As Filed With The Securities And Exchange Commission On July 9, 1999
Registration No. 333-42973
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 1 ON
FORM S-1
TO
UNDER
THE SECURITIES ACT OF 1933
UGLY DUCKLING CORPORATION
(Exact Name Of Registrant As Specified In Its Charter)
Delaware 5521 86-0721358
(State Of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Co Identification No.)
2525 East Camelback Road, Suite 500
Phoenix, Arizona 85016
(602) 852-6600
(Address, Including Zip Code, And Telephone Number, Including Area Code, Of
Registrant's Principal Executive Offices)
STEVEN P. JOHNSON, ESQ.
Senior Vice President And General Counsel
Ugly Duckling Corporation
2525 East Camelback Road, Suite 500
Phoenix, Arizona 85016
(602) 852-6600
(Name, Address, Including Zip Code, And Telephone Number, Including Area Code,
Of Agent For Service)
COPY TO:
STEVEN D. PIDGEON, ESQ.
Snell & Wilmer L.L.P.
One Arizona Center
Phoenix, Arizona 85004-0001
(602) 382-6000
Approximate Date Of Commencement Of Proposed Sale To The Public:
From time to time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
<PAGE>
Subject to Completion, Dated July __, 1999
The information contained in this prospectus is not complete and may be changed.
No one may sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
LOGO
5,666,190 Shares of Common Stock
and
666,190 Common Stock Purchase Warrants
Ugly Duckling Corporation operates a chain of used car dealerships. We also
service used car sales contracts that we own or service for third parties.
We acquired servicing and other rights in the bankruptcy proceedings of First
Merchants Acceptance Corporation.
This prospectus relates to the sale from time to time:
o By First Merchants of warrants to purchase up to 325,000 shares of our
common stock at $20.00 per share through April 1, 2001;
o By certain other selling securityholders who were originally lenders to
First Merchants of warrants to purchase up to 341,190 shares of our
common stock at $20.00 per share through February 20, 2000;
o By First Merchants or the other selling securityholders of up to 666,190
shares of our common stock issuable upon exercise of the warrants; and
o By Ugly Duckling of up to 5,000,000 shares of our common stock to First
Merchants or its creditors or equityholders in exchange for cash
distributions that would otherwise be paid to First Merchants.
Except for the proceeds from the exercise of the warrants, we will not receive
any of the proceeds from the sale of the warrants or common stock acquired on
exercise of the warrants by First Merchants or the other selling
securityholders.
Our common stock is traded on the Nasdaq National Market ("Nasdaq") under the
symbol "UGLY." On July 6, 1999, the last reported price of our common stock was
$7.25 per share.
First Merchants will be deemed to be an underwriter of the warrants that they
hold, the related warrant shares, and the shares offered by Ugly Duckling in
this prospectus, to the extent that First Merchants participates, directly or
indirectly, in the distribution of such securities. See "Plan of Distribution."
Investing in our warrants and common stock involves certain risks. See "Risk
Factors" beginning on page 5.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
----------------
The date of this Prospectus is _________, 1999.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Prospectus Summary........................................................................................... 3
Risk Factors................................................................................................. 5
Forward Looking Statements................................................................................... 11
Use of Proceeds.............................................................................................. 11
Dividend Policy.............................................................................................. 12
Capitalization............................................................................................... 13
Selected Consolidated Financial and Operating Data........................................................... 14
Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 15
Business..................................................................................................... 41
Management................................................................................................... 49
Description of Capital Stock................................................................................. 63
Selling Security holders..................................................................................... 68
Plan of Distribution......................................................................................... 69
Legal Matters................................................................................................ 71
Experts...................................................................................................... 71
Where You Can Find More Information.......................................................................... 71
Index to Consolidated Financial Statements and to Condensed Consolidated Financial Statements................ F-1
</TABLE>
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
Because it is a summary, it does not contain all of the information that you
should consider before investing in our common stock or warrants. You should
read the entire prospectus carefully, including the "Risk Factors" section and
the consolidated financial statements and the notes to those statements.
Ugly Duckling
We sell used cars through 59 wholly-owned used car dealerships in Arizona,
California, Georgia, Texas, Florida, Nevada, and New Mexico and finance the
sales through retail installment contracts that we service. We target our
products and services to the sub-prime segment of the automobile financing
industry, which focuses on selling and financing the sale of used cars to
persons who have limited credit histories, low incomes, or past credit problems.
The competition for our dealerships are the numerous small independent used car
dealerships, also known as "buy here-pay here" dealers, that sell and finance
used cars to sub-prime borrowers. We estimate that there are over 63,000
independent used car dealers in the United States, a substantial portion of
which are buy here-pay here dealers. We distinguish our dealership operations
from those of typical buy here-pay here dealers by our:
o multiple locations,
o upgraded facilities,
o large inventories of used automobiles,
o centralized purchasing on a regional basis,
o value-added marketing programs, and
o dedication to customer service.
Through our Cygnet dealer program, we also purchase and service contracts
originated by third party dealers, and provide secured, operating lines of
credit to participating dealers. In addition, in the past we entered into
several large servicing or bulk purchase transactions involving third party
dealer contract portfolios.
We service loans that we originate at our dealerships out of facilities in
Phoenix, Arizona, Dallas, Texas and Tampa, Florida. Our non-dealership
operations currently maintain servicing facilities in Aurora, Colorado, and
Plano, Texas.
Prior to February, 1998, we purchased automobile sales contracts from third
party dealers through a branch office network. We operated 83 branch offices at
December 31, 1997. We closed our branch office network in the first quarter of
1998.
Our principal executive offices are located at 2525 East Camelback Road,
Suite 500, Phoenix, Arizona 85016. The phone number of our executive offices is
602-852-6600.
We conducted a series of transactions with First Merchants Acceptance
Corporation.
First Merchants Acceptance Corporation was in the business of purchasing and
securitizing loans made primarily to sub-prime borrowers by various third party
used car dealers. FMAC filed for reorganization under Title 11 of the United
States Code in July 1997. In connection with FMAC's bankruptcy transactions, we
purchased FMAC's senior bank debt at a discount, and issued warrants to members
of the bank group previously holding such debt. 341,190 of those warrants are
being offered in this prospectus. We then sold the contracts which secured the
debt to a third party purchaser and recorded a gain from this transaction. We
obtained the right to service those contracts and the contracts in all but one
of FMAC's securitized pools and acquired FMAC's servicing platform. We issued
325,000 of the warrants that are being offered in this prospectus to FMAC in
that transaction. We also acquired an interest in the contracts we service. We
have the option, if we can satisfy certain conditions, to increase our interest
3
<PAGE>
in the distributions from the contracts that we service by issuing the shares of
our common stock being offered in this prospectus in exchange for the increased
distributions.
The Offering
FMAC Warrants offered 325,000 warrants offered by FMAC, each to
purchase one share of common stock at $20.00 per
share, at any time on or prior to April 1, 2001.
We may redeem the warrants for $.10 per warrant
if our common stock closes at or above $28.50
per share during any ten consecutive trading
days.
Bank Group Warrants
offered.............. 341,190 warrants offered by the selling
securityholders, each to purchase one share of
common stock at $20.00 per share, at any time on
or prior to February 20, 2000. We may redeem the
warrants for $.10 per warrant if our common
stock closes at or above $27.00 per share during
any five consecutive trading days.
Common Stock offered Up to 5,666,190 shares, including 5,000,000
shares that we may offer and 666,190 shares
issuable upon exercise of the warrants offered
in this prospectus.
Common Stock
outstanding(1)....... 14,941,253
Use of Proceeds...... We may issue up to 5,000,000 shares of our
common stock in lieu of making cash
distributions otherwise payable to FMAC from
contracts that we obtained the right to service
in the FMAC proceedings. Distributions that we
choose to retain will be used for general
corporate purposes. The FMAC warrants, bank
group warrants and related warrant shares may be
offered from time to time in the future by FMAC
or the selling securityholders. Except for
proceeds from the exercise of the FMAC warrants
or bank group warrants, we will not receive any
of the proceeds from the sale of the warrants
and related warrant shares offered in this
prospectus.
Nasdaq Symbol........ "UGLY"
- ----------
(1) As of May 31, 1999. Does not include 3,699,028 shares of common stock
held in treasury and 3,506,775 shares of common stock issuable upon
exercise of outstanding options and warrants.
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<TABLE>
<CAPTION>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(In thousands, except per share data)
Three Months Ended
March 31, Years Ended December 31,
--------- ------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Total Revenues................. $130,118 $ 87,704 $ 366,170 $ 170,083 $ 68,827
Sales of Used Cars........... 106,443 72,973 287,618 123,814 53,768
Interest Income.............. 14,003 6,205 27,828 18,736 8,597
Gain on Sale of Loans........ -- 4,614 12,093 14,852 3,925
Servicing and Other Income... 9,672 3,912 38,631 12,681 2,537
Cost of Used Cars Sold......... 60,097 39,731 167,014 72,358 31,879
Provision for Credit Losses.... 28,561 15,362 67,634 23,045 9,657
Income before Operating Expenses 41,460 32,611 131,522 74,680 27,291
Total Operating Expenses....... 37,104 24,880 118,702 55,741 18,085
Income Before Interest Expense. 4,356 7,731 12,820 18,939 9,206
Interest Expense............... 3,656 1,502 6,904 2,774 2,429
Earnings from Continuing 700 3,729 3,520 9,528 6,677
Operations.....................
Loss from Discontinued Operations -- (5,595) (9,223) (83) (811)
Net Earnings (Loss) ........... $ 420 $ (1,866) $ (5,703) $ 9,445 $ 5,866
Diluted Earnings (Loss) per Share $ 0.03 $ (0.10) $ (0.31) $ 0.52 $ 0.60
Shares used in Computation..... 15,785 19,093 18,405 18,234 8,298
March 31, December 31,
-------------------- -----------------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
Balance Sheet Data:
Cash and Cash Equivalents...........$ 4,387 $ 514 $ 2,751 $ 3,537 $ 18,455
Finance Receivables, Net............ 237,928 91,213 163,209 90,573 51,063
Total Assets........................ 406,616 288,041 345,975 276,426 118,083
Notes Payable....................... 78,433 63,304 55,093 64,821 12,904
Collateralized Notes Payable........ 93,471 -- 62,201 -- --
Subordinated Notes Payable.......... 40,815 27,000 43,741 12,000 14,000
Total Debt.......................... 212,719 90,304 161,035 76,821 26,904
Total Stockholders' Equity (1)....$ 157,890 $ 181,010 $ 162,767 $181,774 $ 82,319
- ----------
<FN>
(1) Excludes 3,506,775 shares of common stock issuable upon exercise of
outstanding stock options and warrants with exercise prices ranging from
$0.86 to $20.00.
</FN>
</TABLE>
RISK FACTORS
Investment in our warrants and common stock involves certain risks. In
addition to the other information included elsewhere in this prospectus, you
should carefully consider the following factors before purchasing the securities
offered in this prospectus.
Future losses could impair our ability to raise capital or borrow money, as
well as affect our stock price.
Although we recorded earnings of $420,000 in the first quarter of 1999, we
incurred a net loss of $5.7 million in 1998. We cannot assure you that we will
be profitable in future periods. Losses in subsequent periods could impair our
ability to raise additional capital or borrow money as needed, and could
adversely affect our stock price. 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 our branch office network;
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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 our branch office loan portfolio;
o a charge of $2.0 million ($1.2 million, net of income taxes) during the
third quarter of 1998 to write off costs associated with our attempt to
spin off Cygnet Financial Corporation through a rights offering to our
stockholders; and
o a change in the fourth quarter of 1998 in the way we structure
securitization transactions for accounting purposes.
We may not be able to continue to obtain the financing we need to fund our
operations.
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.
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 May 31, 1999, we owed approximately $53.1 million under the revolving
facility, and had the ability to borrow an additional $31.9 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.
Our securitization subsidiaries are wholly-owned "bankruptcy remote"
entities. Their assets, including the line items "Residuals in Finance
Receivables Sold" and "Investments Held in Trust," within Dealership Operations
which are components 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 have been material to our
results of operation. This change has caused and will continue to 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.
Contractual Restrictions. The revolving facility, the securitization
program, and our other credit facilities contain various restrictive covenants.
Under these credit facilities, we must also meet certain financial tests. As of
March 31, 1999, we did not satisfy the interest coverage ratio under the GE
facility. GE Capital waived the default for this period. We believe that we are
in compliance with the other 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 preclude us from further
borrowing under the defaulted facility and could prevent us from securing
alternate sources of funds necessary to operate our business.
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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. Loans to sub-prime borrowers are difficult to collect and are subject
to a high risk of loss. We have established an allowance for credit losses to
cover our anticipated credit losses. However, we cannot assure you that we have
adequately provided for such credit risks or that we will continue to do so in
the future. A significant variation in the timing of or increase in credit
losses in 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
financing 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. We have established an allowance for credit
losses to cover our anticipated credit losses. However, we cannot assure you
that we have adequately provided for such credit risks or that we will continue
to do so in the future. 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 net earnings 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 also 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.
Laws that limit the interest rates we can charge can adversely affect our
profitability.
Historically, 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 can adversely affect our profitability.
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Government regulation may limit our ability to recover and enforce receivables
or to repossess and sell collateral.
We are subject to ongoing regulation, supervision, and licensing under
various federal, state, and local statutes, ordinances, and regulations. 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. 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. 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 could experience problems with the recent conversion of our loan servicing
and data processing operations to a single computer system.
We recently converted our chain of dealerships and related loan servicing
data processing operations to a single computer system. These conversions can
cause various 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.
Our computer systems may be subject to a Year 2000 date failure.
We could be affected by failures of our business systems, as well as those
of our suppliers and vendors, due to Year 2000 issues. Any failure could result
in a disruption of our collection efforts, which would impair our operations. We
have evaluated and remediated our mission critical computer systems to determine
our exposure to Year 2000 issues. We have made modifications to our computer
systems that we believe will 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 $2.2 million through May 31, 1999. We
can also be adversely affected by Year 2000 issues 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 issues 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."
We could have a system failure if our current contingency plan is not adequate.
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 systems 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.
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We have certain risks relating to the FMAC transaction.
We have entered into several transactions in the bankruptcy proceedings of
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 up to the price of the shares we
issue. 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 (up to approximately
$7.6 million) 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. We assert that FMAC is currently in default on the DIP
Facility. We have negotiated a settlement with them that will cure the
asserted default and increase our funding obligation by $2.0 million, in
exchange for other concessions; and
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.
We may make acquisitions that are unsuccessful or strain or divert our
resources.
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.
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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.
Increased competition could adversely affect our operations and profitability.
Although a large number of smaller companies have historically operated in
the used car sales industry, this industry has 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.
Increased competition in our dealership operations 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;
o we may issue common stock under our various stock option plans, and
o we may issue common stock in the FMAC transaction in exchange for
FMAC's portion of the Excess Collections.
10
<PAGE>
The voting power of our principal stockholder may limit your voting rights.
Mr. Ernest C. Garcia, II, our Chairman, Chief Executive Officer, and
principal stockholder, or his affiliates held approximately 32% of our
outstanding common stock as of May 31, 1999. 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 or dilutive 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.
Preferred stock can also reduce the market value of the common stock.
FORWARD LOOKING STATEMENTS
This prospectus 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, liquidity, estimates of capital expenditures, plans for future
operations, products or services, Year 2000 readiness, 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
prospectus and specifically those found above. 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.
USE OF PROCEEDS
We may elect to issue up to 5,000,000 shares of common stock in lieu of
making distributions in cash to FMAC from the Excess Collections on the
contracts sold to a third party purchaser in the FMAC transaction and from the
interests that FMAC retained in its securitization transactions. The shares
would be priced at 98% of the closing price of our common stock for the 10
trading days prior to the date of issuance (the "Share Value"). Our ability to
issue these shares is subject to certain conditions. If we choose and are able
to issue these shares, we would retain the cash distributions otherwise payable
to FMAC from the contracts and interests up to the Share Value. These proceeds
will be used for general corporate purposes. See "Business - Non-Dealership
Operations - Bulk Purchasing and Loan Servicing Operations" and "Risk Factors -
We have certain risks relating to the FMAC transaction" for a more detailed
description of our transactions with FMAC.
The FMAC warrants, the bank group warrants and related warrant shares may be
offered from time to time in the future by FMAC and the selling securityholders.
Except for proceeds from the exercise of such warrants, if any, we will not
receive any of the proceeds from the sale of the warrants or related warrant
shares offered in this prospectus. See "Plan of Distribution." Payments made to
us upon the exercise of the warrants will be used for general corporate
purposes.
11
<PAGE>
PRICE RANGE OF COMMON STOCK
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 and the first quarter of 1999 are reported
below.
Market Price
------------
High Low
---- ---
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
Fiscal Year 1999:
First Quarter...........................................$... 6.50 $ 4.25
On July 6, 1999, the last reported sale price of the common stock on Nasdaq
was $7.25 per share. On July 6, 1999 there were approximately 89 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 our current policy 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."
12
<PAGE>
CAPITALIZATION
The following table sets forth our actual capitalization as of March 31,
1999, and our pro forma capitalization giving effect to the issuance of the
5,000,000 shares offered in this prospectus at an assumed issuance price of
$8.00 per share (the floor price) plus the issuance of 666,190 shares of common
stock upon exercise of the FMAC warrants and bank group warrants being offered
in this prospectus at the stated exercise price of $20.00 per share, and the
initial application of such proceeds. The table should be read in conjunction
with our Consolidated Financial Statements and the related notes included
elsewhere in this prospectus.
March 31, 1999
--------------
Actual Pro Forma
------ ---------
(In Thousands)
Debt:
Notes Payable................................ $ 171,904 $ 171,904
Subordinated Notes Payable................... 40,815 40,815
------ ------
Total Debt........................... 212,719 212,719
------- -------
Stockholders' Equity:
Common Stock................................. 19 25
Additional Paid in Capital................... 173,819 226,737
Retained Earnings............................ 3,869 3,869
Treasury Stock............................... (19,817) (19,817)
------- -------
Total Stockholders' Equity(1)........ 157,890 210,814
-- ------- -------
Total Capitalization............ $ 370,609 $ 423,533
========= =========
- ----------
(1) Excludes (i) 1,128,732 shares of common stock issuable upon exercise of
stock options outstanding at May 31, 1999 under our Long-Term Incentive Plan
with a weighted average price of $6.32 per share; (ii) 800,000 shares of
common stock issuable upon exercise of stock options outstanding at May 31,
1999 under our 1998 Executive Incentive Plan with a weighted average price
of $7.24 per share; (iii) 22,220 shares of common stock issuable upon
exercise of stock options under our Directors Stock Option Plan with a
weighted average price of $6.75; (iv) 291,023 shares of common stock
issuable upon exercise of warrants issued in connection with our initial
public offering of common stock with a weighted average exercise price of
$8.33 per share; (v) 325,000 shares of common stock issuable upon exercise
of warrants issued to FMAC which have an exercise price of $20.00 per share;
(vi) 50,000 shares of common stock issuable upon exercise of warrants issued
in connection with the bankruptcy of Reliance Acceptance Group which have an
exercise price of $12.50 per share; (vii) 500,000 shares of common stock
issuable upon exercise of warrants issued in connection with the sale of
subordinated notes payable which have an exercise price of $10.00 per share;
and (viii) 389,800 shares of common stock issuable upon exercise of warrants
issued in connection with our purchase of FMAC's senior bank debt which have
an exercise price of $20.00 per share.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share and operating data)
The following table sets forth selected historical consolidated financial
data for Ugly Duckling for each of the years in the five-year period ended
December 31, 1998, and for the three month periods ending March 31, 1999 and
1998. The selected annual historical consolidated financial data is derived from
our Consolidated Financial Statements audited by KPMG LLP, independent auditors.
Information for the three month periods ended March 31, 1999 and 1998 is derived
from unaudited interim condensed consolidated financial statements which
reflect, in our opinion, all adjustments, which include only normal recurring
adjustments, necessary for a fair presentation of the data for such periods. For
additional information, see our Consolidated Financial Statements included
elsewhere in this prospectus. The following table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
--------- ------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(unaudited) (unaudited)
Statement of Operations
Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Sales of Used Cars......... $106,443 $ 72,973 $287,618 $123,814 $ 53,768 $ 47,824 $ 27,768
Less:
Cost of Used Cars Sold... 60,097 39,731 167,014 72,358 31,879 27,964 12,577
Provision for Credit
Losses................ 28,561 15,362 67,634 23,045 9,657 8,359 8,140
------ ------ ------ ------ ----- ----- -----
17,785 17,880 52,970 28,411 12,232 11,501 7,051
------ ------ ------ ------ ------ ------ -----
Other Income:
Interest Income............ 14,003 6,205 27,828 18,736 8,597 10,071 5,449
Gain on Sale of Loans...... -- 4,614 12,093 14,852 3,925 -- --
Servicing and Other Income. 9,672 3,912 38,631 12,681 2,537 308 556
----- ----- ------ ------ ----- --- ---
23,675 14,731 78,552 46,269 15,059 10,379 6,005
------ ------ ------ ------ ------ ------ -----
Income before Operating
Expenses................. 41,460 32,611 131,522 74,680 27,291 21,880 13,056
Operating Expenses:
Selling and Marketing...... 6,416 4,921 20,565 10,538 3,585 3,856 2,402
General and Administrative. 28,553 18,786 92,402 41,902 13,118 14,726 9,141
Depreciation and
Amortization............. 2,135 1,173 5,732 3,301 1,382 1,314 777
----- ----- ----- ----- ----- ----- ---
37,104 24,880 118,702 55,741 18,085 19,896 12,320
------ ------ ------- ------ ------ ------ ------
Income before Interest
Expense.................. 4,356 7,731 12,820 18,939 9,206 1,984 736
Interest Expense........... 3,656 1,502 6,904 2,774 2,429 5,956 3,037
----- ----- ----- ----- ----- ----- -----
Earnings (Loss) before Income
Taxes.................... 700 6,229 5,916 16,165 6,777 (3,972) (2,301)
Income Taxes (Benefit)..... 280 2,500 2,396 6,637 100 -- (334)
--- ----- ----- ----- --- ----
Earnings (Loss) from
Continuing Operations... 420 3,729 3,520 9,528 6,677 (3,976) (1,967)
Discontinued Operations:
Loss from Operations of
Discontinued Operations. -- (768) (768) (83) (811) -- --
Loss from Disposal of
Discontinued Operations. -- (4,827) (8,455) -- -- -- --
----- ------ ------ ----- ----- ----- -----
Net Earnings (Loss) $ 420 $ (1,866) $ (5,703) $ 9,445 $ 5,866 $ (3,972) $ (1,967)
======== ======== ======== ======== ======== ======== ========
Diluted Earnings (Loss) per
Share................... $ 0.03 $ (0.10) $ (0.31) $ 0.52 $ 0.60 $ (0.67) $ (0.35)
========= ========= ======== ========= ======== ========= ========
Shares used in Computation. 15,785 19,093 18,405 18,234 8,283 5,892 5,584
====== ====== ====== ====== ===== ===== =====
Balance Sheet Data:
Cash and Cash Equivalents $ 4,387 $ 514 $ 2,751 $ 3,537 $ 18,455 $ 1,419 $ 168
Finance Receivables, Net. 237,928 91,213 163,209 90,573 51,063 40,726 15,858
Total Assets............. 406,616 288,041 345,975 276,426 118,083 60,790 29,711
Subordinated Notes Payable 40,815 27,000 43,741 12,000 14,000 14,553 18,291
Total Debt............... 212,719 90,304 161,035 76,821 26,904 49,754 28,233
Total Stockholders' Equity
(Deficit).............. 157,890 181,010 162,767 181,774 82,319 4,884 (1,194)
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information regarding our
consolidated financial position as of March 31, 1999 and December 31, 1998 and
1997, and the results of operations for the three months ended March 31, 1999
and 1998 and for the years ended December 31, 1998, 1997, and 1996. This
discussion should be read in conjunction with the preceding "Selected
Consolidated Financial Data" and our Consolidated Financial Statements and
related Notes thereto and other consolidated financial data appearing elsewhere
in this prospectus. In the opinion of management, such unaudited and interim
data reflect all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present our financial position and results of operations for
the periods presented. The results of operations for any interim period are not
necessarily indicative of the results to be expected for a full fiscal year. For
information relating to factors that could affect future operating results, see
"Risk Factors." Any forward looking statements included in this prospectus
should be considered in light of such factors, as well as the information set
forth below.
Overview
We generally view Ugly Duckling as operating in two areas. The first is
dealership operations, and the second is non-dealership operations. Below is an
organizational chart of our businesses and their related segments:
[ORGANIZATIONAL CHART OMITTED]
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 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,
15
<PAGE>
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 changes in the results of operations of
our various business segments for the periods noted above. As you read this
discussion, you should refer to our Consolidated Financial Statements beginning
on page F-1, which contain the results of our operations for 1998, 1997, and
1996 and our Condensed Consolidated Financial Statements for the three month
periods ended March 31, 1999 and 1998 beginning on page F-27.
Results of Operations--Three Months Ended March 31, 1999 and 1998
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
16
<PAGE>
Sales of Used Cars and Cost of Used Cars Sold
Three Months Ended March 31,
(dollars in thousands)
1999 1998
----------- ----------
Used Cars Sold (Units) 12,754 9,439
=========== ==========
Sales of Used Cars $ 106,443 $ 72,973
Cost of Used Cars Sold 60,097 39,731
----------- ----------
Gross Margin $ 46,346 $ 33,242
=========== ==========
Gross Margin % 43.5% 45.6%
=========== ==========
Per Unit Sold:
Sales of Used Cars $ 8,346 $ 7,731
Cost of Used Cars Sold 4,712 4,209
----------- ----------
Gross Margin $ 3,634 $ 3,522
=========== ==========
The number of cars we sold (units) increased by 35.1% for the three months
ended March 31, 1999 over the same period in 1998. Same store unit sales for the
three months ended March 31, 1999 increased 5.0 % compared to the three month
period ended March 31, 1998. The increase in our same store unit sales was
primarily a result of the maturation of stores purchased or opened in late 1997.
We anticipate future revenue growth will come from increasing the number of our
dealerships and not from higher sales volumes at existing dealerships.
Our Used Car Sales revenues increased by 45.9% for the three months ended
March 31, 1999 over the same period ended March 31, 1998. 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 51.3% for the
three months ended March 31, 1999 over the same period ended March 31, 1998. The
gross margin on used car sales (Sales of Used Cars less Cost of Used Cars Sold
excluding Provision for Credit Losses) increased by 39.4% for the three months
ended March 31, 1999 over the same period ended March 31, 1998. The gross margin
per car sold for the first quarter of 1999 is comparable to the first quarter of
1998.
Our average sales price per car increased by 8.0% for the three months ended
March 31, 1999 over the three months ended March 31, 1998. 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 12.0%
for the three months ended March 31, 1999 over the three months ended March 31,
1998. The increase in our average cost per used car sold is primarily due to an
increase in the direct cost of the cars we acquire and re-sell.
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:
17
<PAGE>
Three Months Ended
March 31,
-------------------------
1999 1998
------------- ------------
Provision for Credit Losses (in thousands) $27,764 $15,034
============= ============
Provision per contact originated $2,198 $1,610
============= ============
Provision as a percentage of
principal balances originated 27.0% 21.6%
============= ============
The Provision for Credit Losses in our dealership operations increased by
84.7% in the three months ended March 31, 1999 over the three months ended March
31, 1998. The Provision for Credit Losses per unit originated at our dealerships
increased by $588 or 36.5% in the three months ended March 31, 1999 over the
three months ended March 31, 1998. 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 21% 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 for accounting purposes and recognizing income over the life
of the contracts. We record the provision for credit losses at 27% of the
principal balance at the time of origination.
Non-Dealership Operations. The provision for credit losses in our
non-dealership operations increased by 143.0% to $797,000 in the three months
ended March 31, 1999 from $328,000 in the three months ended March 31, 1998. The
increase was primarily due to the significant increase in loans under the Cygnet
dealer program.
See also "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 securitization transactions that were
structured as sale transactions for accounting purposes ("Securitized Contract
Sales"). Interest Income increased by 167.3% to $10.4 million for the three
months ended March 31, 1999 from $6.5 million for the three months ended March
31, 1998. The increase was primarily due to the increase in the average finance
receivables retained on our balance sheet. Because we structured most of our
securitizations to recognize income as sales for accounting purposes prior to
1999, there were fewer receivables retained on our balance sheet and Interest
Income was lower in these periods. See "Securitizations-Dealership Operations"
below for additional discussion of our securitization transactions and our on
balance sheet portfolio.
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 and financed.
Three Months Ended March 31,
1999 1998
----------------- ----------
Percentage of sales revenue financed 96.0% 95.5%
Percentage of sales units financed 99.1% 98.9%
18
<PAGE>
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
25.3% for the three months ended March 31, 1999 and 26.0% for the three months
ended March 31, 1998. Our policy is to charge 29.9% per year on our dealership
contracts. However, in those states that impose interest rate limits, such as
Texas and Florida, we charge the maximum interest rate permitted.
Non-Dealership Operations. In our non-dealership operations, we generate
interest income primarily from our Cygnet dealer program and from a loan we made
to FMAC as part of its bankruptcy proceedings. Interest Income from the FMAC
transaction decreased by 56.9% to $313,000 for the three months ended March 31,
1999 from $727,000 for the three months ended March 31, 1998. Interest Income
from the Cygnet dealer program increased by 107.6% to $3.3 million for the three
months ended March 31, 1999 from $1.6 million for the three months ended March
31, 1998. The increase in interest income in the Cygnet dealer program reflects
a significant increase in the amount of loans outstanding during the three
months ended March 31, 1999 compared to the three months ended March 31, 1998.
Gain on Sale of Loans
Dealership Operations. The gain on sale of finance receivables we recorded
prior to the fourth quarter of 1998 was generated from securitizations that were
structured as sale transactions. During the fourth quarter of 1998, we began
structuring our securitization transactions as financings for accounting
purposes ("Securitized Borrowings") instead of as sales transactions and,
therefore, we will not recognize gains on the sale of loans from securitization
transactions in the future. We recorded Gains on Sale of Loans related to
Securitized Contract Sales of zero for the three months ended March 31, 1999 and
$4.6 million during the three months ended March 31, 1998. See
"Securitizations-Dealership Operations" below for a summary of the structure of
our securitizations.
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 for the three months ending March 31, 1999 and 1998 (in thousands):
Dealership Non-Dealership
Operations Operations Total
--------------- -------------- ------------
March 31, 1999 $ 2,834 $ 6,738 $ 9,572
=============== ============== ============
March 31, 1998 $ 3,912 $ 3,912 $ 7,824
=============== ============== ============
Dealership Operations. Servicing and Other Income decreased by 25.0% to $2.9
million in the three months ended March 31, 1999 compared to the $3.9 million
recognized in the three months ended March 31, 1998. We service the securitized
contracts that were included in the Securitized Contract Sales transactions for
monthly fees ranging from .25% to .33% of the beginning of month principal
balances (3.0% to 4.0% per year). We do not, however, recognize service fee
income on the contracts included in our Securitized Borrowings. The significant
decrease in Servicing and Other Income is primarily due to the decrease in the
principal balance of (1) contracts being serviced under the previous
securitization structure and (2) a portfolio we service on behalf of a third
party. We anticipate that our future Servicing and Other Income will decline as
the principal balance of the contracts serviced under the Securitized Contract
Sales agreements and the third party portfolio will continue to decrease.
Non-Dealership Operations. Our Servicing and Other Income in the first
quarter 1999 totaled $6.7 million. 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). Our service fee income is
tied to the contract principal balance of the contracts we service and the
number of units that we service, and will continue to decline, subject to the
incentive compensation discussed below, unless we increase the number and amount
19
<PAGE>
of contracts we are servicing. We have not entered into any loan servicing
agreements thus far in 1999 and expect that our service fee income will continue
to decline as the principal balances of the portfolios that we are currently
servicing decrease. We did not recognize any servicing income in the first
quarter 1998, as we did not begin servicing loans in our non-dealership
operations until April 1998.
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.O% 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 March 31, 1999, we estimate that the total incentive compensation
from both agreements could range from $0 to $8.0 million. 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 27.1% to $41.5 million for the three months ended March 31, 1999 from
$32.6 million for the three months ended March 31, 1998. Growth of Sales of Used
Cars, Interest Income, and Servicing and Other Income were the primary
contributors to the increase.
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 three
months ended March 31, 1999 and 1998 follows (in thousands).
<TABLE>
<CAPTION>
Dealership Operations Non-Dealership Operations
------------------------------------ -----------------------------------
Company
Company Dealership Corporate Cygnet Cygnet Loan Corporate
Receivables and Other Dealer Servicing and Other Total
Dealerships
----------------------------------------------------------------------------------------
1999:
<S> <C> <C> <C> <C> <C> <C> <C>
Selling and Marketing $ 6,378 $ - $ - $ 35 $ 3 $ - $ 6,416
General and Administrative 11,102 4,590 5,332 963 5,821 745 28,553
Depreciation and Amortization 791 283 521 78 321 141 2,135
------------ ----------- ---------- ---------- ------------ ---------- -----------
$ 18,271 $ 4,873 $5,853 $ 1,076 $ 6,145 $ 886 $ 37,104
============ =========== ========== ========== ============ ========== ===========
1998:
Selling and Marketing $ 4,878 $ - $ - $ 43 $ - $ - $ 4,921
General and Administrative 10,506 4,555 2,619 515 - 591 18,786
Depreciation and Amortization 613 337 201 22 - - 1,173
------------ ----------- ---------- ---------- ------------ ---------- -----------
$ 15,997 $ 4,892 $2,820 $ 580 $ - $ 591 $ 24,880
============ =========== ========== ========== ============ ========== ===========
</TABLE>
20
<PAGE>
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:
Three Months
ended March 31,
----------------------
1999 1998
---------- ----------
Selling and Marketing Expense as a
Percent of Sales of Used Cars 6.0% 6.7%
========== ==========
Selling and Marketing Expense
per Car Sold $ 500 $ 517
========== ==========
For the three months ended March 31, 1999 and 1998, Selling and Marketing
Expenses consisted almost entirely of advertising costs and commissions relating
to our dealership operations. Selling and Marketing Expenses increased by 30.8%
to $6.4 million for the three months ended March 31, 1999 from $4.9 million for
the three months ended March 31, 1998. The decrease in Selling and Marketing
Expense as a percentage of Sales of Used Cars and on a per unit basis from 1998
to 1999 is due to the significant increase in the number of cars sold in 1999
compared to 1998 and an increase in the selling price of units sold and
management's decision to reduce expenditures for advertising on a per car basis.
General and Administrative Expenses. General and Administrative Expenses
increased by 52.0% to $28.6 million for the three months ended March 31, 1999
from $18.8 million for the three months ended March 31, 1998. The increase in
General and Administrative Expenses was primarily a result of the addition of
our bulk purchasing and loan servicing operations, the expansion of
infrastructure to administer the increased number of used car dealerships in
operation, and the growth of the Cygnet dealer program.
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 82.0% to
$2.1 million for the three months ended March 31, 1999 from $1.2 million for the
three months ended March 31, 1998. The increase in 1999 was primarily due to
depreciation from our non-dealership operations and an increase in software
amortization of our investment in our integrated car sales and loan servicing
system.
Interest Expense
Interest expense increased by 143.4% to $3.7 million for the three months
ended March 31, 1999 from $1.5 million for the three months ended March 31,
1998. The increase in the first quarter of 1999 was primarily due to increased
borrowings under our Securitization Note Payable, Notes Payable and Subordinated
Notes Payable. The increased borrowings were used primarily to fund the
increases in Finance Receivables in our dealership operations and our Cygnet
dealer finance receivables portfolio.
Income Taxes
Income taxes totaled $280,000 for the three months ended March 31, 1999, and
$2.5 million for the three months ended March 31, 1998. Our effective tax rate
was 40.0% for the three months ended March 31, 1999 and 40.1% for the three
months ended March 31, 1998.
Discontinued Operations
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 related to the closure of our branch office
network. In addition, we recorded a $6.0 million charge (approximately $3.6
million, net of income taxes) during the third quarter of 1998 due primarily to
higher than anticipated loan losses and servicing expenses. The charges we
recorded to discontinued operations represent the total estimated net loss we
expect to realize from the branch office network closure. As a result, there was
no income or loss from discontinued operations for the three months ended March
31, 1999.
21
<PAGE>
Results of Operations- Years Ended December 31, 1998, 1997 and 1996
Sales of Used Cars and Cost of Used Cars Sold
(dollars in thousands)
1998 1997 1996
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 $ 3,094 $ 2,893
========== =========== ==========
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 comparable to the year ended December 31,
1997. We anticipate future revenue growth will come from increasing the number
of our 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.
Provision for Credit Losses
We record provisions for credit losses in our dealership operations and our
non-dealership operations.
22
<PAGE>
Dealership Operations. Following is a summary of the Provision for Credit
Losses from our dealership operations:
1998 1997 1996
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%
========= ======== =========
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 contract 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 Securitized Contract Sales. 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 as sales for accounting purposes 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.
23
<PAGE>
1998 1997 1996
---- ---- ----
Percentage of sales revenue financed... 96.4% 94.4% 90.5%
===== ===== =====
Percentage of used cars sold financed.. 98.9% 96.2% 91.6%
===== ===== =====
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 in 1998 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:
(dollar amounts in thousands)
1998 1997 1996
---- ---- ----
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
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
of Loans (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 of Loans (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 $8.1 million from this transaction. See "Business--Non-Dealership
Operations--Bulk Purchasing and Loan Servicing Operations."
24
<PAGE>
Servicing and Other Income
We generate Servicing and Other Income from both our dealership operations
and our non-dealership operations. A summary of Servicing and Other Income
follows (in thousands):
Non-Dealership
Dealership Operations Operations
--------------------- --------------
Company
Company Dealership Corporate Cygnet
Dealerships Receivables and Other Loan Servicing Total
----------- ----------- --------- -------------- --------
1998...........$ 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
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 the contracts under our Securitized Contract Sales 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 a
portfolio that we service for Kars Yes Holdings, Inc. (Kars). 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.
We expect that our future Servicing and Other Income will decline as the
principal balance of the contracts serviced under the Securitized Contract Sales
agreements and the Kars portfolio continue to decrease.
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.
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.
25
<PAGE>
Operating Expenses
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
----------- ----------- --------- ------- --------- --------- -----
1998:
<S> <C> <C> <C> <C> <C> <C> <C>
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:
1998 1997 1996
---- ---- ----
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
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. Total 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 total 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.
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 operation, as well as 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
($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
26
<PAGE>
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 17.5% to $406.6 million at March 31, 1999 from
$346.0 million at December 31, 1998. The increase was due primarily to an
increase in Finance Receivables of $74.7 million to $237.9 million at March 31,
1999 from $163.2 million at December 31, 1998. Our dealership operations'
Finance Receivables increased approximately $63.9 million and our non-dealership
operations' Finance Receivables increased approximately $10.8 million primarily
as a result of growth of the Cygnet dealer program.
We financed the increases in assets primarily through additional borrowings,
represented by increases in Notes Payable. Notes Payable increased by $54.6
million to $171.9 million at March 31, 1999 from $117.3 million at December 31,
1998. We obtained a $30 million repurchase facility in the first quarter of
1999, which resulted in the increase in Collateralized Notes Payable. The
increase in our Notes Payable is attributable to an increase in the balance of
our revolving line of credit, which totaled approximately $75.6 million at March
31, 1999, compared to $51.8 million at December 31, 1998.
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
27
<PAGE>
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.
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)
March 31, December 31,
-------------------------------------------- ---------------------------------------------
1999 1998 1998 1997
-------------------- --------------------- -------------------- ---------------------
Principal No. of Principal No. of Principal No. of Principal No. of
Amount Contracts Amount Contracts Amount Contracts Amount Contracts
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Amount...................$341,040 56,333 $ 218,505 39,734 $292,683 49,601 $ 183,321 35,762
Less: Portfolios Securitized
and Sold......................... 158,890 28,409 185,240 35,237 198,747 37,186 127,356 27,769
-------- ------ --------- ------ -------- ------ --------- ------
Dealership Operations Total......$182,150 27,924 $ 33,265 4,497 $ 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.
<TABLE>
<CAPTION>
Total Contracts Generated or Acquired-Dealership Operations
Amounts (Principal In Thousands)
During the Three Months
Ended March 31, During the Years Ended December 31,
----------------------- -----------------------------------
1999 1998 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Principal Amount......... $102,733 $ 69,708 $277,226 $172,230 $ 48,996
Number of Contracts...... 12,634 9,339 35,560 29,251 6,929
Average Principal........ $ 8,131 $ 7,464 $ 7,796 $ 5,888 $ 7,071
</TABLE>
Finance Receivable principal balances generated or acquired by our
dealership operations during the three months ended March 31, 1999 increased by
47.4% to $102.7 million from $69.7 million in the three months ended March 31,
1998. 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 $92.1 million
($36.1 million for Kars and $56.0 million from our branch office network) as of
March 31, 1999, $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. As of March 31, 1999, our non-dealership bulk
purchasing/loan servicing operations were servicing a total of $480.4 million in
finance receivables (approximately 70,000 contracts) compared to a total of
$587.3 million in finance receivables (approximately 80,000 contracts) under
servicing at December 31, 1998.
28
<PAGE>
Allowance for Credit Losses
We have established an Allowance for Credit Losses ("Allowance") to cover
anticipated credit losses inherent in 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.
The following table reflects activity in the Allowance, as well as
information regarding charge off activity, for the three month periods ended
March 31, 1999 and 1998, and for the years ended December 31, 1998 and 1997, in
thousands.
<TABLE>
<CAPTION>
Dealership Operations
---------------------
Three Months Ended Years Ended
March 31, December 31,
-------------------- ----------------------
1999 1998 1998 1997
-------- ------- -------- ---------
<S> <C> <C> <C> <C>
Allowance Activity:
Balance, Beginning of Period..................... $ 24,777 $10,356 $ 10,356 $ 1,625
Provision for Credit Losses...................... 27,764 15,034 65,318 22,354
Allowance on Acquired Loans...................... -- -- -- 15,309
Reduction Attributable to Loans Sold............. -- (17,090) (44,539) (21,408)
Net Charge Offs.................................. (3,913) (2,147) (6,358) (7,524)
------ ------ ------ ------
Balance, End of Period........................... $ 48,628 $ 6,153 $ 24,777 $10,356
======== ======= ======== =======
Allowance as Percent of Period End Principal Balances 26.7% 18.5% 26.4% 18.5%
==== ==== ==== ====
Charge off Activity:
Principal Balances............................. $ (5,155) $ (3,197) $ (8,410) $(10,285)
Recoveries, Net................................ 1,242 1,050 2,052 2,761
----- ----- ----- -----
Net Charge Offs.................................. $ (3,913) $ (2,147) $ (6,358) $(7,524)
======== ======== ======== =======
</TABLE>
The Allowance on contracts from dealership operations was 26.7% of the
outstanding principal balances as of March 31, 1999 and 18.5% of outstanding
principal balances as of March 31, 1998, 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 at March 31, 1999 and December 31, 1998 compared to March 31,
1998 and December 31, 1997 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.
A Summary of the Allowance on contracts from non-dealership operations
follows.
Non-Dealership Operations
-------------------------
March 31, December 31,
--------- ------------
1999 1998 1998 1997
---- ---- ---- ----
As Percent of Period End Principal Balances:
Allowance...................................... 3.5% 2.9% 3.9% 3.8%
Non-refundable discount and security deposits.. 32.2% 27.6% 29.9% 26.0%
---- ---- ---- ----
Total Allowance, discount and security deposits 35.7% 30.5% 33.8% 29.8%
==== ==== ==== ====
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 24.1% for the three months ended March 31, 1999
compared to 32.8% in the comparable period in 1998, and 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 24.1% for the three months ended March 31, 1999 compared to
32.8% in the comparable period in 1998, and 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.
29
<PAGE>
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.
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 April 30, 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).
<TABLE>
<CAPTION>
Pool's Cumulative Net Losses as Percentage of Pool's Original
Aggregate Principal Balance
(dollars in thousands)
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% 22.1% 22.5% 99.9%
3rd Quarter $ 10,106 2.5% 7.9% 12.2% 18.8% 22.2% 23.6% 24.2% 99.5%
4th Quarter $ 8,426 1.5% 6.6% 11.7% 18.2% 22.6% 24.1% 24.7% 99.2%
1996:
1st Quarter $ 13,635 1.6% 8.0% 13.7% 20.7% 24.8% 26.2% 27.0% 97.8%
2nd Quarter $ 13,462 2.2% 9.2% 13.4% 22.1% 26.1% 27.7% 28.8% 95.4%
3rd Quarter $ 11,082 1.6% 6.9% 12.5% 21.5% 25.7% 28.0% 28.6% 91.8%
4th Quarter $ 10,817 0.6% 8.5% 16.0% 25.0% 29.3% 31.2% 31.3% 88.5%
1997:
1st Quarter $ 16,279 2.1% 10.6% 17.9% 24.6% 29.6% 30.9% 31.3% 83.8%
2nd Quarter $ 25,875 1.5% 9.9% 15.9% 22.8% 27.6% 27.5% 27.5% 75.9%
3rd Quarter $ 32,147 1.4% 8.4% 13.3% 22.6% 25.3% 26.4% 26.4% 68.7%
4th Quarter $ 42,529 1.5% 6.9% 12.7% 21.6% 23.4% x 23.4% 61.8%
1998:
1st Quarter $ 69,708 0.9% 6.9% 13.6% 20.0% x -- 20.1% 53.6%
2nd Quarter $ 66,908 1.1% 8.1% 14.3% x -- -- 16.9% 40.5%
3rd Quarter $ 71,027 1.0% 8.1% x -- -- -- 11.7% 27.7%
4th Quarter $ 69,583 1.0% x -- -- -- -- 4.7% 13.1%
1999
1st Quarter $102,733 x -- -- -- -- -- 0.3% 0.0%
</TABLE>
30
<PAGE>
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.
Retained Securitized Managed
-------- ----------- -------
March 31, 1999:
31 to 60 days... 2.3% 4.9% 3.5%
61 to 90 days... 1.1% 2.8% 1.9%
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%
In accordance with our charge off policy, there are no accounts more than 90
days delinquent as of March 31, 1999, December 31, 1998 and December 31, 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
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 retain the contracts and
the related Securitization Note Payable on our balance sheet and 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. We maintain a spread account under our
securitization agreements. The spread account is a reserve account that would be
used to repay the Class A certificates in the event collections on a particular
pool of finance receivables was insufficient to make the required payments. At
the time a securitization transaction is entered into, our securitization
subsidiary makes an initial cash deposit into the spread account, generally
equivalent to 4% of the initial underlying Finance Receivables principal
31
<PAGE>
balance, and pledges 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.
We did not complete a securitization during the three-month period ended
March 31, 1999. We met the targeted spread account balances under our
securitization agreements of $19.8 million as of March 31, 1999. We also
maintain spread accounts for the securitization transactions that were
consummated by our discontinued operations. We had satisfied the spread account
obligation of $3.0 million as of March 31, 1999 with respect to these
securitization transactions. During the three month period ended March 31, 1998,
we made initial spread account deposits totaling approximately $3.5 million.
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. In addition, as of March 31, 1999, we had satisfied the spread
account funding obligation of $3.0 million for our discontinued operations.
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 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
32
<PAGE>
charge offs in the Residuals in Finance Receivables Sold as a percentage of the
remaining principal balances of securitized contracts was approximately 20.5% as
of March 31, 1999, and 22.0% as of December 31, 1998 compared to 17.9 % as of
December 31, 1997. 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.
Certain Financial Information Regarding Our Securitizations. We did not
complete a securitization during the three month period ended March 31, 1999
compared to the comparable period in 1998, when we securitized a total of $86.6
million in contracts, issuing $62.6 million in Class A certificates and $24.0
million in Class B certificates. 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.
We recorded the carrying value of the Residuals in Finance Receivables sold
at $13.9 million for the securitization transaction closed in the first quarter
of 1998, and $36.5 million in the year ended December 31, 1998, and $17.7
million in the year ended December 31, 1997. The balance of the Residuals in
Finance Receivables sold from our dealership operations was $28.5 million as of
March 31, 1999, $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>
Years Ended December 31,
-------------------------------------------------------------
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.
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:
33
<PAGE>
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 $23.6 million in the
three months ended March 31, 1999 to $47.0 million compared to the three months
ended March 31, 1998 of $23.4 million. The change in inventory and accounts
payable and accrued expenses contributed to the increase in operating cash flow
for the quarter.
Net Cash Used in Investing Activities increased by $79.5 million to $99.9
million in the three months ended March 31, 1999 compared to $20.4 million in
the three months ended March 31, 1998. The increase 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, which
were offset by increased collections of Finance Receivables and Notes
Receivable.
Net Cash Provided by Financing Activities increased by $32.7 million to
$46.3 million in the three months ended March 31, 1999 compared to $13.6 million
in the three months ended March 31, 1998. The increase is due to increases in
Notes Payable, net of increases in repayments of Notes Payable and the
acquisition of Treasury Stock.
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 increased 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.
Financing Resources
Revolving Facility. The maximum commitment under our revolving credit
facility with GE Capital is $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,
34
<PAGE>
o the lesser of $20 million or 58% of the direct vehicle costs for
eligible vehicle inventory, and
o 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 First Merchants is outstanding. 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 March 31, 1999, our borrowing capacity under the revolving facility
was $97.1 million, the aggregate principal amount outstanding under the
revolving facility was approximately $75.6 million, and the amount available to
be borrowed under the facility was $21.5 million. The revolving facility bears
interest at the 30-day LIBOR plus 3.15%, payable daily (total rate of 8.09% as
of March 31, 1999).
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 32.0% of our common stock at March 31, 1999.
In addition, we are also required to:
o be Year 2000 compliant no later than June 30, 1999 (see discussion below
under the 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 million.
Under the terms of the revolving facility, we are required to maintain an
interest coverage ratio that we failed to satisfy during the three months ended
March 31, 1999. We failed to meet this covenant primarily due to the reduction
in earnings we recognized as a result of the change in our securitization
structure. GE Capital has waived the covenant violation as of March 31, 1999.
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
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.
In April 1999, we closed a securitization transaction through Greenwich
Capital. Under this transaction, we securitized approximately $120 million of
contracts and issued approximately $87 million of Class A certificates with an
annual interest rate of 5.7%. We received approximately $87 million in cash that
we used to repay our repurchase facility and pay down our revolving line of
credit.
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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 II. The
Subordinated Notes Payable balances outstanding to Verde totaled $10.0 million
as of March 31, 1999 and as of December 31, 1998. 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. These borrowings accrue interest at an
annual rate of 10.0%. Except for the debt incurred related to our exchange
offer, 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,
o the First Merchants 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
prospectus. Any prepayment would require the consent of certain of our lenders.
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, subject to the subordination provision of
the debentures. The balance of the subordinated debentures was $13.8 million at
March 31, 1999.
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 (also described
above), 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 the first quarter of 1999, we prepaid
$3.0 million of the loans and the lenders waived their right to a proportionate
amount of the warrants. We repaid the remaining $2.0 million in June 1999 and
will not be required to issue the remaining warrants.
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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
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.
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. This loan was paid in full in June 1999.
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. This repurchase facility was repaid subsequent
to March 31, 1999. In addition, 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 May 1999, we borrowed approximately $38.0 million from an unrelated party
for a term of three years. We pay interest on this loan at a rate of LIBOR plus
550 basis points. The loan is secured by our residuals and finance receivables
sold.
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
During the three months ended March 31, 1999, we opened two new dealerships.
We also have 6 more dealerships under development. 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 (DIP facility). As of March 31, 1999, the maximum
commitment on the DIP facility was $11.5 million and the outstanding balance on
the DIP facility totaled $11.1 million. We have obligations under our
debtor-in-possession credit facility. We assert that FMAC is currently in
default on the DIP facility. We have negotiated a settlement with them that will
cure the asserted default and increase our funding obligation by $2.0 million in
exchange for certain other considerations, subject to satisfaction of certain
conditions.
We intend to finance the construction of new dealerships and the DIP
facility financing through operating cash flows and supplemental borrowings,
including amounts available under the revolving facility and the securitization
program.
Common Stock Repurchase Program. During the first quarter of 1999 we
repurchased approximately 928,000 shares of our common stock for $5.2 million
under our stock repurchase program. We have repurchased a total of one million
shares of our common stock under the program, which is the total number of
shares the Board of Directors authorized. In April 1999, our Board of Directors
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authorized, subject to certain conditions, a second stock repurchase program
that would allow us to repurchase up to 2.5 million additional shares of our
common stock. Purchases may be made depending on market conditions, share price,
and other factors. We have not purchased any additional shares of common stock
under the second stock repurchase program.
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 issue. Failures of our own business systems due to Year 2000
issues as well as those of our suppliers and business partners could materially
adversely affect our business. 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 have finished remediating the program code and
underlying data, testing the remediated code modifications, and have implemented
these changes into operation for our integrated Car Loan Accounting and
Servicing System (CLASS). We placed the modified program code into production in
April 1999 and have completed date testing on the modified code.
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. In addition, we have performed independent
Year 2000 compliance testing on the Cygnet dealer program's custom module, and
believe it is year 2000 compliant.
The remediation of the critical business systems used by our dealership and
non-dealership operations was 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 have taken 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 are currently working on updating our disaster recovery plan and
formulating our Year 2000 contingency plans. We will continue to develop our
contingency plans throughout the rest of the year and expect to complete them by
December 31, 1999.
Costs
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. Costs through May 31, 1999
approximate $2.2 million, including approximately $140,000 of internal payroll
costs, substantially all of which have been charged to general and
administrative expense. We believe costs associated with developing and
implementing contingency measures will not be material to our operating results.
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.
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
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allowed in states that impose interest rate limits. At December 31, 1998, the
scheduled maturities on our finance receivables ranged 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 as of December 31, 1998 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.
Change in Interest Rates Change in Pretax Earnings
(in thousands)
+ 2% $ (1,208)
+ 1% $ (604)
- 1% $ 627
- 2% $ 1,581
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.
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 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 became
effective for us January 1, 1999. SFAS No. 132 establishes standards for the
information that public enterprises report in annual financial statements. The
adoption of SFAS No. 132 did 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 June 15,
2000. We believe the adoption of SFAS No. 133 will not have a material impact on
us.
BUSINESS
General
We operate the largest chain of buy here-pay here used 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 March 31,
1999, we operated 58 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.
For a description of the general development of our business during the past
five years, and a description of our financial information over the past three
years, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Overview of Used Car Sales and Finance Industry
Used Car Sales. Used car retail sales typically occur through either
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.
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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 and the first quarter of 1999,
adding 17 new dealerships in our existing markets in 1998 and 2 new dealerships
in our existing markets in the first quarter of 1999. We opened one dealership
in the Albuquerque market, four dealerships in the Atlanta market, four
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 four dealerships in the Tampa market. We also closed two dealerships in
Miami and exited that market.
The following table summarizes the number of stores we had in operation by
major market for the three years ended December 31, 1998 and the three month
period ended March 31, 1999:
Number of Stores By Market
---------------------------------------------------------
March 31, December 31,
------------ ----------------------------------------
1999 1998 1997 1996
----------- ---------- ---------- ------------
Phoenix........... 9 9 7 5
San Antonio....... 9 9 7 --
Atlanta........... 9 9 5 --
Los Angeles....... 8 8 6 --
Tampa............. 9 8 5 --
Dallas............ 7 6 3 --
Tucson............ 3 3 3 3
Albuquerque....... 3 3 2 --
Las Vegas......... 1 1 1 --
Miami............. -- -- 2 --
=========== ========== ========== ============
58 56 41 8
=========== ========== ========== ============
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
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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.
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 dealership portfolio 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.
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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.
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 use our collections software to monitor the performance
of the contracts.
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.
44
<PAGE>
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 March
31, 1999, we had lending relationships with a total of 65 independent dealers in
37 states, with principal balances totaling approximately $55.0 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
dealer into a bank account that we maintain and control. We keep all regular
monthly cash payments and payoffs, and generally pay the dealer a servicing fee
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 $16.3 million representing
approximately 30% of Cygnet dealer's net finance receivables portfolio as of
March 31, 1999. There were no other third party dealer loans that exceeded 10%
of Cygnet dealer's finance receivable portfolio as of March 31, 1999.
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 Aurora, Colorado and Plano, Texas. As of March 31,
1999, our loan servicing segment employed approximately 470 employees and
serviced approximately 70,000 loans with an aggregate principal balance of
approximately $475 million.
45
<PAGE>
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 Claim. 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 in the fourth
quarter to a third party (the "Contract Purchaser") at a gain of approximately
$8.1 million ($5.0 million, net of income taxes). 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 March 31, 1999.
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 March 31, 1999.
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
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 March 31, 1999, our maximum commitment under
the DIP Facility was reduced to $11.5 million, of which $11.1 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 March
31, 1999, FMAC had applied approximately $10.0 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 have negotiated a
resolution of this matter with FMAC, which will include an increase in the DIP
Facility by approximately $2.0 million in exchange for other concessions.
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 March 31, 1999, 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 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.
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<PAGE>
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 "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 the existing 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. These businesses were
then 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
reclassified the Cygnet dealer program and bulk purchasing and loan servicing
operations into continuing operations for all years presented in the
accompanying consolidated financial statements and this prospectus.
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.
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 of
serving these markets. While traditional financial institutions, such as
commercial banks, saving 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.
47
<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.
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. We believe we have taken appropriate measures to
protect our proprietary rights. However, there can be no assurance that such
efforts have been successful.
Employees
At March 31, 1999, we employed approximately 2,100 persons. None of our
employees are covered by a collective bargaining agreement.
Properties
As of March 31, 1999, we leased substantially all of our facilities,
including 58 dealerships, 4 collection facilities that service our dealership
portfolios, 3 non-dealership collection facilities, 11 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.
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
48
<PAGE>
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, based on
the advice of counsel, we do not expect the final outcome to have a material
adverse effect on our financial position.
MANAGEMENT
Directors and Executive Officers
Information concerning our directors and executive officers as of June 21,
1999 is below. The table gives the name, age, positions and offices with Ugly
Duckling, principal occupation and business experience of the individual, family
relationships, other directorships and certain other biographical information
for our directors and executive officers. The table also includes for our
directors the year in which he first became a director for us:
<TABLE>
<CAPTION>
- ------------------------------- --------- ---------------------------------------------------------------------- -----------
Name Age Position with Ugly Duckling & Business Experience Director
Since
- ------------------------------- --------- ---------------------------------------------------------------------- -----------
<S> <C> <C>
Ernest C. Garcia II 42 Chairman of the Board and Chief Executive Officer of Ugly Duckling 1992
since its founding in 1992. Mr. Garcia also served as President from
1992 to 1996. Since 1991, Mr. Garcia has served as President of
Verde Investments, Inc. (Verde), a real estate investment
corporation that is an affiliate of Ugly Duckling. Mr. Garcia's
sister is married to Mr. Johnson, our General Counsel and Secretary.
See "Involvement in Certain Legal Proceedings" and "Certain
Relationships and Related Transactions."
- ------------------------------- --------- ---------------------------------------------------------------------- -----------
- ------------------------------- --------- ---------------------------------------------------------------------- -----------
Christopher D. Jennings 45 Director of Ugly Duckling. Also, a Managing Director of Friedman, 1996
Billings, Ramsey & Co., Inc., an investment banking firm, since
April 1998. Mr. Jennings served as a managing director of Cruttenden
Roth Incorporated (Cruttenden Roth), also an investment banking
firm, from 1995 to April 1998. From 1992 to 1994, Mr. Jennings
served as a Managing Director at the investment banking firm, Sutro
& Co. From 1989 to 1992, Mr. Jennings served as a Senior Managing
Director at Maiden Lane Associates, Ltd., a private equity fund.
Prior to 1989, Mr. Jennings served in various positions with, among
others, Dean Witter Reynolds, Inc. and Warburg Paribas Becker, Inc.,
both of which are investment banking firms. Mr. Jennings is also a
director of GlobalNet Financial.com, an international multimedia
provider of online news and information services to the investment
community. Mr. Jennings is a member of both the Compensation
Committee and the Audit Committee of our board. See "Certain
Relationships and Related Transactions" and "Security Ownership of
Certain Beneficial Owners and Management."
- ------------------------------- --------- ---------------------------------------------------------------------- -----------
49
<PAGE>
- ------------------------------- --------- ---------------------------------------------------------------------- -----------
John N. MacDonough 55 Director of Ugly Duckling. Also, the former Chairman and Chief 1996
Executive Officer of Miller Brewing Company, a brewer and marketer
of beer, from 1993 until April 1999. Mr. MacDonough previously
served from 1992 to 1993 as Miller Brewing's President and Chief
Operating Officer. Prior to 1992, he was employed in various
positions at Anheuser Busch, Inc., also a brewer and marketer of
beer. Mr. MacDonough is also a director of Marshall & Ilsley Bank
and Wisconsin Energy Corporation, a utility engaged in the
generation, transmission, distribution and sale of electric energy.
He is married to the sister of Mr. Sullivan.
- ------------------------------- --------- ---------------------------------------------------------------------- -----------
- ------------------------------- --------- ---------------------------------------------------------------------- -----------
Gregory B. Sullivan 41 Director, President and Chief Operating Officer of Ugly Duckling 1998
Corporation, since 1998 as Director and since March 1996 as
President and COO. 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 for us. He formerly
served as President and principal stockholder of National Sports
Games, Inc., an amusement game manufacturing company that he
co-founded in 1989 and sold in 1994. Prior to 1989, Mr. Sullivan was
involved in the securities industry and practiced law with a large
Arizona firm. He is an inactive member of the State Bar of Arizona.
Mr. Sullivan's sister is married to Mr. MacDonough.
- ------------------------------- --------- ---------------------------------------------------------------------- -----------
- ------------------------------- --------- ---------------------------------------------------------------------- -----------
Frank P. Willey 45 Director of Ugly Duckling. Also, President of Fidelity National 1996
Financial, Inc., a title insurance underwriter, since 1995. From
1984 to 1995, Mr. Willey served as the Executive Vice President and
General Counsel of Fidelity National Title. Mr. Willey is also a
director of Fidelity National Financial, Inc. and CKE Restaurants,
Inc., an operator of various quick-service restaurant chains. He is
a member of both the Compensation Committee and the Audit Committee
of our board.
- ------------------------------- --------- ---------------------------------------------------------------------- -----------
- ------------------------------- --------- ---------------------------------------------------------------------- -----------
Steven P. Johnson 39 Senior Vice President, General Counsel and Secretary of Ugly --
Duckling, 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 51 Senior Vice President and Chief Financial Officer of Ugly Duckling, --
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.
- ------------------------------- --------- ---------------------------------------------------------------------- -----------
50
<PAGE>
- ------------------------------- --------- ---------------------------------------------------------------------- -----------
Donald L. Addink 49 Treasurer and Senior Vice President - Senior Analyst of Ugly --
Duckling, since June 1999 as Treasurer and since November 1998 as
Senior Vice President - Senior Analyst. 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.
- ------------------------------- --------- ---------------------------------------------------------------------- -----------
</TABLE>
Directors of Ugly Duckling are elected for 1 year terms. Each of our
directors serve until the following annual meeting of Ugly Duckling or until his
successor is duly elected and qualified. Our executive officers serve at the
discretion our Board of Directors. The term of office for the officers named
above will expire in July 2000 or on their earlier retirement, resignation, or
removal. Except as summarized above, there is no family relationship among any
of our directors or executive officers.
Involvement in Certain Legal Proceedings
Prior to 1992, when he founded Ugly Duckling, Ernest C. Garcia II 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, 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 $50
(the minimum fine the court could assess), and during the period of his
probation, which ended in 1996, was banned from becoming an officer, director or
employee of any federally-insured financial institution or a securities firm
without governmental approval. In separate actions arising out of this matter,
Mr. Garcia agreed not to violate the securities laws, and filed for bankruptcy
both personally and with respect to certain entities he controlled. The
bankruptcies were discharged by 1993.
COMPENSATION OF EXECUTIVE OFFICERS, BENEFITS AND RELATED MATTERS
Summary Compensation Table
The table below sets forth information concerning the annual and long-term
compensation for services rendered in all capacities for us during the three
fiscal years ended December 31, 1998 of our Named Executive Officers. "Named
Executive Officers" consist of (1) our Chairman of the Board and Chief Executive
Officer, (2) our 4 next most highly compensated executive officers serving as
executive officers at December 31, 1998, and (3) 2 additional individuals who
would have been reported under (2) above but for the fact that the individuals
were not serving as executive officers for Ugly Duckling at December 31, 1998.
51
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------- -------- ----------------------------------- -------------------------- ----------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------- --------------------------
AWARDS
------------- ------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDER- ALL OTHER
NAME AND PRINCIPAL COMPEN- STOCK LYING COMPEN-
POSITION YEAR SALARY BONUS SATION AWARD(S) OPTIONS SATION
($) ($) ($) (#)(1) ($)(2)
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------- -------- ----------- ----------- ----------- ------------- ------------ ----------
Ernest C. Garcia II 1998 $150,462 -- $ 3,228(3) -- -- $ 1,000
Chairman of the Board and -------- ----------- ----------- ----------- ------------- ------------ ----------
Chief Executive Officer 1997 131,677 -- 2,985(3) -- -- 950
-------- ----------- ----------- ----------- ------------- ------------ ----------
1996 121,538 -- 2,950(3) -- -- 923
-------- ----------- ----------- ----------- ------------- ------------ ----------
- ----------------------------------------- -------- ----------- ----------- ----------- ------------- ------------ ----------
Gregory B. Sullivan 1998 $208,308 -- $ 1,156(4) -- 500,000 $ 833
President and Chief -------- ----------- ----------- ----------- ------------- ------------ ----------
Operating Officer 1997 197,846 -- -- -- -- 554
-------- ----------- ----------- ----------- ------------- ------------ ----------
1996 97,385(4) --(4) --(4) -- 125,000 --
-------- ----------- ----------- ----------- ------------- ------------ ----------
- ----------------------------------------- -------- ----------- ----------- ----------- ------------- ------------ ----------
Steven T. Darak 1998 $180,961 -- $ 1,750(5) -- 65,001(6) --
Senior Vice President and -------- ----------- ----------- ----------- ------------- ------------ ----------
Chief Financial Officer 1997 148,654 $ 25,000 1,750(5) -- -- --
-------- ----------- ----------- ----------- ------------- ------------ ----------
1996 100,000 100,000 9,250(5) -- 40,000 --
-------- ----------- ----------- ----------- ------------- ------------ ----------
- ----------------------------------------- -------- ----------- ----------- ----------- ------------- ------------ ----------
Steven P. Johnson 1998 $179,023 -- -- -- 42,500(7) $ 1,252
Senior Vice President, -------- ----------- ----------- ----------- ------------- ------------ ----------
General Counsel and Secretary 1997 131,677 -- -- -- 20,000 820
-------- ----------- ----------- ----------- ------------- ------------ ----------
1996 121,538 -- -- -- 25,000 566
-------- ----------- ----------- ----------- ------------- ------------ ----------
- ----------------------------------------- -------- ----------- ----------- ----------- ------------- ------------ ----------
Donald L. Addink 1998 $171,346 $ 40,000 -- -- 33,500(8) $ 1,000
Treasurer and Senior Vice -------- ----------- ----------- ----------- ------------- ------------ ----------
President -- Senior Analyst 1997 139,671 10,000 -- -- -- 950
-------- ----------- ----------- ----------- ------------- ------------ ----------
1996 122,142 10,000 -- -- 42,000 985
-------- ----------- ----------- ----------- ------------- ------------ ----------
- ----------------------------------------- -------- ----------- ----------- ----------- ------------- ------------ ----------
Walter T. Vonsh(10) 1998 $155,869 $ 81,000 $ 1,125(3) -- -- $ 1,000
Former Senior Vice President -------- ----------- ----------- ----------- ------------- ------------ ----------
--- Credit 1997 150,000 -- 2,550(3) -- -- 889
-------- ----------- ----------- ----------- ------------- ------------ ----------
1996 126,923 30,000 5,000(3) -- 50,000 277
-------- ----------- ----------- ----------- ------------- ------------ ----------
- ----------------------------------------- -------- ----------- ----------- ----------- ------------- ------------ ----------
Steven A. Tesdahl(10) 1998 $187,115 -- -- -- 75,000(9) $ 1,000
Senior Vice President -------- ----------- ----------- ----------- ------------- ------------ ----------
and Chief Information Officer 1997 53,846 -- -- $100,000(11) 100,000 --
of Ugly Duckling Car Sales -------- ----------- ----------- ----------- ------------- ------------ ----------
1996 -- -- -- -- -- --
- ----------------------------------------- -------- ----------- ----------- ----------- ------------- ------------ ----------
<FN>
(1) The amounts shown in this column represent stock options granted either
pursuant to the Incentive Plan or the Executive Plan. For the Incentive
Plan, options generally vest over a 5-year period, with 20.0% of the
options becoming exercisable on each successive anniversary of the date
of grant. For the Executive Plan, options vest over a 5-year period,
with 20.0% becoming exercisable on each successive anniversary of the
date of grant, but subject to additional vesting hurdles based on the
market price of our common stock as traded on Nasdaq. Regardless of the
preceding vesting schedule being met for the Executive Plan options,
such options fully vest on January 15, 2005 (i.e., "cliff vest"). See
"Compensation of Executive Officers, Benefits and Related Matters -
Long Term Incentive Plan" and " --- 1998 Executive Incentive Plan" for
a discussion of the Incentive Plan and Executive Plan, respectively.
(2) The amounts shown in this column include the dollar value of 401(k)
plan contributions made by Ugly Duckling for the benefit of our Named
Executive Officers.
(3) These amounts include car allowances as follows: (a) Mr. Garcia -- a
$3,228 car allowance during 1998, a $2,985 car allowance during 1997
and a $2,950 car allowance during 1996; and (b) Mr. Vonsh - a $1,125
car allowance during 1998, a $2,550 car allowance during 1997, and a
$5,000 car allowance during 1996.
(4) Mr. Sullivan became an executive officer of Ugly Duckling during March
1996. Prior to that, he was an independent contractor for us.
Therefore, the above table does not reflect the Annual Compensation
paid to Mr. Sullivan while he was an independent contractor in 1996.
Other Annual Compensation includes $1,156 for Mr. Sullivan's personal
use of a company car for a portion of 1998.
(5) These amounts include $7,500 that we paid for a Phoenix apartment for
Mr. Darak during 1996, while his full time residence was in Tucson,
Arizona, and a $1,750 car allowance during each of 1998, 1997 and 1996.
(6) Includes 15,001 options that were cancelled and reissued on November
17, 1998. See "Report on Repricing of Options."
(7) Includes 17,500 options that were cancelled and reissued on November
17, 1998. See "Report on Repricing of
Options."
(8) Includes 8,500 options that were cancelled and reissued on November 17,
1998. See "Report on Repricing of Options."
(9) Includes 50,000 options that were cancelled and reissued on November
17, 1998. See "Report on Repricing of Options."
(10) Employment changes occurred for these officers as follows: (a) Mr.
Vonsh -- effective March 1998, resigned his officer position of Senior
Vice President -- Credit for Ugly Duckling, but he continues to be
employed by us in other positions and capacities; and (b) Mr. Tesdahl
-- effective November 1998, we revised our officer structure and as
part of that process, Mr. Tesdahl stopped being an executive officer
for Ugly Duckling. He continues to be employed by us as a Senior Vice
President and Chief Information Officer of Ugly Duckling Car Sales. Mr.
Tesdahl began his employment and became an executive officer of Ugly
Duckling in September 1997.
(11) The dollar amount shown represents the market value as of the grant
date of restricted stock awarded to Mr. Tesdahl upon his initial hiring
in September 1997. The grant was pursuant to his employment agreement
with us and was made outside of the Incentive Plan and the Executive
Plan. The award was for approximately 7,692 shares at $13.00 per share
(based on the closing price of our stock on the grant date as reported
by Nasdaq). Under Mr. Tesdahl's employment agreement, these shares
vested 100% in January 1998. At December 31, 1998, Mr. Tesdahl retained
4,565 shares from the restricted stock award, valued at $21,136 (based
on the December 31, 1998 closing price of our stock of $4.63 per share
as reported by Nasdaq).
</FN>
</TABLE>
52
<PAGE>
Option Grants In Last Fiscal Year
The following table provides information on option grants for the fiscal
year ended December 31, 1998 to each of our Named Executive Officers.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------ --------------------------------
POTENTIAL REALIZABLE VALUE AT
INDIVIDUAL GRANTS ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR OPTION
TERM(1)
- --------------------------- --------------- ----------------- ----------- ---------------- --------------- ----------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES EXERCISE
OPTIONS IN FISCAL YEAR PRICE EXPIRATION
NAME GRANTED (#) ($/SH) DATE 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
- --------------------------- --------- ----- ----------- ---------------- ---------- ----------
Ernest C. Garcia II -- -- -- -- -- --
- --------------------------- --------- ----- ----------- ---------------- ---------- ----------
Gregory B. Sullivan 250,000(2) 17.2% $ 8.25 1/15/2008 $1,297,095 $3,287,094
250,000(3) 17.2% 8.25 1/15/2008 1,297,095 3,287,094
- --------------------------- --------- ----- ----------- ---------------- ---------- ----------
Steven T. Darak 50,000(2) 3.5% $ 8.25 1/15/2008 $ 259,419 $ 657,419
15,001(4) 1.0% 5.13 11/17/2004(4) 26,172 59,376
- --------------------------- --------- ----- ----------- ---------------- ---------- ----------
Steven P. Johnson 25,000(2) 1.7% $ 8.25 1/15/2008 $ 129,710 $ 328,709
17,500(4) 1.2% 5.13 11/17/2004(4) 30,532 69,267
- --------------------------- --------- ----- ----------- ---------------- ---------- ----------
Donald L. Addink 25,000(2) 1.7% $ 8.25 1/15/2008 $ 129,710 $ 328,709
8,500(4) 0.6% 5.13 11/17/2004(4) 14,830 33,644
- --------------------------- --------- ----- ----------- ---------------- ---------- ----------
Walter T. Vonsh -- -- -- -- -- --
- --------------------------- --------- ----- ----------- ---------------- ---------- ----------
Steven A. Tesdahl 25,000(2) 1.7% $ 8.25 1/15/2008 $ 129,710 $ 328,709
50,000(4) 3.5% 5.13 11/17/2004(4) 87,235 197,905
- --------------------------- --------- ----- ----------- ---------------- ---------- ----------
<FN>
(1) Potential Realized Values are net of the exercise price, but before
taxes associated with the exercise. Amounts represent hypothetical
gains that could be achieved for the respective options if exercised at
the end of the option term. The assumed 5% and 10% rates of stock price
appreciation are provided in accordance with the rules of the
Securities and Exchange Commission and do not represent our estimate or
projection of the future price of our common stock. Actual gains, if
any, on stock option exercises will depend upon the future market
prices of our common stock on the date of exercise. Accordingly, there
can be no assurance that the values shown in the last 2 columns will be
realized. The closing price of our common stock on June 21, 1999 was
$7.50 per share.
(2) On January 15, 1998, these Named Executive Officers of Ugly Duckling
were granted these performance-based stock option awards under the
Executive Plan. They are part of the initial grants that were approved
by our board, the Compensation Committee and ultimately our
stockholders at the 1998 annual meeting. The initial grants have
exercise prices equal to the fair value of our common stock on the date
of grant. They vest over a 5-year period, with 20.0% becoming
exercisable on each successive anniversary of the date of grant, but
subject to additional vesting hurdles based on the market price of our
common stock as traded on Nasdaq. However, even if the market price
hurdles are not met, these options fully vest on January 15, 2005
(i.e., "cliff vest"). The options have 10-year terms. See "Compensation
of Executive Officers, Benefits and Related Matters - 1998 Executive
Incentive Plan" for additional information on these initial grants and
our Executive Plan.
(3) These options were granted to Mr. Sullivan under the Incentive Plan at
an exercise price equal to the fair value of the shares on the date of
grant. The options have a 10-year term. The options vest over a 5-year
period, with 20.0% becoming exercisable on each successive anniversary
of the date of grant. See "Compensation of Executive Officers, Benefits
and Related Matters - Long Term Incentive Plan" for additional
information on this grant and our Incentive Plan.
(4) In November 1998, we repriced certain outstanding options. As a
condition to the repricing, the optionee was required to reduce the
number of shares underlying the repriced grant by 50%. The number in
the table represents the repriced options remaining after the
reduction. See "Report on Repricing of Options."
</FN>
</TABLE>
Recent Option Grants In 1999
On March 2, 1999, the Compensation Committee reviewed and approved grants of
stock options to Ugly Duckling employees. These grants include the right to
acquire an aggregate of approximately 452,400 shares of our common stock. The
options include awards to the following Named Executive Officers to acquire our
common stock at an exercise price of $5.56 per share: (1) a 100,000 share option
to Ernest C. Garcia II; (2) a 125,000 share option to Gregory B. Sullivan; (3) a
35,000 share option to Steven T. Darak; (4) a 20,000 share option to Steven P.
Johnson; and (5) a 35,000 share option to Donald L. Addink. The grants to
Messrs. Sullivan and Darak are performance-based stock options with cliff
vesting. The exercise price for these grants equaled the fair value of the
shares on the date of grant.
53
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Option Values as of
December 31, 1998
The table below sets forth information with respect to option exercises and
the number and value of options outstanding at December 31, 1998 held by our
Named Executive Officers. Generally, we have not issued any other forms of stock
based awards.
<TABLE>
<CAPTION>
- --------------------------- ---------------- ----------------- ---------------------------------- ----------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR END (#)(1) FISCAL YEAR END ($)(2)
----------------- ---------------- ----------------- ----------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
- --------------------------- ---------------- ----------------- ----------------- ---------------- ----------------- ----------------
Ernest C. Garcia II -- -- -- -- -- --
- --------------------------- ---------------- ----------------- ----------------- ---------------- ----------------- ----------------
Gregory B. Sullivan -- -- 79,600 561,400 $141,984 $94,656
- --------------------------- ---------------- ----------------- ----------------- ---------------- ----------------- ----------------
Steven T. Darak -- -- 4,000 71,001 -- --
- --------------------------- ---------------- ----------------- ----------------- ---------------- ----------------- ----------------
Steven P. Johnson 4,000 $13,820(4) -- 48,500 -- --
- --------------------------- ---------------- ----------------- ----------------- ---------------- ----------------- ----------------
Donald L. Addink 20,000(3) $30,000(4) -- 33,500 -- --
- --------------------------- ---------------- ----------------- ----------------- ---------------- ----------------- ----------------
Walter T. Vonsh -- -- 20,000 30,000 -- --
- --------------------------- ---------------- ----------------- ----------------- ---------------- ----------------- ----------------
Steven A. Tesdahl -- -- -- 75,000 -- --
- --------------------------- ---------------- ----------------- ----------------- ---------------- ----------------- ----------------
<FN>
(1) For the Incentive Plan, generally, options vest over a 5-year period,
with 20% of the options becoming exercisable on each successive
anniversary of the date of grant. For the Executive Plan, options vest
over a 5-year period, with 20% of the options becoming exercisable on
each successive anniversary of the date of grant, but subject to
additional vesting hurdles based on the market price of our common
stock as traded on Nasdaq. In any event, such options fully vest on
January 15, 2005 (i.e., "cliff vest"). See "Compensation of Executive
Officers, Benefits and Related Matters- Long Term Incentive Plan" and "
--- 1998 Executive Incentive Plan" for additional information on the
Incentive Plan and Executive Plan, respectively.
(2) In-the-money options are options for which the option exercise price
(the fair market value on the date of grant) was lower than the market
price of our common stock on December 31, 1998. The market price of our
common stock on December 31, 1998 was $4.63 per share based on the
closing price of our stock on that date as reported by Nasdaq. The
values in the last two columns have not been, and may never be,
received by the Named Executive Officers. Actual gains, if any, on
option exercises will depend on the value of the common stock on the
exercise dates. Accordingly, there can be no assurance that the values
shown in the last 2 columns will be realized. The closing price of our
common stock on June 21, 1999 was $7.50 per share.
(3) In January 1998, Mr. Addink exercised 20,000 stock options at an
exercise price of $6.75 per share. As discussed in this prospectus,
these options were subject to accelerated vesting pursuant to Mr.
Addink's restated employment agreement with us. See " -- Contracts with
Directors and Executive Officers and Severance Arrangements - Donald L.
Addink."
(4) The value realized represents the value of stock options exercised
during the last fiscal year. The value realized was calculated by
subtracting the exercise price of each relevant option from the fair
market value of the common stock underlying the options as of the
exercise date. The fair market value of our common stock was based on
the closing price of Ugly Duckling stock on the date of exercise as
reported by Nasdaq. Under Ugly Duckling's plans, the exercise date is
the date the participant provides notice to us of his/her exercise and
method of payment.
</FN>
</TABLE>
Long-Term Incentive Plan
In June 1995, our stockholders approved the Long Term Incentive Plan
(Incentive Plan). We believe that our Incentive Plan promotes the success and
enhances the value of Ugly Duckling by (1) linking the personal interests of
participants to those of our stockholders, and (2) providing participants with
an incentive for outstanding performance. Under the Incentive Plan, we may grant
various types of awards to our employees, consultants and advisors, including:
o incentive stock options (ISOs),
o nonqualified stock options (NQSOs),
o performance shares,
o restricted stock, and
o performance-based awards.
54
<PAGE>
The Incentive Plan is administered by our board or a board committee (i.e.,
Compensation Committee), whose membership qualifies as non-employee directors
and outside directors. The Compensation Committee has the authority to
administer the plan, including the power to determine -
o eligibility,
o type and number of awards to be granted, and
o terms and conditions of any award granted, including the price and timing of
awards, vesting and acceleration of such awards (other than
performance-based awards).
Thus far, we have only granted ISOs and NQSOs under this plan. Generally,
these stock options have been subject to vesting over a 5-year period, with
20.0% of the options becoming exercisable by the holder on each successive
anniversary date of the grant. The options generally expire 10 years after the
grant date. The total number of shares of our common stock initially available
for awards under the Incentive Plan was 1,800,000. The exercise price of all
options granted under the plan in the past has equaled or exceeded the fair
market value of our common stock on the date of grant. The plan has a "change of
control" provision that is summarized below in this prospectus. See
"Compensation of Executive Officers, Benefits and Related Matters -- Change of
Control Arrangements."
In January 1998, the Compensation Committee granted, subject to certain
conditions, approximately 775,000 options to purchase common stock to several of
our officers, 250,000 of which were granted under the Incentive Plan and the
remaining 525,000 of which were granted under the 1998 Executive Incentive Plan.
In March 1999, the Compensation Committee granted, subject to certain
conditions, approximately 152,400 options under the Incentive Plan. Also in
January 1998 and later in November 1998, we repriced certain options under the
Incentive Plan after the Compensation Committee approved the repricings.
At June 28, 1999, we had granted options under the plan to purchase
approximately 1,396,000 shares of our common stock (net of canceled and lapsed
grants) to various of our employees, of which approximately 1,125,000 were
outstanding. Also at June 28, 1999, there were approximately 404,000 of our
shares that remained available for grant under the plan.
1998 Executive Incentive Plan
The 1998 Executive Incentive Plan (Executive Plan) was approved by our
stockholders at our 1998 annual meeting. The plan became effective as of January
1998. Under the Executive Plan, Ugly Duckling may grant ISOs, NQSOs, SARs,
performance shares, restricted stock, and performance-based awards to its
employees, consultants and advisors. Although the Executive Plan allows broad
based awards to be granted and thus is similar to the Incentive Plan, we
currently intend to utilize the Executive Plan primarily for performance-based
awards to our executives and key employees. The total number of shares of our
common stock initially available for awards under the Executive Plan was
800,000. The exercise price of all options granted under the Executive Plan in
the past has been equal to the fair market value of our common stock on the date
of grant. The plan is administered by the Compensation Committee and has a
"change of control" provision that is summarized below in this prospectus. See
"-- Change of Control Arrangements."
In January 1998, the Compensation Committee granted, subject to certain
conditions, approximately 775,000 options to purchase our common stock to
several of our officers, 525,000 of which were granted under the Executive Plan
and the remaining 250,000 of which were granted under the Incentive Plan. In
March 1999, the Compensation Committee granted, subject to certain conditions,
approximately 300,000 options under the Executive Plan.
At June 28, 1999, we had granted options under the plan to purchase 760,000
shares of our common stock (net of canceled and lapsed grants) to various
officers of Ugly Duckling, all of which are outstanding. Also at June 28, 1999,
there were 40,000 shares that remained available for grant under the plan.
Other than as summarized and noted above, the Executive Plan is similar to
the Incentive Plan as described in this Prospectus.
55
<PAGE>
401(k) Plans
Under both of our 401(k) plans, eligible employees may direct that we
withhold a portion of their compensation, up to a legally established maximum,
and contribute this amount to their accounts. We place all 401(k) plan
contributions in trust funds within our 401(k) plans. Participants may direct
the investment of their account balances among mutual or investment funds
available under the plans. The 401(k) plans provide a matching contribution of
25.0% of a participant's pretax contributions up to 6% of the participant's
compensation. Under one of our 401(k) plans, Ugly Duckling's matching
contributions are generally made in the form of Ugly Duckling common stock.
Under both plans, discretionary additional contributions may be made by us, if
we authorize them. Amounts contributed to participant accounts under the 401(k)
plans and any earnings or interest accrued on the participant accounts are
generally not subject to federal income tax until distributed to the participant
and, except in limited cases, the participant may not withdraw such amounts
until death, retirement or termination of employment.
Report on Repricing of Options
During 1998, the Compensation Committee of our board approved 2 separate
plans to reprice certain outstanding stock options under the Incentive Plan. The
first repricing occurred on January 15, 1998 and excluded Ugly Duckling's
executive officers from the repricing program (January Repricing). In connection
with the January Repricing the Compensation Committee retained a compensation
consultant who advised the members on the reasonableness and appropriateness of
the repricing. The second repricing occurred on November 17, 1998 and included
certain executive officers in the program (November Repricing). During 1997 and
1998, Ugly Duckling's stock declined leaving many key employees with options
that had exercise prices significantly above the trading range of our stock
(i.e., the options were "underwater"). Both the January Repricing and November
Repricing were offered to a broad base of Ugly Duckling's non-executive officers
and other employees holding options under the Incentive Plan. As part of both
repricings, the exercise price of the options was reduced to equal or exceed the
then fair market value of Ugly Duckling's stock on the date of the repricings,
as measured by the closing price of its stock on such date per Nasdaq. Other
than the 2 repricings that occurred in 1998, Ugly Duckling has not repriced any
options held by any of its employees.
For the January Repricing, eligible options were repriced to $9.75 per
share. The repriced exercise price was at a premium over the market price of
Ugly Duckling's stock on the date of the reprice. On the date of the repricing,
Ugly Duckling's stock closed at $8.25 per share. The repricing did not change
any other term of the eligible options, including vesting.
For the November Repricing, the Compensation Committee decided to give
certain optionees (including executive officers) a new opportunity to cancel and
reprice certain underwater options. Generally, this repricing allowed optionees
with grants at exercise prices of $9.75 and above the choice of repricing
specific grants to an exercise price of $5.13, the closing price of Ugly
Duckling's stock on the date of the repricing. The term of each repriced option
began anew on the date of repricing. In exchange for the lower exercise price
and extended term, the optionees were required to (1) reduce their number of
eligible shares under each grant by 50%, and (2) start the original vesting
schedule over again.
Contracts with Directors and Executive Officers and Severance Arrangements
Ernest C. Garcia II. On January 1, 1996, we entered into a 3-year employment
agreement with Mr. Garcia, our Chairman and Chief Executive Officer. This
agreement was extended for another 3-year term effective December 31, 1998. The
agreement established Mr. Garcia's base salary for 1996 at $120,000 per year and
provides a minimum 10.0% increase in the base salary each year throughout the
term of the agreement. In addition, the agreement provides for the continuation
of Mr. Garcia's base salary and certain benefits for a period of 1 year in the
event Mr. Garcia is terminated by us without cause prior to the expiration of
the agreement. It also contains confidentiality and non-compete covenants.
Mr. Garcia has advised the Board of Directors that during 1999 he intends to
step down from his position as Chief Executive Officer of Ugly Duckling. He will
remain as our Chairman of the Board. Mr. Garcia plans to transition his CEO
duties to Gregory B. Sullivan in anticipation of Mr. Sullivan being appointed as
the new Chief Executive Officer of Ugly Duckling.
56
<PAGE>
Donald L. Addink. On June 1, 1995, we entered into a 5-year employment
agreement with Mr. Addink, our Treasurer and Senior Vice President -- Senior
Analyst, that was amended and restated effective August 1, 1997. The restated
agreement establishes Mr. Addink's base salary at $165,000 per year beginning on
or around the effective date of the restated agreement, a $10,000 bonus payment
upon execution of the restated agreement, certain benefits, and the continuation
of Mr. Addink's base salary and certain benefits for a period of 1 year in the
event Mr. Addink is terminated by us without cause prior to expiration of the
restated agreement. It also contains confidentiality and non-compete covenants.
Further, it accelerated the vesting of Mr. Addink's 100,000 stock options
previously granted under the Incentive Plan, as set forth in the table below.
These options were originally granted pursuant to the Incentive Plan's general
5-year vesting schedule with 20% vesting each year.
ORIGINAL GRANT DATE NUMBER EXERCISE PRICE ACCELERATED
OF SHARES(#) PER SHARE($) VESTING DATE
- --------------------- ----------------- ---------------- ----------------------
June 1995 58,000 $ 1.72 August 1, 1997
- --------------------- ----------------- ---------------- ----------------------
June 1996 25,000 6.75 January 15, 1998
- --------------------- ----------------- ---------------- ----------------------
December 1996 17,000 17.69 August 1, 1997
- --------------------- ----------------- ---------------- ----------------------
Walter T. Vonsh. On April 1, 1995, we entered into a 3-year employment
agreement with Mr. Vonsh, our former Senior Vice President -- Credit, that was
modified on or about April 1, 1996, August 6, 1997 and May 26, 1998. Mr. Vonsh
is no longer our Senior Vice President -- Credit, but continues to be employed
by us in other capacities. The modified agreement provides for a base salary of
$150,000 per year through June 30, 2001 and certain other compensation and
benefits, including a one-time cash bonus of $81,000 that was paid on May 26,
1998. The modified agreement also provides for the continuation of Mr. Vonsh's
base salary and certain benefits for the term of the agreement in the event Mr.
Vonsh is terminated by us without cause prior to that time. It also contains
confidentiality and non-compete covenants.
Steven A. Tesdahl. On August 16, 1997, we entered into an employment
agreement with Mr. Tesdahl that was amended as of May 21, 1998. Mr. Tesdahl is
Senior Vice President and Chief Information Officer of our Ugly Duckling Car
Sales subsidiary and the former Senior Vice President and Chief Information
Officer of Ugly Duckling. The agreement provides for no minimum or maximum term
of employment. But it does provide for: (1) his annual base salary at $175,000
per year with a minimum 10% increase on each anniversary of the hire date; (2)
an initial stock option grant to acquire 100,000 shares of our common stock
under the Incentive Plan, with terms and conditions consistent with the plan's
general terms; (3) a grant of restricted stock valued at $100,000 on the
approximate effective date of Mr. Tesdahl's employment with us, which fully
vested as of January 15, 1998; and (4) certain other benefits. The agreement
provides for the continuation of Mr. Tesdahl's base salary for a limited period
in the event he is terminated by us without cause. The potential severance
benefit decreases over time, and goes to zero after September 1, 2000. The
agreement has a "change of control" provision that provides for certain rights
and benefits to Mr. Tesdahl upon such an event occurring and either:
o he terminates his employment with us within 12 months after the change
of control; or
o we terminate him without cause within 90 days prior to the change of
control or within 12 months after the event.
If these events occur, Mr. Tesdahl will receive a termination fee equal to
200% of his then current salary, and at the time of the change of control, his
initial option will fully vest. The agreement adopts the Incentive Plan's
definition of a "change of control" and adds an additional change of control
event if neither Ernest C. Garcia II nor Gregory B. Sullivan is Chief Executive
Officer of Ugly Duckling. See " -- Change of Control Arrangements."
Generally. For additional information on option grants to our executive
officers under the Incentive Plan and Executive Plan, see " - Long Term
Incentive Plan" and " - 1998 Executive Incentive Plan." For information on stock
repricings that occurred during 1998, see "Report on Repricing of Options."
57
<PAGE>
Change of Control Arrangements
Long Term Incentive Plan. The term "change of control" is defined in the
Incentive Plan and is summarized in the next paragraph of this prospectus. Upon
a change of control of Ugly Duckling, the Compensation Committee, in its
discretion, will either --
o cause all outstanding options and awards to be fully vested and
exercisable and all restrictions to lapse, allowing participants the
right to exercise options and awards before the change of control occurs
(which event would otherwise terminate participants' options and
awards); or
o cause all outstanding options and awards to terminate, if the surviving
or resulting corporation agrees to assume the options and awards on
terms that substantially preserve the rights and benefits of outstanding
options and awards.
Under the Incentive Plan, a "change of control" occurs upon any of the
following events:
o a merger or consolidation of Ugly Duckling with another corporation
where we are not the surviving entity or where our stock would be
converted into cash, securities or other property, other than a merger
in which our stockholders before the merger have the same proportionate
ownership after the merger;
o with certain exceptions, any sale, lease, or other transfer of more than
40% of our assets or our earning power;
o our stockholders approve a plan of complete liquidation or dissolution;
o any person (other than a current stockholder or any employee benefit
plan) becoming the beneficial owner of 20% or more of our common stock;
or
o during any 2-year period, the persons who are on our board at the
beginning of such period and any new person whose election or nomination
was approved by two-thirds of such directors cease to constitute a
majority of the persons serving on our board.
1998 Executive Incentive Plan. The Executive Plan provides that in the event
of a "change of control" of Ugly Duckling, all outstanding options and awards
will be fully vested and exercisable and all restrictions will lapse unless the
surviving or resulting corporation agrees to assume the options and awards on
terms that substantially preserve the rights and benefits of outstanding options
and awards. The Executive Plan and the Incentive Plan have the same definition
for the term "change of control."
Generally. For additional information on change of control and severance
arrangements, see " -- Contracts with Directors and Executive Officers and
Severance Arrangements."
Compensation Committee Interlocks and Insider Participation
There are no compensation committee interlocks and no officer or former
officer of ours has ever been a member of our board's Compensation Committee.
See "Certain Relationships and Related Transactions."
Compensation of Our Directors and the Director Incentive Plan
We pay our independent directors $1,000 for physical attendance at meetings
of the board and at meetings of committees of the board on which they serve, and
we reimburse them for reasonable travel expenses for such meetings. We do not
compensate board and committee members for their attendance at telephonic
meetings. If a board and committee meeting are held on the same day, a member
who attends both meetings will receive a combined total compensation of $1,000.
In addition, under Ugly Duckling's Director Incentive Plan (Director Plan), upon
initial appointment or initial election to the board, each of our independent
directors receives Ugly Duckling common stock valued at $30,000 (Director
Stock). Director Stock generally vests in increments of 1/3 over a three-year
period. Arturo Moreno stepped down from our board in June 1998 due to time
constraints relating to his family and other business interests. In
consideration for Mr. Moreno's invaluable services as a director over the past
two years, we accelerated the vesting of the final one-third of Mr. Moreno's
Director Stock. Similarly, when Robert Abrahams resigned from the board in April
of 1999, we accelerated the vesting of the final one-third of Mr. Abrahams'
Director Stock in recognition of his services to us as a director. On April 20,
1999, our board and the Compensation Committee approved additional compensation
58
<PAGE>
for each of our independent directors. On that date it was determined that each
independent director would receive a stock option to purchase 5,000 shares of
Ugly Duckling common stock under the Incentive Plan. The options were granted
effective June 21, 1999 at an exercise price of $6.28 per share (the closing
price per Nasdaq and the fair market value of our stock on April 20, 1999), and
fully vested as of June 21, 1999. We do not compensate directors who are also
officers of Ugly Duckling for their service as directors and such directors are
not eligible to participate in our Director Plan.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table gives information as of June 21, 1999, unless another date
is indicated, concerning:
o each beneficial owner of more than 5% of our common stock: Ernest C.
Garcia II, Harris Associates L.P., FMR Corp., Merrill Lynch & Co., Inc.
and Wellington Management Company, LLP;
o beneficial ownership by all our directors and all our other executive
officers named in the Summary Compensation Table found earlier in this
prospectus (Named Executive Officers); and
o beneficial ownership by all our directors and executive officers as a
group.
The number of shares beneficially owned by each entity, person, director or
executive officer is determined under rules of the Securities and Exchange
Commission, and the information does not necessarily indicate beneficial
ownership for any other purpose. Under these rules, beneficial ownership
includes any shares as to which the individual has the sole or shared voting
power or investment power and also any shares which the individual has the right
to acquire as of August 20, 1999 (60 days after June 21, 1999) through the
exercise of any stock option, warrant or other right. Unless otherwise
indicated, each person has sole investment and voting power (or shares these
powers with his spouse) with respect to the shares set forth in the following
table. Other than as set forth below, we know of no other 5% owner of our common
stock as of June 21, 1999.
59
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP TABLE
Amount and Nature of Percent of
Title of Class Name of Beneficial Owner, Address and Other Information(1) Beneficial Class(2)(3)(4)
Ownership(#)(2)(3)(4)
- ------------------ ------------------------------------------------------------- -------------------------------- -------------
<S> <C> <C> <C>
Common Stock Ernest C. Garcia II, Chairman of the Board and Chief 4,500,000 Direct
Executive Officer and 5% Owner, indirect ownership consists 294,500 Indirect 32.1%
of 136,500 shares held by The Garcia Family Foundation, 0 Vested Options
Inc., an Arizona nonprofit corporation, and 158,000 shares ---------
held by Verde, an affiliate of ours and Mr. Garcia. 4,794,500 Total
=========
- ------------------ ------------------------------------------------------------- -------------------------------- -------------
Common Stock Harris Associates L.P.,(4) 5% Owner, based on Schedule 13G 1,825,000 Direct 11.4%
filings as of December 31, 1998, by Harris Associates L.P. 0 Indirect
(Harris) and an affiliate of Harris, Harris Associates 0 Vested Options
Investment Trust and related funds (Harris Trust). ---------
According to these Schedule 13Gs, each of Harris and Harris 1,825,000 Total
Trust has shared voting and dispositive power over 1,750,000 =========
shares of our common stock and Harris has shared voting and
sole dispositive power over an additional 75,000 shares of
our common stock.
Two North LaSalle Street, Suite 500
Chicago, Illinois 60602
- ------------------ ------------------------------------------------------------- -------------------------------- -------------
Common Stock FMR Corp.,(4) 5% Owner, based on a Schedule 13G filing as 1,172,800 Direct 7.3%
of December 31, 1998, by FMR Corp., along with certain of 0 Indirect
its affiliates (FMR). According to the Schedule 13G, FMR 0 Vested Options
has no voting power over shares and has sole dispositive ---------
power over 1,172,800 shares of our common stock. 1,172,800 Total
82 Devonshire Street =========
Boston, Massachusetts 02019
- ------------------ ------------------------------------------------------------- -------------------------------- -------------
Common Stock Merrill Lynch & Co., Inc.,(4) 5% Owner, based on a Schedule 1,055,000 Direct 6.6%
13G filing as of December 31, 1998, by Merrill Lynch & Co., 0 Indirect
Inc. on behalf of Merrill Lynch Asset Management Group 0 Vested Options
(Merrill Parent) and Merrill Lynch Global Allocation Fund, ---------
Inc. (Merrill Global). Merrill Parent is located at 250 1,055,000 Total
Vesey Street, New York, New York 10281. Merrill Global is =========
located at the below address. According to the Schedule
13G, Merrill Global has shared voting and dispositive power
over 1,000,000 shares of our common stock and Merrill
Parent has shared voting and dispositive power over
1,055,000 shares of our common stock.
800 Scudders Mill Rd.
Plainsboro, New Jersey 08536
- ------------------ ------------------------------------------------------------- -------------------------------- -------------
Common Stock Wellington Management Company, LLP,(4) 5% Owner, based on a 1,041,000 Direct 6.5%
Schedule 13G filing as of December 31, 1998, by Wellington 0 Indirect
Management Company, LLP. According to the filing, 0 Vested Options
Wellington Management Company, LLP has shared voting power ---------
over 403,200 shares of our common stock and shared 1,041,000 Total
dispositive power over 1,041,000 shares of our common stock. =========
75 State Street
Boston, Massachusetts 02109
- ------------------ ------------------------------------------------------------- -------------------------------- -------------
Common Stock Gregory B. Sullivan, Director, President and Chief 50,800 Direct 1.6%
Operating Officer 0 Indirect
184,600 Vested Options
-------
235,400 Total
=======
- ------------------ ------------------------------------------------------------- -------------------------------- -------------
Common Stock Steven P. Johnson, Senior Vice President, General Counsel 313,000 Direct 2.1%
and Secretary 0 Indirect
7,000 Vested Options
320,000 Total
- ------------------ ------------------------------------------------------------- -------------------------------- -------------
Common Stock Steven T. Darak, Senior Vice President, Chief Financial 140,000 Direct 1.0%
Officer 0 Indirect
16,000 Vested Options
------
156,000 Total
=======
- ------------------ ------------------------------------------------------------- -------------------------------- -------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Title of Class Amount and Nature of Percent of
Name of Beneficial Owner, Address and Other Information(1) Beneficial Class(2)(3)(4)
Ownership(#)(2)(3)(4)
- ------------------ ------------------------------------------------------------ -------------------------------- --------------
<S> <C> <C> <C>
Common Stock Donald L. Addink, Treasurer and Senior Vice President - 98,000 Direct *
Senior Analyst 0 Indirect
5,000 Vested Options
-----
103,000 Total
=======
- ------------------ ------------------------------------------------------------ -------------------------------- --------------
Common Stock Walter T. Vonsh, Former Senior Vice President - Credit 14,000 Direct *
0 Indirect
25,000 Vested Options
------
39,000 Total
======
- ------------------ ------------------------------------------------------------ -------------------------------- --------------
Common Stock Steven A. Tesdahl, Senior Vice President and Chief 14,565 Direct *
Information Officer of Ugly Duckling Car Sales and Finance 0 Indirect
Corporation (Ugly Duckling Car Sales) 5,000 Vested Options
-----
19,565 Total
======
- ------------------ ------------------------------------------------------------ -------------------------------- --------------
Common Stock Robert J. Abrahams, (5) Former Director (6), indirect 8,244 Direct *
ownership consists of shares of our common stock acquired 700 Indirect
by Mr. Abrahams' spouse. 0 Vested Options
-----
8,944 Total
=====
- ------------------ ------------------------------------------------------------ -------------------------------- --------------
Common Stock Christopher D. Jennings, (5)(7) Director, indirect ownership 6,444 Direct *
of a warrant to purchase 19,833 shares of our common stock 19,833 Indirect
held on behalf of Mr. Jennings by Cruttenden Roth, an 5,000 Vested Options
investment banking firm and previous employer of Mr. ------
Jennings. The warrants are convertible into our common 31,277 Total
stock at any time through June 21, 2001 at an exercise ======
price of $9.45 per share and are fully vested
- ------------------ ------------------------------------------------------------ -------------------------------- --------------
Common Stock John N. MacDonough, (5)(7) Director, indirect ownership 4,444 Direct *
consists of shares of our common stock acquired by Mr. 100 Indirect
MacDonough's son. 5,000 Vested Options
-----
9,544 Total
=====
- ------------------ ------------------------------------------------------------ -------------------------------- --------------
Common Stock Frank P. Willey, (5)(7) Director 27,144 Direct *
0 Indirect
5,000 Vested Options
-----
32,144 Total
======
- ------------------ ------------------------------------------------------------ -------------------------------- --------------
All directors and executive officers as a group 5,749,374 37.8%
(11 persons)
- ------------------ ------------------------------------------------------------ -------------------------------- --------------
<FN>
* Represents less than one percent of the outstanding common stock.
(1) Unless otherwise noted, the address of each of the listed beneficial owners
of our common stock is 2525 East Camelback Road, Suite 500, Phoenix,
Arizona 85016.
(2) "Vested Options" are options that the holder can exercise as of August 20,
1999. These options were issued under either the Incentive Plan or
Executive Plan and their related terms and conditions, including vesting
schedules. See "Compensation of Executive Officers, Benefits and Related
Matters - Long Term Incentive Plan" and " - 1998 Executive Incentive Plan."
(3) Shares of our common stock that are subject to options, warrants or other
rights which are currently exercisable or exercisable within 60 days (i.e.,
as of August 20, 1999) are treated as outstanding for purposes of computing
the percentage of the person holding the option, warrant or other right,
but are not treated as outstanding for computing the percentage of any
other person. Except as indicated in footnote (4) below, the amounts and
percentages are based upon 14,942,557 shares of our common stock
outstanding as of June 21, 1999, net of shares we hold in our treasury.
(4) Information in the table that is described as based on Schedule 13G and/or
amendment filings was provided to us by the beneficial owner as of December
31, 1998, including the amount of securities beneficially owned and the
percentage of class. We make no representation as to the accuracy or
completeness of the information provided in these Schedule 13Gs and/or
amendments or the information in the beneficial ownership table which is
based solely on the filings.
(5) The total and direct ownership for each independent board member includes
4,444 shares of our common stock that we granted under the Director Plan.
We granted and issued shares having a value of $30,000 on or about the date
of grant (i.e., 4,444 shares of our common stock) to each independent board
member upon his appointment or election to our board in June 1996. Under
the Director Plan, these shares generally vest over a 3-year period at an
annual rate of 33%, beginning on the first anniversary date after the grant
date (June 1996).
(6) Mr. Abrahams resigned from the board effective on or around April 16, 1999
because of personal reasons, other business commitments and related
matters.
(7) These stock options were granted under the Incentive Plan effective June
21, 1999 at an exercise price of $6.28 per share to each of our independent
directors. The options fully vested as of June 21, 1999.
</FN>
</TABLE>
61
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the most recent fiscal year, we have maintained business relationships
and engaged in certain transactions with the affiliated companies and parties
described below. Our plan is that any significant future transactions between us
and our affiliated entities, executive officers, directors, or significant
stockholders will receive approval of a majority of our independent directors,
will be fair and generally will be on terms no less favorable to us than we
could obtain from non-affiliated parties.
Verde has been and continues to be one of our lenders. As mentioned above in
this prospectus, Mr. Garcia, our Chairman and Chief Executive Officer, is also
the President and sole stockholder of Verde. Generally, we have used the Verde
loan proceeds to fund working capital and other corporate needs. The loan is
represented by a $14 million unsecured note with interest payable monthly at a
rate of 10% per year and annual principal payments of $2 million. The Verde debt
matures in June 2003. At January 1, 1998, the balance of the debt was $12.0
million. At December 31, 1998 and at June 30, 1999, the balance of the debt was
$10.0 million and $8.0 million, respectively. For the year ended 1998, we paid
Verde $2.0 million of principal and approximately $1.1 million of interest in
connection with the debt. During 1999, through June 30, 1999, we paid Verde $2.0
million of principal and approximately $475,000 of interest in connection with
the debt. The Verde loan is subordinate to all of our other indebtedness except
our 12% Subordinated Debentures due 2003 issued in the fourth quarter of 1998.
In addition, pursuant to a Modification Agreement effective June 21, 1996
between us and Verde, on December 31, 1996, we purchased from Verde six car
lots, a vehicle reconditioning center, and two office buildings at the lower of
$7.45 million or the appraised value. We had previously leased these properties
from Verde. Rents paid to Verde under these leases totaled approximately $1.5
million in 1996. In addition, Verde assigned to us Verde's leasehold interest in
two properties it had previously sub-leased to us.
We believe that it is important for our directors and officers to be
stakeholders in Ugly Duckling. With this in mind, in September 1997, our board
approved a directors' and officers' stock repurchase program (D&O Stock Purchase
Program). The program provides loans of up to $1.0 million in total to our
directors and senior officers to assist them in purchasing our common stock on
the open market from time-to-time. The D&O Stock Purchase Program provides for
unsecured loans, with interest at 10% per year, interest and principal payments
due at the end of each loan term, and maturity dates of either December 31, 1999
or May 31, 2000. During 1997, senior officers purchased 50,000 shares of common
stock under the program and we advanced $500,000 for these purchases. During
1998, senior officers purchased an additional 40,000 shares of common stock
under the program and we advanced approximately $400,000 for these purchases.
Through June 21, 1999, there were no additional purchases of common stock under
the program. In addition, there have been no principal payments and minimal
interest payments made to Ugly Duckling since the program began. The table that
follows provides additional information on the D&O Stock Purchase Program for
each of our executive officers.
During September 1998 and October 1998, we loaned a total of $285,500 to
Mr. Darak, our Senior Vice President and Chief Financial Officer. The loan is an
employee advance to Mr. Darak. The indebtedness is unsecured, with interest at
10% per year, and principal and interest due upon demand. There have been no
interest or principal payments made by Mr. Darak to Ugly Duckling since the
inception of the loan. The table that follows provides additional information on
this loan.
62
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------- -------------------- ------------- --------------------------- --------------
Name & title of executive officer Nature of debt Date debt Principal Balance Of Debt Number of
incurred At 12/31/98 & 6/30/99 Shares
(unless otherwise Purchased (#)
indicated) ($)
- ----------------------------------------------- -------------------- ------------- --------------------------- --------------
<S> <C> <C> <C> <C>
Gregory B. Sullivan, President, COO & D&O Stock Purchase 11/97 & 5/98 $198,126 20,000
Director Program
- ----------------------------------------------- -------------------- ------------- --------------------------- --------------
Steven T. Darak, Sr. VP & CFO D&O Stock Purchase 11/97 $100,000 10,000
Program
- ----------------------------------------------- -------------------- ------------- --------------------------- --------------
Steven P. Johnson, Sr VP, Genl Counsel & D&O Stock Purchase 11/97 $100,000 10,000
Secretary Program
- ----------------------------------------------- -------------------- ------------- --------------------------- --------------
Donald L. Addink, Treasurer and Sr. VP - Sr. D&O Stock Purchase 11/97 $100,000 10,000
Analyst Program
- ----------------------------------------------- -------------------- ------------- --------------------------- --------------
Steven A. Tesdahl, Sr. VP & CIO of Ugly D&O Stock Purchase 5/98 $98,126 10,000
Duckling Program
Car Sales
- ----------------------------------------------- -------------------- ------------- --------------------------- --------------
Russell J. Grisanti, former Ex VP - D&O Stock Purchase 5/98 $98,126(1) 10,000
Operations(1) Program
- ----------------------------------------------- -------------------- ------------- --------------------------- --------------
Other Senior Officers D&O Stock Purchase 11/97 & 5/98 $198,126 20,000
Program
- ----------------------------------------------- -------------------- ------------- --------------------------- --------------
TOTAL for D&O Stock Purchase Program D&O Stock Purchase 11/97 & 5/98 $892,504 90,000
Program
- ----------------------------------------------- -------------------- ------------- --------------------------- --------------
- ----------------------------------------------- -------------------- ------------- --------------------------- --------------
Steven T. Darak, Sr. VP & CFO Employee Advance 9/98 & 10/98 $285,500
- ----------------------------------------------- -------------------- ------------- --------------------------- --------------
<FN>
(1) In October 1998, Mr. Grisanti and Ugly Duckling mutually agreed to
terminate their employment relationship. In connection with this
termination, the principal balance of the debt was reduced to zero during
March 1999 in exchange for the company receiving the Ugly Duckling stock
initially purchased by Mr. Grisanti under the D&O Stock Purchase Program.
</FN>
</TABLE>
Since April 1998, Mr. Jennings, one of our directors, has been a managing
director of Friedman, Billings, Ramsey & Co., Inc., which makes a market in our
common stock and from time to time may provide investment banking and other
services to us.
DESCRIPTION OF CAPITAL STOCK
We are a Delaware corporation and our affairs are governed by our
certificate of incorporation and bylaws and the Delaware General Corporation
Law. The following description of our capital stock is qualified in its entirety
by reference to the provisions of the our Certificate of Incorporation and
Bylaws, as amended.
The authorized capital stock of Ugly Duckling consists of 100,000,000 shares
of common stock, par value $.001 per share, and 10,000,000 shares of preferred
stock, par value $.001 per share. At March 31, 1999, there were approximately
14,939,000 shares of common stock issued and outstanding. As of March 31,1999,
there were no issued and outstanding shares of preferred stock.
Common Stock
Holders of common stock are entitled to one vote for each share held of
record on all matters on which stockholders are entitled to vote. Holders of
common stock do not have cumulative voting rights, and therefore holders of a
majority of the shares voting for the election of directors can elect all of the
directors. In such event, the holders of the remaining shares will not be able
to elect any directors.
Holders of common stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. We do not anticipate paying cash dividends in the
foreseeable future. See "Dividend Policy." In the event of liquidation,
dissolution, or winding up of Ugly Duckling, the holders of common stock are
entitled to share ratably in any corporate assets remaining after payment of all
debts, subject to any preferential rights of any outstanding preferred stock.
Holders of common stock have no preemptive, conversion, or redemption rights
and are not subject to further calls or assessments by us. All of the
outstanding shares of common stock are validly issued, fully paid, and
nonassessable.
63
<PAGE>
Preferred Stock
The Board of Directors of Ugly Duckling has the authority, without further
action by our stockholders, to issue from time to time up to 10,000,000 shares
of preferred stock in one or more series and to fix the number of shares,
designations, voting powers, preferences, optional and other special rights, and
the restrictions or qualifications thereof. The rights, preferences, privileges,
and restrictions or qualifications of different series of preferred stock may
differ with respect to dividend rates, amounts payable on liquidation, voting
rights, conversion rights, redemption provisions, sinking fund provisions, and
other matters. The issuance of preferred stock could: (i) decrease the amount of
earnings and assets available for distribution to holders of common stock; (ii)
adversely affect the rights and powers, including voting rights, of holders of
common stock; and (iii) have the effect of delaying, deferring, or preventing a
change in control of Ugly Duckling.
Warrants
The warrants that may be offered and sold by FMAC under this prospectus
("FMAC warrants") will be governed by the Warrant Agreement dated as of April 1,
1999 (the "Warrant Agreement") between us and Harris Trust Company of
California, as warrant agent (the "Warrant Agent"). Holders of warrants are
referred to the Warrant Agreement which is included as an exhibit to the
Registration Statement of which this prospectus is a part for a complete
statement of the terms of the FMAC warrants. The following summary does not
purport to be complete and is qualified in its entirety by reference to all of
the provisions of the Warrant Agreement. Capitalized terms used in this
description of the FMAC warrants and not defined herein have the meanings given
to them in the Warrant Agreement.
Each FMAC warrant entitles the holder to purchase one share of our common
stock for $20.00 per share, subject to adjustment as described herein (the
"Warrant Price"). The FMAC warrants can be exericed at any time through April
1, 2001.
We can redeem the then outstanding FMAC warrants, at our option, at $.10 per
share of common stock purchasable upon exercise of such warrants, at any time
after the average daily market price (defined below) per share of our common
stock for a period of at least 10 consecutive trading days ending not more than
fifteen days prior to the date of the redemption notice described below has
equaled or exceeded $28.50. We must redeem all outstanding FMAC warrants if any
are redeemed, and any right to exercise an outstanding warrant shall terminate
at 5:00 p.m. (New York City time) on the date fixed for redemption. Trading day
means a day in which trading of securities occurred on Nasdaq. Appropriate
adjustment shall be made to the redemption price and to the minimum daily market
price required for redemption, in each case on the same basis as provided with
respect to adjustment of the Warrant Price as described below.
If we exercise our right to redeem, we will 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 appear on the records of the
Warrant Agent. The notice of redemption must specify the redemption price, the
date fixed for redemption (which must be at least 30 days after the date such
notice is mailed), the place where the warrant certificates must be delivered
and the redemption price paid, and that the right to exercise the warrants will
terminate at 5:00 P.M. (New York City time) on the date fixed for redemption.
The term "daily market price" means either:
(i) if our common stock is quoted on Nasdaq or the Nasdaq Small Cap Market
or on a national securities exchange, the daily per share closing
price of the common stock as quoted on Nasdaq or the Nasdaq Small Cap
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.
The closing price shall be the last reported sale price or, in case no
such reported sale takes place on such day, the average of the
reported closing bid and asked prices, in either case on Nasdaq or the
Nasdaq Small Cap Market or on the national securities exchange on
which our common stock is then listed.
(ii) if our common stock is traded in the over-the-counter market and not
quoted on Nasdaq or the Nasdaq Small Cap Market nor on any national
securities exchange, the closing bid price of the common stock on the
trading day in question, as reported by Nasdaq or an equivalent
generally accepted reporting service. If trading in our common stock
is not reported by Nasdaq, the bid price referred to 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.
64
<PAGE>
The warrants may be exercised in whole or in part by surrendering at the
office of the Warrant Agent in Los Angeles, California, or at the office of any
successor to the Warrant Agent, the warrant certificate evidencing such
warrants, together with the subscription form set forth on the reverse of the
warrant certificate, duly executed and endorsed, with signatures properly
guaranteed, and accompanied by payment of the Warrant Price in cash or by
certified or bank draft, payable in U.S. dollars to the order of the Warrant
Agent. As soon as practicable after such exercise, we will cause to be issued
and delivered to the holder or upon his order, in such name or names as may be
directed by him, a certificate or certificates for the number of full shares of
common stock to which he is entitled.
If fewer than all of the warrants evidenced by a warrant certificate are
exercised, the Warrant Agent will deliver to you a new warrant certificate
representing the unexercised portion of the warrant certificate. We will not
issue fractional shares upon exercise of a warrant, and instead, we will pay to
the holder an amount in cash equal to such fraction multiplied by the then
Current Market Price per share, determined in accordance with the Warrant
Agreement.
We will consider the person in whose name the stock certificate is to be
issued to have become the holder of record of the stock represented by a warrant
on the date when you exercise a warrant certificate and the Warrant Price is
paid, or if our stock transfer books are closed on such date, on the next date
on which such books shall be opened.
We will not make a service charge for registration of transfer or exchange
of any warrant certificate. We may require payment of a sum sufficient to cover
any stamp or other tax or governmental charge that may be imposed in connection
with any registration of transfer of warrant certificates or the issuance of a
warrant certificate in a name other than that of the registered holder of the
warrants.
We will adjust the number of shares of common stock issuable upon the
exercise of the warrants and/or the Warrant Price if we pay a dividend or make a
distribution in common stock, subdivide our outstanding common stock into a
greater number of shares, combine our common stock into a smaller number of
shares or issue by reclassification of our common stock, other securities of
Ugly Duckling. For purposes of these adjustment mechanisms, "common stock" means
our common stock as of the date of execution and delivery of the Warrant
Agreement or any other class of stock or securities resulting from successive
changes or reclassifications of such common stock consisting solely of changes
in par value, or from par value to no par value, or from no par value to par
value. Upon any adjustment of the number of shares issuable upon exercise of the
warrants, the Warrant Price will also be adjusted proportionately.
In the event that we consolidate with, merge into, or sell or convey our
property, assets, or business as an entirety or substantially as an entirety to,
another corporation, we and such successor or purchasing corporation will
execute with the Warrant Agent an agreement that the registered holders of the
warrants will have the right thereafter, upon payment of the Warrant Price in
effect immediately prior to the action, to purchase, upon exercise of a warrant,
the kind and amount of shares and other securities and property which the holder
would have owned or been entitled to receive after the happening of such action
had the warrants been exercised immediately prior to the consolidation, merger,
or sale of assets.
In the event a bankruptcy or reorganization is commenced by or against us, a
bankruptcy court may hold that unexercised warrants are executory contracts
which may be subject to rejection by us with approval of the bankruptcy court.
As a result, holders of the warrants may not be entitled to receive any
consideration or may receive an amount less than they would be entitled to if
they had exercised their warrants prior to the commencement of any such
bankruptcy or reorganization.
The holders of unexercised warrants are not entitled, by virtue of being
holders, to exercise any rights as stockholders of Ugly Duckling.
Subject to certain requirements, from time to time we and the Warrant Agent,
without the consent of the holders of the warrants, may amend or supplement the
Warrant Agreement for certain purposes, including curing ambiguities, defects,
or inconsistencies, or to make other provisions in regard to matters or
questions arising under the Warrant Agreement which shall not be inconsistent
with the provisions of the warrants, or which shall not adversely affect the
interests of holders of the warrants (including reducing the Warrant Price or
extending the redemption or exercise date). In any situation where the Warrant
65
<PAGE>
Agreement cannot be amended by us and the Warrant Agent as described above, the
Warrant Agreement can be amended by us, the Warrant Agent, and the holders of a
majority of the outstanding warrants representing a majority of the shares of
common stock underlying such warrants, provided that, among other exceptions,
without the consent of each holder of a warrant, except pursuant to the
adjustment mechanisms of the Warrant Agreement, there can be no increase of the
Warrant Price, reduction of the number of shares of common stock purchasable on
exercise of the warrants, or reduction of the exercise period for the warrants.
Bank Group Warrants
The warrants that may be offered and sold by the selling securityholers
under this prospectus ("bank group warrants") are governed by a Warrant
Agreement dated as of August 20, 1997 (the "Bank Group Warrant Agreement")
between us and Harris Trust Company of California, as Warrant Agent. Holders of
bank group warrants are referred to the Bank Group Warrant Agreement which is
included as an exhibit to the Registration Statement of which this prospectus is
a part for a complete statement of the terms of the bank group warrants. The
summary contained herein does not purport to be complete and is qualified in its
entirety by reference to all of the provisions of the Bank Group Warrant
Agreement.
Except as described below, the bank group warrants and the Bank Group
Warrant Agreement are substantially similar to the FMAC warrants and the Warrant
Agreement relating to the FMAC Warrants described above under "Description of
Capital Stock -- FMAC warrants." The bank group warrants differ substantially
from the FMAC warrants as follows:
o The bank group warrants are exerciseable only through February 20,
2000.
o The outstanding bank group warrants are redeemable at our option at
$.10 per share of common stock purchaseable upon exercise of such bank
group warrants, at any time after the average daily market price per
share of the common stock for a period of at least five consecutive
trading days ending not more than fifteen days prior to the date of
the required redemption notice has equaled or exceeded $27.00. The
method of determining the daily market price per share of the common
stock and for giving the required redemption notice are as described
with respect to the FMAC warrants under the heading "Description of
Capital Stock -- FMAC Warrants."
Other Securities and Registration Rights
In connection with our initial public offering, we issued warrants to
SunAmerica to purchase 121,023 shares, as adjusted, of common stock at an
exercise price per share of $6.75 and to Cruttenden Roth to purchase 170,000
shares of common stock at an exercise price per share of $9.45. The agreements
with respect to the issuance of such warrants provide for certain registration
rights. We are required to use our best efforts to effect such registrations,
subject to certain conditions and limitations, and are required to pay all
expenses of SunAmerica and Cruttenden Roth in connection with any registration
of such securities, except for any underwriting discounts and commissions.
In connection with our initial public offering, we registered the warrants
issued to Cruttenden Roth and the shares underlying such warrants. Under the
terms of such warrants, however, Cruttenden Roth could not exercise such
warrants and sell the underlying common stock until June 21, 1997, and only
pursuant to a currently effective registration statement.
In connection with the FMAC senior bank debt purchase, we issued warrants
(including the bank group warrants) to the bank group members to purchase a
total of 500,000 shares of common stock at an exercise price of $20.00 per
share, through February 20, 2000, subject to a call provision by us and
containing certain registration rights. 110,200 of these warrants were
subsequently returned to us and cancelled in connection with the settlement of a
disputed issue with certain of the bank group members.
In connection with a $15.0 million loan, we issued warrants to the lenders to
purchase a total of 500,000 shares of our common stock at an exercise price of
$10.00 per share, through February 12, 2001, subject to a call provision by us
and containing certain registration rights.
In connection with our involvement in the Reliance Acceptance Group bankruptcy
proceedings, we issued warrants to Reliance to purchase 50,000 shares of common
stock at an exercise price of $12.50 per share, with certain registration
rights. For additional information
66
<PAGE>
concerning the warrants that we may issue to Reliance, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations -- Three Months Ended March 31, 1999 -- Servicing and
Other Income -- Non-Dealership Operations.
We have authorized for issuance the following:
o 1,800,000 shares of common stock under our Incentive Plan, as amended.
See "Management -- Compensation of Executive Officers, Benefits and
Related Matters -- Long-Term Incentive Plan."
o 50,000 shares of common stock under our Director Incentive Plan. See
"Management -- Compensation of Executive Officers, Benefits and
Related Matters -- and the Director's Incentive Plan."
o 800,000 shares of common stock under our 1998 Executive Incentive
Plan. See "Management -- Compensation of Executive Officers, Benefits
and Related Matters -- 1998 Executive Incentive Plan."
Limitation of Liability and Indemnification of Directors and Officers
Our Certificate of Incorporation provides that to the fullest extent
permitted by Delaware law, a director of Ugly Duckling shall not be personally
liable to us or our stockholders for monetary damages for breach of such
director's fiduciary duty, except for liability:
o for any breach of the director's duty of loyalty to us or our stockholders;
o for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
o in respect of certain unlawful dividend payments or stock redemptions or
repurchases; and
o for any transaction from which the director derives an improper benefit.
The effect of this provision is to eliminate our rights and the rights of
our stockholders (through stockholders' derivative suits on our behalf) to
recover monetary damages against a director for breach of the fiduciary duty of
care as a director (including breaches resulting from negligent or grossly
negligent behavior), except in the situations described above. This provision
does not limit or eliminate our rights or the rights of any stockholder to seek
non-monetary relief such as an injunction or recision in the event of a breach
of a director's duty of care. In addition, our Certificate of Incorporation
provides that we will indemnify any person who is or was a director, officer,
employee, or agent of Ugly Duckling, or who is or was serving at our request as
a director, officer, employee, or agent of another corporation or entity,
against expenses, liabilities, and losses incurred by any such person by reason
of the fact that such person is or was acting in such capacity. We have also
obtained insurance on behalf of our directors and officers for any liability
arising out of such person's actions in such capacity.
We have entered into agreements to indemnify our directors and certain
officers. These agreements, among other things, require us to indemnify our
directors and officers for certain expenses (including attorneys' fees),
judgments, fines, and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in the right of Ugly Duckling,
arising out of such person's services as a director or officer of Ugly Duckling,
any of our subsidiaries, or any other company or enterprise to which such person
provides services at our request. To the extent that our Board of Directors or
stockholders may in the future wish to limit or repeal our ability to provide
indemnification as set forth in our Certificate of Incorporation, such repeal or
limitation may not be effective as to directors or officers who are parties to
the indemnification agreements because their rights to full protection would be
contractually assured by such agreements. It is anticipated that similar
contracts may be entered into, from time to time, with our future directors. We
believe that the indemnification provisions in our Certificate of Incorporation
and in the indemnification agreements are necessary to attract and retain
qualified persons as directors and officers.
Certain Bylaw Provisions
Our Bylaws, as amended, contain several provisions that regulate the
nomination of directors and the submission of proposals in connection with
stockholder meetings. Our Bylaws require that, subject to certain exceptions,
any stockholder desiring to propose business or nominate a person to the Board
of Directors at a stockholders meeting must give notice of any proposals not
less than 60 days nor more than 90 days prior to the meeting. Such notice is
required to contain certain information as set forth in the Bylaws. No business
matter shall be transacted nor shall any person be eligible for election as a
director unless proposed or nominated, as the case may be, in strict accordance
with this procedure set forth in our Bylaws.
67
<PAGE>
Although the Bylaws do not give the Board of Directors any power to approve
or disapprove of stockholder nominations for the election of directors or of any
other business desired by stockholders to be conducted at an annual or any other
meeting, the Bylaws may have the effect of precluding a nomination for the
election of directors or the conduct of business at a particular annual meeting
if the proper procedures are not followed or may discourage or deter a third
party from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of Ugly Duckling, even if
the conduct of such solicitation or such attempt might be beneficial to us and
our stockholders. Our procedures with respect to all stockholder proposals and
the nomination of directors will be conducted in accordance with Section 14 of
the Security Exchange Act of 1934 and the rules promulgated thereunder.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is Harris Trust
Company of California, 601 S. Figueroa, Los Angeles, California 90017.
SELLING SECURITY HOLDERS
The following table sets forth the name of each selling securityholder, the
aggregate number of shares of common stock beneficially owned by each selling
securityholder as of July 1, 1999, the aggregate number of bank group warrants
and related warrant shares registered hereby that each selling securityholder
may offer and sell pursuant to this prospectus, and the aggregate number of
shares of common stock that will be beneficially owned by each selling
securityholder after completion of the offering. However, because the selling
securityholders may offer all or a portion of the bank group warrants and
related warrant shares at any time and from time to time after the date hereof,
the exact number of shares of common stock that each selling securityholder may
retain upon completion of the offering cannot be determined at this time. All of
the bank group warrants are issued and outstanding as of the date of this
prospectus. To our knowledge, none of the selling securityholders has had any
material relationship with us or any of our predecessors or affiliates within
the past three years, except as set forth in the footnotes to the following
table.
<TABLE>
<CAPTION>
Bank Group Warrants
and related
Warrant Shares
to be Offered
Shares Beneficially for the Selling Shares Beneficially
Owned Prior to Securityholder's Owned after the
Selling Securityholder the Offering Account Offering
------------------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C>
First Merchants Acceptance
Corporation.................. 325,000 325,000 0
LaSalle National Bank........... 72,916 72,916 0
Fleet Bank, National Association 60,763 60,763 0
Bank One, Michigan
(formerly NBD Bank)........... 61,680 61,680 0
Bank of America National Association
(formerly known as Nations Bank, N.A) 36,458 36,458 0
U.S. Bank National Association
(successor by merger to First Bank
National Association)......... 60,763 60,763 0
Mellon Bank, N.A. (or its
assignee APT Holdings
Corporation).................. 117,664 48,610 69,054
------- ------ ------
410,244 341,190 69,054
======= ======= ======
<FN>
- ----------
Note: Other than the short-term loan to us arising out of the FMAC transaction, we are unaware of any borrowings by us from any of
the selling securityholders listed above.
</FN>
</TABLE>
68
<PAGE>
PLAN OF DISTRIBUTION
FMAC Warrants, related Warrant Shares, and Stock Option Shares
The FMAC Warrants were issued to FMAC on the effective date of FMAC's plan
of reorganization. The term "equity holders," when used in this prospectus, will
mean the equity holders of FMAC on the effective date of the plan of
reorganization. Under FMAC's plan of reorganization, equity holders received the
benefit of 32,500 warrants. FMAC may:
o distribute that portion of the warrants allocable to its equity holders
(the "Equity Warrants") directly to such holders,
o hold the Equity Warrants until exercise and either distribute the warrant
shares to its equity holders or sell the warrant shares and distribute the
proceeds to such holders, or
o sell the Equity Warrants and distribute the proceeds to its equity holders.
With respect to any remaining FMAC warrants not allocated to the equity
holders of FMAC, FMAC may:
o distribute such warrants to its unsecured creditors,
o hold such warrants until exercise and either distribute the warrant shares
to its unsecured creditors or sell the warrant shares and distribute the
proceeds thereof to its unsecured creditors, or
o sell such warrants and distribute the proceeds to its unsecured creditors,
or if necessary, use the proceeds of the sale of warrants or warrant shares
to pay ongoing administrative and operating expenses.
The warrant shares relating to the FMAC warrants will be issued from time
to time upon exercise of the warrants by the holders thereof in accordance with
the Warrant Agreement. See "Description of Capital Stock -- FMAC Warrants."
At our option, we have the right to issue up to 5,000,000 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 (the "Stock
Option"). If we decide to exercise the Stock Option, we must give FMAC at least
15 days advance notice of the date on which we will exercise the Stock Option
and the number of shares of our common stock that we will issue on the exercise
date ("Stock Option Shares"). We may only exercise the Stock Option one time. On
the exercise date, the aggregate value of the Stock Option Shares will be
determined by multiplying the Stock Option Shares by 98% of the average of the
closing prices for the previous 10 trading days of our common stock on the
Nasdaq (the "Stock Option Value".) After issuance and delivery of the Stock
Option Shares, we will be entitled to receive FMAC's share of cash distributions
under the Excess Collections Split until we have received cash distributions
equal to the Stock Option Value. This would be in addition to our right to
receive our 17.5% share under the Excess Collections Split. In order to exercise
the Stock Option,
o the value of our common stock on the exercise date and the closing price
for our common stock on each day during the previous 10 trading days must
be at least $8.00 per share,
o we must have registered the Stock Option Shares under the Securities Act of
1933 and the Stock Options Shares must be unrestricted and transferable,
o we must have taken all steps necessary to allow FMAC to distribute the
Stock Option Shares to its unsecured creditors, and
o we cannot have purchased any of our common stock (except upon the exercise
of previously issued and outstanding options, warrants or other rights) or
announced any stock repurchase programs from the delivery of the notice of
our intent to exercise this option through the exercise date.
If we issue the Stock Option Shares directly to FMAC, FMAC may either
distribute such shares to its unsecured creditors or sell such Stock Option
Shares and distribute the proceeds to its unsecured creditors, or if necessary,
use the proceeds of the sale of the Stock Option Shares to pay ongoing
administrative and operating expenses.
FMAC or its nominees or pledgees may sell or distribute some or all of the
FMAC warrants and/or related warrant shares and/or Stock Option Shares from time
to time through dealers, brokers or other agents or directly to one or more
purchasers, including pledgees, in transactions (which may involve crosses and
block transactions) on Nasdaq (as to the warrant shares and/or Stock Option
Shares only), in privately negotiated transactions (including sales pursuant to
pledges), in the over-the-counter market, in brokerage transactions, in a
combination of such transactions or by any other legally available means. Such
transactions may be effected by FMAC or its nominees or pledgees at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, at negotiated prices, or at fixed prices, which may be changed.
Brokers, dealers, or agents participating in such transactions may receive
compensation in the form of discounts, concessions or commissions from FMAC or
its nominees or pledgees (and, if they act as agent for the purchaser of such
shares, from such purchaser). Such discounts, concessions or commissions as to a
particular broker, dealer, or agent might be in excess of those customary in the
type of transaction involved. To the extent required, we will file, during any
period in which offers or sales are being made, one or more supplements to this
prospectus to set forth any other material information with respect to the plan
of distribution not previously disclosed.
69
<PAGE>
FMAC will be deemed to be an underwriter, as such term is defined in Section
2(11) of the Securities Act, of the FMAC warrants, warrant shares, and Stock
Option Shares to the extent that it participates, directly or indirectly, in the
distribution of such securities. Both Ugly Duckling and FMAC have agreed to
indemnify the other against certain liabilities including certain liabilities
under the Securities Act.
Bank Group Warrants and Related Warrant Shares
The selling securityholders or their nominees or pledgees, other than FMAC,
may sell or distribute some or all of the bank group warrants and/or related
warrant shares from time to time through dealers, brokers or other agents or
directly to one or more purchasers, including pledgees, in transactions (which
may involve crosses and block transactions) on Nasdaq (as to the warrant shares
only), in privately negotiated transactions (including sales pursuant to
pledges), in the over-the-counter market, in brokerage transactions, in a
combination of such transactions or by any other legally available means. Such
transactions may be effected by the selling securityholders at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at negotiated prices, or at fixed prices, which may be changed. Brokers,
dealers or agents participating in such transactions may receive compensation in
the form of discounts, concessions or commissions from the selling
securityholders (and, if they act as agent for the purchaser of such shares,
from such purchaser). Such discounts, concessions or commissions as to a
particular broker, dealer or agent might be in excess of those customary in the
type of transaction involved. This prospectus also may be used, with our
consent, by donees of the selling securityholders or by other persons acquiring
bank group warrants and related warrant shares and who wish to offer and sell
such shares under circumstances requiring or making desirable its use. To the
extent required, we will file, during any period in which offers or sales are
being made, one or more supplements to this prospectus to set forth the names of
donees of selling securityholders and any other material information with
respect to the plan of distribution not previously disclosed. In addition, any
bank group warrants and related warrant shares which qualify for sale pursuant
to Section 4 of, or Rule 144 under, the Securities Act may be sold under such
provisions rather than pursuant to this prospectus.
The selling securityholders and any such brokers, dealers or agents that
participate in such distribution may be deemed to be "underwriters" within the
meaning of the Securities Act with regard to the bank group warrants and related
warrant shares, and any discounts, commissions or concessions received by any
such brokers, dealers or agents might be deemed to be underwriting discounts and
commissions under the Securities Act. Neither Ugly Duckling nor the selling
securityholders can presently estimate the amount of such compensation. We know
of no existing arrangements between any selling securityholder and any other
selling securityholder, broker, dealer or other agent relating to the sale or
distribution of the bank group warrants and related warrant shares.
The selling securityholders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including without
limitation Regulation M, which provisions may limit the timing of purchases and
sales of any of the bank group warrants and related warrant shares by the
selling securityholders. All of the foregoing may affect the marketability of
the bank group warrants and related warrant shares.
We will pay substantially all of the expenses incident to this offering of
the bank group warrants and related warrant shares by the selling
securityholders to the public other than commissions and discounts of brokers,
dealers or agents. Each selling securityholder may indemnify any broker, dealer,
or agent that participates in transactions involving sales of the bank group
warrants and related warrant shares against certain liabilities, including
liabilities arising under the Securities Act. We have agreed to indemnify the
selling securityholders against certain liabilities including certain
liabilities under the Securities Act. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to our directors, officers or
persons controlling us, we have been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
General
Our common stock is traded on Nasdaq under the symbol "UGLY." Neither the
FMAC Warrants nor the bank group warrants will be listed on any national
securities exchange or admitted for trading on Nasdaq.
We are bearing the expenses of registration of the FMAC warrants, bank group
warrants, warrant shares, and Stock Option Shares offered hereby, which we
estimate will be approximately $400,000.
70
<PAGE>
LEGAL MATTERS
The validity of the securities offered hereby is being passed upon for us by
Snell & Wilmer L.L.P., Phoenix, Arizona.
EXPERTS
The consolidated financial statements of Ugly Duckling Corporation as of
December 31, 1998 and 1997 and for each of the years in the three-year period
ended December 31, 1998, have been included herein and in the Registration
Statement in reliance upon the report of KPMG LLP, independent auditors,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission (the "Commission") with respect to the FMAC warrants, bank
group warrants, warrant shares, and Stock Option Shares offered hereby. Please
see the registration statement and the exhibits and schedules filed as part of
the registration statement for further information about us and our stock. You
may examine the registration statement, including the exhibits thereto, at the
Commission's public reference facility at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. In addition, you can obtain copies of all
or any part of the registration statement, including such exhibits, from the
Commission at its principal office in Washington, D.C., upon payment of the
required fees.
We are subject to the reporting and informational requirements of the
Exchange Act and file reports, proxy statements, and other information with the
Commission. You may inspect and copy such reports, proxy statements, and other
information filed by us at the principal office of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549, and at the
following regional offices of the Commission: 7 World Trade Center, New York, NY
10048, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, IL 60601. You may obtain copies of such material from the Public
Reference Section of the Commission at its principal office at 450 Fifth Street,
N.W., Washington D.C. 20549, upon payment of the required fees. The Commission
maintains a World Wide Web site (http://www.sec.gov) that contains reports,
proxy statements, and other information regarding registrants, such as us, that
file electronically with the Commission.
Our common stock is traded on Nasdaq. Reports, proxy statements, and other
information filed by us may be inspected and copied at the National Association
of Securities Dealers, 1735 K Street, N.W., Washington, D.C. 20007.
71
<PAGE>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report............................................. F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1997............. F-3
Consolidated Statements of Operations for the years ended December 31,
1998,1997 and 1996......................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996........................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996......................................................... F-6
Notes to Consolidated Financial Statements................................. F-7
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 1999 and December
31, 1998............................................................... F-27
Condensed Consolidated Statements of Operations for the three months ended
March 31, 1999 and 1998................................................... F-28
Consolidated Statements of Cash Flows for the three months ended March 31,
1999 and 1998......................................................... F-29
Notes to Consolidated Financial Statements................................. F-30
F-1
<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 our
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.
/S/ KPMG LLP
Phoenix, Arizona
February 18, 1999
F-2
<PAGE>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
1998 1997
(In thousands, except
share amounts)
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
========= =========
See accompanying notes to Consolidated Financial Statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
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.
F-4
<PAGE>
<TABLE>
<CAPTION>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1998, 1997, and 1996
(in thousands)
Retained
Earnings Total
Number of Shares Amount ($'s) (Accumulated Stockholders'
---------------- ---------------------- ------------ -------------
Preferred Common Treasury Preferred Common Treasury Deficit) Equity
--------- ------ -------- --------- ------ -------- -------- ------
<S> <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 Cash.................. -- 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.
F-5
<PAGE>
<TABLE>
<CAPTION>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
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.
F-6
<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
F-7
<PAGE>
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
(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):
December 31,
------------
1998 1997
---- ----
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 1,153 550
Liabilities................................
Disposal Liability........................... (6,024) --
------ ------
$ 38,516 $ 54,583
======== ========
Following is a summary of the operating results of the Discontinued
Operations for the years ended December 31, 1998, 1997, and 1996 (in thousands):
December 31,
------------
1998 1997 1996
---- ---- ----
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)
======== ======== =======
(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.
F-8
<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 (B 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.
F-9
<PAGE>
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
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
F-10
<PAGE>
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.
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
F-11
<PAGE>
stock price volatility, expected dividend yields, the risk free interest rate,
and the expected life. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the value determined by the Model is not necessarily
indicative of the ultimate value of the granted options.
Earnings Per Share
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company.
Impairment of Long-Lived Assets
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 $ 93,936 $ 51,282 $145,218 $ 55,965 $ 27,480 $ 83,445
Balances...............................
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>
F-12
<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):
December 31,
------------
1998 1997
---- ----
Retained interest in subordinated securities (B $ 51,243 $ 25,483
Certificates)........................................
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%
==== ====
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):
December 31,
------------
1998 1997
---- ----
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
======== ========
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.
F-13
<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.
F-14
<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):
December 31,
------------
1998 1997
---- ----
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
======== ========
(7) Property and Equipment
A summary of Property and Equipment as of December 31, 1998 and 1997 follows
(in thousands):
December 31,
------------
1998 1997
---- ----
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
======== ========
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):
December 31,
------------
1998 1997
---- ----
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
======== =======
F-15
<PAGE>
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.
(9) Other Assets
A summary of Other Assets as of December 31, 1998 and 1997 follows (in
thousands):
December 31,
------------
1998 1997
---- ----
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
======= =======
(10) Accrued Expenses and Other Liabilities
A summary of Accrued Expenses and Other Liabilities as of December 31, 1998
and 1997 follows (in thousands):
December 31,
------------
1998 1997
---- ----
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
======= =======
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
Others 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............................................... 56,118 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.
F-16
<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 underlying 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
distributions for Residuals in Finance Receivables Sold 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>
$17.5million 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.
F-17
<PAGE>
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.
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):
Subordinated
December 31, Notes Payable Notes Payable Total
------------ ------------- ------------- -----
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
=========== =========== =========
(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):
December 31,
------------
1998 1997 1996
---- ---- ----
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
====== ====== ========
Components of income taxes (benefit) for the years ended December 31, 1998,
1997 and 1996 follow (in thousands):
Current Deferred Total
------- -------- -----
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
======= ======= =======
F-18
<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):
December 31,
------------
1998 1997
---- ----
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)
------ ------
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.
F-19
<PAGE>
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.
A summary of portfolios serviced by the Company's respective segments as of
December 31, 1998 and 1997 follows (in thousands):
Dealership Operations: 1998 1997
---- ----
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
=========== ==========
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):
Continuing Discontinued
December 31, Operations Operations Total
------------ ---------- ---------- -----
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
======= ====== ========
F-20
<PAGE>
(17) Stockholders' Equity
During 1998 the company acquired approximately 2.7 million shares of Ugly
Duckling common stock with a value of approximately $14.0 million in the
Exchange Offer. We 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.
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 we.
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 1,044 390 --
====== ======== ========
Antidilutive.....................................
Stock Options Not Included in Diluted EPS Since
Antidilutive................................... 1,044 828 --
====== ======== =======
</TABLE>
F-21
<PAGE>
(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.
A summary of the aforementioned stock plan activity follows:
Stock Option Plan Executive Plan
----------------- --------------
Weighted Weighted
Average Average
Price Per Price Per
Number Share Number Share
------ ----- ------ -----
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
========= =======
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 $9.75 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:
F-22
<PAGE>
<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>
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 8.2501 -- --
$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.
F-23
<PAGE>
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.
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.
F-24
<PAGE>
(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.
<TABLE>
<CAPTION>
Dealership Operations Non Dealership Operations
--------------------- -------------------------
Company
Company Dealership Corporate Cygnet 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 $ 5,974 $ 19,119 $ (16,266) $ 3,326 $ 4,819 $ (4,152) $ 12,820
Expense.......................... ========= ========= ========= ========= ========== ========== =========
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 $ 1,312 $ 14,683 $ (8,387) $ 1,079 $ 11,949 $ (1,697) $ 18,939
========= ========= ========= ========= ========== ========== =========
Expense..........................
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 $ 2,235 $ 10,610 $ (3,639) $ -- $ -- $ -- $ 9,206
Expense.......................... ========= ========= ========= ========= ========== ========== =========
Capital Expenditures............. $ 4,530 $ 455 $ 564 $ -- $ -- $ -- $ 5,549
========= ========= ========= ========= ========== ========== =========
Identifiable Assets.............. $ 20,698 $ 12,775 $ 84,156 $ -- $ -- $ -- $ 117,629
========= ========= ========= ========= ========== ========== =========
</TABLE>
F-25
<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>
F-26
<PAGE>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
1999 1998
-------------- --------------
ASSETS
Cash and Cash Equivalents $ 4,387 $ 2,751
Finance Recievables, net 237,928 163,209
Notes Receiveable, Net 21,670 28,257
Inventory 39,891 44,167
Property and Equipment, net 34,299 32,970
Intangible Assets, Net 15,256 15,530
Other Assets 22,880 20,575
Net Assets of Discontinued Operations 30,305 38,516
-------------- --------------
$ 406,616 $ 345,975
============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Accounts Payable $ 5,678 $ 2,479
Accrued Expenses and Other Liabilities 30,329 19,694
Notes Payable 171,904 117,294
Subordinated Notes Payable 40,815 43,741
--------------- -------------
Total Liabilities: 248,726 183,208
--------------- -------------
Stockholder's Equity
Common Stock 19
19
Additional Paid in Capital 173,819 173,809
Retained Earnings 3,869 3,449
Treasury Stock (19,817) (14,510)
--------------- -------------
Total Stockholders' Equity 157,890 162,767
--------------- -------------
$ 406,616 $ 345,975
=============== =============
See accompanying notes to Condensed Consolidated Financial Statements.
F-27
<PAGE>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1999 and
1998 (In thousands, except earnings per
share amounts)
1999 1998
------------- --------------
Sales of Used Cars $106,443 $72,973
Less:
Cost of Used Cars Sold 60,097 39,731
Provision for Credit Losses 28,561 15,362
------------- --------------
17,880
17,785
------------- --------------
Other Income:
Interest Income 14,003 6,205
Gain on Sale of Finance Receivables - 4,614
Servicing and Other Income 9,672 3,912
------------- --------------
14,731
23,675
------------- --------------
Income before Operating Expenses 41,460 32,611
Operating Expenses:
Selling and Marketing 6,416 4,921
General and Administrative 28,553 18,786
Depreciation and Amortization 2,135 1,173
------------- --------------
37,104 24,880
------------- --------------
Operating Income 4,356 7,731
Interest Expense 3,656 1,502
------------- --------------
Earnings before Income Taxes 700 6,229
Income Taxes 280 2,500
------------- --------------
Income from Continuing Operations 420 3,729
Discontinued Operations:
Loss from Operations of Discontinued Operations,
net of income tax benefit of $492 - (768)
Loss on Disposal of Discontinued Operations net
of income tax benefit of $3,024 - (4,827)
------------- --------------
Net Earnings (Loss) $ 420 $(1,866)
============= ==============
Earnings per Common Share from Continuing
Operations:
Basic $ 0.03 $ 0.20
============= ==============
Diluted $ 0.03 $ 0.20
============= ==============
Net Earnings (Loss) per Common Share:
Basic $ 0.03 $ (0.10)
============= ==============
Diluted $ 0.03 $ (0.10)
============= ==============
Shares Used in Computation:
Basic 15,650 18,557
============= ==============
Diluted 15,785 19,093
============= ==============
F-28
<PAGE>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Earnings (Loss) $ 420 $ (1,866)
Adjustments to Reconcile Net Earnings (Loss) to Net Cash
Provided
by Operating Activities:
Loss from Discontinued Operations - 5,595
Provision for Credit Losses 28,561 15,362
Purchase of Finance Receivables for Sale - (69,708)
Increase in Deferred Income Taxes (5,188) (2,205)
Depreciation and Amortization 2,135 1,173
Gain on Sale of Finance Receivables - (4,614)
Proceeds from Sale of Finance Receivables - 62,556
Collections of Finance Receivables - 5,935
Decrease in Inventory 4,276 6,914
Decrease in Other Assets 237 1,324
Increase in Accounts Payable, Accrued Expenses and Other 9,911 2,139
Increase in Income Taxes Receivable 6,689 793
------------- -------------
Net Cash Provided by Operating Activities 47,041 23,398
------------- -------------
Cash Flows Used in Investing Activities:
Increase in Finance Receivable (137,358) (8,735)
Collections of Finance Receivables 36,319 4,741
Increase in Investments Held in Trust (2,116) (3,543)
Advances under Notes Receivable (3,109) (11,131)
Repayments of Notes Receivable 9,571 4,926
Purchase of Property and Equipment (3,190) (6,640)
------------- -------------
Net Cash Used in Investing Activities (99,883) (20,382)
------------- -------------
Cash Flows from Financing Activities:
Additions to Notes Payable 72,717 45,000
Repayment of Notes Payable (21,538) (31,867)
Proceeds from Issuance of Common Stock 32 202
Acquisition of Treasury Stock (5,307) -
Other, Net 363 223
------------- -------------
Net Cash Provided by Financing Activities 46,267 13,558
------------- -------------
Cash Provided by (Used in) Discontinued Operations 8,211 (19,597)
------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents 1,636 (3,023)
Cash and Cash Equivalents and Beginning of Period 2,751 3,537
------------- -------------
Cash and Cash Equivalents and End of Period $ 4,387 $ 514
============= =============
Supplemental Statement of Cash Flows Information:
Interest Paid $ 5,934 $ 2,222
============= =============
Income Taxes Paid $ - $ 408
============= =============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
F-29
<PAGE>
UGLY DUCKLING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
Our accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and pursuant to rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for a complete financial statement presentation. In our opinion, such unaudited
interim information reflects all adjustments, consisting only of normal
recurring adjustments, necessary to present our financial position and results
of operations for the periods presented. Our results of operations for interim
periods are not necessarily indicative of the results to be expected for a full
fiscal year. Our Condensed Consolidated Balance Sheet as of December 31, 1998
was derived from our audited consolidated financial statements as of that date
but does not include all the information and footnotes required by generally
accepted accounting principles. We suggest that these condensed consolidated
financial statements be read in conjunction with the audited consolidated
financial statements included in our Annual Report on Form 10-K, for the year
ended December 31, 1998.
Note 2. Summary of Finance Receivables
Following is a summary of our Finance Receivables, net, as of March 31, 1999 and
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
---------------------------------------- ----------------------------------------
Non Non
Dealership Dealership Dealership Dealership
Operations Operations Total Operations Operations Total
------------- ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Installment Sales Contract Principal Balances $182,150 $ 69,053 $251,203 $ 93,936 $ 51,282 $145,218
Add: Accrued Interest 1,798 765 2,563 877 473 1,350
Loan Origination Costs 3,583 - 3,583 2,237 - 2,237
------------- ------------ ------------ ------------ ------------ -------------
Principal Balances, net 187,531 69,818 257,349 97,050 51,755 148,805
Residuals in Finance Receivables Sold 28,480 2,625 31,105 33,331 2,625 35,956
Investments Held in Trust 22,680 - 22,680 20,564 - 20,564
------------- ------------ ------------ ------------ ------------ -------------
238,691 72,443 311,134 150,945 54,380 205,325
Allowance for Credit Losses (48,628) (2,326) (50,954) (24,777) (2,024) (26,801)
Discount on Acquired Loans - (22,252) (22,252) - (15,315) (15,315)
------------- ------------ ------------ ------------ ------------ -------------
Finance Receivables, net $190,063 $ 47,865 $237,928 $126,168 $ 37,041 $163,209
============= ============ ============ ============ ============ =============
Classification:
Finance Receivables Held for Investment $123,787 $ 69,053 $192,840 $ 26,852 $ 51,282 $ 78,134
Finance Receivables Held as Collateral for
Securitization Note Payable 58,363 - 58,363 67,084 - 67,084
============= ============ ============ ============ ============ =============
$182,150 $ 69,053 $251,203 $ 93,936 $ 51,282 $145,218
============= ============ ============ ============ ============ =============
</TABLE>
F-30
<PAGE>
As of March 31, 1999 and December 31, 1998, our Residuals in Finance
Receivables Sold from dealership operations were comprised of the following (in
thousands):
March 31, December 31,
1999 1998
--------------- -------------
Retained interest in subordinated securities (B $ $ 51,243
Certificates) 41,165
Net interest spreads, less present value discount 19,837 25,838
Reduction for estimated credit losses (32,522) (43,750)
--------------- -------------
Residuals in finance receivables sold $ 28,480 $ 33,331
=============== =============
Securitized principal balances outstanding $158,890 $ 198,747
=============== =============
Estimated credit losses as a % of securitized
principal balances outstanding 20.5% 22.0%
=============== =============
The following table reflects a summary of activity for our Residuals in
Finance Receivables Sold from dealership operations for the three month periods
ended March 31, 1999 and 1998 (in thousands):
March 31, March 31,
1999 1998
------------------- -------------------
Balance, Beginning of Period $ 33,331 $ 13,277
Additions - 13,858
Amortization (4,851) (2,394)
------------------- -------------------
Balance, End of Period $ 28,480 $ 24,741
=================== ===================
Note 3. Notes Receivable
Our Cygnet dealer program has various notes receivable from used car
dealers. Under Cygnet's asset based loan program, our commitments for revolving
notes receivable totaled $10.2 million at March 31, 1999.
In July 1997, First Merchants Acceptance Corporation (First Merchants) filed
for bankruptcy. Immediately subsequent to the bankruptcy filing, we executed a
loan agreement to provide First Merchants with debtor in possession financing
(DIP facility). The maximum commitment under the DIP facility is $11.5 million
at March 31, 1999. The outstanding balance on the DIP facility totaled $11.1
million and $12.2 million at March 31, 1999 and December 31, 1998.
Following is a summary of Notes Receivable at March 31, 1999 and December
31, 1998 (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------- ----------------
<S> <C> <C>
Notes Receivable under the asset based loan program, net of
allowance for doubtful accounts of $167, and $500, respectively $ 7,230 $ 8,311
First Merchants Debtor in Possession Note Receivable 11,062 12,228
First Merchants Bank Group Participation 2,331 6,856
Other Notes Receivable 1,047 862
-------------- ----------------
Notes Receivable, net $ 21,670 $ 28,257
============== ================
</TABLE>
F-31
<PAGE>
Note 4. Notes Payable
The following is a summary of Notes Payable at March 31, 1999 and December
31, 1998 (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------------- ------------------
<S> <C> <C>
Revolving Facility with GE Capital $ 75,606 $ 51,765
Securitization Note Payable 44,596 49,967
Note Payable Collateralized by the Common Stock of our Securitization Subsidiaries 19,999 12,234
Note Payable Collateralized by Finance Receivables Contracts 28,876 -
Mortgage Loan with Finance Company 3,386 3,386
Others 897 967
----------------- ------------------
Subtotal 173,360 118,319
Less: Unamortized Loan Fees 1,456 1,025
----------------- ------------------
Notes Payable $ 171,904 $ 117,294
================= ==================
</TABLE>
Note 5. Common Stock Equivalents
Net Earnings (Loss) per common share amounts are based on the weighted
average number of common shares and common stock equivalents outstanding for the
three month periods ended March 31, 1999, and 1998 as follows (in thousands,
except for per share amounts):
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
---------------- -----------------
<S> <C> <C>
Income from Continuing Operations $ 420 $ 3,729
================ =================
Net Earnings (Loss) $ 420 $ (1,866)
================ =================
Basic EPS-Weighted Average Shares Outstanding 15,650 18,557
================ =================
Basic Earnings (Loss) Per Share from:
Continuing Operations $ 0.03 $ 0.20
================ =================
Net Earnings (Loss) $ 0.03 $ (0.10)
================ =================
Basic EPS-Weighted Average Shares Outstanding 15,650 18,557
Effect of Diluted Securities:
Warrants - 87
Stock Options 135 449
---------------- -----------------
Dilutive EPS-Weighted Average Shared Outstanding 15,785 19,093
================ =================
Diluted Earnings (Loss) Per Share from:
Continuing Operations $ 0.03 $ 0.20
================ =================
Net Earnings (Loss) $ 0.03 $ (0.10)
================ =================
Warrants Not Included in Diluted EPS Since Antidilutive 1,556 715
================ =================
Stock Options Not Included in Diluted EPS since Antidilutive 1,153 603
================ =================
</TABLE>
F-32
<PAGE>
Note 6. Business Segments
We have two divisions: dealership operations and non-dealership operations.
Within our divisions we have six distinct business segments. Within the
dealership operations division, the segments consist of retail car sales
operations (company dealerships), the income generated from the finance
receivables generated at the Ugly Duckling dealerships and corporate and other
operations. Under the non-dealership operations division, the segments consist
of the Cygnet dealer program, bulk purchasing and loan servicing, and corporate
and other operations.
A summary of operating activity by business segment for the three months
ended March 31, 1999 and 1998 follows (in thousands):
<TABLE>
<CAPTION>
Dealership Operations Non Dealership Operations
----------------------------------------- -----------------------------------------
Company
Company Dealership Corporate Cygnet Cygnet Loan Corporate
Dealerships Receivables and Other Dealer Servicing and Other Total
----------- ----------- --------- ------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999:
Sales of Used Cars $ 106,443 $ - $ - $ - $ - $ - $ 106,443
Less: Cost of Used Cars Sold 60,097 - - - - - 60,097
Provision for Credit Losses 21,893 5,871 - 797 - - 28,561
----------- ----------- ------------- ------- -------------- ----------- ------------
24,453 (5,871) - (797) - - 17,785
----------- ----------- ------------- ------- -------------- ----------- ------------
Interest Income - 10,312 61 3,317 313 - 14,003
Servicing and Other Income 6 2,883 45 47 6,691 - 9,672
----------- ----------- ------------- ------- -------------- ----------- ------------
Income before Operating Expenses 24,459 7,324 106 2,567 7,004 - 41,460
----------- ----------- ------------- ------- -------------- ----------- ------------
Operating Expenses:
Selling and Marketing 6,378 35 3 - 6,416
General and Administrative 11,102 4,590 5,332 963 5,821 745 28,553
Depreciation and Amortization 791 283 521 78 321 141 2,135
----------- ----------- ------------- ------- -------------- ----------- ------------
18,271 4,873 5,853 1,076 6,145 886 37,104
----------- ----------- ------------- ------- -------------- ----------- ------------
Operating Income $ 6,188 $ 2,451 $(5,747) $ 1,491 $ 859 $ (886) $ 4,356
=========== =========== ============= ======= ============== =========== ============
1998:
Sales of Used Cars $ 72,973 $ - $ - $ - $ - $ - $ 72,973
Less: Cost of Used Cars Sold 39,731 - - - - - 39,731
Provision for Credit Losses 15,034 - - 328 - - 15,362
----------- ----------- ------------- ------- -------------- ----------- ------------
18,208 - - (328) - - 17,880
----------- ----------- ------------- ------- -------------- ----------- ------------
Interest Income - 3,816 64 1,598 727 - 6,205
Gain on Sale of Loans - 4,614 - - - - 4,614
Servicing and Other Income 41 3,825 46 - - - 3,912
----------- ----------- ------------- ------- -------------- ----------- ------------
Income before Operating Expenses 18,249 12,255 110 1,270 727 - 32,611
----------- ----------- ------------- ------- -------------- ----------- ------------
Operating Expenses:
Selling and Marketing 4,878 - - 43 - - 4,921
General and Administrative 10,506 4,555 2,619 515 - 591 18,786
Depreciation and Amortization 613 337 201 22 - - 1,173
----------- ----------- ------------- ------- -------------- ----------- ------------
15,997 4,892 2,820 580 - 591 24,880
----------- ----------- ------------- ------- -------------- ----------- ------------
Operating Income $ 2,252 $ 7,363 $(2,710) $ 690 $ 727 $ (591) $ 7,731
=========== =========== ============= ======= ============== =========== ============
</TABLE>
F-33
<PAGE>
Note 7. Discontinued Operations
In February 1998, we announced our intention to close our branch office
network, through which we purchased retail installment contracts from third
party dealers, and exit this line of business. We substantially completed the
branch office closure as of March 31, 1998. We are continuing to negotiate lease
settlements and terminations with respect to our branch office network closure.
As a result of the branch office network closure, we reclassified the results of
operations of the branch office network in the accompanying condensed
consolidated balance sheets and condensed consolidated statements of operations
to discontinued operations.
The components of Net Assets of Discontinued Operations as of March 31, 1999
and December 31, 1998 follow (in thousands):
March 31, December 31,
1999 1998
---------------- ----------------
Finance Receivables, net $ 24,282 $ 30,649
Residuals in Finance Receivables Sold 6,052 7,875
Investments Held in Trust 2,971 3,665
Disposal Liability (3,000) (3,673)
---------------- ----------------
Net Assets of Discontinued Operations $ 30,305 $ 38,516
================ ================
Note 8. Use of Estimates
The preparation of our consolidated financial statements requires us to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statement and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from our estimates.
Note 9. Certain Bankruptcy Remote Entities
Ugly Duckling Receivables Corporation ("UDRC") and Ugly Duckling Receivables
Corporation II ("UDRC II") (collectively referred to as "Securitization
Subsidiaries"), are our wholly-owned special purpose "bankruptcy remote
entities." Their assets, including assets classified as Discontinued Operations,
include Residuals in Finance Receivables Sold and Investments Held In Trust, in
the amounts of approximately $34.5 million and $25.6 million, respectively, at
March 31, 1999. These amounts would not be available to satisfy claims of our
creditors on a consolidated basis.
Note 10. Reclassifications
We have made certain reclassifications to previously reported information to
conform to the current presentation.
F-34
<PAGE>
You should rely only on the information contained in this prospectus. No
dealer, salesperson or other person is authorized to give information that is
not contained in this prospectus. This prospectus is not an offer to sell nor is
it seeking an offer to buy these securities in any jurisdiction where the offer
or sale is not permitted. The information contained in this prospectus is
correct only as of the date of this prospectus, regardless of the time of the
delibvery of this prospectus or any sale of these securities.
---------------
TABLE OF CONTENTS
Page
Prospectus Summary.................. 3
Risk Factors........................ 5
Forward Looking Statements.......... 11
Use of Proceeds..................... 11
Dividend Policy..................... 12
Capitalization...................... 13
Selected Consolidated Financial and
Operating Data................... 14
Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................ 15
Business............................ 41
Management.......................... 49
Description of Capital Stock........ 63
Selling Securityholders............. 68
Plan of Distribution................ 68
Legal Matters....................... 71
Experts............................. 71
Where You Can Find More Information 71
Index to Consolidated Financial
Statements and to Condensed Consolidated
Financial Statements................ F-1
===============================================================================
===============================================================================
5,666,190 Shares
Common Stock
666,190
Common Stock Purchase Warrants
LOGO
----------------
PROSPECTUS
----------------
__________, 1999
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Other expenses in connection with the issuance and distribution of the
securities to be registered hereunder, all of which will be paid by the
registrant, will be substantially as follows:
Item Amount
------------------------------------------- -------
SEC Registration Fee........................ $ 14,445
Nasdaq Filing Fee........................... 17,500
*Blue Sky Fees and Expenses (including legal 10,000
fees)........................................
*Accounting Fees and Expenses................ 135,000
*Legal Fees and Expenses..................... 135,000
*Printing and Engraving...................... 70,000
*Registrar and Transfer Agent's Fees......... 5,000
*Miscellaneous Expenses...................... 13,055
------
Total.............................. $ 400,000
=========
- ----------
* Estimated
Item 14. Indemnification of Directors and Officers.
Our Certificate of Incorporation provides that our directors shall not be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability for: (i) any breach of the
director's duty of loyalty to us or our stockholders; (ii) acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) liability for payments of dividends or stock purchases or redemptions
in violation of Section 174 of the Delaware General Corporation Law; or (iv) any
transaction from which the director derived an improper personal benefit. In
addition, our Certificate of Incorporation provides that we shall to the fullest
extent authorized by the Delaware General Corporation Law, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits us to provide broader indemnification rights
than such law permitted us to provide prior to such amendment), indemnify and
hold harmless any person who was or is a party, or is threatened to be made a
party to or is otherwise involved in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that such person is or was a director or
officer of Ugly Duckling, or is or was serving at our request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, including service with respect to an employee benefit
plan (an "Indemnitee") against expenses, liabilities and losses (including
attorneys' fees, judgments, fines, excise taxes or penalties paid in connection
with the Employee Retirement Income Security Act of 1974, as amended, and
amounts paid in settlement) reasonably incurred or suffered by such Indemnitee
in connection therewith; provided, however, that except as otherwise provided
with respect to proceedings to enforce rights to indemnification, we shall
indemnify any such Indemnitee in connection with a proceeding (or part thereof)
initiated by such Indemnitee only if such proceeding or part thereof was
authorized by our board of directors.
The Delaware General Corporation Law provides that indemnification is
permissible only when the director, officer, employee, or agent acted in good
faith and in a manner reasonably believed to be in or not opposed to our best
interests, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe the conduct was unlawful. The Delaware General
Corporation Law also precludes indemnification in respect of any claim, issue,
or matter as to which an officer, director, employee, or agent shall have been
adjudged to be liable to us unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
that, despite such adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
II-1
<PAGE>
For information regarding indemnity agreements we have entered into with our
directors and certain officers, see "Description of Capital Stock -- Limitation
of Liability and Indemnification of Directors and Officers."
For information regarding our undertaking to submit to adjudication the
issue of indemnification for violation of the securities laws, see Item 17
hereof.
Item 15. Recent Sales of Unregistered Securities.
On February 13, 1997, we sold 5,075,500 shares of common stock to
approximately 115 institutional purchasers for an aggregate purchase price of
$94,531,188. Friedman, Billings, Ramsey & Co., Inc. acted as placement agent in
the transaction. Our total proceeds, net of discounts and commissions, was
$89,804,629 before deducting offering expenses.
On August 6, 1997, we entered into an employment agreement with Steven A.
Tesdahl, Senior Vice President -- our Chief Information Officer, The agreement
contains our commitment to grant on January 15, 1998 a number of unregistered
shares of our common stock valued at $100,000 as of September 1, 1997. On or
about January 15, 1998, we issued a net amount of 4,565 shares of common stock
to Mr. Tesdahl.
In two separate transactions in August and December, 1997, we issued
warrants to purchase 389,800 and 110,200 shares of common stock, respectively,
to members of the bank group in connection with our purchase of the senior bank
debt in the FMAC bankruptcy case. The warrants to purchase 110,200 shares of
common stock were subsequently returned to us and cancelled pursuant to a
negotiated settlement of a dispute with the purchasers thereof.
During the first quarter of 1998, we issued warrants to acquire 500,000
shares of our common stock at an exercise price of $10.00 per share in a private
placement to certain lenders in connection with a $15 million loan. In addition,
we issued warrants to acquire 50,000 shares of our common stock at an exercise
price of $12.50 per share in a private placement in connection with the Reliance
Bankruptcy proceedings. In the third quarter of 1998, we agreed to issue
warrants to acquire 115,000 shares of our common stock at an exercise price of
120% of the average trading price of the common stock over a specified period,
if a related loan was not paid on full on or before December 31, 1998. Although
the loan was not repaid prior to December 31, 1998, it was prepaid prior to its
maturity date. In exchange for the prepayment of the loan, the warrants were not
issued.
Exemption from registration for each transaction described above was claimed
pursuant to Section 4(2) of the Securities Act regarding transactions by an
issuer not involving any public offering.
As discussed earlier in this prospectus, on September 17, 1998 we initiated
an exchange offer to exchange up to 5,000,000 shares of our common stock for
12%, five-year subordinated debentures due October 23, 2003 ("Debentures"). A
total of approximately 2.7 million shares of common stock were exchanged for
Debentures (approximately $17.5 million aggregate principal amount) in
connection with the exchange offer and supplemental exchange offer. The
Debentures were not registered under the Securities Act, since the exchange of
such securities for common stock was made pursuant to Section 3(a)(9) of the
Securities Act.
Item 16. Exhibits and Financial Statement Schedule.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
<S> <C>
3.1 Certificate of Incorporation of the Registrant Amended and Restated as of May 15, 1997 (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 1998 (w/form of warrant attached as Exhibit A, thereto) (19)
4.3 Form of Certificate representing Common Stock (1)
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)
II-2
<PAGE>
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 (19)
5 Opinion of Snell & Wilmer L.L.P. regarding the legality of the securities being registered (previously filed with
this Form S-1)
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 (19)
10.1(g) Amendment to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between General
Electric Capital Corporation and Registrant dated March 25, 1999 regarding Year 2000 Date Change (20)
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)
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 (19)
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)
II-3
<PAGE>
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
10.21 Ugly Duckling Corporation 1996 Director Incentive Plan (1)
10.22 Purchase Agreement, dated February 10, 1997 between the Registrant and Friedman, Billings, Ramsey & Co.,
Inc. (10)
10.23 Agreement of Purchase and Sale of Assets dated as of December 31, 1996 (3)
10.23(a) First Amendment to Agreement of Purchase and Sale of Assets dated as of June 6, 1997 (5)
10.24 Agreement of Purchase and Sale of Assets among the Registrant, E-Z Plan, Inc., shareholders of E-Z Plan, Inc., and
certain lessors, dated as of March 5, 1997 (4)
10.25 Agreement for Purchase and Sale of Certain Assets among Registrant, Kars-Yes Holdings Inc. and certain other
parties, dated as of September 15, 1997 (7)
10.26 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)
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)
II-4
<PAGE>
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 (19)
10.43(a) Stock Pledge Agreement among Greenwich Capital Financial Products, Inc., Registrant, and certain related
parties, dated November 12, 1998 (19)
10.43(b) $20 Million Loan agreement between Greenwich Capital Financial Products, Inc. and Registrant dated March 18,
1999 (20)
10.43(c) Stock Pledge Agreement among Greenwich Capital Financial Products, Inc., Registrant, and certain related parties,
dated March 18, 1999 (20)
10.43(d) Engagement Letter between Greenwich Capital Markets, Inc. and Registrant dated March 16, 1999 for Greenwich
to Act as Placement Agent for not less than $300 Million of Securitized Loans (20)
10.43(e) Commitment Letter between Greenwich Capital Markets, Inc. and Registrant dated March 17, 1999 with Term
Sheet for $100 Million Revolving Credit Facility (20)
10.44 KPMG Year 2000 Renovation Project Service Proposal to and Engagement Letter with the Registrant, dated November 2,
1998 (19)
10.45 $38 Million Senior Secured Loan Agreement between CIBC Inc., SunAmerica, etc. and the Registrant dated May 14, 1999
(w/form of note and guaranty attached)
10.45(a) Stock Pledge Agreement among certain lenders, Harris and the Registrant dated May 14, 1999
11 Earnings (Loss) per Share Computation (see Note 18 to Notes to Consolidated Financial Statements)
21 List of Subsidiaries
23.1 Consent of KPMG LLP
23.2 Consent of Snell & Wilmer L.L.P. (included in Exhibit 5)
24 Power of Attorney (included in signature pages)
27 Financial Data Schedule (previously filed)
<FN>
- ---------------------------
(1) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-3998),
effective June 18, 1996.
(2) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-13755),
effective October 30, 1996.
(3) Incorporated by reference to the Company's Current Report on Form 8-K, filed January 30, 1997.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K, filed March 31, 1997.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed August 14, 1997.
(6) Incorporated by reference to the Company's Current Report on Form 8-K, filed September 5, 1997.
(7) Incorporated by reference to the Company's Current Report on Form 8-K, filed October 3, 1997.
(8) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed November 14, 1997.
(9) Incorporated by reference to the Company's Current Report on Form 8-K, filed November 20, 1997.
(10) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-22237).
(11) Incorporated by reference to the Company's Current Report on Form 8-K, filed January 2, 1998.
(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.
(19) Incorporated by reference to the Company's Annual Report on Form 10-K, filed March 30, 1999.
(20) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed May 14, 1999.
</FN>
</TABLE>
II-5
<PAGE>
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low
or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Post-Effective Amendment No. 1 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Phoenix, State of
Arizona, on July 9, 1999.
Ugly Duckling Corporation
By: /s/ GREGORY B. SULLIVAN
------------------------
Gregory B. Sullivan
President and
Chief Operating Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Ernest C. Garcia, II, Gregory B. Sullivan, Steven
P. Johnson and Steven T. Darak, and each of them, in his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Form S-1 Registration
Statement and to sign any registration statement for the same offering that is
to be effective upon filing pursuant to Rule 462(b) of the Securities Act, and
to file the same, with all exhibits thereto, and all documents in connection
therewith, with the Commission, granting unto said attorneys-in-fact and agents,
and each of them, in full power and authority to do and perform each and every
act and thing requisite and necessary to be done in and about the premises, as
fully and to all intents and purposes as he might or could do in person hereby
ratifying and confirming that all said attorneys-in-fact and agents, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 has been signed by the following persons in the
capacities and on the dates indicated.
Name and Signature Title Date
------------------ ----- ----
*
- ---------------------------------- Chief Executive Officer July 9, 1999
Ernest C. Garcia II and Director (Principal
executive officer)
*
- ----------------------------------- Senior Vice President July 9, 1999
Steven T. Darak and Chief Financial Officer
(Principal financial and
accounting officer)
* Director July 9, 1999
- -----------------------------------
Christopher D. Jennings
* Director July 9, 1999
- -----------------------------------
John N. MacDonough
* Director July 9, 1999
- -----------------------------------
Frank P. Willey
/S/ GREGORY B. SULLIVAN Director July 9, 1999
- -----------------------------------
Gregory B. Sullivan
By: /s/ GREGORY B. SULLIVAN
- ---------------------------
*Gregory B. Sullivan
(Attorney-in-fact)
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ---------------------------------------------------------------------------------------------------------------------
<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 1998 (w/form of warrant attached as Exhibit A, thereto) (19)
4.3 Form of Certificate representing Common Stock (1)
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 (19)
5 Opinion of Snell & Wilmer L.L.P. regarding the legality of the securities being registered (previously filed with
this Form S-1)
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 (19)
10.1(g) Amendment to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between General
Electric Capital Corporation and Registrant dated March 25, 1999 regarding Year 2000 Date Change (20)
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)
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 (19)
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)
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ---------------------------------------------------------------------------------------------------------------------
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
10.21 Ugly Duckling Corporation 1996 Director Incentive Plan (1)
10.22 Purchase Agreement, dated February 10, 1997 between the Registrant and Friedman, Billings, Ramsey & Co.,
Inc. (10)
10.23 Agreement of Purchase and Sale of Assets dated as of December 31, 1996 (3)
10.23(a) First Amendment to Agreement of Purchase and Sale of Assets dated as of June 6, 1997 (5)
10.24 Agreement of Purchase and Sale of Assets among the Registrant, E-Z Plan, Inc., shareholders of E-Z Plan, Inc., and
certain lessors, dated as of March 5, 1997 (4)
10.25 Agreement for Purchase and Sale of Certain Assets among Registrant, Kars-Yes Holdings Inc. and certain other
parties, dated as of September 15, 1997 (7)
10.26 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)
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 (19)
10.43(a) Stock Pledge Agreement among Greenwich Capital Financial Products, Inc., Registrant, and certain related
parties, dated November 12, 1998 (19)
10.43(b) $20 Million Loan agreement between Greenwich Capital Financial Products, Inc. and Registrant dated March 18,
1999 (20)
10.43(c) Stock Pledge Agreement among Greenwich Capital Financial Products, Inc., Registrant, and certain related parties,
dated March 18, 1999 (20)
10.43(d) Engagement Letter between Greenwich Capital Markets, Inc. and Registrant dated March 16, 1999 for Greenwich
to Act as Placement Agent for not less than $300 Million of Securitized Loans (20)
10.43(e) Commitment Letter between Greenwich Capital Markets, Inc. and Registrant dated March 17, 1999 with Term
Sheet for $100 Million Revolving Credit Facility (20)
10.44 KPMG Year 2000 Renovation Project Service Proposal to and Engagement Letter with the Registrant, dated November 2,
1998 (19)
10.45 $38 Million Senior Secured Loan Agreement between CIBC Inc., SunAmerica, etc. and the Registrant dated May 14, 1999
(w/form of note and guaranty attached)
10.45(a) Stock Pledge Agreement among certain lenders, Harris and the Registrant dated May 14, 1999
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ---------------------------------------------------------------------------------------------------------------------
11 Earnings (Loss) per Share Computation (see Note 18 to Notes to Consolidated Financial Statements)
21 List of Subsidiaries
23.1 Consent of KPMG LLP
23.2 Consent of Snell & Wilmer L.L.P. (included in Exhibit 5)
24 Power of Attorney (included in signature pages)
27 Financial Data Schedule (previously filed)
<FN>
- ---------------------------
(1) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-3998),
effective June 18, 1996.
(2) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-13755),
effective October 30, 1996.
(3) Incorporated by reference to the Company's Current Report on Form 8-K, filed January 30, 1997.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K, filed March 31, 1997.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed August 14, 1997.
(6) Incorporated by reference to the Company's Current Report on Form 8-K, filed September 5, 1997.
(7) Incorporated by reference to the Company's Current Report on Form 8-K, filed October 3, 1997.
(8) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed November 14, 1997.
(9) Incorporated by reference to the Company's Current Report on Form 8-K, filed November 20, 1997.
(10) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-22237).
(11) Incorporated by reference to the Company's Current Report on Form 8-K, filed January 2, 1998.
(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.
(19) Incorporated by reference to the Company's Annual Report on Form 10-K, filed March 30, 1999.
(20) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed May 14, 1999.
</FN>
</TABLE>
INDEMNITY AGREEMENT
(Form of)
By this INDEMNITY AGREEMENT (this "Agreement"), Ugly Duckling Corporation, a
Delaware corporation (the "Company"), and the undersigned officer or member of
its Board of Directors ("Indemnitee") warrant, covenant and agree as follows:
WHEREAS, Indemnitee is an officer and/or a member of the Board of
Directors of the Company and in such capacity is performing a valuable service
for the Company; and
WHEREAS, the Company's Certificate of Incorporation provides for
indemnification of officers and directors to the fullest extent authorized by
the Delaware General Corporation Law; and
WHEREAS, the Delaware General Corporation Law provides that the
indemnification rights provided thereunder are not exclusive, and that
agreements may be entered into between Company and its officers and the members
of its Board of Directors with respect to indemnification; and
WHEREAS, in order to induce Indemnitee to serve as an officer or member
of the Board of Directors of the Company, the Company desires to enter into this
contract with Indemnitee;
NOW, THEREFORE, in consideration of Indemnitee's continued service as
an officer and/or director after the date hereof the parties hereto agree as
follows:
1. Indemnification of Indemnitee. Subject to Section 2 below, the
Company shall hold harmless and indemnify Indemnitee against any and all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by Indemnitee in connection with any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative to which Indemnitee is, was or at any
time becomes a party, or is threatened to be made a party, by reason of the fact
that Indemnitee is, was or at any time becomes a director, officer, employee or
agent of the Company, or is or was serving or at any time serves at the request
of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, to the extent set forth
from time to time in the Company's Certificate of Incorporation, Bylaws or
Indemnification Policies, if any. No amendment or termination of the Company's
Certificate of Incorporation, Bylaws or Indemnification Policies, if any, shall
affect or terminate the contracted rights granted to the Indemnitee hereunder.
2. Limitations on Indemnification. No indemnity pursuant to Section 1
hereof shall be paid by the Company:
a) Except to the extent the aggregate of losses to be indemnified
hereunder exceeds the amount of losses for which the Indemnitee
is indemnified pursuant to any policy of insurance purchased and
maintained by the Company;
b) In respect to remuneration paid to Indemnitee if it shall be
determined by a final judgment or other final adjudication that
such remuneration was in violation of law;
c) On account of any suit in which final judgment is rendered
against Indemnitee or an accounting of profits made from the
pruchase or sale by Indemnitee of securities of the Company
pursuant to the provisions of Section 16(b) of the Securities
Exchange Act of 1934 and amendments thereto or similar provisions
of any law; or
d) If a final decision by a court having jurisdiction in the matter
shall determine that such indemnification is not lawful.
3. Continuation of Indemnification. All obligations of the Company
hereunder shall continue during the period Indemnitee is a director, officer,
employee or agent of the Company (or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise) and shall continue
thereafter so long as Indemnitee shall be subject to any possible claim or
threatened, pending or completed action, suit or proceeding, whether civil,
criminal or investigative, by reason of the fact that Indemnitee was a director
of the Company or serving in any other capacity referred to herein.
4. Notification and Defense of Claim. Indemnitee shall promptly notify
the Company of any matter which is or may be the subject of any indemnification
claim hereunder. Promptly after receipt by Indemnitee of notice of the
commencement of any action, suit or proceeding, Indemnitee will notify the
Company thereof. With respect to any such action, suit or proceeding;
a) The Company will be entitled to participate therein at its own
expense;
b) Except as otherwise provided below, to the extent that it may
wish, the Company jointly with any other indemnifying party may
assume the defense thereof, with counsel reasonably satisfactory
to Indemnitee. After notice from the Company to Indemnitee of its
election so to assume the defense thereof, the Company will not
be liable to Indemnitee for any legal or other expense
subsequently incurred by Indemnitee in connection with the
defense thereof other than reasonable costs of investigation or
as otherwise provided below. Indemnitee shall have the right to
employ counsel in such action, suit or proceeding but the fees
and expenses of such counsel incurred after notice from the
Company of its assumption of the defense thereof shall be at the
expense of Indemnitee unless (I) the employment of counsel by
Indemnitee has been authorized by the Company, (ii) Indemnitee
shall have reasonably concluded that there may be a material
conflict of interest between the Company and Indemnitee in the
conduct of the defense of such action, in each of which cases the
fees and expenses of counsel shall be borne by the Company. The
Company shall not be entitled to assume the defense of any
action, suit or proceeding brought by or on behalf of the Company
or as to which Indemnitee shall have made the determination
provided for in (ii) above.
c) The Company shall not be liable to indemnify Indemnitee under the
Agreement for any amounts paid in settlement of an action or claim
effected without its written consent. The Company shall not settle
any action or claim in any manner which would impose any material
penalty or limitation on Indemnitee without Indemnitee's written
consent. Neither the Company nor Indemnitee will unreasonably
withhold its or his consent to any settlement proposed by the
other of any matter for which indemnity is provided hereunder,
including any settlement including a penalty or limitation on the
Indemnitee.
5. Prepaid Expenses. The expenses (including attorneys' fees) incurred
by Indemnitee in investigating, defending, or appealing any threatened, pending
or completed action, suit or proceeding covered hereunder, whether civil,
criminal, administrative or investigative, including without limitation any
action by or in the right of the Company (other than expenses to be paid
directly by the Company in assuming the defense of any matter covered hereby
under Section 4(b) hereof), shall be paid in advance by the Company.
6. Repayment of Expenses. Indemnitee shall reimburse the Company for
all expenses paid by the Company in defending any civil or criminal action, suit
or proceeding against Indemnitee in the event and only to the extent that it
shall be finally determined that Indemnitee is not entitled to be indemnified by
the Company for such expenses under the Agreement or otherwise.
7. Other Rights and Remedies. The rights provided by any provision of
this Agreement shall not be deemed exclusive of any other rights to which
Indemnitee may be entitled under any provision of law or of the Company's
Certificate of Incorporation, any Bylaw, this or other agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while occupying any of
the positions or having any of the relationships referred to in Section 1 of
this Agreement, and shall continue after Indemnitee has ceased to occupy such
position or have such relationship.
8. Enforcement. In the event Indemnitee is required to bring any action
to enforce rights or to collect monies due under this Agreement and is
successful in such action, the Company shall reimburse Indemnitee for all of
Indemnitee's reasonable fees and expenses in bringing and pursuing such action.
9. Separability. Each of the provision of this Agreement is a separate
and distinct agreement and independent of the others, so that if any provision
hereof shall be held to be invalid or unenforceable for any reason, such
invalidity or unenforceability shall not affect the validity or enforceability
of the other provisions hereof.
10. Miscellaneous. This Agreement shall be interpreted and enforced in
accordance with the laws of Delaware. This Agreement shall be binding upon
Indemnitee and upon Company, its successors and assigns, and shall inure to the
benefit of Indemnitee, his heirs, personal representatives and assigns and to
the benefit of the Company, its successors and assigns. No amendment,
modification, termination or cancellation of this Agreement, other than pursuant
to Section 9, shall be effective unless in writing signed by both parties
hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of _________.
UGLY DUCKLING CORPORATION
By: ___________________________________
[NAME]
Its: ___________________________________
Indemnitee
-----------------------------------------
[NAME]
[DIRECTOR AND/OR OFFICER TITLE]
================================================================================
SENIOR SECURED LOAN AGREEMENT
Dated as of May 14, 1999
by and among
UGLY DUCKLING CORPORATION,
a Delaware corporation
("Borrower")
THE LENDERS FROM TIME TO TIME PARTY HERETO
and
HARRIS TRUST AND SAVINGS BANK,
as Collateral Agent
$38,000,000 Senior Secured Loan
================================================================================
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TABLE OF CONTENTS
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ARTICLE I. DEFINITIONS........................................................1
1.1. Defined Terms......................................................1
1.2. Other Interpretive Provisions.....................................15
1.3. Accounting Principles.............................................16
1.4. Times.............................................................17
ARTICLE II. THE LOAN 17
2.1. The Loan..........................................................17
2.2. Payment Upon Collection; Monthly Amortization.....................17
2.3. Payment Upon Maturity.............................................17
2.4. Interest..........................................................17
2.5. Prepayments.......................................................18
2.6. Application of Payments...........................................18
2.7. Prepayment........................................................20
2.8. Fees..............................................................20
2.9. Fees and Interest.................................................20
2.10. Payments by Borrower; Payments by Collateral Agent...............20
2.11. Taxes............................................................21
2.12. Sharing of Payments, Etc.........................................23
2.13. Suspension of LIBOR..............................................23
2.14. Increased Costs, Etc.............................................24
ARTICLE III. SECURITY AGREEMENT AND COLLATERAL...............................24
3.1. Security for Obligations..........................................24
3.2. Security Documents................................................25
3.3. Duties Regarding Collateral.......................................25
3.4. Borrower's Duties Regarding Collateral............................25
3.5. Power of Attorney.................................................26
3.6. Collateral Inspections............................................27
ARTICLE IV. CONDITIONS PRECEDENT; TERM OF AGREEMENT..........................27
4.1. Conditions Precedent..............................................27
4.2. Receipt of Documents..............................................27
4.3. Term..............................................................29
4.4. Effect of Termination.............................................29
ARTICLE V. REPRESENTATIONS AND WARRANTIES....................................29
5.1. No Encumbrances...................................................29
5.2. Location of Chief Executive Office; FEIN..........................29
5.3. Due Organization and Qualification; Subsidiaries..................29
5.4. Due Authorization: No Conflict...................................30
5.5. Litigation........................................................31
5.6. Financial Statements; No Material Adverse Change..................31
5.7. Securitization Documents..........................................31
5.8. ERISA.............................................................31
5.9. Environmental and Safety Matters..................................32
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TABLE OF CONTENTS
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5.10. Tax Matters......................................................32
5.11. Year 2000 Matters................................................32
5.12. Ownership of Properties..........................................32
5.13. Investment Company Status........................................32
5.14. Solvency.........................................................33
ARTICLE VI. AFFIRMATIVE COVENANTS............................................33
6.1. Financial Statements and Other Documents..........................33
6.2. Inspection of Property............................................34
6.3. Default Disclosure................................................34
6.4. Notices to Lenders and the Collateral Agent.......................35
6.5. Books and Records.................................................35
6.6. Compliance and Preservation.......................................35
6.7. Perfection of Liens...............................................35
6.8. Cooperation.......................................................35
6.9. Use of Proceeds...................................................35
6.10. Securitizations..................................................35
6.11. Compliance with Covenants........................................36
6.12. Payment of Indebtedness..........................................36
6.13. Tangible Net Worth...............................................36
6.14. Consolidated EBITDA to Consolidated Interest Expense.............36
6.15. Consolidated Senior Debt to Consolidated Total Capitalization....36
6.16. Minimum B-Piece Cash Flows.......................................36
6.17. Sale of Cygnet...................................................36
6.18. Collateral Account...............................................37
6.19. Year 2000 Assurances.............................................37
6.20. Maintenance of Properties........................................37
6.21. Maintenance of Insurance.........................................37
ARTICLE VII. NEGATIVE COVENANTS..............................................37
7.1. Liens.............................................................37
7.2. Indebtedness......................................................37
7.3. Restrictions on Fundamental Changes...............................38
7.4. Disposal of Collateral............................................38
7.5. Change Name.......................................................38
7.6. Amendments........................................................38
7.7. Change of Control.................................................38
7.8. Distributions.....................................................38
7.9. Standing Dividend Resolutions.....................................38
7.10. Change in Location of Chief Executive Office.....................38
7.11. No Prohibited Transactions Under ERISA...........................39
7.12. Changes in Nature of Business....................................39
7.13. Transactions with Affiliates.....................................39
ARTICLE VIII. EVENTS OF DEFAULT/REMEDIES.....................................40
8.1. Event of Default..................................................40
8.2. Rights and Remedies...............................................41
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TABLE OF CONTENTS
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ARTICLE IX. THE COLLATERAL AGENT.............................................42
9.1. Authorization and Action..........................................42
9.2. Collateral Agent's Reliance, Etc..................................43
9.3. Harris Trust and Savings Bank and Affiliates......................43
9.4. Lender Credit Decision............................................43
9.5. Indemnification...................................................44
9.6. Successor Collateral Agents.......................................44
9.7. Monthly Verification Duties of Collateral Agent...................44
ARTICLE X. MISCELLANEOUS.....................................................45
10.1. Amendments and Waivers...........................................45
10.2. Notices..........................................................45
10.3. No Waiver: Cumulative Remedies..................................47
10.4. Costs and Expenses...............................................47
10.5. Indemnity........................................................48
10.6. Marshaling: Payments Set Aside..................................48
10.7. Successors and Assigns...........................................48
10.8. Set-off..........................................................48
10.9. Counterparts.....................................................49
10.10. Severability....................................................49
10.11. No Third Parties Benefited......................................49
10.12. Time............................................................49
10.13. Governing Law and Jurisdiction..................................49
10.14. Entire Agreement................................................50
10.15. Interpretation..................................................50
10.16. Assignment; Register............................................51
10.17. Revival and Reinstatement of Obligations........................51
10.18. Survival........................................................52
10.19. Confidentiality.................................................52
10.20. Actions by Portfolio Advisor....................................52
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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
Schedule H Collateral Agent Fees
Schedule I Administrative Forms
Exhibit A UDRC and UDRC II Securitization Documents
Exhibit B Form of Collateral Account Agreement
Exhibit C Form of Assignment and Acceptance
Exhibit D Form of Promissory Note
Exhibit E Form of Guaranty
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<PAGE>
SENIOR SECURED LOAN AGREEMENT
This SENIOR SECURED LOAN AGREEMENT (the "Agreement"), is
entered into as of May 14, 1999, among UGLY DUCKLING CORPORATION, a Delaware
corporation ("Borrower"), with a place of business located at 2525 East
Camelback Road, Suite 500, Phoenix, Arizona 85016, the Lenders party hereto
(together with their respective successors and assigns, "Lenders") and HARRIS
TRUST AND SAVINGS BANK, as Collateral Agent (together with its successors and
assigns in such capacity, "Collateral Agent").
Lenders have agreed to make to Borrower a senior secured 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
1.1. Defined Terms. In addition to the terms defined elsewhere in
this Agreement, the following terms have the following meanings:
"Actual Amortization Amount" has the meaning set forth in
Section 2.6.
"Additional Class B Certificates" shall mean all Class B
Certificates or similar interests which both (i) are issued during the
Securitization Period by each Securitization Trust or other similar entity with
respect to which UDRC, UDRC II or any other Affiliate of UDC or UDCC is the
seller or issuer (or equivalent), and (ii) represent the securitization of Ugly
Duckling Collateral.
"Administrative Form" means an administrative details form
delivered by the Collateral Agent and any Lender to Collateral Agent and
Borrower. The initial Administrative Forms are attached hereto as Schedule I.
The Collateral Agent and each Lender may change its Administrative Form at any
time by delivering a new Administrative Form to the Collateral Agent and
Borrower.
"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 any Lender
be deemed an "Affiliate" of Borrower.
"Agreement" means this Senior Secured Loan Agreement, as
amended, supplemented or modified from time to time in accordance with the terms
hereof.
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"Assignment and Acceptance" means an assignment and acceptance
in substantially the form of Exhibit C.
"Attorney Costs" means and includes all fees and disbursements
of any law firm or other external or internal counsel.
"Base Rate" means a fluctuating interest rate per annum in
effect from time to time, which rate per annum shall at all times be equal to
the highest of: (a) either (1) the "prime rate" published in the "Money Rates"
section of the Wall Street Journal, as such "prime rate" may change from time to
time or, if such rate ceases to be published, (2) the rate of interest announced
publicly by Harris Trust and Savings Bank from time to time as Harris Trust and
Savings Bank's prime rate; and (b) 1/2 of one percent per annum above the
Federal Funds Rate.
"B-Piece" means the UDRC Class B Certificates, the UDRC II
Class B Certificates and all Additional Class B Certificates.
"B-Piece Cash Flows" means, for any period, all cash
distributions with respect to a B-Piece together with all related spread account
distributions, in each case during such period.
"B-Piece Value" means, as of any date of determination with
respect to any B-Piece, the amount of the entire cash balance in the spread
account relating to such B-Piece plus the difference between (a) the outstanding
principal balance of auto loans in the pool of collateral securing the related
securitization and (b) the outstanding principal balance of all certificates and
other interests or rights to payment in respect of such securitization senior in
priority to such B-Piece, in each case as set forth in the then most recently
delivered Collateral Servicing Report (subject to confirmation of the
calculations set forth in such Collateral Servicing Report by the Collateral
Agent).
"Bankruptcy Code" means the United States Bankruptcy Code (11
U.S.C. section 101 et seq.), as amended, and any successor statute.
"Bond Insurance Policy" shall mean a financial guaranty or
financial insurance policy issued by MBIA 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 Taxes" 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.
"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.
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"Borrowing Base" means, as of any date of determination, the
sum of the products obtained by multiplying the B-Piece Value of each B-Piece as
of the most recent Calculation Date by the Advance Rate (as set forth below)
applicable to such B-Piece as of such Calculation Date:
Complete Months of Seasoning
Since Securitization Cut-Off Date Advance Rate
--------------------------------------------------- -------------------
0 - 3 months 25%
4 - 5 months 30%
6 - 9 months 35%
10 - 12 months 40%
13 - 18 months 45%
19 - 23 months 55%
Greater than or equal to 24 months 60%
Notwithstanding the foregoing, the Advance Rate with respect to Ugly Duckling
Auto Grantor Trust 1999-A shall be 27% for the zero (0) to three (3) month
period above.
Notwithstanding the foregoing or any other provision hereof or
of any other Loan Document to the contrary, (i) no Additional Class B
Certificates shall be included in the calculation of the Borrowing Base unless
and until the provisions of Section 3.1 have been complied with respect to such
Additional Class B Certificates, and (ii) Lenders shall be entitled to exclude
from the Borrowing Base any B-Piece (or any portion thereof) as to which (A)
Required Lenders determine that the Collateral Agent does not have a perfected
first priority, valid and enforceable security interest either in such B-Piece
directly or in 100% of the capital stock of the holder of such B-Piece, or (B) a
Securitization Default exists.
"Business Day" means a day of the year on which banks are not
required or authorized by law to close in Los Angeles, California or Chicago,
Illinois and, if the applicable Business Day relates to any Eurodollar Rate
Advances, on which dealings are carried on in the London interbank market.
"Calculation Date" means the second Business Day prior to the
15th day of each month.
"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 (i) 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 or (ii) Ernest C. Garcia shall
cease to be the record and beneficial owner of at least 15% of the capital stock
of Borrower, entitled, in the absence of contingencies (whether or not any of
Page -3-
<PAGE>
such contingencies has occurred), to vote in the election of directors of
Borrower or (iii) Borrower ceases to own 100% of the capital stock of UDCSFC, or
(iv) UDCSFC ceases to own 100% of the capital stock of UDRC and UDRC II.
"Closing Date" means the date on which all conditions
precedent set forth in Section 4.1 are either satisfied or waived by each Lender
and each Lender makes its ratable portion of the Loan.
"Code" means the Internal Revenue Code of 1986, as amended,
and any regulations promulgated thereunder.
"Collateral" means all "Collateral" referred to in the
Security Documents and all other property that is subject to any Lien in favor
of the Collateral Agent or any Lender.
"Collateral Account" means the cash collateral account
established and maintained pursuant to Section 6.18.
"Collateral Account Agreement" means the cash collateral
account agreement in substantially the form of Exhibit B.
"Collateral Agent" has the meaning set forth in the preamble to
this Agreement.
"Collateral Servicing Report" means a report of the Borrower
with respect to the B-Piece Values, B-Piece Cash Flows and Borrowing Base and
such other information as Required Lenders may request in form and detail
acceptable to Required Lenders.
"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 or any of its Affiliates in respect of any
B-Piece or any Collateral, including all amounts paid to Collateral Agent or any
Lender pursuant to any Dividend Direction Letter.
"Consolidated" refers to the consolidation of accounts in
accordance with GAAP.
"Consolidated EBITDA" means for any period, net income (or net
loss) plus, to the extent deducted in determining such net income (or net loss),
the sum of (a) interest expense, (b) income tax expense, (c) depreciation
expense and (d) amortization expense, in each case determined for the Borrower
and its Subsidiaries on a Consolidated basis for such period in conformity with
GAAP.
"Consolidated Interest Expense" means, for any period, total
interest expense (including the interest component of capitalized leases) of the
Borrower and its Subsidiaries on a Consolidated basis for such period in
conformity with GAAP, including, without limitation, all commissions, discounts
and other fees and charges owed with respect to any financings or letters of
credit and net costs under hedge agreements.
"Consolidated Net Worth" means the excess of (i) the total
assets of the Borrower and its Subsidiaries determined on a Consolidated basis
in conformity with GAAP, over (ii) all liabilities of the Borrower and its
Subsidiaries determined on a Consolidated basis in conformity with GAAP.
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"Consolidated Senior Debt" means, at any time of determination,
Consolidated Total Debt minus Subordinated Debt and Non-Recourse Debt.
"Consolidated Total Capitalization" means, at any time of
determination, the sum of (i) Consolidated Total Debt, and (ii) Consolidated Net
Worth, in each case, as of such time.
"Consolidated Total Debt" means, at any time of determination,
all indebtedness for borrowed money (including capitalized leases), in each case
of the Borrower and its Subsidiaries at such time determined on a Consolidated
basis.
"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
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.
"Dividend Direction Letter" means (i) the UDRC Dividend
Direction Letter, (ii) the UDRC II Dividend Direction Letter, and (iii) each
letter agreement or other agreement entered into after the date hereof with
respect to any Additional Class B Certificates providing for payment of
distributions in respect of such Additional Class B Certificates (or payments
and distributions in respect of the stock or other equity interests of the
holder of such Additional Class B Certificates) to be made directly to the
Collateral Account for application to the Obligations and/or release to Borrower
in accordance with the Collateral Account Agreement and Section 2.6.
"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,
Page -5-
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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),
membership interest 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.
"ERISA Affiliate" of any Person means any other Person that
for purposes of Title IV of ERISA is a member of such Person's controlled group,
or under common control with such Person, within the meaning of Section 414 of
the Internal Revenue Code.
"ERISA Event" with respect to any Person means (a) the
occurrence of a reportable event, within the meaning of Section 4043 of ERISA,
with respect to any Plan of such Person or any of its ERISA Affiliates unless
the 30-day notice requirement with respect to such event has been waived by the
PBGC; (b) the provision by the administrator of any Plan of such Person or any
of its ERISA Affiliates of a notice of intent to terminate such Plan, pursuant
to Section 4041(a)(2) of ERISA (including any such notice with respect to a plan
amendment referred to in Section 4041(e) of ERISA); (c) the cessation of
operations at a facility of such Person or any of its ERISA Affiliates in the
circumstances described in Section 4062(e) of ERISA; (d) the withdrawal by such
Person or any of its ERISA Affiliates from a Multiple Employer Plan during a
plan year for which it was a substantial employer, as defined in Section
4001(a)(2) of ERISA; (e) the failure by such Person or any of its ERISA
Affiliates to make a payment to a Plan required under Section 302(f)(1) of
ERISA; (f) the adoption of an amendment to a Plan of such Person or any of its
ERISA Affiliates requiring the provision of security to such Plan, pursuant to
Section 307 of ERISA; or (g) the institution by the PBGC of proceedings to
terminate a Plan of such Person or any of its ERISA Affiliates, pursuant to
Section 4042 of ERISA, or the occurrence of any event or condition described in
Section 4042 of ERISA that could constitute grounds for the termination of, or
the appointment of a trustee to administer, such Plan.
"Event of Default" means any of the events or circumstances
specified in Section 8.1.
"Federal Funds Rate" means, for any period, a fluctuating
interest rate per annum equal for each day during such period to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers, as published for such
Page -6-
<PAGE>
day (or, if such day is not a Business Day, for the next preceding Business Day)
by the Federal Reserve Bank of New York, or, if such rate is not so published
for any day that is a Business Day, the average of the quotations for such day
for such transactions received by Collateral Agent from three Federal funds
brokers of recognized standing selected by it.
"FEIN" means Federal Employer Identification Number.
"Financing Statements" means the Financing Statements on Form
UCC-1 relating to and filed in connection with the Collateral and naming the
Collateral Agent as secured party.
"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.
"Greenwich Loan Agreement" means the Loan Agreement dated as
of March 18, 1999 between Borrower and Greenwich Capital Financial Products,
Inc.
"Guaranty" means the guaranty executed by UDCSFC on the date
hereof in substantially the form of Exhibit E.
"Guarantor" means (i) UDCSFC and (ii) each other Subsidiary of
the Borrower that, after the date hereof, becomes a party to the Guaranty.
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"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.
"Indebtedness" see "Debt".
"Indemnified Liabilities" has the meaning specified in Section
10.5.
"Indemnified Person" has the meaning specified in Section 10.5.
"Initial Principal Amount" means the amount of Thirty Eight
Million Dollars ($38,000,000).
"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 Collateral
Agent, any Lender or any of their respective affiliates; (b) reasonable
out-of-pocket fees or charges paid or incurred by Collateral Agent or any Lender
in connection with Lenders' 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 Collateral Agent or any Lender in the disbursement of funds to
Borrower (by wire transfer or otherwise); (c) actual out-of-pocket charges paid
or incurred by Collateral Agent or any Lender resulting from the dishonor of
checks; (d) reasonable out-of-pocket costs and expenses paid or incurred by
Collateral Agent or any 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 Collateral
Agent or any 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
Collateral Agent or any Lender in enforcing or defending the Loan Documents or
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<PAGE>
in connection with the transactions contemplated by the Loan Documents or
Collateral Agent or any Lender's relationship with Borrower; and (g) Collateral
Agent's, any Lender's or any of their respective Affiliate'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 (including, without limitation, any
negotiations in the nature of a work-out). For purposes of this definition, the
term "Lender" shall include any portfolio advisor or collateral manager
(including, without limitation, SunAmerica Investment Advisor, Inc.) acting on
behalf of any Lender or in connection with such Lender's Loan hereunder.
"LIBOR" shall mean, with respect to an Interest Accrual
Period, the rate per annum equal to the rate appearing at page 3750 of the
Telerate Screen two LIBOR Business Days prior to the beginning 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 on Bloomberg on the day two LIBOR Business Days prior to the beginning
of such Interest Accrual Period, or if neither such rate shall be so quoted, the
"London Interbank Offered Rates (LIBOR)" (one month) published in the "Money
Rates" section of the Wall Street Journal two LIBOR Business Days prior to the
beginning of such Interest Accrual Period.
"LIBOR Business Day" shall mean any day which is a Business
Day and which is also a day on which dealings in U.S. Dollars are carried on in
the London interbank market.
"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, each Note, the
Guaranty, the Security Documents, the Stock Pledge Agreement, the Collateral
Account Agreement, each Dividend Direction Letter, the Financing Statements, and
all documents delivered to Collateral Agent or any Lender in connection
therewith.
"Loan Party" means Borrower, UDCSFC and each other Affiliate
of Borrower that is a party to any Loan Document.
"Material Adverse Change" or "Material Adverse Effect" means a
material adverse change in, or a material adverse effect upon, any of (a) the
operations, performance, business, properties, condition (financial or
otherwise) or prospects of any Loan Party or of Borrower and its Subsidiaries
taken as a whole, (b) the ability of Borrower or any other Loan Party 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 June 1, 2001.
"MBIA" shall mean MBIA Insurance Corporation.
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"Monthly Amortization Amount" means:
(i) with respect to any Payment Date occurring prior
to June 15, 2000, the greater of (A) $500,000.00, and (B) subject to
Section 2.6, the amount, if any, by which the then Outstanding
Principal Amount of the Loan exceeds the Borrowing Base as of such date
as set forth in the Collateral Servicing Report required to be
delivered with respect to such Payment Date; and
(ii) with respect to any Payment Date occurring on or
after June 15, 2000, the greatest of (A) $1,000,000, (B) 50% of the
aggregate B-Piece Cash Flows for the then most recently ended monthly
period as set forth in the Collateral Servicing Report required to be
delivered with respect to such Payment Date, and (C) the amount, if
any, by which the then Outstanding Principal Amount of the Loan exceeds
the Borrowing Base as of such date as set forth in the Collateral
Servicing Report required to be delivered with respect to such Payment
Date.
"Multiemployer Plan" of any Person means a multiemployer plan,
as defined in Section 4001(a)(3) of ERISA, to which such Person or any of its
ERISA Affiliates is making or accruing an obligation to make contributions, or
has within any of the preceding six plan years made or accrued an obligation to
make contributions.
"Multiple Employer Plan" of any Person means a single employer
plan, as defined in Section 4001(a)(15) of ERISA, that (a) is maintained for
employees of such Person or any of its ERISA Affiliates and at least one Person
other than such Person and its ERISA Affiliates or (b) was so maintained and in
respect of which such Person or any of its ERISA Affiliates could have liability
under Section 4064 or 4069 of ERISA in the event such plan has been or were to
be terminated.
"Non-Recourse Debt" means (i) the Securitizations identified
on Exhibit A and securitizations existing on the date hereof of Cygnet Financial
Corporation and its Subsidiaries, (ii) Debt under one or more warehouse
facilities or securitizations of a Subsidiary of Borrower that is a bankruptcy
remote or other similar special purpose entity so long as such Debt satisfies
each of the following requirements: (a) the sole collateral for such Debt are
loan receivables purchased by such bankruptcy remote or other special purpose
entity and the recourse of the lenders under such warehouse facility is limited
to such collateral, (b) no Loan Party (1) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute Debt),
(2) is directly or indirectly liable as a guarantor or otherwise, or (3)
constitutes the lender; (b) the lenders with respect to such Debt have been
notified, and have acknowledged in writing or pursuant to the terms of the
instruments and agreements governing such Debt, in each case prior to the
incurrence of such Debt, that they will not have any recourse to the stock or
assets of any Loan Party, and (c) the Lenders have received notice of the amount
and principal terms of such Debt prior to its incurrence, and (iii) other Debt
approved by the Required Lenders as Non-Recourse Debt.
"Note" means a promissory note of the Borrower in favor of a
Lender in substantially the form of Exhibit D evidencing the Borrower's
obligations to such Lender in respect of the principal amount of the Loan made
by or otherwise owing to such Lender.
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"Obligations" means all Debt, advances, debts, liabilities,
obligations, covenants and duties owing by Borrower to Collateral Agent or any
Lender, of any kind or nature, present or future, whether or not evidenced by
any note, guaranty or other instrument, arising under this Agreement, any Note
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(d).
"Payment Date" shall mean the 15th day of each month during
the term of this Agreement commencing on June 15, 1999.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Permitted Liens" means (a) Liens held by Collateral Agent or
any Lender and (b) each lien existing at or prior to the date of this Agreement
that is identified on Schedule E to this Agreement.
"Permitted Subsidiary Indebtedness" means (a) Indebtedness
outstanding under agreements in effect on the date hereof with General Electric
Capital Corporation, as such agreements may be amended, supplemented or modified
from time to time but without any increase in the aggregate commitments or
Indebtedness available to be borrowed (or other credit available to be extended)
thereunder, (b) Non-Recourse Debt, and (c) other Indebtedness in an aggregate
principal amount not to exceed $10,000,000 at any time outstanding. For purposes
of calculating the amount of Indebtedness outstanding under the foregoing clause
(c), obligations in respect of capitalized leases (as described in clause (iv)
of the definition of "Debt") shall be excluded to the extent the aggregate
principal amount of all such obligations (determined in accordance with GAAP)
does not exceed $4,000,000.
"Person" means a natural person, partnership, corporation,
business trust, joint stock company, trust, unincorporated association, limited
liability company, joint venture or Governmental Authority.
"Plan" means a Single Employer Plan or a Multiple Employer
Plan.
"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.
"Required Amortization Amount" has the meaning set forth in
Section 2.6.
"Required Lenders" means Lenders holding greater than fifty
percent (50%) of the aggregate principal amount of the Loan.
"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.
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"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.
"SAI" means SAI Investment Advisor, Inc., and its successors
and assigns.
"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 termination event, 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 termination event, default or event
of default under any Securitization Document, which has not been cured within
any applicable period thereunder.
"Securitization Documents" shall mean (i) each UDRC
Securitization Document, (ii) each UDRC II Securitization Document, (iii) each
purchase agreement and/or pooling and servicing agreement (or comparable
document) entered into or acknowledged by Borrower, UDCC, UDRC, UDRC II or any
Affiliate of any of them after the date hereof with respect to any Additional
Class B Certificates, and (iv) the other agreements, instruments, certificates
and documents entered into or acknowledged by Borrower, UDCC, or any Affiliate
of any of them or by a Securitization Trust (or comparable vehicle) with respect
to any Additional Class B Certificates.
"Securitization Period" shall mean the period from and
including the date hereof to and including the date immediately following the
date on which Borrower completes securitizations of at least $75,000,000 of Ugly
Duckling Collateral in the year 2000.
"Securitization Trust" shall mean any trust formed pursuant to
a purchasing agreement or a pooling and servicing agreement specified on Exhibit
A hereto or contemplated in clause (iii) of the definitions of Securitization
Documents.
"Single Employer Plan" of any Person means a single employer
plan, as defined in Section 4001(a)(15) of ERISA, that (a) is maintained for
employees of such Person or any of its ERISA Affiliates and no Person other than
such Person and its ERISA Affiliates or (b) was so maintained and in respect of
which such Person or any of its ERISA Affiliates could have liability under
Section 4069 of ERISA in the event such plan has been or were to be terminated.
"Standing Dividend Resolutions" shall mean (i) the UDRC
Standing Dividend Resolution, (ii) the UDRC II Standing Dividend Resolution, and
(iii) all other resolutions adopted by the board of directors of Borrower or any
of its Affiliates or Subsidiaries to the effect that any amounts received as
distributions on any Additional Class B Certificates or in respect of spread
accounts (or the like) should be promptly distributed to Collateral Agent for
the ratable account of the Lenders.
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"Stock Pledge Agreement" means that certain Stock Pledge
Agreement, dated as of the date hereof, among UDCSFC as Pledgor, Borrower and
Collateral Agent, pursuant to which UDCSFC grants to Collateral Agent 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 Required Lenders.
"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), 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.
"Trustee" means Harris Trust and Savings Bank.
"UCC" means the Uniform Commercial Code as in effect from time
to time in the State of New York, 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.
"UDCSFC" 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 mean Ugly Duckling Receivables Corp. II, a
Delaware corporation.
"UDRC Class B Certificates" shall mean the currently issued
and outstanding, and all further issued and then 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.
"UDRC II Class B Certificates" shall mean the currently issued
and outstanding, and all further issued and then outstanding, Class B
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Certificates issued by each Securitization Trust with respect to which UDRC II
is the seller, including those set forth on Schedule F, which constitute all of
the UDRC II Class B Certificates in existence on the Closing Date.
"UDRC Dividend Direction Letter" means the letter dated May 6,
1999 in which Collateral Agent, Lenders, UDRC, UDCC and Trustee agree that
Trustee shall pay all distributions in respect of the UDRC Class B Certificates
directly to the Collateral Account for application to the Obligations and/or
release to Borrower in accordance with the Collateral Account Agreement and
Section 2.6.
"UDRC II Dividend Direction Letter" means the letter dated May
6, 1999 in which Collateral Agent, Lender, UDRC II, UDCC and Trustee agree that
Trustee shall pay all distributions in respect of the UDRC II Class B
Certificates directly to the Collateral Account for application to the
Obligations and/or release to Borrower in accordance with the Collateral Account
Agreement and Section 2.6.
"UDRC Securitization Documents" shall mean each of (i) the
purchase agreements listed on Exhibit A hereto, (ii) the pooling and servicing
agreements listed on Exhibit A hereto, and (iii) 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 A hereto, (ii) the pooling and servicing
agreements listed on Exhibit A hereto, and (iii) 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 distributed as dividends to UDCSFC or
any other holder or assignee of the Common Stock of UDRC.
"UDRC II Standing Dividend Resolution" shall mean the
resolution adopted on May 6, 1999 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 distributed as
dividends to UDCSFC or any other holder or assignee of the Common Stock of UDRC
II.
"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.
"United States" and "U.S." each means the United States of
America.
"Voidable Transfer" has the meaning set forth in Section 10.17.
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1.2......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 or under any Note (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.
(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.
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(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.
1.3 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 Lenders 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 (and would continue to be) 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.
1.4 Times. All times of the day herein are Los Angeles, California time.
ARTICLE II.
THE LOAN
--------
2.1 The Loan. Each Lender, on the terms and conditions hereinafter set
forth and subject to the conditions precedent pursuant to Section 4.1 of this
Agreement, severally agrees to make the Loan to Borrower in the ratable portion
of the Initial Principal Amount set forth opposite such Lender's name on the
signature pages hereto.
2.2 Payment Upon Collection; Monthly Amortization. Upon receipt by
Borrower or any of its Affiliates of any Collections, Borrower shall promptly
(and in any event within one (1) Business Day) pay (or cause to be paid) such
Collections to Collateral Agent for deposit in the Collateral Account. Subject
to Section 2.6, Borrower shall, on each Payment Date, repay the Outstanding
Principal Amount in an amount equal to the Monthly Amortization Amount for such
Payment Date. Each Lender shall, upon receipt of any such Collections, apply
such Collections and any Collections paid directly to Lender by Trustee or
Collateral Agent in accordance with the procedures set forth in Section 2.6 (but
subject to Section 2.12).
2.3. Payment Upon Maturity. On the Maturity Date, Borrower will pay to
each Lender an amount equal to the Outstanding Principal Amount of the Loan then
owing to such Lender, together with all accrued and unpaid interest on such
Outstanding Principal Amount and any other accrued and unpaid Obligations then
owing to such Lender.
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2.4. 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 five hundred fifty
(550) 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 during each Interest Accrual Period at a rate per annum equal to LIBOR
for such Interest Accrual Period plus one thousand fifty (1,050) basis points.
Upon determining LIBOR for each Interest Accrual Period, the Collateral Agent
shall notify the Lenders and Borrower of such LIBOR determination and the rate
thereof.
(b) Limitation on Interest Rate. The obligations of Borrower
hereunder and under the Notes shall be subject to the limitation that payments
of interest to any Lender, plus any other amounts paid to such Lender in
connection herewith and therewith, shall not be required, to the extent (but
only to the extent) that contracting for or receiving such payment by such
Lender would be contrary to the provisions of any law applicable to such Lender
limiting the highest rate of interest which may be lawfully contracted for,
charged or received by such Lender, and in such event Borrower shall pay such
Lender interest and other amounts at the highest rate permitted by applicable
law.
2.5 Voluntary Prepayments; Deposits to Collateral Account.
(a) 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); provided, however, that (i) each
such voluntary prepayment shall be applied ratably among the Lenders and shall
be accompanied by payment of any amounts owing under Section 10.4(d) with
respect to such prepayment, (ii) except as set forth in the following clause
(iv), any such voluntary prepayment on or prior to December 31, 1999 shall be
accompanied by a prepayment premium in the amount of 2.0% of the amount prepaid,
(iii) except as set forth in the following clause (iv), any such voluntary
prepayment on or after January 1, 2000 and on or prior to June 30, 2000 shall be
accompanied by a prepayment premium in the amount of 1.0% of the amount prepaid,
and (iv) no prepayment premium under the foregoing clauses (ii) and (iii) shall
be required in the event of a prepayment in full of the Obligations within 30
days after the Required Lenders have refused to consent (after a reasonable
period for review) to additional Indebtedness of a Subsidiary of the Borrower
(to the extent such consent is required under Section 7.2(b)) in respect of a
bona fide proposal from a non-affiliated third party financial institution to
provide additional Indebtedness that is otherwise permitted hereunder. After
June 30, 2000, there shall be no prepayment premium. Borrower shall give each
Lender at least ten Business Days prior notice of its intention to prepay,
specifying the date of payment, the total amount and portion of the Loan of such
Lender to be paid on such date and the amount of interest to be paid with such
prepayment.
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(b) Deposits to Collateral Account. In the event the
Outstanding Principal Amount shall at any time exceed the sum of the Borrowing
Base plus the amount then on deposit in the Collateral Account, the Borrower
shall immediately deposit cash in the amount of such excess to the Collateral
Account.
2.6 Application of Payments. All payments on the Loan shall be
applied, without duplication, in the following order:
(a) First, to Collateral Agent and each Lender for any and all
sums advanced by Collateral Agent or such Lender as are reasonably necessary in
order to preserve the Collateral or the security interests 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
Collateral Agent or any Lender (or any portfolio advisor for any Lender) of its
rights under this Agreement or any other Loan Document, together with reasonable
Attorney Costs and unpaid fees and expenses; and
(b) Second, ratably to each Lender for application to overdue
interest on the Obligations;
(c) Third, ratably to each Lender for application to accrued
interest on the Obligations;
(d) Fourth, ratably to each Lender for application to the
Outstanding Principal Amount in an amount equal to such Lender's ratable portion
of any Monthly Amortization Amount then due and payable;
(e) Fifth, ratably to each Lender in payment of all other
accrued and unpaid Obligations owing to such Lender.
Any provision hereof to the contrary notwithstanding, if, at
any time prior to June 15, 2000, immediately after giving effect to the payment
of any Monthly Amortization Amount, the aggregate amount of all principal
payments actually made by Borrower hereunder and received by the Lenders (as of
any date of determination, the "Actual Amortization Amount") since the date
hereof exceeds the product of $500,000.00 multiplied by the number of Payment
Dates that have then occurred since the date hereof (as of any date of
determination, the "Required Amortization Amount"), then Borrower, upon written
request to the Collateral Agent (with a copy to the Lenders), may reduce the
amount of any subsequent Monthly Amortization Amount with respect to any Payment
Date occurring prior to June 15, 2000 by such amount as would not cause the
Actual Amortization Amount to be less than the Required Amortization Amount
immediately following such Payment Date.
In the event clause (i)(B) of the definition of Monthly
Amortization Amount would result in a Monthly Amortization Amount with respect
to any Payment Date in excess of $500,000.00, Borrower may elect by written
notice to Collateral Agent and Lenders received at least one Business Day in
advance of such Payment Date, to repay only $500,000.00 of the Outstanding
Principal Amount on such Payment Date and, in lieu of repaying the remainder of
any such excess on such Payment Date, elect to have such excess remain in the
Collateral Account (to be held by Collateral Agent pursuant to the Collateral
Account Agreement and this Section 2.6).
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Any provision hereof or of the Collateral Account Agreement to
the contrary notwithstanding, any amounts held by Collateral Agent pursuant to
the Collateral Account Agreement and not otherwise required to be applied to the
Obligations shall, at the written direction of Borrower, be applied to repay
Obligations hereunder (to be applied as set forth in this Section 2.6) or, if
the Borrowing Base plus such amount on deposit in the Collateral Account exceeds
the Outstanding Principal Amount and no Default has occurred and is continuing,
such amounts held in the Collateral Account shall, upon written request by
Borrower to Collateral Agent, be released to Borrower up to the amount of such
excess; provided, however, that any release to Borrower of amounts on deposit in
the Collateral Account shall only be made on a Payment Date and only after
giving effect to the payment of all amounts due hereunder and under the other
Loan Documents on such Payment Date.
2.7 Prepayment. Upon any prepayment of the Loan, Borrower
shall pay to each Lender such Lender's ratable share of the principal amount to
be prepaid, together with all accrued and unpaid interest thereon through the
date of prepayment and any applicable premium payable pursuant to Section 2.5.
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.
2.8 Fees.
(a) Up-Front Fee. Borrower shall pay to Lenders on the Closing
Date, a non-refundable Up-Front Fee in the aggregate amount of $380,000, such
fee to be allocated ratably among the Lenders.
(b) Collateral Agent Fees. Borrower shall pay to the
Collateral Agent, as and when due, the non-refundable fees set forth on Schedule
H.
2.9. 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 Lenders all accrued
and unpaid interest on each Payment Date.
2.10 Payments by Borrower; Payments by Collateral Agent.
(a) All payments (including prepayments) to be made by or on
behalf of Borrower on account of principal, interest, fees and other amounts
required hereunder or under any Note shall be made without set-off, deduction,
recoupment or counterclaim and shall, except as otherwise expressly provided
herein, be made to Collateral Agent at Collateral Agent's office as set forth on
its Administrative Form or as otherwise directed in writing by the Collateral
Agent, in dollars and in immediately available funds, no later than 11:00 a.m.
on the date specified herein. Any payment which is received by Collateral Agent
later than 11:00 a.m. shall be deemed to have been received on the immediately
succeeding Business Day and any applicable interest or fee shall continue to
accrue. The Collateral Agent will promptly after receipt of each payment cause
to be distributed like funds relating to the payment of principal and interest
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ratably to each Lender, and like funds relating to the payment of any other
amount payable to any Lender to such Lender, in each case to be applied in
accordance with, and subject to, the terms of this Agreement. Upon its
acceptance of an Assignment and Acceptance and recording of the information
contained therein in the Register pursuant to Section 10.16, from and after the
effective date specified in such Assignment and Acceptance, the Collateral Agent
shall make all payments hereunder, under any Note and under any other Loan
Document in respect of the interest assigned thereby to the Lender assignee
thereunder, and the parties to such Assignment and Acceptance shall make all
appropriate adjustments in such payments for periods prior to such effective
date directly between themselves.
(b) Whenever any payment hereunder or under any Note 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 owing to any
Lender is not received by such Lender, within ten (10) days of the date when the
same is due, Borrower shall pay to such Lender a late charge in an amount equal
to five percent (5%) of the amount not so paid.
2.11. Taxes.
(a) Withholding Taxes. Any and all payments by the Borrower
hereunder and under any Note shall be made free and clear of and without
deduction for any and all present or future taxes, levies, imposts, deductions,
charges or withholdings, and all liabilities with respect thereto, excluding, in
the case of each Lender and the Collateral Agent, net income taxes that are
imposed by the United States and franchise taxes and net income taxes that are
imposed on such Lender or the Collateral Agent by the state or foreign
jurisdiction under the laws of which such Lender or the Collateral Agent (as the
case may be) is organized or any political subdivision thereof and, in the case
of each Lender, franchise taxes and net income taxes that are imposed on such
Lender by the state or foreign jurisdiction of such Lender's Applicable Lending
Office or any political subdivision thereof (all such non-excluded taxes,
levies, imposts, deductions, charges, withholdings and liabilities being
hereinafter referred to as "Taxes"). If the Borrower shall be required by law to
deduct any Taxes from or in respect of any sum payable hereunder (or under any
Note) to any Lender or the Collateral Agent, (i) the sum payable shall be
increased as may be necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this Section
2.11(a)) such Lender Party or the Collateral Agent (as the case may be) receives
an amount equal to the sum it would have received had no such deductions been
made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall
pay the full amount deducted to the relevant taxation authority or other
authority in accordance with applicable law.
(b) Other Taxes. In addition, the Borrower shall pay any
present or future stamp, documentary, excise, property or similar taxes, charges
or levies that arise from any payment made hereunder or under any Note or from
the execution, delivery or registration of, or otherwise with respect to, this
Agreement or any other Loan Document (hereinafter referred to as "Other Taxes").
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(c)......Indemnification. The Borrower shall indemnify each
Lender and the Collateral Agent for the full amount of Taxes and Other Taxes,
and for the full amount of taxes imposed by any jurisdiction on amounts payable
under this Section 2.11 paid by such Lender or the Collateral Agent (as the case
may be) and any liability (including penalties, additions to tax, interest and
expenses) arising therefrom or with respect thereto. This indemnification shall
be made within 30 days from the date such Lender or the Collateral Agent (as the
case may be) makes written demand therefor.
(d)......Evidence of Payment. Within 30 days after the date of
any payment of Taxes, the Borrower shall furnish to the each Lender the original
receipt of payment thereof or a certified copy of such receipt. In the case of
any payment hereunder or under any Note by the Borrower through an account or
branch outside the United States or on behalf of the Borrower by a payor that is
not a United States person, if the Borrower determines that no Taxes are payable
in respect thereof, the Borrower shall furnish, or shall cause such payor to
furnish, to each Lender an opinion of counsel acceptable to such Lender stating
that such payment is exempt from Taxes. For purposes of this subsection (d) and
subsection (e), the terms "United States" and "United States person" shall have
the meanings specified in Section 7701 of the Internal Revenue Code.
(e)......Foreign Lenders and Issuing Banks. Each Lender
organized under the laws of a jurisdiction outside the United States shall, on
or prior to the date of it becomes a party to this Agreement, and from time to
time thereafter upon the reasonable request in writing by the Borrower or the
Collateral Agent (but only so long thereafter as such Lender remains lawfully
able to do so), provide the Collateral Agent and the Borrower with Internal
Revenue Service Form 1001 or 4224 (or other appropriate form), as appropriate,
or any successor form prescribed by the Internal Revenue Service, certifying
that such Lender is exempt from or is entitled to a reduced rate of United
States withholding tax on payments under this Agreement. If the form provided by
a Lender at the time such Lender first becomes a party to this Agreement
indicates a United States interest withholding tax rate in excess of zero,
withholding tax at such rate shall be considered excluded from Taxes unless and
until such Lender provides the appropriate form certifying that a lesser rate
applies, whereupon withholding tax at such lesser rate only shall be considered
excluded from Taxes for periods governed by such form; provided, however, that,
if at the date of the assignment pursuant to which a Lender assignee becomes a
party to this Agreement, the Lender assignor was entitled to payments under
subsection (a) in respect of United States withholding tax with respect to
interest paid at such date, then, to such extent, the term Taxes shall include
(in addition to withholding taxes that may be imposed in the future or other
amounts otherwise includable in Taxes) United States withholding tax, if any,
applicable with respect to the Lender assignee on such date.
(f)......Failure to Provide Forms. For any period with respect
to which a Lender has failed to provide the Borrower with the appropriate form
described in Section 2.11(e) (other than if such failure is due to a change in
law occurring after the date on which a form originally was required to be
provided or if such form otherwise is not required under Section 2.11(e)), such
Lender Party shall not be entitled to indemnification under Section 2.11(a) or
Section 2.11(c) with respect to Taxes imposed by the United States; provided,
however, that should a Lender become subject to Taxes because of its failure to
deliver a form required hereunder, the Borrower shall take such steps as such
Lender shall reasonably request to assist such Lender to recover such Taxes.
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2.12.....Sharing of Payments, Etc.. If any Lender shall obtain at any
time any payment (whether voluntary, involuntary, through the exercise of any
right of set-off, or otherwise) (a) on account of Obligations due and payable to
such Lender hereunder or under any Note at such time in excess of its ratable
share (according to the proportion of (i) the amount of such Obligations due and
payable to such Lender at such time to (ii) the aggregate amount of the
Obligations due and payable to all Lenders hereunder and under the Notes at such
time) of payments on account of the Obligations due and payable to all Lenders
hereunder and under the Notes at such time obtained by all the Lenders at such
time or (b) on account of Obligations owing (but not due and payable) to such
Lender hereunder or under any Note at such time in excess of its ratable share
(according to the proportion of (i) the amount of such Obligations owing to such
Lender at such time to (ii) the aggregate amount of the Obligations owing (but
not due and payable) to all Lenders hereunder and under the Notes at such time)
of payments on account of the Obligations owing (but not due and payable) to all
Lenders hereunder and under the Notes at such time obtained by all the Lenders
at such time, such Lender shall forthwith purchase from the other Lenders such
participations in the Obligations due and payable or owing to them, as the case
may be, as shall be necessary to cause such purchasing Lender to share the
excess payment ratably with each of them; provided, however, that if all or any
portion of such excess payment is thereafter recovered from such purchasing
Lender, such purchase from each other Lender shall be rescinded and such other
Lender shall repay to the purchasing Lender the purchase price to the extent of
such other Lender's ratable share (according to the proportion of (i) the
purchase price paid to such Lender to (ii) the aggregate purchase price paid to
all Lenders) of such recovery together with an amount equal to such Lender's
ratable share (according to the proportion of (i) the amount of such other
Lender's required repayment to (ii) the total amount so recovered from the
purchasing Lender) of any interest or other amount paid or payable by the
purchasing Lender in respect of the total amount so recovered. The Borrower
agrees that any Lender so purchasing a participation from another Lender
pursuant to this Section 2.12 may, to the fullest extent permitted by law,
exercise all its rights of payment (including the right of set-off) with respect
to such participation as fully as if such Lender were the direct creditor of the
Borrower in the amount of such participation.
2.13.....Suspension of LIBOR.
(a)......Illegality. Notwithstanding any other provision of
this Agreement, if the introduction of or any change in or in the interpretation
of any law or regulation shall make it unlawful, or any central bank or other
governmental authority shall assert that it is unlawful, for any Lender to
perform its obligations hereunder to make, fund or maintain its portion of the
Loan as a LIBOR based obligation, then, on notice thereof and demand therefor by
such Lender to the Borrower, the interest rate applicable to the Loan pursuant
to Section 2.4 shall thereafter be the Base Rate plus 4.50% until such Lender
shall notify the Borrower that such Lender has determined that the circumstances
causing such suspension no longer exist.
(b)......Other Circumstances. If any Lender shall determine in
good faith (which determination shall be conclusive) that (A) LIBOR cannot be
determined in accordance with the definition thereof, or (B) LIBOR for any
Interest Accrual Period will not adequately reflect the cost to such Lender of
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making, funding or maintaining such Lender's ratable portion of the Loan for
such Interest Period, such Lender shall forthwith so notify the Borrower and the
other Lenders, whereupon the interest rate applicable to the Loan pursuant to
Section 2.4 for such Lender shall thereafter be the Base Rate plus 4.50%.
2.14.....Increased Costs, Etc..
(a)......Increased Costs. If, due to either (i) the
introduction of or any change in or in the interpretation of any law or
regulation or (ii) the compliance with any guideline or request from any central
bank or other governmental authority (whether or not having the force of law),
there shall be any increase in the cost to any Lender of agreeing to make or of
making, funding or maintaining its portion of the Loan based on LIBOR, then the
Borrower shall from time to time, upon demand by such Lender pay to such Lender
additional amounts sufficient to compensate such Lender for such increased cost
A certificate as to the amount of such increased cost, submitted to the Borrower
by such Lender, shall be conclusive and binding for all purposes, absent
manifest error.
(b)......Capital Requirements. If, due to either (i) the
introduction of or any change in or in the interpretation of any law or
regulation or (ii) the compliance with any guideline or request from any central
bank or other governmental authority (whether or not having the force of law),
there shall be any increase in the amount of capital required or expected to be
maintained by such Lender or any corporation controlling such Lender as a result
of or based upon the existence of such Lender's commitment to lend hereunder,
then, upon demand by such Lender, the Borrower shall pay to such Lender, from
time to time as specified by such Lender, additional amounts sufficient to
compensate such Lender in the light of such circumstances, to the extent that
such Lender reasonably determines such increase in capital to be allocable to
the existence of such Lender's commitment to lend hereunder. A certificate as to
such amounts submitted to the Borrower by such Lender, shall be conclusive and
binding for all purposes, absent manifest error.
2.15.....Promissory Notes. The Borrower hereby agrees that if, in the
opinion of any Lender, a promissory note or other evidence of debt is required,
appropriate or desirable to reflect or enforce the indebtedness of the Borrower
resulting from the Loan made by or otherwise owing to such Lender, then upon
request of such Lender, the Borrower shall (in the case of any such request by a
Lender that is not an initial party hereto, in accordance with Section 10.16)
promptly execute and deliver to such Lender, a promissory note substantially in
the form of Exhibit D, payable to the order of such Lender in an amount equal to
the principal amount of the Loan made by or otherwise owing to such Lender.
ARTICLE III.
SECURITY AGREEMENT AND COLLATERAL
3.1......Security for Obligations. As security for the payment and
performance of the Obligations under this Agreement and the other Loan Documents
and all other present and future debts, obligations and liabilities of any
nature whatsoever of Borrower to Collateral Agent or any Lender in respect of
this Agreement and the other Loan Documents, and all modifications, renewals,
replacements and extensions thereof, UDCSFC shall grant Collateral Agent (for
Collateral Agent's benefit and the ratable benefit of the Lenders) a security
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interest in the Collateral pursuant to the Stock Pledge Agreement, the
Collateral Account Agreement and such other agreements, documents and
instruments as Required Lenders may reasonably require. Borrower shall cause
UDCSFC to execute and deliver the Stock Pledge Agreement and to perform its
obligations thereunder. Borrower will, prior to the creation of any Additional
Class B Certificates, take and cause its Affiliates and Subsidiaries to take,
such actions and execute such agreements, documents and instruments (and deliver
such opinions of counsel) as may be necessary or as Collateral Agent or Required
Lenders may reasonably request in order to create a perfected first priority
security interest securing the Obligations in favor of Collateral Agent (for
Collateral Agent's benefit and the ratable benefit of the Lenders) in such
Additional Class B Certificates or in 100% of the capital stock or other equity
interests of the entity owning such Additional Class B Certificates, including,
without limitation, compliance with Section 7(c) of the Stock Pledge Agreement.
Borrower will execute, and shall cause UDCSFC and Borrower's other Affiliates
and Subsidiaries, to execute, any security agreements, collateral assignments,
financing statements for filing and/or recording and any other agreements,
documents or instruments reasonably required by Collateral Agent or Required
Lenders to evidence and perfect the Liens and security interests of Collateral
Agent. 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.
3.2......Security Documents. The Financing Statements shall remain on
file in the appropriate jurisdictions and Borrower shall promptly execute or
cause to be executed any other financing statements and notices as are necessary
to properly perfect Collateral Agent's security interest in the Collateral.
3.3......Duties Regarding Collateral. Neither Collateral Agent nor any
Lender (nor any portfolio advisor for any Lender) shall have any duty or
obligation to protect, insure, collect or realize upon the Collateral or
preserve rights in it against prior parties. Borrower releases Collateral Agent
and each Lender (and each portfolio advisor) from, and shall indemnify
Collateral Agent and each Lender (and each portfolio advisor) against, any
liability for any act or omission relating to the Collateral, except with
respect to any such Person for any liability directly resulting from such
Person's gross negligence or willful misconduct.
3.4......Borrower's Duties Regarding Collateral. Borrower agrees as
follows:
(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 Required Lenders, mechanic's
liens, Permitted Liens, and any Liens in favor of Collateral Agent for the
benefit of the Lenders); (ii) shall defend the Collateral against all claims and
legal proceedings by persons other than Collateral Agent and Lenders; (iii)
shall pay and discharge when due all taxes, levies and other charges upon the
Collateral; (iv) shall cause UDCSFC and Borrower's other Affiliates and
Subsidiaries 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.
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(b)......Perfection and Priority. Borrower shall pay all
Lender's Expenses necessary to, take all actions necessary to, and, upon
Collateral Agent's or any Lender's request, execute all writings and take and
cause Borrower's Affiliates and Subsidiaries to take all other actions
reasonably deemed advisable by Collateral Agent or any Lender to, preserve the
Collateral or to establish, and determine priority of, perfection, continued
perfection or enforce Collateral Agent's interest in the Collateral.
(c)......Records and Inspections. Upon reasonable notice to
Borrower, any Lender may examine and conduct audits of the Collateral, and
Borrower's and UDCSFC's and Borrower's other Affiliates' and Subsidiaries'
records concerning it, wherever located, and make copies of such records, at any
time during normal business hours, and Borrower shall assist such 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 any Lender, furnish to
such 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.
3.5......Power of Attorney. Borrower hereby makes, constitutes and
appoints Collateral Agent and each Lender and its portfolio advisor 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 10.2:
(a)......To take all actions and to execute, acknowledge,
obtain and deliver any and all writings necessary or deemed advisable by
Collateral Agent or such 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
(d)......To file any claim or proceeding or to take any other
action, in the name of Collateral Agent or such 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 Collateral Agent or such 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.
3.6......Collateral Inspections. Collateral Agent and each 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.
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ARTICLE IV.
CONDITIONS PRECEDENT; TERM OF AGREEMENT
4.1......Conditions Precedent. No Lender shall be required to make the
Loan to be made by it hereunder if Borrower has not fulfilled to the
satisfaction of such Lender and its counsel, each of the following conditions on
or before the Closing Date; provided, however, that each Lender, in its sole and
absolute discretion, may waive any of the following conditions.
4.2......Receipt of Documents. Each 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, Collateral Agent
and each Lender;
(b)......The Notes duly executed, the Guaranty duly executed,
the Collateral Account Agreement duly executed and the Stock Pledge Agreement
duly executed together with the certificates representing 100% of the capital
stock of UDRC and UDRC II and undated stock powers relating thereto duly
endorsed in blank;
(c)......The UDRC Dividend Direction Letter;
(d)......The UDRC II Dividend Direction Letter;
(e)......The UDRC Standing Dividend Resolution certified by
UDRC's Secretary;
(f)......The UDRC II Standing Dividend Resolution certified by
UDRC II's Secretary;
(g)......A consent and subordination from GECC consenting to
the execution, delivery and performance by Borrower and UDCSFC of the Loan
Documents and subordinating to Collateral Agent GECC's Lien on any assets
constituting Collateral;
(h)......A consent by MBIA to the pledge of the Collateral to
Collateral Agent;
(i)......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;
(j)......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;
(k)......Certified copies of the resolutions of the board of
directors of UDCSFC approving and authorizing the execution, delivery and
performance by UDCSFC of the applicable Loan Documents to be delivered
hereunder, certified as of the Closing Date by the Secretary or an Assistant
Secretary of UDCSFC;
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(l)......A certificate of the Secretary or Assistant Secretary
of UDCSFC certifying the names and true signatures of the officers of UDCSFC
authorized to execute, deliver and perform the Stock Pledge Agreement and all
other applicable Loan Documents to be delivered hereunder;
(m)......Copies of each of Borrower's, UDCSFC'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;
(n)......Good standing certificates for the jurisdiction of
incorporation and the jurisdiction in which the chief executive office is
located for each of Borrower, UDCSFC, UDRC and UDRC II;
(o)......A copy of lien searches, completed as of a recent
date, against Borrower and UDCSFC, UDRC and UDRC II, in such jurisdictions as
shall be satisfactory to Lenders and its counsel;
(p)......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 Lenders and from counsel satisfactory to
Lenders; and
(q)......Evidence satisfactory to Lenders of the termination
of the Greenwich Loan Agreement, satisfaction of all obligations of Borrower and
its Subsidiaries thereunder and the release of all Liens relating thereto.
(r)......There shall have occurred since December 31, 1998, no
Material Adverse Change.
(s)......Lenders shall have received Borrower's audited
financial statements for the fiscal year ended December 31, 1998.
(t)......Officers Certificate as to no default and truth of
representations and warranties.
(u)......Completion of due diligence.
4.3......Term. This Agreement shall become effective upon the execution
and delivery hereby by Borrower, Collateral Agent and Lenders 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.
4.4......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 Collateral
Agent's continuing security interest in the Collateral shall remain in effect
until all Obligations have been fully and finally discharged.
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ARTICLE V.
REPRESENTATIONS AND WARRANTIES
In order to induce Lenders 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:
5.1......No Encumbrances. UDCSFC has good and indefeasible title to the
Collateral, free and clear of
Liens except for Permitted Liens.
5.2......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. The chief executive office of
UDCSFC is located at the address of Borrower indicated in the preamble to this
Agreement and UDCSFC's FEIN is 86-0657074.
5.3......Due Organization and Qualification; Subsidiaries.
(a)......Each Loan Party is duly organized, validly 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.
(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.
5.4......Due Authorization: No Conflict.
(a)......The execution, delivery, and performance by each Loan
Party of each of the Loan Documents to which it is a party have been duly
authorized by all necessary corporate action.
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(b)......The execution, delivery, and performance by each Loan
Party of each of 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 T, U, and X of the Federal Reserve Board) applicable to
such Loan Party, the Governing Documents of such Loan Party, or any order,
judgment, or decree of any court or other Governmental Authority binding on any
Loan Party, (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 any Loan Party, (iii) result in or require the
creation or imposition of any Lien of any nature whatsoever upon any properties
or assets of any Loan Party, other than pursuant to the Security Documents, or
(iv) require any approval of stockholders or any approval or consent of any
Person under any material contractual obligation of any Loan Party. No Loan
Party or any of its Subsidiaries is in violation of any law, rule, regulation,
order, writ, judgment, injunction, decree, determination or award or in breach
of any such contract, loan agreement, indenture, mortgage, deed of trust, lease
or other instrument, the violation or breach of which could have a Material
Adverse Effect.
(c)......Other than the taking of any other action expressly
required under this Agreement or any of the other Loan Documents, the execution,
delivery, and performance by each Loan Party of this Agreement and the other
Loan Documents to which such Loan Party 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 other Loan Documents and all
other documents contemplated hereby and thereby, when executed and delivered by
any Loan Party party thereto, will be the legally valid and binding obligations
of such Loan Party, enforceable against such Loan Party 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 Stock Pledge Agreement and the stock powers
delivered in connection therewith, and the Collateral Account Agreement when
executed and delivered by UDCSFC and UDC, will be the legally valid and binding
obligations of UDCSFC and UDC, enforceable against each of UDCSFC and UDC 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 UDCSFC and UDC on the Collateral
is a validly created and perfected first priority Lien, and the Collateral is
subject to no other Liens other than Liens in favor of Collateral Agent and the
Liens referred to in item 1 on Schedule E.
5.5......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.
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5.6......Financial Statements; No Material Adverse Change. All
financial statements relating to Borrower, UDRC and UDRC II that have been
delivered by Borrower to Lenders 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. No information, exhibit or report furnished by Borrower
or any other Loan Party to the Collateral Agent or any Lender in connection with
the negotiation of the Loan Documents or pursuant to the terms of the Loan
Documents contained any untrue statement of a material fact or omitted to state
a material fact necessary to make the statements made therein not misleading.
There has not been a Material Adverse Change with respect to Borrower since
December 31, 1998.
5.7......Securitization Documents. Borrower, UDRC and UDRC II and each
of their Affiliates are in full compliance with their respective obligations
under the Securitization Documents, and no Securitization Default exists.
5.8......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 and
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.
5.9......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
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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 Lenders in writing prior
to the date hereof, 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.
5.10.....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 Borrower Taxes owed by any of
Borrower and its Subsidiaries have been paid.
5.11.....Year 2000 Matters. Any reprogramming required to permit the
proper functioning, in and following the year 2000, of (i) each Loan Party's and
each of its Subsidiaries' computer systems and (ii) equipment containing
embedded microchips (including systems and equipment supplied by others or with
which any Loan Party's or any of its Subsidiaries' systems interface) and the
testing of all such systems and equipment, as so reprogrammed, will be completed
by June 30, 1999. The cost to the Loan Parties of such reprogramming and testing
of the reasonably foreseeable consequences of year 2000 to the Loan Parties and
their respective subsidiaries (including, without limitation, reprogramming
errors and the failure of others' systems or equipment) will not result in a
Default or a Material Adverse Effect. Except for such of the reprogramming
referred to in the preceding sentence as may be necessary, each Loan Party's and
each of its Subsidiaries' computer and management information systems are and,
with ordinary course upgrading and maintenance, will continue for the term of
this Agreement to be, sufficient to permit such Loan Party and its Subsidiaries
to conduct its business without Material Adverse Effect. Each Loan Party
represents and warrants that it has a reasonable basis to believe that no year
2000 problem will cause a Material Adverse Effect.
5.12.....Ownership of Properties. Each Loan Party and its Subsidiaries
has good, marketable and insurable title in fee simple to, or a valid leasehold
interest in, all its real property, and good title to, or a valid leasehold
interest in, all its other Property.
5.13.....Investment Company Status. Neither any Loan Party nor any of
its Subsidiaries is an "investment company," or an "affiliated person" of, or
"promoter" or "principal underwriter" for, an "investment company," as such
terms are defined in the Investment Company Act of 1940, as amended. Neither the
making of the Loan nor the application of the proceeds or repayment thereof by
Borrower, nor the consummation of the other transactions contemplated hereby,
will violate any provision of such Act or any rule, regulation or order of the
Securities and Exchange Commission thereunder.
5.14.....Solvency. Each Loan Party is, individually and together with
its Subsidiaries, Solvent. For purposes hereof, the term "Solvent" means, with
respect to any Person on a particular date, that on such date (a) the fair value
of the property of such Person is greater than the total amount of liabilities,
including, without limitation, contingent liabilities, of such Person, (b) the
present fair salable value of the assets of such Person is not less than the
amount that will be required to pay the probable liability of such Person on its
debts as they become absolute and matured, (c) such Person does not intend to,
and does not believe that it will, incur debts or liabilities beyond such
Person's ability to pay as such debts and liabilities mature and (d) such Person
is not engaged in business or a transaction, and is not about to engage in
business or a transaction, for which such Person's property would constitute an
unreasonably small capital. The amount of contingent liabilities at any time
shall be computed as the amount that, in the light of all the facts and
circumstances existing at such time, represents the amount that can reasonably
be expected to become an actual or matured liability.
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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 Required Lenders shall otherwise consent in writing,
Borrower shall do all of the following:
6.1......Financial Statements and Other Documents. Borrower shall
deliver to Lenders in form and detail satisfactory to Required Lenders:
(a)......Within 45 days of the end of each fiscal quarter
(except the last fiscal quarter of each fiscal year), Borrower's consolidated
unaudited financial statements for such quarter, and, within 90 days of the end
of Borrower's fiscal year, Borrower's consolidated 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 and together, in each case, with a
certificate of the Chief Financial Officer of Borrower stating that the
representations and warranties herein are true and correct in all material
respects as of the date of such certificate and that no Default has occurred and
is continuing or, if a default has occurred and is continuing, a statement as to
the nature thereof and the action that Borrower has taken and proposes to take
with respect thereto and setting forth in reasonable detail satisfactory to
Required Lenders the calculations demonstrating compliance with Sections 6.13
through 6.16;
(b)......Promptly upon receipt thereof, any financial
statements of Borrower distributed to other lenders or financing parties;
(c)......On or prior to each Calculation Date, a Collateral
Servicing Report certified as true and correct by an officer of Borrower and
including the calculation of the Borrowing Base as of such Calculation Date and
certifying such calculation as true and correct.
(d)......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;
(e)......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;
(f)......Promptly upon receipt thereof, copies of any other
information or documents received by Borrower pursuant to any Securitization
Document (including, without limitation, monthly servicing reports with respect
to each Securitization);
(g)......With reasonable promptness, such other financial data
and information as any Lender may reasonably request; and
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(h)......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.
6.2......Inspection of Property. Borrower shall permit any Person
designated by any 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 any Lender may reasonably request.
6.3......Default Disclosure.
(a)......Borrower shall forthwith, upon a Responsible Officer
of Borrower obtaining knowledge of an Event of Default or Default, promptly
deliver to each 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, deliver to each
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.
6.4......Notices to Lenders and the Collateral Agent. Borrower shall
promptly notify each Lender and the Collateral Agent in writing of:
(a)......Any lawsuit over One Hundred Thousand Dollars
($100,000) against Borrower or any of its Subsidiaries;
(b)......Any substantial dispute between Borrower or any of
its subsidiaries and any Governmental Authority; or
(c)......Any change in any Loan Party's name, address, or
legal structure.
6.5......Books and Records. Borrower shall maintain adequate books and
records in accordance with generally accepted accounting principles.
6.6......Compliance and Preservation. Borrower shall and shall cause
its Subsidiaries to:
(a)......Comply with the laws (including any fictitious name
statute), regulations and orders of any government body with authority over its
business;
(b)......Maintain and preserve all privileges and franchises
such Person now has provided, however, that neither the Borrower nor any of its
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Subsidiaries shall be required to preserve any privilege or franchise (other
than the corporate existence of each Loan Party, UDCC, UDRC and UDRC II) if the
Board of Directors of the Borrower shall determine that the preservation thereof
is no longer desirable in the conduct of the business of the Borrower or such
Subsidiary, as the case may be, and that the loss thereof is not disadvantageous
in any material respect to the Borrower, such Subsidiary or the Lenders; and
(c)......Make any repairs, renewals, or replacements
reasonably necessary to keep such Person's properties in good working condition.
6.7......Perfection of Liens. Borrower shall take such actions as may
be necessary or as Collateral Agent or any Lender may request in order to
perfect and protect Collateral Agent's security interests and liens.
6.8......Cooperation. Borrower shall take any reasonable action
requested by Collateral Agent or any Lender to carry out the intent of this
Agreement.
6.9......Use of Proceeds. Borrower shall use the proceeds of the Loan
for (i) repayment of all amounts outstanding under the Greenwich Loan Agreement
and repayment of other indebtedness of the Borrower (other than Subordinated
Debt), (ii) general working capital to facilitate ongoing growth in Borrower's
core operations and (iii) to the extent permitted by Section 7.8 and by the
documents and instruments governing other indebtedness of the Borrower, the
repurchase of common stock of the Borrower.
6.10.....Securitizations. Any securitizations of Ugly Duckling
Collateral executed during the Securitization Period shall be executed through
either UDRC II or a New Issuer (as defined in the Stock Pledge Agreement) that
meets the requirements of Section 7(c) of the Stock Pledge Agreement (and
Borrower shall ensure that Pledgor performs its obligations pursuant to the
Stock Pledge Agreement) or by a person or entity otherwise able to satisfy the
requirements of Section 3.1 with respect to the related Additional Class B
Certificates. Borrower shall continue to execute periodic securitizations (in an
amount of not less than $75,000,000 in any period of six consecutive months) of
the Ugly Duckling Collateral during the Securitization Period and each such
securitization shall include b-pieces constituting Additional Class B
Certificates which grant an affiliate of UDCC acceptable to the Required Lenders
a 100% interest in all securitization assets to the extent interests have not
been sold to senior third party investors and with respect to which the
provisions of Section 3.1 have been complied with.
6.11.....Compliance with Covenants. Borrower shall perform, keep and
observe each term, provision, condition or covenant or agreement contained in
each Bond Insurance Policy, the GECC Agreement and any other agreement
evidencing Indebtedness.
6.12.....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 or
any holder of Additional Class B Certificates.
6.13.....Tangible Net Worth. Borrower shall maintain a consolidated
Tangible Net Worth of not less than the sum of (i) $130,000,000, plus (ii) 50%
of the cumulative net earnings (but only to the extent positive) after taxes of
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the Borrower and its Subsidiaries on a consolidated basis determined in
accordance with generally accepted accounting principles for each period ending
after December 31, 1999.
6.14.....Consolidated EBITDA to Consolidated Interest Expense. Maintain
a ratio of Consolidated EBITDA to Consolidated Interest Expense of not less than
the amount set forth below for each period set forth below:
Period Ratio
------------------------------------------------------ ---------------
Closing to and including June 30, 1999 0.60 to 1.0
July 1, 1999 to and including September 30, 1999 0.85 to 1.0
October 1, 1999 to and including December 31, 1999 1.00 to 1.0
January 1, 2000 to and including March 31, 2000 1.35 to 1.0
April 1, 2000 and thereafter 1.50 to 1.0
6.15. Consolidated Senior Debt to Consolidated Total Capitalization.
Not permit at any time Consolidated Senior Debt of the Borrower and its
Subsidiaries on a consolidated basis to exceed 50% of Consolidated Total
Capitalization.
6.16. Minimum B-Piece Cash Flows. Not permit aggregate B-Piece Cash
Flows deposited to the Collateral Account for any month to be less than
$2,000,000.
6.17. Sale of Cygnet. Borrower shall use its best efforts to consummate
the sale of Cygnet Dealer Finance, Inc. on or prior to the date one year after
the date hereof.
6.18. Collateral Account. Borrower shall establish and maintain the
Collateral Account free and clear of all liens other than liens in favor of the
Collateral Agent pursuant to the Loan Documents.
6.19. Year 2000 Assurances. Borrower and each of its Subsidiaries shall
take all action necessary and commit adequate resources to assure that their
respective computer-based and other systems are able to effectively process data
including dates before, on and after January 1, 2000 without experiencing any
year 2000 problem that could cause a Material Adverse Effect. At the request of
the Collateral Agent or any Lender, the Borrower shall use commercially
reasonable efforts to provide or cause to be provided to the Collateral Agent or
such Lender, as the case may be, with assurance and substantiation (including,
but not limited to, the results of internal or external audit reports prepared
in the ordinary course of business) reasonably acceptable to the Collateral
Agent or such Lender, as the case may be, as to the year 2000 capability of the
Borrower and its Subsidiaries and their respective abilities to conduct their
respective businesses and operations before, on and after January 1, 2000
without experiencing a year 2000 problem causing a Material Adverse Effect.
6.20. Maintenance of Properties. Borrower shall maintain and preserve,
and cause each of its Subsidiaries to maintain and preserve, all of its
properties that are used or useful in the conduct of its business in good
working order and condition, ordinary wear and tear excepted and excepting
replacement in the ordinary course of business.
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6.21. Maintenance of Insurance. Borrower shall maintain, and cause each
of its Subsidiaries to maintain, insurance with responsible and reputable
insurance companies or associations in such amounts and covering such risks as
is usually carried by prudent companies engaged in similar businesses and owning
similar properties in the same general areas in which the Borrower or such
Subsidiary operates.
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 Required Lender's
prior written consent:
7.1. 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
or any holder of Additional Class B Certificates, including the UDRC Class B
Certificates, the UDRC II Class B Certificates and any Additional Class B
Certificates, or any income or profits from any of the foregoing, except for
Permitted Liens listed on Schedule E or liens of Collateral Agent for the
benefit of Lenders.
7.2. Indebtedness.
(a)......Permit UDRC or UDRC II or any holder of Additional
Class B Certificates to incur, assume, or permit to exist, directly or
indirectly any Indebtedness; or
(b)......permit any other Subsidiary of the Borrower to incur,
assume, or permit to exist, directly or indirectly any Indebtedness other than
Permitted Subsidiary Indebtedness without the prior written consent of the
Required Lenders.
7.3. 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 (excluding the sale of Cygnet Dealer Finance, Inc.) or
cease to be a public company.
7.4. Disposal of Collateral, B-Pieces, Additional Class B Certificates.
Except as expressly consented to by Required Lenders in writing, sell, lease,
assign, transfer, or otherwise dispose of any of the Collateral or permit any of
its Affiliates to do any of the foregoing or permit UDRC to sell, lease, assign,
transfer or otherwise dispose of any UDRC Class B Certificates, or permit UDRC
II to sell, lease, assign, transfer or otherwise dispose of any UDRC II Class B
Certificates, or permit the Person or entity that is the holder of any
Additional Class B Certificates at the time such Additional Class B Certificates
are first included in the Borrowing Base to sell, lease, assign, transfer or
otherwise dispose of any such Additional Class B Certificates.
7.5. Change Name. Without giving thirty (30) days prior written
notification to Collateral Agent and each Lender, change Borrower's or any other
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Loan Party's name, FEIN, corporate structure (within the meaning of Section
9402(7) of the Code), or identity, or add any new fictitious name.
7.6. Amendments. Except as expressly consented to by Required Lenders
in writing, directly or indirectly, amend, modify, alter, increase, or change
any of the terms or conditions of any Securitization Document.
7.7. Change of Control. Cause, permit, or suffer, directly or
indirectly, any Change of Control.
7.8. 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, so long as no
Default exists, the buyback after the date hereof of 2,500,000 shares of
Borrower's common stock previously approved by Borrower's Board of Directors on
April 20, 1999.
7.9. Standing Dividend Resolutions. Permit any Standing Dividend
Resolution to be rescinded, amended, modified, revoked or altered in any manner.
7.10. Change in Location of Chief Executive Office. Relocate, or permit
any other Loan Party to relocate, any Loan Party's chief executive office to a
new location without providing 30 days prior written notification thereof to
Collateral Agent and each 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 Collateral Agent's security
interests and also provides to Collateral Agent a Collateral access agreement
with respect to such new location.
7.11. 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 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 Plan;
(d)......Terminate, or permit any Subsidiary of Borrower to
terminate, any 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;
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(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
(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.
7.12. Changes in Nature of Business. Make, or permit any of its
Subsidiaries to make, any material change in the nature of its business as
carried on at the date hereof.
7.13. Transactions with Affiliates. Not engage, and not permit any of
its Subsidiaries to engage, in any transaction with any Affiliate of Borrower or
such Subsidiary except on terms that are fair and reasonable and no less
favorable to the Borrower or such Subsidiary than it would obtain in a
comparable arm's-length transaction with a Person not an Affiliate (it being
understood that the foregoing shall not prohibit any transaction otherwise
permitted hereunder among the Borrower and any of its wholly owned
Subsidiaries).
ARTICLE VIII.
EVENTS OF DEFAULT/REMEDIES
8.1. 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 Collateral Agent or any Lender, reimbursement of
Lender Costs, or other amounts constituting Obligations) or if Borrower fails to
make when due any deposit to the Collateral Account required pursuant to Section
2.5(b);
(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 any Lender;
(c)......If there is a Material Adverse Change with respect to
Borrower, UDCSFC, UDRC or UDRC II or any holder of Additional Class B
Certificates (the occurrence or non-occurrence of which shall be determined by
the Required Lenders in the exercise of 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;
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(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)......Any judgment or order for the payment of money in
excess of $1,000,000 not covered by insurance as to which the insurer has
acknowledged liability shall be rendered against any Loan Party or UDRC or UDRC
II and either (i) enforcement proceedings shall have been commenced by any
creditor upon such judgment or order and are not stayed or dismissed within 45
days or (ii) there shall be any period of 45 consecutive days during which such
judgment remains unpaid or unbonded and a stay of enforcement of such judgment
or order, by reason of a pending appeal or otherwise, shall not be in effect;
(g)......If Borrower makes any payment on account of
Indebtedness that is 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
(including, without limitation, any Collateral Servicing Report) made to
Collateral Agent, any Lender by Borrower or any officer, employee, agent, or
director of Borrower, or if any such warranty or representation is withdrawn;
(i)......If any Standing Dividend Resolution is rescinded,
amended, altered, revoked or modified in any manner;
(j)......If a default or event of default occurs under the
GECC Agreement or under the terms of any other Indebtedness aggregating in
excess of $3,000,000 (with respect to any particular item of Indebtedness or in
the aggregate and in each case after any applicable cure or grace period) 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;
(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 Borrower or any of its Subsidiaries bankrupt or
insolvent, or any order for relief with respect to the Borrower or any of its
Subsidiaries 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 Borrower or any of
its Subsidiaries, or commences any proceeding relating to the Borrower 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; or
(l)......Any ERISA Event shall have occurred with respect to a
Plan of any Loan Party or any of its ERISA Affiliates and the liability of the
Loan Parties and their ERISA Affiliates related to such ERISA Event and any and
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all other ERISA Events which shall have occurred and then exist with respect to
any Plans of the Loan Parties and their ERISA Affiliates exceeds $1,000,000; or
(m)......any provision of any Loan Document shall for any
reason cease to be valid and binding on or enforceable against any Loan Party
party to it, or any such Loan Party shall so state in writing; or
(n)......any Security Document shall for any reason (other
than pursuant to the terms thereof) cease to create a valid and perfected first
priority Lien on the Collateral purported to be covered thereby.
8.2. Rights and Remedies. Upon the occurrence, and during the
continuation, of an Event of Default, Required Lenders may (and may direct the
Collateral Agent to, and upon such direction the Collateral Agent shall), at
their 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 (and upon the occurrence of any Event of Default described in Section
8.1(k) all Obligations shall automatically and without action by Collateral
Agent or any Lender be and become immediately due and payable);
(b)......terminate this Agreement and any of the other Loan
Documents as to any future liability or obligation of each Lender, but without
affecting any Lender's or the Collateral Agent's rights and security interests
in the Collateral and without affecting the Obligations;
(c)......without notice to or demand upon Borrower, make such
payments and do such acts as Required Lenders consider necessary or reasonable
to protect the security interests of the Collateral Agent 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 any Lender, or (ii) indebtedness at any time owing to or for
the credit or the account of Borrower held by any Lender; or
(e)......direct the Collateral Agent to collect, receive,
appropriate and realize upon the Collateral, on such terms as Required Lenders,
in their sole and absolute discretion, deem appropriate without any liability
for any loss due to 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
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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. Neither Collateral Agent nor
any Lender shall 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 Required Lenders.
The rights and remedies of Collateral Agent and each Lender under this
Agreement, the Loan Documents, and all other agreements shall be cumulative. No
exercise by Collateral Agent or any Lender of one right or remedy shall be
deemed an election, and no waiver by Collateral Agent or any Lender of any Event
of Default shall be deemed a continuing waiver. No delay by Collateral Agent or
any Lender shall constitute a waiver, election, or acquiescence by it.
ARTICLE IX.
THE COLLATERAL AGENT
9.1. Authorization and Action. Each Lender hereby appoints and
authorizes the Collateral Agent to take such action as agent on its behalf and
to exercise such powers under this Agreement and the other Loan Documents as are
delegated to the Collateral Agent by the terms hereof and thereof, together with
such powers as are reasonably incidental thereto. Except as specifically
provided for by the Loan Documents, the Collateral Agent shall not be required
to exercise any discretion or take any action under any of the Loan Documents,
but shall be required to act or to refrain from acting (and shall be fully
protected in so acting or refraining from acting) upon the instructions of the
Required Lenders, and such instructions shall be binding upon all Lenders and
the Collateral Agent shall not be liable to the Borrower or any Lender for any
action taken or omitted at the direction of the Required Lenders; provided,
however, that the Collateral Agent shall not be required to take any action that
exposes the Collateral Agent, in its sole judgment, to personal liability or
that is contrary to this Agreement or applicable law. The Collateral Agent
agrees to give to each Lender prompt notice of each notice given to it by the
Borrower pursuant to the terms of this Agreement.
9.2. Collateral Agent's Reliance, Etc.. Neither the Collateral Agent
nor any of its directors, officers, agents or employees shall be liable for any
action taken or omitted to be taken by it or them under or in connection with
the Loan Documents, except for its or their own gross negligence or willful
misconduct. Without limitation of the generality of the foregoing, the
Collateral Agent: (i) may treat the Lender that made any portion of the Loan as
the holder of the debt resulting therefrom until the Collateral Agent receives
notice of an assignment by such Lender; (ii) may consult with legal counsel
(including counsel for any Loan Party), independent public accountants and other
experts selected by it and shall not be liable for any action taken or omitted
to be taken in good faith by it in accordance with the advice of such counsel,
accountants or experts; (iii) makes no warranty or representation to any Lender
and shall not be responsible to any Lender for any statements, warranties or
representations made by any Person other than the Collateral Agent in or in
connection with the Loan Documents; (iv) shall not have any duty to ascertain or
to inquire as to the performance or observance of any of the terms, covenants or
conditions of any Loan Document on the part of any Loan Party or to inspect the
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property (including the books and records) of any Loan Party; (v) shall not be
responsible to any Lender for the due execution, legality, validity,
enforceability, genuineness, sufficiency or value of any Loan Document or any
other instrument or document furnished pursuant hereto or thereto; and (vi)
shall incur no liability under or in respect of any Loan Document by acting upon
any notice, consent, certificate or other instrument or writing (which may be by
telegram, telecopy, cable or telex) believed by it to be genuine and signed or
sent by the proper party or parties.
9.3. Harris Trust and Savings Bank and Affiliates. Harris Trust and
Savings Bank and its affiliates may accept deposits from, lend money to, act as
trustee under indentures of, accept investment banking engagements from and
generally engage in any kind of business with, any Loan Party, any of its
Subsidiaries and any Person who may do business with or own securities of any
Loan Party or any such Subsidiary, all as if Harris Trust and Savings Bank were
not the Collateral Agent and without any duty to account therefor to the Lender
Parties.
9.4. Lender Credit Decision. Each Lender acknowledges that it has,
independently and without reliance upon the Collateral Agent or any other Lender
and based on the financial statements referred to herein and such other
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement. Each Lender also
acknowledges that it will, independently and without reliance upon the
Collateral Agent or any other Lender and based on such documents and information
as it shall deem appropriate at the time, continue to make its own credit
decisions in taking or not taking action under this Agreement.
9.5. Indemnification. Each Lender severally agrees to indemnify the
Collateral Agent (to the extent not promptly reimbursed by the Borrower) from
and against such Lender's ratable share of any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever that may be imposed on, incurred
by, or asserted against the Collateral Agent in any way relating to or arising
out of the Loan Documents or any action taken or omitted by the Collateral Agent
under the Loan Documents; provided, however, that no Lender shall be liable for
any portion of such liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements resulting from the
Collateral Agent's gross negligence or willful misconduct. Without limitation of
the foregoing, each Lender agrees to reimburse the Collateral Agent promptly
upon demand for its ratable share of any costs and expenses payable by the
Borrower under Section 10.4, to the extent that the Collateral Agent is not
promptly reimbursed for such costs and expenses by the Borrower.
9.6. Successor Collateral Agents. The Collateral Agent may resign at
any time by giving written notice thereof to the Lenders and the Borrower and
may be removed at any time with cause by the Required Lenders. Upon any such
resignation or removal, the Required Lenders shall have the right to appoint a
successor Collateral Agent. If no successor Collateral Agent shall have been so
appointed by the Required Lenders, and shall have accepted such appointment,
within 30 days after the retiring Collateral Agent's giving of notice of
resignation or the Required Lenders' removal of the retiring Collateral Agent,
then the retiring Collateral Agent may, on behalf of the Lender Parties, appoint
a successor Collateral Agent, which shall be a commercial bank organized under
the laws of the United States or of any State thereof and having a combined
capital and surplus of at least $50,000,000. Upon the acceptance of any
appointment as Collateral Agent hereunder by a successor Collateral Agent and
upon the execution and filing or recording of such financing statements, or
amendments thereto, and such other instruments or notices, as may be necessary
or desirable, or as the Required Lenders may request, in order to continue the
perfection of the liens granted or purported to be granted by the Security
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Documents, such successor Collateral Agent shall succeed to and become vested
with all the rights, powers, discretion, privileges and duties of the retiring
Collateral Agent, and the retiring Collateral Agent shall be discharged from its
duties and obligations under the Loan Documents. After any retiring Collateral
Agent's resignation or removal hereunder as Collateral Agent, the provisions of
this Article IX shall inure to its benefit as to any actions taken or omitted to
be taken by it while it was Collateral Agent under this Agreement.
9.7. Monthly Verification Duties of Collateral Agent. Upon receipt of
each Collateral Servicing Report and in no event later than the Calculation Date
in respect thereof, the Collateral Agent shall verify the following items in
such Collateral Servicing Report against the monthly servicing reports with
respect to each Securitization:
(a) the outstanding principal balance of auto loans in
the pool of collateral securing the related
securitization;
(b) the outstanding principal balance of all certificates
and other interests or rights to payment in respect
of such securitization senior in priority to such
B-Piece;
(c) the amount of the cash balance in the spread account
relating to such B-Piece; and
(d) the B-Piece Cash Flows.
The Collateral Agent shall also verify the following rates and
amounts on the Collateral Servicing Report:
(y) LIBOR; and
(z) the pro rata payments of interest and Monthly
Amortization Amount made to each Lender.
ARTICLE X.
MISCELLANEOUS
10.1. 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 Required Lenders and Borrower, and then such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given; provided, however, that (a) no amendment, waiver or
consent shall, unless in writing and signed by all the Lenders, do any of the
following at any time: (i) change the percentage of the aggregate unpaid
principal amount of the Loan that shall be required for the Lenders or any of
them to take any action hereunder, (ii) permit the creation, incurrence,
assumption or existence of any Lien on any item of Collateral to secure any
obligations other than Obligations owing to the Lenders and Collateral Agent
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under the Loan Documents, (iii) amend this Section 10.1, (iv) increase the
outstanding principal amount of the Loan, (v) reduce the principal of, or
interest on, the Loan or any fees or other amounts payable hereunder or (vi)
postpone any date fixed for any payment of principal of, or interest on, the
Loan or any fees or other amounts payable hereunder; and provided further that
no amendment, waiver or consent shall, unless in writing and signed by the
Collateral Agent in addition to the Lenders required above to take such action,
affect the rights or duties of the Collateral Agent under this Agreement or any
other Loan Document.
10.2. 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: David A. Sprentall
Facsimile: (602) 382-6070
If to any Lender: As set forth on the Administrative
Form of such Lender
If to Collateral Agent: Harris Trust and Savings Bank
311 West Monroe Street - 12th floor
Chicago, Illinois 60606
Attn: Megan Francis
Telephone: (312) 461-6030
Facsimile: (312) 461-3525
(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 each Lender.
(c)......Borrower acknowledges and agrees that any agreement
of Collateral Agent or any Lender to receive certain notices by telephone and
facsimile is solely for the convenience and at the request of Borrower. Each of
Collateral Agent and each Lender shall be entitled to rely on the authority of
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any Person purporting to be a Person authorized by Borrower to give such notice
and neither Collateral Agent nor any Lender shall have any liability to Borrower
or to other Person on account of any action taken or not taken by Collateral
Agent or any 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 Collateral Agent or any Lender to receive written
confirmation of any telephonic or facsimile notice or the receipt by Collateral
Agent or any Lender of a confirmation which is at variance with the terms
understood by Collateral Agent or such Lender to be contained in the telephonic
or facsimile notice.
10.3. No Waiver: Cumulative Remedies. No failure to exercise and no
delay in exercising, on the part of Collateral Agent or 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.
10.4. Costs and Expenses. Borrower shall, whether or not the
transactions contemplated hereby shall be consummated:
(a)......pay or reimburse Collateral Agent and each Lender and
each portfolio advisor within ten (10) Business Days after demand for all Lender
Costs incurred by Collateral Agent or such Lender or such portfolio advisor 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 other 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 Collateral Agent or any Lender or any
portfolio advisor with respect thereto;
(b)......pay or reimburse Collateral Agent and each Lender and
each portfolio advisor within ten (10) Business Days after demand for all Lender
Costs incurred by Collateral Agent or such Lender or such portfolio advisor 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 Collateral
Agent or any Lender or any portfolio advisor; and
(c)......pay or reimburse Collateral Agent and each Lender and
each portfolio advisor within ten (10) Business Days after demand for all
reasonable appraisal (including the allocated cost of internal appraisal
services), audit, due diligence, monitoring review, syndication, environmental
inspection and review (including the allocated cost of such internal services
and the allocated costs of services of SAI or its Affiliates and Trustee),
search and filing costs, fees and expenses, rating agency costs, fees and
expenses, transportation costs and other out-of-pocket expenses incurred or
sustained by Collateral Agent, any Lender or any portfolio advisor, SAI or any
of their respective affiliates in connection with the Loan, the Loan Documents,
any of the Obligations and the matters referred to under (a) and (b) of this
Section 10.4.
(d)......In addition to the foregoing, if any payment of
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principal on the Loan is made by the Borrower to or for the account of a Lender
other than on the last day of the then current Interest Accrual Period, as a
result of a payment, acceleration or for any other reason, Borrower shall, upon
demand by such Lender, pay to such Lender any amounts required to compensate
such Lender for any additional losses, costs or expenses that it may reasonably
incur as a result of such payment, including, without limitation, any loss, cost
or expense incurred by reason of the liquidation or reemployment of deposits or
other funds acquired by any Lender to fund or maintain the Loan or any portion
thereof.
10.5. Indemnity. Borrower shall pay, indemnify, and hold Collateral
Agent, each Lender, SAI, Trustee and each of their respective Affiliates and
Subsidiaries, and each of their respective officers, directors, employees,
counsel, agents and attorneys-in-fact (each, an "Indemnified Person") harmless
from and against any environmental liabilities and obligations of Borrower, any
of its Subsidiaries or any of their properties and from and against any and all
claims, 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 or in connection with
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 or any B-Piece,
Securitization Document or Securitization Trust, 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 or willful misconduct of such Indemnified Person or the breach
by such Indemnified Person of its obligations hereunder. The agreements in this
Section 10.5 shall survive payment of all other Obligations and the termination
of this Agreement.
10.6. Marshaling: Payments Set Aside. Neither Collateral Agent nor any
Lender shall 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 Collateral Agent or
any Lender, or to the extent Collateral Agent or any 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.
10.7. 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 each Lender.
10.8. Set-off. In addition to any rights and remedies of Lenders
provided by law, if an Event of Default exists, each 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
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apply any and all monies or deposits at any time held by, and other indebtedness
at any time owing by, such Lender to or for the credit or the account of
Borrower against any and all Obligations owing to such Lender, now or hereafter
existing, irrespective of whether or not such Lender shall have made demand
under this Agreement or any Loan Document and although such Obligations may be
contingent or unmatured. Each Lender agrees promptly to notify Borrower after
any such set-off and application made by such Lender; provided, however, that,
the failure to give such notice shall not affect the validity of such set-off
and application. The rights of each Lender under this Section 10.8 are in
addition to the other rights and remedies (including other rights of set-off)
which such Lender may have.
10.9. 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.
10.10. 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.
10.11. No Third Parties Benefited. This Agreement is made and entered
into for the sole protection and legal benefit of Borrower, Collateral Agent and
each Lender (and its portfolio advisor), 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. Neither Collateral Agent nor any
Lender shall have any obligation to any Person not a party to this Agreement or
other Loan Documents.
10.12. Time. Time is of the essence as to each term or provision of
this Agreement and each of the other Loan Documents.
10.13. 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.
THE BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS,
FOR ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF ANY NEW YORK
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STATE COURT OR FEDERAL COURT OF THE UNITED STATES OF AMERICA SITTING IN NEW YORK
CITY, AND ANY APPELLATE COURT FROM ANY THEREOF, IN ANY ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS
TO WHICH IT IS OR IS TO BE A PARTY, OR FOR RECOGNITION OR ENFORCEMENT OF ANY
JUDGMENT, AND THE BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREES THAT
ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND
DETERMINED IN ANY SUCH NEW YORK STATE COURT OR, TO THE EXTENT PERMITTED BY LAW,
IN SUCH FEDERAL COURT. THE BORROWER AGREES THAT A FINAL JUDGMENT IN ANY SUCH
ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER
JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW.
NOTHING IN THIS AGREEMENT SHALL AFFECT ANY RIGHT THAT ANY PARTY MAY OTHERWISE
HAVE TO BRING ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OF THE
OTHER LOAN DOCUMENTS TO WHICH IT IS OR IS TO BE A PARTY IN THE COURTS OF ANY
JURISDICTION.
THE BORROWER IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE
FULLEST EXTENT IT MAY LEGALLY AND EFFECTIVELY DO SO, ANY OBJECTION THAT IT MAY
NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS
TO WHICH IT IS OR IS TO BE A PARTY IN ANY NEW YORK STATE OR FEDERAL COURT. THE
BORROWER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE
DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING
IN ANY SUCH COURT.
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.
10.14. Entire Agreement. This Agreement, together with the other Loan
Documents, embodies the entire Agreement and understanding among Borrower,
Collateral Agent and Lenders and supersedes all prior or contemporaneous
agreements and understandings of such Persons, verbal or written, relating to
the subject matter hereof and thereof and any prior arrangements made with
respect to the payment by Borrower (or any indemnification for) any Lender Costs
incurred (or to be incurred) by or on behalf of Collateral Agent or any Lender.
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10.15. Interpretation. This Agreement is the result of negotiations
between and has been reviewed by counsel to Collateral Agent, Lenders, 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 Collateral
Agent or any Lender merely because of Lenders' involvement in the preparation of
such documents and agreements.
10.16. Assignment; Register. Each Lender may assign, sell
participations in or pledge its rights hereunder and under the Loan Documents
without the consent of Borrower; provided, however, that no such assignment
shall be effective until the parties thereto shall have executed and delivered
to the Collateral Agent for acceptance and recording in the Register (as defined
below) an Assignment and Acceptance. Upon such execution, delivery, acceptance
and recording, from and after the effective date specified in such Assignment
and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the
extent that rights and obligations hereunder have been assigned to it pursuant
to such Assignment and Acceptance, have the rights and obligations of a Lender
hereunder and (y) the Lender assignor thereunder shall, to the extent that
rights and obligations hereunder have been assigned by it pursuant to such
Assignment and Acceptance, relinquish its rights and be released from its
obligations under this Agreement (and, in the case of an Assignment and
Acceptance covering all or the remaining portion of an assigning Lender's rights
and obligations under this Agreement, such Lender shall cease to be a party
hereto). Borrower may not assign or delegate any of its rights, interest or
obligations hereunder or under any of the Loan Documents.
The Collateral Agent, on behalf of the Borrower, shall
maintain at the Collateral Agent's address referred to in Section 9.02 a copy of
each Assignment and Acceptance delivered to and accepted by it and a register
for the recordation of the names and addresses of the Lenders and the principal
amount of the Loan owing to each Lender from time to time (the "Register"). The
entries in the Register shall be conclusive and binding for all purposes, absent
manifest error, and the Borrower, the Collateral Agent and the Lenders may treat
each Person whose name is recorded in the Register as a Lender hereunder for all
purposes of this Agreement. The Register shall be available for inspection by
the Borrower or any Lender at any reasonable time and from time to time upon
reasonable prior notice.
Upon its receipt of an Assignment and Acceptance executed by
an assigning Lender and an assignee, the Collateral Agent shall, if such
Assignment and Acceptance has been completed and is in substantially the form of
Exhibit C hereto, (i) accept such Assignment and Acceptance, (ii) record the
information contained therein in the Register and (iii) give prompt notice
thereof to the Borrower. Within five Business Days after its receipt of written
request therefor, the Borrower, at its own expense, shall execute and deliver to
the Collateral Agent in exchange for any Note surrendered in connection with an
assignment hereunder, a new Note to the order of the assignee in an amount equal
to the principal amount of the Loan assumed by it and, if the assigning Lender
has retained a portion of the Loan hereunder, a new Note to the order of the
assigning Lender in an amount equal to such portion retained by it hereunder.
Such new Note or Notes shall be in an aggregate principal amount equal to the
aggregate principal amount of such surrendered Note, shall be dated the
effective date of the applicable Assignment and Acceptance and shall otherwise
be in substantially the form of Exhibit D.
Page -49-
<PAGE>
10.17. Revival and Reinstatement of Obligations. If the incurrence or
payment of the Obligations by Borrower or the transfer by Borrower to Collateral
Agent or any 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 Collateral Agent or any 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.
10.18. Survival. Notwithstanding any provision of this agreement or any
other Loan Document to the contrary, the provisions of Sections 2.11, 2.12,
2.13, 2.14, 9.4, 9.5, 10.4 and 10.5 shall survive payment of all other
Obligations and the termination of this Agreement.
10.19. Confidentiality. Each Lender and Collateral Agent agrees to hold
any confidential information that it may receive from Borrower pursuant to this
Agreement in confidence, except for disclosure: (a) to other Lenders, rating
agencies, trustees, reference lenders, portfolio advisors, any direct or
indirect contractual counterparty in swap agreements or such contractual
counterparty's professional advisor, and any other parties relevant to any
investment vehicle managed by SAI Investment Adviser, Inc.; (b) to legal counsel
and accountants for Borrower, Collateral Agent or any Lender or prospective
Lender; (c) to other professional advisors to Borrower, Collateral Agent or any
Lender or prospective Lender; (d) to regulatory officials; (e) as required by
law or legal process; and (f) to another proposed Lender in connection with a
proposed assignment permitted hereunder provided that the recipient has accepted
such information subject to a confidentiality agreement substantially similar to
this Section 10.19. For purposes of the foregoing "confidential information"
shall mean any information respecting Borrower, its Subsidiaries or Affiliates
delivered to Lenders and marked confidential, other than (i) information
previously filed with any governmental agency and available to the public, (ii)
information previously published in any public medium from a source other than
directly or indirectly, that Lender, (iii) information previously disclosed by
Borrower to any Person not associated with Borrower without a confidentiality
agreement or obligation substantially similar to this Section 10.19, and (iv)
any such information that is or becomes generally available to the public other
than as a result of a breach by Collateral Agent or any Lender of its
obligations hereunder or that is or becomes available to Collateral Agent or
such Lender from a source other than Borrower.
10.20. Actions by Portfolio Advisor. Any rights of a Lender hereunder
or under any other Loan Document may be exercised by such Lender's portfolio
advisor or collateral manager upon delivery to the Collateral Agent of evidence
in writing, reasonably satisfactory to the Collateral Agent, setting forth such
authority (which may be in the form of a written confirmation of such authority
from the applicable Lender).
* * * * *
Page -50-
<PAGE>
S-5
S-1
[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: Sr. V.P./Secretary/General Counsel
<PAGE>
Lenders:
CIBC INC.
By: /S/ WILLIAM M. SWENSON
Name: William M. Swenson
Title: Authorzied Signatory
Portion of Loan: $18,000,000
Ratable Share: 47.368421052%
Address for Notice:
425 Lexington Avenue
7th Floor
New York, NY 10017
Facsimile: (212) 856-3799
Attention: Korin Volk
<PAGE>
SUNAMERICA LIFE INSURANCE COMPANY
By: /S/ JOHN G. LAPHAM, III
Name: John G. Lapham, III
Title: Authorized Agen
Portion of Loan: $7,000,000
Ratable Share: 18.421052631%
Address for notices in respect of
payment:
SunAmerica Investments
1 SunAmerica Center
Los Angeles, CA 90067-6022
Attn: Investment Accounting, 36th Floor
Facsimile: (310) 772-6596
Address for all other notices:
SunAmerica Corporate Finance
1 SunAmerica Center
Los Angeles, CA 90067-6022
Attn: Amy Grenier
Facsimile: (310) 772-6078
<PAGE>
Collateral Agent:
HARRIS TRUST AND SAVINGS BANK, as Collateral Agent
By: /S/ VIRGINIA CONWAY
Name: Viginia Conway
Title: Authorized Agent
Portion of Loan: $13,000,000
Ratable Share: 34.210526315%
<PAGE>
SCHEDULES A - I and EXHIBITS A - C ARE OMITTED AND SINCE THEY ARE NOT MATERIAL
OR SIGNIFICANT DOCUMENTS.
<PAGE>
EXHIBIT D
FORM OF PROMISSORY NOTE
$____________ Dated: _____________, 199_
FOR VALUE RECEIVED, the undersigned, UGLY DUCKLING CORPORATION, a Delaware
corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of
[_______________] (the "Lender") the principal sum of
[__________________________] [($___________)] in consecutive monthly
installments until such principal amount has been paid in full, such
installments (other than the last installment owing hereunder which shall be due
and payable on the Maturity Date (as defined in the Loan Agreement referred to
below)) shall be due and payable on each Payment Date (as defined in such Loan
Agreement), the amount payable on each such Payment Date being equal to the
Monthly Amortization Amount (as defined in such Loan Agreement ) for such
Payment Date, subject to Section 2.6 of the Loan Agreement; provided, however
that the last such installment shall be in the amount necessary to repay in full
the aggregate unpaid principal amount of this Note and shall, in any event, be
due and payable on the Maturity Date.
The Borrower promises to pay interest on the unpaid principal
amount of this Note from the date hereof until such principal amount is paid in
full, at such interest rates, and payable at such times, as are specified in the
Loan Agreement.
Both principal and interest are payable in lawful money of the
United States of America in same day funds to the Lender in accordance with the
provisions of the Loan Agreement. All payments made on account of principal
hereof, shall be recorded by the Lender and, prior to any transfer hereof,
endorsed on the grid attached hereto, which is part of this Note; provided,
however, that any failure to make such endorsement on such grid shall in no way
alter, impair or limit the Borrower's obligations hereunder.
This Note is one of the Notes referred to in, and is entitled
to the benefits of, the Senior Secured Loan Agreement dated as of May [__], 1999
(as the same may be amended, supplemented or otherwise modified from time to
time, the "Loan Agreement") among the Borrower, the Lender and certain other
lenders parties thereto, and Harris Trust and Savings Bank, as Collateral Agent
for the Lender and such other lenders. The Loan Agreement, among other things,
contains provisions for acceleration of the maturity hereof upon the happening
of certain stated events and also for prepayments on account of principal hereof
prior to the maturity hereof upon the terms and conditions therein specified.
The Borrower and any endorser of this Note hereby waive
presentment, demand, protest and notice of any kind. No failure to exercise, and
no delay in exercising, any rights hereunder on the part of the holder hereof
shall operate as a waiver of such rights.
This Note shall be governed by, and construed in accordance
with, the laws of the State of New York.
UGLY DUCKLING CORPORATION
By: ______________________
Title:____________________
<PAGE>
EXHIBIT E
FORM OF GUARANTY
GUARANTY dated as of May 14, 1999 (as amended, supplemented or
otherwise modified from time to time, this "Guaranty") made by UGLY DUCKLING CAR
SALES AND FINANCE CORPORATION, an Arizona corporation (together with any future
subsidiary of the Borrower (as hereinafter defined) that agrees to be bound by
the terms hereof, each a "Guarantor" and, collectively, the "Guarantors"), in
favor of the financial institutions from time to time party to the Loan
Agreement referred to below as Lenders and Harris Trust and Savings Bank, as
collateral agent (in such capacity, together with any successor appointed
pursuant to Article IX of the Loan Agreement, the "Collateral Agent"; the
Collateral Agent and such Lenders are each referred to individually herein as a
"Guaranteed Party" and are collectively referred to herein as the "Guaranteed
Parties").
PRELIMINARY STATEMENT. Ugly Duckling Corporation, a Delaware
corporation (the "Borrower") has entered into that certain Senior Secured Loan
Agreement dated as of May 14, 1999 with the financial institutions from time to
time party thereto as Lenders and Harris Trust and Savings Bank, as Collateral
Agent (said Agreement, as it may hereafter be amended, supplemented or otherwise
modified from time to time, being the "Loan Agreement", the terms defined
therein and not otherwise defined herein being used herein as therein defined).
Each Guarantor will derive substantial direct and indirect benefit from the
transactions contemplated by the Loan Agreement. It is a condition precedent to
the making of the Loan by the Lenders under the Loan Agreement that each
Guarantor shall have executed and delivered this Guaranty.
NOW, THEREFORE, in consideration of the premises and in order
to induce the Lenders to make the Loan under the Loan Agreement, each Guarantor
hereby agrees as follows:
Section 1. Guaranty ; Limitation of Liability. (a) Each
Guarantor hereby unconditionally and irrevocably guarantees, on a joint and
several basis, the punctual payment when due, whether at stated maturity, by
acceleration or otherwise, of all Obligations of the Borrower now or hereafter
existing under the Loan Documents, whether for principal, interest, fees,
expenses, indemnities or otherwise (such Obligations being the "Guaranteed
Obligations"), and agrees to pay any and all expenses (including counsel fees
and expenses) incurred by the Collateral Agent or any other Guaranteed Party in
enforcing any rights under this Guaranty. Without limiting the generality of the
foregoing, each Guarantor's liability shall extend to all amounts that
constitute part of the Guaranteed Obligations and would be owed by the Borrower
to the Collateral Agent or any other Guaranteed Party under the Loan Documents
but for the fact that they are unenforceable or not allowable due to the
existence of a bankruptcy, reorganization or similar proceeding.
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(b) Any provision of this Guaranty to the contrary
notwithstanding, the liability of each Guarantor under this Guaranty shall be
limited to such maximum aggregate amount as would not render such Guarantor's
obligations hereunder subject to avoidance as a fraudulent transfer or
conveyance under Section 548 of Title 11 of the United States Code or any
applicable provisions of any state or foreign law having similar effect.
Section 2. Guaranty Absolute. Each Guarantor guarantees that
the Guaranteed Obligations will be paid strictly in accordance with the terms of
the Loan Documents, regardless of any law, regulation or order now or hereafter
in effect in any jurisdiction affecting any of such terms or the rights of the
Collateral Agent or any other Guaranteed Party with respect thereto. The
Obligations of each Guarantor under this Guaranty are independent of the
Guaranteed Obligations or any other Obligations of any other Loan Party under
the Loan Documents, and a separate action or actions may be brought and
prosecuted against each Guarantor to enforce this Guaranty, irrespective of
whether any action is brought against the Borrower or any other Loan Party or
whether the Borrower or any other Loan Party is joined in any such action or
actions. The liability of each Guarantor under this Guaranty is joint and
several and shall be irrevocable, absolute and unconditional irrespective of,
and each Guarantor hereby irrevocably waives any defenses it may now or
hereafter have in any way relating to, any or all of the following:
(a) any lack of validity or enforceability of any Loan
Document or any agreement or instrument relating thereto;
(b) any change in the time, manner or place of payment of, or
in any other term of, all or any of the Guaranteed Obligations or any
other Obligations of any other Loan Party under the Loan Documents, or
any other amendment or waiver of or any consent to departure from any
Loan Document, including, without limitation, any increase in the
Guaranteed Obligations resulting from the extension of additional
credit to the Borrower or any of its Subsidiaries or otherwise;
(c) any taking, exchange, release or non-perfection of any
Collateral, or any taking, release or amendment or waiver of or consent
to departure from any other guaranty, for all or any of the Guaranteed
Obligations;
(d) any manner of application of collateral, or proceeds
thereof, to all or any of the Guaranteed Obligations, or any manner of
sale or other disposition of any collateral for all or any of the
Guaranteed Obligations or any other Obligations of any other Loan Party
under the Loan Documents or any other assets of the Borrower or any of
its Subsidiaries;
(e) any change, restructuring or termination of the corporate
structure or existence of the Borrower or any of its Subsidiaries;
(f) any failure of any Guaranteed Party to disclose to the
Borrower or any Guarantor any information relating to the financial
condition, operations, properties or prospects of any other Loan Party
now or in the future known to any Guaranteed Party (each Guarantor
hereby waiving any duty on the part of the Guaranteed Parties to
disclose such information); or
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<PAGE>
(g) any other circumstance (including, without limitation, any
statute of limitations) or any existence of or reliance on any
representation by the Collateral Agent or any other Guaranteed Party
that might otherwise constitute a defense available to, or a discharge
of, the Borrower, any Guarantor or any other guarantor or surety.
This Guaranty shall continue to be effective or be reinstated, as the case may
be, if at any time any payment of any of the Guaranteed Obligations is rescinded
or must otherwise be returned by any Guaranteed Party or any other Person upon
the insolvency, bankruptcy or reorganization of the Borrower or any other Loan
Party or otherwise, all as though such payment had not been made.
Section 3. Waivers and Acknowledgments. (a) Each Guarantor
hereby waives promptness, diligence, notice of acceptance and any other notice
with respect to any of the Guaranteed Obligations and this Guaranty and any
requirement that the Collateral Agent or any other Guaranteed Party protect,
secure, perfect or insure any Lien or any property subject thereto or exhaust
any right or take any action against the Borrower or any other Person or any
collateral.
(b) Each Guarantor hereby waives any right to revoke this
Guaranty, and acknowledges that this Guaranty is continuing in nature and
applies to all Guaranteed Obligations, whether existing now or in the future.
(c) Each Guarantor acknowledges that it will receive
substantial direct and indirect benefits from the financing arrangements
contemplated by the Loan Documents and that the waivers set forth in this
Section 3 are knowingly made in contemplation of such benefits.
Section 4. Subrogation; Subordination; Contribution. (a) Each
Guarantor agrees that it will not exercise any rights that it may now or
hereafter acquire against the Borrower or any other insider guarantor that arise
from the existence, payment, performance or enforcement of such Guarantor's
Obligations under this Guaranty or any other Loan Document, including, without
limitation, any right of subrogation, reimbursement, exoneration, contribution
or indemnification and any right to participate in any claim or remedy of the
Collateral Agent or any other Guaranteed Party against the Borrower or any other
insider guarantor or any collateral, whether or not such claim, remedy or right
arises in equity or under contract, statute or common law, including, without
limitation, the right to take or receive from the Borrower or any other insider
guarantor, directly or indirectly, in cash or other property or by set-off or in
any other manner, payment or security on account of such claim, remedy or right,
unless and until all of the Obligations and all other amounts payable under this
Guaranty shall have been paid in full in cash. If any amount shall be paid to
any Guarantor in violation of the preceding sentence at any time prior to the
later of the payment in full in cash of the Guaranteed Obligations and all other
amounts payable under this Guaranty and the Maturity Date, such amount shall be
held in trust for the benefit of the Collateral Agent and the other Guaranteed
Parties and shall forthwith be paid to the Collateral Agent to be credited and
applied to the Guaranteed Obligations and all other amounts payable under this
Guaranty, whether matured or unmatured, in accordance with the terms of the Loan
Documents, or to be held as collateral for any Guaranteed Obligations or other
amounts payable under this Guaranty thereafter arising. If (i) any Guarantor
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<PAGE>
shall make payment to the Collateral Agent or any other Guaranteed Party of all
or any part of the Guaranteed Obligations, (ii) all of the Guaranteed
Obligations and all other amounts payable under this Guaranty shall be paid in
full in cash and (iii) the Maturity Date shall have occurred, the Collateral
Agent and the other Guaranteed Parties will, at such Guarantor's request and
expense, execute and deliver to such Guarantor appropriate documents, without
recourse and without representation or warranty, necessary to evidence the
transfer by subrogation to such Guarantor of an interest in the Guaranteed
Obligations resulting from such payment by such Guarantor.
(b) Each Guarantor hereby agrees that any indebtedness of the
Borrower now or hereafter owing to such Guarantor (the "Subordinated Debt") is
hereby subordinated to all of the Guaranteed Obligations and all other amounts
payable under this Guaranty, whether heretofore, now or hereafter created, and
that without the prior consent of the Collateral Agent, the Subordinated Debt
shall not be paid in whole or in part until the Guaranteed Obligations and all
other amounts payable under this Guaranty have been paid in full and the Loan
Agreement has been terminated and is of no further force or effect, except that
payments of principal and interest on the Subordinated Debt shall be permitted
(i) so long as no Event of Default shall have occurred and be continuing and
(ii) during the continuance of any Event of Default so long as the Collateral
Agent has not provided the Company and each Guarantor with written notice of
default stating that such payment shall no longer be permitted, but in either of
the foregoing events only to the extent such payments would not render the
Borrower incapable of performing the Guaranteed Obligations. Each Guarantor
agrees that it will not accept any payment of or on account of any Subordinated
Debt at any time in contravention of the foregoing. At the request of the
Collateral Agent, following the occurrence and during the continuance of an
Event of Default, each Guarantor hereby agrees to direct the Borrower to pay to
the Collateral Agent, for the account of the Collateral Agent and the Lenders,
all or any part of the Subordinated Debt and any amount so paid to the
Collateral Agent shall be applied to payment of the Guaranteed Obligations and
all other amounts payable under this Guaranty. Each payment on the Subordinated
Debt received in violation of any of the provisions hereof shall be deemed to
have been received as trustee for the Collateral Agent and shall be paid over to
the Collateral Agent immediately on account of the Guaranteed Obligations, but
without otherwise affecting in any manner any Guarantor's liability under any of
the provisions of this Guaranty. Each Guarantor agrees to file all claims
against the Borrower in any bankruptcy or other proceeding in which the filing
of claims is required by law in respect of any Subordinated Debt, and the
Collateral Agent shall be entitled to all of such Guarantor's rights thereunder.
If for any reason any Guarantor fails to file such claim at least 30 days prior
to the last date on which such claim should be filed, the Collateral Agent, as
such Guarantor's attorney-in-fact, is hereby authorized to do so in such
Guarantor's name or, in the Collateral Agent's discretion, to assign such claim
to and cause proof of claim to be filed in the name of the Collateral Agent or
its nominee. In all such cases, whether in reorganization, bankruptcy or
otherwise, the Person or Persons authorized to pay such claim shall pay to the
Collateral Agent, for the account of the Collateral Agent and the Lenders, the
full amount payable on the claim in the proceeding, and, to the full extent
necessary for that purpose, each Guarantor hereby assigns to the Collateral
Agent, for the account of the Collateral Agent and the Lenders, all of such
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<PAGE>
Guarantor's rights to any payments or distributions to which such Guarantor
otherwise would be entitled. If the amount so paid is greater than such
Guarantor's liability hereunder, the Collateral Agent will pay the excess amount
to the party entitled thereto. In addition, each Guarantor hereby appoints the
Collateral Agent as its attorney-in-fact to exercise all of such Guarantor's
voting rights in connection with any bankruptcy proceeding or any plan for the
reorganization of the Borrower.
(c) In order to provide for just and equitable contribution
among the Guarantors, the Guarantors agree, inter se, that in the event any
payment or distribution is made by any Guarantor (a "Funding Guarantor") under
this Guaranty, such Funding Guarantor shall be entitled to a contribution from
all other Guarantors in a pro rata amount based on the Adjusted Net Assets (as
hereinafter defined) of each Guarantor (including the Funding Guarantor) for all
payments, damages and expenses incurred by that Funding Guarantor in discharging
the Guaranteed Obligations or any other Guarantor's Obligations with respect to
this Guaranty. "Adjusted Net Assets" of any Guarantor at any date means the
lesser of (a) the amount by which the fair value of the property of such
Guarantor exceeds the total amount of liabilities (including, without
limitation, contingent liabilities, but excluding liabilities of such Guarantor
under this Guaranty) of such Guarantor at such date, and (b) the amount by which
the present fair salable value of the assets of such Guarantor at such date
exceeds the amount that will be required to pay the probable liability of such
Guarantor on its debts (after giving effect to all contingent liabilities, but
excluding liabilities of such Guarantor under this Guaranty) as they become
absolute and matured.
Section 5. Payments Free and Clear of Taxes, Etc. (a) Any and
all payments made by any Guarantor hereunder shall be made free and clear of and
without deduction for any and all present or future Taxes. If any Guarantor
shall be required by law to deduct any Taxes from or in respect of any sum
payable hereunder to the Collateral Agent or any other Guaranteed Party, (i) the
sum payable shall be increased as may be necessary so that after making all
required deductions (including deductions applicable to additional sums payable
under this Section) the Collateral Agent or such other Guaranteed Party (as the
case may be) receives an amount equal to the sum it would have received had no
such deductions been made, (ii) such Guarantor shall make such deductions and
(iii) such Guarantor shall pay the full amount deducted to the relevant taxation
authority or other authority in accordance with applicable law.
(b) In addition, each Guarantor agrees to pay any present or
future Other Taxes.
(c) Each Guarantor will indemnify the Collateral Agent and
each other Guaranteed Party for the full amount of Taxes and Other Taxes
(including, without limitation, any Taxes or Other Taxes imposed by any
jurisdiction on amounts payable under this Section) paid by the Collateral Agent
or such other Guaranteed Party (as the case may be) and any liability (including
penalties, additions to tax, interest and expenses) arising therefrom or with
respect thereto. This indemnification shall be made within 30 days from the date
the Collateral Agent or such other Guaranteed Party (as the case may be) makes
written demand therefor.
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<PAGE>
(d) Within 30 days after the date of any payment of Taxes by
or on behalf of any Guarantor, such Guarantor will furnish to the Collateral
Agent, at its address referred to in the Loan Agreement, the original receipt of
payment thereof or a certified copy of such receipt. In the case of any payment
hereunder by or on behalf of any Guarantor through an account or branch outside
the United States or on behalf of any Guarantor by a payor that is not a United
States person, if such Guarantor determines that no Taxes are payable in respect
thereof, such Guarantor shall furnish, or shall cause such payor to furnish, to
the Collateral Agent, at such address, an opinion of counsel acceptable to the
Collateral Agent stating that such payment is exempt from Taxes. For purposes of
this Section 5(d) and Section 5(e), the terms "United States" and "United States
person" shall have the meanings specified in Section 7701 of the Internal
Revenue Code.
(e) Without prejudice to the survival of any other agreement
of any Guarantor hereunder or under any other Loan Document, the agreements and
obligations of each Guarantor contained in this Section 5 shall survive the
payment in full of the Guaranteed Obligations and all other amounts payable
under this Guaranty.
Section 6. Representations and Warranties. Each Guarantor
hereby represents and warrants as follows:
(a) Such Guarantor (i) is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation, (ii) is duly qualified and in good standing as a foreign
corporation in each other jurisdiction in which it owns or leases property or in
which the conduct of its business requires it to so qualify or be licensed
except where the failure to so qualify or be licensed is not reasonably likely
to have a Material Adverse Effect and (iii) has all requisite corporate power
and authority to own or lease and operate its properties and to carry on its
business as now conducted and as proposed to be conducted.
(b) The execution, delivery and performance by such Guarantor
of this Guaranty and each other Loan Document to which it is or is to be a
party, and the consummation of the transactions contemplated hereby and thereby,
are within such Guarantor's corporate powers, have been duly authorized by all
necessary corporate action, and do not (i) contravene such Guarantor's charter
or by-laws, (ii) violate any law (including, without limitation, the Securities
Exchange Act of 1934), rule, regulation (including, without limitation,
Regulation X of the Board of Governors of the Federal Reserve System), order,
writ, judgment, injunction, decree, determination or award, (iii) conflict with
or result in the breach of, or constitute a default under, any contract, loan
agreement, indenture, mortgage, deed of trust, lease or other instrument binding
on or affecting such Guarantor, any of its Subsidiaries or any of their
properties or (iv) except for the Liens created by the Collateral Documents,
result in or require the creation or imposition of any Lien upon or with respect
to any of the properties of such Guarantor or any or any of its Subsidiaries.
(c) No authorization or approval or other action by, and no
notice to or filing with, any governmental authority or regulatory body or any
other third party is required for (i) the due execution, delivery, recordation,
filing or performance by such Guarantor any Loan Party of this Guaranty or any
other Loan Document to which it is or is to be a party, or for the consummation
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<PAGE>
of the transactions contemplated hereby and thereby, (ii) the grant by any Loan
Party of the Liens granted by it pursuant to the Collateral Documents, (iii) the
perfection or maintenance of the Liens created by the Collateral Documents
(including the first priority nature thereof) or (iv) the exercise by the
Collateral Agent or any Lender of its rights under the Loan Documents or the
remedies in respect of the Collateral pursuant to the Collateral Documents,
except for the authorizations, approvals, actions, notices and filings which
have been duly obtained, taken, given or made and are in full force and effect.
(d) This Guaranty has been, and each of the other Loan
Documents to which such Guarantor is a party have been, duly executed and
delivered by such Guarantor and constitute the legal, valid and binding
obligation of such Guarantor, enforceable against such Guarantor in accordance
with their respective terms.
(e) There are no conditions precedent to the effectiveness of
this Guaranty that have not been satisfied or waived.
(f) Such Guarantor has, independently and without reliance
upon the Collateral Agent or any other Guaranteed Party and based on such
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Guaranty, and such Guarantor has
established adequate means of obtaining from any other Loan Parties on a
continuing basis information pertaining to, and is now and on a continuing basis
will be completely familiar with, the financial condition, operations,
properties and prospects of such other Loan Parties.
Section 7. Covenants. So long as any part of the Guaranteed
Obligations shall remain unpaid, each Guarantor agrees that if, under the terms
of the Loan Agreement, the Borrower is required to cause such Guarantor or any
of such Guarantor's Subsidiaries to take, or to refrain from taking, any action,
or to comply with any requirements, obligations, limitations or restrictions
contained therein, in each case whether individually or together with any other
Loan Parties, such Guarantor shall, and shall cause each of its Subsidiaries to,
take or refrain from taking (as the case may be) any such action and comply with
all such requirements, obligations, limitations and restrictions.
Section 8. Amendments, Etc. No amendment or waiver of any
provision of this Guaranty and no consent to any departure by any Guarantor
therefrom shall in any event be effective unless the same shall be in writing
and signed by the Collateral Agent (with the consent or at the direction of the
Required Lenders) and, in the case of any such amendment, by each Guarantor, and
then such waiver or consent shall be effective only in the specific instance and
for the specific purpose for which given; provided, however, that no amendment,
waiver or consent shall, unless in writing and signed by all of the Lenders (or
by the Collateral Agent with the consent or at the direction of all of the
Lenders), (i) further reduce or limit the liability of any Guarantor hereunder,
(ii) postpone any date fixed for payment hereunder or (iii) change the number or
percentage of Lenders required to take any action hereunder.
Section 9. Notices, Etc. All notices and other communications
provided for hereunder shall be in writing (including telegraphic, telecopy or
telex communication) and mailed, telegraphed, telecopied, telexed or delivered
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to it, if to any Guarantor, addressed to it at its address set forth on the
applicable signature page hereto, if to the Collateral Agent or any Guaranteed
Party, at its address specified in the Loan Agreement, or as to any party at
such other address as shall be designated by such party in a written notice to
each other party. All such notices and other communications shall, when mailed,
telegraphed, telecopied or telexed, be effective when deposited in the mails,
delivered to the telegraph company, transmitted by telecopier or confirmed by
telex answerback, respectively.
Section 10. No Waiver; Remedies. No failure on the part of the
Collateral Agent or any other Guaranteed Party to exercise, and no delay in
exercising, any right hereunder shall operate as a waiver thereof; nor shall any
single or partial exercise of any right hereunder preclude any other or further
exercise thereof or the exercise of any other right. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law.
Section 11. Right of Set-off. Upon (a) the occurrence and
during the continuance of any Event of Default, each Guaranteed Party and each
of its respective Affiliates is hereby authorized, by each Guarantor, at any
time and from time to time, to the fullest extent permitted by law, to set off
and apply any and all deposits (general or special, time or demand, provisional
or final) at any time held and other indebtedness at any time owing by such
Guaranteed Party or such Affiliate to or for the credit or the account of such
Guarantor against any and all of the Obligations of such Guarantor now or
hereafter existing under this Guaranty, whether or not such Guaranteed Party
shall have made any demand under this Guaranty and although such Obligations may
be unmatured. Each Guaranteed Party agrees promptly to notify the applicable
Guarantor after any such set-off and application; provided, however, that the
failure to give such notice shall not affect the validity of such set-off and
application. The rights of each Guaranteed Party and its respective Affiliates
under this Section are in addition to other rights and remedies (including,
without limitation, other rights of set-off) that such Guaranteed Party and its
respective Affiliates may have.
Section 12. Indemnification. Without limitation on any other
Obligations of any Guarantor or remedies of the Guaranteed Parties under this
Guaranty, each Guarantor shall, to the fullest extent permitted by law,
indemnify, defend and save and hold harmless each Guaranteed Party from and
against, and shall pay on demand, any and all losses, liabilities, damages,
costs, expenses and charges (including the fees and disbursements of such
Guaranteed Party's legal counsel) suffered or incurred by such Guaranteed Party
as a result of any failure of any Guaranteed Obligations to be the legal, valid
and binding obligations of the Borrower enforceable against the Borrower in
accordance with their terms.
Section 13. Continuing Guaranty; Assignments under the Loan
Agreement. This Guaranty is a continuing guaranty and shall (a) remain in full
force and effect until the later of the payment in full in cash of the
Guaranteed Obligations and all other amounts payable under this Guaranty and the
Maturity Date (b) be binding upon each Guarantor, its successors and assigns and
(c) inure to the benefit of and be enforceable by the Collateral Agent and the
other Guaranteed Parties and their successors, transferees and assigns. Without
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limiting the generality of the foregoing clause (c), any Guaranteed Party may
assign or otherwise transfer all or any portion of its rights and obligations
under the Loan Agreement (including, without limitation, all or any portion of
the Loan owing to it and any Note or Notes held by it) to any other Person, and
such other Person shall thereupon become vested with all the benefits in respect
thereof granted to such Guaranteed Party herein or otherwise, in each case as
and to the extent provided in Section 10.16 of the Loan Agreement.
Section 14. Governing Law; Jurisdiction; Waiver of Jury Trial,
Etc. (a) This Guaranty shall be governed by, and construed in accordance with,
the laws of the State of New York.
(b) Each Guarantor hereby irrevocably and unconditionally
submits, for itself and its property, to the nonexclusive jurisdiction of any
New York State court or federal court of the United States of America sitting in
New York City, and any appellate court from any thereof, in any action or
proceeding arising out of or relating to this Guaranty or any of the other Loan
Documents to which it is or is to be a party, or for recognition or enforcement
of any judgment, and each Guarantor hereby irrevocably and unconditionally
agrees that all claims in respect of any such action or proceeding may be heard
and determined in any such New York State court or, to the extent permitted by
law, in such federal court. Each Guarantor agrees that a final judgment in any
such action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Nothing in this Guaranty shall affect any right that any party may otherwise
have to bring any action or proceeding relating to this Guaranty or any of the
other Loan Documents to which it is or is to be a party in the courts of any
jurisdiction.
(c) Each Guarantor irrevocably and unconditionally waives, to
the fullest extent it may legally and effectively do so, any objection that it
may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Guaranty or any of the other Loan
Documents to which it is or is to be a party in any New York State or federal
court. Each Guarantor hereby irrevocably waives, to the fullest extent permitted
by law, the defense of an inconvenient forum to the maintenance of such action
or proceeding in any such court.
(d) Each Guarantor hereby irrevocably waives all right to
trial by jury in any action, proceeding or counterclaim (whether based on
contract, tort or otherwise) arising out of or relating to any of the Loan
Documents, the transactions contemplated thereby or the actions of the
Collateral Agent or any other Guaranteed Party in the negotiation,
administration, performance or enforcement thereof.
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IN WITNESS WHEREOF, each Guarantor has caused this Guaranty to
be duly executed and delivered by its officer thereunto duly authorized as of
the date first above written.
UGLY DUCKLING CAR SALES AND FINANCE CORPORATION, an
Arizona corporation
By: ________________________
Title:
Address for Notice:
____________________________
____________________________
____________________________
Telecopier: ______________________
Telephone: ______________________
Attention: ______________________
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT dated as of May 14, 1999 (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 HARRIS TRUST AND SAVINGS BANK, as collateral agent (in
such capacity, together with its successors in such capacity, the "Collateral
Agent") for the Lenders from time to time party to the Loan Agreement referred
to below.
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, together with the capital
stock of each New Issuer (as defined below) pledged or required to be pledged
hereunder, the "Pledged Shares"). UDC, as borrower, has on the date hereof
entered into a Senior Secured Loan Agreement with certain lenders (such lenders,
together with their successors and assigns, the "Lenders") and the Collateral
Agent (as such agreement may be amended, supplemented or otherwise modified from
time to time, the "Loan Agreement") pursuant to which UDC has borrowed money
from the Lenders. Pledgor, which is a wholly owned subsidiary of UDC, will
receive substantial direct and indirect benefits from the loans made to UDC
under the Loan Agreement and Pledgor has agreed to (i) guarantee the Obligations
(as defined in the Loan Agreement) pursuant to the Guaranty (as defined in the
Loan Agreement), and (ii) pledge the Pledged Shares and any proceeds thereof as
security for Pledgor's obligations under the Guaranty. Accordingly, the Pledged
Shares and any proceeds thereof will secure obligations of 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 have been
fully paid and performed to the satisfaction of each Lender. The term "Loan
Documents" shall mean the Loan Agreement, the Notes, the Guaranty, the
Collateral Account Agreement, this Pledge Agreement and any and all documents,
instruments and agreements securing and/or relating to the Obligations of UDC or
Pledgor to any Lender.
Section 2. Pledge of Stock and Grant of Security Interest. As
security for the prompt payment and performance in full when due of the Secured
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Obligations (as defined below), Pledgor hereby delivers, pledges and assigns to
the Collateral Agent, for the benefit of the Collateral Agent and the ratable
benefit of the Lenders and grants in favor of the Collateral Agent, for the
benefit of the Collateral Agent and the ratable benefit of the Lenders, a first
priority security interest in all of Pledgor's right, title and interest in and
to the Pledged Shares (which represent all capital stock of each issuer of
Pledged Shares) and all capital stock of each New Issuer (as defined below),
together with all of Pledgor's rights and privileges with respect thereto, all
proceeds, income and profits thereof, all dividends and other distributions in
respect thereof (including, without limitation, any and all investment property
distributed in respect thereof) and all property (including, without limitation,
all investment property) received in exchange thereof or in substitution
therefor (the "Collateral").
This Agreement secures, and the Collateral is collateral
security for, the prompt payment and performance in full when due, whether on a
specified payment date, at stated maturity, by acceleration or otherwise
(including, without limitation, the payment of amounts that would become due but
for the operation of the automatic stay under Section 362(a) of the Bankruptcy
Code or any similar law) of all obligations of UDC and all obligations of
Pledgor, in each case of every type and nature, now or hereafter existing under
the Loan Documents (including, without limitation, the Guaranty), whether for
principal, interest (including, without limitation, interest that, but for the
filing of a petition in bankruptcy would accrue on such obligations), fees,
expenses, indemnities or otherwise (all such obligations being the "Secured
Obligations"). Without limiting the generality of the foregoing, this Agreement
secures the payment of all amounts that constitute part of the Secured
Obligations and would be owed to the Collateral Agent or any Lender under the
Loan Documents but for the fact that they are unenforceable or not allowable due
to the existence of a bankruptcy, reorganization or similar proceeding.
Section 3. Dividends, Options, or Other Adjustments. Until the
Final Date, Pledgor shall deliver as Collateral to the Collateral Agent, and, as
security for the full and complete payment and performance of all of the Secured
Obligations hereby grants to the Collateral Agent a continuing security interest
in, any and all additional shares of stock or any other property (including,
without limitation, investment 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 the Collateral Agent as
Collateral hereunder.
Section 4. Delivery of Share Certificates; Stock Powers.
Pledgor shall promptly deliver to the Collateral Agent, 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 in blank by Pledgor. If, at any time the
Collateral Agent notifies Pledgor that it requires additional stock powers
endorsed in blank, Pledgor shall promptly execute in blank and deliver the
requested power to the Collateral Agent.
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Section 5. Power of Attorney. Pledgor hereby constitutes and
irrevocably appoints the Collateral Agent 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 the Collateral Agent
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 the Collateral Agent's
interest in the Collateral and shall not impose any duty upon the Collateral
Agent 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 the Collateral Agent and each Lender that:
(a) The Pledged Shares are validly issued, fully paid for and
non-assessable.
(b) The Pledged Shares of UDRC and UDRC II represent all of
the issued and outstanding capital stock of UDRC and UDRC II, respectively.
(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.
(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
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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 the Collateral Agent of any
Pledged Shares hereafter issued to, acquired or received by Pledgor, the
Collateral Agent has (and, with respect to Pledged Shares hereafter delivered,
will have) a valid, perfected first priority 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
remain 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 UDC and Pledgor. Pledgor further
represents, warrants and covenants to the Collateral Agent and each Lender that:
(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, as such Agreement may
be amended from time to time.
(b) During the Securitization Period, 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 not effect any securitizations through any
subsidiary or affiliate other than UDRC II unless (i) either (A) Pledgor pledges
to Lender all of the capital stock of any such subsidiary or affiliate (the "New
Issuer") and Pledgor delivers to Lender a dividend direction letter executed by
the New Issuer and supported by a standing dividend resolution of the board of
directors of New Issuer, which dividend direction letter and standing dividend
resolution are each substantially similar to the UDRC II Dividend Direction
Letter and the UDRC II Standing Dividend Resolution, or (B) the New Issuer
pledges directly to Lender all of its interests in any trust or other entity
which issues interests in a securitization, or (C) UDC or Pledgor otherwise
complies with the provisions of Section 3.1 of the Loan Agreement, and (ii) all
other matters in connection with such securitization are reasonably satisfactory
in form and substance to the Required Lenders.
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(d) Pledgor will, at Pledgor's expense, at any time and from
time to time at the request of the Collateral Agent or the Required Lenders 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 the Collateral
Agent and the Lenders as created by, provided in, or emanating from this Pledge
Agreement.
(e) Pledgor will not take any action which would cause UDRC or
UDRC II or any New Issuer to issue any other capital stock without the prior
written consent of the Required Lenders.
(f) Pledgor will not consent to any amendment to the articles
of incorporation of UDRC or UDRC II or any New Issuer without the prior written
consent of the Required Lenders.
(g) Pledgor will not take any action which would cause, and
will not consent to, any transfer by UDRC or UDRC II or any New Issuer of the
UDRC Class B Certificates, the UDRC II Class B Certificates or any Additional
Class B Certificates.
Section 8. Dividends. Pledgor has not and will not permit UDRC
or UDRC II or any New Issuer to, rescind, amend, alter, revoke or modify any
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 the Required Lenders.
Section 9. Voting Proxy. Pledgor hereby grants to the
Collateral Agent an irrevocable proxy to vote the Pledged Shares at the
direction of the Required Lenders with respect to any matter permitted under the
Articles of Incorporation of UDRC and UDRC II and each New Issuer, 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 and each New Issuer, in
accordance with Section 217 of the Delaware General Corporation Law, to reflect
on UDRC's and UDRC II's and such New Issuer's books, respectively, the right of
the Collateral Agent to vote the Pledged Shares at the direction of the Required
Lenders. Upon the request of the Collateral Agent or the Required Lenders,
Pledgor shall deliver to the Collateral Agent and the Lenders such further
evidence of such irrevocable proxy to vote the Collateral as Collateral Agent or
Required Lenders may request pursuant hereto.
Section 10. Rights of the Collateral Agent and the Lenders.
The Collateral Agent or any 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 the Collateral Agent and
each such 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. The Collateral Agent may exercise any one or more of the following
remedies:
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(a) Upon the occurrence of an "Event of Default" pursuant to
the Loan Agreement, the Collateral Agent may, without notice to Pledgor:
(i) cause the Collateral to be transferred to the
Collateral Agent's name or to the name of a nominee of the Collateral
Agent, 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 Secured Obligations in such manner and order as the
Collateral Agent shall decide at the direction of the Required Lenders;
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, the Collateral Agent 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 that any purchaser
of all or any part 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 the Collateral Agent, at the
direction of the Required Lenders, deems appropriate without any liability for
any loss due to 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
the Collateral Agent 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.
(c) At the direction of the Required Lenders, the Collateral
Agent shall sell the Collateral on any credit terms which the Required Lenders
deem reasonable. The out-of-pocket costs and expenses of such sale shall be for
the account of Pledgor. The sale of any of the Collateral on credit terms shall
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not relieve Pledgor of its liability with respect to the Secured Obligations.
All payments received in respect of any sale of the Collateral by the Collateral
Agent or any Lender shall be applied to the Secured Obligations as and when such
payments are received and any price received by the Collateral Agent or any
Lender in respect of such sale shall be conclusive and binding upon Pledgor.
(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 the Collateral Agent 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.
(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.
(f) The Collateral Agent 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.
(g) The Collateral Agent 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 the Collateral
Agent. The Collateral Agent 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 the Collateral Agent or any Lender
until the selling price is paid by the purchaser thereof, but neither the
Collateral Agent nor any Lender shall 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 the Collateral
Agent and the Lenders, including but not limited to the foregoing, shall be
cumulative and not exclusive and shall be enforceable alternatively,
successively or concurrently as the Collateral Agent or such Lender may deem
expedient.
Page - 7
<PAGE>
Section 12. Limitation on Liability.
(a) None of the Collateral Agent, any Lender nor any of their
respective directors, officers, employers or agents shall be liable to Pledgor,
UDC, UDRC, UDRC II or any New Issuer for any action taken or omitted to be taken
by it or them hereunder, or in connection herewith, except that each of the
Collateral Agent and each Lender shall be liable for its own (and only for its
own) gross negligence, bad faith or willful misconduct.
(b) The Collateral Agent and each 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 the Collateral
Agent or such Lender, as the case may be, 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 the Collateral Agent or such Lender,
as the case may be) neither the Collateral Agent nor any Lender shall be
required to make any independent investigation with respect thereto. The
Collateral Agent and each 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) The Collateral Agent and each 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.
(d) The Collateral Agent shall not be required to exercise any
discretion or take any action under this Pledge Agreement, but shall be required
to act or refrain from acting (and shall be fully protected in so acting or
refraining from acting) upon the instructions of the Required Lenders, and such
instructions shall be binding upon all Lenders, and the Collateral Agent shall
not be liable to the Pledgor or any Lender with respect to any action taken or
omitted at the direction of the Required Lenders, provided that the Collateral
Agent shall not be required to take any action that exposes the Collateral Agent
in its sole judgment to personal liability or that is contrary to this Pledge
Agreement or applicable law.
Section 13. Indemnification. UDC and Pledgor jointly and
severally agree to indemnify each of the Collateral Agent, each Lender, each of
their respective 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 the Collateral Agent, each Lender, each of their
respective Affiliates and Subsidiaries and all of 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 out of or in connection with this Pledge Agreement and the transactions
contemplated hereby, except that no indemnitee shall be entitled to
indemnification to the extent any such loss, liability or expense results from
the gross negligence, bad faith or willful misconduct of such indemnitee. The
obligation of UDC and Pledgor under this Section shall survive the termination
of this Pledge Agreement.
Page - 8
<PAGE>
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 UDC under Sections 13 and 15 of this Pledge Agreement shall
survive the termination of this Pledge Agreement.
Section 15. Compensation and Reimbursement. UDC agrees for the
benefit of each Lender and the Collateral Agent and as part of the Secured
Obligations to reimburse each Lender and the Collateral Agent upon its request
for all reasonable expenses, disbursements and advances incurred or made by such
Lender or the Collateral Agent in accordance with any provision of, or carrying
out its duties and obligations under, this Pledge Agreement (including the
reasonable compensation and fees and the expenses and disbursements of its
agents, any independent certified public accounts and independent counsel),
except no Person shall be entitled to reimbursement for any expense,
disbursement or advances as may be attributable to gross negligence, bad faith
or willful misconduct on the part of such Person.
Section 16. Foreclosure Expenses. All expenses (including
reasonable fees and disbursements of counsel) incurred in compliance with this
Pledge Agreement by the Collateral Agent or any 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 the
Collateral Agent or any 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 Secured Obligations shall be
deemed an Secured Obligation for all purposes of this Pledge Agreement and each
of the Collateral Agent and each Lender may apply the Collateral to payment of
or reimbursement of itself for such liability.
Section 17. Obligations Absolute. The obligations of Pledgor
under this Pledge Agreement are independent of the Obligations or any other
obligations of any other Loan Party under the Loan Documents, and a separate
action or actions may be brought and prosecuted against Pledgor to enforce this
Pledge Agreement, irrespective of whether any action is brought against the
Borrower or any other Loan Party or whether the Borrower or any other Loan Party
is joined in any such action or actions. The liability of Pledgor under this
Pledge Agreement is joint and several and shall be irrevocable, absolute and
unconditional irrespective of, and Pledgor hereby irrevocably waives any
defenses it may now or hereafter have in any way relating to, any or all of the
following:
(a) any lack of validity or enforceability of any Loan
Document or any agreement or instrument relating thereto;
(b) any change in the time, manner or place of payment of, or
in any other term of, all or any of the Obligations or any other
obligations of any other Loan Party under the Loan Documents, or any
other amendment or waiver of or any consent to departure from any Loan
Document, including, without limitation, any increase in the
obligations resulting from the extension of additional credit to the
Borrower or any of its Subsidiaries or otherwise;
Page - 9
<PAGE>
(c) any taking, exchange, release or non-perfection of any
Collateral, or any taking, release or amendment or waiver of or consent
to departure from any other guaranty, for all or any of the
Obligations;
(d) any manner of application of collateral, or proceeds
thereof, to all or any of the Obligations, or any manner of sale or
other disposition of any collateral for all or any of the Obligations
or any other obligations of any other Loan Party under the Loan
Documents or any other assets of the Borrower or any of its
Subsidiaries;
(e) any change, restructuring or termination of the corporate
structure or existence of the Borrower or any of its Subsidiaries;
(f) any failure of the Collateral Agent or any Lender to
disclose to the Borrower or any other Loan Party any information
relating to the financial condition, operations, properties or
prospects of any other Loan Party now or in the future known to any the
Collateral Agent or any Lender (Pledgor hereby waiving any duty on the
part of the Collateral Agent or any Lender to disclose such
information); or
(g) any other circumstance (including, without limitation, any
statute of limitations) or any existence of or reliance on any
representation by the Collateral Agent or any Lender that might
otherwise constitute a defense available to, or a discharge of, the
Borrower, Pledgor, any other Loan Party or any other guarantor or
surety.
This Pledge Agreement shall continue to be effective or be
reinstated, as the case may be, if at any time any payment of any of the Secured
Obligations is rescinded or must otherwise be returned by the Collateral Agent
or any Lender or any other Person upon the insolvency, bankruptcy or
reorganization of the Borrower or any other Loan Party or otherwise, all as
though such payment had not been made.
Section 18. Waivers and Acknowledgments. (a) Pledgor hereby
waives promptness, diligence, notice of acceptance and any other notice with
respect to any of the Secured Obligations and this Pledge Agreement and any
requirement that the Collateral Agent or any Lender protect, secure, perfect or
insure any Lien or any property subject thereto or exhaust any right or take any
action against the Borrower or any other Person or any collateral.
(b) Pledgor hereby waives any right to revoke this Pledge
Agreement, and acknowledges that this Agreement is continuing in nature and
applies to all Secured Obligations, whether existing now or in the future.
Section 19. 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:
Page - 10
<PAGE>
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
with a copy to:
SNELL & WILMER, L.L.P.
One Arizona Center
Phoenix, Arizona 85004-0001
Attention: David A. Sprentall
Facsimile: (602) 382-6070
To Collateral Agent:
HARRIS TRUST AND SAVINGS BANK
311 West Monroe Street - 12th Floor
Chicago, Illinois 60606
Attention: Megan Francis
Telephone: (312) 461-6030
Facsimile: (312) 461-3525
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: David A. Sprentall
Facsimile: (602) 382-6070
Section 20. General Provisions.
(a) The failure of the Collateral Agent or any Lender to
exercise, or any delay in exercising, any right, power or remedy hereunder,
Page - 11
<PAGE>
shall not operate as a waiver thereof, nor shall any single or partial exercise
by the Collateral Agent or any 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
Sections 13 and 15 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.
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.
Page - 12
<PAGE>
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 D. EHLINGER
Name: Jon D. Ehlinger
Title: V.P./General Counsel/Secretary
UGLY DUCKLING CORPORATION,
a Delaware corporation
By: /S/ STEVEN P. JOHNSON
Name: Steven P. Johnson
Title: Sr. V.P./Secretary/General Counsel
HARRIS TRUST AND SAVINGS BANK
By: /S/ ROBERT D. FOLTZ
Name: Robert D. Foltz
Title: Vice President
EXHIBIT 21
<TABLE>
<CAPTION>
LIST OF SUBSIDIARIES (as of 7/7/99)
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 Autos Arizona
Ugly Duckling Processing Center
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. Ugly Duckling Autos Florida
Champion Acceptance
Ugly Duckling Car Sales
Ugly Duckling Car Sales New Mexico, Inc. New Mexico
Ugly Duckling Car Sales Texas, L.L.P. Ugly Duckling Autos Arizona
Ugly Duckling Car Sales
Yes-Cars
E-Z Motors
Red McComb's Super Store
Ugly Duckling
Ugly Duckling Car Sales Georgia, Inc. Ugly Duckling Autos Georgia
Ugly Duckling Car Sales
Kars-Yes
Ugly Duckling Car Sales California, Inc. Ugly Duckling Autos California
Ugly Duckling Car Sales
Kars-Yes
Ugly Duckling Finance Corporation Arizona
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 Dealer Finance Florida, Inc. Florida
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 AUDITOR'S CONSENT
The Board of Directors
Ugly Duckling Corporation:
We consent to the inclusion of our report dated February 18, 1999 on the
consolidated financial statements of Ugly Duckling Corporation included in
the Post-Effective Amendment No. 1 to the Form S-1 Registration Statement (No.
333-42973) of Ugly Duckling Corporation and the related Prospectus, and to the
references to our firm under the headings "Selected Consolidated Financial Data"
and "Experts" therein.
/S/ KPMG LLP
Phoenix, Arizona
July 7, 1999
