As Filed With The Securities And Exchange Commission On June 22, 2000
Registration No. 333-42973
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 2 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 Code Number 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)
JON D. EHLINGER, ESQ.
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 June 22, 2000
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.
(Ugly Duckling Logo Omitted)
5,325,000 Shares of Common Stock
and
325,000 Common Stock Purchase Warrants
Ugly Duckling Corporation operates a chain of used car dealerships. We sell and
finance quality used cars to customers in the sub-prime segment of the used car
market.
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 First Merchants of up to 325,000 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.
Our common stock is traded on the Nasdaq National Market ("Nasdaq") under the
symbol "UGLY." On June 5, 2000, the last reported price of our common stock was
$7.1875 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 4.
----------------
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 _______ __,2000.
Page 1
<PAGE>
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 operate the largest chain of buy here-pay here used car dealerships
in the United States. At March 31, 2000, we operated 75 dealerships located in
eleven metropolitan areas in eight states. We have one primary line of business:
to sell and finance quality used vehicles to customers within what is referred
to as the sub-prime segment of the used car market. The sub-prime market is
comprised of customers who typically have limited credit histories, low incomes
or past credit problems. We finance substantially all of the used cars that we
sell at our dealerships through retail installment loan contracts that we
service.
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. First Merchants filed for reorganization
under Title 11 of the United States Code in July 1997. We issued 325,000 of the
warrants that are being offered in this prospectus to First Merchants in
connection with our involvement in First Merchants' bankruptcy proceedings. We
purchased First Merchants' senior bank debt and sold the contracts which secured
the debt to a third party purchaser. We obtained the right to service those
contracts and the contracts in all but one of First Merchants' securitized pools
and acquired First Merchants' servicing platform. We also made
debtor-in-possession loans to First Merchants and received or are entitled to
receive certain fees. We are entitled to 17 1/2% of the recoveries on the
contracts we service after certain prior payments are made by First Merchants
out of such recoveries. If we can satisfy certain conditions, we have the option
to retain all or a portion of First Merchants' 82 1/2% share of such recoveries
by issuing the shares of our common stock being offered in this prospectus. If
we issue these shares, we would retain the cash distributions otherwise payable
to First Merchants out of such recoveries up to an amount equal to the number of
shares we issue times 98% of the average of the closing prices of our common
stock for the 10 trading days prior to the date we issue the shares. See "Plan
of Distribution."
<TABLE>
<CAPTION>
The Offering
<S> <C>
First Merchants Warrants 325,000 warrants offered by First Merchants, each to purchase one share of common
offered............. 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.
Common Stock offered Up to 5,325,000 shares,
including 5,000,000 shares that we may offer
and 325,000 shares issuable upon exercise of
the warrants offered in this prospectus.
Common Stock outstanding(1) 13,897,965 shares
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<PAGE>
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 First Merchants from contracts that we obtained the
right to service in the First Merchants' bankruptcy proceedings. Distributions that
we retain after we issue those shares will be used for repayment of indebtedness and
general corporate purposes. The First Merchants warrants and related warrant shares
may be offered from time to time in the future by First Merchants. Except for
proceeds from the exercise of the First Merchants warrants, we will not receive any of
the proceeds from the sale of the warrants and related warrant shares offered in this
prospectus. We will use the proceeds from the exercise price of the First Merchants
warrants for repayment of indebtedness and general corporate purposes.
Nasdaq Symbol........ "UGLY"
----------
<FN>
(1) As of May 26, 2000. Does not include 4,860,768 shares of common stock held in treasury and 2,858,888 shares of common stock
issuable upon exercise of outstanding options and warrants.
</FN>
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(In thousands, except per share data)
Three Months Ended
March 31, Years Ended December 31,
-------------------- -------------------------------
2000 1999 1999 1998 1997
-------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total Revenues................. $159,124 $119,715 $465,954 $ 332,479 $ 155,419
Sales of Used Cars........ 132,786 106,443 389,908 287,618 123,814
Interest Income........... 25,531 10,373 68,574 17,287 12,559
Gain on Sale of Loans..... --- --- --- 12,093 6,721
Servicing and Other Income 807 2,899 7,472 15,481 12,325
Cost of Used Cars Sold......... 72,942 60,088 219,037 165,282 72,358
Provision for Credit Losses.... 34,573 27,763 102,955 65,318 22,354
Income before Operating Expenses 46,580 29,869 129,365 99,019 60,532
Total Operating Expenses....... 36,688 28,970 111,650 93,052 53,100
Income Before Other Interest
Expense................... 9,892 899 17,715 5,967 7,432
Other Interest Expense......... 2,292 --- 3,028 161 531
Earnings from Continuing 4,483 544 8,687 3,455 4,081
Operations................
Earnings (Loss) from
Discontinued Operations... --- (121) 573 (9,158) 5,364
Net Earnings (Loss) ........... $ 4,483 $ 423 $ 9,260 $ (5,703) $ 9,445
Diluted Earnings (Loss) per Share $ 0.30 $ 0.03 $ 0.60 $ (0.31) $ 0.52
Shares used in Computation..... 15,153 15,785 15,329 18,405 18,234
March 31, December 31,
----------------------- -------------------------
2000 1999 1999 1998 1997
----------- -------- ----------- ----------- -------
Balance Sheet Data:
Cash and Cash Equivalents........... $ 6,330 $ 4,387 $ 3,683 $ 2,544 $ 3,537
Finance Receivables, Net............ 407,267 190,063 365,586 126,168 60,778
Inventory........................... 49,058 39,878 62,865 44,145 32,372
Total Assets........................ 547,953 400,247 536,711 337,281 275,633
Notes Payable Portfolio............. 282,865 171,543 275,774 101,732 65,171
Other Notes Payable................. 33,418 536 36,556 15,899 --
Subordinated Notes Payable.......... 28,900 38,279 28,611 37,980 12,000
Total Debt.......................... 345,183 210,358 340,941 155,611 77,171
Total Stockholders' Equity (1).... $170,553 $ 157,890 $165,680 $ 162,767 $181,774
----------
<FN>
(1) Excludes 2,858,888 shares of common stock issuable upon exercise of outstanding stock options and warrants with exercise prices
ranging from $1.72 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 from continuing operations of $8.7
million for the year ended December 31, 1999 and $3.5 million in 1998, we cannot
assure you that we will be profitable in future periods. Losses in future
periods could impair our ability to raise additional capital or borrow money as
needed, and could decrease our stock price.
We may not be able to continue to obtain the financing we need to fund our
operations and, as a result, our profitability could be reduced.
Our operations require large amounts of capital. We have borrowed, and
will continue to borrow, substantial amounts to fund our operations. If we
cannot obtain the financing we need on a timely basis and on favorable terms,
our business and
Page 4
<PAGE>
profitability could be materially adversely affected. We currently obtain our
financing through three primary sources: a revolving credit facility with
General Electric Capital Corporation, securitization transactions, and 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. When we have used all our capacity under the revolving
facility, our liquidity can be adversely affected unless we can find alternative
financing sources. The revolving facility expires in June 2000 and, 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. If we cannot
extend the term of the revolving facility or replace that facility with a
substitute facility, our operations would be materially adversely affected.
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 and how favorable the terms
of our securitizations will be to us 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 portfolio; and
o the performance of our servicing operations.
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.
Failure to satisfy the covenants in our credit facilities or our securitization
program could preclude us from further borrowing under the defaulted facility,
could cause cross defaults to our other debt, and could prevent us from securing
alternate sources of funds necessary to operate our business.
Recent Waivers. From time to time, we incur technical or other breaches
under our material credit facilities, and we have obtained waivers from the
applicable lenders. There can be no assurance that we will continue to receive
waivers when required and our inability to obtain these waivers may have a
material impact on our ability to obtain or retain operating capital.
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 loans
that we service are with sub-prime borrowers. Sub-prime borrowers generally
cannot borrow money from traditional lending institutions, such as banks,
savings and loans, credit unions, and 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, our allowance may not be
sufficient to cover our credit losses. 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.
Interest rates affect our profitability.
Much of our financing income results from the difference between the
rate of interest that we pay on the funds we borrow and the rate of interest
that we earn on the loans in our portfolio. While we earn interest on the loans
that we own at a fixed rate, we pay interest on our borrowings under our
revolving 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.
We operate in many states that impose limits on the interest rate that
a lender may charge. When a state limits the amount of interest that we can
charge on our installment sales loans, 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.
Page 5
<PAGE>
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 are subject to pending actions and investigations relating to our
compliance with various laws and regulations. While we do not believe that
ultimate resolution of these matters will result in a material adverse effect on
our business or financial condition (such as fines, injunctions or damages),
there can be no assurance in this regard.
Events happening to other companies in our industry can adversely affect our
operations and the value of our securities.
In recent years, 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, some 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.
If our current contingency plan is inadequate, we could have a system failure,
which could adversely affect our ability to collect on loans, and comply with
statutory requirements.
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. We regularly revise our contingency plan; however, the plan
as revised may not prevent a systems failure or allow us to timely resolve any
systems failures. 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.
We have continuing risks relating to the First Merchants transaction.
We have entered into several transactions in the bankruptcy proceedings
of First Merchants Acceptance Corporation. We have the right to 17 1/2% of
recoveries on First Merchants' residual interests in certain securitized loan
pools and other loans. However, if we lose our right to service these loans, our
share of these residual interests can be reduced or eliminated. This could
affect our future cash flow and profitability. In addition, as described in this
prospectus, if we meet certain conditions, we have the right to issue our common
stock to First Merchants or its unsecured creditors or equity holders in
exchange for a portion of First Merchants' 82 1/2% share of collections on the
residual interests. However, we must estimate anticipated collections in advance
to determine the amount of stock to issue, and if our estimates are not accurate
we could issue too many shares of our common stock and dilute our shareholders.
See "Plan of Distribution."
Page 6
<PAGE>
We may make acquisitions that are unsuccessful or strain or divert our resources
from more profitable operations.
In 1999, we completed two acquisitions. We intend to consider
additional acquisitions, alliances, and transactions involving other companies
that could complement our existing business. However, we may not be able to
identify suitable acquisition parties, joint venture candidates, or transaction
counterparties. Also, even if we can identify suitable parties, we may not be
able to consummate these transactions on terms that we find favorable.
We may also 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. 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 issuance 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. These transactions involve numerous
other risks as well, 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.
Our primary competitors are the numerous small buy-here pay-here used
car dealers that operate in the sub-prime segment of the used car sales
industry. We attempt to distinguish ourselves from our competitors through name
recognition and other factors. However the advertising and infrastructure
required by these efforts increase our operating expenses. There is no assurance
that we can successfully distinguish ourselves and compete in this industry. In
addition, in recent years, a number of larger companies with significant
financial and other resources, have entered or announced plans to enter the used
car sales industry. Although these companies do not currently compete with us in
the sub-prime segment of the market, they compete with us in the purchase of
inventory, which can result in increased wholesale costs for used cars and lower
margins. They could also enter the sub-prime segment of the market at any time.
Increased competition may also cause downward pressure on the interest
rates that we charge on loans originated by our dealerships, which could have a
material effect on our profitability and 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 key person life insurance on any member of our senior management team
other than Gregory B. Sullivan, our President and Chief Executive Officer.
We may issue stock in the future that will dilute the value of our existing
stock.
We have the ability to issue common stock or securities exercisable for
or convertible into common stock, which may dilute the securities our existing
stockholders now hold. In particular, 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
1.24 million shares of our common stock to various parties, with
exercise prices ranging from $6.75 to $20.00 per share;
o we may issue additional warrants in connection with future
transactions;
o we may issue common stock under our various stock option plans;
and
o we may issue the common stock that is the subject of this
prospectus in exchange for an increased share of collections on
certain loans that we service for First Merchants.
We also are asking for our shareholders approval at our annual meeting,
currently scheduled for July 27, 2000, of a proposal authorizing the creation of
"blank check" common stock. If passed, this would allow our Board of Directors
to establish one or more series of common stock on terms to be determined by the
Board of Directors. Depending upon the terms of any series of the stock and on
the market's reaction to the stock, the market value of our outstanding common
stock could be adversely affected or the new stock could have a potential
anti-takeover or dilutive effect.
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<PAGE>
The voting power of our principal stockholder may limit your voting rights.
Mr. Ernest C. Garcia, II, our Chairman, or his affiliates holds
approximately 32.48% of our outstanding common stock as of May 26, 2000. 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.
Forward-looking statements in this prospectus relate, among other matters, to:
anticipated financial results, such as continuing growth of sales, other
revenues and loan portfolios, and improvements in loan performance, including
delinquencies; growth in our dealerships through acquisitions and de novo
dealership openings, and e-commerce related growth and loan performance. Factors
that could cause or contribute to differences from these forward-looking
statement include, but are not limited to:
o any decline in consumer acceptance of our car sales strategies or
marketing campaigns;
o any inability of Ugly Duckling to finance its operations in light
of a tight credit market for the sub-prime industry;
o any deterioration in the used car finance industry or increased
competition in the used car sales and finance industry;
o any inability of Ugly Duckling to monitor and improve its
underwriting and collection processes;
o any changes in estimates and assumptions in, and the ongoing
adequacy of, our allowance for credit losses;
o any inability of Ugly Duckling to continue to reduce operating
expenses as a percentage of sales; and
o any new or revised accounting, tax or legal guidance that
adversely affect used car sales or financing.
Other factors are detailed in the sections entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operation" and
"Risk Factors." 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
Under First Merchants' plan of reorganization, we service the contracts
that originally secured First Merchant's senior bank debt and the contracts in
all but one of First Merchants' securitized loan pools, and we are entitled to a
percent of the recoveries from these contracts after First Merchants pays
certain prior amounts ("Excess Collections"). We may elect to issue up to
5,000,000 shares of our common stock in lieu of making distributions in cash to
First Merchants from the Excess Collections. The shares would be priced at 98%
of the average of the closing prices 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 First
Merchants from the Excess Collections up to the Share Value. See "Plan of
Distribution." These proceeds will be used for repayment of indebtedness and
general corporate purposes.
The First Merchants warrants and related warrant shares may be offered from
time to time in the future by First Merchants. Except for proceeds from the
exercise of such warrants, if any, we will not receive any of the proceeds from
the
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<PAGE>
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 repayment of indebtedness and general corporate purposes.
Page 9
<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 2000 are
reported below.
<TABLE>
<CAPTION>
Market Price
High Low
<S> <C> <C>
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
Second Quarter......................................................................................$ 7.69 $ 5.13
Third Quarter.......................................................................................$ 9.00 $ 6.88
Fourth Quarter......................................................................................$ 8.88 $ 6.81
Fiscal Year 2000:
First Quarter.......................................................................................$ 8.50 $ 6.69
</TABLE>
On June 5, 2000, the last reported sale price of the common stock on
Nasdaq was $7.1875 per share. On May 26, 2000 there were approximately 75 record
owners of our common stock. We estimate that, as of such date, there were
approximately 1,500 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. 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.
Page 10
<PAGE>
CAPITALIZATION
The following table sets forth our actual capitalization as of March
31, 2000, 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 325,000 shares of common
stock upon exercise of the First Merchants warrants being offered in this
prospectus at the stated exercise price of $20.00 per share, net of estimated
expenses, 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.
<TABLE>
<CAPTION>
March 31, 2000
Actual Pro Forma
(In Thousands)
<S> <C> <C>
Debt:
Notes Payable Portfolio...................... $ 282,865 $ 282,865
Other Notes Payable.......................... 33,418 33,418
Subordinated Notes Payable................... 28,900 28,900
--------- ---------
Total Debt........................... 345,183 345,183
--------- ---------
Stockholders' Equity:
Common Stock................................. 19 24
Additional Paid in Capital................... 173,663 219,758
Retained Earnings............................ 17,192 17,192
Treasury Stock............................... (20,321) (20,321)
---------- ----------
Total Stockholders' Equity(1)........ 170,553 216,653
--------- ---------
Total Capitalization............ $ 515,736 $ 561,836
========= =========
----------
<FN>
(1) Excludes (i) 982,865 shares of common stock issuable upon exercise of stock options outstanding at May 26, 2000 under our
Long-Term Incentive Plan with a weighted average price of $6.52 per share; (ii) 635,000 shares of common stock issuable upon
exercise of stock options outstanding at May 26, 2000 under our 1998 Executive Incentive Plan with a weighted average price of $7.15
per share; (iii) 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; (iv) 325,000 shares of common stock issuable upon
exercise of warrants issued to First Merchants which have an exercise price of $20.00 per share; (v) 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; and (vi) 575,000 shares of common stock issuable upon exercise of warrants issued in connection with the
sale of subordinated notes payable with a weighted average exercise price of $10.11 per share.
</FN>
</TABLE>
Page 11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share amounts)
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, 1999, and for the three month periods ending March 31, 2000
and 1999. 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, 2000 and 1999
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>
As of and for the
Three Months Ended As of and for the
March 31, Years Ended December 31,
----------------------- ------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---------- ---------- ---------- ---------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Sales of Used Cars............... $132,786 $106,443 $389,908 $287,618 $123,814 $ 53,768 $ 47,824
Less:
Cost of Used Cars Sold........ 72,942 60,088 219,037 165,282 72,358 29,890 27,964
Provision for Credit Losses... 34,573 27,763 102,955 65,318 22,354 9,657 8,359
--------- -------- -------- -------- -------- -------- --------
25,271 18,592 67,916 57,018 29,102 14,221 11,501
--------- -------- --------- -------- -------- -------- --------
Other Income:
Interest Income.................. 25,531 10,373 68,574 17,287 12,559 8,597 8,227
Portfolio Interest Expense....... 5,029 1,995 14,597 2,860 175 --- ---
--------- --------- -------- --------- --------- --------- ---------
Net Interest Income........... 20,502 8,378 53,977 14,427 12,384 8,597 8,227
Gain on Sale of Loans............ --- --- --- 12,093 6,721 3,925 --
Servicing and Other Income....... 807 2,899 7,472 15,481 12,325 2,537 308
--------- -------- --------- -------- -------- -------- --------
Total Other Income............ 21,309 11,277 61,449 42,001 31,430 15,059 8,535
--------- -------- -------- -------- -------- -------- --------
Income before Operating Expenses. 46,580 29,869 129,365 99,019 60,532 29,280 20,036
Operating Expenses:
Selling and Marketing............ 8,135 6,366 23,132 18,246 10,538 3,585 3,856
General and Administrative....... 26,345 21,009 81,570 69,894 39,414 14,210 13,446
Depreciation and Amortization.... 2,208 1,595 6,948 4,912 3,148 1,382 1,225
--------- --------- -------- -------- -------- -------- --------
Operating Expenses............ 36,688 28,970 111,650 93,052 53,100 19,177 18,527
--------- --------- -------- -------- -------- -------- --------
Income Before Other Interest Expense 9,892 899 17,715 5,967 7,432 10,103 1,509
Other Interest Expense........... 2,292 --- 3,028 161 531 2,429 5,328
--------- --------- --------- --------- --------- --------- ---------
Earnings (Loss) before Income Taxes 7,600 899 14,687 5,806 6,901 7,674 (3,819)
Income Taxes..................... 3,117 355 6,000 2,351 2,820 694 --
--------- --------- -------- -------- -------- -------- --------
Earnings (Loss) from Continuing
Operations.................... 4,483 544 8,687 3,455 4,081 6,980 (3,819)
Discontinued Operations:
Earnings (Loss) from Operations of
Discontinued Operations....... --- (121) 248 (703) 5,364 --- ---
Earnings (Loss) from Disposal of
Discontinued Operations....... --- --- 325 (8,455) --- --- ---
--------- --------- --------- ---------- --------- --------- ---------
Net Earnings (Loss).............. $ 4,483 $ 423 $ 9,260 $ (5,703) $ 9,445 $ --- $ ---
========= ========= ========= ========= ======== ======== ========
Earnings (Loss) per Common Share from
Continuing Operations.........
Basic Earnings (Loss) per Share $ 0.30 $ 0.04 $ 0.58 $ 0.19 $ 0.23 $ 0.89 $ (0.69)
========== ========= ========= ========= ========== ========= ===========
Diluted Earnings (Loss) per Share $ 0.30 $ 0.04 $ 0.57 $ 0.19 $ 0.22 $ 0.84 $ (0.69)
========== ========= ========= ========= ========== ========= ==========
Shares used in Computation:
Basic Weighted Average Shares
Outstanding................... 14,905 15,650 15,093 18,082 17,832 7,887 5,522
========= ========= ========= ========= ========= ========= =========
Diluted Weighted Average Shares
Outstanding................... 15,153 15,785 15,329 18,405 18,234 8,298 5,522
========= ========= ========= ========= ========= ========= =========
Balance Sheet Data:
Cash and Cash Equivalents........ $ 6,330 $ 4,387 $ 3,683 $ 2,544 $ 3,537 $ 18,455 $ 1,419
Finance Receivables, Net......... 407,267 190,063 365,586 126,168 60,778 14,186 27,732
Inventory........................ 49,058 39,878 49,058 39,878 62,865 44,145 32,372
Total Assets..................... 547,953 400,247 536,711 337,281 275,633 117,629 60,712
Notes Payable Portfolio.......... 282,865 171,543 275,774 101,732 65,171 12,904 35,201
Other Notes Payable.............. 33,418 536 36,556 15,899 --- --- ---
Subordinated Notes Payable....... 28,900 38,279 28,611 37,980 12,000 14,000 14,553
Total Debt....................... 345,183 210,358 340,941 155,611 77,171 26,904 49,754
Total Stockholders' Equity....... 170,553 157,890 165,680 162,767 181,774 82,319 4,884
</TABLE>
Page 12
<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, 2000 and December 31, 1999
and 1998, and the results of operations for the three months ended March 31,
2000 and 1999 and for the years ended December 31, 1999, 1998, and 1997. 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" and "Forward Looking Statements." 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 have experienced a number of significant events during the past
three years. Some of the more important events follow:
During 1997 we:
o completed a private placement of common stock in February 1997
generating $88.7 million in cash,
o completed a conversion of one of our loan servicing systems. We
experienced various transitional problems with the conversion,
which resulted in a charge of $5.7 million (approximately $3.4
million net of income taxes) to write down our residuals in
finance receivables sold,
o completed three significant acquisitions and developed new
dealerships to increase our total number of dealerships in
operation from eight at December 31, 1996 to 41 at December 31,
1997, and
o expanded our dealership chain from two markets to ten markets at
the end of 1997.
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 (an additional
charge of $1.5 million net of income taxes was taken in the
fourth quarter of 1999),
o completed the conversion of our retail operations to a single
computer system,
o developed 15 new dealerships to increase our total number of
dealerships in operation from 41 at December 31, 1997 to 56 at
December 31, 1998, and
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.
During 1999 we:
o completed the conversion of loan portfolio administration,
accounting and financial reporting, and collections to a single
computer system,
o completed two acquisitions and developed new dealerships to
increase our total number of dealerships in operation from 56 at
December 31, 1998 to 72 at December 31, 1999,
o completed the sale of Cygnet Dealer Finance, Inc. to Cygnet
Capital Corporation, an affiliate of Mr. Garcia, and
o adopted a formal plan to discontinue the operations of our Cygnet
Servicing subsidiary operations.
Our business is divided into three operating segments: retail,
portfolio and corporate. Information regarding our operating segments can be
found in Note (18) of the Notes to Consolidated Financial Statements and Note
(6) of the Notes to Condensed Consolidated Financial Statements contained
herein. Operating segment information is also included in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on pages 19 and 26 below.
Other Significant Developments - We use securitization of our loan
portfolios as a significant source of capital to finance our growth.
Historically we have applied two methods in structuring these transactions that
result in materially
Page 13
<PAGE>
different accounting entries on our books. As financial results reported herein
include periods where both securitization structures were utilized, the
following explanation is provided to facilitate an understanding of the material
impact these separate structures have had on financial results.
September 30, 1998 and prior. For the securitization transactions
closed in the third quarter of 1998 and prior, we structured and recorded these
transactions for accounting purposes using what we refer to as the "gain on
sale" method. The computation of amounts reported as Gain on Sale income is
equal to the difference between the sales proceeds (includes cash received and
fair value of residual interests) 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 attributable 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.
Gain on Sale Method - Under the gain on sale method, the securitized
loans are transferred off our balance sheet, a residual interest is recorded
(reported herein as Residual Interest in Finance Receivables Sold) and a Gain on
Sale of Loans is recorded. Subsequent to a sale, traditional financial statement
elements generally associated with loan portfolios such as interest income,
interest expense, servicing costs and other costs are not recorded on our
accounting records, but rather were estimated at the time of sale and recorded
as an element of the gain computation.
After September 30, 1998 - Beginning in the fourth quarter of 1998, we
changed the way we structure securitization transactions for accounting purposes
to what we refer to as the "collateralized borrowing" method and accordingly
recognize the income and associated costs over the life of the loan. The change
in structure beginning in the fourth quarter of 1998 did not affect our prior
securitizations.
Collateralized Borrowing Method - Under the collateralized borrowing
method, the securitized loans are retained on our balance sheet, and a note
payable known as Class A obligations is recorded for the amount loaned to us by
the Class A note and certificate holders. As additional collateral for the
lenders, at closing cash is deposited into a restricted cash "reserve" account
(reported herein as Investments Held in Trust). Under this accounting method,
our financial statements include interest income, interest expense, servicing
costs and the other costs generally associated with loan portfolio accounting
and these are recognized over the life of the loan.
With this overview and background information, the following is
management's discussion and analysis of financial condition and results of
operations.
INFORMATION FOR THE FIRST QUARTER OF 2000
Financial Statements for the three month periods ended March 31, 2000 and
1999 begin on page F-24.
In the following discussion and analysis, we explain the results of
operations and general financial condition of Ugly Duckling and its
subsidiaries. In particular, we analyze and explain the changes in the results
of operations of our business segments for the quarterly period ended March 31,
2000 compared to the quarterly period ended March 31,1999.
Page 14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA (unaudited)
<TABLE>
<CAPTION>
At or For the Three Months Ended:
----------------------------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
2000 1999 1999 1999 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Data: ($ in thousands except per share and per unit amounts)
Total Revenues $159,124 $ 105,429 $ 124,883 $115,927 $119,715
Sales of Used Cars $132,786 $ 82,275 $ 103,315 $ 97,875 $106,443
Number of Used Cars Sold 15,802 9,731 12,219 11,416 12,754
Sales Price - Per Car Sold $ 8,403 $ 8,455 $ 8,455 $ 8,574 $ 8,346
Cost of Sales - Per Car Sold $ 4,616 $ 4,690 $ 4,727 $ 4,865 $ 4,712
Gross Margin Per Car Sold $ 3,787 $ 3,765 $ 3,728 $ 3,708 $ 3,634
Provision - Per Car Sold $ 2,188 $ 2,245 $ 2,256 $ 2,259 $ 2,177
Total Operating Expense - Per Car Sold $ 2,322 $ 2,764 $ 2,298 $ 2,427 $ 2,274
Cost of Used Cars as Percent of Sales 54.9% 55.5% 55.9% 56.7% 56.5%
Gross Margin as Percent of Sales 45.1% 44.5% 44.1% 43.3% 43.5%
Provision - % of Originations 27.0% 27.0% 26.9% 26.8% 27.0%
Total Oper. Exp. - % of Total Revenues 23.1% 25.5% 22.5% 23.9% 24.2%
Segment Operating Expense Data:
Retail Expense - Per Car Sold $ 1,481 $ 1,775 $ 1,484 $ 1,562 $ 1,431
Retail Exp. - % of Used Car Sales 17.6% 21.0% 17.6% 18.2% 17.1%
Corp./Other Exp. - Per Car Sold $ 387 $ 357 $ 399 $ 440 $ 458
Corp./Other Exp. - % of Total Revenue 3.8% 3.3% 3.9% 4.3% 4.9%
Portfolio Exp. Annualized - % of End of 6.2% 6.8% 4.7% 5.1% 5.7%
Period Managed Principal
Balance Sheet Data:
Finance Receivables, Net $ 407,267 $ 365,586 $ 321,739 $ 256,085 $ 190,063
Inventory $ 49,058 $ 62,865 $ 45,768 $ 37,737 $ 39,878
Total Assets $ 547,953 $ 536,711 $ 516,513 $ 460,718 $ 400,247
Notes Payable - Portfolio $ 282,865 $ 275,774 $ 244,363 $ 195,244 $ 171,543
Subordinated Notes Payable $ 28,900 $ 28,611 $ 37,077 $ 36,943 $ 38,279
Total Debt $ 345,183 $ 340,941 $ 317,440 $ 269,687 $ 210,358
Common Stock $ 173,682 $ 173,292 $ 173,276 $ 173,883 $ 173,836
Treasury Stock $ (20,321) $(20,321) $(20,321) $(19,824) $(19,817)
Total Stockholders' Equity $ 170,553 $ 165,680 $ 162,477 $ 159,398 $ 157,890
Shares Outstanding - End of Period 14,980 14,888 14,889 14,943 14,939
Book Value per Share $ 11.39 $ 11.13 $ 10.91 $ 10.67 $ 10.57
Tangible Book Value per Share $ 10.43 $ 10.15 $ 9.95 $ 9.74 $ 9.62
Total Debt to Equity 2.0 2.1 2.0 1.7 1.3
Loan Portfolio Data:
Interest Income $ 25,531 $ 22,670 $ 19,775 $ 15,756 $ 10,373
Average Yield on Portfolio 26.17% 25.41% 25.90% 26.27% 26.19%
Principal Balances Originated $ 128,123 $ 80,900 $ 102,599 $ 96,098 $102,733
Principal Balances Orig. as % of Sales 96.5% 98.3% 99.3% 98.2% 96.5%
Principal Balances Acquired -- $ 6,811 $ 14,596 -- --
Number of Loans Originated 15,721 9,650 12,137 11,335 12,634
Average Original Amount Financed $ 8,150 $ 8,383 $ 8,453 $ 8,478 $ 8,131
Number of Loan Orig. % of Units Sold 99.5% 99.2% 99.3% 99.3% 99.1%
Number of Loans Acquired -- 2,586 2,543 -- --
Managed Portfolio Delinquencies:
31 to 60 days 3.4% 5.7% 6.8% 4.7% 3.5%
Over 60 days 1.9% 2.9% 3.5% 2.6% 1.9%
Page 15
<PAGE>
Principal Outstanding - Managed $ 461,824 $ 424,480 $ 427,439 $383,596 $ 341,040
Principal Outstanding - Retained $ 418,913 $ 358,818 $ 331,982 $256,645 $ 182,150
</TABLE>
First Quarter 2000 highlights include:
o Earnings from continuing operations totaled $4.5 million, or $0.30 per
diluted share, the highest quarterly EPS ever for us, versus earnings from
continuing operations of $0.5 million or $0.04 per diluted share in the
corresponding quarter of the prior year.
o Total revenues increased 33% to $159.1 million from $119.7 million in the
corresponding quarter of the prior year.
o E-Commerce provided $5.9 million in revenue and 701 cars sold during the
first quarter of 2000 versus $3.9 million in revenue and 415 cars sold
during the fourth quarter of 1999.
o On-balance sheet loan portfolio principal balance reached $418.9 million,
representing a 17% increase over the fourth quarter and a 130% rise over
the year-ago quarter.
o New loan originations reached $128.1 million, a 25% increase over the same
quarter of the prior year.
Sales of Used Cars and Cost of Used Cars Sold
<TABLE>
<CAPTION>
Three months ended Percentage
March 31, Change
<S> <C> <C> <C>
($ in thousands) 2000 1999
---- ----
Number of Used Cars Sold ........... 15,802 12,754 23.9%
=========== ===========
Sales of Used Cars ................. $ 132,786 $ 106,443 24.7%
Cost of Used Cars Sold ............. 72,942 60,088 21.4%
----------- -----------
Gross Margin ....................... $ 59,844 $ 46,355 29.1%
=========== ===========
Gross Margin %...................... 45.1% 43.5%
========== ==========
Per Car Sold:
Sales .............................. $ 8,403 $ 8,346 0.7%
Cost of Used Cars Sold ............. 4,616 4,711 (2.0)%
----------- -----------
Gross Margin ....................... $ 3,787 $ 3,635 4.2%
=========== ===========
</TABLE>
The number of cars sold increased by 23.9% and Used Car Sales revenues
increased by 24.7% for the three months ended March 31, 2000 over the same
period in 1999. The increase in both units sold and revenues is primarily the
result of an increase in the number of dealerships in operation coupled with an
increase in E-commerce related business.
We expanded our marketing efforts during 1999 to include E-commerce by
accepting credit applications from potential customers via our website, located
at http://www.uglyduckling.com. Credit inquiries received over the web are
reviewed by our employees, who then contact the customers and schedule
appointments. We continue to monitor and enhance our internet application
levels. These efforts continue to provide an increasing number of used cars
sold. During the first quarter of 2000, we sold 701 cars totaling $5.9 million
in revenue, up from 415 used cars sold and $3.9 million in revenue during the
fourth quarter of 1999. We are also finding that the E-commerce customer group
is outperforming all other customers in terms of loan performance.
Same store unit sales for the three months ended March 31, 2000
decreased approximately 3% from the first quarter of 1999. We anticipate future
revenue growth will come from increasing the number of our dealerships and not
from higher sales volumes at existing dealerships.
Page 16
<PAGE>
The Cost of Used Cars Sold increased by 21.4% for the three months
ended March 31, 2000 over the comparable period of the previous year. The
increase for this period reflects a rise in the volume of cars sold due to the
increase in number of dealerships in operation and E-commerce related business
as previously mentioned. The gross margin on used car sales (Sales of Used Cars
less Cost of Used Cars Sold excluding Provision for Credit Losses) as a
percentage of related revenue increased to 45.1% for the three months ended
March 31, 2000 versus 43.5% for the same period of the previous year. The gross
margin per car sold for the three months ended March 31, 2000 increased 4.2%
over the three months ended March 31, 1999. The increase in both overall gross
margin as well as on a per car sold basis is the result of an increase in
average revenue per car sold coupled with a decrease in average Cost per Used
Car Sold.
The Company finances substantially all of its sales. The following
table indicates the percentage of sales units and revenue financed:
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------------------
<S> <C> <C>
2000 1999
------- -------
Percentage of used cars sold financed....................... 99.5% 99.1%
============ ===========
Percentage of sales revenue financed........................ 96.5% 96.5%
=========== ===========
</TABLE>
Provision for Credit Losses
<TABLE>
<CAPTION>
The following is a summary of the Provision for Credit Losses:
Three months ended Percentage
March 31, Change
---------------------------- -------------
2000 1999
---- ----
<S> <C> <C> <C>
Provision for Credit Losses (in thousands)........ $ 34,573 $ 27,763 24.5%
======== ========
Provision per loan originated .................... $ 2,199 $ 2,198 --
======= ========
Provision as % of principal balances originated... 27.0% 27.0%
========== ==========
</TABLE>
The Provision for Credit Losses is the amount we charge to current
operations on each car sold to establish an allowance for credit losses. The
Provision for Credit Losses for the three months ended March 31, 2000 increased
24.5% over the comparable period of the prior year. The increase was primarily
due to an increase in the volume of loans originated. The average amount
financed increased slightly to $8,150 per unit in the period ended March 31,
2000 from $8,131 per unit in the quarter ended March 31, 1999.
Net Interest Income
<TABLE>
<CAPTION>
Three months ended Percentage
March 31, Change
---------------------------- -------------
------------ --------------- -------------
($ in thousands) 2000 1999
---- ----
<S> <C> <C> <C>
Interest Income................................... $ 25,531 $ 10,373 146.1%
Portfolio Interest Expense........................ 5,029 1,995 152.1%
---------- ----------
Net Interest Income............................... $ 20,502 $ 8,378 144.7%
========== ==========
Average Effective Yield........................... 26.2% 25.3% 3.6%
========== ==========
Average Effective Borrowing Cost.................. 9.0% 8.4% 7.1%
========== ========== ====
</TABLE>
Interest Income consists primarily of interest on finance receivable
principal balances retained on our balance sheet. Retained principal balances
grew to $418.9 million at March 31, 2000 from $182.2 million at March 31, 1999
primarily as a result of the change in the way we structure our securitizations
to the collateralized borrowing method during the fourth quarter of 1998. Prior
to the fourth quarter of 1998, securitized loans were transferred off of our
balance sheet and a gain on
Page 17
<PAGE>
sale was recorded. Under the collateralized borrowing method, the securitized
loans are retained on our balance sheet and the income and associated costs are
recorded over the life of the loan.
Servicing Income
We generate Servicing Income primarily from servicing the remaining
loan portfolios securitized under the gain on sale method. A summary of
Servicing Income follows for the three months ended March 31, 2000 and 1999 ($
in thousands):
Three months ended Percentage
March 31, Change
------------------------- --------------
2000 1999
---- ----
Servicing Income.........$ 807 $ 2,899 (72.2%)
===== ======= =======
We service loans for monthly fees ranging from .25% to .33% of the
beginning of month principal balances (3.0% to 4.0% per year). The decrease in
Servicing Income for the quarter ended March 31, 2000 is due to the decrease in
remaining principal balances securitized and serviced under the gain on sale
method from $158.9 million at March 31, 1999 to $42.9 million at March 31, 2000.
Income before Operating Expenses
Income before Operating Expenses grew by 55.9% to $46.6 million for the
three months ended March 31, 2000 from $29.9 million for the three months ended
March 31,1999. Growth in Sales of Used Cars, an increase in gross margins and an
increase in Interest Income were the primary contributors to the increase.
Operating Expenses
<TABLE>
<CAPTION>
Three months ended Percentage
March 31, Change
2000 1999
---- ----
<S> <C> <C> <C>
Operating Expenses (in thousands)... $ 36,688 $ 28,970 26.6%
=========== ===========
Per Car Sold........................ $ 2,322 $ 2,271 2.2%
=========== ===========
As % of Total Revenues.................. 23.1% 24.2%
========== ==========
</TABLE>
Operating expenses, which consist of selling, marketing, general and
administrative and depreciation/amortization expenses, increased as a result of
overall growth in our operations. The decrease in operating expenses as a
percentage of total revenues is primarily the result of increased economies of
scale related to marketing efforts with the addition of more dealerships in
existing markets, efficiencies gained from enhanced management information
systems and an increase in interest income.
Interest Expense
Interest expense arising from our subordinated debt totaled $2.3
million for the three months ended March 31, 2000 versus none for the three
months ended March 31, 1999. While we have additional interest expense arising
from subordinated notes payable, a portion of this interest expense was
attributed to the financing of assets and activities reported as discontinued
operations. As the assets and activities of discontinued operations diminish,
the Company does not expect to retire the subordinated notes payable but rather
use these borrowings to fund our growth. Accordingly, we would expect to have a
disproportionate increase in interest expense allocated to continuing operations
in future periods as existing subordinated debt is used to fund our growth and
the allocation of this interest to discontinued operations decreases.
Subordinated debt carries interest rates generally higher than those charged on
borrowings collateralized by our finance receivables.
Page 18
<PAGE>
Income Taxes
Income taxes totaled $3.1 million for the three months ended March 31,
2000, and $.4 million for the three months ended March 31,1999. Our effective
tax rate was 41% for the three months ended March 31, 2000 and 40% for the three
months ended March 31,1999.
Earnings from Continuing Operations
Earnings from continuing operations totaled $4.5 million for the three
months ended March 31, 2000 versus $0.5 million for the same three months of the
previous year. The increase is primarily due to an increase in the volume of
used cars sold and growth in interest income. The interest income is due to the
increase in our retained portfolio along with an increase in gross margins on
used cars sold. These improvements were offset by a decrease in servicing income
resulting from the decline in remaining principal balances securitized and
serviced under the gain on sale method.
Discontinued Operations
Discontinued operations provided no income or loss for the three months
ended March 31, 2000 versus a loss, net of income tax benefits, of $121,000 for
the three months ended March 31, 1999. Effective December 31, 1999, we adopted a
formal plan to abandon any effort for its third party dealer operations to
acquire loans or servicing rights to additional portfolios. Accordingly, our
Cygnet Servicing and the associated Cygnet Corporate segment are reported as
components of discontinued operations. We plan to complete servicing the
portfolios that we currently service.
Business Segment Information
We report our operations based on three operating segments. These
segments are reported herein as Retail, Portfolio and Corporate. These segments
were previously reported as Company Dealership, Company Dealership Receivables
and Corporate and Other, respectively.
Operating Expenses for our business segments, along with a description
of the included activities, for the three month periods ended March 31, 2000 and
1999 are as follows:
Retail Operations. Operating expenses for our retail segment consist of
our marketing efforts, maintenance and development of dealership and inspection
center sites, and direct management oversight of used car acquisition,
reconditioning and sales activities. A summary of retail operating expenses
follows ($ in thousands except per car sold data):
<TABLE>
<CAPTION>
Three months ended Percentage
March 31, Change
2000 1999
---- ----
<S> <C> <C> <C>
Selling and Marketing............. $ 8,135 $ 6,366 27.8%
General and Administrative........ 14,190 11,094 27.9%
Depreciation and Amortization..... 1,071 791 35.4%
----------- -----------
$ 23,396 $ 18,251 28.2%
=========== ===========
Per Car Sold:
Selling and Marketing............. $ 515 $ 499 3.2%
General and Administrative........ 898 870 3.2%
Depreciation and Amortization..... 68 62 9.7%
----------- -----------
$ 1,481 $ 1,431 3.5%
=========== ===========
As % of Used Cars Sold Revenue:
Selling and Marketing............. 6.1% 6.0%
General and Administrative........ 10.7% 10.4%
Depreciation and Amortization..... 0.8% 0.7%
-------- --------
Total............................. 17.6% 17.1%
======== ========
</TABLE>
Page 19
<PAGE>
Selling and Marketing expenses as a percentage of related revenue
remained relatively constant at 6% for the first quarter of 2000 as compared to
the first quarter of 1999. The additional revenue from internet based sales, as
well as an overall increase in average sales price per vehicle, have allowed the
Selling and Marketing expenses as a percentage of related revenue to remain
stable while increasing slightly on a per car sold basis.
General and Administrative expenses increased quarter over quarter
principally as a result of increases in salary and benefit costs.
Portfolio Operations. Operating expenses for our portfolio segment
consist of loan servicing and collection efforts, securitization activities, and
other operations pertaining directly to the administration and collection of the
loan portfolio ($ in thousands except expense per month per loan serviced).
<TABLE>
<CAPTION>
Three months ended Percentage
March 31, Change
2000 1999
---- ----
<S> <C> <C> <C>
General and Administrative.................... $ 6,884 $ 4,601 49.6%
Depreciation and Amortization...................... 300 283 6.0%
----------- -----------
$ 7,184 $ 4,884 47.1%
=========== ===========
Expense per month per loan serviced $ 28.75 $ 20.70
========== ==========
Annualized Expense as % of Managed Principal
Balances.............................. 6.2% 5.7%
========= ==========
</TABLE>
The increase in operating expenses from the first quarter of 1999 to
the first quarter of 2000 for our portfolio segment is primarily a result of the
increased number of loans in our portfolio. Also attributing to the increase
were market adjustments made to collection staff wages and a decrease in the
number of delinquent accounts serviced per collector due to loan servicing
inefficiencies experienced in the latter half of 1999. As of result of these
initiatives, we have seen a significant decline in delinquency levels as
discussed in the "Static Pool Analysis" section below.
Corporate Operations. Operating expenses for our Corporate segment
consist of costs to provide managerial oversight and reporting for Ugly
Duckling, develop and implement policies and procedures, and provide expertise
to Ugly Duckling in areas such as finance, legal, human resources and
information technology.
<TABLE>
<CAPTION>
Three months ended Percentage
March 31, Change
($ in thousands) 2000 1999
---- ----
<S> <C> <C> <C>
General and Administrative.............. $ 5,271 $ 5,314 (0.8%)
Depreciation and Amortization........... 837 521 60.7%
------ --------
$ 6,108 $ 5,835 4.7%
============ ============
Per Car Sold............................ $ 387 $ 458 (15.5%)
============ ============
As % of Total Revenues.................. 3.8% 4.9%
=========== ===========
</TABLE>
Operating expenses related to our Corporate segment decreased on both a
per car sold basis and as a percent of total revenue primarily as a result of
various operating efficiencies. These efficiencies include those gained by the
consolidation of all accounting and management information to a single computer
system in early 1999. Further, as new dealerships opened in existing markets,
revenue and units sold increased while related expenditures increased at a
lesser rate. Finally,
Page 20
<PAGE>
as our retained portfolio increases, there is a proportionate increase in net
interest income thereby significantly improving the ratio of corporate expenses
to total revenues.
Financial Position
The following table represents key components of our financial position
($ in thousands):
<TABLE>
<CAPTION>
March 31, December 31, Percentage
2000 1999 Change
---- ---- ------
<S> <C> <C> <C>
Total Assets............................... $ 547,953 $ 536,711 2.1%
Inventory.................................. 49,058 62,865 (22.0%)
Finance Receivables, Net................... 407,267 365,586 11.4%
Net Assets of Discontinued Operations...... 14,162 33,880 (58.2%)
Total Debt................................. 345,183 340,941 1.2%
Notes Payable - Portfolio.................. 282,865 275,774 2.6%
Other Notes Payable........................ 33,418 36,556 (8.6%)
Subordinated Notes Payable................. 28,900 28,611 1.0%
Stockholders' Equity....................... $ 170,553 $ 165,680 2.9%
</TABLE>
Total Assets. The increase in total assets is primarily due to the
growth in Finance Receivables, Net, offset by the decrease in Inventory and Net
Assets of Discontinued Operations.
Inventory. Inventory represents the acquisition and reconditioning
costs of used cars located at our dealerships and our inspection centers. The
change in inventory from December 31, 1999 to March 31, 2000 is due to
management's decision to increase inventory levels at the end of 1999 in
preparation for the strong seasonal sale periods, which are typically the first
and second quarters of the year. We generally acquire our used car inventory
from three sources: approximately 50% from auctions, 30% from wholesalers and
20% from new car dealerships.
Growth in Finance Receivables, Net. Due to the growth in the volume of
cars sold, Finance Receivables, Net as of March 31, 2000 has increased
approximately 11% from December 31, 1999. See Note 2 to the Condensed
Consolidated Financial Statements for detail of the components of Finance
Receivables, Net.
The following table reflects the growth in principal balances retained
on our balance sheet measured in terms of the principal amount ($ in thousands)
and the number of loans outstanding.
<TABLE>
<CAPTION>
Managed Loans Outstanding
Principal Balances Number of Loans
March 31, December 31, March 31, December 31,
--------- ------------ --------- ------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Principal - Managed........................ $ 461,824 $ 424,480 75,496 70,450
Less: Principal - Securitized and Sold.... 42,911 65,662 13,037 17,369
------------ ------------ ------------ ------------
Principal - Retained on Balance Sheet...... $ 418,913 $ 358,818 62,459 53,081
============ ============ ============ ============
</TABLE>
The increase in Principal Balances - Retained on Balance Sheet was
primarily due to growth in loans receivable as a result of increased used car
sales and financing, partially offset by the principal balance runoff of loans
originated in prior periods. Used Car Sales totaled 15,802 for the quarter ended
March 31, 2000, versus sales of 9,731 used cars during the quarter ended
December 31, 1999.
The following table reflects activity in the Allowance for Credit Losses,
as well as information regarding charge off activity, for the three months ended
March 31, 2000 and year ended December 31, 1999 ($ in thousands):
Page 21
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Allowance Activity:
Balance, Beginning of Period.................. $ 76,150 $ 80,698
Provision for Credit Losses................... 34,573 23,133
Other Allowance Activity...................... 104 1,245
Net Charge Offs............................... (23,242) (28,926)
---------- ----------
Balance, End of Period........................ $ 87,585 $ 76,150
============ ============
Allowance as % Ending Principal Balances...... 20.9% 21.2%
=========== ===========
Charge off Activity:
Principal Balances......................... $ (31,166) $ (34,667)
Recoveries, Net............................ 7,924 5,741
------------ ------------
Net Charge Offs............................... $ (23,242) $ (28,926)
============= =============
</TABLE>
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 retail operations averaged 25.4% for the three months ended March 31,
2000 compared to 16.6% for the three months ended December 31, 1999. This
increase is due to the initiatives taken to retain qualified loan service staff
and reduce the number of delinquencies serviced per collector.
The Allowance for Credit Losses is maintained at a level that in
management's judgment is adequate to provide for estimated probable credit
losses inherent in our retail portfolio. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Static Pool
Analysis" below.
Page 22
<PAGE>
<TABLE>
<CAPTION>
INFORMATION FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1999
Sales of Used Cars and Cost of Used Cars Sold
Annual Percentage
Change
($ in thousands) 1999 1998 1997 1999 1998
----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Number of Used Cars Sold ........... 46,120 35,964 16,636 28.2% 116.2%
=========== ========== ===========
Sales of Used Cars ................. $ 389,908 $ 287,618 $ 123,814 35.6% 132.3%
Cost of Used Cars Sold ............. 219,037 165,282 72,358 32.5% 128.4%
----------- ---------- -----------
Gross Margin ....................... $ 170,871 $ 122,336 $ 51,456 39.7% 137.7%
=========== ========== ===========
Gross Margin %...................... 43.8% 42.5% 41.6%
========== ========== ==========
Per Car Sold:
Sales .............................. $ 8,454 $ 7,997 $ 7,443 5.7% 7.4%
Cost of Used Cars Sold ............. 4,749 4,595 4,349 3.4% 5.7%
----------- ---------- -----------
Gross Margin ....................... $ 3,705 $ 3,402 $ 3,094 8.9% 10.0%
=========== ========== ===========
</TABLE>
The number of Used Cars Sold (units), Sales of Used Cars (revenues),
and Cost of Used Cars Sold increased in both 1999 and 1998. Same store unit
sales were comparable for the years ended December 31, 1999, 1998 and 1997. The
growth for these periods reflects increases in the number of dealerships in
operation and the average unit sales price. The gross margin percentage has also
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. We
anticipate future revenue growth will continue to come from increasing the
number of dealerships and not from higher sales volumes at existing dealerships.
The Company finances substantially all of its sales. The following
table indicates the percentage of sales units and revenue financed:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ----------- --------
<S> <C> <C> <C>
Percentage of used cars sold financed....... 99.2% 98.9% 96.2%
============ =========== ===========
Percentage of sales revenue financed........ 98.1% 96.4% 94.4%
=========== =========== ===========
</TABLE>
Provision for Credit Losses
<TABLE>
<CAPTION>
Annual Percentage
Change
1999 1998 1997 1999 1998
--------- --------- --------- --------- ------
<S> <C> <C> <C> <C> <C>
Provision for Credit Losses (in thousands)........ $ 102,955 $ 65,318 $ 22,354 57.6% 192.2%
========= ======== ==========
Provision per loan originated .................... $ 2,250 $ 1,837 $ 1,397 22.5% 31.5%
========= ======== ==========
Provision as % of principal balances originated... 26.9% 23.6% 19.1%
========== ========= =========
</TABLE>
Provision for Credit Losses is the amount we charge to current
operations on each car sold to establish an allowance for credit losses. The
Provision for Credit Losses in total, per loan originated and as a percent of
principal balances originated increased in both 1999 and 1998. The increases
were due to an increase in the average amount financed to $8,356 per unit in the
year ended December 31, 1999 from $7,796 per unit in the year ended December 31,
1998 and from $7,301 per unit in the year ended December 31, 1997. The increase
from 1998 to 1999 was also a result of the change in our securitization
structure as discussed in the following paragraph.
When we changed the way we structured securitizations for accounting
purposes in the fourth quarter of 1998, we also changed the amount we provided
for credit losses. For periods prior to the fourth quarter of 1998, we generally
provided a Provision for Credit Losses of approximately 20% of the loan
principal balance at the time of origination.
Page 23
<PAGE>
Upon securitization, using the gain on sale method, losses for the life of the
loans were estimated and recorded as an element of the gain computation.
Beginning in the fourth quarter of 1998, we increased the provision for credit
losses to 27% of the initial amount financed.
<TABLE>
<CAPTION>
Net Interest Income
Annual Percentage
Change
($ in thousands) 1999 1998 1997 1999 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Interest Income................................... $ 68,574 $ 17,287 $ 12,559 296.7% 37.6%
Portfolio Interest Expense........................ 14,597 2,860 175 410.4% 1534.3%
---------- ------------ ----------
Net Interest Income............................... $ 53,977 $ 14,427 $ 12,384 274.1% 16.5%
========== ========== =========
Average Effective Yield........................... 26.0% 25.8% 26.7%
========== ========== =========
Average Effective Borrowing Cost.................. 8.0% 9.5% 10.1%
========== ========== =========
</TABLE>
Interest Income for 1999 consists primarily of interest on finance
receivable principal balances retained on our balance sheet. Retained principal
balances grew from $93.9 million at December 31, 1998 to $358.8 million at
December 31, 1999 primarily as a result of the change in our securitization
structure. Interest income in 1998 and 1997 consists primarily of interest
income from Residuals in Finance Receivables Sold retained under our
securitization structure using the gain on sale method. Residuals in Finance
Receivables Sold were $33.3 million and $13.3 million at December 31, 1998 and
1997, respectively. Both retained principal balances and Residuals in Finance
Receivables Sold are components of Finance Receivables, Net. See "Financial
Position - Growth in Finance Receivables, Net" beginning on page 28.
Interest Expense for 1999 consists primarily of interest on the
revolving facility and the Class A obligations issued in our securitization
transactions arising from the collateralized borrowings on the retained
portfolio. The increase in interest expense from 1998 to 1999 is in direct
correlation to the increase in retained principal balances noted above. Interest
expense in 1998 and 1997 relates solely to expense on our revolving facility for
the period between origination and securitization, which generally averaged
three months. Also, as a result of two common stock offerings in late 1996 and
February 1997, a significant portion of our portfolio was financed with
stockholders' equity.
Gain on Sale of Loans
We recorded no gains on sale in 1999. Gains on the sale of loans from
securitization transactions were $12.1 million in 1998 and $6.7 million in 1997.
The $6.7 million gain in 1997 is net of a $5.7 million charge arising from
higher loan losses than originally estimated at securitization.
Servicing Income
We generate Servicing Income primarily from servicing loan portfolios
securitized under the gain on sale method. A summary of Servicing Income follows
($ in thousands):
<TABLE>
<CAPTION>
Annual Percentage
Change
1999 1998 1997 1999 1998
----------- ----------- ----------- --------- -------
<S> <C> <C> <C> <C> <C>
Servicing Income $ 7,472 $ 15,481 $ 12,325 (51.7%) 25.6%
======= ======== ========
</TABLE>
We service loans for monthly fees ranging from .25% to .33% of the
beginning of month principal balances (3.0% to 4.0% per year). The decrease in
Servicing Income in 1999 is due to the decrease in remaining principal balances
securitized and serviced under the gain on sale method from $198.7 million at
December 31, 1998 to $65.7 million at December 31, 1999. The increase in 1998
Page 24
<PAGE>
from 1997 is due to the increase in such principal balances from $127.4 million
at December 31, 1997 to $198.7 million at December 31, 1998. The decrease in
Servicing Income is expected to continue as principal balances associated with
loans securitized under the gain on sale method continue to decline.
Income before Operating Expenses
As a result of our continued expansion, Income before Operating
Expenses grew from 1997 through 1999.
<TABLE>
<CAPTION>
Annual Percentage
Change
1999 1998 1997 1999 1998
----------- ----------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
Income before Operating Expenses $ 129,365 $ 99,019 $ 60,532 30.6% 63.6%
=========== =========== ===========
</TABLE>
Growth of Sales of Used Cars, Net Interest Income, Gain on Sale of
Loans, and Servicing and Other Income were the primary contributors to year over
year increases.
Operating Expenses
<TABLE>
<CAPTION>
Annual Percentage
Change
1999 1998 1997 1999 1998
----------- ----------- ----------- ----------- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Expenses (in thousands)....... $ 111,650 $ 93,052 $ 53,100 20.0% 75.2%
=========== =========== ===========
Per Car Sold............................ $ 2,420 $ 2,587 $ 3,192 (6.5%) (19.0%)
=========== =========== ===========
As % of Total Revenues.................. 24.0% 28.0% 34.2%
========== ========== ==========
</TABLE>
Operating expenses, which consist of selling, marketing, general and
administrative and depreciation/amortization expenses increased in total
resulting from overall growth in our operations. Decreases in operating expenses
on a per car sold and as a percent of total revenue basis is a result of
increased economies of scale related primarily to marketing expenses with the
opening of additional dealerships in established markets, efficiencies gained
from enhanced management information systems and benefits gained from certain
costs which do not rise proportionately to the increase in used cars sold and
financed. See additional discussion of operating expenses in the Business
Segment section beginning on page 26.
Interest Expense
Interest expenses arising from our subordinated debt totaled $3,028,000
for the year ended December 31, 1999. Interest expense for the years ended
December 31, 1998 and 1997, other than interest expense associated with our
retained portfolios, was not material to results of operations. While we have
additional interest expenses arising from subordinated notes payable,
substantially all of this interest expense was attributed to the financing of
assets and activities reported as discontinued operations. As the assets and
activities of discontinued operations diminish, we do not expect to retire the
subordinated notes payable but rather use these borrowings to fund our growth.
Subordinated debt carries interest rates generally higher than those charged on
borrowings collateralized by our finance receivables. Accordingly, we would
expect to have a disproportionate increase in interest expense in future periods
as existing subordinated debt is used to fund our growth.
Income Taxes
Income taxes totaled $6.0 million for the year ended December 31, 1999,
$2.4 million for the year ended December 31, 1998, and $2.8 million for the year
ended December 31, 1997. Our effective tax rate was 40.9% for the year ended
December 31, 1999, 40.5% for the year ended December 31, 1998, and 40.9% for the
year ended December 31, 1997.
Page 25
<PAGE>
Earnings from Continuing Operations
Earnings from Continuing Operations totaled $8.7 million, $3.5 million
and $4.1 million for 1999, 1998 and 1997, respectively. The increase in 1999
from 1998 resulted from an increase in the number of used cars sold, an increase
in gross margin on used cars sold, an increase in net interest income from the
growth of our retained portfolio and the decrease in operating expenses as a
percent of total revenues. The increase in 1999 over 1998 was partially offset
by the change in the level of provision for credit losses charged as discussed
in the following paragraph. The decrease in 1998 from 1997 results primarily
from the reduction in gain on sale income discussed below, and to a lesser
extent an increase in our Provision for Credit Losses.
In 1997 and 1998, we completed one securitization each quarter. In
1997, all four quarterly securitizations were completed using the gain on sale
method. In 1998, securitization transactions for the first three-quarters were
completed using the gain on sale method, with the fourth quarter transaction
being completed using the collateralized borrowings method, thus recording no
gain. Additionally, beginning in the fourth quarter of 1998, the provision for
credit losses was increased to 27% of the original amount financed from the 20%
level used in the first three-quarter of 1998 and all of 1997.
Discontinued Operations
Earnings from Discontinued Operations, net of income tax benefits, was
$573,000 in 1999, a loss of $9.2 million in 1998, and earnings of $5.4 million
in 1997. The significant change from 1997 to 1998 was due to the charges we
recorded totaling $15.1 million ($9.2 million, net of income taxes) to close our
branch office network and our terminated Cygnet rights offering. See Note (2) to
the Consolidated Financial Statements included herein.
Business Segment Information
We report our operations based on three operating segments. These
segments are reported in this prospectus as Retail, Portfolio and Corporate.
These segments were previously reported as Company Dealership, Company
Dealership Receivables and Corporate and Other, respectively.
Operating Expenses for our business segments, along with a description
of the included activities, for the years ended December 31, 1999, 1998 and 1997
follows:
Retail Operations. Operating expenses for our retail segment consists
of our marketing efforts, maintenance and development of dealership and
inspection center sites, and direct management oversight of used car
acquisition, reconditioning and sales activities. A summary of retail operating
expenses follows ($ in thousands except per car sold amounts):
<TABLE>
<CAPTION>
Annual Percentage
Change
1999 1998 1997 1999 1998
----------- ----------- ----------- ---------- ---- ----
<S> <C> <C> <C> <C> <C>
Selling and Marketing.............. $ 23,132 $ 18,246 $ 10,538 26.8% 73.1%
General and Administrative......... 44,770 35,765 17,215 25.2% 107.8%
Depreciation and Amortization...... 3,588 2,582 1,536 39.0% 68.1%
----------- ----------- -----------
$ 71,490 $ 56,593 $ 29,289 26.3% 93.2%
=========== =========== ===========
Per Car Sold:
Selling and Marketing.............. $ 502 $ 507 $ 633 (0.1)% (19.9)%
General and Administrative......... 970 995 1,035 (2.5)% (3.9)%
Depreciation and Amortization...... 78 72 92 8.3% (21.7)%
----------- ----------- -----------
$ 1,550 $ 1,574 $ 1,760 (1.5)% (10.6)%
=========== =========== ===========
As % of Used Cars Sold Revenue:
Selling and Marketing.............. 5.9% 6.3% 8.5%
General and Administrative......... 11.5% 12.4% 13.9%
Depreciation and Amortization...... 0.9% 1.0% 1.2%
-------- -------- --------
Total.............................. 18.3% 19.7% 23.6%
======== ======== ========
</TABLE>
Page 26
<PAGE>
Selling and marketing expenses as a percent of revenue and on a per car
sold basis trended downward in both 1999 and 1998 primarily as a result of
having additional dealerships in existing markets. Additional dealerships in a
market have increased units sold and revenues while selling and marketing costs
remained stable. This generally equates to costs spread over a larger operating
base thus improving both our margins per car sold and percent of revenue
operating results.
General and Administrative expenses increased year over year as a
result of our growth in the number of operating dealerships. On a per car sold
basis, these expenses trended down in 1998 primarily as a result of increased
volume in each market, thereby allowing certain fixed regional costs to be
spread over the increased unit volume. The 1999 increase was primarily the
result of opening dealerships in two new markets. As a percent of used car sales
revenue, both 1999 and 1998 trended downward primarily as a result of an
increase in average selling price as well as the efficiencies gained with the
opening of additional dealerships in existing markets.
Portfolio Operations. Operating expenses for our portfolio segment
consist of loan servicing and collection efforts, securitization activities, and
other operations pertaining directly to the administration and collection of the
loan portfolio ($ in thousands except expense per month per loan serviced).
<TABLE>
<CAPTION>
Annual Percentage
Change
1999 1998 1997 1999 1998
----------- ----------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C>
General and Administrative......... $ 19,809 $ 18,519 $ 12,303 7.0% 50.5%
Depreciation and Amortization...... 1,141 1,333 1,108 (14.4)% 20.3%
----------- ---------- ---------
$ 20,950 $ 19,852 $ 13,411 5.5% 48.0%
=========== ========== ==========
Expense per month per loan serviced
$ 22.38 $ 20.20 $ 22.80
========== ========== =========
Expense as % of Average Managed
Portfolio........................ 4.9% 4.5% 5.3%
========= ========== ========
</TABLE>
The increase in operating expenses for our portfolio segment year over
year is primarily a result of the increasing number of loans in our portfolio.
Expenses per loan serviced and as a percent of average managed portfolio
increased from 1998 to 1999 primarily due to personnel related issues as
discussed below. Expenses per loan serviced and as a percent of average managed
portfolio decreased from 1997 to 1998. The decrease is due primarily to the
efficiencies associated with our integrated loans servicing system acquired in
late 1997 and an initiative begun in late 1997 that increased the number of
loans each collector serviced.
In the last half of 1999, we experienced loan servicing inefficiencies,
including the loss of a large number of experienced collectors to other
financial services entities. While we believe we have successfully addressed
these issues, loan servicing costs increased significantly in the fourth quarter
of 1999. As part of our resolution, we made market adjustments to collection
staff wages and also decreased the number of delinquent accounts serviced per
collector. While management is confident that these efforts will ultimately
translate into decreased loan charge offs, servicing expense on a per loan
serviced basis as well as a percent of the managed portfolio are expected to
increase from the levels reported in 1999.
Corporate Operations. Operating expenses for our Corporate segment
consist of costs to provide managerial oversight and reporting for Ugly
Duckling, develop and implement policies and procedures, and provide expertise
to Ugly Duckling in areas such as finance, legal, human resources and
information technology.
<TABLE>
<CAPTION>
Page 27
<PAGE>
Annual Percentage
Change
($ in thousands) 1999 1998 1997 1999 1998
------------ ------------ ------------ ----------- ---- ----
<S> <C> <C> <C> <C> <C>
General and Administrative............ $ 16,991 $ 15,610 $ 9,896 8.8% 57.7%
Depreciation and Amortization......... 2,219 997 504 122.6% 97.8%
------ ------------ ------------
$ 19,210 $ 16,607 $ 10,400 15.7% 59.1%
============ ============ ============
Per Car Sold.......................... $ 417 $ 462 $ 625 (9.7%) (26.4%)
============ ============ ============
As % of Total Revenues............... 4.1% 5.0% 6.7%
=========== =========== ===========
</TABLE>
Operating expenses related to our Corporate segment decreased on both a
per car sold basis and as a percent of total revenue primarily as a result of
various operating efficiencies. These efficiencies include those gained by the
consolidation of all accounting and management information to a single computer
system in early 1999. Further, as new dealerships opened in existing markets,
revenue and units sold increased while expenditures related to infrastructure
deployment and support, human resources activities and regulatory compliance
increased at a lesser rate. Finally, as our retained portfolio increased, there
is a proportionate increase in net interest income thereby significantly
improving the ratio of corporate expenses to total revenues.
Financial Position
The following table represents key components of our financial position
($ in thousands):
<TABLE>
<CAPTION>
Annual Percentage
December 31, Change
1999 1998 1999
------------ ------------ ----------
<S> <C> <C> <C>
Total Assets............................... $ 536,711 $ 337,281 59.1%
Inventory.................................. 62,865 44,145 42.4%
Finance Receivables, Net................... 365,586 126,168 189.8%
Net Assets of Discontinued Operations...... 33,880 106,997 (68.3%)
Total Debt................................. 340,941 155,611 119.1%
Notes Payable - Portfolio.................. 275,774 101,732 171.1%
Other Notes Payable........................ 36,556 15,899 129.9%
Subordinated Notes Payable................. 28,611 37,980 (24.7)%
Stockholders Equity........................ $ 165,680 $ 162,767 1.8%
</TABLE>
Total Assets. The growth in total assets from 1998 to 1999 was
primarily due to an increase in Finance Receivables, Net and Inventory, offset
by a decrease in Net Assets of Discontinued Operations.
Inventory. Inventory represents the acquisition and reconditioning
costs of used cars located at our dealerships and our inspection centers. The
increase in inventory in 1999 over 1998 was primarily due to an increase in
dealership and inspection center sites coupled with a decision to increase
inventory levels at year end in preparation for the strong seasonal sale period
during the first and second quarters of 2000. Management estimates that for each
car it has at a dealership location it must have a car in the reconditioning
process at an inspection center to maintain a stable supply of cars for sale. We
generally acquire our used car inventory from three sources: approximately 50%
from auctions, 30% from wholesalers and 20% from new car dealerships.
Growth in Finance Receivables, Net. As a result of our expansion, Finance
Receivables, Net increased significantly during the past two years.
Components of Finance Receivables, Net follow:
Page 28
<PAGE>
<TABLE>
<CAPTION>
December 31,
---------------------------------
($ in thousands) 1999 1998
------------ --------
<S> <C> <C>
Contractually Scheduled Payments........... $ 492,937 $131,510
Unearned Finance Charges................... (134,119) (37,574)
-------- ---------
Principal - Retained on Balance Sheet...... 358,818 93,936
Add: Accrued Interest Receivable........... 3,741 877
Loan Origination Costs, Net................ 5,079 2,237
----------- -----------
Principal Balances, Net.................... 367,638 97,050
Investments Held in Trust.................. 56,716 20,564
Residuals in Finance Receivables Sold...... 17,382 33,331
----------- -----------
Finance Receivables..................... 441,736 150,945
Allowance for Credit Losses................ (76,150) (24,777)
----------- -----------
Finance Receivables, Net................ $ 365,586 $ 126,168
======== ===========
</TABLE>
The following table reflects the growth in year end principal balances
retained on our balance sheet measured in terms of the principal amount ($ in
thousands) and the number of loans outstanding.
<TABLE>
<CAPTION>
Managed Loans Outstanding - December 31,
---------------------------------------------------
Principal Balances Number of Loans
----------------------------- ---------------------
1999 1998 1999 1998
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
Principal - Managed........................ $ 424,480 $ 292,683 70,450 49,601
Less: Principal - Securitized and Sold.... 65,662 198,747 17,369 37,186
------------ ------------ ----------- ------------
Principal - Retained on Balance Sheet...... $ 358,818 $ 93,936 53,081 12,415
============ ============ =========== ============
</TABLE>
The increase in Principal Balances - Retained on Balance Sheet was
primarily due to an increase in loans receivable as a result of increased used
car sales and financing from growth in the number of dealerships, partially
offset by the principal balance runoff of loans originated in prior periods. Our
dealership network increased from 41 dealerships at December 31, 1997 to 56
dealerships at December 31, 1998 to 72 dealerships at December 31, 1999.
Investments Held in Trust represent funds held by trustees on behalf of
our securitization lenders. The increase in 1999 is attributable to
securitizations completed under the collateralized borrowing method.
Residuals in Finance Receivables Sold represent our subordinated
interest in loans sold under the gain on sale method. The decrease in 1999 is
attributable to no additional loans securitized under the gain on sale method,
as well as the runoff of portfolios securitized and sold during prior periods.
The following table reflects activity in the Allowance for Credit
Losses, as well as information regarding charge off activity, for the years
ended December 31, 1999 and 1998 ($ in thousands):
<TABLE>
<CAPTION>
Years Ended
December 31,
1999 1998
---------- -------
Allowance Activity:
<S> <C> <C>
Balance, Beginning of Period..................... $ 24,777 $ 10,356
Provision for Credit Losses...................... 102,955 65,318
Other Allowance Activity......................... 6,424 (44,539)
Net Charge Offs.................................. (58,006) (6,358)
------------ ------------
Balance, End of Period........................... $ 76,150 $ 24,777
============ ============
Allowance as % Ending Principal Balances......... 21.2% 26.4%
=========== ===========
Charge off Activity:
Principal Balances........................... $ (71,277) $ (8,410)
Recoveries, Net.............................. 13,271 2,052
------------ ------------
Net Charge Offs.................................. $ (58,006) $ (6,358)
============ ============
</TABLE>
Page 29
<PAGE>
Other Allowance activity in 1999 consists primarily of additions to our
Allowance recorded in association with loans acquired as part of our two
acquisitions. The reduction in 1998 is the amount of Allowance transferred off
balance sheet as part of loans sold under the gain on sale method in our
securitizations.
Even though a loan is charged off, we continue with collection efforts
on the loan. Recoveries as a percentage of principal balances charged off from
dealership operations averaged 18.6% for the year ended December 31, 1999
compared to 24.4% for the year ended December 31, 1998. The reduction in the
recovery percent is attributable to inefficiencies in our loan service
operations, as previously mentioned, and an increase in gross margin per car
sold which translates into the value of the recovered collateral representing a
lesser percent of the loan balance.
The Allowance for Credit Losses is maintained at a level that in
management's judgment is adequate to provide for estimated probable credit
losses inherent in our retail portfolio. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Static Pool
Analysis" below.
Net Assets of Discontinued Operations. See Note (2) to the Consolidated
Financial Statements included herein.
Total Debt. Total Debt is comprised of Notes Payable - Portfolio, Other
Notes Payable and Subordinated Notes Payable. We financed the increases in our
loan portfolio and other assets primarily through additional borrowings,
represented by increases in Notes Payable - Portfolio. The significant increase
in Notes Payable - Portfolio in 1999 was primarily due to the change in our
securitization structure to the collateralized borrowing method. The decrease in
Subordinated Notes Payable was primarily due to the assumption of the Verde
subordinated debt by Cygnet Capital Corporation, the purchaser, in connection
with the sale of Cygnet Dealer Finance. Other Notes Payable were increased
primarily to finance assets attributed to our discontinued operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Interest Expense."
Stockholders' Equity. See the Consolidated Financial Statements included
herein - Consolidated Statement of Stockholders' Equity.
STATIC POOL ANALYSIS
We use a "static pool" analysis to monitor performance for loans 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
loan 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 of proceeds.
Page 30
<PAGE>
The following table sets forth as of April 30, 2000, the cumulative net
charge offs as a percentage of original loan 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
($ 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>
1993 $ 12,984 9.1% 22.1% 28.5% 33.8% 35.9% 36.5% 36.8% 100.0%
1994 $ 23,589 5.3% 14.8% 19.9% 25.6% 28.0% 28.7% 28.8% 100.0%
1995 $ 36,569 2.0% 8.1% 13.2% 19.2% 22.3% 23.6% 24.1% 100.0%
1996:
1st Quarter $ 13,635 1.6% 8.0% 13.7% 20.6% 24.7% 26.0% 27.2% 100.0%
2nd Quarter $ 13,462 2.3% 9.3% 13.4% 22.0% 25.9% 27.6% 29.0% 99.9%
3rd Quarter $ 11,082 1.7% 6.9% 12.6% 21.4% 25.5% 27.7% 28.8% 99.7%
4th Quarter $ 10,817 0.7% 8.5% 15.9% 24.9% 29.3% 31.1% 32.2% 99.2%
1997:
1st Quarter $ 16,279 2.1% 10.8% 18.2% 24.9% 30.0% 32.3% 33.6% 98.1%
2nd Quarter $ 25,875 1.5% 9.9% 15.9% 22.8% 27.6% 29.7% 30.7% 95.7%
3rd Quarter $ 32,147 1.4% 8.4% 13.2% 22.6% 27.1% 29.4% 30.3% 93.5%
4th Quarter $ 42,529 1.4% 6.9% 12.7% 22.0% 26.3% 29.1% 29.4% 90.6%
1998:
1st Quarter $ 69,708 1.0% 6.9% 13.5% 21.1% 26.8% x 28.9% 87.4%
2nd Quarter $ 66,908 1.1% 8.1% 14.3% 22.0% 27.7% -- 28.4% 81.5%
3rd Quarter $ 71,027 1.0% 8.0% 13.5% 23.5% x -- 27.7% 76.5%
4th Quarter $ 69,583 0.9% 6.7% 13.3% 25.0% -- -- 26.6% 67.5%
1999:
1st Quarter $ 102,733 0.8% 7.6% 15.5% x -- -- 22.9% 57.5%
2nd Quarter $ 96,098 1.1% 10.2% 17.2% -- -- -- 20.3% 45.9%
3rd Quarter $ 102,599 1.0% 8.5% x -- -- -- 12.5% 32.0%
4th Quarter $ 80,900 0.7% x -- -- -- -- 4.5% 16.1%
2000:
1st Quarter $ 128,123 x -- -- -- -- -- 0.4% 6.6%
</TABLE>
The following table sets forth the principal balances 31 to 60 days
delinquent, and 61 to 90 days delinquent as a percentage of total outstanding
contract principal balances from dealership operations.
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999 1998
------------------ ----------------- ----------
Days Delinquent: 31-60 61-90 31-60 61-90 31-60 61-90
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Retained on Balance Sheet..................... 3.3% 1.8% 5.3% 2.8% 2.2% 0.6%
Securitized - Gain on Sale.................... 4.8% 2.8% 7.6% 3.7% 5.7% 2.8%
---- ---- ---- ---- ---- ----
Total Portfolio............................... 3.4% 1.9% 5.7% 2.9% 4.6% 2.1%
==== ==== ==== ==== ==== ====
</TABLE>
In accordance with our charge off policy, there are no accounts more than
90 days delinquent as of March 31, 2000 or December 31, 1999 or 1998.
Page 31
<PAGE>
Delinquencies have improved dramatically as of the end of the first
quarter of 2000 versus the fourth quarter of 1999. As a result of loan servicing
inefficiencies experienced in the second and third quarters of 1999, initiatives
were put into place to retain qualified loan servicing staff and to reduce the
number of delinquent accounts serviced per collector. As exemplified in the
decline in delinquency levels, the initiatives have proven to be effective.
However, due to the first quarter of the year typically being our strongest
sales quarter, finance receivables increased significantly during this period.
As a result, delinquency levels appear lower due to the influx of receivables in
the latter months of the first quarter. Consequently, we cannot expect to
maintain the current delinquency levels in future periods.
Page 32
<PAGE>
SECURITIZATIONS
Under the current legal structure of our securitization program, we
sell loans to our subsidiaries that then securitize the loans by transferring
them to separate trusts that issue several classes of notes and certificates
collateralized by the loans. The securitization subsidiaries then sell Class A
notes or certificates (Class A obligations or Notes Payable) to investors and
subordinate classes are retained by us or our subsidiaries. We continue to
service the securitized loans.
The Class A obligations have historically received investment grade
ratings. To secure the payment of the Class A obligations, the securitization
subsidiaries obtain an insurance policy from MBIA Insurance Corporation that
guarantees payment of amounts to the holders of the Class A obligations.
Additionally, we also establish a cash "reserve" account for the benefit of the
Class A obligation holders. The reserve accounts are classified in our
consolidated financial statements as Investments Held in Trust and are a
component of Finance Receivables, Net.
Reserve Account Requirements. Under our current securitization
structure, we make an initial cash deposit into a reserve account, generally
equivalent to 4% of the initial underlying Finance Receivables principal balance
and pledge this cash to the reserve account agent. The trustee then makes
additional deposits to the reserve account out of collections on the securitized
receivables as necessary to fund the reserve account to a specified percentage,
ranging from 8.0% to 10.5%, of the underlying Finance Receivables' principal
balance. The trustee makes distributions to us when:
o the reserve account balance exceeds the specified percentage,
o the required periodic payments to the Class A certificate holders
are current, and
o the trustee, servicer and other administrative costs are current.
During the second and third quarters of 1999, we experienced loan
servicing inefficiencies that resulted in increased delinquency and charge off
levels. As a result, certain reserve account requirements were increased until
delinquency and charge off levels returned to contractually specified
percentages. As of March 31, 2000, all increases in reserve account requirements
had been eliminated and we met the targeted reserve account balances under our
securitization agreements of $34.6 million.
December 1999 Securitization. As a result of the servicing issues
discussed above, the December 1999 securitization included an additional 5%
initial deposit requirement. Assuming continuation of improved current
delinquency and charge off levels, the additional 5% deposit will be returned to
us at 1% per month during the last two quarters in 2000. As of the date of this
filing, this trust has reached its specified required deposit level and is
distributing cash to the Company.
Page 33
<PAGE>
Certain Financial Information Regarding Our Securitizations
The following table summarizes certain financial information and attributes of
our securitizations:
<TABLE>
<CAPTION>
($ in thousands) 1999 1998 1997
-------------- -------------- ---------
<S> <C> <C> <C>
Principal Balances Securitized - Retained by Company and
Recorded as Finance Receivables............................. $ 359,700 $ 69,300 $ --
Class A Obligations Issued - Retained by Company and Recorded
as Notes Payable ........................................... $ 257,800 $ 50,600 $ --
Principal Balances Securitized - Recorded as Sales,
Transferred off Company Books Recognizing Gain on Sale ..... $ -- $ 222,800 $ 151,700
Class A Obligations Issued - Transferred off Company Books
Recognizing Gain on Sale ................................... $ -- $ 161,100 $ 121,400
Subordinate Certificates - Retained by Company and Recorded
as Residuals in Finance Receivables Sold.................... $ -- $ 61,700 $ 30,300
Weighted Average Yield of Class A Obligations ................. 6.3% 5.9% 6.7%
Range of Yields for Class A Obligations........................ 5.7% - 6.8% 5.6% - 6.1% 6.3% - 8.1%
Average Net Spreads (after fees and expenses).................. 17.6% 17.6% 15.8%
Range of Net Spreads (after fees and expenses)................. 17.1% - 18.2% 17.0% - 18.1% 13.7% - 17.8%
</TABLE>
We did not enter into any securitization transaction during the first
quarter of 2000 or 1999.
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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
o increases in our loan portfolio, o common stock repurchases,
o expansion of our dealership network, o the purchase of inventories, and
o working capital and general corporate purposes, o the purchase of property and equipment.
We fund our capital requirements primarily through:
o operating cash flow, o our revolving facility with GE Capital, and
o securitization transactions, o supplemental borrowings.
</TABLE>
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.
Cash Flow
Net Cash Provided by Operating Activities increased by $11.0 million in
the three months ended March 31, 2000 to $61.9 million compared to cash
generated of $50.9 million for the three months ended March 31,1999. The
increase is primarily due to an increase in net earnings coupled with a
significant decrease in inventory from year end 1999, resulting from
management's decision to increase inventory levels at the end of 1999 in
preparation for the high seasonal sales, which typically occur in the first
quarter of the year.
Net cash used by investing activities decreased to $81.2 million for
the quarter ended March 31, 2000 versus $99.3 million for the same quarter of
the previous year. The decrease is due to a significant decrease in Investments
Held in Trust due to the decline in principal balances securitized under the
gain on sale method, offset by collections on finance receivables.
Page 34
<PAGE>
Financing activities generated $3.6 million for the quarter ended March
31, 2000 as compared to $49.3 million generated for the quarter ended March 31,
1999. The reason for the decrease is primarily due to net repayment of notes
payable.
Net Cash Provided by Operating Activities increased by $106.3 million
in the year ended December 31, 1999 to $128.8 million from cash provided in the
year ended December 31, 1998 of $22.5 million. The increase in 1999 was due
primarily to net earnings, an increase in the provision for credit losses and
decreases in activity associated with the elimination of gain on sale
recognition of finance receivables, offset by an increase in inventory resulting
from management's decision to increase inventory levels at year end in
preparation for strong seasonal sales in the first and second quarters of 2000.
Net Cash Provided by Operating Activities increased by $36.2 million in the year
ended December 31, 1998 to $22.5 million from cash used in the year ended
December 31, 1997 of $13.7 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 in Investing Activities increased by $304.9 million to
$379.3 million in the year ended December 31, 1999 compared to $74.4 million in
1998. The increase is primarily due to increases in Cash Used in Investing
Activities from purchases of Finance Receivables. Net Cash Used in Investing
Activities increased by $11.5 million to $74.4 million in the year ended
December 31, 1998 compared to $62.9 million in 1997. 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,
increased collections of Notes Receivable, and a reduction in payment for
Acquisition of Assets.
Net Cash Provided by Financing Activities increased by $112.9 million
to $177.9 million in the year ended December 31, 1999 compared to $65.0 million
in 1998. The increase is due to increases in Notes Payable, net of increases in
repayments of Notes Payable. Net Cash Provided by Financing Activities decreased
by $44.8 million to $65.0 million in the year ended December 31, 1998 compared
to $109.8 million 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.
Financing Resources
Revolving Facility. Under our $125 million revolving facility, our
borrowing base consists of up to 65.0% of the principal balance of eligible
loans originated from the sale of used cars and the lesser of $25 million or 58%
of the direct vehicle costs for eligible vehicle inventory. The revolving
facility expires on June 30, 2000 and includes a provision for a one year
extension upon agreement by both parties. Although there can be no assurance, we
expect this agreement to be extended for an additional year. The revolving
facility also 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, 2000, our borrowing capacity under the revolving
facility was $121.9 million, the aggregate principal amount outstanding under
the revolving facility was approximately $89.1 million, and the amount available
to be borrowed under the facility was $32.8 million. The revolving facility
bears interest at the 30-day LIBOR plus 3.15%, payable daily (total rate of
9.04% as of March 31, 2000).
The revolving facility contains covenants that, among other things,
limit our ability to take certain actions without GE Capital's consent,
including incur additional indebtedness, make any change in our capital
structure, declare or pay dividends, and 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 32.2% of our common stock at March 31, 2000.
In addition, we are also required to maintain specified financial
ratios, including a debt (excluding subordinated debt) to equity ratio of not
more than 2.2 to 1 and a net worth of at least $150 million. As of March 31,
2000, we were in compliance with the covenants in this agreement.
Securitizations. Our securitization program is a primary source of our
working capital. Securitizations generate cash flow for us from the sale of
Class A obligations, ongoing servicing fees, and excess cash flow distributions
Page 35
<PAGE>
from collections on the loans securitized after payments on the Class A
obligations, payment of fees, expenses, and insurance premiums, and required
deposits to the reserve account.
Securitization also allows us to fix our cost of funds for a given loan
portfolio. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Securitizations" for a more complete description of our
securitization program.
Supplemental Borrowings
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. 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 and warrants to purchase
an additional 75,000 shares of our common stock at $10.81 per share, exercisable
at any time until the later of February 2001, or when the debt is paid in full.
This debt is senior to the subordinated debentures issued in our exchange offers
(described below), subordinate to our other indebtedness, and had a $15.0
million balance at March 31, 2000.
In May 1999, we borrowed approximately $38.0 million from an unrelated
party for a term of two years maturing on May 1, 2001 (Residual Loan). The note
calls for monthly principal payments of generally not less than $800,000 through
May 2000 and not less than $1.7 million thereafter, plus interest at a rate
equal to LIBOR plus 550 basis points. The loan is secured by our Residuals in
Finance Receivables Sold and certain Finance Receivables and the loan balance
was $31.5 million at March 31, 2000.
Sale-Leaseback of Real Property. In March 1998, we executed an
agreement with an unrelated 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 for up to
an additional 20 years. 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 to 11.0% of the purchase price in
1999 and thereafter in accordance with increases in the Consumer Price Index. As
of March 31, 2000, we had sold 17 properties for a total price of approximately
$27.4 million under this arrangement. For the reason discussed in the following
paragraph, we do not anticipate closing any additional transactions under this
agreement. We used substantially all of the proceeds from the sales to pay down
debt.
In December 1999, Verde Investments, Inc., an affiliate of Mr. Garcia,
acquired at a 10% discount, all 17 sale-leaseback properties sold to the
unrelated investment company in 1998. We acquired the option to purchase these
properties at Verde's purchase price at anytime through December 31, 2000. Under
the terms of the sale of our Cygnet Dealer subsidiary to an affiliate of Mr.
Garcia in December 1999, the term of the option was extended and the new option
expires simultaneously with our receipt of payment in full of the $12 million
note receivable arising from the sale of Cygnet Dealer or December 31, 2000,
whichever comes later.
1998 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. 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%. 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 can redeem all or
part of the debentures at any time.
2000 Exchange Offer. On February 22, 2000, we commenced a new exchange
offer to acquire up to 2.5 million shares of our common stock in exchange for up
to $27.5 million principal amount of our 11% Subordinated Debentures due 2007.
This offer expired on April 13, 2000. We acquired approximately 1.1 million
shares of our common stock in exchange for approximately $11.9 million of seven
year subordinated debentures due April 15, 2007. Under the terms of the offer,
each share of stock was exchangeable for $11.00 principal amount of debentures.
Page 36
<PAGE>
The debentures were issued at a premium, which will be amortized over the life
of the debentures and results in an effective annual interest rate of 19.3%. We
must pay interest bi-annually at 11% per year.
General Electric Capital Corporation Lease. In March 2000, we entered
into an agreement with General Electric Capital Corporation to provide lease
financing in the aggregate of $4.7 million. The lease provides for 36 monthly
payments bearing interest at 9.42%. The lease is being treated as an operating
lease for accounting purposes.
Additional Financing. In November 1998, we borrowed $15.0 million for a
term of 364 days from Greenwich Capital. We paid 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 was at LIBOR plus 500 basis points and we paid an origination
fee of 100 basis points. This loan was paid in full during the second quarter of
1999.
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.
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
As a result of an aggressive growth strategy, during the year ended
December 31, 1999 we opened 16 new dealerships. During the three months ended
March 31, 2000, we developed three new dealerships in existing markets. The
magnitude of the direct cost of opening a dealership is primarily a function of
whether we lease a facility or construct a facility. A leased facility costs
approximately $650,000 to develop, while a facility we construct costs
approximately $ 1.7 million. In addition, we require capital to finance the
portfolio that we carry on our balance sheet for each dealership. It takes
approximately $2.2 million in cash to support a typical stabilized dealership
portfolio with our existing 65% advance rate under our GE facility.
Additionally, it takes approximately 34 months for a dealership portfolio to
reach a stabilized level.
We intend to finance the construction of new dealerships through
operating cash flows and supplemental borrowings, including amounts available
under the revolving facility and the securitization program.
Common Stock Repurchase Program. In October 1997, our Board of
Directors authorized a stock repurchase program, allowing us to purchase up to
one million shares of our common stock from time to time. Purchases may be made
depending on market conditions, share price and other factors. Our Board of
Directors extended the stock repurchase program in February 1999, to December
31, 1999. During 1999 and 1998, we repurchased 1,004,000 and 75,000 shares,
respectively, of common stock pursuant to the stock repurchase program.
Since January 1, 1998, we have repurchased a total of approximately 4.9
million shares of our common stock under our stock repurchase program and the
exchange offers described above at an average cost of approximately 5.83 per
share.
In September 1997, our Board of Directors approved a director and
senior officer stock purchase loan program. We may make loans of up to $1.0
million in total to the directors and senior officers under the program to
assist directors' and officers' purchases of common stock on the open market.
These unsecured loans bear interest at 10% per year. During 1997, senior
officers purchased 50,000 shares of common stock under this program and we
loaned $500,000 to the senior officers for these purchases. During 1998, we made
additional loans under similar terms and conditions to senior officers totaling
approximately $393,000 for the purchase of 40,000 shares of our common stock.
During 1999 and 2000, no loans under this program were made to senior officers.
Page 37
<PAGE>
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 loans originated at our
dealerships (if allowed under applicable law), or
o by increasing the profit margin on the cars sold.
Accounting Matters
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). The adoption of SFAS No. 133 was delayed
by the issuance of SFAS 137. The statement requires all derivatives to be
recorded on the balance sheet at fair value and establishes new accounting rules
for hedging instruments. In June 1999, the FASB deferred the effective date of
SFAS No. 133 for one year until fiscal years beginning after June 15, 2000.
Management does not expect the adoption of SFAS No. 133 to have a material
impact on us.
Market Risk
We are exposed to market risk on our financial instruments from changes
in interest rates. We do not use financial instruments for trading purposes or
to manage interest rate risk. Our earnings are substantially affected by our net
interest income, which is the difference between the income earned on
interest-bearing assets and the interest paid on interest bearing notes payable.
Increases in market interest rates could have an adverse effect on
profitability.
Our financial instruments consist primarily of fixed rate finance
receivables, residual interests in pools of fixed rate finance receivables,
short term variable rate revolving Notes Receivable, and variable and fixed rate
Notes Payable. Our finance receivables are classified as subprime loans and
generally bear interest at the lower of 29.9% or the maximum interest rate
allowed in states that impose interest rate limits. At December 31, 1999, the
scheduled maturities on our finance receivables ranged from one to 48 months,
with a weighted average maturity of 18.1 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, 1999 is the Collateralized Notes Payable (Class A obligations)
issued under our securitization program. Issuing debt through our securitization
program allows us to mitigate our interest rate risk by reducing the balance of
the variable revolving line of credit and replacing it with a lower fixed rate
note payable. We are subject to interest rate risk on fixed rate Notes Payable
to the extent that future interest rates are higher than the interest rates on
our existing Notes Payable.
The table below illustrates the impact that hypothetical changes in
interest rates could have on our earnings before income taxes over a twelve
month period. We compute the impact on earnings for the period by first
computing the baseline net interest income on our financial instruments with
interest rate risk, which are the variable rate revolving credit lines and the
variable rate notes payable. We then determine the net interest income based on
each of the interest rate changes listed below and compare the results to the
baseline net interest income to determine the estimated change in pretax
earnings. The table does not give effect to our fixed rate receivables and
borrowings.
Change in Interest Rates Change in Pretax Earnings
($ in thousands)
+ 2% $ (1,349)
+ 1% $ (674)
- 1% $ 674
- 2% $ 1,349
Page 38
<PAGE>
In computing the effect of hypothetical changes in interest rates, we
have assumed that:
o interest rates used for the baseline and hypothetical net interest income
amounts are in effect for the entire twelve month period,
o interest for the period is calculated on financial instruments held at
December 31, 1999 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.
We believe that our market risk information has not changed materially
from December 31, 1999.
Page 39
<PAGE>
BUSINESS
Principal Line of Business
We operate the largest chain of buy here-pay here car dealerships in
the United States. At March 31, 2000, we operated 75 dealerships located in
eleven large markets from coast to coast. We have one line of business: to sell
and finance quality used vehicles to customers within what is generally referred
to as the sub-prime segment of the used car market.
Our business is divided into three operating segments. Information
about our operating segments can be found in Note (18) of the Notes to
Consolidated Financial Statements beginning on page F-21 and in Note (6) of the
Notes to Condensed Consolidated Financial Statements beginning on page F-30.
Operating segment information is also included in "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Business Segment
Information" beginning on pages 19 and 26. We have revised the composition of
our operating segments as a result of the discontinuance of our Cygnet Dealer
and bulk purchasing and third party loan servicing lines of business. See
"Discontinued Operations" below. As a result, we have restated our segment
information for all periods included in Note (18) of the Notes to Consolidated
Financial Statements contained herein.
We commenced operations through various entities beginning in 1989.
Ugly Duckling Corporation was formed in 1992 and was reincorporated in Delaware
in 1996.
Overview of Used Car Sales and Finance Industry(1)
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
19,000 franchised and 56,000 independent used car dealers in the United States.
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. Based on these credit
characteristics, credit worthiness classifications have evolved generally
ranging from A through D, with the D classification representing those customers
being the least credit worthy. The C and D, or sub-prime segment, is comprised
of customers who typically have limited credit histories, low incomes or past
credit problems. This sub-prime market segment alone is estimated to grow over
the next two years from the current 1999 estimate of $136 billion to $143
billion, an increase of 5.1%. Of the C and D total market, independent used car
dealerships provide approximately $59 billion of total retail sales, or 43.4%.
We are a buy here-pay here dealer and participate in the sub-prime
segment of the independent used car sales and finance market. 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 structuring loan payment due dates as
weekly or biweekly, often coinciding with a customer's payday; and
o the ability to make payments in person at the dealerships. 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 due to the timing of paydays.
------
(1) The industry statistical information presented in this section from
information provided to us by CNW Marketing/Research of Bandon, Oregon.
Page 40
<PAGE>
Company Dealership (Retail) Operations
We commenced dealership operations in 1992 with the acquisition of two
dealerships in Arizona. At December 31, 1996, we had expanded to 8 dealerships,
all in Arizona. Beginning in 1997, we expanded aggressively through a
combination of de novo dealership developments and acquisitions. Acquisitions in
1997 and 1999 added 38 dealerships in ten new markets outside of Arizona.
The following table summarizes, by market for the last three years and
the first quarter of 2000, the number of dealerships we had in operation:
<TABLE>
<CAPTION>
Dealerships, by Market
---------------------------------------------------------
March 31, December 31,
------------- --------------------
2000 1999 1998 1997
------------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Los Angeles............. 13 12 8 6
Phoenix................. 9 9 9 7
San Antonio............. 9 9 9 7
Atlanta................. 9 9 9 5
Tampa................... 9 9 8 5
Dallas.................. 8 7 6 3
Richmond................ 5 5 -- --
Orlando................. 5 4 -- --
Tucson.................. 3 3 3 3
Albuquerque............. 3 3 3 2
Las Vegas............... 2 2 1 1
Miami................... -- -- -- 2
------------- ----------- --------- ----------
75 72 56 41
============= =========== ========= ==========
</TABLE>
Retail Car Sales.
We distinguish our dealership (retail) operations from those of typical
buy here-pay here dealers through our:
o dedication to customer service, o advertising and marketing programs,
o larger inventories of used cars, o upgraded facilities, and
o network of multiple locations, o centralized purchasing.
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. These characteristics help promote our image as a
friendly and reputable business. We believe this image, coupled with our
widespread brand name recognition, enables us to attract customers who might
otherwise visit another buy here-pay here dealer.
Each dealership is run by a general manager who has responsibility for
the operations of the dealership facility, including:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
o underwriting and approval of sales and loan originations, o profitability of the dealership,
o hiring, training, and performance of dealership employees, o post-sale customer relations, and
o inventory maintenance, o the appearance and condition of the facility.
</TABLE>
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 4 to 7 years) and a range of sale prices. This inventory 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, longevity, and the costs of buying,
reconditioning, and delivering the car for resale. After purchase, cars are
generally delivered to one of our 15 inspection centers, where they are
inspected and reconditioned for sale.
Page 41
<PAGE>
Used Car Financing.
We finance substantially all of the used cars that we sell at our
dealerships through retail installment loan contracts. Subject to the discretion
of our dealership or sales managers, potential customers must meet our formal
underwriting guidelines before we will agree to finance the purchase of a car.
In connection with each sale, we require our customers 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 loan payments to coincide with the
customer's paydays, whether weekly, biweekly, semi-monthly, or monthly.
Monitoring and Collections.
One of our goals is to minimize credit losses through close monitoring
of loans in our portfolio. When a car sale is completed, the loan is
automatically added to our loan servicing database. Our monitoring and
collections staff then use our collection software to monitor the performance of
the loans.
The collection software provides us with, among other capabilities,
up-to-date activity reports, allowing prompt identification of customers whose
accounts have become past due. Our early detection of a customer's delinquent
status, as well as our commitment to working directly with our customers, allows
us to identify and address payment problems quickly, and reduce the chance of
credit loss.
Unlike most other used car dealership chains or automobile finance
companies, we permit our customers to make payments on their loans in person at
any of our dealerships or at any of our collection facilities. Payments received
at our dealerships currently account for more than 60% of monthly loan receipts.
Integrated Computer System.
We manage all the operations of our inspection centers, dealerships,
loan service centers, and our accounting and reporting functions with a single
integrated computer system. When a used car is purchased, the system
automatically adds the car to inventory and records the appropriate entries in
our accounting system. Reconditioning costs also are subsequently tracked for
each car. With the generation of a sales contract, the system automatically adds
the loan to our loan servicing and collections database and records the sale,
cost of sale, inventory, loan and all related entries in our accounting system.
We use both local and wide-area data and voice communication networks that allow
us to account for all purchase and sale activity centrally and to service large
volumes of loans from one of our four centralized servicing facilities.
Concurrently, we retain the capability and flexibility that allows our customer
to make payments at any of our dealership locations. We also have developed
comprehensive databases and sophisticated management tools, including static
pool analysis, to analyze customer payment history and loan performance, and to
monitor underwriting effectiveness.
Primarily as a result of acquisitions, for 1997 and substantially all
of 1998, we managed our operations on four different computer systems. In
September and October 1998 and February 1999, we converted operations to our
single integrated computer system.
Advertising and Marketing.
In general, our advertising campaigns emphasize our ability to provide
financing to most sub-prime borrowers, our multiple locations, and our wide
selection of quality used cars. 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, as well as an Internet site at www.uglyduckling.com to market our
dealerships. We also operate a loan-by-phone program using our toll-free
telephone number of 1-800-THE-DUCK. Substantially all our marketing materials
are produced in both English and Spanish.
Page 42
<PAGE>
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.
Internet Activity
In 1999, we began to accept credit inquiries via the Internet on our
web site at www.uglyduckling.com. Credit inquiries received over the web are
reviewed by our employees, who then contact the customers and schedule
appointments. This "clicks and mortar" approach has increased our internet sales
dramatically during 1999, with internet based applications spawning sales
totaling $1.5 million, $2.6 million and $3.9 million for the second, third and
fourth quarter of 1999, respectively. Thus far in 2000, this trend has
continued. For the first quarter of 2000, our internet sales totaled 701 cars
generating $5.9 million in revenue. We are in the process of developing new
strategies to increase internet application levels and enhance closing ratios,
and believe sales activity via the internet will increasingly become a
complimentary method of expanding our base of operations.
Securitization Program
We periodically securitize our loan portfolio as a significant source
of capital to finance our business. Historically we have applied two methods in
structuring these transactions. For the quarter ended September 30, 1998 and for
prior periods, we structured and recorded securitization transactions for
accounting purposes using what we refer to as the "gain on sale" method. After
September 30, 1998, we changed the way we structure and record securitization
transactions for accounting purposes to what we refer to as the "collateralized
borrowing" method. The application of these two methods in structuring and
recording securitization transactions result in materially different accounting
entries on our books and our results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Overview - Other
Significant Developments."
Discontinued Operations
In December 1999, the Company sold its Cygnet Dealer Finance (CDF)
subsidiary to an entity controlled by Ernest C. Garcia II, Chairman and
principal shareholder of the Company for approximately $37.5 million, the book
value of the Company's investment in CDF. As a result of the sale, CDF has been
reclassified as discontinued operations for 1999 and all preceding years. See
Note (2) of the Notes to Consolidated Financial Statements for further
discussion of the sale of CDF.
Effective December 31, 1999, we adopted a formal plan to abandon any
efforts to acquire third party loans or servicing rights to additional third
party portfolios. Accordingly, our Cygnet Servicing and the associated Cygnet
Corporate segment are reported as components of discontinued operations. The
Company plans to complete servicing the portfolios that it currently services.
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 plan to
close the branch office network and exited this line of business in the first
quarter of 1998. See Note (2) of the Notes to Consolidated Financial Statements
for further discussion of our discontinued operations.
Trademarks and Proprietary Rights
We have an ongoing program under which we evaluate our intellectual
property and consider appropriate federal and state intellectual property
related filings. We believe that the value of our trademarks is increasing with
the development of our business, but that our business as a whole is not
materially dependent on our trademarks. We believe we have taken appropriate
measures to protect our proprietary rights. However, there can be no assurance
that such efforts have been successful.
Page 43
<PAGE>
Employees
At May 26, 2000, we employed approximately 2,650 persons, with 1750,
715 and 185 employed in the operation of our retail, portfolio and corporate
segments, respectively. None of our employees are covered by a collective
bargaining agreement.
Seasonality
Historically, we have experienced higher same store revenues in the
first two quarters of the year than in the latter half of the year. We believe
that these results are due to seasonal buying patterns resulting in part because
many of our customers receive income tax refunds during the first half of the
year, which are a primary source of down payments on used car purchases.
Properties
As of March 31, 2000, we leased substantially all of our facilities. At
March 31, 2000, facilities operated included 75 dealerships, 15 inspection
centers, 4 loan administration and collection facilities that service our loan
portfolio, and our corporate office. Our corporate administrative office is
located 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
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 us.
MANAGEMENT
Directors and Executive Officers
Information concerning our directors and executive officers as of May
1, 2000 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> <C>
Ernest C. Garcia II 42 Chairman of the Board of Ugly Duckling since its founding in 1992. 1992
Mr. Garcia also served as Chief Executive Officer of Ugly Duckling
until July 1999 and 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. See "Involvement in Certain Legal Proceedings" and
"Certain Relationships and Related Transactions."
------------------------------- --------- ---------------------------------------------------------------------- -----------
Page 44
<PAGE>
------------------------------- --------- ---------------------------------------------------------------------- -----------
Christopher D. Jennings 46 Director of Ugly Duckling. Also, Co-Chief Executive Officer of 1996
Global EuroNet Group, a company focused on investment and merchant
banking opportunities in the global technology sector, beginning in
May 2000. Prior to that time, he was a Managing Director of
Friedman, 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 Global Netfinancial.com, Inc.
Mr. Jennings is a member of the Compensation Committee of the board
and effective March 1999 is also a member of the Audit Committee.
See "Certain Relationships and Related Transactions" and "Security
Ownership of Certain Beneficial Owners and Management."
------------------------------- --------- ---------------------------------------------------------------------- -----------
John N. MacDonough 56 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 a director of FSbuy.com, a company offering
an e-commerce solution for the food service industry. 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 Executive Officer of Ugly Duckling 1998
Corporation, since 1998 as Director, since March 1996 as President,
and since July 1999 as CEO. From March 1996 to July 1999, Mr.
Sullivan served as Chief Operating Officer of Ugly Duckling. 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.
------------------------------- --------- ---------------------------------------------------------------------- -----------
Page 45
<PAGE>
------------------------------- --------- ---------------------------------------------------------------------- -----------
Frank P. Willey 46 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.
------------------------------- --------- ---------------------------------------------------------------------- -----------
Jon D. Ehlinger 42 Vice President, General Counsel and Secretary of Ugly Duckling --
Corporation, since July 1999. Beginning in July 1998, Mr. Ehlinger
began serving as General Counsel and Secretary for Ugly Duckling's
Car Sales subsidiaries and related dealership operations. From 1997
to July 1998, Mr. Ehlinger worked as a corporate attorney in the law
firm of Bonn, Luscher, Padden & Wilkins. From April of 1996 to
April of 1997 Mr. Ehlinger was self-employed as an attorney in the
state of Arizona. Mr. Ehlinger served as corporate counsel for
First Interstate Bank in Phoenix, Arizona from 1984 to 1996.
------------------------------- --------- ---------------------------------------------------------------------- -----------
Steven T. Darak 52 Senior Vice President and Chief Financial Officer of Ugly Duckling, --
since February 1994. From June 1993 through January 1994, Mr. Darak
was a consultant to us. From 1989 to 1994, Mr. Darak owned and
operated Champion Financial Services, Inc., a used car finance
company we acquired in early 1994. Prior to 1989, Mr. Darak served
in various positions in the banking industry and in public
accounting.
------------------------------- --------- ---------------------------------------------------------------------- -----------
Donald L. Addink 50 Senior Vice President and Treasurer 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 and hold office until their successors are
chosen and qualified or until 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 $50
(the minimum fine the court could assess), and during the period of his
probation, which ended in 1996, was banned from becoming an officer, director or
employee of any federally-insured financial institution or a securities firm
without governmental approval.
Page 46
<PAGE>
In separate actions arising out of this matter, Mr. Garcia agreed not to violate
the securities laws, and filed for bankruptcy both personally and with respect
to certain entities he controlled. The bankruptcies were discharged by 1993.
COMPENSATION OF EXECUTIVE OFFICERS, BENEFITS AND RELATED MATTERS
Summary Compensation Table
The table below sets forth information concerning the annual and
long-term compensation for services rendered in all capacities for us during the
three fiscal years ended December 31, 1999 of our Named Executive Officers.
"Named Executive Officers" consist of (1) each person serving as our Chief
Executive Officer during 1999, (2) our 4 next most highly compensated executive
officers serving as executive officers at December 31, 1999, and (3) 2
additional individuals who would have been reported under (2) above but for the
fact that the individuals were not serving as executive officers for Ugly
Duckling at December 31, 1999.
<TABLE>
<CAPTION>
----------------------------------------- -------- ------------------------------------ ------------------------- ----------
Annual Compensation Long-Term Compensation
------------------------------------ -------------------------
Awards
------------- -----------
Other Securities
Annual Restricted Under- All Other
Name And Principal Compen- Stock Lying Compen-
Position Year Salary Bonus sation Award(s) Options sation
($) ($) ($) (#)(1) ($)(2)
----------------------------------------- -------- ----------- ----------- ------------ ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Ernest C. Garcia II 1999 $93,416 -- $ 3,258(3) 100,000 --
-------- ----------- ----------- ------------ ------------- ----------- ----------
Chairman of the Board and 1998 $150,462 -- $ 3,228(3) -- -- $ 1,000
-------- ----------- ----------- ------------ ------------- ----------- ----------
former Chief Executive Officer 1997 $131,677 -- $ 2,985(3) -- -- $950
----------------------------------------- -------- ----------- ----------- ------------ ------------- ----------- ----------
Gregory B. Sullivan 1999 $200,000 $60,000 $4,850 (4) -- 125,000 --
-------- ----------- ----------- ------------ ------------- ----------- ----------
President and Chief 1998 $208,308 -- $ 1,156(4) -- 500,000 $ 833
-------- ----------- ----------- ------------ ------------- ----------- ----------
Executive Officer 1997 $197,846 -- -- -- -- $554
----------------------------------------- -------- ----------- ----------- ------------ ------------- ----------- ----------
Steven T. Darak 1999 $175,000 $49,950 $870 (5) -- 35,000 --
-------- ----------- ----------- ------------ ------------- ----------- ----------
Senior Vice President, and 1998 $180,961 -- $ 1,750(5) -- 65,001(6) --
-------- ----------- ----------- ------------ ------------- ----------- ----------
Chief Financial Officer 1997 $148,654 $ 25,000 $1,750(5) -- -- --
----------------------------------------- -------- ----------- ----------- ------------ ------------- ----------- ----------
Donald L. Addink 1999 $169,230 $18,000 -- -- 45,000 --
-------- ----------- ----------- ------------ ------------- ----------- ----------
Senior Vice President -- 1998 $171,346 $ 40,000 -- -- 33,500(7) $ 1,000
-------- ----------- ----------- ------------ ------------- ----------- ----------
Treasurer 1997 $139,671 $10,000 -- -- -- $950
----------------------------------------- -------- ----------- ----------- ------------ ------------- ----------- ----------
Steven A. Tesdahl(8) 1999 $198,941 $11,658
-------- ----------- ----------- ------------ ------------- ----------- ----------
Senior Vice President 1998 $187,115 -- -- -- 75,000(9) $ 1,000
-------- ----------- ----------- ------------ ------------- ----------- ----------
and Chief Information Officer 1997 $53,846 -- -- $100,000(10) 100,000 --
----------------------------------------- -------- ----------- ----------- ------------ ------------- ----------- ----------
Jon Ehlinger 1999 $135,076 $17,081 -- -- 10,000 --
-------- ----------- ----------- ------------ ------------- ----------- ----------
Vice President, 1998 $56,307 -- -- -- 10,000 --
-------- ----------- ----------- ------------ ------------- ----------- ----------
General Counsel and Secretary 1997 -- -- -- -- -- --
----------------------------------------- -------- ----------- ----------- ------------ ------------- ----------- ----------
Ray Fidel 1999 $174,999 $4,354 $6,000(11) -- -- --
-------- ----------- ----------- ------------ ------------- ----------- ----------
Former President, Cygnet Dealer Finance 1998 $147,115 $761 $1,500(11)
-------- ----------- ----------- ------------ ------------- ----------- ----------
1997 $132,692 -- $11,000(11) -- -- --
----------------------------------------- -------- ----------- ----------- ------------ ------------- ----------- ----------
<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 and /or internal financial performance targets. Regardless of the preceding
vesting schedule being met for the Executive Plan options, such options also fully vest at a set date in the future. (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. The stock related portion of this amount only includes vested stock as of December 31, 1999 and
the value is calculated with a share price of $6.88, the closing price of the stock as of December 31, 1999 (as reported by
Nasdaq).
(3) These amounts include car allowances as follows: (a) Mr. Garcia a $3,258 car allowance during 1999, a $3,228 car allowance
during 1998, and a $2,985 car allowance during 1997.
(4) These amounts include $4,850 for Mr. Sullivan's personal use of a company car for 1999 and $1,156 for a portion of 1998.
(5) These amounts include an $850 car allowance in 1999 and a $1,750 car allowance during each of 1998 and 1997.
(6) Includes 15,001 options that were cancelled and reissued on November 17, 1998.
(7) Includes 8,500 options that were cancelled and reissued on November 17, 1998.
(8) Employment changes occurred for this officer as follows: Mr. Tesdahl became Senior Vice President and Chief Information Officer
of Ugly Duckling on February 15, 2000. Prior to that time, effective November 1998, we revised our officer structure and as
part of that process,
Page 47
<PAGE>
Mr. Tesdahl stopped being an executive officer for Ugly Duckling. Mr. Tesdahl began his employment as an executive officer of
Ugly Duckling in September 1997.
(9) Includes 50,000 options that were cancelled and reissued on November 17, 1998.
(10) 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, 1999, Mr. Tesdahl retained 4,565 shares from the restricted stock award, valued at $31,407
(based on the December 31, 1999 closing price of our stock of $6.88 per share as reported by Nasdaq).
(11) This amount is for car allowances in 1999, 1998 and 1997.
</FN>
</TABLE>
Option Grants In Last Fiscal Year
The following table provides information on option grants for the
fiscal year ended December 31, 1999 to each of our Named Executive Officers.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------ --------------------------------
Potential Realizable Value At
Individual Grants Assumed Annual Rates Of Stock
Price Appreciation For Option
Term(1)
------------------------------------------------------------------------------------------ --------------------------------
Percent Of
Number Of Total
Securities Options Granted
Underlying To Employees Exercise
Options In Fiscal Year Price Expiration
Name Granted (#) ($/Sh) Date 5% ($) 10% ($)
--------------------------- --------------- ----------------- ----------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ernest C. Garcia II 100,000 (2) 3.3% $5.56 3/2/2009 349,665 886,121
--------------------------- --------------- ----------------- ----------- ---------------- --------------- ----------------
Gregory B. Sullivan 125,000 (2) 20.4% $5.56 3/3/2009 437,082 1,107,651
--------------------------- --------------- ----------------- ----------- ---------------- --------------- ----------------
Steven T. Darak 35,000 (2) 5.7% $5.56 122,383 310,142
--------------------------- --------------- ----------------- ----------- ---------------- --------------- ----------------
Jon Ehlinger 7,500 (3) 1.2% $5.56 3/2/2009 26,225 66,454
2,500 (3) 0.4% 8.19 7/28/2009 12,876 32,632
--------------------------- --------------- ----------------- ----------- ---------------- --------------- ----------------
Donald L. Addink 35,000 (2) 5.7% $5.56 3/2/2009 122,383 310,142
10,000 (3) 1.6% 8.19 7/28/2009 51,506 130,528
--------------------------- --------------- ----------------- ----------- ---------------- --------------- ----------------
Ray Fidel -- -- -- -- -- --
--------------------------- --------------- ----------------- ----------- ---------------- --------------- ----------------
Steven A. Tesdahl -- -- -- -- -- --
--------------------------- --------------- ----------------- ----------- ---------------- --------------- ----------------
<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 May 1, 2000
was $7.50 per share.
(2) On March 2, 1999 Mr. Garcia was granted these options under the Executive Plan at an exercise price equal to the fair value of
the shares on the date of the 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. On March 2, 1999, Mr. Sullivan, Mr. Darak and Mr.
Addink were granted these performance-based stock option awards under the Executive Plan. They vest over a 5-year period,
subject to vesting hurdles based on the market price of our common stock as traded on Nasdaq and certain internal target
financial performance measures. However, even if the hurdles are not met, these options fully vest on March 2, 2006 (i.e.,
"cliff vesting"). The options have 10-year terms. See "Compensation of Executive Officers, Benefits and Related Matters - 1998
Executive Incentive Plan" for additional information on our Executive Plan.
(3) These options were granted to the Named Executive Officers 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 our Incentive Plan.
</FN>
</TABLE>
Recent Option Grants In 1999
On February 15, 2000, the Compensation Committee reviewed and approved,
in advance, grants of stock options to Ugly Duckling employees. These grants
include the right to acquire an aggregate of approximately 15,000 shares of our
common stock at an exercise price of $8.438 per share. The options did not
include awards to any Named Executive Officers.
Page 48
<PAGE>
On April 17, 2000, the Compensation Committee reviewed and approved a
grant of stock options to an employee. The grant included the right to acquire
approximately 5,000 shares of our common stock at an exercise price of $7.406
per share. The Board and Compensation Committee also approved a grant of 5,000
options under the Executive Plan to each independent director on April 17, 2000.
Aggregated Option Exercises in Last Fiscal Year and Option Values as of
December31, 1999
The table below sets forth information with respect to option exercises
and the number and value of options outstanding at December 31, 1999 held by our
Named Executive Officers. Generally, we have not issued any other forms of stock
based awards.
<TABLE>
<CAPTION>
--------------------------- ---------------- ----------------- ---------------------------------- ----------------------------------
Number of Securities Value Of Unexercised
Underlying Options At In-The-Money Options At
Fiscal Year End (#)(1) Fiscal Year End ($)(2)
----------------- ---------------- ----------------- ----------------
Shares
Acquired On Value
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
--------------------------- ---------------- ----------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Ernest C. Garcia II -- -- -- 100,000 -- $132,000.00
--------------------------- ---------------- ----------------- ----------------- ---------------- ----------------- ----------------
Gregory B. Sullivan -- -- 207,800 558,200 $400,062.00 $265,828.00
--------------------------- ---------------- ----------------- ----------------- ---------------- ----------------- ----------------
Steven T. Darak -- -- 18,999 91,002 $6,028.25 $67,723.50
--------------------------- ---------------- ----------------- ----------------- ---------------- ----------------- ----------------
Jon D. Ehlinger -- -- 2,000 18,000 $0.00 $9,900.00
--------------------------- ---------------- ----------------- ----------------- ---------------- ----------------- ----------------
Donald L. Addink -- -- 6,700 71,800 $2,975.00 $58,100.00
--------------------------- ---------------- ----------------- ----------------- ---------------- ----------------- ----------------
Ray Fidel (3) -- -- -- -- $0.00 $0.00
--------------------------- ---------------- ----------------- ----------------- ---------------- ----------------- ----------------
Steven A. Tesdahl -- -- 15,000 60,000 $17,500.00 $70,000.00
--------------------------- ---------------- ----------------- ----------------- ---------------- ----------------- ----------------
<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. Under 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 and/or certain internal target financial performance
measures. In any event, such options fully vest on January 15, 2005 or March 2, 2006 (i.e., "cliff vesting"), depending upon
their issuance date. 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, 1999. The market price of our common stock on December 31, 1999 was
$6.88 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 May 1, 2000 was $7.50 per share.
(3) Prior to December 30, 1999, Mr. Fidel was the President of Ugly Duckling's Cygnet Dealer Finance division. As of December 30,
1999 Cygnet Dealer Finance was sold to an affiliate of Mr. Garcia and Mr. Fidel's options were forfeited as part of the
transaction by Mr. Fidel.
</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.
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 -
Page 49
<PAGE>
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 1999, the Compensation Committee granted, subject to certain
conditions, approximately 312,250 options under the Incentive Plan. On February
15, 2000, we granted 15,000 options and on April 17, 2000 we granted 5,000
options under the Incentive Plan.
At May 1, 2000 we had granted options under the plan to purchase
approximately 1,391,485 shares of our common stock (net of canceled and lapsed
grants) to various of our employees, of which approximately 1,005,365 were
outstanding. Also at May 1, 2000, there were approximately 408,515 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 as noted previously. 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."
At May 1, 2000, we had granted options under the plan to purchase
635,000 shares of our common stock (net of canceled and lapsed grants) under the
Executive Plan to various officers of Ugly Duckling, of which 635,000 are still
outstanding. There were 165,000 shares that remain available for grant under the
plan as of May 1, 2000.
Other than as summarized and noted above, the Executive Plan is similar
to the Incentive Plan as described in this prospectus.
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. Until June 1, 1999, the 401(k) plans provided a
matching contribution ranging from 10.0% to 25.0% of a participant's pretax
contributions and discretionary additional matchings by us, if we authorize
them. Beginning June 1, 1999, the 401(k) plans provide a matching contribution
of Ugly Duckling stock of up to 50% for up to the first six percent of a
participant's pre-tax contributions. The matching contribution vesting and
percentage match are based upon years of service with one hundred percent
vesting and fifty percent matching at five years. 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.
Page 50
<PAGE>
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. 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 provided a minimum 10.0% increase in the base
salary each year throughout the term of the agreement. In addition, the
agreement provided for the continuation of Mr. Garcia's base salary and certain
benefits for a period of 1 year in the event Mr. Garcia was terminated by us
without cause prior to the expiration of the agreement. It also contained
confidentiality and non-compete covenants. Mr. Garcia stepped down from his
position as Chief Executive Officer of Ugly Duckling in July of 1999 and this
agreement terminated at that time.
Donald L. Addink
On June 1, 1995, we entered into a 5-year employment agreement with Mr.
Addink, our Senior Vice President -- Senior Analyst, that was amended and
restated effective August 1, 1997. This restated agreement expired May 31, 2000.
The restated agreement established Mr. Addink's base salary at $165,000 per year
beginning on or around the effective date of the restated agreement, a $10,000
bonus payment upon execution of the restated agreement, certain benefits, and
the continuation of Mr. Addink's base salary and certain benefits for a period
of 1 year (but not to exceed the expiration date of the agreement) in the event
Mr. Addink is terminated by us without cause prior to expiration of the restated
agreement. It also contained confidentiality and non-compete covenants. Further,
it accelerated the vesting of Mr. Addink's 100,000 stock options previously
granted under the Incentive Plan, as set forth in the table below. These options
were originally granted pursuant to the Incentive Plan's general 5-year vesting
schedule with 20% vesting each year.
<TABLE>
<CAPTION>
Original grant date Number Exercise price Accelerated
Of shares(#) Per share($) Vesting date
------------------------------ ----------------- ------------------------ ----------------------
<S> <C> <C> <C>
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
------------------------------ ----------------- ------------------------ ----------------------
</TABLE>
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 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:
(1) he terminates his employment with us within 12 months after the change of
control; or
(2) 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."
Page 51
<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
We pay our independent directors:
o an annual retainer of $7,500 per year;
o $2,000 for physical attendance at meetings of the board and $1,000 for
physical attendance at meetings of committees of the board on which they
serve; and
o $1,000 for their attendance by telephone at meetings of the board and $500
for telephonic attendance at committee meetings.
Page 52
<PAGE>
We also reimburse these directors for reasonable travel expenses for
their attendance at these meetings. 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 in recognition of his services to us as a director.
Similarly, when Mr. 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 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. In 2000, each of our
independent directors were also granted 5,000 options under the Executive Plan.
These options are non-qualified stock options, and it is our current intention
to have annual option awards to our independent directors.
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 May 1, 2000, unless another
date is indicated, concerning:
o each beneficial owner of more than 5% of our common stock;
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 July 1, 2000 (60 days after May 1, 2000) 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 May 1, 2000.
Page 53
<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 Ownership(#)(2)(3)(4) Class(2)(3)(4)
------------------ -------------------------------------------------------------- --------------------------------- -------------
<S> <C> <C> <C> <C>
Common Stock Ernest C. Garcia II, Chairman of the Board and 5% Owner. 4,500,000 Direct 32.48%
0 Indirect
20,000 Vested Options
----------
4,520,000 Total
==========
------------------ -------------------------------------------------------------- --------------------------------- -------------
Common Stock Harris Associates L.P. (Harris) and an affiliate Harris 1,962,000 Direct 14.12%
Associates Investment Trust (Harris Trust), series 0 Indirect
designated The Oakmark Small Cap Fund (4), 5% Owner, based 0 Vested Options
----------
on Schedule 13G filing filed February 7, 2000 and effective 1,962,000 Total
==========
as of December 31, 1999. According to this Schedule 13G,
Harris Trust has shared voting and dispositive power over
1,750,000 shares of our common stock and Harris has
beneficial ownership of 1,962,000, including the shares
beneficially owned by Harris Trust.
Two North LaSalle Street, Suite 500
Chicago, Illinois 60602-3790
------------------ -------------------------------------------------------------- --------------------------------- -------------
Common Stock Wellington Management Company, LLP, (4) 5% Owner, based on a 860,000 Direct 6.19%
Schedule 13G filing as of December 31, 1999, by Wellington 0 Indirect
Management Company, LLP. According to the filing, 0 Vested Options
----------
Wellington Management Company, LLP has shared voting power 860,000 Total
==========
over 264,600 shares of our common stock and shared
dispositive power over 860,000 shares of our common stock.
75 State Street
Boston, Massachusetts 02109
------------------ -------------------------------------------------------------- --------------------------------- -------------
Common Stock Gregory B. Sullivan, Director, President and Chief Executive 59,800 Direct 2.58%
Officer 0 Indirect
307,800 Vested Options
----------
367,600 Total
==========
------------------ -------------------------------------------------------------- --------------------------------- -------------
Common Stock Steven T. Darak, Senior Vice President and Chief Financial 140,000 Direct 1.21%
Officer 0 Indirect
28,999 Vested Options
----------
168,999 Total
==========
------------------ -------------------------------------------------------------- --------------------------------- -------------
Common Stock Donald L. Addink, Senior Vice President and Treasurer 98,000 Direct *
0 Indirect
18,700 Vested Options
----------
116,700 Total
==========
------------------ -------------------------------------------------------------- --------------------------------- -------------
Common Stock Steven A. Tesdahl, Senior Vice President and Chief 14,565 Direct *
Information Officer 0 Indirect
20,000 Vested Options
----------
34,565 Total
==========
------------------ -------------------------------------------------------------- --------------------------------- -------------
Common Stock Christopher D. Jennings, (5) Director, indirect ownership of 6,444 Direct *
a warrant to purchase 19,833 shares of our common stock held 19,833 Indirect
on behalf of Mr. Jennings by Cruttenden Roth, an investment 5,000 Vested Options
----------
banking firm and previous employer of Mr. Jennings. The 31,277 Total
==========
warrants are convertible into our common 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) 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)(6) Director 27,144 Direct 1.29%
147,400 Indirect
5,000 Vested Options
----------
179,544 Total
==========
Page 54
<PAGE>
------------------ -------------------------------------------------------------- --------------------------------- -------------
Common Stock Jon D. Ehlinger, Vice President, Secretary and General 2,000 Direct *
Counsel 0 Indirect
3,500 Vested Options
----------
5,500 Total
==========
------------------ -------------------------------------------------------------- --------------------------------- -------------
Common Stock Ray Fidel, Former President, Cygnet Dealer Finance 10,000 Direct *
0 Indirect
0 Vested Options
----------
10,000 Total
==========
------------------ -------------------------------------------------------------- --------------------------------- -------------
All directors and executive officers as a group
(10 persons) 5,443,729 38.04%
------------------ -------------------------------------------------------------- --------------------------------- -------------
<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 May 1, 2000. These options were issued under either the
Incentive Plan or the 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 July 1, 2000) 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 13,895,965 shares of our common
stock outstanding as of May 1, 2000, 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 effective as of December 31, 1999, 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) Possible indirect ownership of shares of Ugly Duckling acquired by Fidelity National Financial, Inc. Mr. Willey disclaims
beneficial ownership of such shares.
</FN>
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the three most recent fiscal years, 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.
On December 30, 1999 Ugly Duckling sold its Cygnet Dealer Finance
division (CDF) to an entity controlled by Mr. Garcia for an amount equal to the
book value of CDF, approximately $37.5 million. This transaction occurred after
several attempts by Ugly Duckling to sell or finance CDF, including the
retention and effort of an investment banking firm to sell CDF in the first
quarter of 1999. The purchase price of CDF was paid through the assumption by
the buyer of approximately $8 million of outstanding debt owed by the Company to
Verde Investments, Inc., an affiliate of Mr. Garcia; a $12 million, ten-year
promissory note from the buyer to the Company that is guaranteed by Verde; and
the remainder in cash. The Company also received warrants to acquire up to 50%
of the buyer for $1, exercisable beginning two years from close though five
years after the note is paid in full. The warrants would be forfeited in the
event that the $12 million note is repaid in full within one year. The
percentage of the buyer purchasable under the warrants would be reduced to 25%
if the note were reduced to $4 million within two years and to 10% if the
warrant were paid in full within two years.
As part of the transaction, the board requested and received a fairness
opinion from an investment banking firm and the transaction was reviewed by the
Special Transaction Committee of the Board.
Page 55
<PAGE>
In December, 1999, Verde Investments Inc., an affiliated company owned
by Ernest C. Garcia, II, the Company's Chairman, acquired at a 10% discount of
all the sale-leaseback properties sold to an unrelated investment company in
March of 1998. We acquired the option to purchase these properties at Verde's
purchase price at any time until December 31, 2000. Under the terms of the sale
of Cygnet Dealer, the term of the option was extended and now the option expires
simultaneously with our receiving payment in full of the $12 million note
receivable arising from the sale of Cygnet Dealer or December 31, 2000,
whichever comes later.
Verde was one of our lenders for several years. As noted above, Ugly
Duckling was released of all liability under its loan with Verde as part of the
Cygnet Dealer Finance sale. Mr. Garcia, our Chairman, is also the President and
sole stockholder of Verde.
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 provided 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, and interest and principal
payments due at the end of each loan term. These loans were amended to make them
due on demand by Ugly Duckling effective in 1999. 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 $400,000 for these purchases. Through March 15, 2000 there were no
additional purchases of common stock under the program. In addition, there have
been no principal payments and minimal interest payments made to Ugly Duckling
since the program began. The table that follows provides additional information
on the D&O Stock Purchase Program for each of our executive officers as of
year-end 1999.
During August of 1999, we made loans to Mr. Darak, our Senior Vice
President and Chief Financial Officer, and to Mr. Addink, our Senior Vice
President and Treasurer. The loans were employee advances. The indebtedness is
unsecured, with interest at 10% per year, and principal and interest due upon
demand. There have been no interest or principal payments made by Mr. Darak or
Mr. Addink to Ugly Duckling since the inception of the loans, or on the
September 1998 or October 1998 loans to Mr. Darak. The table that follows
provides additional information on outstanding loans to our executive officers.
<TABLE>
<CAPTION>
----------------------------------------------- -------------------- ------------- --------------------------- --------------
Name & title of executive officer Nature of debt Date debt Principal Balance Of Debt Number of
incurred At 12/31/99 ($) Shares
Purchased (#)
----------------------------------------------- -------------------- ------------- --------------------------- --------------
<S> <C> <C> <C> <C>
Gregory B. Sullivan, CEO, President, & 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, former Sr. VP, Gen. D&O Stock Purchase 11/97 $100,000 10,000
Counsel & Secretary(1) Program
----------------------------------------------- -------------------- ------------- --------------------------- --------------
Donald L. Addink, Sr. VP - Treasurer D&O Stock Purchase 11/97 $100,000 10,000
Program
----------------------------------------------- -------------------- ------------- --------------------------- --------------
Steven A. Tesdahl, Sr. VP & CIO of Ugly D&O Stock Purchase 5/98 $98,126 10,000
Duckling Program
Car Sales
----------------------------------------------- -------------------- ------------- --------------------------- --------------
Other Senior Officers(1) D&O Stock Purchase 11/97 $100,000 10,000
Program
----------------------------------------------- -------------------- ------------- --------------------------- --------------
TOTAL for D&O Stock Purchase Program D&O Stock Purchase 11/97 & 5/98 $696,252 70,000
Program
----------------------------------------------- -------------------- ------------- --------------------------- --------------
Steven T. Darak, Sr. VP & CFO Employee Advance 9/98, $368,684 --
10/98 & 8/99
----------------------------------------------- -------------------- ------------- --------------------------- --------------
Don Addink, Sr. VP-Treasurer Employee Advance 8/99 $218,942 --
----------------------------------------------- -------------------- ------------- --------------------------- --------------
<FN>
(1) As of December 31, 1999, Mr. Johnson and Ugly Duckling mutually agreed to terminate their employment relationship. In addition,
Mr. Ray Fidel and Ugly Duckling also terminated their employment relationship on December 30, 1999. In connection with these
terminations, the principal balance of the debt was reduced to zero in exchange for the company receiving the Ugly Duckling
stock initially purchased by them under the D&O Stock Purchase Program. Mr. Fidel's exchange occurred in March of 2000 and Mr.
Johnson's exchange occurred in May of 2000.
</FN>
</TABLE>
Page 56
<PAGE>
From April 1998 to May 2000, Mr. Jennings, one of our directors, was 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 May 26, 2000, there were
approximately 13,897,965 shares of common stock issued and outstanding. As of
May 26, 2000, 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.
We are seeking stockholder approval at our next annual meeting,
currently scheduled for July 27, 2000, of a proposal to amend our certificate of
incorporation to allow our Board of Directors to authorize the issuance of up to
100 million shares of our common stock in series. Of the 100 million shares of
common stock authorized, 75 million shares will be designated as Series A Common
Stock. When the amendment becomes effective, each share of our existing common
stock outstanding immediately prior to the amendment becoming effective will
automatically be reclassified into one share of Series A Common Stock, and all
warrants, options and other rights to acquire shares of our existing common
stock will be converted into a right to acquire the same number of shares of
Series A Common Stock on the same terms and conditions. Outstanding certificates
that immediately prior to such effectiveness represented shares of our existing
common stock will automatically and without any action by the holders of such
stock be deemed to represent an equivalent number of shares of Series A Common
Stock despite the absence of any indication in the certificate to that effect.
Under the terms of the amendment, our board of directors, or a
committee of our board of directors that is so authorized by the board of
directors, will have the power to adopt resolutions authorizing the creation and
issuance from time to time of one or more series of common stock in addition to
the Series A Common Stock and to fix:
o the designation, voting powers, preferences and relative, participating,
optional and other rights, if any, of each such series;
o the qualifications, limitations or restrictions, if any, of each such
series; and
o the number of shares constituting each such series.
Page 57
<PAGE>
Our board or any committee of the board that is so authorized by the
board of directors will also have the power to increase or decrease the number
of shares of any series of common stock, subject to the limitations in our
certificate of incorporation (including the amendment) and to provisions of law.
The total number of shares of such series of common stock, in addition to the
Series A Common Stock, that Ugly Duckling will have the authority to create and
issue under the amendment will be 25 million.
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 First Merchants under this
prospectus ("First Merchants 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 First Merchants 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 First Merchants warrants and not defined herein
have the meanings given to them in the Warrant Agreement.
Each First Merchants 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 First Merchants warrants can be exercised at
any time through April 1, 2001.
We can redeem the then outstanding First Merchants 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
First Merchants 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.
Page 58
<PAGE>
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; or
(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.
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 the holder 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.
Page 59
<PAGE>
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 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.
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. We also have
registered the shares underlying the warrants issued to SunAmerica.
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 and additional warrants to purchase a total of 75,000
shares of common stock at an exercise price of $10.81 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. Under the terms of a servicing agreement with Reliance and
its approved plan of reorganization, once certain creditors of Reliance have
been paid in full, we are entitled to certain incentive compensation in excess
of the servicing fees that we have earned to date. We would receive the first
$3.25 million in collections once the specified creditors have been paid in full
and 15.0% thereafter. We are required to issue warrants to purchase up to
150,000 shares of 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. We do not
anticipate receiving any incentive compensation or issuing any additional
warrants.
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 our Directors."
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."
Page 60
<PAGE>
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.
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 Securities Exchange Act of 1934 and the rules promulgated thereunder.
Page 61
<PAGE>
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 SECURITYHOLDERS
The following table sets forth the name of each selling securityholder,
the aggregate number of shares of common stock beneficially owned by each
selling securityholder as of May 26, 2000, the aggregate number of 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 securityholder
may offer all or a portion of the 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 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 in connection
with the transactions effected in the First Merchants bankruptcy proceedings.
See "Prospectus Summary - Ugly Duckling - We conducted a series of transactions
with First Merchants Acceptance Corporation."
<TABLE>
<CAPTION>
Warrants
and related
Warrant Shares
to be Offered
for the Selling
Shares Beneficially Securityholder's Shares Beneficially
Owned Prior to Account Owned after the
Selling Securityholder the Offering Offering
<S> <C> <C> <C>
First Merchants Acceptance
Corporation.................. 325,000 325,000 0
======= ======= =
</TABLE>
PLAN OF DISTRIBUTION
First Merchants Warrants, related Warrant Shares, and Stock Option Shares
The First Merchants Warrants were issued to First Merchants on the
effective date of First Merchants' plan of reorganization. The term "equity
holders," when used in this prospectus, will mean the equity holders of First
Merchants on the effective date of the plan of reorganization. Under First
Merchants' plan of reorganization, equity holders received the benefit of 32,500
warrants. First Merchants 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 First Merchants warrants not allocated to
the equity holders of First Merchants, First Merchants 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.
Page 62
<PAGE>
The warrant shares relating to the First Merchants 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 --
First Merchants Warrants."
At our option, we have the right to issue up to 5,000,000 shares of our
common stock to First Merchants or its unsecured creditors or equity holders
(the "Stock Option") in exchange for all or part of First Merchants' portion of
the recoveries on the contracts we service after First Merchants makes certain
prior payments ("Excess Collections"). If we decide to exercise the Stock
Option, we must give First Merchants 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
First Merchants' share of cash distributions from the Excess Collections 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 from the Excess
Collections. 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 First Merchants 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 First Merchants, First
Merchants 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.
First Merchants or its nominees or pledgees may sell or distribute some
or all of the First Merchants 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 First Merchants 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 First Merchants 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.
First Merchants will be deemed to be an underwriter, as such term is
defined in Section 2(11) of the Securities Act, of the First Merchants 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 First Merchants have agreed to indemnify the other against certain
liabilities including certain liabilities under the Securities Act.
Page 63
<PAGE>
General
Our common stock is traded on Nasdaq under the symbol "UGLY." The First
Merchants Warrants will not be listed on any national securities exchange or
admitted for trading on Nasdaq.
We are bearing the expenses of registration of the First Merchants
warrants and Stock Option Shares offered hereby, which we estimate will be
approximately $400,000.
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, 1999 and 1998 and for each of the years in the three-year period
ended December 31, 1999, 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 First Merchants
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
Securities Exchange Act of 1934 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 Room of the Commission at its principal
office at 450 Fifth Street, N.W., Washington D.C. 20549, upon payment of the
required fees. You may obtain information on the operation of the Public
Reference Room by calling the Commission at 1-800-SEC-0330. 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.
Page 64
<PAGE>
<TABLE>
<CAPTION>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
Independent Auditors' Report............................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and 1998............. F-3
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 F-4
and 1997..............................................................
Consolidated Statements of Stockholders' Equity for the years ended
December 31, F-5
1999, 1998 and 1997...................................................
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 F-6
and 1997..............................................................
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, 2000 and December F-24
31, 1999...................................................................
Condensed Consolidated Statements of Operations for the three months ended
March 31, 2000 and 1999.................................................... F-25
Consolidated Statements of Cash Flows for the three months ended March 31,
2000 and 1999.............................................................. F-26
Notes to Consolidated Financial Statements................................. F-27
</TABLE>
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, 1999 and 1998, 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, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ugly
Duckling Corporation and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
KPMG LLP
Phoenix, Arizona
March 10, 2000
F-2
<PAGE>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
----------------------------
<S> <C> <C>
1999 1998
------------ ------------
ASSETS
Cash and Cash Equivalents.......................................... $ 3,683 $ 2,544
Finance Receivables, Net........................................... 365,586 126,168
Note Receivable from Related Party................................. 12,000 --
Inventory.......................................................... 62,865 44,145
Property and Equipment, Net........................................ 31,752 28,631
Intangible Assets, Net............................................. 14,618 14,433
Other Assets....................................................... 12,327 14,363
Net Assets of Discontinued Operations.............................. 33,880 106,997
------------ ------------
$ 536,711 $ 337,281
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts Payable............................................... $ 3,185 $ 2,137
Accrued Expenses and Other Liabilities......................... 26,905 16,766
Notes Payable - Portfolio...................................... 275,774 101,732
Other Notes Payable............................................ 36,556 15,899
Subordinated Notes Payable..................................... 28,611 37,980
------------ ------------
Total Liabilities........................................... 371,031 174,514
------------ ------------
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,
18,656,000 and 18,605,000 issued, respectively, and
14,888,000 and 15,841,000 outstanding,
respectively................................................ 19 19
Additional Paid-in Capital..................................... 173,273 173,809
Retained Earnings.............................................. 12,709 3,449
Treasury Stock, at cost........................................ (20,321) (14,510)
------------- ---------------
Total Stockholders' Equity................................. 165,680 162,767
Commitments and Contingencies ..................................... -- --
------------ ------------
$ 536,711 $ 337,281
============= ============
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-3
<PAGE>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
<S> <C> <C> <C>
1999 1998 1997
------------ ------------ -------------
Sales of Used Cars........................................... $ 389,908 $ 287,618 $ 123,814
Less:
Cost of Used Cars Sold.................................... 219,037 165,282 72,358
Provision for Credit Losses............................... 102,955 65,318 22,354
---------- ---------- ----------
67,916 57,018 29,102
---------- ---------- ----------
Other Income:
Interest Income........................................... 68,574 17,287 12,559
Portfolio Interest Expense................................ 14,597 2,860 175
---------- ---------- ----------
Net Interest Income...................................... 53,977 14,427 12,384
Gain on Sale of Loans..................................... -- 12,093 6,721
Servicing and Other Income................................ 7,472 15,481 12,325
---------- ---------- ----------
61,449 42,001 31,430
---------- ---------- ----------
Income before Operating Expenses............................. 129,365 99,019 60,532
---------- ---------- ----------
Operating Expenses:
Selling and Marketing..................................... 23,132 18,246 10,538
General and Administrative................................ 81,570 69,894 39,414
Depreciation and Amortization............................. 6,948 4,912 3,148
---------- ---------- ----------
111,650 93,052 53,100
---------- ---------- ----------
Income before Other Interest Expense......................... 17,715 5,967 7,432
Interest Expense from Subordinated Debt...................... 3,028 161 531
---------- ---------- ----------
Earnings before Income Taxes................................. 14,687 5,806 6,901
Income Taxes................................................. 6,000 2,351 2,820
---------- ---------- ----------
Earnings from Continuing Operations.......................... 8,687 3,455 4,081
Discontinued Operations:
Earnings (Loss) from Operations of Discontinued Operations
net of income taxes (benefit) of $172, ($440) and $3,759. 248 (703) 5,364
Earnings (Loss) from Disposal of Discontinued Operations, net
of income taxes (benefit) of $225, ($5,393), and $0..... 325 (8,455) --
---------- ----------- ----------
Net Earnings (Loss).......................................... $ 9,260 $ (5,703) $ 9,445
========== =========== ==========
Earnings per Common Share - Continuing Operations:
Basic..................................................... $ 0.58 $ 0.19 $ 0.23
========== ========== ==========
Diluted................................................... $ 0.57 $ 0.19 $ 0.22
========== ========== ==========
Net Earnings (Loss) per Common Share:
Basic..................................................... $ 0.61 $ (0.32) $ 0.53
========== =========== ==========
Diluted................................................... $ 0.60 $ (0.31) $ 0.52
========== =========== ==========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-4
<PAGE>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
( IN THOUSANDS)
<TABLE>
Number of Shares Total
------------------------- Retained Stockholders'
Common Treasury Common Earnings Treasury Equity
----------- -------- ----------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
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... -- (75) -- -- (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 (2,764) $ 173,828 $ 3,449 $ (14,510) $ 162,767
Issuance of Common Stock for Cash.... 51 -- 364 -- -- 364
Repurchase of Common Stock Warrants... -- (900) -- -- (900)
Purchase of Treasury Stock for Cash... -- (1,004) -- -- (5,811) (5,811)
Net Earnings for the Year............. -- -- -- 9,260 -- 9,260
--------- ------- --------- --------- --------- ----------
Balances at December 31, 1999......... 18,656 (3,768) $ 173,292 $ 12,709 $ (20,321) $ 165,680
========= ======== ========= ========= ========== ==========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-5
<PAGE>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
<S> <C> <C> <C>
1999 1998 1997
----------- ----------- ----------
Cash Flows from Operating Activities:
Net Earnings (Loss).............................................. $ 9,260 $ (5,703) $ 9,445
Adjustments to Reconcile Net Earnings (Loss) to Net Cash Provided by
(Used in) Operating Activities from Continuing Operations:
Loss (Earnings) from Discontinued Operations..................... (573) 9,158 (5,364)
Provision for Credit Losses...................................... 102,955 65,318 22,354
Gain on Sale of Loans............................................ -- (12,093) (6,721)
Deferred Income Taxes............................................ (3,078) (2,759) 510
Depreciation and Amortization.................................... 7,579 5,071 3,150
Purchase of Finance Receivables for Sale......................... -- (207,085) (116,830)
Proceeds from Sale of Finance Receivables........................ -- 159,498 81,098
Collections of Finance Receivables for Sale...................... 16,644 22,000 15,554
Increase in Goodwill from Acquisitions......................... (1,217) (528) --
Loss on Disposal of Property and Equipment..................... 43 903 --
Increase in Inventory............................................ (18,720) (11,773) (20,592)
Decrease (Increase) in Other Assets.............................. 1,415 (967) (1,252)
Increase in Accounts Payable, Accrued Expenses, and Other 7,751 2,715 6,345
Liabilities......................................................
Increase (Decrease) in Income Taxes Receivable/Payable........... 6,772 (1,233) (1,377)
----------- ----------- -----------
Net Cash Provided by (Used in) Operating Activities
of Continuing Operations................................... 128,831 22,522 (13,680)
----------- --------- ----------
Cash Flows from Investing Activities:
Increase in Finance Receivables.................................. (403,742) (111,467) --
Collections of Finance Receivables............................... 80,877 40,112 --
Increase in Investments Held in Trust............................ (36,152) (8,927) (8,475)
Advances under Notes Receivable.................................. (12,000) -- --
Repayments of Notes Receivable................................... 763 149 151
Proceeds from disposal of Property and Equipment................. 77 28,563 --
Purchase of Property and Equipment............................... (8,974) (22,825) (18,764)
Payment for Acquisition of Assets................................ (169) -- (35,841)
------------ ---------- -----------
Net Cash Used in Investing Activities of Continuing Operations (379,320) (74,395) (62,929)
----------- --------- ---------
Cash Flows from Financing Activities:
Additions to Notes Payable....................................... 751,070 49,967 22,578
Repayments of Notes Payable...................................... (577,028) (5,185) --
Additions to Other Notes Payable................................. 59,180 21,825 --
Repayments of Other Notes Payable................................ (38,523) (13,502) --
Issuance of Subordinated Notes Payable........................... -- 15,000 --
Repayment of Subordinated Notes Payable.......................... (10,000) (2,000) (2,000)
Proceeds from Issuance of Common Stock........................... 364 306 89,398
Acquisition of Treasury Stock.................................... (5,811) (535) --
Other, Net....................................................... (1,324) (862) (180)
----------- ---------- ---------
Net Cash Provided by Financing Activities of Continuing
Operations .............................................. 177,928 65,014 109,796
----------- --------- ---------
Net Cash Provided by (Used in) Discontinued Operations............... 73,700 (14,134) (48,105)
----------- ---------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents................. 1,139 (993) (14,918)
Cash and Cash Equivalents at Beginning of Year....................... 2,544 3,537 18,455
----------- --------- ---------
Cash and Cash Equivalents at End of Year............................. $ 3,683 $ 2,544 $ 3,537
=========== ========= =========
Supplemental Statement of Cash Flows Information:
Interest Paid.................................................... $ 17,580 $ 10,483 $ 5,382
Income Taxes Paid................................................ 2,154 1,633 6,570
Assumption of Debt in Connection with Acquisition of Assets...... -- -- 29,900
Purchase of Property and Equipment with Notes Payable............ -- 825 --
Purchase of Property and Equipment with Capital Leases........... -- -- 357
Purchase of Treasury Stock with Subordinated Notes Payable....... -- 13,975 --
Issuance (Repurchase) of Warrants for Subordinated Note Payable.. (900) 900 --
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-6
<PAGE>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Organization, Operations 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.
The Company, through wholly-owned subsidiaries, operates 72 used car sales
dealerships, 15 inspection centers, and four loan-servicing facilities. Two
additional wholly-owned special purpose securitization subsidiaries are Ugly
Duckling Receivables Corporation and Ugly Duckling Receivables Corporation II,
both of which are "bankruptcy remote subsidiaries". Their assets at December 31,
1999 and 1998 include both continuing and discontinued residuals in finance
receivables sold and investments held in trust in the amounts of $78.6 million
and $68.1 million, respectively. The assets of these two special purpose
securitization subsidiaries generally would not be available to satisfy claims
of creditors of the Company.
During 1999 and 1997 the Company completed a total of five acquisitions.
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 has been recorded as goodwill, which is
being amortized over periods ranging from fifteen to twenty years. The results
of operations of the acquired entities have been included in the accompanying
statements of operations from the respective acquisition dates.
During 1999, the Company completed two acquisitions of two portfolios and
nine car sales locations. In August, 1999, the Company acquired certain assets
of DCT of Ocala Corporation, including four dealerships in Orlando, Florida and
a loan portfolio of approximately $15 million in exchange for approximately
$12.1 million in cash. In November, 1999, the Company acquired certain assets of
Virginia Auto Mart, including five dealerships in Richmond, Virginia and a loan
portfolio of approximately $6.8 million in exchange for approximately $3.9
million in cash and $2.7 million in debt provided by the sellers. The excess of
the purchase price over the fair values of the net assets acquired was
approximately $1.1 million.
During 1997, the Company completed three 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 loan 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 loan 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, including twelve dealerships, in exchange
for approximately $5.5 million in cash. The excess of the purchase price over
the fair values of the net assets acquired was approximately $16.0 million.
(2) Discontinued Operations
During the first quarter of 1998, the Company closed its branch office
network (the "Branch Offices") through which the Company purchased retail
installment loans, and exited this line of business. The Company plans to
complete servicing its existing portfolio. The Company recorded a pre-tax charge
to discontinued operations of $15.1 million (approximately $9.2 million, net of
income taxes) in 1998 for branch closing costs, loan losses and related loan
servicing expenses. Loan losses and related loan servicing expenses have
exceeded amounts originally provided for such activities and in the fourth
quarter of 1999 the Company recorded an additional charge of $2.5 million ($1.5
million net of income tax) for costs and loan losses associated with the
remaining portfolio servicing activities. The Company has reclassified the
accompanying consolidated balance sheets and consolidated statements of
operations of the Branch Offices to Discontinued Operations.
The Company's Cygnet Dealer program provided qualified used car dealers with
warehouse purchase facilities and revolving lines of credit primarily secured by
the dealers finance receivable portfolios. In December, 1999, the Company sold
its Cygnet Dealer Finance (CDF) subsidiary to an entity controlled by Ernest C.
Garcia II, Chairman and principal shareholder of the Company, for approximately
$37.5 million, the estimated book value of the Company's investment in CDF. As a
result of the sale, CDF has been reclassified as discontinued operations for
1999 and all preceding years.
F-7
<PAGE>
The purchase price of CDF was paid through the assumption by the buyer of
approximately $8.0 million of outstanding debt owed by the Company to Verde
Investments Inc. (Verde), an affiliate of Mr. Garcia, a $12 million, 10-year
promissory note from the buyer to the Company that is guaranteed by Verde, and
the remainder in cash. The note is subordinate to the initial financing obtained
by Cygnet Dealer.
Effective December 31, 1999, the Company adopted a formal plan to abandon
any effort for its third party dealer operations to acquire loans or servicing
rights to additional portfolios. Accordingly, our Cygnet Servicing and the
associated Cygnet Corporate segment also are reported as components of
discontinued operations. The Company plans to complete servicing the portfolios
that it currently services.
No gain or loss has been recorded on the disposal of Cygnet Servicing as the
Company anticipates that over the servicing period, expected to be approximately
30 months, it will realize a net gain.
The components of Net Assets of Discontinued Operations as of December 31,
1999 and December 31, 1998 follow ($ in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---------- ---------
<S> <C> <C>
Finance Receivables, net......................................... $ 14,837 $ 65,065
Residuals in Finance Receivables Sold............................ 3,742 10,500
Investments Held in Trust........................................ 1,545 3,665
Notes Receivable, net of Subordinated Notes Payable.............. 6,697 22,071
Property and Equipment........................................... 2,114 5,538
Servicing Receivable............................................. 6,125 --
Other Assets, net of Accounts Payable and Accrued Liabilities.... (1,180) 6,182
Disposal Liability............................................... -- (6,024)
--------- ---------
$ 33,880 $106,997
========= ========
</TABLE>
Following is a summary of the operating results of the Discontinued
Operations for the years ended December 31, 1999, 1998, and 1997 ($ in
thousands):
December 31,
---------------------------------
1999 1998 1997
---------- ---------- ---------
Revenues...................................... $ 46,705 $ 33,193 $ 34,515
Operating Expenses............................ 38,056 40,508 19,338
Interest Expense.............................. 7,673 7,676 6,053
--------- ---------- --------
Gain (Loss) before Income Tax (Benefit)....... 976 (14,991) 9,124
Income Tax (Benefit).......................... 403 (5,833) 3,760
--------- ----------- --------
Earnings (Loss) from Discontinued Operations.. $ 573 $ (9,158) $ 5,364
========= =========== ========
(3) Summary of Significant Accounting Policies
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 72, 56, and 41 used car dealerships (Company dealerships) in
eleven, nine and ten metropolitan markets at December 31, 1999, 1998, and 1997,
respectively.
Periodically during the year, the Company maintains cash in financial
institutions in excess of the amounts insured by the federal government.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents. Cash equivalents
generally consist of interest-bearing money market accounts.
Revenue Recognition
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.
Interest income is recognized using the interest method. Direct loan
origination costs related to loans originated at Company dealerships are
deferred and charged against finance income over the life of the related
installment sales loan 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.
Residuals in Finance Receivables Sold, Investments Held in Trust, and Gain on
Sale of Loans
Under the current legal structure of the securitization program, the Company
sells loans to Company subsidiaries that then securitize the loans by
transferring them to separate trusts that issue several classes of notes and
certificates collateralized by the loans. The securitization subsidiaries then
sell Class A notes or certificates (Class A obligations) to investors, and
subordinate classes are retained by the Company. The Company continues to
service the securitized loans.
The Class A obligations have historically received investment grade ratings.
To secure the payment of the Class A obligations, the securitization
subsidiaries obtain an insurance policy from MBIA Insurance Corporation that
guarantees payment of amounts to the holders of the Class A obligations.
Additionally, a cash "reserve" account is established for the benefit of the
Class A obligations holders. The reserve accounts are classified in the
financial statements as Investments Held in Trust and are a component of Finance
Receivables, Net.
For securitization transactions closed during the third quarter of 1998 and
prior, gains on sale were computed 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. The retained portion is reported as Residuals in Finance
Receivables Sold and is a component of Finance Receivables, Net
Residuals in Finance Receivables Sold represents the present value of future
cash flows from the underlying trust portfolios. These securitization
transactions were discounted with a rate of 12% using the "cash out method". To
the extent that actual cash flows on a securitization are below original
estimates and differ materially from the original securitization assumptions
and, in the opinion of management, those differences appear to be other than
temporary in nature, the Company'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 residual
interest retained by the Company.
Residuals in Finance Receivables are classified as "held-to-maturity"
securities in accordance with SFAS No. 115.
Securtization transactions closed subsequent to September 30, 1998 have been
accounted for as a collateralized borrowing 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 Class A obligations are reflected in Notes
Payable.
F-9
<PAGE>
Servicing Income
Under servicing agreements for all Company securitizations, servicing fees
are earned and paid monthly. Servicing Income is recognized when earned for
securitization transactions structured as sales. Servicing Income earned on
securitization transactions structured as borrowings are eliminated in
consolidation. All servicing costs are charged to expense as incurred. In the
event delinquencies and/or losses on any 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 (loans) net of unearned finance charges, plus
accrued interest receivable, direct loan origination costs, residuals in finance
receivables sold, investments held in trust, and allowance for credit losses.
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 loans.
An allowance for credit losses (allowance) is established by charging the
provision for credit losses and the allocation of acquired allowances. For loans
generated by the Company dealerships, the allowance is established by charging
the provision for credit losses. 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 dealership's
loan portfolio, the Company's historical credit losses, the overall portfolio
quality and delinquency status, the value of underlying collateral, and current
economic conditions that may affect the borrower's ability to pay.
Inventory
Inventory consists of used vehicles held for sale, 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.
F-10
<PAGE>
Interest Expense
The Company allocates interest expense to discontinued operations in
accordance with guidance under EITF 87-24: "Allocation of Interest to
Discontinued Operations". Thereunder, interest expense charged to discontinued
operations is limited to the total of interest on debt assumed by the
discontinued operations and an allocation of other consolidated interest that is
not directly attributable to other continuing operations of the Company. Other
consolidated interest that cannot be allocated to operations of the Company is
allocated based on a uniform ratio of consolidated debt to equity.
Income Taxes
The Company utilizes the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Stock Option Plan
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation
expense is recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. The Company has adopted the
disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
which permits entities to provide pro forma net earnings and pro forma earnings
per share disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method as defined in SFAS No. 123 had been
applied.
The Company uses one of the most widely used option pricing models, the
Black-Scholes model (Model), for purposes of valuing its stock option grants.
The Model was developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. In addition, it
requires the input of highly subjective assumptions, including the expected
stock price volatility, expected dividend yields, the risk free interest rate,
and the expected life. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the value determined by the Model is not necessarily
indicative of the ultimate value of the granted options.
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 exceeds 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.
Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statement amounts to conform to the current year presentation.
F-11
<PAGE>
(4) Finance Receivables, Net
A summary of Finance Receivables, Net follows ($ in thousands):
December 31,
--------------------------
1999 1998
----------- ------------
Contractually Scheduled Payments............. $ 492,937 $ 131,510
Unearned Finance Charges..................... (134,119) (37,574)
----------- -----------
Loan Principal Balances...................... 358,818 93,936
Add: Accrued Interest Receivable............. 3,741 877
Loan Origination Costs, Net............ 5,079 2,237
---------- ----------
Principal Balances, Net...................... 367,638 97,050
Residuals in Finance Receivables Sold........ 17,382 33,331
Investments Held in Trust.................... 56,716 20,564
---------- ----------
Finance Receivables.......................... 441,736 150,945
Allowance for Credit Losses.................. (76,150) (24,777)
------------ ------------
Finance Receivables, Net..................... $ 365,586 $ 126,168
========== ==========
A summary of Residuals in Finance Receivables Sold (Residuals) follows ($ in
thousands):
<TABLE>
<CAPTION>
December 31,
------------------------
<S> <C> <C>
1999 1998
----------- ----------
Retained Interest in Subordinated Securities................. $ 17,335 $ 51,243
Net Interest Spreads, less Present Value Discount............ 6,113 25,838
Reduction for Estimated Credit Loss.......................... (6,066) (43,750)
---------- ----------
Residuals in Finance Receivables Sold........................ $ 17,382 $ 33,331
========== ==========
Underlying Principal Balances Outstanding on Securitization
Transactions with Residuals ................................. $ 65,662 $ 198,747
========== ==========
Estimated Credit Losses and Allowances as a % of
Underlying Principal Balances Outstanding................ 10.2% 22.0%
=========== ============
</TABLE>
A summary of activity for the Residuals in Finance Receivables Sold follows
($ in thousands):
December 31,
-------------------------------------
1999 1998 1997
----------- ----------- ----------
Balance, Beginning of Year............ $ 33,331 $ 13,277 $ 8,512
Additions............................. -- 35,435 17,734
Amortization and write-down........... (15,949) (15,381) (12,969)
----------- ----------- -----------
Balance, End of Year.................. $ 17,382 $ 33,331 $ 13,277
========== ========== ==========
During the year ended December 31, 1997, the Company recorded a $5.7 million
charge to write-down the Residuals in Finance Receivables Sold. No such charge
was recorded for the year ended December 31, 1999 or 1998. The 1997 charge had
the effect of increasing the cumulative net loss assumption to approximately
27.5%, for the securitization transactions that took place prior to June 30,
1997. For the securitization transaction that took place in September 1997, net
losses were estimated using total expected cumulative net losses at loan
origination of approximately 27.5%, adjusted for actual cumulative net losses
prior to securitization. For securitization transactions completed during the
nine month period ended September 30, 1998, net losses were estimated using
total expected cumulative net losses at loan origination of approximately 29.0%,
adjusted for actual cumulative net losses prior to securitization. Prepayment
rates were estimated to be 1% per month of the beginning of month balance.
F-12
<PAGE>
A summary of activity for Investments Held in Trust follows ($ in
thousands):
December 31,
-----------------------------------
1999 1998 1997
---------- ---------- ----------
Balance, Beginning of Year.................. $ 20,564 $ 11,637 $ 3,162
Initial Deposits at Securitization.......... 21,427 13,071 6,068
Additional Deposits from Trust collections.. 7,217 5,879 2,407
Collections in Transit...................... 15,484 3,594 --
Disbursements to the Company................ (7,976) (13,617) --
----------- ----------- ----------
Balance, End of Year........................ $ 56,716 $ 20,564 $ 11,637
========== ========== ==========
In connection with its securitization transactions, the Company provides a
credit enhancement to the investor. The Company makes an initial cash deposit,
generally 4% of the initial underlying finance receivables principal balance,
into an account held by the trustee (reserve 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 reserve account as
necessary to attain and maintain the reserve account at a specified percentage,
ranging from 8.0% to 10.5%, of the underlying finance receivables principal
balances.
During 1999, we made initial reserve account deposits totaling approximately
$21.4 million. The required aggregate reserve account balance, based upon the
targeted percentages, was approximately $53.8 million at December 31, 1999, with
balances in the reserve accounts totaling approximately $41.2 million. As of
December 31, 1999, the amount remaining to be funded to meet the required
aggregate balance was approximately $10.7 million.
(5) Allowance for Credit Losses
A summary of the activity for the allowance for credit losses on finance
receivables follows ($ in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Balances, Beginning of Year.......................... $ 24,777 $ 10,356 $ 1,625
Provision for Credit Losses.......................... 102,955 65,318 22,354
Allowance on Acquired Loans.......................... 6,424 -- 15,309
Reduction Attributable Sale of Finance Receivables... -- (44,539) (21,408)
Net Charge Offs...................................... (58,006) (6,358) (7,524)
----------- ----------- -----------
Balances, End of Year................................ $ 76,150 $ 24,777 $ 10,356
========== ========== ==========
</TABLE>
(6) Note Receivable - Related Party
The Note Receivable - Related Party originated from the Company's December
1999 sale of its Cygnet Dealer Finance subsidiary to Cygnet Capital Corporation,
an entity controlled by Ernest C. Garcia II, Chairman and principal shareholder
of the Company. The $12.0 million note from Cygnet Capital Corporation has a 10
year term, with interest payable quarterly at 9%, due December 2009, is secured
by capital stock of Cygnet Capital Corporation and is guaranteed by Verde. Under
the terms of the agreement, Mr. Garcia will be allowed to pay down the principal
balance up to a maximum of $8 million through the redemption of Ugly Duckling
common stock (valued at 98% of the average of the closing prices of the stock on
NASDAQ for the ten trading days prior to the redemption) as long as Mr. Garcia's
ownership interest of voting stock does not fall below 15% or result in a breach
of a covenant.
(7) Property and Equipment
A summary of Property and Equipment as of December 31, 1999 and 1998 follows
($ in thousands):
December 31,
-------------------------
1999 1998
----------- -----------
Land.............................................. $ 5,431 $ 3,721
Buildings and Leasehold Improvements.............. 14,751 9,915
Furniture and Equipment........................... 24,086 19,345
Construction in Process........................... 538 2,872
----------- -----------
44,806 35,853
Less Accumulated Depreciation and Amortization.... (13,054) (7,222)
------------ -----------
Property and Equipment, Net....................... $ 31,752 $ 28,631
=========== ===========
F-13
<PAGE>
In 1998 the Company sold certain real property to an investment company at
its cost and leased back the properties for an initial term of twenty years.
This property was then sold by the buyer to Verde. Verde has provided to the
Company an option to buy back the property from Verde. The option expires with
the Company receiving payment in full of the $12 million note receivable arising
from the sale of Cygnet Dealer on December 31, 2000, whichever comes first.
Interest expense capitalized in 1999, 1998 and 1997 totaled zero, $135,000,
and $229,000, respectively.
(8) Notes Payable
Notes Payable, Portfolio
A summary of Notes Payable, Portfolio at December 31, 1999 and 1998 follows
($ in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Revolving facility for $125,000,000 with GE Capital, secured by substantially
all assets of the Company, including $61.1 million in finance receivables..... $ 41,717 $ 51,765
Class A Obligations issued pursuant to the company's Securitization Program,
secured by underlying pools of finance receivables and reserve accounts
totaling $342.6 million at December 31, 1999................................... 236,555 50,607
---------- ----------
Subtotal...................................................................... 278,272 102,372
Less: Unamortized Loan Fees.................................................. 2,498 640
---------- ----------
Total......................................................................... $ 275,774 $ 101,732
=========== ==========
</TABLE>
The revolving facility note payable has interest payable daily at 30 day
LIBOR plus 3.15% (8.71% at December 31, 1999) through June 2000. The revolving
facility is subject to a one-year extension provision upon mutual consent of
both parties. The revolving facility agreement also 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 is currently in compliance with these
covenants.
Class A obligations have interest payable monthly at rates ranging from 5.7%
to 6.8% and are secured by underlying pools of finance receivable loans and
reserve accounts which total $335.5 million at December 31, 1999. Monthly
principal reductions on Class A obligations approximate 70% of the principal
reductions on the underlying pool of finance receivable loans.
Other Notes Payable
A summary of Other Notes Payable at December 31, 1999 and 1998 follows ($ in
thousands):
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---------- ---------
<S> <C> <C>
Note payable, secured by the capital stock of UDRC and UDRC II.................... $ 33,900 $ --
$15 million note payable to a finance Company, secured by the capital stock
of UDRC and UDRC II.......................................................... -- 12,234
Others bearing interest at rates ranging from 7.5% to 11% due through August
2001, secured by certain real property and certain property and equipment 2,939 3,930
---------- ---------
36,839 16,164
Less: Unamortized Loan Fees................................................. 283 265
---------- ---------
Total........................................................................ $ 36,556 $ 15,899
=========== =========
</TABLE>
F-14
<PAGE>
In 1999, we borrowed approximately $38.0 million from an unrelated party for
a term of two years. The note calls for monthly principal payments of not less
than $800,000 through May 2000 and $1.7 million per month thereafter plus
interest at a rate equal to LIBOR (6.64% at December 31, 1999) plus 550 basis
points. Future minimum principal payments required under this note payable are
$15.9 million in 2000 and $18.0 million in 2001. The remaining balance, if any,
is due at maturity, May 1, 2001. The note payable balance is $33.9 million at
December 31, 1999.
In 1998, the Company borrowed $15.0 million for a term of 364 days from
Greenwich Capital. We paid interest on this loan at an interest rate equal to
LIBOR plus 400 basis points. The note payable balance is $12.2 million at
December 31, 1998 and was paid in full in 1999.
Subordinated Notes Payable
A summary of Subordinated Notes Payable at December 31, 1999 and 1998
follows ($ in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
$15 million senior subordinated notes payable to unrelated parties, bearing
interest at 12% per annum payable quarterly, principal due February
2001 and is senior to subordinated debentures................................. $ 15,000 $ 15,000
$17.5 million subordinated debentures, interest at 12% per annum
(approximately 18.8% effective rate) payable semi-annually with the
entire principal balance due October 23, 2003................................ 17,479 17,479
$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
--------- ---------
Subtotal................................................................... 32,479 42,479
Less: Unamortized Loan Fees............................................... 605 761
Unamortized Premium - subordinated debentures................... 3,263 3,738
--------- ---------
Total...................................................................... $ 28,611 $ 37,980
========= =========
</TABLE>
In connection with the 1998 issuance of the $15 million senior subordinated
notes payable, the Company issued warrants, to the lenders to purchase up to
500,000 shares of the Company's Common Stock. The warrants were valued at
approximately $900,000, have an exercise price of $10.00 per share and are
exercisable at any time until the later of February 2001, or such time as the
notes have been paid in full.
During 1998 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 subordinate to all other Company indebtedness and contain
certain call provisions at the option of the Company. The debentures were issued
at a premium of approximately $3.9 million in excess of the market value of the
shares tendered, which will be amortized as interest expense over the life of
the debentures.
Interest expense related to the subordinated note payable with Verde totaled
$879,000, $1.1 million, and $1.2 million during the years ended December 31,
1999, 1998 and 1997, respectively. As the Verde note was assumed by CDF,
interest expense for all three years is reclassified as a component of interest
expense within operating results of Discontinued Operations.
F-15
<PAGE>
(9) Income Taxes
Income taxes from continuing operations totaled $6.0 million, $2.3 million,
and $2.8 million for years ended December 31, 1999, 1998 and 1997, respectively
(an effective tax rate of 40.9%, 40.5%, and 40.9%, respectively). Reconciliation
between taxes computed at the federal statutory rate of 35%, 34% and 35% in
1999, 1998 and 1997 respectively at the effective tax rate on earnings before
income taxes are as follows ($ in thousands):
December 31,
----------------------------------
1999 1998 1997
-------- -------- --------
Computed "Expected" Income Taxes ........... $ 5,140 $ 1,974 $ 2,415
State Income Taxes, Net of Federal Effect... 785 385 425
Other, Net.................................. 75 (8) (20)
-------- --------- ---------
$ 6,000 $ 2,351 $ 2,820
======== ======== ========
Components of income taxes (benefit) for the years ended December 31, 1999,
1998 and 1997 follow ($ in thousands):
Current Deferred Total
---------- --------- --------
1999:
Federal.............................. $ 2,839 $ 1,953 $ 4,792
State................................ 1,403 (195) 1,208
---------- --------- --------
4,242 1,758 6,000
Discontinued operations.............. 683 (280) 403
-------- --------- --------
$ 4,925 $ 1,478 $ 6,403
========== ======== ========
1998:
Federal.............................. $ (188) $ 1,955 $ 1,767
State................................ 29 555 584
---------- -------- --------
(159) 2,510 2,351
Discontinued operations.............. 21 (5,854) (5,833)
---------- --------- ---------
$ (138) $ (3,344) $ (3,482)
=========== ========= =========
1997:
Federal.............................. $ 1,751 $ 424 $ 2,175
State................................ 560 85 645
-------- -------- --------
2,311 509 2,820
Discontinued operations.............. 2,589 1,170 3,759
---------- ---------- --------
$ 4,900 $ 1,679 $ 6,579
========== ======== ========
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, 1999 and 1998 are presented below ($ in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Deferred Tax Assets:
Finance Receivables, Principally Due to the Allowance for Credit Losses.. $ 2,655 $ 2,282
Inventory................................................................ 1,413 --
Federal and State Income Tax Net Operating Loss Carryforwards............ 979 1,224
Discontinued Operations Liability........................................ 583 2,410
Accrued Post Sale Support................................................ 949 717
Deferred Rent............................................................ 312 35
Other.................................................................... 741 899
-------- --------
Total Gross Deferred Tax Assets.......................................... 7,632 7,567
Less: Valuation Allowance................................................ (735) (735)
--------- ---------
Net Deferred Tax Assets............................................... 6,897 6,832
-------- --------
Deferred Tax Liabilities:
Software Development Costs............................................... (2,607) (2,191)
Inventory................................................................ -- (1,176)
Loan Origination Fees.................................................... (2,075) (255)
401K..................................................................... (449) --
Other.................................................................... (619) (584)
-------- --------
Total Gross Deferred Tax Liabilities.................................. (5,750) (4,206)
-------- --------
Net Deferred Tax Asset (Liability).................................... $ 1,147 $ 2,626
========== ==========
</TABLE>
F-16
<PAGE>
There was no change in the Valuation Allowance for the year ended December
31, 1999 and an increase of $735,000 in 1998. In assessing the ability to
realize the 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, 1999.
At December 31, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $148,000, which, subject to annual
limitations, are available to offset future taxable income, if any, through
2011.
(10) 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 recognized servicing income of $7.5
million, $15.5 million, and $12.3 million in the years ended December 31, 1999,
1998 and 1997, respectively.
Servicing income is primarily a result of fees earned on Company
securitizations where the loan portfolios were sold with servicing retained. As
the Company currently structures its securitization transactions as borrowings,
it is expected that servicing income will reduce significantly in future
periods.
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. 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.
(11) Lease Commitments
The Company leases used car sales facilities, loan servicing centers,
offices, and certain office equipment generally from unrelated entities under
various operating leases that expire through March 2019. The leases require
monthly rental payments 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 $13. 0 million, $11.4 million and $5.4 million for the
years ended December 31, 1999, 1998, and 1997, respectively.
A summary of future minimum lease payments required under noncancelable
operating leases with remaining lease terms in excess of one year as of December
31, 1999 follows ($ in thousands):
Total
-----------
2000................................................ $ 10,969
2001................................................ 8,685
2002................................................ 7,000
2003................................................ 5,709
2004................................................ 4,621
Thereafter.......................................... 43,825
---------
Total........................................... $ 80,809
===========
F-17
<PAGE>
In 1998 the Company sold 17 properties to an unrelated investment company
under a sale-leaseback agreement. In December 1999, Verde acquired these 17
properties at a 10.0% discount for approximately $24.7 million. The Company
acquired the option to purchase these properties at Verde's purchase price at
anytime until December 31, 2000. Under the terms of the sale of Cygnet Dealer,
the term of the option was extended and the new option expires simultaneously
with the Company receiving payment in full of the $12.0 million note receivable
arising from the sale of Cygnet Dealer or December 31, 2000, whichever comes
later.
(12) Stockholders' Equity
During 1999 the Company acquired approximately 1.0 million shares of
Treasury Stock for approximately $5.8 million under its Stock Repurchase
Program. During 1998 the Company acquired approximately 2.7 million shares of
Company Common Stock with a value of approximately $14.0 million in the Exchange
Offer. The Company also acquired 75,000 shares of Treasury Stock for
approximately $535,000 under its Stock Repurchase Program.
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 1998 the Company issued 325,000 warrants to a third party to purchase
Company common stock at $20.00 per share. The warrants expire on April 1, 2001
and are subject to a call feature by the Company.
During 1997, the Company issued warrants for the right to purchase 389,800
shares of the Company's common stock for $20.00 per share exercisable through
February 2000. The warrants were valued at approximately $612,000. These
warrants remained outstanding at December 31, 1998 but were subsequently
repurchased during 1999. In addition, warrants to acquire 121,023 shares of the
Company's common stock at $6.75 per share and 174,000 shares of the Company's
common stock at $9.45 per share were outstanding at December 31, 1999.
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
$79.4 million cash, net of stock issuance costs.
(13) Earnings (Loss) Per Share
The Company paid no preferred stock dividends in 1999, 1998 or 1997. A
summary of the reconciliation from basic earnings (loss) per share to diluted
earnings (loss) per share for the years ended December 31, 1999, 1998, and 1997
follows ($ in thousands, except for per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
--------- ----------- -----------
<S> <C> <C> <C>
Earnings from Continuing Operations........................... $ 8,687 $ 3,455 $ 4,081
========= ========= =========
Net Earnings (Loss)........................................... $ 9,260 $ (5,703) $ 9,445
========= ========== =========
Basic Earnings Per Share From Continuing Operations........... $ 0.58 $ 0.19 $ 0.23
========= ========= =========
Diluted Earnings Per Share From Continuing Operations........ $ 0.57 $ 0.19 $ 0.22
========= ========= =========
Basic Earnings (Loss) Per Share............................... $ 0.61 $ (0.32) $ 0.53
========= ========== =========
Diluted Earnings (Loss) Per Share............................. $ 0.60 $ (0.31) $ 0.52
========= ========== =========
Basic EPS-Weighted Average Shares Outstanding................. 15,093 18,082 17,832
Effect of Diluted Securities:
Warrants................................................... 7 41 98
Stock Options.............................................. 229 282 304
--------- --------- ---------
Dilutive EPS-Weighted Average Shares Outstanding.............. 15,329 18,405 18,234
========= ========= =========
Warrants Not Included in Diluted EPS Since Antidilutive....... 1,049 1,389 390
========= ========= =========
Stock Options Not Included in Diluted EPS Since Antidilutive.. 610 1,470 828
========= ========= =========
</TABLE>
F-18
<PAGE>
(14) 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 and/or the achievement of certain internal performance measures.
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 including the number and
weighted average price per share (Average Price) follows:
<TABLE>
<CAPTION>
Stock Option Plan Executive Plan
-------------------------- ---------------------------
Average Average
Number Price Number Price
-------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1997.... 1,310,000 $ 11.66 -- $ --
Granted.................... 927,000 7.68 525,000 8.25
Forfeited.................. (1,086,000) 13.97 (25,000) 8.25
Exercised.................. (76,000) 3.61 -- --
------------- --------- ------------- ----------
Balance, December 31, 1998.... 1,075,000 6.80 500,000 8.25
Granted.................... 312,000 6.81 300,000 5.56
Forfeited.................. (178,000) 9.25 (120,000) 7.35
Exercised.................. (50,000) 1.56 -- --
------------- --------- ------------- ---------
Balance, December 31, 1999.... 1,159,000 6.56 680,000 7.22
============= ========= ============== =========
Number of shares exercisable.. 382,000 5.55 100,000 8.25
============= ========= ============== =========
</TABLE>
At December 31, 1999, there were 641,000 and 120,000 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 1999, 1998 and 1997 was $3.88, $3.22 and $6.54, respectively, on the date
of grant using the Black-Scholes option-pricing model. The following are the
weighted-average assumptions: 1999 -- expected dividend yield 0%, risk-free
interest rate of 5.67%, expected volatility of 41.2%, and an expected life of 5
years; 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
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 1999 of
$1,084,000, which is reflected in the pro forma table below. The repricing
activity has been reflected in the table above and is included in the options
granted and forfeited in 1999.
F-19
<PAGE>
The Company applies APB Opinion 25 in accounting for its Plans, and
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net earnings (loss) and earnings (loss) per share would
have been reduced to the pro forma amounts indicated below ($ in thousands
except per share data):
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
----------- ----------- ----------
Pro Forma Earnings from Continuing Operations
Available to Common Stockholders............. $ 7,603 $ 2,468 $ 3,204
Pro forma Net Earnings (Loss) Available to
Common Stockholders.......................... $ 8,176 $ (6,690) $ 8,567
Earnings (Loss) per Share-- Basic:
Continuing Operations Pro Forma.............. $ 0.50 $ 0.14 $ 0.19
Net Earnings (Loss) Pro Forma................ $ 0.54 $ (0.37) $ 0.48
Earnings (Loss) per Share-- Diluted:
Continuing Operations Pro Forma.............. $ 0.50 $ 0.14 $ 0.18
Net Earnings (Loss) Pro Forma................ $ 0.53 $ (0.36) $ 0.47
</TABLE>
A summary of stock options granted at December 31, 1999 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 12/31/99 Contractual Life Price at 12/31/99 Price
-------------------------- --------------- ---------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
$ .50 to $1.00............ 23,000 5.5 years $ 0.86 -- $ --
$1.50 to $7.00............ 906,000 6.9 years 5.10 300,000 4.62
$8.00 to $8.25............ 851,000 8.3 years 8.24 159,000 8.25
$8.30 to $18.63........... 59,000 7.1 years 10.37 23,000 10.62
---------- ------- --------- --------
1,839,000 $ 6.67 482,000 $ 6.11
========== ======= ========= ========
</TABLE>
(15) Commitments and Contingencies
In connection with its securitization transactions, the Company provides a
credit enhancement to the investor. The Company maintains reserve accounts at a
specified percentage, ranging from 8.0% 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 reserve account as necessary to pay
the obligations of the trust. The reserve 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 reserve account exceeds the specified percentage, the
trustee will release the excess cash to the Company from the pledged reserve
account. Except for releases in this manner, the cash in the reserve account is
restricted from use by the Company.
The Company's discontinued 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, 1999, management estimates
that the incentive compensation could range from $7.0 to $8.0 million under
these agreements. For the year ended December 31, 1999 results of operations for
discontinued operations includes $6.1 million in fee income with regard to these
incentives.
On July 18, 1997, the Company filed a Form S-3 registration statement for
the purpose of registering up to $200 million of its debt securities in one or
more series at prices and on terms to be determined at the time of sale. The
registration statement has been declared effective by the Securities and
Exchange Commission and may be available for future debt offerings. There can be
no assurance, however, that the Company will be able to use this registration
statement to sell debt or other securities.
The Company is involved in various claims and actions arising in the
ordinary course of business. In the opinion of management, based on consultation
with legal counsel, the ultimate disposition of these matters will not have a
material adverse effect on the Company. No provision has been made in the
accompanying consolidated financial statements for losses, if any, that might
result from the ultimate disposition of these matters.
F-20
<PAGE>
(16) 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
with Company common stock. 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. Compensation expense related
to these plans totaled $194,000, $121,000, and $49,000 during the years ended
December 31, 1999, 1998, and 1997, respectively.
(17) 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, 1999 and 1998, 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 due to 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 due to the relatively 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.
(18) Business Segments
Operating results and other financial data are presented for the principal
business segments of the Company for the years ended December 31, 1999, 1998,
and 1997, respectively. The Company has three distinct business segments. These
consist of retail car sales operations (Retail Operations), the income generated
from the finance receivables generated at the Company dealerships (Portfolio
Operations), and corporate and other operations (Corporate Operations). In
computing operating profit by business segment, the following items were
considered in the Corporate Operations category: portions of administrative
expenses, interest expense and other items not considered direct operating
expenses. Identifiable assets by business segment are those assets used in each
segment of Company operations.
F-21
<PAGE>
A summary of operating results and other information, by business segment,
for years ended December 31, 1999, 1998 and 1997 follows ($ in thousands):
<TABLE>
<CAPTION>
Retail Portfolio Corporate Total
------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
December 31, 1999:
Sales of Used Cars........................... $ 389,908 $ -- $ -- $ 389,908
Less: Cost of Cars Sold...................... 219,037 -- -- 219,037
Provision for Credit Losses.............. 80,627 22,328 -- 102,955
------------- ------------- --------------- -------------
90,244 (22,328) -- 67,916
Net Interest Income.......................... -- 53,521 456 53,977
Servicing and Other Income................... -- 7,472 -- 7,472
------------- ------------- --------------- -------------
Income before Operating Expenses............. 90,244 38,665 456 129,365
------------- ------------- --------------- -------------
Operating Expenses:
Selling and Marketing........................ 23,132 -- -- 23,132
General and Administrative................... 44,770 19,809 16,991 81,570
Depreciation and Amortization................ 3,588 1,141 2,219 6,948
------------- ------------- --------------- -------------
71,490 20,950 19,210 111,650
------------- ------------- --------------- -------------
Income (loss) before Other Interest Expense.. $ 18,754 $ 17,715 $ (18,754) $ 17,715
============= ============= ================ =============
Capital Expenditures......................... $ 5,175 $ 897 $ 2,902 $ 8,974
============= ============= =============== =============
Identifiable Assets.......................... $ 100,183 $ 398,437 $ 4,211 $ 502,831
============= ============= =============== =============
December 31, 1998:
Sales of Used Cars........................... $ 287,618 $ -- $ -- $ 287,618
Less: Cost of Cars Sold...................... 165,282 -- -- 165,282
Provision for Credit Losses.............. 59,770 5,548 -- 65,318
------------- ------------- ------------- -------------
62,566 (5,548) -- 57,018
Net Interest Income.......................... -- 14,086 341 14,427
Gain on Sale of Loans........................ -- 12,093 -- 12,093
Servicing and Other Income................... -- 15,481 -- 15,481
------------- ------------- ------------- -------------
Income before Operating Expenses............. 62,566 36,112 341 99,019
------------- ------------- ------------- -------------
Operating Expenses:
Selling and Marketing........................ 18,246 -- -- 18,246
General and Administrative................... 35,765 18,519 15,610 69,894
Depreciation and Amortization................ 2,582 1,333 997 4,912
------------- ------------- ------------- -------------
56,593 19,852 16,607 93,052
------------- ------------- ------------- -------------
Income (loss) before Other Interest Expense.. $ 5,973 $ 16,260 $ (16,266) $ 5,967
============= ============= ============= =============
Capital Expenditures......................... $ 19,176 $ 1,297 $ 2,352 $ 22,825
============= ============= ============= =============
Identifiable Assets.......................... $ 75,366 $ 145,880 $ 9,038 $ 230,284
============= ============= ============= =============
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 -- -- 22,354
------------- ------------- ------------- -------------
29,102 -- -- 29,102
Net Interest Income.......................... -- 12,384 -- 12,384
Gain on Sale of Loans........................ -- 6,721 -- 6,721
Servicing and Other Income................... 1,498 8,814 2,013 12,325
------------- ------------- ------------- -------------
Income before Operating Expenses............. 30,600 27,919 2,013 60,532
------------- ------------- ------------- -------------
Operating Expenses:
Selling and Marketing........................ 10,538 -- -- 10,538
General and Administrative................... 17,215 12,303 9,896 39,414
Depreciation and Amortization................ 1,536 1,108 504 3,148
------------- ------------- ------------- -------------
29,289 13,411 10,400 53,100
------------- ------------- ------------- -------------
Income (loss) before Other Interest Expense.. $ 1,311 $ 14,508 $ (8,387) $ 7,432
============= ============= ============= =============
Capital Expenditures......................... $ 12,869 $ 3,791 $ 2,104 $ 18,764
============= ============= ============= =============
Identifiable Assets.......................... $ 74,287 $ 78,514 $ 72,799 $ 225,600
=============== =============== =============== ===============
</TABLE>
F-22
<PAGE>
(19) Quarterly Financial Data -- unaudited
A summary of the quarterly data for the years ended December 31, 1999, and
1998 follows ($ in thousands):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
1999:
Total Revenue................................ $ 119,715 $ 115,927 $ 124,883 $ 105,429 $ 465,954
========= ========= ========= ========= =========
Income before Operating Expenses............. 29,868 31,378 35,516 32,603 129,365
========= ========= ========= ========= =========
Operating Expenses........................... 28,969 27,709 28,082 26,891 111,650
========= ========= ========= ========= =========
Income before Interest Expense............... 899 3,669 7,436 5,711 17,715
========= ========= ========= ========= =========
Earnings from Continuing Operations.......... $ 619 $ 1,792 $ 3,657 $ 2,619 $ 8,687
========= ========= ========= ========= =========
Earnings (Loss) from Discontinued Operations.
(196) (324) 525 568 573
========== ========== ========= ========= =========
Net Earnings................................. $ 423 $ 1,468 $ 4,182 $ 3,187 $ 9,260
========= ========= ========= ========= =========
Basic Earnings Per Share from Continuing
Operations................................ $ 0.04 $ 0.12 $ 0.24 $ 0.18 $ 0.58
========= ========= ========= ========= =========
Diluted Earnings Per Share from Continuing
Operations................................ $ 0.04 $ 0.12 $ 0.24 $ 0.17 $ 0.57
========= ========= ========= ========= =========
Basic Earnings Per Share..................... $ 0.03 $ 0.10 $ 0.28 $ 0.21 $ 0.61
========= ========= ========= ========= =========
Diluted Earnings Per Share................... $ 0.03 $ 0.10 $ 0.28 $ 0.21 $ 0.60
========= ========= ========= ========= =========
1998:
Total Revenue................................ $ 85,303 $ 80,766 $ 85,965 $ 80,446 $ 332,479
========= ========= ========= ========= =========
Income before Operating Expenses............. 27,940 25,535 27,712 17,832 99,019
========= ========= ========= ========= =========
Operating Expenses........................... 21,683 21,182 23,973 26,214 93,052
========= ========= ========= ========= =========
Income (Loss) before Interest Expense........ 6,257 4,353 3,739 (8,382) 5,967
========= ========= ========= ========= =========
Earnings (Loss) from Continuing Operations... $ 3,745 $ 2,590 $ 2,184 $ (5,064) $ 3,455
========= ========= ========= ========== =========
Earnings (Loss) from Discontinued Operations.
(5,611) 352 (4,285) 386 (9,158)
========== ========= ========= ========= ==========
Net Earnings (Loss).......................... $ (1,866) $ 2,942 $ (2,101) $ (4,678) $ (5,703)
========== ========= ========= ========== ==========
Basic Earnings (Loss) Per Share from
Continuing Operations...................... $ 0.20 $ 0.14 $ 0.12 $ (0.28) $ 0.19
========= ========= ========= ========= =========
Diluted Earnings (Loss) Per Share from
Continuing Operations...................... $ 0.20 $ 0.14 $ 0.12 $ (0.27) $ 0.19
========= ========= ========= ========= =========
Basic Earnings (Loss) Per Share.............. $ (0.10) $ 0.16 $ (0.11) $ (0.26) $ (0.32)
========== ========= ========= ========== ==========
Diluted Earnings (Loss) Per Share............ $ (0.10) $ 0.16 $ (0.11) $ (0.25) $ (0.31)
========== ========= ========= ========== ==========
</TABLE>
F-23
<PAGE>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------------- ---------------
ASSETS
<S> <C> <C>
Cash and Cash Equivalents............................................. $ 6,330 $ 3,683
Finance Receivables, Net.............................................. 407,267 365,586
Notes Receivable from Related Party................................... 12,000 12,000
Inventory............................................................. 49,058 62,865
Property and Equipment, Net........................................... 32,141 31,752
Intangible Assets, Net................................................ 14,359 14,618
Other Assets.......................................................... 12,636 12,327
Net Assets of Discontinued Operations................................. 14,162 33,880
------------ -------------
$ 547,953 $ 536,711
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts Payable................................................... $ 2,928 $ 3,185
Accrued Expenses and Other Liabilities............................. 29,289 26,905
Notes Payable Portfolio............................................ 282,865 275,774
Other Notes Payable................................................ 33,418 36,556
Subordinated Notes Payable......................................... 28,900 28,611
------------ -------------
Total Liabilities................................................ 377,400 371,031
------------ -------------
Stockholders' Equity:
Common Stock.......................................................... 19 19
Additional Paid in Capital............................................ 173,663 173,273
Retained Earnings..................................................... 17,192 12,709
Treasury Stock........................................................ (20,321) (20,321)
------------ -------------
Total Stockholders' Equity........................................ 170,553 165,680
------------ -------------
$ 547,953 $ 536,711
============ =============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
F-24
<PAGE>
<TABLE>
<CAPTION>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2000 and 1999
(In thousands, except earnings per share amounts)
March 31,
-----------------------------
2000 1999
--------- ---------
<S> <C> <C>
Sales of Used Cars............................................. $ 132,786 $ 106,443
Less:
Cost of Used Cars Sold...................................... 72,942 60,088
Provision for Credit Losses................................. 34,573 27,763
------------ -------------
25,271 18,592
Other Income:
Interest Income............................................. 25,531 10,373
Portfolio Interest Expense.................................. (5,029) (1,995)
Servicing and Other Income.................................. 807 2,899
------------ -------------
807
21,309 11,277
Income before Operating Expenses............................... 46,580 29,869
------------ -------------
Operating Expenses:
Selling and Marketing....................................... 8,135 6,366
General and Administrative.................................. 26,345 21,009
Depreciation and Amortization............................... 2,208 1,595
36,688 28,970
Income before Other Interest Expense........................... 9,892 899
Other Interest Expense......................................... 2,292 --
------------ -------------
Earnings before Income Taxes................................... 7,600 899
Income Taxes................................................... 3,117 355
------------ -------------
Earnings from Continuing Operations............................ 4,483 544
Loss from Discontinued Operations, net of income tax benefit
of $75 -- (121)
------------ -------------
Net Earnings................................................... $ 4,483 $ 423
============ =============
Earnings per Common Share - Continuing Operations:
Basic....................................................... $ 0.30 $ 0.04
============ =============
Diluted..................................................... $ 0.30 $ 0.04
============ =============
Net Earnings per Common Share:
Basic....................................................... $ 0.30 $ 0.03
============ =============
Diluted..................................................... $ 0.30 $ 0.03
============ =============
See accompanying notes to Condensed Consolidated Financial Statements.
</TABLE>
F-25
<PAGE>
<TABLE>
<CAPTION>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2000 and 1999
(In thousands)
2000 1999
-------------- --------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Earnings........................................................... $ 4,483 $ 423
Adjustments to Reconcile Net Earnings to Net Cash Provided
by Operating Activities:
Provision for Credit Losses............................................. 34,573 27,763
Depreciation and Amortization .......................................... 3,239 1,719
Loss from Disposal of Property and Equipment............................ 3 33
Loss from Discontinued Operations....................................... -- 121
Deferred Income Taxes................................................... -- (5,188)
Collections of Finance Receivables...................................... 3,994 4,851
Decrease in Inventory................................................... 13,807 4,267
(Increase) Decrease in Other Assets..................................... (309) 911
Increase in Accounts Payable, Accrued Expenses and Other Liabilities.... 3,353 9,053
Increase (Decrease) in Income Taxes Payable............................. (1,208) 6,969
-------------- ---------------
Net Cash Provided by Operating Activities 61,935 50,922
-------------- ---------------
Cash Flows from Investing Activities:
Increase in Finance Receivables......................................... (133,887) (124,323)
Collections of Finance Receivables...................................... 49,974 29,928
(Increase) Decrease in Investments Held in Trust........................ 3,665 (2,114)
Advances under Notes Receivable......................................... -- (600)
Proceeds from Disposal of Property and Equipment........................ 1,330 65
Purchase of Property and Equipment...................................... (2,278) (2,279)
-------------- ---------------
-------------- ---------------
Net Cash Used in Investing Activities (81,196) (99,323)
-------------- ---------------
Cash Flows from Financing Activities:
Additions to Notes Payable Portfolio.................................... 96,700 109,476
Repayment of Notes Payable Portfolio.................................... (90,302) (62,525)
Additions to Other Notes Payable........................................ -- 18,349
Repayment of Other Notes Payable........................................ (3,220) (10,750)
Net Issuance of Subordinated Notes Payable.............................. -- 75
Proceeds from Issuance of Common Stock.................................. 390 8
Acquisition of Treasury Stock........................................... -- (5,307)
-------------- ---------------
Net Cash Provided by Financing Activities 3,568 49,326
-------------- ---------------
Net Cash Provided by Discontinued Operations................................ 18,340 918
-------------- ---------------
Net Increase in Cash and Cash Equivalents................................... 2,647 1,843
Cash and Cash Equivalents at Beginning of Period............................ 3,683 2,544
-------------- ---------------
Cash and Cash Equivalents at End of Period.................................. $ 6,330 $ 4,387
============== ===============
Supplemental Statement of Cash Flows Information:
Interest Paid.......................................................... $ 7,140 $ 3,072
============== ===============
Income Taxes Paid...................................................... $ 4,325 $ 1,504
============== ===============
See accompanying notes to Condensed Consolidated Financial Statements.
</TABLE>
F-26
<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, 1999
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, 1999.
Note 2. Summary of Finance Receivables
A summary of Finance Receivables, Net, follows ($ in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------------- -----------------
<S> <C> <C>
Contractually Scheduled Payments..................................... $ 574,664 $ 492,937
Unearned Finance Charges............................................. (155,751) (134,119)
----------- -----------
Principal - Retained on Balance 418,913 358,818
Sheet................................
Accrued Interest Receivable.......................................... 4,101 3,741
Loan Origination Costs, Net.......................................... 6,094 5,079
----------- -----------
Principal Balances, Net.............................................. 429,108 367,638
Investments Held in Trust............................................ 53,051 56,716
Residuals in Finance Receivables Sold................................ 12,693 17,382
----------- -----------
Finance Receivables............................................... 494,852 441,736
Allowance for Credit Losses.......................................... (87,585) (76,150)
----------- -----------
Finance Receivables, Net.......................................... $ 407,267 $ 365,586
=========== ===========
</TABLE>
Investments Held in Trust represent funds held by trustees on behalf of our
securitization lenders. The balance of Investments Held in Trust remained
relatively constant from the fourth quarter of 1999 as compared to the first
quarter of 2000 as there were no securitization transactions completed during
the first quarter of 2000.
Residuals in Finance Receivables Sold represent our subordinated interest in
loans sold through securitizations. The decrease from December 31, 1999 to March
31, 2000 is attributable to no additional loans sold through securitization with
servicing retained, amortization and release of cash, as well as the runoff of
portfolios securitized and sold during prior periods.
F-27
<PAGE>
A summary of Residuals in Finance Receivables Sold (Residuals) follows ($ in
thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------------ ----------------
<S> <C> <C>
Retained interest in subordinated securities (B Certificates)........ $ 13,279 $ 17,335
Net interest spreads, less present value discount.................... 2,579 6,113
Reduction for estimated credit losses................................ (3,165) (6,066)
----------- -----------
Residuals in finance receivables sold................................ $ 12,693 $ 17,382
============ ===========
Securitized principal balances outstanding........................... $ 42,911 $ 65,662
Estimated credit losses as a % of securitized principal balances ============ ===========
outstanding.......................................................... 7.4% 9.2%
============ ===========
</TABLE>
Note 3. Notes Receivable- Related Party
The Note Receivable - Related Party originated from the Company's December
1999 sale of its Cygnet Dealer Finance subsidiary to Cygnet Capital Corporation,
an entity controlled by Ernest C. Garcia II, Chairman and principal shareholder
of the Company. The $12.0 million note from Cygnet Capital Corporation has a 10
year term, with interest payable quarterly at 9%, due December 2009. The note is
secured by the capital stock of Cygnet Capital Corporation and guaranteed by
Verde Investments, Inc., an affiliate of Mr. Garcia. Under the terms of the
agreement, Mr. Garcia will be allowed to reduce the principal balance up to a
maximum of $8 million by surrendering to the Company shares of Ugly Duckling
common stock (valued at 98% of the average of the closing prices of the stock on
NASDAQ for the ten trading days prior to the surrender) as long as Mr. Garcia's
ownership interest of the Company voting stock does not fall below 15% and the
acceptance of such stock in the Company does not result in a breach of a
covenant.
Note 4. Notes Payable
Notes Payable, Portfolio
A summary of Notes Payable, Portfolio at March 31, 2000 and December 31,
1999 follows ($ in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Revolving facility for $125.0 Million with GE Capital, secured by substantially
all assets of the Company, including $172.7 million in finance receivables..... $ 89,122 $ 41,717
Class A obligations issued pursuant to the Company's Securitization Program,
secured by underlying pools of finance receivables and investments held in
trust totaling $273.5 million at March 31, 2000................................ 195,860 236,555
---------- ----------
Subtotal....................................................................... 284,982 278,272
Less: Unamortized Loan Fees................................................... 2,117 2,498
---------- ----------
Total.......................................................................... $ 282,865 $ 275,774
=========== ==========
</TABLE>
The revolving facility note payable has interest payable daily at 30 day
LIBOR plus 3.15% (9.04% at March 31, 2000) through June 2000. The revolving
facility is subject to a one-year extension provision upon mutual consent of
both parties. The revolving facility agreement also 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 is currently in compliance with these
covenants.
Class A obligations have interest payable monthly at rates ranging from 5.7%
to 6.8%. Monthly principal reductions on Class A obligations approximate 70% of
the principal reductions on the underlying pool of finance receivable loans.
F-28
<PAGE>
Other Notes Payable
A summary of Other Notes Payable at March 31, 2000 and December 31, 1999
follows ($ in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------------- ---------------
<S> <C> <C>
Note payable, secured by the capital stock of UDRC and UDRC II.................. $ 31,500 $ 33,900
Other notes payable bearing interest at rates ranging from 7.5% to 11% due
through August 2001, secured by certain real property and certain property and
equipment....................................................................... 2,119 2,939
------------- --------------
33,619 36,839
Less: Unamortized Loan Fees............................................... 201 283
------------- --------------
Total........................................................................ $ 33,418 $ 36,556
============== ==============
</TABLE>
Subordinated Notes Payable
A summary of Subordinated Notes Payable at March 31, 2000 and December 31,
1999 follows ($ in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- -------------
<S> <C> <C>
$15 million senior subordinated notes payable to unrelated parties,
bearing interest at 12% per annum payable quarterly, principal due
February 2001 and senior to subordinated debentures.................. $ 15,000 $ 15,000
$17.5 million subordinated debentures, interest at 12% per annum
(approximately 18.8% effective rate) payable semi-annually, principal
balance due October 23, 2003......................................... 17,479 17,479
------------ ------------
Subtotal............................................................ 32,479 32,479
Less: Unamortized Loan Fees........................................ 464 605
Unamortized Premium - subordinated debentures................ 3,115 3,263
------------ ------------
Total............................................................... $ 28,900 $ 28,611
============ ============
</TABLE>
Note 5. Common Stock Equivalents
Net Earnings per common share amounts are based on the weighted average
number of common shares and common stock equivalents outstanding for the periods
ended March 31, 2000, and 1999 as follows ($ in thousands, except for per share
amounts): <TABLE>
<CAPTION>
March 31, March 31,
2000 1999
----------- -----------
<S> <C> <C>
Earnings from Continuing Operations........................................ $ 4,483 $ 544
=========== ==========
Net Earnings............................................................... $ 4,483 $ 423
=========== ==========
Basic Earnings Per Share From Continuing Operations........................ $ 0.30 $ 0.04
=========== ==========
Diluted Earnings Per Share From Continuing Operations...................... $ 0.30 $ 0.04
=========== ==========
Basic Earnings Per Share................................................... $ 0.30 $ 0.03
=========== ==========
Diluted Earnings Per Share................................................. $ 0.30 $ 0.03
=========== ==========
Basic EPS-Weighted Average Shares Outstanding.............................. 14,905 15,650
Effect of Diluted Securities:
Warrants................................................................ 14 --
Stock Options........................................................... 234 135
----------- ----------
Dilutive EPS-Weighted Average Shares Outstanding........................... 15,153 15,785
=========== ==========
Warrants Not Included in Diluted EPS Since Antidilutive.................... 1,156 1,556
=========== ==========
Stock Options Not Included in Diluted EPS Since Antidilutive......... 875 1,153
=========== ==========
</TABLE>
F-29
<PAGE>
Note 6. Business Segments
The Company has three distinct business segments. These consist of retail
car sales operations (Retail Operations), the income resulting from the finance
receivables generated at the Company dealerships (Portfolio Operations), and
corporate and other operations (Corporate Operations). In computing operating
profit by business segment, the following items were considered in the Corporate
Operations 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.
<PAGE>
A summary of operating activity by business segment for the three month
periods ended March 31, 2000 and 1999 follows ($ in thousands):
<TABLE>
<CAPTION>
Retail Portfolio Corporate Total
March 31, 2000:
<S> <C> <C> <C> <C>
Sales of Used Cars......................... $ 132,786 $ -- $ -- $ 132,786
Less: Cost of Cars Sold.................... 72,942 -- -- 72,942
Provision for Credit Losses......... 27,094 7,479 -- 34,573
------------- ------------- ------------- -------------
32,750 (7,479) -- 25,271
Net Interest Income........................ -- 20,392 110 20,502
Servicing and Other Income................. -- 807 -- 807
------------- ------------- ------------- -------------
Income before Operating Expenses........... 32,750 13,720 110 46,580
------------- ------------- ------------- -------------
Operating Expenses:
Selling and Marketing...................... 8,135 -- -- 8,135
General and Administrative................. 14,190 6,884 5,271 26,345
Depreciation and Amortization.............. 1,071 300 837 2,208
------------- ------------- ------------- -------------
23,396 7,184 6,108 36,688
------------- ------------- ------------- -------------
Income (loss) before Other Interest Expense $ 9,354 $ 6,536 $ (5,998) $ 9,892
============= ============= ============= =============
Capital Expenditures....................... $ 1,273 $ 99 $ 906 $ 2,278
============= ============= ============= =============
Identifiable Assets........................ $ 75,435 $ 430,334 $ 28,022 $ 533,791
============= ============= ============= =============
March 31, 1999:
Sales of Used Cars......................... $ 106,443 $ -- $ -- $ 106,443
Less: Cost of Cars Sold.................... 60,088 -- -- 60,088
Provision for Credit Losses......... 21,893 5,870 -- 27,763
------------- ------------- ------------- -------------
24,462 (5,870) -- 18,592
Net Interest Income........................ -- 8,317 61 8,378
Servicing and Other Income................. -- 2,899 -- 2,899
------------- ------------- ------------- -------------
Income before Operating Expenses........... 24,462 5,346 61 29,869
------------- ------------- ------------- -------------
Operating Expenses:
Selling and Marketing...................... 6,366 -- -- 6,366
General and Administrative................. 11,094 4,601 5,314 21,009
Depreciation and Amortization.............. 791 283 521 1,595
------------- ------------- ------------- -------------
18,251 4,884 5,835 28,970
------------- ------------- ------------- -------------
Income (loss) before Other Interest Expense $ 6,211 $ 462 $ (5,774) $ 899
============= ============= ============= =============
Capital Expenditures....................... $ 1,735 $ 179 $ 365 $ 2,279
============= ============= ============= =============
</TABLE>
F-30
<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 completed the branch office
closure as of March 31, 1998. 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.
Effective December 31, 1999, the Company adopted a formal plan to abandon
any effort for its third party dealer operations to acquire loans or servicing
rights to additional portfolios. Accordingly, our Cygnet Servicing and the
associated Cygnet Corporate segment also are reported as components of
discontinued operations. The Company plans to complete servicing the portfolios
that it currently services.
The components of Net Assets of Discontinued Operations as of March 31, 2000
and December 31, 1999 follow ($ in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------- ----------
<S> <C> <C>
Finance Receivables, Net........................... $ 9,558 $ 14,837
Residuals in Finance Receivables Sold.............. 3,254 3,742
Investments Held in Trust.......................... 1,053 1,545
Property and Equipment............................. 604 2,114
Notes Receivable, net of Sub. Notes Payable........ 919 6,697
Servicing Receivable............................... 6,125 6,125
Other Assets, net of Accounts Payable and Accrued
Liabilities........................................ (7,351) (1,180)
------------- ------------
Net Assets of Discontinued Operations.............. $ 14,162 $ 33,880
============= ============
</TABLE>
Note 8. Use of Estimates
The preparation of our condensed 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 statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from our estimates.
Note 9. Reclassifications
We have made certain reclassifications to previously reported information to
conform to the current presentation.
Note 10. Subsequent Event
On February 22, 2000, we commenced an exchange offer to acquire up to 2.5
million shares of our common stock. The offer expired April 13, 2000 and on
April 20, 2000, we acquired approximately 1.1 million shares of our common stock
in exchange for approximately $11.9 million of seven year subordinated
debentures bearing interest at 11% payable bi-annually and principal due April
15, 2007. Under the terms of the offer, each share of stock was exchangeable for
$11.00 principal amount of debentures. The debentures were issued at a premium,
which will be amortized over the life of the debentures and results in an
effective annual interest rate of 19.3%.
F-31
<PAGE>
================================================================================
PROSPECTUS SUMMARY..........................................2
RISK FACTORS................................................4
FORWARD LOOKING STATEMENTS..................................8
USE OF PROCEEDS.............................................8
PRICE RANGE OF COMMON STOCK................................10
DIVIDEND POLICY............................................10
CAPITALIZATION.............................................11
SELECTED CONSOLIDATED FINANCIAL DATA.......................12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...........................................13
SELECTED CONSOLIDATED FINANCIAL DATA (UNAUDITED)...........15
MARKET RISK................................................38
BUSINESS...................................................40
MANAGEMENT.................................................44
COMPENSATION OF EXECUTIVE OFFICERS,
BENEFITS AND RELATED MATTERS............................47
CHANGE OF CONTROL ARRANGEMENTS.............................52
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION...............................52
COMPENSATION OF OUR DIRECTORS..............................52
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT........................53
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............55
DESCRIPTION OF CAPITAL STOCK...............................57
SELLING SECURITYHOLDERS....................................62
PLAN OF DISTRIBUTION.......................................62
LEGAL MATTERS..............................................64
EXPERTS....................................................64
WHERE YOU CAN FIND MORE INFORMATION........................64
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................F-1
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS......F-1
PART II..................................................II-1
================================================================================
================================================================================
5,325,000 Shares
Common Stock
325,000
Common Stock Purchase Warrants
(UGLY DUCKLING LOGO OMITTED)
----------------
PROSPECTUS
----------------
__________, 2000
================================================================================
<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 fees)...................... 10,000
*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,
II-1
<PAGE>
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.
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 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 First Merchants 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. We
repurchased the remainder of these warrants in the third quarter of 1999 for
approximately $612,000.
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 June of
2000, we issued warrants to purchase an additional 75,000 shares at $10.81 per
share to these lenders. In addition, in the first quarter of 1998, 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 ("12%
Debentures"). A total of approximately 2.7 million shares of common stock were
exchanged for 12% Debentures (approximately $17.5 million aggregate principal
amount) in connection with the exchange offer and a supplemental exchange offer.
In February 1999, we commenced another exchange offer to exchange up to
2,500,000 shares of our common stock for 11%, seven-year subordinated debentures
due April 15, 2007 ("11% Debentures"). A total of approximately 1.1 million
shares of common stock were exchanged for 11% Debentures (approximately $11.9
million aggregate principal amount) in connection with this exchange offer. The
12% Debentures and the 11% Debentures were not registered under the Securities
Act, since the exchange of such securities for common stock was made pursuant to
the exemption contained in Section 3(a)(9) of the Securities Act.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedule.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
3.1 Certificate of Incorporation of the Registrant Amended and Restated as of May 15, 1997(13)
3.2 Bylaws of the Registrant (22)
4.1 Certificate of Incorporation of the Registrant (filed as Exhibit 3.1)
4.2 Warrant Agreement between the Registrant and Harris Trust Company of California, as warrant agent, with respect to the
FMAC Warrants, dated as of April 1, 1998 (w/form of warrant attached as Exhibit A thereto) (16)
4.3 Form of Certificate representing Common Stock (1)
4.4 Form of Warrant issued to Cruttenden Roth Incorporated as Representative of the several underwriters (1)
4.5 Form of Warrant issued to SunAmerica Life Insurance Company (1)
4.6 Form of 12% Senior Subordinated Note between Registrant and Kayne Anderson related entities, each as a lender, executed in
February 1998 (9)
4.7 Warrant Agreement dated as of February 12, 1998 between Registrant and each of the Kayne Anderson related lenders named
therein (9)
4.8 Form of Warrant issued to Kayne Anderson related entities issued in February 1998 (9)
4.8(a) Form of Warrant issued to
Kayne Anderson related entities in June 2000**
4.9 Warrant Agreement between the Registrant and Reliance Acceptance Corporation and Harris Trust Company of California, as
warrant agent, dated as of February 9, 1998 (w/form of warrant attached as Exhibit A thereto) (12)
4.10 Certificate of Designation of the Preferred Stock (par value $.001 per share) (filed as part of Exhibit 3.1) (13)
4.11 Indenture dated as of October 15, 1998 between Registrant and Harris Trust and Savings Bank, as Trustee ("Harris")
("Indenture") (15)
4.11(a) First Supplemental Indenture dated as of October 15, 1998 between Registrant and Harris (15)
4.11(b) Form of 12% Subordinated Debenture due 2003 (16)
4.11(c) Second Supplemental Indenture dated as of April 15, 2000 between Registrant and Harris**
4.11(d) Form of 11% Subordinated Debenture due 2007**
5 Opinion of Snell & Wilmer L.L.P. (previously filed with this Registration Statement)
10.1 Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between Registrant and General
Electric Capital Corporation ("GECC") (6)
10.1(a) Assumption and Amendment Agreement between the Registrant and GECC (2)
10.1(b) Amendment No. 1 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between Registrant
and GECC dated December 22, 1997 (10)
10.1(c) Letter Agreement to amend the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between
Registrant and GECC dated as of October 20, 1997(12)
10.1(d) Letter agreement to amend the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between
Registrant and GECC, dated as of March 25, 1998 (12)
10.1(e) Amendment No. 2 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between Registrant
and GECC (14)
10.1(f) Amendment No. 3 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between Registrant
and GECC (16)
10.1(g) Amendment to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC and
Registrant dated March 25, 1999 regarding Year 2000 Date Change (17)
10.1(h) Amendment No. 4 to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC
and Registrant dated June 30, 1999 (19)
10.1(i) Amendment No. 5 to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC
and Registrant dated August 16, 1999 (20)
10.1(j) Amendment No. 6 to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC
and Registrant dated August 27, 1999 (20)
10.1(k) Amendment No. 7 to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC
and Registrant dated as of November 30, 1999 (23)
10.1(l) Amendment No. 8 to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC
and Registrant dated as of December 7, 1999 (23)
10.1(m) Amendment No. 9 to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC
and Registrant dated as of December 8, 1999 (23)
10.1(n) Amendment No. 10 to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC
and Registrant dated as of March 6, 2000 (23)
II-3
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 (4)
10.4(a) Assignment of Loan and Bank Claim dated as of August 20, 1997 among the Registrant and certain banks, as assignors (4)
10.4(b) Security Agreement dated as of August 20, 1997 among the Registrant, as obligor, and certain banks (4)
10.4(c) Payment Guaranty dated as of August 20, 1997 of certain affiliates of the Registrant, as guarantors (4)
10.5* Restated (as of March 14, 1997) Ugly Duckling Corporation Long-Term Incentive Plan (3)
10.5(a)* Amended and Restated Long Term Incentive Plan (as of January 15, 1998) (14)
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 (16)
10.7* Employment Agreement between the Registrant and Steven T. Darak (1)
10.8* Amended and Restated Employment Agreement between Registrant and Walter Vonsh dated May 26, 1998 (13)
10.9* Amended and Restated Employment Agreement between the Registrant and Donald L. Addink (6)
10.10* Employment Agreement between the Registrant and Steven A. Tesdahl (6)
10.10(a)* Modification of Terms of Employment between Registrant and Steven A. Tesdahl (13)
10.11 Form of Indemnity Agreement between the Registrant and its directors and officers (18)
10.12* Ugly Duckling Corporation 1996 Director Incentive Plan (1)
10.13 Purchase Agreement, dated February 10, 1997 between the Registrant and Friedman, Billings, Ramsey & Co., Inc. (7)
10.14 Portfolio Servicing Agreement among Registrant, Kars-Yes Financial, inc., and certain other parties, dated as of September
15, 1997 (5)
10.14(a) Subservicing Agreement among Registrant, Kars-Yes Financial, Inc., and certain other parties, dated as of September 15,
1997 (5)
10.15 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 (8)
10.16 Purchase Agreement dated as of December 18, 1997 by and among Contract Purchaser, Registrant and LaSalle National Bank, as
Agent (8)
10.17 Guaranty dated as of December 18, 1997 by Registrant in favor of Contract Purchaser (8)
10.18 Servicing Agreement dated as of December 15, 1997 between Registrant and Contract Purchaser (8)
10.19 FMAC Guaranty and Stock Pledge Agreement among FMAC, Registrant and certain banks (11)
10.20 Contribution Agreement between Registrant and FMAC (10)
10.21 Indemnification Agreement between the Company and FMAC (11)
10.22 Loan Agreement dated as of February 12, 1998 between the Registrant and each of the Kayne Anderson related Lenders named
therein (9)
10.22(a) Amendment to Loan Agreement between the Registrant and each of the Kayne Anderson related lenders named therein, dated
September 30, 1999 (20)
10.23 Credit and Security Agreement between Registrant and First Merchants Acceptance Corp., dated as of July 17, 1997 (12)
10.23(a) First Amendment to Credit and Security Agreement between Registrant and FMAC, dated as of January 21, 1998 (12)
10.23(b) Second Amendment to Credit and Security Agreement between Registrant and FMAC, dated as of April 1, 1998 (12)
10.23(c) Third Amendment to Credit and Security Agreement between Registrant and FMAC, dated as of August 2, 1999 (20)
10.24 Service Agreement among Reliance Acceptance Corporation, Registrant, Bank America Business Credit, Inc. and certain other
parties dated as of February 9, 1998 (14)
II-4
<PAGE>
10.25 Agreement of Understanding among Reliance Acceptance Group, Inc., Reliance Acceptance Corporation and Registrant, dated as
of February 9, 1998 (14)
10.26 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 (13)
10.27 Loan Agreement by and among the Registrant, Kayne Anderson Non-Traditional Investments, LP, and certain other lenders,
dated July 20, 1998 (14)
10.28 Payment Guaranty by Registrant in favor of Kayne Anderson and the Lenders, dated as of July 20, 1998 (14)
10.29 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. (14)
10.30* 1998 Executive Incentive Plan (14)
10.31 Loan agreement between Greenwich Capital Financial Products, Inc. and Registrant dated November 12, 1998 (16)
10.31(a) Stock Pledge Agreement among Greenwich Capital Financial Products, Inc., Registrant, and certain related parties, dated
November 12, 1998 (16)
10.31(b) $20 Million Loan agreement between Greenwich Capital Financial Products, Inc. and Registrant dated March 18, 1999 (17)
10.31(c) Stock Pledge Agreement among Greenwich Capital Financial Products, Inc., Registrant, and certain related parties, dated
March 18, 1999 (17)
10.31(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 (17)
10.31(e) Commitment Letter between Greenwich Capital Markets, Inc. and Registrant dated March 17, 1999 with Term Sheet for $100
Million Revolving Credit Facility (17)
10.32 KPMG LLP Year 2000 Renovation Project Service Proposal to and Engagement Letter with the Registrant, dated November 2,
1998 (16)
10.33 $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) (18)
10.33(a) Stock Pledge Agreement among certain lenders, Harris and the Registrant dated May 14, 1999 (18)
10.33(b) First Amendment to $38 million Senior Secured Loan Agreement between CIBC Inc., SunAmerica, etc. and the Registrant dated
November 12, 1999 (24)
10.33(c) Second Amendment to $38 million Senior Secured Loan Agreement between CIBC Inc., SunAmerica, etc. and the Registrant dated
February 15, 2000 (24)
10.34 Stock Purchase Agreement, by and among Ugly Duckling Car Sales & Finance Corporation, Ugly Duckling Finance Corporation
("UDFC"), Cygnet Dealer Finance, Inc.("CDF"), and Cygnet Capital Corporation ("CCC"), dated as of December 30, 1999 (21)
10.34(a) Promissory Note dated December 30, 1999 from CCC to UDFC (21)
10.34(b) Pledge Agreement dated December 30, 1999 from CCC to UDFC (21)
10.34(c) Verde Guaranty dated December 30, 1999 (21)
10.34(d) CDF Guaranty dated December 30, 1999 (21)
10.34(e) Warrant dated December 30, 1999 from CCC to UDFC (21)
11 Earnings (Loss) per Share Computation (see Note 18 to Notes to Consolidated Financial Statements)
12 Statement on Computation of Ratios**
21 List of Subsidiaries (23)
23.1 Consent of KPMG LLP**
23.2 Consent of Snell & Wilmer L.L.P. (included in Exhibit 5)
24 Power of Attorney (included on signature page)
---------------------------
<FN>
* Management contract or compensatory plan, contract or arrangement.
II-5
** Filed with this Post-Effective Amendment to Form S-1 Registration Statement.
(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 Quarterly Report on Form 10-Q, filed August 14, 1997.
(4) Incorporated by reference to the Company's Current Report on Form 8-K, filed September 5, 1997.
(5) Incorporated by reference to the Company's Current Report on Form 8-K, filed October 3, 1997.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed November 14, 1997.
(7) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No.
333-22237).
(8) Incorporated by reference to the Company's Current Report on Form 8-K, filed January 2, 1998.
(9) Incorporated by reference to the Company's Current Report on Form 8-K, filed February 20, 1998.
(10) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No.
333-42973) effective February 11, 1998.
(11) Incorporated by reference to the Company's Annual Report on Form 10-K, filed March 31, 1998.
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed May 15, 1998.
(13) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed August 10, 1998.
(14) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed November 13, 1998.
(15) Incorporated by reference to the Company's Form T-3 Application for Qualification of Indenture under
the Trust Indenture Act of 1939, filed November 20, 1998 (File No. 022-22415) effective December 21,
1998.
(16) Incorporated by reference to the Company's Annual Report on Form 10-K, filed March 30, 1999.
(17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed May 14, 1999.
(18) Incorporated by reference to the Company's Post-Effective Amendment No. 1 to Registration Statement on
Form S-1 (Registration No. 333-42973) filed July 9, 1999 ,effective August 2, 1999.
(19) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed August 16, 1999.
(20) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed November 15, 1999.
(21) Incorporated by reference to the Company's Current Report on Form 8-K, filed January 5, 2000.
(22) Incorporated by reference to the Company's Form T-3 Application for Qualification of Indenture under
the Trust Indenture Act of 1939, filed February 23, 2000 (File No. 022-22463).
(23) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31,
1999.
(24) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed May 12, 2000.
</FN>
</TABLE>
<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;
II-6
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.
For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Post-Effective Amendment No. 2 to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Phoenix, State of Arizona, on June 21, 2000.
Ugly Duckling Corporation
By: /s/ GREGORY B. SULLIVAN
--------------------------------
Gregory B. Sullivan
President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Ernest C. Garcia, II, and 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. 2 has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
------------------ ----- ----
<S> <C> <C>
/s/ GREGORY B. SULLIVAN Chief Executive Officer and Director June 21, 2000
--------------------------------------
Gregory B. Sullivan (Principal executive officer)
* Chairman of the Board June __, 2000
--------------------------------------
Ernest C. Garcia II
* Senior Vice President and Chief June __, 2000
--------------------------------------
Steven T. Darak Financial Officer (Principal financial
and accounting officer)
* Director June __, 2000
--------------------------------------
Christopher D. Jennings
* Director June __, 2000
--------------------------------------
John N. MacDonough
* Director June __, 2000
--------------------------------------
Frank P. Willey
By: /s/ GREGORY B. SULLIVAN June 21, 2000
--------------------------------------
*Gregory B. Sullivan
(Attorney-in-fact)
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
3.1 Certificate of Incorporation of the Registrant Amended and Restated as of May 15, 1997(13)
3.2 Bylaws of the Registrant (22)
4.1 Certificate of Incorporation of the Registrant (filed as Exhibit 3.1)
4.2 Warrant Agreement between the Registrant and Harris Trust Company of California, as warrant agent, with respect to the
FMAC Warrants, dated as of April 1, 1998 (w/form of warrant attached as Exhibit A thereto) (16)
4.3 Form of Certificate representing Common Stock (1)
4.4 Form of Warrant issued to Cruttenden Roth Incorporated as Representative of the several underwriters (1)
4.5 Form of Warrant issued to SunAmerica Life Insurance Company (1)
4.6 Form of 12% Senior Subordinated Note between Registrant and Kayne Anderson related entities, each as a lender, executed in
February 1998 (9)
4.7 Warrant Agreement dated as of February 12, 1998 between Registrant and each of the Kayne Anderson related lenders named
therein (9)
4.8 Form of Warrant issued to Kayne Anderson related entities issued in February 1998 (9)
4.8(a) Form of Warrant issued to
Kayne Anderson related entities in June 2000**
4.9 Warrant Agreement between the Registrant and Reliance Acceptance Corporation and Harris Trust Company of California, as
warrant agent, dated as of February 9, 1998 (w/form of warrant attached as Exhibit A thereto) (12)
4.10 Certificate of Designation of the Preferred Stock (par value $.001 per share) (filed as part of Exhibit 3.1) (13)
4.11 Indenture dated as of October 15, 1998 between Registrant and Harris Trust and Savings Bank, as Trustee ("Harris")
("Indenture") (15)
4.11(a) First Supplemental Indenture dated as of October 15, 1998 between Registrant and Harris (15)
4.11(b) Form of 12% Subordinated Debenture due 2003 (16)
4.11(c) Second Supplemental Indenture dated as of April 15, 2000 between Registrant and Harris**
4.11(d) Form of 11% Subordinated Debenture due 2007**
5 Opinion of Snell & Wilmer L.L.P. (previously filed with this Registration Statement)
10.1 Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between Registrant and General
Electric Capital Corporation ("GECC") (6)
10.1(a) Assumption and Amendment Agreement between the Registrant and GECC (2)
10.1(b) Amendment No. 1 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between Registrant
and GECC dated December 22, 1997 (10)
10.1(c) Letter Agreement to amend the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between
Registrant and GECC dated as of October 20, 1997(12)
10.1(d) Letter agreement to amend the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between
Registrant and GECC, dated as of March 25, 1998 (12)
10.1(e) Amendment No. 2 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between Registrant
and GECC (14)
10.1(f) Amendment No. 3 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between Registrant
and GECC (16)
10.1(g) Amendment to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC and
Registrant dated March 25, 1999 regarding Year 2000 Date Change (17)
10.1(h) Amendment No. 4 to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC
and Registrant dated June 30, 1999 (19)
10.1(i) Amendment No. 5 to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC
and Registrant dated August 16, 1999 (20)
10.1(j) Amendment No. 6 to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC
and Registrant dated August 27, 1999 (20)
10.1(k) Amendment No. 7 to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC
and Registrant dated as of November 30, 1999 (23)
10.1(l) Amendment No. 8 to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC
and Registrant dated as of December 7, 1999 (23)
10.1(m) Amendment No. 9 to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC
and Registrant dated as of December 8, 1999 (23)
10.1(n) Amendment No. 10 to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC
and Registrant dated as of March 6, 2000 (23)
<PAGE>
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 (4)
10.4(a) Assignment of Loan and Bank Claim dated as of August 20, 1997 among the Registrant and certain banks, as assignors (4)
10.4(b) Security Agreement dated as of August 20, 1997 among the Registrant, as obligor, and certain banks (4)
10.4(c) Payment Guaranty dated as of August 20, 1997 of certain affiliates of the Registrant, as guarantors (4)
10.5* Restated (as of March 14, 1997) Ugly Duckling Corporation Long-Term Incentive Plan (3)
10.5(a)* Amended and Restated Long Term Incentive Plan (as of January 15, 1998) (14)
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 (16)
10.7* Employment Agreement between the Registrant and Steven T. Darak (1)
10.8* Amended and Restated Employment Agreement between Registrant and Walter Vonsh dated May 26, 1998 (13)
10.9* Amended and Restated Employment Agreement between the Registrant and Donald L. Addink (6)
10.10* Employment Agreement between the Registrant and Steven A. Tesdahl (6)
10.10(a)* Modification of Terms of Employment between Registrant and Steven A. Tesdahl (13)
10.11 Form of Indemnity Agreement between the Registrant and its directors and officers (18)
10.12* Ugly Duckling Corporation 1996 Director Incentive Plan (1)
10.13 Purchase Agreement, dated February 10, 1997 between the Registrant and Friedman, Billings, Ramsey & Co., Inc. (7)
10.14 Portfolio Servicing Agreement among Registrant, Kars-Yes Financial, inc., and certain other parties, dated as of September
15, 1997 (5)
10.14(a) Subservicing Agreement among Registrant, Kars-Yes Financial, Inc., and certain other parties, dated as of September 15,
1997 (5)
10.15 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 (8)
10.16 Purchase Agreement dated as of December 18, 1997 by and among Contract Purchaser, Registrant and LaSalle National Bank, as
Agent (8)
10.17 Guaranty dated as of December 18, 1997 by Registrant in favor of Contract Purchaser (8)
10.18 Servicing Agreement dated as of December 15, 1997 between Registrant and Contract Purchaser (8)
10.19 FMAC Guaranty and Stock Pledge Agreement among FMAC, Registrant and certain banks (11)
10.20 Contribution Agreement between Registrant and FMAC (10)
10.21 Indemnification Agreement between the Company and FMAC (11)
10.22 Loan Agreement dated as of February 12, 1998 between the Registrant and each of the Kayne Anderson related Lenders named
therein (9)
10.22(a) Amendment to Loan Agreement between the Registrant and each of the Kayne Anderson related lenders named therein, dated
September 30, 1999 (20)
<PAGE>
10.23 Credit and Security Agreement between Registrant and First Merchants Acceptance Corp., dated as of July 17, 1997 (12)
10.23(a) First Amendment to Credit and Security Agreement between Registrant and FMAC, dated as of January 21, 1998 (12)
10.23(b) Second Amendment to Credit and Security Agreement between Registrant and FMAC, dated as of April 1, 1998 (12)
10.23(c) Third Amendment to Credit and Security Agreement between Registrant and FMAC, dated as of August 2, 1999 (20)
10.24 Service Agreement among Reliance Acceptance Corporation, Registrant, Bank America Business Credit, Inc. and certain other
parties dated as of February 9, 1998 (14)
10.25 Agreement of Understanding among Reliance Acceptance Group, Inc., Reliance Acceptance Corporation and Registrant, dated as
of February 9, 1998 (14)
10.26 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 (13)
10.27 Loan Agreement by and among the Registrant, Kayne Anderson Non-Traditional Investments, LP, and certain other lenders,
dated July 20, 1998 (14)
10.28 Payment Guaranty by Registrant in favor of Kayne Anderson and the Lenders, dated as of July 20, 1998 (14)
10.29 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. (14)
10.30* 1998 Executive Incentive Plan (14)
10.31 Loan agreement between Greenwich Capital Financial Products, Inc. and Registrant dated November 12, 1998 (16)
10.31(a) Stock Pledge Agreement among Greenwich Capital Financial Products, Inc., Registrant, and certain related parties, dated
November 12, 1998 (16)
10.31(b) $20 Million Loan agreement between Greenwich Capital Financial Products, Inc. and Registrant dated March 18, 1999 (17)
10.31(c) Stock Pledge Agreement among Greenwich Capital Financial Products, Inc., Registrant, and certain related parties, dated
March 18, 1999 (17)
10.31(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 (17)
10.31(e) Commitment Letter between Greenwich Capital Markets, Inc. and Registrant dated March 17, 1999 with Term Sheet for $100
Million Revolving Credit Facility (17)
10.32 KPMG LLP Year 2000 Renovation Project Service Proposal to and Engagement Letter with the Registrant, dated November 2,
1998 (16)
10.33 $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) (18)
10.33(a) Stock Pledge Agreement among certain lenders, Harris and the Registrant dated May 14, 1999 (18)
10.33(b) First Amendment to $38 million Senior Secured Loan Agreement between CIBC Inc., SunAmerica, etc. and the Registrant dated
November 12, 1999 (24)
10.33(c) Second Amendment to $38 million Senior Secured Loan Agreement between CIBC Inc., SunAmerica, etc. and the Registrant dated
February 15, 2000 (24)
10.34 Stock Purchase Agreement, by and among Ugly Duckling Car Sales & Finance Corporation, Ugly Duckling Finance Corporation
("UDFC"), Cygnet Dealer Finance, Inc.("CDF"), and Cygnet Capital Corporation ("CCC"), dated as of December 30, 1999 (21)
10.34(a) Promissory Note dated December 30, 1999 from CCC to UDFC (21)
10.34(b) Pledge Agreement dated December 30, 1999 from CCC to UDFC (21)
10.34(c) Verde Guaranty dated December 30, 1999 (21)
10.34(d) CDF Guaranty dated December 30, 1999 (21)
10.34(e) Warrant dated December 30, 1999 from CCC to UDFC (21)
11 Earnings (Loss) per Share Computation (see Note 18 to Notes to Consolidated Financial Statements)
12 Statement on Computation of Ratios**
21 List of Subsidiaries (23)
23.1 Consent of KPMG LLP**
23.2 Consent of Snell & Wilmer L.L.P. (included in Exhibit 5)
24 Power of Attorney (included on signature page)
---------------------------
<FN>
* Management contract or compensatory plan, contract or arrangement.
** Filed with this Post-Effective Amendment to Form S-1 Registration Statement.
(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 Quarterly Report on Form 10-Q, filed August 14, 1997.
(4) Incorporated by reference to the Company's Current Report on Form 8-K, filed September 5, 1997.
(5) Incorporated by reference to the Company's Current Report on Form 8-K, filed October 3, 1997.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed November 14, 1997.
(7) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No.
333-22237).
(8) Incorporated by reference to the Company's Current Report on Form 8-K, filed January 2, 1998.
(9) Incorporated by reference to the Company's Current Report on Form 8-K, filed February 20, 1998.
(10) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No.
333-42973) effective February 11, 1998.
(11) Incorporated by reference to the Company's Annual Report on Form 10-K, filed March 31, 1998.
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed May 15, 1998.
(13) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed August 10, 1998.
(14) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed November 13, 1998.
(15) Incorporated by reference to the Company's Form T-3 Application for Qualification of Indenture under
the Trust Indenture Act of 1939, filed November 20, 1998 (File No. 022-22415) effective December 21,
1998.
(16) Incorporated by reference to the Company's Annual Report on Form 10-K, filed March 30, 1999.
(17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed May 14, 1999.
(18) Incorporated by reference to the Company's Post-Effective Amendment No. 1 to Registration Statement on
Form S-1 (Registration No. 333-42973) filed July 9, 1999 ,effective August 2, 1999.
(19) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed August 16, 1999.
(20) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed November 15, 1999.
(21) Incorporated by reference to the Company's Current Report on Form 8-K, filed January 5, 2000.
(22) Incorporated by reference to the Company's Form T-3 Application for Qualification of Indenture under
the Trust Indenture Act of 1939, filed February 23, 2000 (File No. 022-22463).
(23) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31,
1999.
(24) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed May 12, 2000.
</FN>
</TABLE>
