sell used cars or through
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. There
are over 23,000 franchised and 63,000 independent used car dealership locations
in the United States.
We participate 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, including:
o expanded credit opportunities;
o flexible payment terms, including prorating customer payments due
within one month into several smaller payments and scheduling payments
to coincide with a customer's paydays; and
o the ability to make payments in person. This is 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.
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. 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.
The industry statistical information presented in this section is derived
from information provided to the Company by CNW Marketing/Research of Bandon,
Oregon.
Company Dealership Operations
We commenced dealership operations in 1992 with the acquisition of two
dealerships in Arizona, and have expanded aggressively since then through a
combination of acquisitions and development of new stores. Our most significant
growth occurred in 1997, when
o we acquired from Seminole Finance, Inc. and related companies (Seminole),
four dealerships in Tampa/St. Petersburg and a contract portfolio of
approximately $31.1 million;
o we purchased from E-Z Plan, Inc. (E-Z Plan), seven dealerships in San
Antonio and a contract portfolio of approximately $24.3 million;
o we purchased from Kars-Yes Holdings, Inc. and related companies (Kars),
six dealerships in the Los Angeles market, two in the Miami market, two
in the Atlanta market, and two in the Dallas market; and
o we opened our first used car dealership in the Las Vegas market, opened
two additional dealerships in the Albuquerque market and opened one
additional dealership in the Phoenix market. We also closed a
dealership in Arizona.
We continued our aggressive growth in 1998, adding 17 new dealerships in our
existing markets. We opened one dealership in the Albuquerque market, four
dealerships in the Atlanta market, three dealerships in the Dallas market, two
dealerships in the Los Angeles market, two dealerships in the Phoenix market,
two dealerships in the San Antonio market, and three dealerships in the Tampa
market. We also closed two dealerships in Miami and exited that market.
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The following table summarizes the number of stores we had in operation by major
market for the three years ended December 31, 1998:
Number of Stores By
Market
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As of December 31,
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1998 1997 1996
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Phoenix........... 9 7 5
San Antonio....... 9 7 --
Atlanta........... 9 5 --
Los Angeles....... 8 6 --
Tampa............. 8 5 --
Dallas............ 6 3 --
Tucson............ 3 3 3
Albuquerque....... 3 2 --
Las Vegas......... 1 1 --
Miami............. -- 2 --
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56 41 8
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Retail Car Sales. We distinguish our dealership operations from those of
typical buy here-pay here dealers through our:
o network of multiple locations,
o upgraded facilities,
o larger inventories of used cars,
o centralized purchasing,
o advertising and marketing programs, and
o dedication to customer service.
Our dealerships are generally located in high visibility, high traffic
commercial areas, and tend to be newer and cleaner in appearance than other buy
here-pay here dealerships. This helps promote our image as a friendly and
reputable business. We believe this, coupled with our widespread brand name
recognition, enables us to attract customers who might otherwise visit another
buy here-pay here dealer.
Our dealerships generally maintain an average inventory of 50 to 150 used
cars and feature a wide selection of makes and models (with ages generally
ranging from 3 to 7 years) and a range of sale prices. This allows us to meet
the tastes and budgets of a broad range of potential customers. We acquire our
inventory from new or late-model used car dealers, used car wholesalers, used
car auctions, and customer trade-ins. In making purchases, we take into account
each car's retail value and the costs of buying, reconditioning, and delivering
the car for resale. After purchase, cars are generally delivered to one of our
nearby inspection centers, where they are inspected and reconditioned for sale.
Upon inspection, certain used cars do not meet our criteria for reconditioning
either because it will cost too much to recondition the car, or because the car
is in a condition too poor for us to recondition and sell. In these instances,
we promptly sell the car in the wholesale market. Although the supply and prices
of used cars are subject to market variance, we do not believe that we will
encounter significant difficulty in maintaining the necessary inventory levels.
Our average sales price per car was $7,997 for the year ended December 31,
1998 compared to $7,443 for the year ended December 31, 1997 and $7,107 in the
year ended December 31, 1996. We typically require down payments of
approximately 5.0% 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. We sell cars on an "as is" basis, and
require our customers to sign an agreement at the date of sale releasing us from
any obligation with respect to vehicle-related problems that subsequently occur.
See "Legal Proceedings."
Used Car Financing. We finance substantially all of the used cars that we
sell at our dealerships through retail installment contracts, under which we
provide the financing and service the collection of loan payments. Subject to
the discretion of our sales managers, potential customers must meet our
underwriting guidelines before we will agree to finance the purchase of a car.
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In connection with each sale, customers are required to complete a credit
application. Our employees then analyze and verify the customer application
information, which contains employment and residence histories, income
information, references, and other information regarding the customer's credit
history.
Our credit underwriting process takes into account the ability of our
managers 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, we may schedule contract payments to coincide with the
customer's paydays, whether weekly, biweekly, semi-monthly, or monthly.
Dealership Operations Computer Systems. We recently completed converting our
chain of dealerships and loan service centers to a single integrated computer
system. The system allows us to make the sale, service the loan, and track the
vehicle and related loan. Once the final sales contract is generated, the system
automatically adds the loan to our loan servicing and collections database and
records the sale and related loan in our accounting system. We use communication
networks that allow us to service large volumes of contracts from our
centralized servicing facilities, while enabling the customer the flexibility to
make payments at any of our dealership locations. In addition, we have 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. We have a large advertising budget. In general,
our advertising campaigns emphasize our multiple locations, wide selection of
quality used cars, and ability to provide financing to most sub-prime borrowers.
We believe that our marketing approach creates brand name recognition and
promotes our image as a professional, yet approachable, business. We use
television, radio, billboard, and print advertising to market our dealerships.
A primary focus of our marketing strategy is our ability to finance
consumers with poor credit histories. Consequently, we have initiated innovative
marketing programs designed to attract sub-prime borrowers, assist these
customers in establishing good credit, reward those customers who pay on time,
develop customer loyalty, and increase referral and repeat business. Among these
programs are:
o The Down Payment Back Program. This program encourages customers to make
timely payments on their contracts by allowing them to receive a refund
of their initial down payment at the end of the contract term, if all
payments have been made by the scheduled due date.
o The Income Tax Refund Program. During the first quarter of each year, we
offer assistance to customers in the preparation of their income tax
returns, including forwarding the customers' tax information to a
designated preparer, paying the preparation fee (in most states), and,
if they get a tax refund, crediting the refund toward the required down
payment. This program enables customers to purchase cars without having
to wait to receive their income tax refund.
o $250 Visa Card Program. This program encourages customers to make timely
payments on their contracts by allowing them to receive a Visa credit
card with an initial credit limit of $250. This program offers otherwise
unqualified customers the chance to obtain the convenience of a credit
card and rebuild their credit records.
We also operate a loan-by-phone program using our toll-free telephone number
of 1-800-THE-DUCK, and accept credit inquiries on our web site at
www.uglyduckling.com. Credit inquiries received over the web are reviewed by our
employees, who then contact and schedule an appointment for the customers.
Sales Personnel and Compensation. Each dealership is run by a general manager
who has responsibility for the operations of the dealership facility, including:
o profitability of the dealership,
o final approval of sales and contract originations,
o inventory maintenance,
o the appearance and condition of the facility, and
o the hiring, training, and performance of dealership employees.
We also typically staff each dealership with a sales manager, an assistant
sales manager, three customer service representatives, five to twelve
salespersons, and two lot attendants.
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We train our managers to be contract underwriters. They are paid a base
salary and may earn bonuses based upon the overall performance of the contract
portfolio originated at their dealership, as well as the dealership's
profitability. Sales persons are paid on a commission basis. However, each sale
must be underwritten and approved by a manager.
Monitoring and Collections
One of our goals is to minimize credit losses through close monitoring of
contracts in our portfolio. When a car sale is completed, the contract is
automatically added to our loan servicing database. Our monitoring and
collections staff then uses our collections software to monitor the performance
of the contracts. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations -- Risk Factors -- We are dependent on our
data processing platforms and other technology. Our computer systems may be
subject to a Year 2000 date failure."
The collections software provides us with, among other things, up-to-date
activity reports, allowing prompt identification of customers whose accounts
have become past due. In accordance with our policy, collections personnel
contact a customer with a past due account within three days of delinquency to
inquire as to the reasons for the delinquency and to suggest ways in which the
customer can resolve the underlying problem. Our early detection of a customer's
delinquent status, as well as our commitment to working with our customers,
allows us to identify and address payment problems quickly, and reduce the
chance of credit loss. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Allowance for Credit Losses."
If our efforts to work with a customer are unsuccessful and the customer
becomes seriously delinquent, we will take the necessary steps to minimize our
loan loss and protect our collateral. Frequently, delinquent customers will
recognize their inability to honor their contractual obligations and will work
with us to coordinate "voluntary repossessions" of their cars. In other cases,
we hire independent firms to repossess the vehicles. After repossession and a
statutorily mandated waiting period, we typically sell the repossessed car in
the wholesale market. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Allowance for Credit Losses."
Unlike most other used car dealership chains or automobile finance
companies, we permit our customers to make payments on their contracts in person
at any of our dealerships or at any of our collection facilities. Payments
received at our dealerships account for a significant portion of monthly
contract receipts on the dealership portfolio.
Non-Dealership Operations
Cygnet Dealer Program. Many independent used car dealers have difficulty
obtaining working capital from traditional financing sources. As a result, they
are forced to sell the finance receivables that they originate from the sale of
used cars at significant discounts in order to obtain the working capital
necessary to operate their businesses. Most financing programs available to
independent used car dealers do not allow the dealer to service the loans sold.
Yet, we believe that dealers prefer to service the loans they originate so they
can maintain contact with the customer to more effectively collect payments and
generate referrals or repeat business.
To capitalize on this opportunity, we developed the Cygnet dealer program,
which provides qualified dealers with warehouse purchase facilities and
revolving lines of credit primarily secured by the dealers' finance receivable
portfolios. The dealer remains responsible for collection of finance receivable
payments and retains control of the customer relationship. The credit facilities
are for specified amounts and are 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 finance receivables originated.
As a condition to providing financing, each dealer is required to satisfy
certain criteria to qualify for the program, report collection activities to us
on a daily basis and provide us with periodic financial statements. In addition,
dealers are "audited" by our audit department on a periodic basis. As of
December 31, 1998, we had lending relationships with a total of 63 independent
dealers in 18 states, with principal balances totaling approximately $41
million.
The dealer collection program is the primary product offered to independent
dealers under the Cygnet dealer program. Under this program, we purchase finance
receivables at a discount from qualified dealers. The dealer remains responsible
for the collection of the contract payments and retains control of the customer
relationship. We typically purchase finance receivable contracts at 65% to 75%
of the principal balance subject to a maximum of 170% of the Kelly Blue Book
wholesale price of the underlying collateral. All cash collections, including
regular monthly payments, payoffs and repurchases, are deposited directly by the
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dealer into a bank account that we maintain and control. We keep all regular
monthly cash payments and payoffs, and pay the dealer a servicing fee generally
equal to 20% to 25% of the regular monthly cash payments collected. Generally,
each dealer pays a nonrefundable initial audit fee plus a processing fee per
contract or provides a security deposit. The dealer is required to repurchase
all finance receivable contracts that are 45 days past due. The dealer
collection program is full recourse to the dealer and typically includes
personal guarantees by the principal owners of the dealership.
We also offer a secured revolving line of credit to qualified dealers under
the asset based loan version of the Cygnet dealer program. We generally advance
up to 65% of the principal amount of eligible finance receivables subject to a
maximum of 170% of the Kelly Blue Book wholesale price of the underlying
collateral. We also charge an annual commitment fee of 1% to 2% of the available
line and interest on any amounts outstanding at the rate of prime plus 5% to 9%.
In addition, each dealer generally pays a nonrefundable initial audit fee plus a
processing fee per contract. The dealer is responsible for collection of
contract payments and maintaining the customer relationship. All cash
collections are deposited directly into a bank account that we maintain and
control. Finance receivables that are 45 days delinquent are excluded from the
calculation of the amount available under the line of credit. If the exclusion
of delinquent contracts causes the line to become over funded, then the dealer
must either pay down the line or assign additional qualifying finance
receivables to us. Each line of credit is full recourse to the dealer, typically
with full guarantees by the principal owners of the dealership.
Cygnet dealer's net investment in finance receivables purchased from two
third party dealers totaled approximately $15.1 million representing
approximately 34% of Cygnet dealer's net finance receivables portfolio as of
December 31, 1998. There were no other third party dealer loans that exceeded
10% of Cygnet dealer's finance receivable portfolio as of December 31, 1998.
Bulk Purchasing and Loan Servicing Operations. In 1997 and 1998, we entered
into several large servicing and/or bulk purchasing transactions involving third
party dealer contract portfolios. The most significant of these transactions is
our involvement in the bankruptcy proceedings of First Merchants Acceptance
Corporation ("FMAC") described below. Our non-dealership operations service
loans from facilities in Nashville, Tennessee, Aurora, Colorado and Plano,
Texas. As of December 31, 1998, our loan servicing segment employed
approximately 450 employees and serviced approximately 80,000 loans with an
aggregate principal balance of $587 million.
Our non-dealership operations use separate computer systems from our
dealership operations. However, our collection policies and procedures for
non-dealership operations are generally the same as those used by our dealership
operations. See "Monitoring and Collections" above.
The following describes certain aspects of our involvement in the bankruptcy
case of FMAC and in FMAC's approved plan of reorganization which were undertaken
through our bulk purchasing and loan servicing operations. FMAC emerged from
bankruptcy on April 1, 1998.
Senior Bank Debt Claims. On August 21, 1997, we purchased 78% of the senior
bank debt of FMAC for approximately $69 million, which represented a discount of
10% of the outstanding principal amount of such debt. In addition, we agreed to
pay the selling banks additional consideration up to the amount of this 10%
discount (or approximately $7.6 million) if FMAC makes cash payments or issues
notes at market rates to its unsecured creditors and equity holders in excess of
10% of their allowed claims against FMAC. In connection with the purchase, we
also issued to the selling banks warrants to purchase up to 389,800 shares of
our common stock at an exercise price of $20.00 per share at any time through
February 20, 2000. We subsequently purchased the remaining senior bank debt at a
5% discount.
The contracts securing the senior bank debt were then sold to a third party
(the "Contract Purchaser") at a profit. We guaranteed to the Contract Purchaser
a specified return on the contracts that it purchased. Our maximum exposure on
this guarantee was approximately $8.0 million at December 31, 1998. However, we
do not believe that we will be required to make any payments under this
guarantee. Consequently, we have not accrued any liability related to this
guarantee as of December 31, 1998. We recorded a gain in the fourth quarter of
1997 of approximately $8.1 million ($5.0 million, net of income taxes) from the
senior bank debt transaction.
Once the Contract Purchaser has received its guaranteed return on the
contracts, we are entitled to additional recoveries from the contracts up to a
specified amount. FMAC has guaranteed to us on a non-recourse basis our recovery
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of this amount, secured by the residual interests and certain equity
certificates in FMAC's securitization transactions (collectively, the "B
Pieces"). However, with certain exceptions, if we do not continue to service the
contracts sold to the Contract Purchaser, the guaranteed amount will be limited
to $10 million.
DIP Facility. We have agreed to provide debtor-in-possession financing to
FMAC (the "DIP Facility"). As of December 31, 1998, our maximum commitment under
the DIP Facility was reduced to $12.4 million, of which $12.2 million was
outstanding. FMAC pays interest on the DIP Facility at 10% per year. The DIP
Facility is scheduled to be repaid with certain income tax refunds and, after
payment of FMAC's guarantee to us, distributions from FMAC's B pieces. Under the
terms of the agreement, FMAC must apply the first $10 million of income tax
refunds to pay down the DIP Facility. These payments will permanently reduce the
maximum that FMAC can borrow under the DIP Facility. Payments from B Pieces will
also pay down and permanently reduce the maximum amount FMAC can borrow under
the DIP Facility. Payments made on the DIP Facility from sources other than
income tax refunds and B Pieces will not permanently reduce the maximum amount
and FMAC is allowed to reborrow such amounts under the DIP Facility. As of
December 31, 1998, FMAC had applied approximately $9.1 million in income tax
refunds to pay down and reduce the maximum availability under this facility.
Although we have declared FMAC in default under the DIP Facility, we are
negotiating a resolution of this matter with FMAC, which may include an increase
in the DIP Facility of up to approximately $2.0 million.
Excess Collections Split. We will split with FMAC any excess recovery on the
contracts sold to the Contract Purchaser and on the B Pieces, after FMAC pays
its guaranteed amount to us, the DIP Facility and our fees. We are entitled to
receive 17 1/2% of the excess with the remaining 82 1/2% being distributed to
FMAC (the "Excess Collections Split"). The Excess Collections Split allocation
may be reduced or eliminated if certain events occur. As of December 31, 1998,
we had not recognized any revenue from the Excess Collections Split. We
anticipate recognizing revenue on this transaction at the time collections under
the arrangement are probable and reasonably estimable. If several conditions are
met, including that our common stock is trading at $8 or more, we have the right
to issue shares of our common stock to FMAC or its unsecured creditors or equity
holders in exchange for all or part of FMAC's portion of the Excess Collection
Split.
Servicing. We service the contracts sold to the Contract Purchaser and the
contracts in all but one of FMAC's securitized pools, and receive servicing
fees.
Other Matters. On the effective date of FMAC's plan of reorganization, in
addition to the warrants described above, we issued warrants to FMAC to purchase
up to 325,000 shares of our common stock at $20.00 per share. These warrants are
exercisable through April 1, 2001. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Risk Factors--We Have Certain
Risks Relating to the FMAC Transaction".
Discontinued Operations/Split-Up of the Company
Contract Purchasing. In 1994, we acquired Champion Financial Services, Inc.,
an independent automobile finance company. In April 1995, we initiated an
aggressive plan to expand Champion's branch office network and, by December 31,
1997, we operated 83 branch offices across the country. In February 1998, we
announced our intention to close the branch office network and exit this line of
business in the first quarter of 1998. We recorded a pre-tax charge to
discontinued operations totaling approximately $9.1 million (approximately $5.6
million, net of income taxes) during the first quarter of 1998. In addition, a
$6.0 million charge (approximately $3.6 million, net of income taxes) was taken
during the third quarter of 1998 due primarily to higher than anticipated loan
losses and servicing expenses. The branch office closure was substantially
complete by the end of the first quarter of 1998.
In the third quarter of 1997, we announced a strategic evaluation of our
non-dealership operations, including the possible sale or spin-off of these
operations. In February 1998, in addition to closing our branch offices, we
announced our intent to evaluate alternatives for our remaining non-dealership
operations. On April 28, 1998, we announced that our Board of Directors had
directed management to proceed with separating current operations into two
companies and subsequently formed a new wholly owned subsidiary, Cygnet
Financial Corporation ("Cygnet"), to operate the Cygnet dealer program and the
bulk purchase and third party loan servicing operations. Since that date, these
businesses were classified as discontinued operations in our consolidated
financial statements. A proposal to split-up the two companies through a rights
offering was approved by our stockholders at the annual stockholders meeting
held in August 1998. We subsequently issued rights to our stockholders to
purchase Cygnet common stock. Due to a lack of stockholder participation,
however, the rights offering was canceled. We recorded a $2.0 million charge
($1.2 million, net of income tax) in the third quarter of 1998 to write off the
costs associated with the rights offering. In the first quarter of 1999, we
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discontinued efforts to sell or spin off the Cygnet dealer program and bulk
purchasing and loan servicing operations and have reclassified these operations
into continuing operations for all years presented in the consolidated financial
statements and this Form 10-K.
Accordingly, while the branch office network continues to be reported as
discontinued operations, the Cygnet dealer program and bulk purchasing and loan
servicing operations (including the FMAC transaction) have been reclassified
into continuing operations for the years ended December 31, 1998, 1997, and 1996
in our accompanying consolidated financial statements.
Regulation, Supervision, and Licensing
Our operations are subject to ongoing regulation, supervision, and licensing
under various federal, state, and local laws related to the sale of cars, the
extension of credit, and the collections of loans. Among other things, these
laws:
o require that we obtain and maintain certain licenses and qualifications,
o limit or prescribe terms of the contracts that we originate and/or
purchase,
o require specific disclosures to customers,
o limit our right to repossess and sell collateral, and
o prohibit us from discriminating against certain customers.
We typically charge fixed interest rates significantly in excess of
traditional finance companies on the contracts originated at our dealerships.
Currently, a significant portion of our used car sales activities are conducted
in, and a significant portion of the contracts we service were originated in,
states which do not impose limits on the interest rate that a lender may charge.
However, we have expanded, and will continue to expand our operations into
states that impose interest rate limits, such as Florida and Texas.
We believe that we are currently in substantial compliance with all
applicable material federal, state, and local laws and regulations. However, if
we do not remain in compliance with such laws, this failure could have a
material adverse effect on our operations. In addition, the adoption of
additional laws, changes in the interpretation of existing laws, or our entrance
into jurisdictions with more stringent regulatory requirements could have a
material adverse effect on our business.
Trademarks and Proprietary Rights
We have an ongoing program under which we evaluate our intellectual property
and consider appropriate Federal and State intellectual property related
filings. We believe that the value of our trademarks is increasing with the
development of our business, but that our business as a whole is not materially
dependent on our trademarks. We believe we have taken appropriate measures to
protect our proprietary rights. However, there can be no assurance that such
efforts have been successful.
Competition
Although the used car industry has historically been highly fragmented, it
has attracted significant attention from a number of large companies, including
AutoNation, U.S.A, and Car Max, all of whom 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. We believe 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 we have.
However, none of these companies currently represent significant direct
competition in the sub-prime market. Currently, our major competition for our
dealership operations is the numerous independent buy here-pay here dealers that
sell and finance sales of used cars to sub-prime borrowers. See
"Business--Company Dealership Operations" for a description of how we
distinguish our operations from those of typical buy here-pay here dealers.
Our non-dealership operations are also highly competitive. In these
operations, we compete with a variety of finance companies, financial
institutions, and providers of financial services, many of whom have
significantly greater resources, including access to lower priced capital. In
addition, there are numerous financial services companies serving, or capable or
serving, these markets. While traditional financial institutions, such as
commercial banks, savings and loans, credit unions, and captive finance
companies of major automobile manufacturers, have not consistently served the
sub-prime markets, the yields earned by companies involved in sub-prime
financing have encouraged certain of these traditional institutions to enter, or
contemplate entering these markets.
10
<PAGE>
Increased competition may cause downward pressure on sales prices and/or on
the interest rate we charge on contracts originated at our dealerships, or cause
us to reduce or eliminate acquisition discounts on the contracts we purchase in
our non-dealership operations. Such events would have a material adverse affect
on us.
Employees
At December 31, 1998, we employed approximately 2,500 persons. None of our
employees are covered by a collective bargaining agreement.
Seasonality
Historically, we have experienced higher same store revenues in the first
two quarters of the year than in the latter half of the year. We believe that
these results are due to seasonal buying patterns resulting in part because many
of our customers receive income tax refunds during the first half of the year,
which are a primary source of down payments on used car purchases.
ITEM 2 -- PROPERTIES
As of December 31, 1998, we leased substantially all of our facilities,
including 55 dealerships, four collection facilities that service our dealership
portfolios, four non-dealership collection facilities, four inspection centers,
and our corporate offices. We are continuing to negotiate lease settlements and
terminations with respect to our branch office network closure. Our corporate
and divisional administrative offices are located in approximately 40,000 square
feet of leased space in Phoenix, Arizona.
ITEM 3 -- LEGAL PROCEEDINGS
We sell our cars on an "as is" basis. We require all customers to
acknowledge in writing on the date of sale that we disclaim any obligation for
vehicle-related problems that subsequently occur. Although we believe that these
disclaimers are enforceable under applicable laws, there can be no assurance
that they will be upheld in every instance. Despite obtaining these disclaimers,
in the ordinary course of business, we receive complaints from customers
relating to vehicle condition problems as well as alleged violations of federal
and state consumer lending or other similar laws and regulations. Most of these
complaints are made directly to us or to various consumer protection
organizations and are subsequently resolved. However, customers occasionally
name us as a defendant in civil suits filed in state, local, or small claims
courts. Additionally, in the ordinary course of business, we are a defendant in
various other types of legal proceedings. Although we cannot determine at this
time the amount of the ultimate exposure from these lawsuits, if any, we, based
on the advice of counsel, do not expect the final outcome to have a material
adverse effect on our financial position.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
<PAGE>
ITEM 4A -- EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Information Concerning Our Executive Officers as of March 24, 1999.
<TABLE>
<CAPTION>
Name Age Position
- ------------------------ --- ----------------------------------------------------
<S> <C> <C>
Ernest C. Garcia II......... 41 Chairman of the Board (since 1992) and Chief Executive Officer
Gregory B. Sullivan......... 40 Director (since 1998), President and Chief Operating Officer
Steven P. Johnson........... 39 Senior Vice President, General Counsel and Secretary
Steven T. Darak............. 51 Senior Vice President and Chief Financial Officer
Donald L. Addink............ 49 Senior Vice President - Senior Analyst
</TABLE>
Ernest C. Garcia II has served as our Chairman of the Board and Chief
Executive Officer since 1992, and served as President from 1992 to 1996. Mr.
Garcia is also a significant stockholder of Ugly Duckling, owning approximately
29.8% of our stock at December 31, 1998. Since 1991, Mr. Garcia has served as
President of Verde Investments, Inc., a real estate investment corporation that
is also an affiliate of us. Mr. Garcia's sister is married to Mr. Johnson. See
below "Involvement in Certain Legal Proceedings by Directors and Executive
Officers."
Gregory B. Sullivan has served as our President and Chief Operating Officer
since March 1996. In 1998, Mr. Sullivan was elected to our Board of Directors.
Mr. Sullivan has also served as President of Ugly Duckling Car Sales, Inc. since
December 1996. From 1995 through February 1996, Mr. Sullivan was a consultant to
us. Mr. Sullivan formerly served as President and principal stockholder of 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 an inactive member of the State
Bar of Arizona. Mr. Sullivan's sister is married to John N. MacDonough, another
member of our Board of Directors.
Steven P. Johnson has served as our Senior Vice President, General Counsel
and Secretary since 1992. Since 1991, Mr. Johnson has also served as the General
Counsel of Verde, an affiliate of us. 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 our Senior Vice President and Chief Financial
Officer since February 1994, having joined us 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 we acquired in
early 1994. Prior to 1989, Mr. Darak served in various positions in the banking
industry and in public accounting.
Donald L. Addink has served as our Senior Vice President -- Senior Analyst
since November 1998. From 1995 to November 1998, he served as our Vice President
- - Senior Analyst. 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.
Our officers serve at the discretion of our Board of Directors. The present
term of office for the officers named above will expire on June 2, 1999 or on
their earlier retirement, resignation, or removal. Except as summarized above,
there is no family relationship among any of our officers.
(b)Involvement in Certain Legal Proceedings by Directors and Executive
Officers.
Prior to 1992, when he founded Ugly Duckling, Mr. Garcia was involved in
various real estate, securities, and banking ventures. Arising out of two
transactions in 1987 between Lincoln Savings and Loan Association ("Lincoln")
and entities controlled by Mr. Garcia, the Resolution Trust Corporation (the
"RTC"), which ultimately took over Lincoln, asserted that Lincoln improperly
accounted for the transactions and that Mr. Garcia's participation in the
transactions facilitated the improper accounting. Facing severe financial
pressures, Mr. Garcia agreed to plead guilty to one count of bank fraud, but in
light of his cooperation with authorities both before and after he was charged,
was sentenced to only three years probation, which has expired, was fined $50
12
<PAGE>
(the minimum fine the court could assess), and during the period of his
probation, which ended in 1996, was banned from becoming an officer, director or
employee of any federally-insured financial institutions or a securities firms
without governmental approval. In separate actions arising out of this matter,
Mr. Garcia agreed not to violate the securities laws, and filed for bankruptcy
both personally and with respect to certain entities he controlled. The
bankruptcies were discharged by 1993.
PART II
ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY SECURITIES
AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the Nasdaq Stock Market under the symbol "UGLY."
The high and low closing sales prices of the common stock, as reported by Nasdaq
for the two most recent fiscal years are reported below.
<TABLE>
<CAPTION>
Market Price
---------------------
High Low
------- -------
<S> <C> <C>
Fiscal Year 1997:
First Quarter.................................... $ 25.75 $ 16.25
Second Quarter................................... $ 18.06 $ 13.13
Third Quarter.................................... $ 17.00 $ 12.50
Fourth Quarter................................... $ 16.75 $ 7.69
Fiscal Year 1998:
First Quarter.................................... $ 10.88 $ 6.31
Second Quarter................................... $ 12.69 $ 8.00
Third Quarter.................................... $ 9.13 $ 4.63
Fourth Quarter................................... $ 6.00 $ 4.25
</TABLE>
On March 22, 1999, the last reported sale price of the common stock on
Nasdaq was $6.44 per share. On March 22, 1999 there were approximately 93 record
owners of our common stock. We estimate that as of such date there were
approximately 2,000 beneficial owners of our common stock.
Dividend Policy. We have never paid dividends on our common stock and do not
anticipate doing so in the foreseeable future. It is the current policy of our
Board of Directors to retain any earnings to finance the operation and expansion
of our business or to repurchase our common stock pursuant to an existing stock
buy back program. In addition, the terms of our primary revolving credit
facility prevent us from declaring or paying dividends in excess of 15.0% of
each year's net earnings available for distribution. Our future financings may
also include such restrictions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital Resources
- -- Financing Resources -- Revolving Facility."
Exchange Offer. In the fourth quarter of 1998, we issued a total of
approximately $17.5 million of our 12% subordinated debentures due 2003 in
exchange for approximately 2.7 million shares of our common stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Supplemental Borrowings --
Exchange Offer." Beginning on March 2, 1999, the debentures became listed and
trade on the American Stock Exchange under the ticker symbol UGY.
13
<PAGE>
ITEM 6 -- SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share and operating data)
The following table sets forth our selected historical consolidated
financial data for each of the years in the five-year period ended December 31,
1998. The selected annual historical consolidated financial data for 1998, 1997,
1996, 1995, and 1994 are derived from our consolidated financial statements
audited by KPMG LLP, independent auditors. For additional information, see our
consolidated financial statements included elsewhere in this report. The
following table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales of Used Cars................ $ 287,618 $ 123,814 $ 53,768 $ 47,824 $ 27,768
Less:
Cost of Used Cars Sold.......... 167,014 72,358 31,879 29,733 13,604
Provision for Credit Losses..... 67,634 23,045 9,657 8,359 8,024
--------- --------- --------- -------- --------
52,970 28,411 12,232 9,732 6,140
--------- --------- --------- -------- --------
Interest Income................... 27,828 18,736 8,597 8,227 4,683
Gain on Sale of Loans............. 12,093 14,852 3,925 -- --
Servicing and Other Income........ 38,631 12,681 2,537 308 556
--------- --------- --------- -------- --------
78,552 46,269 15,059 8,535 5,239
--------- --------- --------- -------- --------
Income before Operating Expenses.. 131,522 74,680 27,291 18,267 11,379
Operating Expenses................ 118,702 55,741 18,085 16,758 10,837
--------- --------- --------- -------- --------
Income before Interest Expense.... 12,820 18,939 9,206 1,509 542
Interest Expense.................. 6,904 2,774 2,429 5,328 2,870
--------- --------- --------- -------- --------
Earnings (Loss) before Income
Taxes........................... 5,916 16,165 6,777 (3,819) (2,328)
Income Taxes (Benefit)............ 2,396 6,637 100 -- (334)
--------- --------- --------- -------- --------
Earnings (Loss) from Continuing
Operations...................... $ 3,520 $ 9,528 $ 6,677 $ (3,819) $ (1,994)
========= ========= ========= ========= ========
Earnings (Loss) per Common Share
from Continuing Operations:
Basic ............................ $ 0.19 $ 0.53 $ 0.73 $ (0.69) $ (0.36)
========= ========= ========= ========= =========
Diluted........................... $ 0.19 $ 0.52 $ 0.69 $ (0.69) $ (0.36)
========= ========= ========= ========= =========
EBITDA $ 18,555 $ 22,240 $ 10,588 $ 3,298 $ 1,513
Balance Sheet Data:
Finance Receivables, Net.......... $ 163,209 $ 90,573 $ 17,348 $ 27,732 $14,534
Total Assets...................... 345,975 276,426 117,629 60,712 29,681
Subordinated Notes Payable........ 43,741 12,000 14,000 14,553 18,291
Total Debt........................ 161,035 76,821 28,904 49,754 28,233
Preferred Stock................... -- -- -- 10,000 --
Common Stock...................... 173,828 172,622 82,612 127 77
Treasury Stock.................... (14,510) -- -- -- --
Total Stockholders' Equity
(Deficit)....................... $ 162,767 $ 181,774 $ 82,319 $ 4,884 $(1,194)
</TABLE>
- ----------
Note: See "Business-Company Dealership Operations" for a summary of significant
acquisitions during 1997, and a description of our conversion to a single
integrated computer system in 1998. Also, see "Business--Discontinued
Operations/Split-Up of the Company" for a description of significant charges
taken in 1998 for the closure of our branch office network, and our
attempted split-up of Ugly Duckling. Finally, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations --
Securitizations -- Dealership Operations" for a discussion of a change in
our securitization structure in the fourth quarter of 1998.
14
<PAGE>
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We have experienced a number of significant events during the past three
years. Some of the more important events follow:
o During 1996 we:
o completed our initial public offering and secondary offering of
common stock generating a total of $79.4 million in cash.
o During 1997 we:
o completed a private placement of common stock in February 1997 generating
$88.7 million in cash,
o completed a conversion of one of our loan servicing systems. We
experienced various transitional problems with the conversion, which
resulted in a charge of $5.7 million (approximately $3.4 million, net
of income taxes) to write down our residuals in finance receivables
sold,
o completed three significant acquisitions and developed new stores to
increase our total number of dealerships in operation from seven to 41
at December 31, 1997, and
o expanded our dealership chain from two markets at the end of 1996 to ten
markets at the end of 1997.
o During 1998 we:
o closed our branch office network resulting in two significant charges
to discontinued operations totaling $15.1 million (approximately $9.2
million, net of income taxes),
o completed the conversion of our dealerships to a single computer system,
o attempted to split-up the company through a rights offering to our
stockholders. We terminated the rights offering due to a lack of
stockholder participation. Although the rights offering was
unsuccessful, the exercise of splitting the operations and management
teams has proven beneficial to each of our businesses,
o completed an exchange offer whereby we issued $17.5 million in
subordinated debentures and repurchased approximately 2.7 million
shares of our common stock, and
o changed the way we structure our securitization transactions for
accounting purposes from a sale to a financing. The change had a
significant effect on earnings in 1998.
In this discussion and analysis we explain the general financial condition
and the results of operations of Ugly Duckling and its subsidiaries. In
particular, we analyze and explain the annual changes in the results of
operations of our various business segments. As you read this discussion, you
should refer to our Consolidated Financial Statements beginning on page 41,
which contain the results of our operations for 1998, 1997, and 1996.
Results of Operations- Years Ended December 31, 1998, 1997 and 1996
Income items in our Statement of Operations consist of:
o Sales of Used Cars
less Cost of Used Cars Sold
less Provision for Credit Losses
o Interest Income
o Gain on Sale of Loans
o Servicing and Other Income
15
<PAGE>
Sales of Used Cars and Cost of Used Cars Sold
<TABLE>
<CAPTION>
(dollars in thousands)
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Used Cars Sold (Units).............. 35,964 16,636 7,565
========== =========== ==========
Sales of Used Cars ................. $ 287,618 $ 123,814 $ 53,768
Cost of Used Cars Sold ............. 167,014 72,358 31,879
---------- ----------- ----------
Gross Margin ....................... $ 120,604 $ 51,456 $ 21,889
========== =========== ==========
Gross Margin %...................... 41.9% 41.6% 40.7%
========== =========== ==========
Per Unit Sold:
Sales .............................. $ 7,997 $ 7,443 $ 7,107
Cost of Used Cars Sold ............. 4,644 4,349 4,214
---------- ----------- ----------
Gross Margin ....................... $ 3,353 $ 3,093 $ 2,893
========== =========== ==========
</TABLE>
The number of cars sold (units) increased by 116.2% for the year ended
December 31, 1998 over the year ended December 31, 1997, compared to an increase
of 119.9% over the year ended December 31, 1996. Same store unit sales in the
year ended December 31, 1998 were compararable to the year ended December 31,
1997. We anticipate future revenue growth would come from increasing the number
of dealerships and not from higher sales volumes at existing dealerships. Same
store unit sales declined by 11.6% in the year ended December 31, 1997 compared
to the year ended December 31, 1996. We believe that this decline was due
primarily to the increased emphasis on underwriting at our dealerships,
particularly at one dealership where unit sales decreased by 742 units, which
represents 85.0% of the net decrease for the year ended December 31, 1997.
Sales of Used Cars (revenues) increased by 132.3% for the year ended
December 31, 1998 over the year ended December 31, 1997, compared to a 130.3%
increase over the year ended December 31, 1996. The growth for these periods
reflects increases in the number of dealerships in operation and the average
unit sales price. The Cost of Used Cars Sold increased by 130.8% for the year
ended December 31, 1998 over the year ended December 31, 1997, compared to an
increase of 127.0% over the year ended December 31, 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 134.4% for the year ended December 31,
1998 over the year ended December 31, 1997, compared to an increase of 135.1%
over the year ended December 31, 1996. The gross margin percentage has increased
over the past two years, as we have been successful in increasing our sales
prices by more than the increase in the cost of used cars sold.
Our average sales price per car increased by 7.4% for the year ended
December 31, 1998 over the year ended December 31, 1997, compared to a 4.7%
increase in the year ended December 31, 1997 from the year ended December 31,
1996. The increase in the average sales price was necessary to offset the
increase in the Cost of Used Cars Sold. On a per unit basis, the Cost of Used
Cars Sold increased by 6.8% for the year ended December 31, 1998 over the year
ended December 31, 1997, compared to an increase of 3.2% over the year ended
December 31, 1996.
16
<PAGE>
Provision for Credit Losses
We record provisions for credit losses in our dealership operations and our
non-dealership operations.
Dealership Operations. Following is a summary of the Provision for Credit
Losses from our dealership operations:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Provision for Credit Losses (in thousands)... $65,318 $22,354 $9,657
======= ======= ======
Provision per contract originated............ 1,837 $1,397 $1,394
======== ======= ======
Provision as a percentage of
principal balances originated.............. 23.6% 19.1% 19.7%
======== ======== ======
</TABLE>
The Provision for Credit Losses in our dealership operations increased by
192.2% in the year ended December 31, 1998 over the year ended December 31,
1997, compared to an increase of 131.5% over the year ended December 31, 1996.
The Provision for Credit Losses per unit originated at our dealerships increased
by 31.5% in the year ended December 31, 1998 over the year ended December 31,
1997, compared to an increase of 0.2% over the year ended December 31, 1996. The
increase in 1998 was primarily due to an increase in the average amount financed
to $7,796 per unit in the year ended December 31, 1998 from $7,301 per unit in
the year ended December 31, 1997 and from the change in our securitization
structure beginning in the fourth quarter of 1998.
As a percentage of dealership contract principal balances originated, the
Provision for Credit Losses averaged 23.6% for the year ended December 31, 1998,
19.1% for the year ended December 31, 1997, and 19.7% for the year ended
December 31, 1996. When we changed how we structure securitizations for
accounting purposes in the fourth quarter of 1998, we also changed the timing of
providing for credit losses. For periods prior to the fourth quarter of 1998, we
generally provided a Provision for Credit Losses of approximately 20% of the
loan principal balance at the time of origination to record the loan at the
lower of cost or market. However, as a consequence of our revised securitization
structure, we will now be retaining securitized loans on our balance sheet and
recognizing income over the life of the contracts. Therefore, for loans
originated in the fourth quarter of 1998, we increased the provision for credit
losses to 27% of the principal balance at the time of origination. We also
increased the provision for credit losses to 27% on loans originated in prior
periods that had not been securitized prior to the fourth quarter.
Non-Dealership Operations. The provision for credit losses in our
non-dealership operations increased by 235.2% to $2.3 million in the year ended
December 31, 1998 from $691,000 in the year ended December 31, 1997. The
increase was primarily due to the significant increase in loans under the Cygnet
dealer program. There was no provision for credit losses in our non-dealership
operations in 1996, since there was no significant activity until 1997.
See "Allowance for Credit Losses" below.
Interest Income
We generate Interest Income from both our dealership operations and our
non-dealership operations.
Dealership Operations. Interest Income consists primarily of interest on
finance receivables from our dealership sales and income from Residuals in
Finance Receivables Sold from our prior securitizations. Interest Income
increased by 37.6% to $17.3 million for the year ended December 31, 1998 from
$12.6 million for the year ended December 31, 1997, which increased by 46.1%
from $8.6 million in the year ended December 31, 1996. The increases were
primarily due to the increase in the average finance receivables retained on our
balance sheet during these periods. However, because we structured most of our
securitizations to recognize income as sales during 1998, 1997, and 1996,
Interest Income was lower than if we had structured the securitizations as
secured financings for accounting purposes.
A primary element of our sales strategy is to provide financing to our
customers, almost all of whom are sub-prime borrowers. As summarized in the
following table, we continue to increase the percentage of sales revenue
financed, and the number of units sold.
17
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Percentage of sales revenue financed... 96.4% 94.4% 90.5%
Percentage of used cars sold financed.. 98.9% 96.2% 91.6%
</TABLE>
As a result of our expansion into markets with interest rate limits, the
yield on our dealership receivable contracts has gone down. The average
effective yield on finance receivables from our dealerships was approximately
25.8% for the year ended December 31, 1998, 26.7% for the year ended December
31, 1997, and 29.2% for the year ended December 31, 1996. Our policy is to
charge 29.9% per year on our dealership contracts. However, in those states that
impose interest rate limits, we charge the maximum interest rate permitted.
Non-Dealership Operations. In our non-dealership operations, we generate
interest income primarily from a loan we made to FMAC as part of its bankruptcy
proceedings, and from our Cygnet dealer program. Interest Income from the FMAC
transaction decreased by 52.0% to $1.8 million from $3.8 million in 1997 when we
originated the FMAC loan. During a portion of 1997, in addition to our
debtor-in-possession loan to FMAC, we held other notes receivable from FMAC
totaling approximately $76.3 million. We sold receivables that secured the notes
for a gain at the end of 1997. Interest income from the Cygnet dealer program
increased by 269.2% to $8.7 million from $2.4 million in 1997 when the Cygnet
dealer program commenced significant operations. The increase in interest income
in the Cygnet dealer program reflects a significant increase in the amount of
loans outstanding during 1998 compared to 1997.
Gain on Sale of Loans
A summary of Gain on Sale of Loans follows:
<TABLE>
<CAPTION>
(dollar amounts in thousands)
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
Dealership Operations................... $ 12,093 $ 6,721 $ 3,925
Non-Dealership Operations............... -- 8,131 --
----------- ------------ ------------
$ 12,093 $ 14,852 $ 3,925
=========== =========== =============
Gain on Sale of Loans as a percentage
of principal balances securitized -
dealership operations ................ 5.4% (1) 8.2% 6.7%
=========== =========== ============
(1) Excluding a $5.7 million charge in 1997 described below
</TABLE>
Dealership Operations. We recorded Gain on Sale of Loans related to
securitization transactions of $12.1 million during the year ended December 31,
1998, $6.7 million (net of a $5.7 million charge) during the year ended December
31, 1997, and $3.9 million during the year ended December 31, 1996. We recorded
a $5.7 million charge (approximately $3.4 million net of income taxes) in the
third quarter of 1997 in order to adjust our assumptions related to our
previously completed securitization transactions. The decrease in Gain on Sale
(excluding the $5.7 million charge in 1997) as a percentage of principal
balances securitized in 1998 compared to 1997 is primarily due to the use of a
higher cumulative charge off assumption in the 1998 securitizations and the
securitized portfolios in 1998 having a shorter weighted average life than those
in 1997. The increase in Gain on Sale (excluding the $5.7 million charge in
1997) as a percentage of principal balances securitized in 1997 compared to 1996
is primarily due to a decrease in the weighted average borrowing rate of the
underlying Class A certificates. See "Securitizations-Dealership Operations"
below for a summary of the structure of our securitizations.
Non-Dealership Operations. During 1997, our non-dealership operations
entered into a series of transactions with FMAC including transactions in which
we acquired 100% of FMAC's senior bank debt. When FMAC put the finance contracts
securing this debt up for bid, we purchased the contracts by releasing the debt.
We then sold the contracts to a third party purchaser. We recorded a one-time
gain of $8.1 million from this transaction. See "Business--Non-Dealership
Operations--Bulk Purchasing and Loan Servicing Operations."
18
<PAGE>
Servicing and Other Income
We generate Servicing and Other Income from both our dealership operations
and our non-dealership operations. A summary of Servicing and Other Income
follows (in thousands):
<TABLE>
<CAPTION>
Non-Dealership
Dealership Operations Operations
--------------------- ---------------
Company
Company Dealership Corporate Cygnet
Dealerships Receivables and Other Loan Servicing Total
----------- ----------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C>
1998..................$ 389 $ 15,453 $ 493 $ 22,296 $ 38,631
1997..................$ 1,498 $ 8,814 $ 2,013 $ 356 $ 12,681
1996..................$ 195 $ 1,887 $ 455 $ -- $ 2,537
</TABLE>
Dealership Operations. Servicing and Other Income increased by 32.5% to
$16.3 million in the year ended December 31, 1998 over the $12.3 million
recognized in 1997, which was an increase of 385.8% over the $2.5 million in
1996. We service our securitized contracts for monthly fees ranging from .25% to
.33% of the beginning of month principal balances (3.0% to 4.0% per year). The
significant increase in Servicing and Other Income is primarily due to the
increase in the principal balance of contracts being serviced under the
securitization program and the addition in 1997 of the Kars portfolio. Although
we acquired several dealerships in the Kars transaction, the owners retained the
loan portfolio, which we service. In addition, the increase in 1997 was also due
to our investment income on the proceeds from our private placement that we
closed in February 1997. We recorded earnings on these investments of $1.2
million compared to no investment earnings in the year ended December 31, 1996.
Non-Dealership Operations. In April 1998, we began servicing loans on behalf
of FMAC. Shortly thereafter, we entered into additional agreements to service
loan portfolios on behalf of other third parties. Our servicing fee is generally
a percentage of the portfolio balance (generally 3.25% to 4.0% per year) with a
minimum fee per loan serviced (generally $14 to $17 per month). Servicing and
Other Income totaled $22.3 million in the year ended December 31, 1998, compared
to $356,000 in 1997 and $0 in 1996.
Our non-dealership operations have entered into servicing agreements with
two companies that have filed and subsequently emerged from bankruptcy and
continue to operate under their approved plans of reorganization. Under the
terms of the respective servicing agreements and approved plans of
reorganization, once certain creditors of the bankrupt companies have been paid
in full, we are entitled to certain incentive compensation in excess of the
servicing fees that we have earned to date. Under the terms of the agreements
with FMAC, we are scheduled to receive 17.5% of all collections of the serviced
portfolio once the specified creditors have been paid in full. See
"Business--Non-Dealership Operations--Bulk Purchasing and Loan Servicing
Operations." Under the terms of the second agreement, we are scheduled to
receive the first $3.25 million in collections once the specified creditors have
been paid in full and 15% thereafter. We are required to issue warrants to
purchase up to 150,000 shares of our common stock to the extent we receive the
$3.25 million and, in addition, will be required to issue 75,000 warrants for
each $1.0 million in incentive fee income we receive after we collect the $3.25
million. As of December 31, 1998, we estimate that the incentive compensation
could range from $0 to $8.0 million under both agreements. We have not accrued
any fee income from these incentives.
Income before Operating Expenses
As a result of our continued expansion, Income before Operating Expenses
grew by 76.1% to $131.5 million for the year ended December 31, 1998 from $74.7
million for the year ended December 31, 1997, compared to an increase of 173.6%
from $27.3 million in 1996. Growth of Sales of Used Cars, Interest Income, Gain
on Sale of Loans, and Servicing and Other Income were the primary contributors
to the increase.
19
<PAGE>
Operating Expenses
Operating Expenses consist of:
o Selling and Marketing Expenses,
o General and Administrative Expenses, and
o Depreciation and Amortization.
A summary of operating expenses for our business segments for the years
ended December 31, 1998, 1997 and 1996 follows (in thousands):
<TABLE>
<CAPTION>
Dealership Operations Non-Dealership Operations
--------------------- -------------------------
Company Cygnet Cygnet
Company Dealership Corporate Dealer Loan Corporate
Dealerships Receivables and Other Program Servicing and Other Total
----------- ----------- --------- ------- --------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
1998:
Selling and Marketing...... $ 20,285 $ -- $ -- $ 242 $ 31 $ 7 $ 20,565
General and Administrative. 32,383 18,491 16,103 2,721 18,664 4,040 92,402
Depreciation and
Amortization............ 2,581 1,334 997 104 614 105 5,735
-------- ------- ------- ------ ------ ------ --------
$ 55,249 $19,825 $17,100 $ 3,067 $19,309 $4,152 $118,702
======== ======= ======= ====== ======= ====== ========
1997:
Selling and Marketing...... $ 10,538 $ -- $ -- $ -- $ -- $ -- $ 10,538
General and Administrative. 17,214 12,303 9,896 917 -- 1,572 41,902
Depreciation and
Amortization........... 1,536 1,108 504 28 -- 125 3,301
-------- ------- ------ ------- ------- ------ --------
$ 29,288 $13,411 $10,400 $ 945 $ -- $1,697 $ 55,741
======== ======= ======= ======= ======= ====== ========
1996:
Selling and Marketing...... $ 3,568 $ -- $ 17 $ -- $ -- $ -- $ 3,585
General and Administrative. 6,306 2,859 3,953 -- -- -- 13,118
Depreciation and
Amortization........... 318 769 295 -- -- -- 1,382
-------- ------- ------ ------- ------- ------- --------
$ 10,192 $ 3,628 $4,265 $ -- $ -- $ -- $ 18,085
======== ======= ====== ======= ======= ======= ========
</TABLE>
Selling and Marketing Expenses. A summary of Selling and Marketing Expense
as a percentage of Sales of Used Cars and Selling and Marketing Expense per car
sold from our dealership operations follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Selling and Marketing Expense as a
Percent of Sales of Used Cars....... 7.1% 8.5% 6.6%
==== ==== ====
Selling and Marketing Expense
per Car Sold....................... $564 $633 $472
==== ==== ====
</TABLE>
For the years ended December 31, 1998, 1997, and 1996, Selling and Marketing
Expenses consisted almost entirely of advertising costs and commissions relating
to our dealership operations. Selling and Marketing Expenses increased by 95.2%
to $20.6 million for the year ended December 31, 1998 from $10.5 million for the
year ended December 31, 1997, which was an increase of 193.9% from $3.6 million
in 1996. The decrease in Selling and Marketing Expense as a percentage of Sales
of Used Cars and on a per unit basis from 1997 to 1998 is due to the significant
increase in the number of cars sold in 1998 compared to 1997, and to the fact
that we did not enter any new markets in 1998. The significant increase in per
unit marketing in 1997 was primarily due to our expansion into several new
markets. We operated dealerships in ten markets during 1997, compared to two
markets in 1996. As a result of this expansion, we incurred significant
marketing costs in 1997 in new markets in an effort to establish brand name
recognition.
<PAGE>
General and Administrative Expenses. General and Administrative Expenses
increased by 120.5% to $92.4 million for the year ended December 31, 1998 from
$41.9 million for the year ended December 31, 1997, which was an increase of
219.4% from $13.1 million for the year ended December 31, 1996. The increase in
General and Administrative Expenses was primarily a result of the increased
number of used car dealerships in operations, as well the expansion of our bulk
purchasing and loan servicing operations, the Cygnet dealer program, and
continued expansion of infrastructure to administer growth. General and
Administrative expenses for the year ended 1998 includes a $2.0 million charge
20
<PAGE>
($1.2 million, net of income taxes) to write off costs associated with the
rights offering.
Depreciation and Amortization. Depreciation and Amortization consists of
depreciation and amortization on our property and equipment and amortization of
goodwill and trademarks. Depreciation and amortization increased by 73.7% to
$5.7 million for the year ended December 31,1998 from $3.3 million for the year
ended December 31, 1997, which was an increase of 138.9% over the $1.4 million
incurred in the year ended December 31, 1996. The increase in 1998 was primarily
due to increases in amortization of goodwill associated with our 1997
acquisitions, increased depreciation expense from the addition of used car
dealerships and the addition of four loan servicing facilities in 1998 to
support our bulk purchase and loan servicing operations.
Interest Expense
Interest expense increased by 148.9% to $6.9 million in 1998 from $2.8
million in 1997, which was an increase of 14.2% from $2.4 million in 1996. The
increase in 1998 was primarily due to increased borrowings of Notes Payable and
Subordinated Notes Payable. The relatively small increase in 1997, despite
significant growth in our total assets, was primarily the result of the private
placement of common stock that we completed in February 1997. Our private
placement generated $88.7 million in cash which we used to pay down debt.
Income Taxes
Income taxes totaled $2.4 million for the year ended December 31, 1998, $6.6
million for the year ended December 31, 1997, and $100,000 for the year ended
December 31, 1996. Our effective tax rate was 40.5% for the year ended December
31, 1998, 41.1% for the year ended December 31, 1997, and 1.6% for the year
ended December 31, 1996. In 1996, we reversed all of the valuation allowance
that existed against our deferred income tax assets as of December 31, 1995,
which significantly reduced our effective income tax rate.
Discontinued Operations
The loss from Discontinued Operations, net of income tax benefits, increased
by $9.1 million to $9.2 million in 1998 from $83,000 in 1997, which was an
improvement from the $811,000 loss we incurred in 1996. The significant increase
in the loss in 1998 was due to the charges we recorded totaling $15.1 million
($9.2 million, net of income taxes) to close our branch office network.
Financial Position
Total assets increased by 25.2% to $346.0 million at December 31, 1998 from
$276.4 million at December 31, 1997. The increase was due in part to an increase
in Finance Receivables of $72.6 million to $163.2 million at December 31, 1998
from $90.6 million at December 31, 1997. The increase in Finance Receivables was
primarily due to a significant increase in loans under the Cygnet dealer
program, and a change in the structure of our securitization transactions for
accounting purposes which resulted in us retaining on balance sheet the Finance
Receivables we securitized in the fourth quarter of 1998. We previously
structured securitizations as sales for accounting purposes and we removed the
related Finance Receivables from the balance sheet upon securitization.
Additionally, our dealership network increased from 41 dealerships at December
31, 1997 to 56 at December 31, 1998. The increase in the number of our
dealerships resulted in an increase in Inventory of $11.8 million to $44.2
million at December 31, 1998 from $32.4 million at December 31, 1997.
We financed the increases in assets primarily through additional borrowings,
represented by increases in Notes Payable, Collateralized Notes Payable, and
Subordinated Notes Payable. Notes Payable and Collateralized Notes Payable
increased by $52.5 million to $117.3 million at December 31, 1998 from $64.8
million at December 31, 1997. This increase was primarily due to the change in
our securitization structure. We retained the debt related to the securitization
transaction we closed in the fourth quarter of 1998 on our balance sheet.
Subordinated Notes Payable increased by $31.7 million to $43.7 million at
December 31, 1998 from $12.0 million at December 31, 1997. The increase in
Subordinated Notes Payable was primarily due to the addition of $20.0 million in
subordinated notes used for working capital and other uses and approximately
$17.5 million used to repurchase our common stock in an exchange transaction.
See "Liquidity and Capital Resources--Supplemental Borrowings--Exchange Offer"
below.
21
<PAGE>
Growth in Finance Receivables. As a result of our rapid expansion, contract
receivables managed by our dealership operations have increased significantly
during the past three years.
The following table reflects the growth in period end balances of our
dealership operations measured in terms of the principal amount and the number
of contracts outstanding.
<TABLE>
<CAPTION>
Total Contracts Outstanding-Dealership
Operations
(In thousands, except number of contracts)
as of December 31,
--------------------------------------------
1998 1997
-------------------- ----------------------
Principal No. of Principal No. of
Amount Contracts Amount Contracts
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Principal Amount..................... $292,683 49,601 $ 183,321 35,762
Less: Portfolios Securitized and Sold 198,747 37,186 127,356 27,769
------- ------ --------- ------
Dealership Operations Total........ $ 93,936 12,415 $ 55,965 7,993
======== ====== ========= ======
</TABLE>
The following table reflects the growth in the principal amount and number
of contracts generated or acquired by our dealership operations.
Total Contracts Generated or Acquired-Dealership Operations
(Principal Amounts In Thousands)
<TABLE>
<CAPTION>
During the Years Ended December 31,
----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Principal Amount... $277,226 $172,230 $ 48,996
Number of Contracts 35,560 29,251 6,929
Average Principal.. $ 7,796 $ 5,888 $ 7,071
</TABLE>
Finance Receivable principal balances generated or acquired by our
dealership operations during the year ended December 31, 1998 increased by 61.0%
to $277.2 million from $172.2 million in the year ended December 31, 1997.
During the year ended December 31, 1997, Finance Receivable principal balances
generated or acquired by our dealership operations included the purchase of
approximately $55.4 million (13,250 contracts) in Finance Receivables principal
balances in conjunction with the E-Z Plan and Seminole acquisitions.
In addition to the loan portfolio summarized above, our dealership
operations also serviced loan portfolios totaling approximately $121.2 million
($47.9 million for Kars and $73.3 million from our branch office network) as of
December 31, 1998, and $267.9 million ($127.3 million for Kars and $140.6
million from our branch office network) as of December 31, 1997.
Our non-dealership operations began servicing loans on behalf of FMAC on
April 1, 1998, and began servicing additional loan portfolios on behalf of other
third parties throughout 1998. By December 31, 1998, our non-dealership bulk
purchasing/loan servicing operations were servicing a total of $587.3 million in
finance receivables (approximately 80,000 contracts).
Allowance for Credit Losses
We have established an Allowance for Credit Losses ("Allowance") to cover
anticipated credit losses on the contracts currently in our portfolio. We
established the Allowance by recording an expense through the Provision for
Credit Losses.
For Finance Receivables generated at our dealerships, our policy is to
charge off a contract the earlier of:
o when we believe it is uncollectible, or
o when it is delinquent for more than 90 days.
22
<PAGE>
The following table reflects activity in the Allowance, as well as
information regarding charge off activity, for the years ended December 31, 1998
and 1997, in thousands.
<TABLE>
<CAPTION>
Dealership Operations
---------------------
Years Ended
December 31,
---------------------
1998 1997
--------- --------
<S> <C> <C>
Allowance Activity:
Balance, Beginning of Period..................... $ 10,356 $ 1,625
Provision for Credit Losses...................... 65,318 22,354
Allowance on Acquired Loans...................... -- 15,309
Reduction Attributable to Loans Sold............. (44,539) (21,408)
Net Charge Offs.................................. (6,358) (7,524)
--------- --------
Balance, End of Period........................... $ 24,777 $10,356
======== =======
Allowance as Percent of Period End Principal
Balances...................................... 26.4% 18.5%
======== ========
Charge off Activity:
Principal Balances............................. $ (8,410) $(10,285)
Recoveries, Net................................ 2,052 2,761
-------- -------
Net Charge Offs.................................. $ (6,358) $(7,524)
========= ========
</TABLE>
The Allowance on contracts from dealership operations was 26.4% of the
outstanding principal balances as of December 31, 1998 and 18.5% of outstanding
principal balances as of December 31, 1997. The increase is due to the change in
the structure of our securitization transactions for accounting purposes in the
fourth quarter of 1998. The change resulted in us retaining the securitized
loans from our fourth quarter securitization on balance sheet. As we intend to
hold the balance sheet portfolio for investment and not for sale, we increased
the provision for credit losses to 27% of the principal balance for loans
originated in the fourth quarter of 1998.
The Allowance on contracts from non-dealership operations was 3.9% of the
outstanding principal balances as of December 31, 1998 and 3.8% of outstanding
principal balances as of December 31, 1997. In addition, our non-dealership
operations held non-refundable discounts and security deposits from third party
dealers totaling $15.3 million, which represented 29.9% of outstanding principal
balances as of December 31, 1998. Our non-dealership operations held
non-refundable discounts and security deposits from third party dealers totaling
$7.2 million, which represented 26.0% of the outstanding principal balances as
of December 31, 1997.
Even though a contract is charged off, we continue to attempt to collect the
contract. Recoveries as a percentage of principal balances charged off from
dealership operations averaged 24.4% for the year ended December 31, 1998
compared to 26.8% for the year ended December 31, 1997. Recoveries as a
percentage of principal balances charged off from non-dealership operations
averaged 30.1% for the year ended December 31, 1998 compared to 0% for the year
ended December 31, 1997, when we recorded only one charge off against the
Allowance.
For Finance Receivables acquired by our non-dealership operations with
recourse to the seller, our general policy is to exercise the recourse
provisions in our agreements under the Cygnet dealer program when a contract is
delinquent for 45 days. For contracts not purchased with recourse, our policy is
similar to that of our dealership operations.
Static Pool Analysis
We use a "static pool" analysis to monitor performance for contracts we have
originated at our dealerships. In a static pool analysis, we assign each month's
originations to a unique pool and track the charge offs for each pool
separately. We calculate the cumulative net charge offs for each pool as a
percentage of that pool's original principal balances, based on the number of
complete payments made by the customer before charge off. The table below
displays the cumulative net charge offs of each pool as a percentage of original
contract cumulative balances, based on the quarter the loans were originated.
The table is further stratified by the number of payments made by our customers
prior to charge off. For periods denoted by "x", the pools have not seasoned
sufficiently to allow us to compute cumulative losses. For periods denoted by
"-", the pools have not yet reached the indicated cumulative age. While we
monitor static pools on a monthly basis, for presentation purposes, we are
presenting the information in the table below on a quarterly basis.
23
<PAGE>
Currently reported cumulative losses may vary from those previously reported
for the reasons listed below, however, management believes that such variation
will not be material:
o ongoing collection efforts on charged off accounts, and
o the difference between final proceeds on the sale of repossessed
collateral versus our estimates of the sale proceeds.
The following table sets forth as of February 28, 1999, 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 customers before charge off. The table also shows 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
(dollars in thousands)
<TABLE>
<CAPTION>
Monthly Payments Completed by Customer Before Charge Off
-------------------------------------------------------------------------
Orig. 0 3 6 12 18 24 TLI Reduced
----- --- ---- ---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1994:
1st Quarter $ 6,305 3.4% 10.0% 13.4% 17.9% 20.3% 20.9% 21.0% 100.0%
2nd Quarter $ 5,664 2.8% 10.4% 14.1% 19.6% 21.5% 22.0% 22.1% 100.0%
3rd Quarter $ 6,130 2.8% 8.1% 12.0% 16.3% 18.2% 19.1% 19.2% 100.0%
4th Quarter $ 5,490 2.4% 7.6% 11.2% 16.4% 19.3% 20.2% 20.3% 100.0%
1995:
1st Quarter $ 8,191 1.6% 9.1% 14.7% 20.4% 22.7% 23.6% 23.8% 100.0%
2nd Quarter $ 9,846 2.0% 8.5% 13.3% 18.1% 20.7% 22.2% 22.6% 99.9%
3rd Quarter $ 10,106 2.5% 7.9% 12.2% 18.8% 22.2% 23.6% 24.2% 99.1%
4th Quarter $ 8,426 1.5% 6.6% 11.7% 18.2% 22.6% 24.1% 24.7% 98.7%
1996:
1st Quarter $ 13,635 1.6% 8.0% 13.7% 20.7% 24.9% 26.2% 27.1% 96.5%
2nd Quarter $ 13,462 2.2% 9.2% 13.4% 22.1% 26.1% 27.7% 28.9% 93.6%
3rd Quarter $ 11,082 1.6% 6.9% 12.5% 21.5% 25.7% 28.0% 28.5% 89.3%
4th Quarter $ 10,817 0.6% 8.5% 16.0% 25.0% 29.3% 31.2% 31.2% 85.3%
1997:
1st Quarter $ 16,279 2.1% 10.6% 17.9% 24.6% 29.6% 30.9% 30.9% 80.1%
2nd Quarter $ 25,875 1.5% 9.9% 15.9% 22.8% 27.3% 27.5% 27.5% 71.2%
3rd Quarter $ 32,147 1.4% 8.4% 13.3% 22.6% 25.3% x 25.3% 63.1%
4th Quarter $ 42,529 1.5% 6.9% 12.7% 21.6% x -- 21.9% 55.4%
1998:
1st Quarter $ 69,708 0.9% 6.9% 13.6% x -- -- 18.4% 47.0%
2nd Quarter $ 66,908 1.1% 8.1% x -- -- -- 14.3% 32.2%
3rd Quarter $ 71,027 1.0% x -- -- -- -- 8.1% 18.0%
4th Quarter $ 69,583 x -- -- -- -- -- 1.6% 5.3%
</TABLE>
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
contract principal balances from dealership operations.
<TABLE>
<CAPTION>
Retained Securitized Managed
-------- ----------- -------
<S> <C> <C> <C>
December 31, 1998:
31 to 60 days... 2.3% 5.2% 4.6%
61 to 90 days... 0.5% 2.2% 1.9%
December 31,1997:
31 to 60 days... 2.2% 4.5% 3.6%
61 to 90 days... 0.6% 2.2% 1.5%
</TABLE>
In accordance with our charge off policy, there are no accounts more than 90
days delinquent as of December 31, 1998 and 1997.
Securitizations-Dealership Operations
Structure of Securitizations. For the securitization transactions closed
prior to the fourth quarter of 1998, we recognized a Gain on Sale of Loans equal
to the difference between the sales proceeds for the Finance Receivables sold
and our recorded investment in the Finance Receivables sold. Our investment in
Finance Receivables consisted of the principal balance of the Finance
Receivables securitized net of the Allowance for Credit Losses related to the
securitized receivables. We then reduced our Allowance for Credit Losses by the
24
<PAGE>
amount of Allowance for Credit Losses related to the loans securitized. We
allocated 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.
In the fourth quarter of 1998 we announced that we were changing the way we
structure transactions under our securitization program for accounting purposes.
Through September 30, 1998, we had structured these transactions as sales for
accounting purposes. However, beginning in the fourth quarter of 1998, we began
structuring securitizations for accounting purposes to recognize the income over
the life of the contracts. This change will not affect our prior
securitizations. Historically, Gain on Sale of Loans has been material to our
reported revenues and net earnings. Altering the structure of these transactions
so that no gain is recognized at the time of a securitization transaction will
have a material effect on our reported revenues and net earnings until such time
as we accumulate Finance Receivables on our balance sheet sufficient to generate
interest income (net of interest, credit losses, and other expenses) equivalent
to the revenues that we had historically recognized on our securitization
transactions.
Under our securitization program, we sell the securitized Finance
Receivables to our securitization subsidiaries who then assign and transfer the
Finance Receivables to separate trusts. The trusts issue Class A certificates
and subordinated Class B certificates (Residuals in Finance Receivables Sold) to
the securitization subsidiaries. The securitization subsidiaries then sell the
Class A certificates to the investors and retain the Class B certificates. We
continue to service the securitized contracts.
The Class A certificates from our securitization transactions have
historically received investment grade ratings. To secure the payment of the
Class A certificates, the securitization subsidiaries have:
o obtained an insurance policy from MBIA Insurance Corporation which
guarantees payment of amounts to the holders of the Class A
certificates (for transactions closed after July 1, 1997), and
o established a cash "spread" account (essentially, a reserve account) for
the benefit of the certificate holders.
Spread Account Requirements. The securitization subsidiaries make an initial
cash deposit into the spread account, generally equivalent to 4% of the initial
underlying Finance Receivables principal balance and pledge this cash to the
spread account agent. The trustee then makes additional deposits to the spread
account out of collections on the securitized receivables as necessary to fund
the spread account to a specified percentage, ranging from 6.0% to 10.5%, of the
underlying Finance Receivables' principal balance. The trustee will not make
distributions to the securitization subsidiaries on the Class B certificates
unless:
o the spread account has the required balance,
o the required periodic payments to the Class A certificate holders are
current, and
o the trustee, servicer and other administrative costs are current.
During 1998, we made initial spread account deposits totaling approximately
$13.1 million. The required spread account balance based upon the targeted
percentages was approximately $23.7 million at December 31, 1998 with balances
in the spread accounts totaling approximately $20.6 million. Therefore, the
amount remaining to be funded to meet the targeted balance was approximately
$3.1 million as of December 31, 1998.
In addition to the spread account balance of $20.6 million at December 31,
1998, we also had deposited a total of $1.6 million in trust accounts in
conjunction with certain other agreements. We also maintain spread accounts for
the securitization transactions that were consummated by our discontinued
operations. We had satisfied the spread account funding obligation of $3.7
million as of December 31, 1998 with respect to these securitization
transactions.
Certain Financial Information Regarding Our Securitizations. During the
first three quarters of 1998, we securitized an aggregate of $222.8 million in
contracts, issuing $161.1 million in Class A certificates, and $61.7 million in
Class B certificates. During the fourth quarter of 1998, we securitized $69.3
million in contracts, issuing $50.6 million of Class A certificates. Due to the
revised securitization structure, the $69.3 million of loans remained classified
as Finance Receivables, and the $50.6 million in Class A certificates were
classified as Notes Payable in our Consolidated Balance Sheet. During the year
ended December 31, 1997, we securitized an aggregate of $151.7 million in
contracts, issuing $121.4 million in Class A certificates, and $30.3 million in
Class B certificates. In 1996, we securitized an aggregate of $58.2 million in
contracts, issuing $44.7 million in Class A certificates, and $13.5 million in
Class B certificates.
25
<PAGE>
We recorded the carrying value of the Residuals in Finance Receivables sold
at $36.5 million in 1998, and $17.7 million in 1997. The balance of the
Residuals in Finance Receivables sold was $33.3 million as of December 31, 1998
and $13.3 million as of December 31, 1997.
The table below summarizes certain attributes of our securitizations:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ------------------ ------------------
<S> <C> <C> <C>
Weighted Average Yield of Certificates Issued.......... 5.9% 6.7% 8.4%
Range of Yields for Certificates Issued................ 5.6% - 6.1% 6.3% - 8.1% 8.2% - 8.6%
Average Net Spreads (after fees and expenses).......... 17.6% 15.8% 17.1%
Range of Net Spreads (after fees and expenses)......... 17.0% - 18.1% 13.7% - 17.8% 16.8% - 17.4%
</TABLE>
The decrease in net spreads from 1996 to 1997, despite lower certificate
yields, is primarily the result of the decrease in the average contract yield of
the finance receivable contracts securitized due to our expansion into markets
with interest rate limits.
Residuals in Finance Receivables Sold, which are a component of Finance
Receivables, represent our retained portion (the Class B certificates) of the
loans we securitized prior to the fourth quarter of 1998. We utilize a number of
assumptions to determine the initial value of the Residuals in Finance
Receivables Sold. The Residuals in Finance Receivables Sold represent the
present value of the expected net cash flows of the securitization trusts using
the out of the trust method. The net cash flows out of the trusts are the
collections on the loans in the trust in excess of the Class A certificate
principal and interest payments and certain other trust expenses. The
assumptions used to compute the Residuals in Finance Receivables Sold include,
but are not limited to:
o charge off rates,
o repossession recovery rates,
o portfolio delinquency,
o prepayment rates, and
o trust expenses.
The Residuals in Finance Receivables Sold are adjusted monthly to
approximate the present value of the expected remaining net cash flows out of
the trust. To the extent that actual cash flows on a securitization are below
our original estimates, and those differences appear to be other than temporary
in nature, we are required to revalue Residuals in Finance Receivables Sold and
record a charge to earnings based upon the reduction. During the third quarter
of 1997, we recorded a $5.7 million charge (approximately $3.4 million, net of
income taxes) to dealership operations to write down the Residuals in Finance
Receivables Sold. We 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. The charge resulted in a reduction in the carrying
value of the our Residuals in Finance Receivables Sold and had the effect of
increasing the cumulative net loss at loan origination assumption to
approximately 27.5% for the securitization transactions that took place prior to
September 30, 1997. The revised loss assumption approximates the assumption used
for the securitization transaction consummated during the third quarter of 1997.
For the securitizations that we completed during the nine month period ended
September 30, 1998, net losses were estimated using total expected cumulative
net losses at loan origination of approximately 29.0%, adjusted for actual
cumulative net losses prior to securitization.
One of the assumptions inherent in the valuation of the Residuals in Finance
Receivables Sold is the projected portfolio net charge offs. The remaining net
charge offs in the Residuals in Finance Receivables Sold as a percentage of the
remaining principal balances of securitized contracts was approximately 14.9% as
of December 31, 1998, compared to 17.9% as of December 31, 1997. This decrease
is primarily due to having a more seasoned securitized portfolio as of December
31, 1998 than at December 31, 1997. As a greater portion of our losses tend to
take place in the early stages of the portfolio's existence, a more seasoned
portfolio will have fewer losses remaining than a portfolio that has not aged as
much. There can be no assurance that the charge we recorded in the third quarter
of 1997 was sufficient and that we will not need to record additional charges in
the future in order to write down the Residuals in Finance Receivables Sold.
We classify the residuals as "held-to-maturity" securities in accordance
with SFAS No. 115.
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Liquidity and Capital Resources
In recent periods, our needs for additional capital resources have increased
in connection with the growth of our business. We require capital for:
o increases in our contract portfolio,
o expansion of our dealership network,
o our commitments under the FMAC transaction,
o expansion of the Cygnet dealer program,
o common stock repurchases,
o the purchase of inventories,
o the purchase of property and equipment, and
o working capital and general corporate purposes.
We fund our capital requirements primarily through:
o operating cash flow,
o our revolving facility with General Electric Capital Corporation,
o securitization transactions,
o supplemental borrowings, and
o in the past, equity offerings.
While to date we have met our liquidity requirements as needed, there can be
no assurance that we will be able to continue to do so in the future.
Operating Cash Flow
Net Cash Provided by Operating Activities increased by $29.9 million in the
year ended December 31, 1998 to $22.1 million from cash used in the year ended
December 31, 1997 of $7.8 million. The increase in 1998 was due primarily to
increases in the Loss from Discontinued Operations, the Provision for Credit
Losses, and Proceeds from the Sale of Finance Receivables, net of decreases in
Net Earnings and purchases of Finance Receivables. Net Cash Used by Operating
Activities totaled $7.8 million in the year ended December 31, 1997 compared to
Cash Provided by Operating Activities of $23.8 million in 1996. This increase in
cash used in 1997 over cash provided in 1996 was primarily due to increases in
the purchases of Finance Receivables and Inventory, and a reduction in
collections of Finance Receivables, net of increases in the Provision for Credit
Losses and Proceeds from the Sale of Finance Receivables.
Net Cash Used in Investing Activities decreased by $12.2 million to $98.7
million in the year ended December 31, 1998 compared to $110.9 million in 1997.
The decrease is primarily due to increases in Cash Used in Investing Activities
from purchases of Finance Receivables, net decreases in Cash advanced under our
Notes Receivable, increased collections of Notes Receivable, and a reduction in
payment for Acquisition of Assets. Net Cash Used in Investing Activities
increased by $100.3 million to $110.9 million in the year ended December 31,
1997 compared to $10.5 million in 1996. The increase was due primarily to net
increases in Notes Receivable of $25.9 million and Payment for Acquisition of
Assets of $45.2 million.
Net Cash Provided by Financing Activities decreased by $40.5 million to
$69.0 million in the year ended December 31, 1998 compared to $109.5 million in
the comparable period in 1997. The decrease is due to increases in Notes
Payable, net of increases in repayments of Notes Payable and a decrease in
proceeds from the issuance of common stock. Net Cash Provided by Financing
Activities decreased by $69.3 million to $109.5 million in the year ended
December 31, 1997 compared to $40.1 million in 1996. The increase was primarily
due to increases in the issuance of Notes Payable, reduction in repayments of
Notes Payable and a lack of any redemption of Preferred Stock.
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Financing Resources
Revolving Facility. In September 1998, we amended our revolving credit
facility with General Electric Capital Corporation ("GE Capital") increasing the
maximum commitment to $125.0 million. Under the revolving facility, we may
borrow:
o up to 65.0% of the principal balance of eligible contracts originated from
the sale of used cars,
o up to 86.0% of the principal balance of eligible contracts previously
originated by our branch office network,
o the lesser of $20 million or 58% of the direct vehicle costs for
eligible vehicle inventory, and
o starting in January 1999, the lesser of $15 million or 50% of eligible
contracts or loans originated under the Cygnet dealer program.
However, an amount up to $8.0 million of the borrowing capacity under the
revolving facility is not available at any time while our guarantee to the
purchaser of contracts acquired from FMAC is outstanding. See
"Business--Non-Dealership Operations--Bulk Purchasing and Loan Servicing
Operations."
The revolving facility expires in June 2000 and contains a provision that
requires us to pay GE Capital a termination fee of $200,000 if we terminate the
revolving facility prior to the expiration date. We secure the facility with
substantially all of our assets.
As of December 31, 1998, our borrowing capacity under the revolving facility
was $55.5 million, the aggregate principal amount outstanding under the
revolving facility was approximately $52.0 million, and the amount available to
be borrowed under the facility was $3.5 million. The revolving facility bears
interest at the 30-day LIBOR plus 3.15%, payable daily (total rate of 8.40% as
of December 31, 1998).
The revolving facility contains covenants that, among other things, limit
our ability to do the following without GE Capital's consent:
o incur additional indebtedness,
o make any change in our capital structure,
o 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, and
o make certain investments and capital expenditures.
The revolving facility also provides that an event of default will occur if
Mr. Ernest C. Garcia II owns less than 15.0% of our voting stock. Mr. Garcia
owned approximately 29.8% of our common stock at December 31, 1998.
In addition, we are also required to:
o be Year 2000 compliant no later than June 30, 1999 (see discussion below
under "Year 2000 Readiness Disclosure"), and
o maintain specified financial ratios, including a debt to equity ratio of
2.2 to 1 and a net worth of at least $110,000,000.
Under the terms of the revolving facility, we are required to maintain an
interest coverage ratio and a cash flow based interest coverage ratio that we
failed to satisfy during the year ended December 31, 1998. We failed to meet
these covenants primarily as a result of the charges we took during 1998 for the
closure of our branch office network. GE Capital has waived the covenant
violations as of December 31, 1998.
Securitizations. Our securitization program is a primary source of our
working capital. Since September 30, 1997, we have closed all of our
securitizations with private investors through Greenwich Capital Markets, Inc.
("Greenwich Capital"). In March 1999, we executed a commitment letter with
Greenwich Capital to act as our exclusive agent in placing up to $300 million of
surety wrapped securities under our securitization program.
Securitizations generate cash flow for us from:
o the sale of Class A certificates,
o ongoing servicing fees, and
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o excess cash flow distributions from collections on the contracts
securitized after:
o payments on the Class A certificates sold to third party investors,
o payment of fees, expenses, and insurance premiums, and
o required deposits to the spread account.
Securitization also allows us to fix our cost of funds for a given contract
portfolio. Failure to regularly engage in securitization transactions will
adversely affect us. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Securitizations-Dealership Operations" for
a more complete description of our securitization program.
Supplemental Borrowings
Verde Debt. Prior to our public offering in September 1996, we historically
borrowed substantial amounts from Verde Investments Inc. ("Verde"), which is
owned by our Chairman and Chief Executive Officer, Ernest C. Garcia. The
Subordinated Notes Payable balances outstanding to Verde totaled $10.0 million
as of December 31, 1998 and $12 million as of December 31, 1997. Prior to
September 21, 1996, these borrowings accrued interest at an annual rate of
18.0%. Effective September 21, 1996, the annual interest rate on these
borrowings was reduced to 10.0%. Under the terms of this note, we are required
to make monthly payments of interest and annual payments of principal in the
amount of $2.0 million. Except for the debt incurred related to the exchange
offer (see below), this debt is junior to all of our other indebtedness and we
may suspend interest and principal payments if we are in default on obligations
to any other creditors. In July 1997, our Board of Directors approved the
prepayment of the $10.0 million in subordinated debt after the earlier of the
following:
o the completion of a debt offering, or
o at such time as the following:
o the FMAC transactions have been completed or the cash requirements for
completion of the transaction are known, or
o we either have cash in excess of our current needs or have funds available
under our financing sources in excess of our current needs.
No such prepayment has been made as of the date of filing of this Form 10-K.
Any prepayment would require the consent of certain of our lenders.
Senior Subordinated Notes. In February 1998, we borrowed a total of $15.0
million of subordinated debt from unrelated third parties for a three year term.
We pay interest on this debt quarterly at 12% per annum. This debt is:
o senior to the Verde subordinated note (described above) and the
subordinated debentures issued in our exchange offer (described below),
and
o subordinate to our other indebtedness.
We issued warrants to the lenders of this debt to purchase up to 500,000
shares of our common stock at an exercise price of $10.00 per share, exercisable
at any time until the later of February 2001, or when the debt is paid in full.
In July 1998, we borrowed a total of $5.0 million in subordinated debt from
unrelated third parties for a three-year term. Under the terms of the loan
agreement, we were required to issue warrants to purchase 115,000 shares of our
common stock by December 31, 1998 if the loan was not paid in full by that date.
The warrants were to have been issued at an exercise price of 120% of the
average trading price for our common stock for the 20 consecutive trading days
prior to the issuance of the warrants. In January 1999, we prepaid $1.8 million
of the loans and the lenders waived their right to a proportionate amount of the
warrants. We have agreed to pay $1.2 million by March 31, 1999 and the remaining
$2.0 million on June 30, 1999. We will not be required to issue the warrants if
we repay the loans on these dates.
Sale-Leaseback of Real Property. In March 1998, we executed an agreement
with an investment company for the sale and leaseback of up to $37.0 million in
real property. We sold certain real property to the investment company for its
original cost and leased back the properties for an initial term of twenty
years. We have the right to extend the leases in certain cases. We pay monthly
rents of approximately one-twelfth of 10.75% of the purchase price plus all
occupancy costs and taxes. The agreement calls for annual increases in monthly
rent of not less than 2%. As of December 31, 1998, we had sold approximately
$27.4 million of property under this arrangement. However, we do not anticipate
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closing any additional transactions under this agreement with the investment
company. We used substantially all of the proceeds from the sales to pay down
debt.
Exchange Offer. In the fourth quarter of 1998, we acquired approximately 2.7
million shares of our common stock in exchange for approximately $17.5 million
of subordinated debentures. The debentures are unsecured and are subordinate to
all of our existing and future indebtedness. We must pay interest on the
debentures twice a year at 12% per year. We are required to pay the principal
amount of the debentures on October 23, 2003.
We issued the debentures at a premium of approximately $3.9 million over the
market value of the shares of our common stock that were exchanged for the
debentures. Accordingly, the debt was recorded at $13.6 million on our balance
sheet. The premium will be amortized over the life of the debentures and results
in an effective annual interest rate of approximately 18.8%. We can redeem all
or part of the debentures at any time.
As a result of the exchange offer, the number of our common shares
outstanding decreased to approximately 15,845,000 compared to approximately
18,533,000 shares outstanding prior to the exchange offer.
Additional Financing. On November 12, 1998, we borrowed $15.0 million for a
term of 364 days from Greenwich Capital. We pay interest on this loan at an
interest rate equal to LIBOR plus 400 basis points. We secured the loan with the
common stock of our securitization subsidiaries. In March 1999, we borrowed
$20.0 million for a term of 278 days from Greenwich Capital. $1.5 million was
used to repay the remaining balance of the $15 million Greenwich Capital loan.
The new loan was secured by the common stock of our securitization subsidiaries.
The interest rate is at LIBOR plus 500 basis points and we paid an origination
fee of 100 basis points.
In March 1999, we executed a commitment letter with Greenwich Capital in
which, subject to satisfaction of certain conditions, Greenwich Capital agreed
to provide us with a $100 million surety-wrapped warehouse line of credit at a
rate equal to LIBOR plus 110 basis points. In addition, on March 26, 1999, we
borrowed approximately $28.9 million from Greenwich Capital under a repurchase
facility with a 62% advance rate, bearing interest at 8.5%, and maturing May 31,
1999.
Debt Shelf Registration. In 1997, we registered up to $200 million of our
debt securities under the Securities Act of 1933. There can be no assurance that
we will be able to use this registration statement to sell debt securities, or
successfully register and sell other debt securities in the future.
Capital Expenditures and Commitments
We have pursued an aggressive growth strategy. During the year ended
December 31, 1998, we opened 17 new dealerships. We also have six more
dealerships under development. The magnitude of the direct cost of opening a
dealership is primarily a function of whether we lease a facility or construct a
facility. A leased facility costs approximately $650,000 to develop, while a
facility we construct costs approximately $ 1.7 million. In addition, we require
capital to finance the portfolio that we carry on our balance sheet for each
store. It takes approximately $2.2 million in cash to support a typical
stabilized store portfolio with our existing 65% advance rate under our GE
facility. Additionally, it takes approximately 30 months for a store portfolio
to reach a stabilized level.
On July 11, 1997, we entered into an agreement to provide "debtor in
possession" financing to FMAC (the "DIP Facility"). As of December 31, 1998, the
maximum commitment on the DIP Facility was $12.4 million and the outstanding
balance on the DIP Facility totaled $11.8 million. Subsequent to December 31,
1998, the maximum commitment was reduced to $11.5 million from the receipt of
certain income tax refunds received by FMAC and remitted to us. See
"Business--Non-Dealership Operations--Bulk Purchasing and Loan Servicing
Operations--DIP Facility".
We intend to finance the construction of new dealerships and the DIP
financing through operating cash flows and supplemental borrowings, including
amounts available under the revolving facility and the securitization program.
Common Stock Repurchase Program. In October 1997, our Board of Directors
authorized a stock repurchase program allowing us to purchase up to one million
shares of our common stock from time to time. Purchases may be made depending on
market conditions, share price and other factors. Our Board of Directors
extended the stock repurchase program in February 1999, to December 31, 1999.
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During 1998, we repurchased 72,000 shares of common stock pursuant to the stock
repurchase program. Subsequent to December 31, 1998, we repurchased
approximately 928,000 additional shares of common stock under this program.
Since January 1, 1998, we have repurchased a total of approximately 3.7
million shares of our common stock under our stock repurchase program and the
exchange offer described above at an average cost of approximately $5.33 per
share.
In September 1997, our Board of Directors approved a director and senior
officer stock purchase loan program. We may make 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 common stock on the open market. These
unsecured loans bear interest at 10% per year. During 1997, senior officers
purchased 50,000 shares of common stock under this program and we loaned
$500,000 to the senior officers for these purchases. During 1998, we made
additional loans under similar terms and conditions to senior officers totaling
approximately $393,000 for the purchase of 40,000 shares of our common stock.
Year 2000 Readiness Disclosure
Many older computer programs refer to years only in terms of their final two
digits. Such programs may interpret the year 2000 to mean the year 1900 instead.
The problem affects not only computer software, but also computer hardware and
other systems containing processors and embedded chips. Business systems
affected by this problem may not be able to accurately process date-related
information before, during or after January 1, 2000. This is commonly referred
to as the Year 2000 problem. Our business could be materially adversely affected
by failures of our own business systems due to the Year 2000 problem as well as
those of our suppliers and business partners. We are in the process of
addressing these issues.
Our Year 2000 compliance program consists of:
o identification and assessment of critical computer programs, hardware and
other business equipment and systems,
o remediation and testing,
o assessment of the Year 2000 readiness of our critical suppliers, vendors
and business partners, and
o contingency planning.
Identification and Assessment
The first component of our Year 2000 compliance program is complete. We have
identified our critical computer programs, hardware, and other equipment to
determine which systems are compliant, or must be replaced or remediated.
Remediation and Testing
Dealership Operations. We recently completed converting our dealership
operations to a single automobile sales and loan servicing system (the "CLASS
System"), which has reduced the scope of our compliance program. We have engaged
an outside consulting firm to assist us with remediating our critical computer
programs that must become Year 2000 compliant. We have finished remediating the
program code and underlying data in the CLASS System and are currently
performing regression testing on the program code modifications. We anticipate
placing the modified program code into production and performing future date
testing on the modified code in April 1999.
Non-Dealership Operations. Our non-dealership loan servicing operations
currently utilize several loan processing and collections programs provided
through third party service bureaus. Based upon certifications we have received
from the software vendors, and independent testing we have performed, we believe
that our loan processing and collections programs are Year 2000 compliant.
Our Cygnet dealer program utilizes one of the same loan processing and
collections programs used by our loan servicing operations. The service bureau
that provides the program has written a custom module for us and has stated the
custom module is Year 2000 compliant. We anticipate performing and completing
independent Year 2000 compliance testing in May 1999.
We believe the remediation of the critical business systems used by our
dealership and non-dealership operations will be substantially completed during
the second quarter of 1999.
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Assessment of Business Partners
We have also identified critical suppliers, vendors, and other business
partners and we are taking steps to determine their Year 2000 readiness. These
steps include interviews, questionnaires, and other types of inquiries. Because
of the large number of business systems that our business partners use and their
varying levels of Year 2000 readiness, it is difficult to determine how any Year
2000 issues of our business partners will affect us. We are not currently aware
of any business relationships with third parties that we believe will likely
result in a significant disruption of our businesses. We believe that our
greatest risk is with our utility suppliers, banking and financial institution
partners, and suppliers of telecommunications services, all of which are
operating within the United States. Potential consequences if we, or our
business partners, are not Year 2000 compliant include:
o failure to operate from a lack of power,
o shortage of cash flow,
o disruption or errors in loan collection and processing efforts, and
o delays in receiving inventory, supplies, and services.
If any of these events occurred, the results could have a material adverse
impact on us and our operations.
Contingency Plans
We are also developing contingency plans to mitigate the risks that could
occur in the event of a Year 2000 business disruption. Contingency plans may
include:
o increasing inventory levels,
o securing additional financing,
o relocating operations to unaffected sites,
o vendor/supplier replacement,
o utilizing temporary manual or spreadsheet-based processes, or
o other prudent actions.
We currently estimate that remediation and testing of our business systems
will cost between $2.2 million and $2.7 million. Most of these costs will be
expensed and funded by our operating line of credit. Expenses to date
approximate $1.9 million, including approximately $51,000 of internal payroll
costs, substantially all of which have been charged to general and
administrative expense. We cannot currently estimate costs associated with
developing and implementing contingency measures. The scheduled completion dates
and costs associated with the various components of our Year 2000 compliance
program described above are estimates and are subject to change.
Seasonality
Historically, we have experienced higher revenues in the first two quarters
of the year than in the latter half of the year. We believe that these results
are due to seasonal buying patterns because many of our customers receive income
tax refunds during the first half of the year, which are a primary source of
down payments on used car purchases.
Inflation
Increases in inflation generally result in higher interest rates. Higher
interest rates on our borrowings would decrease the profitability of our
existing portfolio. To date, inflation has not had a significant impact on our
operations. We seek to limit this risk:
o through our securitization program, which allows us to fix our borrowing
costs,
o by increasing the interest rate charged for contracts originated at our
dealerships (if allowed under applicable law), or
o by increasing the profit margin on the cars sold, and for contracts
acquired from third party dealers under our Cygnet dealer program,
either by acquiring contracts at a higher discount or with a higher APR.
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Accounting Matters
In September 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) which became effective for us
January 1, 1998. SFAS No. 131 establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim reports issued to stockholders. The adoption of
SFAS No. 131 did not have a material impact on us.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employer's Disclosures about
Pensions and Other Postretirement Benefits" (SFAS No. 132) which becomes
effective for us January 1, 1999. SFAS No. 132 establishes standards for the
information that public enterprises report in annual financial statements. We
believe the adoption of SFAS No. 132 will not have a material impact on us.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133) which becomes effective for us July 1,
1999. We believe the adoption of SFAS No. 133 will not have a material impact on
us.
Risk Factors
There are various risks in purchasing our securities or investing in our
business, including those described below. You should carefully consider these
risk factors together with all other information included in this Form 10-K.
We make forward looking statements
This report contains forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The words "believe," "expect," "anticipate," "estimate,"
"project," and similar expressions identify forward looking statements. These
statements may include, but are not limited to, projections of revenues, income,
or loss, estimates of capital expenditures, plans for future operations,
products or services, and financing needs or plans, as well as assumptions
relating to these matters. Forward looking statements speak only as of the date
the statement was made. They are inherently subject to risks and uncertainties,
some of which we cannot predict or quantify. Future events and actual results
could differ materially from the forward looking statements. When considering
each forward looking statement, you should keep in mind the risk factors and
cautionary statements found throughout this Form 10-K and specifically those
found below. We are not obligated to publicly update or revise any forward
looking statements, whether as a result of new information, future events, or
for any other reason.
We have incurred net losses in three of the last five years and could incur
additional net losses in future periods.
We began operations in 1992 and incurred significant operating losses in
1994 and 1995. Although we recorded net earnings in 1996 and 1997, we incurred a
net loss of $5.7 million in 1998. A substantial portion of our net earnings in
1997 and 1996 was attributable to the gains recognized on our securitization
transactions. The net loss in 1998 was due in large part to:
o a charge of approximately $9.1 million ($5.6 million, net of income
taxes) to discontinued operations in the first quarter of 1998 for the
closure of the branch office network,
o a charge of approximately $6.0 million ($3.6 million, net of income
taxes) to discontinued operations during the third quarter of 1998 due
primarily to higher than anticipated loan losses and servicing expenses
in connection with the branch office loan portfolio and to costs
incurred in our terminated rights offering, and
o a change in the fourth quarter of 1998 in the way we structure
securitization transactions for accounting purposes.
There can be no assurance that we will be profitable again in future
periods. Our failure to be profitable can adversely affect the value of our
outstanding securities.
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Factors Determining Our Future Profitability. Our ability to achieve
profitability will depend primarily upon our ability to:
o expand our revenue generating operations while not proportionately
increasing our administrative overhead,
o originate and purchase contracts with an acceptable level of credit risk,
o effectively collect payments due on the contracts in our portfolio and
portfolios we service for others,
o locate sufficient financing, with acceptable terms, to fund and maintain
our operations, and
o adapt to the increasingly competitive market in which we operate.
Our inability to achieve or maintain any or all of these objectives could
have a material adverse effect on our business and the value of our outstanding
securities. Outside factors, such as the economic, regulatory, and judicial
environments in which we operate, will also have an effect on our business.
Our operations depend significantly on external financing.
We have borrowed, and will continue to borrow, substantial amounts to fund
our operations. Our operations require large amounts of capital. If we cannot
obtain the financing we need on a timely basis and on favorable terms, our
business will be adversely affected. We currently obtain our financing through
three primary sources:
o a revolving credit facility with General Electric Capital Corporation;
o securitization transactions; and
o loans from other sources.
Each of these financing sources is described in detail in "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
Revolving Credit Facility with GE Capital. Our revolving facility with GE
Capital is our primary source of operating capital. We have pledged
substantially all of our assets to GE Capital to secure the borrowings we make
under this facility. Although this facility has a maximum commitment of $125
million, the amount we can borrow is limited by the amount of certain types of
assets that we own. In addition, we cannot borrow approximately $8 million of
the capacity while our guarantee to the FMAC Contract Purchaser is in effect. As
of December 31, 1998, we owed approximately $52.0 million under the revolving
facility, and had the ability to borrow an additional $3.5 million. The
revolving facility expires in June 2000. Even if we continue to satisfy the
terms and conditions of the revolving facility, we may not be able to extend its
term beyond the current expiration date.
Securitization Transactions. We can restore capacity under the GE facility
from time to time by securitizing portfolios of finance receivables. Our ability
to successfully complete securitizations in the future may be affected by
several factors, including:
o the condition of securities markets generally,
o conditions in the asset-backed securities markets specifically,
o the credit quality of our loan contract portfolio, and
o the performance of our servicing operations.
The securitization subsidiaries are wholly-owned "bankruptcy remote"
entities. Their assets, including the line items "Residuals in Finance
Receivables Sold" and "Investments Held in Trust", which are a component of
Finance Receivables on our balance sheet, are not available to satisfy the
claims of our creditors.
On November 17, 1998, we announced that we were changing the way that we
structure transactions under our securitization program. In the past, we
structured these transactions as sales for accounting purposes. In the fourth
quarter of 1998, however, we began to structure securitizations for accounting
purposes to retain the financed receivables and related debt on our balance
sheet and recognize the income over the life of the contracts. In the past, gain
on sales of loans in securitization transactions has been material to our
profitability. This change will cause a material adverse effect on our reported
earnings until the net interest earnings from new contracts added to our balance
sheet approximates those net revenues that we historically recognized on our
securitization sales.
34
<PAGE>
Contractual Restrictions. The revolving facility, the securitization
program, and our other credit facilities contain various restrictive covenants
that limit our operations. Under these credit facilities, we must also meet
certain financial tests. As of December 31, 1998, we did not satisfy the
interest coverage ratio and cash flow based interest coverage ratio under the GE
facility. GE Capital waived these defaults for this period. At the present time,
we believe that we are in compliance with the terms and conditions of the
revolving facility and our other credit facilities. Failure to satisfy the
covenants in our credit facilities and/or our securitization program could have
a material adverse effect on our operations.
We have a high risk of credit losses because of the poor creditworthiness of
our borrowers.
Substantially all of the sales financing that we extend and the contracts
that we service are with sub-prime borrowers. Sub-prime borrowers generally
cannot obtain credit from traditional financial institutions, such as banks,
savings and loans, credit unions, or captive finance companies owned by
automobile manufacturers, because of their poor credit histories and/or low
incomes. We have established an Allowance for Credit Losses approximating 26.4%
of contract principal balances as of December 31, 1998 to cover anticipated
credit losses on the contracts currently in our portfolio. Further, the
Allowance for Credit Losses embedded in the Residuals in Finance Receivables
Sold as a percentage of the remaining principal balances of the underlying
contracts was approximately 14.9% as of December 31, 1998. We believe that our
current Allowance for Credit Losses is adequate to cover anticipated credit
losses. There is, however, no assurance that we have adequately provided for, or
will adequately provide for, such credit risks. A significant variation in the
timing of or increase in credit losses on our portfolio would have a material
adverse effect on our net earnings.
We also operate our Cygnet dealer program, under which we provide third
party dealers who finance the sale of used cars to sub-prime borrowers with
warehouse purchase facilities and operating lines of credit primarily secured by
those dealers' retail installment contract portfolios and/or inventory. While we
require third party dealers to meet certain minimum net worth and operating
history criteria before we loan money to them, these dealers may not otherwise
be able to obtain debt financing from traditional lending institutions. Like our
other financing activities, these loans subject us to a high risk of credit
losses that could have a material adverse effect on our operations and ability
to meet our other financing obligations.
We are affected by various 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. Companies in the used vehicle
sales and financing market have also been named as defendants in an increasing
number of class action lawsuits brought by customers claiming violations of
various federal and state consumer credit and similar laws and regulations. In
addition, certain of these companies have filed for bankruptcy protection. These
events:
o have lowered the value of securities of sub-prime automobile finance
companies,
o have made it more difficult for sub-prime lenders to borrow money, and
o could cause more restrictive regulation of this industry.
Compliance with additional regulatory requirements may increase our
operating expenses and reduce our profitability.
Interest rates affect our profitability.
A substantial portion of our financing income results from the difference
between the rate of interest we pay on the funds we borrow and the rate of
interest we earn on the contracts in our portfolio. While we earn interest on
the contracts we own at a fixed rate, we pay interest on our borrowings under
our GE facility at a floating rate. When interest rates increase, our interest
expense increases and our net interest margins decrease. Increases in our
interest expense that we cannot offset by increases in interest income will
lower our profitability.
35
<PAGE>
Impact of Laws Limiting Interest Rates. Historically, we conducted a
significant portion of our used car sales activities in, and a significant
portion of the contracts we service were originated in states that did not
impose limits on the interest rate that a lender may charge. However, we have
expanded, and will continue to expand, into states that impose interest rate
limitations. When a state limits the amount of interest we can charge on our
installment sales contracts, we may not be able to offset any increased interest
expense caused by rising interest rates or greater levels of borrowings under
our credit facilities. Therefore, these interest rate limitations or additional
laws, rules, or regulations that may be adopted in the future can adversely
affect our profitability.
Our business is subject to federal and state regulation, supervision, and
licensing.
We are subject to ongoing regulation, supervision, and licensing under
various federal, state, and local statutes, ordinances, and regulations. Among
other things, these laws:
o require that we obtain and maintain certain licenses and qualifications,
o limit or prescribe terms of the contracts that we originate and/or
purchase,
o require specified disclosures to customers,
o limit our right to repossess and sell collateral, and
o prohibit us from discriminating against certain customers.
We believe that we are currently in substantial compliance with all
applicable material federal, state, and local laws and regulations. We may not,
however, be able to remain in compliance with such laws. If we do not comply
with these laws, we could be fined or certain of our operations could be
interrupted or shut down. Failure to comply could, therefore, have a material
adverse effect on our operations. In addition, the adoption of additional
statutes and regulations, changes in the interpretation of existing statutes and
regulations, or our entry into jurisdictions with more stringent regulatory
requirements could also have a material adverse effect on our operations.
We are dependent on our data processing platforms and other technology. Our
computer systems may be subject to a Year 2000 date failure.
Conversion of Our Data Processing Platforms. We recently converted our chain
of dealerships and related loan servicing data processing operations to a single
computer system. These conversions can cause various implementation and
integration problems that can affect our servicing operations and result in
increases in contract delinquencies and charge-offs and decreases in our
servicing income. Failure to successfully complete our conversions could
materially affect our business and profitability.
Year 2000 Readiness. We are continuing to study our computer systems to
determine our exposure to Year 2000 issues. We expect to make the necessary
modifications or changes to our computer systems to allow them to properly
process transactions relating to the Year 2000 and beyond. We estimate that we
will spend between $2.2 million to $2.7 million for Year 2000 evaluation,
remediation, testing, and replacement. We have spent approximately $1.9 million
to date. If we have to replace certain systems to make them Year 2000 compliant,
we will record the costs as assets and subsequently amortize them. If we have to
modify existing systems, we will expense the costs as incurred. We can be
adversely affected by Year 2000 problems in the business systems of our
suppliers, vendors, and business partners, such as utility suppliers, banking
partners and telecommunication service providers. We can also be adversely
affected if Year 2000 problems result in business disruptions or failures that
impact our customers' ability to make their loan payments. Failure to fully
address and resolve these Year 2000 issues could have a material adverse effect
on our operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Readiness Disclosure."
Our Current Contingency Plan is Being Revised. We depend on our loan
servicing and collection facilities and on long-distance and local
telecommunications access to transmit and process information among our various
facilities. We use a standard program to prepare and store off-site backup tapes
of our main system applications and data files on a routine basis. However, we
believe that we need to revise our current contingency plan because of our
recent system conversions and significant growth. Although we intend to update
our contingency plan during 1999, there could be a failure in the interim. In
addition, the plan as revised may not prevent a system failure or allow us to
timely resolve any systems failure. Also, a natural disaster, calamity, or other
significant event that causes long-term damage to any of these facilities or
that interrupts our telecommunications networks could have a material adverse
effect on our operations.
36
<PAGE>
We have certain risks relating to the FMAC transaction.
We have entered into several transactions in the bankruptcy proceedings of
First Merchants Acceptance Corporation ("FMAC"). We purchased 78% of FMAC's
senior bank debt at a 10% discount. We agreed to pay the selling banks
additional consideration up to the amount of this 10% discount (or approximately
$7.6 million) if FMAC makes cash payments or issues notes at market rates to its
unsecured creditors and equity holders in excess of 10% of their allowed claims
against FMAC. FMAC may make future cash payments to its unsecured creditors and
equity holders from recoveries on the contracts which originally secured the
senior bank debt and from certain residual interests in FMAC's securitized loan
pools, after FMAC pays certain other amounts ("Excess Collections").
Under FMAC's plan of reorganization, we will split these Excess Collections with
FMAC.
If we satisfy certain requirements, we may be able to issue shares of our
common stock in exchange for all or part of FMAC's share of the Excess
Collections. This would reduce the cash distributions that could be made to
FMAC's unsecured creditors and/or equity holders. We would then be entitled to
receive FMAC's share of the Excess Collections. The shares would be priced at
98% of the average closing price of our common stock for the 10 trading days
prior to the date of issuance. This market price must be at least $8.00 per
share or we cannot exercise this option.
Even if we are able to issue common stock for this purpose:
o the number of shares that we issue may not be sufficient to prevent FMAC
from paying unsecured creditors and equity holders more than 10% of
their claims against FMAC. Should this happen, we would be required to
pay the selling banks additional consideration for our purchase of 78%
of FMAC's senior bank debt, and
o the issuance of shares would cause dilution to our common stock.
We also have other risks in the FMAC bankruptcy case:
o we sold the contracts securing the bank claims at a profit to a third
party purchaser (the "Contract Purchaser"). We guaranteed the Contract
Purchaser a specified return on the contracts with a current maximum of
$8 million. Although we obtained a related guarantee from FMAC secured
by certain assets, there is no assurance that the FMAC guarantee will
cover all of our obligations under our guarantee to the Contract
Purchaser,
o we have made debtor-in-possession loans to FMAC, secured by certain
assets. We have continuing obligations under our debtor-in-possession
credit facility. FMAC is currently in default on the DIP Facility and we
are negotiating a settlement with them that might increase our funding
obligation in exchange for other concessions,
o we entered into various agreements to service the contracts in the
securitized pools of FMAC and the contracts sold to the Contract
Purchaser. If we lose our right to service these contracts, our 17 1/2%
share of the Excess Collections can be reduced or eliminated.
Each of the FMAC risks described in this section could have a material
adverse effect on our operations.
If we make additional acquisitions, there is no assurance they will be
successful.
In 1997 we completed three significant acquisitions (Seminole, E-Z Plan, and
Kars). We intend to consider additional acquisitions, alliances, and
transactions involving other companies that could complement our existing
business. We may not, however, be able to identify suitable acquisition parties,
joint venture candidates, or transaction counterparties. Additionally, even if
we can identify suitable parties, we may not be able to consummate these
transactions on terms that we find favorable.
Furthermore, we may not be able to successfully integrate any businesses
that we acquire into our existing operations. If we cannot successfully
integrate acquisitions, our operating expenses may increase in the short-term.
This increase would affect our net earnings, which could adversely affect the
value of our outstanding securities. Moreover, these types of transactions 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 our profitability. In addition to
the risks already mentioned, these transactions involve numerous other risks,
including the diversion of management attention from other business concerns,
entry into markets in which we have had no or only limited experience, and the
potential loss of key employees of acquired companies. Occurrence of any of
these risks could have a material adverse effect on us.
37
<PAGE>
Our industry is highly competitive.
Although a large number of smaller companies have historically operated in
the used car sales industry, this industry has recently attracted significant
attention from a number of large companies. These large companies include
AutoNation, U.S.A., CarMax, and Driver's Mart. These companies have either
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. We believe 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 we do.
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. Through these public offerings, these
companies have been able 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
higher prices than we would be willing to pay.
There are numerous financial services companies serving, or capable of
serving, our market. These companies include traditional financial institutions
such as banks, savings and loans, credit unions, and captive finance companies
owned by automobile manufacturers, as well as other non-traditional consumer
finance companies, many of which have significantly greater financial and other
resources than our own. Increased competition may cause downward pressure on the
interest rates that we charge. This pressure could affect the interest rates we
charge on contracts originated by our dealerships or cause us to reduce or
eliminate the acquisition discount on the contracts we purchase from third party
dealers. Either change could have a material adverse effect on the value of our
securities.
The success of our operations depends on certain key personnel.
We believe that our ability to successfully implement our business strategy
and to operate profitably depends on the continued employment of our senior
management team. The unexpected loss of the services of any of our key
management personnel or our inability to attract new management when necessary
could have a material adverse effect on our operations. We do not currently
maintain any key person life insurance on any of our executive officers.
We may be required to issue stock in the future that will dilute the value of
our existing stock.
Issuance of any or all of the following securities may dilute the value of
the securities that our existing stockholders now hold:
o we have granted warrants to purchase a total of approximately 1.6
million shares of our common stock to various parties with exercise
prices ranging from $6.75 to $20.00 per share,
o we may be required to issue additional warrants in the future in
connection with both a completed and as yet unidentified transactions,
and
o we may issue common stock in the FMAC transaction in exchange for FMAC's
portion of the Excess Collections.
38
<PAGE>
A significant percentage of our stock is controlled by a principal stockholder.
Mr. Ernest C. Garcia, II, our Chairman, Chief Executive Officer, and
principal stockholder, or his affiliates held approximately 29.8% of our
outstanding common stock as of December 31, 1998. This percentage includes
136,500 shares held by The Garcia Family Foundation, Inc., an Arizona non-profit
corporation, and 88,000 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 our activities as well as on all matters requiring
approval of our stockholders. These matters include electing or removing members
of our board of directors, engaging in transactions with affiliated entities,
causing or restricting our sale or merger, and changing our dividend policy. The
interests of Mr. Garcia may conflict with the interests of our other
stockholders.
There is a potential anti-takeover effect if we issue preferred stock.
Our Certificate of Incorporation authorizes us to issue "blank check"
preferred stock. Our Board of Directors may fix or change from time to time the
designation, number, voting powers, preferences, and rights of this stock. Such
issuances could make it more difficult for a third party to acquire us by
reducing the voting power or other rights of the holders of our common stock.
Although we have no present intention of issuing any shares of our authorized
preferred stock, we may do so in the future.
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
We are exposed to market risk on our financial instruments from changes in
interest rates. We do not use financial instruments for trading purposes or to
manage interest rate risk. Our earnings are substantially affected by our net
interest income, which is the difference between the income earned on
interest-bearing assets and the interest paid on interest bearing notes payable.
Increases in market interest rates could have an adverse effect on
profitability.
Our financial instruments consist primarily of fixed rate finance
receivables, residual interests in pools of fixed rate finance receivables,
short term variable rate revolving Notes Receivable, and variable and fixed rate
Notes Payable. Our finance receivables are classified as subprime loans and
generally bear interest at the lower of 29.9% or the maximum interest rate
allowed in states that impose interest rate limits. At December 31, 1998, the
scheduled maturities on our finance receivables range from one to 52 months with
a weighted average maturity of 31.3 months. The interest rates we charge our
customers on finance receivables has not changed as a result of fluctuations in
market interest rates, although we may increase the interest rates we charge in
the future if market interest rates increase. A large component of our debt at
December 31, 1998 is the Collateralized Note Payable (Class A certificates)
issued under our securitization program. Issuing debt through our securitization
program allows us to mitigate our interest rate risk by reducing the balance of
the variable revolving line of credit and replacing it with a lower fixed rate
note payable. We are subject to interest rate risk on fixed rate Notes Payable
to the extent that future interest rates are higher than the interest rates on
our existing Notes Payable.
The table below illustrates the impact that hypothetical changes in interest
rates could have on our earnings before income taxes over a twelve month period.
We compute the impact on earnings for the period by first computing the baseline
net interest income on our financial instruments with interest rate risk, which
are the variable rate revolving credit lines and the variable rate notes
payable. We then determine the net interest income based on each of the interest
rate changes listed below and compare the results to the baseline net interest
income to determine the estimated change in pretax earnings. The table does not
give effect to our fixed rate receivables and borrowings.
<TABLE>
<CAPTION>
Change in Interest Rates Change in Pretax Earnings
------------------------ -------------------------
(in thousands)
<S> <C>
+ 2% $ (1,208)
+ 1% $ (604)
- 1% $ 627
- 2% $ 1,581
</TABLE>
39
<PAGE>
In computing the effect of hypothetical changes in interest rates, we have
assumed that:
o interest rates used for the baseline and hypothetical net interest income
amounts are in effect for the entire twelve month period,
o interest for the period is calculated on financial instruments held at
December 31, 1998 less contractually scheduled payments and maturities,
and
o there is no change in prepayment rates as a result of the interest rate
changes.
Our sensitivity to interest rate changes could be significantly different if
actual experience differs from the assumptions used to compute the estimates.
40
<PAGE>
ITEM 8 -- CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
Independent Auditors' Report............................................ 42
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1997.......... 43
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996................................................ 44
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997, and 1996.................................. 45
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996................................................ 46
Notes to Consolidated Financial Statements.............................. 47
</TABLE>
41
<PAGE>
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, 1998 and 1997, 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, 1998.
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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
KPMG LLP
Phoenix, Arizona
February 18, 1999
42
<PAGE>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
--------- ---------
(In thousands, except
share amounts)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents......................................... $ 2,751 $ 3,537
Finance Receivables, Net.......................................... 163,209 90,573
Notes Receivable, Net............................................. 28,257 26,745
Inventory......................................................... 44,167 32,372
Property and Equipment, Net....................................... 32,970 39,827
Intangible Assets, Net............................................ 15,530 17,543
Other Assets...................................................... 20,575 11,246
Net Assets of Discontinued Operations............................. 38,516 54,583
--------- ---------
$ 345,975 $ 276,426
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts Payable................................................ $ 2,479 $ 2,867
Accrued Expenses and Other Liabilities.......................... 19,694 14,964
Notes Payable................................................... 55,093 64,821
Collateralized Notes Payable.................................... 62,201 --
Subordinated Notes Payable...................................... 43,741 12,000
--------- ---------
Total Liabilities....................................... 183,208 94,652
--------- ---------
Stockholders' Equity:
Preferred Stock $.001 par value, 10,000,000 shares authorized,
none issued and outstanding.................................. -- --
Common Stock $.001 par value, 100,000,000 shares authorized,
18,605,000 and 18,521,000 issued, respectively, and
15,841,000 and 18,521,000 outstanding, respectively.......... 19 19
Additional Paid in Capital ..................................... 173,809 172,603
Retained Earnings............................................... 3,449 9,152
Treasury Stock, 2,761,000 shares at cost....................... (14,510) --
--------- ---------
Total Stockholders' Equity.............................. 162,767 181,774
Commitments and Contingencies .................................... -- --
--------- ---------
$ 345,975 $ 276,426
========= =========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
43
<PAGE>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands, except earnings
per share amounts)
<S> <C> <C> <C>
Sales of Used Cars...................................... $ 287,618 $ 123,814 $ 53,768
Less:
Cost of Used Cars Sold................................ 167,014 72,358 31,879
Provision for Credit Losses........................... 67,634 23,045 9,657
-------- --------- ---------
52,970 28,411 12,232
-------- --------- ---------
Other Income:
Interest Income....................................... 27,828 18,736 8,597
Gain on Sale of Loans................................. 12,093 14,852 3,925
Servicing and Other Income............................ 38,631 12,681 2,537
-------- --------- ---------
78,552 46,269 15,059
-------- --------- ---------
Income before Operating Expenses........................ 131,522 74,680 27,291
-------- --------- ---------
Operating Expenses:
Selling and Marketing................................. 20,565 10,538 3,585
General and Administrative............................ 92,402 41,902 13,118
Depreciation and Amortization......................... 5,735 3,301 1,382
-------- --------- ---------
118,702 55,741 18,085
-------- --------- ---------
Income before Interest Expense.......................... 12,820 18,939 9,206
Interest Expense........................................ 6,904 2,774 2,429
-------- --------- ---------
Earnings before Income Taxes............................ 5,916 16,165 6,777
Income Taxes............................................ 2,396 6,637 100
-------- --------- ---------
Earnings from Continuing Operations..................... 3,520 9,528 6,677
Discontinued Operations:
Loss from Operations of Discontinued Operations,
net of income tax benefit of $489, $58, and $0..... (768) (83) (811)
Loss from Disposal of Discontinued Operations,
net of income tax benefit of $5,393, $0, and $0.... (8,455) -- --
--------- --------- ---------
Net Earnings (Loss)..................................... $ (5,703) $ 9,445 $ 5,866
========= ========= =========
Earnings per Common Share from Continuing Operations:
Basic................................................. $ 0.19 $ 0.53 $ 0.73
======== ========= =========
Diluted............................................... $ 0.19 $ 0.52 $ 0.69
======== ========= =========
Net Earnings (Loss) per Common Share:
Basic................................................. $ (0.32) $ 0.53 $ 0.63
========= ========= =========
Diluted............................................... $ (0.31) $ 0.52 $ 0.60
========= ========= =========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
44
<PAGE>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1998, 1997, and 1996
(in thousands)
<TABLE>
<CAPTION>
Retained
Number of Shares Amount ($'s) Earnings Total
----------------------------- ------------------- (Accumulated Stockholders'
Preferred Common Treasury Preferred Common Treasury Deficit) Equity
-------- ------- -------- -------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1995........................ 1,000 5,580 -- $10,000 $ 127 $ -- $ (5,243) $ 4,884
Issuance of Common Stock
for Cash................... -- 7,281 -- -- 79,335 -- -- 79,335
Conversion of Debt to
Common Stock................ -- 444 -- -- 3,000 -- -- 3,000
Issuance of Common Stock
to Board of Director's..... -- 22 -- -- 150 -- -- 150
Redemption of Preferred (1,000) -- -- (10,000) -- -- -- (10,000)
Stock......................
Preferred Stock Dividends..... -- -- -- -- -- -- (916) (916)
Net Earnings for the Year..... -- -- -- -- -- -- 5,866 5,866
------- ------- ------ ------- --------- ------ -------- ---------
Balances at December 31,
1996........................ -- 13,327 -- -- 82,612 -- (293) 82,319
Issuance of Common Stock
for Cash................... -- 5,194 -- -- 89,398 -- -- 89,398
Issuance of Common Stock
Warrants.................... -- -- -- -- 612 -- -- 612
Net Earnings for the Year..... -- -- -- -- -- -- 9,445 9,445
------- ------- ------ ------- --------- ------ -------- ---------
Balances at December 31,
1997........................ -- 18,521 -- -- 172,622 -- 9,152 181,774
Issuance of Common Stock
for Casg................... -- 84 -- -- 306 -- -- 306
Issuance of Common Stock
Warrants.................... -- -- -- -- 900 -- -- 900
Purchase of Treasury Stock
for Cash................... -- -- (72) -- -- (535) -- (535)
Acquisition of Treasury
Stock for Subordinated
Debentures................. -- -- (2,689) -- -- (13,975) -- (13,975)
Net Loss for the Year......... -- -- -- -- (5,703) (5,703)
------- ------- --------- ------- --------- -------- --------- ----------
Balances at December 31,
1998........................ -- 18,605 (2,761) $ -- $ 173,828 $(14,510) $ 3,449 $ 162,767
======= ======= ========= ======= ========= ========= ======== =========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
45
<PAGE>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1998 1997 1996
----------- ---------- --------
(In thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Earnings (Loss).......................................... $ (5,703) $ 9,445 $ 5,866
Adjustments to Reconcile Net Earnings (Loss) to Net Cash
Provided by (Used in) Operating Activities from
Continuing Operations:
Loss from Discontinued Operations............................ 9,223 83 811
Provision for Credit Losses.................................. 67,634 23,045 9,657
Gain on Sale of Loans........................................ (12,093) (6,721) (3,925)
Deferred Income Taxes........................................ (3,344) 1,094 498
Depreciation and Amortization................................ 5,735 3,301 1,382
Purchase of Finance Receivables for Sale..................... (207,085) (116,830) (48,996)
Proceeds from Sale of Finance Receivables.................... 159,498 81,098 30,259
Collections of Finance Receivables........................... 22,000 15,554 26,552
Decrease (Increase) in Inventory............................. (11,795) (20,592) 778
Increase in Other Assets..................................... (6,020) (2,779) (2,155)
Increase in Accounts Payable, Accrued Expenses, and Other
Liabilities............................................... 5,425 6,905 2,571
Increase (Decrease) in Income Taxes Receivable/Payable....... (1,233) (1,378) 535
Other, Net................................................... (156) -- --
----------- ---------- --------
Net Cash Provided by (Used in) Operating Activities
of Continuing Operations................................. 22,086 (7,775) 23,833
---------- ---------- --------
Cash Flows from Investing Activities:
Increase in Finance Receivables.............................. (111,467) (20,941) --
Collections of Finance Receivables........................... 22,779 9,160 --
Increase in Investments Held in Trust........................ (13,802) (8,475) (3,162)
Advances under Notes Receivable.............................. (13,669) (32,782) --
Repayments of Notes Receivable............................... 11,857 6,900 137
Proceeds from disposal of Property and Equipment............. 27,413 -- --
Purchase of Property and Equipment........................... (21,786) (19,509) (5,549)
Payment for Acquisition of Assets............................ -- (45,220) --
Other, Net................................................... -- -- (1,944)
---------- ---------- --------
Net Cash Used in Investing Activities of Continuing
Operations.............................................. (98,675) (110,867) (10,518)
---------- ---------- --------
Cash Flows from Financing Activities:
Additions to Notes Payable................................... 95,191 22,228 1,000
Repayments of Notes Payable.................................. (43,169) -- (28,610)
Issuance of Subordinated Notes Payable....................... 19,630 -- --
Repayment of Subordinated Notes Payable...................... (2,000) (2,000) (553)
Redemption of Preferred Stock................................ -- -- (10,000)
Proceeds from Issuance of Common Stock....................... 306 89,398 79,435
Acquisition of Treasury Stock................................ (535) -- --
Other, Net................................................... (464) (178) (1,158)
---------- ---------- --------
Net Cash Provided by Financing Activities of Continuing
Operations.............................................. 68,959 109,448 40,114
---------- ---------- --------
Net Cash Provided by (Used in) Discontinued Operations......... 6,844 (5,724) (36,393)
---------- ---------- --------
Net Increase (Decrease) in Cash and Cash Equivalents........... (786) (14,918) 17,036
Cash and Cash Equivalents at Beginning of Year................. 3,537 18,455 1,419
---------- ---------- --------
Cash and Cash Equivalents at End of Year....................... $ 2,751 $ 3,537 $ 18,455
========== ========== ========
Supplemental Statement of Cash Flows Information:
Interest Paid................................................ $ 10,483 $ 5,382 $ 5,144
Income Taxes Paid............................................ 1,633 6,570 450
Assumption of Debt in Connection with Acquisition of Assets.. -- 29,900 --
Conversion of Note Payable to Common Stock................... -- -- 3,000
Purchase of Property and Equipment with Notes Payable........ 825 -- 8,313
Purchase of Property and Equipment with Capital Leases....... -- 357 57
Purchase of Treasury Stock with Subordinated Notes Payable... 13,835 -- --
Issuance of Warrants for Subordinated Note Payable........... 900 -- --
</TABLE>
See accompanying notes to Consolidated Financial Statements.
46
<PAGE>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Organization and Acquisitions
Ugly Duckling Corporation, a Delaware corporation (the Company), was
incorporated in April 1996 as the successor to Ugly Duckling Holdings, Inc.
(UDH), an Arizona corporation formed in 1992. Contemporaneous with the formation
of the Company, UDH was merged into the Company with each share of UDH's common
stock exchanged for 1.16 shares of common stock in the Company and each share of
UDH's preferred stock exchanged for one share of preferred stock in the Company
under identical terms and conditions. UDH was effectively dissolved in the
merger. The resulting effect of the merger was a recapitalization increasing the
number of authorized shares of common stock to 20,000,000 and a 1.16-to-1 common
stock split effective April 24, 1996. The stockholders' equity section of the
Consolidated Balance Sheets and the Statements of Stockholders' Equity reflect
the number of authorized shares after giving effect to the merger and common
stock split. The Company's principal stockholder is also the sole stockholder of
Verde Investments, Inc. (Verde). The Company's subordinated debt is held by, and
the land for certain of its car dealerships and loan servicing facilities was
leased from Verde until December 31, 1996, see Note 16.
During 1997, the Company completed several acquisitions. In January 1997,
the Company acquired substantially all of the assets of Seminole Finance
Corporation and related companies (Seminole) including four dealerships in
Tampa/St. Petersburg and a contract portfolio of approximately $31.1 million in
exchange for approximately $2.5 million in cash and assumption of $29.9 million
in debt. In April 1997, the Company purchased substantially all of the assets of
E-Z Plan, Inc. (EZ Plan), including seven dealerships in San Antonio and a
contract portfolio of approximately $24.3 million in exchange for approximately
$26.3 million in cash. In September 1997, the Company acquired substantially all
of the dealership and loan servicing assets (but not the loan portfolio) of
Kars-Yes Holdings Inc. and related companies (Kars), including six dealerships
in the Los Angeles market, two in the Miami market, two in the Atlanta market
and two in the Dallas market, in exchange for approximately $5.5 million in
cash. These acquisitions were recorded in accordance with the "purchase method"
of accounting, and, accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based upon the estimated fair
values at the date of acquisition. The excess of the purchase price over the
fair values of the net assets acquired was approximately $16.0 million and has
been recorded as goodwill, which is being amortized over periods ranging from
fifteen to twenty years. The results of operations of the acquired operations
have been included in the accompanying statements of operations from the
respective acquisition dates.
(2) Discontinued Operations
In February 1998, the Company announced its intention to close its branch
office network (the "Branch Offices") through which the Company purchased retail
installment contracts, and exit this line of business in the first quarter of
1998. The Company recorded a pre-tax charge to discontinued operations of $15.1
million (approximately $9.2 million, net of income taxes) in 1998. The closure
was substantially complete as of March 31, 1998 and included the termination of
approximately 400 employees, substantially all of whom were employed at the
Company's 76 branches that were in place on the date of the announcement.
Approximately $1.7 million of the discontinued operations charge was for
termination benefits, $6.7 million for portfolio allowance and collection costs,
$2.5 million for write-off of pre-opening and start-up costs, and the remainder
for lease payments on idle facilities, writedowns of leasehold improvements,
data processing and other equipment. The Company has reclassified the
accompanying consolidated balance sheets and consolidated statements of
operations of the Branch Offices to Discontinued Operations.
In April 1998, the Company announced that its Board of Directors directed
management to proceed with separating the Company's operations into two
companies. The Company formed a new subsidiary to operate the Cygnet Dealer
Program and Cygnet Financial Services ("Non Dealership Operations"). A proposal
to split-up the Company through a rights offering was approved by stockholders
at the annual meeting held in August 1998 and rights were subsequently issued to
Company stockholders. The Company had previously reported the net assets,
results of operations, and cash flows of the Non Dealership Operations in
Discontinued Operations. However, the rights offering failed due to a lack of
shareholder participation. The Board of Directors has directed management to
cease its efforts, for the time being, to separate the Non Dealership Operations
of the Company. As a result of the aforementioned, the assets, liabilities,
results of operations, and cash flows of the Non Dealership Operations have been
reclassified into continuing operations for the periods presented in these
consolidated financial statements. Total assets and liabilities for Non
Dealership Operations were $77.2 million and $8.7 million, and $49.9 million and
$559,000 at December 31, 1998 and 1997, respectively. Revenues and Earnings
47
<PAGE>
(Loss) before Interest Expense were $32,837,000 and $3,993,000, $14,664,000 and
$11,331,000, and zero and zero, respectively, for the years ended December 31,
1998, 1997, and 1996. The Company did not record any charges to record the net
assets of the Non Dealership Operations at net realizable value at the time the
separation was announced, and, consequently, did not reverse any loss accruals
during 1998.
The components of Net Assets of Discontinued Operations as of December 31,
1998 and December 31, 1997 follow (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
--------- --------
<S> <C> <C>
Finance Receivables, net..................... $ 30,649 $ 26,780
Residuals in Finance Receivables Sold........ 7,875 16,099
Investments Held in Trust.................... 3,665 7,277
Property and Equipment....................... 1,198 1,424
Capitalized Start-up Costs................... -- 2,453
Other Assets, net of Accounts Payable and
Accrued Liabilities........................ 1,153 550
Disposal Liability........................... (6,024) --
--------- --------
$ 38,516 $ 54,583
======== ========
</TABLE>
Following is a summary of the operating results of the Discontinued
Operations for the years ended December 31, 1998, 1997, and 1996 (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Revenues................................. $ 3,095 $ 21,213 $ 7,768
Expenses................................. (18,200) (21,354) (8,579)
-------- -------- -------
Loss before Income Tax (Benefit)......... (15,105) (141) (811)
Income Tax Benefit....................... (5,882) (58) --
--------- --------- -------
Loss from Discontinued Operations........ $ (9,223) $ (83) $ (811)
========= ========= =======
</TABLE>
(3) Summary of Significant Accounting Policies
Operations
The Company, through its subsidiaries, owns and operates used car sales
dealerships, a collateralized dealer finance program, and a third party bulk
purchasing and loan servicing operation. Additionally, Ugly Duckling Receivables
Corporation (UDRC) and Ugly Duckling Receivables Corporation II (UDRC II),
"bankruptcy remote entities" are the Company's wholly-owned special purpose
securitization subsidiaries. Their assets include residuals in finance
receivables sold and investments held in trust, including amounts classified as
discontinued operations, in the amounts of $7,875,000 and $3,665,000,
respectively, at December 31, 1998 and in the amounts of $16,099,000 and
$7,277,000, respectively, at December 31, 1997. These amounts would not be
available to satisfy claims of creditors of the Company.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company
and its subsidiaries. Significant intercompany accounts and transactions have
been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
48
<PAGE>
Concentration of Credit Risk
The Company provides sales finance services in connection with the sales of
used cars to individuals residing in numerous metropolitan areas. The Company
operated a total of 56, 41, and 8 used car dealerships (company dealerships) in
nine, ten and two metropolitan markets at December 31, 1998, 1997, and 1996,
respectively.
As of December 31, 1998, the Company's Cygnet Dealer Program had warehouse
purchase facilities and revolving lines of credit with a total of approximately
63 third party dealers. Cygnet Dealer's net investment in finance receivables
purchased from 2 third party dealers totaled approximately $15.1 million,
representing approximately 34% of Cygnet dealer's net finance receivables
portfolio as of December 31, 1998. There were no other third party dealer loans
that exceeded 10% of the Company's finance receivables portfolio as of December
31, 1998.
Periodically during the year, the Company maintains cash in financial
institutions in excess of the amounts insured by the federal government.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents. Cash equivalents
generally consist of interest bearing money market accounts.
Revenue Recognition
Interest income is recognized using the interest method. Direct loan
origination costs related to contracts originated at Company dealerships are
deferred and charged against finance income over the life of the related
installment sales contract as an adjustment of yield. The accrual of interest is
suspended if collection becomes doubtful, generally 90 days past due, and is
resumed when the loan becomes current. Interest income also includes income on
the Company's residual interests from its Securitization Program.
Revenue from the sales of used cars is recognized upon delivery, when the
sales contract is signed and the agreed-upon down payment has been received.
Residuals in Finance Receivables Sold, Investments Held in Trust, and Gain on
Sale of Loans
In 1996, the Company initiated a Securitization Program under which it sold
(securitized), on a non-recourse basis, finance receivables to a trust which
used the finance receivables to create asset backed securities which were
remitted to the Company in consideration for the sale. The Company then sold
senior certificates (A certificates) to third party investors and retained
subordinated certificates certificates). In consideration of such sale, the
Company received cash proceeds from the sale of certificates collateralized by
the finance receivables and the right to future cash flows under the
subordinated certificates (residual in finance receivables sold, or residual)
arising from those receivables to the extent not required to make payments on
the A certificates sold to a third party or to pay associated costs.
Gains or losses were 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 allocated 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.
To the extent that actual cash flows on a securitization are below original
estimates and differ materially from the original securitization assumptions,
and in the opinion of management, if those differences appear to be other than
temporary in nature, the Company's residual will be adjusted, with corresponding
charges against income in the period in which the adjustment is made. Such
evaluations are performed on a security by security basis, for each certificate
or spread account retained by the Company.
The structure of the Company's securitization transaction consummated in the
fourth quarter of 1998 was changed from the structure of the transactions
previously effected under its Securitization Program and has been accounted for
as a secured financing in accordance with SFAS 125, Accounting for Transfers and
49
<PAGE>
Servicing of Financial Assets and Extinguishments of Liabilities (SFAS No. 125).
The loan contracts included in the transaction remain in Finance Receivables and
the A Certificates are reflected in Collateralized Notes Payable.
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 Finance Receivables.
Residuals in Finance Receivables Sold are classified as "held-to-maturity"
securities in accordance with SFAS No. 115.
Servicing Income
Servicing Income is recognized when earned. Servicing costs are charged to
expense as incurred. In the event delinquencies and/or losses on the portfolio
serviced exceed specified levels, the Company may be required to transfer the
servicing of the portfolio to another servicer.
Finance Receivables and Allowance for Credit Losses
Finance receivables consist of contractually scheduled payments from
installment sales contracts net of unearned finance charges, accrued interest
receivable, direct loan origination costs, investments held in trust, and an
allowance for credit losses, including nonaccretable discounts.
The Company follows the provisions of Statement of Financial Accounting
Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases." Direct loan
origination costs represent the unamortized balance of costs incurred in the
origination of contracts at the Company's dealerships.
An allowance for credit losses (allowance) is established by charging the
provision for credit losses and the allocation of acquired allowances. 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 an 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 nonaccretable discount 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 credit losses, additions to the allowance are established through a
charge to the provision for credit losses. The evaluation of the allowance
considers such factors as the performance of each dealerships loan portfolio,
the Company's historical credit losses, the overall portfolio quality and
delinquency status, the review of specific problem loans, the value of
underlying collateral, and current economic conditions that may affect the
borrower's ability to pay.
Notes Receivable
Notes receivable are recorded at cost, less related allowance for impaired
notes receivable. Management, considering information and events regarding the
borrowers ability to repay their obligations, including an evaluation of the
estimated value of the related collateral, considers a note to be impaired when
it is probable that the Company will be unable to collect amounts due according
to the contractual terms of the note agreement. When a loan is considered to be
impaired, the amount of impairment is measured based on the present value of
expected future cash flows discounted at the note's effective interest rate or
the fair value of the collateral if the loan is collateral dependent. Impairment
losses are included in the allowance for credit losses through a charge to the
provision for credit losses. Cash receipts on impaired notes receivable are
applied to reduce the principal amount of such notes until the principal has
been received and are recognized as interest income, thereafter.
50
<PAGE>
Inventory
Inventory consists of used vehicles held for sale which is valued at the
lower of cost or market, and repossessed vehicles which are valued at market
value. Vehicle reconditioning costs are capitalized as a component of inventory
cost. The cost of used vehicles sold is determined on a specific identification
basis.
Property and Equipment
Property and Equipment are stated at cost. Depreciation is computed using
straight-line and accelerated methods over the estimated useful lives of the
assets which range from three to ten years for equipment and thirty years for
buildings. Leasehold and land improvements are amortized using straight-line and
accelerated methods over the shorter of the lease term or the estimated useful
lives of the related improvements.
The Company has capitalized costs related to the development of software
products for internal use. Capitalization of costs begins when technological
feasibility has been established and ends when the software is available for
general use. Amortization is computed using the straight-line method over the
estimated economic life of five years.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally fifteen to twenty years.
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.
Stock Option Plan
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation
expense is recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. The Company has adopted the
disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
which permits entities to provide pro forma net earnings and pro forma earnings
per share disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method as defined in SFAS No. 123 had been
applied.
The Company uses one of the most widely used option pricing models, the
Black-Scholes model (Model), for purposes of valuing its stock option grants.
The Model was developed for use in estimating the fair value of traded options
that 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.
51
<PAGE>
Earnings Per Share
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company.
Impairment of Long-Lived Assets
Long-Lived Assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to
future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
The Company adopted the provisions of SFAS No. 125 on January 1, 1997. This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Adoption of SFAS No. 125 did not have a
material impact on the Company.
Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statement amounts to conform to the current year presentation.
(4) Finance Receivables and Allowance for Credit Losses
A summary of finance receivables as of December 31, 1998 and 1997 follows
(in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
1998 1997
---------------------------------- ---------------------------------
Non Non
Dealership Dealership Dealership Dealership
Operations Operations Total Operations Operations Total
--------- ---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Installment Sales Contract Principal
Balances............................ $ 93,936 $ 51,282 $145,218 $ 55,965 $ 27,480 $ 83,445
Add: Accrued Interest Receivable....... 877 473 1,350 462 147 609
Loan Origination Costs, Net............ 2,237 -- 2,237 1,431 -- 1,431
-------- -------- -------- -------- -------- --------
Principal Balances, Net................ 97,050 51,755 148,805 57,858 27,627 85,485
Residuals in Finance Receivables Sold.. 33,331 2,625 35,956 13,277 -- 13,277
Investments Held in Trust.............. 20,564 -- 20,564 10,357 -- 10,357
-------- -------- -------- -------- -------- --------
150,945 54,380 205,325 81,492 27,627 109,119
Allowance for Credit Losses............ (24,777) (2,024) (26,801) (10,356) (1,035) (11,391)
Discount on Acquired Loans............. -- (15,315) (15,315) -- (7,155) (7,155)
-------- --------- -------- -------- --------- --------
Finance Receivables, net............... $126,168 $ 37,041 $163,209 $ 71,136 $ 19,437 $ 90,573
======== ======== ======== ======== ======== ========
Classification:
Finance Receivables Held for Sale $ -- $ -- $ -- $ 52,000 $ -- $ 52,000
Finance Receivables Held for Investment 97,050 51,755 148,805 5,858 27,627 33,485
-------- -------- -------- -------- -------- --------
$ 97,050 $ 51,755 $148,805 $ 57,858 $ 27,627 $ 85,485
======== ======== ======== ======== ======== ========
</TABLE>
52
<PAGE>
A summary of the allowance for credit losses on finance receivables for the
years ended December 31, 1998, 1997 and 1996 follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------------------- -------------------------------
1996
Non Non ----------
Dealership Dealership Dealership Dealership Dealership
Operations Operations Total Operations Operations Total Operations
---------- ---------- --------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, Beginning of Year $ 10,356 $ 1,035 $ 11,391 $ 1,625 $ -- $ 1,625 $ 7,500
Provision for Credit Losses 65,318 2,016 67,334 22,354 491 22,845 9,657
Allowance on Acquired Loans -- 801 801 15,309 550 15,859 --
Net Charge Offs............ (6,358) (1,828) (8,186) (7,524) (6) (7,530) (6,202)
Sale of Finance Receivables (44,539) -- (44,539) (21,408) -- (21,408) (9,330)
--------- --------- --------- --------- -------- --------- ---------
Balances, End of Year...... $ 24,777 $ 2,024 $ 26,801 $ 10,356 $ 1,035 $ 11,391 $ 1,625
========= ========= ========= ========= ========= ========= =========
</TABLE>
The valuation of the Residual in Finance Receivables Sold as of December 31,
1998, which totaled $33.3 million, represents the present value of the
Dealership Operations' interests in the distributions of future cash flows from
the underlying portfolio out of the securitization trusts and Investments Held
in Trust (see note 5) which totaled $20.6 million at December 31, 1998. The
Company's securitization transactions were discounted with a rate of 12% using
the "cash out method". For securitizations between June 30, 1996 and June 30,
1997, net losses were originally estimated using total expected cumulative net
losses at loan origination of approximately 26.0%, adjusted for actual
cumulative net losses prior to securitization. Prepayment rates were estimated
to be 1.5% per month of the beginning of month balances.
During the year ended December 31, 1997, the Company recorded a $5.7 million
charge to write-down the Residuals in Finance Receivables Sold. The charge had
the effect of increasing the cumulative net loss assumption to approximately
27.5%, for the securitization transactions that took place prior to June 30,
1997. For the securitization transaction that took place in September 1997, net
losses were estimated using total expected cumulative net losses at loan
origination of approximately 27.5%, adjusted for actual cumulative net losses
prior to securitization. For securitization transactions completed during the
nine month period ended September 30, 1998, net losses were estimated using
total expected cumulative net losses at loan origination of approximately 29.0%,
adjusted for actual cumulative net losses prior to securitization. Prepayment
rates were estimated to be 1% per month of the beginning of month balance.
As of December 31, 1998 and 1997, the Residuals in Finance Receivables Sold
for the Company's Dealership Operations were comprised of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Retained interest in subordinated securities (B
Certificates)................................. $ 51,243 $ 25,483
Net interest spreads, less present value discount.. 25,838 10,622
Reduction for estimated credit loss................ (43,750) (22,828)
--------- --------
Residuals in finance receivables sold.............. $ 33,331 $ 13,277
========= =========
Securitized principal balances outstanding......... $ 198,747 $ 127,356
========= =========
Estimated credit losses and allowances as a % of
securitized principal balances outstanding...... 22.0% 17.9%
======== ==========
</TABLE>
The following table reflects a summary of activity for the Residuals in
Finance Receivables Sold for the Company's Dealership Operations for the years
ended December 31, 1998 and 1997, respectively (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Balance, Beginning of Year....................... $ 13,277 $ 8,512
Additions........................................ 35,435 17,734
Amortization..................................... (15,381) (7,242)
Write-down of Residual in Finance Receivables Sold -- (5,727)
-------- --------
Balance, End of Year............................. $ 33,331 $ 13,277
======== ========
</TABLE>
The Company also has an investment in subordinate certificates originated by
a third party approximating $2.6 million at December 31, 1998 held by its Non
Dealership Operations classified as Residuals in Finance Receivables Sold.
53
<PAGE>
(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 4% to 6% 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. Additional deposits from the residual cash flow (through
the trustee) are made to the spread account as necessary to attain and maintain
the spread account at a specified percentage, ranging from 6.0% to 10.5%, of the
underlying finance receivables principal balance.
In the event that the cash flows generated by the finance receivables are
insufficient to pay obligations of the trust, including principal or interest
due to certificate holders or expenses of the trust, the trustee will draw funds
from the spread account as necessary to pay the obligations of the trust. The
spread account must be maintained at a specified percentage of the principal
balances of the finance receivables held by the trust, which can be increased in
the event delinquencies or losses exceed specified levels. If the spread account
exceeds the specified percentage, the trustee will release the excess cash to
the Company from the pledged spread account. Except for releases in this manner,
the cash in the spread account is restricted from use by the Company.
During 1998, the Company made initial spread account deposits totaling $13.1
million and additional net deposits through the trustee totaling $4.8 million.
The total balance in the spread accounts was $20.6 million as of December 31,
1998. In connection therewith, the specified spread account balance based upon
the aforementioned specified percentages of the balances of the underlying
portfolios was $23.7 million, resulting in additional funding requirements from
future cash flows of $3.1 million as of December 31, 1998. The additional
funding requirement will decline as the trustee deposits additional cash flows
into the spread account and as the principal balance of the underlying finance
receivables declines.
During 1997, the Company made initial spread account deposits totaling $6.1
million and additional net deposits through the trustee totaling $1.8 million.
The total balance in the spread accounts was $10.4 million as of December 31,
1997. In connection therewith, the specified spread account balance based upon
the aforementioned specified percentages of the balances of the underlying
portfolios as of December 31, 1997 was $10.5 million, resulting in additional
funding requirements of $101,000 as of December 31, 1997.
(6) Notes Receivable
The Company's Cygnet Dealer Program has various notes receivable from
used car dealers. Under its Asset Based Loan program, the Company had
commitments for revolving notes receivable totaling $13.8 million at December
31, 1998. These notes have various maturity dates through June 2001 with
interest rates ranging from prime plus 5.00% to prime plus 9.75% per annum
(12.75% to 17.50% at December 31, 1998) payable monthly. The revolving notes
subject the borrower to borrowing base requirements with advances on eligible
collateral (retail installment contracts) ranging from forty-five percent to
sixty-five percent of the par value of the underlying collateral. The balance
outstanding on notes receivable totaled $8.8 million, and $5.6 million at
December 31, 1998 and 1997, respectively. The allowance for credit losses for
notes receivable totaled $500,000 and $200,000 at December 31, 1998 and 1997,
respectively.
In July 1997, First Merchants Acceptance Corporation (FMAC) filed for
bankruptcy. Immediately subsequent to the bankruptcy filing, the Company
executed a loan agreement to provide FMAC with up to $10.0 million in debtor in
possession (the DIP facility) financing. The DIP facility accrued interest at
12.0%, was initially scheduled to mature on February 28, 1998, and was secured
by substantially all of FMAC's assets. The Company and FMAC subsequently amended
the DIP facility to increase the maximum commitment to $21.5 million, decrease
the interest rate to 10.0% per annum, and extend the maturity date indefinitely.
In connection with the amendment, FMAC pledged the first $10.0 million of income
tax refunds receivable, the balance of which FMAC anticipates collecting in
1999, to the Company. The maximum commitment under the DIP facility had been
reduced to $12.4 million at December 31, 1998. Once the proceeds from the income
tax refunds are remitted to the Company, such amounts permanently reduce the
maximum commitment under the DIP facility. Thereafter, the Company anticipates
collecting the balance of the DIP facility from distributions to FMAC from
FMAC's residual interests in certain securitization transactions. The
outstanding balance on the DIP facility totaled $12.2 million and $11.0 million
at December 31, 1998 and 1997, respectively.
54
<PAGE>
During the third and fourth fiscal quarters of 1997, the Company acquired
the senior bank debt of FMAC from the bank group members holding such debt. In
December 1997, a credit bid for the outstanding balance of the senior bank debt
plus certain fees and expenses (the "credit bid purchase price") was entered and
approved in the bankruptcy court resulting in the transfer of the senior bank
debt for the loan portfolio which secured the senior bank debt (the "owned
loans"). Simultaneous with the transfer to the Company, a finance company
purchased the owned loans for 86% of the principal balance of the loan
portfolio, and the Company retained a 14% participation in the loan portfolio.
FMAC has guaranteed that the Company will receive an 11.0% return on the credit
bid purchase price from the cash flows generated by the owned loans, and further
collateralized by FMAC's residual interests in certain securitization
transactions. The balance of the participation totaled $6.9 million and $9.2
million at December 31, 1998 and 1997, respectively.
A summary of notes receivable as of December 31, 1998 and 1997 follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------- --------
1998 1997
-------- --------
<S> <C> <C>
Notes Receivable under the Asset Based Loan Program, net
of allowance for doubtful accounts of $500, and $200,
respectively......................................... $ 8,311 $ 5,594
FMAC Debtor in Possession Note Receivable............... 12,228 10,994
FMAC Bank Group Participation........................... 6,856 9,244
Other Notes Receivable.................................. 862 913
-------- --------
Notes Receivable, net................................... $ 28,257 $ 26,745
======== ========
</TABLE>
(7) Property and Equipment
A summary of Property and Equipment as of December 31, 1998 and 1997 follows
(in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Land................................................ $ 3,721 $ 13,813
Buildings and Leasehold Improvements................ 9,984 16,274
Furniture and Equipment............................. 24,373 11,668
Vehicles............................................ 219 306
Construction in Process............................. 2,872 2,817
-------- --------
41,169 44,878
Less Accumulated Depreciation and Amortization...... (8,199) (5,051)
-------- --------
Property and Equipment, Net......................... $ 32,970 $ 39,827
======== ========
</TABLE>
In March 1998, the Company executed a commitment letter with an investment
company for the sale-leaseback of up to $37.0 million in real property. Pursuant
to the terms of the agreement, the Company would sell certain real property to
the investment company at its cost and leaseback the properties for an initial
term of twenty years. During 1998, the Company sold approximately $27.4 million
of property under this agreement and recognized no gain or loss on the
sale-leaseback transactions.
Interest expense capitalized in 1998, 1997 and 1996 totaled $135,000,
$229,000, and zero, respectively.
(8) Intangible Assets
A summary of intangible assets as of December 31, 1998 and 1997 follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- -------
<S> <C> <C>
Original Cost:
Goodwill.................... $ 17,037 $17,945
Trademarks.................. 581 581
Covenants not to Compete.... 250 250
-------- -------
17,868 18,776
Accumulated Amortization.... (2,338) (1,233)
-------- -------
Intangibles, Net............ $ 15,530 $17,543
======== =======
</TABLE>
Amortization expense relating to intangible assets totaled $1,105,000,
$857,000, and $63,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
55
<PAGE>
(9) Other Assets
A summary of Other Assets as of December 31, 1998 and 1997 follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Prepaid Expenses.............. $2,484 $1,957
Income Taxes Receivable....... 2,926 1,693
Servicing Receivables......... 4,266 1,389
Restricted Cash............... 1,565 1,280
Deposits...................... 1,286 829
Employee Advances............. 1,431 821
Deferred Income Taxes......... 2,626 --
Other......................... 3,991 3,277
------- -------
$20,575 $11,246
======= =======
</TABLE>
(10) Accrued Expenses and Other Liabilities
A summary of Accrued Expenses and Other Liabilities as of December 31, 1998
and 1997 follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
------- -------
<S> <C> <C>
Sales Taxes.................... $ 3,033 $ 3,909
Accrued Payroll, Benefits & Taxes 2,192 2,366
Collections Liability.......... 3,121 1,503
Accrued Advertising............ 1,234 850
Accrued Post Sale Support...... 1,809 771
Deferred Income Taxes.......... -- 718
Others......................... 8,305 4,847
------- -------
$19,694 $14,964
======= =======
</TABLE>
In connection with the retail sale of vehicles, the Company is required to
pay sales taxes to certain government jurisdictions. In certain of these
jurisdictions, the Company has elected to pay these taxes using the "cash
basis", which requires the Company to pay the sales tax obligation for a sale
transaction as principal is collected over the life of the related finance
receivable contract.
(11) Notes Payable
A summary of Notes Payable at December 31, 1998 and 1997 follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
$125,000,000 revolving loan with a finance company, interest
payable daily at 30 day LIBOR (5.24% at December 31, 1998)
plus 3.15% through June 2000, secured by substantially all
assets of the Company............................................. $ 51,765 $ 56,950
Two notes payable to a finance company totaling $7,450,000,
monthly interest payable at the prime rate plus 1.50%
(9.25 % at December 31, 1998) through January 1998; thereafter,
monthly payments of $89,000 plus interest through April 1999
when the remaining unpaid principal is due, secured by first
deeds of trust and assignments of rents on certain real property.. 3,386 7,450
Other notes bearing interest at rates ranging from 9% to 11% due
through August 2001, secured by certain real property and
certain property and equipment .................................. 967 771
--------- ---------
Subtotal................................................... 56,119 65,171
Less: Unamortized Loan Fees............................... 1,025 350
--------- ---------
Total...................................................... $ 55,093 $ 64,821
========== =========
</TABLE>
The aforementioned revolving loan agreement contains various reporting and
performance covenants including the maintenance of certain ratios, limitations
on additional borrowings from other sources, restrictions on certain operating
activities, and a restriction on the payment of dividends under certain
circumstances. The Company was in compliance with the covenants at December 31,
1998 and 1997 except for interest coverage ratios at December 31, 1998, for
which the Company obtained a waiver.
56
<PAGE>
(12) Collateralized Notes Payable
The Company has Collateralized Notes Payable consisting of a note payable
under a securitization and a note payable secured by the common stock of the
Company's securitization subsidiaries. These notes do not have contractually
scheduled principal payments but require the Company to remit all collections on
the collateral to the note holders. A summary of Collateralized Notes Payable at
December 31, 1998 and 1997, respectively, follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
-------- ---------
<S> <C> <C>
$50,607,000 of A Certificates issued pursuant to the Company's
Securitization Program, interest payable monthly at 5.90%,
secured by the pool of finance receivable contracts and spread
account ($5.7 million at December 31, 1998), monthly principal
payments are 73% of principal reductions of the underlying
pool of finance receivable contracts........................... 50,607 --
$15 million note payable to a finance company, bearing interest at
LIBOR plus 4% (9.54% at December 31, 1998), secured by the
capital stock of UDRC and UDRC II, Lender will receive all
UDRC II, Lender will receive all distributions for Residuals in
distributions for Residuals in Finance Receivables Sold until
until note is paid in full..................................... 12,234 --
-------- ---------
Subtotal................................................ 62,841 --
Less: Unamortized Loan Fees............................ 640 --
-------- ---------
Total................................................... $ 62,201 $ --
======== =========
</TABLE>
(13) Subordinated Notes Payable
A summary of Subordinated Notes Payable at December 31, 1998 and 1997
follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
--------- -------
(In thousands)
<S> <C> <C>
$17.5 million Subordinated debentures, interest at 12% per
annum (approximately 18.8% effective rate) payable
semi-annually with the entire principal balance due October
23, 2003; the debentures are subordinate to all other Company
indebtedness except the Verde note and contain certain call
provisions at the option of the Company.......................... $ 17,479 $ --
$15 million notes payable to unrelated parties, bearing interest at
12% per annum payable quarterly, principal due February 2001
senior to the Verde subordinated note payable and the
subordinated debentures.......................................... 15,000 --
$5 million notes payable to unrelated parties, bearing interest 12%
per annum payable quarterly, principal due July 2001 senior to
the Verde subordinated note payable and the subordinated
debentures....................................................... 5,000 --
$14 million unsecured note payable with Verde, interest payable
monthly at 10% per annum with annual principal payments of
$2 million, maturing June 2003................................... 10,000 12,000
---------- ------
Subtotal.................................................. 47,479 12,000
Less: Unamortized Premium................................ 3,738 --
--------- --------
Total..................................................... $ 43,741 $ 12,000
======== ========
</TABLE>
During the year the Company issued $17.5 million of subordinated debentures
in exchange for 2.7 million shares of Company common stock valued at $14.0
million ("Exchange Offer"), including $370,000 of costs incurred for the
Exchange Offer. The debentures are unsecured and subordinate to all existing and
future indebtedness of the Company and bear interest at 12% per annum payable
semi-annually each April and October, approximately $2.9 million per year, until
they are paid in full on October 23, 2003. The debentures were issued at a
premium of approximately $3,874,000 in excess of the market value of the shares
tendered, which will be amortized over the life of the debentures and results in
an effective interest rate of approximately 18.8%. The Company is required to
pay the principal amount of debentures on the fifth anniversary of their
issuance date.
In connection with the issuance of the $15 million senior subordinated notes
payable, the Company issued warrants, which were valued at approximately
$900,000, to the lenders to purchase up to 500,000 shares of the Company's
Common Stock at an exercise price of $10.00 per share exercisable at any time
until the later of (1) February 2001, or (2) such time as the notes have been
paid in full.
Interest expense related to the subordinated note payable with Verde totaled
$1,073,000, $1,232,000, and $1,933,000, during the years ended December 31,
1998, 1997 and 1996, respectively.
57
<PAGE>
A summary of the future minimum principal payments required under the
aforementioned notes payable and subordinated notes payable after December 31,
1998 follows (in thousands):
<TABLE>
<CAPTION>
Subordinated
December 31, Notes Payable Notes Payable Total
------------ ------------- ------------- ----------
<S> <C> <C> <C>
1999.......... $ 3,634 $ 2,000 $ 5,634
2000.......... 51,903 2,000 53,903
2001.......... 581 22,000 22,581
2002.......... -- 2,000 2,000
2003.......... -- 19,479 19,479
------------- ------------- ----------
$ 56,118 $ 47,479 $ 103,597
=========== ============= ==========
</TABLE>
(14) Income Taxes
Income taxes amounted to $2,396,000, $6,637,000, and $100,000 for the years
ended December 31, 1998, 1997 and 1996, respectively (an effective tax rate of
40.5%, 41.1%, and 1.6%, respectively). A reconciliation between taxes computed
at the federal statutory rate of 35% in 1998 and 1997 and 34% in 1996 at the
effective tax rate on earnings before income taxes follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997 1996
------- ------ --------
<S> <C> <C> <C>
Computed "Expected" Income Taxes ....... $2,071 $5,658 $ 2,142
State Income Taxes, Net of Federal Effect 96 962 41
Change in Valuation Allowance........... 735 -- (2,315)
Other, Net.............................. (506) 17 232
------- ------ --------
$2,396 $6,637 $ 100
====== ====== ========
</TABLE>
Components of income taxes (benefit) for the years ended December 31, 1998,
1997 and 1996 follow (in thousands):
<TABLE>
<CAPTION>
Current Deferred Total
-------- ------- -------
<S> <C> <C> <C>
1998:
Federal.............. $ 91 $ 2,158 $ 2,249
State................ 6 141 147
------- ------- -------
97 2,299 2,396
Discontinued operations (239) (5,643) (5,882)
-------- -------- --------
$ (142) $(3,344) $(3,486)
======== ======== ========
1997:
Federal.............. $ 3,743 $ 1,414 $ 5,157
State................ 1,197 283 1,480
------- ------- -------
4,940 1,697 6,637
Discontinued operations (40) (18) (58)
-------- -------- --------
$ 4,900 $ 1,679 $ 6,579
======= ======= =======
1996:
Federal.............. $ (149) $ 187 $ 38
State................ -- 62 62
------- ------- -------
$ (149) $ 249 $ 100
======= ======= =======
</TABLE>
58
<PAGE>
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, 1998 and 1997 are presented below (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
------- ------
<S> <C> <C>
Deferred Tax Assets:
Finance Receivables, Principally Due to the
Allowance for Credit Losses.................... $2,282 $ 473
Inventory......................................... -- 246
Federal and State Income Tax Net Operating Loss
Carryforwards.................................. 1,224 28
Discontinued Operations Liability................. 2,410 --
Accrued Post Sale Support......................... 717 357
Other............................................. 934 395
------ ------
Total Gross Deferred Tax Assets................... 7,567 1,499
Less: Valuation Allowance......................... (735) --
------- ------
Net Deferred Tax Assets................... 6,832 1,499
------ ------
Deferred Tax Liabilities:
Software Development Costs........................ (2,191) (237)
Inventory......................................... (1,176) --
Pre-Opening and Start Up Costs.................... -- (1,236)
Loan Origination Fees............................. (255) (586)
Other............................................. (584) (158)
------ ------
Total Gross Deferred Tax Liabilities........... (4,206) (2,217)
------ -------
Net Deferred Tax Asset (Liability)........ $2,626 $ (718)
====== ======
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1998 and
1997 was $735,000 and zero, respectively. The net change in the total valuation
allowance for the year ended December 31, 1998 was an increase of $735,000. The
allowance is attributable primarily to future deductions and net operating loss
carryforwards in certain states where the Branch Offices operated and
realization of a tax benefit is unlikely. There was no change in the Valuation
Allowance for the year ended December 31, 1997. In assessing the realizability
of Deferred Tax Assets, management considers whether it is more likely than not
that some portion or all of the Deferred Tax Assets will not be realized. The
ultimate realization of Deferred Tax Assets is dependent upon generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the reversal of Deferred Tax
Liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the Deferred Tax
Assets are deductible, management believes it is more likely than not that the
Company will realize the benefits of these deductible differences, net of the
established valuation allowance at December 31, 1998.
At December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $1,822,000, which, subject to
annual limitations, are available to offset future taxable income, if any,
through 2011.
(15) Servicing
Pursuant to the Company's securitization program that began in 1996, the
Company securitizes loan portfolios with servicing retained. The Company
services the securitized portfolios for a monthly fee ranging from .25% to .33%
(generally, 3.0% to 4.0% per annum) of the beginning of month principal balance
of the serviced portfolios. The Company has retained the servicing rights on the
contracts it has sold in connection with its securitization transactions. The
Company has not established any servicing assets or liabilities in connection
with its securitizations as the revenues from contractually specified servicing
fees and other ancillary sources have been just adequate to compensate the
Company for its servicing responsibilities.
In 1998 the Company's Non Dealership Operations entered into several
agreements with third parties to service loan portfolios on their behalf. The
service fees are generally a percentage of the outstanding principal balance
ranging from generally, 3.25% to 4.0% per annum, subject to a minimum dollar
amount per contract, and are paid monthly.
The Company recognized servicing income of $33.3 million, $8.8 million, and
$1.9 million in the years ended December 31, 1998, 1997 and 1996, respectively.
59
<PAGE>
A summary of portfolios serviced by the Company's respective segments as of
December 31, 1998 and 1997 follows (in thousands):
<TABLE>
<CAPTION>
Dealership Operations: 1998 1997
----------- ---------
<S> <C> <C>
Finance Receivables from continuing operations....... $ 93,936 $ 55,965
Finance Receivables from discontinued operations 30,219 29,965
Securitized with servicing retained.................. 242,297 238,025
Servicing on behalf of others........................ 47,947 127,322
----------- ---------
Total serviced portfolios Dealership Operations ..... 414,399 451,277
----------- ---------
Non Dealership Operations:
Finance Receivables ................................. 1,237 --
Servicing on behalf of others........................ 586,081 --
----------- --------
Total serviced portfolios Non Dealership
Operations.................................. 587,318 --
----------- ---------
Total serviced portfolios...................... $ 1,001,717 $ 451,277
=========== =========
</TABLE>
Pursuant to the terms of the various servicing agreements, the serviced
portfolios are subject to certain performance criteria. In the event the
serviced portfolios do not satisfy such criteria the servicing agreements
contain various remedies up to and including the removal of servicing rights
from the Company.
(16) Lease Commitments
The Company leases used car sales facilities, loan servicing centers,
offices, and certain office equipment from unrelated entities under various
operating leases that expire through March 2019. The leases require monthly
rental payments aggregating approximately $871,000 and contain various renewal
options from one to ten years. In certain instances, the Company is also
responsible for occupancy and maintenance costs, including real estate taxes,
insurance, and utility costs. Rent expense totaled $11,419,000, $5,398,000 and
$2,394,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
During 1996, the Company purchased six car lots, a vehicle reconditioning
center, and two office buildings from Verde. These properties had previously
been rented from Verde pursuant to various leases which called for base monthly
rents aggregating approximately $123,000 plus contingent rents as well as all
occupancy and maintenance costs, including real estate taxes, insurance, and
utilities. In connection with the purchase, Verde returned security deposits
that totaled $364,000. Rent expense for the year ended December 31, 1996 totaled
$2,394,000, which included rents paid to Verde totaling $1,498,000 including
contingent rents of $440,000.
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, 1998 follows (in thousands):
<TABLE>
<CAPTION>
Continuing Discontinued
December 31, Operations Operations Total
------------ ---------- ------------ --------
<S> <C> <C> <C>
1999.......... $11,320 $ 567 $ 11,887
2000.......... 10,216 178 10,394
2001.......... 8,263 -- 8,263
2002.......... 5,849 -- 5,849
2003.......... 3,874 -- 3,874
Thereafter.... 45,181 -- 45,181
------- ------ --------
Total $84,703 $ 745 $ 85,448
======= ====== ========
</TABLE>
(17) Stockholders' Equity
During 1998 the Company acquired approximately 2.7 million shares of Company
Common Stock with a value of approximately $14.0 million in the Exchange Offer.
The Company also acquired 72,000 shares of Treasury Stock for approximately
$535,000 under its Stock Repurchase Program.
During 1997, the Company completed a private placement of 5,075,500 shares
of common stock for a total of approximately $88.7 million cash, net of stock
issuance costs. The registration of the shares sold in the private placement was
effective in April 1997. During 1996, the Company completed two public offerings
in which it issued a total of 7,245,000 shares of common stock for approximately
$79.4 million cash, net of stock issuance costs.
60
<PAGE>
During 1998, the Company issued 50,000 warrants to a third party to purchase
Company common stock. The warrants are exercisable through February 2001 at an
exercise price of $12.50 per share of common stock.
During 1998, the Company issued warrants, valued at approximately $900,000,
to purchase 500,000 shares of Company common stock at $10 per share in
connection with senior subordinated note payable agreements. The warrants are
exercisable at any time until (1) February 2001, or (2) the notes are paid in
full.
During the year the Company issued 325,000 warrants to a third party to
purchase Company common stock at $20.00 per share. The warrants expire on April
1, 2001 and are subject to a call feature by the Company.
During 1997, the Company issued warrants for the right to purchase 389,800
shares of the Company's common stock for $20.00 per share exercisable through
February 2000. The warrants were valued at approximately $612,000. These
warrants remained outstanding at December 31, 1998. In addition, warrants to
acquire 116,000 shares of the Company's common stock at $6.75 per share and
170,000 shares of the Company's common stock at $9.45 per share were outstanding
at December 31, 1997.
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'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.
(18) Earnings (Loss) Per Share
A summary of the reconciliation from basic earnings (loss) per share to
diluted earnings (loss) per share for the years ended December 31, 1998, 1997,
and 1996 follows (in thousands, except for per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Earnings From Continuing Operations.............. $ 3,520 $ 9,528 $ 6,677
Less: Preferred Stock Dividends.................. -- -- (916)
------- -------- -------
Earnings available to Common Stockholders........ $ 3,520 $ 9,528 $ 5,761
======= ======== =======
Net Earnings (Loss).............................. $(5,703) $ 9,445 $ 5,866
Less: Preferred Stock Dividends.................. -- -- (916)
------- -------- -------
Earnings (Loss) available to Common Stockholders. $(5,703) $ 9,445 $ 4,950
======== ======== =======
Basic Earnings Per Share From Continuing
Operations..................................... $ 0.19 $ 0.53 $ 0.73
======= ======== =======
Diluted Earnings Per Share From Continuing
Operations..................................... $ 0.19 $ 0.52 $ 0.69
======= ======== =======
Basic Earnings (Loss) Per Share.................. $ (0.32) $ 0.53 $ 0.63
======= ======== =======
Diluted Earnings (Loss) Per Share................ $ (0.31) $ 0.52 $ 0.60
======= ======== =======
Basic EPS-Weighted Average Shares Outstanding.... 18,082 17,832 7,887
Effect of Diluted Securities:
Warrants....................................... 41 98 71
Stock Options.................................. 282 304 340
------- -------- -------
Dilutive EPS-Weighted Average Shares Outstanding. 18,405 18,234 8,298
======= ======== =======
Warrants Not Included in Diluted EPS Since
Antidilutive.................................. 1,044 390 --
======= ======== =======
Stock Options Not Included in Diluted EPS Since
Antidilutive................................... 1,044 828 --
======= ======== =======
</TABLE>
(19) Stock Option Plan
In June, 1995, the Company adopted a long-term incentive plan (Stock Option
Plan) under which it has set aside 1,800,000 shares of common stock to be
granted to employees. Options are to vest over a period to be determined by the
Board of Directors upon grant and will generally expire 6 to 10 years after the
date of grant. The options generally vest over a period of 5 years.
In August 1998, the Company's stockholders approved an executive incentive
stock option plan (Executive Plan). The Company has reserved 800,000 shares of
its common stock for issuance. Options granted under the plan expire ten years
after the grant date and vest 20% per year upon completion of each year of
service after the date of grant (beginning 1 year after the grant date) subject
to meeting additional vesting hurdles that are based on the trading price of the
Company's stock. Even if these additional vesting hurdles are not met, the
options will fully vest 7 years after the date of grant.
61
<PAGE>
A summary of the aforementioned stock plan activity follows:
<TABLE>
<CAPTION>
Stock Option Plan Executive Plan
----------------------- -----------------------
Weighted Weighted
Average Average
Price Per Price Per
Number Share Number Share
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 912,000 $ 8.60 -- $ --
Granted................. 582,000 15.07 -- --
Forfeited............... (78,000) 14.00 -- --
Exercised............... (118,000) 2.04 -- --
----------- -----------
Balance, December 31, 1997 1,298,000 11.76 -- --
Granted................. 925,000 7.68 525,000 8.25
Forfeited............... (995,000) 13.64 (25,000) 8.25
Exercised............... (76,000) 3.61 -- --
----------- -----------
Balance, December 31, 1998 1,152,000 7.43 500,000 8.25
=========== ===========
</TABLE>
At December 31, 1998, there were 409,000 and 300,000 additional shares
available for grant under the Stock Option Plan and Executive Plan,
respectively. The per share weighted-average fair value of stock options granted
during 1998, 1997 and 1996 was $3.22, $6.54 and $8.39, respectively, on the date
of grant using the Black-Scholes option-pricing model. The following are the
weighted-average assumptions: 1998 -- expected dividend yield 0%, risk-free
interest rate of 5.25%, expected volatility of 50.0%, and an expected life of 5
years; 1997 -- expected dividend yield 0%, risk-free interest rate of 5.53%,
expected volatility of 40.0%, and an expected life of 5 years; 1996 -- expected
dividend yield 0%, risk-free interest rate of 6.4%, expected volatility of 56.5%
and an expected life of 7 years.
During 1998 the Board of Directors approved separate plans to reprice the
Company's outstanding stock options under the Stock Option Plan, one in January
1998 and a second in November 1998. The forfeited options had exercise prices
ranging from $9.75 to $20.75 and were repriced at $8.25 or $5.13 per share, the
fair market value on the date of the respective repricings. Approximately
391,000 options were issued under the repricing program. The vesting period was
not affected for the options repriced under the January 1998 repricing plan.
However, the vesting period started over on the repricing date for the options
issued under the November 1998 repricing plan. Generally vesting occurs 20% per
year beginning one year after the grant date. The fair values of these options
were estimated at the date of grant using the criteria noted above. The
repricing resulted in additional pro forma compensation expense in 1998 of
$795,000, which is reflected in the pro forma table below. The repricing
activity has been reflected in table above and is included in the options
granted and forfeited in 1998.
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 (loss) and earnings (loss) per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- ---------
<S> <C> <C> <C>
Pro Forma Earnings from Continuing Operations
Available to Common Stockholders............. $ 2,533 $ 8,650 $ 5,642
Pro forma Net Earnings (Loss) Available to
Common Stockholders ......................... $ (6,690) $ 8,567 $ 4,831
Earnings (Loss) per Share -- Basic:
Continuing Operations Pro Forma.............. $ 0.14 $ 0.49 $ 0.72
Net Earnings (Loss) Pro Forma................ $ (0.37) $ 0.48 $ 0.61
Earnings (Loss) per Share -- Diluted:
Continuing Operations Pro Forma.............. $ 0.14 $ 0.48 $ 0.72
Net Earnings (Loss) Pro Forma................ $ (0.37) $ 0.48 $ 0.61
</TABLE>
62
<PAGE>
A summary of stock options granted at December 31, 1998 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 12/31/98 Contractual Life Price at 12/31/98 Price
- --------------- --------------- ---------------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C>
$ .50 to $1.00. 65,000 5.4 years $ 0.86 -- $ --
$1.50 to $7.00. 543,000 5.9 years 4.68 117,000 3.78
$8.00 to $8.25. 816,000 7.8 years 8.25 -- --
$8.30 to $18.63 228,000 5.4 years 14.71 86,000 15.76
---------- ------- --------- -------
1,652,000 $ 7.68 203,000 $ 8.86
========== ======= ========= =======
</TABLE>
(20) Year 2000 Readiness Disclosure
In 1998, the Company developed a plan to deal with the Year 2000 problem and
began modifying and testing, or converting its computer systems to be Year 2000
compliant. The plan provides for the modification, testing, and conversion
efforts to be completed by June 30, 1999. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. Management has also assessed the Year 2000 remediation efforts
of the Company's significant suppliers. Although management believes its efforts
minimize the potential adverse effects that a supplier's failure would have on
the Company, there can be no absolute assurance that all its suppliers will
become Year 2000 compliant on time. The Company will evaluate appropriate
courses of action, including replacement of certain systems whose associated
costs would be recorded as assets and subsequently amortized, or modification of
its existing systems which costs would be expensed as incurred. The Company
estimates it will cost between $2.2 million and $2.7 million to become Year 2000
compliant and had incurred $1.3 million of these costs during 1998. However,
there can be no assurance that the Company will be able to completely resolve
all Year 2000 issues or that the ultimate cost to identify and implement
solutions to all Year 2000 problems will not exceed the Company's estimate.
(21) Commitments and Contingencies
The Company's Non Dealership operations have entered into servicing
agreements with two companies that have filed and subsequently emerged from
bankruptcy and continue to operate under their approved plans of reorganization.
Under the terms of the respective servicing agreements and approved plans of
reorganization, once certain creditors of the bankrupt companies have been paid
in full, the Company is entitled to certain incentive compensation in excess of
the servicing fees earned to date. Under the terms of one of the agreements, the
Company is scheduled to receive 17.5% of all collections of the serviced
portfolio once the specified creditors have been paid in full. Under the terms
of the second agreement, the Company is scheduled to receive the first $3.25
million in collections once the specified creditors have been paid in full and
15% thereafter. The Company is required to issue up to 150,000 warrants to the
extent the Company receives the $3.25 million and in addition will be required
to issue 75,000 warrants for each $1.0 million in incentive fee income after
collection of the $3.25 million. As of December 31, 1998, management estimates
that the incentive compensation could range from $0 to $8.0 million under these
agreements. The Company has not accrued any fee income with regard to these
incentives.
On July 18, 1997, the Company filed a Form S-3 registration statement for
the purpose of registering up to $200 million of its debt securities in one or
more series at prices and on terms to be determined at the time of sale. The
registration statement has been declared effective by the Securities and
Exchange Commission and may be available for future debt offerings. There can be
no assurance, however, that the Company will be able to use this registration
statement to sell debt or other securities.
The Company is involved in various claims and actions arising in the
ordinary course of business. In the opinion of management, based on consultation
with legal counsel, the ultimate disposition of these matters will not have a
material adverse effect on the Company. No provision has been made in the
accompanying consolidated financial statements for losses, if any, that might
result from the ultimate disposition of these matters.
(22) Retirement Plan
The Company has established qualified 401(k) retirement plans (defined
contribution plans) which became effective on October 1, 1995. The plans, as
amended, cover substantially all employees having no less than three months of
service, have attained the age of 21, and work at least 1,000 hours per year.
63
<PAGE>
Participants may voluntarily contribute to the plan up to the maximum limits
established by Internal Revenue Service regulations.
The Company will match from 10% to 25% 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 $121,000, $49,000, and $23,000
during the years ended December 31, 1998, 1997, and 1996, respectively.
(23) 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, 1998 and 1997, the
amounts that will actually be realized or paid in settlement of the instruments
could be significantly different.
Cash and Cash Equivalents
The carrying amount is estimated to be the fair value because of the
liquidity of these instruments.
Finance Receivables, Residuals in Finance Receivables Sold, Investments Held in
Trust, and Notes Receivable
The carrying amount is estimated to be the fair value because of the
relative short maturity and repayment terms of the portfolio as compared to
similar instruments.
Accounts Payable, Accrued Expenses, and Notes Payable
The carrying amount approximates fair value because of the short maturity of
these instruments. The terms of the Company's notes payable approximate the
terms in the market place at which they could be replaced. Therefore, the fair
market value approximates the carrying value of these financial instruments.
Subordinated Notes Payable
The terms of the Company's subordinated notes payable approximate the terms
in the market place at which they could be replaced. Therefore, the fair value
approximates the carrying value of these financial instruments.
(24) Business Segments
Operating results and other financial data are presented for the principal
business segments of the Company for the years ended December 31, 1998, 1997,
and 1996, respectively. The Company has 6 distinct business segments. Within the
Dealership Operations division, these consist of retail car sales operations
(Company dealerships), the income generated from the finance receivables
generated at the Company dealerships and corporate and other operations. Within
the Non Dealership Operations division, these consist of the Cygnet dealer
program, bulk purchasing and loan servicing, 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.
64
<PAGE>
<TABLE>
<CAPTION>
Dealership Operations Non Dealership Operations
---------------------------------- -----------------------------------
Company Cygnet
Company Dealership Corporate Cygnet Loan Corporate
Dealerships Receivables and Other Dealer Servicing and Other Total
---------- ----------- ---------- --------- ---------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1998:
Sales of Used Cars............... $ 287,618 $ -- $ -- $ -- $ -- $ -- $ 287,618
Less: Cost of Cars Sold.......... 167,014 -- -- -- -- -- 167,014
Provision for Credit Losses...... 59,770 5,548 -- 2,316 -- -- 67,634
--------- --------- --------- --------- ---------- ---------- ---------
60,834 (5,548) -- (2,316) -- -- 52,970
Interest Income.................. -- 16,946 341 8,709 1,832 -- 27,828
Gain on Sale of Loans............ -- 12,093 -- -- -- -- 12,093
Service Fee and Other Income..... 389 15,453 493 -- 22,296 -- 38,631
--------- --------- --------- --------- ---------- ---------- ---------
Income before Operating Expenses. 61,223 38,944 834 6,393 24,128 -- 131,522
--------- --------- --------- --------- ---------- ---------- ---------
Operating Expenses:
Selling and Marketing............ 20,285 -- -- 242 31 7 20,565
General and Administrative....... 32,383 18,491 16,103 2,721 18,664 4,040 92,402
Depreciation and Amortization.... 2,581 1,334 997 104 614 105 5,735
--------- --------------------- --------- ---------- ---------- ---------
55,249 19,825 17,100 3,067 19,309 4,152 118,702
--------- --------- --------- --------- ---------- ---------- ---------
Income (loss) before Interest
Expense....................... $ 5,974 $ 19,119 $ (16,266) $ 3,326 $ 4,819 $ (4,152) $ 12,820
========= ========= ========= ========= ========== =========== =========
Capital Expenditures............. $ 14,265 $ 1,297 $ 2,352 $ 449 $ 2,260 $ 1,163 $ 21,786
========= ========= ========= ========= ========== ========== =========
Identifiable Assets.............. $ 75,366 $ 145,880 $ 47,543 $ 44,250 $ 31,589 $ 1,347 $ 345,975
========= ========= ========= ========= ========== ========== =========
December 31, 1997:
Sales of Used Cars............... $ 123,814 $ -- $ -- $ -- $ -- $ -- $ 123,814
Less: Cost of Cars Sold.......... 72,358 -- -- -- -- -- 72,358
Provision for Credit Losses...... 22,354 -- -- 691 -- -- 23,045
--------- --------- --------- --------- ---------- ---------- ---------
29,102 -- -- (691) -- -- 28,411
Interest Income.................. -- 12,559 -- 2,359 3,818 -- 18,736
Gain on Sale of Loans............ -- 6,721 -- -- 8,131 -- 14,852
Service Fee and Other Income..... 1,498 8,814 2,013 356 -- -- 12,681
--------- --------- --------- --------- ---------- ---------- ---------
Income before Operating Expenses. 30,600 28,094 2,013 2,024 11,949 -- 74,680
--------- --------- --------- --------- ---------- ---------- ---------
Operating Expenses:
Selling and Marketing............ 10,538 -- -- -- -- -- 10,538
General and Administrative....... 17,214 12,303 9,896 917 -- 1,572 41,902
Depreciation and Amortization.... 1,536 1,108 504 28 -- 125 3,301
--------- --------- --------- --------- ---------- ---------- ---------
29,288 13,411 10,400 945 -- 1,697 55,741
--------- --------- --------- --------- ---------- ---------- ---------
Income (loss) before Interest
Expense....................... $ 1,312 $ 14,683 $ (8,387) $ 1,079 $ 11,949 $ (1,697) $ 18,939
========= ========= ========= ========= ========== =========== =========
Capital Expenditures............. $ 13,571 $ 3,791 $ 2,104 $ 19 $ -- $ 24 $ 19,509
========= ========= ========= ========= ========== ========== =========
Identifiable Assets.............. $ 74,287 $ 78,514 $ 72,799 $ 27,539 $ 22,318 $ 969 $ 276,426
========= ========= ========= ========= ========== ========== =========
December 31, 1996:
Sales of Used Cars............... $ 53,768 $ -- $ -- $ -- $ -- $ -- $ 53,768
Less: Cost of Cars Sold.......... 31,879 -- -- -- -- -- 31,879
Provision for Credit Losses...... 9,657 -- -- -- -- -- 9,657
--------- --------- --------- --------- ---------- ---------- ---------
12,232 -- -- -- -- -- 12,232
Interest Income.................. -- 8,426 171 -- -- -- 8,597
Gain on Sale of Loans............ -- 3,925 -- -- -- -- 3,925
Service Fee and Other Income..... 195 1,887 455 -- -- -- 2,537
--------- --------- --------- --------- ---------- ---------- ---------
Income before Operating Expenses. 12,427 14,238 626 -- -- -- 27,291
--------- --------- --------- --------- ---------- ---------- ---------
Operating Expenses:
Selling and Marketing............ 3,568 -- 17 -- -- -- 3,585
General and Administrative....... 6,306 2,859 3,953 -- -- -- 13,118
Depreciation and Amortization.... 318 769 295 -- -- -- 1,382
--------- --------- --------- --------- ---------- ---------- ---------
10,192 3,628 4,265 -- -- -- 18,085
--------- --------- --------- --------- ---------- ---------- ---------
Income (loss) before Interest
Expense....................... $ 2,235 $ 10,610 $ (3,639) $ -- $ -- $ -- $ 9,206
========= ========= ========= ========= ========== ========== =========
Capital Expenditures............. $ 4,530 $ 455 $ 564 $ -- $ -- $ -- $ 5,549
========= ========= ========= ========= ========== ========== =========
Identifiable Assets.............. $ 20,698 $ 12,775 $ 84,156 $ -- $ -- $ -- $ 117,629
========= ========= ========= ========= ========== ========== =========
</TABLE>
65
<PAGE>
(25) Quarterly Financial Data -- unaudited
A summary of the quarterly data for the years ended December 31, 1998, and
1997 follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
1998:
Total Revenue..................... $ 87,777 $ 88,819 $ 96,714 $ 92,860 $ 366,170
======== ======== ======== ======== =========
Income before Operating Expenses.. 31,246 32,678 37,653 29,945 131,522
======== ======== ======== ======== =========
Operating Expenses................ 23,514 26,359 33,542 35,287 118,702
======== ======== ======== ======== =========
Income (Loss) before Interest
Expense........................ 7,732 6,319 4,111 (5,342) 12,820
======== ======== ======== ======== =========
Earnings (Loss) from Continuing
Operations..................... $ 3,729 $ 2,942 $ 1,527 $ (4,678) $ 3,520
======== ======== ======== ========= =========
(Loss) from Discontinued Operations (5,595) -- (3,628) -- (9,223)
========= ======== ======== ======== ==========
Net Earnings (Loss)............... $ (1,866) $ 2,942 $ (2,101) $ (4,678) $ (5,703)
========= ======== ======== ========= ==========
Basic Earnings (Loss) Per Share from
Continuing Operations.......... $ 0.20 $ 0.16 $ 0.08 $ (0.28) $ 0.19
========= ======== ======== ======== ==========
Diluted Earnings (Loss) Per Share
from Continuing Operations..... $ 0.20 $ 0.16 $ 0.08 $ (0.28) $ 0.19
========= ======== ======== ======== =========
Basic Earnings (Loss) Per Share... $ (0.10) $ 0.16 $ (0.11) $ (0.28) $ (0.32)
========== ======== ======== ========= ==========
Diluted Earnings (Loss) Per Share. $ (0.10) $ 0.16 $ (0.11) $ (0.28) $ (0.31)
========== ======== ======== ========= ==========
1997:
Total Revenue..................... $ 22,301 $ 36,279 $ 45,737 $ 65,766 $ 170,083
======== ======== ======== ======== =========
Income before Operating Expenses.. 9,101 15,480 19,415 30,684 74,680
======== ======== ======== ======== =========
Operating Expenses................ 8,133 11,988 14,780 20,840 55,741
======== ======== ======== ======== =========
Income before Interest Expense.... 968 3,492 4,635 9,844 18,939
======== ======== ======== ======== =========
Earnings from Continuing Operations $ 408 $ 1,896 $ 2,220 $ 5,004 $ 9,528
======== ======== ======== ======== =========
Earnings (Loss) from Discontinued
Operations..................... 2,854 2,415 (4,048) (1,304) (83)
======== ======== ========= ========= ==========
Net Earnings (Loss)............... $ 3,262 $ 4,311 $ (1,828) $ 3,700 $ 9,445
======== ======== ======== ======== =========
Basic Earnings Per Share from
Continuing Operations.......... $ 0.03 $ 0.10 $ 0.12 $ 0.27 $ 0.53
========= ======== ======== ======== ==========
Diluted Earnings Per Share from
Continuing Operations.......... $ 0.02 $ 0.10 $ 0.12 $ 0.26 $ 0.52
========= ======== ======== ======== ==========
Basic Earnings (Loss) Per Share... $ 0.21 $ 0.23 $ (0.10) $ 0.20 $ 0.53
========= ======== ======== ======== ==========
Diluted Earnings (Loss) Per Share. $ 0.20 $ 0.23 $ (0.10) $ 0.20 $ 0.52
========= ======== ======== ======== ==========
</TABLE>
66
<PAGE>
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES
The Company has had no disagreements with its independent accountants in
regard to accounting and financial disclosure and has not changed its
independent accountants during the two most recent fiscal years.
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item pertaining to executive officers of Ugly
Duckling is set forth above in Part I of this Form 10-K under the caption,
"Executive Officers of the Registrant," and is incorporated by reference into
this Item. Information concerning directors of the registrant and persons
nominated to become directors is incorporated by reference from the text under
the captions, "Board of Directors, Board Committees and Other Board Information"
and "Proposal to Be Voted on -- Item No. 1 --Election of Directors" in the Proxy
Statement for the June 2, 1999 Annual Meeting of Stockholders. Information
required by this Item pertaining to compliance with Section 16(a) of the
Securities Act of 1934 is set forth under the caption, "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement for the June 2, 1999
Annual Meeting of Stockholders and is incorporated by reference into this Item.
ITEM 11 -- EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference
from the text under the captions, "Certain Relationships and Related
Transactions" and "Compensation of Executive Officers, Benefits and Related
Matters" (excluding the material under the headings "Compensation Committee
Report on Executive Compensation" and "Stockholder Return Performance Graph"
therein) in the Proxy Statement for the June 2, 1999 Annual Meeting of
Stockholders.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning ownership of equity stock of the Company by certain
beneficial owners and management is incorporated by reference from the text
under the caption, "Security Ownership of Certain Beneficial Owners and
Management--Beneficial Ownership Table" in the Proxy Statement for the June 2,
1999 Annual Meeting of Stockholders.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions with
officers and directors is incorporated by reference from the text under the
caption, "Certain Relationships and Related Transactions" in the Proxy Statement
for the June 2, 1999 Annual Meeting of Stockholders.
67
<PAGE>
PART IV
ITEM 14 -- EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) Consolidated Financial Statements.
The following consolidated financial statements of Ugly Duckling Corporation
are filed as part of this Form 10-K.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................. 42
Consolidated Financial Statements and Notes thereto of Ugly Duckling
Corporation:
Consolidated Balance Sheets--December 31, 1998 and 1997.................. 43
Consolidated Statements of Operations--for the years ended
December 31, 1998, 1997 and 1996..................................... 44
Consolidated Statements of Stockholders' Equity--for the years ended
December 31, 1998, 1997 and 1996...................................... 45
Consolidated Statements of Cash Flows--for the years ended
December 31, 1998, 1997 and 1996..................................... 46
Notes to Consolidated Financial Statements............................... 47
All schedules have been omitted because they are not applicable, not
required, or the information has been disclosed in the consolidated
financial statements and related notes thereto or otherwise in this
Form 10-K Report.
</TABLE>
(b) Reports on Form 8-K.
During the fourth quarter of 1998, the Company filed five reports on Form
8-K. The first report on Form 8-K, dated October 8, 1998 and filed on October
13, 1998, pursuant to Items 5 and 7 (1) reported an expected charge to
Discontinued Operations totaling approximately $4.8 million (net of income
taxes) in the third quarter ended September 30, 1998, and (2) filed as exhibits
to the Form 8-K a Supplement No. 2 dated October 9, 1998 to the Offering
Circular for the Exchange Offer regarding the third quarter charge and Ugly
Duckling Corporation's press release dated October 8, 1998 titled "Ugly Duckling
Corporation Announces Third Quarter Charges to Discontinued Operations." The
second report on Form 8-K, dated October 20, 1998 and filed on October 21, 1998,
pursuant to Items 5 and 7 (1) reported the events described in two press
releases, and (2) filed as exhibits to the Form 8-K said press releases dated
October 21, 1998 and October 20, 1998 titled "Ugly Duckling Corporation
Announces Third Quarter 1998 Results" and "Ugly Duckling Corporation Announces
Successful Completion of Exchange Offer," respectively. The third report on Form
8-K, dated and filed November 18, 1998, pursuant to Items 5 and 7 filed as
exhibits to the Form 8-K a press release dated November 18, 1998 titled "Ugly
Duckling Corporation to Discontinue Gain-on-Sale Accounting." The fourth report
on Form 8-K, dated and filed November 23, 1998, pursuant to Items 5 and 7 (1)
reported the initiation of a supplemental offer by the Company to exchange
shares of its Common Stock for subordinated debentures, and (2) filed as
exhibits to the Form 8-K the offering circular describing the exchange offer and
Ugly Duckling Corporation's press release dated November 23, 1998 titled "Ugly
Duckling Corporation Announces Supplemental Exchange Offer." The fifth report on
Form 8-K, dated and filed December 23, 1998, pursuant to Items 5 and 7 filed as
an exhibit to the Form 8-K a press release dated December 23, 1998 titled "Ugly
Duckling Corporation Announces Completion of Supplemental Exchange Offer." After
the fourth quarter of 1998, the Company filed one report on Form 8-K. This
report on Form 8-K, dated and filed March 16, 1999, pursuant to Items 5 and 7
filed as an exhibit to the Form 8-K a press release dated March 16, 1999 titled
"Ugly Duckling Corporation Announces Reclassification of Cygnet Dealer Into
Continuing Operations and Anticipated First Quarter Results."
68
<PAGE>
(c) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
<S> <C>
3.1 Certificate of Incorporation of the Registrant Amended and Restated as of May 15, 1997(16)
3.2 Bylaws of the Registrant (5)
4.1 Certificate of Incorporation of the Registrant (filed as Exhibit 3.1)
4.2 Warrant Agreement between the Registrant and Harris Trust Company of California, as warrant agent, with respect to
the FMAC Warrants, dated as of April 1, 1998 (with form of warrant attached as Exhibit A, thereto)**
4.3 Form of Certificate representing Common Stock
4.4 10% Subordinated Debenture of the Registrant issued to Verde Investments, Inc. (13)
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 (6)
4.8 Form of 12% Senior Subordinated Note between Registrant and Kayne Anderson related entities, each as a lender
executed in February 1998 (12)
4.9 Warrant Agreement dated as of February 12, 1998 between Registrant and each of the Kayne Anderson related lenders
named therein (12)
4.10 Form of Warrant issued to Kayne Anderson related entities issued in February 1998 (12)
4.11 Warrant Agreement between the Registrant and Reliance Acceptance Corporation and Harris Trust of California, as
warrant agent, dated as of February 9, 1998 (w/form of warrant attached as Exhibit A, thereto) (15)
4.12 Certificate of Designation of the Preferred Stock (par value $.001 per share) (filed as part of Exhibit 3.1) (16)
4.13 Indenture dated as of October 15, 1998 between Registrant and Harris Trust and Savings Bank, as Trustee ("Harris")
("Indenture") (18)
4.13(a) First Supplemental Indenture dated as of October 15, 1998 between Registrant and Harris (18)
4.13(b) Form of 12% Subordinated Debenture due 2003**
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 (13)
10.1(c) Letter Agreement to Amend the Amended and Restated Loan and Security Agreement between Registrant and General
Electric Capital Corp. ("GECC"), dated as of October 20, 1997(15)
10.1(d) Letter agreement to Amend the Amended and Restated Loan Agreement between Registrant and GECC, dated as of March 25,
1998 (15)
10.1(e) Amendment No. 2 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between
Registrant and General Electric Capital Corporation dated September 9, 1998 (17)
10.1(f) Amendment No. 3 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between
Registrant and General Electric Capital Corporation dated January 19, 1999 **
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)
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)
</TABLE>
69
<PAGE>
<TABLE>
<S> <C>
10.5 Restated (as of March 14, 1997) Ugly Duckling Corporation Long-Term Incentive Plan (5)*
10.5(a) Amended and Restated Long Term Incentive Plan (as of January 15, 1998) (17)*
10.6 Employment Agreement between the Registrant and Ernest C. Garcia II (1)*
10.6(a) Amendment to Employment Agreement between the Registrant and Ernest C. Garcia II */**
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 (13)*
10.8(b) Amended and Restated Employment Agreement between Registrant and Walter Vonsh, dated May 26, 1998 (16)*
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)*
10.11(a) Modification of Terms of Employment between Registrant and Steven A. Tesdahl (16)*
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, 1998 (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 Portfolio Servicing Agreement among Registrant, Kars-Yes Financial, Inc., and certain other parties, dated as of
September 15, 1997 (7)
10.26(a) 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 15, 1997 between Registrant and Contract Purchaser (11)
10.31 FMAC Guaranty and Stock Pledge Agreement among FMAC, Registrant and certain banks (14)
10.32 Contribution Agreement between Registrant and FMAC (13)
10.33 Indemnification Agreement between the Company and FMAC (14)
10.34 Loan Agreement dated as of February 12, 1998 between the Registrant and each of the Kayne Anderson related Lenders
named therein (12)
10.35 Credit and Security Agreement between Registrant and First Merchants Acceptance Corp., dated as of July 17, 1997 (15)
10.35(a) First Amendment to Credit and Security Agreement between Registrant and FMAC, dated as of January 21, 1998 (15)
10.35(b) Second Amendment to Credit and Security Agreement between Registrant and FMAC, dated as of April 1, 1998 (15)
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.36 Service Agreement among Reliance Acceptance Corporation, Registrant, Bank America Business Credit, Inc. and certain
other parties dated as of February 9, 1998 (17)
10.37 Agreement of Understanding among Reliance Acceptance Group, Inc., Reliance Acceptance Corporation and Registrant,
dated as of February 9, 1998 (17)
10.38 Purchase and Sale-Leaseback Agreement and Joint Escrow Instructions between Champion Acceptance Corporation, Ugly
Duckling Car Sales, Inc., Ugly Duckling Car Sales New Mexico, Inc., Ugly Duckling Car Sales Florida, Inc. and Ugly
Duckling Car Sales Texas, LLP, date as of May 13, 1998 (16)
10.39 Loan Agreement by and among the Registrant, Kayne Anderson Non-Traditional Investments, LP, and certain other lenders,
dated July 20, 1998 (17)
10.40 Payment Guaranty by Registrant in favor of Kayne Anderson and the Lenders, dated as of July 20, 1998(17)
10.41 Agreement of Purchase and Sale of Assets made as of July 31, 1998, by and among Cygnet Financial Services, Inc. and
Mountain Parks Financial Services, Inc. (17)
10.42 1998 Executive Incentive Plan (17)*
10.43 Loan agreement between Greenwich Capital Financial Products, Inc. and Registrant dated November 12, 1998 **
10.43(a) Stock Pledge Agreement among Greenwich Capital Financial Products, Inc., Registrant and certain related parties,
dated November 12, 1998 **
10.44 KPMG Year 2000 Renovation Project Service Proposal to and Engagement Letter with the Registrant, dated November 12,
1998**
11 Earnings (Loss) per Share Computation (see Note 18 to Notes to Consolidated Financial Statements)**
12 Statement on Computation of Ratios **
21 List of Subsidiaries **
23 Consent of KPMG LLP **
24.1 Special Power of Attorney for R. Abrahams **
24.2 Special Power of Attorney for C. Jennings **
24.3 Special Power of Attorney for J. MacDonough **
24.4 Special Power of Attorney for F. Willey **
24.5 Special Power of Attorney for Ernest C. Garcia II **
24.6 Special Power of Attorney for Gregory Sullivan **
24.7 Special Power of Attorney for Steven Darak **
27.1 Financial Data Schedule for the year ending December 31, 1998**
27.2 Financial Data Schedule for the year ending December 31, 1997**
27.3 Financial Data Schedule for the year ending December 31, 1996**
27.4 Financial Data Schedule for the three months ending September 30, 1998**
27.5 Financial Data Schedule for the three months ending June 30, 1998**
27.6 Financial Data Schedule for the three months ending March 31, 1998**
27.7 Financial Data Schedule for the three months ending September 30, 1997**
27.8 Financial Data Schedule for the three months ending June 30, 1997**
27.9 Financial Data Schedule for the three months ending March 31, 1997**
</TABLE>
- ---------------------------
* Management contract or compensatory plan, contract or arrangement.
** Filed with this Form 10-K.
(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.
71
<PAGE>
(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.
(12) Incorporated by reference to the Company's Current Report on Form
8-K, filed February 20, 1998.
(13) Incorporated by reference to the Company's Registration Statement
on Form S-1 (Registration No. 333-42973), effective February 11,
1998.
(14) Incorporated by reference to the Company's Annual Report on Form
10-K, filed March 31 1998.
(15) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q, filed May 15, 1998.
(16) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q, filed August 10, 1998.
(17) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q, filed November 13, 1998.
(18) Incorporated by reference to the Company's Form T-3 for
Application for Qualification of Indentures under the Trust
Indenture Act of 1939, filed November 20, 1998
(File No. 022-22415), effective December 21, 1998.
72
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UGLY DUCKLING CORPORATION,
a Delaware corporation
By: /s/ ERNEST C. GARCIA II
-----------------------
Ernest C. Garcia II
Its: Chief Executive Officer
and Chairman of the Board
Date: March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name and Signature Title Date
<S> <C> <C>
/s/ ERNEST C. GARCIA II Chief Executive Officer and Chairman March 29, 1999
- ---------------------------------- of the Board of Directors (Principal
Ernest C. Garcia II Executive Officer and Director)
/s/ GREGORY B. SULLIVAN President, Chief Operating Officer March 29, 1999
- ---------------------------------- and Director (Director)
Gregory B. Sullivan
/s/ STEVEN T. DARAK Senior Vice President and Chief March 29, 1999
- ---------------------------------- Financial Officer (Principal Financial
Steven T. Darak and Accounting Officer)
* Director March 29, 1999
- ----------------------------------
Robert J. Abrahams
* Director March 29, 1999
- ----------------------------------
Christopher D. Jennings
* Director March 29, 1999
- ----------------------------------
John N. MacDonough
* Director March 29, 1999
- ----------------------------------
Frank P. Willey
</TABLE>
*By: /s/ ERNEST C. GARCIA II
-----------------------
Ernest C. Garcia II
Attorney-in-Fact
73
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
3.1 Certificate of Incorporation of the Registrant Amended and Restated as of May 15, 1997(16)
3.2 Bylaws of the Registrant (5)
4.1 Certificate of Incorporation of the Registrant (filed as Exhibit 3.1)
4.2 Warrant Agreement between the Registrant and Harris Trust Company of California, as warrant agent, with respect to
the FMAC Warrants, dated as of April 1, 1998 (with form of warrant attached as Exhibit A, thereto)**
4.3 Form of Certificate representing Common Stock
4.4 10% Subordinated Debenture of the Registrant issued to Verde Investments, Inc. (13)
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 (6)
4.8 Form of 12% Senior Subordinated Note between Registrant and Kayne Anderson related entities, each as a lender
executed in February 1998 (12)
4.9 Warrant Agreement dated as of February 12, 1998 between Registrant and each of the Kayne Anderson related lenders
named therein (12)
4.10 Form of Warrant issued to Kayne Anderson related entities issued in February 1998 (12)
4.11 Warrant Agreement between the Registrant and Reliance Acceptance Corporation and Harris Trust of California, as
warrant agent, dated as of February 9, 1998 (w/form of warrant attached as Exhibit A, thereto) (15)
4.12 Certificate of Designation of the Preferred Stock (par value $.001 per share) (filed as part of Exhibit 3.1) (16)
4.13 Indenture dated as of October 15, 1998 between Registrant and Harris Trust and Savings Bank, as Trustee ("Harris")
("Indenture") (18)
4.13(a) First Supplemental Indenture dated as of October 15, 1998 between Registrant and Harris (18)
4.13(b) Form of 12% Subordinated Debenture due 2003**
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 (13)
10.1(c) Letter Agreement to Amend the Amended and Restated Loan and Security Agreement between Registrant and General
Electric Capital Corp. ("GECC"), dated as of October 20, 1997(15)
10.1(d) Letter agreement to Amend the Amended and Restated Loan Agreement between Registrant and GECC, dated as of March 25,
1998 (15)
10.1(e) Amendment No. 2 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between
Registrant and General Electric Capital Corporation dated September 9, 1998 (17)
10.1(f) Amendment No. 3 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between
Registrant and General Electric Capital Corporation dated January 19, 1999 **
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)
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)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.5 Restated (as of March 14, 1997) Ugly Duckling Corporation Long-Term Incentive Plan (5)*
10.5(a) Amended and Restated Long Term Incentive Plan (as of January 15, 1998) (17)*
10.6 Employment Agreement between the Registrant and Ernest C. Garcia II (1)*
10.6(a) Amendment to Employment Agreement between the Registrant and Ernest C. Garcia II */**
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 (13)*
10.8(b) Amended and Restated Employment Agreement between Registrant and Walter Vonsh, dated May 26, 1998 (16)*
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)*
10.11(a) Modification of Terms of Employment between Registrant and Steven A. Tesdahl (16)*
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, 1998 (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 Portfolio Servicing Agreement among Registrant, Kars-Yes Financial, Inc., and certain other parties, dated as of
September 15, 1997 (7)
10.26(a) 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 15, 1997 between Registrant and Contract Purchaser (11)
10.31 FMAC Guaranty and Stock Pledge Agreement among FMAC, Registrant and certain banks (14)
10.32 Contribution Agreement between Registrant and FMAC (13)
10.33 Indemnification Agreement between the Company and FMAC (14)
10.34 Loan Agreement dated as of February 12, 1998 between the Registrant and each of the Kayne Anderson related Lenders
named therein (12)
10.35 Credit and Security Agreement between Registrant and First Merchants Acceptance Corp., dated as of July 17, 1997 (15)
10.35(a) First Amendment to Credit and Security Agreement between Registrant and FMAC, dated as of January 21, 1998 (15)
10.35(b) Second Amendment to Credit and Security Agreement between Registrant and FMAC, dated as of April 1, 1998 (15)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.36 Service Agreement among Reliance Acceptance Corporation, Registrant, Bank America Business Credit, Inc. and certain
other parties dated as of February 9, 1998 (17)
10.37 Agreement of Understanding among Reliance Acceptance Group, Inc., Reliance Acceptance Corporation and Registrant,
dated as of February 9, 1998 (17)
10.38 Purchase and Sale-Leaseback Agreement and Joint Escrow Instructions between Champion Acceptance Corporation, Ugly
Duckling Car Sales, Inc., Ugly Duckling Car Sales New Mexico, Inc., Ugly Duckling Car Sales Florida, Inc. and Ugly
Duckling Car Sales Texas, LLP, date as of May 13, 1998 (16)
10.39 Loan Agreement by and among the Registrant, Kayne Anderson Non-Traditional Investments, LP, and certain other lenders,
dated July 20, 1998 (17)
10.40 Payment Guaranty by Registrant in favor of Kayne Anderson and the Lenders, dated as of July 20, 1998(17)
10.41 Agreement of Purchase and Sale of Assets made as of July 31, 1998, by and among Cygnet Financial Services, Inc. and
Mountain Parks Financial Services, Inc. (17)
10.42 1998 Executive Incentive Plan (17)*
10.43 Loan agreement between Greenwich Capital Financial Products, Inc. and Registrant dated November 12, 1998 **
10.43(a) Stock Pledge Agreement among Greenwich Capital Financial Products, Inc., Registrant and certain related parties,
dated November 12, 1998 **
10.44 KPMG Year 2000 Renovation Project Service Proposal to and Engagement Letter with the Registrant, dated November 12,
1998**
11 Earnings (Loss) per Share Computation (see Note 18 to Notes to Consolidated Financial Statements)**
12 Statement on Computation of Ratios **
21 List of Subsidiaries **
23 Consent of KPMG LLP **
24.1 Special Power of Attorney for R. Abrahams **
24.2 Special Power of Attorney for C. Jennings **
24.3 Special Power of Attorney for J. MacDonough **
24.4 Special Power of Attorney for F. Willey **
24.5 Special Power of Attorney for Ernest C. Garcia II **
24.6 Special Power of Attorney for Gregory Sullivan **
24.7 Special Power of Attorney for Steven Darak **
27.1 Financial Data Schedule for the year ending December 31, 1998**
27.2 Financial Data Schedule for the year ending December 31, 1997**
27.3 Financial Data Schedule for the year ending December 31, 1996**
27.4 Financial Data Schedule for the three months ending September 30, 1998**
27.5 Financial Data Schedule for the three months ending June 30, 1998**
27.6 Financial Data Schedule for the three months ending March 31, 1998**
27.7 Financial Data Schedule for the three months ending September 30, 1997**
27.8 Financial Data Schedule for the three months ending June 30, 1997**
27.9 Financial Data Schedule for the three months ending March 31, 1997**
</TABLE>
- ---------------------------
* Management contract or compensatory plan, contract or arrangement.
** Filed with this Form 10-K.
(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.
<PAGE>
(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.
(12) Incorporated by reference to the Company's Current Report on Form
8-K, filed February 20, 1998.
(13) Incorporated by reference to the Company's Registration Statement
on Form S-1 (Registration No. 333-42973), effective February 11,
1998.
(14) Incorporated by reference to the Company's Annual Report on Form
10-K, filed March 31 1998.
(15) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q, filed May 15, 1998.
(16) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q, filed August 10, 1998.
(17) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q, filed November 13, 1998.
(18) Incorporated by reference to the Company's Form T-3 for
Application for Qualification of Indentures under the Trust
Indenture Act of 1939, filed November 20, 1998
(File No. 022-22415), effective December 21, 1998.
UGLY DUCKLING CORPORATION
WARRANT AGREEMENT
THIS WARRANT AGREEMENT (the "Agreement"), dated as of April 1, 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.
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.
PAGE - 1
<PAGE>
(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 April 1, 2001, 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.
(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
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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 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
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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 written 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.
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.
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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 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:
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(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
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
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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.
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
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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.
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
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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 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
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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.
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) 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
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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.
(c) Until sold by FMAC pursuant to the applicable prospectus included
within the registration statement filed by the Company and in effect from time
to time as contemplated in Section 14(a) above, the certificates evidencing the
Warrants and shares issuable upon exercise of the Warrants will bear a legend in
substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS AND MAY NOT BE SOLD, EXCHANGED, HYPOTHECATED
OR OTHERWISE TRANSFERRED IN ANY MANNER EXCEPT IN COMPLIANCE
WITH SECTION 14 OF THE WARRANT AGREEMENT DATED AS OF APRIL 1,
1998, BETWEEN UGLY DUCKLING CORPORATION AND HARRIS TRUST
COMPANY OF CALIFORNIA, AS WARRANT AGENT, AS THE SAME MAY BE
AMENDED FROM TIME TO TIME.
Section 15. [Intentionally Left Blank]
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
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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.
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
PAGE - 12
<PAGE>
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 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.
PAGE - 13
<PAGE>
(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 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.
PAGE - 14
<PAGE>
(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 Warrant Agent
or the registered holder of any Warrant may, at the expense of the Company,
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 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.
PAGE - 15
<PAGE>
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
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
PAGE - 16
<PAGE>
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
against the Warrant Agent without the execution of such supplement or amendment
by 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.
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.
PAGE - 17
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, as of the day and year first above written.
UGLY DUCKLING CORPORATION
By: /s/ Gregory B. Sullivan
-----------------------
Name:Gregory B. Sullivan
Its: President
HARRIS TRUST COMPANY
OF CALIFORNIA, as Warrant Agent
By:/S/ NEIL T. ROSSO
------------------
Name: Neil T. Rosso
Its:Assistant Vice President
PAGE - 18
<PAGE>
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 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,
PAGE - 19
<PAGE>
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
ATTEST:
Secretary
PAGE - 20
<PAGE>
This is one of the
Warrants referred
to in the within
mentioned Warrant
Agreement.
HARRIS TRUST COMPANY
OF CALIFORNIA
By:
Authorized Representative
PAGE - 21
<PAGE>
UGLY DUCKLING CORPORATION
PURCHASE FORM
Mailing Address:
HARRIS TRUST COMPANY OF CALIFORNIA
601 South Figueroa
49th Floor
Los Angeles, CA 90017
Attention: Corporate Trust
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
PAGE - 22
<PAGE>
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)
- --------------------------------------------------------------------------------
_____________ 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.
PAGE - 23
Form of Debentures
THIS SECURITY IS ISSUED WITH ORIGINAL ISSUE DISCOUNT
WITHIN THE MEANING OF THE INTERNAL REVENUE CODE
FOR INFORMATION REGARDING THE ISSUE PRICE, THE
AMOUNT OF THE ORIGINAL ISSUE DISCOUNT, THE ISSUE
DATE, AND THE YIELD TO MATURITY, PLEASE CONTACT:
DOUGLAS L. WILLIAMS, PARTNER
SECURITIES HOTLINE
202-739-8754
12% SUBORDINATED DEBENTURES DUE 2003
UGLY DUCKLING CORPORATION
No. _____________ $_________
CUSIP NO. 903512 AA 9 Date of Original Issuance: October 23, 1998
Ugly Duckling Corporation, a corporation duly organized and existing
under the laws of Delaware (herein called the "Company," which term includes any
successor Person under the Indenture hereinafter referred to), for value
received, hereby promises to pay to ______________, or registered assigns, the
principal sum of ___________ Dollars on the date that is five (5) years from the
date of original issuance set forth above, and to pay interest thereon from the
original date of issuance or from the most recent Interest Payment Date to which
interest has been paid or duly provided for, semi-annually on April 15 and
October 15 in each year, commencing April 15, 1999, at the rate of 12% per
annum, until the principal hereof is paid or made available for payment. The
interest so payable, and punctually paid or duly provided for, on any Interest
Payment Date will, as provided in such Indenture, be paid to the Person in whose
name this Security (or one or more Predecessor Securities) is registered at the
close of business on the Regular Record Date for such interest, which shall be
the April 1 or October 1 (whether or not a Business Day), as the case may be,
next preceding such Interest Payment Date. Any such interest not so punctually
paid or duly provided for will forthwith cease to be payable to the Holder on
such Regular Record Date and may either be paid to the Person in whose name this
Security (or one or more Predecessor Securities) is registered at the close of
business on a Special Record Date for the payment of such Defaulted Interest to
be fixed by the Trustee, notice whereof shall be given to Holders of Securities
of this series not less than 10 days prior to such Special Record Date, or be
paid at any time in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the Securities of this series
may be listed, and upon such notice as may be required by such exchange, all as
more fully provided in said Indenture.
<PAGE>
Payment of the principal of (and premium, if any) and any such interest
on this Security will be made at the office or agency of the Company maintained
for that purpose in Chicago, Illinois, in such coin or currency of the United
States of America as at the time of payment is legal tender for payment of
public and private debts; provided, however, that at the option of the Company
payment of interest may be made by check mailed to the address of the Person
entitled thereto as such address shall appear in the Security Register.
Reference is hereby made to the further provisions of this Security set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by
the Trustee referred to on the reverse hereof by manual signature, this Security
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
In Witness Whereof, the Company has caused this instrument to be duly
executed.
UGLY DUCKLING CORPORATION
By /s/ ERNEST C. GARCIA II
---------------------------
Chairman and Chief Executive Officer
Attest:
/s/ STEVEN P. JOHNSON
- ---------------------
Secretary
<PAGE>
Form of Reverse of Security.
This Security is one of a duly authorized issue of securities of the
Company (herein called the "Securities"), issued and to be issued in one or more
series under an Indenture, dated as of October 15, 1998 (herein called the
"Indenture", which term shall have the meaning assigned to it in such
instrument), between the Company and Harris Bank and Trust Company, as Trustee
(herein called the "Trustee", which term includes any successor trustee under
the Indenture), and reference is hereby made to the Indenture for a statement of
the respective rights, limitations of rights, duties and immunities thereunder
of the Company, the Trustee and the Holders of the Securities and of the terms
upon which the Securities are, and are to be, authenticated and delivered. This
Security is one of the series designated on the face hereof, limited in
aggregate principal amount to $32,500,000.
The Securities of this series are subject to redemption upon not less
than 30 days' notice by mail, at any time, as a whole or in part, at the
election of the Company, at a Redemption Price equal to 100% of the principal
amount, together with accrued interest to the Redemption Date, but interest
installments whose Stated Maturity is on or prior to such Redemption Date will
be payable to the Holders of such Securities, or one or more Predecessor
Securities, of record at the close of business on the relevant Record Dates
referred to on the face hereof for such interest installments, all as provided
in the Indenture. The Indenture provides that a notice of redemption may be
given that is conditional upon the receipt by the Trustee on or prior to the
Redemption Date of amounts sufficient to pay principal of, and premium, if any,
and interest on, the Securities to be redeemed, and that if such amounts shall
not have been so received, said notice shall be of no force and effect, the
Securities to be redeemed will not become due and payable on the Redemption
Date, and the Company will not be required to redeem such Securities on such
date.
In the event of redemption of this Security in part only, a new
Security or Securities of this series and of like tenor for the unredeemed
portion hereof will be issued in the name of the Holder hereof upon the
cancellation hereof.
The Securities of this series are subordinate in right of payment, in
the manner and to the extent set forth in the Indenture, to the prior payment in
full of all Senior Indebtedness of the Company. To the extent and in the manner
provided in the Indenture, Senior Indebtedness must be paid before any payment
may be made to any Holder of this Security. Any Holder by accepting this
Security agrees to the subordination and authorizes the Trustee to give it
effect.
The Indenture contains provisions for defeasance at any time of the
entire indebtedness of this Security or certain restrictive covenants and Events
of Default with respect to this Security, in each case upon compliance with
certain conditions set forth in the Indenture.
If an Event of Default with respect to Securities of this series shall
occur and be continuing, the principal of the Securities of this series may be
declared due and payable in the manner and with the effect provided in the
Indenture.
<PAGE>
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities of each series to be
affected under the Indenture at any time by the Company and the Trustee without
the consent of any Holders in certain limited cases, and with the consent of the
Holders of a majority in principal amount of the Securities at the time
Outstanding of each series to be affected subject to certain exceptions. The
Indenture also contains provisions permitting the Holders of specified
percentages in principal amount of the Securities of each series at the time
Outstanding, on behalf of the Holders of all Securities of such series, to waive
compliance by the Company with certain provisions of the Indenture and certain
past defaults under the Indenture and their consequences. Any such consent or
waiver shall be conclusive and binding upon the Holder of this Security and upon
all future Holders of this Security and of any Security issued upon the
registration of transfer hereof or in exchange herefor or in lieu hereof,
whether or not notation of such consent or waiver is made upon this Security.
As provided in and subject to the provisions of the Indenture, the
Holder of this Security shall not have the right to institute any proceeding
with respect to the Indenture or for the appointment of a receiver or trustee or
for any other remedy thereunder, unless such Holder shall have previously given
the Trustee written notice of a continuing Event of Default with respect to the
Securities of this series, the Holders of not less than 25% in principal amount
of the Securities of this series at the time Outstanding shall have made written
request to the Trustee to institute proceedings in respect of such Event of
Default as Trustee and offered the Trustee reasonable indemnity, and the Trustee
shall not have received from the Holders of a majority in principal amount of
Securities of this series at the time Outstanding a direction inconsistent with
such request, and shall have failed to institute any such proceeding, for 60
days after receipt of such notice, request and offer of indemnity. The foregoing
shall not apply to any suit instituted by the Holder of this Security for the
enforcement of any payment of principal hereof or any premium or interest hereon
on or after the respective due dates expressed herein.
No reference herein to the Indenture and no provision of this Security
or of the Indenture shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay the principal of and any premium and
interest on this Security at the times, place and rate, and in the coin or
currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein
set forth, the transfer of this Security is registrable in the Security
Register, upon surrender of this Security for registration of transfer at the
office or agency of the Company in any place where the principal of and any
premium and interest on this Security are payable, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar duly executed by the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Securities of
this series and of like tenor, of authorized denominations and for the same
aggregate principal amount, will be issued to the designated transferee or
transferees.
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The Securities of this series are issuable only in registered form
without coupons in denominations of $1.00 and any integral multiple thereof. As
provided in the Indenture and subject to certain limitations therein set forth,
Securities of this series are exchangeable for a like aggregate principal amount
of Securities of this series and of like tenor of a different authorized
denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any such registration of transfer
or exchange, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name this Security is registered as the owner hereof for all
purposes, whether or not this Security be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
All terms used in this Security which are defined in the Indenture
shall have the meanings assigned to them in the Indenture.
Amendment No. 3 to Amended and Restated Motor Vehicle Installment Contract
Loan and Security Agreement
This Amendment is entered into by and between Ugly Duckling Corporation,
successor in interest to Ugly Duckling Holdings, Inc. ("Ugly Duckling"), a
Delaware corporation; Ugly Duckling Car Sales and Finance Corporation
("UDCSFC"), an Arizona corporation formerly known as Duck Ventures, Inc.; Ugly
Duckling Credit Corporation ("UDCC") formerly known as Champion Acceptance
Corporation, an Arizona corporation; Ugly Duckling Car Sales, Inc. ("Sales"); an
Arizona corporation; Champion Financial Services, Inc. ("Champion"), an Arizona
corporation; Ugly Duckling Car Sales Florida, Inc. ("Car Sales Florida"), a
Florida corporation; Ugly Duckling Car Sales Texas, L.L.P. ("Car Sales Texas"),
an Arizona limited liability partnership; Ugly Duckling Car Sales New Mexico,
Inc. ("Car Sales New Mexico"), a New Mexico corporation; Ugly Duckling Car Sales
California, Inc. ("Car Sales California"), a California corporation; Ugly
Duckling Car Sales Georgia, Inc. ("Car Sales Georgia"), a Georgia corporation
(all of the foregoing entities collectively referred to herein as "Existing
Borrower"); Cygnet Financial Corporation ("Cygnet"), a Delaware corporation;
Cygnet Dealer Finance, Inc. ("Dealer Finance"), an Arizona corporation; Cygnet
Finance Alabama, Inc. ("Cygnet Alabama"), an Arizona corporation; Cygnet Support
Services, Inc. ("Services"), an Arizona corporation; Cygnet Financial Services,
Inc. ("Cygnet Services"), an Arizona corporation; Cygnet Financial Portfolio,
Inc. ("Cygnet Portfolio"), an Arizona corporation (Cygnet, Dealer Finance,
Cygnet Alabama, Services, Cygnet Services, and Cygnet Portfolio collectively
referred to herein as "New Borrower"; Existing Borrower and New Borrower
collectively referred to herein as "Borrower"); and General Electric Capital
Corporation, a New York corporation ("Lender").
RECITALS
A. Existing Borrower and Lender are parties to an Amended and Restated
Motor Vehicle Installment Contract Loan and Security Agreement dated as of
August 15, 1997, as amended by an Assumption and Amendment Agreement dated
October 23, 1997, Amendment No. 1 dated December 22, 1997, Amendment No. 2 dated
September 9, 1998 (the Amended and Restated Motor Vehicle Installment Contract
Loan and Security Agreement as so amended is referred to herein as the
"Agreement") pursuant to which Lender agreed to make Advances to Existing
Borrower on the terms and conditions set forth in the Agreement.
B. Existing Borrower and Lender desire to add New Borrower to the Agreement
and to amend certain provisions of the Agreement pursuant to the terms set forth
in this Amendment.
In consideration of the premises and other good and valuable consideration,
the receipt of which is hereby acknowledged by each of the parties hereto, the
parties agree as follows:
1. Defined Terms. Unless otherwise specified herein, all capitalized terms
used in this Amendment shall have the same meaning given to such term(s) in the
Agreement.
2. New Borrower. Without releasing Existing Borrower from liability to
Lender for all obligations existing or in the future arising under the
Agreement, New Borrower hereby assumes obligations as a Borrower to Lender under
the Agreement and all obligations to Lender under all other documents and
instruments executed by Existing Borrower in connection with the Agreement.
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By executing this Amendment, New Borrower shall become a Borrower under the
Agreement with all rights and obligations attendant to such status. New Borrower
grants to Lender all of the conveyances and rights granted to Lender under the
Agreement, including but not limited to a security interest in all collateral
described therein and all rights and remedies set forth therein (including but
not limited to rights of termination, acceleration and foreclosure).
3. Amendments to Agreement. Effective as of the date hereof, the Agreement
is hereby amended as follows.
Definitions.
a. Borrowing Base. The definition of Borrowing Base in Section 16.0 of the
Agreement is amended to be as follows:
Borrowing Base: the amount equal to the lesser of (i) One Hundred
Twenty-five Million Dollars ($125,000,000.00) minus the Guaranty Liability, or
(ii) an amount equal to (A) sixty five percent (65%) of the Outstanding
Principal Balance of all Originated Eligible Contracts (but not to exceed one
hundred fifteen percent (115%) of the NADA average wholesale Black Book value
for all such Contracts in the aggregate) during the time they are included in
the Borrowing Base pursuant to Section 3.1; plus (B) eighty-six percent (86%) of
the Outstanding Principal Balance of all Champion Eligible Contracts (but not to
exceed one hundred seven percent (107%) of wholesale Kelly Blue Book for all
such Contracts in the aggregate) during the time they are included in the
Borrowing Base pursuant to Section 3.1; plus (C) seventy-five percent (75%) of
the Outstanding Principal Balance of all Seminole Eligible Contracts during the
time they are included in the Borrowing Base pursuant to Section 3.1; plus (D)
the Inventory Advance Value; plus (E) during the term of the Dealer Contract
Facility, the Dealer Contract Advance Value. At Lender's sole and absolute
discretion and Borrower's request, Lender may agree to include Bulk Purchase
Contracts as part of the Borrowing Base hereunder. The amount of advance against
Bulk Purchase Contracts, if any, shall be at Lender's sole and absolute
discretion. With respect to section (ii) (A) of this definition, compliance with
the parenthetical test based on Black Book values shall be measured by Lender's
sample of 100 or more Contracts and not on a Contract-by-Contract basis.
b. Contract Rights. The following sentence is added to the definition of
Contract Rights in Section 16.0 of the Agreement:
With respect to Dealer Contracts, Contract Rights are all of Borrower's
interests and rights in, under and with respect to, Dealer Contracts, including
but not limited to rights in collateral securing Dealer Contracts and rights to
payments under Dealer Contracts.
c. Cygnet Borrower. The following definition is added to Section 16.0 of
the Agreement:
Cygnet Borrower: one or more of Cygnet Financial Corporation, a Delaware
corporation; Cygnet Dealer Finance, Inc., an Arizona corporation; Cygnet Finance
Alabama, Inc., an Arizona corporation; Cygnet Support Services, Inc., an Arizona
corporation; Cygnet Financial Services, Inc., an Arizona corporation; and Cygnet
Financial Portfolio, Inc., an Arizona corporation.
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d. Dealer Contract. The following definition is added to Section 16.0 of
the Agreement:
Dealer Contract: a contract between Cygnet Borrower and a motor vehicle
dealer for (i) a revolving loan under Cygnet Borrower's Asset Based Loan Program
by Cygnet Borrower to the dealer with advances based on and secured by motor
vehicle installment contracts (which installment contracts are secured by the
motor vehicle), and with servicing to be performed by the dealer, or (ii) the
purchase of motor vehicle installment contracts (which installment contracts are
secured by the motor vehicle) under Cygnet Borrower's Dealer Collection Program
by Cygnet Borrower from the dealer, and with servicing to be performed by the
dealer.
e. Dealer Contract Advance. The following definition is added to Section
16.0 of the Agreement:
Dealer Contract Advance Value: the lesser of (i) Fifteen Million Dollars
($15,000,000) and (ii) fifty percent of Cygnet Borrower's net investment in
Eligible Dealer Contracts. For the purpose of this definition, (i) Cygnet
Borrower's net investment in Eligible Dealer Contracts is equal to the gross
finance receivable for the underlying installment contracts minus the sum of
unearned interest, Cygnet Borrower discounts and refundable reserves, and (ii)
Cygnet Borrower's net investment in Eligible Dealer Contracts shall not include
the balances outstanding under a Dealer Contract with respect to motor vehicle
installment contracts which are more than 45 days past due or which are not
included by Cygnet Borrower in the active outstandings under the Dealer
Contract.
f. Dealer Contract Facility. The following definition is added to Section
16.0 of the Agreement:
Dealer Contract Facility: the loan Facility described in Section 2.1 (C).
g. Eligible Dealer Contract . The following definition is added to Section
16.0 of the Agreement:
Eligible Dealer Contract: a Dealer Contract (i) which was, and continues to
be, originated, underwritten, documented, and administered under the Dealer
Collection Program or Asset Based Loan program in all material respects in
accordance with the June 10, 1998 Cygnet Dealer Finance, Inc. Business Plan and
Summary of Operations (including exhibits), or as otherwise approved in writing
by Lender, (ii) under which installment contracts outstanding are less than
Three Million Five Hundred Thousand Dollars ($3,500,000), unless the dealer is
DCT or Texas Auto Outlet, (iii) under which not more than 15% of the outstanding
installment contracts are more than 45 days past due, (iv) for which the dealer
is servicing the installment contracts, (v) which is not in default by the
Dealer or Cygnet Borrower, (vi) with a dealer which is actively in business and
not in a reorganization or liquidation proceeding, (vii) with a dealer approved
by Lender, (viii) which is valid, and enforceable by Cygnet Borrower and which
is for installment contracts which are valid and enforceable, and (ix) for which
Cygnet Borrower has a first priority perfected security interest or ownership of
all installment contracts (and of the security interest in the underlying motor
vehicle) outstanding under the Dealer Contract.
h. Facility. The definition of Facility is amended to be:
Facility: the Installment Contract Facility, the Inventory Facility, or the
Dealer Contract Facility, as applicable.
i. Loan Availability: The definition of "Loan Availability" in Section 16.0
of the Agreement is amended to be:
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Loan Availability: as to the Installment Contract Facility, the amount by
which the Borrowing Base exceeds the Loan; as to the Inventory Facility, the
amount of the Inventory Advance Value; as to the Dealer Contract Facility, the
amount of the Dealer Contract Advance Value.
j. Single Loan. Section 2.0 of the Agreement is amended to be:
Section 2.0. Single Loan. All Advances by Lender to Borrower under
Sections 2.1(A), 2.1(B) and 2.1(C) shall constitute one loan and
all indebtedness and obligations of Borrower to Lender under the
Loan Documents shall constitute an obligation secured by Lender's
security interest in all of the Collateral. In no event shall the
Loan exceed One Hundred Twenty-five Million ($125,000,000.00).
Borrower's obligation to pay the Loan is evidenced by this
Agreement. Borrower shall pay Lender when due all Indebtedness in
accordance with the terms of this Agreement whether or not
Borrower has executed a promissory note. The actual amount
Borrower is obligated to pay Lender hereunder shall be determined
by this Agreement and the records of Lender, regardless of the
terms of any promissory note. Any promissory note executed in
connection with the Indebtedness need not be amended to reflect
changes made to this Agreement.
k. Loan Facilities. Section 2.1 of the Agreement is amended to be:
Section 2.1. Loan Facilities.
(A) Installment Contract Facility. Subject to all of the terms and
conditions of this Agreement, Lender agrees to loan funds
up to One Hundred Twenty-five Million ($125,000,000.00) to
Borrower against Eligible Contracts from time to time in a
series of Advances during the term of this Agreement. Funds
may be borrowed, repaid and reborrowed on a revolving basis
subject to the terms and conditions set forth in this
Agreement, provided that the amount outstanding under the
Installment Contract Facility shall not at any time exceed the
Borrowing Base.
(B) Inventory Facility. Subject to all of the terms and conditions
of this Agreement, Lender agrees to loan funds up to Twenty
Million ($20,000,000.00) to Borrower against Eligible
Inventory from time to time in a series of Advances during the
term of this Agreement. Funds may be borrowed, repaid and
reborrowed on a revolving basis subject to the terms and
conditions set forth in this Agreement, provided that the
amount outstanding under the Inventory Facility shall not at
any time exceed the Inventory Advance Value.
(C) Dealer Contract Facility. Subject to all of the terms and
conditions of this Agreement, Lender agrees to loan funds up
to Fifteen Million ($15,000,000.00) to Borrower against
Eligible Dealer Contracts from time to time in a series of
Advances during the term of the Dealer Contract Facility.
Funds may be borrowed, repaid, and reborrowed on a revolving
basis subject to the terms and conditions set forth in this
Agreement, provided that the amount outstanding under the
Dealer Contract Facility shall not at any time exceed the
Dealer Contract Advance Value. The term of the Dealer Contract
Facility shall commerce on January 15, 1999 and shall expire
on July 14, 1999. Borrower may terminate the Dealer Contract
Facility at any time prior to July 14, 1999 by Borrower's
delivery to Lender of written notice of termination of the
Dealer Contract Facility and payment of all amounts
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outstanding under the Dealer Contract Facility. Upon
expiration or termination of the Dealer Contract Facility and
provided Borrower is not then in default under this Agreement,
Cygnet Borrower shall be released of all obligations as
Borrower under this Agreement, all Dealer Contracts shall be
released as Collateral and Lender shall execute and deliver to
Borrower all documents reasonably required to evidence the
release of Cygnet Borrower and Dealer Contracts. The
expiration or termination of the Dealer Contract Facility
shall not effect the Loan Term or the guaranty of the
obligations in this Agreement by Cygnet Dealer Finance, Inc.
l. Dealer Contract Facility Fee. Section 2.2 of the Agreement is amended by
adding the following Section 2.2 (D):
(D) On the fifteenth day of each month beginning in February, 1999 and
continuing during the term of the Dealer Contract Facility, Borrower shall
pay to Lender a Dealer Contract Facility fee of Twenty Thousand Dollars
($20,000).
m. Determination of Eligibility. The content of Section 3.1 of the
Agreement is amended to be Section 3.1(A) and the following is added as Section
3.1(B) :
Section 3.1(B) Borrower shall from time to time deliver to Lender Eligible
Dealer Contracts which Borrower desires to be included in the Borrowing Base. An
Eligible Dealer Contract shall be included in the Borrowing Base only when and
for so long as, in Lender's sole determination, each of the requirements in the
definition of Eligible Dealer Contract continues to be satisfied. If a Dealer
Contract is determined by Lender to be, or is treated by Lender as, an Eligible
Dealer Contract, Lender reserves the right to change its determination or
treatment and to remove the Dealer Contract from the Borrowing Base if it later
determines that the Dealer Contract is not or was not an Eligible Dealer
Contract. A determination by Lender that a Dealer Contract is an Eligible Dealer
Contract is not a waiver by Lender of, or an admission by Lender of the truth
of, any of Borrower's representations and warranties in this Agreement.
n. Procedure for Borrowing. Section 3.2.(A) of the Agreement is amended to
be:
Section 3.2. Procedure for Borrowing. (A) Borrower shall designate under
which Facility it is requesting an Advance. If no Facility is specified by
Borrower at the time of the request, then Lender may, at its option, (i)
designate the Facility under which the Advance shall be made, or (ii) request a
designation from Borrower. The first Advance shall not exceed the Borrowing
Base. Subsequent Advances shall not be made more frequently than daily. Each
subsequent Advance shall not exceed the applicable Loan Availability determined
at Lender's election either as of the end of the most recent Accounting Period
for which Lender has received the monthly reports required by Section 5.1 (C),
or, as of such other date thereafter designated by Lender. Lender is not
obligated to make an Advance if the amount available or requested is less than
Twenty-Five Thousand Dollars ($25,000.00). Lender is not obligated to make an
Advance unless Borrower provides Lender with sufficient information to calculate
the Loan Availability. Lender's use of the information provided by Borrower to
determine the amount available for Advances is not an admission by Lender as to
the accuracy of the information, and Lender reserves the right to verify the
information and redetermine the amount available for Advances.
o. Borrower Administration. Sections 5.1 (C), (D) and (E) of the Agreement
are amended to be:
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(C) Borrower shall furnish to Lender such reports in such form that Lender
determines are necessary for it to track and monitor the Pledged Contracts,
Remittances, Financed Vehicles, Dealer Contracts and insurance. Such reports
shall be in a format and on a medium readable by Lender's computer software, or
such other format or medium acceptable to Lender. The reports shall include but
not be limited to those reports set forth on Exhibit 5.1(C) attached hereto and
made a part hereof, and shall be delivered to Lender in accordance with such
Exhibit.
(D) Notwithstanding anything herein to the contrary, (i) Borrower shall
remain liable under all Contracts and Dealer Contracts, and any other contracts
and agreements with Contract Rights Payors or otherwise included in or related
to the Collateral, to the extent set forth therein to perform all of its duties
and obligations thereunder to the same extent as if this Agreement had not been
executed, and (ii) the exercise by Lender of any rights under any of the Loan
Documents shall not release Borrower from any of its duties or obligations under
the Contracts or Dealer Contracts, or the other contracts and agreements, and
(iii) Lender shall not have any obligation or liability under the Contracts or
Dealer Contracts, or the other contracts and agreements, nor shall Lender be
obligated to perform any of the obligations or duties of Borrower thereunder or
to take any action to collect or enforce any rights thereunder.
(E) Borrower shall administer the Contracts and Dealer Contracts at its own
expense. In the event that Borrower fails to administer the Contracts in
accordance with Section 5.1(A), or fails to administer Dealer Contracts in
accordance with (i) the Dealer Collection Program or Asset Based Loan program as
described in the June 10, 1998 Cygnet Dealer Finance, Inc. Business Plan and
Summary of Operations (including exhibits), (ii) applicable law, and (iii)
reasonable and prudent procedures in a way that, in Lender's determination, does
not adversely affect the value of the Collateral, or there is an Event of
Default or a Pre-Default Event, Lender may in Lender's or Borrower's name take
over all or part of the Contract administration Borrower is required by this
Agreement to perform and all or part of the Dealer Contract Administration
performed by Borrower. If Lender takes over all or part of such administration,
Borrower shall pay to Lender on demand all out-of-pocket costs incurred by
Lender in the performance of Borrower's administration obligations, and Borrower
shall pay Lender for the administration performed by Lender an administration
fee (exclusive of out-of-pocket costs) established by Lender, and until so paid
such costs and fee shall be part of the Loan.
p. Security Interest. The description of Collateral in Section 6.0 of the
Agreement is amended to include the following:
Dealer Contracts; all rights of Borrower, and all assets owned by Borrower,
arising under its Dealer Collection Program and Asset Based Loan Program
(including but not limited to all receivables from dealers to Borrower and all
rights of Borrower under agreements with dealers)
q. Right to Notify and Endorse. Section 6.4 of the Agreement is amended to
be:
Right to Notify and Endorse. Borrower hereby irrevocably authorizes Lender
to notify any or all Contract Debtors, dealers under Dealer Contracts, and
Contract Rights Payors that Lender has a security interest in Contracts, Dealer
Contracts, Contract Rights, and other items of Collateral at any time (i) prior
to the occurrence of an Event of Default, in the name of Borrower, and (ii)
after the occurrence of an Event of Default, in Lender's or Borrower's name. Any
such notice shall, at Lender's election, be signed by Borrower and may be sent
on Borrower's stationery.
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r. Lender Appointed Attorney-in-Fact. The first sentence in Section 6.5 of
the Agreement is amended by adding the following:
and (v) to exercise Borrower's rights with respect to bank accounts
into which payments are deposited for installment contracts outstanding
under Dealer Contracts and to perfect the assignment of such accounts to
Lender.
s. Contract Delivery Documents. Section 6.9 of the Agreement is amended by
adding the following sentence:
Until Lender notifies Borrower to deliver the Contract Delivery Documents
to Lender, in which case Borrower shall immediately deliver them to Lender,
Borrower may maintain possession of the Contract Delivery Documents for the
installment contracts underlying Dealer Contracts if an assignment to Lender is
attached to each installment contract, and if requested by Lender (in the event
Lender determines stamping is appropriate to protect its interests) each
contract is stamped "pledged to GECC" (rather than attaching an assignment.)
t. Notice Regarding Contracts. The following sentence is added to Section
7.0 (B) of the Agreement:
After an Eligible Dealer Contract is included in the Borrowing Base, in the
event that Borrower becomes aware that one of the requirements in the definition
of Eligible Dealer Contract is no longer satisfied, Borrower shall provide
Lender with written notice thereof within five (5) Business Days of Borrower
becoming aware, explaining in detail the timing and reasons why the requirement
is not satisfied.
u. Assignment of Bank Accounts. Article VIII of the Agreement is amended by
adding the following Section 8.3:
Section 8.3 Assignment of Bank Accounts. In addition to the security
interest granted in Section 6.0, Borrower hereby absolutely assigns to Lender
Borrower's interest in and right to all bank accounts, and all funds in such
accounts, which are established in connection with Dealer Contracts for payments
under installment contracts.
v. Conditions to Each Advance. Section 9.0 (A) of the Agreement is amended
to be as follows:
For each Eligible Contract, Borrower shall have included the Eligible
Contract on a List of Contracts delivered to Lender and, subject to Section 6.9,
shall have delivered to Lender the Contract Delivery Documents; except that, if
a Certificate of Title has not been issued and Borrower has provided Lender with
proof acceptable to Lender that a Certificate of Title has been applied for,
then the Certificate of Title must be delivered to Lender within ninety (90)
days of the Contract date;
w. Conditions of Dealer Contracts. Section 10.0 of the Agreement is amended
by adding the following Section 10.0(q):
Section 10.0(q) Dealer Contracts. Each Dealer Contract presented to Lender
for inclusion in the Borrowing Base meets all of the requirements listed in the
definition of Eligible Dealer Contract, except that Borrower makes no
representation or warranty as to whether the Dealer Contract meets such
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requirements to Lender's satisfaction. No selection procedures adverse to Lender
have been utilized in selecting the Dealer Contracts presented to Lender.
x. Cygnet Finance, Inc. The sentence in Section 13.15 of the Agreement
regarding Borrower's investment in Cygnet Finance Inc. is amended to be:
Ugly Duckling Corporation shall not invest more than Sixty Million Dollars
($60,000,000) in Cygnet Finance Inc.
y. Borrower Agent. Article XIII of the Agreement is amended by adding the
following new section 13.17:
Section 13.17. Borrower Agent. Borrower hereby irrevocably appoints Ugly
Duckling Corporation as its agent for the purpose of dealing with Lender
(including receiving notices from Lender and making requests for Advances) in
connection with the Loan and this Agreement. This appointment and authorization
is for the convenience of the parities and does not relieve any Borrower of any
of its obligations to Lender.
z. Subordination and Dealer Contracts. Section 14.3 of the Agreement is
amended by adding the following sentences:
All obligations and security interests owned by any Borrower with respect
to any other Borrower are subordinated to the Loan and the Lender's security
interest in the Collateral. Borrower shall not have loans or purchases of more
than Three Million Five Hundred Dollars ($3,500,000) outstanding at the same
time under any Dealer Contract, except for DCT and Texas Auto Outlet.
4. Conditions Precedent To Effectiveness Of Amendment No.3.
New Borrower shall have delivered to Lender on or before the date hereof
the following duly executed documents in form and substance satisfactory to
Lender, delivery of which shall be a condition precedent to the effectiveness of
this Amendment:
(A) This Amendment;
(B) UCC-1 Financing Statements of New Borrower;
(C) Duly adopted resolutions of the Board of Directors of each
New Borrower;
(D) Copies of New Borrower's Articles of Incorporation and
By-laws, certified as a true and correct copy by the
Secretary of New Borrower as true and correct;
(E) Certificates of good standing for each New Borrower issued
by the Secretary of State of its state of incorporation;
(F) A power of attorney of New Borrower;
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(G) A copy of a letter delivered by New Borrower to its
accountants instructing them to disclose to Lender any and
all financial statements and other information of any kind
relating to New Borrower's business, financial condition and
other affairs that Lender may request;
(H) Two certificates of the chief financial officer of New
Borrower;
(I) Assignment of bank accounts;
(J) An initial fee of One Hundred Thousand Dollars ($100,000)
for the Dealer Contract Facility, and the Line Fees for 1998
(as to the $25,000,000 increase in September 1998) in the
amount of $19,349.31 and 1999 in the amount of $312,500; and
(K) Such additional information and materials as Lender may
reasonably request.
5. Incorporation of Amendment: The parties acknowledge and agree that this
Amendment is incorporated into and made a part of the Agreement, the terms and
provisions of which, unless expressly modified herein, or unless no longer
applicable by their terms, are hereby affirmed and ratified and remain in full
force and effect. To the extent that any term or provision of this Amendment is
or may be deemed expressly inconsistent with any term or provision of the
Agreement, the terms and provisions of this Amendment shall control. Each
reference to the Agreement shall be a reference to the Agreement as amended by
this Amendment. This Amendment, taken together with the Agreement, which is
affirmed and ratified by Borrower, contains the entire agreement among the
parties regarding the transactions described herein and supersedes all prior
agreements, written or oral, with respect thereto.
6. Borrower Remains Liable. Borrower hereby confirms that the Agreement and
each document executed by Borrower in connection therewith continue unimpaired
and in full force and effect and shall cover and secure all of Borrower's
existing and future obligations to Lender.
7. Headings. The paragraph headings contained in this Amendment are for
convenience of reference only and shall not be considered a part of this
Amendment in any respect.
8. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of Arizona. Nothing herein shall preclude
Lender from bringing suit or taking other legal action in any jurisdiction.
9. Execution in Counterparts. This Amendment may be executed in any number
of counterparts and by different parties hereto in separate counterparts, each
of which when so executed and delivered shall be deemed to be an original and
all of which taken together shall constitute one and the same instrument.
Page-9
<PAGE>
IN WITNESS WHEREOF, the undersigned have entered into this Amendment as of
January 18, 1999.
GENERAL ELECTRIC CAPITAL CORPORATION UGLY DUCKLING CAR SALES, INC.
By: ______________________________ By: /S/ JON EHLINGER
----------------
Title: ____________________________ Title: Secretary
UGLY DUCKLING CORPORATION UGLY DUCKLING CAR SALES NEW MEXICO, INC.
By: /S/ STEVEN P. JOHNSON By: /S/ JON EHLINGER
--------------------- ----------------
Title: Senior Vice President Title: Secretary
UGLY DUCKLING CAR SALES AND CHAMPION FINANCIAL SERVICES, INC.
FINANCE CORPORATION
By: /S/ JON EHLINGER By: /S/ JON EHLINGER
---------------- ----------------
Title: Secretary Title: Secretary
UGLY DUCKLING CAR SALES FLORIDA, INC. UGLY DUCKLING CREDIT CORPORATION
By: /S/ JON EHLINGER By: /S/ JON EHLINGER
---------------- ----------------
Title: Secretary Title: Secretary
UGLY DUCKLING CAR SALES TEXAS,L.L.P. UGLY DUCKLING CAR SALES CALIFORNIA, INC.
By: Ugly Duckling Car Sales, Inc.
Its: General Partner By: /S/ JON EHLINGER
----------------
Title: Secretary
By: /S/ JON EHLINGER
----------------
Title: Secretary UGLY DUCKLING CAR SALES GEORGIA,INC.
By: /S/ JON EHLINGER
----------------
Title: Secretary
CYGNET FINANCIAL CORPORATION CYGNET DEALER FINANCE, INC.
By: /S/ STEVEN P. JOHNSON By: /S/ JUDITH A. BOYLE
--------------------- -------------------
Title: Senior Vice President Title: Secretary
CYGNET FINANCE ALABAMA, INC. CYGNET SUPPORT SERVICES, INC.
By: /S/ JUDITH A. BOYLE By: /S/ JUDITH A. BOYLE
------------------- -------------------
Title: Secretary Title: Secretary
CYGNET FINANCIAL SERVICES, INC. CYGNET FINANCIAL PORTFOILIO, INC.
By: /S/ JUDITH A. BOYLE By: /S/ JUDITH A. BOYLE
------------------- -------------------
Title: Secretary Title: Secretary
FIRST AMENDMENT
TO
EMPLOYMENT AGREEMENT
Amendment Date: December 31, 1998
Company: Ugly Duckling Corporation
2525 East Camelback Road, Suite 1150
Phoenix, Arizona 85016
Employee: Ernest C. Garcia II
4330 North 57th Way
Phoenix, Arizona 85018
Company and Employee hereby mutually agree to amend the Employment
Agreement dated January 1, 1996 (the "Employment Agreement") by extending the
term of the Employment Agreement for three years. The expiration date in Section
5.1 of the Employment Agreement is hereby extended from December 31, 1998 to
December 31, 2001. Except as modified by this First Amendment, the Employment
Agreement remains in full force and effect and is hereby ratified and affirmed
by Company and Employee.
IN WITNESS WHEREOF, the parties hereby acknowledge their receipt,
review, understanding and acceptance of every provision of this First Amendment
as of the date stated below, effective as of the Amendment Date.
Company: Ugly Duckling Corporation
a Delaware corporation
By: /s/ STEVEN P. JOHNSON
-------------------------------
Name: Steven P.Johnson
Its: Senior Vice President
and General Counsel
Date: March 3, 1999
Employee: /s/ ERNEST C. GARCIA II
-------------------------
Ernest C. Garcia II
Date: 3-3-99
================================================================================
LOAN AGREEMENT
Dated as of November 12, 1998
by and between
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
a Delaware corporation
("Lender")
and
UGLY DUCKLING CORPORATION,
a Delaware corporation
("Borrower")
$15,000,000 Collateralized Loan
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS....................................................................1
1.1 Defined Terms.........................................................1
1.2 Other Interpretive Provisions........................................10
1.3 Accounting Principles................................................11
1.4 Times................................................................11
ARTICLE II
THE LOAN......................................................................11
2.1 The Loan.............................................................11
2.2 Payment Upon Collections.............................................11
2.3 Payment Upon Maturity................................................12
2.4 Interest.............................................................12
2.5 Voluntary Prepayments................................................12
2.6 Application of Payments..............................................12
2.7 Prepayment...........................................................13
2.9 Fees and Interest....................................................13
2.10 Payments by Borrower.................................................13
ARTICLE III
SECURITY AGREEMENT AND COLLATERAL.............................................14
3.1 Security for Obligations.............................................14
3.2 Security Documents...................................................14
3.3 Lender's Duty Regarding Collateral...................................14
3.4 Borrower's Duties Regarding Collateral...............................14
3.5 Power of Attorney....................................................15
3.6 Collateral Inspections...............................................16
ARTICLE IV
CONDITIONS PRECEDENT; TERM OF AGREEMENT.......................................16
4.1 Conditions Precedent.................................................16
4.2 Receipt of Documents. ...............................................16
4.3 Term.................................................................17
4.4 Effect of Termination................................................18
<PAGE>
ARTICLE V
REPRESENTATIONS AND WARRANTIES................................................18
5.1 No Encumbrances......................................................18
5.2 Location of Chief Executive Office; FEIN.............................18
5.3 Due Organization and Qualification; Subsidiaries.....................18
5.4 Due Authorization: No Conflict.......................................19
5.5 Litigation...........................................................20
5.6 Financial Statements; No Material Adverse Change.....................20
5.7 Securitization Documents. ..........................................20
5.8 ERISA................................................................20
5.9 Environmental and Safety Matters.....................................20
5.10 Tax Matters..........................................................21
ARTICLE VI
AFFIRMATIVE COVENANTS.........................................................21
6.1 Financial Statements and Other Documents.............................21
6.2 Inspection of Property...............................................22
6.3 Default Disclosure...................................................22
6.4 Notices to Lender....................................................22
6.5 Books and Records....................................................23
6.6 Compliance and Preservation..........................................23
6.7 Perfection of Liens..................................................23
6.8 Cooperation..........................................................23
ARTICLE VII
NEGATIVE COVENANTS............................................................24
7.1 Liens................................................................24
7.2 Indebtedness.........................................................24
7.3 Restrictions on Fundamental Changes..................................24
7.4 Disposal of Collateral...............................................24
7.5 Change Name..........................................................24
7.6 Amendments...........................................................24
7.7 Change of Control....................................................24
7.8 Distributions........................................................24
7.9 Standing Dividend Resolutions........................................25
7.10 Change in Location of Chief Executive Office.........................25
7.11 No Prohibited Transactions Under ERISA...............................25
7.12 Stock Buyback Program................................................26
7.13 Verde Subordinated Debt..............................................26
<PAGE>
ARTICLE VIII
EVENTS OF DEFAULT/REMEDIES....................................................26
8.1 Event of Default.....................................................26
8.2 Lender's Rights and Remedies.........................................27
ARTICLE IX
MISCELLANEOUS.................................................................28
9.1 Amendments and Waivers...............................................28
9.2 Notices..............................................................29
9.3 No Waiver: Cumulative Remedies.......................................30
9.4 Costs and Expenses...................................................30
9.5 Indemnity............................................................30
9.6 Marshaling: Payments Set Aside.......................................31
9.7 Successors and Assigns...............................................31
9.8 Set-off..............................................................31
9.9 Counterparts.........................................................31
9.10 Severability.........................................................32
9.11 No Third Parties Benefited...........................................32
9.12 Time.................................................................32
9.13 Governing Law and Jurisdiction.......................................32
9.14 Entire Agreement.....................................................33
9.15 Interpretation.......................................................33
9.16 Assignment...........................................................33
9.17 Revival and Reinstatement of Obligations.............................33
<PAGE>
SCHEDULES AND EXHIBITS
Schedule A Borrower's Subsidiaries
Schedule B Warrants, Options, etc.
Schedule C Litigation
Schedule D Exceptions to Financial Statements
Schedule E Permitted Liens
Schedule F Class B Certificates
Schedule G Subordinated Indebtedness
Exhibit A UCC-1 Financing Statement(s)
Exhibit B UDRC and UDRCII Securitization Documents
<PAGE>
LOAN AGREEMENT
This LOAN AGREEMENT (the "Agreement"), is entered into as of November 12,
1998, between GREENWICH CAPITAL FINANCIAL PRODUCTS, INC., a Delaware corporation
("Lender"), with a place of business located at 600 Steamboat Road, Greenwich,
Connecticut 06830 and UGLY DUCKLING CORPORATION, a Delaware corporation
("Borrower"), with a place of business located at 2525 East Camelback Road,
Suite 500, Phoenix, Arizona 85016.
Lender has agreed to make to Borrower a collateralized loan (the "Loan")
upon the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained herein, the parties agree as follows:
ARTICLE I
DEFINITIONS
I.1 Defined Terms. In addition to the terms defined elsewhere in this
Agreement, the following terms have the following meanings:
"Affiliate" means, as to any Person, any other Person which, directly or
indirectly, is in control of, is controlled by, or is under common control with,
such Person. A Person shall be deemed to control another Person if the
controlling Person possesses, directly or indirectly, the power to direct or
cause the direction of the management and policies of the other Person, whether
through the ownership of voting securities, by contract or otherwise. Without
limitation, any director, executive officer or beneficial owner of twenty
percent (20%) or more of the equity of a Person shall for the purposes of this
Agreement, be deemed to control the other Person. In no event shall Lender be
deemed an "Affiliate" of Borrower.
"Agreement" means this Loan Agreement, as amended, supplemented or modified
from time to time in accordance with the terms hereof.
"Attorney Costs" means and includes all fees and disbursements of any law
firm or other external counsel.
"Bankruptcy Code" means the United States Bankruptcy Code (11 U.S.C.ss. 101
et seq.), as amended, and any successor statute.
Page - 1
<PAGE>
"Bond Insurance Policy" shall mean a financial guaranty or financial
insurance policy issued by MBIA Corp. or any of its Affiliates or any other
financial guarantor in respect of one or more classes of investor certificates
or other interests issued by a Securitization Trust.
"Borrower's Books" means all of Borrower's books and records including:
ledgers, records indicating, summarizing, or evidencing Borrower's properties or
assets (including the Collateral and the assets of any Subsidiaries of Borrower)
or liabilities; all information relating to Borrower's business operations or
financial condition; and all computer programs, disk or tape files, printouts,
runs, or other computer prepared information.
"Business Day" means any day other than a Saturday, Sunday or national
holiday.
"CERCLA" shall mean the Comprehensive Environmental Response, Compensation
and Liability Act (49 U.S.C. Section 9601, et seq.).
"Change of Control" shall be deemed to have occurred at such time as a
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934) becomes, after the date of this Agreement, the
"beneficial owner" (as defined in Rule 13(d)(3) under the Securities Exchange
Act of 1934), directly or indirectly, of more than 25% of the total voting power
of all classes of stock then outstanding of Borrower entitled to vote in the
election of directors.
"Closing Date" means the date on which all conditions precedent set forth
in Section 4.1 are either satisfied or waived by Lender and Lender makes the
Loan.
"Code" means the Internal Revenue Code of 1986, as amended, and any
regulations promulgated thereunder.
"Collateral" means all of the outstanding capital stock of UDRC and UDRC
II.
"Collections" means all proceeds of, payments or other distributions of
principal, interest or other amounts on, and other amounts received by or on
behalf of Borrower in respect of the Collateral, including all amounts paid to
Lender pursuant to the UDRC Dividend Direction Letter and the UDRC II Dividend
Direction Letter.
"Debt" or "Indebtedness" means (i) indebtedness for borrowed money, (ii)
obligations evidenced by bonds, debentures, notes, matured reimbursable
obligations under letters of credit or other similar instruments, (iii)
obligations to pay the deferred purchase price of property or services other
than trade payables incurred in the ordinary course of business, (iv)
obligations as lessee under leases that shall have been or should be, in
accordance with GAAP recorded as capital leases, (v) obligations under direct or
Page - 2
<PAGE>
indirect guaranties in respect of, and obligations (contingent or otherwise) to
purchase or otherwise acquire, or otherwise to assure a creditor against loss in
respect of, indebtedness or obligations of others of the kinds referred to in
clauses (i) through (iv), and (vi) liabilities in respect of unfunded vested
benefits under Pension Plans covered by Title IV of ERISA.
"Default" means any event or circumstance which, with the giving of notice,
the lapse of time, or both, would (if not cured or otherwise remedied)
constitute an Event of Default.
"Dollars", "dollars" and "$" each mean lawful money of the United States.
"Environmental and Safety Laws" means all Federal, state and local laws,
regulations and ordinances, relating to the discharge, handling, disposition or
treatment of Hazardous Materials and other substances or the protection of the
environment or of employee health and safety, including CERCLA, the Hazardous
Materials Transportation Act (49 U.S.C. Section 1801, et seq.), the Resource
Conservation and Recovery Act (42 U.S.C. Section 7401, et seq.), the Clean Air
Act (42 U.S.C. Section 7401, et seq.), the Toxic Substances Control Act (15
U.S.C. Section 2601, et seq.), the Occupational Safety and Health Act (29 U.S.C.
Section 651, et seq.) and the Emergency Planning and Community Right-To-Know Act
(42 U.S.C. Section 11001, et seq.), each as the same may be amended and
supplemented.
"Environmental Liabilities and Costs" means, as to any Person, all
liabilities, obligations, responsibilities, remedial actions, losses, damages,
punitive damages, consequential damages, treble damages, contribution, cost
recovery, costs and expenses (including all fees, disbursements and expenses of
counsel, expert and consulting fees, and costs of investigation and feasibility
studies), fines, penalties, sanctions and interest incurred as a result of any
claim or demand, by any Person, whether based in contract, tort, implied or
express warranty, strict liability, criminal or civil statute, permit, order or
agreement with any Federal, state or local governmental authority or other
Person, arising from environmental, health or safety conditions, or the release
or threatened release of a contaminant, pollutant or Hazardous Material into the
environment, resulting from the operations of such Person or its subsidiaries,
or breach of any Environmental and Safety Law or for which such Person or its
subsidiaries is otherwise liable or responsible.
"Equity Interests" means, with respect to a Person, any common stock,
preferred stock, partnership interest (whether general or limited) or other
equity or participating interest in such Person.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and regulations promulgated thereunder.
"Event of Default" means any of the events or circumstances specified in
Section 8.1.
"FEIN" means Federal Employer Identification Number.
Page - 3
<PAGE>
"Financing Statements" means the Financing Statements on Form UCC-1
together with an attachment thereto in the form attached hereto as Exhibit A, to
perfect the security interests in the Collateral pursuant to the provisions of
Article III that can be perfected by filing.
"Fiscal Quarter" means a fiscal quarter of Borrower.
"Fiscal Year" means a fiscal year of Borrower.
"GAAP" means generally accepted accounting principles set forth from time
to time in the opinions and pronouncements of the Accounting Principles Board
and the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board (or agencies with
similar functions of comparable stature and authority within the accounting
profession), or in such other statements by such other entity as may be in
general use by significant segments of the U.S. accounting profession, which are
applicable to the circumstances as of the date of determination.
"GECC" means General Electric Capital Corporation, a New York corporation.
"GECC Agreement" shall mean the Amended and Restated Motor Vehicle
Installment Contract Loan and Security Agreement, dated as of August 15, 1997,
by and between Borrower, GECC and certain other parties thereto, as such
agreement may be amended from time to time.
"Governing Documents" means, with respect to Borrower, Borrower's
certificate of incorporation and bylaws.
"Governmental Authority" means any nation or government, any state or other
political subdivision thereof, any central bank (or similar monetary or
regulatory authority) thereof, any entity, body, authority, bureau, department
or instrumentality exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government, and any corporation or
other entity owned or controlled, through stock or capital ownership or
otherwise, by any of the foregoing.
"Hazardous Materials" means (a) any material or substance defined as or
included in the definition of "hazardous substances," "hazardous wastes,"
"hazardous materials," "toxic substances" or any other formulations intended to
define, list or classify substances by reason of their deleterious properties,
(b) any oil, petroleum or petroleum derived substance, (c) any flammable
substances or explosives, (d) any radioactive materials, (e) asbestos in any
form, (f) electrical equipment that contains any oil or dielectric fluid
containing levels of polychlorinated biphenyls in excess of fifty parts per
million, (g) pesticides or (h) any other chemical, material or substance,
exposure to which is prohibited, limited or regulated by any governmental agency
or authority or which may or could pose a hazard to the health and safety of
persons in the vicinity thereof.
Page - 4
<PAGE>
"Indemnified Liabilities" has the meaning specified in Section 9.5.
"Indemnified Person" has the meaning specified in Section 9.5.
"Initial Principal Amount" means the amount of Fifteen Million Dollars
($15,000,000).
"Interest Accrual Period" shall mean the one-month period from and
including a Payment Date to the close of business on the day preceding the next
Payment Date, except that the first Interest Accrual Period shall commence on
the Closing Date and end at the close of business on the day preceding the
Payment Date.
"Lender Costs" or "Lender Expenses" means all: (a) costs or expenses
(including taxes and insurance premiums) required to be paid by Borrower under
any of the Loan Documents that are paid or incurred by Lender; (b) reasonable
out-of-pocket fees or charges paid or incurred by Lender in connection with
Lender's transactions with Borrower, including, fees or charges for
photocopying, notarization, couriers and messengers, telecommunication, public
record searches (including tax lien, litigation and UCC searches and including
searches with the patent and trademark office, the copyright office or the
department of motor vehicles), filing, recording, publication, appraisals, due
diligence, actual out-of-pocket costs and expenses incurred by Lender in the
disbursement of funds to Borrower (by wire transfer or otherwise); (c) actual
out-of-pocket charges paid or incurred by Lender resulting from the dishonor of
checks; (d) reasonable out-of-pocket costs and expenses paid or incurred by
Lender to correct any default or enforce any provision of the Loan Documents, or
in gaining possession of, maintaining, handling, preserving, storing, shipping,
selling, preparing for sale, or advertising to sell the Collateral, or any
portion thereof, irrespective of whether a sale is consummated; (e) reasonable
costs and expenses paid or incurred by Lender in examining Borrower's Books; (f)
reasonable out-of pocket costs and expenses of third party claims or any other
suit paid or incurred by Lender in enforcing or defending the Loan Documents or
in connection with the transactions contemplated by the Loan Documents or
Lender's relationship with Borrower; and (g) Lender's reasonable Attorney Costs
incurred in advising, structuring, drafting, reviewing, administering, amending,
terminating, enforcing, defending, or concerning the Loan Documents,
irrespective of whether suit is brought.
"LIBOR" shall mean, with respect to an Interest Accrual Period, the rate
per annum equal to the rate appearing on Bloomberg on the first day of such
Interest Accrual Period, for the one-month term corresponding to such Interest
Accrual Period, or if such rate shall not be so quoted then the applicable rate
appearing at page 3750 of the Telerate Screen on the first day of such Interest
Accrual Period, or if neither such rate shall be so quoted, the rate per annum
at which Lender is offered Dollar deposits at or about 11:00 a.m., New York City
time, on such date by prime banks in the interbank eurodollar market where the
Page - 5
<PAGE>
eurodollar and foreign currency exchange operations of Lender are then being
conducted, for delivery on the first day of such Interest Accrual Period for the
number of days in such Interest Accrual Period, and in an amount comparable to
the amount of the Loan on such day.
"Lien or Encumbrance"or "Liens and Encumbrances" means any mortgage, deed
of trust, pledge, hypothecation, assignment, charge or deposit arrangement,
encumbrance, lien (statutory or other) or preference, priority or other security
interest or preferential arrangement of any kind or nature whatsoever (including
those created by, arising under or evidenced by any conditional sale or other
title retention agreement, the interest of a lessor under a capital lease
obligation, any financing lease having substantially the same economic effect as
any of the foregoing, or the filing of any financing statement naming the owner
of the asset to which such lien relates as debtor, under the UCC or any
comparable law) and any contingent or other agreement to provide any of the
foregoing.
"Loan Documents" means this Agreement, the Stock Pledge Agreement, the UDRC
Dividend Direction Letter, the UDRC II Dividend Direction Letter, the Financing
Statements, and all documents delivered to Lender in connection therewith.
"Material Adverse Change" or "Material Adverse Effect" means a material
adverse change in, or a material adverse effect upon, any of (a) the operations,
business, properties, condition (financial or otherwise) or prospects of
Borrower or an Affiliate of Borrower, (b) the ability of Borrower to perform
under any Loan Document and avoid any Event of Default, or (c) the legality,
validity, binding effect or enforceability of any Loan Document.
"Maturity Date" shall mean the date that is three hundred sixty-four (364)
days following the Closing Date, unless such date is not a Business Day, in
which case the Maturity Date shall be the immediately preceding Business Day.
"Obligations" means all Debt, advances, debts, liabilities, obligations,
covenants and duties owing by Borrower to Lender, of any kind or nature, present
or future, whether or not evidenced by any note, guaranty or other instrument,
arising under this Agreement or under any other Loan Document, absolute or
contingent, due or to become due, now existing or hereafter arising and however
acquired.
"Outstanding Principal Amount" means the Initial Principal Amount minus all
amounts applied to the repayment of the Loan pursuant to Section 2.6(c).
"Payment Date" shall mean the 15th day of each month during the term of
this Agreement.
"Permitted Liens" means (a) Liens held by Lender and (b) each lien existing
at or prior to the date of this Agreement that is identified on Schedule E to
this Agreement.
Page - 6
<PAGE>
"Person" means a natural person, partnership, corporation, business trust,
joint stock company, trust, unincorporated association, limited liability
company, joint venture or Governmental Authority.
"Repayment Date" means the earlier of (i) the Maturity Date or (ii) the
date that the Outstanding Principal Amount of the Loan outstanding hereunder,
together with all accrued interest in respect thereof and all other Obligations,
has been reduced to zero.
"Requirement of Law" means, as to any Person, any law (statutory or
common), treaty, rule or regulation or determination of an arbitrator or of a
Governmental Authority, in each case applicable to or binding upon the Person or
any of its property or to which the Person or any of its property is subject.
"Responsible Officer" means the chief executive officer or the president of
Borrower, or any other officer having substantially the same authority and
responsibility or, with respect to financial matters, the chief financial
officer or the treasurer of Borrower, or any other officer having substantially
the same authority and responsibility.
"Security Documents" means the writings described in Article III hereof, as
they may hereafter be amended, modified and/or supplemented, and all other
writings now or hereafter executed to create, evidence and/or perfect any
Lien(s) to secure the Loan or any portion(s) thereof.
"Securitization Default" means any default or event of default, or event or
occurrence which, with the passage of time or the giving of notice or both,
would become a default or event of default, by UDRC, UDRC II or any seller to
UDRC or UDRC II in their respective obligations under the UDRC Securitization
Documents or the UDRC II Securitization Documents, which has not been cured
within any applicable period thereunder.
"Securitization Trust" shall mean any trust formed pursuant to a purchasing
agreement or a pooling and servicing agreement specified on Exhibit B hereto or
contemplated in clause (iii) of the definitions of UDRC Securitization Documents
and UDRC II Securitization Documents.
"Stock Pledge Agreement" means that certain Stock Pledge Agreement, dated
as of the date hereof, among UDCS as Pledgor, Borrower and Lender, pursuant to
which UDCS grants Lender a security interest in one hundred percent (100%) of
the issued and outstanding capital stock of each of UDRC and UDRC II.
"Subordinated Debt" shall mean the Debt set forth on Schedule G and any
Debt incurred after the date hereof as to which the repayment of principal and
interest is subordinated to repayment of the Loan pursuant to subordination
provisions that have been approved in writing by Lender.
Page - 7
<PAGE>
"Subsidiary" of a Person means a corporation, partnership, limited
liability partnership, limited liability company, or other entity in which that
Person directly or indirectly owns or controls the shares of stock or other
ownership interests having ordinary voting power to elect a majority of the
board of directors (or appoint other comparable managers) of such corporation,
partnership, limited liability partnership, limited liability company, or other
entity.
"Tangible Net Worth" of Borrower shall mean the total of Borrower's and its
consolidated Subsidiaries' shareholders' equity (including capital stock,
additional paid-in capital and retained earnings) plus Subordinated Debt of
Borrower and its consolidated Subsidiaries, less (i) the total amount of all
Indebtedness owing to Borrower from its consolidated Subsidiaries, Affiliates,
shareholders, officers or employees, and (ii) the total amount of any intangible
assets of Borrower and its consolidated Subsidiaries, including unamortized
discounts, deferred charges and goodwill.
"Tax" means any federal, state, local or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental, customs, duties, capital stock, franchise,
profits, withholding, social security (or similar), unemployment, disability,
real property, personal property, intangible, ad valorem, sales, use, transfer,
registration, value added, alternative or add-on minimum, estimated or other tax
or other governmental charge of any kind whatsoever, including any interest,
penalty or additions thereto.
"Trustee" means Harris Trust and Savings Bank.
"UCC" means the Uniform Commercial Code as in effect from time to time in
the State of Arizona, and in any and all other states in which Borrower and/or
any of its Subsidiaries conduct, or are authorized to conduct business.
"UDCC" means Ugly Duckling Credit Corp., an Arizona corporation formerly
known as Champion Acceptance Corporation.
"UDCS" means Ugly Duckling Car Sales and Finance Corporation, an Arizona
corporation formerly known as Duck Ventures, Inc.
"UDRC" shall mean Ugly Duckling Receivables Corp., a Delaware corporation.
"UDRC II" shall means Ugly Duckling Receivable Corp. II, a Delaware
corporation.
"UDRC Class B Certificates" shall mean the issued and outstanding Class B
Certificates issued by each Securitization Trust with respect to which UDRC is
the seller, including those set forth on Schedule F, which constitute all of the
UDRC Class B Certificates in existence on the Closing Date.
Page - 8
<PAGE>
"UDRC II Class B Certificates" shall mean the currently issued and
outstanding, and all further issued and then outstanding, Class B Certificates
issued by each of Securitization Trust with respect to which UDRC II is the
seller, including those set forth on Schedule F, which constitute all of the
UDRCII Class B Certificates in existence on the Closing Date.
"UDRC Dividend Direction Letter" means the letter dated November __, 1998
in which Lender, UDRC, UDCC and Trustee agree that Trustee shall pay all
distributions in respect of the UDRC Class B Certificates directly to Lender.
"UDRC II Dividend Direction Letter" means the letter dated November __,
1998 in which Lender, UDRC II, UDCC and Trustee agree that Trustee shall pay all
distributions in respect of the UDRC II Class B Certificates directly to Lender.
"UDRC Securitization Documents" shall mean each of (i) the purchase
agreements listed on Exhibit B hereto, (ii) the pooling and servicing agreements
listed on Exhibit B hereto, (iii) any similar purchase agreements or pooling and
servicing agreements entered into or acknowledged by Borrower, UDCC, UDRC or any
Affiliate of any of them after the date hereof, and (iv) the other agreements,
instruments, certificates and documents entered into or acknowledged by
Borrower, UDCC, UDRC or any Affiliate of any of them or by a Securitization
Trust.
"UDRC II Securitization Documents" shall mean each of (i) the purchase
agreements listed on Exhibit B hereto, (ii) the pooling and servicing agreements
listed on Exhibit B hereto, (iii) any similar purchase agreements or pooling and
servicing agreements entered into or acknowledged by Borrower, UDCC, UDRC II or
any Affiliate of any of them after the date hereof, and (iv) the other
agreements, instruments, certificates and documents entered into or acknowledged
by Borrower, UDCC, UDRC II or any Affiliate of any of them or by a
Securitization Trust.
"UDRC Standing Dividend Resolution" shall mean the resolution adopted on
January 27, 1998 by the board of directors of UDRC (formerly Champion
Receivables Corp.) to the effect that any amounts received as distributions on
the UDRC Class B Certificates should be promptly distributed to Lender.
"UDRC II Standing Dividend Resolution" shall mean the resolution adopted on
January 27, 1998 by the board of directors of UDRC II (formerly Champion
Receivables Corp. II) to the effect that any amounts received as distributions
on the UDRC II Class B Certificates should be promptly distributed to Lender.
"Ugly Duckling Collateral" shall mean any installment contracts or
conditional sales contracts, with any amendments thereto, originated by Borrower
or its Subsidiaries pursuant to which a person has: (i) purchased a new or used
motor vehicle, (ii) granted a security interest in the motor vehicle, and (iii)
agreed to pay the unpaid purchase price and a finance charge in periodic
installments.
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"United States" and "U.S." each means the United States of America.
"Voidable Transfer" has the meaning set forth in Section 9.17.
I.2 Other Interpretive Provisions.
(a) Defined Terms. Unless otherwise specified herein or therein, all terms
defined in this Agreement shall have the defined meanings when used in any
certificate or other document made or delivered pursuant hereto. The meaning of
defined terms shall be equally applicable to the singular and plural forms of
the defined terms. Terms (including uncapitalized terms) not otherwise defined
herein, and that are defined in the UCC shall have the meanings therein
described.
(b) The Agreement. The words "hereof", "herein", "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement; and section,
schedule and exhibit references are to this Agreement unless otherwise
specified.
(c) Certain Common Terms.
(i)......The term "documents" includes any and all instruments,
documents, agreements, certificates, indentures, notices and other
writings, however evidenced.
(ii).....The term "including" is not limiting and means "including
without limitation".
(iii)....The term "or" has, except where otherwise indicated, the
inclusive meaning represented by the phrase "and/or".
(d) Performance; Time. Whenever any performance obligation hereunder (other
than a payment obligation) shall be stated to be due or required to be satisfied
on a day other than a Business Day, such performance shall be made or satisfied
on the next succeeding Business Day. In the computation of periods of time from
a specified date to a later specified date, the word "from" means "from and
including"; the words "to" and "until" each mean "to but excluding"; and the
word "through" means "to and including". If any provision of this Agreement
refers to any action taken or to be taken by any Person, or which such Person is
prohibited from taking, such provision shall be interpreted to encompass any and
all means, direct or indirect, of taking, or not taking, such action.
(e) Contracts. Unless otherwise expressly provided herein, references to
agreements and other contractual instruments shall be deemed to include all
subsequent amendments and other modifications thereto, but only to the extent
such amendments and other modifications are not prohibited by the terms of any
Loan Document.
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(f) Laws. References to any statute or regulation are to be
construed as including all statutory and regulatory provisions consolidating,
amending, replacing, supplementing or interpreting the statute or regulation.
(g) Captions. The captions and headings of this Agreement are
for convenience of reference only and shall not affect the construction of this
Agreement.
(h) Independence of Provisions. The parties acknowledge that
this Agreement and other Loan Documents may use several different limitations,
tests or measurements to regulate the same or similar matters, and that such
limitations, tests and measurements are cumulative and must each be performed,
except as expressly stated to the contrary in this Agreement.
I.3 Accounting Principles.
(a) Unless the context otherwise clearly requires, all
accounting terms not expressly defined herein shall be construed, and all
financial computations required under this Agreement shall be made, in
accordance with GAAP, consistently applied. In the event that GAAP changes
during the term of this Agreement such that the covenants contained in Article
VI would then be calculated in a different manner or with different components,
(i) Borrower and Lender agree to amend this Agreement in such respects as are
necessary to conform those covenants as criteria for evaluating Borrower's
financial condition to substantially the same criteria as were effective prior
to such change in GAAP and (ii) Borrower shall be deemed to be in compliance
with the covenants contained in Article VI following any such change in GAAP if
and to the extent that Borrower would have been in compliance therewith under
GAAP as in effect immediately prior to such change.
(b) References herein to "fiscal year" and "fiscal quarter"
refer to such fiscal periods of Borrower.
I.4 Times. All times of the day herein are New York City
time.
ARTICLE II
THE LOAN
II.1 The Loan. Lender, on the terms and conditions hereinafter
set forth and the conditions precedent pursuant to Section 4.1 of this
Agreement, agrees to make the Loan to Borrower in the Initial Principal Amount.
II.2 Payment Upon Collections. Upon Borrower's receipt of any
Collections, Borrower shall promptly (and in any event within one (1) Business
Day) pay such Collections to Lender. Lender shall apply such Collections and any
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Collections paid directly to Lender by Trustee in accordance with the procedures
set forth in Section 2.6; provided, however, Lender shall remit to Borrower any
Collections received by Lender on or prior to November 30, 1998, except for the
portion of such Collections equal to the amount of accrued interest on the
Obligations through the date on which such Collections are received, which
retained Collections shall be applied in accordance with the procedures set
forth in Section 2.6.
II.3 Payment Upon Maturity. On the Maturity Date, Borrower
will pay to Lender an amount equal to the Outstanding Principal Amount of the
Loan, together with all accrued and unpaid interest on the Loan and any other
accrued and unpaid Obligations.
II.4 Interest.
(a) Interest Rate. Interest shall accrue on the Outstanding
Principal Amount of the Loan during each Interest Accrual Period at a rate per
annum equal to LIBOR for such Interest Accrual Period plus four hundred basis
points (the "Initial Interest Rate"). In addition, after the occurrence of and
during the continuance of any Event of Default under Section 8.1 of this
Agreement, the Outstanding Principal Amount of the Loan together with all
accrued and unpaid interest on the Loan and any other accrued and unpaid
Obligations due and payable to Lender under this Agreement shall bear interest
at a rate per annum which shall be 500 basis points above the Initial Interest
Rate.
(b) Limitation on Interest Rate. The obligations of Borrower
hereunder shall be subject to the limitation that payments of interest, plus any
other amounts paid in connection herewith, shall not be required, to the extent
(but only to the extent) that contracting for or receiving such payment by
Lender would be contrary to the provisions of any law applicable to Lender
limiting the highest rate of interest which may be lawfully contracted for,
charged or received by Lender, and in such event Borrower shall pay Lender
interest and other amounts at the highest rate permitted by applicable law.
II.5 Voluntary Prepayments. Borrower shall have the right, at
its option, to prepay its obligations under the Loan in whole or in part at any
time (in a minimum amount of $100,000 and an integral multiple of $10,000, or
such lesser amount as is then outstanding). Borrower shall give Lender at least
one Business Day prior notice of its intention to prepay, specifying the date of
payment, the total amount and portion of the Loan to be paid on such date and
the amount of interest to be paid with such prepayment.
II.6 Application of Payments. All payments on the Loan shall
be applied, without duplication, in the following order:
(a) First, to Lender for application to overdue interest
on the Obligations;
(b) Second, to Lender for application to accrued interest
on the Obligations;
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(c) Third, to Lender for application to the Outstanding
Principal Amount;
(d) Fourth, to Lender for any and all sums advanced by Lender
as are reasonably necessary in order to preserve the Collateral or its security
interest in the Collateral and all reasonable expenses of taking, holding,
preparing for sale or lease, selling or otherwise disposing of or realizing on
the Collateral or of any exercise by Lender of its rights under this Agreement,
together with reasonable Attorney Costs; and
(e) Fifth, to all other accrued and unpaid Obligations.
II.7 Prepayment. Upon any prepayment of the Loan, Borrower
shall pay to Lender the principal amount to be prepaid, together with all
accrued and unpaid interest on the Loan through the date of prepayment. Notice
of prepayment having been given in accordance with Section 2.5, the amount
specified to be prepaid shall become due and payable on the date specified for
prepayment.
II.8 Fees.
(a) Commitment Fee. Borrower shall pay to Lender a commitment
fee equal to one percent (1.00%) of the Initial Principal Amount on the Closing
Date, which fee shall be subtracted on the Closing Date from the proceeds of the
Loan.
(b) Late Payment Fee. In the event the Outstanding Principal
Amount of the Loan, together with all accrued and unpaid interest on the Loan
and any other accrued and unpaid Obligations are not paid in full on or prior to
the Maturity Date, Borrower shall pay Lender a late payment fee equal to one
percent (1.00%) of the Initial Principal Amount.
II.9 Fees and Interest. All computations of fees and interest
under this Agreement shall be made on the basis of a 360-day year and actual
days elapsed, which results in more interest being paid than if computed on the
basis of a 365-day year. Interest and fees shall accrue during each Interest
Accrual Period during which interest or such fees are computed from the first
day thereof to the last day thereof. Borrower shall pay to Lender all accrued
and unpaid interest on each Payment Date.
II.10 Payments by Borrower.
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(a) All payments (including prepayments) to be made by
Borrower on account of principal, interest, fees and other amounts required
hereunder shall be made without set-off, deduction, recoupment or counterclaim
and shall, except as otherwise expressly provided herein, be made to Lender at
Lender's office as set forth in the preamble hereto, in dollars and in
immediately available funds, no later than 3:00 p.m. on the date specified
herein. Any payment which is received by Lender later than 3:00 p.m. shall be
deemed to have been received on the immediately succeeding Business Day and any
applicable interest or fee shall continue to accrue.
(b) Whenever any payment hereunder shall be stated to be due
on a day, other than a Business Day, such payment shall be made on the next
succeeding Business Day, and such extension of time shall in such case be
included in the computation of interest or fees, as the case may be.
(c) If any payment of interest or Lender Expenses is not
received by Lender, within ten (10) days of the date when the same is due,
Borrower shall pay to Lender a late charge in an amount equal to five percent
(5%) of the amount not so paid.
ARTICLE III
SECURITY AGREEMENT AND COLLATERAL
III.1 Security for Obligations. As security for the payment
and performance of the Obligations under this Agreement and all other present
and future debts, obligations and liabilities of any nature whatsoever of
Borrower to Lender, and all modifications, renewals, replacements and extensions
thereof, UDCS shall grant Lender a security interest in the Collateral pursuant
to the Stock Pledge Agreement. Borrower shall cause UDCS to execute and deliver
the Stock Pledge Agreement and to perform its obligations thereunder. Borrower
will execute, and shall cause UDCS to execute, any security agreements,
collateral assignments, financing statements for filing and/or recording and any
other Lien writings reasonably required by Lender to evidence and perfect the
Liens and security interests of Lender. A carbon, photographic or other
reproduced copy of this Agreement and/or any financing statement relating hereto
shall be sufficient for filing and/or recording as a financing statement.
III.2 Security Documents. Borrower shall promptly execute or
cause to be executed the Financing Statements and such other financing
statements and notices as are necessary to properly perfect Lender's security
interest in the Collateral.
III.3 Lender's Duty Regarding Collateral. Lender shall have no
duty or obligation to protect, insure, collect or realize upon the Collateral or
preserve rights in it against prior parties. Borrower releases Lender from, and
shall indemnify Lender against, any liability for any act or omission relating
to the Collateral, except for any liability directly resulting from Lender's
gross negligence or willful misconduct.
III.4 Borrower's Duties Regarding Collateral. Borrower agrees
as follows:
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(a) General Maintenance of Collateral. Borrower: (i) shall
keep the Collateral free from all Liens (other than the Liens of ad valorem
property taxes which are not delinquent, any statutory landlords' liens which
are covered by lien waivers satisfactory to Lender, mechanic's liens, Permitted
Liens, and any Liens in favor of Lender); (ii) shall defend the Collateral
against all claims and legal proceedings by persons other than Lender; (iii)
shall pay and discharge when due all taxes, levies and other charges upon the
Collateral; (iv) shall cause UDCS not to sell, lease or otherwise dispose of the
Collateral; and (v) shall not permit the Collateral to be used in violation of
any Requirement of Law or any policy of insurance.
(b) Perfection and Priority. Borrower shall pay all Lender's
Expenses and, upon Lender's request, execute all writings and take all other
actions reasonably deemed advisable by Lender to preserve the Collateral or to
establish, and determine priority of, perfection, continued perfection or
enforce Lender's interest in the Collateral.
(c) Records and Inspections. Upon reasonable notice to
Borrower, Lender may examine and conduct audits of the Collateral, and
Borrower's and UDCS's records concerning it, wherever located, and make copies
of such records, at any time during normal business hours, and Borrower shall
assist Lender in so doing. Borrower shall keep accurate, complete and current
records respecting the Collateral. In addition to the specific requirements of
Section 6.1, Borrower shall, within ten (10) Business Days of any request by
Lender, furnish to Lender a detailed statement, certified as being substantially
accurate by a Responsible Officer, setting forth the current status, value and
location of all or any portion of the Collateral.
III.5 Power of Attorney. Borrower hereby makes, constitutes
and appoints Lender the true and lawful attorney-in-fact of Borrower, in the
name, place and stead of Borrower, or otherwise, upon the occurrence of any
Event of Default which remains uncured following the receipt of a notice
pursuant to Section 9.2:
(a) To take all actions and to execute, acknowledge, obtain
and deliver any and all writings necessary or deemed advisable by Lender in
order to exercise any rights of Borrower with respect to the Collateral or to
receive and enforce any payment or performance due to Borrower with respect to
the Collateral;
(b) To give any notices, instructions or other communications
to any person or entity in connection with the Collateral;
(c) To demand and receive all performances due under or with
respect to the Collateral and to take all lawful steps to enforce such
performances and to compromise and settle any claim or cause of action of
Borrower arising from or related to the Collateral and give acquittances and
other discharges relating thereto; and
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(d) To file any claim or proceeding or to take any other
action, in the name of Lender, Borrower or otherwise, to enforce performances
due under or related to the Collateral or to protect and preserve the right,
title and interest of Lender thereunder.
The foregoing power of attorney is a power coupled with an interest and shall be
irrevocable and unaffected by the disability of the principal so long as any
portion of the Obligations remains contingent, unmatured, unliquidated, unpaid
or unperformed. Lender shall have no obligation to exercise any of the foregoing
rights and powers in any event.
III.6 Collateral Inspections. Lender shall have the right (but
not the obligation) to do a physical on-site examination of the Collateral. All
costs and expenses associated therewith shall be included in Lender Expenses.
ARTICLE IV
CONDITIONS PRECEDENT; TERM OF AGREEMENT
IV.1 Conditions Precedent. Lender shall not make the Loan
hereunder if Borrower has not fulfilled to the satisfaction of Lender and its
counsel, each of the following conditions on or before the Closing Date;
provided, however, that Lender, in its sole and absolute discretion, may waive
any of the following conditions.
IV.2 Receipt of Documents. Lender shall have received each of
the following documents, duly executed, and each such document shall be in full
force and effect:
(a) This Agreement executed by Borrower and Lender;
(b) The Stock Pledge Agreement;
(c) The certificate or certificates representing the
Collateral, together with stock powers executed in
blank (the "Stock Powers");
(d) The Financing Statements executed by Borrower and
Lender;
(e) The UDRC Dividend Direction Letter;
(f) The UDRC II Dividend Direction Letter;
(g) The UDRC Standing Dividend Resolution certified by
UDRC's Secretary;
(h) The UDRC II Standing Dividend Resolution certified by
UDRCII's Secretary;
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(i) A consent and subordination from GECC consenting to the
execution, delivery and performance by Borrower and UDCS of the Loan
Documents and subordinating to Lender GECC's Lien on any assets
constituting Collateral;
(j) Certified copies of the resolutions of the board of
directors of Borrower approving and authorizing the execution, delivery
and performance by Borrower of this Agreement and the other Loan
Documents to be delivered hereunder, and authorizing the Loan,
certified as of the Closing Date by the Secretary or an Assistant
Secretary of Borrower;
(k) A certificate of the Secretary or Assistant Secretary of
Borrower certifying the names and true signatures of the officers of
Borrower authorized to execute, deliver and perform, as applicable,
this Agreement, the Stock Pledge Agreement and all other Loan Documents
to be delivered hereunder;
(l) Certified copies of the resolutions of the board of
directors of UDCS approving and authorizing the execution, delivery and
performance by UDCS of the applicable Loan Documents to be delivered
hereunder, certified as of the Closing Date by the Secretary or an
Assistant Secretary of UDCS;
(m) A certificate of the Secretary or Assistant Secretary of
UDCS certifying the names and true signatures of the officers of UDCS
authorized to execute, deliver and perform the Stock Pledge Agreement
and all other applicable Loan Documents to be delivered hereunder;
(n) Copies of each of Borrower's, UDCS's, UDRC's and UDRC II's
certificate of incorporation certified by the Secretary of the State of
their respective jurisdictions of incorporation and bylaws certified by
their respective Secretaries or Assistant Secretaries;
(o) Good standing certificates for the jurisdiction of
incorporation and the jurisdiction in which the chief executive office
is located for each of Borrower, UDCS, UDRC and UDRC II;
(p) A copy of lien searches, completed as of a recent date,
against Borrower and UDCS, in such jurisdictions as shall be
satisfactory to Lender and its counsel;
(q) Legal opinions from counsel for Borrower with respect to
the transactions contemplated by the Loan Documents, which opinions
shall be in form and substance satisfactory to Lender and from counsel
satisfactory to Lender.
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IV.3 Term. This Agreement shall become effective upon the
execution and delivery hereby by Borrower and Lender and shall continue in full
force and effect for a term ending on the earliest of (a) the Repayment Date, or
(b) the date of termination of this Agreement in accordance with its terms after
the occurrence and during the continuation of an Event of Default.
IV.4 Effect of Termination. Upon termination of this
Agreement, all Obligations shall become due and payable immediately without
notice or demand. No termination of this Agreement, however, shall relieve or
discharge Borrower of Borrower's duties, Obligations, or covenants hereunder,
and Lender's continuing security interest in the Collateral shall remain in
effect until all Obligations have been fully and finally discharged.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
In order to induce Lender to enter into this Agreement and
make the Loan, Borrower makes the following representations and warranties which
shall be true, correct, and complete in all respects as of the date hereof, and
shall be true, correct, and complete in all respects as of the Closing Date
(except to the extent that such representations and warranties relate solely to
an earlier date) and such representations and warranties shall survive the
execution and delivery of this Agreement:
V.1 No Encumbrances. UDCS has good and indefeasible
title to the Collateral, free and clear of Liens except for Permitted Liens.
V.2 Location of Chief Executive Office; FEIN. The chief
executive office of Borrower is located at the address indicated in the preamble
to this Agreement and Borrower's FEIN is 86-0721358.
V.3 Due Organization and Qualification; Subsidiaries.
(a) Borrower is duly organized and existing and in good
standing under the laws of the jurisdiction of its incorporation and qualified
and licensed to do business in, and in good standing in, any state where the
failure to be so licensed or qualified reasonably could be expected to have a
Material Adverse Effect.
(b) Set forth on Schedule A is a complete and accurate list of
Borrower's direct and indirect Subsidiaries, showing: (i) the jurisdiction of
their incorporation; (ii) the number of shares of each class of Equity Interests
authorized for each of such Subsidiaries; and (iii) the number and the
percentage of the outstanding shares of each such class owned directly or
indirectly by Borrower. All of the outstanding Equity Interests of each such
Subsidiary have been validly issued and are fully paid and non-assessable.
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(c) Except as set forth on Schedule B, no Equity Interests (or
any securities, instruments, warrants, options, purchase rights, conversion or
exchange rights, calls, commitments or claims of any character convertible into
or exercisable for Equity Interests) of any direct or indirect Subsidiary of
Borrower is subject to the issuance of any security, instrument, warrant,
option, purchase right, conversion or exchange right, call, commitment or claim
of any right, title, or interest therein or thereto.
V.4 Due Authorization: No Conflict.
(a) The execution, delivery, and performance by Borrower of
this Agreement and the Loan Documents to which it is a party have been duly
authorized by all necessary corporate action.
(b) The execution, delivery, and performance by Borrower of
this Agreement and the Loan Documents to which it is a party do not and will not
(i) violate any provision of federal, state, or local law or regulation
(including Regulations G, T, U, and X of the Federal Reserve Board) applicable
to Borrower, the Governing Documents of Borrower, or any order, judgment, or
decree of any court or other Governmental Authority binding on Borrower, (ii)
conflict with, result in a breach of, or constitute (with due notice or lapse of
time or both) a default under any material contractual obligation or material
lease of Borrower, (iii) result in or require the creation or imposition of any
Lien of any nature whatsoever upon any properties or assets of such Borrower,
other than Permitted Liens, or (iv) require any approval of stockholders or any
approval or consent of any Person under any material contractual obligation of
Borrower.
(c) Other than the taking of any other action expressly
required under this Agreement and the Loan Documents, the execution, delivery,
and performance by Borrower of this Agreement and the Loan Documents to which
Borrower is a party do not and will not require any registration with, consent,
or approval of, or notice to, or other action with or by, any federal, state,
foreign, or other Governmental Authority or other Person.
(d) This Agreement, the Loan Documents and all other documents
contemplated hereby and thereby, when executed and delivered by Borrower, will
be the legally valid and binding obligations of Borrower, enforceable against
Borrower in accordance with their respective terms, except as enforcement may be
limited by equitable principles or by bankruptcy, insolvency, reorganization,
moratorium, or similar laws relating to or limiting creditors' rights generally.
(e) The Pledge Agreement and the Stock Powers, when executed
and delivered by UDCS, will be the legally valid and binding obligations of
Borrower, enforceable against Borrower in accordance with their respective
terms, except as enforcement may be limited by equitable principles or by
bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to
or limiting creditors' rights generally.
(f) The Lien granted by UDCS on the Collateral is a validly
created and perfected Lien, subject to no other Liens.
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V.5 Litigation. Except as set forth in Schedule C, there are
no actions or proceedings pending by or against Borrower before any court or
administrative agency and Borrower does not have knowledge or belief of any
pending, threatened, or imminent litigation, governmental investigations, or
claims, complaints, actions, or prosecutions involving Borrower, except for: (a)
ongoing collection matters in which Borrower is the plaintiff and (b) matters
that, if decided adversely to Borrower, would not have a Material Adverse
Effect.
V.6 Financial Statements; No Material Adverse Change. All
financial statements relating to Borrower, UDRC and UDRC II that have been
delivered by Borrower to Lender have been prepared in accordance with GAAP
(except, in the case of unaudited financial statements, for the lack of
footnotes and being subject to year-end audit adjustments) and fairly present
the financial condition as of the date thereof and the results of operations for
the period then ended for Borrower and its consolidated Subsidiaries, except as
disclosed on Schedule D. There has not been a Material Adverse Change with
respect to Borrower since the date of the latest financial statements submitted
to Lender on or before the Closing Date.
V.7 Securitization Documents. Borrower, UDRC and UDRC II and
each of their Affiliates are in full compliance with their respective
obligations under the UDRC Securitization Documents and the UDRC II
Securitization Documents, and no Securitization Default exists.
V.8 ERISA. No accumulated funding deficiency (as defined in
Section 302 of ERISA and Section 412 of the Code), whether or not waived, exists
with respect to any plan (other than a multiemployer plan). No liability to the
Pension Benefit Guaranty Corporation has been or is expected by Borrower to be
incurred with respect to any plan (other than a multiemployer plan) by Borrower
which is or would have a Material Adverse Effect. Borrower has not incurred or
does not presently expect to incur any withdrawal liability under Title IV of
ERISA with respect to any multiemployer plan which is or would be materially
adverse to Borrower. The execution and delivery of this Agreement and the other
Loan Documents will not involve any transaction which is subject to the
prohibitions of Section 406 of ERISA or in connection with which a tax could be
imposed pursuant to section 4975 of the Code. For the purpose of this Section
5.8, the term "plan" shall mean an "employee pension benefit plan" (as defined
in section 3 of ERISA) which is or has been established or maintained, or to
which contributions are or have been made, by Borrower or by any trade or
business, whether or not incorporated, which, together with Borrower, is under
common control, as described in Section 414(b) or (c) of the Code; and the term
"multiemployer plan" shall mean any plan which is a "multiemployer plan" (as
such term is defined in Section 4001(a)(3) of ERISA). No plan providing welfare
benefits to retired former employees of Borrower has been established or is
maintained for which the present value of future benefits payable, in excess of
irrevocably designated funds for such purpose, is or would have a Material
Adverse Effect.
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V.9 Environmental and Safety Matters. Borrower (a) has
complied in all material respects with all applicable material Environmental and
Safety Laws, and Borrower has not received (i) notice of any material failure so
to comply, (ii) any letter or request for information under Section 104 of
CERCLA or comparable state laws or (iii) any information that would lead it to
believe that it is the subject of any Federal or state investigation concerning
Environmental and Safety Laws; (b) does not manage, generate, discharge or store
any Hazardous Materials in material violation of any material Environmental and
Safety Laws; (c) does not own, operate or maintain any underground storage tanks
or surface impoundments; and (d) except as disclosed to Lender in writing, is
not aware of any conditions or circumstances associated with its currently or
previously owned or leased properties or operations (or those of its tenants)
which may give rise to any Environmental Liabilities and Costs which could have
a Material Adverse Effect.
V.10 Tax Matters. Each of Borrower and its Subsidiaries has
filed all tax returns that it was required to file. All such tax returns were
correct and complete in all material respects. All Taxes owed by any of Borrower
and its Subsidiaries have been paid.
ARTICLE VI
AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until full and final payment of the
Obligations, and unless Lender shall otherwise consent in writing, Borrower
shall do all of the following:
VI.1 Financial Statements and Other Documents. Borrower shall deliver to
Lender in form and detail satisfactory to Lender:
(a) Within 45 days of the end of each fiscal quarter, Borrower's unaudited
financial statements for such quarter, and, within 90 days of the end of
Borrower's fiscal year, Borrower's audited financial statements for such period,
certified by Borrower's Chief Financial Officer or Treasurer as fairly
presenting in all material respects, in accordance with GAAP (subject, in the
case of unaudited financial statements, to ordinary, good faith year-end
adjustments and to the absence of footnote disclosure), the financial position
and results of operations of Borrower;
(b) Promptly upon receipt thereof, any financial statements of Borrower
distributed to other lenders or financing parties;
(c) Promptly upon preparation thereof, a copy of each other report, if any,
submitted to Borrower by independent accountants in connection with any annual,
interim or special audit made by them of the books of Borrower;
(d) Promptly after its submission, copies of any other information or
documents regularly provided by Borrower to any of its other lenders or holders
of Borrower's Debt;
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(e) Promptly upon receipt thereof, copies of any other information or
documents received by borrower pursuant to the UDRC Securitization Documents and
the UDRC II Securitization Documents;
(f) With reasonable promptness, such other financial data as Lender may
reasonably request; and
(g) Promptly upon receipt thereof, (i) copies of any federal revenue
agent's reports (so called "thirty-day letter") issued by the IRS, and copies of
any equivalent documents from state or local tax authorities; (ii) copies of any
federal notice of deficiency (so-called "ninety-day letters") issued by the IRS,
and copies of any equivalent documents from state or local tax authorities; and
(iii) copies of any information requests or document requests received from
federal, state or local tax authorities that are not in the ordinary course of
business.
VI.2 Inspection of Property. Borrower shall permit any Person designated by
Lender in writing, to visit and inspect any of the properties of Borrower, to
examine the corporate books and financial records of Borrower and make copies
thereof or extracts therefrom and to discuss the affairs, finances and accounts
of any of such corporations with the principal officers of Borrower and its
independent public accountants, all at such reasonable times and as often as
Lender may reasonably request.
VI.3 Default Disclosure.
(a) Borrower shall forthwith, upon a Responsible Officer of Borrower
obtaining knowledge of an Event of Default or Default, promptly deliver to
Lender a certificate of a Responsible Officer specifying the nature and period
of existence thereof and what action Borrower proposes to take with respect
thereto.
(b) Borrower shall forthwith, upon a Responsible Officer of Borrower
obtaining knowledge of a Securitization Default, promptly deliver to Lender a
certificate of a Responsible Officer specifying the nature and period of
existence thereof, what action the defaulting party proposes to take with
respect thereto, and what action Borrower proposes to take with respect thereto.
VI.4 Notices to Lender. Borrower shall promptly notify Lender in writing
of:
(a) Any lawsuit over One Hundred Thousand Dollars ($100,000) against
Borrower;
(b) Any substantial dispute between Borrower and any Governmental
Authority; or
(c) Any change in Borrower's name, address, or legal structure.
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VI.5 Books and Records. Borrower shall maintain adequate
books and records.
VI.6 Compliance and Preservation. Borrower shall:
(a) Comply with the laws (including any fictitious name
statute), regulations and orders of any government body with authority over
Borrower's business;
(b) Maintain and preserve all privileges and franchises
Borrower now has; and
(c) Make any repairs, renewals, or replacements reasonably
necessary to keep Borrower's properties in good working condition.
VI.7 Perfection of Liens. Borrower shall help Lender perfect
and protect its security interests and liens.
VI.8 Cooperation. Borrower shall take any reasonable action
requested by Lender to carry out the intent of this Agreement.
VI.9 Use of Proceeds. Borrower shall use the proceeds of the
Loan for general working capital to facilitate ongoing growth in Borrower's core
operations.
VI.10 Securitizations. Any securitizations of the Ugly
Duckling Collateral executed during the term of this Agreement shall be done
through UDRC II. Borrower shall continue to execute quarterly securitizations of
the Ugly Duckling Collateral during the term of this Agreement.
VI.11 Compliance with Covenants. Borrower shall perform, keep
or observe any term, provision, condition or covenant or agreement contained in
each Bond Insurance Policy, the GECC Agreement and any other agreement
evidencing Indebtedness.
VI.12 Payment of Indebtedness. Borrower shall timely pay and
shall cause its Subsidiaries to timely pay all Indebtedness which, if not paid,
could result in the imposition of a Lien on any of the assets of UDRC or UDRC
II.
VI.13 Tangible Net Worth. Borrower shall maintain a
consolidated Tangible Net Worth of net less than $100,000,000.
VI.14 Debt to Tangible Net Worth. Borrower shall maintain a
ratio of (i) the principal amount of Debt of Borrower and its consolidated
Subsidiaries to (ii) Tangible Net Worth of no greater than 2.1 to 1.
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ARTICLE VII
NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until full and final payment of the
Obligations, Borrower will not do any of the following without Lender's prior
written consent:
VII.1 Liens. Create, incur, assume, or permit to exist,
directly or indirectly, any lien on or with respect to any of the assets of UDRC
and UDRC II, including the UDRC Class B Certificates, the UDRC II Class B
Certificates, or any income or profits from any of the foregoing, except for
Permitted Liens listed on Schedule E or liens of Lender.
VII.2 Indebtedness. Permit UDRC or UDRC II to incur, assume,
or permit to exist, directly or indirectly any Indebtedness.
VII.3 Restrictions on Fundamental Changes. Enter into any
merger, consolidation, reorganization, or recapitalization, or reclassify its
capital stock, or liquidate, wind up, or dissolve itself (or suffer any
liquidation or dissolution), or convey, sell, assign, lease, transfer, or
otherwise dispose of, in one transaction or a series of transactions, all or any
substantial part of its property or assets.
VII.4 Disposal of Collateral. Except as expressly consented to
by Lender in writing, sell, lease, assign, transfer, or otherwise dispose of any
of the Collateral.
VII.5 Change Name. Without giving thirty (30) days prior
written notification to Lender, change Borrower's name, FEIN, corporate
structure (within the meaning of Section 9402(7) of the Code), or identity, or
add any new fictitious name.
VII.6 Amendments. Except as expressly consented to by Lender
in writing, directly or indirectly, amend, modify, alter, increase, or change
any of the terms or conditions of the UDRC Securitization Documents or the UDRC
II Securitization Documents.
VII.7 Change of Control. Cause, permit, or suffer,
directly or indirectly, any Change of Control.
VII.8 Distributions. Make any distribution or declare or pay
any dividends (in cash or other property, other than capital stock) on, or
purchase, acquire, redeem, or retire any of Borrower's capital stock, of any
class, whether now or hereafter outstanding, for cash, other than the buyback of
1,000,000 shares of Borrower's common stock previously approved by Borrower's
Board of Directors.
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VII.9 Standing Dividend Resolutions. Permit UDRC to rescind,
amend, modify, revoke or alter the UDRC Standing Dividend Resolution or permit
UDRC II to rescind, amend, modify, revoke or alter the UDRC II Standing Dividend
Resolution.
VII.10 Change in Location of Chief Executive Office. Relocate
its chief executive office to a new location without providing 30 days prior
written notification thereof to Lender and so long as, at the time of such
written notification, Borrower provides any financing statements or fixture
filings necessary to perfect and continue perfected Lender's security interests
and also provides to Lender a Collateral access agreement with respect to such
new location.
VII.11 No Prohibited Transactions Under ERISA. Directly or
indirectly:
(a) Engage, or permit any Subsidiary of Borrower to engage, in
any prohibited transaction which is reasonably likely to result in a civil
penalty or excise tax described in Sections 406 of ERISA or 4975 of the Code for
which a statutory or class exemption is not available or a private exemption has
not been previously obtained from the Department of Labor;
(b) Permit to exist with respect to any Benefit Plan any
accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of
the Code), whether or not waived;
(c) Fail, or permit any Subsidiary of Borrower to fail, to pay
timely required contributions or annual installments due with respect to any
waived funding deficiency to any Benefit Plan;
(d) Terminate, or permit any Subsidiary of Borrower to
terminate, any Benefit Plan where such event would result in any liability of
Borrower or any of its Subsidiaries under Title IV of ERISA;
(e) Fail, or permit any Subsidiary of Borrower to fail, to
make any required contribution or payment to any Multiemployer Plan;
(f) Fail, or permit any Subsidiary of Borrower to fail, to pay
any required installment or any other payment required under Section 412 of the
Code on or before the due date for such installment or other payment;
(g) Amend, or permit any Subsidiary of Borrower to amend, a
retirement plan resulting in an increase in current liability for the plan year
such that either of Borrower or any Subsidiary of Borrower is required to
provide security to such retirement plan under Section 401 (a)(29) of the Code;
or
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(h) Withdraw, or permit any Subsidiary of Borrower to
withdraw, from any Multiemployer Plan where such withdrawal is reasonably likely
to result in any liability of any such entity under Title IV of ERISA.
VII.12 Stock Buyback Program. Use the proceeds of the
Loan to facilitate a stock buyback program.
VII.13 Verde Subordinated Debt. Repay any portion of the $10
million loan from Verde Investments without Lender's prior written consent.
ARTICLE VIII
EVENTS OF DEFAULT/REMEDIES
VIII.1 Event of Default. Any of the following shall constitute
an "Event of Default":
(a) If Borrower fails to pay when due and payable or when
declared due and payable, any portion of the Obligations (whether of principal,
interest, fees and charges due Lender, reimbursement of Lender Costs, or other
amounts constituting Obligations);
(b) If Borrower fails to perform, keep, or observe any term,
provision, condition, covenant, or agreement contained in this Agreement, in any
of the Loan Documents, or in any other future agreement between Borrower and
Lender;
(c) If there is a Material Adverse Change with respect to
Borrower, UDRC or UDRC II (the occurrence or non-occurrence of which shall be
determined by Lender in the exercise of its reasonable discretion);
(d) If Borrower is enjoined or restrained, by court order from
continuing to conduct all or any material part of its business affairs, unless
such order is stayed;
(e) If notices of any Lien, levy, or assessment in excess of
$250,000 other than of Permitted Liens are filed of record with respect to any
of Borrower's properties or assets which have not been cured within ten (10)
days after the Lien has been filed;
(f) If a judgment or other claim in excess of $250,000 becomes
a Lien or encumbrance upon any material portion of Borrower's properties or
assets and such judgment is not removed or released within 15 days of the entry
of such judgment;
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(g) If Borrower makes any payment on account of Indebtedness
that has been contractually subordinated in right of payment to the payment of
the Obligations, except to the extent such payment is permitted by the terms of
the subordination provisions applicable to such Indebtedness;
(h) If any material misstatement or misrepresentation exists
now or hereafter in any warranty, representation, statement, or report made to
Lender by Borrower or any officer, employee, agent, or director of Borrower
which has not been corrected to date, or if any such warranty or representation
is withdrawn;
(i) If Borrower rescinds, amends, alters, revokes or modifies
(or permits UDRC or UDRC II to rescind, amend, alter, revoke or modify) the UDRC
Standing Dividend Resolution or the UDRC II Standing Dividend Resolution in any
respect;
(j) If a default or event of default occurs under the GECC
Agreement or under the terms of any other Indebtedness in excess of $1,000,000
or there is a termination event under the terms of any Bond Insurance Policy (or
the policy of another bond insurer), regardless of whether such default or
termination event is waived or amended; or
(k) If Borrower or any of its Subsidiaries makes a general
assignment for the benefit of creditors, or an order, judgment or decree is
entered adjudicating the Company or any of its Subsidiaries bankrupt or
insolvent, or any order for relief with respect to the Company is entered under
the Federal Bankruptcy Code, or Borrower or any of its Subsidiaries petitions or
applies to any tribunal for the appointment of a custodian, trustee, receiver or
liquidator of Borrower or any of its Subsidiaries or of any substantial part of
the assets of the Company or any of its Subsidiaries, or commences any
proceeding relating to the Company or any of its Subsidiaries under any
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
dissolution or liquidation law of any jurisdiction, or any such petition or
application is filed, or any such proceeding is commenced against the Company or
any of its Subsidiaries.
VIII.2 Lender's Rights and Remedies. Subject to the
occurrence, and during the continuation, of an Event of Default, Lender shall
provide Borrower with written notice thereof and the option to cure. If Borrower
fails to cure such Event of Default within ten (10) days after delivery of such
written notice, Lender may, at its sole and absolute discretion, without further
notice, do any one or more of the following, all of which are authorized by
Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due
and payable;
(b) Terminate this Agreement and any of the other Loan
Documents as to any future liability or obligation of Lender, but without
affecting Lender's rights and security interests in the Collateral and without
affecting the Obligations;
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(c) Without notice to or demand upon Borrower, make such
payments and do such acts as Lender considers necessary or reasonable to protect
its security interests in the Collateral;
(d) Without notice to Borrower (such notice being expressly
waived), and without constituting a retention of any collateral in satisfaction
of an obligation (within the meaning of Section 9-505 of the UCC), set off and
apply to the Obligations any and all (i) balances and deposits of Borrower held
by Lender, or (ii) indebtedness at any time owing to or for the credit or the
account of Borrower held by Lender; or
(e) Collect, receive, appropriate and realize upon the
Collateral, on such terms as Lender, in its sole and absolute discretion, deems
appropriate without any liability for any loss due a decrease in the market
value of the Collateral during the period held, without demand of performance or
other demand, advertisement or notice of any kind, except as specified below, to
or upon Borrower or any other person (all and each of which demands,
advertisements and/or notices are hereby expressly waived to the extent
permitted by law). If any notification to Borrower of intended disposition of
the Collateral is required by law, such notification shall be deemed reasonable
and properly given if mailed to Borrower, postage prepaid, at least ten (10)
days before any such disposition at the address indicated by Borrower's
signature. Any disposition of the Collateral or any part thereof shall be free
of any equity or right of redemption in Borrower, which right of equity is, to
the extent permitted by applicable law, hereby expressly waived or released by
Borrower. Borrower further agrees that such sale or sales made under the
foregoing circumstances shall be deemed to have been made in a commercially
reasonable manner. Lender shall not be obligated to make any sale or other
disposition of the Collateral permitted under this Loan Agreement, unless the
terms thereof shall be satisfactory to Lender.
Lender's rights and remedies under this Agreement, the Loan Documents, and all
other agreements shall be cumulative. No exercise by Lender of one right or
remedy shall be deemed an election, and no waiver by Lender of any Event of
Default shall be deemed a continuing waiver. No delay by Lender shall constitute
a waiver, election, or acquiescence by it.
ARTICLE IX
MISCELLANEOUS
IX.1 Amendments and Waivers. No amendment or waiver of any
provision of this Agreement or any other Loan Document, and no consent with
respect to any departure by Borrower therefrom, shall be effective unless the
same shall be in writing and signed by Lender and Borrower, and then such waiver
shall be effective only in the specific instance and for the specific purpose
for which given.
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IX.2 Notices.
(a) All notices, requests and other communications provided
for hereunder shall be in writing (including, unless the context expressly
otherwise provides, by facsimile transmission, provided, that, any matter
transmitted by facsimile (i) shall be immediately confirmed by a telephone call
to the recipient, and (ii) shall be followed promptly by a hard copy original
thereof by over-night courier to the address set forth below; or to such other
address as shall be designated by such party in a written notice to the other
party, and as directed to each other party, at such other address as shall be
designated by Lender or Borrower in a written notice to Borrower and Lender.
If to Borrower:...Ugly Duckling Corporation
2525 East Camelback Road
Suite 500
Phoenix, Arizona 85016
Attn: Steven P. Johnson
Facsimile: (602) 552-3139
With a copy to:...Snell & Wilmer L.L.P.
One Arizona Center
Phoenix, Arizona 85004-0001
Attn: Timothy W. Moser
Facsimile: (602) 382-6070
If to Lender:.....Greenwich Capital Financial Products, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
Attn: Ira J. Platt
Facsimile: (203) 622-2090
With a copy to:...Kirkland & Ellis
200 East Randolph
Chicago, Illinois 60601
Attn: Kenneth P. Morrison
Facsimile: (312) 861-2200
(b) All such notices, requests and communications shall, when
transmitted by overnight delivery or faxed, be effective when delivered for
overnight (next day) delivery, transmitted by facsimile machine, respectively,
or if delivered, upon delivery, except that notices pursuant to Article II shall
not be effective until actually received by Lender.
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(c) Borrower acknowledges and agrees that any agreement of
Lender to receive certain notices by telephone and facsimile is solely for the
convenience and at the request of Borrower. Lender shall be entitled to rely on
the authority of any Person purporting to be a Person authorized by Borrower to
give such notice and Lender shall not have any liability to Borrower or to other
Person on account of any action taken or not taken by Lender in reliance upon
such telephonic or facsimile notice. The obligations of Borrower hereunder shall
not be affected in any way or to any extent by any failure by Lender to receive
written confirmation of any telephonic or facsimile notice or the receipt by
Lender of a confirmation which is at variance with the terms understood by
Lender to be contained in the telephonic or facsimile notice.
IX.3 No Waiver: Cumulative Remedies. No failure to exercise
and no delay in exercising, on the part of Lender, any right, remedy, power or
privilege hereunder, shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, remedy, power or privilege hereunder preclude any
other or further exercise thereof or the exercise of any other right, remedy,
power or privilege.
IX.4 Costs and Expenses. Borrower shall, whether or not the
transactions contemplated hereby shall be consummated:
(a) pay or reimburse Lender within ten (10) Business Days
after demand for all Lender Costs incurred by Lender in connection with the
development, preparation, delivery, administration and execution of (and any
amendment, supplement, waiver or modification to in each case whether or not
consummated), this Agreement, any Loan Document and any other documents prepared
in connection herewith, or therewith, and the consummation of the transactions
contemplated hereby and thereby, including the reasonable Attorney Costs
incurred by Lender with respect thereto;
(b) pay or reimburse Lender within ten (10) Business Days
after demand for all Lender Costs incurred by Lender in connection with the
enforcement, attempted enforcement, or preservation of any rights or remedies
under this Agreement, any other Loan Document, and any such other documents,
including reasonable Attorney Costs incurred by Lender; and
(c) pay or reimburse Lender within ten (10) Business Days
after demand for all reasonable appraisal (including the allocated cost of
internal appraisal services), audit, due diligence, monitoring review,
environmental inspection and review (including the allocated cost of such
internal services), search and filing costs, fees and expenses, incurred or
sustained by Lender in connection with the Loan, the Loan Documents, any of the
Obligations and the matters referred to under (a) and (b) of this Section 9.4.
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IX.5 Indemnity. Borrower shall pay, indemnify, and hold
Lender, its Affiliates and Subsidiaries, and their respective officers,
directors, employees, counsel, agents and attorneys-in-fact (each, an
"Indemnified Person") harmless from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
charges, expenses or disbursements (including Attorney Costs) of any kind or
nature whatsoever with respect to the execution, delivery, enforcement,
performance and administration of this Agreement and any other Loan Documents,
or the transactions contemplated hereby and thereby, and with respect to any
investigation, litigation or proceeding related to this Agreement or the use of
the proceeds thereof, whether or not any Indemnified Person is a party thereto
(all the foregoing, collectively, the "Indemnified Liabilities"); provided,
however, Borrower shall have no obligation hereunder to any Indemnified Person
with respect to Indemnified Liabilities arising from the gross negligence, bad
faith or willful misconduct of such Indemnified Person or the breach by Lender
of its obligations hereunder. The agreements in this Section 9.5 shall survive
payment of all other Obligations and the termination of this Agreement.
IX.6 Marshaling: Payments Set Aside. Lender shall not be under
any obligation to marshal any assets in favor of Borrower or any other Person or
against or in payment of any or all of the Obligations. To the extent that
Borrower makes a payment or payments to Lender, or to the extent Lender enforces
its Liens or exercises its rights of set-off, and such payment or payments or
the proceeds of such enforcement or set-off or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside or required to
be repaid to a trustee, receiver or any other party in connection with any
bankruptcy, or otherwise, then to the extent of such recovery the obligation or
part thereof originally intended to be satisfied shall be revived and continued
in full force and effect as if such payment had not been made or such
enforcement or set-off had not occurred.
IX.7 Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, except that Borrower may not assign or
transfer any of its rights or delegate obligations under this Agreement or any
of the Loan Documents without the prior written consent of Lender.
IX.8 Set-off. In addition to any rights and remedies of Lender
provided by law, if an Event of Default exists, and Borrower fails to cure such
Event of Default within five (5) days after delivery of written notice thereof,
Lender is authorized at any time and from time to time, without prior notice to
Borrower, any such notice being waived by Borrower to the fullest extent
permitted by law, to set off and apply any and all monies or deposits at any
time held by, and other indebtedness at any time owing by, Lender to or for the
credit or the account of Borrower against any and all Obligations owing to
Lender, now or hereafter existing, irrespective of whether or not Lender shall
have made demand under this Agreement or any Loan Document and although such
Obligations may be contingent or unmatured. Lender agrees promptly to notify
Borrower after any such set-off and application made by Lender; provided,
however, that, the failure to give such notice shall not affect the validity of
such set-off and application. The rights of Lender under this Section 9.8 are in
addition to the other rights and remedies (including other rights of set-off)
which Lender may have.
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IX.9 Counterparts. This Agreement may be executed by one or
more of the parties to this Agreement in any number of separate counterparts,
each of which, when so executed, shall be deemed an original, and all of said
counterparts taken together shall be deemed to constitute but one and the same
instrument. A set of the copies of this Agreement signed by both parties shall
be lodged with Borrower and Lender.
IX.10 Severability. The illegality or unenforceability of any
provision of this Agreement or any instrument or agreement required hereunder
shall not in any way affect or impair the legality or enforceability of the
remaining provisions of this Agreement or any instrument or agreement required
hereunder.
IX.11 No Third Parties Benefited. This Agreement is made and
entered into for the sole protection and legal benefit of Borrower and Lender,
and their permitted successors and assigns, and no other Person shall be a
direct or indirect legal beneficiary of, or have any direct or indirect cause of
action or claim in connection with, this Agreement or any of the other Loan
Documents. Lender shall have no obligation to any Person not a party to this
Agreement or other Loan Documents.
IX.12 Time. Time is of the essence as to each term or
provision of this Agreement and each of the other Loan Documents.
IX.13 Governing Law and Jurisdiction.
THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS,
THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE
RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING
HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER,
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK,
IT BEING THE INTENT OF THE PARTIES THAT THE LAW OF THE STATE OF NEW YORK SHALL
GOVERN THE RIGHTS AND DUTIES OF THE PARTIES HERETO WITHOUT REGARD TO CHOICE OR
CONFLICTS OF LAW PRINCIPLES; EXCEPT THAT THE PROVISIONS HEREIN THAT PERTAIN TO
THE PERFECTION OR THE EFFECT OF PERFECTION OF SECURITY INTERESTS IN COLLATERAL
SHALL BE GOVERNED BY THE LAWS OF SUCH STATE AS ARE SPECIFIED IN SECTION 9103 OF
THE UCC.
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<PAGE>
BORROWER AND LENDER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A
JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF
THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING
CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. BORROWER AND LENDER REPRESENT THAT EACH HAS REVIEWED THIS
WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING
CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS
AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
IX.14 Entire Agreement. This Agreement, together with the
other Loan Documents, embodies the entire Agreement and understanding among
Borrower and Lender and supersedes all prior or contemporaneous agreements and
understandings of such Persons, verbal or written, relating to the subject
matter hereof and thereof and any prior arrangements made with respect to the
payment by Borrower (or any indemnification for) any Lender Costs incurred (or
to be incurred) by or on behalf of Lender.
IX.15 Interpretation. This Agreement is the result of
negotiations between and has been reviewed by counsel to Lender, Borrower and
other parties, and is the product of all parties hereto. Accordingly, this
Agreement and the other Loan Documents shall not be construed against Lender
merely because of Lender's involvement in the preparation of such documents and
agreements.
IX.16 Assignment. Lender may assign its rights hereunder and
under the Loan Documents without the consent of Borrower. Borrower may not
assign or delegate any of its rights, interest or obligations hereunder or under
any of the Loan Documents.
IX.17 Revival and Reinstatement of Obligations. If the
incurrence or payment of the Obligations by Borrower or the transfer by Borrower
to Lender of any property of either or both of such parties should for any
reason subsequently be declared to be void or voidable under any state or
federal law relating to creditors' rights, including provisions of the
Bankruptcy Code relating to fraudulent conveyances, preferences, and other
voidable or recoverable payments of money or transfers of property
(collectively, a "Voidable Transfer"), and if Lender is required to repay or
restore, in whole or in part, any such Voidable Transfer, or elects to do so
upon the reasonable advice of its counsel, then, as to any such Voidable
Transfer, or the amount thereof that Lender is required or elects to repay or
restore, and as to all reasonable costs, expenses, and Attorney Costs of Lender
related thereto, the liability of Borrower automatically shall be revived,
reinstated, and restored and shall exist as though such Voidable Transfer had
never been made.
* * * * *
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<PAGE>
[Signature Page to Loan Agreement]
IN WITNESS WHEREOF, the parties hereby have caused this
Agreement to be executed as of the date first written above.
UGLY DUCKLING CORPORATION,
a Delaware corporation
By: /s/ STEVEN P. JOHNSON
------------------------------
Name: Steven P. Johnson
Title: Senior Vice President
GREENWICH CAPITAL FINANCIAL PRODUCTS,
INC., a Delaware corporation
By: /s/ IRA PLATT
-------------
Name: Ira Platt
Title: Vice President
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT dated as of November 12, 1998 (the "Pledge
Agreement") among UGLY DUCKLING CAR SALES AND FINANCE CORPORATION, an Arizona
corporation formerly known as Duck Ventures, Inc. ("Pledgor"), as owner of all
of the outstanding capital stock in Ugly Duckling Receivables Corp. ("UDRC"), a
Delaware corporation, and Ugly Duckling Receivables Corp. II, a Delaware
Corporation ("UDRC II"), UGLY DUCKLING CORPORATION, a Delaware corporation
("UDC") and GREENWICH CAPITAL FINANCIAL PRODUCTS, INC., a Delaware corporation
("Lender").
INTRODUCTORY STATEMENTS
Pledgor is the sole holder of fifty (50) shares of common stock, $.01 par
value per share in UDRC and fifty (50) shares of common stock, $.01 par value
per share, in UDRC II (collectively, the "Pledged Shares"). UDC, as debtor, has
on the date hereof entered into a Loan Agreement with Lender (the "Loan
Agreement") pursuant to which UDC has borrowed money from Lender. Pledgor, which
is wholly owned subsidiary of UDC, has agreed to pledge the Pledged Shares and
any proceeds thereof as further security for the Obligations (as defined in the
Loan Agreement). Accordingly, the Pledged Shares and any proceeds thereof will
secure Obligations of UDC and Pledgor to Lender. Terms used herein but not
defined herein shall have the meanings assigned to such terms in the Loan
Agreement.
In consideration of the premises and of the agreements herein contained,
Pledgor, Lender and UDC agree as follows:
Section 1. Definitions.
(a) Capitalized terms used but not otherwise defined in this Pledge
Agreement shall have the meanings specified therefor in the Loan Agreement.
(b) As used herein, the term "Final Date" shall mean the date upon which
all of the Obligations as defined in the Loan Agreement and all obligations
under any other financing arrangement between UDC and Lender, or any Affiliate
of either, have been fully paid and performed to the satisfaction of Lender. The
term "Loan Documents" shall mean the Loan Agreement, this Pledge Agreement and
any and all documents, instruments and agreements securing and/or relating to
the Obligations of UDC or Pledgor to Lender.
Section 2. Pledge of Stock and Grant of Security Interest. As security for
the full and complete performance of all of the Obligations, Pledgor hereby
delivers, pledges and assigns to the Lender and grants in favor of Lender a
security interest in all of Pledgor's right, title and interest in and to the
Pledged Shares, together with all of Pledgor's rights and privileges with
respect thereto, all proceeds, income and profits thereof and all property
received in exchange thereof or in substitution therefor (the "Collateral").
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Section 3. Dividends, Options, or Other Adjustments. Until the Final Date,
Pledgor shall deliver as Collateral to the Lender any and all additional shares
of stock or any other property of any kind distributable on or by reason of the
Collateral, whether in the form of or by way of stock dividends, warrants, total
or partial liquidation, conversion, prepayments, redemptions or otherwise,
including cash dividends and any cash interest payments. If any such dividends,
interest payments, 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 Collateral pledged hereunder,
shall come into the possession or control of Pledgor, Pledgor shall forthwith
transfer and deliver such property to Lender as Collateral hereunder.
Section 4. Delivery of Share Certificates; Stock Powers. Pledgor shall
promptly deliver to Lender, or cause UDRC or UDRC II or any other entity issuing
the Collateral to deliver directly to Lender, share certificates or other
instruments representing any Collateral issued to, acquired or received by
Pledgor after the date of this Pledge Agreement with a stock or bond power duly
executed by Pledgor. If, at any time Lender notifies Pledgor that it requires
additional stock powers endorsed in blank, Pledgor shall promptly execute in
blank and deliver the requested power to Lender.
Section 5. Power of Attorney. Pledgor hereby constitutes and irrevocably
appoints Lender as Pledgor's true and lawful attorney-in-fact, with the power,
after the occurrence of an "Event of Default" under and as defined in the Loan
Agreement, to the full extent permitted by law, to affix to any certificates and
documents representing the Collateral, the stock or bond powers delivered with
respect thereto, and to transfer or cause the transfer of Collateral, or any
part thereof, on the books of UDRC or UDRC II or any other entity issuing such
Collateral, to the name of Lender or any nominee of either, and thereafter to
exercise with respect to such Collateral all the rights, powers and remedies of
an owner. The power of attorney granted pursuant to this Pledge Agreement and
all authority hereby conferred are granted and conferred solely to protect
Lender's interest in the Collateral and shall not impose any duty upon Lender to
exercise any power. This power of attorney shall be irrevocable as one coupled
with an interest until the Final Date.
Section 6. Inducing Representations of Pledgor. Pledgor represents and
warrants to Lender that:
(a) The Pledged Shares are validly issued, fully paid for and
non-assessable.
(b) The Pledged Shares represent all of the issued and outstanding capital
stock of UDRC and UDRC II.
(c) 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 interest created by this Pledge Agreement, and Pledgor has
the unqualified right and authority to execute and perform this Pledge
Agreement.
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(d) No options, warrants or other agreements with respect to the Collateral
are outstanding.
(e) Any consent, approval or authorization of or designation or filing with
any authority on the part of Pledgor which is required in connection with the
pledge and security interest granted under this Pledge Agreement has been
obtained or effected.
(f) Neither the execution and delivery of this Pledge Agreement by 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 Pledgor or any law,
rule, regulation, order, writ, judgment, injunction, decree, determination
or award currently in effect having applicability to Pledgor or any of its
properties, including regulations issued by an administrative agency or
other governmental authority having supervisory powers over 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 Pledgor under, or a breach of or contravenes any provision of,
any agreement to which 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; or
(iii) results in or requires the creation of any lien upon or in
respect of any of 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 Lender, and upon delivery to Lender of any Pledged Shares
hereafter issued to, acquired or received by Pledgor, Lender will have a valid,
perfected security interest in and to the Collateral, enforceable as such
against all other creditors of Pledgor and against all persons purporting to
purchase any of the Collateral from Pledgor.
(h) The board of directors of UDRC and UDRC II have duly adopted the
resolutions identified on Exhibits A-1 and A-2, respectively, attached hereto
(the "Standing Dividend Resolutions"), and such resolutions remains in full
force and effect and have not been rescinded, amended, altered, revoked or
modified in any respect. Pursuant to the Standing Dividend Resolutions, Pledgor
has delivered the UDRC Dividend Direction Letter and the UDRC II Dividend
Direction Letter to the Trustee.
Section 7. Obligations of the UDC and Pledgor. Pledgor further represents,
warrants and covenants to Lender that:
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(a) Pledgor will not sell, transfer or convey any interest in, or
suffer or permit any lien or encumbrance to be created upon or to exist
with respect to, any of the Collateral during the term of this Pledge
Agreement, other than the lien granted hereunder and the lien granted to
General Electric Capital Corporation ("GECC") pursuant to the Amended and
Restated Motor Vehicle Installment Contract Loan and Security Agreement
entered into as of August 15, 1997 among GECC, UDC, Pledgor, and certain
other entities.
(b) Pledgor will not cause or permit UDRC or UDRC II to enter into any
securitization agreement or arrangement other than as set forth in the UDRC
Securitization Documents or the UDRC II Securitization Documents, or
substantially similar agreements and arrangements in the future, without
the prior written consent of Lender.
(c) Pledgor will, at Pledgor's expense, at any time and from time to
time at the request of Lender do, make, procure, execute and deliver all
acts, things, writings, assurances and other documents as may be reasonably
proposed by Lender to preserve, establish, demonstrate or enforce the
rights, interests and remedies of Lender as created by, provided in, or
emanating from this Pledge Agreement.
(d) Pledgor will not take any action which would cause UDRC or UDRC II
to issue any other capital stock without the prior written consent of
Lender.
(e) Pledgor will not consent to any amendment to the articles of
incorporation of UDRC or UDRC II without the prior written consent of
Lender.
(f) Pledgor will not take any action which would cause, and will not
consent to, any transfer by UDRC or UDRC II of the UDRC Class B
Certificates or the UDRC II Class B Certificates.
Section 8. Dividends. Pledgor has not and will not permit UDRC or UDRC II
to, rescind, amend, alter, revoke or modify the Standing Dividend Resolutions,
the UDRC Dividend Direction Letter or the UDRC II Dividend Direction Letter, as
the case may be, in any respect without the prior written consent of Lender.
Section 9. Voting Proxy. Pledgor hereby grants to Lender an irrevocable
proxy to vote the Pledged Shares with respect to any matter permitted under the
Articles of Incorporation of UDRC and UDRC II, as the case may be, which proxy
shall continue until the Final Date. Pledgor represents and warrants that it has
directed UDRC and UDRC II, in accordance with Section 217 of the Delaware
General Corporation Law, to reflect on UDRC's and UDRC II's books, respectively,
the right of Lender to vote the Pledged Shares. Upon the request of Lender,
Pledgor shall deliver to Lender such further evidence of such irrevocable proxy
to vote the Collateral as Lender may request pursuant hereto.
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Section 10. Rights of Lender. Lender may, at any time and without notice,
discharge any taxes, liens, security interests or other encumbrances levied or
placed on the Collateral, pay for the maintenance and preservation of the
Collateral, or pay for insurance on the Collateral; the amount of such payments,
plus any and all reasonable fees, costs and expenses of Lender (including
attorneys' fees and disbursements) in connection therewith, shall be reimbursed
by UDC within five (5) days of demand, with interest thereon from the date paid
at the rate provided in the Loan Agreement.
Section 11. Remedies Upon Event of Default under the Loan Agreement. Lender
may exercise any one or more of the following remedies:
(a) Upon the occurrence of an "Event of Default" pursuant to the Loan
Agreement, Lender may without notice to Pledgor:
(i) cause the Collateral to be transferred to Lender's name or to
the name of a nominee of Lender, and thereafter exercise as to such
Collateral all of the rights, powers and remedies of an owner;
(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 Collateral, and hold all such
sums as part of the Collateral, or apply such sums to the payment of
the Obligations in such manner and order as Lender 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 Collateral, and in connection therewith
deposit or surrender control of the 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.
(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" pursuant to the
Loan Agreement, Lender shall have the right, without demand of performance
or other demand, advertisement or notice of any kind, except as specified
below, to or upon 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 to collect, receive,
appropriate and realize upon the 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") and on such terms (including a requirement
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that any purchaser of all or any party of the Collateral shall be required
to purchase any securities constituting the Collateral solely for
investment and without any intention to make a distribution thereof) as
Lender, in its sole and absolute discretion, deems appropriate without any
liability for any loss due a decrease in the market value of the Collateral
during the period held. If any notification to Pledgor of intended
disposition of the Collateral is required by law, such notification shall
be deemed reasonable and properly given if mailed to Pledgor, postage
prepaid, at least ten (10) days before any such disposition at the address
indicated by Pledgor's signature. Any disposition of the 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 Lender to purchase all or
any part of the Collateral so sold at any such sale or sales, public or
private, free of any equity or right of redemption in Pledgor, which right
of equity is, to the extent permitted by applicable law, hereby expressly
waived or released by Pledgor; or
(c) Lender may elect to sell the 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 Lender. The sale of any of the Collateral on
credit terms shall not relieve Pledgor of its liability with respect to the
Obligations. All payments received in respect of any sale of the Collateral
by Lender shall be applied to the Obligations as and when such payments are
received and any price received by the Collateral Agreement in respect of
such sale shall be conclusive and binding upon Lender; or
(d) Pledgor recognizes that it may not be feasible to effect a public
sale of all or a part of the 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 Collateral for their own account, for
investment and not with a view for the distribution or resale thereof.
Pledgor agrees that private sales may be at prices and other terms less
favorable to the Seller than if the Collateral were sold at public sale,
and that Lender has no obligation to delay the sale of any Collateral for
the period of time necessary to permit the registration of the Collateral
for public sale under the Securities Act. Pledgor agrees that a private
sale or sales 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 Collateral or any partial
disposition of the Collateral, Pledgor will execute all such applications
and other instruments as may be required in connection with securing any
such consent, approval or authorization, and will otherwise use its best
efforts to secure the same; or
(f) Lender shall have the right to deliver, assign and transfer to the
purchaser thereof the Collateral so sold or disposed of, free from any
other claim or right of whatever kind, including any equity or right of
redemption of Pledgor. 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
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(g) Lender shall not be obligated to make any sale or other
disposition of the Collateral permitted under this Pledge Agreement, unless
the terms thereof shall be satisfactory to Lender. Lender may, without
notice or publication, adjourn any such private or public sale and, upon
five (5) days' prior notice to 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 Collateral on credit or future delivery, the Collateral so
sold may be retained by Lender until the selling price is paid by the
purchaser thereof, but Lender shall not incur any liability in case of the
failure of such purchaser to take up and pay for the property so sold and,
in the case of any such failure, such property may again be sold as herein
provided.
(h) All of the rights and remedies granted to Lender, including but
not limited to the foregoing, shall be cumulative and not exclusive and
shall be enforceable alternatively, successively or concurrently as Lender
may deem expedient.
Section 12. Limitation on Liability.
(a) Neither Lender nor any of its respective directors, officers,
employers or agents shall be liable to Pledgor, UDC, UDRC or UDRC II for
any action taken or omitted to be taken by it or them hereunder, or in
connection herewith, except that Lender shall be liable for its own gross
negligence, bad faith or willful misconduct.
(b) Lender 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 Lender reasonably believes to be genuine and
to have been duly executed by the appropriate signatory, and (absent actual
knowledge to the contrary of any officer of Lender) Lender shall not be
required to make any independent investigation with respect thereto. Lender
shall at all times be free independently to establish 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.
(c) Lender 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.
Section 13. Indemnification. UDC and Pledgor jointly and severally agree to
indemnify each of Lender, its Affiliates and Subsidiaries (as such terms are
defined in the Loan Agreement) and their respective directors, officers,
employees and agents, for, and hold each of Lender, its Affiliates and
Subsidiaries and their respective directors, officers, employees and agents
harmless against, any loss, liability or expense (including the costs and
expenses of defending against any claim of liability) arising our 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 Lender, its
Affiliates and Subsidiaries or their respective directors, officers, employees
or agents. The obligation of UDC and Pledgor under this Section shall survive
the termination of this Pledge Agreement.
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Section 14. Termination. This Pledge Agreement shall continue in full force
and effect until the Final Date. Subject to any sale or other disposition of the
Collateral pursuant to and in accordance with this Pledge Agreement, the
Collateral shall be returned to Pledgor on the Final Date. The obligation of
Pledgor under Section 16 of this Pledge Agreement shall survive the termination
of this Pledge Agreement.
Section 15. Compensation and Reimbursement. UDC agrees for the benefit of
Lender and as part of the Obligations to reimburse Lender upon its request for
all reasonable expenses, disbursements and advances incurred or made by Lender
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 expenses and disbursements of its agents, any independent certified public
accounts and independent counsel), except any expense, disbursement or advances
as may be attributable to negligence, bad faith or willful misconduct on the
part of Lender.
Section 16. Foreclosure Expenses of Lender. All expenses (including
reasonable fees and disbursements of counsel) incurred in compliance with this
Pledge Agreement by Lender in connection with any actual or attempted sale,
exchange of, or any enforcement, collection, compromise or settlement respecting
this Pledge Agreement or the Collateral, or any other action taken in compliance
with this Pledge Agreement by Lender 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 Obligation shall be deemed an
Obligation for all purposes of this Pledge Agreement and Lender may apply the
Collateral to payment of or reimbursement of itself for such liability.
Section 17. Notices. Any notice or other communication given hereunder
shall be in writing and shall be sent by registered mail, postage prepaid,
overnight courier or personally delivered or facsimiles to the recipient as
follows:
To Pledgor:
UGLY DUCKLING CAR SALES
AND FINANCE CORPORATION
2525 East Camelback Road
Suite 500
Phoenix, Arizona 85016
Attn: Jon D. Ehlinger
Facsimile: (602) 852-6637
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with a copy to:
SNELL & WILMER, L.L.P.
One Arizona Center
Phoenix, Arizona 85004-0001
Attention: Timothy W. Moser
Facsimile: (602) 382-6070
To Lender:
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: Ira J. Platt
Telephone: (203) 622-3882
Facsimile: (203) 622-2090
with a copy to:
OFFICE OF THE GENERAL COUNSEL
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
600 Steamboat Road
Greenwich, Connecticut 06830
Telephone: (203) 625-6065
Facsimile: (203) 629-4640
with a copy to:
KIRKLAND & ELLIS
200 East Randolph
Chicago, Illinois 60201
Attention: Kenneth P. Morrison
Facsimile: (312) 861-2200
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To UDC:
UGLY DUCKLING CORPORATION
2525 East Camelback Road
Suite 500
Phoenix, Arizona 85016
Attn: Steven P. Johnson
Facsimile: (602) 852-6696
with a copy to:
SNELL & WILMER, L.L.P.
One Arizona Center
Phoenix, Arizona 85004-0001
Attention: Timothy W. Moser
Facsimile: (602) 382-6070
Section 18. General Provisions.
(a) The failure of Lender to exercise or delay in exercising any
right, power or remedy hereunder, shall not operate as a waiver thereof,
nor shall any single or partial exercise by Lender 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.
(b) The representations, covenants and agreements of Pledgor herein
contained shall survive the date hereof; provided, however, that only
Section 13 shall survive after the Final Date.
(c) 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. This Pledge Agreement
shall be binding upon and inure to the benefit of the parties hereto, and
their respective successors, legal representatives and 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.
(d) 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.
(e) THE VALIDITY OF THIS PLEDGE AGREEMENT AND THE OTHER LOAN
DOCUMENTS, THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND
THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO
ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO SHALL BE
DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
NEW YORK.
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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 SOUTHERN DISTRICT OF NEW YORK.
PLEDGOR, COLLATERAL AGENT AND LENDER 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 SECTION.
THE PARTIES HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF
ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN
AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING
CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON
LAW OR STATUTORY CLAIMS. BORROWER AND LENDER REPRESENT THAT EACH HAS
REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF
LITIGATION, A COPY OF THIS PLEDGE AGREEMENT MAY BE FILED AS A WRITTEN
CONSENT TO A TRIAL BY THE COURT.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Pledge Agreement on the date first above written.
UGLY DUCKLING CAR SALES AND FINANCE
CORPORATION, an Arizona corporation
By: /s/ JON EHLINGER
------------------
Name: Jon Ehlinger
Title: Secretary
UGLY DUCKLING CORPORATION,
a Delaware corporation
By: /s/ STEVEN P. JOHNSON
----------------------
Name: Steven P. Johnson
Title: Senior Vice President
GREENWICH CAPITAL FINANCIAL PRODUCTS,
INC., a Delaware corporation
By: /s/ IRA PLATT
---------------------------------
Name: Ira Platt
Title: Vice President
KPMG Peat Marwick LLP
Proposal to:
[UGLY DUCKLING CORPORATION LOGO]
Year 2000 Renovation Project Services Proposal
Submitted: November 2, 1998
This proposal, in its entirety, is valid until November 15, 1998.
The KPMG Peat Marwick LLP (KPMG) information contained in this proposal shall be
kept confidential by Ugly Duckling Corporation and used only for the purpose of
evaluation, selection, and contract negotiation. Ugly Duckling Corporation shall
not disclose to any person, firm, or entity any proprietary or confidential
information of KPMG contained in this proposal without the express, written
permission of KPMG.
<PAGE>
November 2, 1998
Mr. Steve Geary Mr. Delano Mayhall
M.I.S. Manager / Year 2000 Coordinator M.I.S. Manager
Ugly Duckling Corporation Ugly Duckling Corporation
2525 East Camelback Road 600 N. Pearl St Suite 2000
Suite 250 Dallas, Texas 75221
Phoenix, Arizona 85016
Dear Mr. Geary and Mr. Mayhall:
KPMG Consulting's Global Year 2000sm practice is pleased to present this revised
proposal to Ugly Duckling Corporation (Ugly Duckling) to describe our assistance
with Ugly Duckling's Year 2000 Renovation project. This letter serves to
document our understanding of the project, define roles and responsibilities,
and describe our business arrangement.
Greg Martin of our Midwest Global Year 2000sm practice spoke with Delano Mayhall
and Ed Everitt of Ugly Duckling on August 3, 1998. Further discussions occurred
on October 20 leading to the changes incorporated in this proposal. Members of
the Midwest Global Year 2000sm practice inventoried the AS/400 source files sent
on tape. Our review determined that the code is of manageable size, averaging
about 435 lines per RPG program, with 34 RPG programs larger than 2000 lines of
code.
Other discussions focused on Ugly Duckling's management structure for the Year
2000 project, configuration management, testing approach, and capacity.
From information provided by you, we understand that Ugly Duckling is addressing
its Year 2000 challenge on several fronts, namely:
. Business Applications in two main areas: AS/400 based applications and
non-AS/400 applications and components
. Technology Infrastructure
. Non-Technical Infrastructure
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From our discussions with Ugly Duckling, we discovered several key issues:
. A considerable number of queries exist. Query/400 and SQL/400 are used to
query the AS/400 database, with some of the data being downloaded to PC
spreadsheets.
. The RPG code is a mix of RPG II, RPG III and some ILE RPG.
. Some RPG programs are using internally described database files or report
files.
From these discussions, we also understand that Ugly Duckling does not have in
place a formal Quality Assurance group for application testing and lacks an
extensive test bed of data for use in acceptance/integration testing of the
renovated applications. Consequently, Ugly Duckling would like the code
renovation and unit-testing to be performed off-site to delay any requirements
for upgrades to data center capacity.
Our proposal focuses on creating a teaming arrangement with Ugly Duckling to
bring the necessary skills, resources, and technology from KPMG to assist Ugly
Duckling in addressing the renovation of your Car Loan Accounting and Servicing
System (CLASS) application residing on the IBM AS/400 Model 640 system.
Our proposal to Ugly Duckling is presented in four sections:
. Scope of the Ugly Duckling Year 2000 Renovation Project
. Methodology and Project Approach
. Roles and Responsibilities
. Estimates and Professional Fees
A discussion of each of these sections follows.
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SCOPE OF THE UGLY DUCKLING YEAR 2000 RENOVATION PROJECT
The scope of this project is limited to the renovation of the CLASS application
(identified in Appendix A) which consists of 1509 RPG programs, 1249 CL
programs, and its related components (i.e. database files, display files,
printer files etc.). The CLASS application consists of the following subsystems:
. Loan Processing
. Collections
. General Ledger
. Accounts Payable
. Accounts Receivables
. Document Tracking
. Cash Entry
. Point of Sales
. Inventory
The renovation of the CLASS application will consist of expanding date fields
into the application source code to allow the application to be able to process
dates after December 31, 1999.
KPMG will renovate the programs in the RPG versions received. Correction of any
renovation-related errors that are identified within 30 days of being moved into
production will be the responsibility of KPMG.
Date expansion will be required in some DB2/400 physical tables. Identification
of expanded fields and the associated creation and testing of data bridges will
be the responsibility of KPMG. Population of the expanded fields on the test
AS/400 will be the responsibility KPMG with assistance from Ugly Duckling where
necessary.
The scope of this project does not cover infrastructure upgrades (i.e. operating
system, databases etc.). Infrastructure upgrades are the responsibility of Ugly
Duckling. It is imperative that the system software infrastructure upgrades be
completed by Ugly Duckling on or before December 7, 1998 in order to meet a
completion date of March 31, 1999.
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METHODOLOGY AND PROJECT APPROACH
The overall project will be divided into three phases:
- --------- ----------------------------------------------------------------
Phase 1 Project initiation and work plan development
- --------- ----------------------------------------------------------------
- --------- ----------------------------------------------------------------
Phase 2 Application renovation and unit testing in KPMG Year 2000 compliant
environment
- --------- ----------------------------------------------------------------
- --------- ----------------------------------------------------------------------
Phase 3 Regression, Year 2000, acceptance testing, in the leased AS/400
environment and implementation in Ugly Duckling's environment
- --------- ----------------------------------------------------------------------
Proposed Project Timeline
(CHART)
In Phase 1, detailed work plans will be developed. These work plans will
describe the applications to be renovated; identify the "chunks" into which the
applications will be grouped for both renovation and unit testing; and identify
the resource allocations needed to successfully complete the project. A "chunk"
is defined as a logical grouping of applications that share common
functionality, interface points, and data. In order to complete the project on
schedule and within the approved budget, the largest and most critical
applications, Loan Processing and Collections, will be renovated first. To
expedite this project, KPMG will make a best effort to complete the renovation
of the Loan Processing and Collections applications by January 1, 1999. KPMG
will make a best effort to complete renovation on the remaining "chunks" between
January 1, 1999 and February 12, 1999. The exact timing for delivery of each
"chunk" will be finalized in phase 1 of the project.
In addition, a detailed, code-level analysis will be performed on the CLASS
application (and its 1509 RPG programs and 1249 CL programs) identified in
Appendix A and their related components. This will provide the level of detail
necessary to accurately locate and correct all Year 2000 failure points within
the application.
Finally, the test environment configurations will be jointly confirmed. Baseline
testing and post renovation regression and acceptance testing will be performed
on the leased AS/400 environment. Unit testing will be performed by KPMG. Ugly
Duckling must ensure that the necessary resources (computers, IT personnel, and
key end users) are available to the project when they are scheduled in order for
KPMG to maintain the project schedule.
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In Phase 2, KPMG will assist Ugly Duckling in stabilizing the AS/400 application
detailed in Appendix A, using the "field expansion" technique. Applications
renovated in this fashion will remain viable after the Year 2000. The code that
will be renovated falls into four date usage categories that could cause Year
2000 application failures:
. Dates used in calculations
. Dates used in Boolean operations
. Dates used as sort fields or sequence by fields
. Dates used as key fields
Any programs that have already been renovated will be reviewed and corrected as
necessary.
DATES DISPLAYED ON HARDCOPY REPORTS OR ON-LINE SCREENS WILL NOT BE EXPANDED TO 4
DIGITS.
If a bridging strategy becomes necessary, due to physical file expansion, it
will be developed jointly by KPMG and Ugly Duckling. The building of bridges to
any applications that reside outside of CLASS are not included in the scope of
work presented in this proposal.
Ugly Duckling has represented that all source code for the application is
present and accessible in the format required by KPMG. The reconciliation of
production to development libraries is the responsibility of Ugly Duckling. This
reconciliation will validate that the code being renovated is the same as the
code in production and that all required pieces are present. KPMG will work with
Ugly Duckling to analyze the reconciliation and develop a schedule for Ugly
Duckling to provide any required missing pieces. Any modules that cannot be
reconciled must be provided by Ugly Duckling prior to commencement of renovation
for the chunk in which that module resides. As part of the reconciliation, KPMG
and Ugly Duckling will jointly develop a point of contact matrix for each
application that includes not only the technical resources, but also the primary
and secondary users of the application.
In addition to receiving code and related components from Ugly Duckling, KPMG
will also request sample data for each "chunk." This is necessary for conducting
the detailed analysis in identifying date fields and for unit testing changed
programs.
Renovation will be achieved through the use of both automated tools and manual
processes. Based on our Renovation Methodology, the method to be used for each
program will be identified during Phase 1 of the project.
The licensing cost of any automated tools used by KPMG will be borne by KPMG and
will remain the property of KPMG.
Renovation of the application code will be performed by KPMG at a KPMG
Renovation Facility or by selected subcontractors under KPMG direction.
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Applications will be packaged as chunks that will be identified during Phase One
of the project. Renovation will occur at the chunk level and source code will be
provided to KPMG at the chunk level. Similarly, turnover of renovated code back
to Ugly Duckling will occur at the chunk level.
During renovation, only limited new development will occur to any program
contained in the chunk. Emergency code fixes are the responsibility of Ugly
Duckling, as is the inclusion and merging of these fixes into the turned over,
renovated code.
In PHASE 3, regression, Year 2000, and acceptance testing needs to be performed
on all applications that KPMG renovates, as identified in Appendix A. KPMG will
assist Ugly Duckling in this phase of work by providing a manager to assist in
planning and the development of a testing plan. KPMG will also augment the Ugly
Duckling staff with three (3) resources to assist in the testing effort. With
each returned "chunk" of renovated code, KPMG will provide Ugly Duckling with a
suggested testing workplan and a testing matrix that details which components
will most likely require testing.
It is our understanding that a full test environment does not exist at Ugly
Duckling and that KPMG as part of this proposal will lease an AS/400 to use as a
testing machine. The costs associated with leasing and operating a test AS/400
are included in the total costs associated with this project.. Additionally, a
formal set of test scripts and testing scenarios do not exist. Among the first
steps of the project will be to execute a regression test for the CLASS
application to establish a "baseline" of expected results. KPMG and Ugly
Duckling will jointly organize, perform these tests, and document the results at
the chunk level.
Compliance testing will occur on the test AS/400 machine. Tests scripts and test
cases will be executed on the test AS/400 machine as well as the conversion
programs that will expand the DB/2 tables.
Any missing pre-renovation baseline test components must be created, and may
affect the project timetable, requiring a revision to the fee schedule. The CL
and databases used for this initial baseline test will be frozen for
post-renovation regression and acceptance testing.
After code renovation, KPMG will unit test every renovated program. Following
turnover of the code to Ugly Duckling, post renovation regression and acceptance
testing will be performed at Ugly Duckling by the KPMG and Ugly Duckling testing
team, using the identical CL and database used for pre-renovation baseline
testing. Any errors resulting from KPMG code renovation will be returned to KPMG
for repair using procedures that will be developed in Phase 1 of the project.
The KPMG and Ugly Duckling testing team will begin testing renovated code on
January 4, 1999 or within a business day following receipt of the first chunk
returned. Ugly Duckling is targeting to complete all regression and acceptance
testing by March 31, 1999. KPMG and Ugly Duckling will be jointly responsible
for developing a test schedule based on the estimated effort required, the
target completion date and the availability of testing resources. Any renovation
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errors detected prior to 30 days after the renovated program is returned to
production will be corrected by KPMG as part of this project. Problems detected
after this time will become the responsibility of Ugly Duckling. All programs
will be moved into production by Ugly Duckling within 30 days after completion
of the regression and acceptance testing of the last chunk. Exceptions to this
procedure will be handled on a case-by-case basis and will be mutually agreed
upon by Ugly Duckling and KPMG. Ugly Duckling will notify KPMG in writing
concerning a defect. KPMG will respond within 48 hours. Ugly Duckling will
provide any test data needed to recreate the error. Time related to discovery of
non-renovation related errors will be billed at an hourly rate of $190 plus
out-of-pocket expenses.
For each phase of the project, there will be project deliverables.
Representative samples of Phase 1 and Phase 2 deliverables are attached to this
engagement letter and serve to illustrate the information and contents that will
be provided. Phase 1 deliverables also include a finalized project workplan that
defines the chunking approach, a detailed code analysis and a finalized test
environment configuration. Phase 2 deliverables include an application contact
matrix and the renovated code for each "chunk". The phase 3 deliverable will be
a testing strategy and plan document and specific test plans, scripts and
testing matrices. The phase 3 deliverables will cover baseline, regression, and
acceptance testing.
KPMG will assign an Engagement Manager and a Project Manager. KPMG will submit
deliverables to Ugly Duckling for review and acceptance. Ugly Duckling will have
the right to reject a deliverable if it does not substantially conform to the
specifications set forth in this agreement. Except for the process previously
defined agreement related to code renovation errors, if Ugly Duckling rejects a
deliverable, KPMG will have 30 days to re-submit the deliverable for acceptance.
If Ugly Duckling does not reject a deliverable within 30 days, the deliverable
will be deemed accepted. KPMG does not warrant that the renovated code will
operate error free. Errors discovered by Ugly Duckling after final acceptance
and after 30 days of migration to production will be repaired at Ugly Duckling's
request on a time and material basis at an hourly rate of $190 plus
out-of-pocket expenses. Ugly Duckling will move all "chunks" into production
within 30 days after completion of the regression and acceptance testing of the
last "chunk."
ROLES AND RESPONSIBILITIES
Mr Vince Neton, the Partner-in-charge of KPMG's Midwest Year 2000 Practice, will
serve as the Engagement Partner to ensure the work is performed in accordance
with KPMG standards and this engagement letter.
. ENGAGEMENT MANAGEMENT. KPMG will assign Greg Martin as Engagement Manager
to the Year 2000 Renovation engagement. Mr. Martin, a Manager in KPMG's
Midwest Year 2000 Practice, has extensive experience in large-scale
conversion and Year 2000 renovation projects.
. Project Management. KPMG will assign Robert Robe as the Project and Test
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<PAGE>
Manager to the Year 2000 Renovation engagement. Mr Robe, a Manager in
KPMG's Midwest Year 2000 Practice, has extensive experience in large-scale
implementation and Year 2000 projects.
. UGLY DUCKLING MANAGEMENT. Ugly Duckling will assign a project liaison. The
Ugly Duckling liaison is responsible for working with the KPMG Project
Manager to schedule Ugly Duckling resources and ensure timely completion of
any tasks assigned to Ugly Duckling personnel.
. EXECUTIVE SPONSOR. Ugly Duckling will designate an executive to sponsor
this project who will interface with KPMG's Engagement Partner as often as
mutually agreed.
Proposed staff may change subject to the timing of acceptance of this proposal
and availability.
Resumes are attached in Appendix B.
It is assumed that appropriate workspace will be available for the KPMG team
whenever they are at Ugly Duckling. This space would minimally consist of a
cubicle with a phone and an analog phone line for remote data access.
Recognizing Ugly Duckling's machine capacity and office space constraints, the
renovation work will be performed at KPMG's facilities. The bulk of the testing
work will be performed at Ugly Duckling's office in Dallas.
As part of KPMG's internal professional practice oversight, we have adopted
standard language related to warranties, liability, and remedies as they pertain
to Year 2000 engagements. This standard language is provided in Appendix C.
ESTIMATES AND PROFESSIONAL FEES
KPMG extends a fixed fee of $1,200,000 for this project. This fee includes
out-of-pocket expenses and the costs associated with leasing the test AS/400.
KPMG will assign Robert Robe as the full time Manager to work with Ugly Duckling
from the inception of the project to March 31, 1999. Mr. Robe will manage the
renovation effort as well as assist Ugly Duckling in high level test strategy,
planning, and test execution and will coordinate with Ugly Duckling and KPMG to
test the CLASS system.
Included in the fixed fee amount are any costs associated with the use of
automated tools. The duration of the project will be approximately 23 weeks,
with a tentative target date of February 12, 1999 for the completion of
renovation and unit testing. Baseline testing, regression testing, Year 2000
testing, and acceptance testing will overlap remediation as each chunk is
completed and will continue through March 31, 1999.
KPMG will augment Ugly Duckling's testing staff. KPMG will include as part of
the fixed fee, three (3) testing resources to execute test cases and test
scripts and will work under the direction of Ugly Duckling and the KPMG testing
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Manager. The testers will consist of one (1) Senior Consultant for a four month
period beginning December 1, 1998 and two (2) Consultants for a three month
period beginning January 1, 1999. In the event that renovation work is delayed,
the schedule for testing assistance will be adjusted such that the overall
testing time commitment by KPMG to Ugly Duckling will be extended to the same
extent that the renovation work is delayed.
Additional testing time spent on the project by KPMG personnel beyond that
described above will be billed on a time and materials basis using the fee
structure in the table below. In this case, in addition to the professional
fees, we are reimbursed for reasonable expenses such as travel, lodging, and
meals. We estimate these costs to be approximately 15% of the professional fees.
The two (2) Consultants will be from the pool of renovators that participated in
the Ugly Duckling code renovation. Ugly Duckling may conduct a telephone
interview with the two testing candidates prior to KPMG assigning them to the
project. The testing work will be covered by the standard terms and conditions
included in this proposal. If additional testers beyond the first three (3)
testers are needed, the following hourly rates will be in effect from October
1998 to June 30, 1999. These fees are over and above the fees for the code
renovation
-------------------------- ------------
Level Fee
-------------------------- ------------
Manager 225
-------------------------- ------------
-------------------------- ------------
Senior Consultant 175
-------------------------- ------------
-------------------------- ------------
Consultant 125
-------------------------- ------------
We understand that Ugly Duckling may not have the necessary resources to execute
the baseline and compliance test of the renovated applications due to other
commitments of the programming staff. Although, this proposal includes three (3)
KPMG resources to augment the Ugly Duckling testing staff, at this time we have
insufficient information to provide an accurate cost estimate and determination
of the appropriate size of the testing staff. To complete all testing by March
31, 1999, additional resources may need to be applied. At the completion of our
unit testing of renovated code, we will have sufficient information to provide a
more accurate cost estimate and determine a workable strategy that is beneficial
to Ugly Duckling in terms of resources, and costs.
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The costs of leasing an AS/400 for testing will be the responsibility of KPMG.
KPMG will procure and manage the test AS/400. Where necessary, Ugly Duckling
will assist KPMG in setting up the test AS/400 making it ready for testing. The
test AS/400 will have the following configuration:
Model 9406-S20
250 MB Memory
40GB DASD
8 MM tape
Modem
OS/400 4.2
Fees for this project will be billed as follows with payment expected within 30
days of receipt of invoice:
------------------------------ -------------------
FIXED FEE
FEE SCHEDULE RENOVATION
PROJECT*
------------------------------ -------------------
------------------------------ -------------------
Project Initiation $240,000
------------------------------ -------------------
------------------------------ -------------------
December 1, 1998 240,000
------------------------------ -------------------
------------------------------ -------------------
January 1, 1999 240,000
------------------------------ -------------------
------------------------------ -------------------
February 1, 1999 240,000
------------------------------ -------------------
------------------------------ -------------------
March 1, 1999 240,000
------------------------------ -------------------
------------------------------ -------------------
Total $1,200,000
------------------------------ -------------------
This proposal is based entirely upon the inventory gathered from the tape sent
by Ugly Duckling on August 10, 1998. In the event that a significant amount (5%
or more) of additional lines of code are found beyond those listed in Appendix
A, an additional fee of $1.50 per line of code will be charged.
* * *
- ----------
* Fixed fee includes three (3) testers and costs associated with leasing the
testing AS/400
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We look forward to working with you and your staff on this project. We
appreciate the opportunity to demonstrate KPMG's experience and capabilities. If
the terms of this engagement letter are acceptable, please sign the enclosed
duplicate and return it to my attention. Should you have any questions or
concerns, please do not hesitate to contact Greg Martin at 312-665-5111 or me at
312-665-5283.
Very truly yours,
KPMG Peat Marwick LLP
Vincent A. Neton
Midwest Partner-in-Charge
Global Year 2000
cc: Greg C. Martin III, KPMG - Chicago
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ENGAGEMENT ACCEPTANCE
To confirm your acceptance on behalf of Ugly Duckling Corporation of this
engagement letter for Year 2000 Renovation Services, please sign in the space
provided and return the original to me. Your signature indicates your
authorization to proceed with the project.
Name: /s/ Steven A. Tesdahl
--------------------------------------------------------
Title: Senior V.P. and Chief Information Officer
--------------------------------------------------------
Date: 11/2/98
--------------------------------------------------------
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APPENDIX A & B ARE OMITTED BECAUSE THEY ARE NOT RELEVANT
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<PAGE>
APPENDIX C
GENERAL BUSINESS TERMS
1. SERVICES. It is understood and agreed that KPMG's services may include advice
and recommendations; but all decisions in connection with the implementation of
such advice and recommendations shall be the responsibility of, and made by,
Client.
2. PAYMENT OF INVOICES. Properly submitted invoices upon which payment is not
received within thirty (30) days of the invoice date shall accrue a late charge
of the lesser of (i) 1 1/2% per month or (ii) the highest rate allowable by law,
in each case compounded monthly to the extent allowable by law. Without limiting
its rights or remedies, KPMG shall have the right to halt or terminate entirely
its services until payment is received on past due invoices.
3. TERM. Unless terminated sooner in accordance with its terms, this engagement
shall terminate on the completion of KPMG's services hereunder. This engagement
may be terminated by either party at any time by giving written notice to the
other party not less than 30 calendar days before the effective date of
termination.
4. OWNERSHIP.
a) KPMG Technology . KPMG has created, acquired or otherwise has rights in,
and may, in connection with the performance of services hereunder, employ,
provide, modify, create, acquire or otherwise obtain rights in, various
concepts, ideas, methods, methodologies, procedures, processes, know-how, and
techniques; models (including, without limitation, function, process, system and
data models); templates; the generalized features of the structure, sequence and
organization of software, user interfaces and screen designs; general purpose
consulting and software tools, utilities and routines; and logic, coherence and
methods of operation of systems) (collectively, the "KPMG Technology").
b) Ownership of Deliverables. Except as provided below, upon full and final
payment to KPMG hereunder, the tangible items specified as deliverables or work
product in the engagement letter or proposal to which these terms are attached
(the "Deliverables") will become the property of Client. To the extent that any
KPMG Technology is contained in any of the Deliverables, KPMG hereby grants
Client, upon full and final payment to KPMG hereunder, a royalty-free, paid-up,
worldwide, non-exclusive license to use such KPMG Technology in connection with
the Deliverables.
c) Ownership of KPMG Property. To the extent that KPMG utilizes any of its
property (including, without limitation, the KPMG Technology or any hardware or
software of KPMG) in connection with the performance of services hereunder, such
property shall remain the property of KPMG and, except for the license expressly
granted in the preceding paragraph, Client shall acquire no right or interest in
such property. Nothing in this Agreement shall be construed as precluding or
limiting in any way the right of KPMG to provide consulting or other services of
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any kind or nature whatsoever to any person or entity as KPMG in its sole
discretion deems appropriate. In addition, and notwithstanding anything in this
Agreement to the contrary, the parties acknowledge and agree that (a) KPMG will
own all right, title, and interest, including, without limitation, all rights
under all copyright, patent and other intellectual property laws, in and to the
KPMG Technology and (b) KPMG may employ, modify, disclose, and otherwise exploit
the KPMG Technology (including, without limitation, providing services or
creating programming or materials for other clients).
5. WARRANTIES; LIMITATION ON WARRANTIES.
(a) Warranty of Services. This is a services engagement. KPMG warrants to
client that (i) in performing the services under the Engagement Letter, KPMG
shall provide sufficient qualified personnel to perform the services in a
competent and workmanlike manner in accordance with applicable industry
standards and (ii) KPMG's performance of the services, to its knowledge, does
not and shall not violate any applicable law, rule or regulation.
(b) Warranty of Software. KPMG warrants that for a period of 30 days
following migration to production , any Client or third-party software modified
by KPMG and any software developed by KPMG for Client will operate substantially
in accordance with the applicable specifications. Client agrees to migrate
remediated code into production within 30 days of the completion of acceptance
testing. If any errors occur during the warranty period that materially affects
the performance of such software, KPMG will use all reasonable efforts to
correct the error. KPMG does not warrant that Client or any third-party software
modified by KPMG or software developed by KPMG for Client will operate
error-free.
(c) WARRANTY DISCLAIMER. KPMG DISCLAIMS ALL OTHER WARRANTIES, EITHER
EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE.
6. Limitation on Damages. Client agrees that KPMG, its partners, principals, and
employees shall not be liable to Client for any actions, damages, claims,
liabilities, costs expenses, or losses in any way arising out of or relating to
the services performed hereunder for an aggregate amount in excess of the fees
paid by Client to KPMG under this engagement. In no event shall either party,
its partners, principals, directors, officers or employees be liable for
consequential, special, indirect, incidental, punitive or exemplary damages,
costs, expenses, or losses (including, without limitation, lost profits and
opportunity costs). Further, KPMG will not be responsible for obtaining any
permissions necessary to modify any third-party software and KPMG will have no
liability to Client if the modifications made to a third party's software have
an adverse effect on Client's rights and obligations in respect of such
software. The provisions of this Paragraph shall apply regardless of the form of
action, damage, claim, liability, cost, expense, or loss, whether in contract,
statute, tort (including, without limitation, negligence), or otherwise.
7. Y2K Disclaimer. While KPMG agrees pursuant to the accompanying engagement
letter or proposal to which these terms are attached (the "Engagement Letter")
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to assist Client in assessing the nature and scope of Client's Year 2000
compliance requirements, KPMG makes no representations or warranties that any
services performed hereunder by KPMG or any third party services provided in
connection with KPMG's services or otherwise recommended by KPMG will result in
the technical changes or fixes needed to make the computer equipment, software,
data or other assets of Client Year 2000 compliant. Client acknowledges and
agrees that the accomplishment of the goals established for this engagement as
set forth in the Engagement Letter will require each party to fully cooperate
with the other party, to fulfill its role and perform its obligations in a
timely manner with personnel qualified to perform the tasks assigned and to
coordinate its efforts with the efforts of the other party and that all services
provided will be the result of the parties' joint input and efforts.
Accordingly, Client shall retain the right and also the responsibility to make
decisions with respect to such services and their implementation with respect to
its business, and KPMG makes no representation or warranty with respect thereto.
8. INDEMNIFICATION; INFRINGEMENT.
(a) Indemnification of KPMG. Client agrees to indemnify, defend and hold
harmless KPMG from and against any and all liabilities, damages, claims, losses,
costs and expenses (including reasonable attorneys' fees) incurred by KPMG in
connection with a third party claim relating to KPMG's performance of services
hereunder except to the extent resulting from the recklessness, gross negligence
or willful misconduct of KPMG and except for claims for personal injury and
damage to tangible property for which KPMG has an obligation to indemnify Client
as set forth below.
(b) Indemnification of Client. KPMG hereby agrees to indemnify, hold
harmless and defend Client from and against any and all liabilities, damages,
claims, losses, costs and expenses (including reasonable attorneys' fees) for
injury to, illness or death of, any person or persons regardless of status, and
damage to or destruction of any tangible property which Client may sustain or
incur to the extent resulting from the negligence or willful misconduct of KPMG
in the performance of the services under the Engagement Letter.
(c) Liability and Remedies for Infringement. (i) KPMG hereby agrees to
indemnify, hold harmless and defend Client from and against any and all claims,
liabilities, losses, expenses (including reasonable attorney's fees, fines,
penalties, taxes or damages incurred by or asserted against Client to the extent
resulting from a claim that any of the Deliverables violates any third party's
trade secret, trademark, copyright, patent or other proprietary rights. The
foregoing provisions shall not apply to any infringement arising out of (i) use
of the Deliverables other than in accordance with applicable documentation or
instructions supplied by KPMG, (ii) any alteration, modification or revision of
the Deliverables not explicitly authorized by KPMG or (iii) use of the
Deliverables other than for Client's internal business purposes.
(ii) In case any of the Deliverables or any portion thereof is held in
any such suit to constitute infringement and the use thereof is enjoined,
KPMG shall within a reasonable time, at its option, either (i) secure for
Client the right to continue the use of such infringing item by procuring
for Client a license or other permission as will enable Client to secure
the suspension of any injunction or (ii) replace, at KPMG's sole expense,
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such item with substantially equivalent non-infringing item or modify such
item so that it becomes non-infringing. In the event KPMG is unable to
procure the aforementioned license or permission or replace the infringing
item as provided herein, KPMG shall accept the return of the infringing
item and refund to Client the amount paid to KPMG for such item.
(iii) The provisions of this Paragraph 8(c) state KPMG's entire
liability and Client's sole remedy with respect to infringement.
(d) Indemnification Procedures. The party entitled to indemnification (the
"Indemnified Party") shall promptly notify the party obligated to provide such
indemnification (the "Indemnifying Party") of any claim for which the
Indemnified Party seeks indemnification hereunder and the Indemnifying Party
shall have the exclusive right and authority to conduct the defense or
settlement of any such claim at the Indemnifying Party's sole expense and the
Indemnified Party shall cooperate with the Indemnifying Party in connection
therewith.
9. COOPERATION. Client shall cooperate with KPMG in the performance by KPMG of
its services hereunder, including, without limitation, providing KPMG with
reasonable facilities and timely access to data, information and personnel of
Client. Client shall be responsible for the performance of its employees and
agents and for the accuracy and completeness of all data and information
provided to KPMG for purposes of the performance by KPMG of its services.
10. FORCE MAJEURE. Neither party shall be liable for any delays resulting from
circumstances or causes beyond its reasonable control, including, without
limitation, fire or other casualty, act of God, strike or labor dispute, are or
other violence, or any law, order or requirement of any governmental agency or
authority.
11. LIMITATION ON ACTIONS. No action, regardless of form, arising under or
relating to this engagement, may be brought by either party more than one year
after the cause of action has accrued, except that an action for non-payment may
be brought by a party not later than one year following the date of the last
payment due to such party hereunder.
12. INDEPENDENT CONTRACTOR. It is understood and agreed that each of the parties
hereto is an independent contractor and that neither party is, nor shall be
considered to be, an agent, distributor or representative of the other. Neither
party shall act or represent itself, directly or by implication, as an agent of
the other or in any manner assume or create any obligation on behalf of , or in
the name of, the other.
13. Confidentiality. Client and KPMG acknowledge and agree that all information
communicated to either Client or KPMG by the other party in connection with the
performance by a party under this Agreement shall be received in confidence,
shall be used only for purposes of this Agreement, and no such confidential
information shall be disclosed by the respective parties or their agents or
personnel without the prior written consent of the other party. Except to the
extent otherwise required by applicable law or professional standards, the
parties' obligations under this section do not apply to information that: (a) is
or becomes generally available to the public other than as a result of
disclosure by Client or KPMG, (b) was known to either Client or KPMG or had been
Page - 18
<PAGE>
previously possessed by Client or KPMG without restriction against disclosure at
the time of receipt thereof by Client or KPMG, (c) was independently developed
by Client or KPMG without violation of this Agreement or (d) Client and KPMG
agree from time to time to disclose. Each party shall be deemed to have met its
nondisclosure obligations under this Paragraph as long as it exercises the same
level of care to protect the other's information as it exercises to protect its
own confidential information, except to the extent that applicable law or
professional standards impose a higher requirement. KPMG may retain, subject to
the terms of this Paragraph, copies of Client's confidential information
required for compliance with applicable professional standards or internal
policies. If either party receives a subpoena or other validly issued
administrative or judicial demand requiring it to disclose the other party's
confidential information, such party shall provide prompt written notice to the
other party of such demand in order to permit such party to seek a protective
order. So long as the notifying party gives notice as provided herein, the
notifying party shall thereafter be entitled to comply with such demand to the
extent permitted by law, subject to any protective order or the like that may
have been entered in the matter.
14. SURVIVAL. The provisions of Paragraphs 1, 2, 4, 5, 6, 7, 8, 11, 12, 13, 14,
15 and 17 hereof shall survive the expiration or termination of this engagement.
15. ASSIGNMENT. Except as provided below, neither party may assign, transfer or
delegate any of the rights or obligations hereunder without the prior written
consent of the other party. KPMG may assign its rights and obligations hereunder
to any affiliate that is a successor in interest to all or substantially all of
the assets or business of KPMG's consulting practice, without the consent of
Client.
16. ENTIRE AGREEMENT. These terms, and the Proposal or Engagement Letter to
which these terms are appended, including Exhibits, constitute the entire
agreement between KPMG and Client with respect to the subject matter hereof and
supersede all other oral and written representation, understandings or
agreements relating to the subject matter hereof.
17. USE OF NAME. In the event that Client desires to make any public
announcement or issue any other release to third parties regarding the services
provided by KPMG in connection with this engagement, Client will obtain KPMG's
prior written approval of any such public announcement or other release. In no
event shall such announcement or other release refer to KPMG by name, except as
otherwise required by law In the event that KPMG desires to make any public
announcement or issue any other release to third parties regarding the services
performed at Ugly Duckling by KPMG in connection with this engagement, KPMG will
obtain Client's prior written approval of any such public announcement or other
release.
Page - 19
Exhibit 12
<TABLE>
<CAPTION>
Ugly Duckling Corporation
Ratio of Earnings to Fixed Charges
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Fixed Charges:
Interest Expense............................. 6,904 2,774 2,429 5,328 2,870
Capitalized Interest......................... 135 229 0 54 142
Interest Factor in Rent Expense (a).......... 3,768 1,358 790 784 462
Preferred dividends.......................... 1,527
--------- --------- --------- --------- ---------
10,807 4,361 4,746 6,166 3,474
--------- --------- --------- --------- ---------
Earnings:
Earnings (Loss) from continuing operations... 5,916 16,165 6,777 (3,972) (2,328)
Fixed Charges................................ 10,807 4,361 3,219 6,166 3,474
Interest Capitalized......................... (135) (229) 0 (54) (142)
Preferred dividends.......................... (1,527)
========= ========= ========= ========= =========
16,588 20,297 8,469 2,140 1,004
========= ========= ========= ========= =========
Ratio of earnings to fixed charges........... 1.53 4.65 1.78 (b) (b)
========= ========= ========= ========= =========
For the purposes of these computations, "earnings" are defined as the sum of pretax income from
continuing operations plus fixed charges of the Company and its subsidiaries, adjusted to exclude
the amount of any interest capitalized during the period and dividends paid on preferred stock;
"fixed charges" consist of interest on debt, amortization of debt discount, premium, and expense,
and the portion of rents which is representative of the interest.
- ---------------------------------------------------
<FN>
(a) One-third of rent expense is deemed to be representative of the interest factor.
(b) Earnings did not cover fixed charges by $4.0 million and $2.5 million in the years ended
December 31, 1995 and 1994, respectively.
</FN>
</TABLE>
<TABLE>
<CAPTION>
LIST OF SUBSIDIARIES (as of 2/16/99)
NAME: dba, IF APPLICABLE: JURISDICTION OF
INCORPORATION:
<S> <C> <C>
Ugly Duckling Car Sales and Finance Corporation Arizona
(formerly Duck Ventures, Inc.)
Ugly Duckling Credit Corporation Arizona
(formerly Champion Acceptance Corporation)
Champion Financial Services, Inc. Arizona
Ugly Duckling Car Sales, Inc. Ugly Duckling Processing Center Arizona
Ugly Duckling Car Sales
Ugly Duckling City of Cars
Ugly Duckling Autorama
Ugly Duckling Glendale Motors
Ugly Duckling-Blue Chip Motors
Ugly Duckling Car Sales Florida, Inc. Champion Acceptance Florida
Ugly Duckling Car Sales
Ugly Duckling Car Sales New Mexico, Inc. New Mexico
Ugly Duckling Car Sales Texas, L.L.P. Ugly Duckling Car Sales Arizona
Yes-Cars
E-Z Motors
Red McComb's Super Store
Ugly Duckling
Ugly Duckling Car Sales Georgia, Inc. Ugly Duckling Car Sales Georgia
Kars-Yes
Ugly Duckling Car Sales California, Ugly Duckling Car Sales California
Inc. Kars-Yes
Ugly Duckling Portfolio Corporation Arizona
(formerly Champion Portfolio Corporation)
Ugly Duckling Portfolio Corporation II Arizona
Ugly Duckling Receivables Corp. Delaware
Ugly Duckling Receivables Corp. II Delaware
Drake Insurance Services, Inc. Arizona
Drake Insurance Agency, Inc. Arizona
Drake Property & Casualty Life Insurance Co. Turks & Caicos Islands
Drake Life Insurance Co. Turks & Caicos Islands
Ugly Duckling Dealer Finance, Inc. Arizona
Ugly Duckling Dealer Finance Alabama, Inc. Arizona
UDRAC, Inc. Arizona
UDRAC Rentals, Inc. Arizona
Cygnet Financial Corporation Delaware
Cygnet Financial Services, Inc. Arizona
Cygnet Dealer Finance, Inc. Arizona
Cygnet Finance Alabama, Inc. Arizona
Cygnet Financial Portfolio, Inc. Arizona
Cygnet Support Services, Inc. Arizona
Fidelity Funding Auto Receivables Corp. Delaware
Fidelity Funding Auto Receivables Corp. II Delaware
Fidelity Funding Auto Receivables Corp. III Delaware
Fidelity Funding Receivables, L.L.C. Delaware
</TABLE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Ugly Duckling Corporation:
We consent to the incorporation by reference in the registration statements of
Ugly Duckling Corporation on Form S-3 (File No. 333-31531) filed as of July 18,
1997, as amended by pre-effective amendment No. 1 to Form S-3 filed as of July
30, 1997; Form S-3 (File No. 333-22237) filed as post-effective amendment No. 2
to Form S-1 as of July 18, 1997; Form S-8 (File No. 333-32313) for Ugly Duckling
Corporation Long-Term Incentive Plan filed as of July 29, 1997; Form S-8 (File
No. 333-08457) for Ugly Duckling Corporation Long-Term Incentive Plan filed as
of July 19, 1996; Form S-8 (File No. 333-06615) for Ugly Duckling Corporation
Director Incentive Plan filed as of June 21, 1996; and Form S-8 (File No.
333-72717) for Ugly Duckling Corporation 1998 Executive Incentive Plan filed as
of February 22, 1999, of our report dated February 18, 1999, relating to the
consolidated balance sheets of Ugly Duckling Corporation and subsidiaries as of
December 31, 1998 and 1997, 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, 1998, which report appears in the December
31, 1998, annual report on Form 10-K of Ugly Duckling Corporation.
KPMG LLP
Phoenix, Arizona
March 26, 1999
SPECIAL POWER OF ATTORNEY
(for Robert J. Abrahams)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Ernest C. Garcia II, Gregory B. Sullivan, Steven T. Darak, and Steven P.
Johnson, and each of them, his true and lawful attorney-in-fact and agent with
full power of substitution and resubstitution, for him and in his name, place,
and stead, in any and all capacities, to sign the Annual Report on Form 10-K for
the fiscal year ended December 31, 1998, for filing with the Securities and
Exchange Commission ("SEC") by Ugly Duckling Corporation, a Delaware
corporation, together with any and all amendments to such Form 10-K, and to file
the same with all exhibits thereto, and all documents in connection therewith,
with the SEC, granting to such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.
DATE: February 25, 1999
/S/ ROBERT J. ABRAHAMS
----------------------
ROBERT J. ABRAHAMS
SPECIAL POWER OF ATTORNEY
(for Christopher D. Jennings)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Ernest C. Garcia II, Gregory B. Sullivan, and Steven T. Darak, Steven P.
Johnson, and each of them, his true and lawful attorney-in-fact and agent with
full power of substitution and resubstitution, for him and in his name, place,
and stead, in any and all capacities, to sign the Annual Report on Form 10-K for
the fiscal year ended December 31, 1998, for filing with the Securities and
Exchange Commission ("SEC") by Ugly Duckling Corporation, a Delaware
corporation, together with any and all amendments to such Form 10-K, and to file
the same with all exhibits thereto, and all documents in connection therewith,
with the SEC, granting to such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.
DATE: February 25, 1999
/S/ CHRISTOPHER D. JENNINGS
---------------------------
Christopher D. Jennings
SPECIAL POWER OF ATTORNEY
(for John N. MacDonough)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Ernest C. Garcia II, Gregory B. Sullivan, Steven T. Darak, and Steven P.
Johnson, and each of them, his true and lawful attorney-in-fact and agent with
full power of substitution and resubstitution, for him and in his name, place,
and stead, in any and all capacities, to sign the Annual Report on Form 10-K for
the fiscal year ended December 31, 1998, for filing with the Securities and
Exchange Commission ("SEC") by Ugly Duckling Corporation, a Delaware
corporation, together with any and all amendments to such Form 10-K, and to file
the same with all exhibits thereto, and all documents in connection therewith,
with the SEC, granting to such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.
DATE: February 25, 1999
/S/ JOHN N. MACDONOUGH
----------------------
JOHN N. MACDONOUGH
SPECIAL POWER OF ATTORNEY
(for Frank P. Willey)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Ernest C. Garcia II, Gregory B. Sullivan, Steven T. Darak, and Steven P.
Johnson, and each of them, his true and lawful attorney-in-fact and agent with
full power of substitution and resubstitution, for him and in his name, place,
and stead, in any and all capacities, to sign the Annual Report on Form 10-K for
the fiscal year ended December 31, 1998, for filing with the Securities and
Exchange Commission ("SEC") by Ugly Duckling Corporation, a Delaware
corporation, together with any and all amendments to such Form 10-K, and to file
the same with all exhibits thereto, and all documents in connection therewith,
with the SEC, granting to such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.
DATE: February 25, 1999
/S/ FRANK P. WILLEY
-------------------
FRANK P. WILLEY
SPECIAL POWER OF ATTORNEY
(for Ernest C. Garcia II)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Gregory B. Sullivan, Steven T. Darak, and Steven P. Johnson, and each of them,
his true and lawful attorney-in-fact and agent with full power of substitution
and resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, for filing with the Securities and Exchange Commission
("SEC") by Ugly Duckling Corporation, a Delaware corporation, together with any
and all amendments to such Form 10-K, and to file the same with all exhibits
thereto, and all documents in connection therewith, with the SEC, granting to
such attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully and to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
DATE: February 25, 1999
/S/ ERNEST C. GARCIA II
---------------------------
ERNEST C. GARCIA II
SPECIAL POWER OF ATTORNEY
(for Gregory B. Sullivan)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Ernest C. Garcia II, Steven T. Darak, and Steven P. Johnson, and each of them,
his true and lawful attorney-in-fact and agent with full power of substitution
and resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, for filing with the Securities and Exchange Commission
("SEC") by Ugly Duckling Corporation, a Delaware corporation, together with any
and all amendments to such Form 10-K, and to file the same with all exhibits
thereto, and all documents in connection therewith, with the SEC, granting to
such attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully and to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
DATE: February 25, 1999
/S/ GREGORY B. SULLIVAN
-----------------------
GREGORY B. SULLIVAN
SPECIAL POWER OF ATTORNEY
(for Steven T. Darak)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Ernest C. Garcia II, Gregory B. Sullivan and Steven P. Johnson, and each of
them, his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities, to sign the Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, for filing with the Securities and Exchange
Commission ("SEC") by Ugly Duckling Corporation, a Delaware corporation,
together with any and all amendments to such Form 10-K, and to file the same
with all exhibits thereto, and all documents in connection therewith, with the
SEC, granting to such attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that such attorneys-in-fact and agents, or each of them, may lawfully do or
cause to be done by virtue hereof.
DATE: February 25, 1999
/S/ STEVEN T . DARAK
--------------------
STEVEN T. DARAK
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27.1
<ARTICLE> 5
<LEGEND>
This financial data schedule contains summary financial information as of
and for the year ended December 31, 1998, which is extracted from the
Consolidated Balance Sheets, Consolidated Statements of Operations, and
Consolidated Statements of Cash Flows, and is qualified in its entirety by
reference to the financial statements within the report on Form 10-K filing.
</LEGEND>
<CIK> 0001012704
<NAME> UGLY DUCKLING CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,751
<SECURITIES> 0
<RECEIVABLES> 234,082
<ALLOWANCES> 42,616
<INVENTORY> 44,167
<CURRENT-ASSETS> 0<F1>
<PP&E> 41,169
<DEPRECIATION> 8,199
<TOTAL-ASSETS> 345,975
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 173,828
<OTHER-SE> 3,449
<TOTAL-LIABILITY-AND-EQUITY> 345,975
<SALES> 287,618
<TOTAL-REVENUES> 366,170
<CGS> 167,014
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 118,702
<LOSS-PROVISION> 67,634
<INTEREST-EXPENSE> 6,904
<INCOME-PRETAX> 5,916
<INCOME-TAX> 2,396
<INCOME-CONTINUING> 3,520
<DISCONTINUED> (9,223)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,703)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> (.31)
<FN>
<F1>UNCLASSIFIED BALANCE SHEET </FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27.2
<ARTICLE> 5
<LEGEND>
This restated financial data schedule (which includes Exhibits 27.2 to
27.9) contains summary financial information as of and for the years ended
December 31, 1997 and 1996, respectively, and for the interim periods for the
years ended December 31, 1998 and 1997, respectively. The summary financial
information as of and for the year ended December 31, 1997, is extracted from
the Consolidated Balance Sheet and the Consolidated Statement of Operations, and
the summary financial information for the year ended December 31, 1996 is
extracted from the Consolidated Statement of Operations. This summary financial
information is qualified in its entirety by reference to the financial
statements within the report on Form 10-K filing.
</LEGEND>
<CIK> 0001012704
<NAME> UGLY DUCKLING CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,357
<SECURITIES> 0
<RECEIVABLES> 136,064
<ALLOWANCES> 18,746
<INVENTORY> 34,690
<CURRENT-ASSETS> 0<F1>
<PP&E> 44,818
<DEPRECIATION> 5,051
<TOTAL-ASSETS> 276,426
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 172,622
<OTHER-SE> 9,152
<TOTAL-LIABILITY-AND-EQUITY> 276,426
<SALES> 123,814
<TOTAL-REVENUES> 170,083
<CGS> 72,358
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 55,741
<LOSS-PROVISION> 23,045
<INTEREST-EXPENSE> 2,774
<INCOME-PRETAX> 16,165
<INCOME-TAX> 6,637
<INCOME-CONTINUING> 9,528
<DISCONTINUED> (83)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,445
<EPS-PRIMARY> .53
<EPS-DILUTED> .52
<FN>
<F1>UNCLASSIFIED BALANCE SHEET </FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27.3
<ARTICLE> 5
<CIK> 0001012704
<NAME> UGLY DUCKLING CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 18,455
<SECURITIES> 0
<RECEIVABLES> 20,036
<ALLOWANCES> 1,626
<INVENTORY> 5,464
<CURRENT-ASSETS> 0<F1>
<PP&E> 22,461
<DEPRECIATION> 2,519
<TOTAL-ASSETS> 117,629
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 82,612
<OTHER-SE> (293)
<TOTAL-LIABILITY-AND-EQUITY> 117,629
<SALES> 53,768
<TOTAL-REVENUES> 122,595
<CGS> 31,879
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 18,085
<LOSS-PROVISION> 9,657
<INTEREST-EXPENSE> 2,429
<INCOME-PRETAX> 6,777
<INCOME-TAX> 100
<INCOME-CONTINUING> 6,677
<DISCONTINUED> (811)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,866
<EPS-PRIMARY> .63
<EPS-DILUTED> .60
<FN>
<F1>UNCLASSIFIED BALANCE SHEET </FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27.4
<ARTICLE> 5
<CIK> 0001012704
<NAME> UGLY DUCKLING CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 1,406
<SECURITIES> 0
<RECEIVABLES> 130,081
<ALLOWANCES> 17,865
<INVENTORY> 36,205
<CURRENT-ASSETS> 0<F1>
<PP&E> 36,287
<DEPRECIATION> 6,856
<TOTAL-ASSETS> 284,752
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 169,691
<OTHER-SE> 11,727
<TOTAL-LIABILITY-AND-EQUITY> 284,752
<SALES> 73,580
<TOTAL-REVENUES> 96,714
<CGS> 42,763
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 33,542
<LOSS-PROVISION> 16,298
<INTEREST-EXPENSE> 1,482
<INCOME-PRETAX> 2,629
<INCOME-TAX> 1,102
<INCOME-CONTINUING> 1,527
<DISCONTINUED> (3,628)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,101)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
<FN>
<F1>UNCLASSIFIED BALANCE SHEET </FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27.5
<ARTICLE> 5
<CIK> 0001012704
<NAME> UGLY DUCKLING CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 1,652
<SECURITIES> 0
<RECEIVABLES> 116,279
<ALLOWANCES> 16,344
<INVENTORY> 34,690
<CURRENT-ASSETS> 0<F1>
<PP&E> 34,040
<DEPRECIATION> 5,616
<TOTAL-ASSETS> 283,218
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 173,562
<OTHER-SE> 10,228
<TOTAL-LIABILITY-AND-EQUITY> 283,218
<SALES> 69,522
<TOTAL-REVENUES> 88,819
<CGS> 41,153
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 26,359
<LOSS-PROVISION> 14,988
<INTEREST-EXPENSE> 1,370
<INCOME-PRETAX> 4,949
<INCOME-TAX> 2,007
<INCOME-CONTINUING> 2,942
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,942
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
<FN>
<F1>UNCLASSIFIED BALANCE SHEET </FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27.6
<ARTICLE> 5
<CIK> 0001012704
<NAME> UGLY DUCKLING CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 514
<SECURITIES> 0
<RECEIVABLES> 105,891
<ALLOWANCES> 14,880
<INVENTORY> 25,458
<CURRENT-ASSETS> 0<F1>
<PP&E> 51,117
<DEPRECIATION> 5,530
<TOTAL-ASSETS> 287,561
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 173,724
<OTHER-SE> 7,285
<TOTAL-LIABILITY-AND-EQUITY> 287,561
<SALES> 72,973
<TOTAL-REVENUES> 87,777
<CGS> 41,169
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 23,514
<LOSS-PROVISION> 15,362
<INTEREST-EXPENSE> 1,503
<INCOME-PRETAX> 6,229
<INCOME-TAX> 2,500
<INCOME-CONTINUING> 3,729
<DISCONTINUED> (5,595)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,866)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
<FN>
<F1>UNCLASSIFIED BALANCE SHEET </FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27.7
<ARTICLE> 5
<CIK> 0001012704
<NAME> UGLY DUCKLING CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 9,328
<SECURITIES> 0
<RECEIVABLES> 147,618
<ALLOWANCES> 5,616
<INVENTORY> 19,467
<CURRENT-ASSETS> 0<F1>
<PP&E> 40,565
<DEPRECIATION> 4,116
<TOTAL-ASSETS> 268,969
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 171,943
<OTHER-SE> 5,452
<TOTAL-LIABILITY-AND-EQUITY> 268,969
<SALES> 33,530
<TOTAL-REVENUES> 45,737
<CGS> 20,012
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 14,780
<LOSS-PROVISION> 6,310
<INTEREST-EXPENSE> 928
<INCOME-PRETAX> 3,707
<INCOME-TAX> 1,487
<INCOME-CONTINUING> 2,220
<DISCONTINUED> (4,048)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,828
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
<FN>
<F1>UNCLASSIFIED BALANCE SHEET </FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27.8
<ARTICLE> 5
<CIK> 0001012704
<NAME> UGLY DUCKLING CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<CASH> 45,349
<SECURITIES> 0
<RECEIVABLES> 89,949
<ALLOWANCES> 12,750
<INVENTORY> 15,782
<CURRENT-ASSETS> 0<F1>
<PP&E> 33,423
<DEPRECIATION> 3,443
<TOTAL-ASSETS> 215,578
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 171,317
<OTHER-SE> 7,280
<TOTAL-LIABILITY-AND-EQUITY> 215,578
<SALES> 27,802
<TOTAL-REVENUES> 36,279
<CGS> 15,951
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,988
<LOSS-PROVISION> 4,848
<INTEREST-EXPENSE> 286
<INCOME-PRETAX> 3,206
<INCOME-TAX> 1,310
<INCOME-CONTINUING> 1,896
<DISCONTINUED> 2,415
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,311
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
<FN>
<F1>UNCLASSIFIED BALANCE SHEET </FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27.9
<ARTICLE> 5
<CIK> 0001012704
<NAME> UGLY DUCKLING CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1997
<CASH> 76,090
<SECURITIES> 0
<RECEIVABLES> 30,771
<ALLOWANCES> 1,875
<INVENTORY> 8,793
<CURRENT-ASSETS> 0<F1>
<PP&E> 27,024
<DEPRECIATION> 2,877
<TOTAL-ASSETS> 205,016
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 171,274
<OTHER-SE> 2,969
<TOTAL-LIABILITY-AND-EQUITY> 205,016
<SALES> 18,211
<TOTAL-REVENUES> 22,301
<CGS> 9,939
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,133
<LOSS-PROVISION> 3,261
<INTEREST-EXPENSE> 188
<INCOME-PRETAX> 780
<INCOME-TAX> 372
<INCOME-CONTINUING> 408
<DISCONTINUED> 2,854
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,262
<EPS-PRIMARY> .21
<EPS-DILUTED> .20
</TABLE>
