-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GY3lCGKZtB5yojE+OeyH3TIkVCCeRk93C5h4rcZTvA/3nerqk1OkzUIDs4hgLpKO pVhunJQ3xJq+dnwU7DkUjQ== 0001064158-99-000049.txt : 19990331 0001064158-99-000049.hdr.sgml : 19990331 ACCESSION NUMBER: 0001064158-99-000049 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 27 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UGLY DUCKLING CORP CENTRAL INDEX KEY: 0001012704 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 860721358 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14759 FILM NUMBER: 99577066 BUSINESS ADDRESS: STREET 1: 2525 E CAMELBACK ROAD STREET 2: STE 500 CITY: PHOENIX STATE: AZ ZIP: 85016 BUSINESS PHONE: 6028526600 MAIL ADDRESS: STREET 1: 2525 E CAMELBACK RD STREET 2: STE 1150 CITY: PHOENIX STATE: AZ ZIP: 85016 10-K 1 1998 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998. or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File Number 0-20841 UGLY DUCKLING CORPORATION (Exact name of registrant as specified in its charter) Delaware 86-0721358 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2525 E. Camelback Road, Suite 500, Phoenix, Arizona 85016 (Address of principal executive (Zip Code) offices) (Registrant's telephone number, including area code) (602) 852-6600 Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of each Exchange on which registered -------------- ----------------------------------------- Cumulative 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. [ ] At March 15, 1999, the aggregate market value of common stock held by non-affiliates of the registrant was approximately $60,652,000. Applicable Only to Registrants Involved in Bankruptcy Proceedings During the Preceding Five Years: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] (Applicable Only to Corporate Registrants) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of March 24, 1999: 14,948,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the June 2, 1999 Annual Meeting of Stockholders are incorporated by reference into Part III ================================================================================ 1 TABLE OF CONTENTS
Page PART I Item 1 Business........................................................................ 3 Item 2 Properties...................................................................... 11 Item 3 Legal Proceedings............................................................... 11 Item 4 Submission Of Matters To A Vote Of Security Holders............................. 11 Item 4A Executive Officers Of The Registrant............................................ 12 PART II Item 5 Market For The Registrant's Common Equity Securities And Related Stockholder Matters............................................................. 13 Item 6 Selected Consolidated Financial Data............................................ 14 Item 7 Management's Discussion And Analysis Of Financial Condition And Results Of Operations........................................................... 15 Item 7A Quantitative And Qualitative Disclosures About Market Risk...................... 39 Item 8 Consolidated Financial Statements And Supplementary Data........................ 41 Item 9 Changes In And Disagreements With Accountants On Accounting And Financial Disclosures........................................................... 67 PART III Item 10 Directors And Executive Officers Of The Registrant.............................. 67 Item 11 Executive Compensation.......................................................... 67 Item 12 Security Ownership Of Certain Beneficial Owners And Management.................. 67 Item 13 Certain Relationships And Related Transactions.................................. 67 PART IV Item 14 Exhibits, Consolidated Financial Statement Schedules, And Reports On Form 8-K....................................................................... 68 Signatures..................................................................................... 73
2 PART I ITEM 1 -- BUSINESS General We operate the largest chain of buy here-pay here car dealerships in the United States. We sell and finance our used vehicles to customers within the sub-prime segment of the used car market. Our customers will typically have limited credit histories, low incomes or past credit problems. At December 31, 1998, we operated 56 dealerships located in several large markets, including Los Angeles, Phoenix, Dallas, San Antonio, Atlanta, and Tampa. In addition to our own dealership and financing operations, we also o provide financing to other independent used car dealers through our Cygnet dealer program, o service and collect large portfolios of finance receivables owned by others, and o manage selected financial assets that we acquire from financially distressed third parties. From 1994 through the first quarter of 1998, we maintained a national branch office network that acquired and serviced retail installment contracts from numerous independent third party dealers. We discontinued these operations in 1998. We direct your attention to note 24 to the Consolidated Financial Statements, which begin at page 41, where we summarize the results of operations of our business segments. Below is a summary of our businesses by segment: [OBJECT OMITTED - DESCRIBED IN FOLLOWING PARAGRAPH] The chart above shows Ugly Duckling with two operating divisions. Dealership operations is the first division. Dealership operations has three distinct segments. Retail sales is its first segment. This is the segment that operates our chain of Ugly Duckling Car Sales dealerships. Portfolio and loan servicing is the second segment of dealership operations. This segment holds and services the loan portfolios originated or acquired by our dealership operations. Finally, dealership operations has an administration segment that provides corporate administration to the division. Our non-dealership operations division also contains three segments. The first non-dealership operations segment is the bulk purchasing/loan servicing segment. In this segment, we acquire loan portfolios from third parties and provide loan servicing for third parties. The second segment of non-dealership operations is the Cygnet dealer program under which we provide various credit facilities to independent used car dealers. Finally, the non-dealership operations also have an administration segment that provides corporate administration to the non-dealership operations. Lastly, the chart shows our discontinued operations, which contains our branch office network that we closed in February 1998 and the loans we acquired through that network. We commenced operations through various entities beginning in 1989. Ugly Duckling Corporation was formed in 1992 and was reincorporated in Delaware in 1996. Overview of Used Car Sales and Finance Industry Used Car Sales. Used car retail sales typically occur through either 3 manufacturer's franchised new car dealerships that sell used cars or through independent used car dealerships. The market for used car sales in the United States is significant and has steadily increased over the past five years. There are over 23,000 franchised and 63,000 independent used car dealership locations in the United States. We participate in the sub-prime segment of the independent used car sales and finance market. This segment is serviced primarily by buy here-pay here dealers that sell and finance the sale of used cars to sub-prime borrowers. Buy here-pay here dealers typically offer their customers certain advantages over more traditional financing sources, including: o expanded credit opportunities; o flexible payment terms, including prorating customer payments due within one month into several smaller payments and scheduling payments to coincide with a customer's paydays; and o the ability to make payments in person. This is an important feature to many sub-prime borrowers who may not have checking accounts or are otherwise unable to make payments by the due date through use of the mail because of the timing of paychecks. Used Car Financing. The automobile financing industry is the third-largest consumer finance market in the country, after mortgage debt and credit card revolving debt. This industry is served by such traditional lending sources as banks, savings and loans, and captive finance subsidiaries of automobile manufacturers, as well as by independent finance companies and buy here-pay here dealers. In general, the industry is categorized according to the type of car sold (new versus used) and the credit characteristics of the borrower. The industry statistical information presented in this section is derived from information provided to the Company by CNW Marketing/Research of Bandon, Oregon. Company Dealership Operations We commenced dealership operations in 1992 with the acquisition of two dealerships in Arizona, and have expanded aggressively since then through a combination of acquisitions and development of new stores. Our most significant growth occurred in 1997, when o we acquired from Seminole Finance, Inc. and related companies (Seminole), four dealerships in Tampa/St. Petersburg and a contract portfolio of approximately $31.1 million; o we purchased from E-Z Plan, Inc. (E-Z Plan), seven dealerships in San Antonio and a contract portfolio of approximately $24.3 million; o we purchased from Kars-Yes Holdings, Inc. and related companies (Kars), six dealerships in the Los Angeles market, two in the Miami market, two in the Atlanta market, and two in the Dallas market; and o we opened our first used car dealership in the Las Vegas market, opened two additional dealerships in the Albuquerque market and opened one additional dealership in the Phoenix market. We also closed a dealership in Arizona. We continued our aggressive growth in 1998, adding 17 new dealerships in our existing markets. We opened one dealership in the Albuquerque market, four dealerships in the Atlanta market, three dealerships in the Dallas market, two dealerships in the Los Angeles market, two dealerships in the Phoenix market, two dealerships in the San Antonio market, and three dealerships in the Tampa market. We also closed two dealerships in Miami and exited that market. 4 The following table summarizes the number of stores we had in operation by major market for the three years ended December 31, 1998: Number of Stores By Market
As of December 31, ------------------------------------- 1998 1997 1996 ----------- --------- --------- Phoenix........... 9 7 5 San Antonio....... 9 7 -- Atlanta........... 9 5 -- Los Angeles....... 8 6 -- Tampa............. 8 5 -- Dallas............ 6 3 -- Tucson............ 3 3 3 Albuquerque....... 3 2 -- Las Vegas......... 1 1 -- Miami............. -- 2 -- =========== ========= ========= 56 41 8 =========== ========= =========
Retail Car Sales. We distinguish our dealership operations from those of typical buy here-pay here dealers through our: o network of multiple locations, o upgraded facilities, o larger inventories of used cars, o centralized purchasing, o advertising and marketing programs, and o dedication to customer service. Our dealerships are generally located in high visibility, high traffic commercial areas, and tend to be newer and cleaner in appearance than other buy here-pay here dealerships. This helps promote our image as a friendly and reputable business. We believe this, coupled with our widespread brand name recognition, enables us to attract customers who might otherwise visit another buy here-pay here dealer. Our dealerships generally maintain an average inventory of 50 to 150 used cars and feature a wide selection of makes and models (with ages generally ranging from 3 to 7 years) and a range of sale prices. This allows us to meet the tastes and budgets of a broad range of potential customers. We acquire our inventory from new or late-model used car dealers, used car wholesalers, used car auctions, and customer trade-ins. In making purchases, we take into account each car's retail value and the costs of buying, reconditioning, and delivering the car for resale. After purchase, cars are generally delivered to one of our nearby inspection centers, where they are inspected and reconditioned for sale. Upon inspection, certain used cars do not meet our criteria for reconditioning either because it will cost too much to recondition the car, or because the car is in a condition too poor for us to recondition and sell. In these instances, we promptly sell the car in the wholesale market. Although the supply and prices of used cars are subject to market variance, we do not believe that we will encounter significant difficulty in maintaining the necessary inventory levels. Our average sales price per car was $7,997 for the year ended December 31, 1998 compared to $7,443 for the year ended December 31, 1997 and $7,107 in the year ended December 31, 1996. We typically require down payments of approximately 5.0% to 15.0% of the purchase price with the balance of the purchase price financed at fixed interest rates ranging from 21.0% to 29.9% over periods ranging from 12 to 48 months. We sell cars on an "as is" basis, and require our customers to sign an agreement at the date of sale releasing us from any obligation with respect to vehicle-related problems that subsequently occur. See "Legal Proceedings." Used Car Financing. We finance substantially all of the used cars that we sell at our dealerships through retail installment contracts, under which we provide the financing and service the collection of loan payments. Subject to the discretion of our sales managers, potential customers must meet our underwriting guidelines before we will agree to finance the purchase of a car. 5 In connection with each sale, customers are required to complete a credit application. Our employees then analyze and verify the customer application information, which contains employment and residence histories, income information, references, and other information regarding the customer's credit history. Our credit underwriting process takes into account the ability of our managers to make sound judgments regarding the extension of credit to sub-prime borrowers and to personalize financing terms to meet the needs of individual customers. For example, we may schedule contract payments to coincide with the customer's paydays, whether weekly, biweekly, semi-monthly, or monthly. Dealership Operations Computer Systems. We recently completed converting our chain of dealerships and loan service centers to a single integrated computer system. The system allows us to make the sale, service the loan, and track the vehicle and related loan. Once the final sales contract is generated, the system automatically adds the loan to our loan servicing and collections database and records the sale and related loan in our accounting system. We use communication networks that allow us to service large volumes of contracts from our centralized servicing facilities, while enabling the customer the flexibility to make payments at any of our dealership locations. In addition, we have developed comprehensive databases and sophisticated management tools, including static pool analysis, to analyze customer payment history and contract performance, and to monitor underwriting effectiveness. Advertising and Marketing. We have a large advertising budget. In general, our advertising campaigns emphasize our multiple locations, wide selection of quality used cars, and ability to provide financing to most sub-prime borrowers. We believe that our marketing approach creates brand name recognition and promotes our image as a professional, yet approachable, business. We use television, radio, billboard, and print advertising to market our dealerships. A primary focus of our marketing strategy is our ability to finance consumers with poor credit histories. Consequently, we have initiated innovative marketing programs designed to attract sub-prime borrowers, assist these customers in establishing good credit, reward those customers who pay on time, develop customer loyalty, and increase referral and repeat business. Among these programs are: o The Down Payment Back Program. This program encourages customers to make timely payments on their contracts by allowing them to receive a refund of their initial down payment at the end of the contract term, if all payments have been made by the scheduled due date. o The Income Tax Refund Program. During the first quarter of each year, we offer assistance to customers in the preparation of their income tax returns, including forwarding the customers' tax information to a designated preparer, paying the preparation fee (in most states), and, if they get a tax refund, crediting the refund toward the required down payment. This program enables customers to purchase cars without having to wait to receive their income tax refund. o $250 Visa Card Program. This program encourages customers to make timely payments on their contracts by allowing them to receive a Visa credit card with an initial credit limit of $250. This program offers otherwise unqualified customers the chance to obtain the convenience of a credit card and rebuild their credit records. We also operate a loan-by-phone program using our toll-free telephone number of 1-800-THE-DUCK, and accept credit inquiries on our web site at www.uglyduckling.com. Credit inquiries received over the web are reviewed by our employees, who then contact and schedule an appointment for the customers. Sales Personnel and Compensation. Each dealership is run by a general manager who has responsibility for the operations of the dealership facility, including: o profitability of the dealership, o final approval of sales and contract originations, o inventory maintenance, o the appearance and condition of the facility, and o the hiring, training, and performance of dealership employees. We also typically staff each dealership with a sales manager, an assistant sales manager, three customer service representatives, five to twelve salespersons, and two lot attendants. 6 We train our managers to be contract underwriters. They are paid a base salary and may earn bonuses based upon the overall performance of the contract portfolio originated at their dealership, as well as the dealership's profitability. Sales persons are paid on a commission basis. However, each sale must be underwritten and approved by a manager. Monitoring and Collections One of our goals is to minimize credit losses through close monitoring of contracts in our portfolio. When a car sale is completed, the contract is automatically added to our loan servicing database. Our monitoring and collections staff then uses our collections software to monitor the performance of the contracts. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Risk Factors -- We are dependent on our data processing platforms and other technology. Our computer systems may be subject to a Year 2000 date failure." The collections software provides us with, among other things, up-to-date activity reports, allowing prompt identification of customers whose accounts have become past due. In accordance with our policy, collections personnel contact a customer with a past due account within three days of delinquency to inquire as to the reasons for the delinquency and to suggest ways in which the customer can resolve the underlying problem. Our early detection of a customer's delinquent status, as well as our commitment to working with our customers, allows us to identify and address payment problems quickly, and reduce the chance of credit loss. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Allowance for Credit Losses." If our efforts to work with a customer are unsuccessful and the customer becomes seriously delinquent, we will take the necessary steps to minimize our loan loss and protect our collateral. Frequently, delinquent customers will recognize their inability to honor their contractual obligations and will work with us to coordinate "voluntary repossessions" of their cars. In other cases, we hire independent firms to repossess the vehicles. After repossession and a statutorily mandated waiting period, we typically sell the repossessed car in the wholesale market. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Allowance for Credit Losses." Unlike most other used car dealership chains or automobile finance companies, we permit our customers to make payments on their contracts in person at any of our dealerships or at any of our collection facilities. Payments received at our dealerships account for a significant portion of monthly contract receipts on the dealership portfolio. Non-Dealership Operations Cygnet Dealer Program. Many independent used car dealers have difficulty obtaining working capital from traditional financing sources. As a result, they are forced to sell the finance receivables that they originate from the sale of used cars at significant discounts in order to obtain the working capital necessary to operate their businesses. Most financing programs available to independent used car dealers do not allow the dealer to service the loans sold. Yet, we believe that dealers prefer to service the loans they originate so they can maintain contact with the customer to more effectively collect payments and generate referrals or repeat business. To capitalize on this opportunity, we developed the Cygnet dealer program, which provides qualified dealers with warehouse purchase facilities and revolving lines of credit primarily secured by the dealers' finance receivable portfolios. The dealer remains responsible for collection of finance receivable payments and retains control of the customer relationship. The credit facilities are for specified amounts and are subject to various collateral coverage ratios, maximum advance rates, and performance measurements, depending on the financial condition of the dealer and the quality of the finance receivables originated. As a condition to providing financing, each dealer is required to satisfy certain criteria to qualify for the program, report collection activities to us on a daily basis and provide us with periodic financial statements. In addition, dealers are "audited" by our audit department on a periodic basis. As of December 31, 1998, we had lending relationships with a total of 63 independent dealers in 18 states, with principal balances totaling approximately $41 million. The dealer collection program is the primary product offered to independent dealers under the Cygnet dealer program. Under this program, we purchase finance receivables at a discount from qualified dealers. The dealer remains responsible for the collection of the contract payments and retains control of the customer relationship. We typically purchase finance receivable contracts at 65% to 75% of the principal balance subject to a maximum of 170% of the Kelly Blue Book wholesale price of the underlying collateral. All cash collections, including regular monthly payments, payoffs and repurchases, are deposited directly by the 7 dealer into a bank account that we maintain and control. We keep all regular monthly cash payments and payoffs, and pay the dealer a servicing fee generally equal to 20% to 25% of the regular monthly cash payments collected. Generally, each dealer pays a nonrefundable initial audit fee plus a processing fee per contract or provides a security deposit. The dealer is required to repurchase all finance receivable contracts that are 45 days past due. The dealer collection program is full recourse to the dealer and typically includes personal guarantees by the principal owners of the dealership. We also offer a secured revolving line of credit to qualified dealers under the asset based loan version of the Cygnet dealer program. We generally advance up to 65% of the principal amount of eligible finance receivables subject to a maximum of 170% of the Kelly Blue Book wholesale price of the underlying collateral. We also charge an annual commitment fee of 1% to 2% of the available line and interest on any amounts outstanding at the rate of prime plus 5% to 9%. In addition, each dealer generally pays a nonrefundable initial audit fee plus a processing fee per contract. The dealer is responsible for collection of contract payments and maintaining the customer relationship. All cash collections are deposited directly into a bank account that we maintain and control. Finance receivables that are 45 days delinquent are excluded from the calculation of the amount available under the line of credit. If the exclusion of delinquent contracts causes the line to become over funded, then the dealer must either pay down the line or assign additional qualifying finance receivables to us. Each line of credit is full recourse to the dealer, typically with full guarantees by the principal owners of the dealership. Cygnet dealer's net investment in finance receivables purchased from two third party dealers totaled approximately $15.1 million representing approximately 34% of Cygnet dealer's net finance receivables portfolio as of December 31, 1998. There were no other third party dealer loans that exceeded 10% of Cygnet dealer's finance receivable portfolio as of December 31, 1998. Bulk Purchasing and Loan Servicing Operations. In 1997 and 1998, we entered into several large servicing and/or bulk purchasing transactions involving third party dealer contract portfolios. The most significant of these transactions is our involvement in the bankruptcy proceedings of First Merchants Acceptance Corporation ("FMAC") described below. Our non-dealership operations service loans from facilities in Nashville, Tennessee, Aurora, Colorado and Plano, Texas. As of December 31, 1998, our loan servicing segment employed approximately 450 employees and serviced approximately 80,000 loans with an aggregate principal balance of $587 million. Our non-dealership operations use separate computer systems from our dealership operations. However, our collection policies and procedures for non-dealership operations are generally the same as those used by our dealership operations. See "Monitoring and Collections" above. The following describes certain aspects of our involvement in the bankruptcy case of FMAC and in FMAC's approved plan of reorganization which were undertaken through our bulk purchasing and loan servicing operations. FMAC emerged from bankruptcy on April 1, 1998. Senior Bank Debt Claims. On August 21, 1997, we purchased 78% of the senior bank debt of FMAC for approximately $69 million, which represented a discount of 10% of the outstanding principal amount of such debt. In addition, we agreed to pay the selling banks additional consideration up to the amount of this 10% discount (or approximately $7.6 million) if FMAC makes cash payments or issues notes at market rates to its unsecured creditors and equity holders in excess of 10% of their allowed claims against FMAC. In connection with the purchase, we also issued to the selling banks warrants to purchase up to 389,800 shares of our common stock at an exercise price of $20.00 per share at any time through February 20, 2000. We subsequently purchased the remaining senior bank debt at a 5% discount. The contracts securing the senior bank debt were then sold to a third party (the "Contract Purchaser") at a profit. We guaranteed to the Contract Purchaser a specified return on the contracts that it purchased. Our maximum exposure on this guarantee was approximately $8.0 million at December 31, 1998. However, we do not believe that we will be required to make any payments under this guarantee. Consequently, we have not accrued any liability related to this guarantee as of December 31, 1998. We recorded a gain in the fourth quarter of 1997 of approximately $8.1 million ($5.0 million, net of income taxes) from the senior bank debt transaction. Once the Contract Purchaser has received its guaranteed return on the contracts, we are entitled to additional recoveries from the contracts up to a specified amount. FMAC has guaranteed to us on a non-recourse basis our recovery 8 of this amount, secured by the residual interests and certain equity certificates in FMAC's securitization transactions (collectively, the "B Pieces"). However, with certain exceptions, if we do not continue to service the contracts sold to the Contract Purchaser, the guaranteed amount will be limited to $10 million. DIP Facility. We have agreed to provide debtor-in-possession financing to FMAC (the "DIP Facility"). As of December 31, 1998, our maximum commitment under the DIP Facility was reduced to $12.4 million, of which $12.2 million was outstanding. FMAC pays interest on the DIP Facility at 10% per year. The DIP Facility is scheduled to be repaid with certain income tax refunds and, after payment of FMAC's guarantee to us, distributions from FMAC's B pieces. Under the terms of the agreement, FMAC must apply the first $10 million of income tax refunds to pay down the DIP Facility. These payments will permanently reduce the maximum that FMAC can borrow under the DIP Facility. Payments from B Pieces will also pay down and permanently reduce the maximum amount FMAC can borrow under the DIP Facility. Payments made on the DIP Facility from sources other than income tax refunds and B Pieces will not permanently reduce the maximum amount and FMAC is allowed to reborrow such amounts under the DIP Facility. As of December 31, 1998, FMAC had applied approximately $9.1 million in income tax refunds to pay down and reduce the maximum availability under this facility. Although we have declared FMAC in default under the DIP Facility, we are negotiating a resolution of this matter with FMAC, which may include an increase in the DIP Facility of up to approximately $2.0 million. Excess Collections Split. We will split with FMAC any excess recovery on the contracts sold to the Contract Purchaser and on the B Pieces, after FMAC pays its guaranteed amount to us, the DIP Facility and our fees. We are entitled to receive 17 1/2% of the excess with the remaining 82 1/2% being distributed to FMAC (the "Excess Collections Split"). The Excess Collections Split allocation may be reduced or eliminated if certain events occur. As of December 31, 1998, we had not recognized any revenue from the Excess Collections Split. We anticipate recognizing revenue on this transaction at the time collections under the arrangement are probable and reasonably estimable. If several conditions are met, including that our common stock is trading at $8 or more, we have the right to issue shares of our common stock to FMAC or its unsecured creditors or equity holders in exchange for all or part of FMAC's portion of the Excess Collection Split. Servicing. We service the contracts sold to the Contract Purchaser and the contracts in all but one of FMAC's securitized pools, and receive servicing fees. Other Matters. On the effective date of FMAC's plan of reorganization, in addition to the warrants described above, we issued warrants to FMAC to purchase up to 325,000 shares of our common stock at $20.00 per share. These warrants are exercisable through April 1, 2001. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Risk Factors--We Have Certain Risks Relating to the FMAC Transaction". Discontinued Operations/Split-Up of the Company Contract Purchasing. In 1994, we acquired Champion Financial Services, Inc., an independent automobile finance company. In April 1995, we initiated an aggressive plan to expand Champion's branch office network and, by December 31, 1997, we operated 83 branch offices across the country. In February 1998, we announced our intention to close the branch office network and exit this line of business in the first quarter of 1998. We recorded a pre-tax charge to discontinued operations totaling approximately $9.1 million (approximately $5.6 million, net of income taxes) during the first quarter of 1998. In addition, a $6.0 million charge (approximately $3.6 million, net of income taxes) was taken during the third quarter of 1998 due primarily to higher than anticipated loan losses and servicing expenses. The branch office closure was substantially complete by the end of the first quarter of 1998. In the third quarter of 1997, we announced a strategic evaluation of our non-dealership operations, including the possible sale or spin-off of these operations. In February 1998, in addition to closing our branch offices, we announced our intent to evaluate alternatives for our remaining non-dealership operations. On April 28, 1998, we announced that our Board of Directors had directed management to proceed with separating current operations into two companies and subsequently formed a new wholly owned subsidiary, Cygnet Financial Corporation ("Cygnet"), to operate the Cygnet dealer program and the bulk purchase and third party loan servicing operations. Since that date, these businesses were classified as discontinued operations in our consolidated financial statements. A proposal to split-up the two companies through a rights offering was approved by our stockholders at the annual stockholders meeting held in August 1998. We subsequently issued rights to our stockholders to purchase Cygnet common stock. Due to a lack of stockholder participation, however, the rights offering was canceled. We recorded a $2.0 million charge ($1.2 million, net of income tax) in the third quarter of 1998 to write off the costs associated with the rights offering. In the first quarter of 1999, we 9 discontinued efforts to sell or spin off the Cygnet dealer program and bulk purchasing and loan servicing operations and have reclassified these operations into continuing operations for all years presented in the consolidated financial statements and this Form 10-K. Accordingly, while the branch office network continues to be reported as discontinued operations, the Cygnet dealer program and bulk purchasing and loan servicing operations (including the FMAC transaction) have been reclassified into continuing operations for the years ended December 31, 1998, 1997, and 1996 in our accompanying consolidated financial statements. Regulation, Supervision, and Licensing Our operations are subject to ongoing regulation, supervision, and licensing under various federal, state, and local laws related to the sale of cars, the extension of credit, and the collections of loans. Among other things, these laws: o require that we obtain and maintain certain licenses and qualifications, o limit or prescribe terms of the contracts that we originate and/or purchase, o require specific disclosures to customers, o limit our right to repossess and sell collateral, and o prohibit us from discriminating against certain customers. We typically charge fixed interest rates significantly in excess of traditional finance companies on the contracts originated at our dealerships. Currently, a significant portion of our used car sales activities are conducted in, and a significant portion of the contracts we service were originated in, states which do not impose limits on the interest rate that a lender may charge. However, we have expanded, and will continue to expand our operations into states that impose interest rate limits, such as Florida and Texas. We believe that we are currently in substantial compliance with all applicable material federal, state, and local laws and regulations. However, if we do not remain in compliance with such laws, this failure could have a material adverse effect on our operations. In addition, the adoption of additional laws, changes in the interpretation of existing laws, or our entrance into jurisdictions with more stringent regulatory requirements could have a material adverse effect on our business. Trademarks and Proprietary Rights We have an ongoing program under which we evaluate our intellectual property and consider appropriate Federal and State intellectual property related filings. We believe that the value of our trademarks is increasing with the development of our business, but that our business as a whole is not materially dependent on our trademarks. We believe we have taken appropriate measures to protect our proprietary rights. However, there can be no assurance that such efforts have been successful. Competition Although the used car industry has historically been highly fragmented, it has attracted significant attention from a number of large companies, including AutoNation, U.S.A, and Car Max, all of whom have entered the used car sales business or announced plans to develop large used car sales operations. Many franchised automobile dealers have increased their focus on the used car market as well. We believe that these companies are attracted by the relatively high gross margins that can be achieved in this market as well as the industry's lack of consolidation. Many of these companies and franchised dealers have significantly greater financial, marketing and other resources than we have. However, none of these companies currently represent significant direct competition in the sub-prime market. Currently, our major competition for our dealership operations is the numerous independent buy here-pay here dealers that sell and finance sales of used cars to sub-prime borrowers. See "Business--Company Dealership Operations" for a description of how we distinguish our operations from those of typical buy here-pay here dealers. Our non-dealership operations are also highly competitive. In these operations, we compete with a variety of finance companies, financial institutions, and providers of financial services, many of whom have significantly greater resources, including access to lower priced capital. In addition, there are numerous financial services companies serving, or capable or serving, these markets. While traditional financial institutions, such as commercial banks, savings and loans, credit unions, and captive finance companies of major automobile manufacturers, have not consistently served the sub-prime markets, the yields earned by companies involved in sub-prime financing have encouraged certain of these traditional institutions to enter, or contemplate entering these markets. 10 Increased competition may cause downward pressure on sales prices and/or on the interest rate we charge on contracts originated at our dealerships, or cause us to reduce or eliminate acquisition discounts on the contracts we purchase in our non-dealership operations. Such events would have a material adverse affect on us. Employees At December 31, 1998, we employed approximately 2,500 persons. None of our employees are covered by a collective bargaining agreement. Seasonality Historically, we have experienced higher same store revenues in the first two quarters of the year than in the latter half of the year. We believe that these results are due to seasonal buying patterns resulting in part because many of our customers receive income tax refunds during the first half of the year, which are a primary source of down payments on used car purchases. ITEM 2 -- PROPERTIES As of December 31, 1998, we leased substantially all of our facilities, including 55 dealerships, four collection facilities that service our dealership portfolios, four non-dealership collection facilities, four inspection centers, and our corporate offices. We are continuing to negotiate lease settlements and terminations with respect to our branch office network closure. Our corporate and divisional administrative offices are located in approximately 40,000 square feet of leased space in Phoenix, Arizona. ITEM 3 -- LEGAL PROCEEDINGS We sell our cars on an "as is" basis. We require all customers to acknowledge in writing on the date of sale that we disclaim any obligation for vehicle-related problems that subsequently occur. Although we believe that these disclaimers are enforceable under applicable laws, there can be no assurance that they will be upheld in every instance. Despite obtaining these disclaimers, in the ordinary course of business, we receive complaints from customers relating to vehicle condition problems as well as alleged violations of federal and state consumer lending or other similar laws and regulations. Most of these complaints are made directly to us or to various consumer protection organizations and are subsequently resolved. However, customers occasionally name us as a defendant in civil suits filed in state, local, or small claims courts. Additionally, in the ordinary course of business, we are a defendant in various other types of legal proceedings. Although we cannot determine at this time the amount of the ultimate exposure from these lawsuits, if any, we, based on the advice of counsel, do not expect the final outcome to have a material adverse effect on our financial position. ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 11 ITEM 4A -- EXECUTIVE OFFICERS OF THE REGISTRANT (a) Information Concerning Our Executive Officers as of March 24, 1999.
Name Age Position - ------------------------ --- ---------------------------------------------------- Ernest C. Garcia II......... 41 Chairman of the Board (since 1992) and Chief Executive Officer Gregory B. Sullivan......... 40 Director (since 1998), President and Chief Operating Officer Steven P. Johnson........... 39 Senior Vice President, General Counsel and Secretary Steven T. Darak............. 51 Senior Vice President and Chief Financial Officer Donald L. Addink............ 49 Senior Vice President - Senior Analyst
Ernest C. Garcia II has served as our Chairman of the Board and Chief Executive Officer since 1992, and served as President from 1992 to 1996. Mr. Garcia is also a significant stockholder of Ugly Duckling, owning approximately 29.8% of our stock at December 31, 1998. Since 1991, Mr. Garcia has served as President of Verde Investments, Inc., a real estate investment corporation that is also an affiliate of us. Mr. Garcia's sister is married to Mr. Johnson. See below "Involvement in Certain Legal Proceedings by Directors and Executive Officers." Gregory B. Sullivan has served as our President and Chief Operating Officer since March 1996. In 1998, Mr. Sullivan was elected to our Board of Directors. Mr. Sullivan has also served as President of Ugly Duckling Car Sales, Inc. since December 1996. From 1995 through February 1996, Mr. Sullivan was a consultant to us. Mr. Sullivan formerly served as President and principal stockholder of an amusement game manufacturing company that he co-founded in 1989 and sold in 1994. Prior to 1989, Mr. Sullivan was involved in the securities industry and practiced law with a large Arizona firm. He is an inactive member of the State Bar of Arizona. Mr. Sullivan's sister is married to John N. MacDonough, another member of our Board of Directors. Steven P. Johnson has served as our Senior Vice President, General Counsel and Secretary since 1992. Since 1991, Mr. Johnson has also served as the General Counsel of Verde, an affiliate of us. Prior to 1991, Mr. Johnson practiced law in Tucson, Arizona. Mr. Johnson is licensed to practice law in Arizona and Colorado and is married to the sister of Mr. Garcia. Steven T. Darak has served as our Senior Vice President and Chief Financial Officer since February 1994, having joined us in 1994 as Vice President and Chief Financial Officer. From 1989 to 1994, Mr. Darak owned and operated Champion Financial Services, Inc., a used car finance company we acquired in early 1994. Prior to 1989, Mr. Darak served in various positions in the banking industry and in public accounting. Donald L. Addink has served as our Senior Vice President -- Senior Analyst since November 1998. From 1995 to November 1998, he served as our Vice President - - Senior Analyst. From 1988 to 1995, Mr. Addink served as Executive Vice President of Pima Capital Co., a life insurance holding company. Prior to 1988, Mr. Addink served in various capacities with a variety of insurance companies. Mr. Addink is a Fellow of the Society of Actuaries and a Member of the American Academy of Actuaries. Our officers serve at the discretion of our Board of Directors. The present term of office for the officers named above will expire on June 2, 1999 or on their earlier retirement, resignation, or removal. Except as summarized above, there is no family relationship among any of our officers. (b)Involvement in Certain Legal Proceedings by Directors and Executive Officers. Prior to 1992, when he founded Ugly Duckling, Mr. Garcia was involved in various real estate, securities, and banking ventures. Arising out of two transactions in 1987 between Lincoln Savings and Loan Association ("Lincoln") and entities controlled by Mr. Garcia, the Resolution Trust Corporation (the "RTC"), which ultimately took over Lincoln, asserted that Lincoln improperly accounted for the transactions and that Mr. Garcia's participation in the transactions facilitated the improper accounting. Facing severe financial pressures, Mr. Garcia agreed to plead guilty to one count of bank fraud, but in light of his cooperation with authorities both before and after he was charged, was sentenced to only three years probation, which has expired, was fined $50 12 (the minimum fine the court could assess), and during the period of his probation, which ended in 1996, was banned from becoming an officer, director or employee of any federally-insured financial institutions or a securities firms without governmental approval. In separate actions arising out of this matter, Mr. Garcia agreed not to violate the securities laws, and filed for bankruptcy both personally and with respect to certain entities he controlled. The bankruptcies were discharged by 1993. PART II ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY SECURITIES AND RELATED STOCKHOLDER MATTERS Our common stock trades on the Nasdaq Stock Market under the symbol "UGLY." The high and low closing sales prices of the common stock, as reported by Nasdaq for the two most recent fiscal years are reported below.
Market Price --------------------- High Low ------- ------- Fiscal Year 1997: First Quarter.................................... $ 25.75 $ 16.25 Second Quarter................................... $ 18.06 $ 13.13 Third Quarter.................................... $ 17.00 $ 12.50 Fourth Quarter................................... $ 16.75 $ 7.69 Fiscal Year 1998: First Quarter.................................... $ 10.88 $ 6.31 Second Quarter................................... $ 12.69 $ 8.00 Third Quarter.................................... $ 9.13 $ 4.63 Fourth Quarter................................... $ 6.00 $ 4.25
On March 22, 1999, the last reported sale price of the common stock on Nasdaq was $6.44 per share. On March 22, 1999 there were approximately 93 record owners of our common stock. We estimate that as of such date there were approximately 2,000 beneficial owners of our common stock. Dividend Policy. We have never paid dividends on our common stock and do not anticipate doing so in the foreseeable future. It is the current policy of our Board of Directors to retain any earnings to finance the operation and expansion of our business or to repurchase our common stock pursuant to an existing stock buy back program. In addition, the terms of our primary revolving credit facility prevent us from declaring or paying dividends in excess of 15.0% of each year's net earnings available for distribution. Our future financings may also include such restrictions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources - -- Financing Resources -- Revolving Facility." Exchange Offer. In the fourth quarter of 1998, we issued a total of approximately $17.5 million of our 12% subordinated debentures due 2003 in exchange for approximately 2.7 million shares of our common stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Supplemental Borrowings -- Exchange Offer." Beginning on March 2, 1999, the debentures became listed and trade on the American Stock Exchange under the ticker symbol UGY. 13 ITEM 6 -- SELECTED CONSOLIDATED FINANCIAL DATA (In thousands, except per share and operating data) The following table sets forth our selected historical consolidated financial data for each of the years in the five-year period ended December 31, 1998. The selected annual historical consolidated financial data for 1998, 1997, 1996, 1995, and 1994 are derived from our consolidated financial statements audited by KPMG LLP, independent auditors. For additional information, see our consolidated financial statements included elsewhere in this report. The following table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Years Ended December 31, ----------------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- --------- -------- -------- (In thousands, except per share amounts) Statement of Operations Data: Sales of Used Cars................ $ 287,618 $ 123,814 $ 53,768 $ 47,824 $ 27,768 Less: Cost of Used Cars Sold.......... 167,014 72,358 31,879 29,733 13,604 Provision for Credit Losses..... 67,634 23,045 9,657 8,359 8,024 --------- --------- --------- -------- -------- 52,970 28,411 12,232 9,732 6,140 --------- --------- --------- -------- -------- Interest Income................... 27,828 18,736 8,597 8,227 4,683 Gain on Sale of Loans............. 12,093 14,852 3,925 -- -- Servicing and Other Income........ 38,631 12,681 2,537 308 556 --------- --------- --------- -------- -------- 78,552 46,269 15,059 8,535 5,239 --------- --------- --------- -------- -------- Income before Operating Expenses.. 131,522 74,680 27,291 18,267 11,379 Operating Expenses................ 118,702 55,741 18,085 16,758 10,837 --------- --------- --------- -------- -------- Income before Interest Expense.... 12,820 18,939 9,206 1,509 542 Interest Expense.................. 6,904 2,774 2,429 5,328 2,870 --------- --------- --------- -------- -------- Earnings (Loss) before Income Taxes........................... 5,916 16,165 6,777 (3,819) (2,328) Income Taxes (Benefit)............ 2,396 6,637 100 -- (334) --------- --------- --------- -------- -------- Earnings (Loss) from Continuing Operations...................... $ 3,520 $ 9,528 $ 6,677 $ (3,819) $ (1,994) ========= ========= ========= ========= ======== Earnings (Loss) per Common Share from Continuing Operations: Basic ............................ $ 0.19 $ 0.53 $ 0.73 $ (0.69) $ (0.36) ========= ========= ========= ========= ========= Diluted........................... $ 0.19 $ 0.52 $ 0.69 $ (0.69) $ (0.36) ========= ========= ========= ========= ========= EBITDA $ 18,555 $ 22,240 $ 10,588 $ 3,298 $ 1,513 Balance Sheet Data: Finance Receivables, Net.......... $ 163,209 $ 90,573 $ 17,348 $ 27,732 $14,534 Total Assets...................... 345,975 276,426 117,629 60,712 29,681 Subordinated Notes Payable........ 43,741 12,000 14,000 14,553 18,291 Total Debt........................ 161,035 76,821 28,904 49,754 28,233 Preferred Stock................... -- -- -- 10,000 -- Common Stock...................... 173,828 172,622 82,612 127 77 Treasury Stock.................... (14,510) -- -- -- -- Total Stockholders' Equity (Deficit)....................... $ 162,767 $ 181,774 $ 82,319 $ 4,884 $(1,194)
- ---------- Note: See "Business-Company Dealership Operations" for a summary of significant acquisitions during 1997, and a description of our conversion to a single integrated computer system in 1998. Also, see "Business--Discontinued Operations/Split-Up of the Company" for a description of significant charges taken in 1998 for the closure of our branch office network, and our attempted split-up of Ugly Duckling. Finally, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Securitizations -- Dealership Operations" for a discussion of a change in our securitization structure in the fourth quarter of 1998. 14 ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We have experienced a number of significant events during the past three years. Some of the more important events follow: o During 1996 we: o completed our initial public offering and secondary offering of common stock generating a total of $79.4 million in cash. o During 1997 we: o completed a private placement of common stock in February 1997 generating $88.7 million in cash, o completed a conversion of one of our loan servicing systems. We experienced various transitional problems with the conversion, which resulted in a charge of $5.7 million (approximately $3.4 million, net of income taxes) to write down our residuals in finance receivables sold, o completed three significant acquisitions and developed new stores to increase our total number of dealerships in operation from seven to 41 at December 31, 1997, and o expanded our dealership chain from two markets at the end of 1996 to ten markets at the end of 1997. o During 1998 we: o closed our branch office network resulting in two significant charges to discontinued operations totaling $15.1 million (approximately $9.2 million, net of income taxes), o completed the conversion of our dealerships to a single computer system, o attempted to split-up the company through a rights offering to our stockholders. We terminated the rights offering due to a lack of stockholder participation. Although the rights offering was unsuccessful, the exercise of splitting the operations and management teams has proven beneficial to each of our businesses, o completed an exchange offer whereby we issued $17.5 million in subordinated debentures and repurchased approximately 2.7 million shares of our common stock, and o changed the way we structure our securitization transactions for accounting purposes from a sale to a financing. The change had a significant effect on earnings in 1998. In this discussion and analysis we explain the general financial condition and the results of operations of Ugly Duckling and its subsidiaries. In particular, we analyze and explain the annual changes in the results of operations of our various business segments. As you read this discussion, you should refer to our Consolidated Financial Statements beginning on page 41, which contain the results of our operations for 1998, 1997, and 1996. Results of Operations- Years Ended December 31, 1998, 1997 and 1996 Income items in our Statement of Operations consist of: o Sales of Used Cars less Cost of Used Cars Sold less Provision for Credit Losses o Interest Income o Gain on Sale of Loans o Servicing and Other Income 15 Sales of Used Cars and Cost of Used Cars Sold
(dollars in thousands) 1998 1997 1996 ---------- ----------- ---------- Used Cars Sold (Units).............. 35,964 16,636 7,565 ========== =========== ========== Sales of Used Cars ................. $ 287,618 $ 123,814 $ 53,768 Cost of Used Cars Sold ............. 167,014 72,358 31,879 ---------- ----------- ---------- Gross Margin ....................... $ 120,604 $ 51,456 $ 21,889 ========== =========== ========== Gross Margin %...................... 41.9% 41.6% 40.7% ========== =========== ========== Per Unit Sold: Sales .............................. $ 7,997 $ 7,443 $ 7,107 Cost of Used Cars Sold ............. 4,644 4,349 4,214 ---------- ----------- ---------- Gross Margin ....................... $ 3,353 $ 3,093 $ 2,893 ========== =========== ==========
The number of cars sold (units) increased by 116.2% for the year ended December 31, 1998 over the year ended December 31, 1997, compared to an increase of 119.9% over the year ended December 31, 1996. Same store unit sales in the year ended December 31, 1998 were compararable to the year ended December 31, 1997. We anticipate future revenue growth would come from increasing the number of dealerships and not from higher sales volumes at existing dealerships. Same store unit sales declined by 11.6% in the year ended December 31, 1997 compared to the year ended December 31, 1996. We believe that this decline was due primarily to the increased emphasis on underwriting at our dealerships, particularly at one dealership where unit sales decreased by 742 units, which represents 85.0% of the net decrease for the year ended December 31, 1997. Sales of Used Cars (revenues) increased by 132.3% for the year ended December 31, 1998 over the year ended December 31, 1997, compared to a 130.3% increase over the year ended December 31, 1996. The growth for these periods reflects increases in the number of dealerships in operation and the average unit sales price. The Cost of Used Cars Sold increased by 130.8% for the year ended December 31, 1998 over the year ended December 31, 1997, compared to an increase of 127.0% over the year ended December 31, 1996. The gross margin on used car sales (Sales of Used Cars less Cost of Used Cars Sold excluding Provision for Credit Losses) increased by 134.4% for the year ended December 31, 1998 over the year ended December 31, 1997, compared to an increase of 135.1% over the year ended December 31, 1996. The gross margin percentage has increased over the past two years, as we have been successful in increasing our sales prices by more than the increase in the cost of used cars sold. Our average sales price per car increased by 7.4% for the year ended December 31, 1998 over the year ended December 31, 1997, compared to a 4.7% increase in the year ended December 31, 1997 from the year ended December 31, 1996. The increase in the average sales price was necessary to offset the increase in the Cost of Used Cars Sold. On a per unit basis, the Cost of Used Cars Sold increased by 6.8% for the year ended December 31, 1998 over the year ended December 31, 1997, compared to an increase of 3.2% over the year ended December 31, 1996. 16 Provision for Credit Losses We record provisions for credit losses in our dealership operations and our non-dealership operations. Dealership Operations. Following is a summary of the Provision for Credit Losses from our dealership operations:
1998 1997 1996 ------- ------- ------ Provision for Credit Losses (in thousands)... $65,318 $22,354 $9,657 ======= ======= ====== Provision per contract originated............ 1,837 $1,397 $1,394 ======== ======= ====== Provision as a percentage of principal balances originated.............. 23.6% 19.1% 19.7% ======== ======== ======
The Provision for Credit Losses in our dealership operations increased by 192.2% in the year ended December 31, 1998 over the year ended December 31, 1997, compared to an increase of 131.5% over the year ended December 31, 1996. The Provision for Credit Losses per unit originated at our dealerships increased by 31.5% in the year ended December 31, 1998 over the year ended December 31, 1997, compared to an increase of 0.2% over the year ended December 31, 1996. The increase in 1998 was primarily due to an increase in the average amount financed to $7,796 per unit in the year ended December 31, 1998 from $7,301 per unit in the year ended December 31, 1997 and from the change in our securitization structure beginning in the fourth quarter of 1998. As a percentage of dealership contract principal balances originated, the Provision for Credit Losses averaged 23.6% for the year ended December 31, 1998, 19.1% for the year ended December 31, 1997, and 19.7% for the year ended December 31, 1996. When we changed how we structure securitizations for accounting purposes in the fourth quarter of 1998, we also changed the timing of providing for credit losses. For periods prior to the fourth quarter of 1998, we generally provided a Provision for Credit Losses of approximately 20% of the loan principal balance at the time of origination to record the loan at the lower of cost or market. However, as a consequence of our revised securitization structure, we will now be retaining securitized loans on our balance sheet and recognizing income over the life of the contracts. Therefore, for loans originated in the fourth quarter of 1998, we increased the provision for credit losses to 27% of the principal balance at the time of origination. We also increased the provision for credit losses to 27% on loans originated in prior periods that had not been securitized prior to the fourth quarter. Non-Dealership Operations. The provision for credit losses in our non-dealership operations increased by 235.2% to $2.3 million in the year ended December 31, 1998 from $691,000 in the year ended December 31, 1997. The increase was primarily due to the significant increase in loans under the Cygnet dealer program. There was no provision for credit losses in our non-dealership operations in 1996, since there was no significant activity until 1997. See "Allowance for Credit Losses" below. Interest Income We generate Interest Income from both our dealership operations and our non-dealership operations. Dealership Operations. Interest Income consists primarily of interest on finance receivables from our dealership sales and income from Residuals in Finance Receivables Sold from our prior securitizations. Interest Income increased by 37.6% to $17.3 million for the year ended December 31, 1998 from $12.6 million for the year ended December 31, 1997, which increased by 46.1% from $8.6 million in the year ended December 31, 1996. The increases were primarily due to the increase in the average finance receivables retained on our balance sheet during these periods. However, because we structured most of our securitizations to recognize income as sales during 1998, 1997, and 1996, Interest Income was lower than if we had structured the securitizations as secured financings for accounting purposes. A primary element of our sales strategy is to provide financing to our customers, almost all of whom are sub-prime borrowers. As summarized in the following table, we continue to increase the percentage of sales revenue financed, and the number of units sold. 17
1998 1997 1996 ---- ---- ---- Percentage of sales revenue financed... 96.4% 94.4% 90.5% Percentage of used cars sold financed.. 98.9% 96.2% 91.6%
As a result of our expansion into markets with interest rate limits, the yield on our dealership receivable contracts has gone down. The average effective yield on finance receivables from our dealerships was approximately 25.8% for the year ended December 31, 1998, 26.7% for the year ended December 31, 1997, and 29.2% for the year ended December 31, 1996. Our policy is to charge 29.9% per year on our dealership contracts. However, in those states that impose interest rate limits, we charge the maximum interest rate permitted. Non-Dealership Operations. In our non-dealership operations, we generate interest income primarily from a loan we made to FMAC as part of its bankruptcy proceedings, and from our Cygnet dealer program. Interest Income from the FMAC transaction decreased by 52.0% to $1.8 million from $3.8 million in 1997 when we originated the FMAC loan. During a portion of 1997, in addition to our debtor-in-possession loan to FMAC, we held other notes receivable from FMAC totaling approximately $76.3 million. We sold receivables that secured the notes for a gain at the end of 1997. Interest income from the Cygnet dealer program increased by 269.2% to $8.7 million from $2.4 million in 1997 when the Cygnet dealer program commenced significant operations. The increase in interest income in the Cygnet dealer program reflects a significant increase in the amount of loans outstanding during 1998 compared to 1997. Gain on Sale of Loans A summary of Gain on Sale of Loans follows:
(dollar amounts in thousands) 1998 1997 1996 ----------- ------------ ------------ Dealership Operations................... $ 12,093 $ 6,721 $ 3,925 Non-Dealership Operations............... -- 8,131 -- ----------- ------------ ------------ $ 12,093 $ 14,852 $ 3,925 =========== =========== ============= Gain on Sale of Loans as a percentage of principal balances securitized - dealership operations ................ 5.4% (1) 8.2% 6.7% =========== =========== ============ (1) Excluding a $5.7 million charge in 1997 described below
Dealership Operations. We recorded Gain on Sale of Loans related to securitization transactions of $12.1 million during the year ended December 31, 1998, $6.7 million (net of a $5.7 million charge) during the year ended December 31, 1997, and $3.9 million during the year ended December 31, 1996. We recorded a $5.7 million charge (approximately $3.4 million net of income taxes) in the third quarter of 1997 in order to adjust our assumptions related to our previously completed securitization transactions. The decrease in Gain on Sale (excluding the $5.7 million charge in 1997) as a percentage of principal balances securitized in 1998 compared to 1997 is primarily due to the use of a higher cumulative charge off assumption in the 1998 securitizations and the securitized portfolios in 1998 having a shorter weighted average life than those in 1997. The increase in Gain on Sale (excluding the $5.7 million charge in 1997) as a percentage of principal balances securitized in 1997 compared to 1996 is primarily due to a decrease in the weighted average borrowing rate of the underlying Class A certificates. See "Securitizations-Dealership Operations" below for a summary of the structure of our securitizations. Non-Dealership Operations. During 1997, our non-dealership operations entered into a series of transactions with FMAC including transactions in which we acquired 100% of FMAC's senior bank debt. When FMAC put the finance contracts securing this debt up for bid, we purchased the contracts by releasing the debt. We then sold the contracts to a third party purchaser. We recorded a one-time gain of $8.1 million from this transaction. See "Business--Non-Dealership Operations--Bulk Purchasing and Loan Servicing Operations." 18 Servicing and Other Income We generate Servicing and Other Income from both our dealership operations and our non-dealership operations. A summary of Servicing and Other Income follows (in thousands):
Non-Dealership Dealership Operations Operations --------------------- --------------- Company Company Dealership Corporate Cygnet Dealerships Receivables and Other Loan Servicing Total ----------- ----------- --------- -------------- ----------- 1998..................$ 389 $ 15,453 $ 493 $ 22,296 $ 38,631 1997..................$ 1,498 $ 8,814 $ 2,013 $ 356 $ 12,681 1996..................$ 195 $ 1,887 $ 455 $ -- $ 2,537
Dealership Operations. Servicing and Other Income increased by 32.5% to $16.3 million in the year ended December 31, 1998 over the $12.3 million recognized in 1997, which was an increase of 385.8% over the $2.5 million in 1996. We service our securitized contracts for monthly fees ranging from .25% to .33% of the beginning of month principal balances (3.0% to 4.0% per year). The significant increase in Servicing and Other Income is primarily due to the increase in the principal balance of contracts being serviced under the securitization program and the addition in 1997 of the Kars portfolio. Although we acquired several dealerships in the Kars transaction, the owners retained the loan portfolio, which we service. In addition, the increase in 1997 was also due to our investment income on the proceeds from our private placement that we closed in February 1997. We recorded earnings on these investments of $1.2 million compared to no investment earnings in the year ended December 31, 1996. Non-Dealership Operations. In April 1998, we began servicing loans on behalf of FMAC. Shortly thereafter, we entered into additional agreements to service loan portfolios on behalf of other third parties. Our servicing fee is generally a percentage of the portfolio balance (generally 3.25% to 4.0% per year) with a minimum fee per loan serviced (generally $14 to $17 per month). Servicing and Other Income totaled $22.3 million in the year ended December 31, 1998, compared to $356,000 in 1997 and $0 in 1996. Our non-dealership operations have entered into servicing agreements with two companies that have filed and subsequently emerged from bankruptcy and continue to operate under their approved plans of reorganization. Under the terms of the respective servicing agreements and approved plans of reorganization, once certain creditors of the bankrupt companies have been paid in full, we are entitled to certain incentive compensation in excess of the servicing fees that we have earned to date. Under the terms of the agreements with FMAC, we are scheduled to receive 17.5% of all collections of the serviced portfolio once the specified creditors have been paid in full. See "Business--Non-Dealership Operations--Bulk Purchasing and Loan Servicing Operations." Under the terms of the second agreement, we are scheduled to receive the first $3.25 million in collections once the specified creditors have been paid in full and 15% thereafter. We are required to issue warrants to purchase up to 150,000 shares of our common stock to the extent we receive the $3.25 million and, in addition, will be required to issue 75,000 warrants for each $1.0 million in incentive fee income we receive after we collect the $3.25 million. As of December 31, 1998, we estimate that the incentive compensation could range from $0 to $8.0 million under both agreements. We have not accrued any fee income from these incentives. Income before Operating Expenses As a result of our continued expansion, Income before Operating Expenses grew by 76.1% to $131.5 million for the year ended December 31, 1998 from $74.7 million for the year ended December 31, 1997, compared to an increase of 173.6% from $27.3 million in 1996. Growth of Sales of Used Cars, Interest Income, Gain on Sale of Loans, and Servicing and Other Income were the primary contributors to the increase. 19 Operating Expenses Operating Expenses consist of: o Selling and Marketing Expenses, o General and Administrative Expenses, and o Depreciation and Amortization. A summary of operating expenses for our business segments for the years ended December 31, 1998, 1997 and 1996 follows (in thousands):
Dealership Operations Non-Dealership Operations --------------------- ------------------------- Company Cygnet Cygnet Company Dealership Corporate Dealer Loan Corporate Dealerships Receivables and Other Program Servicing and Other Total ----------- ----------- --------- ------- --------- --------- ------ 1998: Selling and Marketing...... $ 20,285 $ -- $ -- $ 242 $ 31 $ 7 $ 20,565 General and Administrative. 32,383 18,491 16,103 2,721 18,664 4,040 92,402 Depreciation and Amortization............ 2,581 1,334 997 104 614 105 5,735 -------- ------- ------- ------ ------ ------ -------- $ 55,249 $19,825 $17,100 $ 3,067 $19,309 $4,152 $118,702 ======== ======= ======= ====== ======= ====== ======== 1997: Selling and Marketing...... $ 10,538 $ -- $ -- $ -- $ -- $ -- $ 10,538 General and Administrative. 17,214 12,303 9,896 917 -- 1,572 41,902 Depreciation and Amortization........... 1,536 1,108 504 28 -- 125 3,301 -------- ------- ------ ------- ------- ------ -------- $ 29,288 $13,411 $10,400 $ 945 $ -- $1,697 $ 55,741 ======== ======= ======= ======= ======= ====== ======== 1996: Selling and Marketing...... $ 3,568 $ -- $ 17 $ -- $ -- $ -- $ 3,585 General and Administrative. 6,306 2,859 3,953 -- -- -- 13,118 Depreciation and Amortization........... 318 769 295 -- -- -- 1,382 -------- ------- ------ ------- ------- ------- -------- $ 10,192 $ 3,628 $4,265 $ -- $ -- $ -- $ 18,085 ======== ======= ====== ======= ======= ======= ========
Selling and Marketing Expenses. A summary of Selling and Marketing Expense as a percentage of Sales of Used Cars and Selling and Marketing Expense per car sold from our dealership operations follows:
1998 1997 1996 ---- ---- ---- Selling and Marketing Expense as a Percent of Sales of Used Cars....... 7.1% 8.5% 6.6% ==== ==== ==== Selling and Marketing Expense per Car Sold....................... $564 $633 $472 ==== ==== ====
For the years ended December 31, 1998, 1997, and 1996, Selling and Marketing Expenses consisted almost entirely of advertising costs and commissions relating to our dealership operations. Selling and Marketing Expenses increased by 95.2% to $20.6 million for the year ended December 31, 1998 from $10.5 million for the year ended December 31, 1997, which was an increase of 193.9% from $3.6 million in 1996. The decrease in Selling and Marketing Expense as a percentage of Sales of Used Cars and on a per unit basis from 1997 to 1998 is due to the significant increase in the number of cars sold in 1998 compared to 1997, and to the fact that we did not enter any new markets in 1998. The significant increase in per unit marketing in 1997 was primarily due to our expansion into several new markets. We operated dealerships in ten markets during 1997, compared to two markets in 1996. As a result of this expansion, we incurred significant marketing costs in 1997 in new markets in an effort to establish brand name recognition. General and Administrative Expenses. General and Administrative Expenses increased by 120.5% to $92.4 million for the year ended December 31, 1998 from $41.9 million for the year ended December 31, 1997, which was an increase of 219.4% from $13.1 million for the year ended December 31, 1996. The increase in General and Administrative Expenses was primarily a result of the increased number of used car dealerships in operations, as well the expansion of our bulk purchasing and loan servicing operations, the Cygnet dealer program, and continued expansion of infrastructure to administer growth. General and Administrative expenses for the year ended 1998 includes a $2.0 million charge 20 ($1.2 million, net of income taxes) to write off costs associated with the rights offering. Depreciation and Amortization. Depreciation and Amortization consists of depreciation and amortization on our property and equipment and amortization of goodwill and trademarks. Depreciation and amortization increased by 73.7% to $5.7 million for the year ended December 31,1998 from $3.3 million for the year ended December 31, 1997, which was an increase of 138.9% over the $1.4 million incurred in the year ended December 31, 1996. The increase in 1998 was primarily due to increases in amortization of goodwill associated with our 1997 acquisitions, increased depreciation expense from the addition of used car dealerships and the addition of four loan servicing facilities in 1998 to support our bulk purchase and loan servicing operations. Interest Expense Interest expense increased by 148.9% to $6.9 million in 1998 from $2.8 million in 1997, which was an increase of 14.2% from $2.4 million in 1996. The increase in 1998 was primarily due to increased borrowings of Notes Payable and Subordinated Notes Payable. The relatively small increase in 1997, despite significant growth in our total assets, was primarily the result of the private placement of common stock that we completed in February 1997. Our private placement generated $88.7 million in cash which we used to pay down debt. Income Taxes Income taxes totaled $2.4 million for the year ended December 31, 1998, $6.6 million for the year ended December 31, 1997, and $100,000 for the year ended December 31, 1996. Our effective tax rate was 40.5% for the year ended December 31, 1998, 41.1% for the year ended December 31, 1997, and 1.6% for the year ended December 31, 1996. In 1996, we reversed all of the valuation allowance that existed against our deferred income tax assets as of December 31, 1995, which significantly reduced our effective income tax rate. Discontinued Operations The loss from Discontinued Operations, net of income tax benefits, increased by $9.1 million to $9.2 million in 1998 from $83,000 in 1997, which was an improvement from the $811,000 loss we incurred in 1996. The significant increase in the loss in 1998 was due to the charges we recorded totaling $15.1 million ($9.2 million, net of income taxes) to close our branch office network. Financial Position Total assets increased by 25.2% to $346.0 million at December 31, 1998 from $276.4 million at December 31, 1997. The increase was due in part to an increase in Finance Receivables of $72.6 million to $163.2 million at December 31, 1998 from $90.6 million at December 31, 1997. The increase in Finance Receivables was primarily due to a significant increase in loans under the Cygnet dealer program, and a change in the structure of our securitization transactions for accounting purposes which resulted in us retaining on balance sheet the Finance Receivables we securitized in the fourth quarter of 1998. We previously structured securitizations as sales for accounting purposes and we removed the related Finance Receivables from the balance sheet upon securitization. Additionally, our dealership network increased from 41 dealerships at December 31, 1997 to 56 at December 31, 1998. The increase in the number of our dealerships resulted in an increase in Inventory of $11.8 million to $44.2 million at December 31, 1998 from $32.4 million at December 31, 1997. We financed the increases in assets primarily through additional borrowings, represented by increases in Notes Payable, Collateralized Notes Payable, and Subordinated Notes Payable. Notes Payable and Collateralized Notes Payable increased by $52.5 million to $117.3 million at December 31, 1998 from $64.8 million at December 31, 1997. This increase was primarily due to the change in our securitization structure. We retained the debt related to the securitization transaction we closed in the fourth quarter of 1998 on our balance sheet. Subordinated Notes Payable increased by $31.7 million to $43.7 million at December 31, 1998 from $12.0 million at December 31, 1997. The increase in Subordinated Notes Payable was primarily due to the addition of $20.0 million in subordinated notes used for working capital and other uses and approximately $17.5 million used to repurchase our common stock in an exchange transaction. See "Liquidity and Capital Resources--Supplemental Borrowings--Exchange Offer" below. 21 Growth in Finance Receivables. As a result of our rapid expansion, contract receivables managed by our dealership operations have increased significantly during the past three years. The following table reflects the growth in period end balances of our dealership operations measured in terms of the principal amount and the number of contracts outstanding.
Total Contracts Outstanding-Dealership Operations (In thousands, except number of contracts) as of December 31, -------------------------------------------- 1998 1997 -------------------- ---------------------- Principal No. of Principal No. of Amount Contracts Amount Contracts -------- --------- --------- --------- Principal Amount..................... $292,683 49,601 $ 183,321 35,762 Less: Portfolios Securitized and Sold 198,747 37,186 127,356 27,769 ------- ------ --------- ------ Dealership Operations Total........ $ 93,936 12,415 $ 55,965 7,993 ======== ====== ========= ======
The following table reflects the growth in the principal amount and number of contracts generated or acquired by our dealership operations. Total Contracts Generated or Acquired-Dealership Operations (Principal Amounts In Thousands)
During the Years Ended December 31, ---------------------------------- 1998 1997 1996 -------- -------- -------- Principal Amount... $277,226 $172,230 $ 48,996 Number of Contracts 35,560 29,251 6,929 Average Principal.. $ 7,796 $ 5,888 $ 7,071
Finance Receivable principal balances generated or acquired by our dealership operations during the year ended December 31, 1998 increased by 61.0% to $277.2 million from $172.2 million in the year ended December 31, 1997. During the year ended December 31, 1997, Finance Receivable principal balances generated or acquired by our dealership operations included the purchase of approximately $55.4 million (13,250 contracts) in Finance Receivables principal balances in conjunction with the E-Z Plan and Seminole acquisitions. In addition to the loan portfolio summarized above, our dealership operations also serviced loan portfolios totaling approximately $121.2 million ($47.9 million for Kars and $73.3 million from our branch office network) as of December 31, 1998, and $267.9 million ($127.3 million for Kars and $140.6 million from our branch office network) as of December 31, 1997. Our non-dealership operations began servicing loans on behalf of FMAC on April 1, 1998, and began servicing additional loan portfolios on behalf of other third parties throughout 1998. By December 31, 1998, our non-dealership bulk purchasing/loan servicing operations were servicing a total of $587.3 million in finance receivables (approximately 80,000 contracts). Allowance for Credit Losses We have established an Allowance for Credit Losses ("Allowance") to cover anticipated credit losses on the contracts currently in our portfolio. We established the Allowance by recording an expense through the Provision for Credit Losses. For Finance Receivables generated at our dealerships, our policy is to charge off a contract the earlier of: o when we believe it is uncollectible, or o when it is delinquent for more than 90 days. 22 The following table reflects activity in the Allowance, as well as information regarding charge off activity, for the years ended December 31, 1998 and 1997, in thousands.
Dealership Operations --------------------- Years Ended December 31, --------------------- 1998 1997 --------- -------- Allowance Activity: Balance, Beginning of Period..................... $ 10,356 $ 1,625 Provision for Credit Losses...................... 65,318 22,354 Allowance on Acquired Loans...................... -- 15,309 Reduction Attributable to Loans Sold............. (44,539) (21,408) Net Charge Offs.................................. (6,358) (7,524) --------- -------- Balance, End of Period........................... $ 24,777 $10,356 ======== ======= Allowance as Percent of Period End Principal Balances...................................... 26.4% 18.5% ======== ======== Charge off Activity: Principal Balances............................. $ (8,410) $(10,285) Recoveries, Net................................ 2,052 2,761 -------- ------- Net Charge Offs.................................. $ (6,358) $(7,524) ========= ========
The Allowance on contracts from dealership operations was 26.4% of the outstanding principal balances as of December 31, 1998 and 18.5% of outstanding principal balances as of December 31, 1997. The increase is due to the change in the structure of our securitization transactions for accounting purposes in the fourth quarter of 1998. The change resulted in us retaining the securitized loans from our fourth quarter securitization on balance sheet. As we intend to hold the balance sheet portfolio for investment and not for sale, we increased the provision for credit losses to 27% of the principal balance for loans originated in the fourth quarter of 1998. The Allowance on contracts from non-dealership operations was 3.9% of the outstanding principal balances as of December 31, 1998 and 3.8% of outstanding principal balances as of December 31, 1997. In addition, our non-dealership operations held non-refundable discounts and security deposits from third party dealers totaling $15.3 million, which represented 29.9% of outstanding principal balances as of December 31, 1998. Our non-dealership operations held non-refundable discounts and security deposits from third party dealers totaling $7.2 million, which represented 26.0% of the outstanding principal balances as of December 31, 1997. Even though a contract is charged off, we continue to attempt to collect the contract. Recoveries as a percentage of principal balances charged off from dealership operations averaged 24.4% for the year ended December 31, 1998 compared to 26.8% for the year ended December 31, 1997. Recoveries as a percentage of principal balances charged off from non-dealership operations averaged 30.1% for the year ended December 31, 1998 compared to 0% for the year ended December 31, 1997, when we recorded only one charge off against the Allowance. For Finance Receivables acquired by our non-dealership operations with recourse to the seller, our general policy is to exercise the recourse provisions in our agreements under the Cygnet dealer program when a contract is delinquent for 45 days. For contracts not purchased with recourse, our policy is similar to that of our dealership operations. Static Pool Analysis We use a "static pool" analysis to monitor performance for contracts we have originated at our dealerships. In a static pool analysis, we assign each month's originations to a unique pool and track the charge offs for each pool separately. We calculate the cumulative net charge offs for each pool as a percentage of that pool's original principal balances, based on the number of complete payments made by the customer before charge off. The table below displays the cumulative net charge offs of each pool as a percentage of original contract cumulative balances, based on the quarter the loans were originated. The table is further stratified by the number of payments made by our customers prior to charge off. For periods denoted by "x", the pools have not seasoned sufficiently to allow us to compute cumulative losses. For periods denoted by "-", the pools have not yet reached the indicated cumulative age. While we monitor static pools on a monthly basis, for presentation purposes, we are presenting the information in the table below on a quarterly basis. 23 Currently reported cumulative losses may vary from those previously reported for the reasons listed below, however, management believes that such variation will not be material: o ongoing collection efforts on charged off accounts, and o the difference between final proceeds on the sale of repossessed collateral versus our estimates of the sale proceeds. The following table sets forth as of February 28, 1999, the cumulative net charge offs as a percentage of original contract cumulative (pool) balances, based on the quarter of origination and segmented by the number of monthly payments completed by customers before charge off. The table also shows the percent of principal reduction for each pool since inception and cumulative total net losses incurred (TLI). Pool's Cumulative Net Losses as Percentage of Pool's Original Aggregate Principal Balance (dollars in thousands)
Monthly Payments Completed by Customer Before Charge Off ------------------------------------------------------------------------- Orig. 0 3 6 12 18 24 TLI Reduced ----- --- ---- ---- ---- ---- ---- ---- ------- 1994: 1st Quarter $ 6,305 3.4% 10.0% 13.4% 17.9% 20.3% 20.9% 21.0% 100.0% 2nd Quarter $ 5,664 2.8% 10.4% 14.1% 19.6% 21.5% 22.0% 22.1% 100.0% 3rd Quarter $ 6,130 2.8% 8.1% 12.0% 16.3% 18.2% 19.1% 19.2% 100.0% 4th Quarter $ 5,490 2.4% 7.6% 11.2% 16.4% 19.3% 20.2% 20.3% 100.0% 1995: 1st Quarter $ 8,191 1.6% 9.1% 14.7% 20.4% 22.7% 23.6% 23.8% 100.0% 2nd Quarter $ 9,846 2.0% 8.5% 13.3% 18.1% 20.7% 22.2% 22.6% 99.9% 3rd Quarter $ 10,106 2.5% 7.9% 12.2% 18.8% 22.2% 23.6% 24.2% 99.1% 4th Quarter $ 8,426 1.5% 6.6% 11.7% 18.2% 22.6% 24.1% 24.7% 98.7% 1996: 1st Quarter $ 13,635 1.6% 8.0% 13.7% 20.7% 24.9% 26.2% 27.1% 96.5% 2nd Quarter $ 13,462 2.2% 9.2% 13.4% 22.1% 26.1% 27.7% 28.9% 93.6% 3rd Quarter $ 11,082 1.6% 6.9% 12.5% 21.5% 25.7% 28.0% 28.5% 89.3% 4th Quarter $ 10,817 0.6% 8.5% 16.0% 25.0% 29.3% 31.2% 31.2% 85.3% 1997: 1st Quarter $ 16,279 2.1% 10.6% 17.9% 24.6% 29.6% 30.9% 30.9% 80.1% 2nd Quarter $ 25,875 1.5% 9.9% 15.9% 22.8% 27.3% 27.5% 27.5% 71.2% 3rd Quarter $ 32,147 1.4% 8.4% 13.3% 22.6% 25.3% x 25.3% 63.1% 4th Quarter $ 42,529 1.5% 6.9% 12.7% 21.6% x -- 21.9% 55.4% 1998: 1st Quarter $ 69,708 0.9% 6.9% 13.6% x -- -- 18.4% 47.0% 2nd Quarter $ 66,908 1.1% 8.1% x -- -- -- 14.3% 32.2% 3rd Quarter $ 71,027 1.0% x -- -- -- -- 8.1% 18.0% 4th Quarter $ 69,583 x -- -- -- -- -- 1.6% 5.3%
The following table sets forth the principal balances 31 to 60 days delinquent, and 61 to 90 days delinquent as a percentage of total outstanding contract principal balances from dealership operations.
Retained Securitized Managed -------- ----------- ------- December 31, 1998: 31 to 60 days... 2.3% 5.2% 4.6% 61 to 90 days... 0.5% 2.2% 1.9% December 31,1997: 31 to 60 days... 2.2% 4.5% 3.6% 61 to 90 days... 0.6% 2.2% 1.5%
In accordance with our charge off policy, there are no accounts more than 90 days delinquent as of December 31, 1998 and 1997. Securitizations-Dealership Operations Structure of Securitizations. For the securitization transactions closed prior to the fourth quarter of 1998, we recognized a Gain on Sale of Loans equal to the difference between the sales proceeds for the Finance Receivables sold and our recorded investment in the Finance Receivables sold. Our investment in Finance Receivables consisted of the principal balance of the Finance Receivables securitized net of the Allowance for Credit Losses related to the securitized receivables. We then reduced our Allowance for Credit Losses by the 24 amount of Allowance for Credit Losses related to the loans securitized. We allocated the recorded investment in the Finance Receivables between the portion of the Finance Receivables sold and the portion retained based on the relative fair values on the date of sale. In the fourth quarter of 1998 we announced that we were changing the way we structure transactions under our securitization program for accounting purposes. Through September 30, 1998, we had structured these transactions as sales for accounting purposes. However, beginning in the fourth quarter of 1998, we began structuring securitizations for accounting purposes to recognize the income over the life of the contracts. This change will not affect our prior securitizations. Historically, Gain on Sale of Loans has been material to our reported revenues and net earnings. Altering the structure of these transactions so that no gain is recognized at the time of a securitization transaction will have a material effect on our reported revenues and net earnings until such time as we accumulate Finance Receivables on our balance sheet sufficient to generate interest income (net of interest, credit losses, and other expenses) equivalent to the revenues that we had historically recognized on our securitization transactions. Under our securitization program, we sell the securitized Finance Receivables to our securitization subsidiaries who then assign and transfer the Finance Receivables to separate trusts. The trusts issue Class A certificates and subordinated Class B certificates (Residuals in Finance Receivables Sold) to the securitization subsidiaries. The securitization subsidiaries then sell the Class A certificates to the investors and retain the Class B certificates. We continue to service the securitized contracts. The Class A certificates from our securitization transactions have historically received investment grade ratings. To secure the payment of the Class A certificates, the securitization subsidiaries have: o obtained an insurance policy from MBIA Insurance Corporation which guarantees payment of amounts to the holders of the Class A certificates (for transactions closed after July 1, 1997), and o established a cash "spread" account (essentially, a reserve account) for the benefit of the certificate holders. Spread Account Requirements. The securitization subsidiaries make an initial cash deposit into the spread account, generally equivalent to 4% of the initial underlying Finance Receivables principal balance and pledge this cash to the spread account agent. The trustee then makes additional deposits to the spread account out of collections on the securitized receivables as necessary to fund the spread account to a specified percentage, ranging from 6.0% to 10.5%, of the underlying Finance Receivables' principal balance. The trustee will not make distributions to the securitization subsidiaries on the Class B certificates unless: o the spread account has the required balance, o the required periodic payments to the Class A certificate holders are current, and o the trustee, servicer and other administrative costs are current. During 1998, we made initial spread account deposits totaling approximately $13.1 million. The required spread account balance based upon the targeted percentages was approximately $23.7 million at December 31, 1998 with balances in the spread accounts totaling approximately $20.6 million. Therefore, the amount remaining to be funded to meet the targeted balance was approximately $3.1 million as of December 31, 1998. In addition to the spread account balance of $20.6 million at December 31, 1998, we also had deposited a total of $1.6 million in trust accounts in conjunction with certain other agreements. We also maintain spread accounts for the securitization transactions that were consummated by our discontinued operations. We had satisfied the spread account funding obligation of $3.7 million as of December 31, 1998 with respect to these securitization transactions. Certain Financial Information Regarding Our Securitizations. During the first three quarters of 1998, we securitized an aggregate of $222.8 million in contracts, issuing $161.1 million in Class A certificates, and $61.7 million in Class B certificates. During the fourth quarter of 1998, we securitized $69.3 million in contracts, issuing $50.6 million of Class A certificates. Due to the revised securitization structure, the $69.3 million of loans remained classified as Finance Receivables, and the $50.6 million in Class A certificates were classified as Notes Payable in our Consolidated Balance Sheet. During the year ended December 31, 1997, we securitized an aggregate of $151.7 million in contracts, issuing $121.4 million in Class A certificates, and $30.3 million in Class B certificates. In 1996, we securitized an aggregate of $58.2 million in contracts, issuing $44.7 million in Class A certificates, and $13.5 million in Class B certificates. 25 We recorded the carrying value of the Residuals in Finance Receivables sold at $36.5 million in 1998, and $17.7 million in 1997. The balance of the Residuals in Finance Receivables sold was $33.3 million as of December 31, 1998 and $13.3 million as of December 31, 1997. The table below summarizes certain attributes of our securitizations:
1998 1997 1996 ----------------- ------------------ ------------------ Weighted Average Yield of Certificates Issued.......... 5.9% 6.7% 8.4% Range of Yields for Certificates Issued................ 5.6% - 6.1% 6.3% - 8.1% 8.2% - 8.6% Average Net Spreads (after fees and expenses).......... 17.6% 15.8% 17.1% Range of Net Spreads (after fees and expenses)......... 17.0% - 18.1% 13.7% - 17.8% 16.8% - 17.4%
The decrease in net spreads from 1996 to 1997, despite lower certificate yields, is primarily the result of the decrease in the average contract yield of the finance receivable contracts securitized due to our expansion into markets with interest rate limits. Residuals in Finance Receivables Sold, which are a component of Finance Receivables, represent our retained portion (the Class B certificates) of the loans we securitized prior to the fourth quarter of 1998. We utilize a number of assumptions to determine the initial value of the Residuals in Finance Receivables Sold. The Residuals in Finance Receivables Sold represent the present value of the expected net cash flows of the securitization trusts using the out of the trust method. The net cash flows out of the trusts are the collections on the loans in the trust in excess of the Class A certificate principal and interest payments and certain other trust expenses. The assumptions used to compute the Residuals in Finance Receivables Sold include, but are not limited to: o charge off rates, o repossession recovery rates, o portfolio delinquency, o prepayment rates, and o trust expenses. The Residuals in Finance Receivables Sold are adjusted monthly to approximate the present value of the expected remaining net cash flows out of the trust. To the extent that actual cash flows on a securitization are below our original estimates, and those differences appear to be other than temporary in nature, we are required to revalue Residuals in Finance Receivables Sold and record a charge to earnings based upon the reduction. During the third quarter of 1997, we recorded a $5.7 million charge (approximately $3.4 million, net of income taxes) to dealership operations to write down the Residuals in Finance Receivables Sold. We determined a write down in the Residuals in Finance Receivables Sold was necessary due to an increase in net losses in the securitized loan portfolio. The charge resulted in a reduction in the carrying value of the our Residuals in Finance Receivables Sold and had the effect of increasing the cumulative net loss at loan origination assumption to approximately 27.5% for the securitization transactions that took place prior to September 30, 1997. The revised loss assumption approximates the assumption used for the securitization transaction consummated during the third quarter of 1997. For the securitizations that we completed during the nine month period ended September 30, 1998, net losses were estimated using total expected cumulative net losses at loan origination of approximately 29.0%, adjusted for actual cumulative net losses prior to securitization. One of the assumptions inherent in the valuation of the Residuals in Finance Receivables Sold is the projected portfolio net charge offs. The remaining net charge offs in the Residuals in Finance Receivables Sold as a percentage of the remaining principal balances of securitized contracts was approximately 14.9% as of December 31, 1998, compared to 17.9% as of December 31, 1997. This decrease is primarily due to having a more seasoned securitized portfolio as of December 31, 1998 than at December 31, 1997. As a greater portion of our losses tend to take place in the early stages of the portfolio's existence, a more seasoned portfolio will have fewer losses remaining than a portfolio that has not aged as much. There can be no assurance that the charge we recorded in the third quarter of 1997 was sufficient and that we will not need to record additional charges in the future in order to write down the Residuals in Finance Receivables Sold. We classify the residuals as "held-to-maturity" securities in accordance with SFAS No. 115. 26 Liquidity and Capital Resources In recent periods, our needs for additional capital resources have increased in connection with the growth of our business. We require capital for: o increases in our contract portfolio, o expansion of our dealership network, o our commitments under the FMAC transaction, o expansion of the Cygnet dealer program, o common stock repurchases, o the purchase of inventories, o the purchase of property and equipment, and o working capital and general corporate purposes. We fund our capital requirements primarily through: o operating cash flow, o our revolving facility with General Electric Capital Corporation, o securitization transactions, o supplemental borrowings, and o in the past, equity offerings. While to date we have met our liquidity requirements as needed, there can be no assurance that we will be able to continue to do so in the future. Operating Cash Flow Net Cash Provided by Operating Activities increased by $29.9 million in the year ended December 31, 1998 to $22.1 million from cash used in the year ended December 31, 1997 of $7.8 million. The increase in 1998 was due primarily to increases in the Loss from Discontinued Operations, the Provision for Credit Losses, and Proceeds from the Sale of Finance Receivables, net of decreases in Net Earnings and purchases of Finance Receivables. Net Cash Used by Operating Activities totaled $7.8 million in the year ended December 31, 1997 compared to Cash Provided by Operating Activities of $23.8 million in 1996. This increase in cash used in 1997 over cash provided in 1996 was primarily due to increases in the purchases of Finance Receivables and Inventory, and a reduction in collections of Finance Receivables, net of increases in the Provision for Credit Losses and Proceeds from the Sale of Finance Receivables. Net Cash Used in Investing Activities decreased by $12.2 million to $98.7 million in the year ended December 31, 1998 compared to $110.9 million in 1997. The decrease is primarily due to increases in Cash Used in Investing Activities from purchases of Finance Receivables, net decreases in Cash advanced under our Notes Receivable, increased collections of Notes Receivable, and a reduction in payment for Acquisition of Assets. Net Cash Used in Investing Activities increased by $100.3 million to $110.9 million in the year ended December 31, 1997 compared to $10.5 million in 1996. The increase was due primarily to net increases in Notes Receivable of $25.9 million and Payment for Acquisition of Assets of $45.2 million. Net Cash Provided by Financing Activities decreased by $40.5 million to $69.0 million in the year ended December 31, 1998 compared to $109.5 million in the comparable period in 1997. The decrease is due to increases in Notes Payable, net of increases in repayments of Notes Payable and a decrease in proceeds from the issuance of common stock. Net Cash Provided by Financing Activities decreased by $69.3 million to $109.5 million in the year ended December 31, 1997 compared to $40.1 million in 1996. The increase was primarily due to increases in the issuance of Notes Payable, reduction in repayments of Notes Payable and a lack of any redemption of Preferred Stock. 27 Financing Resources Revolving Facility. In September 1998, we amended our revolving credit facility with General Electric Capital Corporation ("GE Capital") increasing the maximum commitment to $125.0 million. Under the revolving facility, we may borrow: o up to 65.0% of the principal balance of eligible contracts originated from the sale of used cars, o up to 86.0% of the principal balance of eligible contracts previously originated by our branch office network, o the lesser of $20 million or 58% of the direct vehicle costs for eligible vehicle inventory, and o starting in January 1999, the lesser of $15 million or 50% of eligible contracts or loans originated under the Cygnet dealer program. However, an amount up to $8.0 million of the borrowing capacity under the revolving facility is not available at any time while our guarantee to the purchaser of contracts acquired from FMAC is outstanding. See "Business--Non-Dealership Operations--Bulk Purchasing and Loan Servicing Operations." The revolving facility expires in June 2000 and contains a provision that requires us to pay GE Capital a termination fee of $200,000 if we terminate the revolving facility prior to the expiration date. We secure the facility with substantially all of our assets. As of December 31, 1998, our borrowing capacity under the revolving facility was $55.5 million, the aggregate principal amount outstanding under the revolving facility was approximately $52.0 million, and the amount available to be borrowed under the facility was $3.5 million. The revolving facility bears interest at the 30-day LIBOR plus 3.15%, payable daily (total rate of 8.40% as of December 31, 1998). The revolving facility contains covenants that, among other things, limit our ability to do the following without GE Capital's consent: o incur additional indebtedness, o make any change in our capital structure, o declare or pay dividends, except in accordance with all applicable laws and not in excess of fifteen percent (15%) of each year's net earnings available for distribution, and o make certain investments and capital expenditures. The revolving facility also provides that an event of default will occur if Mr. Ernest C. Garcia II owns less than 15.0% of our voting stock. Mr. Garcia owned approximately 29.8% of our common stock at December 31, 1998. In addition, we are also required to: o be Year 2000 compliant no later than June 30, 1999 (see discussion below under "Year 2000 Readiness Disclosure"), and o maintain specified financial ratios, including a debt to equity ratio of 2.2 to 1 and a net worth of at least $110,000,000. Under the terms of the revolving facility, we are required to maintain an interest coverage ratio and a cash flow based interest coverage ratio that we failed to satisfy during the year ended December 31, 1998. We failed to meet these covenants primarily as a result of the charges we took during 1998 for the closure of our branch office network. GE Capital has waived the covenant violations as of December 31, 1998. Securitizations. Our securitization program is a primary source of our working capital. Since September 30, 1997, we have closed all of our securitizations with private investors through Greenwich Capital Markets, Inc. ("Greenwich Capital"). In March 1999, we executed a commitment letter with Greenwich Capital to act as our exclusive agent in placing up to $300 million of surety wrapped securities under our securitization program. Securitizations generate cash flow for us from: o the sale of Class A certificates, o ongoing servicing fees, and 28 o excess cash flow distributions from collections on the contracts securitized after: o payments on the Class A certificates sold to third party investors, o payment of fees, expenses, and insurance premiums, and o required deposits to the spread account. Securitization also allows us to fix our cost of funds for a given contract portfolio. Failure to regularly engage in securitization transactions will adversely affect us. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Securitizations-Dealership Operations" for a more complete description of our securitization program. Supplemental Borrowings Verde Debt. Prior to our public offering in September 1996, we historically borrowed substantial amounts from Verde Investments Inc. ("Verde"), which is owned by our Chairman and Chief Executive Officer, Ernest C. Garcia. The Subordinated Notes Payable balances outstanding to Verde totaled $10.0 million as of December 31, 1998 and $12 million as of December 31, 1997. Prior to September 21, 1996, these borrowings accrued interest at an annual rate of 18.0%. Effective September 21, 1996, the annual interest rate on these borrowings was reduced to 10.0%. Under the terms of this note, we are required to make monthly payments of interest and annual payments of principal in the amount of $2.0 million. Except for the debt incurred related to the exchange offer (see below), this debt is junior to all of our other indebtedness and we may suspend interest and principal payments if we are in default on obligations to any other creditors. In July 1997, our Board of Directors approved the prepayment of the $10.0 million in subordinated debt after the earlier of the following: o the completion of a debt offering, or o at such time as the following: o the FMAC transactions have been completed or the cash requirements for completion of the transaction are known, or o we either have cash in excess of our current needs or have funds available under our financing sources in excess of our current needs. No such prepayment has been made as of the date of filing of this Form 10-K. Any prepayment would require the consent of certain of our lenders. Senior Subordinated Notes. In February 1998, we borrowed a total of $15.0 million of subordinated debt from unrelated third parties for a three year term. We pay interest on this debt quarterly at 12% per annum. This debt is: o senior to the Verde subordinated note (described above) and the subordinated debentures issued in our exchange offer (described below), and o subordinate to our other indebtedness. We issued warrants to the lenders of this debt to purchase up to 500,000 shares of our common stock at an exercise price of $10.00 per share, exercisable at any time until the later of February 2001, or when the debt is paid in full. In July 1998, we borrowed a total of $5.0 million in subordinated debt from unrelated third parties for a three-year term. Under the terms of the loan agreement, we were required to issue warrants to purchase 115,000 shares of our common stock by December 31, 1998 if the loan was not paid in full by that date. The warrants were to have been issued at an exercise price of 120% of the average trading price for our common stock for the 20 consecutive trading days prior to the issuance of the warrants. In January 1999, we prepaid $1.8 million of the loans and the lenders waived their right to a proportionate amount of the warrants. We have agreed to pay $1.2 million by March 31, 1999 and the remaining $2.0 million on June 30, 1999. We will not be required to issue the warrants if we repay the loans on these dates. Sale-Leaseback of Real Property. In March 1998, we executed an agreement with an investment company for the sale and leaseback of up to $37.0 million in real property. We sold certain real property to the investment company for its original cost and leased back the properties for an initial term of twenty years. We have the right to extend the leases in certain cases. We pay monthly rents of approximately one-twelfth of 10.75% of the purchase price plus all occupancy costs and taxes. The agreement calls for annual increases in monthly rent of not less than 2%. As of December 31, 1998, we had sold approximately $27.4 million of property under this arrangement. However, we do not anticipate 29 closing any additional transactions under this agreement with the investment company. We used substantially all of the proceeds from the sales to pay down debt. Exchange Offer. In the fourth quarter of 1998, we acquired approximately 2.7 million shares of our common stock in exchange for approximately $17.5 million of subordinated debentures. The debentures are unsecured and are subordinate to all of our existing and future indebtedness. We must pay interest on the debentures twice a year at 12% per year. We are required to pay the principal amount of the debentures on October 23, 2003. We issued the debentures at a premium of approximately $3.9 million over the market value of the shares of our common stock that were exchanged for the debentures. Accordingly, the debt was recorded at $13.6 million on our balance sheet. The premium will be amortized over the life of the debentures and results in an effective annual interest rate of approximately 18.8%. We can redeem all or part of the debentures at any time. As a result of the exchange offer, the number of our common shares outstanding decreased to approximately 15,845,000 compared to approximately 18,533,000 shares outstanding prior to the exchange offer. Additional Financing. On November 12, 1998, we borrowed $15.0 million for a term of 364 days from Greenwich Capital. We pay interest on this loan at an interest rate equal to LIBOR plus 400 basis points. We secured the loan with the common stock of our securitization subsidiaries. In March 1999, we borrowed $20.0 million for a term of 278 days from Greenwich Capital. $1.5 million was used to repay the remaining balance of the $15 million Greenwich Capital loan. The new loan was secured by the common stock of our securitization subsidiaries. The interest rate is at LIBOR plus 500 basis points and we paid an origination fee of 100 basis points. In March 1999, we executed a commitment letter with Greenwich Capital in which, subject to satisfaction of certain conditions, Greenwich Capital agreed to provide us with a $100 million surety-wrapped warehouse line of credit at a rate equal to LIBOR plus 110 basis points. In addition, on March 26, 1999, we borrowed approximately $28.9 million from Greenwich Capital under a repurchase facility with a 62% advance rate, bearing interest at 8.5%, and maturing May 31, 1999. Debt Shelf Registration. In 1997, we registered up to $200 million of our debt securities under the Securities Act of 1933. There can be no assurance that we will be able to use this registration statement to sell debt securities, or successfully register and sell other debt securities in the future. Capital Expenditures and Commitments We have pursued an aggressive growth strategy. During the year ended December 31, 1998, we opened 17 new dealerships. We also have six more dealerships under development. The magnitude of the direct cost of opening a dealership is primarily a function of whether we lease a facility or construct a facility. A leased facility costs approximately $650,000 to develop, while a facility we construct costs approximately $ 1.7 million. In addition, we require capital to finance the portfolio that we carry on our balance sheet for each store. It takes approximately $2.2 million in cash to support a typical stabilized store portfolio with our existing 65% advance rate under our GE facility. Additionally, it takes approximately 30 months for a store portfolio to reach a stabilized level. On July 11, 1997, we entered into an agreement to provide "debtor in possession" financing to FMAC (the "DIP Facility"). As of December 31, 1998, the maximum commitment on the DIP Facility was $12.4 million and the outstanding balance on the DIP Facility totaled $11.8 million. Subsequent to December 31, 1998, the maximum commitment was reduced to $11.5 million from the receipt of certain income tax refunds received by FMAC and remitted to us. See "Business--Non-Dealership Operations--Bulk Purchasing and Loan Servicing Operations--DIP Facility". We intend to finance the construction of new dealerships and the DIP financing through operating cash flows and supplemental borrowings, including amounts available under the revolving facility and the securitization program. Common Stock Repurchase Program. In October 1997, our Board of Directors authorized a stock repurchase program allowing us to purchase up to one million shares of our common stock from time to time. Purchases may be made depending on market conditions, share price and other factors. Our Board of Directors extended the stock repurchase program in February 1999, to December 31, 1999. 30 During 1998, we repurchased 72,000 shares of common stock pursuant to the stock repurchase program. Subsequent to December 31, 1998, we repurchased approximately 928,000 additional shares of common stock under this program. Since January 1, 1998, we have repurchased a total of approximately 3.7 million shares of our common stock under our stock repurchase program and the exchange offer described above at an average cost of approximately $5.33 per share. In September 1997, our Board of Directors approved a director and senior officer stock purchase loan program. We may make loans of up to $1.0 million in total to the directors and senior officers under the program to assist directors' and officers' purchases of common stock on the open market. These unsecured loans bear interest at 10% per year. During 1997, senior officers purchased 50,000 shares of common stock under this program and we loaned $500,000 to the senior officers for these purchases. During 1998, we made additional loans under similar terms and conditions to senior officers totaling approximately $393,000 for the purchase of 40,000 shares of our common stock. Year 2000 Readiness Disclosure Many older computer programs refer to years only in terms of their final two digits. Such programs may interpret the year 2000 to mean the year 1900 instead. The problem affects not only computer software, but also computer hardware and other systems containing processors and embedded chips. Business systems affected by this problem may not be able to accurately process date-related information before, during or after January 1, 2000. This is commonly referred to as the Year 2000 problem. Our business could be materially adversely affected by failures of our own business systems due to the Year 2000 problem as well as those of our suppliers and business partners. We are in the process of addressing these issues. Our Year 2000 compliance program consists of: o identification and assessment of critical computer programs, hardware and other business equipment and systems, o remediation and testing, o assessment of the Year 2000 readiness of our critical suppliers, vendors and business partners, and o contingency planning. Identification and Assessment The first component of our Year 2000 compliance program is complete. We have identified our critical computer programs, hardware, and other equipment to determine which systems are compliant, or must be replaced or remediated. Remediation and Testing Dealership Operations. We recently completed converting our dealership operations to a single automobile sales and loan servicing system (the "CLASS System"), which has reduced the scope of our compliance program. We have engaged an outside consulting firm to assist us with remediating our critical computer programs that must become Year 2000 compliant. We have finished remediating the program code and underlying data in the CLASS System and are currently performing regression testing on the program code modifications. We anticipate placing the modified program code into production and performing future date testing on the modified code in April 1999. Non-Dealership Operations. Our non-dealership loan servicing operations currently utilize several loan processing and collections programs provided through third party service bureaus. Based upon certifications we have received from the software vendors, and independent testing we have performed, we believe that our loan processing and collections programs are Year 2000 compliant. Our Cygnet dealer program utilizes one of the same loan processing and collections programs used by our loan servicing operations. The service bureau that provides the program has written a custom module for us and has stated the custom module is Year 2000 compliant. We anticipate performing and completing independent Year 2000 compliance testing in May 1999. We believe the remediation of the critical business systems used by our dealership and non-dealership operations will be substantially completed during the second quarter of 1999. 31 Assessment of Business Partners We have also identified critical suppliers, vendors, and other business partners and we are taking steps to determine their Year 2000 readiness. These steps include interviews, questionnaires, and other types of inquiries. Because of the large number of business systems that our business partners use and their varying levels of Year 2000 readiness, it is difficult to determine how any Year 2000 issues of our business partners will affect us. We are not currently aware of any business relationships with third parties that we believe will likely result in a significant disruption of our businesses. We believe that our greatest risk is with our utility suppliers, banking and financial institution partners, and suppliers of telecommunications services, all of which are operating within the United States. Potential consequences if we, or our business partners, are not Year 2000 compliant include: o failure to operate from a lack of power, o shortage of cash flow, o disruption or errors in loan collection and processing efforts, and o delays in receiving inventory, supplies, and services. If any of these events occurred, the results could have a material adverse impact on us and our operations. Contingency Plans We are also developing contingency plans to mitigate the risks that could occur in the event of a Year 2000 business disruption. Contingency plans may include: o increasing inventory levels, o securing additional financing, o relocating operations to unaffected sites, o vendor/supplier replacement, o utilizing temporary manual or spreadsheet-based processes, or o other prudent actions. We currently estimate that remediation and testing of our business systems will cost between $2.2 million and $2.7 million. Most of these costs will be expensed and funded by our operating line of credit. Expenses to date approximate $1.9 million, including approximately $51,000 of internal payroll costs, substantially all of which have been charged to general and administrative expense. We cannot currently estimate costs associated with developing and implementing contingency measures. The scheduled completion dates and costs associated with the various components of our Year 2000 compliance program described above are estimates and are subject to change. Seasonality Historically, we have experienced higher revenues in the first two quarters of the year than in the latter half of the year. We believe that these results are due to seasonal buying patterns because many of our customers receive income tax refunds during the first half of the year, which are a primary source of down payments on used car purchases. Inflation Increases in inflation generally result in higher interest rates. Higher interest rates on our borrowings would decrease the profitability of our existing portfolio. To date, inflation has not had a significant impact on our operations. We seek to limit this risk: o through our securitization program, which allows us to fix our borrowing costs, o by increasing the interest rate charged for contracts originated at our dealerships (if allowed under applicable law), or o by increasing the profit margin on the cars sold, and for contracts acquired from third party dealers under our Cygnet dealer program, either by acquiring contracts at a higher discount or with a higher APR. 32 Accounting Matters In September 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131) which became effective for us January 1, 1998. SFAS No. 131 establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim reports issued to stockholders. The adoption of SFAS No. 131 did not have a material impact on us. In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employer's Disclosures about Pensions and Other Postretirement Benefits" (SFAS No. 132) which becomes effective for us January 1, 1999. SFAS No. 132 establishes standards for the information that public enterprises report in annual financial statements. We believe the adoption of SFAS No. 132 will not have a material impact on us. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133) which becomes effective for us July 1, 1999. We believe the adoption of SFAS No. 133 will not have a material impact on us. Risk Factors There are various risks in purchasing our securities or investing in our business, including those described below. You should carefully consider these risk factors together with all other information included in this Form 10-K. We make forward looking statements This report contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words "believe," "expect," "anticipate," "estimate," "project," and similar expressions identify forward looking statements. These statements may include, but are not limited to, projections of revenues, income, or loss, estimates of capital expenditures, plans for future operations, products or services, and financing needs or plans, as well as assumptions relating to these matters. Forward looking statements speak only as of the date the statement was made. They are inherently subject to risks and uncertainties, some of which we cannot predict or quantify. Future events and actual results could differ materially from the forward looking statements. When considering each forward looking statement, you should keep in mind the risk factors and cautionary statements found throughout this Form 10-K and specifically those found below. We are not obligated to publicly update or revise any forward looking statements, whether as a result of new information, future events, or for any other reason. We have incurred net losses in three of the last five years and could incur additional net losses in future periods. We began operations in 1992 and incurred significant operating losses in 1994 and 1995. Although we recorded net earnings in 1996 and 1997, we incurred a net loss of $5.7 million in 1998. A substantial portion of our net earnings in 1997 and 1996 was attributable to the gains recognized on our securitization transactions. The net loss in 1998 was due in large part to: o a charge of approximately $9.1 million ($5.6 million, net of income taxes) to discontinued operations in the first quarter of 1998 for the closure of the branch office network, o a charge of approximately $6.0 million ($3.6 million, net of income taxes) to discontinued operations during the third quarter of 1998 due primarily to higher than anticipated loan losses and servicing expenses in connection with the branch office loan portfolio and to costs incurred in our terminated rights offering, and o a change in the fourth quarter of 1998 in the way we structure securitization transactions for accounting purposes. There can be no assurance that we will be profitable again in future periods. Our failure to be profitable can adversely affect the value of our outstanding securities. 33 Factors Determining Our Future Profitability. Our ability to achieve profitability will depend primarily upon our ability to: o expand our revenue generating operations while not proportionately increasing our administrative overhead, o originate and purchase contracts with an acceptable level of credit risk, o effectively collect payments due on the contracts in our portfolio and portfolios we service for others, o locate sufficient financing, with acceptable terms, to fund and maintain our operations, and o adapt to the increasingly competitive market in which we operate. Our inability to achieve or maintain any or all of these objectives could have a material adverse effect on our business and the value of our outstanding securities. Outside factors, such as the economic, regulatory, and judicial environments in which we operate, will also have an effect on our business. Our operations depend significantly on external financing. We have borrowed, and will continue to borrow, substantial amounts to fund our operations. Our operations require large amounts of capital. If we cannot obtain the financing we need on a timely basis and on favorable terms, our business will be adversely affected. We currently obtain our financing through three primary sources: o a revolving credit facility with General Electric Capital Corporation; o securitization transactions; and o loans from other sources. Each of these financing sources is described in detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Revolving Credit Facility with GE Capital. Our revolving facility with GE Capital is our primary source of operating capital. We have pledged substantially all of our assets to GE Capital to secure the borrowings we make under this facility. Although this facility has a maximum commitment of $125 million, the amount we can borrow is limited by the amount of certain types of assets that we own. In addition, we cannot borrow approximately $8 million of the capacity while our guarantee to the FMAC Contract Purchaser is in effect. As of December 31, 1998, we owed approximately $52.0 million under the revolving facility, and had the ability to borrow an additional $3.5 million. The revolving facility expires in June 2000. Even if we continue to satisfy the terms and conditions of the revolving facility, we may not be able to extend its term beyond the current expiration date. Securitization Transactions. We can restore capacity under the GE facility from time to time by securitizing portfolios of finance receivables. Our ability to successfully complete securitizations in the future may be affected by several factors, including: o the condition of securities markets generally, o conditions in the asset-backed securities markets specifically, o the credit quality of our loan contract portfolio, and o the performance of our servicing operations. The securitization subsidiaries are wholly-owned "bankruptcy remote" entities. Their assets, including the line items "Residuals in Finance Receivables Sold" and "Investments Held in Trust", which are a component of Finance Receivables on our balance sheet, are not available to satisfy the claims of our creditors. On November 17, 1998, we announced that we were changing the way that we structure transactions under our securitization program. In the past, we structured these transactions as sales for accounting purposes. In the fourth quarter of 1998, however, we began to structure securitizations for accounting purposes to retain the financed receivables and related debt on our balance sheet and recognize the income over the life of the contracts. In the past, gain on sales of loans in securitization transactions has been material to our profitability. This change will cause a material adverse effect on our reported earnings until the net interest earnings from new contracts added to our balance sheet approximates those net revenues that we historically recognized on our securitization sales. 34 Contractual Restrictions. The revolving facility, the securitization program, and our other credit facilities contain various restrictive covenants that limit our operations. Under these credit facilities, we must also meet certain financial tests. As of December 31, 1998, we did not satisfy the interest coverage ratio and cash flow based interest coverage ratio under the GE facility. GE Capital waived these defaults for this period. At the present time, we believe that we are in compliance with the terms and conditions of the revolving facility and our other credit facilities. Failure to satisfy the covenants in our credit facilities and/or our securitization program could have a material adverse effect on our operations. We have a high risk of credit losses because of the poor creditworthiness of our borrowers. Substantially all of the sales financing that we extend and the contracts that we service are with sub-prime borrowers. Sub-prime borrowers generally cannot obtain credit from traditional financial institutions, such as banks, savings and loans, credit unions, or captive finance companies owned by automobile manufacturers, because of their poor credit histories and/or low incomes. We have established an Allowance for Credit Losses approximating 26.4% of contract principal balances as of December 31, 1998 to cover anticipated credit losses on the contracts currently in our portfolio. Further, the Allowance for Credit Losses embedded in the Residuals in Finance Receivables Sold as a percentage of the remaining principal balances of the underlying contracts was approximately 14.9% as of December 31, 1998. We believe that our current Allowance for Credit Losses is adequate to cover anticipated credit losses. There is, however, no assurance that we have adequately provided for, or will adequately provide for, such credit risks. A significant variation in the timing of or increase in credit losses on our portfolio would have a material adverse effect on our net earnings. We also operate our Cygnet dealer program, under which we provide third party dealers who finance the sale of used cars to sub-prime borrowers with warehouse purchase facilities and operating lines of credit primarily secured by those dealers' retail installment contract portfolios and/or inventory. While we require third party dealers to meet certain minimum net worth and operating history criteria before we loan money to them, these dealers may not otherwise be able to obtain debt financing from traditional lending institutions. Like our other financing activities, these loans subject us to a high risk of credit losses that could have a material adverse effect on our operations and ability to meet our other financing obligations. We are affected by various industry considerations and legal contingencies. In recent periods, several major used car finance companies have announced major downward adjustments to their financial statements, violations of loan covenants, related litigation, and other events. Companies in the used vehicle sales and financing market have also been named as defendants in an increasing number of class action lawsuits brought by customers claiming violations of various federal and state consumer credit and similar laws and regulations. In addition, certain of these companies have filed for bankruptcy protection. These events: o have lowered the value of securities of sub-prime automobile finance companies, o have made it more difficult for sub-prime lenders to borrow money, and o could cause more restrictive regulation of this industry. Compliance with additional regulatory requirements may increase our operating expenses and reduce our profitability. Interest rates affect our profitability. A substantial portion of our financing income results from the difference between the rate of interest we pay on the funds we borrow and the rate of interest we earn on the contracts in our portfolio. While we earn interest on the contracts we own at a fixed rate, we pay interest on our borrowings under our GE facility at a floating rate. When interest rates increase, our interest expense increases and our net interest margins decrease. Increases in our interest expense that we cannot offset by increases in interest income will lower our profitability. 35 Impact of Laws Limiting Interest Rates. Historically, we conducted a significant portion of our used car sales activities in, and a significant portion of the contracts we service were originated in states that did not impose limits on the interest rate that a lender may charge. However, we have expanded, and will continue to expand, into states that impose interest rate limitations. When a state limits the amount of interest we can charge on our installment sales contracts, we may not be able to offset any increased interest expense caused by rising interest rates or greater levels of borrowings under our credit facilities. Therefore, these interest rate limitations or additional laws, rules, or regulations that may be adopted in the future can adversely affect our profitability. Our business is subject to federal and state regulation, supervision, and licensing. We are subject to ongoing regulation, supervision, and licensing under various federal, state, and local statutes, ordinances, and regulations. Among other things, these laws: o require that we obtain and maintain certain licenses and qualifications, o limit or prescribe terms of the contracts that we originate and/or purchase, o require specified disclosures to customers, o limit our right to repossess and sell collateral, and o prohibit us from discriminating against certain customers. We believe that we are currently in substantial compliance with all applicable material federal, state, and local laws and regulations. We may not, however, be able to remain in compliance with such laws. If we do not comply with these laws, we could be fined or certain of our operations could be interrupted or shut down. Failure to comply could, therefore, have a material adverse effect on our operations. In addition, the adoption of additional statutes and regulations, changes in the interpretation of existing statutes and regulations, or our entry into jurisdictions with more stringent regulatory requirements could also have a material adverse effect on our operations. We are dependent on our data processing platforms and other technology. Our computer systems may be subject to a Year 2000 date failure. Conversion of Our Data Processing Platforms. We recently converted our chain of dealerships and related loan servicing data processing operations to a single computer system. These conversions can cause various implementation and integration problems that can affect our servicing operations and result in increases in contract delinquencies and charge-offs and decreases in our servicing income. Failure to successfully complete our conversions could materially affect our business and profitability. Year 2000 Readiness. We are continuing to study our computer systems to determine our exposure to Year 2000 issues. We expect to make the necessary modifications or changes to our computer systems to allow them to properly process transactions relating to the Year 2000 and beyond. We estimate that we will spend between $2.2 million to $2.7 million for Year 2000 evaluation, remediation, testing, and replacement. We have spent approximately $1.9 million to date. If we have to replace certain systems to make them Year 2000 compliant, we will record the costs as assets and subsequently amortize them. If we have to modify existing systems, we will expense the costs as incurred. We can be adversely affected by Year 2000 problems in the business systems of our suppliers, vendors, and business partners, such as utility suppliers, banking partners and telecommunication service providers. We can also be adversely affected if Year 2000 problems result in business disruptions or failures that impact our customers' ability to make their loan payments. Failure to fully address and resolve these Year 2000 issues could have a material adverse effect on our operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Readiness Disclosure." Our Current Contingency Plan is Being Revised. We depend on our loan servicing and collection facilities and on long-distance and local telecommunications access to transmit and process information among our various facilities. We use a standard program to prepare and store off-site backup tapes of our main system applications and data files on a routine basis. However, we believe that we need to revise our current contingency plan because of our recent system conversions and significant growth. Although we intend to update our contingency plan during 1999, there could be a failure in the interim. In addition, the plan as revised may not prevent a system failure or allow us to timely resolve any systems failure. Also, a natural disaster, calamity, or other significant event that causes long-term damage to any of these facilities or that interrupts our telecommunications networks could have a material adverse effect on our operations. 36 We have certain risks relating to the FMAC transaction. We have entered into several transactions in the bankruptcy proceedings of First Merchants Acceptance Corporation ("FMAC"). We purchased 78% of FMAC's senior bank debt at a 10% discount. We agreed to pay the selling banks additional consideration up to the amount of this 10% discount (or approximately $7.6 million) if FMAC makes cash payments or issues notes at market rates to its unsecured creditors and equity holders in excess of 10% of their allowed claims against FMAC. FMAC may make future cash payments to its unsecured creditors and equity holders from recoveries on the contracts which originally secured the senior bank debt and from certain residual interests in FMAC's securitized loan pools, after FMAC pays certain other amounts ("Excess Collections"). Under FMAC's plan of reorganization, we will split these Excess Collections with FMAC. If we satisfy certain requirements, we may be able to issue shares of our common stock in exchange for all or part of FMAC's share of the Excess Collections. This would reduce the cash distributions that could be made to FMAC's unsecured creditors and/or equity holders. We would then be entitled to receive FMAC's share of the Excess Collections. The shares would be priced at 98% of the average closing price of our common stock for the 10 trading days prior to the date of issuance. This market price must be at least $8.00 per share or we cannot exercise this option. Even if we are able to issue common stock for this purpose: o the number of shares that we issue may not be sufficient to prevent FMAC from paying unsecured creditors and equity holders more than 10% of their claims against FMAC. Should this happen, we would be required to pay the selling banks additional consideration for our purchase of 78% of FMAC's senior bank debt, and o the issuance of shares would cause dilution to our common stock. We also have other risks in the FMAC bankruptcy case: o we sold the contracts securing the bank claims at a profit to a third party purchaser (the "Contract Purchaser"). We guaranteed the Contract Purchaser a specified return on the contracts with a current maximum of $8 million. Although we obtained a related guarantee from FMAC secured by certain assets, there is no assurance that the FMAC guarantee will cover all of our obligations under our guarantee to the Contract Purchaser, o we have made debtor-in-possession loans to FMAC, secured by certain assets. We have continuing obligations under our debtor-in-possession credit facility. FMAC is currently in default on the DIP Facility and we are negotiating a settlement with them that might increase our funding obligation in exchange for other concessions, o we entered into various agreements to service the contracts in the securitized pools of FMAC and the contracts sold to the Contract Purchaser. If we lose our right to service these contracts, our 17 1/2% share of the Excess Collections can be reduced or eliminated. Each of the FMAC risks described in this section could have a material adverse effect on our operations. If we make additional acquisitions, there is no assurance they will be successful. In 1997 we completed three significant acquisitions (Seminole, E-Z Plan, and Kars). We intend to consider additional acquisitions, alliances, and transactions involving other companies that could complement our existing business. We may not, however, be able to identify suitable acquisition parties, joint venture candidates, or transaction counterparties. Additionally, even if we can identify suitable parties, we may not be able to consummate these transactions on terms that we find favorable. Furthermore, we may not be able to successfully integrate any businesses that we acquire into our existing operations. If we cannot successfully integrate acquisitions, our operating expenses may increase in the short-term. This increase would affect our net earnings, which could adversely affect the value of our outstanding securities. Moreover, these types of transactions may result in potentially dilutive issuances of equity securities, the incurrence of additional debt, and amortization of expenses related to goodwill and intangible assets, all of which could adversely affect our profitability. In addition to the risks already mentioned, these transactions involve numerous other risks, including the diversion of management attention from other business concerns, entry into markets in which we have had no or only limited experience, and the potential loss of key employees of acquired companies. Occurrence of any of these risks could have a material adverse effect on us. 37 Our industry is highly competitive. Although a large number of smaller companies have historically operated in the used car sales industry, this industry has recently attracted significant attention from a number of large companies. These large companies include AutoNation, U.S.A., CarMax, and Driver's Mart. These companies have either entered the used car sales business or announced plans to develop large used car sales operations. Many franchised new car dealerships have also increased their focus on the used car market. We believe that these companies are attracted by the relatively high gross margins that can be achieved in this market and the industry's lack of consolidation. Many of these companies and franchised dealers have significantly greater financial, marketing, and other resources than we do. Among other things, increased competition could result in increased wholesale costs for used cars, decreased retail sales prices, and lower margins. Like the sale of used cars, the business of purchasing and servicing contracts originated from the sale of used cars to sub-prime borrowers is highly fragmented and very competitive. In recent years, several consumer finance companies have completed public offerings. Through these public offerings, these companies have been able to raise the capital necessary to fund expansion and support increased purchases of contracts. These companies have increased the competition for the purchase of contracts, in many cases purchasing contracts at higher prices than we would be willing to pay. There are numerous financial services companies serving, or capable of serving, our market. These companies include traditional financial institutions such as banks, savings and loans, credit unions, and captive finance companies owned by automobile manufacturers, as well as other non-traditional consumer finance companies, many of which have significantly greater financial and other resources than our own. Increased competition may cause downward pressure on the interest rates that we charge. This pressure could affect the interest rates we charge on contracts originated by our dealerships or cause us to reduce or eliminate the acquisition discount on the contracts we purchase from third party dealers. Either change could have a material adverse effect on the value of our securities. The success of our operations depends on certain key personnel. We believe that our ability to successfully implement our business strategy and to operate profitably depends on the continued employment of our senior management team. The unexpected loss of the services of any of our key management personnel or our inability to attract new management when necessary could have a material adverse effect on our operations. We do not currently maintain any key person life insurance on any of our executive officers. We may be required to issue stock in the future that will dilute the value of our existing stock. Issuance of any or all of the following securities may dilute the value of the securities that our existing stockholders now hold: o we have granted warrants to purchase a total of approximately 1.6 million shares of our common stock to various parties with exercise prices ranging from $6.75 to $20.00 per share, o we may be required to issue additional warrants in the future in connection with both a completed and as yet unidentified transactions, and o we may issue common stock in the FMAC transaction in exchange for FMAC's portion of the Excess Collections. 38 A significant percentage of our stock is controlled by a principal stockholder. Mr. Ernest C. Garcia, II, our Chairman, Chief Executive Officer, and principal stockholder, or his affiliates held approximately 29.8% of our outstanding common stock as of December 31, 1998. This percentage includes 136,500 shares held by The Garcia Family Foundation, Inc., an Arizona non-profit corporation, and 88,000 shares held by Verde Investments, Inc., a real estate investment corporation controlled by Mr. Garcia. As a result, Mr. Garcia has a significant influence upon our activities as well as on all matters requiring approval of our stockholders. These matters include electing or removing members of our board of directors, engaging in transactions with affiliated entities, causing or restricting our sale or merger, and changing our dividend policy. The interests of Mr. Garcia may conflict with the interests of our other stockholders. There is a potential anti-takeover effect if we issue preferred stock. Our Certificate of Incorporation authorizes us to issue "blank check" preferred stock. Our Board of Directors may fix or change from time to time the designation, number, voting powers, preferences, and rights of this stock. Such issuances could make it more difficult for a third party to acquire us by reducing the voting power or other rights of the holders of our common stock. Although we have no present intention of issuing any shares of our authorized preferred stock, we may do so in the future. ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk We are exposed to market risk on our financial instruments from changes in interest rates. We do not use financial instruments for trading purposes or to manage interest rate risk. Our earnings are substantially affected by our net interest income, which is the difference between the income earned on interest-bearing assets and the interest paid on interest bearing notes payable. Increases in market interest rates could have an adverse effect on profitability. Our financial instruments consist primarily of fixed rate finance receivables, residual interests in pools of fixed rate finance receivables, short term variable rate revolving Notes Receivable, and variable and fixed rate Notes Payable. Our finance receivables are classified as subprime loans and generally bear interest at the lower of 29.9% or the maximum interest rate allowed in states that impose interest rate limits. At December 31, 1998, the scheduled maturities on our finance receivables range from one to 52 months with a weighted average maturity of 31.3 months. The interest rates we charge our customers on finance receivables has not changed as a result of fluctuations in market interest rates, although we may increase the interest rates we charge in the future if market interest rates increase. A large component of our debt at December 31, 1998 is the Collateralized Note Payable (Class A certificates) issued under our securitization program. Issuing debt through our securitization program allows us to mitigate our interest rate risk by reducing the balance of the variable revolving line of credit and replacing it with a lower fixed rate note payable. We are subject to interest rate risk on fixed rate Notes Payable to the extent that future interest rates are higher than the interest rates on our existing Notes Payable. The table below illustrates the impact that hypothetical changes in interest rates could have on our earnings before income taxes over a twelve month period. We compute the impact on earnings for the period by first computing the baseline net interest income on our financial instruments with interest rate risk, which are the variable rate revolving credit lines and the variable rate notes payable. We then determine the net interest income based on each of the interest rate changes listed below and compare the results to the baseline net interest income to determine the estimated change in pretax earnings. The table does not give effect to our fixed rate receivables and borrowings.
Change in Interest Rates Change in Pretax Earnings ------------------------ ------------------------- (in thousands) + 2% $ (1,208) + 1% $ (604) - 1% $ 627 - 2% $ 1,581
39 In computing the effect of hypothetical changes in interest rates, we have assumed that: o interest rates used for the baseline and hypothetical net interest income amounts are in effect for the entire twelve month period, o interest for the period is calculated on financial instruments held at December 31, 1998 less contractually scheduled payments and maturities, and o there is no change in prepayment rates as a result of the interest rate changes. Our sensitivity to interest rate changes could be significantly different if actual experience differs from the assumptions used to compute the estimates. 40 ITEM 8 -- CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
UGLY DUCKLING CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report............................................ 42 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 1998 and 1997.......... 43 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996................................................ 44 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997, and 1996.................................. 45 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996................................................ 46 Notes to Consolidated Financial Statements.............................. 47
41 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Ugly Duckling Corporation: We have audited the accompanying consolidated balance sheets of Ugly Duckling Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ugly Duckling Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. KPMG LLP Phoenix, Arizona February 18, 1999 42 UGLY DUCKLING CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets
December 31, --------------------- 1998 1997 --------- --------- (In thousands, except share amounts) ASSETS Cash and Cash Equivalents......................................... $ 2,751 $ 3,537 Finance Receivables, Net.......................................... 163,209 90,573 Notes Receivable, Net............................................. 28,257 26,745 Inventory......................................................... 44,167 32,372 Property and Equipment, Net....................................... 32,970 39,827 Intangible Assets, Net............................................ 15,530 17,543 Other Assets...................................................... 20,575 11,246 Net Assets of Discontinued Operations............................. 38,516 54,583 --------- --------- $ 345,975 $ 276,426 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts Payable................................................ $ 2,479 $ 2,867 Accrued Expenses and Other Liabilities.......................... 19,694 14,964 Notes Payable................................................... 55,093 64,821 Collateralized Notes Payable.................................... 62,201 -- Subordinated Notes Payable...................................... 43,741 12,000 --------- --------- Total Liabilities....................................... 183,208 94,652 --------- --------- Stockholders' Equity: Preferred Stock $.001 par value, 10,000,000 shares authorized, none issued and outstanding.................................. -- -- Common Stock $.001 par value, 100,000,000 shares authorized, 18,605,000 and 18,521,000 issued, respectively, and 15,841,000 and 18,521,000 outstanding, respectively.......... 19 19 Additional Paid in Capital ..................................... 173,809 172,603 Retained Earnings............................................... 3,449 9,152 Treasury Stock, 2,761,000 shares at cost....................... (14,510) -- --------- --------- Total Stockholders' Equity.............................. 162,767 181,774 Commitments and Contingencies .................................... -- -- --------- --------- $ 345,975 $ 276,426 ========= =========
See accompanying notes to Consolidated Financial Statements. 43 UGLY DUCKLING CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations
Years Ended December 31, --------------------------------- 1998 1997 1996 --------- --------- --------- (In thousands, except earnings per share amounts) Sales of Used Cars...................................... $ 287,618 $ 123,814 $ 53,768 Less: Cost of Used Cars Sold................................ 167,014 72,358 31,879 Provision for Credit Losses........................... 67,634 23,045 9,657 -------- --------- --------- 52,970 28,411 12,232 -------- --------- --------- Other Income: Interest Income....................................... 27,828 18,736 8,597 Gain on Sale of Loans................................. 12,093 14,852 3,925 Servicing and Other Income............................ 38,631 12,681 2,537 -------- --------- --------- 78,552 46,269 15,059 -------- --------- --------- Income before Operating Expenses........................ 131,522 74,680 27,291 -------- --------- --------- Operating Expenses: Selling and Marketing................................. 20,565 10,538 3,585 General and Administrative............................ 92,402 41,902 13,118 Depreciation and Amortization......................... 5,735 3,301 1,382 -------- --------- --------- 118,702 55,741 18,085 -------- --------- --------- Income before Interest Expense.......................... 12,820 18,939 9,206 Interest Expense........................................ 6,904 2,774 2,429 -------- --------- --------- Earnings before Income Taxes............................ 5,916 16,165 6,777 Income Taxes............................................ 2,396 6,637 100 -------- --------- --------- Earnings from Continuing Operations..................... 3,520 9,528 6,677 Discontinued Operations: Loss from Operations of Discontinued Operations, net of income tax benefit of $489, $58, and $0..... (768) (83) (811) Loss from Disposal of Discontinued Operations, net of income tax benefit of $5,393, $0, and $0.... (8,455) -- -- --------- --------- --------- Net Earnings (Loss)..................................... $ (5,703) $ 9,445 $ 5,866 ========= ========= ========= Earnings per Common Share from Continuing Operations: Basic................................................. $ 0.19 $ 0.53 $ 0.73 ======== ========= ========= Diluted............................................... $ 0.19 $ 0.52 $ 0.69 ======== ========= ========= Net Earnings (Loss) per Common Share: Basic................................................. $ (0.32) $ 0.53 $ 0.63 ========= ========= ========= Diluted............................................... $ (0.31) $ 0.52 $ 0.60 ========= ========= =========
See accompanying notes to Consolidated Financial Statements. 44 UGLY DUCKLING CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years Ended December 31, 1998, 1997, and 1996 (in thousands)
Retained Number of Shares Amount ($'s) Earnings Total ----------------------------- ------------------- (Accumulated Stockholders' Preferred Common Treasury Preferred Common Treasury Deficit) Equity -------- ------- -------- -------- --------- -------- ---------- --------- Balances at December 31, 1995........................ 1,000 5,580 -- $10,000 $ 127 $ -- $ (5,243) $ 4,884 Issuance of Common Stock for Cash................... -- 7,281 -- -- 79,335 -- -- 79,335 Conversion of Debt to Common Stock................ -- 444 -- -- 3,000 -- -- 3,000 Issuance of Common Stock to Board of Director's..... -- 22 -- -- 150 -- -- 150 Redemption of Preferred (1,000) -- -- (10,000) -- -- -- (10,000) Stock...................... Preferred Stock Dividends..... -- -- -- -- -- -- (916) (916) Net Earnings for the Year..... -- -- -- -- -- -- 5,866 5,866 ------- ------- ------ ------- --------- ------ -------- --------- Balances at December 31, 1996........................ -- 13,327 -- -- 82,612 -- (293) 82,319 Issuance of Common Stock for Cash................... -- 5,194 -- -- 89,398 -- -- 89,398 Issuance of Common Stock Warrants.................... -- -- -- -- 612 -- -- 612 Net Earnings for the Year..... -- -- -- -- -- -- 9,445 9,445 ------- ------- ------ ------- --------- ------ -------- --------- Balances at December 31, 1997........................ -- 18,521 -- -- 172,622 -- 9,152 181,774 Issuance of Common Stock for Casg................... -- 84 -- -- 306 -- -- 306 Issuance of Common Stock Warrants.................... -- -- -- -- 900 -- -- 900 Purchase of Treasury Stock for Cash................... -- -- (72) -- -- (535) -- (535) Acquisition of Treasury Stock for Subordinated Debentures................. -- -- (2,689) -- -- (13,975) -- (13,975) Net Loss for the Year......... -- -- -- -- (5,703) (5,703) ------- ------- --------- ------- --------- -------- --------- ---------- Balances at December 31, 1998........................ -- 18,605 (2,761) $ -- $ 173,828 $(14,510) $ 3,449 $ 162,767 ======= ======= ========= ======= ========= ========= ======== =========
See accompanying notes to Consolidated Financial Statements. 45 UGLY DUCKLING CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows
Years Ended December 31, ----------------------------------- 1998 1997 1996 ----------- ---------- -------- (In thousands) Cash Flows from Operating Activities: Net Earnings (Loss).......................................... $ (5,703) $ 9,445 $ 5,866 Adjustments to Reconcile Net Earnings (Loss) to Net Cash Provided by (Used in) Operating Activities from Continuing Operations: Loss from Discontinued Operations............................ 9,223 83 811 Provision for Credit Losses.................................. 67,634 23,045 9,657 Gain on Sale of Loans........................................ (12,093) (6,721) (3,925) Deferred Income Taxes........................................ (3,344) 1,094 498 Depreciation and Amortization................................ 5,735 3,301 1,382 Purchase of Finance Receivables for Sale..................... (207,085) (116,830) (48,996) Proceeds from Sale of Finance Receivables.................... 159,498 81,098 30,259 Collections of Finance Receivables........................... 22,000 15,554 26,552 Decrease (Increase) in Inventory............................. (11,795) (20,592) 778 Increase in Other Assets..................................... (6,020) (2,779) (2,155) Increase in Accounts Payable, Accrued Expenses, and Other Liabilities............................................... 5,425 6,905 2,571 Increase (Decrease) in Income Taxes Receivable/Payable....... (1,233) (1,378) 535 Other, Net................................................... (156) -- -- ----------- ---------- -------- Net Cash Provided by (Used in) Operating Activities of Continuing Operations................................. 22,086 (7,775) 23,833 ---------- ---------- -------- Cash Flows from Investing Activities: Increase in Finance Receivables.............................. (111,467) (20,941) -- Collections of Finance Receivables........................... 22,779 9,160 -- Increase in Investments Held in Trust........................ (13,802) (8,475) (3,162) Advances under Notes Receivable.............................. (13,669) (32,782) -- Repayments of Notes Receivable............................... 11,857 6,900 137 Proceeds from disposal of Property and Equipment............. 27,413 -- -- Purchase of Property and Equipment........................... (21,786) (19,509) (5,549) Payment for Acquisition of Assets............................ -- (45,220) -- Other, Net................................................... -- -- (1,944) ---------- ---------- -------- Net Cash Used in Investing Activities of Continuing Operations.............................................. (98,675) (110,867) (10,518) ---------- ---------- -------- Cash Flows from Financing Activities: Additions to Notes Payable................................... 95,191 22,228 1,000 Repayments of Notes Payable.................................. (43,169) -- (28,610) Issuance of Subordinated Notes Payable....................... 19,630 -- -- Repayment of Subordinated Notes Payable...................... (2,000) (2,000) (553) Redemption of Preferred Stock................................ -- -- (10,000) Proceeds from Issuance of Common Stock....................... 306 89,398 79,435 Acquisition of Treasury Stock................................ (535) -- -- Other, Net................................................... (464) (178) (1,158) ---------- ---------- -------- Net Cash Provided by Financing Activities of Continuing Operations.............................................. 68,959 109,448 40,114 ---------- ---------- -------- Net Cash Provided by (Used in) Discontinued Operations......... 6,844 (5,724) (36,393) ---------- ---------- -------- Net Increase (Decrease) in Cash and Cash Equivalents........... (786) (14,918) 17,036 Cash and Cash Equivalents at Beginning of Year................. 3,537 18,455 1,419 ---------- ---------- -------- Cash and Cash Equivalents at End of Year....................... $ 2,751 $ 3,537 $ 18,455 ========== ========== ======== Supplemental Statement of Cash Flows Information: Interest Paid................................................ $ 10,483 $ 5,382 $ 5,144 Income Taxes Paid............................................ 1,633 6,570 450 Assumption of Debt in Connection with Acquisition of Assets.. -- 29,900 -- Conversion of Note Payable to Common Stock................... -- -- 3,000 Purchase of Property and Equipment with Notes Payable........ 825 -- 8,313 Purchase of Property and Equipment with Capital Leases....... -- 357 57 Purchase of Treasury Stock with Subordinated Notes Payable... 13,835 -- -- Issuance of Warrants for Subordinated Note Payable........... 900 -- --
See accompanying notes to Consolidated Financial Statements. 46 UGLY DUCKLING CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Organization and Acquisitions Ugly Duckling Corporation, a Delaware corporation (the Company), was incorporated in April 1996 as the successor to Ugly Duckling Holdings, Inc. (UDH), an Arizona corporation formed in 1992. Contemporaneous with the formation of the Company, UDH was merged into the Company with each share of UDH's common stock exchanged for 1.16 shares of common stock in the Company and each share of UDH's preferred stock exchanged for one share of preferred stock in the Company under identical terms and conditions. UDH was effectively dissolved in the merger. The resulting effect of the merger was a recapitalization increasing the number of authorized shares of common stock to 20,000,000 and a 1.16-to-1 common stock split effective April 24, 1996. The stockholders' equity section of the Consolidated Balance Sheets and the Statements of Stockholders' Equity reflect the number of authorized shares after giving effect to the merger and common stock split. The Company's principal stockholder is also the sole stockholder of Verde Investments, Inc. (Verde). The Company's subordinated debt is held by, and the land for certain of its car dealerships and loan servicing facilities was leased from Verde until December 31, 1996, see Note 16. During 1997, the Company completed several acquisitions. In January 1997, the Company acquired substantially all of the assets of Seminole Finance Corporation and related companies (Seminole) including four dealerships in Tampa/St. Petersburg and a contract portfolio of approximately $31.1 million in exchange for approximately $2.5 million in cash and assumption of $29.9 million in debt. In April 1997, the Company purchased substantially all of the assets of E-Z Plan, Inc. (EZ Plan), including seven dealerships in San Antonio and a contract portfolio of approximately $24.3 million in exchange for approximately $26.3 million in cash. In September 1997, the Company acquired substantially all of the dealership and loan servicing assets (but not the loan portfolio) of Kars-Yes Holdings Inc. and related companies (Kars), including six dealerships in the Los Angeles market, two in the Miami market, two in the Atlanta market and two in the Dallas market, in exchange for approximately $5.5 million in cash. These acquisitions were recorded in accordance with the "purchase method" of accounting, and, accordingly, the purchase price has been allocated to the assets purchased and the liabilities assumed based upon the estimated fair values at the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired was approximately $16.0 million and has been recorded as goodwill, which is being amortized over periods ranging from fifteen to twenty years. The results of operations of the acquired operations have been included in the accompanying statements of operations from the respective acquisition dates. (2) Discontinued Operations In February 1998, the Company announced its intention to close its branch office network (the "Branch Offices") through which the Company purchased retail installment contracts, and exit this line of business in the first quarter of 1998. The Company recorded a pre-tax charge to discontinued operations of $15.1 million (approximately $9.2 million, net of income taxes) in 1998. The closure was substantially complete as of March 31, 1998 and included the termination of approximately 400 employees, substantially all of whom were employed at the Company's 76 branches that were in place on the date of the announcement. Approximately $1.7 million of the discontinued operations charge was for termination benefits, $6.7 million for portfolio allowance and collection costs, $2.5 million for write-off of pre-opening and start-up costs, and the remainder for lease payments on idle facilities, writedowns of leasehold improvements, data processing and other equipment. The Company has reclassified the accompanying consolidated balance sheets and consolidated statements of operations of the Branch Offices to Discontinued Operations. In April 1998, the Company announced that its Board of Directors directed management to proceed with separating the Company's operations into two companies. The Company formed a new subsidiary to operate the Cygnet Dealer Program and Cygnet Financial Services ("Non Dealership Operations"). A proposal to split-up the Company through a rights offering was approved by stockholders at the annual meeting held in August 1998 and rights were subsequently issued to Company stockholders. The Company had previously reported the net assets, results of operations, and cash flows of the Non Dealership Operations in Discontinued Operations. However, the rights offering failed due to a lack of shareholder participation. The Board of Directors has directed management to cease its efforts, for the time being, to separate the Non Dealership Operations of the Company. As a result of the aforementioned, the assets, liabilities, results of operations, and cash flows of the Non Dealership Operations have been reclassified into continuing operations for the periods presented in these consolidated financial statements. Total assets and liabilities for Non Dealership Operations were $77.2 million and $8.7 million, and $49.9 million and $559,000 at December 31, 1998 and 1997, respectively. Revenues and Earnings 47 (Loss) before Interest Expense were $32,837,000 and $3,993,000, $14,664,000 and $11,331,000, and zero and zero, respectively, for the years ended December 31, 1998, 1997, and 1996. The Company did not record any charges to record the net assets of the Non Dealership Operations at net realizable value at the time the separation was announced, and, consequently, did not reverse any loss accruals during 1998. The components of Net Assets of Discontinued Operations as of December 31, 1998 and December 31, 1997 follow (in thousands):
December 31, ------------------- 1998 1997 --------- -------- Finance Receivables, net..................... $ 30,649 $ 26,780 Residuals in Finance Receivables Sold........ 7,875 16,099 Investments Held in Trust.................... 3,665 7,277 Property and Equipment....................... 1,198 1,424 Capitalized Start-up Costs................... -- 2,453 Other Assets, net of Accounts Payable and Accrued Liabilities........................ 1,153 550 Disposal Liability........................... (6,024) -- --------- -------- $ 38,516 $ 54,583 ======== ========
Following is a summary of the operating results of the Discontinued Operations for the years ended December 31, 1998, 1997, and 1996 (in thousands):
December 31, -------------------------------- 1998 1997 1996 -------- -------- ------- Revenues................................. $ 3,095 $ 21,213 $ 7,768 Expenses................................. (18,200) (21,354) (8,579) -------- -------- ------- Loss before Income Tax (Benefit)......... (15,105) (141) (811) Income Tax Benefit....................... (5,882) (58) -- --------- --------- ------- Loss from Discontinued Operations........ $ (9,223) $ (83) $ (811) ========= ========= =======
(3) Summary of Significant Accounting Policies Operations The Company, through its subsidiaries, owns and operates used car sales dealerships, a collateralized dealer finance program, and a third party bulk purchasing and loan servicing operation. Additionally, Ugly Duckling Receivables Corporation (UDRC) and Ugly Duckling Receivables Corporation II (UDRC II), "bankruptcy remote entities" are the Company's wholly-owned special purpose securitization subsidiaries. Their assets include residuals in finance receivables sold and investments held in trust, including amounts classified as discontinued operations, in the amounts of $7,875,000 and $3,665,000, respectively, at December 31, 1998 and in the amounts of $16,099,000 and $7,277,000, respectively, at December 31, 1997. These amounts would not be available to satisfy claims of creditors of the Company. Principles of Consolidation The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 48 Concentration of Credit Risk The Company provides sales finance services in connection with the sales of used cars to individuals residing in numerous metropolitan areas. The Company operated a total of 56, 41, and 8 used car dealerships (company dealerships) in nine, ten and two metropolitan markets at December 31, 1998, 1997, and 1996, respectively. As of December 31, 1998, the Company's Cygnet Dealer Program had warehouse purchase facilities and revolving lines of credit with a total of approximately 63 third party dealers. Cygnet Dealer's net investment in finance receivables purchased from 2 third party dealers totaled approximately $15.1 million, representing approximately 34% of Cygnet dealer's net finance receivables portfolio as of December 31, 1998. There were no other third party dealer loans that exceeded 10% of the Company's finance receivables portfolio as of December 31, 1998. Periodically during the year, the Company maintains cash in financial institutions in excess of the amounts insured by the federal government. Cash Equivalents The Company considers all highly liquid debt instruments purchased with maturities of three months or less to be cash equivalents. Cash equivalents generally consist of interest bearing money market accounts. Revenue Recognition Interest income is recognized using the interest method. Direct loan origination costs related to contracts originated at Company dealerships are deferred and charged against finance income over the life of the related installment sales contract as an adjustment of yield. The accrual of interest is suspended if collection becomes doubtful, generally 90 days past due, and is resumed when the loan becomes current. Interest income also includes income on the Company's residual interests from its Securitization Program. Revenue from the sales of used cars is recognized upon delivery, when the sales contract is signed and the agreed-upon down payment has been received. Residuals in Finance Receivables Sold, Investments Held in Trust, and Gain on Sale of Loans In 1996, the Company initiated a Securitization Program under which it sold (securitized), on a non-recourse basis, finance receivables to a trust which used the finance receivables to create asset backed securities which were remitted to the Company in consideration for the sale. The Company then sold senior certificates (A certificates) to third party investors and retained subordinated certificates certificates). In consideration of such sale, the Company received cash proceeds from the sale of certificates collateralized by the finance receivables and the right to future cash flows under the subordinated certificates (residual in finance receivables sold, or residual) arising from those receivables to the extent not required to make payments on the A certificates sold to a third party or to pay associated costs. Gains or losses were determined based upon the difference between the sales proceeds for the portion of finance receivables sold and the Company's recorded investment in the finance receivables sold. The Company allocated the recorded investment in the finance receivables between the portion of the finance receivables sold and the portion retained based on the relative fair values on the date of sale. To the extent that actual cash flows on a securitization are below original estimates and differ materially from the original securitization assumptions, and in the opinion of management, if those differences appear to be other than temporary in nature, the Company's residual will be adjusted, with corresponding charges against income in the period in which the adjustment is made. Such evaluations are performed on a security by security basis, for each certificate or spread account retained by the Company. The structure of the Company's securitization transaction consummated in the fourth quarter of 1998 was changed from the structure of the transactions previously effected under its Securitization Program and has been accounted for as a secured financing in accordance with SFAS 125, Accounting for Transfers and 49 Servicing of Financial Assets and Extinguishments of Liabilities (SFAS No. 125). The loan contracts included in the transaction remain in Finance Receivables and the A Certificates are reflected in Collateralized Notes Payable. The Company is required to make an initial deposit into an account held by the trustee (spread account) and to pledge this cash to the trust to which the finance receivables were sold. The trustee in turn invests the cash in highly liquid investment securities. In addition, the Company (through the trustee) deposits additional cash flows from the residual to the spread account as necessary to attain and maintain the spread account at a specified percentage of the underlying finance receivable principal balances. These deposits are classified as Finance Receivables. Residuals in Finance Receivables Sold are classified as "held-to-maturity" securities in accordance with SFAS No. 115. Servicing Income Servicing Income is recognized when earned. Servicing costs are charged to expense as incurred. In the event delinquencies and/or losses on the portfolio serviced exceed specified levels, the Company may be required to transfer the servicing of the portfolio to another servicer. Finance Receivables and Allowance for Credit Losses Finance receivables consist of contractually scheduled payments from installment sales contracts net of unearned finance charges, accrued interest receivable, direct loan origination costs, investments held in trust, and an allowance for credit losses, including nonaccretable discounts. The Company follows the provisions of Statement of Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases." Direct loan origination costs represent the unamortized balance of costs incurred in the origination of contracts at the Company's dealerships. An allowance for credit losses (allowance) is established by charging the provision for credit losses and the allocation of acquired allowances. For contracts generated by the Company dealerships, the allowance is established by charging the provision for credit losses. Contracts purchased from third party dealers are generally purchased with an acquisition discount (discount). The discount is negotiated with third party dealers pursuant to a financing program that bases the discount on, among other things, the credit risk of the borrower and the amount to be financed in relation to the car's wholesale value. The discount is allocated between nonaccretable discount and discount available for accretion to interest income. The portion of discount allocated to the allowance is based upon historical performance and write-offs of contracts acquired from third party dealers, as well as the general credit worthiness of the borrowers and the wholesale value of the vehicle. The remaining discount, if any, is deferred and accreted to income using the interest method. To the extent that the allowance is considered insufficient to absorb anticipated credit losses, additions to the allowance are established through a charge to the provision for credit losses. The evaluation of the allowance considers such factors as the performance of each dealerships loan portfolio, the Company's historical credit losses, the overall portfolio quality and delinquency status, the review of specific problem loans, the value of underlying collateral, and current economic conditions that may affect the borrower's ability to pay. Notes Receivable Notes receivable are recorded at cost, less related allowance for impaired notes receivable. Management, considering information and events regarding the borrowers ability to repay their obligations, including an evaluation of the estimated value of the related collateral, considers a note to be impaired when it is probable that the Company will be unable to collect amounts due according to the contractual terms of the note agreement. When a loan is considered to be impaired, the amount of impairment is measured based on the present value of expected future cash flows discounted at the note's effective interest rate or the fair value of the collateral if the loan is collateral dependent. Impairment losses are included in the allowance for credit losses through a charge to the provision for credit losses. Cash receipts on impaired notes receivable are applied to reduce the principal amount of such notes until the principal has been received and are recognized as interest income, thereafter. 50 Inventory Inventory consists of used vehicles held for sale which is valued at the lower of cost or market, and repossessed vehicles which are valued at market value. Vehicle reconditioning costs are capitalized as a component of inventory cost. The cost of used vehicles sold is determined on a specific identification basis. Property and Equipment Property and Equipment are stated at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the assets which range from three to ten years for equipment and thirty years for buildings. Leasehold and land improvements are amortized using straight-line and accelerated methods over the shorter of the lease term or the estimated useful lives of the related improvements. The Company has capitalized costs related to the development of software products for internal use. Capitalization of costs begins when technological feasibility has been established and ends when the software is available for general use. Amortization is computed using the straight-line method over the estimated economic life of five years. Goodwill Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, generally fifteen to twenty years. Post Sale Customer Support Programs A liability for the estimated cost of post sale customer support, including car repairs and the Company's down payment back and credit card programs, is established at the time the used car is sold by charging Cost of Used Cars Sold. The liability is evaluated for adequacy through a separate analysis of the various programs' historical performance. Income Taxes The Company utilizes the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Stock Option Plan The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. The Company has adopted the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to provide pro forma net earnings and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method as defined in SFAS No. 123 had been applied. The Company uses one of the most widely used option pricing models, the Black-Scholes model (Model), for purposes of valuing its stock option grants. The Model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, it requires the input of highly subjective assumptions, including the expected stock price volatility, expected dividend yields, the risk free interest rate, and the expected life. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in subjective input assumptions can materially affect the fair value estimate, in management's opinion, the value determined by the Model is not necessarily indicative of the ultimate value of the granted options. 51 Earnings Per Share Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Impairment of Long-Lived Assets Long-Lived Assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Transfers and Servicing of Financial Assets and Extinguishments of Liabilities The Company adopted the provisions of SFAS No. 125 on January 1, 1997. This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Adoption of SFAS No. 125 did not have a material impact on the Company. Reclassifications Certain reclassifications have been made to the prior years' consolidated financial statement amounts to conform to the current year presentation. (4) Finance Receivables and Allowance for Credit Losses A summary of finance receivables as of December 31, 1998 and 1997 follows (in thousands):
December 31, ----------------------------------------------------------------------- 1998 1997 ---------------------------------- --------------------------------- Non Non Dealership Dealership Dealership Dealership Operations Operations Total Operations Operations Total --------- ---------- -------- --------- ---------- -------- Installment Sales Contract Principal Balances............................ $ 93,936 $ 51,282 $145,218 $ 55,965 $ 27,480 $ 83,445 Add: Accrued Interest Receivable....... 877 473 1,350 462 147 609 Loan Origination Costs, Net............ 2,237 -- 2,237 1,431 -- 1,431 -------- -------- -------- -------- -------- -------- Principal Balances, Net................ 97,050 51,755 148,805 57,858 27,627 85,485 Residuals in Finance Receivables Sold.. 33,331 2,625 35,956 13,277 -- 13,277 Investments Held in Trust.............. 20,564 -- 20,564 10,357 -- 10,357 -------- -------- -------- -------- -------- -------- 150,945 54,380 205,325 81,492 27,627 109,119 Allowance for Credit Losses............ (24,777) (2,024) (26,801) (10,356) (1,035) (11,391) Discount on Acquired Loans............. -- (15,315) (15,315) -- (7,155) (7,155) -------- --------- -------- -------- --------- -------- Finance Receivables, net............... $126,168 $ 37,041 $163,209 $ 71,136 $ 19,437 $ 90,573 ======== ======== ======== ======== ======== ======== Classification: Finance Receivables Held for Sale $ -- $ -- $ -- $ 52,000 $ -- $ 52,000 Finance Receivables Held for Investment 97,050 51,755 148,805 5,858 27,627 33,485 -------- -------- -------- -------- -------- -------- $ 97,050 $ 51,755 $148,805 $ 57,858 $ 27,627 $ 85,485 ======== ======== ======== ======== ======== ========
52 A summary of the allowance for credit losses on finance receivables for the years ended December 31, 1998, 1997 and 1996 follows (in thousands):
1998 1997 ------------------------------- ------------------------------- 1996 Non Non ---------- Dealership Dealership Dealership Dealership Dealership Operations Operations Total Operations Operations Total Operations ---------- ---------- --------- ---------- ---------- --------- ---------- Balances, Beginning of Year $ 10,356 $ 1,035 $ 11,391 $ 1,625 $ -- $ 1,625 $ 7,500 Provision for Credit Losses 65,318 2,016 67,334 22,354 491 22,845 9,657 Allowance on Acquired Loans -- 801 801 15,309 550 15,859 -- Net Charge Offs............ (6,358) (1,828) (8,186) (7,524) (6) (7,530) (6,202) Sale of Finance Receivables (44,539) -- (44,539) (21,408) -- (21,408) (9,330) --------- --------- --------- --------- -------- --------- --------- Balances, End of Year...... $ 24,777 $ 2,024 $ 26,801 $ 10,356 $ 1,035 $ 11,391 $ 1,625 ========= ========= ========= ========= ========= ========= =========
The valuation of the Residual in Finance Receivables Sold as of December 31, 1998, which totaled $33.3 million, represents the present value of the Dealership Operations' interests in the distributions of future cash flows from the underlying portfolio out of the securitization trusts and Investments Held in Trust (see note 5) which totaled $20.6 million at December 31, 1998. The Company's securitization transactions were discounted with a rate of 12% using the "cash out method". For securitizations between June 30, 1996 and June 30, 1997, net losses were originally estimated using total expected cumulative net losses at loan origination of approximately 26.0%, adjusted for actual cumulative net losses prior to securitization. Prepayment rates were estimated to be 1.5% per month of the beginning of month balances. During the year ended December 31, 1997, the Company recorded a $5.7 million charge to write-down the Residuals in Finance Receivables Sold. The charge had the effect of increasing the cumulative net loss assumption to approximately 27.5%, for the securitization transactions that took place prior to June 30, 1997. For the securitization transaction that took place in September 1997, net losses were estimated using total expected cumulative net losses at loan origination of approximately 27.5%, adjusted for actual cumulative net losses prior to securitization. For securitization transactions completed during the nine month period ended September 30, 1998, net losses were estimated using total expected cumulative net losses at loan origination of approximately 29.0%, adjusted for actual cumulative net losses prior to securitization. Prepayment rates were estimated to be 1% per month of the beginning of month balance. As of December 31, 1998 and 1997, the Residuals in Finance Receivables Sold for the Company's Dealership Operations were comprised of the following (in thousands):
December 31, ---------------------- 1998 1997 -------- -------- Retained interest in subordinated securities (B Certificates)................................. $ 51,243 $ 25,483 Net interest spreads, less present value discount.. 25,838 10,622 Reduction for estimated credit loss................ (43,750) (22,828) --------- -------- Residuals in finance receivables sold.............. $ 33,331 $ 13,277 ========= ========= Securitized principal balances outstanding......... $ 198,747 $ 127,356 ========= ========= Estimated credit losses and allowances as a % of securitized principal balances outstanding...... 22.0% 17.9% ======== ==========
The following table reflects a summary of activity for the Residuals in Finance Receivables Sold for the Company's Dealership Operations for the years ended December 31, 1998 and 1997, respectively (in thousands):
December 31, --------------------- 1998 1997 -------- -------- Balance, Beginning of Year....................... $ 13,277 $ 8,512 Additions........................................ 35,435 17,734 Amortization..................................... (15,381) (7,242) Write-down of Residual in Finance Receivables Sold -- (5,727) -------- -------- Balance, End of Year............................. $ 33,331 $ 13,277 ======== ========
The Company also has an investment in subordinate certificates originated by a third party approximating $2.6 million at December 31, 1998 held by its Non Dealership Operations classified as Residuals in Finance Receivables Sold. 53 (5) Investments Held in Trust In connection with its securitization transactions, the Company is required to provide a credit enhancement to the investor. The Company makes an initial cash deposit, ranging from 4% to 6% of the initial underlying finance receivables principal balance, of cash into an account held by the trustee (spread account) and pledges this cash to the trust to which the finance receivables were sold. Additional deposits from the residual cash flow (through the trustee) are made to the spread account as necessary to attain and maintain the spread account at a specified percentage, ranging from 6.0% to 10.5%, of the underlying finance receivables principal balance. In the event that the cash flows generated by the finance receivables are insufficient to pay obligations of the trust, including principal or interest due to certificate holders or expenses of the trust, the trustee will draw funds from the spread account as necessary to pay the obligations of the trust. The spread account must be maintained at a specified percentage of the principal balances of the finance receivables held by the trust, which can be increased in the event delinquencies or losses exceed specified levels. If the spread account exceeds the specified percentage, the trustee will release the excess cash to the Company from the pledged spread account. Except for releases in this manner, the cash in the spread account is restricted from use by the Company. During 1998, the Company made initial spread account deposits totaling $13.1 million and additional net deposits through the trustee totaling $4.8 million. The total balance in the spread accounts was $20.6 million as of December 31, 1998. In connection therewith, the specified spread account balance based upon the aforementioned specified percentages of the balances of the underlying portfolios was $23.7 million, resulting in additional funding requirements from future cash flows of $3.1 million as of December 31, 1998. The additional funding requirement will decline as the trustee deposits additional cash flows into the spread account and as the principal balance of the underlying finance receivables declines. During 1997, the Company made initial spread account deposits totaling $6.1 million and additional net deposits through the trustee totaling $1.8 million. The total balance in the spread accounts was $10.4 million as of December 31, 1997. In connection therewith, the specified spread account balance based upon the aforementioned specified percentages of the balances of the underlying portfolios as of December 31, 1997 was $10.5 million, resulting in additional funding requirements of $101,000 as of December 31, 1997. (6) Notes Receivable The Company's Cygnet Dealer Program has various notes receivable from used car dealers. Under its Asset Based Loan program, the Company had commitments for revolving notes receivable totaling $13.8 million at December 31, 1998. These notes have various maturity dates through June 2001 with interest rates ranging from prime plus 5.00% to prime plus 9.75% per annum (12.75% to 17.50% at December 31, 1998) payable monthly. The revolving notes subject the borrower to borrowing base requirements with advances on eligible collateral (retail installment contracts) ranging from forty-five percent to sixty-five percent of the par value of the underlying collateral. The balance outstanding on notes receivable totaled $8.8 million, and $5.6 million at December 31, 1998 and 1997, respectively. The allowance for credit losses for notes receivable totaled $500,000 and $200,000 at December 31, 1998 and 1997, respectively. In July 1997, First Merchants Acceptance Corporation (FMAC) filed for bankruptcy. Immediately subsequent to the bankruptcy filing, the Company executed a loan agreement to provide FMAC with up to $10.0 million in debtor in possession (the DIP facility) financing. The DIP facility accrued interest at 12.0%, was initially scheduled to mature on February 28, 1998, and was secured by substantially all of FMAC's assets. The Company and FMAC subsequently amended the DIP facility to increase the maximum commitment to $21.5 million, decrease the interest rate to 10.0% per annum, and extend the maturity date indefinitely. In connection with the amendment, FMAC pledged the first $10.0 million of income tax refunds receivable, the balance of which FMAC anticipates collecting in 1999, to the Company. The maximum commitment under the DIP facility had been reduced to $12.4 million at December 31, 1998. Once the proceeds from the income tax refunds are remitted to the Company, such amounts permanently reduce the maximum commitment under the DIP facility. Thereafter, the Company anticipates collecting the balance of the DIP facility from distributions to FMAC from FMAC's residual interests in certain securitization transactions. The outstanding balance on the DIP facility totaled $12.2 million and $11.0 million at December 31, 1998 and 1997, respectively. 54 During the third and fourth fiscal quarters of 1997, the Company acquired the senior bank debt of FMAC from the bank group members holding such debt. In December 1997, a credit bid for the outstanding balance of the senior bank debt plus certain fees and expenses (the "credit bid purchase price") was entered and approved in the bankruptcy court resulting in the transfer of the senior bank debt for the loan portfolio which secured the senior bank debt (the "owned loans"). Simultaneous with the transfer to the Company, a finance company purchased the owned loans for 86% of the principal balance of the loan portfolio, and the Company retained a 14% participation in the loan portfolio. FMAC has guaranteed that the Company will receive an 11.0% return on the credit bid purchase price from the cash flows generated by the owned loans, and further collateralized by FMAC's residual interests in certain securitization transactions. The balance of the participation totaled $6.9 million and $9.2 million at December 31, 1998 and 1997, respectively. A summary of notes receivable as of December 31, 1998 and 1997 follows (in thousands):
December 31, -------- -------- 1998 1997 -------- -------- Notes Receivable under the Asset Based Loan Program, net of allowance for doubtful accounts of $500, and $200, respectively......................................... $ 8,311 $ 5,594 FMAC Debtor in Possession Note Receivable............... 12,228 10,994 FMAC Bank Group Participation........................... 6,856 9,244 Other Notes Receivable.................................. 862 913 -------- -------- Notes Receivable, net................................... $ 28,257 $ 26,745 ======== ========
(7) Property and Equipment A summary of Property and Equipment as of December 31, 1998 and 1997 follows (in thousands):
December 31, --------------------- 1998 1997 -------- -------- Land................................................ $ 3,721 $ 13,813 Buildings and Leasehold Improvements................ 9,984 16,274 Furniture and Equipment............................. 24,373 11,668 Vehicles............................................ 219 306 Construction in Process............................. 2,872 2,817 -------- -------- 41,169 44,878 Less Accumulated Depreciation and Amortization...... (8,199) (5,051) -------- -------- Property and Equipment, Net......................... $ 32,970 $ 39,827 ======== ========
In March 1998, the Company executed a commitment letter with an investment company for the sale-leaseback of up to $37.0 million in real property. Pursuant to the terms of the agreement, the Company would sell certain real property to the investment company at its cost and leaseback the properties for an initial term of twenty years. During 1998, the Company sold approximately $27.4 million of property under this agreement and recognized no gain or loss on the sale-leaseback transactions. Interest expense capitalized in 1998, 1997 and 1996 totaled $135,000, $229,000, and zero, respectively. (8) Intangible Assets A summary of intangible assets as of December 31, 1998 and 1997 follows (in thousands):
December 31, ------------------ 1998 1997 -------- ------- Original Cost: Goodwill.................... $ 17,037 $17,945 Trademarks.................. 581 581 Covenants not to Compete.... 250 250 -------- ------- 17,868 18,776 Accumulated Amortization.... (2,338) (1,233) -------- ------- Intangibles, Net............ $ 15,530 $17,543 ======== =======
Amortization expense relating to intangible assets totaled $1,105,000, $857,000, and $63,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 55 (9) Other Assets A summary of Other Assets as of December 31, 1998 and 1997 follows (in thousands):
December 31, ------------------ 1998 1997 ------- ------- Prepaid Expenses.............. $2,484 $1,957 Income Taxes Receivable....... 2,926 1,693 Servicing Receivables......... 4,266 1,389 Restricted Cash............... 1,565 1,280 Deposits...................... 1,286 829 Employee Advances............. 1,431 821 Deferred Income Taxes......... 2,626 -- Other......................... 3,991 3,277 ------- ------- $20,575 $11,246 ======= =======
(10) Accrued Expenses and Other Liabilities A summary of Accrued Expenses and Other Liabilities as of December 31, 1998 and 1997 follows (in thousands):
December 31, ----------------- 1998 1997 ------- ------- Sales Taxes.................... $ 3,033 $ 3,909 Accrued Payroll, Benefits & Taxes 2,192 2,366 Collections Liability.......... 3,121 1,503 Accrued Advertising............ 1,234 850 Accrued Post Sale Support...... 1,809 771 Deferred Income Taxes.......... -- 718 Others......................... 8,305 4,847 ------- ------- $19,694 $14,964 ======= =======
In connection with the retail sale of vehicles, the Company is required to pay sales taxes to certain government jurisdictions. In certain of these jurisdictions, the Company has elected to pay these taxes using the "cash basis", which requires the Company to pay the sales tax obligation for a sale transaction as principal is collected over the life of the related finance receivable contract. (11) Notes Payable A summary of Notes Payable at December 31, 1998 and 1997 follows (in thousands):
December 31, -------------------- 1998 1997 --------- --------- $125,000,000 revolving loan with a finance company, interest payable daily at 30 day LIBOR (5.24% at December 31, 1998) plus 3.15% through June 2000, secured by substantially all assets of the Company............................................. $ 51,765 $ 56,950 Two notes payable to a finance company totaling $7,450,000, monthly interest payable at the prime rate plus 1.50% (9.25 % at December 31, 1998) through January 1998; thereafter, monthly payments of $89,000 plus interest through April 1999 when the remaining unpaid principal is due, secured by first deeds of trust and assignments of rents on certain real property.. 3,386 7,450 Other notes bearing interest at rates ranging from 9% to 11% due through August 2001, secured by certain real property and certain property and equipment .................................. 967 771 --------- --------- Subtotal................................................... 56,119 65,171 Less: Unamortized Loan Fees............................... 1,025 350 --------- --------- Total...................................................... $ 55,093 $ 64,821 ========== =========
The aforementioned revolving loan agreement contains various reporting and performance covenants including the maintenance of certain ratios, limitations on additional borrowings from other sources, restrictions on certain operating activities, and a restriction on the payment of dividends under certain circumstances. The Company was in compliance with the covenants at December 31, 1998 and 1997 except for interest coverage ratios at December 31, 1998, for which the Company obtained a waiver. 56 (12) Collateralized Notes Payable The Company has Collateralized Notes Payable consisting of a note payable under a securitization and a note payable secured by the common stock of the Company's securitization subsidiaries. These notes do not have contractually scheduled principal payments but require the Company to remit all collections on the collateral to the note holders. A summary of Collateralized Notes Payable at December 31, 1998 and 1997, respectively, follows (in thousands):
December 31, ------------------- 1998 1997 -------- --------- $50,607,000 of A Certificates issued pursuant to the Company's Securitization Program, interest payable monthly at 5.90%, secured by the pool of finance receivable contracts and spread account ($5.7 million at December 31, 1998), monthly principal payments are 73% of principal reductions of the underlying pool of finance receivable contracts........................... 50,607 -- $15 million note payable to a finance company, bearing interest at LIBOR plus 4% (9.54% at December 31, 1998), secured by the capital stock of UDRC and UDRC II, Lender will receive all UDRC II, Lender will receive all distributions for Residuals in distributions for Residuals in Finance Receivables Sold until until note is paid in full..................................... 12,234 -- -------- --------- Subtotal................................................ 62,841 -- Less: Unamortized Loan Fees............................ 640 -- -------- --------- Total................................................... $ 62,201 $ -- ======== =========
(13) Subordinated Notes Payable A summary of Subordinated Notes Payable at December 31, 1998 and 1997 follows:
December 31, ------------------- 1998 1997 --------- ------- (In thousands) $17.5 million Subordinated debentures, interest at 12% per annum (approximately 18.8% effective rate) payable semi-annually with the entire principal balance due October 23, 2003; the debentures are subordinate to all other Company indebtedness except the Verde note and contain certain call provisions at the option of the Company.......................... $ 17,479 $ -- $15 million notes payable to unrelated parties, bearing interest at 12% per annum payable quarterly, principal due February 2001 senior to the Verde subordinated note payable and the subordinated debentures.......................................... 15,000 -- $5 million notes payable to unrelated parties, bearing interest 12% per annum payable quarterly, principal due July 2001 senior to the Verde subordinated note payable and the subordinated debentures....................................................... 5,000 -- $14 million unsecured note payable with Verde, interest payable monthly at 10% per annum with annual principal payments of $2 million, maturing June 2003................................... 10,000 12,000 ---------- ------ Subtotal.................................................. 47,479 12,000 Less: Unamortized Premium................................ 3,738 -- --------- -------- Total..................................................... $ 43,741 $ 12,000 ======== ========
During the year the Company issued $17.5 million of subordinated debentures in exchange for 2.7 million shares of Company common stock valued at $14.0 million ("Exchange Offer"), including $370,000 of costs incurred for the Exchange Offer. The debentures are unsecured and subordinate to all existing and future indebtedness of the Company and bear interest at 12% per annum payable semi-annually each April and October, approximately $2.9 million per year, until they are paid in full on October 23, 2003. The debentures were issued at a premium of approximately $3,874,000 in excess of the market value of the shares tendered, which will be amortized over the life of the debentures and results in an effective interest rate of approximately 18.8%. The Company is required to pay the principal amount of debentures on the fifth anniversary of their issuance date. In connection with the issuance of the $15 million senior subordinated notes payable, the Company issued warrants, which were valued at approximately $900,000, to the lenders to purchase up to 500,000 shares of the Company's Common Stock at an exercise price of $10.00 per share exercisable at any time until the later of (1) February 2001, or (2) such time as the notes have been paid in full. Interest expense related to the subordinated note payable with Verde totaled $1,073,000, $1,232,000, and $1,933,000, during the years ended December 31, 1998, 1997 and 1996, respectively. 57 A summary of the future minimum principal payments required under the aforementioned notes payable and subordinated notes payable after December 31, 1998 follows (in thousands):
Subordinated December 31, Notes Payable Notes Payable Total ------------ ------------- ------------- ---------- 1999.......... $ 3,634 $ 2,000 $ 5,634 2000.......... 51,903 2,000 53,903 2001.......... 581 22,000 22,581 2002.......... -- 2,000 2,000 2003.......... -- 19,479 19,479 ------------- ------------- ---------- $ 56,118 $ 47,479 $ 103,597 =========== ============= ==========
(14) Income Taxes Income taxes amounted to $2,396,000, $6,637,000, and $100,000 for the years ended December 31, 1998, 1997 and 1996, respectively (an effective tax rate of 40.5%, 41.1%, and 1.6%, respectively). A reconciliation between taxes computed at the federal statutory rate of 35% in 1998 and 1997 and 34% in 1996 at the effective tax rate on earnings before income taxes follows (in thousands):
December 31, ----------------------------- 1998 1997 1996 ------- ------ -------- Computed "Expected" Income Taxes ....... $2,071 $5,658 $ 2,142 State Income Taxes, Net of Federal Effect 96 962 41 Change in Valuation Allowance........... 735 -- (2,315) Other, Net.............................. (506) 17 232 ------- ------ -------- $2,396 $6,637 $ 100 ====== ====== ========
Components of income taxes (benefit) for the years ended December 31, 1998, 1997 and 1996 follow (in thousands):
Current Deferred Total -------- ------- ------- 1998: Federal.............. $ 91 $ 2,158 $ 2,249 State................ 6 141 147 ------- ------- ------- 97 2,299 2,396 Discontinued operations (239) (5,643) (5,882) -------- -------- -------- $ (142) $(3,344) $(3,486) ======== ======== ======== 1997: Federal.............. $ 3,743 $ 1,414 $ 5,157 State................ 1,197 283 1,480 ------- ------- ------- 4,940 1,697 6,637 Discontinued operations (40) (18) (58) -------- -------- -------- $ 4,900 $ 1,679 $ 6,579 ======= ======= ======= 1996: Federal.............. $ (149) $ 187 $ 38 State................ -- 62 62 ------- ------- ------- $ (149) $ 249 $ 100 ======= ======= =======
58 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 1998 and 1997 are presented below (in thousands):
December 31, ----------------- 1998 1997 ------- ------ Deferred Tax Assets: Finance Receivables, Principally Due to the Allowance for Credit Losses.................... $2,282 $ 473 Inventory......................................... -- 246 Federal and State Income Tax Net Operating Loss Carryforwards.................................. 1,224 28 Discontinued Operations Liability................. 2,410 -- Accrued Post Sale Support......................... 717 357 Other............................................. 934 395 ------ ------ Total Gross Deferred Tax Assets................... 7,567 1,499 Less: Valuation Allowance......................... (735) -- ------- ------ Net Deferred Tax Assets................... 6,832 1,499 ------ ------ Deferred Tax Liabilities: Software Development Costs........................ (2,191) (237) Inventory......................................... (1,176) -- Pre-Opening and Start Up Costs.................... -- (1,236) Loan Origination Fees............................. (255) (586) Other............................................. (584) (158) ------ ------ Total Gross Deferred Tax Liabilities........... (4,206) (2,217) ------ ------- Net Deferred Tax Asset (Liability)........ $2,626 $ (718) ====== ======
The valuation allowance for deferred tax assets as of December 31, 1998 and 1997 was $735,000 and zero, respectively. The net change in the total valuation allowance for the year ended December 31, 1998 was an increase of $735,000. The allowance is attributable primarily to future deductions and net operating loss carryforwards in certain states where the Branch Offices operated and realization of a tax benefit is unlikely. There was no change in the Valuation Allowance for the year ended December 31, 1997. In assessing the realizability of Deferred Tax Assets, management considers whether it is more likely than not that some portion or all of the Deferred Tax Assets will not be realized. The ultimate realization of Deferred Tax Assets is dependent upon generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the reversal of Deferred Tax Liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the Deferred Tax Assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the established valuation allowance at December 31, 1998. At December 31, 1998, the Company had net operating loss carryforwards for federal income tax purposes of approximately $1,822,000, which, subject to annual limitations, are available to offset future taxable income, if any, through 2011. (15) Servicing Pursuant to the Company's securitization program that began in 1996, the Company securitizes loan portfolios with servicing retained. The Company services the securitized portfolios for a monthly fee ranging from .25% to .33% (generally, 3.0% to 4.0% per annum) of the beginning of month principal balance of the serviced portfolios. The Company has retained the servicing rights on the contracts it has sold in connection with its securitization transactions. The Company has not established any servicing assets or liabilities in connection with its securitizations as the revenues from contractually specified servicing fees and other ancillary sources have been just adequate to compensate the Company for its servicing responsibilities. In 1998 the Company's Non Dealership Operations entered into several agreements with third parties to service loan portfolios on their behalf. The service fees are generally a percentage of the outstanding principal balance ranging from generally, 3.25% to 4.0% per annum, subject to a minimum dollar amount per contract, and are paid monthly. The Company recognized servicing income of $33.3 million, $8.8 million, and $1.9 million in the years ended December 31, 1998, 1997 and 1996, respectively. 59 A summary of portfolios serviced by the Company's respective segments as of December 31, 1998 and 1997 follows (in thousands):
Dealership Operations: 1998 1997 ----------- --------- Finance Receivables from continuing operations....... $ 93,936 $ 55,965 Finance Receivables from discontinued operations 30,219 29,965 Securitized with servicing retained.................. 242,297 238,025 Servicing on behalf of others........................ 47,947 127,322 ----------- --------- Total serviced portfolios Dealership Operations ..... 414,399 451,277 ----------- --------- Non Dealership Operations: Finance Receivables ................................. 1,237 -- Servicing on behalf of others........................ 586,081 -- ----------- -------- Total serviced portfolios Non Dealership Operations.................................. 587,318 -- ----------- --------- Total serviced portfolios...................... $ 1,001,717 $ 451,277 =========== =========
Pursuant to the terms of the various servicing agreements, the serviced portfolios are subject to certain performance criteria. In the event the serviced portfolios do not satisfy such criteria the servicing agreements contain various remedies up to and including the removal of servicing rights from the Company. (16) Lease Commitments The Company leases used car sales facilities, loan servicing centers, offices, and certain office equipment from unrelated entities under various operating leases that expire through March 2019. The leases require monthly rental payments aggregating approximately $871,000 and contain various renewal options from one to ten years. In certain instances, the Company is also responsible for occupancy and maintenance costs, including real estate taxes, insurance, and utility costs. Rent expense totaled $11,419,000, $5,398,000 and $2,394,000 for the years ended December 31, 1998, 1997, and 1996, respectively. During 1996, the Company purchased six car lots, a vehicle reconditioning center, and two office buildings from Verde. These properties had previously been rented from Verde pursuant to various leases which called for base monthly rents aggregating approximately $123,000 plus contingent rents as well as all occupancy and maintenance costs, including real estate taxes, insurance, and utilities. In connection with the purchase, Verde returned security deposits that totaled $364,000. Rent expense for the year ended December 31, 1996 totaled $2,394,000, which included rents paid to Verde totaling $1,498,000 including contingent rents of $440,000. A summary of future minimum lease payments required under noncancelable operating leases with remaining lease terms in excess of one year as of December 31, 1998 follows (in thousands):
Continuing Discontinued December 31, Operations Operations Total ------------ ---------- ------------ -------- 1999.......... $11,320 $ 567 $ 11,887 2000.......... 10,216 178 10,394 2001.......... 8,263 -- 8,263 2002.......... 5,849 -- 5,849 2003.......... 3,874 -- 3,874 Thereafter.... 45,181 -- 45,181 ------- ------ -------- Total $84,703 $ 745 $ 85,448 ======= ====== ========
(17) Stockholders' Equity During 1998 the Company acquired approximately 2.7 million shares of Company Common Stock with a value of approximately $14.0 million in the Exchange Offer. The Company also acquired 72,000 shares of Treasury Stock for approximately $535,000 under its Stock Repurchase Program. During 1997, the Company completed a private placement of 5,075,500 shares of common stock for a total of approximately $88.7 million cash, net of stock issuance costs. The registration of the shares sold in the private placement was effective in April 1997. During 1996, the Company completed two public offerings in which it issued a total of 7,245,000 shares of common stock for approximately $79.4 million cash, net of stock issuance costs. 60 During 1998, the Company issued 50,000 warrants to a third party to purchase Company common stock. The warrants are exercisable through February 2001 at an exercise price of $12.50 per share of common stock. During 1998, the Company issued warrants, valued at approximately $900,000, to purchase 500,000 shares of Company common stock at $10 per share in connection with senior subordinated note payable agreements. The warrants are exercisable at any time until (1) February 2001, or (2) the notes are paid in full. During the year the Company issued 325,000 warrants to a third party to purchase Company common stock at $20.00 per share. The warrants expire on April 1, 2001 and are subject to a call feature by the Company. During 1997, the Company issued warrants for the right to purchase 389,800 shares of the Company's common stock for $20.00 per share exercisable through February 2000. The warrants were valued at approximately $612,000. These warrants remained outstanding at December 31, 1998. In addition, warrants to acquire 116,000 shares of the Company's common stock at $6.75 per share and 170,000 shares of the Company's common stock at $9.45 per share were outstanding at December 31, 1997. On April 24, 1996, the Company effectuated a 1.16-to-1 stock split. The effect of this stock split has been reflected for all periods presented in the Consolidated Financial Statements. The Company's Board of Directors declared quarterly dividends on preferred stock totaling approximately $916,000 during the year ended December 31, 1996. There were no cumulative unpaid dividends at December 31, 1996. (18) Earnings (Loss) Per Share A summary of the reconciliation from basic earnings (loss) per share to diluted earnings (loss) per share for the years ended December 31, 1998, 1997, and 1996 follows (in thousands, except for per share amounts):
1998 1997 1996 -------- -------- ------- Earnings From Continuing Operations.............. $ 3,520 $ 9,528 $ 6,677 Less: Preferred Stock Dividends.................. -- -- (916) ------- -------- ------- Earnings available to Common Stockholders........ $ 3,520 $ 9,528 $ 5,761 ======= ======== ======= Net Earnings (Loss).............................. $(5,703) $ 9,445 $ 5,866 Less: Preferred Stock Dividends.................. -- -- (916) ------- -------- ------- Earnings (Loss) available to Common Stockholders. $(5,703) $ 9,445 $ 4,950 ======== ======== ======= Basic Earnings Per Share From Continuing Operations..................................... $ 0.19 $ 0.53 $ 0.73 ======= ======== ======= Diluted Earnings Per Share From Continuing Operations..................................... $ 0.19 $ 0.52 $ 0.69 ======= ======== ======= Basic Earnings (Loss) Per Share.................. $ (0.32) $ 0.53 $ 0.63 ======= ======== ======= Diluted Earnings (Loss) Per Share................ $ (0.31) $ 0.52 $ 0.60 ======= ======== ======= Basic EPS-Weighted Average Shares Outstanding.... 18,082 17,832 7,887 Effect of Diluted Securities: Warrants....................................... 41 98 71 Stock Options.................................. 282 304 340 ------- -------- ------- Dilutive EPS-Weighted Average Shares Outstanding. 18,405 18,234 8,298 ======= ======== ======= Warrants Not Included in Diluted EPS Since Antidilutive.................................. 1,044 390 -- ======= ======== ======= Stock Options Not Included in Diluted EPS Since Antidilutive................................... 1,044 828 -- ======= ======== =======
(19) Stock Option Plan In June, 1995, the Company adopted a long-term incentive plan (Stock Option Plan) under which it has set aside 1,800,000 shares of common stock to be granted to employees. Options are to vest over a period to be determined by the Board of Directors upon grant and will generally expire 6 to 10 years after the date of grant. The options generally vest over a period of 5 years. In August 1998, the Company's stockholders approved an executive incentive stock option plan (Executive Plan). The Company has reserved 800,000 shares of its common stock for issuance. Options granted under the plan expire ten years after the grant date and vest 20% per year upon completion of each year of service after the date of grant (beginning 1 year after the grant date) subject to meeting additional vesting hurdles that are based on the trading price of the Company's stock. Even if these additional vesting hurdles are not met, the options will fully vest 7 years after the date of grant. 61 A summary of the aforementioned stock plan activity follows:
Stock Option Plan Executive Plan ----------------------- ----------------------- Weighted Weighted Average Average Price Per Price Per Number Share Number Share ----------- ---------- ----------- ---------- Balance, December 31, 1996 912,000 $ 8.60 -- $ -- Granted................. 582,000 15.07 -- -- Forfeited............... (78,000) 14.00 -- -- Exercised............... (118,000) 2.04 -- -- ----------- ----------- Balance, December 31, 1997 1,298,000 11.76 -- -- Granted................. 925,000 7.68 525,000 8.25 Forfeited............... (995,000) 13.64 (25,000) 8.25 Exercised............... (76,000) 3.61 -- -- ----------- ----------- Balance, December 31, 1998 1,152,000 7.43 500,000 8.25 =========== ===========
At December 31, 1998, there were 409,000 and 300,000 additional shares available for grant under the Stock Option Plan and Executive Plan, respectively. The per share weighted-average fair value of stock options granted during 1998, 1997 and 1996 was $3.22, $6.54 and $8.39, respectively, on the date of grant using the Black-Scholes option-pricing model. The following are the weighted-average assumptions: 1998 -- expected dividend yield 0%, risk-free interest rate of 5.25%, expected volatility of 50.0%, and an expected life of 5 years; 1997 -- expected dividend yield 0%, risk-free interest rate of 5.53%, expected volatility of 40.0%, and an expected life of 5 years; 1996 -- expected dividend yield 0%, risk-free interest rate of 6.4%, expected volatility of 56.5% and an expected life of 7 years. During 1998 the Board of Directors approved separate plans to reprice the Company's outstanding stock options under the Stock Option Plan, one in January 1998 and a second in November 1998. The forfeited options had exercise prices ranging from $9.75 to $20.75 and were repriced at $8.25 or $5.13 per share, the fair market value on the date of the respective repricings. Approximately 391,000 options were issued under the repricing program. The vesting period was not affected for the options repriced under the January 1998 repricing plan. However, the vesting period started over on the repricing date for the options issued under the November 1998 repricing plan. Generally vesting occurs 20% per year beginning one year after the grant date. The fair values of these options were estimated at the date of grant using the criteria noted above. The repricing resulted in additional pro forma compensation expense in 1998 of $795,000, which is reflected in the pro forma table below. The repricing activity has been reflected in table above and is included in the options granted and forfeited in 1998. The Company applies APB Opinion 25 in accounting for its Plan, and accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net earnings (loss) and earnings (loss) per share would have been reduced to the pro forma amounts indicated below:
1998 1997 1996 ------------- ------------- --------- Pro Forma Earnings from Continuing Operations Available to Common Stockholders............. $ 2,533 $ 8,650 $ 5,642 Pro forma Net Earnings (Loss) Available to Common Stockholders ......................... $ (6,690) $ 8,567 $ 4,831 Earnings (Loss) per Share -- Basic: Continuing Operations Pro Forma.............. $ 0.14 $ 0.49 $ 0.72 Net Earnings (Loss) Pro Forma................ $ (0.37) $ 0.48 $ 0.61 Earnings (Loss) per Share -- Diluted: Continuing Operations Pro Forma.............. $ 0.14 $ 0.48 $ 0.72 Net Earnings (Loss) Pro Forma................ $ (0.37) $ 0.48 $ 0.61
62 A summary of stock options granted at December 31, 1998 follows:
Options Outstanding Options Exercisable ------------------------------------------------- ------------------------------- Number Weighted-Avg. Weighted-Avg. Number Weighted-Avg. Range of Outstanding Remaining Exercise Exercisable Exercise Exercise Prices at 12/31/98 Contractual Life Price at 12/31/98 Price - --------------- --------------- ---------------- ------------ --------------- ------------ $ .50 to $1.00. 65,000 5.4 years $ 0.86 -- $ -- $1.50 to $7.00. 543,000 5.9 years 4.68 117,000 3.78 $8.00 to $8.25. 816,000 7.8 years 8.25 -- -- $8.30 to $18.63 228,000 5.4 years 14.71 86,000 15.76 ---------- ------- --------- ------- 1,652,000 $ 7.68 203,000 $ 8.86 ========== ======= ========= =======
(20) Year 2000 Readiness Disclosure In 1998, the Company developed a plan to deal with the Year 2000 problem and began modifying and testing, or converting its computer systems to be Year 2000 compliant. The plan provides for the modification, testing, and conversion efforts to be completed by June 30, 1999. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Management has also assessed the Year 2000 remediation efforts of the Company's significant suppliers. Although management believes its efforts minimize the potential adverse effects that a supplier's failure would have on the Company, there can be no absolute assurance that all its suppliers will become Year 2000 compliant on time. The Company will evaluate appropriate courses of action, including replacement of certain systems whose associated costs would be recorded as assets and subsequently amortized, or modification of its existing systems which costs would be expensed as incurred. The Company estimates it will cost between $2.2 million and $2.7 million to become Year 2000 compliant and had incurred $1.3 million of these costs during 1998. However, there can be no assurance that the Company will be able to completely resolve all Year 2000 issues or that the ultimate cost to identify and implement solutions to all Year 2000 problems will not exceed the Company's estimate. (21) Commitments and Contingencies The Company's Non Dealership operations have entered into servicing agreements with two companies that have filed and subsequently emerged from bankruptcy and continue to operate under their approved plans of reorganization. Under the terms of the respective servicing agreements and approved plans of reorganization, once certain creditors of the bankrupt companies have been paid in full, the Company is entitled to certain incentive compensation in excess of the servicing fees earned to date. Under the terms of one of the agreements, the Company is scheduled to receive 17.5% of all collections of the serviced portfolio once the specified creditors have been paid in full. Under the terms of the second agreement, the Company is scheduled to receive the first $3.25 million in collections once the specified creditors have been paid in full and 15% thereafter. The Company is required to issue up to 150,000 warrants to the extent the Company receives the $3.25 million and in addition will be required to issue 75,000 warrants for each $1.0 million in incentive fee income after collection of the $3.25 million. As of December 31, 1998, management estimates that the incentive compensation could range from $0 to $8.0 million under these agreements. The Company has not accrued any fee income with regard to these incentives. On July 18, 1997, the Company filed a Form S-3 registration statement for the purpose of registering up to $200 million of its debt securities in one or more series at prices and on terms to be determined at the time of sale. The registration statement has been declared effective by the Securities and Exchange Commission and may be available for future debt offerings. There can be no assurance, however, that the Company will be able to use this registration statement to sell debt or other securities. The Company is involved in various claims and actions arising in the ordinary course of business. In the opinion of management, based on consultation with legal counsel, the ultimate disposition of these matters will not have a material adverse effect on the Company. No provision has been made in the accompanying consolidated financial statements for losses, if any, that might result from the ultimate disposition of these matters. (22) Retirement Plan The Company has established qualified 401(k) retirement plans (defined contribution plans) which became effective on October 1, 1995. The plans, as amended, cover substantially all employees having no less than three months of service, have attained the age of 21, and work at least 1,000 hours per year. 63 Participants may voluntarily contribute to the plan up to the maximum limits established by Internal Revenue Service regulations. The Company will match from 10% to 25% of the participants' contributions. Participants are immediately vested in the amount of their direct contributions and vest over a five-year period, as defined by the plan, with respect to the Company's contribution. Pension expense totaled $121,000, $49,000, and $23,000 during the years ended December 31, 1998, 1997, and 1996, respectively. (23) Disclosures About Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", requires that the Company disclose estimated fair values for its financial instruments. The following summary presents a description of the methodologies and assumptions used to determine such amounts. Limitations Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument; they are subjective in nature and involve uncertainties, matters of judgment and, therefore, cannot be determined with precision. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular instrument. Changes in assumptions could significantly affect these estimates. Since the fair value is estimated as of December 31, 1998 and 1997, the amounts that will actually be realized or paid in settlement of the instruments could be significantly different. Cash and Cash Equivalents The carrying amount is estimated to be the fair value because of the liquidity of these instruments. Finance Receivables, Residuals in Finance Receivables Sold, Investments Held in Trust, and Notes Receivable The carrying amount is estimated to be the fair value because of the relative short maturity and repayment terms of the portfolio as compared to similar instruments. Accounts Payable, Accrued Expenses, and Notes Payable The carrying amount approximates fair value because of the short maturity of these instruments. The terms of the Company's notes payable approximate the terms in the market place at which they could be replaced. Therefore, the fair market value approximates the carrying value of these financial instruments. Subordinated Notes Payable The terms of the Company's subordinated notes payable approximate the terms in the market place at which they could be replaced. Therefore, the fair value approximates the carrying value of these financial instruments. (24) Business Segments Operating results and other financial data are presented for the principal business segments of the Company for the years ended December 31, 1998, 1997, and 1996, respectively. The Company has 6 distinct business segments. Within the Dealership Operations division, these consist of retail car sales operations (Company dealerships), the income generated from the finance receivables generated at the Company dealerships and corporate and other operations. Within the Non Dealership Operations division, these consist of the Cygnet dealer program, bulk purchasing and loan servicing, and corporate and other operations. In computing operating profit by business segment, the following items were considered in the Corporate and Other category: portions of administrative expenses, interest expense and other items not considered direct operating expenses. Identifiable assets by business segment are those assets used in each segment of Company operations. 64
Dealership Operations Non Dealership Operations ---------------------------------- ----------------------------------- Company Cygnet Company Dealership Corporate Cygnet Loan Corporate Dealerships Receivables and Other Dealer Servicing and Other Total ---------- ----------- ---------- --------- ---------- --------- --------- (In thousands) December 31, 1998: Sales of Used Cars............... $ 287,618 $ -- $ -- $ -- $ -- $ -- $ 287,618 Less: Cost of Cars Sold.......... 167,014 -- -- -- -- -- 167,014 Provision for Credit Losses...... 59,770 5,548 -- 2,316 -- -- 67,634 --------- --------- --------- --------- ---------- ---------- --------- 60,834 (5,548) -- (2,316) -- -- 52,970 Interest Income.................. -- 16,946 341 8,709 1,832 -- 27,828 Gain on Sale of Loans............ -- 12,093 -- -- -- -- 12,093 Service Fee and Other Income..... 389 15,453 493 -- 22,296 -- 38,631 --------- --------- --------- --------- ---------- ---------- --------- Income before Operating Expenses. 61,223 38,944 834 6,393 24,128 -- 131,522 --------- --------- --------- --------- ---------- ---------- --------- Operating Expenses: Selling and Marketing............ 20,285 -- -- 242 31 7 20,565 General and Administrative....... 32,383 18,491 16,103 2,721 18,664 4,040 92,402 Depreciation and Amortization.... 2,581 1,334 997 104 614 105 5,735 --------- --------------------- --------- ---------- ---------- --------- 55,249 19,825 17,100 3,067 19,309 4,152 118,702 --------- --------- --------- --------- ---------- ---------- --------- Income (loss) before Interest Expense....................... $ 5,974 $ 19,119 $ (16,266) $ 3,326 $ 4,819 $ (4,152) $ 12,820 ========= ========= ========= ========= ========== =========== ========= Capital Expenditures............. $ 14,265 $ 1,297 $ 2,352 $ 449 $ 2,260 $ 1,163 $ 21,786 ========= ========= ========= ========= ========== ========== ========= Identifiable Assets.............. $ 75,366 $ 145,880 $ 47,543 $ 44,250 $ 31,589 $ 1,347 $ 345,975 ========= ========= ========= ========= ========== ========== ========= December 31, 1997: Sales of Used Cars............... $ 123,814 $ -- $ -- $ -- $ -- $ -- $ 123,814 Less: Cost of Cars Sold.......... 72,358 -- -- -- -- -- 72,358 Provision for Credit Losses...... 22,354 -- -- 691 -- -- 23,045 --------- --------- --------- --------- ---------- ---------- --------- 29,102 -- -- (691) -- -- 28,411 Interest Income.................. -- 12,559 -- 2,359 3,818 -- 18,736 Gain on Sale of Loans............ -- 6,721 -- -- 8,131 -- 14,852 Service Fee and Other Income..... 1,498 8,814 2,013 356 -- -- 12,681 --------- --------- --------- --------- ---------- ---------- --------- Income before Operating Expenses. 30,600 28,094 2,013 2,024 11,949 -- 74,680 --------- --------- --------- --------- ---------- ---------- --------- Operating Expenses: Selling and Marketing............ 10,538 -- -- -- -- -- 10,538 General and Administrative....... 17,214 12,303 9,896 917 -- 1,572 41,902 Depreciation and Amortization.... 1,536 1,108 504 28 -- 125 3,301 --------- --------- --------- --------- ---------- ---------- --------- 29,288 13,411 10,400 945 -- 1,697 55,741 --------- --------- --------- --------- ---------- ---------- --------- Income (loss) before Interest Expense....................... $ 1,312 $ 14,683 $ (8,387) $ 1,079 $ 11,949 $ (1,697) $ 18,939 ========= ========= ========= ========= ========== =========== ========= Capital Expenditures............. $ 13,571 $ 3,791 $ 2,104 $ 19 $ -- $ 24 $ 19,509 ========= ========= ========= ========= ========== ========== ========= Identifiable Assets.............. $ 74,287 $ 78,514 $ 72,799 $ 27,539 $ 22,318 $ 969 $ 276,426 ========= ========= ========= ========= ========== ========== ========= December 31, 1996: Sales of Used Cars............... $ 53,768 $ -- $ -- $ -- $ -- $ -- $ 53,768 Less: Cost of Cars Sold.......... 31,879 -- -- -- -- -- 31,879 Provision for Credit Losses...... 9,657 -- -- -- -- -- 9,657 --------- --------- --------- --------- ---------- ---------- --------- 12,232 -- -- -- -- -- 12,232 Interest Income.................. -- 8,426 171 -- -- -- 8,597 Gain on Sale of Loans............ -- 3,925 -- -- -- -- 3,925 Service Fee and Other Income..... 195 1,887 455 -- -- -- 2,537 --------- --------- --------- --------- ---------- ---------- --------- Income before Operating Expenses. 12,427 14,238 626 -- -- -- 27,291 --------- --------- --------- --------- ---------- ---------- --------- Operating Expenses: Selling and Marketing............ 3,568 -- 17 -- -- -- 3,585 General and Administrative....... 6,306 2,859 3,953 -- -- -- 13,118 Depreciation and Amortization.... 318 769 295 -- -- -- 1,382 --------- --------- --------- --------- ---------- ---------- --------- 10,192 3,628 4,265 -- -- -- 18,085 --------- --------- --------- --------- ---------- ---------- --------- Income (loss) before Interest Expense....................... $ 2,235 $ 10,610 $ (3,639) $ -- $ -- $ -- $ 9,206 ========= ========= ========= ========= ========== ========== ========= Capital Expenditures............. $ 4,530 $ 455 $ 564 $ -- $ -- $ -- $ 5,549 ========= ========= ========= ========= ========== ========== ========= Identifiable Assets.............. $ 20,698 $ 12,775 $ 84,156 $ -- $ -- $ -- $ 117,629 ========= ========= ========= ========= ========== ========== =========
65 (25) Quarterly Financial Data -- unaudited A summary of the quarterly data for the years ended December 31, 1998, and 1997 follows:
First Second Third Fourth Quarter Quarter Quarter Quarter Total -------- -------- -------- -------- --------- (In thousands, except per share amounts) 1998: Total Revenue..................... $ 87,777 $ 88,819 $ 96,714 $ 92,860 $ 366,170 ======== ======== ======== ======== ========= Income before Operating Expenses.. 31,246 32,678 37,653 29,945 131,522 ======== ======== ======== ======== ========= Operating Expenses................ 23,514 26,359 33,542 35,287 118,702 ======== ======== ======== ======== ========= Income (Loss) before Interest Expense........................ 7,732 6,319 4,111 (5,342) 12,820 ======== ======== ======== ======== ========= Earnings (Loss) from Continuing Operations..................... $ 3,729 $ 2,942 $ 1,527 $ (4,678) $ 3,520 ======== ======== ======== ========= ========= (Loss) from Discontinued Operations (5,595) -- (3,628) -- (9,223) ========= ======== ======== ======== ========== Net Earnings (Loss)............... $ (1,866) $ 2,942 $ (2,101) $ (4,678) $ (5,703) ========= ======== ======== ========= ========== Basic Earnings (Loss) Per Share from Continuing Operations.......... $ 0.20 $ 0.16 $ 0.08 $ (0.28) $ 0.19 ========= ======== ======== ======== ========== Diluted Earnings (Loss) Per Share from Continuing Operations..... $ 0.20 $ 0.16 $ 0.08 $ (0.28) $ 0.19 ========= ======== ======== ======== ========= Basic Earnings (Loss) Per Share... $ (0.10) $ 0.16 $ (0.11) $ (0.28) $ (0.32) ========== ======== ======== ========= ========== Diluted Earnings (Loss) Per Share. $ (0.10) $ 0.16 $ (0.11) $ (0.28) $ (0.31) ========== ======== ======== ========= ========== 1997: Total Revenue..................... $ 22,301 $ 36,279 $ 45,737 $ 65,766 $ 170,083 ======== ======== ======== ======== ========= Income before Operating Expenses.. 9,101 15,480 19,415 30,684 74,680 ======== ======== ======== ======== ========= Operating Expenses................ 8,133 11,988 14,780 20,840 55,741 ======== ======== ======== ======== ========= Income before Interest Expense.... 968 3,492 4,635 9,844 18,939 ======== ======== ======== ======== ========= Earnings from Continuing Operations $ 408 $ 1,896 $ 2,220 $ 5,004 $ 9,528 ======== ======== ======== ======== ========= Earnings (Loss) from Discontinued Operations..................... 2,854 2,415 (4,048) (1,304) (83) ======== ======== ========= ========= ========== Net Earnings (Loss)............... $ 3,262 $ 4,311 $ (1,828) $ 3,700 $ 9,445 ======== ======== ======== ======== ========= Basic Earnings Per Share from Continuing Operations.......... $ 0.03 $ 0.10 $ 0.12 $ 0.27 $ 0.53 ========= ======== ======== ======== ========== Diluted Earnings Per Share from Continuing Operations.......... $ 0.02 $ 0.10 $ 0.12 $ 0.26 $ 0.52 ========= ======== ======== ======== ========== Basic Earnings (Loss) Per Share... $ 0.21 $ 0.23 $ (0.10) $ 0.20 $ 0.53 ========= ======== ======== ======== ========== Diluted Earnings (Loss) Per Share. $ 0.20 $ 0.23 $ (0.10) $ 0.20 $ 0.52 ========= ======== ======== ======== ==========
66 ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES The Company has had no disagreements with its independent accountants in regard to accounting and financial disclosure and has not changed its independent accountants during the two most recent fiscal years. PART III ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this Item pertaining to executive officers of Ugly Duckling is set forth above in Part I of this Form 10-K under the caption, "Executive Officers of the Registrant," and is incorporated by reference into this Item. Information concerning directors of the registrant and persons nominated to become directors is incorporated by reference from the text under the captions, "Board of Directors, Board Committees and Other Board Information" and "Proposal to Be Voted on -- Item No. 1 --Election of Directors" in the Proxy Statement for the June 2, 1999 Annual Meeting of Stockholders. Information required by this Item pertaining to compliance with Section 16(a) of the Securities Act of 1934 is set forth under the caption, "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement for the June 2, 1999 Annual Meeting of Stockholders and is incorporated by reference into this Item. ITEM 11 -- EXECUTIVE COMPENSATION Information concerning executive compensation is incorporated by reference from the text under the captions, "Certain Relationships and Related Transactions" and "Compensation of Executive Officers, Benefits and Related Matters" (excluding the material under the headings "Compensation Committee Report on Executive Compensation" and "Stockholder Return Performance Graph" therein) in the Proxy Statement for the June 2, 1999 Annual Meeting of Stockholders. ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning ownership of equity stock of the Company by certain beneficial owners and management is incorporated by reference from the text under the caption, "Security Ownership of Certain Beneficial Owners and Management--Beneficial Ownership Table" in the Proxy Statement for the June 2, 1999 Annual Meeting of Stockholders. ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions with officers and directors is incorporated by reference from the text under the caption, "Certain Relationships and Related Transactions" in the Proxy Statement for the June 2, 1999 Annual Meeting of Stockholders. 67 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.
Page ---- Independent Auditors' Report............................................. 42 Consolidated Financial Statements and Notes thereto of Ugly Duckling Corporation: Consolidated Balance Sheets--December 31, 1998 and 1997.................. 43 Consolidated Statements of Operations--for the years ended December 31, 1998, 1997 and 1996..................................... 44 Consolidated Statements of Stockholders' Equity--for the years ended December 31, 1998, 1997 and 1996...................................... 45 Consolidated Statements of Cash Flows--for the years ended December 31, 1998, 1997 and 1996..................................... 46 Notes to Consolidated Financial Statements............................... 47 All schedules have been omitted because they are not applicable, not required, or the information has been disclosed in the consolidated financial statements and related notes thereto or otherwise in this Form 10-K Report.
(b) Reports on Form 8-K. During the fourth quarter of 1998, the Company filed five reports on Form 8-K. The first report on Form 8-K, dated October 8, 1998 and filed on October 13, 1998, pursuant to Items 5 and 7 (1) reported an expected charge to Discontinued Operations totaling approximately $4.8 million (net of income taxes) in the third quarter ended September 30, 1998, and (2) filed as exhibits to the Form 8-K a Supplement No. 2 dated October 9, 1998 to the Offering Circular for the Exchange Offer regarding the third quarter charge and Ugly Duckling Corporation's press release dated October 8, 1998 titled "Ugly Duckling Corporation Announces Third Quarter Charges to Discontinued Operations." The second report on Form 8-K, dated October 20, 1998 and filed on October 21, 1998, pursuant to Items 5 and 7 (1) reported the events described in two press releases, and (2) filed as exhibits to the Form 8-K said press releases dated October 21, 1998 and October 20, 1998 titled "Ugly Duckling Corporation Announces Third Quarter 1998 Results" and "Ugly Duckling Corporation Announces Successful Completion of Exchange Offer," respectively. The third report on Form 8-K, dated and filed November 18, 1998, pursuant to Items 5 and 7 filed as exhibits to the Form 8-K a press release dated November 18, 1998 titled "Ugly Duckling Corporation to Discontinue Gain-on-Sale Accounting." The fourth report on Form 8-K, dated and filed November 23, 1998, pursuant to Items 5 and 7 (1) reported the initiation of a supplemental offer by the Company to exchange shares of its Common Stock for subordinated debentures, and (2) filed as exhibits to the Form 8-K the offering circular describing the exchange offer and Ugly Duckling Corporation's press release dated November 23, 1998 titled "Ugly Duckling Corporation Announces Supplemental Exchange Offer." The fifth report on Form 8-K, dated and filed December 23, 1998, pursuant to Items 5 and 7 filed as an exhibit to the Form 8-K a press release dated December 23, 1998 titled "Ugly Duckling Corporation Announces Completion of Supplemental Exchange Offer." After the fourth quarter of 1998, the Company filed one report on Form 8-K. This report on Form 8-K, dated and filed March 16, 1999, pursuant to Items 5 and 7 filed as an exhibit to the Form 8-K a press release dated March 16, 1999 titled "Ugly Duckling Corporation Announces Reclassification of Cygnet Dealer Into Continuing Operations and Anticipated First Quarter Results." 68 (c) Exhibits.
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS 3.1 Certificate of Incorporation of the Registrant Amended and Restated as of May 15, 1997(16) 3.2 Bylaws of the Registrant (5) 4.1 Certificate of Incorporation of the Registrant (filed as Exhibit 3.1) 4.2 Warrant Agreement between the Registrant and Harris Trust Company of California, as warrant agent, with respect to the FMAC Warrants, dated as of April 1, 1998 (with form of warrant attached as Exhibit A, thereto)** 4.3 Form of Certificate representing Common Stock 4.4 10% Subordinated Debenture of the Registrant issued to Verde Investments, Inc. (13) 4.5 Form of Warrant issued to Cruttenden Roth Incorporated as Representative of the several underwriters (1) 4.6 Form of Warrant issued to SunAmerica Life Insurance Company (1) 4.7 Warrant Agreement between the Registrant and Harris Trust Company of California, as warrant agent, with respect to Bank Group Warrants (6) 4.8 Form of 12% Senior Subordinated Note between Registrant and Kayne Anderson related entities, each as a lender executed in February 1998 (12) 4.9 Warrant Agreement dated as of February 12, 1998 between Registrant and each of the Kayne Anderson related lenders named therein (12) 4.10 Form of Warrant issued to Kayne Anderson related entities issued in February 1998 (12) 4.11 Warrant Agreement between the Registrant and Reliance Acceptance Corporation and Harris Trust of California, as warrant agent, dated as of February 9, 1998 (w/form of warrant attached as Exhibit A, thereto) (15) 4.12 Certificate of Designation of the Preferred Stock (par value $.001 per share) (filed as part of Exhibit 3.1) (16) 4.13 Indenture dated as of October 15, 1998 between Registrant and Harris Trust and Savings Bank, as Trustee ("Harris") ("Indenture") (18) 4.13(a) First Supplemental Indenture dated as of October 15, 1998 between Registrant and Harris (18) 4.13(b) Form of 12% Subordinated Debenture due 2003** 10.1 Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between Registrant and General Electric Capital Corporation (8) 10.1(a) Assumption and Amendment Agreement between the Registrant and General Electric Capital Corporation (2) 10.1(b) Amendment No. 1 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between Registrant and General Electric Capital Corporation dated December 22, 1997 (13) 10.1(c) Letter Agreement to Amend the Amended and Restated Loan and Security Agreement between Registrant and General Electric Capital Corp. ("GECC"), dated as of October 20, 1997(15) 10.1(d) Letter agreement to Amend the Amended and Restated Loan Agreement between Registrant and GECC, dated as of March 25, 1998 (15) 10.1(e) Amendment No. 2 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between Registrant and General Electric Capital Corporation dated September 9, 1998 (17) 10.1(f) Amendment No. 3 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between Registrant and General Electric Capital Corporation dated January 19, 1999 ** 10.2 Note Purchase Agreement between the Registrant and SunAmerica Life Insurance Company (1) 10.2(a) First Amendment to Note Purchase Agreement between the Registrant and SunAmerica Life Insurance Company (1) 10.2(b) Second Amendment to Note Purchase Agreement between the Registrant and SunAmerica Life Insurance Company (1) 10.2(c) Third Amendment to Note Purchase Agreement between the Registrant and SunAmerica Life Insurance Company (1) 10.2(d) Fourth Amendment to Note Purchase Agreement between the Registrant and SunAmerica Life Insurance Company (1) 10.2(e) Commitment Letter entered into between the Registrant and SunAmerica Life Insurance Company (1) 10.2(f) Letter Agreement regarding Note Conversion between the Registrant and SunAmerica Life Insurance Company (1) 10.3 Amended and Restated Registration Rights Agreement between the Registrant and SunAmerica Life Insurance Company (1) 10.4 Loan Purchase Agreement dated as of August 20, 1997 among the Registrant and certain banks (6) 10.4(a) Assignment of Loan and Bank Claim dated as of August 20, 1997 among the Registrant and certain banks, as assignors (6) 10.4(b) Security Agreement dated as of August 20, 1997 among the Registrant, as obligor, and certain banks (6) 10.4(c) Payment Guaranty dated as of August 20, 1997 of certain affiliates of the Registrant, as guarantors (6)
69 10.5 Restated (as of March 14, 1997) Ugly Duckling Corporation Long-Term Incentive Plan (5)* 10.5(a) Amended and Restated Long Term Incentive Plan (as of January 15, 1998) (17)* 10.6 Employment Agreement between the Registrant and Ernest C. Garcia II (1)* 10.6(a) Amendment to Employment Agreement between the Registrant and Ernest C. Garcia II */** 10.7 Employment Agreement between the Registrant and Steven T. Darak (1)* 10.8 Employment Agreement between the Registrant and Wally Vonsh (1)* 10.8(a) Modification of Employment Agreement between Registrant and Wally Vonsh (13)* 10.8(b) Amended and Restated Employment Agreement between Registrant and Walter Vonsh, dated May 26, 1998 (16)* 10.9 Amended and Restated Employment Agreement between the Registrant and Donald L. Addink (8)* 10.10 Employment Agreement between the Registrant and Russell Grisanti (5)* 10.11 Employment Agreement between the Registrant and Steven A. Tesdahl (8)* 10.11(a) Modification of Terms of Employment between Registrant and Steven A. Tesdahl (16)* 10.12 Land Lease Agreement between the Registrant and Verde Investments, Inc. for property located at 5104 West Glendale Avenue in Glendale, Arizona (1) 10.13 Building Lease Agreement between the Registrant and Verde Investments, Inc. for property and buildings located at 9630 and 9650 North 19th Avenue in Phoenix, Arizona (1) 10.14 Land Lease Agreement between the Registrant and Verde Investments, Inc. for property located at 330 North 24th Street in Phoenix, Arizona (1) 10.15 Land Lease Agreement between the Registrant and Verde Investments, Inc. for property located at 333 South Alma School Road in Mesa, Arizona (1) 10.16 Lease Agreements between the Registrant and Blue Chip Motors, the Registrant and S & S Holding Corporation, and the Registrant and Edelman Brothers for certain properties located at 3901 East Speedway Boulevard in Tucson, Arizona (1) 10.17 Real Property Lease between the Registrant and Peter and Alva Keesal for property located at 3737 South Park Avenue in Tucson, Arizona (1) 10.18 Land Lease Agreement between the Registrant and Verde Investments, Inc. for property located at 2301 North Oracle Road in Tucson, Arizona (1) 10.19 Related Party Transactions Modification Agreement between the Registrant and Verde Investments, Inc.(1) 10.20 Form of Indemnity Agreement between the Registrant and its directors and officers (1) 10.21 Ugly Duckling Corporation 1996 Director Incentive Plan (1)* 10.22 Purchase Agreement, dated February 10, 1997 between the Registrant and Friedman, Billings, Ramsey & Co., Inc. (10) 10.23 Agreement of Purchase and Sale of Assets dated as of December 31, 1998 (3) 10.23(a) First Amendment to Agreement of Purchase and Sale of Assets dated as of June 6, 1997(5) 10.24 Agreement of Purchase and Sale of Assets among the Registrant, E-Z Plan, Inc., shareholders of E-Z Plan, Inc., and certain lessors, dated as of March 5, 1997 (4) 10.25 Agreement for Purchase and Sale of Certain Assets among Registrant, Kars-Yes Holdings Inc. and certain other parties, dated as of September 15, 1997 (7) 10.26 Portfolio Servicing Agreement among Registrant, Kars-Yes Financial, Inc., and certain other parties, dated as of September 15, 1997 (7) 10.26(a) Subservicing Agreement among Registrant, Kars-Yes Financial, Inc., and certain other parties, dated as of September 15, 1997 (7) 10.27 Binding Agreement to Propose and Support Modified Plan Agreement dated as of December 15, 1997 among the Registrant, FMAC and the Official Committee of Unsecured Creditors of FMAC (11) 10.28 Purchase Agreement dated as of December 18, 1997 by and among Contract Purchaser, Registrant and LaSalle National Bank, as Agent (11) 10.29 Guaranty dated as of December 18, 1997 by Registrant in favor of Contract Purchaser (11) 10.30 Servicing Agreement dated as of December 15, 1997 between Registrant and Contract Purchaser (11) 10.31 FMAC Guaranty and Stock Pledge Agreement among FMAC, Registrant and certain banks (14) 10.32 Contribution Agreement between Registrant and FMAC (13) 10.33 Indemnification Agreement between the Company and FMAC (14) 10.34 Loan Agreement dated as of February 12, 1998 between the Registrant and each of the Kayne Anderson related Lenders named therein (12) 10.35 Credit and Security Agreement between Registrant and First Merchants Acceptance Corp., dated as of July 17, 1997 (15) 10.35(a) First Amendment to Credit and Security Agreement between Registrant and FMAC, dated as of January 21, 1998 (15) 10.35(b) Second Amendment to Credit and Security Agreement between Registrant and FMAC, dated as of April 1, 1998 (15)
70
10.36 Service Agreement among Reliance Acceptance Corporation, Registrant, Bank America Business Credit, Inc. and certain other parties dated as of February 9, 1998 (17) 10.37 Agreement of Understanding among Reliance Acceptance Group, Inc., Reliance Acceptance Corporation and Registrant, dated as of February 9, 1998 (17) 10.38 Purchase and Sale-Leaseback Agreement and Joint Escrow Instructions between Champion Acceptance Corporation, Ugly Duckling Car Sales, Inc., Ugly Duckling Car Sales New Mexico, Inc., Ugly Duckling Car Sales Florida, Inc. and Ugly Duckling Car Sales Texas, LLP, date as of May 13, 1998 (16) 10.39 Loan Agreement by and among the Registrant, Kayne Anderson Non-Traditional Investments, LP, and certain other lenders, dated July 20, 1998 (17) 10.40 Payment Guaranty by Registrant in favor of Kayne Anderson and the Lenders, dated as of July 20, 1998(17) 10.41 Agreement of Purchase and Sale of Assets made as of July 31, 1998, by and among Cygnet Financial Services, Inc. and Mountain Parks Financial Services, Inc. (17) 10.42 1998 Executive Incentive Plan (17)* 10.43 Loan agreement between Greenwich Capital Financial Products, Inc. and Registrant dated November 12, 1998 ** 10.43(a) Stock Pledge Agreement among Greenwich Capital Financial Products, Inc., Registrant and certain related parties, dated November 12, 1998 ** 10.44 KPMG Year 2000 Renovation Project Service Proposal to and Engagement Letter with the Registrant, dated November 12, 1998** 11 Earnings (Loss) per Share Computation (see Note 18 to Notes to Consolidated Financial Statements)** 12 Statement on Computation of Ratios ** 21 List of Subsidiaries ** 23 Consent of KPMG LLP ** 24.1 Special Power of Attorney for R. Abrahams ** 24.2 Special Power of Attorney for C. Jennings ** 24.3 Special Power of Attorney for J. MacDonough ** 24.4 Special Power of Attorney for F. Willey ** 24.5 Special Power of Attorney for Ernest C. Garcia II ** 24.6 Special Power of Attorney for Gregory Sullivan ** 24.7 Special Power of Attorney for Steven Darak ** 27.1 Financial Data Schedule for the year ending December 31, 1998** 27.2 Financial Data Schedule for the year ending December 31, 1997** 27.3 Financial Data Schedule for the year ending December 31, 1996** 27.4 Financial Data Schedule for the three months ending September 30, 1998** 27.5 Financial Data Schedule for the three months ending June 30, 1998** 27.6 Financial Data Schedule for the three months ending March 31, 1998** 27.7 Financial Data Schedule for the three months ending September 30, 1997** 27.8 Financial Data Schedule for the three months ending June 30, 1997** 27.9 Financial Data Schedule for the three months ending March 31, 1997**
- --------------------------- * Management contract or compensatory plan, contract or arrangement. ** Filed with this Form 10-K. (1) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-3998), effective June 18, 1996. (2) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-13755), effective October 30, 1996. (3) Incorporated by reference to the Company's Current Report on Form 8-K, filed January 30, 1997. (4) Incorporated by reference to the Company's Annual Report on Form 10-K, filed March 31, 1997. (5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed August 14, 1997. (6) Incorporated by reference to the Company's Current Report on Form 8-K, filed September 5, 1997. (7) Incorporated by reference to the Company's Current Report on Form 8-K, filed October 3, 1997. (8) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed November 14, 1997. 71 (9) Incorporated by reference to the Company's Current Report on Form 8-K, filed November 20, 1997. (10) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-22237). (11) Incorporated by reference to the Company's Current Report on Form 8-K, filed January 2, 1998. (12) Incorporated by reference to the Company's Current Report on Form 8-K, filed February 20, 1998. (13) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-42973), effective February 11, 1998. (14) Incorporated by reference to the Company's Annual Report on Form 10-K, filed March 31 1998. (15) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed May 15, 1998. (16) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed August 10, 1998. (17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed November 13, 1998. (18) Incorporated by reference to the Company's Form T-3 for Application for Qualification of Indentures under the Trust Indenture Act of 1939, filed November 20, 1998 (File No. 022-22415), effective December 21, 1998. 72 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UGLY DUCKLING CORPORATION, a Delaware corporation By: /s/ ERNEST C. GARCIA II ----------------------- Ernest C. Garcia II Its: Chief Executive Officer and Chairman of the Board Date: March 29, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name and Signature Title Date /s/ ERNEST C. GARCIA II Chief Executive Officer and Chairman March 29, 1999 - ---------------------------------- of the Board of Directors (Principal Ernest C. Garcia II Executive Officer and Director) /s/ GREGORY B. SULLIVAN President, Chief Operating Officer March 29, 1999 - ---------------------------------- and Director (Director) Gregory B. Sullivan /s/ STEVEN T. DARAK Senior Vice President and Chief March 29, 1999 - ---------------------------------- Financial Officer (Principal Financial Steven T. Darak and Accounting Officer) * Director March 29, 1999 - ---------------------------------- Robert J. Abrahams * Director March 29, 1999 - ---------------------------------- Christopher D. Jennings * Director March 29, 1999 - ---------------------------------- John N. MacDonough * Director March 29, 1999 - ---------------------------------- Frank P. Willey
*By: /s/ ERNEST C. GARCIA II ----------------------- Ernest C. Garcia II Attorney-in-Fact 73 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION 3.1 Certificate of Incorporation of the Registrant Amended and Restated as of May 15, 1997(16) 3.2 Bylaws of the Registrant (5) 4.1 Certificate of Incorporation of the Registrant (filed as Exhibit 3.1) 4.2 Warrant Agreement between the Registrant and Harris Trust Company of California, as warrant agent, with respect to the FMAC Warrants, dated as of April 1, 1998 (with form of warrant attached as Exhibit A, thereto)** 4.3 Form of Certificate representing Common Stock 4.4 10% Subordinated Debenture of the Registrant issued to Verde Investments, Inc. (13) 4.5 Form of Warrant issued to Cruttenden Roth Incorporated as Representative of the several underwriters (1) 4.6 Form of Warrant issued to SunAmerica Life Insurance Company (1) 4.7 Warrant Agreement between the Registrant and Harris Trust Company of California, as warrant agent, with respect to Bank Group Warrants (6) 4.8 Form of 12% Senior Subordinated Note between Registrant and Kayne Anderson related entities, each as a lender executed in February 1998 (12) 4.9 Warrant Agreement dated as of February 12, 1998 between Registrant and each of the Kayne Anderson related lenders named therein (12) 4.10 Form of Warrant issued to Kayne Anderson related entities issued in February 1998 (12) 4.11 Warrant Agreement between the Registrant and Reliance Acceptance Corporation and Harris Trust of California, as warrant agent, dated as of February 9, 1998 (w/form of warrant attached as Exhibit A, thereto) (15) 4.12 Certificate of Designation of the Preferred Stock (par value $.001 per share) (filed as part of Exhibit 3.1) (16) 4.13 Indenture dated as of October 15, 1998 between Registrant and Harris Trust and Savings Bank, as Trustee ("Harris") ("Indenture") (18) 4.13(a) First Supplemental Indenture dated as of October 15, 1998 between Registrant and Harris (18) 4.13(b) Form of 12% Subordinated Debenture due 2003** 10.1 Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between Registrant and General Electric Capital Corporation (8) 10.1(a) Assumption and Amendment Agreement between the Registrant and General Electric Capital Corporation (2) 10.1(b) Amendment No. 1 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between Registrant and General Electric Capital Corporation dated December 22, 1997 (13) 10.1(c) Letter Agreement to Amend the Amended and Restated Loan and Security Agreement between Registrant and General Electric Capital Corp. ("GECC"), dated as of October 20, 1997(15) 10.1(d) Letter agreement to Amend the Amended and Restated Loan Agreement between Registrant and GECC, dated as of March 25, 1998 (15) 10.1(e) Amendment No. 2 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between Registrant and General Electric Capital Corporation dated September 9, 1998 (17) 10.1(f) Amendment No. 3 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between Registrant and General Electric Capital Corporation dated January 19, 1999 ** 10.2 Note Purchase Agreement between the Registrant and SunAmerica Life Insurance Company (1) 10.2(a) First Amendment to Note Purchase Agreement between the Registrant and SunAmerica Life Insurance Company (1) 10.2(b) Second Amendment to Note Purchase Agreement between the Registrant and SunAmerica Life Insurance Company (1) 10.2(c) Third Amendment to Note Purchase Agreement between the Registrant and SunAmerica Life Insurance Company (1) 10.2(d) Fourth Amendment to Note Purchase Agreement between the Registrant and SunAmerica Life Insurance Company (1) 10.2(e) Commitment Letter entered into between the Registrant and SunAmerica Life Insurance Company (1) 10.2(f) Letter Agreement regarding Note Conversion between the Registrant and SunAmerica Life Insurance Company (1) 10.3 Amended and Restated Registration Rights Agreement between the Registrant and SunAmerica Life Insurance Company (1) 10.4 Loan Purchase Agreement dated as of August 20, 1997 among the Registrant and certain banks (6) 10.4(a) Assignment of Loan and Bank Claim dated as of August 20, 1997 among the Registrant and certain banks, as assignors (6) 10.4(b) Security Agreement dated as of August 20, 1997 among the Registrant, as obligor, and certain banks (6) 10.4(c) Payment Guaranty dated as of August 20, 1997 of certain affiliates of the Registrant, as guarantors (6)
10.5 Restated (as of March 14, 1997) Ugly Duckling Corporation Long-Term Incentive Plan (5)* 10.5(a) Amended and Restated Long Term Incentive Plan (as of January 15, 1998) (17)* 10.6 Employment Agreement between the Registrant and Ernest C. Garcia II (1)* 10.6(a) Amendment to Employment Agreement between the Registrant and Ernest C. Garcia II */** 10.7 Employment Agreement between the Registrant and Steven T. Darak (1)* 10.8 Employment Agreement between the Registrant and Wally Vonsh (1)* 10.8(a) Modification of Employment Agreement between Registrant and Wally Vonsh (13)* 10.8(b) Amended and Restated Employment Agreement between Registrant and Walter Vonsh, dated May 26, 1998 (16)* 10.9 Amended and Restated Employment Agreement between the Registrant and Donald L. Addink (8)* 10.10 Employment Agreement between the Registrant and Russell Grisanti (5)* 10.11 Employment Agreement between the Registrant and Steven A. Tesdahl (8)* 10.11(a) Modification of Terms of Employment between Registrant and Steven A. Tesdahl (16)* 10.12 Land Lease Agreement between the Registrant and Verde Investments, Inc. for property located at 5104 West Glendale Avenue in Glendale, Arizona (1) 10.13 Building Lease Agreement between the Registrant and Verde Investments, Inc. for property and buildings located at 9630 and 9650 North 19th Avenue in Phoenix, Arizona (1) 10.14 Land Lease Agreement between the Registrant and Verde Investments, Inc. for property located at 330 North 24th Street in Phoenix, Arizona (1) 10.15 Land Lease Agreement between the Registrant and Verde Investments, Inc. for property located at 333 South Alma School Road in Mesa, Arizona (1) 10.16 Lease Agreements between the Registrant and Blue Chip Motors, the Registrant and S & S Holding Corporation, and the Registrant and Edelman Brothers for certain properties located at 3901 East Speedway Boulevard in Tucson, Arizona (1) 10.17 Real Property Lease between the Registrant and Peter and Alva Keesal for property located at 3737 South Park Avenue in Tucson, Arizona (1) 10.18 Land Lease Agreement between the Registrant and Verde Investments, Inc. for property located at 2301 North Oracle Road in Tucson, Arizona (1) 10.19 Related Party Transactions Modification Agreement between the Registrant and Verde Investments, Inc.(1) 10.20 Form of Indemnity Agreement between the Registrant and its directors and officers (1) 10.21 Ugly Duckling Corporation 1996 Director Incentive Plan (1)* 10.22 Purchase Agreement, dated February 10, 1997 between the Registrant and Friedman, Billings, Ramsey & Co., Inc. (10) 10.23 Agreement of Purchase and Sale of Assets dated as of December 31, 1998 (3) 10.23(a) First Amendment to Agreement of Purchase and Sale of Assets dated as of June 6, 1997(5) 10.24 Agreement of Purchase and Sale of Assets among the Registrant, E-Z Plan, Inc., shareholders of E-Z Plan, Inc., and certain lessors, dated as of March 5, 1997 (4) 10.25 Agreement for Purchase and Sale of Certain Assets among Registrant, Kars-Yes Holdings Inc. and certain other parties, dated as of September 15, 1997 (7) 10.26 Portfolio Servicing Agreement among Registrant, Kars-Yes Financial, Inc., and certain other parties, dated as of September 15, 1997 (7) 10.26(a) Subservicing Agreement among Registrant, Kars-Yes Financial, Inc., and certain other parties, dated as of September 15, 1997 (7) 10.27 Binding Agreement to Propose and Support Modified Plan Agreement dated as of December 15, 1997 among the Registrant, FMAC and the Official Committee of Unsecured Creditors of FMAC (11) 10.28 Purchase Agreement dated as of December 18, 1997 by and among Contract Purchaser, Registrant and LaSalle National Bank, as Agent (11) 10.29 Guaranty dated as of December 18, 1997 by Registrant in favor of Contract Purchaser (11) 10.30 Servicing Agreement dated as of December 15, 1997 between Registrant and Contract Purchaser (11) 10.31 FMAC Guaranty and Stock Pledge Agreement among FMAC, Registrant and certain banks (14) 10.32 Contribution Agreement between Registrant and FMAC (13) 10.33 Indemnification Agreement between the Company and FMAC (14) 10.34 Loan Agreement dated as of February 12, 1998 between the Registrant and each of the Kayne Anderson related Lenders named therein (12) 10.35 Credit and Security Agreement between Registrant and First Merchants Acceptance Corp., dated as of July 17, 1997 (15) 10.35(a) First Amendment to Credit and Security Agreement between Registrant and FMAC, dated as of January 21, 1998 (15) 10.35(b) Second Amendment to Credit and Security Agreement between Registrant and FMAC, dated as of April 1, 1998 (15)
10.36 Service Agreement among Reliance Acceptance Corporation, Registrant, Bank America Business Credit, Inc. and certain other parties dated as of February 9, 1998 (17) 10.37 Agreement of Understanding among Reliance Acceptance Group, Inc., Reliance Acceptance Corporation and Registrant, dated as of February 9, 1998 (17) 10.38 Purchase and Sale-Leaseback Agreement and Joint Escrow Instructions between Champion Acceptance Corporation, Ugly Duckling Car Sales, Inc., Ugly Duckling Car Sales New Mexico, Inc., Ugly Duckling Car Sales Florida, Inc. and Ugly Duckling Car Sales Texas, LLP, date as of May 13, 1998 (16) 10.39 Loan Agreement by and among the Registrant, Kayne Anderson Non-Traditional Investments, LP, and certain other lenders, dated July 20, 1998 (17) 10.40 Payment Guaranty by Registrant in favor of Kayne Anderson and the Lenders, dated as of July 20, 1998(17) 10.41 Agreement of Purchase and Sale of Assets made as of July 31, 1998, by and among Cygnet Financial Services, Inc. and Mountain Parks Financial Services, Inc. (17) 10.42 1998 Executive Incentive Plan (17)* 10.43 Loan agreement between Greenwich Capital Financial Products, Inc. and Registrant dated November 12, 1998 ** 10.43(a) Stock Pledge Agreement among Greenwich Capital Financial Products, Inc., Registrant and certain related parties, dated November 12, 1998 ** 10.44 KPMG Year 2000 Renovation Project Service Proposal to and Engagement Letter with the Registrant, dated November 12, 1998** 11 Earnings (Loss) per Share Computation (see Note 18 to Notes to Consolidated Financial Statements)** 12 Statement on Computation of Ratios ** 21 List of Subsidiaries ** 23 Consent of KPMG LLP ** 24.1 Special Power of Attorney for R. Abrahams ** 24.2 Special Power of Attorney for C. Jennings ** 24.3 Special Power of Attorney for J. MacDonough ** 24.4 Special Power of Attorney for F. Willey ** 24.5 Special Power of Attorney for Ernest C. Garcia II ** 24.6 Special Power of Attorney for Gregory Sullivan ** 24.7 Special Power of Attorney for Steven Darak ** 27.1 Financial Data Schedule for the year ending December 31, 1998** 27.2 Financial Data Schedule for the year ending December 31, 1997** 27.3 Financial Data Schedule for the year ending December 31, 1996** 27.4 Financial Data Schedule for the three months ending September 30, 1998** 27.5 Financial Data Schedule for the three months ending June 30, 1998** 27.6 Financial Data Schedule for the three months ending March 31, 1998** 27.7 Financial Data Schedule for the three months ending September 30, 1997** 27.8 Financial Data Schedule for the three months ending June 30, 1997** 27.9 Financial Data Schedule for the three months ending March 31, 1997**
- --------------------------- * Management contract or compensatory plan, contract or arrangement. ** Filed with this Form 10-K. (1) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-3998), effective June 18, 1996. (2) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-13755), effective October 30, 1996. (3) Incorporated by reference to the Company's Current Report on Form 8-K, filed January 30, 1997. (4) Incorporated by reference to the Company's Annual Report on Form 10-K, filed March 31, 1997. (5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed August 14, 1997. (6) Incorporated by reference to the Company's Current Report on Form 8-K, filed September 5, 1997. (7) Incorporated by reference to the Company's Current Report on Form 8-K, filed October 3, 1997. (8) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed November 14, 1997. (9) Incorporated by reference to the Company's Current Report on Form 8-K, filed November 20, 1997. (10) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-22237). (11) Incorporated by reference to the Company's Current Report on Form 8-K, filed January 2, 1998. (12) Incorporated by reference to the Company's Current Report on Form 8-K, filed February 20, 1998. (13) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-42973), effective February 11, 1998. (14) Incorporated by reference to the Company's Annual Report on Form 10-K, filed March 31 1998. (15) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed May 15, 1998. (16) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed August 10, 1998. (17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed November 13, 1998. (18) Incorporated by reference to the Company's Form T-3 for Application for Qualification of Indentures under the Trust Indenture Act of 1939, filed November 20, 1998 (File No. 022-22415), effective December 21, 1998. EX-4.2 2 EXHIBIT 4.2 UGLY DUCKLING CORPORATION WARRANT AGREEMENT THIS WARRANT AGREEMENT (the "Agreement"), dated as of April 1, 1998, is between UGLY DUCKLING CORPORATION, a Delaware corporation (the "Company"), and HARRIS TRUST COMPANY OF CALIFORNIA, as warrant agent (the "Warrant Agent"). WHEREAS, on July 11, 1997, First Merchants Acceptance Corporation, a Delaware corporation ("FMAC"), filed a Chapter 11 petition under the provisions of Title 11, United States Code, as amended, in the United States District Court for the District of Delaware and such petition is currently pending as Case No. 97-1500 (JJF) (the "Bankruptcy Case"); WHEREAS, the Company has entered into a Binding Agreement to Propose and Support Modified Plan Agreement dated as of December 15, 1997 (the "Letter Agreement"), by and among the Company, FMAC, and The Official Committee of Unsecured Creditors of First Merchants Acceptance Corporation, in connection with the Bankruptcy Case, pursuant to which the parties agreed to jointly support a plan of reorganization of FMAC in compliance with the Letter Agreement (the "Plan"); WHEREAS, pursuant to the Letter Agreement, the Company has agreed to issue to FMAC warrants (the "Warrants") to purchase up to an aggregate of 325,000 shares of common stock, $.001 par value per share ("Common Stock"), of the Company, subject to the terms and conditions of this Agreement; WHEREAS, FMAC may, but is under no obligation to, redistribute the Warrants, to its creditors or interest holders in the manner provided for in the Plan; and WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing so to act, in connection with the issuance, registration, transfer, exchange, exercise, and redemption of the Warrants. NOW, THEREFORE, in consideration of the promises and the mutual agreements herein set forth, the parties agree as follows: Section 1. Appointment of Warrant Agent. The Company hereby appoints the Warrant Agent to act as agent of the Company in accordance with the terms and conditions set forth in this Agreement, and the Warrant Agent hereby accepts such appointment. Section 2. Issuance of Warrants and Form of Warrants. (a) Subject to the terms and conditions hereof, the Company shall issue to FMAC and FMAC shall accept from the Company, 325,000 Warrants substantially in the form attached hereto as Exhibit A. PAGE - 1 (b) Each Warrant shall entitle the registered holder of the certificate representing such Warrant to purchase upon the exercise thereof one share of Common Stock, subject to the adjustments provided for in Section 9 hereof, at any time until 5:00 p.m., New York City time, on April 1, 2001, unless earlier redeemed pursuant to Section 11 hereof. (c) The Warrant certificates shall be in registered form only. Each Warrant certificate shall be dated by the Warrant Agent as of the date of issuance thereof (whether upon initial issuance or upon transfer or exchange), and shall be executed on behalf of the Company by the manual or facsimile signature of its President or a Vice President, and attested to by the manual or facsimile signature of its Secretary or an Assistant Secretary. In case any officer of the Company who shall have signed any Warrant certificate shall cease to be such officer of the Company before such Warrant Certificate has been countersigned by the Warrant Agent or prior to the issuance thereof, such Warrant certificate may nevertheless be issued and delivered with the same force and effect as though the person who signed the same had not ceased to be such officer of the Company. Section 3. Exercise of Warrants, Duration and Warrant Price. Subject to the provisions of this Agreement, each registered holder of one or more Warrant certificates shall have the right, which may be exercised as provided in such Warrant certificates, to purchase from the Company (and the Company shall issue and sell to such registered holder) the number of shares of Common Stock or other securities to which the Warrants represented by such certificates are at the time entitled hereunder. (a) Each Warrant not exercised by its expiration date shall become void, and all rights thereunder and all rights in respect thereof under this Agreement shall cease on such date. (b) A Warrant may be exercised by the surrender of the certificate representing such Warrant to the Company, at the office of the Warrant Agent, or at the office of a successor to the Warrant Agent, with the subscription form set forth on the reverse thereof duly executed and properly endorsed with the signatures properly guaranteed, and upon payment in full to the Warrant Agent for the account of the Company of the Warrant Price (as hereinafter defined) for the number of shares of Common Stock or other securities as to which the Warrant is exercised. Such Warrant Price shall be paid in full in cash, or by certified check or bank draft payable in United States currency to the order of the Warrant Agent. (c) The price per share of Common Stock at which each Warrant may be exercised (the "Warrant Price") shall be Twenty Dollars ($20.00) (subject to adjustment in accordance with Section 9 hereof). (d) Subject to the further provisions of this Section 3 and of Section 6 hereof, upon surrender of Warrant certificates and payment of the Warrant Price, the Company shall issue and cause to be delivered, as promptly as practicable to or upon the written order of the registered holder of such Warrants and in such name or names as such registered holder may designate, subject to applicable securities laws, a certificate or certificates for the number of securities so purchased upon the exercise of such Warrants, together PAGE - 2 with a current prospectus meeting the requirements of Section 10 of the Securities Act of 1933 and cash, as provided in Section 10 of this Agreement, in respect of any fraction of a share or security otherwise issuable upon such surrender. All shares of Common Stock or other such securities issued upon the exercise of a Warrant shall be duly authorized, validly issued, fully paid and nonassessable and free and clear of all liens and other encumbrances. (e) Certificates representing such securities shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a holder of record of such securities as of the date of the surrender of such Warrants and payment of the Warrant Price; provided, however, that if, at the date of surrender of such Warrants and payment of such Warrant Price, the transfer books for the Common Stock or other securities purchasable upon the exercise of such Warrants shall be closed, the certificates for the securities in respect of which such Warrants are then exercised shall be issuable as of the date on which such books shall next be opened and until such date the Company shall be under no duty to deliver any certificate for such securities and the person to whom such securities are issuable shall not be deemed to have became a holder of record of such securities. The rights of purchase represented by each Warrant certificate shall be exercisable, at the election of the registered holder thereof, either as an entirety or from time to time for part of the number of securities specified therein and, in the event that any Warrant certificate is exercised in respect of less than all of the securities specified therein at any time prior to the expiration date of the Warrant certificate, a new Warrant certificate or certificates will be issued to such registered holder for the remaining number of securities specified in the Warrant certificate so surrendered. Section 4. Countersignature and Registration. (a) The Warrant Agent shall maintain books (the "Warrant Register") for the registration and the registration of transfer of the Warrants. Upon the initial issuance of the Warrants, the Warrant Agent shall issue and register the Warrants in the name of FMAC in accordance with Section 2 hereof. The Warrant certificates shall be countersigned manually or by facsimile by the Warrant Agent (or by any successor to the Warrant Agent then acting as such under this Agreement) and shall not be valid for any purpose unless so countersigned. Warrant certificates may be so countersigned, however, by the Warrant Agent and delivered by the Warrant Agent, notwithstanding that the persons whose manual or facsimile signatures appear thereon as proper officers of the Company shall have ceased to be such officers at the time of such countersignature or delivery. (b) Prior to due presentment for registration of transfer of any Warrant certificate, the Company and the Warrant Agent may deem and treat the person in whose name such Warrant certificate shall be registered upon the Warrant Register (the "registered holder") as the absolute owner of such Warrant certificate and of each Warrant represented thereby (notwithstanding any notation of ownership or other writing on the Warrant certificate made by anyone other than the Company or the Warrant Agent), for the purpose of any exercise PAGE - 3 thereof, of any distribution or notice to the holder thereof, and for all other purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. Section 5. Transfer and Exchange of Warrants. (a) The Warrant Agent shall register the transfer, from time to time, of any outstanding Warrant or portion thereof upon the Warrant Register, upon surrender of the certificate evidencing such Warrant for transfer, properly endorsed with signatures properly guaranteed and accompanied by appropriate instructions for transfer. Upon any such transfer, a new Warrant certificate representing an equal aggregate number of Warrants so transferred shall be issued to the transferee and the surrendered Warrant certificate shall be canceled by the Warrant Agent. In the event that only a portion of a Warrant is transferred at any time, a new Warrant certificate representing the remaining portion of the Warrant will also be issued to the transferring holder. The Warrant certificates so canceled shall be delivered by the Warrant Agent to the Company from time to time upon written request. Notwithstanding the foregoing, no transfer or exchange may be made except in compliance with applicable securities laws and Section 14 hereof. (b) Warrant certificates may be surrendered to the Warrant Agent, together with a written request for exchange, and thereupon the Warrant Agent shall issue in exchange therefor one or more new Warrant certificates as requested by the registered holder of the Warrant certificate or certificates so surrendered, representing an equal aggregate number of Warrants. (c) The Warrant Agent shall not be required to effect any registration of transfer or exchange which will result in the issuance of a Warrant certificate for a fraction of a Warrant. (d) No service charge shall be made for any exchange or registration of transfer of Warrant certificates. (e) The Warrant Agent is hereby authorized to countersign and to deliver, in accordance with the terms of this Agreement, the new Warrant certificates required to be issued pursuant to the provisions hereof, and the Company, whenever required by the Warrant Agent, will supply the Warrant Agent with certificates duly executed on behalf of the Company for such purpose. Section 6. Payment of Taxes. The Company will pay any documentary stamp taxes attributable to the initial issuance or delivery of the shares of Common Stock or other securities issuable upon the exercise of Warrants; provided, however, the Company shall not be required to pay any tax or taxes which may be payable in respect of any transfer of the Warrants or involved in the issuance or delivery of any Warrant certificate or certificates for shares of Common Stock in a name other than registered holder of Warrants in respect of which such shares are issued, and in such case neither the Company nor the Warrant Agent shall be required to issue or deliver any certificate for shares of Common Stock or any Warrant certificate until the person requesting the same has paid to the Company the amount of such tax or has established to the Company's satisfaction that such tax has been paid. PAGE - 4 Section 7. Mutilated or Missing Warrants. In case any of the Warrant certificates shall be mutilated, lost, stolen or destroyed, the Company may issue, and the Warrant Agent shall countersign and deliver in exchange and substitution for and upon cancellation of the mutilated Warrant certificate, or in lieu of and substitution for the Warrant certificate lost, stolen or destroyed, a new Warrant certificate representing an equal aggregate number of Warrants, but only upon receipt of evidence satisfactory to the Company and the Warrant Agent of such loss, theft or destruction of such Warrant certificate and reasonable indemnity, if requested, also satisfactory to them. Applicants for such substitute Warrant certificates shall also comply with such other reasonable conditions and pay such reasonable charges as the Company or the Warrant Agent may prescribe. Section 8. Reservation of Common Stock. (a) There have been reserved, and the Company shall at all times keep reserved, out of its authorized and unissued shares of Common Stock, a number of shares sufficient to provide for the exercise of the rights of purchase represented by the Warrants then outstanding or issuable upon exercise, and the transfer agent for the Common Stock and every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of any of the rights of purchase aforesaid are hereby irrevocably authorized and directed at all times to reserve such number of authorized and unissued shares as shall be requisite for such purpose. The Company will keep a copy of this Agreement on file with the transfer agent for the Common Stock and with every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of the rights of purchase represented by the Warrants. (b) The Warrant Agent is hereby irrevocably authorized to requisition from time to time from such transfer agent stock certificates required to honor outstanding Warrants. The Company will supply such transfer agent with duly executed certificates for such purpose and will itself provide or otherwise make available any cash as provided in Section 10 of this Agreement. All Warrant certificates surrendered in the exercise of the rights thereby evidenced shall be canceled by the Warrant Agent and shall thereafter be delivered to the Company. Promptly after the expiration date of the Warrants, the Warrant Agent shall certify to the Company the aggregate number of such Warrants which expired unexercised, and after the expiration date of the Warrants, no shares of Common Stock shall be subject to reservation in respect of such Warrants. Section 9. Adjustment of Warrant Price and Number of shares of Common Stock. The number and kind of securities purchasable upon the exercise of the Warrants and the Warrant Price shall be subject to adjustment from time to time upon the happening of certain events, as follows: 9.1 Adjustments. The number of shares of Common Stock or other securities purchasable upon the exercise of each Warrant and the Warrant Price shall be subject to adjustment as follows: PAGE - 5 (a) If the Company (i) pays a dividend in Common Stock or makes a distribution in Common Stock, (ii) subdivides its outstanding Common Stock into a greater number of shares, (iii) combines its outstanding Common Stock into a smaller number of shares, or (iv) issues, by reclassification of its Common Stock, other securities of the Company, then the number and kind of shares of Common Stock or other securities purchasable upon exercise of a Warrant immediately prior thereto will be adjusted so that the holder of a Warrant will be entitled to receive the kind and number of shares of Common Stock or other securities of the Company that such holder would have owned and would have been entitled to receive immediately after the happening of any of the events described above, had the Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto. Any adjustment made pursuant to this subsection 9.1(a) will become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (b) No adjustment in the number of shares or securities purchasable pursuant to the Warrants shall be required unless such adjustment would require an increase or decrease of at least one percent in the number of shares or securities then purchasable upon the exercise of the Warrants. (c) Whenever the number of shares or securities purchasable upon the exercise of the Warrants is adjusted, as herein provided, the Warrant Price for shares payable upon exercise of the Warrants shall be adjusted by multiplying such Warrant Price immediately prior to such adjustment by a fraction, the numerator of which shall be the number of shares purchasable upon the exercise of the Warrant immediately prior to such adjustment, and the denominator of which shall be the number of shares so purchasable immediately thereafter. (d) Whenever the number of shares or securities purchasable upon the exercise of the Warrants and/or the Warrant Price is adjusted as herein provided, the Company shall cause to be promptly mailed to the Warrant Agent and each registered holder of a Warrant by first class mail, postage prepaid, notice of such adjustment and a certificate of the chief financial officer of the Company setting forth the number of shares or securities purchasable upon the exercise of the Warrants after such adjustment, the Warrant Price as adjusted, a brief statement of the facts requiring such adjustment and the computation by which such adjustment was made. The Warrant Agent shall be fully protected in relying on any such certificate and any adjustment therein contained, and shall not be obligated or responsible for calculating any adjustment nor shall it be deemed to have knowledge of such an adjustment unless and until it shall have received such certificate. (e) For the purpose of this subsection 9.1, the term "Common Stock" shall mean (i) the class of stock designated as the voting Common Stock of the Company at the date of this Agreement, or (ii) any other class of stock or securities resulting from successive changes or reclassifications of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. In the event that at any time, as a result of an adjustment made pursuant to this Section 9, a registered holder shall become entitled to purchase any securities of the Company other than shares of Common Stock, thereafter the number of such other securities so PAGE - 6 purchasable upon exercise of the Warrants shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the shares contained in this Section 9. 9.2 No Adjustment for Dividends. Except as provided in subsection 9.1, no adjustment in respect of any dividends or distributions shall be made during the term of the Warrants or upon the exercise of the Warrants. 9.3 No Adjustment in Certain Cases. No adjustments are required to be made pursuant to Section 9 hereof in connection with the issuance of shares of Common Stock or the Warrants (or the underlying shares of Common Stock) in the transactions contemplated by this Agreement. 9.4 Preservation of Purchase Rights upon Reclassification, Consolidation, etc. In case of any consolidation of the Company with or merger of the Company into another corporation or in case of any sale or conveyance to another corporation of the property, assets or business of the Company as an entirety or substantially as an entirety, the Company or such successor or purchasing corporation, as the case may be, shall execute with the Warrant Agent an agreement that the registered holders of the Warrants shall have the right thereafter, upon payment of the Warrant Price in effect immediately prior to such action, to purchase, upon exercise of each Warrant, the kind and amount of shares and other securities and property which it would have owned or have been entitled to receive after the happening of such consolidation, merger, sale or conveyance had each Warrant been exercised immediately prior to such action. Any such agreements referred to in this subsection 9.4 shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in Section 9 hereof. The provisions of this subsection 9.4 shall similarly apply to successive consolidations, mergers, sales, or conveyances. 9.5 Par Value of Shares of Common Stock. Before taking any action that would cause an adjustment reducing the Warrant Price below the then par value of the Common Stock issuable upon exercise of the Warrants, the Company will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Common Stock at such adjusted Warrant Price. 9.6 Independent Public Accountants. The Company may but shall not be required to retain a firm of independent public accountants of recognized regional or national standing (which may be any such firm regularly employed by the Company) to make any computation required under this Section 9, and a certificate signed by such firm shall be conclusive evidence of the correctness of any computation made under this Section 9 and the Company shall cause to be promptly mailed to the Warrant Agent and each registered holder of a Warrant by first class mail, postage prepaid, a copy of such certificate. 9.7 Statement on Warrant Certificates. Irrespective of any adjustments in the Warrant Price or the number of securities issuable upon exercise of Warrants, Warrant certificates theretofore or thereafter issued may continue to express the same price and number of securities as are stated in the similar PAGE - 7 Warrant certificates initially issuable pursuant to this Agreement. However, the Company may, at any time in its sole discretion (which shall be conclusive), make any change in the form of Warrant certificate that it may deem appropriate and that does not affect the substance thereof; and any Warrant certificate thereafter issued, whether upon registration of, transfer of, or in exchange or substitution for, an outstanding Warrant certificate, may be in the form so changed. 9.8 No Rights as Stockholder; Notices to Holders of Warrants. If, at any time prior to the expiration of a Warrant and prior to its exercise, any one or more of the following events shall occur: (a) any action that would require an adjustment pursuant to subsection 9.1 or 9.4 hereof; or (b) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation, merger or sale of its property, assets and business as an entirety or substantially as an entirety) shall be proposed; then the Company must give notice in writing of such event to the registered holders of the Warrants, as provided in Section 21 hereof, at least 20 days to the extent practicable, prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to any relevant dividend, distribution, subscription rights or other rights or for the determination of stockholders entitled to vote on such proposed dissolution, liquidation or winding up. Such notice must specify such record date or the date of closing the transfer books, as the case may be. Failure to mail or receive such notice or any defect therein will not affect the validity of any action taken with respect thereto. Section 10. Fractional Interests. The Company is not required to issue fractional shares of Common Stock on the exercise of a Warrant. If any fraction of a share of Common Stock would, except for the provisions of this Section 10, be issuable on the exercise of a Warrant (or specified portion thereof), the Company will in lieu thereof pay an amount in cash equal to the then Current Market Price multiplied by such fraction. For purposes of this Agreement, the term "Current Market Price" means (i) if the Common Stock is listed for quotation on the Nasdaq National Market or the Nasdaq SmallCap Market or on a national securities exchange, the average for the 10 consecutive trading days immediately preceding the date in question of the daily per share closing prices of the Common Stock as quoted by the Nasdaq National Market or the Nasdaq SmallCap Market or on the principal stock exchange on which it is listed, as the case may be, whichever is the higher, or (ii) if the Common Stock is traded in the over-the-counter market and is not listed for quotation on the Nasdaq National Market or the Nasdaq SmallCap Market nor on any national securities exchange, the average of the per share closing bid prices of the Common Stock on the 10 consecutive trading days immediately preceding the date in question, as reported by Nasdaq or an equivalent generally accepted reporting service. The closing price referred to in clause (i) above shall be the last reported sale price or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices, in either case as quoted by the Nasdaq National Market or the Nasdaq SmallCap Market or on the national securities exchange on which the Common Stock is then listed. For purposes of clause (ii) above, if trading in the Common Stock is not reported by Nasdaq, the PAGE - 8 bid price referred to in said clause shall be the lowest bid price as reported on the OTC Bulletin Board or in the "pink sheets" published by National Quotation Bureau, Incorporated. Section 11. Redemption. (a) The then outstanding Warrants may be redeemed, at the option of the Company, at $.10 per share of Common Stock purchasable upon exercise of such Warrants, at any time after the average Daily Market Price per share of the Common Stock for a period of at least 10 consecutive trading days ending not more than fifteen days prior to the date of the notice given pursuant to Section 11(b) hereof has equaled or exceeded $28.50, and prior to expiration of the Warrants. The Daily Market Price of the Common Stock will be determined by the Company in the manner set forth in Section 11(e) as of the end of each trading day (or, if no trading in the Common Stock occurred on such day, as of the end of the immediately preceding trading day in which trading occurred) and verified to the Warrant Agent before the Company may give notice of redemption. All outstanding Warrants must be redeemed if any are redeemed, and any right to exercise an outstanding Warrant shall terminate at 5:00 p.m. (New York City time) on the date fixed for redemption. Trading day means a day in which trading of securities occurred on the Nasdaq National Market. (b) The Company may exercise its right to redeem the Warrants only by giving the notice set forth in the following sentence. If the Company exercises its right to redeem, it shall give notice to the Warrant Agent and the registered holders of the outstanding Warrants by mailing or causing the Warrant Agent to mail to such registered holders a notice of redemption, first class, postage prepaid, at their addresses as they shall appear on the records of the Warrant Agent. Any notice mailed in the manner provided herein will be conclusively presumed to have been duly given whether or not the registered holder actually receives such notice. (c) The notice of redemption must specify the redemption price, the date fixed for redemption (which must be at least 30 days after the date such notice is mailed), the place where the Warrant certificates must be delivered and the redemption price paid, and that the right to exercise the Warrant will terminate at 5:00 P.M. (New York City time) on the date fixed for redemption. (d) Appropriate adjustment shall be made to the redemption price and to the minimum Daily Market Price prerequisite to redemption set forth in Section 11(a) hereof, in each case on the same basis as provided in Section 9 hereof with respect to adjustment of the Warrant Price. (e) For purposes of this Agreement, the term "Daily Market Price" means (i) if the Common Stock is quoted on the Nasdaq National Market or the Nasdaq SmallCap Market or on a national securities exchange, the daily per share closing price of the Common Stock as quoted on the Nasdaq National Market or the Nasdaq SmallCap Market or on the principal stock exchange on which it is listed on the trading day in question, as the case may be, whichever is the higher, or (ii) if the Common Stock is traded in the over-the-counter market and not quoted on the Nasdaq National Market or the Nasdaq SmallCap Market nor on any national securities exchange, the closing bid price of the Common Stock on the trading PAGE - 9 day in question, as reported by Nasdaq or an equivalent generally accepted reporting service. The closing price referred to in clause (i) above shall be the last reported sale price or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices, in either case on the Nasdaq National Market or the Nasdaq SmallCap Market or on the national securities exchange on which the Common Stock is then listed. For purposes of clause (ii) above, if trading in the Common Stock is not reported by Nasdaq, the bid price referred to in said clause shall be the lowest bid price as quoted on the OTC Bulletin Board or reported in the "pink sheets" published by National Quotation Bureau, Incorporated. (f) On the redemption date, each Warrant will be automatically converted into the right to receive the redemption price and the Warrant Agent will no longer honor any purported exercise of a Warrant. On or before the redemption date, the Company will deposit with the Warrant Agent sufficient funds for the purpose of redeeming all of the outstanding unexercised Warrants. All such funds shall be maintained by the Warrant Agent in an interest-bearing, segregated account for payment to holders of Warrants upon surrender of Warrant Certificates in exchange for the redemption price therefor. Funds remaining in such account on the date three years from the redemption date will be returned to the Company. Any Warrants thereafter submitted to the Warrant Agent for redemption will be forwarded for redemption by the Warrant Agent to the Company, and the Warrant Agent will have no further responsibility with respect thereto. Section 12. Rights as Warrantholders. Nothing contained in this Agreement or in any of the Warrants shall be construed as conferring upon the holders thereof, as such, any of the rights of stockholders of the Company, including, without limitation, the right to receive dividends or other distributions, to exercise any preemptive rights, to vote or to consent or to receive notice as stockholders in respect of the meetings of stockholders or the election of directors of the Company or any other matter. Section 13. Disposition of Proceeds on Exercise of Warrants. The Warrant Agent must account promptly to the Company with respect to Warrants exercised, and must promptly pay to the Company all monies received by it upon the exercise of such Warrants, and agrees to keep copies of this Agreement available for inspection by holders of Warrants during normal business hours. Section 14. Registration of Warrants. (a) The Company has registered the Warrants and the Common Stock issuable upon exercise of the Warrants under the Securities Act of 1933, as amended (the "Securities Act"). The Company agrees to use its best efforts to maintain such registration for the period during which the Warrants are exercisable. If at any time during the continuance of such registration, the Company shall determine that the applicable registration statement contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, or if for any other reason as required by law it is necessary to amend or supplement the registration statement or to discontinue trading in or exercise of the Warrants, the Company may request the Warrant Agent in writing to discontinue effecting the PAGE - 10 registration of transfer and/or exercise of the Warrants, as appropriate, until such time as the Company subsequently advises the Warrant Agent in writing that trading and/or exercises, as applicable, of the Warrants may be continued. The Company will use best efforts to promptly amend or supplement its registration statement to permit trading and exercise. (b) All fees, disbursements, and out-of-pocket expenses incurred in connection with the filing of any registration statement under Section 14(a) hereof and in complying with applicable securities and Blue Sky laws shall be borne by the Company, provided, however, that any expenses of the holders of the Warrants or the Shares, including but not limited to their attorneys' fees, shall be borne by such holders. (c) Until sold by FMAC pursuant to the applicable prospectus included within the registration statement filed by the Company and in effect from time to time as contemplated in Section 14(a) above, the certificates evidencing the Warrants and shares issuable upon exercise of the Warrants will bear a legend in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, EXCHANGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN ANY MANNER EXCEPT IN COMPLIANCE WITH SECTION 14 OF THE WARRANT AGREEMENT DATED AS OF APRIL 1, 1998, BETWEEN UGLY DUCKLING CORPORATION AND HARRIS TRUST COMPANY OF CALIFORNIA, AS WARRANT AGENT, AS THE SAME MAY BE AMENDED FROM TIME TO TIME. Section 15. [Intentionally Left Blank] Section 16. Merger or Consolidation or Change of Name of Warrant Agent. (a) Any corporation into which the Warrant Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Warrant Agent shall be a party, or any corporation succeeding to the corporate trust business of the Warrant Agent, shall be the successor to the Warrant Agent hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such corporation would be eligible for appointment as a successor Warrant Agent under the provisions of Section 19 of this Agreement. In case at the time such successor to the Warrant Agent shall succeed to the agency created by this Agreement and any of the Warrant certificates shall have been countersigned but not delivered, any such successor to the Warrant Agent may adopt the countersignature of the original Warrant Agent and deliver such Warrant certificates so countersigned; and in case at that time any of the Warrant certificates shall not have been countersigned, any successor to the Warrant Agent may countersign such Warrant certificates either in the name of the PAGE - 11 predecessor Warrant Agent or in the name of the successor Warrant Agent, and in all such cases the Warrants represented by such Warrant certificates shall have the full force provided in the Warrant certificates and in this Agreement. Any such successor Warrant Agent shall promptly give notice of its succession as Warrant Agent to the Company and to the registered holder of each Warrant certificate. (b) If at any time the name of the Warrant Agent is changed and at such time any of the Warrant certificates have been countersigned but not delivered, the Warrant Agent may adopt the countersignature under its prior name and deliver Warrant certificates so countersigned; and if at that time any of the Warrant certificates have not been countersigned, the Warrant Agent may countersign such Warrant certificates either in its prior name or in its changed name; and in all such cases the Warrants represented by such Warrant certificates will have the full force provided in the Warrant certificates and in this Agreement. Section 17. Concerning the Warrant Agent. The Company agrees to pay to the Warrant Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Warrant Agent, its reasonable expenses and counsel fees and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Warrant Agent, and its officers, agents and directors for, and to hold each of them harmless against, any loss, liability, or expense incurred without negligence or willful misconduct on the part of the Warrant Agent, for anything done or omitted by the Warrant Agent or such indemnified party in connection with the acceptance or administration of this Agreement or the exercise or performance of its duties hereunder, including the costs and expenses of defending against any claim of liability in the premises. The indemnification provided for hereunder shall survive the expiration of the Warrant, the termination of this Agreement and the resignation or removal of the Warrant Agent. The costs and expenses of enforcing this right of indemnification shall also be paid by the Company. The Warrant Agent may conclusively rely upon and shall be protected by the Company and shall incur no liability for, or in respect of any action taken, suffered or omitted by it in connection with, its administration of this Agreement or the exercise or performance of its duties hereunder in reliance upon any Warrant certificate or certificate for the Common Stock or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper person or persons, or otherwise upon the advice of counsel as set forth herein. Notwithstanding anything in this Agreement to the contrary, in no event shall the Warrant Agent be liable for special, indirect or consequential loss or damage of any kind whatsoever (including but not limited to lost profits), even if the Warrant Agent has been advised of the likelihood of such loss or damage and regardless of the form of the action. Section 18. Duties of Warrant Agent. The Warrant Agent undertakes the duties and obligations expressly imposed by this Agreement, and no implied duties or obligations shall be read into this Agreement against the Warrant PAGE - 12 Agent, upon the following terms and conditions, by all of which the Company and the holders of Warrant certificates, by their acceptance thereof, shall be bound: (a) Before the Warrant Agent acts or refrains from acting, the Warrant Agent may consult with legal counsel (who may be legal counsel for the Company) and the opinion of such counsel shall be full and complete authorization and protection to the Warrant Agent as to any action taken or omitted by it in good faith and in accordance with such opinion. (b) Whenever in the performance of its duties under this Agreement the Warrant Agent shall deem it necessary or desirable that any fact or factual matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by any person believed in good faith by the Warrant Agent to be one of the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Treasurer or the Secretary of the Company and delivered to the Warrant Agent; and such certificate shall be full authorization to the Warrant Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Warrant Agent shall be liable hereunder to the Company and any other Person only for its own negligence, bad faith or wilful misconduct. (d) The Warrant Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Warrant certificates (except its countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. (e) The Warrant Agent is serving as an administrative agent and, accordingly, shall not be under any responsibility in respect of the validity of any provision of this Agreement or the execution and delivery hereof (except the due execution hereof by the Warrant Agent) or in respect of the validity or execution of any Warrant certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Warrant certificate; nor shall it be responsible for any change in the exercisability of the Warrant (including the Warrant becoming void) or any adjustment in the terms of the Warrant (including the manner, method or amount thereof) provided for herein, or the ascertaining of the existence of facts that would require any such change or adjustment (except with respect to the exercise of any Warrant evidenced by a Warrant certificate after actual notice to the Warrant Agent that such change or adjustment is required); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any shares of Common stock to be issued pursuant to this Agreement or any Warrant certificate or as to whether any shares of Common stock will, when issued, be validly authorized and issued, fully paid and nonassessable. PAGE - 13 (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Warrant Agent for the carrying out or performing by the Warrant Agent of the provisions of this Agreement. (g) The Warrant Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from any person believed in good faith by the Warrant Agent to be one of the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Treasurer, or the Secretary of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered by it in good faith in accordance with instructions of any such officer of for any delay in acting while waiting for those instructions. Any application by the Warrant Agent for written instructions from the Company may, at the option of the Warrant Agent, set forth in writing any action proposed to be taken or omitted by the Warrant Agent under this Agreement and the date on or after which such action shall be taken or such omission shall be effective. The Warrant Agent shall not be liable for any action taken by, or omission of, the Warrant Agent in accordance with a proposal included in any such application on or after the date specified in such application (which date shall not be less than ten Business Days after the date any officer of the Company actually receives such application, unless any such officer shall have consented in writing to an earlier date) unless, prior to taking any such action (or the effective date in the case of an omission), the Warrant Agent shall have received written instructions in response to such application subject to the proposed action or omission and/or specifying the action to be taken or omitted. (h) Subject to applicable law, the Warrant Agent and any stockholder, director, officer or employee of the Warrant Agent may buy, sell or deal in any of the Warrants or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. (i) The Warrant Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Warrant Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys or agents or for any loss to the Company resulting from any such act, default, neglect or misconduct, provided that reasonable care was exercised in the selection and continued employment thereof. (j) No provision of this Agreement shall require the Warrant Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if there shall be reasonable grounds for believing that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it. PAGE - 14 (k) The Warrant Agent shall not be required to take notice or be deemed to have notice of any fact, event or determination (including, without limitation, any dates or events defined in this Agreement) under this Agreement unless and until the Warrant Agent shall be specifically notified in writing by the Company of such fact, event or determination. Section 19. Change of Warrant Agent. The Warrant Agent may resign and be discharged from its duties under this Agreement by giving the Company at least 30 days prior notice in writing, and by mailing notice in writing to the registered holders at the expense of the Company at their addresses appearing on the Warrant Register, of such resignation, at least 15 days prior to the date such resignation shall take effect and specifying a date when such resignation shall take effect. The Warrant Agent may be removed by like notice to the Warrant Agent from the Company and by like mailing of notice to the registered holders of the Warrants. If the Warrant Agent resigns or is removed or otherwise becomes incapable of acting, the Company shall appoint a successor to the Warrant Agent. If the Company fails to make such appointment within 30 days after such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Warrant Agent or by the registered holder of a Warrant (who shall, with such notice, submit his Warrant certificate for inspection by the Company), then the Warrant Agent or the registered holder of any Warrant may, at the expense of the Company, apply to any court of competent jurisdiction for the appointment of a successor to the Warrant Agent. Pending appointment of a successor to the Warrant Agent, either by the Company or such a court, the Company shall carry out the duties of the Warrant Agent. Any successor Warrant Agent, whether appointed by the Company or by such a court, must be registered and otherwise authorized to serve as a transfer agent pursuant to the Securities Exchange Act of 1934, as amended. If at any time the Warrant Agent ceases to be eligible in accordance with the provisions of this Section 19, it will resign immediately in the manner and with the effect specified in this Section 19. After acceptance in writing of the appointment, the successor Warrant Agent will be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Warrant Agent without further act or deed; but the former Warrant Agent will deliver and transfer to the successor Warrant Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for this purpose. Upon request of any successor Warrant Agent, the Company will make, execute, acknowledge and deliver any and all instruments in writing for more fully and effectually vesting in and confirming to such successor Warrant Agent all such powers, rights, duties and responsibilities. Failure to file or mail any notice provided in this Section 19, however, or any defect therein, will not affect the legality or validity of the resignation or removal of the Warrant Agent or the appointment of the successor Warrant Agent, as the case may be. Section 20. Identity of Transfer Agent. Following the appointment of any transfer agent for the Common Stock or of any subsequent transfer agent for shares of the Common Stock or other shares of the Company's capital stock issuable upon the exercise of the rights of purchase represented by the Warrants, the Company will file with the Warrant Agent a statement setting forth the name and address of such transfer agent. PAGE - 15 Section 21. Notices. Notices or demands authorized by this Agreement to be given or made by the Warrant Agent or by the holder of any Warrant certificate to or on the Company shall be sufficiently given or made if sent by registered or certified mail, addressed (until another address is filed in writing with the Warrant Agent) as follows (and shall be deemed given upon receipt): Ugly Duckling Corporation 2525 East Camelback Road Suite 1150 Phoenix, Arizona 85016 Attention: Steven P. Johnson, Senior Vice President, General Counsel and Secretary With a copy to: Steven D. Pidgeon Snell & Wilmer L.L.P. One Arizona Center Phoenix, Arizona 85004-0001 Notices or demands authorized by this Agreement to be given or made by the Company or by the holder of any Warrant certificate to or on the Warrant Agent shall be sent by registered or certified mail, addressed (until another address is filed in writing with the Company) as follows (and shall be deemed given upon receipt): Harris Trust Company of California 601 South Figueroa 49th Floor Los Angeles, CA 90017 Attention: Neil Rosso, Corporate Trust Notices or demands authorized by this Agreement to be given or made by the Company or the Warrant Agent to the holder of any Warrant certificate shall be sufficiently given or made if sent by first class mail, postage prepaid, addressed to such holder at the address of such holder as shown in the Warrant Register. The Company shall deliver a copy of any notice or demand it delivers to the holder of any Warrant certificate to the Warrant Agent. Section 22. Supplements and Amendments. The Company and the Warrant Agent may from time to time supplement or amend this Agreement without the approval of any holders of Warrants in order to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provision herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Warrant Agent may deem necessary or desirable and which shall not be inconsistent with the provisions of the Warrants, or which shall not adversely affect the interests of the holders of Warrants (including reducing the Warrant PAGE - 16 Price or extending the redemption or expiration date). In any situation in which this Agreement cannot be amended pursuant to the next sentence above, this Agreement may be amended by the Company, the Warrant Agent and the holder or holders of a majority of the outstanding Warrants representing a majority of the shares of Common Stock underlying such Warrants; provided, however, that without the consent of each holder of a Warrant, except as otherwise provided in Section 9, there can be no increase of the Warrant Price, reduction of the number of shares of Common Stock purchasable or reduction of the exercise period for such holder's Warrants and provided, further, that no such supplement or amendment may affect the rights or duties of the Warrant Agent under this Agreement without the written consent of the Warrant Agent. Notwithstanding anything in this Agreement to the contrary, no supplement or amendment that changes the rights and duties of the Warrant Agent under this Agreement shall be effective against the Warrant Agent without the execution of such supplement or amendment by the Warrant Agent. Section 23. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company, or the Warrant Agent or the registered holders of the Warrants will bind and inure to the benefit of their respective successors and assigns hereunder. Section 24. Governing Law. This Agreement will be deemed to be a contract made under the laws of the State of Arizona and for all purposes will be construed in accordance with the laws of said State, except as to Sections 17, 18 and 22, which shall be governed by and construed in accordance with the laws of the State of Illinois. Each holder of a Warrant by its acceptance thereof agrees to submit to the jurisdiction of a court of competent jurisdiction in the State of Arizona, but to the State of Illinois as to Sections 17, 18 and 22, for the purpose of resolving any disputes arising with respect to the rights and obligations of the Warrant Agent. Section 25. Benefits of this Agreement. Nothing in this Agreement will be construed to give to any person or corporation other than the Company, the Warrant Agent and the registered holders of the Warrants any legal or equitable right, remedy or claim under this Agreement. This Agreement is for the sole and exclusive benefit of the Company, the Warrant Agent and the registered holders of the Warrants. Section 26. Counterparts. This Agreement may be executed in counterparts and each of such counterparts will for all purposes be deemed to be an original, and all such counterparts will together constitute but one and the same instrument. Section 27. Descriptive Headings. The descriptive headings of the several Sections of this Agreement are inserted for convenience only and do not control or affect the meaning or construction of any of the provisions hereof. PAGE - 17 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed, as of the day and year first above written. UGLY DUCKLING CORPORATION By: /s/ Gregory B. Sullivan ----------------------- Name:Gregory B. Sullivan Its: President HARRIS TRUST COMPANY OF CALIFORNIA, as Warrant Agent By:/S/ NEIL T. ROSSO ------------------ Name: Neil T. Rosso Its:Assistant Vice President PAGE - 18 Warrant No. ____ EXHIBIT A WARRANT TO PURCHASE ________ SHARES OF COMMON STOCK VOID AFTER 5:00 P.M., NEW YORK CITY TIME, ON _______ __, 200__ UGLY DUCKLING CORPORATION This certifies that, for value received ________________________, the registered holder hereof or assigns (the "Holder"), is entitled to purchase from UGLY DUCKLING CORPORATION, a Delaware corporation (the "Company"), at any time before 5:00 p.m., New York City time, on __________ ___, 200__, at the purchase price per share of $20 (the "Warrant Price"), the number of shares of Common Stock, par value $0.001 per share, of the Company set forth above (the "Shares"). The number of shares of Common Stock purchasable upon exercise of the Warrant evidenced hereby and the Warrant Price is subject to adjustment from time to time as set forth in the Warrant Agreement referred to below. This Warrant may be redeemed, at the option of the Company and as more specifically provided in the Warrant Agreement, at $.10 per share of Common Stock purchasable upon exercise hereof, at any time after the average Daily Market Price (as defined in Section 11 of the Warrant Agreement) per share of the Common Stock for a period of at least 10 consecutive trading days ending not more than fifteen days prior to the date of the notice given pursuant to Section 11(b) thereof has equaled or exceeded $28.50, and prior to expiration of this Warrant. The Holder's right to exercise this Warrant terminates at 5:00 p.m. (New York City time) on the date fixed for redemption in the notice of redemption delivered by the Company in accordance with the Warrant Agreement. The Warrants evidenced hereby may be exercised in whole or in part by presentation of this Warrant certificate with the Purchase Form attached hereto duly executed and guaranteed and simultaneous payment of the Warrant Price (as defined in the Warrant Agreement and subject to adjustment as provided therein) at the principal office in Los Angeles, California, of Harris Trust Company of California (the "Warrant Agent"). Payment of such price may be made at the option of the Holder in cash or by certified check or bank draft, all as provided in the Warrant Agreement. The Warrants evidenced hereby are part of a duly authorized issue of Warrants and are issued under and in accordance with the Warrant Agreement dated as of _________ __, 1998, between the Company and the Warrant Agent, and are subject to the terms and provisions contained in such Warrant Agreement, which Warrant Agreement is hereby incorporated by reference herein and made a part hereof and is hereby referred to for a description of the rights, limitations, duties and indemnities thereunder of the Company and the Holder of the Warrants, PAGE - 19 and to all of which the Holder of this Warrant certificate by acceptance hereof consents. A copy of the Warrant Agreement may be obtained for inspection by the Holder hereof upon written request to the Warrant Agent. Upon any partial exercise of the Warrants evidenced hereby, there will be issued to the Holder a new Warrant certificate in respect of the Shares evidenced hereby that have not been exercised. This Warrant certificate may be exchanged at the office of the Warrant Agent by surrender of this Warrant certificate properly endorsed either separately or in combination with one or more other Warrants for one or more new Warrants to purchase the same aggregate number of Shares as evidenced by the Warrant or Warrants exchanged. No fractional Shares will be issued upon the exercise of rights to purchase hereunder, but the Company will pay the cash value of any fraction upon the exercise of one or more Warrants, as provided in the Warrant Agreement. The Warrant Price and the number of shares of Common Stock issuable upon exercise of this Warrant is subject to adjustment as provided in Section 9 of the Warrant Agreement. The Warrant Agreement may be amended by the holder or holders of a majority of the outstanding Warrants representing a majority of the shares of Common Stock underlying such Warrants; provided that without the consent of each holder of a Warrant certain specified changes cannot be made to such holder's Warrants and no amendment may affect the rights and duties of the Warrant Agent without the consent of the Warrant Agent. Pursuant to the Warrant Agreement, by acceptance of a Warrant, each holder consents to the jurisdiction of a court of competent jurisdiction in the State of Arizona for the purpose of resolving any disputes arising with respect to the Warrants or the Warrant Agreement. The Holder hereof may be treated by the Company, the Warrant Agent and all other persons dealing with this Warrant certificate as the absolute owner hereof for all purposes and as the person entitled to exercise the rights represented hereby, any notice to the contrary notwithstanding, and until any transfer is entered on such books, the Company may treat the Holder hereof as the owner for all purposes. Notices and demands to be given to the Company or the Warrant Agent must be given by certified or registered mail at the addresses provided in the Warrant Agreement. All terms used in the Warrant Certificate that are defined in the Warrant Agreement shall have the respective meanings ascribed to such terms in the Warrant Agreement. Dated: UGLY DUCKLING CORPORATION By: President ATTEST: Secretary PAGE - 20 This is one of the Warrants referred to in the within mentioned Warrant Agreement. HARRIS TRUST COMPANY OF CALIFORNIA By: Authorized Representative PAGE - 21 UGLY DUCKLING CORPORATION PURCHASE FORM Mailing Address: HARRIS TRUST COMPANY OF CALIFORNIA 601 South Figueroa 49th Floor Los Angeles, CA 90017 Attention: Corporate Trust The undersigned hereby irrevocably elects to exercise the right of purchase represented by the within Warrant certificate for, and to purchase thereunder, _____________Shares of Common Stock provided for therein, and requests that certificates for such Shares be issued in the name of: (Please Print or Type Name, Address and Social Security Number) and that such certificates be delivered to ____________________________________ whose address is _______________________________________________________________ and, if said number of Shares shall not be all the Shares purchasable hereunder, that a new Warrant certificate for the balance of the Shares purchasable under the within Warrant certificate be registered in the name of the undersigned Holder or his or her Assignee as below indicated and delivered to the address stated below. Dated: Name of Holder or Assignee: (Please Print) Address: Signature: Note: The above signature must correspond with the name as it appears upon the face of the within Warrant certificate in every particular, without alteration or enlargement or any change whatever, unless these Warrants have been assigned. Signature Guaranteed: THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (Banks, Stock Brokers, Savings and Loan Association, and Credit Unions) WITH PAGE - 22 MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO S.E.C. RULE 17Ad-15. ASSIGNMENT (To be signed only upon assignment of Warrants) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto - -------------------------------------------------------------------------------- (Name and Address of Assignee Must Be Printed or Typewritten) - -------------------------------------------------------------------------------- _____________ Warrants, hereby irrevocably constituting and appointing _______ Attorney to transfer said Warrants on the books of the Company, with full power of substitution in the premises. Dated:_____________ ------------------------------ Signature of Registered Holder Note: The signature on this assignment must correspond with the name as it appears upon the face of the within Warrant certificate in every particular, without alteration or enlargement or any change whatever. Signature Guaranteed: THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (Banks, Stock Brokers, Savings and Loan Association, and Credit Unions) WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO S.E.C. RULE 17Ad-15. PAGE - 23 EX-4.13(B) 3 EXHIBIT 4.13(B) Form of Debentures THIS SECURITY IS ISSUED WITH ORIGINAL ISSUE DISCOUNT WITHIN THE MEANING OF THE INTERNAL REVENUE CODE FOR INFORMATION REGARDING THE ISSUE PRICE, THE AMOUNT OF THE ORIGINAL ISSUE DISCOUNT, THE ISSUE DATE, AND THE YIELD TO MATURITY, PLEASE CONTACT: DOUGLAS L. WILLIAMS, PARTNER SECURITIES HOTLINE 202-739-8754 12% SUBORDINATED DEBENTURES DUE 2003 UGLY DUCKLING CORPORATION No. _____________ $_________ CUSIP NO. 903512 AA 9 Date of Original Issuance: October 23, 1998 Ugly Duckling Corporation, a corporation duly organized and existing under the laws of Delaware (herein called the "Company," which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to ______________, or registered assigns, the principal sum of ___________ Dollars on the date that is five (5) years from the date of original issuance set forth above, and to pay interest thereon from the original date of issuance or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on April 15 and October 15 in each year, commencing April 15, 1999, at the rate of 12% per annum, until the principal hereof is paid or made available for payment. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the April 1 or October 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Payment of the principal of (and premium, if any) and any such interest on this Security will be made at the office or agency of the Company maintained for that purpose in Chicago, Illinois, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. In Witness Whereof, the Company has caused this instrument to be duly executed. UGLY DUCKLING CORPORATION By /s/ ERNEST C. GARCIA II --------------------------- Chairman and Chief Executive Officer Attest: /s/ STEVEN P. JOHNSON - --------------------- Secretary Form of Reverse of Security. This Security is one of a duly authorized issue of securities of the Company (herein called the "Securities"), issued and to be issued in one or more series under an Indenture, dated as of October 15, 1998 (herein called the "Indenture", which term shall have the meaning assigned to it in such instrument), between the Company and Harris Bank and Trust Company, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), and reference is hereby made to the Indenture for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the series designated on the face hereof, limited in aggregate principal amount to $32,500,000. The Securities of this series are subject to redemption upon not less than 30 days' notice by mail, at any time, as a whole or in part, at the election of the Company, at a Redemption Price equal to 100% of the principal amount, together with accrued interest to the Redemption Date, but interest installments whose Stated Maturity is on or prior to such Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Dates referred to on the face hereof for such interest installments, all as provided in the Indenture. The Indenture provides that a notice of redemption may be given that is conditional upon the receipt by the Trustee on or prior to the Redemption Date of amounts sufficient to pay principal of, and premium, if any, and interest on, the Securities to be redeemed, and that if such amounts shall not have been so received, said notice shall be of no force and effect, the Securities to be redeemed will not become due and payable on the Redemption Date, and the Company will not be required to redeem such Securities on such date. In the event of redemption of this Security in part only, a new Security or Securities of this series and of like tenor for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. The Securities of this series are subordinate in right of payment, in the manner and to the extent set forth in the Indenture, to the prior payment in full of all Senior Indebtedness of the Company. To the extent and in the manner provided in the Indenture, Senior Indebtedness must be paid before any payment may be made to any Holder of this Security. Any Holder by accepting this Security agrees to the subordination and authorizes the Trustee to give it effect. The Indenture contains provisions for defeasance at any time of the entire indebtedness of this Security or certain restrictive covenants and Events of Default with respect to this Security, in each case upon compliance with certain conditions set forth in the Indenture. If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee without the consent of any Holders in certain limited cases, and with the consent of the Holders of a majority in principal amount of the Securities at the time Outstanding of each series to be affected subject to certain exceptions. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver shall be conclusive and binding upon the Holder of this Security and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. As provided in and subject to the provisions of the Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy thereunder, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default with respect to the Securities of this series, the Holders of not less than 25% in principal amount of the Securities of this series at the time Outstanding shall have made written request to the Trustee to institute proceedings in respect of such Event of Default as Trustee and offered the Trustee reasonable indemnity, and the Trustee shall not have received from the Holders of a majority in principal amount of Securities of this series at the time Outstanding a direction inconsistent with such request, and shall have failed to institute any such proceeding, for 60 days after receipt of such notice, request and offer of indemnity. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof or any premium or interest hereon on or after the respective due dates expressed herein. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of and any premium and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities of this series and of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Securities of this series are issuable only in registered form without coupons in denominations of $1.00 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. EX-10.1(F) 4 EXHIBIT 10.1(F) Amendment No. 3 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement This Amendment is entered into by and between Ugly Duckling Corporation, successor in interest to Ugly Duckling Holdings, Inc. ("Ugly Duckling"), a Delaware corporation; Ugly Duckling Car Sales and Finance Corporation ("UDCSFC"), an Arizona corporation formerly known as Duck Ventures, Inc.; Ugly Duckling Credit Corporation ("UDCC") formerly known as Champion Acceptance Corporation, an Arizona corporation; Ugly Duckling Car Sales, Inc. ("Sales"); an Arizona corporation; Champion Financial Services, Inc. ("Champion"), an Arizona corporation; Ugly Duckling Car Sales Florida, Inc. ("Car Sales Florida"), a Florida corporation; Ugly Duckling Car Sales Texas, L.L.P. ("Car Sales Texas"), an Arizona limited liability partnership; Ugly Duckling Car Sales New Mexico, Inc. ("Car Sales New Mexico"), a New Mexico corporation; Ugly Duckling Car Sales California, Inc. ("Car Sales California"), a California corporation; Ugly Duckling Car Sales Georgia, Inc. ("Car Sales Georgia"), a Georgia corporation (all of the foregoing entities collectively referred to herein as "Existing Borrower"); Cygnet Financial Corporation ("Cygnet"), a Delaware corporation; Cygnet Dealer Finance, Inc. ("Dealer Finance"), an Arizona corporation; Cygnet Finance Alabama, Inc. ("Cygnet Alabama"), an Arizona corporation; Cygnet Support Services, Inc. ("Services"), an Arizona corporation; Cygnet Financial Services, Inc. ("Cygnet Services"), an Arizona corporation; Cygnet Financial Portfolio, Inc. ("Cygnet Portfolio"), an Arizona corporation (Cygnet, Dealer Finance, Cygnet Alabama, Services, Cygnet Services, and Cygnet Portfolio collectively referred to herein as "New Borrower"; Existing Borrower and New Borrower collectively referred to herein as "Borrower"); and General Electric Capital Corporation, a New York corporation ("Lender"). RECITALS A. Existing Borrower and Lender are parties to an Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement dated as of August 15, 1997, as amended by an Assumption and Amendment Agreement dated October 23, 1997, Amendment No. 1 dated December 22, 1997, Amendment No. 2 dated September 9, 1998 (the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement as so amended is referred to herein as the "Agreement") pursuant to which Lender agreed to make Advances to Existing Borrower on the terms and conditions set forth in the Agreement. B. Existing Borrower and Lender desire to add New Borrower to the Agreement and to amend certain provisions of the Agreement pursuant to the terms set forth in this Amendment. In consideration of the premises and other good and valuable consideration, the receipt of which is hereby acknowledged by each of the parties hereto, the parties agree as follows: 1. Defined Terms. Unless otherwise specified herein, all capitalized terms used in this Amendment shall have the same meaning given to such term(s) in the Agreement. 2. New Borrower. Without releasing Existing Borrower from liability to Lender for all obligations existing or in the future arising under the Agreement, New Borrower hereby assumes obligations as a Borrower to Lender under the Agreement and all obligations to Lender under all other documents and instruments executed by Existing Borrower in connection with the Agreement. Page-1 By executing this Amendment, New Borrower shall become a Borrower under the Agreement with all rights and obligations attendant to such status. New Borrower grants to Lender all of the conveyances and rights granted to Lender under the Agreement, including but not limited to a security interest in all collateral described therein and all rights and remedies set forth therein (including but not limited to rights of termination, acceleration and foreclosure). 3. Amendments to Agreement. Effective as of the date hereof, the Agreement is hereby amended as follows. Definitions. a. Borrowing Base. The definition of Borrowing Base in Section 16.0 of the Agreement is amended to be as follows: Borrowing Base: the amount equal to the lesser of (i) One Hundred Twenty-five Million Dollars ($125,000,000.00) minus the Guaranty Liability, or (ii) an amount equal to (A) sixty five percent (65%) of the Outstanding Principal Balance of all Originated Eligible Contracts (but not to exceed one hundred fifteen percent (115%) of the NADA average wholesale Black Book value for all such Contracts in the aggregate) during the time they are included in the Borrowing Base pursuant to Section 3.1; plus (B) eighty-six percent (86%) of the Outstanding Principal Balance of all Champion Eligible Contracts (but not to exceed one hundred seven percent (107%) of wholesale Kelly Blue Book for all such Contracts in the aggregate) during the time they are included in the Borrowing Base pursuant to Section 3.1; plus (C) seventy-five percent (75%) of the Outstanding Principal Balance of all Seminole Eligible Contracts during the time they are included in the Borrowing Base pursuant to Section 3.1; plus (D) the Inventory Advance Value; plus (E) during the term of the Dealer Contract Facility, the Dealer Contract Advance Value. At Lender's sole and absolute discretion and Borrower's request, Lender may agree to include Bulk Purchase Contracts as part of the Borrowing Base hereunder. The amount of advance against Bulk Purchase Contracts, if any, shall be at Lender's sole and absolute discretion. With respect to section (ii) (A) of this definition, compliance with the parenthetical test based on Black Book values shall be measured by Lender's sample of 100 or more Contracts and not on a Contract-by-Contract basis. b. Contract Rights. The following sentence is added to the definition of Contract Rights in Section 16.0 of the Agreement: With respect to Dealer Contracts, Contract Rights are all of Borrower's interests and rights in, under and with respect to, Dealer Contracts, including but not limited to rights in collateral securing Dealer Contracts and rights to payments under Dealer Contracts. c. Cygnet Borrower. The following definition is added to Section 16.0 of the Agreement: Cygnet Borrower: one or more of Cygnet Financial Corporation, a Delaware corporation; Cygnet Dealer Finance, Inc., an Arizona corporation; Cygnet Finance Alabama, Inc., an Arizona corporation; Cygnet Support Services, Inc., an Arizona corporation; Cygnet Financial Services, Inc., an Arizona corporation; and Cygnet Financial Portfolio, Inc., an Arizona corporation. Page-2 d. Dealer Contract. The following definition is added to Section 16.0 of the Agreement: Dealer Contract: a contract between Cygnet Borrower and a motor vehicle dealer for (i) a revolving loan under Cygnet Borrower's Asset Based Loan Program by Cygnet Borrower to the dealer with advances based on and secured by motor vehicle installment contracts (which installment contracts are secured by the motor vehicle), and with servicing to be performed by the dealer, or (ii) the purchase of motor vehicle installment contracts (which installment contracts are secured by the motor vehicle) under Cygnet Borrower's Dealer Collection Program by Cygnet Borrower from the dealer, and with servicing to be performed by the dealer. e. Dealer Contract Advance. The following definition is added to Section 16.0 of the Agreement: Dealer Contract Advance Value: the lesser of (i) Fifteen Million Dollars ($15,000,000) and (ii) fifty percent of Cygnet Borrower's net investment in Eligible Dealer Contracts. For the purpose of this definition, (i) Cygnet Borrower's net investment in Eligible Dealer Contracts is equal to the gross finance receivable for the underlying installment contracts minus the sum of unearned interest, Cygnet Borrower discounts and refundable reserves, and (ii) Cygnet Borrower's net investment in Eligible Dealer Contracts shall not include the balances outstanding under a Dealer Contract with respect to motor vehicle installment contracts which are more than 45 days past due or which are not included by Cygnet Borrower in the active outstandings under the Dealer Contract. f. Dealer Contract Facility. The following definition is added to Section 16.0 of the Agreement: Dealer Contract Facility: the loan Facility described in Section 2.1 (C). g. Eligible Dealer Contract . The following definition is added to Section 16.0 of the Agreement: Eligible Dealer Contract: a Dealer Contract (i) which was, and continues to be, originated, underwritten, documented, and administered under the Dealer Collection Program or Asset Based Loan program in all material respects in accordance with the June 10, 1998 Cygnet Dealer Finance, Inc. Business Plan and Summary of Operations (including exhibits), or as otherwise approved in writing by Lender, (ii) under which installment contracts outstanding are less than Three Million Five Hundred Thousand Dollars ($3,500,000), unless the dealer is DCT or Texas Auto Outlet, (iii) under which not more than 15% of the outstanding installment contracts are more than 45 days past due, (iv) for which the dealer is servicing the installment contracts, (v) which is not in default by the Dealer or Cygnet Borrower, (vi) with a dealer which is actively in business and not in a reorganization or liquidation proceeding, (vii) with a dealer approved by Lender, (viii) which is valid, and enforceable by Cygnet Borrower and which is for installment contracts which are valid and enforceable, and (ix) for which Cygnet Borrower has a first priority perfected security interest or ownership of all installment contracts (and of the security interest in the underlying motor vehicle) outstanding under the Dealer Contract. h. Facility. The definition of Facility is amended to be: Facility: the Installment Contract Facility, the Inventory Facility, or the Dealer Contract Facility, as applicable. i. Loan Availability: The definition of "Loan Availability" in Section 16.0 of the Agreement is amended to be: Page-3 Loan Availability: as to the Installment Contract Facility, the amount by which the Borrowing Base exceeds the Loan; as to the Inventory Facility, the amount of the Inventory Advance Value; as to the Dealer Contract Facility, the amount of the Dealer Contract Advance Value. j. Single Loan. Section 2.0 of the Agreement is amended to be: Section 2.0. Single Loan. All Advances by Lender to Borrower under Sections 2.1(A), 2.1(B) and 2.1(C) shall constitute one loan and all indebtedness and obligations of Borrower to Lender under the Loan Documents shall constitute an obligation secured by Lender's security interest in all of the Collateral. In no event shall the Loan exceed One Hundred Twenty-five Million ($125,000,000.00). Borrower's obligation to pay the Loan is evidenced by this Agreement. Borrower shall pay Lender when due all Indebtedness in accordance with the terms of this Agreement whether or not Borrower has executed a promissory note. The actual amount Borrower is obligated to pay Lender hereunder shall be determined by this Agreement and the records of Lender, regardless of the terms of any promissory note. Any promissory note executed in connection with the Indebtedness need not be amended to reflect changes made to this Agreement. k. Loan Facilities. Section 2.1 of the Agreement is amended to be: Section 2.1. Loan Facilities. (A) Installment Contract Facility. Subject to all of the terms and conditions of this Agreement, Lender agrees to loan funds up to One Hundred Twenty-five Million ($125,000,000.00) to Borrower against Eligible Contracts from time to time in a series of Advances during the term of this Agreement. Funds may be borrowed, repaid and reborrowed on a revolving basis subject to the terms and conditions set forth in this Agreement, provided that the amount outstanding under the Installment Contract Facility shall not at any time exceed the Borrowing Base. (B) Inventory Facility. Subject to all of the terms and conditions of this Agreement, Lender agrees to loan funds up to Twenty Million ($20,000,000.00) to Borrower against Eligible Inventory from time to time in a series of Advances during the term of this Agreement. Funds may be borrowed, repaid and reborrowed on a revolving basis subject to the terms and conditions set forth in this Agreement, provided that the amount outstanding under the Inventory Facility shall not at any time exceed the Inventory Advance Value. (C) Dealer Contract Facility. Subject to all of the terms and conditions of this Agreement, Lender agrees to loan funds up to Fifteen Million ($15,000,000.00) to Borrower against Eligible Dealer Contracts from time to time in a series of Advances during the term of the Dealer Contract Facility. Funds may be borrowed, repaid, and reborrowed on a revolving basis subject to the terms and conditions set forth in this Agreement, provided that the amount outstanding under the Dealer Contract Facility shall not at any time exceed the Dealer Contract Advance Value. The term of the Dealer Contract Facility shall commerce on January 15, 1999 and shall expire on July 14, 1999. Borrower may terminate the Dealer Contract Facility at any time prior to July 14, 1999 by Borrower's delivery to Lender of written notice of termination of the Dealer Contract Facility and payment of all amounts Page-4 outstanding under the Dealer Contract Facility. Upon expiration or termination of the Dealer Contract Facility and provided Borrower is not then in default under this Agreement, Cygnet Borrower shall be released of all obligations as Borrower under this Agreement, all Dealer Contracts shall be released as Collateral and Lender shall execute and deliver to Borrower all documents reasonably required to evidence the release of Cygnet Borrower and Dealer Contracts. The expiration or termination of the Dealer Contract Facility shall not effect the Loan Term or the guaranty of the obligations in this Agreement by Cygnet Dealer Finance, Inc. l. Dealer Contract Facility Fee. Section 2.2 of the Agreement is amended by adding the following Section 2.2 (D): (D) On the fifteenth day of each month beginning in February, 1999 and continuing during the term of the Dealer Contract Facility, Borrower shall pay to Lender a Dealer Contract Facility fee of Twenty Thousand Dollars ($20,000). m. Determination of Eligibility. The content of Section 3.1 of the Agreement is amended to be Section 3.1(A) and the following is added as Section 3.1(B) : Section 3.1(B) Borrower shall from time to time deliver to Lender Eligible Dealer Contracts which Borrower desires to be included in the Borrowing Base. An Eligible Dealer Contract shall be included in the Borrowing Base only when and for so long as, in Lender's sole determination, each of the requirements in the definition of Eligible Dealer Contract continues to be satisfied. If a Dealer Contract is determined by Lender to be, or is treated by Lender as, an Eligible Dealer Contract, Lender reserves the right to change its determination or treatment and to remove the Dealer Contract from the Borrowing Base if it later determines that the Dealer Contract is not or was not an Eligible Dealer Contract. A determination by Lender that a Dealer Contract is an Eligible Dealer Contract is not a waiver by Lender of, or an admission by Lender of the truth of, any of Borrower's representations and warranties in this Agreement. n. Procedure for Borrowing. Section 3.2.(A) of the Agreement is amended to be: Section 3.2. Procedure for Borrowing. (A) Borrower shall designate under which Facility it is requesting an Advance. If no Facility is specified by Borrower at the time of the request, then Lender may, at its option, (i) designate the Facility under which the Advance shall be made, or (ii) request a designation from Borrower. The first Advance shall not exceed the Borrowing Base. Subsequent Advances shall not be made more frequently than daily. Each subsequent Advance shall not exceed the applicable Loan Availability determined at Lender's election either as of the end of the most recent Accounting Period for which Lender has received the monthly reports required by Section 5.1 (C), or, as of such other date thereafter designated by Lender. Lender is not obligated to make an Advance if the amount available or requested is less than Twenty-Five Thousand Dollars ($25,000.00). Lender is not obligated to make an Advance unless Borrower provides Lender with sufficient information to calculate the Loan Availability. Lender's use of the information provided by Borrower to determine the amount available for Advances is not an admission by Lender as to the accuracy of the information, and Lender reserves the right to verify the information and redetermine the amount available for Advances. o. Borrower Administration. Sections 5.1 (C), (D) and (E) of the Agreement are amended to be: Page-5 (C) Borrower shall furnish to Lender such reports in such form that Lender determines are necessary for it to track and monitor the Pledged Contracts, Remittances, Financed Vehicles, Dealer Contracts and insurance. Such reports shall be in a format and on a medium readable by Lender's computer software, or such other format or medium acceptable to Lender. The reports shall include but not be limited to those reports set forth on Exhibit 5.1(C) attached hereto and made a part hereof, and shall be delivered to Lender in accordance with such Exhibit. (D) Notwithstanding anything herein to the contrary, (i) Borrower shall remain liable under all Contracts and Dealer Contracts, and any other contracts and agreements with Contract Rights Payors or otherwise included in or related to the Collateral, to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, and (ii) the exercise by Lender of any rights under any of the Loan Documents shall not release Borrower from any of its duties or obligations under the Contracts or Dealer Contracts, or the other contracts and agreements, and (iii) Lender shall not have any obligation or liability under the Contracts or Dealer Contracts, or the other contracts and agreements, nor shall Lender be obligated to perform any of the obligations or duties of Borrower thereunder or to take any action to collect or enforce any rights thereunder. (E) Borrower shall administer the Contracts and Dealer Contracts at its own expense. In the event that Borrower fails to administer the Contracts in accordance with Section 5.1(A), or fails to administer Dealer Contracts in accordance with (i) the Dealer Collection Program or Asset Based Loan program as described in the June 10, 1998 Cygnet Dealer Finance, Inc. Business Plan and Summary of Operations (including exhibits), (ii) applicable law, and (iii) reasonable and prudent procedures in a way that, in Lender's determination, does not adversely affect the value of the Collateral, or there is an Event of Default or a Pre-Default Event, Lender may in Lender's or Borrower's name take over all or part of the Contract administration Borrower is required by this Agreement to perform and all or part of the Dealer Contract Administration performed by Borrower. If Lender takes over all or part of such administration, Borrower shall pay to Lender on demand all out-of-pocket costs incurred by Lender in the performance of Borrower's administration obligations, and Borrower shall pay Lender for the administration performed by Lender an administration fee (exclusive of out-of-pocket costs) established by Lender, and until so paid such costs and fee shall be part of the Loan. p. Security Interest. The description of Collateral in Section 6.0 of the Agreement is amended to include the following: Dealer Contracts; all rights of Borrower, and all assets owned by Borrower, arising under its Dealer Collection Program and Asset Based Loan Program (including but not limited to all receivables from dealers to Borrower and all rights of Borrower under agreements with dealers) q. Right to Notify and Endorse. Section 6.4 of the Agreement is amended to be: Right to Notify and Endorse. Borrower hereby irrevocably authorizes Lender to notify any or all Contract Debtors, dealers under Dealer Contracts, and Contract Rights Payors that Lender has a security interest in Contracts, Dealer Contracts, Contract Rights, and other items of Collateral at any time (i) prior to the occurrence of an Event of Default, in the name of Borrower, and (ii) after the occurrence of an Event of Default, in Lender's or Borrower's name. Any such notice shall, at Lender's election, be signed by Borrower and may be sent on Borrower's stationery. Page-6 r. Lender Appointed Attorney-in-Fact. The first sentence in Section 6.5 of the Agreement is amended by adding the following: and (v) to exercise Borrower's rights with respect to bank accounts into which payments are deposited for installment contracts outstanding under Dealer Contracts and to perfect the assignment of such accounts to Lender. s. Contract Delivery Documents. Section 6.9 of the Agreement is amended by adding the following sentence: Until Lender notifies Borrower to deliver the Contract Delivery Documents to Lender, in which case Borrower shall immediately deliver them to Lender, Borrower may maintain possession of the Contract Delivery Documents for the installment contracts underlying Dealer Contracts if an assignment to Lender is attached to each installment contract, and if requested by Lender (in the event Lender determines stamping is appropriate to protect its interests) each contract is stamped "pledged to GECC" (rather than attaching an assignment.) t. Notice Regarding Contracts. The following sentence is added to Section 7.0 (B) of the Agreement: After an Eligible Dealer Contract is included in the Borrowing Base, in the event that Borrower becomes aware that one of the requirements in the definition of Eligible Dealer Contract is no longer satisfied, Borrower shall provide Lender with written notice thereof within five (5) Business Days of Borrower becoming aware, explaining in detail the timing and reasons why the requirement is not satisfied. u. Assignment of Bank Accounts. Article VIII of the Agreement is amended by adding the following Section 8.3: Section 8.3 Assignment of Bank Accounts. In addition to the security interest granted in Section 6.0, Borrower hereby absolutely assigns to Lender Borrower's interest in and right to all bank accounts, and all funds in such accounts, which are established in connection with Dealer Contracts for payments under installment contracts. v. Conditions to Each Advance. Section 9.0 (A) of the Agreement is amended to be as follows: For each Eligible Contract, Borrower shall have included the Eligible Contract on a List of Contracts delivered to Lender and, subject to Section 6.9, shall have delivered to Lender the Contract Delivery Documents; except that, if a Certificate of Title has not been issued and Borrower has provided Lender with proof acceptable to Lender that a Certificate of Title has been applied for, then the Certificate of Title must be delivered to Lender within ninety (90) days of the Contract date; w. Conditions of Dealer Contracts. Section 10.0 of the Agreement is amended by adding the following Section 10.0(q): Section 10.0(q) Dealer Contracts. Each Dealer Contract presented to Lender for inclusion in the Borrowing Base meets all of the requirements listed in the definition of Eligible Dealer Contract, except that Borrower makes no representation or warranty as to whether the Dealer Contract meets such Page-7 requirements to Lender's satisfaction. No selection procedures adverse to Lender have been utilized in selecting the Dealer Contracts presented to Lender. x. Cygnet Finance, Inc. The sentence in Section 13.15 of the Agreement regarding Borrower's investment in Cygnet Finance Inc. is amended to be: Ugly Duckling Corporation shall not invest more than Sixty Million Dollars ($60,000,000) in Cygnet Finance Inc. y. Borrower Agent. Article XIII of the Agreement is amended by adding the following new section 13.17: Section 13.17. Borrower Agent. Borrower hereby irrevocably appoints Ugly Duckling Corporation as its agent for the purpose of dealing with Lender (including receiving notices from Lender and making requests for Advances) in connection with the Loan and this Agreement. This appointment and authorization is for the convenience of the parities and does not relieve any Borrower of any of its obligations to Lender. z. Subordination and Dealer Contracts. Section 14.3 of the Agreement is amended by adding the following sentences: All obligations and security interests owned by any Borrower with respect to any other Borrower are subordinated to the Loan and the Lender's security interest in the Collateral. Borrower shall not have loans or purchases of more than Three Million Five Hundred Dollars ($3,500,000) outstanding at the same time under any Dealer Contract, except for DCT and Texas Auto Outlet. 4. Conditions Precedent To Effectiveness Of Amendment No.3. New Borrower shall have delivered to Lender on or before the date hereof the following duly executed documents in form and substance satisfactory to Lender, delivery of which shall be a condition precedent to the effectiveness of this Amendment: (A) This Amendment; (B) UCC-1 Financing Statements of New Borrower; (C) Duly adopted resolutions of the Board of Directors of each New Borrower; (D) Copies of New Borrower's Articles of Incorporation and By-laws, certified as a true and correct copy by the Secretary of New Borrower as true and correct; (E) Certificates of good standing for each New Borrower issued by the Secretary of State of its state of incorporation; (F) A power of attorney of New Borrower; Page-8 (G) A copy of a letter delivered by New Borrower to its accountants instructing them to disclose to Lender any and all financial statements and other information of any kind relating to New Borrower's business, financial condition and other affairs that Lender may request; (H) Two certificates of the chief financial officer of New Borrower; (I) Assignment of bank accounts; (J) An initial fee of One Hundred Thousand Dollars ($100,000) for the Dealer Contract Facility, and the Line Fees for 1998 (as to the $25,000,000 increase in September 1998) in the amount of $19,349.31 and 1999 in the amount of $312,500; and (K) Such additional information and materials as Lender may reasonably request. 5. Incorporation of Amendment: The parties acknowledge and agree that this Amendment is incorporated into and made a part of the Agreement, the terms and provisions of which, unless expressly modified herein, or unless no longer applicable by their terms, are hereby affirmed and ratified and remain in full force and effect. To the extent that any term or provision of this Amendment is or may be deemed expressly inconsistent with any term or provision of the Agreement, the terms and provisions of this Amendment shall control. Each reference to the Agreement shall be a reference to the Agreement as amended by this Amendment. This Amendment, taken together with the Agreement, which is affirmed and ratified by Borrower, contains the entire agreement among the parties regarding the transactions described herein and supersedes all prior agreements, written or oral, with respect thereto. 6. Borrower Remains Liable. Borrower hereby confirms that the Agreement and each document executed by Borrower in connection therewith continue unimpaired and in full force and effect and shall cover and secure all of Borrower's existing and future obligations to Lender. 7. Headings. The paragraph headings contained in this Amendment are for convenience of reference only and shall not be considered a part of this Amendment in any respect. 8. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Arizona. Nothing herein shall preclude Lender from bringing suit or taking other legal action in any jurisdiction. 9. Execution in Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. Page-9 IN WITNESS WHEREOF, the undersigned have entered into this Amendment as of January 18, 1999. GENERAL ELECTRIC CAPITAL CORPORATION UGLY DUCKLING CAR SALES, INC. By: ______________________________ By: /S/ JON EHLINGER ---------------- Title: ____________________________ Title: Secretary UGLY DUCKLING CORPORATION UGLY DUCKLING CAR SALES NEW MEXICO, INC. By: /S/ STEVEN P. JOHNSON By: /S/ JON EHLINGER --------------------- ---------------- Title: Senior Vice President Title: Secretary UGLY DUCKLING CAR SALES AND CHAMPION FINANCIAL SERVICES, INC. FINANCE CORPORATION By: /S/ JON EHLINGER By: /S/ JON EHLINGER ---------------- ---------------- Title: Secretary Title: Secretary UGLY DUCKLING CAR SALES FLORIDA, INC. UGLY DUCKLING CREDIT CORPORATION By: /S/ JON EHLINGER By: /S/ JON EHLINGER ---------------- ---------------- Title: Secretary Title: Secretary UGLY DUCKLING CAR SALES TEXAS,L.L.P. UGLY DUCKLING CAR SALES CALIFORNIA, INC. By: Ugly Duckling Car Sales, Inc. Its: General Partner By: /S/ JON EHLINGER ---------------- Title: Secretary By: /S/ JON EHLINGER ---------------- Title: Secretary UGLY DUCKLING CAR SALES GEORGIA,INC. By: /S/ JON EHLINGER ---------------- Title: Secretary CYGNET FINANCIAL CORPORATION CYGNET DEALER FINANCE, INC. By: /S/ STEVEN P. JOHNSON By: /S/ JUDITH A. BOYLE --------------------- ------------------- Title: Senior Vice President Title: Secretary CYGNET FINANCE ALABAMA, INC. CYGNET SUPPORT SERVICES, INC. By: /S/ JUDITH A. BOYLE By: /S/ JUDITH A. BOYLE ------------------- ------------------- Title: Secretary Title: Secretary CYGNET FINANCIAL SERVICES, INC. CYGNET FINANCIAL PORTFOILIO, INC. By: /S/ JUDITH A. BOYLE By: /S/ JUDITH A. BOYLE ------------------- ------------------- Title: Secretary Title: Secretary EX-10.6(A) 5 EXHIBIT 10.6(A) FIRST AMENDMENT TO EMPLOYMENT AGREEMENT Amendment Date: December 31, 1998 Company: Ugly Duckling Corporation 2525 East Camelback Road, Suite 1150 Phoenix, Arizona 85016 Employee: Ernest C. Garcia II 4330 North 57th Way Phoenix, Arizona 85018 Company and Employee hereby mutually agree to amend the Employment Agreement dated January 1, 1996 (the "Employment Agreement") by extending the term of the Employment Agreement for three years. The expiration date in Section 5.1 of the Employment Agreement is hereby extended from December 31, 1998 to December 31, 2001. Except as modified by this First Amendment, the Employment Agreement remains in full force and effect and is hereby ratified and affirmed by Company and Employee. IN WITNESS WHEREOF, the parties hereby acknowledge their receipt, review, understanding and acceptance of every provision of this First Amendment as of the date stated below, effective as of the Amendment Date. Company: Ugly Duckling Corporation a Delaware corporation By: /s/ STEVEN P. JOHNSON ------------------------------- Name: Steven P.Johnson Its: Senior Vice President and General Counsel Date: March 3, 1999 Employee: /s/ ERNEST C. GARCIA II ------------------------- Ernest C. Garcia II Date: 3-3-99 EX-10.43 6 EXHIBIT 10.43 ================================================================================ LOAN AGREEMENT Dated as of November 12, 1998 by and between GREENWICH CAPITAL FINANCIAL PRODUCTS, INC. a Delaware corporation ("Lender") and UGLY DUCKLING CORPORATION, a Delaware corporation ("Borrower") $15,000,000 Collateralized Loan ================================================================================ TABLE OF CONTENTS Page ARTICLE I DEFINITIONS....................................................................1 1.1 Defined Terms.........................................................1 1.2 Other Interpretive Provisions........................................10 1.3 Accounting Principles................................................11 1.4 Times................................................................11 ARTICLE II THE LOAN......................................................................11 2.1 The Loan.............................................................11 2.2 Payment Upon Collections.............................................11 2.3 Payment Upon Maturity................................................12 2.4 Interest.............................................................12 2.5 Voluntary Prepayments................................................12 2.6 Application of Payments..............................................12 2.7 Prepayment...........................................................13 2.9 Fees and Interest....................................................13 2.10 Payments by Borrower.................................................13 ARTICLE III SECURITY AGREEMENT AND COLLATERAL.............................................14 3.1 Security for Obligations.............................................14 3.2 Security Documents...................................................14 3.3 Lender's Duty Regarding Collateral...................................14 3.4 Borrower's Duties Regarding Collateral...............................14 3.5 Power of Attorney....................................................15 3.6 Collateral Inspections...............................................16 ARTICLE IV CONDITIONS PRECEDENT; TERM OF AGREEMENT.......................................16 4.1 Conditions Precedent.................................................16 4.2 Receipt of Documents. ...............................................16 4.3 Term.................................................................17 4.4 Effect of Termination................................................18 ARTICLE V REPRESENTATIONS AND WARRANTIES................................................18 5.1 No Encumbrances......................................................18 5.2 Location of Chief Executive Office; FEIN.............................18 5.3 Due Organization and Qualification; Subsidiaries.....................18 5.4 Due Authorization: No Conflict.......................................19 5.5 Litigation...........................................................20 5.6 Financial Statements; No Material Adverse Change.....................20 5.7 Securitization Documents. ..........................................20 5.8 ERISA................................................................20 5.9 Environmental and Safety Matters.....................................20 5.10 Tax Matters..........................................................21 ARTICLE VI AFFIRMATIVE COVENANTS.........................................................21 6.1 Financial Statements and Other Documents.............................21 6.2 Inspection of Property...............................................22 6.3 Default Disclosure...................................................22 6.4 Notices to Lender....................................................22 6.5 Books and Records....................................................23 6.6 Compliance and Preservation..........................................23 6.7 Perfection of Liens..................................................23 6.8 Cooperation..........................................................23 ARTICLE VII NEGATIVE COVENANTS............................................................24 7.1 Liens................................................................24 7.2 Indebtedness.........................................................24 7.3 Restrictions on Fundamental Changes..................................24 7.4 Disposal of Collateral...............................................24 7.5 Change Name..........................................................24 7.6 Amendments...........................................................24 7.7 Change of Control....................................................24 7.8 Distributions........................................................24 7.9 Standing Dividend Resolutions........................................25 7.10 Change in Location of Chief Executive Office.........................25 7.11 No Prohibited Transactions Under ERISA...............................25 7.12 Stock Buyback Program................................................26 7.13 Verde Subordinated Debt..............................................26 ARTICLE VIII EVENTS OF DEFAULT/REMEDIES....................................................26 8.1 Event of Default.....................................................26 8.2 Lender's Rights and Remedies.........................................27 ARTICLE IX MISCELLANEOUS.................................................................28 9.1 Amendments and Waivers...............................................28 9.2 Notices..............................................................29 9.3 No Waiver: Cumulative Remedies.......................................30 9.4 Costs and Expenses...................................................30 9.5 Indemnity............................................................30 9.6 Marshaling: Payments Set Aside.......................................31 9.7 Successors and Assigns...............................................31 9.8 Set-off..............................................................31 9.9 Counterparts.........................................................31 9.10 Severability.........................................................32 9.11 No Third Parties Benefited...........................................32 9.12 Time.................................................................32 9.13 Governing Law and Jurisdiction.......................................32 9.14 Entire Agreement.....................................................33 9.15 Interpretation.......................................................33 9.16 Assignment...........................................................33 9.17 Revival and Reinstatement of Obligations.............................33 SCHEDULES AND EXHIBITS Schedule A Borrower's Subsidiaries Schedule B Warrants, Options, etc. Schedule C Litigation Schedule D Exceptions to Financial Statements Schedule E Permitted Liens Schedule F Class B Certificates Schedule G Subordinated Indebtedness Exhibit A UCC-1 Financing Statement(s) Exhibit B UDRC and UDRCII Securitization Documents LOAN AGREEMENT This LOAN AGREEMENT (the "Agreement"), is entered into as of November 12, 1998, between GREENWICH CAPITAL FINANCIAL PRODUCTS, INC., a Delaware corporation ("Lender"), with a place of business located at 600 Steamboat Road, Greenwich, Connecticut 06830 and UGLY DUCKLING CORPORATION, a Delaware corporation ("Borrower"), with a place of business located at 2525 East Camelback Road, Suite 500, Phoenix, Arizona 85016. Lender has agreed to make to Borrower a collateralized loan (the "Loan") upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties agree as follows: ARTICLE I DEFINITIONS I.1 Defined Terms. In addition to the terms defined elsewhere in this Agreement, the following terms have the following meanings: "Affiliate" means, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the other Person, whether through the ownership of voting securities, by contract or otherwise. Without limitation, any director, executive officer or beneficial owner of twenty percent (20%) or more of the equity of a Person shall for the purposes of this Agreement, be deemed to control the other Person. In no event shall Lender be deemed an "Affiliate" of Borrower. "Agreement" means this Loan Agreement, as amended, supplemented or modified from time to time in accordance with the terms hereof. "Attorney Costs" means and includes all fees and disbursements of any law firm or other external counsel. "Bankruptcy Code" means the United States Bankruptcy Code (11 U.S.C.ss. 101 et seq.), as amended, and any successor statute. Page - 1 "Bond Insurance Policy" shall mean a financial guaranty or financial insurance policy issued by MBIA Corp. or any of its Affiliates or any other financial guarantor in respect of one or more classes of investor certificates or other interests issued by a Securitization Trust. "Borrower's Books" means all of Borrower's books and records including: ledgers, records indicating, summarizing, or evidencing Borrower's properties or assets (including the Collateral and the assets of any Subsidiaries of Borrower) or liabilities; all information relating to Borrower's business operations or financial condition; and all computer programs, disk or tape files, printouts, runs, or other computer prepared information. "Business Day" means any day other than a Saturday, Sunday or national holiday. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability Act (49 U.S.C. Section 9601, et seq.). "Change of Control" shall be deemed to have occurred at such time as a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) becomes, after the date of this Agreement, the "beneficial owner" (as defined in Rule 13(d)(3) under the Securities Exchange Act of 1934), directly or indirectly, of more than 25% of the total voting power of all classes of stock then outstanding of Borrower entitled to vote in the election of directors. "Closing Date" means the date on which all conditions precedent set forth in Section 4.1 are either satisfied or waived by Lender and Lender makes the Loan. "Code" means the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder. "Collateral" means all of the outstanding capital stock of UDRC and UDRC II. "Collections" means all proceeds of, payments or other distributions of principal, interest or other amounts on, and other amounts received by or on behalf of Borrower in respect of the Collateral, including all amounts paid to Lender pursuant to the UDRC Dividend Direction Letter and the UDRC II Dividend Direction Letter. "Debt" or "Indebtedness" means (i) indebtedness for borrowed money, (ii) obligations evidenced by bonds, debentures, notes, matured reimbursable obligations under letters of credit or other similar instruments, (iii) obligations to pay the deferred purchase price of property or services other than trade payables incurred in the ordinary course of business, (iv) obligations as lessee under leases that shall have been or should be, in accordance with GAAP recorded as capital leases, (v) obligations under direct or Page - 2 indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (i) through (iv), and (vi) liabilities in respect of unfunded vested benefits under Pension Plans covered by Title IV of ERISA. "Default" means any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied) constitute an Event of Default. "Dollars", "dollars" and "$" each mean lawful money of the United States. "Environmental and Safety Laws" means all Federal, state and local laws, regulations and ordinances, relating to the discharge, handling, disposition or treatment of Hazardous Materials and other substances or the protection of the environment or of employee health and safety, including CERCLA, the Hazardous Materials Transportation Act (49 U.S.C. Section 1801, et seq.), the Resource Conservation and Recovery Act (42 U.S.C. Section 7401, et seq.), the Clean Air Act (42 U.S.C. Section 7401, et seq.), the Toxic Substances Control Act (15 U.S.C. Section 2601, et seq.), the Occupational Safety and Health Act (29 U.S.C. Section 651, et seq.) and the Emergency Planning and Community Right-To-Know Act (42 U.S.C. Section 11001, et seq.), each as the same may be amended and supplemented. "Environmental Liabilities and Costs" means, as to any Person, all liabilities, obligations, responsibilities, remedial actions, losses, damages, punitive damages, consequential damages, treble damages, contribution, cost recovery, costs and expenses (including all fees, disbursements and expenses of counsel, expert and consulting fees, and costs of investigation and feasibility studies), fines, penalties, sanctions and interest incurred as a result of any claim or demand, by any Person, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute, permit, order or agreement with any Federal, state or local governmental authority or other Person, arising from environmental, health or safety conditions, or the release or threatened release of a contaminant, pollutant or Hazardous Material into the environment, resulting from the operations of such Person or its subsidiaries, or breach of any Environmental and Safety Law or for which such Person or its subsidiaries is otherwise liable or responsible. "Equity Interests" means, with respect to a Person, any common stock, preferred stock, partnership interest (whether general or limited) or other equity or participating interest in such Person. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and regulations promulgated thereunder. "Event of Default" means any of the events or circumstances specified in Section 8.1. "FEIN" means Federal Employer Identification Number. Page - 3 "Financing Statements" means the Financing Statements on Form UCC-1 together with an attachment thereto in the form attached hereto as Exhibit A, to perfect the security interests in the Collateral pursuant to the provisions of Article III that can be perfected by filing. "Fiscal Quarter" means a fiscal quarter of Borrower. "Fiscal Year" means a fiscal year of Borrower. "GAAP" means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the accounting profession), or in such other statements by such other entity as may be in general use by significant segments of the U.S. accounting profession, which are applicable to the circumstances as of the date of determination. "GECC" means General Electric Capital Corporation, a New York corporation. "GECC Agreement" shall mean the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement, dated as of August 15, 1997, by and between Borrower, GECC and certain other parties thereto, as such agreement may be amended from time to time. "Governing Documents" means, with respect to Borrower, Borrower's certificate of incorporation and bylaws. "Governmental Authority" means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity, body, authority, bureau, department or instrumentality exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Hazardous Materials" means (a) any material or substance defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "toxic substances" or any other formulations intended to define, list or classify substances by reason of their deleterious properties, (b) any oil, petroleum or petroleum derived substance, (c) any flammable substances or explosives, (d) any radioactive materials, (e) asbestos in any form, (f) electrical equipment that contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty parts per million, (g) pesticides or (h) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental agency or authority or which may or could pose a hazard to the health and safety of persons in the vicinity thereof. Page - 4 "Indemnified Liabilities" has the meaning specified in Section 9.5. "Indemnified Person" has the meaning specified in Section 9.5. "Initial Principal Amount" means the amount of Fifteen Million Dollars ($15,000,000). "Interest Accrual Period" shall mean the one-month period from and including a Payment Date to the close of business on the day preceding the next Payment Date, except that the first Interest Accrual Period shall commence on the Closing Date and end at the close of business on the day preceding the Payment Date. "Lender Costs" or "Lender Expenses" means all: (a) costs or expenses (including taxes and insurance premiums) required to be paid by Borrower under any of the Loan Documents that are paid or incurred by Lender; (b) reasonable out-of-pocket fees or charges paid or incurred by Lender in connection with Lender's transactions with Borrower, including, fees or charges for photocopying, notarization, couriers and messengers, telecommunication, public record searches (including tax lien, litigation and UCC searches and including searches with the patent and trademark office, the copyright office or the department of motor vehicles), filing, recording, publication, appraisals, due diligence, actual out-of-pocket costs and expenses incurred by Lender in the disbursement of funds to Borrower (by wire transfer or otherwise); (c) actual out-of-pocket charges paid or incurred by Lender resulting from the dishonor of checks; (d) reasonable out-of-pocket costs and expenses paid or incurred by Lender to correct any default or enforce any provision of the Loan Documents, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale, or advertising to sell the Collateral, or any portion thereof, irrespective of whether a sale is consummated; (e) reasonable costs and expenses paid or incurred by Lender in examining Borrower's Books; (f) reasonable out-of pocket costs and expenses of third party claims or any other suit paid or incurred by Lender in enforcing or defending the Loan Documents or in connection with the transactions contemplated by the Loan Documents or Lender's relationship with Borrower; and (g) Lender's reasonable Attorney Costs incurred in advising, structuring, drafting, reviewing, administering, amending, terminating, enforcing, defending, or concerning the Loan Documents, irrespective of whether suit is brought. "LIBOR" shall mean, with respect to an Interest Accrual Period, the rate per annum equal to the rate appearing on Bloomberg on the first day of such Interest Accrual Period, for the one-month term corresponding to such Interest Accrual Period, or if such rate shall not be so quoted then the applicable rate appearing at page 3750 of the Telerate Screen on the first day of such Interest Accrual Period, or if neither such rate shall be so quoted, the rate per annum at which Lender is offered Dollar deposits at or about 11:00 a.m., New York City time, on such date by prime banks in the interbank eurodollar market where the Page - 5 eurodollar and foreign currency exchange operations of Lender are then being conducted, for delivery on the first day of such Interest Accrual Period for the number of days in such Interest Accrual Period, and in an amount comparable to the amount of the Loan on such day. "Lien or Encumbrance"or "Liens and Encumbrances" means any mortgage, deed of trust, pledge, hypothecation, assignment, charge or deposit arrangement, encumbrance, lien (statutory or other) or preference, priority or other security interest or preferential arrangement of any kind or nature whatsoever (including those created by, arising under or evidenced by any conditional sale or other title retention agreement, the interest of a lessor under a capital lease obligation, any financing lease having substantially the same economic effect as any of the foregoing, or the filing of any financing statement naming the owner of the asset to which such lien relates as debtor, under the UCC or any comparable law) and any contingent or other agreement to provide any of the foregoing. "Loan Documents" means this Agreement, the Stock Pledge Agreement, the UDRC Dividend Direction Letter, the UDRC II Dividend Direction Letter, the Financing Statements, and all documents delivered to Lender in connection therewith. "Material Adverse Change" or "Material Adverse Effect" means a material adverse change in, or a material adverse effect upon, any of (a) the operations, business, properties, condition (financial or otherwise) or prospects of Borrower or an Affiliate of Borrower, (b) the ability of Borrower to perform under any Loan Document and avoid any Event of Default, or (c) the legality, validity, binding effect or enforceability of any Loan Document. "Maturity Date" shall mean the date that is three hundred sixty-four (364) days following the Closing Date, unless such date is not a Business Day, in which case the Maturity Date shall be the immediately preceding Business Day. "Obligations" means all Debt, advances, debts, liabilities, obligations, covenants and duties owing by Borrower to Lender, of any kind or nature, present or future, whether or not evidenced by any note, guaranty or other instrument, arising under this Agreement or under any other Loan Document, absolute or contingent, due or to become due, now existing or hereafter arising and however acquired. "Outstanding Principal Amount" means the Initial Principal Amount minus all amounts applied to the repayment of the Loan pursuant to Section 2.6(c). "Payment Date" shall mean the 15th day of each month during the term of this Agreement. "Permitted Liens" means (a) Liens held by Lender and (b) each lien existing at or prior to the date of this Agreement that is identified on Schedule E to this Agreement. Page - 6 "Person" means a natural person, partnership, corporation, business trust, joint stock company, trust, unincorporated association, limited liability company, joint venture or Governmental Authority. "Repayment Date" means the earlier of (i) the Maturity Date or (ii) the date that the Outstanding Principal Amount of the Loan outstanding hereunder, together with all accrued interest in respect thereof and all other Obligations, has been reduced to zero. "Requirement of Law" means, as to any Person, any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon the Person or any of its property or to which the Person or any of its property is subject. "Responsible Officer" means the chief executive officer or the president of Borrower, or any other officer having substantially the same authority and responsibility or, with respect to financial matters, the chief financial officer or the treasurer of Borrower, or any other officer having substantially the same authority and responsibility. "Security Documents" means the writings described in Article III hereof, as they may hereafter be amended, modified and/or supplemented, and all other writings now or hereafter executed to create, evidence and/or perfect any Lien(s) to secure the Loan or any portion(s) thereof. "Securitization Default" means any default or event of default, or event or occurrence which, with the passage of time or the giving of notice or both, would become a default or event of default, by UDRC, UDRC II or any seller to UDRC or UDRC II in their respective obligations under the UDRC Securitization Documents or the UDRC II Securitization Documents, which has not been cured within any applicable period thereunder. "Securitization Trust" shall mean any trust formed pursuant to a purchasing agreement or a pooling and servicing agreement specified on Exhibit B hereto or contemplated in clause (iii) of the definitions of UDRC Securitization Documents and UDRC II Securitization Documents. "Stock Pledge Agreement" means that certain Stock Pledge Agreement, dated as of the date hereof, among UDCS as Pledgor, Borrower and Lender, pursuant to which UDCS grants Lender a security interest in one hundred percent (100%) of the issued and outstanding capital stock of each of UDRC and UDRC II. "Subordinated Debt" shall mean the Debt set forth on Schedule G and any Debt incurred after the date hereof as to which the repayment of principal and interest is subordinated to repayment of the Loan pursuant to subordination provisions that have been approved in writing by Lender. Page - 7 "Subsidiary" of a Person means a corporation, partnership, limited liability partnership, limited liability company, or other entity in which that Person directly or indirectly owns or controls the shares of stock or other ownership interests having ordinary voting power to elect a majority of the board of directors (or appoint other comparable managers) of such corporation, partnership, limited liability partnership, limited liability company, or other entity. "Tangible Net Worth" of Borrower shall mean the total of Borrower's and its consolidated Subsidiaries' shareholders' equity (including capital stock, additional paid-in capital and retained earnings) plus Subordinated Debt of Borrower and its consolidated Subsidiaries, less (i) the total amount of all Indebtedness owing to Borrower from its consolidated Subsidiaries, Affiliates, shareholders, officers or employees, and (ii) the total amount of any intangible assets of Borrower and its consolidated Subsidiaries, including unamortized discounts, deferred charges and goodwill. "Tax" means any federal, state, local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs, duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, intangible, ad valorem, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated or other tax or other governmental charge of any kind whatsoever, including any interest, penalty or additions thereto. "Trustee" means Harris Trust and Savings Bank. "UCC" means the Uniform Commercial Code as in effect from time to time in the State of Arizona, and in any and all other states in which Borrower and/or any of its Subsidiaries conduct, or are authorized to conduct business. "UDCC" means Ugly Duckling Credit Corp., an Arizona corporation formerly known as Champion Acceptance Corporation. "UDCS" means Ugly Duckling Car Sales and Finance Corporation, an Arizona corporation formerly known as Duck Ventures, Inc. "UDRC" shall mean Ugly Duckling Receivables Corp., a Delaware corporation. "UDRC II" shall means Ugly Duckling Receivable Corp. II, a Delaware corporation. "UDRC Class B Certificates" shall mean the issued and outstanding Class B Certificates issued by each Securitization Trust with respect to which UDRC is the seller, including those set forth on Schedule F, which constitute all of the UDRC Class B Certificates in existence on the Closing Date. Page - 8 "UDRC II Class B Certificates" shall mean the currently issued and outstanding, and all further issued and then outstanding, Class B Certificates issued by each of Securitization Trust with respect to which UDRC II is the seller, including those set forth on Schedule F, which constitute all of the UDRCII Class B Certificates in existence on the Closing Date. "UDRC Dividend Direction Letter" means the letter dated November __, 1998 in which Lender, UDRC, UDCC and Trustee agree that Trustee shall pay all distributions in respect of the UDRC Class B Certificates directly to Lender. "UDRC II Dividend Direction Letter" means the letter dated November __, 1998 in which Lender, UDRC II, UDCC and Trustee agree that Trustee shall pay all distributions in respect of the UDRC II Class B Certificates directly to Lender. "UDRC Securitization Documents" shall mean each of (i) the purchase agreements listed on Exhibit B hereto, (ii) the pooling and servicing agreements listed on Exhibit B hereto, (iii) any similar purchase agreements or pooling and servicing agreements entered into or acknowledged by Borrower, UDCC, UDRC or any Affiliate of any of them after the date hereof, and (iv) the other agreements, instruments, certificates and documents entered into or acknowledged by Borrower, UDCC, UDRC or any Affiliate of any of them or by a Securitization Trust. "UDRC II Securitization Documents" shall mean each of (i) the purchase agreements listed on Exhibit B hereto, (ii) the pooling and servicing agreements listed on Exhibit B hereto, (iii) any similar purchase agreements or pooling and servicing agreements entered into or acknowledged by Borrower, UDCC, UDRC II or any Affiliate of any of them after the date hereof, and (iv) the other agreements, instruments, certificates and documents entered into or acknowledged by Borrower, UDCC, UDRC II or any Affiliate of any of them or by a Securitization Trust. "UDRC Standing Dividend Resolution" shall mean the resolution adopted on January 27, 1998 by the board of directors of UDRC (formerly Champion Receivables Corp.) to the effect that any amounts received as distributions on the UDRC Class B Certificates should be promptly distributed to Lender. "UDRC II Standing Dividend Resolution" shall mean the resolution adopted on January 27, 1998 by the board of directors of UDRC II (formerly Champion Receivables Corp. II) to the effect that any amounts received as distributions on the UDRC II Class B Certificates should be promptly distributed to Lender. "Ugly Duckling Collateral" shall mean any installment contracts or conditional sales contracts, with any amendments thereto, originated by Borrower or its Subsidiaries pursuant to which a person has: (i) purchased a new or used motor vehicle, (ii) granted a security interest in the motor vehicle, and (iii) agreed to pay the unpaid purchase price and a finance charge in periodic installments. Page - 9 "United States" and "U.S." each means the United States of America. "Voidable Transfer" has the meaning set forth in Section 9.17. I.2 Other Interpretive Provisions. (a) Defined Terms. Unless otherwise specified herein or therein, all terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto. The meaning of defined terms shall be equally applicable to the singular and plural forms of the defined terms. Terms (including uncapitalized terms) not otherwise defined herein, and that are defined in the UCC shall have the meanings therein described. (b) The Agreement. The words "hereof", "herein", "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement; and section, schedule and exhibit references are to this Agreement unless otherwise specified. (c) Certain Common Terms. (i)......The term "documents" includes any and all instruments, documents, agreements, certificates, indentures, notices and other writings, however evidenced. (ii).....The term "including" is not limiting and means "including without limitation". (iii)....The term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or". (d) Performance; Time. Whenever any performance obligation hereunder (other than a payment obligation) shall be stated to be due or required to be satisfied on a day other than a Business Day, such performance shall be made or satisfied on the next succeeding Business Day. In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding"; and the word "through" means "to and including". If any provision of this Agreement refers to any action taken or to be taken by any Person, or which such Person is prohibited from taking, such provision shall be interpreted to encompass any and all means, direct or indirect, of taking, or not taking, such action. (e) Contracts. Unless otherwise expressly provided herein, references to agreements and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of any Loan Document. Page - 10 (f) Laws. References to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting the statute or regulation. (g) Captions. The captions and headings of this Agreement are for convenience of reference only and shall not affect the construction of this Agreement. (h) Independence of Provisions. The parties acknowledge that this Agreement and other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters, and that such limitations, tests and measurements are cumulative and must each be performed, except as expressly stated to the contrary in this Agreement. I.3 Accounting Principles. (a) Unless the context otherwise clearly requires, all accounting terms not expressly defined herein shall be construed, and all financial computations required under this Agreement shall be made, in accordance with GAAP, consistently applied. In the event that GAAP changes during the term of this Agreement such that the covenants contained in Article VI would then be calculated in a different manner or with different components, (i) Borrower and Lender agree to amend this Agreement in such respects as are necessary to conform those covenants as criteria for evaluating Borrower's financial condition to substantially the same criteria as were effective prior to such change in GAAP and (ii) Borrower shall be deemed to be in compliance with the covenants contained in Article VI following any such change in GAAP if and to the extent that Borrower would have been in compliance therewith under GAAP as in effect immediately prior to such change. (b) References herein to "fiscal year" and "fiscal quarter" refer to such fiscal periods of Borrower. I.4 Times. All times of the day herein are New York City time. ARTICLE II THE LOAN II.1 The Loan. Lender, on the terms and conditions hereinafter set forth and the conditions precedent pursuant to Section 4.1 of this Agreement, agrees to make the Loan to Borrower in the Initial Principal Amount. II.2 Payment Upon Collections. Upon Borrower's receipt of any Collections, Borrower shall promptly (and in any event within one (1) Business Day) pay such Collections to Lender. Lender shall apply such Collections and any Page - 11 Collections paid directly to Lender by Trustee in accordance with the procedures set forth in Section 2.6; provided, however, Lender shall remit to Borrower any Collections received by Lender on or prior to November 30, 1998, except for the portion of such Collections equal to the amount of accrued interest on the Obligations through the date on which such Collections are received, which retained Collections shall be applied in accordance with the procedures set forth in Section 2.6. II.3 Payment Upon Maturity. On the Maturity Date, Borrower will pay to Lender an amount equal to the Outstanding Principal Amount of the Loan, together with all accrued and unpaid interest on the Loan and any other accrued and unpaid Obligations. II.4 Interest. (a) Interest Rate. Interest shall accrue on the Outstanding Principal Amount of the Loan during each Interest Accrual Period at a rate per annum equal to LIBOR for such Interest Accrual Period plus four hundred basis points (the "Initial Interest Rate"). In addition, after the occurrence of and during the continuance of any Event of Default under Section 8.1 of this Agreement, the Outstanding Principal Amount of the Loan together with all accrued and unpaid interest on the Loan and any other accrued and unpaid Obligations due and payable to Lender under this Agreement shall bear interest at a rate per annum which shall be 500 basis points above the Initial Interest Rate. (b) Limitation on Interest Rate. The obligations of Borrower hereunder shall be subject to the limitation that payments of interest, plus any other amounts paid in connection herewith, shall not be required, to the extent (but only to the extent) that contracting for or receiving such payment by Lender would be contrary to the provisions of any law applicable to Lender limiting the highest rate of interest which may be lawfully contracted for, charged or received by Lender, and in such event Borrower shall pay Lender interest and other amounts at the highest rate permitted by applicable law. II.5 Voluntary Prepayments. Borrower shall have the right, at its option, to prepay its obligations under the Loan in whole or in part at any time (in a minimum amount of $100,000 and an integral multiple of $10,000, or such lesser amount as is then outstanding). Borrower shall give Lender at least one Business Day prior notice of its intention to prepay, specifying the date of payment, the total amount and portion of the Loan to be paid on such date and the amount of interest to be paid with such prepayment. II.6 Application of Payments. All payments on the Loan shall be applied, without duplication, in the following order: (a) First, to Lender for application to overdue interest on the Obligations; (b) Second, to Lender for application to accrued interest on the Obligations; Page - 12 (c) Third, to Lender for application to the Outstanding Principal Amount; (d) Fourth, to Lender for any and all sums advanced by Lender as are reasonably necessary in order to preserve the Collateral or its security interest in the Collateral and all reasonable expenses of taking, holding, preparing for sale or lease, selling or otherwise disposing of or realizing on the Collateral or of any exercise by Lender of its rights under this Agreement, together with reasonable Attorney Costs; and (e) Fifth, to all other accrued and unpaid Obligations. II.7 Prepayment. Upon any prepayment of the Loan, Borrower shall pay to Lender the principal amount to be prepaid, together with all accrued and unpaid interest on the Loan through the date of prepayment. Notice of prepayment having been given in accordance with Section 2.5, the amount specified to be prepaid shall become due and payable on the date specified for prepayment. II.8 Fees. (a) Commitment Fee. Borrower shall pay to Lender a commitment fee equal to one percent (1.00%) of the Initial Principal Amount on the Closing Date, which fee shall be subtracted on the Closing Date from the proceeds of the Loan. (b) Late Payment Fee. In the event the Outstanding Principal Amount of the Loan, together with all accrued and unpaid interest on the Loan and any other accrued and unpaid Obligations are not paid in full on or prior to the Maturity Date, Borrower shall pay Lender a late payment fee equal to one percent (1.00%) of the Initial Principal Amount. II.9 Fees and Interest. All computations of fees and interest under this Agreement shall be made on the basis of a 360-day year and actual days elapsed, which results in more interest being paid than if computed on the basis of a 365-day year. Interest and fees shall accrue during each Interest Accrual Period during which interest or such fees are computed from the first day thereof to the last day thereof. Borrower shall pay to Lender all accrued and unpaid interest on each Payment Date. II.10 Payments by Borrower. Page - 13 (a) All payments (including prepayments) to be made by Borrower on account of principal, interest, fees and other amounts required hereunder shall be made without set-off, deduction, recoupment or counterclaim and shall, except as otherwise expressly provided herein, be made to Lender at Lender's office as set forth in the preamble hereto, in dollars and in immediately available funds, no later than 3:00 p.m. on the date specified herein. Any payment which is received by Lender later than 3:00 p.m. shall be deemed to have been received on the immediately succeeding Business Day and any applicable interest or fee shall continue to accrue. (b) Whenever any payment hereunder shall be stated to be due on a day, other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or fees, as the case may be. (c) If any payment of interest or Lender Expenses is not received by Lender, within ten (10) days of the date when the same is due, Borrower shall pay to Lender a late charge in an amount equal to five percent (5%) of the amount not so paid. ARTICLE III SECURITY AGREEMENT AND COLLATERAL III.1 Security for Obligations. As security for the payment and performance of the Obligations under this Agreement and all other present and future debts, obligations and liabilities of any nature whatsoever of Borrower to Lender, and all modifications, renewals, replacements and extensions thereof, UDCS shall grant Lender a security interest in the Collateral pursuant to the Stock Pledge Agreement. Borrower shall cause UDCS to execute and deliver the Stock Pledge Agreement and to perform its obligations thereunder. Borrower will execute, and shall cause UDCS to execute, any security agreements, collateral assignments, financing statements for filing and/or recording and any other Lien writings reasonably required by Lender to evidence and perfect the Liens and security interests of Lender. A carbon, photographic or other reproduced copy of this Agreement and/or any financing statement relating hereto shall be sufficient for filing and/or recording as a financing statement. III.2 Security Documents. Borrower shall promptly execute or cause to be executed the Financing Statements and such other financing statements and notices as are necessary to properly perfect Lender's security interest in the Collateral. III.3 Lender's Duty Regarding Collateral. Lender shall have no duty or obligation to protect, insure, collect or realize upon the Collateral or preserve rights in it against prior parties. Borrower releases Lender from, and shall indemnify Lender against, any liability for any act or omission relating to the Collateral, except for any liability directly resulting from Lender's gross negligence or willful misconduct. III.4 Borrower's Duties Regarding Collateral. Borrower agrees as follows: Page - 14 (a) General Maintenance of Collateral. Borrower: (i) shall keep the Collateral free from all Liens (other than the Liens of ad valorem property taxes which are not delinquent, any statutory landlords' liens which are covered by lien waivers satisfactory to Lender, mechanic's liens, Permitted Liens, and any Liens in favor of Lender); (ii) shall defend the Collateral against all claims and legal proceedings by persons other than Lender; (iii) shall pay and discharge when due all taxes, levies and other charges upon the Collateral; (iv) shall cause UDCS not to sell, lease or otherwise dispose of the Collateral; and (v) shall not permit the Collateral to be used in violation of any Requirement of Law or any policy of insurance. (b) Perfection and Priority. Borrower shall pay all Lender's Expenses and, upon Lender's request, execute all writings and take all other actions reasonably deemed advisable by Lender to preserve the Collateral or to establish, and determine priority of, perfection, continued perfection or enforce Lender's interest in the Collateral. (c) Records and Inspections. Upon reasonable notice to Borrower, Lender may examine and conduct audits of the Collateral, and Borrower's and UDCS's records concerning it, wherever located, and make copies of such records, at any time during normal business hours, and Borrower shall assist Lender in so doing. Borrower shall keep accurate, complete and current records respecting the Collateral. In addition to the specific requirements of Section 6.1, Borrower shall, within ten (10) Business Days of any request by Lender, furnish to Lender a detailed statement, certified as being substantially accurate by a Responsible Officer, setting forth the current status, value and location of all or any portion of the Collateral. III.5 Power of Attorney. Borrower hereby makes, constitutes and appoints Lender the true and lawful attorney-in-fact of Borrower, in the name, place and stead of Borrower, or otherwise, upon the occurrence of any Event of Default which remains uncured following the receipt of a notice pursuant to Section 9.2: (a) To take all actions and to execute, acknowledge, obtain and deliver any and all writings necessary or deemed advisable by Lender in order to exercise any rights of Borrower with respect to the Collateral or to receive and enforce any payment or performance due to Borrower with respect to the Collateral; (b) To give any notices, instructions or other communications to any person or entity in connection with the Collateral; (c) To demand and receive all performances due under or with respect to the Collateral and to take all lawful steps to enforce such performances and to compromise and settle any claim or cause of action of Borrower arising from or related to the Collateral and give acquittances and other discharges relating thereto; and Page - 15 (d) To file any claim or proceeding or to take any other action, in the name of Lender, Borrower or otherwise, to enforce performances due under or related to the Collateral or to protect and preserve the right, title and interest of Lender thereunder. The foregoing power of attorney is a power coupled with an interest and shall be irrevocable and unaffected by the disability of the principal so long as any portion of the Obligations remains contingent, unmatured, unliquidated, unpaid or unperformed. Lender shall have no obligation to exercise any of the foregoing rights and powers in any event. III.6 Collateral Inspections. Lender shall have the right (but not the obligation) to do a physical on-site examination of the Collateral. All costs and expenses associated therewith shall be included in Lender Expenses. ARTICLE IV CONDITIONS PRECEDENT; TERM OF AGREEMENT IV.1 Conditions Precedent. Lender shall not make the Loan hereunder if Borrower has not fulfilled to the satisfaction of Lender and its counsel, each of the following conditions on or before the Closing Date; provided, however, that Lender, in its sole and absolute discretion, may waive any of the following conditions. IV.2 Receipt of Documents. Lender shall have received each of the following documents, duly executed, and each such document shall be in full force and effect: (a) This Agreement executed by Borrower and Lender; (b) The Stock Pledge Agreement; (c) The certificate or certificates representing the Collateral, together with stock powers executed in blank (the "Stock Powers"); (d) The Financing Statements executed by Borrower and Lender; (e) The UDRC Dividend Direction Letter; (f) The UDRC II Dividend Direction Letter; (g) The UDRC Standing Dividend Resolution certified by UDRC's Secretary; (h) The UDRC II Standing Dividend Resolution certified by UDRCII's Secretary; Page -16 (i) A consent and subordination from GECC consenting to the execution, delivery and performance by Borrower and UDCS of the Loan Documents and subordinating to Lender GECC's Lien on any assets constituting Collateral; (j) Certified copies of the resolutions of the board of directors of Borrower approving and authorizing the execution, delivery and performance by Borrower of this Agreement and the other Loan Documents to be delivered hereunder, and authorizing the Loan, certified as of the Closing Date by the Secretary or an Assistant Secretary of Borrower; (k) A certificate of the Secretary or Assistant Secretary of Borrower certifying the names and true signatures of the officers of Borrower authorized to execute, deliver and perform, as applicable, this Agreement, the Stock Pledge Agreement and all other Loan Documents to be delivered hereunder; (l) Certified copies of the resolutions of the board of directors of UDCS approving and authorizing the execution, delivery and performance by UDCS of the applicable Loan Documents to be delivered hereunder, certified as of the Closing Date by the Secretary or an Assistant Secretary of UDCS; (m) A certificate of the Secretary or Assistant Secretary of UDCS certifying the names and true signatures of the officers of UDCS authorized to execute, deliver and perform the Stock Pledge Agreement and all other applicable Loan Documents to be delivered hereunder; (n) Copies of each of Borrower's, UDCS's, UDRC's and UDRC II's certificate of incorporation certified by the Secretary of the State of their respective jurisdictions of incorporation and bylaws certified by their respective Secretaries or Assistant Secretaries; (o) Good standing certificates for the jurisdiction of incorporation and the jurisdiction in which the chief executive office is located for each of Borrower, UDCS, UDRC and UDRC II; (p) A copy of lien searches, completed as of a recent date, against Borrower and UDCS, in such jurisdictions as shall be satisfactory to Lender and its counsel; (q) Legal opinions from counsel for Borrower with respect to the transactions contemplated by the Loan Documents, which opinions shall be in form and substance satisfactory to Lender and from counsel satisfactory to Lender. Page - 17 IV.3 Term. This Agreement shall become effective upon the execution and delivery hereby by Borrower and Lender and shall continue in full force and effect for a term ending on the earliest of (a) the Repayment Date, or (b) the date of termination of this Agreement in accordance with its terms after the occurrence and during the continuation of an Event of Default. IV.4 Effect of Termination. Upon termination of this Agreement, all Obligations shall become due and payable immediately without notice or demand. No termination of this Agreement, however, shall relieve or discharge Borrower of Borrower's duties, Obligations, or covenants hereunder, and Lender's continuing security interest in the Collateral shall remain in effect until all Obligations have been fully and finally discharged. ARTICLE V REPRESENTATIONS AND WARRANTIES In order to induce Lender to enter into this Agreement and make the Loan, Borrower makes the following representations and warranties which shall be true, correct, and complete in all respects as of the date hereof, and shall be true, correct, and complete in all respects as of the Closing Date (except to the extent that such representations and warranties relate solely to an earlier date) and such representations and warranties shall survive the execution and delivery of this Agreement: V.1 No Encumbrances. UDCS has good and indefeasible title to the Collateral, free and clear of Liens except for Permitted Liens. V.2 Location of Chief Executive Office; FEIN. The chief executive office of Borrower is located at the address indicated in the preamble to this Agreement and Borrower's FEIN is 86-0721358. V.3 Due Organization and Qualification; Subsidiaries. (a) Borrower is duly organized and existing and in good standing under the laws of the jurisdiction of its incorporation and qualified and licensed to do business in, and in good standing in, any state where the failure to be so licensed or qualified reasonably could be expected to have a Material Adverse Effect. (b) Set forth on Schedule A is a complete and accurate list of Borrower's direct and indirect Subsidiaries, showing: (i) the jurisdiction of their incorporation; (ii) the number of shares of each class of Equity Interests authorized for each of such Subsidiaries; and (iii) the number and the percentage of the outstanding shares of each such class owned directly or indirectly by Borrower. All of the outstanding Equity Interests of each such Subsidiary have been validly issued and are fully paid and non-assessable. Page - 18 (c) Except as set forth on Schedule B, no Equity Interests (or any securities, instruments, warrants, options, purchase rights, conversion or exchange rights, calls, commitments or claims of any character convertible into or exercisable for Equity Interests) of any direct or indirect Subsidiary of Borrower is subject to the issuance of any security, instrument, warrant, option, purchase right, conversion or exchange right, call, commitment or claim of any right, title, or interest therein or thereto. V.4 Due Authorization: No Conflict. (a) The execution, delivery, and performance by Borrower of this Agreement and the Loan Documents to which it is a party have been duly authorized by all necessary corporate action. (b) The execution, delivery, and performance by Borrower of this Agreement and the Loan Documents to which it is a party do not and will not (i) violate any provision of federal, state, or local law or regulation (including Regulations G, T, U, and X of the Federal Reserve Board) applicable to Borrower, the Governing Documents of Borrower, or any order, judgment, or decree of any court or other Governmental Authority binding on Borrower, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation or material lease of Borrower, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of such Borrower, other than Permitted Liens, or (iv) require any approval of stockholders or any approval or consent of any Person under any material contractual obligation of Borrower. (c) Other than the taking of any other action expressly required under this Agreement and the Loan Documents, the execution, delivery, and performance by Borrower of this Agreement and the Loan Documents to which Borrower is a party do not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any federal, state, foreign, or other Governmental Authority or other Person. (d) This Agreement, the Loan Documents and all other documents contemplated hereby and thereby, when executed and delivered by Borrower, will be the legally valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors' rights generally. (e) The Pledge Agreement and the Stock Powers, when executed and delivered by UDCS, will be the legally valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors' rights generally. (f) The Lien granted by UDCS on the Collateral is a validly created and perfected Lien, subject to no other Liens. Page - 19 V.5 Litigation. Except as set forth in Schedule C, there are no actions or proceedings pending by or against Borrower before any court or administrative agency and Borrower does not have knowledge or belief of any pending, threatened, or imminent litigation, governmental investigations, or claims, complaints, actions, or prosecutions involving Borrower, except for: (a) ongoing collection matters in which Borrower is the plaintiff and (b) matters that, if decided adversely to Borrower, would not have a Material Adverse Effect. V.6 Financial Statements; No Material Adverse Change. All financial statements relating to Borrower, UDRC and UDRC II that have been delivered by Borrower to Lender have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and fairly present the financial condition as of the date thereof and the results of operations for the period then ended for Borrower and its consolidated Subsidiaries, except as disclosed on Schedule D. There has not been a Material Adverse Change with respect to Borrower since the date of the latest financial statements submitted to Lender on or before the Closing Date. V.7 Securitization Documents. Borrower, UDRC and UDRC II and each of their Affiliates are in full compliance with their respective obligations under the UDRC Securitization Documents and the UDRC II Securitization Documents, and no Securitization Default exists. V.8 ERISA. No accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, exists with respect to any plan (other than a multiemployer plan). No liability to the Pension Benefit Guaranty Corporation has been or is expected by Borrower to be incurred with respect to any plan (other than a multiemployer plan) by Borrower which is or would have a Material Adverse Effect. Borrower has not incurred or does not presently expect to incur any withdrawal liability under Title IV of ERISA with respect to any multiemployer plan which is or would be materially adverse to Borrower. The execution and delivery of this Agreement and the other Loan Documents will not involve any transaction which is subject to the prohibitions of Section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975 of the Code. For the purpose of this Section 5.8, the term "plan" shall mean an "employee pension benefit plan" (as defined in section 3 of ERISA) which is or has been established or maintained, or to which contributions are or have been made, by Borrower or by any trade or business, whether or not incorporated, which, together with Borrower, is under common control, as described in Section 414(b) or (c) of the Code; and the term "multiemployer plan" shall mean any plan which is a "multiemployer plan" (as such term is defined in Section 4001(a)(3) of ERISA). No plan providing welfare benefits to retired former employees of Borrower has been established or is maintained for which the present value of future benefits payable, in excess of irrevocably designated funds for such purpose, is or would have a Material Adverse Effect. Page - 20 V.9 Environmental and Safety Matters. Borrower (a) has complied in all material respects with all applicable material Environmental and Safety Laws, and Borrower has not received (i) notice of any material failure so to comply, (ii) any letter or request for information under Section 104 of CERCLA or comparable state laws or (iii) any information that would lead it to believe that it is the subject of any Federal or state investigation concerning Environmental and Safety Laws; (b) does not manage, generate, discharge or store any Hazardous Materials in material violation of any material Environmental and Safety Laws; (c) does not own, operate or maintain any underground storage tanks or surface impoundments; and (d) except as disclosed to Lender in writing, is not aware of any conditions or circumstances associated with its currently or previously owned or leased properties or operations (or those of its tenants) which may give rise to any Environmental Liabilities and Costs which could have a Material Adverse Effect. V.10 Tax Matters. Each of Borrower and its Subsidiaries has filed all tax returns that it was required to file. All such tax returns were correct and complete in all material respects. All Taxes owed by any of Borrower and its Subsidiaries have been paid. ARTICLE VI AFFIRMATIVE COVENANTS Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, and unless Lender shall otherwise consent in writing, Borrower shall do all of the following: VI.1 Financial Statements and Other Documents. Borrower shall deliver to Lender in form and detail satisfactory to Lender: (a) Within 45 days of the end of each fiscal quarter, Borrower's unaudited financial statements for such quarter, and, within 90 days of the end of Borrower's fiscal year, Borrower's audited financial statements for such period, certified by Borrower's Chief Financial Officer or Treasurer as fairly presenting in all material respects, in accordance with GAAP (subject, in the case of unaudited financial statements, to ordinary, good faith year-end adjustments and to the absence of footnote disclosure), the financial position and results of operations of Borrower; (b) Promptly upon receipt thereof, any financial statements of Borrower distributed to other lenders or financing parties; (c) Promptly upon preparation thereof, a copy of each other report, if any, submitted to Borrower by independent accountants in connection with any annual, interim or special audit made by them of the books of Borrower; (d) Promptly after its submission, copies of any other information or documents regularly provided by Borrower to any of its other lenders or holders of Borrower's Debt; Page - 21 (e) Promptly upon receipt thereof, copies of any other information or documents received by borrower pursuant to the UDRC Securitization Documents and the UDRC II Securitization Documents; (f) With reasonable promptness, such other financial data as Lender may reasonably request; and (g) Promptly upon receipt thereof, (i) copies of any federal revenue agent's reports (so called "thirty-day letter") issued by the IRS, and copies of any equivalent documents from state or local tax authorities; (ii) copies of any federal notice of deficiency (so-called "ninety-day letters") issued by the IRS, and copies of any equivalent documents from state or local tax authorities; and (iii) copies of any information requests or document requests received from federal, state or local tax authorities that are not in the ordinary course of business. VI.2 Inspection of Property. Borrower shall permit any Person designated by Lender in writing, to visit and inspect any of the properties of Borrower, to examine the corporate books and financial records of Borrower and make copies thereof or extracts therefrom and to discuss the affairs, finances and accounts of any of such corporations with the principal officers of Borrower and its independent public accountants, all at such reasonable times and as often as Lender may reasonably request. VI.3 Default Disclosure. (a) Borrower shall forthwith, upon a Responsible Officer of Borrower obtaining knowledge of an Event of Default or Default, promptly deliver to Lender a certificate of a Responsible Officer specifying the nature and period of existence thereof and what action Borrower proposes to take with respect thereto. (b) Borrower shall forthwith, upon a Responsible Officer of Borrower obtaining knowledge of a Securitization Default, promptly deliver to Lender a certificate of a Responsible Officer specifying the nature and period of existence thereof, what action the defaulting party proposes to take with respect thereto, and what action Borrower proposes to take with respect thereto. VI.4 Notices to Lender. Borrower shall promptly notify Lender in writing of: (a) Any lawsuit over One Hundred Thousand Dollars ($100,000) against Borrower; (b) Any substantial dispute between Borrower and any Governmental Authority; or (c) Any change in Borrower's name, address, or legal structure. Page - 22 VI.5 Books and Records. Borrower shall maintain adequate books and records. VI.6 Compliance and Preservation. Borrower shall: (a) Comply with the laws (including any fictitious name statute), regulations and orders of any government body with authority over Borrower's business; (b) Maintain and preserve all privileges and franchises Borrower now has; and (c) Make any repairs, renewals, or replacements reasonably necessary to keep Borrower's properties in good working condition. VI.7 Perfection of Liens. Borrower shall help Lender perfect and protect its security interests and liens. VI.8 Cooperation. Borrower shall take any reasonable action requested by Lender to carry out the intent of this Agreement. VI.9 Use of Proceeds. Borrower shall use the proceeds of the Loan for general working capital to facilitate ongoing growth in Borrower's core operations. VI.10 Securitizations. Any securitizations of the Ugly Duckling Collateral executed during the term of this Agreement shall be done through UDRC II. Borrower shall continue to execute quarterly securitizations of the Ugly Duckling Collateral during the term of this Agreement. VI.11 Compliance with Covenants. Borrower shall perform, keep or observe any term, provision, condition or covenant or agreement contained in each Bond Insurance Policy, the GECC Agreement and any other agreement evidencing Indebtedness. VI.12 Payment of Indebtedness. Borrower shall timely pay and shall cause its Subsidiaries to timely pay all Indebtedness which, if not paid, could result in the imposition of a Lien on any of the assets of UDRC or UDRC II. VI.13 Tangible Net Worth. Borrower shall maintain a consolidated Tangible Net Worth of net less than $100,000,000. VI.14 Debt to Tangible Net Worth. Borrower shall maintain a ratio of (i) the principal amount of Debt of Borrower and its consolidated Subsidiaries to (ii) Tangible Net Worth of no greater than 2.1 to 1. Page - 23 ARTICLE VII NEGATIVE COVENANTS Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, Borrower will not do any of the following without Lender's prior written consent: VII.1 Liens. Create, incur, assume, or permit to exist, directly or indirectly, any lien on or with respect to any of the assets of UDRC and UDRC II, including the UDRC Class B Certificates, the UDRC II Class B Certificates, or any income or profits from any of the foregoing, except for Permitted Liens listed on Schedule E or liens of Lender. VII.2 Indebtedness. Permit UDRC or UDRC II to incur, assume, or permit to exist, directly or indirectly any Indebtedness. VII.3 Restrictions on Fundamental Changes. Enter into any merger, consolidation, reorganization, or recapitalization, or reclassify its capital stock, or liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, assign, lease, transfer, or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its property or assets. VII.4 Disposal of Collateral. Except as expressly consented to by Lender in writing, sell, lease, assign, transfer, or otherwise dispose of any of the Collateral. VII.5 Change Name. Without giving thirty (30) days prior written notification to Lender, change Borrower's name, FEIN, corporate structure (within the meaning of Section 9402(7) of the Code), or identity, or add any new fictitious name. VII.6 Amendments. Except as expressly consented to by Lender in writing, directly or indirectly, amend, modify, alter, increase, or change any of the terms or conditions of the UDRC Securitization Documents or the UDRC II Securitization Documents. VII.7 Change of Control. Cause, permit, or suffer, directly or indirectly, any Change of Control. VII.8 Distributions. Make any distribution or declare or pay any dividends (in cash or other property, other than capital stock) on, or purchase, acquire, redeem, or retire any of Borrower's capital stock, of any class, whether now or hereafter outstanding, for cash, other than the buyback of 1,000,000 shares of Borrower's common stock previously approved by Borrower's Board of Directors. Page - 24 VII.9 Standing Dividend Resolutions. Permit UDRC to rescind, amend, modify, revoke or alter the UDRC Standing Dividend Resolution or permit UDRC II to rescind, amend, modify, revoke or alter the UDRC II Standing Dividend Resolution. VII.10 Change in Location of Chief Executive Office. Relocate its chief executive office to a new location without providing 30 days prior written notification thereof to Lender and so long as, at the time of such written notification, Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected Lender's security interests and also provides to Lender a Collateral access agreement with respect to such new location. VII.11 No Prohibited Transactions Under ERISA. Directly or indirectly: (a) Engage, or permit any Subsidiary of Borrower to engage, in any prohibited transaction which is reasonably likely to result in a civil penalty or excise tax described in Sections 406 of ERISA or 4975 of the Code for which a statutory or class exemption is not available or a private exemption has not been previously obtained from the Department of Labor; (b) Permit to exist with respect to any Benefit Plan any accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of the Code), whether or not waived; (c) Fail, or permit any Subsidiary of Borrower to fail, to pay timely required contributions or annual installments due with respect to any waived funding deficiency to any Benefit Plan; (d) Terminate, or permit any Subsidiary of Borrower to terminate, any Benefit Plan where such event would result in any liability of Borrower or any of its Subsidiaries under Title IV of ERISA; (e) Fail, or permit any Subsidiary of Borrower to fail, to make any required contribution or payment to any Multiemployer Plan; (f) Fail, or permit any Subsidiary of Borrower to fail, to pay any required installment or any other payment required under Section 412 of the Code on or before the due date for such installment or other payment; (g) Amend, or permit any Subsidiary of Borrower to amend, a retirement plan resulting in an increase in current liability for the plan year such that either of Borrower or any Subsidiary of Borrower is required to provide security to such retirement plan under Section 401 (a)(29) of the Code; or Page - 25 (h) Withdraw, or permit any Subsidiary of Borrower to withdraw, from any Multiemployer Plan where such withdrawal is reasonably likely to result in any liability of any such entity under Title IV of ERISA. VII.12 Stock Buyback Program. Use the proceeds of the Loan to facilitate a stock buyback program. VII.13 Verde Subordinated Debt. Repay any portion of the $10 million loan from Verde Investments without Lender's prior written consent. ARTICLE VIII EVENTS OF DEFAULT/REMEDIES VIII.1 Event of Default. Any of the following shall constitute an "Event of Default": (a) If Borrower fails to pay when due and payable or when declared due and payable, any portion of the Obligations (whether of principal, interest, fees and charges due Lender, reimbursement of Lender Costs, or other amounts constituting Obligations); (b) If Borrower fails to perform, keep, or observe any term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other future agreement between Borrower and Lender; (c) If there is a Material Adverse Change with respect to Borrower, UDRC or UDRC II (the occurrence or non-occurrence of which shall be determined by Lender in the exercise of its reasonable discretion); (d) If Borrower is enjoined or restrained, by court order from continuing to conduct all or any material part of its business affairs, unless such order is stayed; (e) If notices of any Lien, levy, or assessment in excess of $250,000 other than of Permitted Liens are filed of record with respect to any of Borrower's properties or assets which have not been cured within ten (10) days after the Lien has been filed; (f) If a judgment or other claim in excess of $250,000 becomes a Lien or encumbrance upon any material portion of Borrower's properties or assets and such judgment is not removed or released within 15 days of the entry of such judgment; Page - 26 (g) If Borrower makes any payment on account of Indebtedness that has been contractually subordinated in right of payment to the payment of the Obligations, except to the extent such payment is permitted by the terms of the subordination provisions applicable to such Indebtedness; (h) If any material misstatement or misrepresentation exists now or hereafter in any warranty, representation, statement, or report made to Lender by Borrower or any officer, employee, agent, or director of Borrower which has not been corrected to date, or if any such warranty or representation is withdrawn; (i) If Borrower rescinds, amends, alters, revokes or modifies (or permits UDRC or UDRC II to rescind, amend, alter, revoke or modify) the UDRC Standing Dividend Resolution or the UDRC II Standing Dividend Resolution in any respect; (j) If a default or event of default occurs under the GECC Agreement or under the terms of any other Indebtedness in excess of $1,000,000 or there is a termination event under the terms of any Bond Insurance Policy (or the policy of another bond insurer), regardless of whether such default or termination event is waived or amended; or (k) If Borrower or any of its Subsidiaries makes a general assignment for the benefit of creditors, or an order, judgment or decree is entered adjudicating the Company or any of its Subsidiaries bankrupt or insolvent, or any order for relief with respect to the Company is entered under the Federal Bankruptcy Code, or Borrower or any of its Subsidiaries petitions or applies to any tribunal for the appointment of a custodian, trustee, receiver or liquidator of Borrower or any of its Subsidiaries or of any substantial part of the assets of the Company or any of its Subsidiaries, or commences any proceeding relating to the Company or any of its Subsidiaries under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, or any such petition or application is filed, or any such proceeding is commenced against the Company or any of its Subsidiaries. VIII.2 Lender's Rights and Remedies. Subject to the occurrence, and during the continuation, of an Event of Default, Lender shall provide Borrower with written notice thereof and the option to cure. If Borrower fails to cure such Event of Default within ten (10) days after delivery of such written notice, Lender may, at its sole and absolute discretion, without further notice, do any one or more of the following, all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable; (b) Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of Lender, but without affecting Lender's rights and security interests in the Collateral and without affecting the Obligations; Page - 27 (c) Without notice to or demand upon Borrower, make such payments and do such acts as Lender considers necessary or reasonable to protect its security interests in the Collateral; (d) Without notice to Borrower (such notice being expressly waived), and without constituting a retention of any collateral in satisfaction of an obligation (within the meaning of Section 9-505 of the UCC), set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Lender, or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Lender; or (e) Collect, receive, appropriate and realize upon the Collateral, on such terms as Lender, in its sole and absolute discretion, deems appropriate without any liability for any loss due a decrease in the market value of the Collateral during the period held, without demand of performance or other demand, advertisement or notice of any kind, except as specified below, to or upon Borrower or any other person (all and each of which demands, advertisements and/or notices are hereby expressly waived to the extent permitted by law). If any notification to Borrower of intended disposition of the Collateral is required by law, such notification shall be deemed reasonable and properly given if mailed to Borrower, postage prepaid, at least ten (10) days before any such disposition at the address indicated by Borrower's signature. Any disposition of the Collateral or any part thereof shall be free of any equity or right of redemption in Borrower, which right of equity is, to the extent permitted by applicable law, hereby expressly waived or released by Borrower. Borrower further agrees that such sale or sales made under the foregoing circumstances shall be deemed to have been made in a commercially reasonable manner. Lender shall not be obligated to make any sale or other disposition of the Collateral permitted under this Loan Agreement, unless the terms thereof shall be satisfactory to Lender. Lender's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. No exercise by Lender of one right or remedy shall be deemed an election, and no waiver by Lender of any Event of Default shall be deemed a continuing waiver. No delay by Lender shall constitute a waiver, election, or acquiescence by it. ARTICLE IX MISCELLANEOUS IX.1 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by Borrower therefrom, shall be effective unless the same shall be in writing and signed by Lender and Borrower, and then such waiver shall be effective only in the specific instance and for the specific purpose for which given. Page - 28 IX.2 Notices. (a) All notices, requests and other communications provided for hereunder shall be in writing (including, unless the context expressly otherwise provides, by facsimile transmission, provided, that, any matter transmitted by facsimile (i) shall be immediately confirmed by a telephone call to the recipient, and (ii) shall be followed promptly by a hard copy original thereof by over-night courier to the address set forth below; or to such other address as shall be designated by such party in a written notice to the other party, and as directed to each other party, at such other address as shall be designated by Lender or Borrower in a written notice to Borrower and Lender. If to Borrower:...Ugly Duckling Corporation 2525 East Camelback Road Suite 500 Phoenix, Arizona 85016 Attn: Steven P. Johnson Facsimile: (602) 552-3139 With a copy to:...Snell & Wilmer L.L.P. One Arizona Center Phoenix, Arizona 85004-0001 Attn: Timothy W. Moser Facsimile: (602) 382-6070 If to Lender:.....Greenwich Capital Financial Products, Inc. 600 Steamboat Road Greenwich, Connecticut 06830 Attn: Ira J. Platt Facsimile: (203) 622-2090 With a copy to:...Kirkland & Ellis 200 East Randolph Chicago, Illinois 60601 Attn: Kenneth P. Morrison Facsimile: (312) 861-2200 (b) All such notices, requests and communications shall, when transmitted by overnight delivery or faxed, be effective when delivered for overnight (next day) delivery, transmitted by facsimile machine, respectively, or if delivered, upon delivery, except that notices pursuant to Article II shall not be effective until actually received by Lender. Page - 29 (c) Borrower acknowledges and agrees that any agreement of Lender to receive certain notices by telephone and facsimile is solely for the convenience and at the request of Borrower. Lender shall be entitled to rely on the authority of any Person purporting to be a Person authorized by Borrower to give such notice and Lender shall not have any liability to Borrower or to other Person on account of any action taken or not taken by Lender in reliance upon such telephonic or facsimile notice. The obligations of Borrower hereunder shall not be affected in any way or to any extent by any failure by Lender to receive written confirmation of any telephonic or facsimile notice or the receipt by Lender of a confirmation which is at variance with the terms understood by Lender to be contained in the telephonic or facsimile notice. IX.3 No Waiver: Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of Lender, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. IX.4 Costs and Expenses. Borrower shall, whether or not the transactions contemplated hereby shall be consummated: (a) pay or reimburse Lender within ten (10) Business Days after demand for all Lender Costs incurred by Lender in connection with the development, preparation, delivery, administration and execution of (and any amendment, supplement, waiver or modification to in each case whether or not consummated), this Agreement, any Loan Document and any other documents prepared in connection herewith, or therewith, and the consummation of the transactions contemplated hereby and thereby, including the reasonable Attorney Costs incurred by Lender with respect thereto; (b) pay or reimburse Lender within ten (10) Business Days after demand for all Lender Costs incurred by Lender in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement, any other Loan Document, and any such other documents, including reasonable Attorney Costs incurred by Lender; and (c) pay or reimburse Lender within ten (10) Business Days after demand for all reasonable appraisal (including the allocated cost of internal appraisal services), audit, due diligence, monitoring review, environmental inspection and review (including the allocated cost of such internal services), search and filing costs, fees and expenses, incurred or sustained by Lender in connection with the Loan, the Loan Documents, any of the Obligations and the matters referred to under (a) and (b) of this Section 9.4. Page - 30 IX.5 Indemnity. Borrower shall pay, indemnify, and hold Lender, its Affiliates and Subsidiaries, and their respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses or disbursements (including Attorney Costs) of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement and any other Loan Documents, or the transactions contemplated hereby and thereby, and with respect to any investigation, litigation or proceeding related to this Agreement or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided, however, Borrower shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities arising from the gross negligence, bad faith or willful misconduct of such Indemnified Person or the breach by Lender of its obligations hereunder. The agreements in this Section 9.5 shall survive payment of all other Obligations and the termination of this Agreement. IX.6 Marshaling: Payments Set Aside. Lender shall not be under any obligation to marshal any assets in favor of Borrower or any other Person or against or in payment of any or all of the Obligations. To the extent that Borrower makes a payment or payments to Lender, or to the extent Lender enforces its Liens or exercises its rights of set-off, and such payment or payments or the proceeds of such enforcement or set-off or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party in connection with any bankruptcy, or otherwise, then to the extent of such recovery the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or set-off had not occurred. IX.7 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that Borrower may not assign or transfer any of its rights or delegate obligations under this Agreement or any of the Loan Documents without the prior written consent of Lender. IX.8 Set-off. In addition to any rights and remedies of Lender provided by law, if an Event of Default exists, and Borrower fails to cure such Event of Default within five (5) days after delivery of written notice thereof, Lender is authorized at any time and from time to time, without prior notice to Borrower, any such notice being waived by Borrower to the fullest extent permitted by law, to set off and apply any and all monies or deposits at any time held by, and other indebtedness at any time owing by, Lender to or for the credit or the account of Borrower against any and all Obligations owing to Lender, now or hereafter existing, irrespective of whether or not Lender shall have made demand under this Agreement or any Loan Document and although such Obligations may be contingent or unmatured. Lender agrees promptly to notify Borrower after any such set-off and application made by Lender; provided, however, that, the failure to give such notice shall not affect the validity of such set-off and application. The rights of Lender under this Section 9.8 are in addition to the other rights and remedies (including other rights of set-off) which Lender may have. Page - 31 IX.9 Counterparts. This Agreement may be executed by one or more of the parties to this Agreement in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute but one and the same instrument. A set of the copies of this Agreement signed by both parties shall be lodged with Borrower and Lender. IX.10 Severability. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder. IX.11 No Third Parties Benefited. This Agreement is made and entered into for the sole protection and legal benefit of Borrower and Lender, and their permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents. Lender shall have no obligation to any Person not a party to this Agreement or other Loan Documents. IX.12 Time. Time is of the essence as to each term or provision of this Agreement and each of the other Loan Documents. IX.13 Governing Law and Jurisdiction. THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, IT BEING THE INTENT OF THE PARTIES THAT THE LAW OF THE STATE OF NEW YORK SHALL GOVERN THE RIGHTS AND DUTIES OF THE PARTIES HERETO WITHOUT REGARD TO CHOICE OR CONFLICTS OF LAW PRINCIPLES; EXCEPT THAT THE PROVISIONS HEREIN THAT PERTAIN TO THE PERFECTION OR THE EFFECT OF PERFECTION OF SECURITY INTERESTS IN COLLATERAL SHALL BE GOVERNED BY THE LAWS OF SUCH STATE AS ARE SPECIFIED IN SECTION 9103 OF THE UCC. Page - 32 BORROWER AND LENDER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER AND LENDER REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. IX.14 Entire Agreement. This Agreement, together with the other Loan Documents, embodies the entire Agreement and understanding among Borrower and Lender and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof and any prior arrangements made with respect to the payment by Borrower (or any indemnification for) any Lender Costs incurred (or to be incurred) by or on behalf of Lender. IX.15 Interpretation. This Agreement is the result of negotiations between and has been reviewed by counsel to Lender, Borrower and other parties, and is the product of all parties hereto. Accordingly, this Agreement and the other Loan Documents shall not be construed against Lender merely because of Lender's involvement in the preparation of such documents and agreements. IX.16 Assignment. Lender may assign its rights hereunder and under the Loan Documents without the consent of Borrower. Borrower may not assign or delegate any of its rights, interest or obligations hereunder or under any of the Loan Documents. IX.17 Revival and Reinstatement of Obligations. If the incurrence or payment of the Obligations by Borrower or the transfer by Borrower to Lender of any property of either or both of such parties should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, and other voidable or recoverable payments of money or transfers of property (collectively, a "Voidable Transfer"), and if Lender is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that Lender is required or elects to repay or restore, and as to all reasonable costs, expenses, and Attorney Costs of Lender related thereto, the liability of Borrower automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made. * * * * * Page - 33 [Signature Page to Loan Agreement] IN WITNESS WHEREOF, the parties hereby have caused this Agreement to be executed as of the date first written above. UGLY DUCKLING CORPORATION, a Delaware corporation By: /s/ STEVEN P. JOHNSON ------------------------------ Name: Steven P. Johnson Title: Senior Vice President GREENWICH CAPITAL FINANCIAL PRODUCTS, INC., a Delaware corporation By: /s/ IRA PLATT ------------- Name: Ira Platt Title: Vice President EX-10.43(A) 7 EXHIBIT 10.43(A) STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT dated as of November 12, 1998 (the "Pledge Agreement") among UGLY DUCKLING CAR SALES AND FINANCE CORPORATION, an Arizona corporation formerly known as Duck Ventures, Inc. ("Pledgor"), as owner of all of the outstanding capital stock in Ugly Duckling Receivables Corp. ("UDRC"), a Delaware corporation, and Ugly Duckling Receivables Corp. II, a Delaware Corporation ("UDRC II"), UGLY DUCKLING CORPORATION, a Delaware corporation ("UDC") and GREENWICH CAPITAL FINANCIAL PRODUCTS, INC., a Delaware corporation ("Lender"). INTRODUCTORY STATEMENTS Pledgor is the sole holder of fifty (50) shares of common stock, $.01 par value per share in UDRC and fifty (50) shares of common stock, $.01 par value per share, in UDRC II (collectively, the "Pledged Shares"). UDC, as debtor, has on the date hereof entered into a Loan Agreement with Lender (the "Loan Agreement") pursuant to which UDC has borrowed money from Lender. Pledgor, which is wholly owned subsidiary of UDC, has agreed to pledge the Pledged Shares and any proceeds thereof as further security for the Obligations (as defined in the Loan Agreement). Accordingly, the Pledged Shares and any proceeds thereof will secure Obligations of UDC and Pledgor to Lender. Terms used herein but not defined herein shall have the meanings assigned to such terms in the Loan Agreement. In consideration of the premises and of the agreements herein contained, Pledgor, Lender and UDC agree as follows: Section 1. Definitions. (a) Capitalized terms used but not otherwise defined in this Pledge Agreement shall have the meanings specified therefor in the Loan Agreement. (b) As used herein, the term "Final Date" shall mean the date upon which all of the Obligations as defined in the Loan Agreement and all obligations under any other financing arrangement between UDC and Lender, or any Affiliate of either, have been fully paid and performed to the satisfaction of Lender. The term "Loan Documents" shall mean the Loan Agreement, this Pledge Agreement and any and all documents, instruments and agreements securing and/or relating to the Obligations of UDC or Pledgor to Lender. Section 2. Pledge of Stock and Grant of Security Interest. As security for the full and complete performance of all of the Obligations, Pledgor hereby delivers, pledges and assigns to the Lender and grants in favor of Lender a security interest in all of Pledgor's right, title and interest in and to the Pledged Shares, together with all of Pledgor's rights and privileges with respect thereto, all proceeds, income and profits thereof and all property received in exchange thereof or in substitution therefor (the "Collateral"). Page - 1 Section 3. Dividends, Options, or Other Adjustments. Until the Final Date, Pledgor shall deliver as Collateral to the Lender any and all additional shares of stock or any other property of any kind distributable on or by reason of the Collateral, whether in the form of or by way of stock dividends, warrants, total or partial liquidation, conversion, prepayments, redemptions or otherwise, including cash dividends and any cash interest payments. If any such dividends, interest payments, additional shares of capital stock, instruments, or other property, a security interest in which can only be perfected by possession, which are distributable on or by reason of the Collateral pledged hereunder, shall come into the possession or control of Pledgor, Pledgor shall forthwith transfer and deliver such property to Lender as Collateral hereunder. Section 4. Delivery of Share Certificates; Stock Powers. Pledgor shall promptly deliver to Lender, or cause UDRC or UDRC II or any other entity issuing the Collateral to deliver directly to Lender, share certificates or other instruments representing any Collateral issued to, acquired or received by Pledgor after the date of this Pledge Agreement with a stock or bond power duly executed by Pledgor. If, at any time Lender notifies Pledgor that it requires additional stock powers endorsed in blank, Pledgor shall promptly execute in blank and deliver the requested power to Lender. Section 5. Power of Attorney. Pledgor hereby constitutes and irrevocably appoints Lender as Pledgor's true and lawful attorney-in-fact, with the power, after the occurrence of an "Event of Default" under and as defined in the Loan Agreement, to the full extent permitted by law, to affix to any certificates and documents representing the Collateral, the stock or bond powers delivered with respect thereto, and to transfer or cause the transfer of Collateral, or any part thereof, on the books of UDRC or UDRC II or any other entity issuing such Collateral, to the name of Lender or any nominee of either, and thereafter to exercise with respect to such Collateral all the rights, powers and remedies of an owner. The power of attorney granted pursuant to this Pledge Agreement and all authority hereby conferred are granted and conferred solely to protect Lender's interest in the Collateral and shall not impose any duty upon Lender to exercise any power. This power of attorney shall be irrevocable as one coupled with an interest until the Final Date. Section 6. Inducing Representations of Pledgor. Pledgor represents and warrants to Lender that: (a) The Pledged Shares are validly issued, fully paid for and non-assessable. (b) The Pledged Shares represent all of the issued and outstanding capital stock of UDRC and UDRC II. (c) Pledgor is the sole legal and beneficial owner of, and has good and marketable title to, the Pledged Shares, free and clear of all pledges, liens, security interests and other encumbrances except the security interest created by this Pledge Agreement, and Pledgor has the unqualified right and authority to execute and perform this Pledge Agreement. Page - 2 (d) No options, warrants or other agreements with respect to the Collateral are outstanding. (e) Any consent, approval or authorization of or designation or filing with any authority on the part of Pledgor which is required in connection with the pledge and security interest granted under this Pledge Agreement has been obtained or effected. (f) Neither the execution and delivery of this Pledge Agreement by Pledgor, the consummation of the transaction contemplated hereby nor the satisfaction of the terms and conditions of this Pledge Agreement: (i) conflicts with or results in any breach or violation of any provision of the articles of incorporation or bylaws of Pledgor or any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award currently in effect having applicability to Pledgor or any of its properties, including regulations issued by an administrative agency or other governmental authority having supervisory powers over Pledgor; (ii) conflicts with, constitutes a default (or an event which with the giving of notice or the passage of time, or both, would constitute a default) by Pledgor under, or a breach of or contravenes any provision of, any agreement to which Pledgor or any of its subsidiaries is a party or by which it or any of their properties is or may be bound or affected, including without limitation any loan agreement, mortgage, indenture or other agreement or instrument; or (iii) results in or requires the creation of any lien upon or in respect of any of Pledgor's assets except the lien created by this Pledge Agreement. (g) With respect to all Pledged Shares heretofore delivered to and currently held by Lender, and upon delivery to Lender of any Pledged Shares hereafter issued to, acquired or received by Pledgor, Lender will have a valid, perfected security interest in and to the Collateral, enforceable as such against all other creditors of Pledgor and against all persons purporting to purchase any of the Collateral from Pledgor. (h) The board of directors of UDRC and UDRC II have duly adopted the resolutions identified on Exhibits A-1 and A-2, respectively, attached hereto (the "Standing Dividend Resolutions"), and such resolutions remains in full force and effect and have not been rescinded, amended, altered, revoked or modified in any respect. Pursuant to the Standing Dividend Resolutions, Pledgor has delivered the UDRC Dividend Direction Letter and the UDRC II Dividend Direction Letter to the Trustee. Section 7. Obligations of the UDC and Pledgor. Pledgor further represents, warrants and covenants to Lender that: Page - 3 (a) Pledgor will not sell, transfer or convey any interest in, or suffer or permit any lien or encumbrance to be created upon or to exist with respect to, any of the Collateral during the term of this Pledge Agreement, other than the lien granted hereunder and the lien granted to General Electric Capital Corporation ("GECC") pursuant to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement entered into as of August 15, 1997 among GECC, UDC, Pledgor, and certain other entities. (b) Pledgor will not cause or permit UDRC or UDRC II to enter into any securitization agreement or arrangement other than as set forth in the UDRC Securitization Documents or the UDRC II Securitization Documents, or substantially similar agreements and arrangements in the future, without the prior written consent of Lender. (c) Pledgor will, at Pledgor's expense, at any time and from time to time at the request of Lender do, make, procure, execute and deliver all acts, things, writings, assurances and other documents as may be reasonably proposed by Lender to preserve, establish, demonstrate or enforce the rights, interests and remedies of Lender as created by, provided in, or emanating from this Pledge Agreement. (d) Pledgor will not take any action which would cause UDRC or UDRC II to issue any other capital stock without the prior written consent of Lender. (e) Pledgor will not consent to any amendment to the articles of incorporation of UDRC or UDRC II without the prior written consent of Lender. (f) Pledgor will not take any action which would cause, and will not consent to, any transfer by UDRC or UDRC II of the UDRC Class B Certificates or the UDRC II Class B Certificates. Section 8. Dividends. Pledgor has not and will not permit UDRC or UDRC II to, rescind, amend, alter, revoke or modify the Standing Dividend Resolutions, the UDRC Dividend Direction Letter or the UDRC II Dividend Direction Letter, as the case may be, in any respect without the prior written consent of Lender. Section 9. Voting Proxy. Pledgor hereby grants to Lender an irrevocable proxy to vote the Pledged Shares with respect to any matter permitted under the Articles of Incorporation of UDRC and UDRC II, as the case may be, which proxy shall continue until the Final Date. Pledgor represents and warrants that it has directed UDRC and UDRC II, in accordance with Section 217 of the Delaware General Corporation Law, to reflect on UDRC's and UDRC II's books, respectively, the right of Lender to vote the Pledged Shares. Upon the request of Lender, Pledgor shall deliver to Lender such further evidence of such irrevocable proxy to vote the Collateral as Lender may request pursuant hereto. Page - 4 Section 10. Rights of Lender. Lender may, at any time and without notice, discharge any taxes, liens, security interests or other encumbrances levied or placed on the Collateral, pay for the maintenance and preservation of the Collateral, or pay for insurance on the Collateral; the amount of such payments, plus any and all reasonable fees, costs and expenses of Lender (including attorneys' fees and disbursements) in connection therewith, shall be reimbursed by UDC within five (5) days of demand, with interest thereon from the date paid at the rate provided in the Loan Agreement. Section 11. Remedies Upon Event of Default under the Loan Agreement. Lender may exercise any one or more of the following remedies: (a) Upon the occurrence of an "Event of Default" pursuant to the Loan Agreement, Lender may without notice to Pledgor: (i) cause the Collateral to be transferred to Lender's name or to the name of a nominee of Lender, and thereafter exercise as to such Collateral all of the rights, powers and remedies of an owner; (ii) collect by legal proceedings or otherwise all dividends, interest, principal payments, capital distributions and other sums now or hereafter payable on account of the Collateral, and hold all such sums as part of the Collateral, or apply such sums to the payment of the Obligations in such manner and order as Lender may decide, in its sole discretion; or (iii) enter into any extension, subordination, reorganization, deposit, merger, or consolidation agreement, or any other agreement relating to or affecting the Collateral, and in connection therewith deposit or surrender control of the Collateral thereunder, and accept other property in exchange therefor and hold and apply such property or money so received in accordance with the provisions hereof. (b) In addition to all the rights and remedies of a secured party under the Uniform Commercial Code as in effect in any applicable jurisdiction, upon the occurrence of an "Event of Default" pursuant to the Loan Agreement, Lender shall have the right, without demand of performance or other demand, advertisement or notice of any kind, except as specified below, to or upon Pledgor or any other person (all and each of which demands, advertisements and/or notices are hereby expressly waived to the extent permitted by law), to proceed forthwith to collect, receive, appropriate and realize upon the Collateral, or any part thereof in one or more parcels in accordance with applicable securities laws and in a manner designed to ensure that such sale will not result in a distribution of the Pledged Shares in violation of Section 5 of the Securities Act of 1933, as amended (the "Securities Act") and on such terms (including a requirement Page - 5 that any purchaser of all or any party of the Collateral shall be required to purchase any securities constituting the Collateral solely for investment and without any intention to make a distribution thereof) as Lender, in its sole and absolute discretion, deems appropriate without any liability for any loss due a decrease in the market value of the Collateral during the period held. If any notification to Pledgor of intended disposition of the Collateral is required by law, such notification shall be deemed reasonable and properly given if mailed to Pledgor, postage prepaid, at least ten (10) days before any such disposition at the address indicated by Pledgor's signature. Any disposition of the Collateral or any part thereof may be for cash or on credit or for future delivery without assumption of any credit risk, with the right of Lender to purchase all or any part of the Collateral so sold at any such sale or sales, public or private, free of any equity or right of redemption in Pledgor, which right of equity is, to the extent permitted by applicable law, hereby expressly waived or released by Pledgor; or (c) Lender may elect to sell the Collateral on any credit terms which it deems reasonable. The out-of-pocket costs and expenses of such sale shall be for the account of Lender. The sale of any of the Collateral on credit terms shall not relieve Pledgor of its liability with respect to the Obligations. All payments received in respect of any sale of the Collateral by Lender shall be applied to the Obligations as and when such payments are received and any price received by the Collateral Agreement in respect of such sale shall be conclusive and binding upon Lender; or (d) Pledgor recognizes that it may not be feasible to effect a public sale of all or a part of the Collateral by reason of certain prohibitions contained in the Securities Act, and that it may be necessary to sell privately to a restricted group of purchasers who will be obliged to agree, among other things, to acquire the Collateral for their own account, for investment and not with a view for the distribution or resale thereof. Pledgor agrees that private sales may be at prices and other terms less favorable to the Seller than if the Collateral were sold at public sale, and that Lender has no obligation to delay the sale of any Collateral for the period of time necessary to permit the registration of the Collateral for public sale under the Securities Act. Pledgor agrees that a private sale or sales made under the foregoing circumstances shall be deemed to have been made in a commercially reasonable manner; or (e) If any consent, approval or authorization of any state, municipal or other governmental department, agency or authority shall be necessary to effectuate any sale or other disposition of the Collateral or any partial disposition of the Collateral, Pledgor will execute all such applications and other instruments as may be required in connection with securing any such consent, approval or authorization, and will otherwise use its best efforts to secure the same; or (f) Lender shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold or disposed of, free from any other claim or right of whatever kind, including any equity or right of redemption of Pledgor. Pledgor specifically waives, to the extent permitted by applicable law, all rights of redemption, stay or appraisal which it may have under any rule of law or statute now existing or hereafter adopted; or Page - 6 (g) Lender shall not be obligated to make any sale or other disposition of the Collateral permitted under this Pledge Agreement, unless the terms thereof shall be satisfactory to Lender. Lender may, without notice or publication, adjourn any such private or public sale and, upon five (5) days' prior notice to Pledgor, hold such sale at any time or place to which the same may be so adjourned. In case of any such sale of all or any part of the Collateral on credit or future delivery, the Collateral so sold may be retained by Lender until the selling price is paid by the purchaser thereof, but Lender shall not incur any liability in case of the failure of such purchaser to take up and pay for the property so sold and, in the case of any such failure, such property may again be sold as herein provided. (h) All of the rights and remedies granted to Lender, including but not limited to the foregoing, shall be cumulative and not exclusive and shall be enforceable alternatively, successively or concurrently as Lender may deem expedient. Section 12. Limitation on Liability. (a) Neither Lender nor any of its respective directors, officers, employers or agents shall be liable to Pledgor, UDC, UDRC or UDRC II for any action taken or omitted to be taken by it or them hereunder, or in connection herewith, except that Lender shall be liable for its own gross negligence, bad faith or willful misconduct. (b) Lender shall be protected and shall incur no liability to any party in relying upon the accuracy, acting in reliance upon the contents, and assuming the genuineness of any notice, demand, certificate, signature, instrument or other document Lender reasonably believes to be genuine and to have been duly executed by the appropriate signatory, and (absent actual knowledge to the contrary of any officer of Lender) Lender shall not be required to make any independent investigation with respect thereto. Lender shall at all times be free independently to establish to its reasonable satisfaction, but shall have no duty to independently verify, the existence or nonexistence of facts that are a condition to the exercise or enforcement of any right or remedy hereunder. (c) Lender may consult with qualified counsel, financial advisors or accountants and shall not be liable for any action taken or omitted to be taken by it hereunder in good faith and in accordance with the advice of such counsel, financial advisors or accountants. Section 13. Indemnification. UDC and Pledgor jointly and severally agree to indemnify each of Lender, its Affiliates and Subsidiaries (as such terms are defined in the Loan Agreement) and their respective directors, officers, employees and agents, for, and hold each of Lender, its Affiliates and Subsidiaries and their respective directors, officers, employees and agents harmless against, any loss, liability or expense (including the costs and expenses of defending against any claim of liability) arising our of or in connection with this Pledge Agreement and the transactions contemplated hereby, except any such loss, liability or expense as shall result from the respective gross negligence, bad faith or willful misconduct of each of Lender, its Affiliates and Subsidiaries or their respective directors, officers, employees or agents. The obligation of UDC and Pledgor under this Section shall survive the termination of this Pledge Agreement. Page - 7 Section 14. Termination. This Pledge Agreement shall continue in full force and effect until the Final Date. Subject to any sale or other disposition of the Collateral pursuant to and in accordance with this Pledge Agreement, the Collateral shall be returned to Pledgor on the Final Date. The obligation of Pledgor under Section 16 of this Pledge Agreement shall survive the termination of this Pledge Agreement. Section 15. Compensation and Reimbursement. UDC agrees for the benefit of Lender and as part of the Obligations to reimburse Lender upon its request for all reasonable expenses, disbursements and advances incurred or made by Lender in accordance with any provision of, or carrying out its duties and obligations under, this Pledge Agreement (including the reasonable compensation and fees and the expenses and disbursements of its agents, any independent certified public accounts and independent counsel), except any expense, disbursement or advances as may be attributable to negligence, bad faith or willful misconduct on the part of Lender. Section 16. Foreclosure Expenses of Lender. All expenses (including reasonable fees and disbursements of counsel) incurred in compliance with this Pledge Agreement by Lender in connection with any actual or attempted sale, exchange of, or any enforcement, collection, compromise or settlement respecting this Pledge Agreement or the Collateral, or any other action taken in compliance with this Pledge Agreement by Lender hereunder, whether directly or as attorney-in-fact pursuant to a power of attorney or other authorization herein conferred, for the purpose of satisfaction of the Obligation shall be deemed an Obligation for all purposes of this Pledge Agreement and Lender may apply the Collateral to payment of or reimbursement of itself for such liability. Section 17. Notices. Any notice or other communication given hereunder shall be in writing and shall be sent by registered mail, postage prepaid, overnight courier or personally delivered or facsimiles to the recipient as follows: To Pledgor: UGLY DUCKLING CAR SALES AND FINANCE CORPORATION 2525 East Camelback Road Suite 500 Phoenix, Arizona 85016 Attn: Jon D. Ehlinger Facsimile: (602) 852-6637 Page - 8 with a copy to: SNELL & WILMER, L.L.P. One Arizona Center Phoenix, Arizona 85004-0001 Attention: Timothy W. Moser Facsimile: (602) 382-6070 To Lender: GREENWICH CAPITAL FINANCIAL PRODUCTS, INC. 600 Steamboat Road Greenwich, Connecticut 06830 Attention: Ira J. Platt Telephone: (203) 622-3882 Facsimile: (203) 622-2090 with a copy to: OFFICE OF THE GENERAL COUNSEL GREENWICH CAPITAL FINANCIAL PRODUCTS, INC. 600 Steamboat Road Greenwich, Connecticut 06830 Telephone: (203) 625-6065 Facsimile: (203) 629-4640 with a copy to: KIRKLAND & ELLIS 200 East Randolph Chicago, Illinois 60201 Attention: Kenneth P. Morrison Facsimile: (312) 861-2200 Page - 9 To UDC: UGLY DUCKLING CORPORATION 2525 East Camelback Road Suite 500 Phoenix, Arizona 85016 Attn: Steven P. Johnson Facsimile: (602) 852-6696 with a copy to: SNELL & WILMER, L.L.P. One Arizona Center Phoenix, Arizona 85004-0001 Attention: Timothy W. Moser Facsimile: (602) 382-6070 Section 18. General Provisions. (a) The failure of Lender to exercise or delay in exercising any right, power or remedy hereunder, shall not operate as a waiver thereof, nor shall any single or partial exercise by Lender of any right, power or remedy hereunder preclude any other or future exercise thereof, or the exercise of any other right, power or remedy. The remedies herein provided are cumulative and are not exclusive of any remedies provided by law or any other agreement. (b) The representations, covenants and agreements of Pledgor herein contained shall survive the date hereof; provided, however, that only Section 13 shall survive after the Final Date. (c) Neither this Pledge Agreement nor the provisions hereof can be changed, waived or terminated unless any such change, waiver or termination shall be in writing, signed by the parties hereto. This Pledge Agreement shall be binding upon and inure to the benefit of the parties hereto, and their respective successors, legal representatives and assigns. If any provision of this Pledge Agreement shall be invalid or unenforceable in any respect or in any jurisdiction, the remaining provisions shall remain in full force and effect and shall be enforceable to the maximum extent permitted by law. (d) This Pledge Agreement may be executed in counterparts, each of which shall constitute an original but all of which, when taken together, shall constitute one instrument. (e) THE VALIDITY OF THIS PLEDGE AGREEMENT AND THE OTHER LOAN DOCUMENTS, THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF NEW YORK. Page - 10 THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS PLEDGE AGREEMENT MAY BE TRIED AND LITIGATED IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK. PLEDGOR, COLLATERAL AGENT AND LENDER WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION. THE PARTIES HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER AND LENDER REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS PLEDGE AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. Page - 11 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Pledge Agreement on the date first above written. UGLY DUCKLING CAR SALES AND FINANCE CORPORATION, an Arizona corporation By: /s/ JON EHLINGER ------------------ Name: Jon Ehlinger Title: Secretary UGLY DUCKLING CORPORATION, a Delaware corporation By: /s/ STEVEN P. JOHNSON ---------------------- Name: Steven P. Johnson Title: Senior Vice President GREENWICH CAPITAL FINANCIAL PRODUCTS, INC., a Delaware corporation By: /s/ IRA PLATT --------------------------------- Name: Ira Platt Title: Vice President EX-10.44 8 EXHIBIT 10.44 KPMG Peat Marwick LLP Proposal to: [UGLY DUCKLING CORPORATION LOGO] Year 2000 Renovation Project Services Proposal Submitted: November 2, 1998 This proposal, in its entirety, is valid until November 15, 1998. The KPMG Peat Marwick LLP (KPMG) information contained in this proposal shall be kept confidential by Ugly Duckling Corporation and used only for the purpose of evaluation, selection, and contract negotiation. Ugly Duckling Corporation shall not disclose to any person, firm, or entity any proprietary or confidential information of KPMG contained in this proposal without the express, written permission of KPMG. November 2, 1998 Mr. Steve Geary Mr. Delano Mayhall M.I.S. Manager / Year 2000 Coordinator M.I.S. Manager Ugly Duckling Corporation Ugly Duckling Corporation 2525 East Camelback Road 600 N. Pearl St Suite 2000 Suite 250 Dallas, Texas 75221 Phoenix, Arizona 85016 Dear Mr. Geary and Mr. Mayhall: KPMG Consulting's Global Year 2000sm practice is pleased to present this revised proposal to Ugly Duckling Corporation (Ugly Duckling) to describe our assistance with Ugly Duckling's Year 2000 Renovation project. This letter serves to document our understanding of the project, define roles and responsibilities, and describe our business arrangement. Greg Martin of our Midwest Global Year 2000sm practice spoke with Delano Mayhall and Ed Everitt of Ugly Duckling on August 3, 1998. Further discussions occurred on October 20 leading to the changes incorporated in this proposal. Members of the Midwest Global Year 2000sm practice inventoried the AS/400 source files sent on tape. Our review determined that the code is of manageable size, averaging about 435 lines per RPG program, with 34 RPG programs larger than 2000 lines of code. Other discussions focused on Ugly Duckling's management structure for the Year 2000 project, configuration management, testing approach, and capacity. From information provided by you, we understand that Ugly Duckling is addressing its Year 2000 challenge on several fronts, namely: . Business Applications in two main areas: AS/400 based applications and non-AS/400 applications and components . Technology Infrastructure . Non-Technical Infrastructure Page - 2 From our discussions with Ugly Duckling, we discovered several key issues: . A considerable number of queries exist. Query/400 and SQL/400 are used to query the AS/400 database, with some of the data being downloaded to PC spreadsheets. . The RPG code is a mix of RPG II, RPG III and some ILE RPG. . Some RPG programs are using internally described database files or report files. From these discussions, we also understand that Ugly Duckling does not have in place a formal Quality Assurance group for application testing and lacks an extensive test bed of data for use in acceptance/integration testing of the renovated applications. Consequently, Ugly Duckling would like the code renovation and unit-testing to be performed off-site to delay any requirements for upgrades to data center capacity. Our proposal focuses on creating a teaming arrangement with Ugly Duckling to bring the necessary skills, resources, and technology from KPMG to assist Ugly Duckling in addressing the renovation of your Car Loan Accounting and Servicing System (CLASS) application residing on the IBM AS/400 Model 640 system. Our proposal to Ugly Duckling is presented in four sections: . Scope of the Ugly Duckling Year 2000 Renovation Project . Methodology and Project Approach . Roles and Responsibilities . Estimates and Professional Fees A discussion of each of these sections follows. Page - 3 SCOPE OF THE UGLY DUCKLING YEAR 2000 RENOVATION PROJECT The scope of this project is limited to the renovation of the CLASS application (identified in Appendix A) which consists of 1509 RPG programs, 1249 CL programs, and its related components (i.e. database files, display files, printer files etc.). The CLASS application consists of the following subsystems: . Loan Processing . Collections . General Ledger . Accounts Payable . Accounts Receivables . Document Tracking . Cash Entry . Point of Sales . Inventory The renovation of the CLASS application will consist of expanding date fields into the application source code to allow the application to be able to process dates after December 31, 1999. KPMG will renovate the programs in the RPG versions received. Correction of any renovation-related errors that are identified within 30 days of being moved into production will be the responsibility of KPMG. Date expansion will be required in some DB2/400 physical tables. Identification of expanded fields and the associated creation and testing of data bridges will be the responsibility of KPMG. Population of the expanded fields on the test AS/400 will be the responsibility KPMG with assistance from Ugly Duckling where necessary. The scope of this project does not cover infrastructure upgrades (i.e. operating system, databases etc.). Infrastructure upgrades are the responsibility of Ugly Duckling. It is imperative that the system software infrastructure upgrades be completed by Ugly Duckling on or before December 7, 1998 in order to meet a completion date of March 31, 1999. Page - 4 METHODOLOGY AND PROJECT APPROACH The overall project will be divided into three phases: - --------- ---------------------------------------------------------------- Phase 1 Project initiation and work plan development - --------- ---------------------------------------------------------------- - --------- ---------------------------------------------------------------- Phase 2 Application renovation and unit testing in KPMG Year 2000 compliant environment - --------- ---------------------------------------------------------------- - --------- ---------------------------------------------------------------------- Phase 3 Regression, Year 2000, acceptance testing, in the leased AS/400 environment and implementation in Ugly Duckling's environment - --------- ---------------------------------------------------------------------- Proposed Project Timeline (CHART) In Phase 1, detailed work plans will be developed. These work plans will describe the applications to be renovated; identify the "chunks" into which the applications will be grouped for both renovation and unit testing; and identify the resource allocations needed to successfully complete the project. A "chunk" is defined as a logical grouping of applications that share common functionality, interface points, and data. In order to complete the project on schedule and within the approved budget, the largest and most critical applications, Loan Processing and Collections, will be renovated first. To expedite this project, KPMG will make a best effort to complete the renovation of the Loan Processing and Collections applications by January 1, 1999. KPMG will make a best effort to complete renovation on the remaining "chunks" between January 1, 1999 and February 12, 1999. The exact timing for delivery of each "chunk" will be finalized in phase 1 of the project. In addition, a detailed, code-level analysis will be performed on the CLASS application (and its 1509 RPG programs and 1249 CL programs) identified in Appendix A and their related components. This will provide the level of detail necessary to accurately locate and correct all Year 2000 failure points within the application. Finally, the test environment configurations will be jointly confirmed. Baseline testing and post renovation regression and acceptance testing will be performed on the leased AS/400 environment. Unit testing will be performed by KPMG. Ugly Duckling must ensure that the necessary resources (computers, IT personnel, and key end users) are available to the project when they are scheduled in order for KPMG to maintain the project schedule. Page - 5 In Phase 2, KPMG will assist Ugly Duckling in stabilizing the AS/400 application detailed in Appendix A, using the "field expansion" technique. Applications renovated in this fashion will remain viable after the Year 2000. The code that will be renovated falls into four date usage categories that could cause Year 2000 application failures: . Dates used in calculations . Dates used in Boolean operations . Dates used as sort fields or sequence by fields . Dates used as key fields Any programs that have already been renovated will be reviewed and corrected as necessary. DATES DISPLAYED ON HARDCOPY REPORTS OR ON-LINE SCREENS WILL NOT BE EXPANDED TO 4 DIGITS. If a bridging strategy becomes necessary, due to physical file expansion, it will be developed jointly by KPMG and Ugly Duckling. The building of bridges to any applications that reside outside of CLASS are not included in the scope of work presented in this proposal. Ugly Duckling has represented that all source code for the application is present and accessible in the format required by KPMG. The reconciliation of production to development libraries is the responsibility of Ugly Duckling. This reconciliation will validate that the code being renovated is the same as the code in production and that all required pieces are present. KPMG will work with Ugly Duckling to analyze the reconciliation and develop a schedule for Ugly Duckling to provide any required missing pieces. Any modules that cannot be reconciled must be provided by Ugly Duckling prior to commencement of renovation for the chunk in which that module resides. As part of the reconciliation, KPMG and Ugly Duckling will jointly develop a point of contact matrix for each application that includes not only the technical resources, but also the primary and secondary users of the application. In addition to receiving code and related components from Ugly Duckling, KPMG will also request sample data for each "chunk." This is necessary for conducting the detailed analysis in identifying date fields and for unit testing changed programs. Renovation will be achieved through the use of both automated tools and manual processes. Based on our Renovation Methodology, the method to be used for each program will be identified during Phase 1 of the project. The licensing cost of any automated tools used by KPMG will be borne by KPMG and will remain the property of KPMG. Renovation of the application code will be performed by KPMG at a KPMG Renovation Facility or by selected subcontractors under KPMG direction. Page - 6 Applications will be packaged as chunks that will be identified during Phase One of the project. Renovation will occur at the chunk level and source code will be provided to KPMG at the chunk level. Similarly, turnover of renovated code back to Ugly Duckling will occur at the chunk level. During renovation, only limited new development will occur to any program contained in the chunk. Emergency code fixes are the responsibility of Ugly Duckling, as is the inclusion and merging of these fixes into the turned over, renovated code. In PHASE 3, regression, Year 2000, and acceptance testing needs to be performed on all applications that KPMG renovates, as identified in Appendix A. KPMG will assist Ugly Duckling in this phase of work by providing a manager to assist in planning and the development of a testing plan. KPMG will also augment the Ugly Duckling staff with three (3) resources to assist in the testing effort. With each returned "chunk" of renovated code, KPMG will provide Ugly Duckling with a suggested testing workplan and a testing matrix that details which components will most likely require testing. It is our understanding that a full test environment does not exist at Ugly Duckling and that KPMG as part of this proposal will lease an AS/400 to use as a testing machine. The costs associated with leasing and operating a test AS/400 are included in the total costs associated with this project.. Additionally, a formal set of test scripts and testing scenarios do not exist. Among the first steps of the project will be to execute a regression test for the CLASS application to establish a "baseline" of expected results. KPMG and Ugly Duckling will jointly organize, perform these tests, and document the results at the chunk level. Compliance testing will occur on the test AS/400 machine. Tests scripts and test cases will be executed on the test AS/400 machine as well as the conversion programs that will expand the DB/2 tables. Any missing pre-renovation baseline test components must be created, and may affect the project timetable, requiring a revision to the fee schedule. The CL and databases used for this initial baseline test will be frozen for post-renovation regression and acceptance testing. After code renovation, KPMG will unit test every renovated program. Following turnover of the code to Ugly Duckling, post renovation regression and acceptance testing will be performed at Ugly Duckling by the KPMG and Ugly Duckling testing team, using the identical CL and database used for pre-renovation baseline testing. Any errors resulting from KPMG code renovation will be returned to KPMG for repair using procedures that will be developed in Phase 1 of the project. The KPMG and Ugly Duckling testing team will begin testing renovated code on January 4, 1999 or within a business day following receipt of the first chunk returned. Ugly Duckling is targeting to complete all regression and acceptance testing by March 31, 1999. KPMG and Ugly Duckling will be jointly responsible for developing a test schedule based on the estimated effort required, the target completion date and the availability of testing resources. Any renovation Page - 7 errors detected prior to 30 days after the renovated program is returned to production will be corrected by KPMG as part of this project. Problems detected after this time will become the responsibility of Ugly Duckling. All programs will be moved into production by Ugly Duckling within 30 days after completion of the regression and acceptance testing of the last chunk. Exceptions to this procedure will be handled on a case-by-case basis and will be mutually agreed upon by Ugly Duckling and KPMG. Ugly Duckling will notify KPMG in writing concerning a defect. KPMG will respond within 48 hours. Ugly Duckling will provide any test data needed to recreate the error. Time related to discovery of non-renovation related errors will be billed at an hourly rate of $190 plus out-of-pocket expenses. For each phase of the project, there will be project deliverables. Representative samples of Phase 1 and Phase 2 deliverables are attached to this engagement letter and serve to illustrate the information and contents that will be provided. Phase 1 deliverables also include a finalized project workplan that defines the chunking approach, a detailed code analysis and a finalized test environment configuration. Phase 2 deliverables include an application contact matrix and the renovated code for each "chunk". The phase 3 deliverable will be a testing strategy and plan document and specific test plans, scripts and testing matrices. The phase 3 deliverables will cover baseline, regression, and acceptance testing. KPMG will assign an Engagement Manager and a Project Manager. KPMG will submit deliverables to Ugly Duckling for review and acceptance. Ugly Duckling will have the right to reject a deliverable if it does not substantially conform to the specifications set forth in this agreement. Except for the process previously defined agreement related to code renovation errors, if Ugly Duckling rejects a deliverable, KPMG will have 30 days to re-submit the deliverable for acceptance. If Ugly Duckling does not reject a deliverable within 30 days, the deliverable will be deemed accepted. KPMG does not warrant that the renovated code will operate error free. Errors discovered by Ugly Duckling after final acceptance and after 30 days of migration to production will be repaired at Ugly Duckling's request on a time and material basis at an hourly rate of $190 plus out-of-pocket expenses. Ugly Duckling will move all "chunks" into production within 30 days after completion of the regression and acceptance testing of the last "chunk." ROLES AND RESPONSIBILITIES Mr Vince Neton, the Partner-in-charge of KPMG's Midwest Year 2000 Practice, will serve as the Engagement Partner to ensure the work is performed in accordance with KPMG standards and this engagement letter. . ENGAGEMENT MANAGEMENT. KPMG will assign Greg Martin as Engagement Manager to the Year 2000 Renovation engagement. Mr. Martin, a Manager in KPMG's Midwest Year 2000 Practice, has extensive experience in large-scale conversion and Year 2000 renovation projects. . Project Management. KPMG will assign Robert Robe as the Project and Test Page - 8 Manager to the Year 2000 Renovation engagement. Mr Robe, a Manager in KPMG's Midwest Year 2000 Practice, has extensive experience in large-scale implementation and Year 2000 projects. . UGLY DUCKLING MANAGEMENT. Ugly Duckling will assign a project liaison. The Ugly Duckling liaison is responsible for working with the KPMG Project Manager to schedule Ugly Duckling resources and ensure timely completion of any tasks assigned to Ugly Duckling personnel. . EXECUTIVE SPONSOR. Ugly Duckling will designate an executive to sponsor this project who will interface with KPMG's Engagement Partner as often as mutually agreed. Proposed staff may change subject to the timing of acceptance of this proposal and availability. Resumes are attached in Appendix B. It is assumed that appropriate workspace will be available for the KPMG team whenever they are at Ugly Duckling. This space would minimally consist of a cubicle with a phone and an analog phone line for remote data access. Recognizing Ugly Duckling's machine capacity and office space constraints, the renovation work will be performed at KPMG's facilities. The bulk of the testing work will be performed at Ugly Duckling's office in Dallas. As part of KPMG's internal professional practice oversight, we have adopted standard language related to warranties, liability, and remedies as they pertain to Year 2000 engagements. This standard language is provided in Appendix C. ESTIMATES AND PROFESSIONAL FEES KPMG extends a fixed fee of $1,200,000 for this project. This fee includes out-of-pocket expenses and the costs associated with leasing the test AS/400. KPMG will assign Robert Robe as the full time Manager to work with Ugly Duckling from the inception of the project to March 31, 1999. Mr. Robe will manage the renovation effort as well as assist Ugly Duckling in high level test strategy, planning, and test execution and will coordinate with Ugly Duckling and KPMG to test the CLASS system. Included in the fixed fee amount are any costs associated with the use of automated tools. The duration of the project will be approximately 23 weeks, with a tentative target date of February 12, 1999 for the completion of renovation and unit testing. Baseline testing, regression testing, Year 2000 testing, and acceptance testing will overlap remediation as each chunk is completed and will continue through March 31, 1999. KPMG will augment Ugly Duckling's testing staff. KPMG will include as part of the fixed fee, three (3) testing resources to execute test cases and test scripts and will work under the direction of Ugly Duckling and the KPMG testing Page - 9 Manager. The testers will consist of one (1) Senior Consultant for a four month period beginning December 1, 1998 and two (2) Consultants for a three month period beginning January 1, 1999. In the event that renovation work is delayed, the schedule for testing assistance will be adjusted such that the overall testing time commitment by KPMG to Ugly Duckling will be extended to the same extent that the renovation work is delayed. Additional testing time spent on the project by KPMG personnel beyond that described above will be billed on a time and materials basis using the fee structure in the table below. In this case, in addition to the professional fees, we are reimbursed for reasonable expenses such as travel, lodging, and meals. We estimate these costs to be approximately 15% of the professional fees. The two (2) Consultants will be from the pool of renovators that participated in the Ugly Duckling code renovation. Ugly Duckling may conduct a telephone interview with the two testing candidates prior to KPMG assigning them to the project. The testing work will be covered by the standard terms and conditions included in this proposal. If additional testers beyond the first three (3) testers are needed, the following hourly rates will be in effect from October 1998 to June 30, 1999. These fees are over and above the fees for the code renovation -------------------------- ------------ Level Fee -------------------------- ------------ Manager 225 -------------------------- ------------ -------------------------- ------------ Senior Consultant 175 -------------------------- ------------ -------------------------- ------------ Consultant 125 -------------------------- ------------ We understand that Ugly Duckling may not have the necessary resources to execute the baseline and compliance test of the renovated applications due to other commitments of the programming staff. Although, this proposal includes three (3) KPMG resources to augment the Ugly Duckling testing staff, at this time we have insufficient information to provide an accurate cost estimate and determination of the appropriate size of the testing staff. To complete all testing by March 31, 1999, additional resources may need to be applied. At the completion of our unit testing of renovated code, we will have sufficient information to provide a more accurate cost estimate and determine a workable strategy that is beneficial to Ugly Duckling in terms of resources, and costs. Page - 10 The costs of leasing an AS/400 for testing will be the responsibility of KPMG. KPMG will procure and manage the test AS/400. Where necessary, Ugly Duckling will assist KPMG in setting up the test AS/400 making it ready for testing. The test AS/400 will have the following configuration: Model 9406-S20 250 MB Memory 40GB DASD 8 MM tape Modem OS/400 4.2 Fees for this project will be billed as follows with payment expected within 30 days of receipt of invoice: ------------------------------ ------------------- FIXED FEE FEE SCHEDULE RENOVATION PROJECT* ------------------------------ ------------------- ------------------------------ ------------------- Project Initiation $240,000 ------------------------------ ------------------- ------------------------------ ------------------- December 1, 1998 240,000 ------------------------------ ------------------- ------------------------------ ------------------- January 1, 1999 240,000 ------------------------------ ------------------- ------------------------------ ------------------- February 1, 1999 240,000 ------------------------------ ------------------- ------------------------------ ------------------- March 1, 1999 240,000 ------------------------------ ------------------- ------------------------------ ------------------- Total $1,200,000 ------------------------------ ------------------- This proposal is based entirely upon the inventory gathered from the tape sent by Ugly Duckling on August 10, 1998. In the event that a significant amount (5% or more) of additional lines of code are found beyond those listed in Appendix A, an additional fee of $1.50 per line of code will be charged. * * * - ---------- * Fixed fee includes three (3) testers and costs associated with leasing the testing AS/400 Page - 11 We look forward to working with you and your staff on this project. We appreciate the opportunity to demonstrate KPMG's experience and capabilities. If the terms of this engagement letter are acceptable, please sign the enclosed duplicate and return it to my attention. Should you have any questions or concerns, please do not hesitate to contact Greg Martin at 312-665-5111 or me at 312-665-5283. Very truly yours, KPMG Peat Marwick LLP Vincent A. Neton Midwest Partner-in-Charge Global Year 2000 cc: Greg C. Martin III, KPMG - Chicago Page - 12 ENGAGEMENT ACCEPTANCE To confirm your acceptance on behalf of Ugly Duckling Corporation of this engagement letter for Year 2000 Renovation Services, please sign in the space provided and return the original to me. Your signature indicates your authorization to proceed with the project. Name: /s/ Steven A. Tesdahl -------------------------------------------------------- Title: Senior V.P. and Chief Information Officer -------------------------------------------------------- Date: 11/2/98 -------------------------------------------------------- Page - 13 APPENDIX A & B ARE OMITTED BECAUSE THEY ARE NOT RELEVANT Page - 14 APPENDIX C GENERAL BUSINESS TERMS 1. SERVICES. It is understood and agreed that KPMG's services may include advice and recommendations; but all decisions in connection with the implementation of such advice and recommendations shall be the responsibility of, and made by, Client. 2. PAYMENT OF INVOICES. Properly submitted invoices upon which payment is not received within thirty (30) days of the invoice date shall accrue a late charge of the lesser of (i) 1 1/2% per month or (ii) the highest rate allowable by law, in each case compounded monthly to the extent allowable by law. Without limiting its rights or remedies, KPMG shall have the right to halt or terminate entirely its services until payment is received on past due invoices. 3. TERM. Unless terminated sooner in accordance with its terms, this engagement shall terminate on the completion of KPMG's services hereunder. This engagement may be terminated by either party at any time by giving written notice to the other party not less than 30 calendar days before the effective date of termination. 4. OWNERSHIP. a) KPMG Technology . KPMG has created, acquired or otherwise has rights in, and may, in connection with the performance of services hereunder, employ, provide, modify, create, acquire or otherwise obtain rights in, various concepts, ideas, methods, methodologies, procedures, processes, know-how, and techniques; models (including, without limitation, function, process, system and data models); templates; the generalized features of the structure, sequence and organization of software, user interfaces and screen designs; general purpose consulting and software tools, utilities and routines; and logic, coherence and methods of operation of systems) (collectively, the "KPMG Technology"). b) Ownership of Deliverables. Except as provided below, upon full and final payment to KPMG hereunder, the tangible items specified as deliverables or work product in the engagement letter or proposal to which these terms are attached (the "Deliverables") will become the property of Client. To the extent that any KPMG Technology is contained in any of the Deliverables, KPMG hereby grants Client, upon full and final payment to KPMG hereunder, a royalty-free, paid-up, worldwide, non-exclusive license to use such KPMG Technology in connection with the Deliverables. c) Ownership of KPMG Property. To the extent that KPMG utilizes any of its property (including, without limitation, the KPMG Technology or any hardware or software of KPMG) in connection with the performance of services hereunder, such property shall remain the property of KPMG and, except for the license expressly granted in the preceding paragraph, Client shall acquire no right or interest in such property. Nothing in this Agreement shall be construed as precluding or limiting in any way the right of KPMG to provide consulting or other services of Page - 15 any kind or nature whatsoever to any person or entity as KPMG in its sole discretion deems appropriate. In addition, and notwithstanding anything in this Agreement to the contrary, the parties acknowledge and agree that (a) KPMG will own all right, title, and interest, including, without limitation, all rights under all copyright, patent and other intellectual property laws, in and to the KPMG Technology and (b) KPMG may employ, modify, disclose, and otherwise exploit the KPMG Technology (including, without limitation, providing services or creating programming or materials for other clients). 5. WARRANTIES; LIMITATION ON WARRANTIES. (a) Warranty of Services. This is a services engagement. KPMG warrants to client that (i) in performing the services under the Engagement Letter, KPMG shall provide sufficient qualified personnel to perform the services in a competent and workmanlike manner in accordance with applicable industry standards and (ii) KPMG's performance of the services, to its knowledge, does not and shall not violate any applicable law, rule or regulation. (b) Warranty of Software. KPMG warrants that for a period of 30 days following migration to production , any Client or third-party software modified by KPMG and any software developed by KPMG for Client will operate substantially in accordance with the applicable specifications. Client agrees to migrate remediated code into production within 30 days of the completion of acceptance testing. If any errors occur during the warranty period that materially affects the performance of such software, KPMG will use all reasonable efforts to correct the error. KPMG does not warrant that Client or any third-party software modified by KPMG or software developed by KPMG for Client will operate error-free. (c) WARRANTY DISCLAIMER. KPMG DISCLAIMS ALL OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 6. Limitation on Damages. Client agrees that KPMG, its partners, principals, and employees shall not be liable to Client for any actions, damages, claims, liabilities, costs expenses, or losses in any way arising out of or relating to the services performed hereunder for an aggregate amount in excess of the fees paid by Client to KPMG under this engagement. In no event shall either party, its partners, principals, directors, officers or employees be liable for consequential, special, indirect, incidental, punitive or exemplary damages, costs, expenses, or losses (including, without limitation, lost profits and opportunity costs). Further, KPMG will not be responsible for obtaining any permissions necessary to modify any third-party software and KPMG will have no liability to Client if the modifications made to a third party's software have an adverse effect on Client's rights and obligations in respect of such software. The provisions of this Paragraph shall apply regardless of the form of action, damage, claim, liability, cost, expense, or loss, whether in contract, statute, tort (including, without limitation, negligence), or otherwise. 7. Y2K Disclaimer. While KPMG agrees pursuant to the accompanying engagement letter or proposal to which these terms are attached (the "Engagement Letter") Page - 16 to assist Client in assessing the nature and scope of Client's Year 2000 compliance requirements, KPMG makes no representations or warranties that any services performed hereunder by KPMG or any third party services provided in connection with KPMG's services or otherwise recommended by KPMG will result in the technical changes or fixes needed to make the computer equipment, software, data or other assets of Client Year 2000 compliant. Client acknowledges and agrees that the accomplishment of the goals established for this engagement as set forth in the Engagement Letter will require each party to fully cooperate with the other party, to fulfill its role and perform its obligations in a timely manner with personnel qualified to perform the tasks assigned and to coordinate its efforts with the efforts of the other party and that all services provided will be the result of the parties' joint input and efforts. Accordingly, Client shall retain the right and also the responsibility to make decisions with respect to such services and their implementation with respect to its business, and KPMG makes no representation or warranty with respect thereto. 8. INDEMNIFICATION; INFRINGEMENT. (a) Indemnification of KPMG. Client agrees to indemnify, defend and hold harmless KPMG from and against any and all liabilities, damages, claims, losses, costs and expenses (including reasonable attorneys' fees) incurred by KPMG in connection with a third party claim relating to KPMG's performance of services hereunder except to the extent resulting from the recklessness, gross negligence or willful misconduct of KPMG and except for claims for personal injury and damage to tangible property for which KPMG has an obligation to indemnify Client as set forth below. (b) Indemnification of Client. KPMG hereby agrees to indemnify, hold harmless and defend Client from and against any and all liabilities, damages, claims, losses, costs and expenses (including reasonable attorneys' fees) for injury to, illness or death of, any person or persons regardless of status, and damage to or destruction of any tangible property which Client may sustain or incur to the extent resulting from the negligence or willful misconduct of KPMG in the performance of the services under the Engagement Letter. (c) Liability and Remedies for Infringement. (i) KPMG hereby agrees to indemnify, hold harmless and defend Client from and against any and all claims, liabilities, losses, expenses (including reasonable attorney's fees, fines, penalties, taxes or damages incurred by or asserted against Client to the extent resulting from a claim that any of the Deliverables violates any third party's trade secret, trademark, copyright, patent or other proprietary rights. The foregoing provisions shall not apply to any infringement arising out of (i) use of the Deliverables other than in accordance with applicable documentation or instructions supplied by KPMG, (ii) any alteration, modification or revision of the Deliverables not explicitly authorized by KPMG or (iii) use of the Deliverables other than for Client's internal business purposes. (ii) In case any of the Deliverables or any portion thereof is held in any such suit to constitute infringement and the use thereof is enjoined, KPMG shall within a reasonable time, at its option, either (i) secure for Client the right to continue the use of such infringing item by procuring for Client a license or other permission as will enable Client to secure the suspension of any injunction or (ii) replace, at KPMG's sole expense, Page - 17 such item with substantially equivalent non-infringing item or modify such item so that it becomes non-infringing. In the event KPMG is unable to procure the aforementioned license or permission or replace the infringing item as provided herein, KPMG shall accept the return of the infringing item and refund to Client the amount paid to KPMG for such item. (iii) The provisions of this Paragraph 8(c) state KPMG's entire liability and Client's sole remedy with respect to infringement. (d) Indemnification Procedures. The party entitled to indemnification (the "Indemnified Party") shall promptly notify the party obligated to provide such indemnification (the "Indemnifying Party") of any claim for which the Indemnified Party seeks indemnification hereunder and the Indemnifying Party shall have the exclusive right and authority to conduct the defense or settlement of any such claim at the Indemnifying Party's sole expense and the Indemnified Party shall cooperate with the Indemnifying Party in connection therewith. 9. COOPERATION. Client shall cooperate with KPMG in the performance by KPMG of its services hereunder, including, without limitation, providing KPMG with reasonable facilities and timely access to data, information and personnel of Client. Client shall be responsible for the performance of its employees and agents and for the accuracy and completeness of all data and information provided to KPMG for purposes of the performance by KPMG of its services. 10. FORCE MAJEURE. Neither party shall be liable for any delays resulting from circumstances or causes beyond its reasonable control, including, without limitation, fire or other casualty, act of God, strike or labor dispute, are or other violence, or any law, order or requirement of any governmental agency or authority. 11. LIMITATION ON ACTIONS. No action, regardless of form, arising under or relating to this engagement, may be brought by either party more than one year after the cause of action has accrued, except that an action for non-payment may be brought by a party not later than one year following the date of the last payment due to such party hereunder. 12. INDEPENDENT CONTRACTOR. It is understood and agreed that each of the parties hereto is an independent contractor and that neither party is, nor shall be considered to be, an agent, distributor or representative of the other. Neither party shall act or represent itself, directly or by implication, as an agent of the other or in any manner assume or create any obligation on behalf of , or in the name of, the other. 13. Confidentiality. Client and KPMG acknowledge and agree that all information communicated to either Client or KPMG by the other party in connection with the performance by a party under this Agreement shall be received in confidence, shall be used only for purposes of this Agreement, and no such confidential information shall be disclosed by the respective parties or their agents or personnel without the prior written consent of the other party. Except to the extent otherwise required by applicable law or professional standards, the parties' obligations under this section do not apply to information that: (a) is or becomes generally available to the public other than as a result of disclosure by Client or KPMG, (b) was known to either Client or KPMG or had been Page - 18 previously possessed by Client or KPMG without restriction against disclosure at the time of receipt thereof by Client or KPMG, (c) was independently developed by Client or KPMG without violation of this Agreement or (d) Client and KPMG agree from time to time to disclose. Each party shall be deemed to have met its nondisclosure obligations under this Paragraph as long as it exercises the same level of care to protect the other's information as it exercises to protect its own confidential information, except to the extent that applicable law or professional standards impose a higher requirement. KPMG may retain, subject to the terms of this Paragraph, copies of Client's confidential information required for compliance with applicable professional standards or internal policies. If either party receives a subpoena or other validly issued administrative or judicial demand requiring it to disclose the other party's confidential information, such party shall provide prompt written notice to the other party of such demand in order to permit such party to seek a protective order. So long as the notifying party gives notice as provided herein, the notifying party shall thereafter be entitled to comply with such demand to the extent permitted by law, subject to any protective order or the like that may have been entered in the matter. 14. SURVIVAL. The provisions of Paragraphs 1, 2, 4, 5, 6, 7, 8, 11, 12, 13, 14, 15 and 17 hereof shall survive the expiration or termination of this engagement. 15. ASSIGNMENT. Except as provided below, neither party may assign, transfer or delegate any of the rights or obligations hereunder without the prior written consent of the other party. KPMG may assign its rights and obligations hereunder to any affiliate that is a successor in interest to all or substantially all of the assets or business of KPMG's consulting practice, without the consent of Client. 16. ENTIRE AGREEMENT. These terms, and the Proposal or Engagement Letter to which these terms are appended, including Exhibits, constitute the entire agreement between KPMG and Client with respect to the subject matter hereof and supersede all other oral and written representation, understandings or agreements relating to the subject matter hereof. 17. USE OF NAME. In the event that Client desires to make any public announcement or issue any other release to third parties regarding the services provided by KPMG in connection with this engagement, Client will obtain KPMG's prior written approval of any such public announcement or other release. In no event shall such announcement or other release refer to KPMG by name, except as otherwise required by law In the event that KPMG desires to make any public announcement or issue any other release to third parties regarding the services performed at Ugly Duckling by KPMG in connection with this engagement, KPMG will obtain Client's prior written approval of any such public announcement or other release. Page - 19 EX-12 9 EXHIBIT 12 Exhibit 12
Ugly Duckling Corporation Ratio of Earnings to Fixed Charges 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- Fixed Charges: Interest Expense............................. 6,904 2,774 2,429 5,328 2,870 Capitalized Interest......................... 135 229 0 54 142 Interest Factor in Rent Expense (a).......... 3,768 1,358 790 784 462 Preferred dividends.......................... 1,527 --------- --------- --------- --------- --------- 10,807 4,361 4,746 6,166 3,474 --------- --------- --------- --------- --------- Earnings: Earnings (Loss) from continuing operations... 5,916 16,165 6,777 (3,972) (2,328) Fixed Charges................................ 10,807 4,361 3,219 6,166 3,474 Interest Capitalized......................... (135) (229) 0 (54) (142) Preferred dividends.......................... (1,527) ========= ========= ========= ========= ========= 16,588 20,297 8,469 2,140 1,004 ========= ========= ========= ========= ========= Ratio of earnings to fixed charges........... 1.53 4.65 1.78 (b) (b) ========= ========= ========= ========= ========= For the purposes of these computations, "earnings" are defined as the sum of pretax income from continuing operations plus fixed charges of the Company and its subsidiaries, adjusted to exclude the amount of any interest capitalized during the period and dividends paid on preferred stock; "fixed charges" consist of interest on debt, amortization of debt discount, premium, and expense, and the portion of rents which is representative of the interest. - --------------------------------------------------- (a) One-third of rent expense is deemed to be representative of the interest factor. (b) Earnings did not cover fixed charges by $4.0 million and $2.5 million in the years ended December 31, 1995 and 1994, respectively.
EX-21 10 EXHIBIT 21
LIST OF SUBSIDIARIES (as of 2/16/99) 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 Processing Center Arizona Ugly Duckling Car Sales Ugly Duckling City of Cars Ugly Duckling Autorama Ugly Duckling Glendale Motors Ugly Duckling-Blue Chip Motors Ugly Duckling Car Sales Florida, Inc. Champion Acceptance Florida Ugly Duckling Car Sales Ugly Duckling Car Sales New Mexico, Inc. New Mexico Ugly Duckling Car Sales Texas, L.L.P. Ugly Duckling Car Sales Arizona Yes-Cars E-Z Motors Red McComb's Super Store Ugly Duckling Ugly Duckling Car Sales Georgia, Inc. Ugly Duckling Car Sales Georgia Kars-Yes Ugly Duckling Car Sales California, Ugly Duckling Car Sales California Inc. Kars-Yes Ugly Duckling Portfolio Corporation Arizona (formerly Champion Portfolio Corporation) Ugly Duckling Portfolio Corporation II Arizona Ugly Duckling Receivables Corp. Delaware Ugly Duckling Receivables Corp. II Delaware Drake Insurance Services, Inc. Arizona Drake Insurance Agency, Inc. Arizona Drake Property & Casualty Life Insurance Co. Turks & Caicos Islands Drake Life Insurance Co. Turks & Caicos Islands Ugly Duckling Dealer Finance, Inc. Arizona Ugly Duckling Dealer Finance Alabama, Inc. Arizona UDRAC, Inc. Arizona UDRAC Rentals, Inc. Arizona Cygnet Financial Corporation Delaware Cygnet Financial Services, Inc. Arizona Cygnet Dealer Finance, Inc. Arizona Cygnet Finance Alabama, Inc. Arizona Cygnet Financial Portfolio, Inc. Arizona Cygnet Support Services, Inc. Arizona Fidelity Funding Auto Receivables Corp. Delaware Fidelity Funding Auto Receivables Corp. II Delaware Fidelity Funding Auto Receivables Corp. III Delaware Fidelity Funding Receivables, L.L.C. Delaware
EX-23 11 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT The Board of Directors Ugly Duckling Corporation: We consent to the incorporation by reference in the registration statements of Ugly Duckling Corporation on Form S-3 (File No. 333-31531) filed as of July 18, 1997, as amended by pre-effective amendment No. 1 to Form S-3 filed as of July 30, 1997; Form S-3 (File No. 333-22237) filed as post-effective amendment No. 2 to Form S-1 as of July 18, 1997; Form S-8 (File No. 333-32313) for Ugly Duckling Corporation Long-Term Incentive Plan filed as of July 29, 1997; Form S-8 (File No. 333-08457) for Ugly Duckling Corporation Long-Term Incentive Plan filed as of July 19, 1996; Form S-8 (File No. 333-06615) for Ugly Duckling Corporation Director Incentive Plan filed as of June 21, 1996; and Form S-8 (File No. 333-72717) for Ugly Duckling Corporation 1998 Executive Incentive Plan filed as of February 22, 1999, of our report dated February 18, 1999, relating to the consolidated balance sheets of Ugly Duckling Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998, annual report on Form 10-K of Ugly Duckling Corporation. KPMG LLP Phoenix, Arizona March 26, 1999 EX-24.1 12 EXHIBIT 24.1 SPECIAL POWER OF ATTORNEY (for Robert J. Abrahams) KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Ernest C. Garcia II, Gregory B. Sullivan, Steven T. Darak, and Steven P. Johnson, and each of them, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1998, for filing with the Securities and Exchange Commission ("SEC") by Ugly Duckling Corporation, a Delaware corporation, together with any and all amendments to such Form 10-K, and to file the same with all exhibits thereto, and all documents in connection therewith, with the SEC, granting to such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, or each of them, may lawfully do or cause to be done by virtue hereof. DATE: February 25, 1999 /S/ ROBERT J. ABRAHAMS ---------------------- ROBERT J. ABRAHAMS EX-24.2 13 EXHIBIT 24.2 SPECIAL POWER OF ATTORNEY (for Christopher D. Jennings) KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Ernest C. Garcia II, Gregory B. Sullivan, and Steven T. Darak, Steven P. Johnson, and each of them, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1998, for filing with the Securities and Exchange Commission ("SEC") by Ugly Duckling Corporation, a Delaware corporation, together with any and all amendments to such Form 10-K, and to file the same with all exhibits thereto, and all documents in connection therewith, with the SEC, granting to such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, or each of them, may lawfully do or cause to be done by virtue hereof. DATE: February 25, 1999 /S/ CHRISTOPHER D. JENNINGS --------------------------- Christopher D. Jennings EX-24.3 14 EXHIBIT 24.3 SPECIAL POWER OF ATTORNEY (for John N. MacDonough) KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Ernest C. Garcia II, Gregory B. Sullivan, Steven T. Darak, and Steven P. Johnson, and each of them, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1998, for filing with the Securities and Exchange Commission ("SEC") by Ugly Duckling Corporation, a Delaware corporation, together with any and all amendments to such Form 10-K, and to file the same with all exhibits thereto, and all documents in connection therewith, with the SEC, granting to such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, or each of them, may lawfully do or cause to be done by virtue hereof. DATE: February 25, 1999 /S/ JOHN N. MACDONOUGH ---------------------- JOHN N. MACDONOUGH EX-24.4 15 EXHIBIT 24.4 SPECIAL POWER OF ATTORNEY (for Frank P. Willey) KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Ernest C. Garcia II, Gregory B. Sullivan, Steven T. Darak, and Steven P. Johnson, and each of them, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1998, for filing with the Securities and Exchange Commission ("SEC") by Ugly Duckling Corporation, a Delaware corporation, together with any and all amendments to such Form 10-K, and to file the same with all exhibits thereto, and all documents in connection therewith, with the SEC, granting to such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, or each of them, may lawfully do or cause to be done by virtue hereof. DATE: February 25, 1999 /S/ FRANK P. WILLEY ------------------- FRANK P. WILLEY EX-24.5 16 EXHIBIT 24.5 SPECIAL POWER OF ATTORNEY (for Ernest C. Garcia II) KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Gregory B. Sullivan, Steven T. Darak, and Steven P. Johnson, and each of them, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1998, for filing with the Securities and Exchange Commission ("SEC") by Ugly Duckling Corporation, a Delaware corporation, together with any and all amendments to such Form 10-K, and to file the same with all exhibits thereto, and all documents in connection therewith, with the SEC, granting to such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, or each of them, may lawfully do or cause to be done by virtue hereof. DATE: February 25, 1999 /S/ ERNEST C. GARCIA II --------------------------- ERNEST C. GARCIA II EX-24.6 17 EXHIBIT 24.6 SPECIAL POWER OF ATTORNEY (for Gregory B. Sullivan) KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Ernest C. Garcia II, Steven T. Darak, and Steven P. Johnson, and each of them, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1998, for filing with the Securities and Exchange Commission ("SEC") by Ugly Duckling Corporation, a Delaware corporation, together with any and all amendments to such Form 10-K, and to file the same with all exhibits thereto, and all documents in connection therewith, with the SEC, granting to such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, or each of them, may lawfully do or cause to be done by virtue hereof. DATE: February 25, 1999 /S/ GREGORY B. SULLIVAN ----------------------- GREGORY B. SULLIVAN EX-24.7 18 EXHIBIT 24.7 SPECIAL POWER OF ATTORNEY (for Steven T. Darak) KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Ernest C. Garcia II, Gregory B. Sullivan and Steven P. Johnson, and each of them, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 1998, for filing with the Securities and Exchange Commission ("SEC") by Ugly Duckling Corporation, a Delaware corporation, together with any and all amendments to such Form 10-K, and to file the same with all exhibits thereto, and all documents in connection therewith, with the SEC, granting to such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, or each of them, may lawfully do or cause to be done by virtue hereof. DATE: February 25, 1999 /S/ STEVEN T . DARAK -------------------- STEVEN T. DARAK EX-27.1 19 EXHIBIT 27.1 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. EXHIBIT 27.1
5 This financial data schedule contains summary financial information as of and for the year ended December 31, 1998, which is extracted from the Consolidated Balance Sheets, Consolidated Statements of Operations, and Consolidated Statements of Cash Flows, and is qualified in its entirety by reference to the financial statements within the report on Form 10-K filing. 0001012704 UGLY DUCKLING CORP 1,000 YEAR DEC-31-1998 DEC-31-1998 2,751 0 234,082 42,616 44,167 0 41,169 8,199 345,975 0 0 0 0 173,828 3,449 345,975 287,618 366,170 167,014 0 118,702 67,634 6,904 5,916 2,396 3,520 (9,223) 0 0 (5,703) (.32) (.31) UNCLASSIFIED BALANCE SHEET
EX-27.2 20 EXHIBIT 27.2 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. EXHIBIT 27.2
5 This restated financial data schedule (which includes Exhibits 27.2 to 27.9) contains summary financial information as of and for the years ended December 31, 1997 and 1996, respectively, and for the interim periods for the years ended December 31, 1998 and 1997, respectively. The summary financial information as of and for the year ended December 31, 1997, is extracted from the Consolidated Balance Sheet and the Consolidated Statement of Operations, and the summary financial information for the year ended December 31, 1996 is extracted from the Consolidated Statement of Operations. This summary financial information is qualified in its entirety by reference to the financial statements within the report on Form 10-K filing. 0001012704 UGLY DUCKLING CORP 1,000 YEAR DEC-31-1997 DEC-31-1997 3,357 0 136,064 18,746 34,690 0 44,818 5,051 276,426 0 0 0 0 172,622 9,152 276,426 123,814 170,083 72,358 0 55,741 23,045 2,774 16,165 6,637 9,528 (83) 0 0 9,445 .53 .52 UNCLASSIFIED BALANCE SHEET
EX-27.3 21 EXHIBIT 27.3 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. EXHIBIT 27.3
5 0001012704 UGLY DUCKLING CORP 1,000 YEAR DEC-31-1996 DEC-31-1996 18,455 0 20,036 1,626 5,464 0 22,461 2,519 117,629 0 0 0 0 82,612 (293) 117,629 53,768 122,595 31,879 0 18,085 9,657 2,429 6,777 100 6,677 (811) 0 0 5,866 .63 .60 UNCLASSIFIED BALANCE SHEET
EX-27.4 22 EXHIBIT 27.4 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. EXHIBIT 27.4
5 0001012704 UGLY DUCKLING CORP 1,000 3-MOS DEC-31-1997 SEP-30-1998 1,406 0 130,081 17,865 36,205 0 36,287 6,856 284,752 0 0 0 0 169,691 11,727 284,752 73,580 96,714 42,763 0 33,542 16,298 1,482 2,629 1,102 1,527 (3,628) 0 0 (2,101) (.11) (.11) UNCLASSIFIED BALANCE SHEET
EX-27.5 23 EXHIBIT 27.5 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. EXHIBIT 27.5
5 0001012704 UGLY DUCKLING CORP 1,000 3-MOS DEC-31-1997 JUN-30-1998 1,652 0 116,279 16,344 34,690 0 34,040 5,616 283,218 0 0 0 0 173,562 10,228 283,218 69,522 88,819 41,153 0 26,359 14,988 1,370 4,949 2,007 2,942 0 0 0 2,942 .16 .16 UNCLASSIFIED BALANCE SHEET
EX-27.6 24 EXHIBIT 27.6 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. EXHIBIT 27.6
5 0001012704 UGLY DUCKLING CORP 1,000 3-MOS DEC-31-1997 MAR-31-1998 514 0 105,891 14,880 25,458 0 51,117 5,530 287,561 0 0 0 0 173,724 7,285 287,561 72,973 87,777 41,169 0 23,514 15,362 1,503 6,229 2,500 3,729 (5,595) 0 0 (1,866) (.10) (.10) UNCLASSIFIED BALANCE SHEET
EX-27.7 25 EXHIBIT 27.7 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. EXHIBIT 27.7
5 0001012704 UGLY DUCKLING CORP 1,000 3-MOS DEC-31-1996 SEP-30-1997 9,328 0 147,618 5,616 19,467 0 40,565 4,116 268,969 0 0 0 0 171,943 5,452 268,969 33,530 45,737 20,012 0 14,780 6,310 928 3,707 1,487 2,220 (4,048) 0 0 1,828 (.10) (.10) UNCLASSIFIED BALANCE SHEET
EX-27.8 26 EXHIBIT 27.8 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. EXHIBIT 27.8
5 0001012704 UGLY DUCKLING CORP 1,000 3-MOS DEC-31-1996 JUN-30-1997 45,349 0 89,949 12,750 15,782 0 33,423 3,443 215,578 0 0 0 0 171,317 7,280 215,578 27,802 36,279 15,951 0 11,988 4,848 286 3,206 1,310 1,896 2,415 0 0 4,311 .23 .23 UNCLASSIFIED BALANCE SHEET
EX-27.9 27 EXHIBIT 27.9 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. EXHIBIT 27.9
5 0001012704 UGLY DUCKLING CORP 1,000 3-MOS DEC-31-1996 MAR-31-1997 76,090 0 30,771 1,875 8,793 0 27,024 2,877 205,016 0 0 0 0 171,274 2,969 205,016 18,211 22,301 9,939 0 8,133 3,261 188 780 372 408 2,854 0 0 3,262 .21 .20
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