THIS DOCUMENT IS A COPY OF THE FORM 10-K FILED ON MARCH 30, 2000 PURSUANT TO A
RULE 201 TEMPORARY HARDSHIP EXEMPTION
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _____________.
Commission File Number 0-20841
UGLY DUCKLING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 86-0721358
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2525 E. Camelback Road, Suite 500,
Phoenix, Arizona 85016
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (602) 852-6600
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of each Exchange on which registered
-------------- -----------------------------------------
12% Subordinated Debentures Due 2003 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of Class Name of each Exchange on which registered
-------------- -----------------------------------------
Common Stock, $.001 par value The Nasdaq Stock Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of common stock held by non-affiliates of the
registrant was approximately $80,689,000.
Applicable Only to Registrants Involved in Bankruptcy
Proceedings During the Preceding Five Years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
(Applicable Only to Corporate Registrants)
As of March 15, 2000, there were 14,929,552 shares of common stock of the
Registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting
of Stockholders currently scheduled for May 23, 2000 are incorporated by
reference into Part III
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<PAGE>
Ugly Duckling Corporation
TABLE OF CONTENTS
For the fiscal year ended December 31, 1999
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<S> <C> <C>
Page
PART I
Item 1 Business................................................................ 1
Item 2 Properties.............................................................. 5
Item 3 Legal Proceedings....................................................... 5
Item 4 Submission Of Matters To A Vote Of Security Holders..................... 5
Item 4A Executive Officers Of The Registrant.................................... 5
PART II
Item 5 Market For The Registrant's Common Equity Securities And Related
Stockholder Matters..................................................... 7
Item 6 Selected Consolidated Financial Data.................................... 8
Item 7 Management's Discussion And Analysis Of Financial Condition And
Results Of Operations................................................... 10
Item 7A Quantitative And Qualitative Disclosures About Market Risk.............. 29
Item 8 Consolidated Financial Statements And Supplementary Data................ 30
Item 9 Changes In And Disagreements With Accountants On Accounting And
Financial Disclosures................................................... 54
PART III
Item 10 Directors And Executive Officers Of The Registrant...................... 54
Item 11 Executive Compensation.................................................. 54
Item 12 Security Ownership Of Certain Beneficial Owners And Management.......... 54
Item 13 Certain Relationships And Related Transactions.......................... 54
PART IV
Item 14 Exhibits, Consolidated Financial Statement Schedules, And Reports On
Form 8-K................................................................ 55
Signatures................................................................................ 60
</TABLE>
<PAGE>
PART I
ITEM 1 -- BUSINESS
Principal Line of Business
We operate the largest chain of buy here-pay here car dealerships in the United
States. At December 31, 1999, we operated 72 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 36. Operating segment information is also
included in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Business Segment Information" beginning on page 14. 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 Sales and Financing
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 1
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Company Dealership (Retail) Operations
Aggressive Growth in Dealership Sites
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. Since
1996, we have also developed a total of 26 de novo sites in existing markets.
The following table summarizes, by market for the last three years, the number
of dealerships we had in operation:
Dealerships, by Market
--------------------------------------------------------
1999 1998 1997
----------------- --------------- ----------------
Los Angeles...... 12 8 6
Phoenix.......... 9 9 7
San Antonio...... 9 9 7
Atlanta.......... 9 9 5
Tampa............ 9 8 5
Dallas........... 7 6 3
Richmond......... 5 -- --
Orlando.......... 4 -- --
Tucson........... 3 3 3
Albuquerque...... 3 3 2
Las Vegas........ 2 1 1
Miami............ -- -- 2
----------------- --------------- ----------------
72 56 41
================= =============== ================
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:
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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.
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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.
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
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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. 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 structured and recorded 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 - 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.
Employees
At February 29, 1999, we employed approximately 2,700 persons, with 1,750,
780 and 170 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.
Page 4
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ITEM 2 -- PROPERTIES
As of December 31, 1999, we leased substantially all of our facilities.
Facilities operated currently include 72 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.
ITEM 3 -- LEGAL PROCEEDINGS
We sell our cars on an "as is" basis. We require all customers to
acknowledge in writing on the date of sale that we disclaim any obligation for
vehicle-related problems that subsequently occur. Although we believe that these
disclaimers are enforceable under applicable laws, there can be no assurance
that they will be upheld in every instance. Despite obtaining these disclaimers,
in the ordinary course of business, we receive complaints from customers
relating to vehicle condition problems as well as alleged violations of federal
and state consumer lending or other similar laws and regulations. Most of these
complaints are made directly to us or to various consumer protection
organizations and are subsequently resolved. However, customers occasionally
name us as a defendant in civil suits filed in state, local, or small claims
courts. Additionally, in the ordinary course of business, we are a defendant in
various other types of legal proceedings. Although we cannot determine at this
time the amount of the ultimate exposure from these lawsuits, if any, based on
the advice of counsel we do not expect the final outcome to have a material
adverse effect on the Company.
ITEM 4-- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A -- EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Information Concerning Chairman of the Board and our Executive Officers as
of March 2000.
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Name Age Position
- --------------------------- --- -------------------------------------------------------
Ernest C. Garcia II........ 42 Chairman of the Board
Gregory B. Sullivan........ 41 President, Chief Executive Officer and Director
Steven T. Darak............ 52 Senior Vice President and Chief Financial Officer
Donald L. Addink........... 50 Senior Vice President and Treasurer
Steven A. Tesdahl.......... 40 Senior Vice President and Chief Information Officer
Jon D. Ehlinger............ 42 Vice President, General Counsel and Secretary
</TABLE>
Ernest C. Garcia II has served as our Chairman of the Board since 1992. Mr.
Garcia served as Chief Executive Officer from 1992 to 1999, and served as
President from 1992 to 1996. Mr. Garcia is also a significant stockholder of
Ugly Duckling, owning approximately 32.2% of our stock at December 31, 1999. Mr.
Garcia is President of Verde Investments, Inc. (Verde), a real estate investment
corporation that is also an affiliate of ours. See below "Involvement in Certain
Legal Proceedings by Directors and Executive Officers."
Gregory B. Sullivan was appointed Chief Executive Officer in July 1999. Mr.
Sullivan has served as our President since March 1996. In 1998, Mr. Sullivan was
elected to our Board of Directors. Mr. Sullivan has also served as President of
Ugly Duckling Car Sales, Inc. since December 1996. From 1995 through February
1996, Mr. Sullivan was a consultant to us. Mr. Sullivan formerly served as
President and principal stockholder of an amusement game manufacturing company
that he co-founded in 1989 and sold in 1994. Prior to 1989, Mr. Sullivan was
involved in the securities industry and practiced law with a large Arizona firm.
He is an inactive member of the State Bar of Arizona. Mr. Sullivan's sister is
married to John N. MacDonough, another member of our Board of Directors.
Steven T. Darak has served as our Senior Vice President and Chief Financial
Officer since February 1994. From June 1993 through January 1994, Mr. Darak was
a consultant to us. From 1989 to January 1994, Mr. Darak owned and operated
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Champion Financial Services, Inc., a used car finance company we acquired in
early 1994. Prior to 1989, Mr. Darak served in various positions in the banking
industry and in public accounting.
Donald L. Addink has served as our Senior Vice President and Treasurer
since November 1998. From 1995 to November 1998, he served as our Vice President
- - Senior Analyst. From 1988 to 1995, Mr. Addink served as Executive Vice
President of Pima Capital Co., a life insurance holding Company. Prior to 1988,
Mr. Addink served in various capacities with a variety of insurance companies.
Mr. Addink is a Fellow of the Society of Actuaries and a Member of the American
Academy of Actuaries.
Steven A. Tesdahl has served as the Senior Vice President and Chief
Information Officer for the Company since September of 1997. From 1993 to 1997,
Mr. Tesdahl was a partner with Anderson Consulting, a leading global provider of
business integration consulting services. Prior to 1993, Mr. Tesdahl was an
Associate Partner with Anderson Consulting.
Jon D. Ehlinger has served as our Vice President, General Counsel and
Secretary since July 1999, joining us in 1998 as the General Counsel for Ugly
Duckling Car Sales and Finance Corporation. Prior to 1998, Mr. Ehlinger was
in-house counsel for almost thirteen years for a major financial institution.
Mr. Ehlinger is licensed to practice law in Arizona and has also worked for two
Arizona law firms.
Our officers are elected each year at the first meeting of our Board of
Directors subsequent to our annual meeting of shareholders, currently scheduled
for May 23, 2000. Our officers 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 officers and
directors.
(b) Involvement in Certain Legal Proceedings by Directors and Executive
Officers.
Prior to 1992, when he founded Ugly Duckling, Mr. Garcia was involved in
various real estate, securities, and banking ventures. Arising out of two
transactions in 1987 between Lincoln Savings and Loan Association ("Lincoln")
and entities controlled by Mr. Garcia, the Resolution Trust Corporation (the
"RTC"), which ultimately took over Lincoln, asserted that Lincoln improperly
accounted for the transactions and that Mr. Garcia's participation in the
transactions facilitated the improper accounting. Facing severe financial
pressures, Mr. Garcia agreed to plead guilty to one count of bank fraud, but in
light of his cooperation with authorities both before and after he was charged,
was sentenced to only three years probation, which has expired, was fined $50
(the minimum fine the court could assess), and during the period of his
probation, which ended in 1996, was banned from becoming an officer, director or
employee of any federally-insured financial institutions or a securities firms
without governmental approval. In separate actions arising out of this matter,
Mr. Garcia agreed not to violate the securities laws, and filed for bankruptcy
both personally and with respect to certain entities he controlled. The
bankruptcies were discharged by 1993.
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PART II
ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY SECURITIES
AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the NASDAQ Stock Market under the symbol
"UGLY." The high and low closing sales prices of the common stock, as reported
by NASDAQ for the two most recent fiscal years are reported below.
Market Price
--------------------
High Low
-------- --------
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
On March 16, 2000, the last reported sale price of the common stock on
NASDAQ was $8.00 per share. On March 16, 2000, there were approximately 75
record owners of our common stock. We estimate that as of such date there were
approximately 14,929,552 beneficial owners of our common stock.
Dividend Policy. We have never paid dividends on our common stock and do
not anticipate doing so in the foreseeable future. It is the current policy of
our Board of Directors to retain any earnings to finance the operation and
expansion of our business or to repurchase our common stock pursuant to an
existing stock buy back program. In addition, the terms of our primary revolving
credit facility prevent us from declaring or paying dividends in excess of 15.0%
of each year's net earnings available for distribution. Our future financings
may also include such restrictions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital Resources
- -- Financing Resources -- Revolving Facility."
1998 Exchange Offer. In the fourth quarter of 1998, we issued a total of
approximately $17.5 million of our 12% subordinated debentures due 2003 in
exchange for approximately 2.7 million shares of our common stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Supplemental Borrowings --
Exchange Offer." Beginning on March 2, 1999, the debentures became listed and
trade on the American Stock Exchange under the ticker symbol UGY.
2000 Exchange Offer. On February 22, 2000, we commenced an exchange offer
to acquire up to 2.5 million shares of our common stock in exchange for up to
$27.5 million principal amounts of 11% Subordinated Debentures due 2007. On
March 22, 2000, the offer was extended and currently expires April 13, 2000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Supplemental Borrowings -- 2000
Exchange Offer."
Note Issuance. On November 8, 1999, we issued a note in the amount of
$2.7 million to Virginia Auto Mart as consideration for the purchase of certain
assets, including five used car dealerships and related vehicle inventory, and a
loan portfolio of approximately $6.8 million. The note bears interest at a rate
of 7.5% per annum and is payable in September 2000. In the event that we default
on payment of the note, the holder of the note will have the right to convert
the note into shares of our common stock equal to the lesser of:
o a number of shares equal to the amount outstanding under the note divided by
the closing price of our common stock as of the default date; or
o 446,872 shares.
The note was issued under the private placement exemption of Section 4(2) of the
Securities Act of 1933.
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ITEM 6 -- SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected historical consolidated
financial data for each of the years in the five-year period ended December 31,
1999. The selected annual historical consolidated financial data for 1999, 1998,
1997, 1996, and 1995 are derived in part from our consolidated financial
statements audited by KPMG LLP, independent auditors. For additional
information, see our consolidated financial statements included elsewhere in
this report. The following table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Certain information presented below under the captions: "Other
Operating Data", "Segment Operating Expense Data", "Balance Sheet Data" and
"Loan Portfolio Data" is unaudited.
<TABLE>
Years Ended December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ----------- ---------- ---------- -----------
($ in thousands except units and per share amounts)
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Statement of Operations Data:
Sales of Used Cars....................... $ 389,908 $ 287,618 $ 123,814 $ 53,768 $ 47,824
Less:
Cost of Used Cars Sold............. 219,037 165,282 72,358 29,890 27,964
Provision for Credit Losses........ 102,955 65,318 22,354 9,657 8,359
----------- ----------- ---------- --------- ---------
67,916 57,018 29,102 14,221 11,501
----------- ----------- ---------- --------- ---------
Other Income:
Interest Income.......................... 68,574 17,287 12,559 8,597 8,227
Portfolio Interest Expense............... 14,597 2,860 175 -- --
----------- ----------- ---------- --------- ---------
Net Interest Income................. 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............... 7,472 15,481 12,325 2,537 308
---------- ----------- ---------- --------- ---------
Total Other Income.................. 61,449 42,001 31,430 15,059 8,535
---------- ----------- ---------- --------- ---------
Income before Operating Expenses......... 129,365 99,019 60,532 29,280 20,036
Operating Expenses:
Selling and Marketing ................... 23,132 18,246 10,538 3,585 3,856
General and Administrative .............. 81,570 69,894 39,414 14,210 13,446
Depreciation and Amortization............ 6,948 4,912 3,148 1,382 1,225
---------- ----------- ---------- --------- ----------
Operating Expenses................. 111,650 93,052 53,100 19,177 18,527
---------- ----------- ---------- --------- ---------
Income before Other Interest Expense..... 17,715 5,967 7,432 10,103 1,509
Interest Expense from Subordinated Debt.. 3,028 161 531 2,429 5,328
---------- ----------- ---------- --------- ---------
Earnings (Loss) before Income
Taxes 14,687 5,806 6,901 7,674 (3,819)
Income Taxes ............................ 6,000 2,351 2,820 694 --
---------- ----------- ---------- --------- ---------
Earnings (Loss) from Continuing
Operations......................... $ 8,687 $ 3,455 $ 4,081 $ 6,980 $ (3,819)
========== =========== ========== ========= ==========
Earnings (Loss) per Common Share from
Continuing Operations:
Basic $ 0.58 $ 0.19 $ 0.23 $ 0.89 $ (0.69)
========== ====== ========== ========= ==========
Diluted $ 0.57 $ 0.19 $ 0.22 $ 0.84 $ (0.69)
========== ====== ========== ========= ==========
Shares used in Computation:
Basic Weighted Avg. Shares Outstanding... 15,093 18,082 17,832 7,887 5,522
========== =========== ========== ========= ==========
Diluted Weighted Avg. Shares Outstanding. 15,329 18,405 18,234 8,298 5,522
========== =========== ========== ========= ==========
(Continued)
</TABLE>
Page 8
<PAGE>
ITEM 6 -- SELECTED CONSOLIDATED FINANCIAL DATA -- Continued
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------- -------------
1999 1998 1997 1996 1995
-------------- -------------- -------------- -------------- -------------
($ in thousands, except per car sold and per share amounts)
<S> <C> <C> <C> <C> <C>
Other Operating Data:
Total Revenues............................... $ 465,954 $ 332,479 $ 155,419 $ 68,827 $ 56,359
Number of Used Cars Sold .................... 46,120 35,964 16,636 7,565 7,383
Open Dealerships - End of Year............... 72 56 41 8 8
Avg. Units Sold per Dealership/Month......... 64 63 79 78 79
Sales price - Per Car Sold................... $ 8,454 $ 7,997 $ 7,443 $ 7,107 $ 6,478
Cost of Sales - Per Car Sold................. $ 4,749 $ 4,595 $ 4,349 $ 3,951 $ 3,787
Gross Margin - Per Car Sold.................. $ 3,705 $ 3,402 $ 3,094 $ 3,156 $ 2,691
Provision - Per Car Sold..................... $ 2,232 $ 1,816 $ 1,344 $ 1,276 $ 1,132
Interest Income per Car Sold................. $ 1,487 $ 481 $ 755 $ 1,136 $ 1,114
Total Operating Exp. - Per Car Sold.......... $ 2,420 $ 2,587 $ 3,192 $ 2,535 $ 2,509
Cost of Used Cars as Percent of Sales........ 56.2% 57.5% 58.4% 55.6% 58.5%
Gross Margin as Percent of Sales............. 43.8% 42.5% 41.6% 41.4% 41.5%
Provision as % of Originations............... 26.9% 23.6% 19.1% 19.7% 22.9%
Total Operating Exp. - % of Total Revenue 24.0% 28.0% 34.2% 27.9% 32.9%
Segment Operating Expense Data:
Retail Expense - Per Car Sold................ $ 1,550 $ 1,574 $ 1,760 $ 1,347 $ 1,432
Retail Expense - % of Used Car Sales......... 18.3% 19.7% 23.7% 19.0% 22.1%
Corporate/Other Exp. - Per Car Sold.......... $ 417 $ 462 $ 625 $ 564 $ 425
Corp. & Other Exp. - % of Total Revenue...... 4.1% 5.0% 6.7% 4.9% 5.6%
Loan Servicing Exp. As % of End of Period
Managed Principal........................ 4.9% 6.8% 4.6% 6.2% 10.6%
Balance Sheet Data:
Finance Receivables, Net..................... $ 365,586 $ 126,168 $ 60,778 $ 14,186 $ 27,732
Inventory.................................... $ 62,865 $ 44,145 $ 32,372 $ 5,464 $ 6,329
Total Assets................................. $ 536,711 $ 337,281 $ 275,633 $ 117,629 $ 60,712
Notes Payable - Retained Portfolio........... $ 275,774 $ 101,732 $ 65,171 $ 12,904 $ 35,201
Subordinated Notes Payable................... $ 28,611 $ 37,980 $ 12,000 $ 14,000 $ 14,553
Total Debt................................... $ 340,941 $ 155,611 $ 77,171 $ 26,904 $ 49,754
Common Stock................................. $ 173,292 $ 173,828 $ 172,622 $ 82,612 $ 127
Treasury Stock............................... $ (20,321) $ (14,510) -- -- --
Total Stockholders' Equity................... $ 165,680 $ 162,767 $ 181,774 $ 82,319 $ 4,884
Common Shares Outstanding - End of Year 14,888 15,841 18,521 13,327 5,580
Book Value per Share......................... . $ 10.28 $ 9.81 $ 6.18 $ (0.92)
Tangible Book Value per Share................ $ 10.17 $ 9.35 $ 8.93 $ 6.02 $ (0.97)
Total Debt to Equity......................... 2.1 1.0 0.4 0.3 10.1
Loan Portfolio Data:
Interest Income.............................. $ 68,574 $ 17,287 $ 12,559 $ 8,597 $ 8,227
Avg. Yield on Portfolio...................... 26.0% 25.8% 26.7% 29.2% 28.0%
Principal Balances Originated................ $ 382,335 $ 277,226 $ 116,830 $ 48,996 $ 36,568
Principal Balances Originated as % of Sales 98.1% 96.4% 94.4% 91.1% 76.5%
Principal Balances Acquired.................. $ 21,460 -- $ 55,400 -- --
Number of Loans Originated................... 45,756 35,560 16,001 6,929 6,129
Average Original Amount Financed $ 8,356 $ 7,796 $ 7,301 $ 7,071 $ 5,966
Number of Loans Originated as % of Units Sold
99.2% 98.9% 96.2% 91.6% 83.0%
Number of Loans Acquired..................... 5,129 -- 13,251 -- --
Managed Portfolio Delinquencies:
31 to 60 days............................ 5.7% 4.6% 3.6% 5.0% 2.2%
Over 60 days............................. 2.9% 2.1% 1.5% 1.7% 1.4%
Principal Outstanding - Managed.............. $ 424,480 $ 292,683 $ 293,990 $ 58,730 $ 34,265
Principal Outstanding - Retained............. $ 358,818 $ 93,936 $ 55,965 $ 7,068 $ 34,226
</TABLE>
Page 9
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this discussion and analysis we explain our general financial condition
and results of operations. In particular, we analyze and explain the significant
annual changes in the consolidated results of operations as well as significant
annual changes for our retail, portfolio and corporate segments. As you read
this discussion, you should refer to our Consolidated Financial Statements
beginning on page 30, which contain our financial condition at December 31, 1999
and 1998 and the results of our operations for years ended December 31, 1999,
1998, and 1997.
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.
Other Significant Developments - The Company uses securitization of its
loan portfolio as a significant source of capital to finance its growth.
Historically we have applied two methods in structuring these transactions that
result in materially 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 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.
Page 10
<PAGE>
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 the
Company by the Class A note and certificate holders. As additional collateral
for the borrowers, 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 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.
Sales of Used Cars and Cost of Used Cars Sold
<TABLE>
<CAPTION>
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:
1999 1998 1997
Percentage of used cars sold financed...... 99.2% 98.9% 96.2%
Percentage of sales revenue financed....... 98.1% 96.4% 94.4%
Page 11
<PAGE>
Provision for Credit Losses
<TABLE>
Annual Percentage
Change
-----------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1999 1998
--------- -------- --------- --------- ---------
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 $7,301 per unit in the year ended December 31, 1997. The increase from 1998
to 1999 was also a result of the change in our securitization structure as
discussed in the following paragraph.
When we changed the way we structured securitizations for accounting
purposes in the fourth quarter of 1998, we also changed the amount we provided
for credit losses. For periods prior to the fourth quarter of 1998, we generally
provided a Provision for Credit Losses of approximately 20% of the loan
principal balance at the time of origination. Upon securitization, using the
gain on sale method, losses for the life of the loans were estimated and
recorded as an element of the gain computation. Beginning in the fourth quarter
of 1998, we increased the provision for credit losses to 27% of the initial
amount financed.
Net Interest Income
<TABLE>
<CAPTION>
Annual Percentage
Change
----------------------
($ 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 "Growth in
Finance Receivables, Net" beginning on page 17.
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 securtization, 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.
Page 12
<PAGE>
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):
Annual Percentage
Change
--------------------------
1999 1998 1997 1999 1998
------- -------- -------- ---------- ---------
Servicing Income $ 7,472 $ 15,481 $ 12,325 (51.7%) 25.6%
------- -------- -------- ---------- ---------
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
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>
Annual Percentage
Change
----------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1999 1998
----------- ----------- ----------- -------- ---------
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 the operations of the Company. 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 14.
Page 13
<PAGE>
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 the Company has
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, the Company does 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,
the Company 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.
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, the Company 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 ($9.2 million, net of income taxes) to close our
branch office network and our terminated Cygnet rights offering. See Note (2) to
the Consolidated Financial Statements included herein.
Business Segment Information
The Company reports its operations based on three operating segments. These
segments are reported herein as Retail, Portfolio and Corporate. These segments
were previously reported as Company Dealership, Company Dealership Receivables
and Corporate and Other, respectively.
Operating Expenses for our business segments, along with a description of
the included activities, for the years ended December 31, 1999, 1998 and 1997
follows:
Page 14
<PAGE>
Retail Operations. Operating expenses for our retail segment consists of
Company marketing efforts, maintenance and development of dealership and
inspection center sites, and direct management oversight of used car
acquisition, reconditioning and sales activities. A summary of retail operating
expenses follows ($ in thousands except per car sold amounts):
Retail Operations. Operating expenses for our retail segment consists of
Company 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>
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>
Annual Percentage
Change
--------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1999 1998
----------- ----------- ----------- ----------- ----------
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
Page 15
<PAGE>
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 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>
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):
December 31, Annual Percentage
---------------------- Change
1999 1998 1999
---------- ---------- ----------
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%
Page 16
<PAGE>
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 follows:
December 31,
---------------------------------
($ in thousands) 1999 1998
------------ ------------
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
=========== ===========
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
----------------------------- ---------------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
------------ ------------ ------------ ------------
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 collaterized borrowing method.
Residuals in Finance Receivables Sold represent the Company's 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.
Page 17
<PAGE>
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):
Years Ended
December 31,
--------------------------------
1999 1998
------------- ------------
Allowance Activity:
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)
============= =============
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
Page 18
<PAGE>
"-", 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.
The following table sets forth as of February 29, 1999, 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).
Pool's Cumulative Net Losses as Percentage of Pool's Original
Aggregate Principal Balance
(dollars in thousands)
<TABLE>
<CAPTION>
Monthly Payments Completed by Customer Before Charge Off
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Orig. 0 3 6 12 18 24 TLI Reduced
---------- -------- -------- -------- -------- -------- -------- -------- --------
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 2.2% 9.2% 13.4% 21.9% 25.8% 27.5% 29.0% 99.9%
3rd Quarter $ 11,082 1.6% 6.8% 12.4% 21.2% 25.3% 27.5% 29.0% 99.6%
4th Quarter $ 10,817 0.6% 8.4% 15.8% 24.7% 29.0% 31.8% 32.5% 97.9%
1997:
1st Quarter $ 16,279 2.1% 10.5% 17.7% 24.3% 29.3% 31.6% 33.8% 93.7%
2nd Quarter $ 25,875 1.5% 9.9% 15.8% 22.7% 27.4% 29.6% 30.7% 90.0%
3rd Quarter $ 32,147 1.4% 8.4% 13.2% 22.4% 26.9% 29.5% 30.2% 86.0%
4th Quarter $ 42,529 1.4% 6.8% 12.5% 21.8% 26.2% x 29.2% 81.9%
1998:
1st Quarter $ 69,708 0.9% 6.9% 13.4% 20.9% 26.7% -- 28.5% 76.6%
2nd Quarter $ 66,908 1.1% 8.0% 14.2% 22.0% x -- 27.9% 68.1%
3rd Quarter $ 71,027 1.0% 8.0% 13.4% 23.7% -- -- 26.9% 60.7%
4th Quarter $ 69,583 0.9% 6.7% 13.4% x -- -- 25.2% 49.5%
1999:
1st Quarter $ 103,068 0.8% 7.7% 15.7% -- -- -- 21.0% 37.9%
2nd Quarter $ 95,768 1.2% 10.3% x -- -- -- 17.4% 23.2%
3rd Quarter $ 102,585 1.1% x -- -- -- -- 8.8% 8.7%
4th Quarter $ 80,641 x -- -- -- -- -- 1.7% 2.5%
</TABLE>
Page 19
<PAGE>
The following table sets forth the principal balances delinquent as a
percentage of total outstanding loan principal balances from dealership
operations.
December 31,
------------------------------------
1999 1998
---------------- ---------------
Days Delinquent: 31-60 61-90 31-60 61-90
----- ----- ----- -----
Retained on Balance Sheet........ 5.3% 2.8% 2.2% 0.6%
Securitized - Gain on Sale....... 7.6% 3.7% 5.7% 2.8%
---- ---- ---- ----
Total Portfolio.................. 5.7% 2.9% 4.6% 2.1%
==== ==== ==== ====
In accordance with our charge off policy, no accounts were more than 90 days
delinquent as of December 31, 1999 and 1998.
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 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 $43.1 million. As of
December 31, 1999, the amount remaining to be funded out of portfolio
collections to meet the required aggregate balance was approximately $10.7
million.
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 the
date of this filing, we have addressed the challenges in the loan servicing area
and, consequently, have realized improvements in the delinquency and charge off
levels to allow sufficient reserve account (formerly "spread account")
requirements to return to their original specified percentages. Additionally,
effective with the March 2000 collection period, all increases in reserve
account requirements will have been eliminated, reducing the reserve account
requirement by approximately $10 million. Further, all reserve account balances
have reached their specified percentages and the related trusts will distribute
cash to the Company
December 1999 Securitization. As a result of the servicing issues discussed
above, the December 1999 securitization included an additional 5% initial
deposit requirement. Assuming continuation of improved current delinquency and
charge off levels, the additional 5% deposit will be returned to us at 1% per
month during the last two quarters in 2000. As of the date of this filing, this
trust has reached its specified required deposit level and is distributing cash
to the Company.
Page 20
<PAGE>
Certain Financial Information Regarding Our Securitizations
The following table summarizes certain financial information and attributes
of our securitizations:
<TABLE>
<S> <C> <C> <C>
($ in thousands) 1999 1998 1997
-------------- -------------- --------------
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>
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>
<S> <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.
</TABLE>
We fund our capital requirements primarily through:
<TABLE>
<S> <C>
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 $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.
Page 21
<PAGE>
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 in June 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 December 31, 1999, our borrowing capacity under the revolving facility
was $59.3 million, the aggregate principal amount outstanding under the
revolving facility was approximately $41.7 million, and the amount available to
be borrowed under the facility was $17.6 million. The revolving facility bears
interest at the 30-day LIBOR plus 3.15%, payable daily (total rate of 8.71% as
of December 31, 1999).
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 December 31, 1999.
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 December 31, 1999, 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
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, 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
December 31, 1999.
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 $33.9
million at December 31, 1999.
Page 22
<PAGE>
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
December 31, 1999, 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 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 Cygnet Dealer 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 expires April 13, 2000.
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. We also have six more dealerships under
development. The magnitude of the direct cost of opening a dealership is
primarily a function of whether we lease a facility or construct a facility. A
leased facility costs approximately $650,000 to develop, while a facility we
construct costs approximately $ 1.7 million. In addition, we require capital to
finance the portfolio that we carry on our balance sheet for each 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.
Page 23
<PAGE>
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 3.8
million shares of our common stock under our stock repurchase program and the
exchange offer described above at an average cost of approximately $5.40 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, no loans under this program were made to senior officers.
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.
Year 2000 Disclosures
Many older computer programs refer to years only in terms of their final two
digits. Such programs may interpret the year 2000 to mean the year 1900 instead.
The problem affects not only computer software, but also computer hardware and
other systems containing processors and embedded chips. Business systems
affected by this problem may not be able to accurately process date related
information before, during or after January 1, 2000. This is commonly referred
to as the Year 2000 issue. Failure of our own business systems due to Year 2000
issues as well as those of our suppliers and business partners could materially
adversely affect our business.
We have spent approximately $2.4 million to date preparing and analyzing
Year 2000 issues. With some minor exceptions which have been addressed, we were
unaffected by the change from the year 1999 to the year 2000. We do not
anticipate significant problems or material expenditures in the future related
to the year 2000 issues.
As of the date of this report, we have not been affected by any year 2000
problems of our suppliers or business partners, but such problems could arise in
the future. We will attempt to minimize the impact of other parties' failure to
resolve year 2000 problems.
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.
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<PAGE>
Risk Factors
There are various risks in purchasing our securities and investing in our
business, including those described below. You should carefully consider these
risk factors together with all other information included in this Form 10-K.
We make forward looking statements.
This report contains forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The words "believe", "expect", "anticipate", "estimate",
"project", and similar expressions identify forward looking statements. These
statements may include, but are not limited to, projections of revenues, income,
or loss, estimates of capital expenditures, plans for future operations,
products or services, and financing needs or plans, as well as assumptions
relating to these matters. Forward-looking statements speak only as of the date
the statement was made. They are inherently subject to risks and uncertainties,
some of which we cannot predict or quantify. Future events and actual results
could differ materially from the forward-looking statements. When considering
each forward-looking statement, you should keep in mind the risk factors and
cautionary statements found throughout this Form 10-K and specifically those
found below. We are not obligated to publicly update or revise any forward
looking statements, whether as a result of new information, future events, or
for any other reason.
Future losses could impair our ability to raise capital or borrow money and
consequently affect our stock price.
Although we recorded earnings from continuing operations of $8.7 million for
the twelve months 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 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 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.
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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 and our inability to obtain these waivers may have a material impact 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 that 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.
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 loans 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.
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<PAGE>
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, 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.
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.
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<PAGE>
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 cause downward pressure on the interest rates that
we charge on loans originated by our dealerships. Either change could have a
material effect on the value of our securities.
The success of our operations depends on certain key personnel.
We believe that our ability to successfully implement our business strategy
and to operate profitably depends on the continued employment of our senior
management team. The unexpected loss of the services of any of our key
management personnel or our inability to attract new management when necessary
could have a material adverse effect on our operations. We do not currently
maintain 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 1.2 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 common stock in the First Merchants transaction in exchange
for an increased share of collections on certain loans that we service
for First Merchants.
We also currently intend on asking for our shareholders approval at our
annual meeting, currently scheduled for May 23, 2000, of a proposal authorizing
the creation of "blank check" common stock. If passed, this would allow our
Board of Directors to establish a series of common stock on terms to be
determined by the Board of Directors. Depending upon the terms of the stock and
of the market's reaction, existing shareholders could be adversely affected or
it could have a potential anti-takeover or dilutive effect.
The voting power of our principal stockholder may limit your voting rights.
Mr. Ernest C. Garcia, II, our Chairman, or his affiliates held approximately
32.2% of our outstanding common stock as of December 31, 1999. As a result, Mr.
Garcia has a significant influence upon our activities as well as on all matters
requiring approval of our stockholders. These matters include electing or
removing members of our board of directors, engaging in transactions with
affiliated entities, causing or restricting our sale or merger, and changing our
dividend policy. The interests of Mr. Garcia may conflict with the interests of
our other stockholders.
There is a potential anti-takeover or dilutive effect if we issue preferred
stock.
Our certificate of incorporation authorizes us to issue "blank check"
preferred stock. Our board of directors may fix or change from time to time the
designation, number, voting powers, preferences, and rights of this stock. Such
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<PAGE>
issuance's 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.
ITEM 7A-- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
We are exposed to market risk on our financial instruments from changes in
interest rates. We do not use financial instruments for trading purposes or to
manage interest rate risk. Our earnings are substantially affected by our net
interest income, which is the difference between the income earned on
interest-bearing assets and the interest paid on interest bearing notes payable.
Increases in market interest rates could have an adverse effect on
profitability.
Our financial instruments consist primarily of fixed rate finance
receivables, residual interests in pools of fixed rate finance receivables,
short term variable rate revolving Notes Receivable, and variable and fixed rate
Notes Payable. Our finance receivables are classified as subprime loans and
generally bear interest at the lower of 29.9% or the maximum interest rate
allowed in states that impose interest rate limits. At December 31, 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 Note 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
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.
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75
ITEM 8-- CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report................................................ 31
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and 1998............ 32
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997........................................ 33
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997..................................... 34
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997..................................... 35
Notes to Consolidated Financial Statements.................................. 36
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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
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<PAGE>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
($ in thousands)
<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, 19 19
respectively............
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.
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UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
($ in thousands, except 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.
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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.
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<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.
Page 35
<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.
Page 36
<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.
Page 37
<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.
Page 38
<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.
Page 39
<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.
Page 40
<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 $5.7 million
charge to write-down the Residuals in Finance Receivables Sold. No such charge
was recorded for the year ended December 31, 1999 or 1998. The 1997 charge had
the effect of increasing the cumulative net loss assumption to approximately
27.5%, for the securitization transactions that took place prior to June 30,
1997. For the securitization transaction that took place in September 1997, net
losses were estimated using total expected cumulative net losses at loan
origination of approximately 27.5%, adjusted for actual cumulative net losses
prior to securitization. For securitization transactions completed during the
nine month period ended September 30, 1998, net losses were estimated using
total expected cumulative net losses at loan origination of approximately 29.0%,
adjusted for actual cumulative net losses prior to securitization. Prepayment
rates were estimated to be 1% per month of the beginning of month balance.
Page 41
<PAGE>
A summary of activity for Investments Held in Trust follows ($ 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 $8 million through the redemption of Ugly Duckling
common stock (valued at 98% of the average of the closing prices of the stock on
NASDAQ for the ten trading days prior to the redemption) as long as Mr. Garcia's
ownership interest of voting stock does not fall below 15% or result in a breach
of a covenant.
Page 42
<PAGE>
(7) Property and Equipment
A summary of Property and Equipment as of December 31, 1999 and 1998 follows
($ 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
=========== ===========
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 $335.5 million at December 31, 1999. Monthly
principal reductions on Class A obligations approximate 70% of the principal
reductions on the underlying pool of finance receivable loans.
Page 43
<PAGE>
Other Notes Payable
A summary of Other Notes Payable at December 31, 1999 and 1998 follows ($ 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>
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.
Page 44
<PAGE>
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.
(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
========== ======== ========
Page 45
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of December
31, 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>
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.
Page 46
<PAGE>
(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
===========
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
$79.4 million cash, net of stock issuance costs.
Page 47
<PAGE>
(13) Earnings (Loss) Per Share
The Company paid no preferred stock dividends in 1999, 1998 or 1997. A
summary of the reconciliation from basic earnings (loss) per share to diluted
earnings (loss) per share for the years ended December 31, 1999, 1998, and 1997
follows ($ 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>
(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
Page 48
<PAGE>
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
$1,084,000, which is reflected in the pro forma table below. The repricing
activity has been reflected in the table above and is included in the options
granted and forfeited in 1999.
The Company applies APB Opinion 25 in accounting for its Plans, and
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net earnings (loss) and earnings (loss) per share would
have been reduced to the pro forma amounts indicated below ($ 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.
Page 49
<PAGE>
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.
(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.
Page 50
<PAGE>
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.
Page 51
<PAGE>
A summary of operating results and other information, by business segment,
for years ended December 31, 1999, 198 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>
Page 52
<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>
Page 53
<PAGE>
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES
The Company has had no disagreements with its independent certified public
accountants in regard to accounting and financial disclosure and has not changed
its independent accountants during the two most recent fiscal years.
PART III
ITEM 10-- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item pertaining to executive officers of Ugly
Duckling is set forth above in Part I of this Form 10-K under the caption,
"Executive Officers of the Registrant," and is incorporated by reference into
this Item. Information concerning directors of the registrant and persons
nominated to become directors is incorporated by reference from the text under
the captions, "Board of Directors, Board Committees and Other Board Information"
and "Proposal to Be Voted on -- Item No. 1 -- Election of Directors" in the
Proxy Statement for the Annual Meeting of Stockholders currently scheduled for
May 23, 2000. Information required by this Item pertaining to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is set forth under the
caption, "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement for the Annual Meeting of Stockholders currently scheduled for May 23,
2000 and is incorporated by reference into this Item.
ITEM 11 -- EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference
from the text under the captions, "Certain Relationships and Related
Transactions" and "Compensation of Executive Officers, Benefits and Related
Matters" (excluding the material under the headings "Compensation Committee
Report on Executive Compensation" and "Stockholder Return Performance Graph"
therein) in the Proxy Statement for the Annual Meeting of Stockholders currently
scheduled for May 23, 2000.
ITEM 12-- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning ownership of equity stock of the Company by certain
beneficial owners and management is incorporated by reference from the text
under the caption, "Security Ownership of Certain Beneficial Owners and
Management--Beneficial Ownership Table" in the Proxy Statement for the Annual
Meeting of Stockholders currently scheduled for May 23, 2000.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions with
officers and directors is incorporated by reference from the text under the
caption, "Certain Relationships and Related Transactions" in the Proxy Statement
for the Annual Meeting of Stockholders currently scheduled for May 23, 2000.
Page 54
<PAGE>
PART IV
ITEM 14-- EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) Consolidated Financial Statements.
The following consolidated financial statements of Ugly Duckling
Corporation are filed as part of this Form 10-K.
<TABLE>
<S> <C>
Page
----
Independent Auditors' Report........................................................ 31
Consolidated Financial Statements and Notes thereto of Ugly Duckling Corporation:
Consolidated Balance Sheets-- December 31, 1999 and 1998............................ 32
Consolidated Statements of Operations-- for the years ended December 31, 1999, 1998
and 1997........................................................................ 33
Consolidated Statements of Stockholders' Equity-- for the years ended December 31,
1999, 1998 and 1997............................................................. 34
Consolidated Statements of Cash Flows-- for the years ended December 31, 1999, 1998
and 1997........................................................................ 35
Notes to Consolidated Financial Statements.......................................... 36
All schedules have been omitted because they are not applicable, not required, or the
information has been disclosed in the consolidated financial statements and related
notes thereto or otherwise in this Form 10-K Report.
</TABLE>
(b) Reports on Form 8-K.
During the fourth quarter of 1999, the Company filed two reports on Form
8-K. The first report on Form 8-K, dated November 8, 1999 and filed on November
9, 1999, pursuant to Item 5, reported the acquisition of certain assets of
Virginia Auto Mart. The second report on Form 8-K, dated December 17, 1999 and
filed on December 21, 1999, pursuant to Item 5 reported the execution of a
letter of intent to sell Cygnet Dealer Finance, Inc. to an entity controlled by
Ernest C. Garcia II.
(c) Exhibits.
Page 55
<PAGE>
<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)
4.9 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)
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**
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**
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**
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**
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)
Page 56
<PAGE>
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)
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)
Page 57
<PAGE>
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 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)
10.34 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**
23.1 Consent of KPMG Peat Marwick LLP**
24.1 Special Power of Attorney for Ernest C. Garcia II
24.2 Special Power of Attorney for C. Jennings**
24.3 Special Power of Attorney for J. MacDonough**
24.4 Special Power of Attorney for F. Willey**
24.5 Special Power of Attorney for Gregory Sullivan**
27.1 Financial Data Schedules for the year ending December 31, 1999**
27.2 Financial Data Schedules for the year ending December 31, 1998**
27.3 Financial Data Schedules for the year ending December 31, 1997**
27.4 Financial Data Schedules for the three months ending September 30, 1999**
27.5 Financial Data Schedules for the three months ending June 30, 1999**
27.6 Financial Data Schedules for the three months ending March 31, 1999**
27.7 Financial Data Schedules for the three months ending September 30, 1998**
27.8 Financial Data Schedules for the three months ending June 30, 1998**
27.9 Financial Data Schedules for the three months ending March 31, 1998**
___________________________
* Management contract or compensatory plan, contract or arrangement.
** Filed with this Form 10-K.
(1) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No.
333-3998), effective June 18, 1996.
(2) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No.
333-13755), effective October 30, 1996.
(3) Incorporated by reference to the Company's 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.
Page 58
<PAGE>
(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).
</TABLE>
Page 59
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UGLY DUCKLING CORPORATION,
a Delaware corporation
By: /s/ GREGORY B. SULLIVAN
Gregory B. Sullivan
Its: Chief Executive Officer
Date: March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name and Signature Title Date
------------------ ----- ----
<S> <C> <C>
/s/ ERNEST C. GARCIA II Chairman of the Board of Directors March 29, 2000
Ernest C. Garcia II
/s/ GREGORY B. SULLIVAN President, Chief Executive Officer and March 29, 2000
Gregory B. Sullivan Director (Principal Executive Officer
and Director)
/s/ STEVEN T. DARAK Senior Vice President and Chief March 29, 2000
Steven T. Darak Financial Officer (Principal Financial
and Accounting Officer)
* Director March 29, 2000
Christopher D. Jennings
* Director March 29, 2000
John N. MacDonough
* Director March 29, 2000
Frank P. Willey
</TABLE>
*By: /s/ JON D. EHLINGER
Jon D. Ehlinger
Attorney-in-Fact
Page 60
Amendment No. 7 to Amended and Restated Motor Vehicle Installment Contract
Loan and Security Agreement
This Amendment is entered into by and between Ugly Duckling Corporation,
successor in interest to Ugly Duckling Holdings, Inc. ("Ugly Duckling"), a
Delaware corporation; Ugly Duckling Car Sales and Finance Corporation
("UDCSFC"), an Arizona corporation formerly known as Duck Ventures, Inc.; Ugly
Duckling Credit Corporation ("UDCC") formerly known as Champion Acceptance
Corporation, an Arizona corporation; Ugly Duckling Car Sales, Inc. ("Sales"); an
Arizona corporation; Champion Financial Services, Inc. ("Champion"), an Arizona
corporation; Ugly Duckling Car Sales Florida, Inc. ("Car Sales Florida"), a
Florida corporation;; Ugly Duckling Car Sales New Mexico, Inc. ("Car Sales New
Mexico"), a New Mexico corporation; Ugly Duckling Car Sales California, Inc.
("Car Sales California"), a California corporation; Ugly Duckling Car Sales
Georgia, Inc. ("Car Sales Georgia"), a Georgia corporation; Cygnet Financial
Corporation ("Cygnet"), a Delaware corporation; Cygnet Dealer Finance, Inc.
("Dealer Finance"), an Arizona corporation; Cygnet Finance Alabama, Inc.
("Cygnet Alabama"), an Arizona corporation; Cygnet Support Services, Inc.
("Services"), an Arizona corporation; Cygnet Financial Services, Inc. ("Cygnet
Services"), an Arizona corporation; Cygnet Financial Portfolio, Inc. ("Cygnet
Portfolio"), an Arizona corporation; Ugly Duckling Portfolio Partnership, L.L.P.
("UDPP"), an Arizona limited liability partnership; Ugly Duckling Finance
Corporation ("UDFC"), an Arizona corporation; Ugly Duckling Portfolio
Corporation ("UDPC") an Arizona corporation formerly known as Champion Portfolio
Corporation; Cygnet Dealer Finance Florida, Inc. ("CDFF"), a Florida corporation
(all of the foregoing entities collectively referred to herein as "Borrower");
and General Electric Capital Corporation, a New York corporation ("Lender").
RECITALS
A. Existing Borrower and Lender are parties to an Amended and Restated
Motor Vehicle Installment Contract Loan and Security Agreement dated as of
August 15, 1997, as amended by an Assumption and Amendment Agreement dated
October 23, 1997, Amendment No. 1 dated December 22, 1997, Amendment No. 2 dated
September 9, 1998, Amendment No. 3 dated January 18, 1999, Amendment No. 4 dated
as of July 19, 1999, Amendment No. 5 dated August 16, 1999, and Amendment No. 6
dated August 27, 1999, (the Amended and Restated Motor Vehicle Installment
Contract Loan and Security Agreement as so amended is referred to herein as the
"Agreement") pursuant to which Lender agreed to make Advances to Existing
Borrower on the terms and conditions set forth in the Agreement.
B. Borrower and Lender desire to amend the Agreement pursuant to the terms
and conditions set forth in this Amendment.
In consideration of the premises and other good and valuable
consideration, the receipt of which is hereby acknowledged by each of the
parties hereto, the parties agree as follows:
1. Defined Terms. Unless otherwise specified herein, all capitalized
terms used in this Amendment shall
have the same meaning given to such term(s) in the Agreement.
2. Amendments to Agreement. Effective as of the date hereof, the
Agreement is hereby amended as follows.
1
<PAGE>
Definitions.
Borrowing Base. The definition of Borrowing Base in Section 16.0 of
the Agreement is deleted and replaced in its entirety as follows:
Borrowing Base: the amount equal to the lesser of (i) One
Hundred Twenty-five Million Dollars ($125,000,000.00) minus the
Guaranty Liability, or (ii) an amount equal to (A) sixty five percent
(65%) of the Outstanding Principal Balance of all Originated Eligible
Contracts (but not to exceed one hundred fifteen percent (115%) of the
NADA average wholesale Black Book value for all such Contracts in the
aggregate) during the time they are included in the Borrowing Base
pursuant to Section 3.1; plus (B) eighty-six percent (86%) of the
Outstanding Principal Balance of all Champion Eligible Contracts (but
not to exceed one hundred seven percent (107%) of wholesale Kelly Blue
Book for all such Contracts in the aggregate) during the time they are
included in the Borrowing Base pursuant to Section 3.1; plus (C)
seventy-five percent (75%) of the Outstanding Principal Balance of all
Seminole Eligible Contracts during the time they are included in the
Borrowing Base pursuant to Section 3.1; plus (D) the Inventory Advance
Value; plus (E) during the term of the Dealer Contract Facility, the
Dealer Contract Advance Value; plus (F) fifty percent (50%) of the
Outstanding Principal Balance of all DCT Eligible Contracts (d/b/a Best
Chance) during the time the DCT Eligible Contracts are included in the
Borrowing Base pursuant to Section 3.1. At Lender's sole and absolute
discretion following Borrower's request, Lender may agree to include
Bulk Purchase Contracts as part of the Borrowing Base hereunder. The
amount of advance against Bulk Purchase Contracts, if any, shall be at
Lender's sole and absolute discretion. With respect to section (ii) (A)
of this definition, compliance with the parenthetical test based on
Black Book values shall be measured by Lender's sample of 100 or more
Contracts and not on a Contract-by-Contract basis.
DCT Eligible Contracts. The following definition is added to Section
16.0 of the
Agreement in proper alphabetical order:
DCT Eligible Contracts: an Eligible Contract which was purchased by
Borrower from DCT of Ocala Corporation (d/b/a Best Chance) on August 25,
1999.
3. Incorporation of Amendment: The parties acknowledge and agree that
this Amendment is incorporated into and made a part of the Agreement, the terms
and provisions of which, unless expressly modified herein, or unless no longer
applicable by their terms, are hereby affirmed and ratified and remain in full
force and effect. To the extent that any term or provision of this Amendment is
or may be deemed expressly inconsistent with any term or provision of the
Agreement, the terms and provisions of this Amendment shall control. Each
reference to the Agreement shall be a reference to the Agreement as amended by
this Amendment. This Amendment, taken together with the unamended provisions of
the Agreement which are affirmed and ratified by Borrower, contains the entire
agreement among the parties regarding the transactions described herein and
supersedes all prior agreements, written or oral, with respect thereto.
4. Borrower Remains Liable. Borrower hereby confirms that the Agreement
and each document executed by Borrower in connection therewith continue
unimpaired and in full force and effect and shall cover and secure all of
Borrower's existing and future obligations to Lender.
2
<PAGE>
5. Headings. The paragraph headings contained in this Amendment are
for convenience of reference only and shall not be considered a part of
this Amendment in any respect.
6. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of Arizona. Nothing herein shall
preclude Lender from bringing suit or taking other legal action in any
jurisdiction.
7. Execution in Counterparts. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed
to be an original and all of which taken together shall constitute one and
the same instrument.
<PAGE>
IN WITNESS WHEREOF, the undersigned have entered into this Amendment as of
November 30, 1999.
<TABLE>
<CAPTION>
<S> <C>
GENERAL ELECTRIC CAPITAL
CORPORATION UGLY DUCKLING CAR SALES, INC.
By: /S/ JEFF BATKA By: /S/ JON D. EHLINGER
Title: Account Executive Title: Secretary
UGLY DUCKLING CORPORATION UGLY DUCKLING CAR SALES NEW MEXICO, INC.
By: /S/ DONALD L. ADDINK By: /S/ JON D. EHLINGER
Title: Vice President Title: Secretary
UGLY DUCKLING CAR SALES AND CHAMPION FINANCIAL SERVICES, INC.
FINANCE CORPORATION
By: /S/ JON D. EHLINGER By: /S/ DONALD L. ADDINK
Title: Secretary Title: Vice President
UGLY DUCKLING CAR SALES FLORIDA, INC. UGLY DUCKLING CREDIT CORPORATION
By: /S/ JON D. EHLINGER By: /S/ JON D. EHLINGER
Title: Secretary Title: Secretary
UGLY DUCKLING CAR SALES GEORGIA, INC. UGLY DUCKLING CAR SALES CALIFORNIA, INC.
By: /S/ JON D. EHLINGER By: /S/ JON D. EHLINGER
Title: Secretary Title: Secretary
CYGNET FINANCIAL CORPORATION CYGNET DEALER FINANCE, INC.
By: /S/ DONALD L. ADDINK By: /S/ STEVEN P. JOHNSON
Title: Vice President Title: Secretary
CYGNET FINANCE ALABAMA, INC. CYGNET SUPPORT SERVICES, INC.
By: /S/ STEVEN P. JOHNSON By: /S/ JON D. EHLINGER
Title: Secretary Title: Secretary
CYGNET FINANCIAL SERVICES, INC. CYGNET FINANCIAL PORTFOILIO, INC.
By: /S/ JON D. EHLINGER By: /S/ DONALD L. ADDINK
Title: Secretary Title: Vice President
UGLY DUCKLING PORTFOLIO UGLY DUCKLING FINANCE CORPORATION
PARTNERSHIP, L.L.P.
By: /S/ JON D. EHLINGER By: /S/ JON D. EHLINGER
Title: Secretary Title: Secretary
UGLY DUCKLING PORTFOLIO CYGNET DEALER FINANCE FLORIDA,
CORPORATION INC.
By: /S/ JON D. EHLINGER By: /S/ STEVEN P. JOHNSON
Title: Secretary Title: Secretary
</TABLE>
Amendment No. 8 to Amended and Restated Motor Vehicle Installment Contract
Loan and Security Agreement
This Amendment No. 8 is entered into by and between Ugly Duckling
Corporation, successor in interest to Ugly Duckling Holdings, Inc. ("Ugly
Duckling"), a Delaware corporation; Ugly Duckling Car Sales and Finance
Corporation ("UDCSFC"), an Arizona corporation formerly known as Duck Ventures,
Inc.; Ugly Duckling Credit Corporation ("UDCC") formerly known as Champion
Acceptance Corporation, an Arizona corporation; Ugly Duckling Car Sales, Inc.
("Sales"); an Arizona corporation; Champion Financial Services, Inc.
("Champion"), an Arizona corporation; Ugly Duckling Car Sales Florida, Inc.
("Car Sales Florida"), a Florida corporation; Ugly Duckling Car Sales New
Mexico, Inc. ("Car Sales New Mexico"), a New Mexico corporation; Ugly Duckling
Car Sales California, Inc. ("Car Sales California"), a California corporation;
Ugly Duckling Car Sales Georgia, Inc. ("Car Sales Georgia"), a Georgia
corporation; Cygnet Financial Corporation ("Cygnet"), a Delaware corporation;
Cygnet Dealer Finance, Inc. ("Dealer Finance"), an Arizona corporation; Cygnet
Finance Alabama, Inc. ("Cygnet Alabama"), an Arizona corporation; Cygnet Support
Services, Inc. ("Services"), an Arizona corporation; Cygnet Financial Services,
Inc. ("Cygnet Services"), an Arizona corporation; Cygnet Financial Portfolio,
Inc. ("Cygnet Portfolio"), an Arizona corporation; Ugly Duckling Portfolio
Partnership, L.L.P. ("UDPP"), an Arizona limited liability partnership; Ugly
Duckling Finance Corporation ("UDFC"), an Arizona corporation; Ugly Duckling
Portfolio Corporation ("UDPC") an Arizona corporation formerly known as Champion
Portfolio Corporation; Cygnet Dealer Finance Florida, Inc. ("CDFF"), a Florida
corporation (all of the above entities are collectively referred to herein as
"Borrower"); and General Electric Capital Corporation, a New York corporation
("Lender").
RECITALS
A. Borrower and Lender are parties to an Amended and Restated Motor
Vehicle Installment Contract Loan and Security Agreement dated as of August 15,
1997, as amended by an Assumption and Amendment Agreement dated October 23,
1997, Amendment No. 1 dated December 22, 1997, Amendment No. 2 dated September
9, 1998, Amendment No. 3 dated January 18, 1999, Amendment No. 4 dated as of
July 19, 1999, Amendment No. 5 dated August 16, 1999, Amendment No. 6 dated as
of August 27, 1999, and Amendment No. 7 dated as of November 30, 1999 (the
Amended and Restated Motor Vehicle Installment Contract Loan and Security
Agreement as so amended is referred to herein as the "Agreement") pursuant to
which Lender agreed to make Advances to Borrower on the terms and conditions set
forth in the Agreement.
B. Lender advanced additional funds to Borrower Ugly Duckling in
connection with the December 18, 1997 purchase by Ugly Duckling of interests in
certain loans (the "FMAC Loans") held by First Merchants Acceptance Corporation
("FMAC"). As part of the transaction, Lender agreed to purchase the FMAC Loans
and Ugly Duckling furnished Lender with a Guaranty (the "FMAC Guaranty"), dated
as of December 18, 1997, in the principal amount of Ten Million Dollars
($10,000,000.00) plus interest and enforcement costs. Lender and Ugly Duckling
subsequently agreed that the FMAC Guaranty would operate as a reduction in the
overall credit facility made available to Borrower under the terms of the
Agreement.
C. On or about January 12, 1998, Lender and Ugly Duckling orally agreed
that the amount of the FMAC Guaranty used to cap the availability of the credit
facility would be modified from a total of Ten Million Dollars ($10,000,000.00)
to Eight Million Dollars ($8,000,000.00), thus enabling Borrower to have access
to a higher credit amount. The original principal amount of the FMAC Guaranty,
however, remained unchanged at Ten Million Dollars ($10,000,000.00).
1
<PAGE>
D. Borrower has requested, and Lender has agreed subject to the terms of
this Amendment, that the amount of the FMAC Guaranty used to cap the
availability of the credit facility be modified further from Eight Million
Dollars ($8,000,000.00) to Three Million Dollars ($3,000,000.00), allowing
Borrower potentially higher availability under the overall credit facility. The
original principal amount of the FMAC Guaranty will remain unchanged at Ten
Million Dollars ($10,000,000.00).
E. Borrower and Lender desire to modify the Agreement pursuant to the terms
and conditions set forth in this Amendment.
In consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged by
each of the parties hereto, the parties agree as follows:
1. Defined Terms. Unless otherwise specified herein, all capitalized terms
used in this Amendment shallhave the same meaning given to such term(s) in the
Agreement.
2. Amendments to Agreement. Effective as of the date hereof, the Agreement
is hereby amended as follows.
a. Loan Availability Cap. The following new definition shall be added to
Section 16.0 in its proper alphabetical order:
Loan Availability Cap: shall be a portion (expressed in dollar terms) of
the Guaranty Liability, and shall be applied to the reduce the amount
available under the Loan. Effective as of December 1, 1999, the Loan
Availability Cap shall be Three Million Dollars ($3,000,000.00).
b. Borrowing Base: The definition of Borrowing Base in Section 16.0 shall
be deleted in its entirety and shall be replaced with the following:
Borrowing Base: the amount equal to the lesser of (i) One Hundred
Twenty-five Million Dollars ($125,000,000.00) minus the Loan Availability
Cap, or (ii) an amount equal to (A) sixty five percent (65%) of the
Outstanding Principal Balance of all Originated Eligible Contracts (but not
to exceed one hundred fifteen percent (115%) of the NADA average wholesale
Black Book value for all such Contracts in the aggregate) during the time
they are included in the Borrowing Base pursuant to Section 3.1; plus (B)
eighty-six percent (86%) of the Outstanding Principal Balance of all
Champion Eligible Contracts (but not to exceed one hundred seven percent
(107%) of wholesale Kelly Blue Book for all such Contracts in the
aggregate) during the time they are included in the Borrowing Base pursuant
to Section 3.1; plus (C) seventy-five percent (75%) of the Outstanding
Principal Balance of all Seminole Eligible Contracts during the time they
are included in the Borrowing Base pursuant to Section 3.1; plus (D) the
Inventory Advance Value; plus (E) during the term of the Dealer Contract
Facility, the Dealer Contract Advance Value; plus (F) fifty percent (50%)
of the Outstanding Principal Balance of all contracts purchased from DCT of
Ocala Corporation (dba Best Chance) on August 25, 1999 during the time they
are included in the Borrowing Base pursuant to Section 3.1. At Lender's
sole and absolute discretion and Borrower's request, Lender may agree to
include Bulk Purchase Contracts as part of the Borrowing Base hereunder.
The amount of advance against Bulk Purchase Contracts, if any, shall be at
Lender's sole and absolute discretion. With respect to section (ii) (A) of
this definition, compliance with the parenthetical test based on Black Book
values shall be measured by Lender's sample of 100 or more Contracts and
not on a Contract-by-Contract basis.
2
<PAGE>
c. Subordination and Dealer Contracts. The final sentence of Section 14.3,
Subordination and Dealer Contracts, of the Agreement shall be deleted in its
entirety and replaced with the following:
"Borrower shall not have loans or purchases of more than Three Million Five
Hundred Thousand Dollars ($3,500,000.00) outstanding at the same time under
any Dealer Contract, except for Texas Auto Outlet and Foothill Nissan."
3. Incorporation of Amendment: The parties acknowledge and agree that
this Amendment is incorporated into and made a part of the Agreement, the terms
and provisions of which, unless expressly modified herein, or unless no longer
applicable by their terms, are hereby affirmed and ratified and remain in full
force and effect. To the extent that any term or provision of this Amendment is
or may be deemed expressly inconsistent with any term or provision of the
Agreement, the terms and provisions of this Amendment shall control. Each
reference to the Agreement shall be a reference to the Agreement as amended by
this Amendment. This Amendment, taken together with the unamended provisions of
the Agreement which are affirmed and ratified by Borrower, contains the entire
agreement among the parties regarding the transactions described herein and
supersedes all prior agreements, written or oral, with respect thereto.
4. Borrower Remains Liable. Borrower hereby confirms that the Agreement
and each document executed by Borrower in connection therewith continue
unimpaired and in full force and effect and shall cover and secure all of
Borrower's existing and future obligations to Lender. Nothing contained herein
is intended, nor shall be construed to be a novation or an accord and
satisfaction of the outstanding Liabilities or any of Borrower's other
obligations to Lender.
5. Headings. The paragraph headings contained in this Amendment are for
convenience of reference only and shall not be considered a part of this
Amendment in any respect.
6. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of Arizona. Nothing herein shall preclude
Lender from bringing suit or taking other legal action in any jurisdiction.
7. Execution in Counterparts. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which taken together shall constitute one and the same instrument.
3
<PAGE>
IN WITNESS WHEREOF, the undersigned have entered into this Amendment as of
December 7, 1999.
<TABLE>
<CAPTION>
<S> <C>
GENERAL ELECTRIC CAPITAL
CORPORATION UGLY DUCKLING CAR SALES, INC.
By: /S/ JEFF BATKA By: /S/ JON D. EHLINGER
Title: Account Executive Title: Secretary
UGLY DUCKLING CORPORATION UGLY DUCKLING CAR SALES NEW MEXICO, INC.
By: /S/ JON D. EHLINGER By: /S/ JON D. EHLINGER
Title: Secretary Title: Secretary
UGLY DUCKLING CAR SALES AND CHAMPION FINANCIAL SERVICES, INC.
FINANCE CORPORATION
By: /S/ JON D. EHLINGER By: /S/ JON D. EHLINGER
Title: Secretary Title: Secretary
UGLY DUCKLING CAR SALES FLORIDA, INC. UGLY DUCKLING CREDIT CORPORATION
By: /S/ JON D. EHLINGER By: /S/ JON D. EHLINGER
Title: Secretary Title: Secretary
UGLY DUCKLING CAR SALES GEORGIA, INC. UGLY DUCKLING CAR SALES CALIFORNIA, INC.
By: /S/ JON D. EHLINGER By: /S/ JON D. EHLINGER
Title: Secretary Title: Secretary
CYGNET FINANCIAL CORPORATION CYGNET DEALER FINANCE, INC.
By: /S/ JON D. EHLINGER By: /S/ STEVEN P. JOHNSON
Title: Secretary Title: Secretary
CYGNET FINANCE ALABAMA, INC. CYGNET SUPPORT SERVICES, INC.
By: /S/ STEVEN P. JOHNSON By: /S/ JON D. EHLINGER
Title: Secretary Title: Secretary
CYGNET FINANCIAL SERVICES, INC. CYGNET FINANCIAL PORTFOILIO, INC.
By: /S/ JON D. EHLINGER By: /S/ JON D. EHLINGER
Title: Secretary Title: Secretary
UGLY DUCKLING PORTFOLIO UGLY DUCKLING FINANCE CORPORATION
PARTNERSHIP, L.L.P.
By: /S/ JON D. EHLINGER By: /S/ JON D. EHLINGER
Title: Secretary Title: Secretary
UGLY DUCKLING PORTFOLIO CYGNET DEALER FINANCE FLORIDA,
CORPORATION INC.
By: /S/ JON D. EHLINGER By: /S/ STEVEN P. JOHNSON
Title: Secretary Title: Secretary
</TABLE>
Amendment No. 9 to Amended and Restated Motor Vehicle Installment Contract
Loan and Security Agreement
This Amendment is entered into by and between Ugly Duckling Corporation,
successor in interest to Ugly Duckling Holdings, Inc. ("Ugly Duckling"), a
Delaware corporation; Ugly Duckling Car Sales and Finance Corporation
("UDCSFC"), an Arizona corporation formerly known as Duck Ventures, Inc.; Ugly
Duckling Credit Corporation ("UDCC") formerly known as Champion Acceptance
Corporation, an Arizona corporation; Ugly Duckling Car Sales, Inc. ("Sales"); an
Arizona corporation; Champion Financial Services, Inc. ("Champion"), an Arizona
corporation; Ugly Duckling Car Sales Florida, Inc. ("Car Sales Florida"), a
Florida corporation;; Ugly Duckling Car Sales New Mexico, Inc. ("Car Sales New
Mexico"), a New Mexico corporation; Ugly Duckling Car Sales California, Inc.
("Car Sales California"), a California corporation; Ugly Duckling Car Sales
Georgia, Inc. ("Car Sales Georgia"), a Georgia corporation; Cygnet Financial
Corporation ("Cygnet"), a Delaware corporation; Cygnet Dealer Finance, Inc.
("Dealer Finance"), an Arizona corporation; Cygnet Finance Alabama, Inc.
("Cygnet Alabama"), an Arizona corporation; Cygnet Support Services, Inc.
("Services"), an Arizona corporation; Cygnet Financial Services, Inc. ("Cygnet
Services"), an Arizona corporation; Cygnet Financial Portfolio, Inc. ("Cygnet
Portfolio"), an Arizona corporation; Ugly Duckling Portfolio Partnership, L.L.P.
("UDPP"), an Arizona limited liability partnership; Ugly Duckling Finance
Corporation ("UDFC"), an Arizona corporation; Ugly Duckling Portfolio
Corporation ("UDPC") an Arizona corporation formerly known as Champion Portfolio
Corporation; and Cygnet Dealer Finance Florida, Inc. ("CDFF"), a Florida
corporation (all of the foregoing entities collectively referred to herein as
"Borrower"); and General Electric Capital Corporation, a New York corporation
("Lender").
RECITALS
A. Borrower and Lender are parties to an Amended and Restated Motor
Vehicle Installment Contract Loan and Security Agreement dated as of August 15,
1997, as amended by an Assumption and Amendment Agreement dated October 23,
1997, Amendment No. 1 dated December 22, 1997, Amendment No. 2 dated September
9, 1998, Amendment No. 3 dated January 18, 1999, Amendment No. 4 dated as of
July 19, 1999, Amendment No. 5 dated August 16, 1999, Amendment No. 6 dated
August 27, 1999, Amendment No. 7 dated November 30, 1999, and Amendment No. 8
dated December 7, 1999, (the Amended and Restated Motor Vehicle Installment
Contract Loan and Security Agreement as so amended is referred to herein as the
"Agreement") pursuant to which Lender agreed to make Advances to Existing
Borrower on the terms and conditions set forth in the Agreement.
B. Borrower and Lender desire to amend the Agreement pursuant to the terms
and conditions set forth in this Amendment.
In consideration of the premises and other good and valuable
consideration, the receipt of which is hereby acknowledged by each of the
parties hereto, the parties agree as follows:
1. Defined Terms. Unless otherwise specified herein, all capitalized terms
used in this Amendment shall have the same meaning given to such term(s) in the
Agreement.
1
<PAGE>
2. Amendments to Agreement. Effective as of the date hereof, the Agreement
is hereby amended as follows.
Definitions.
a.) Borrowing Base. The definition of Borrowing Base in Section 16.0
of the Agreement is deleted and replaced in its entirety as follows:
Borrowing Base: the amount equal to the lesser of (i) One
Hundred Twenty-five Million Dollars ($125,000,000.00) minus the Loan
Availability Cap, or (ii) an amount equal to (A) sixty five percent
(65%) of the Outstanding Principal Balance of all Originated Eligible
Contracts (but not to exceed one hundred fifteen percent (115%) of the
NADA average wholesale Black Book value for all such Contracts in the
aggregate) during the time they are included in the Borrowing Base
pursuant to Section 3.1; plus (B) eighty-six percent (86%) of the
Outstanding Principal Balance of all Champion Eligible Contracts (but
not to exceed one hundred seven percent (107%) of wholesale Kelly Blue
Book for all such Contracts in the aggregate) during the time they are
included in the Borrowing Base pursuant to Section 3.1; plus (C)
seventy-five percent (75%) of the Outstanding Principal Balance of all
Seminole Eligible Contracts during the time they are included in the
Borrowing Base pursuant to Section 3.1; plus (D) the Inventory Advance
Value; plus (E) during the term of the Dealer Contract Facility, the
Dealer Contract Advance Value; plus (F) fifty percent (50%) of the
Outstanding Principal Balance of all DCT Eligible Contracts during the
time the DCT Eligible Contracts are included in the Borrowing Base
pursuant to Section 3.1. (G) forty and one-half percent (40.5%) of the
Outstanding Principal Balance of all VAM Eligible Contracts during the
time the VAM Eligible Contracts are included in the Borrowing Base
pursuant to Section 3.1. At Lender's sole and absolute discretion
following Borrower's request, Lender may agree to include Bulk Purchase
Contracts as part of the Borrowing Base hereunder. The amount of
advance against Bulk Purchase Contracts, if any, shall be at Lender's
sole and absolute discretion. With respect to section (ii) (A) of this
definition, compliance with the parenthetical test based on Black Book
values shall be measured by Lender's sample of 100 or more Contracts
and not on a Contract-by-Contract basis.
b.) VAM Eligible Contracts. The following definition is added to
Section 16.0 of the Agreement in proper alphabetical order:
VAM Eligible Contracts: an Eligible Contract which was purchased by
Borrower from Virginia Auto Mart on November 8, 1999.
c.) Inventory Advance Value. The definition of Inventory Advance Value
in Section 16.0 of the Agreement is deleted and replaced in its entirety as
follows:
Inventory Advance Value: the lesser of (i) Twenty-five Million
Dollars ($25,000,000.00); (ii) the cumulative Eligible Vehicle Advance
Value for all Eligible Vehicles in Borrower's inventory; (iii) an
amount equal to the Borrowing Base minus the amount outstanding under
the Installment Contract Facility or (iv) 65% of the cumulative NADA
average wholesale Black Book value for Borrower's inventory of Motor
Vehicles (compliance with which shall be measured by Lender's sample of
100 or more Contracts and not on a Contract-by-Contract basis).
2
<PAGE>
d.) Eligible Vehicle. The definition of Eligible Vehicle in Section
16.0 of the Agreement is deleted and replaced in its entirety as follows:
"Eligible Vehicle: a Motor Vehicle (i) which Borrower has
purchased for at least $1,500 and not more than $6,000; (ii)
which has been in Borrower's possession for no more than 120
days, or 150 days if purchased in the months of October 1999,
November, 1999 or December, 1999; (iii) which has not been
repossessed by Borrower (unless subsequently re-purchased at
auction); (iv) for which Borrower holds in its possession the
title and purchase documentation, provided, however, that, if
all other criteria for Eligible Vehicles is met, Motor
Vehicles may be held in Borrower's possession for 30 days
without title documentation; and (v) is not subject to any
lien, encumbrance or security interest of any kind other than
the interest of Lender as granted hereunder or any other
agreement with Lender.
e.) Application of Payments. The definition of Application of Payments
in Section 4.2 of the Agreement is deleted and replaced in its entirety as
follows:
Application of Payments. All Remittances received by Lender
shall be applied by Lender to the Indebtedness the same Business Day if
deposited in Lender's account before 1:30 PM CST and the next Business
Day if deposited in the Lender's account after 1:30 PM CST . No
Remittance other than cash shall be treated as a final payment to
Lender unless and until such item has actually been collected by
Lender's bank and such collection has been finally credited to Lender's
account; provided, further, that if a Remittance applied to the
Indebtedness is charged back to Lender's Bank, Lender can retroactively
remove the application of the Remittance to the Indebtedness and accrue
any interest not accrued because of the application of the Remittance
to the Indebtedness. Each Remittance shall be applied by Lender to the
Indebtedness (i) first to accrued interest and, if sufficient to pay
accrued interest, (ii) then to the Indebtedness, other than Advances,
and, (iii) then to the Loan. Lender reserves the right to use a
different order of application if there is an Event of Default or
Pre-Default Event, or Lender has given prior written notice to Borrower
of a different order. All Remittances received by Lender may be applied
to the Indebtedness even though no portion of the Indebtedness is
otherwise then due and even though Lender has not sent Borrower a
demand, notice or request for payment of the Indebtedness. Payments
shall be deemed to be due by Borrower when received by Lender unless
they are due sooner by the terms of the Loan Documents.
f.) Exhibit 5.1(C) of the Agreement is deleted and replaced in its
entirety as follows: Exhibit 5.1(C)
Report Frequency
Cash Report Daily
Borrowing Base Weekly
Deferment & Rewrite Report Monthly
Covenant Compliance Summary Monthly
Trial Balance of Contracts Monthly
Contract Delinquency Report Monthly
Paid Off Contract Report Monthly
Charged-Off Contract Report Monthly
3
<PAGE>
Recovery Report Monthly
Repossession Report Monthly
Title Tracking Report Monthly
Insurance Tracking Report Monthly
Vehicle Inventory Report Monthly
New Contract Report Monthly
Static Pool Information Quarterly
Status of Cygnet Program Quarterly
Performance of Securitized Assets Quarterly
The monthly reports shall be provided to Lender no later than
twenty (20) Business Days after the end of the month. The daily reports shall be
provided no later than two (2) Business days after the day covered by the
report; provided that, the daily reports for the last day of an Accounting
Period shall be provided no later than the fifth (5th) Business Day after the
end of the Accounting Period. Borrower shall deliver with the monthly reports a
certificate of the chief financial officer of Borrower, in the form of Exhibit
5.1(C)(1), certifying as to the completeness and accuracy of the reports
provided pursuant to this Exhibit 5.1(C). Borrower shall provide Lender with
quarterly reports no later than thirty (30) Business Days after the end of the
quarter. Borrower shall deliver to Lender, no later than the twentieth (20th)
Business Day following each Accounting Period, an up-to-date master file back-up
tape in a form usable by Lender's computer of all Pledged Contract information
for the Accounting Period relating to Contract files which the Borrower has
placed on electronic media, including but not limited to, payment histories,
contract accounting, Outstanding Principal Balance, customer service notes,
collection histories and Contract Debtor names and addresses.
3. Incorporation of Amendment: The parties acknowledge and agree that
this Amendment is incorporated into and made a part of the Agreement, the terms
and provisions of which, unless expressly modified herein, or unless no longer
applicable by their terms, are hereby affirmed and ratified and remain in full
force and effect. To the extent that any term or provision of this Amendment is
or may be deemed expressly inconsistent with any term or provision of the
Agreement, the terms and provisions of this Amendment shall control. Each
reference to the Agreement shall be a reference to the Agreement as amended by
this Amendment. This Amendment, taken together with the unamended provisions of
the Agreement which are affirmed and ratified by Borrower, contains the entire
agreement among the parties regarding the transactions described herein and
supersedes all prior agreements, written or oral, with respect thereto.
4. Borrower Remains Liable. Borrower hereby confirms that the Agreement
and each document executed by Borrower in connection therewith continue
unimpaired and in full force and effect and shall cover and secure all of
Borrower's existing and future obligations to Lender. Nothing contained herein
is intended, nor shall be construed, to be a novation or an accord and
satisfaction of the outstanding liabilities or any of Borrower's other
obligations to Lender.
5. Headings. The paragraph headings contained in this Amendment are
for convenience of reference only and shall not be considered a part of
this Amendment in any respect.
6. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of Arizona. Nothing herein shall
preclude Lender from bringing suit or taking other legal action in any
jurisdiction.
4
<PAGE>
7. Execution in Counterparts. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which taken together shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the undersigned have entered into this Amendment as of
December 8, 1999.
<TABLE>
<CAPTION>
<S> <C>
GENERAL ELECTRIC CAPITAL
CORPORATION UGLY DUCKLING CAR SALES, INC.
By: /S/ JEFF BATKA By: /S/ JON D. EHLINGER
Title: Account Executive Title: Secretary
UGLY DUCKLING CORPORATION UGLY DUCKLING CAR SALES NEW MEXICO, INC.
By: /S/ JON D. EHLINGER By: /S/ JON D. EHLINGER
Title: Secretary Title: Secretary
UGLY DUCKLING CAR SALES AND CHAMPION FINANCIAL SERVICES, INC.
FINANCE CORPORATION
By: /S/ JON D. EHLINGER By: /S/ JON D. EHLINGER
Title: Secretary Title: Secretary
UGLY DUCKLING CAR SALES FLORIDA, INC. UGLY DUCKLING CREDIT CORPORATION
By: /S/ JON D. EHLINGER By: /S/ JON D. EHLINGER
Title: Secretary Title: Secretary
UGLY DUCKLING CAR SALES GEORGIA, INC. UGLY DUCKLING CAR SALES CALIFORNIA, INC.
By: /S/ JON D. EHLINGER By: /S/ JON D. EHLINGER
Title: Secretary Title: Secretary
CYGNET FINANCIAL CORPORATION CYGNET DEALER FINANCE, INC.
By: /S/ JON D. EHLINGER By: /S/ STEVEN P. JOHNSON
Title: Secretary Title: Secretary
CYGNET FINANCE ALABAMA, INC. CYGNET SUPPORT SERVICES, INC.
By: /S/ STEVEN P. JOHNSON By: /S/ JON D. EHLINGER
Title: Secretary Title: Secretary
CYGNET FINANCIAL SERVICES, INC. CYGNET FINANCIAL PORTFOILIO, INC.
By: /S/ JON D. EHLINGER By: /S/ JON D. EHLINGER
Title: Secretary Title: Secretary
UGLY DUCKLING PORTFOLIO UGLY DUCKLING FINANCE CORPORATION
PARTNERSHIP, L.L.P.
By: /S/ JON D. EHLINGER By: /S/ JON D. EHLINGER
Title: Secretary Title: Secretary
UGLY DUCKLING PORTFOLIO CYGNET DEALER FINANCE FLORIDA,
CORPORATION INC.
By: /S/ JON D. EHLINGER By: /S/ STEVEN P. JOHNSON
Title: Secretary Title: Secretary
</TABLE>
Amendment No. 10 to Amended and Restated Motor Vehicle Installment Contract
Loan and Security Agreement
This Amendment is entered into by and between Ugly Duckling
Corporation, successor in interest to Ugly Duckling Holdings, Inc. ("Ugly
Duckling"), a Delaware corporation; Ugly Duckling Car Sales and Finance
Corporation ("UDCSFC"), an Arizona corporation formerly known as Duck Ventures,
Inc.; Ugly Duckling Credit Corporation ("UDCC") formerly known as Champion
Acceptance Corporation, an Arizona corporation; Ugly Duckling Car Sales, Inc.
("Sales"); an Arizona corporation; Champion Financial Services, Inc.
("Champion"), an Arizona corporation; Ugly Duckling Car Sales Florida, Inc.
("Car Sales Florida"), a Florida corporation;; Ugly Duckling Car Sales New
Mexico, Inc. ("Car Sales New Mexico"), a New Mexico corporation; Ugly Duckling
Car Sales California, Inc. ("Car Sales California"), a California corporation;
Ugly Duckling Car Sales Georgia, Inc. ("Car Sales Georgia"), a Georgia
corporation; Cygnet Financial Corporation ("Cygnet"), a Delaware corporation;
Cygnet Dealer Finance, Inc. ("Dealer Finance"), an Arizona corporation; Cygnet
Finance Alabama, Inc. ("Cygnet Alabama"), an Arizona corporation; Cygnet Support
Services, Inc. ("Services"), an Arizona corporation; Cygnet Financial Services,
Inc. ("Cygnet Services"), an Arizona corporation; Cygnet Financial Portfolio,
Inc. ("Cygnet Portfolio"), an Arizona corporation; Ugly Duckling Portfolio
Partnership, L.L.P. ("UDPP"), an Arizona limited liability partnership; Ugly
Duckling Finance Corporation ("UDFC"), an Arizona corporation; Ugly Duckling
Portfolio Corporation ("UDPC") an Arizona corporation formerly known as Champion
Portfolio Corporation; and Cygnet Dealer Finance Florida, Inc. ("CDFF"), a
Florida corporation (all of the foregoing entities collectively referred to
herein as "Borrower"); and General Electric Capital Corporation, a New York
corporation ("Lender").
RECITALS
A. Borrower and Lender are parties to an Amended and Restated Motor
Vehicle Installment Contract Loan and Security Agreement dated as of August 15,
1997, as amended by an Assumption and Amendment Agreement dated October 23,
1997, Amendment No. 1 dated December 22, 1997, Amendment No. 2 dated September
9, 1998, Amendment No. 3 dated January 18, 1999, Amendment No. 4 dated as of
July 19, 1999, Amendment No. 5 dated August 16, 1999, Amendment No. 6 dated
August 27, 1999, Amendment No. 7 dated November 30, 1999, Amendment No. 8 dated
December 7, 1999, and Amendment No. 9 dated December 8, 1999, (the Amended and
Restated Motor Vehicle Installment Contract Loan and Security Agreement as so
amended is referred to herein as the "Agreement") pursuant to which Lender
agreed to make Advances to Borrower on the terms and conditions set forth in the
Agreement.
B. Borrower and Lender desire to delete certain Borrowers from the
Agreement and to amend certain provisions of the Agreement pursuant to the terms
set forth in this Amendment.
In consideration of the premises and other good and valuable
consideration, the receipt of which is hereby acknowledged by each of the
parties hereto, the parties agree as follows:
1. Defined Terms. Unless otherwise specified herein, all capitalized
terms used in this Amendment shall have the same meaning given to such
term(s) in the Agreement.
2. Release and Deletion of Certain Borrowers. Without releasing
Borrower from liability to Lender for all obligations existing or in the future
arising under the Agreement, Lender and Borrower hereby agree to release
obligations of Borrowers Dealer Finance, Cygnet Finance Alabama and CDFF
(collectively, the "Released Parties") to Lender under the Agreement and all
other documents and instruments executed by the Released Parties in connection
1
<PAGE>
with the Agreement. By executing this Amendment, all parties agree that,
effective as of December 30, 1999, the Released Parties shall be deleted as
Borrowers under the Agreement and all associated rights and obligations are
hereby terminated as to the Released Parties.
3. Amendments to Agreement. Effective as of the date hereof, the
Agreement is hereby further amended as follows.
a.) Deletion of Borrower, Ugly Duckling Car Sales New Mexico,
Inc. Pursuant to the execution of those certain Articles of Merger of
Ugly Duckling Car Sales New Mexico, Inc. into Ugly Duckling Car Sales
Inc., dated December 27, 1999, Car Sales New Mexico agreed to merge
into Sales, with Sales to be the surviving corporation. Sales agreed
to assume all of the liabilities and obligations (collectively, the
"obligations") of Car Sales New Mexico. As a result of the merger and
the assumption of the obligations, Borrower and Lender agree to delete
Car Sales New Mexico as a Borrower under the Agreement.
b.) Deletion of Borrower, Ugly Duckling Car Sales Georgia, Inc.
Pursuant to the execution of those certain Articles of Merger of Ugly
Duckling Car Sales Georgia, Inc. into Ugly Duckling Car Sales Inc.,
dated January 19, 2000, Car Sales Georgia agreed to merge into Sales,
with Sales to be the surviving corporation. Sales agreed to assume all
of the liabilities and obligations (collectively, the "obligations")
of Car Sales Georgia. As a result of the merger and the assumption of
the obligations, Borrower and Lender agree to delete Car Sales Georgia
as a Borrower under the Agreement.
c.) Deletion of Borrower, Ugly Duckling Car Sales California,
Inc. Pursuant to the execution of those certain Articles of Merger of
Ugly Duckling Car Sales California, Inc. into Ugly Duckling Car Sales
Inc., dated as of January 24, 2000, Car Sales California agreed to
merge into Sales, with Sales to be the surviving corporation. Sales
agreed to assume all of the liabilities and obligations (collectively,
the "obligations") of Car Sales California. As a result of the merger
and the assumption of the obligations, Borrower and Lender agree to
delete Car Sales California as a Borrower under the Agreement.
d.) Single Loan. The second sentence in Section 2.0 of the
Agreement shall be amended to insert the word "Dollars" between the
word "Million" and "($125,000,000.00)".
e.) Loan Facility. The first sentence in Section 2.1 (A) of the
Agreement shall be amended to insert the word "Dollars" between the
word "Million" and "($125,000,000.00)".
f.) Loan Facility. The first sentence in Section 2.1 (B) of the
Agreement shall be amended to substitute the word "Twenty-five" for
"Twenty" and the amount "($25,000,000.00)" for the amount
"($20,000,000.00)" and to insert the word "Dollars" between the word
"Million" and "($25,000,000.00)".
g.) Financial Condition. Section 13.6 (E) of the Agreement shall
be amended to read as follows:
Borrower's three-month Rolling Average Managed Portfolio
Delinquency ratio shall not exceed ten percent (10%) except
for the periods ending December 31, 1999, January 31, 2000,
and February 29, 2000 (respectively) for which the three-month
Rolling Average Managed Portfolio Delinquency shall not exceed
twelve and one-half percent (12.50%). For all periods
following February 29, 2000, the level allowed for this
covenant shall return to ten percent (10%).
2
<PAGE>
h.) Financial Condition. Section 13.6 (G) of the Agreement shall
be amended to read as follows:
Borrower's Average Charged-Off Losses for all Managed
Portfolio Contracts shall not exceed two and three-quarters
percent (2.75%) except for the periods ending December 31,
1999, January 31, 2000, and February 29, 2000 (respectively)
for which the Average Charged-Off Losses for all Managed
Portfolio Contracts shall not exceed three and three-quarters
percent (3.75%). For all periods following February 29, 2000,
the level allowed for this covenant shall return to two and
three-quarters percent (2.75%).
i.) Seminole Eligible Contract. The definition of "Seminole
Eligible Contract" in Section 16.0 of the Agreement shall be amended
to read as follows:
Seminole Eligible Contract: an Eligible Contract which was
originally purchased by Borrower from Seminole Finance;
provided, however, that any such Eligible Contract that has
been sold or securitized by Borrower and then subsequently
repurchased by Borrower and that remains owned by Borrower
shall be deemed to be a Seminole Eligible Contract.
4. Incorporation of Amendment. The parties acknowledge and agree that
this Amendment is incorporated into and made a part of the Agreement, the terms
and provisions of which, unless expressly modified herein, or unless no longer
applicable by their terms, are hereby affirmed and ratified and remain in full
force and effect. To the extent that any term or provision of this Amendment is
or may be deemed expressly inconsistent with any term or provision of the
Agreement, the terms and provisions of this Amendment shall control. Each
reference to the Agreement shall be a reference to the Agreement as amended by
this Amendment. This Amendment, taken together with the unamended provisions of
the Agreement which are affirmed and ratified by Borrower, contains the entire
agreement among the parties regarding the transactions described herein and
supersedes all prior agreements, written or oral, with respect thereto.
5. Borrower Remains Liable. Borrower hereby confirms that the Agreement
and each document executed by Borrower in connection therewith continue
unimpaired and in full force and effect and shall cover and secure all of
Borrower's existing and future obligations to Lender. Nothing contained herein
is intended, nor shall be construed, to be a novation or an accord and
satisfaction of the outstanding liabilities or any of Borrower's other
obligations to Lender.
6. Headings. The paragraph headings contained in this Amendment
are for convenience of reference only and shall not be considered a
part of this Amendment in any respect.
7. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Arizona. Nothing
herein shall preclude Lender from bringing suit or taking other legal
action in any jurisdiction.
8. Execution in Counterparts. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which taken together shall constitute one and the same instrument.
3
<PAGE>
IN WITNESS WHEREOF, the undersigned have entered into this Amendment as of
March 6, 2000.
<TABLE>
<CAPTION>
<S> <C>
GENERAL ELECTRIC CAPITAL
CORPORATION UGLY DUCKLING CAR SALES, INC.
By: /S/ JEFF BATKA By: /S/ JON D. EHLINGER
Title: Account Executive Title: Secretary
UGLY DUCKLING CORPORATION UGLY DUCKLING CAR SALES NEW MEXICO, INC.
By: /S/ JON D. EHLINGER By: /S/ JON D. EHLINGER
Title: Secretary Title: Secretary
UGLY DUCKLING CAR SALES AND CHAMPION FINANCIAL SERVICES, INC.
FINANCE CORPORATION
By: /S/ JON D. EHLINGER By: /S/ JON D. EHLINGER
Title: Secretary Title: Secretary
UGLY DUCKLING CAR SALES FLORIDA, INC. UGLY DUCKLING CREDIT CORPORATION
By: /S/ JON D. EHLINGER By: /S/ JON D. EHLINGER
Title: Secretary Title: Secretary
UGLY DUCKLING CAR SALES GEORGIA, INC. UGLY DUCKLING CAR SALES CALIFORNIA, INC.
By: /S/ JON D. EHLINGER By: /S/ JON D. EHLINGER
Title: Secretary Title: Secretary
CYGNET FINANCIAL CORPORATION CYGNET DEALER FINANCE, INC.
By: /S/ JON D. EHLINGER By: /S/ STEVEN P. JOHNSON
Title: Secretary Title: Secretary
CYGNET FINANCE ALABAMA, INC. CYGNET SUPPORT SERVICES, INC.
By: /S/ STEVEN P. JOHNSON By: /S/ JON D. EHLINGER
Title: Secretary Title: Secretary
CYGNET FINANCIAL SERVICES, INC. CYGNET FINANCIAL PORTFOILIO, INC.
By: /S/ JON D. EHLINGER By: /S/ JON D. EHLINGER
Title: Secretary Title: Secretary
UGLY DUCKLING PORTFOLIO UGLY DUCKLING FINANCE CORPORATION
PARTNERSHIP, L.L.P.
By: /S/ JON D. EHLINGER By: /S/ JON D. EHLINGER
Title: Secretary Title: Secretary
UGLY DUCKLING PORTFOLIO CYGNET DEALER FINANCE FLORIDA,
CORPORATION INC.
By: /S/ JON D. EHLINGER By: /S/ STEVEN P. JOHNSON
Title: Secretary Title: Secretary
</TABLE>
<TABLE>
LIST OF SUBSIDIARIES (as of March 30, 2000)
<S> <C> <C>
- ----------------------------------------------------------- -------------------------------------- ----------------------------
NAME: dba, IF APPLICABLE: JURISDICTION OF
INCORPORATION:
- ----------------------------------------------------------- -------------------------------------- ----------------------------
Ugly Duckling Car Sales and Finance Corporation Arizona
(formerly Duck Ventures, Inc.)
- ----------------------------------------------------------- -------------------------------------- ----------------------------
Ugly Duckling Credit Corporation Arizona
(formerly Champion Acceptance Corporation)
- ----------------------------------------------------------- -------------------------------------- ----------------------------
Champion Financial Services, Inc. Arizona
- ----------------------------------------------------------- -------------------------------------- ----------------------------
Ugly Duckling Car Sales, Inc. Ugly Duckling Autos Arizona
Ugly Duckling Processing Center
Ugly Duckling Car Sales
Ugly Duckling City of Cars
Ugly Duckling Autorama
Ugly Duckling Glendale Motors
Ugly Duckling-Blue Chip Motors
- ----------------------------------------------------------- -------------------------------------- ----------------------------
Ugly Duckling Car Sales Florida, Inc. Ugly Duckling Autos Florida
Champion Acceptance
Ugly Duckling Car Sales
- ----------------------------------------------------------- -------------------------------------- ----------------------------
Ugly Duckling Finance Corporation Arizona
- ----------------------------------------------------------- -------------------------------------- ----------------------------
Ugly Duckling Funding Corporation Delaware
- ----------------------------------------------------------- -------------------------------------- ----------------------------
Ugly Duckling Portfolio Corporation Ugly Duckling Autos Arizona
(formerly Champion Portfolio Corporation) (To be dissolved)
- ----------------------------------------------------------- -------------------------------------- ----------------------------
Ugly Duckling Receivables Corp. Delaware
- ----------------------------------------------------------- -------------------------------------- ----------------------------
Ugly Duckling Receivables Corp. II Delaware
- ----------------------------------------------------------- -------------------------------------- ----------------------------
Ugly Duckling Portfolio Partnership, LLP Arizona
- ----------------------------------------------------------- -------------------------------------- ----------------------------
Drake Insurance Services, Inc. Arizona
- ----------------------------------------------------------- -------------------------------------- ----------------------------
Drake Insurance Agency, Inc. Arizona
- ----------------------------------------------------------- -------------------------------------- ----------------------------
Drake Property & Casualty Insurance Co. Turks & Caicos Islands
- ----------------------------------------------------------- -------------------------------------- ----------------------------
Drake Life Insurance Co. Turks & Caicos Islands
- ----------------------------------------------------------- -------------------------------------- ----------------------------
Ugly Duckling Dealer Finance, Inc. Arizona
- ----------------------------------------------------------- -------------------------------------- ----------------------------
Ugly Duckling Dealer Finance Alabama, Inc. Arizona
- ----------------------------------------------------------- -------------------------------------- ----------------------------
UDRAC, Inc. Ugly Duckling Rent-A-Car Arizona
- ----------------------------------------------------------- -------------------------------------- ----------------------------
UDRAC Rentals, Inc. Ugly Duckling Rent-A-Car Arizona
- ----------------------------------------------------------- -------------------------------------- ----------------------------
Cygnet Financial Corporation Delaware
- ----------------------------------------------------------- -------------------------------------- ----------------------------
Cygnet Financial Services, Inc. Arizona
- ----------------------------------------------------------- -------------------------------------- ----------------------------
Cygnet Financial Portfolio, Inc. Arizona
- ----------------------------------------------------------- -------------------------------------- ----------------------------
Cygnet Support Services, Inc. Arizona
- ----------------------------------------------------------- -------------------------------------- ----------------------------
Fidelity Funding Auto Receivables Corp. Delaware
- ----------------------------------------------------------- -------------------------------------- ----------------------------
Fidelity Funding Auto Receivables Corp. II Delaware
- ----------------------------------------------------------- -------------------------------------- ----------------------------
Fidelity Funding Auto Receivables Corp. III Delaware
- ----------------------------------------------------------- -------------------------------------- ----------------------------
Fidelity Funding Receivables, L.L.C. Delaware
- ----------------------------------------------------------- -------------------------------------- ----------------------------
</TABLE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Ugly Duckling Corporation:
We consent to the incorporation by reference in the registration statements of
Ugly Duckling Corporation on Form S-3 (File No. 333-90041) filed as of November
1, 1999; Form S-3 (File No. 333-31531) filed as of July 18, 1997, as amended by
pre-effective amendment No. 1 to Form S-3 filed as of July 30, 1997; Form S-3
(File No. 333-22237) filed as post-effective amendment No. 2 to Form S-1 as of
July 18, 1997; Form S-8 (File No. 333-32313) for Ugly Duckling Corporation
Long-Term Incentive Plan filed as of July 29, 1997; Form S-8 (File No.
333-08457) for Ugly Duckling Corporation Long-Term Incentive Plan filed as of
July 19, 1996; Form S-8 (File No. 333-06615) for Ugly Duckling Corporation
Director Incentive Plan filed as of June 21, 1996; and Form S-8 (File No.
333-72717) for Ugly Duckling Corporation 1998 Executive Incentive Plan filed as
of February 22, 1999, of our report dated March 10, 2000, relating to the
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, which report appears in the December
31, 1999, annual report on Form 10-K of Ugly Duckling Corporation.
/s/ KPMG LLP
Phoenix, Arizona
March 29, 2000
SPECIAL POWER OF ATTORNEY
The undersigned constitutes and appoints Jon Ehlinger his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, for filing with the Securities and Exchange Commission by
Ugly Duckling Corporation, a Delaware corporation, together with any and all
amendments to such Form 10-K, and to file the same with all exhibits thereto,
and all documents in connection therewith, with the Securities and Exchange
Commission, granting to such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.
DATED: February 11, 2000
/S/ ERNEST C. GARCIA II
-----------------------
Ernest C. Garcia II
SPECIAL POWER OF ATTORNEY
The undersigned constitutes and appoints Jon Ehlinger his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, for filing with the Securities and Exchange Commission by
Ugly Duckling Corporation, a Delaware corporation, together with any and all
amendments to such Form 10-K, and to file the same with all exhibits thereto,
and all documents in connection therewith, with the Securities and Exchange
Commission, granting to such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.
DATED: February 15, 2000
/S/ CHRISTOPHER D. JENNINGS
-----------------------
Christopher D. Jennings
SPECIAL POWER OF ATTORNEY
The undersigned constitutes and appoints Jon Ehlinger his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, for filing with the Securities and Exchange Commission by
Ugly Duckling Corporation, a Delaware corporation, together with any and all
amendments to such Form 10-K, and to file the same with all exhibits thereto,
and all documents in connection therewith, with the Securities and Exchange
Commission, granting to such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.
DATED: March 28, 2000
/S/ JOHN N. MACDONOUGH
-----------------------
John N. MacDonough
SPECIAL POWER OF ATTORNEY
The undersigned constitutes and appoints Jon Ehlinger his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, for filing with the Securities and Exchange Commission by
Ugly Duckling Corporation, a Delaware corporation, together with any and all
amendments to such Form 10-K, and to file the same with all exhibits thereto,
and all documents in connection therewith, with the Securities and Exchange
Commission, granting to such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.
DATED: February 15, 2000
/S/ FRANK P. WILLEY
-----------------------
Frank P. Willey
SPECIAL POWER OF ATTORNEY
The undersigned constitutes and appoints Jon Ehlinger his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, for filing with the Securities and Exchange Commission by
Ugly Duckling Corporation, a Delaware corporation, together with any and all
amendments to such Form 10-K, and to file the same with all exhibits thereto,
and all documents in connection therewith, with the Securities and Exchange
Commission, granting to such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.
DATED: February 11, 2000
/S/ GREGORY B. SULLIVAN
-----------------------
Gregory B. Sullivan
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0
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<INCOME-TAX> 6,001
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<EPS-DILUTED> 0.60
</TABLE>
<TABLE> <S> <C>
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<NET-INCOME> (5,703)
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<TABLE> <S> <C>
<ARTICLE> 5
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<NAME> Ugly Duckling Corp.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,537
<SECURITIES> 0
<RECEIVABLES> 78,568
<ALLOWANCES> 6,153
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<BONDS> 0
0
0
<COMMON> 172,622
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<TOTAL-LIABILITY-AND-EQUITY> 275,633
<SALES> 123,814
<TOTAL-REVENUES> 155,419
<CGS> 72,358
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 53,100
<LOSS-PROVISION> 22,354
<INTEREST-EXPENSE> 706
<INCOME-PRETAX> 6,901
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<INCOME-CONTINUING> 4,031
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<CHANGES> 0
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<EPS-BASIC> 0.53
<EPS-DILUTED> 0.52
</TABLE>
<TABLE> <S> <C>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-1-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,293
<SECURITIES> 0
<RECEIVABLES> 403,087
<ALLOWANCES> 80,698
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