================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________. Commission File Number 0-20841 UGLY DUCKLING CORPORATION (Exact name of registrant as specified in its charter) Delaware 86-0721358 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2525 E. Camelback Road, Suite 500, Phoenix, Arizona 85016 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (602) 852-6600 Securities registered pursuant to Section 12(b) of the act: Title of Class Name of Each Exchange On Which Registered -------------- ----------------------------------------- 12% Subordinated Debentures Due 2003 American Stock Exchange 11% Subordinated Debentures Due 2007 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. [ ] As of May 1, 2000, the aggregate market value of common stock held by non-affiliates of the registrant was approximately $73,202,715. APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] (APPLICABLE ONLY TO CORPORATE REGISTRANTS) As of May 1, 2000, there were approximately 13,895,965 shares of common stock of the Registrant outstanding. DOCUMENTS INCORPORATED BY REFERENCE NONE ================================================================================ PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. DIRECTORS The following table gives the name, age, principal occupation and business experience of our directors. Also, included for each director is the year in which he became a director for us, his positions and offices with us, family relationships, other directorships and certain other biographical information. NAME AGE BUSINESS EXPERIENCE SINCE - ---- --- ------------------- ----- ERNEST C. GARCIA II (1) 42 CHAIRMAN OF THE BOARD OF UGLY DUCKLING since its 1996 founding in 1992. Mr. Garcia also served as Chief Executive Officer until July 1999 and as President from 1992 to 1996. Since 1991, Mr. Garcia has served as President of Verde Investments, Inc. (Verde), a real estate investment corporation that is an affiliate of Ugly Duckling. See "Certain Relationships and Related Transactions." CHRISTOPHER D. JENNINGS 46 CO-CHIEF EXECUTIVE OFFICER OF GLOBAL EURONET GROUP, 1996 a venture capital/investment banking internet company, beginning in May 2000. Prior to that time, he was a Managing Director of Friedman, Billings, Ramsey & Co., Inc., an investment banking firm, since April 1998. Mr. Jennings served as a managing director of Cruttenden Roth Incorporated (Cruttenden Roth), also an investment banking firm, from 1995 to April 1998. From 1992 to 1994, Mr. Jennings served as a Managing Director at the investment banking firm, Sutro & Co. From 1989 to 1992, Mr. Jennings served as a Senior Managing Director at Maiden Lane Associates, Ltd., a private equity fund. Prior to 1989, Mr. Jennings served in various positions with, among others, Dean Witter Reynolds, Inc. and Warburg Paribas Becker, Inc., both of which are investment banking firms. Mr. Jennings is also a director of Global Netfinancial.com. Mr. Jennings is a member of the Compensation Committee of the board and effective March 1999 is also a member of the Audit Committee. See "Certain Relationships and Related Transactions" and "Security Ownership of Certain Beneficial Owners and Management." JOHN N. MACDONOUGH 56 FORMER CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF 1996 MILLER BREWING COMPANY, a brewer and marketer of beer, from 1993 until April of 1999. Mr. MacDonough previously served from 1992 to 1993 as Miller Brewing's President and Chief Operating Officer. Prior to 1992, he was employed in various positions at Anheuser Busch, Inc., also a brewer and marketer of beer. Mr. MacDonough is also a director of Marshall & Ilsley Bank and Wisconsin Energy Corporation, a utility engaged in the generation, transmission, distribution and sale of electric energy. He is married to the sister of Mr. Sullivan. 1 NAME AGE BUSINESS EXPERIENCE SINCE - ---- --- ------------------- ----- GREGORY B. SULLIVAN 41 UGLY DUCKLING CORPORATION'S PRESIDENT SINCE MARCH 1998 1996 AND CHIEF EXECUTIVE OFFICER SINCE JULY 1999. Mr. Sullivan has also served as President of Ugly Duckling Car Sales, Inc. since December 1996. From 1995 through February 1996, Mr. Sullivan was a consultant for us. He formerly served as President and principal stockholder of National Sports Games, Inc., an amusement game manufacturing company that he co-founded in 1989 and sold in 1994. Prior to 1989, Mr. Sullivan was involved in the securities industry and practiced law with a large Arizona firm. He is an inactive member of the State Bar of Arizona. Mr. Sullivan's sister is married to Mr. MacDonough. FRANK P. WILLEY 46 PRESIDENT OF FIDELITY NATIONAL FINANCIAL, INC., a 1996 title insurance underwriter, since 1995. From 1984 to 1995, Mr. Willey served as the Executive Vice President and General Counsel of Fidelity National Title. Mr. Willey is also a director of Fidelity National Financial, Inc. and CKE Restaurants, Inc., an operator of various quick-service restaurant chains. He is a member of the Compensation and Audit Committees of the board (1) Prior to 1992, when he founded Ugly Duckling, Ernest C. Garcia II was involved in various real estate, securities, and banking ventures. Arising out of two transactions in 1987 between Lincoln Savings and Loan Association (Lincoln) and entities controlled by Mr. Garcia, the Resolution Trust Corporation, which ultimately took over Lincoln, asserted that Lincoln improperly accounted for the transactions and that Mr. Garcia's participation in the transactions facilitated the improper accounting. Facing severe financial pressures, Mr. Garcia agreed to plead guilty to one count of bank fraud, but in light of his cooperation with authorities both before and after he was charged, was sentenced to only three years probation, which has expired, was fined $50 (the minimum fine the court could assess), and during the period of his probation, which ended in 1996, was banned from becoming an officer, director or employee of any federally-insured financial institution or a securities firm without governmental approval. In separate actions arising out of this matter Mr. Garcia agreed not to violate the securities laws, and filed for bankruptcy both personally and with respect to certain entities he controlled. The bankruptcies were discharged by 1993. 2 SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers, and persons who own more than 10% of our common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission. We are not aware of any failure of our directors, officers and 10% stockholders to comply with all Section 16(a) reporting requirements during 1999, except as set forth below. In making this statement, we have relied upon the written representation of our directors, officers and 10% stockholders who are our affiliates. We disclaim any responsibility for determining whether any person, other than Ernest C. Garcia II, who has filed a Schedule 13G or Schedule 13D reporting more than 10% beneficial ownership for purposes of Section 13(d) or Section 13(g) of the Securities Exchange Act of 1934 is also a more than 10% owner for purposes of Section 16(a) of the Securities Exchange Act of 1934 and we make no representations as to whether any such person has made all required filings under Section 16(a). * Mr. Willey is the President and Director of Fidelity National Financial, Inc. (Fidelity). A subsidiary of Fidelity purchased 147,400 shares of stock of Ugly Duckling on various dates between April and July of 1999, at prices ranging from $5.30 to $7.71 without Mr. Willey's knowledge. After becoming aware of the transaction, a Form 4 filing was done on December 8, 1999. Fidelity now has a process for the timely reporting of transactions in Ugly Duckling stock. Mr. Willey disclaims any beneficial ownership in these or any other shares of Ugly Duckling owned by Fidelity. * We prepared Form 5's and inadvertently filed them two days after the required filing date for the following individuals: Greg Sullivan, Steve Darak, Don Addink, Jon Ehlinger, Ernie Garcia, Christopher Jennings, John MacDonough, and Frank Willey. Steps have been taken to ensure this does not happen again. 3 ITEM 11. EXECUTIVE COMPENSATION. COMPENSATION OF EXECUTIVE OFFICERS, BENEFITS AND RELATED MATTERS SUMMARY COMPENSATION TABLE The table below sets forth information concerning the annual and long-term compensation for services rendered in all capacities for us during the three fiscal years ended December 31, 1999 of our Named Executive Officers. "Named Executive Officers" consist of (1) each person serving as our Chief Executive Officer during 1999, (2) our 4 next most highly compensated executive officers serving as executive officers at December 31, 1999, and (3) 2 additional individuals who would have been reported under (2) above but for the fact that the individuals were not serving as executive officers for Ugly Duckling at December 31, 1999. ANNUAL COMPENSATION LONG-TERM COMPENSATION ----------------------------- --------------------- AWARDS --------------------- OTHER SECURITIES ANNUAL RESTRICTED UNDER- ALL OTHER COMPEN- STOCK LYING COMPEN- NAME AND PRINCIPAL SALARY SATION AWARD(S) OPTIONS SATION POSITION YEAR ($) BONUS ($) ($) (#)(1) ($)(2) -------- ---- -------- ------- ------- -------- ------ ------ Ernest C. Garcia II 1999 $ 93,416 -- $ 3,258(3) 100,000 -- Chairman of the Board and 1998 $150,462 -- $ 3,228(3) -- -- $1,000 former Chief Executive Officer 1997 $131,677 -- $ 2,985(3) -- -- $ 950 Gregory B. Sullivan 1999 $200,000 $60,000 $ 4,850(4) -- 125,000 $ 688 President and Chief 1998 $208,308 -- $ 1,156(4) -- 500,000 $ 833 Executive Officer 1997 $197,846 -- -- -- -- $ 554 Steven T. Darak 1999 $175,000 $49,950 $ 870(5) -- 35,000 -- Senior Vice President, and 1998 $180,961 -- $ 1,750(5) -- 65,001(6) -- Chief Financial Officer 1997 $148,654 $25,000 $ 1,750(5) -- -- -- Donald L. Addink 1999 $169,230 $18,000 -- -- 45,000 -- Senior Vice President -- 1998 $171,346 $40,000 -- -- 33,500(7) $1,000 Treasurer 1997 $139,671 $10,000 -- -- -- $ 950 Steven A. Tesdahl(8) 1999 $198,941 $11,658 $ 220 Senior Vice President 1998 $187,115 -- -- -- 75,000(9) $1,000 and Chief Information Officer 1997 $ 53,846 -- -- $100,000(10) 100,000 -- Jon Ehlinger 1999 $135,076 $17,081 -- -- 10,000 $ 172 Vice President, 1998 $ 56,307 -- -- -- 10,000 -- General Counsel and Secretary 1997 -- -- -- -- -- -- Ray Fidel 1999 $174,999 $ 4,354 $ 6,000(11) -- -- -- Former President, 1998 $147,115 $ 761 $ 1,500(11) Cygnet Dealer Finance 1997 $132,692 -- $11,000(11) -- -- -- (1) The amounts shown in this column represent stock options granted either pursuant to the Incentive Plan or the Executive Plan. For the Incentive Plan, options generally vest over a 5-year period, with 20.0% of the options becoming exercisable on each successive anniversary of the date of grant. For the Executive Plan, options vest over a 5-year period, with 20.0% becoming exercisable on each successive anniversary of the date of grant, but subject to additional vesting hurdles based on the market price of our common stock as traded on Nasdaq and /or internal financial performance targets. Regardless of the preceding vesting schedule being met for the Executive Plan options, such options also fully vest at a set date in the future. (i.e., "cliff vest"). See "Compensation of Executive Officers, Benefits and Related Matters - Long Term Incentive Plan" and " --- 1998 Executive Incentive Plan" for a discussion of the Incentive Plan and Executive Plan, respectively. 4 (2) The amounts shown in this column include the dollar value of 401(k) plan contributions in Ugly Duckling common stock made by Ugly Duckling for the benefit of our Named Executive Officers. The stock related portion of this amount only includes vested stock as of December 31, 1999 and the value is calculated with a share price of $6.88, the closing price of the stock as of December 31, 1999 (as reported by Nasdaq). (3) These amounts include car allowances as follows: (a) Mr. Garcia -- a $3,258 car allowance during 1999, a $3,228 car allowance during 1998, and a $2,985 car allowance during 1997. (4) These amounts include $4,850 for Mr. Sullivan's personal use of a company car for 1999 and $1,156 for a portion of 1998. (5) These amounts include an $850 car allowance in 1999 and a $1,750 car allowance during each of 1998 and 1997. (6) Includes 15,001 options that were cancelled and reissued on November 17, 1998. (7) Includes 8,500 options that were cancelled and reissued on November 17, 1998. (8) Employment changes occurred for this officer as follows: Mr. Tesdahl became Senior Vice President and Chief Information Officer of Ugly Duckling on February 15, 2000. Prior to that time, effective November 1998, we revised our officer structure and as part of that process, Mr. Tesdahl stopped being an executive officer for Ugly Duckling. Mr. Tesdahl began his employment as an executive officer of Ugly Duckling in September 1997. (9) Includes 50,000 options that were cancelled and reissued on November 17, 1998. (10) The dollar amount shown represents the market value as of the grant date of restricted stock awarded to Mr. Tesdahl upon his initial hiring in September 1997. The grant was pursuant to his employment agreement with us and was made outside of the Incentive Plan and the Executive Plan. The award was for approximately 7,692 shares at $13.00 per share (based on the closing price of our stock on the grant date as reported by Nasdaq). Under Mr. Tesdahl's employment agreement, these shares vested 100% in January 1998. At December 31, 1999, Mr. Tesdahl retained 4,565 shares from the restricted stock award, valued at $31,407 (based on the December 31, 1999 closing price of our stock of $6.88 per share as reported by Nasdaq). (11) This amount is for car allowances in 1999, 1998 and 1997. OPTION GRANTS IN LAST FISCAL YEAR The following table provides information on option grants for the fiscal year ended December 31, 1999 to each of our Named Executive Officers. POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ---------------------------------------------------- ASSUMED ANNUAL NUMBER OF PERCENT OF RATES OF STOCK SECURITIES TOTAL PRICE APPRECIATION UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERM(1) OPTIONS TO EMPLOYEES PRICE EXPIRATION -------------------- NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE 5% ($) 10% ($) ---- ----------- -------------- ------ ---- ------ ------- Ernest C. Garcia II 100,000(2) 3.3% $5.56 3/2/2009 349,665 886,121 Gregory B. Sullivan 125,000(2) 20.4% $5.56 3/2/2009 437,082 1,107,651 Steven T. Darak 35,000(2) 5.7% $5.56 3/2/2009 122,383 310,142 Jon Ehlinger 7,500(3) 1.2% $5.56 3/2/2009 26,225 66,454 2,500(3) 0.4% 8.19 7/28/2009 12,876 32,632 Donald L. Addink 35,000(2) 5.7% $5.56 3/2/2009 122,383 310,142 10,000(3) 1.6% 8.19 7/28/2009 51,506 130,528 Ray Fidel -- -- -- -- -- -- Steven A. Tesdahl -- -- -- -- -- -- (1) Potential Realized Values are net of the exercise price, but before taxes associated with the exercise. Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. The assumed 5% and 10% rates of stock price appreciation are 5 provided in accordance with the rules of the Securities and Exchange Commission and do not represent our estimate or projection of the future price of our common stock. Actual gains, if any, on stock option exercises will depend upon the future market prices of our common stock on the date of exercise. Accordingly, there can be no assurance that the values shown in the last 2 columns will be realized. The closing price of our common stock on May 1, 2000 was $7.50 per share (as reported by Nasdaq). (2) On March 2, 1999 Mr. Garcia was granted these options under the Executive Plan at an exercise price equal to the fair value of the shares on the date of the grant. The options have a 10-year term. The options vest over a 5-year period, with 20.0% becoming exercisable on each successive anniversary of the date of grant. On March 2, 1999, Mr. Sullivan, Mr. Darak and Mr. Addink were granted these performance-based stock option awards under the Executive Plan. They vest over a 5-year period, subject to vesting hurdles based on the market price of our common stock as traded on Nasdaq and certain internal target financial performance measures. However, even if the hurdles are not met, these options fully vest on March 2, 2006 (i.e., "cliff vesting"). The options have 10-year terms. See "Compensation of Executive Officers, Benefits and Related Matters - 1998 Executive Incentive Plan" for additional information on our Executive Plan. (3) These options were granted to the Named Executive Officers under the Incentive Plan at an exercise price equal to the fair value of the shares on the date of grant. The options have a 10-year term. The options vest over a 5-year period, with 20.0% becoming exercisable on each successive anniversary of the date of grant. See "Compensation of Executive Officers, Benefits and Related Matters - Long Term Incentive Plan" for additional information on our Incentive Plan. 6 RECENT OPTION GRANTS IN 2000 On February 15, 2000, the Compensation Committee reviewed and approved, in advance, grants of stock options to Ugly Duckling employees. These grants include the right to acquire an aggregate of approximately 15,000 shares of our common stock at an exercise price of $8.438 per share. The options did not include awards to any Named Executive Officers. On April 17, 2000, the Compensation Committee reviewed and approved a grant of stock options to an employee. The grant included the right to acquire approximately 5,000 shares of our common stock at an exercise price of $7.406 per share. The Board and Compensation Committee also approved a grant of 5,000 options under the Executive Plan to each independent director on April 17, 2000. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The table below sets forth information with respect to option exercises and the number and value of options outstanding at December 31, 1999 held by our Named Executive Officers. Generally, we have not issued any other forms of stock based awards. NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING OPTIONS AT IN-THE-MONEY OPTIONS AT SHARES FISCAL YEAR END (#)(1) FISCAL YEAR END ($)(2) ACQUIRED ON VALUE --------------------------- --------------------------- NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ------------ ------------ ----------- ------------- ----------- ------------- Ernest C. Garcia II -- -- -- 100,000 -- $132,000.00 Gregory B. Sullivan -- -- 207,800 558,200 $400,062.00 $265,828.00 Steven T. Darak -- -- 18,999 91,002 $ 6,028.25 $ 67,723.50 Jon D. Ehlinger -- -- 2,000 18,000 $ 0.00 $ 9,900.00 Donald L. Addink -- -- 6,700 71,800 $ 2,975.00 $ 58,100.00 Ray Fidel (3) -- -- -- -- $ 0.00 $ 0.00 Steven A. Tesdahl -- -- 15,000 60,000 $ 17,500.00 $ 70,000.00 (1) For the Incentive Plan, generally options vest over a 5-year period, with 20% of the options becoming exercisable on each successive anniversary of the date of grant. Under the Executive Plan, options vest over a 5-year period, with 20% of the options becoming exercisable on each successive anniversary of the date of grant, but subject to additional vesting hurdles based on the market price of our common stock as traded on Nasdaq and/or certain internal target financial performance measures. In any event, such options fully vest on January 15, 2005 or March 2, 2006 (i.e., "cliff vesting"), depending upon their issuance date. See "Compensation of Executive Officers, Benefits and Related Matters- Long Term Incentive Plan" and " --- 1998 Executive Incentive Plan" for additional information on the Incentive Plan and Executive Plan, respectively. (2) In-the-money options are options for which the option exercise price (the fair market value on the date of grant) was lower than the market price of our common stock on December 31, 1999. The market price of our common stock on December 31, 1999 was $6.88 per share based on the closing price of our stock on that date as reported by Nasdaq. The values in the last two columns have not been, and may never be, received by the Named Executive Officers. Actual gains, if any, on option exercises will depend on the value of the common stock on the exercise dates. Accordingly, there can be no assurance that the values shown in the last 2 columns will be realized. The closing price of our common stock on May 1, 2000 was $7.50 per share. (3) Prior to December 30, 1999, Mr. Fidel was the President of Ugly Duckling's Cygnet Dealer Finance division. As of December 30, 1999 Cygnet Dealer Finance was sold to an affiliate of Mr. Garcia and Mr. Fidel's options were forfeited as part of the transaction by Mr. Fidel. 7 LONG TERM INCENTIVE PLAN In June 1995, our stockholders approved the Long Term Incentive Plan (Incentive Plan). We believe that our Incentive Plan promotes the success and enhances the value of Ugly Duckling by (1) linking the personal interests of participants to those of our stockholders, and (2) providing participants with an incentive for outstanding performance. Under the Incentive Plan, we may grant various types of awards to our employees, consultants and advisors, including: * incentive stock options (ISOs), * nonqualified stock options (NQSOs), * performance shares, * restricted stock, and * performance-based awards. The Incentive Plan is administered by our board or a board committee (i.e., Compensation Committee), whose membership qualifies as non-employee directors and outside directors. The Compensation Committee has the authority to administer the plan, including the power to determine - * eligibility, * type and number of awards to be granted, and * terms and conditions of any award granted, including the price and timing of awards, vesting and acceleration of such awards (other than performance-based awards). Thus far, we have only granted ISOs and NQSOs under this plan. Generally, these stock options have been subject to vesting over a 5-year period, with 20.0% of the options becoming exercisable by the holder on each successive anniversary date of the grant. The options generally expire 10 years after the grant date. The total number of shares of our common stock initially available for awards under the Incentive Plan was 1,800,000. The exercise price of all options granted under the plan in the past has equaled or exceeded the fair market value of our common stock on the date of grant. The plan has a "change of control" provision that is summarized below in this proxy statement. See "Compensation of Executive Officers, Benefits and Related Matters -- Change of Control Arrangements." In 1999, the Compensation Committee granted, subject to certain conditions, approximately 312,250 options under the Incentive Plan. On February 15, 2000 we granted 15,000 options and on April 17, 2000 we granted 5,000 options under the Incentive Plan. At May 1, 2000 we had granted options under the plan to purchase approximately 1,391,485 shares of our common stock (net of canceled and lapsed grants) to various of our employees, of which approximately 1,005,365 were outstanding. Also at May 1, 2000, there were approximately 408,515 of our shares that remained available for grant under the plan. 1998 EXECUTIVE INCENTIVE PLAN The 1998 Executive Incentive Plan (Executive Plan) was approved by our stockholders at our 1998 annual meeting. The plan became effective as of January 1998. Under the Executive Plan, Ugly Duckling may grant ISOs, NQSOs, SARs, performance shares, restricted stock, and performance-based awards to its employees, consultants and advisors. Although the Executive Plan allows broad based awards to be granted and thus is similar to the Incentive Plan, we currently intend to utilize the Executive Plan primarily for performance-based awards to our executives and key employees as noted previously. The total number 8 of shares of our common stock initially available for awards under the Executive Plan was 800,000. The exercise price of all options granted under the Executive Plan in the past has been equal to the fair market value of our common stock on the date of grant. The plan is administered by the Compensation Committee and has a "change of control" provision that is summarized below in this proxy statement. See "-- Change of Control Arrangements." At May 1, 2000, we had granted options under the plan to purchase 635,000 shares of our common stock (net of canceled and lapsed grants) under the Executive Plan to various officers of Ugly Duckling, of which 635,000 are still outstanding. There were 165,000 shares that remain available for grant under the plan as of May 1, 2000. Other than as summarized and noted above, the Executive Plan is similar to the Incentive Plan as described in this proxy statement. 401(K) PLANS Under both of our 401(k) plans, eligible employees may direct that we withhold a portion of their compensation, up to a legally established maximum, and contribute this amount to their accounts. We place all 401(k) plan contributions in trust funds within our 401(k) plans. Participants may direct the investment of their account balances among mutual or investment funds available under the plans. Until June 1, 1999, the 401(k) plans provided a matching contribution ranging from 10.0% to 25.0% of a participant's pretax contributions and discretionary additional matchings by us, if we authorize them. Beginning June 1, 1999, the 401(k) plans provide a matching contribution of Ugly Duckling stock of up to 50% for up to the first six percent of a participant's pre-tax contributions. The matching contribution vesting and percentage match are based upon years of service with one hundred percent vesting and fifty percent matching at five years. Amounts contributed to participant accounts under the 401(k) plans and any earnings or interest accrued on the participant accounts are generally not subject to federal income tax until distributed to the participant and, except in limited cases, the participant may not withdraw such amounts until death, retirement or termination of employment. CONTRACTS WITH DIRECTORS AND EXECUTIVE OFFICERS AND SEVERANCE ARRANGEMENTS Ernest C. Garcia II On January 1, 1996, we entered into a 3-year employment agreement with Mr. Garcia, our Chairman and Chief Executive Officer. This agreement was extended for another 3-year term effective December 31, 1998. The agreement established Mr. Garcia's base salary for 1996 at $120,000 per year and provided a minimum 10.0% increase in the base salary each year throughout the term of the agreement. In addition, the agreement provided for the continuation of Mr. Garcia's base salary and certain benefits for a period of 1 year in the event Mr. Garcia was terminated by us without cause prior to the expiration of the agreement. It also contained confidentiality and non-compete covenants. Mr. Garcia stepped down from his position as Chief Executive Officer of Ugly Duckling in July of 1999 and this agreement terminated at that time. Donald L. Addink On June 1, 1995, we entered into a 5-year employment agreement with Mr. Addink, our Senior Vice President -- Senior Analyst, that was amended and restated effective August 1, 1997. This restated agreement expires May 31, 2000. The restated agreement establishes Mr. Addink's base salary at $165,000 per year beginning on or around the effective date of the restated agreement, a $10,000 bonus payment upon execution of the restated agreement, certain benefits, and the continuation of Mr. Addink's base salary and certain benefits for a period of 1 year (but not to exceed the expiration date of the agreement) in the event Mr. Addink is terminated by us without cause prior to expiration of the restated agreement. It also contains confidentiality and non-compete covenants. Further, it accelerated the vesting of Mr. Addink's 100,000 stock options previously granted under the Incentive Plan, as set forth in the table below. These options were originally granted pursuant to the Incentive Plan's general 5-year vesting schedule with 20% vesting each year. 9 NUMBER EXERCISE PRICE ACCELERATED ORIGINAL GRANT DATE OF SHARES(#) PER SHARE($) VESTING DATE ------------------- ------------ ------------ ------------ June 1995 58,000 $ 1.72 August 1, 1997 June 1996 25,000 6.75 January 15, 1998 December 1996 17,000 17.69 August 1, 1997 STEVEN A. TESDAHL On August 16, 1997, we entered into an employment agreement with Mr. Tesdahl that was amended as of May 21, 1998. Mr. Tesdahl is Senior Vice President and Chief Information Officer of Ugly Duckling. The agreement provides for no minimum or maximum term of employment. But it does provide for: (1) his annual base salary at $175,000 per year with a minimum 10% increase on each anniversary of the hire date; (2) an initial stock option grant to acquire 100,000 shares of our common stock under the Incentive Plan, with terms and conditions consistent with the plan's general terms; (3) a grant of restricted stock valued at $100,000 on the approximate effective date of Mr. Tesdahl's employment with us, which fully vested as of January 15, 1998; and (4) certain other benefits. The agreement provides for the continuation of Mr. Tesdahl's base salary for a limited period in the event he is terminated by us without cause. The potential severance benefit decreases over time, and goes to zero after September 1, 2000. The agreement has a "change of control" provision that provides for certain rights and benefits to Mr. Tesdahl upon such an event occurring and either: * he terminates his employment with us within 12 months after the change of control; or * we terminate him without cause within 90 days prior to the change of control or within 12 months after the event. If these events occur, Mr. Tesdahl will receive a termination fee equal to 200% of his then current salary, and at the time of the change of control, his initial option will fully vest. The agreement adopts the Incentive Plan's definition of a "change of control" and adds an additional change of control event if neither Ernest C. Garcia II nor Gregory B. Sullivan is Chief Executive Officer of Ugly Duckling. See " -- Change of Control Arrangements." GENERALLY For additional information on option grants to our executive officers under the Incentive Plan and Executive Plan, see " - Long Term Incentive Plan" and " - 1998 Executive Incentive Plan." CHANGE OF CONTROL ARRANGEMENTS LONG TERM INCENTIVE PLAN The term "change of control" is defined in the Incentive Plan and is summarized in the next paragraph of this proxy statement. Upon a change of control of Ugly Duckling the Compensation Committee, in its discretion, will either - * cause all outstanding options and awards to be fully vested and exercisable and all restrictions to lapse, allowing participants the right to exercise options and awards before the change of control occurs (which event would otherwise terminate participants' options and awards); or * cause all outstanding options and awards to terminate, if the surviving or resulting corporation agrees to assume the options and awards on terms that substantially preserve the rights and benefits of outstanding options and awards. 10 Under the Incentive Plan, a "change of control" occurs upon any of the following events: * a merger or consolidation of Ugly Duckling with another corporation where we are not the surviving entity or where our stock would be converted into cash, securities or other property, other than a merger in which our stockholders before the merger have the same proportionate ownership after the merger; * with certain exceptions, any sale, lease, or other transfer of more than 40% of our assets or our earning power; * our stockholders approve a plan of complete liquidation or dissolution; * any person (other than a current stockholder or any employee benefit plan) becoming the beneficial owner of 20% or more of our common stock; or * during any 2-year period, the persons who are on our board at the beginning of such period and any new person whose election or nomination was approved by two-thirds of such directors cease to constitute a majority of the persons serving on our board. 1998 EXECUTIVE INCENTIVE PLAN The Executive Plan provides that in the event of a "change of control" of Ugly Duckling, all outstanding options and awards will be fully vested and exercisable and all restrictions will lapse unless the surviving or resulting corporation agrees to assume the options and awards on terms that substantially preserve the rights and benefits of outstanding options and awards. The Executive Plan and the Incentive Plan have the same definition for the term "change of control." GENERALLY For additional information on change of control and severance arrangements, see " -- Contracts with Directors and Executive Officers and Severance Arrangements." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION There are no compensation committee interlocks and no officer or former officer of ours has ever been a member of our board's Compensation Committee. See "Certain Relationships and Related Transactions." COMPENSATION OF OUR DIRECTORS We pay our independent directors: * an annual retainer of $7,500 per year; * $2,000 for physical attendance at meetings of the board and $1,000 for physical attendance at meetings of committees of the board on which they serve; and * $1,000 for their attendance by telephone at meetings of the board and $500 for telephonic attendance at committee meetings. We also reimburse these directors for reasonable travel expenses for their attendance at these meetings. In addition, under Ugly Duckling's Director Incentive Plan (Director Plan), upon initial appointment or initial election to the board, each of our independent directors receives Ugly Duckling common stock valued at $30,000 (Director Stock). Director Stock generally vests in increments of 1/3 over a three-year period. When Mr. Abrahams resigned from the board in April of 1999, we accelerated the vesting of the final one-third of Mr. Abrahams' Director Stock in recognition of his services to us as a director. 11 On April 20, 1999, our board and the Compensation Committee approved additional compensation for each of our independent directors. On that date it was determined that each independent director would receive a stock option to purchase 5,000 shares of Ugly Duckling common stock under the Incentive Plan. The options were granted effective June 21, 1999 at an exercise price of $6.28 per share (the closing price per Nasdaq and the fair market value of our stock on April 20, 1999), and fully vested as of June 21, 1999. In 2000, each of our independent directors were also granted 5,000 options under the Executive Plan. These options are non-qualified stock options, and it is our current intention to have annual option awards to our independent directors. We do not compensate directors who are also officers of Ugly Duckling for their service as directors and such directors are not eligible to participate in our Director Plan. 12 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table gives information as of May 1, 2000, unless another date is indicated, concerning: * each beneficial owner of more than 5% of our common stock; * beneficial ownership by all our directors and all our other executive officers named in the Summary Compensation Table on page 4 of this report (Named Executive Officers); and * beneficial ownership by all our directors and executive officers as a group. The number of shares beneficially owned by each entity, person, director or executive officer is determined under rules of the Securities and Exchange Commission, and the information does not necessarily indicate beneficial ownership for any other purpose. Under these rules, beneficial ownership includes any shares as to which the individual has the sole or shared voting power or investment power and also any shares which the individual has the right to acquire as of July 1, 2000 (60 days after May 1, 1999) through the exercise of any stock option, warrant or other right. Unless otherwise indicated, each person has sole investment and voting power (or shares these powers with his spouse) with respect to the shares set forth in the following table. Other than as set forth below, we know of no other 5% owner of our common stock as of May 1, 2000. 13 BENEFICIAL OWNERSHIP TABLE AMOUNT AND NATURE OF PERCENT OF TITLE OF CLASS NAME OF BENEFICIAL OWNER, ADDRESS AND OTHER INFORMATION(1) BENEFICIAL OWNERSHIP(#)(2)(3)(4) CLASS(2)(3)(4) - -------------- ---------------------------------------------------------- -------------------------------- -------------- Common Stock ERNEST C. GARCIA II, Chairman of the Board and 5% Owner. 4,500,000 Direct 32.48% 0 Indirect 20,000 Vested Options ---------- 4,520,000 Total ========== Common Stock HARRIS ASSOCIATES L.P. (Harris) and an affiliate Harris 1,962,000 Direct 14.12% Associates Investment Trust (Harris Trust), series designated 0 Indirect The Oakmark Small Cap Fund (4), 5% Owner, based on Schedule 0 Vested Options 13G filing filed February 7, 2000 and effective as of ---------- December 31, 1999. According to this Schedule 13G, Harris 1,962,000 Total Trust has shared voting and dispositive power over 1,750,000 ========== shares of our common stock and Harris has beneficial ownership of 1,962,000, including the shares beneficially owned by Harris Trust. Two North LaSalle Street, Suite 500 Chicago, Illinois 60602-3790 Common Stock WELLINGTON MANAGEMENT COMPANY, LLP, (4) 5% Owner, based on a 860,000 Direct 6.19% Schedule 13G filing as of December 31, 1999, by Wellington 0 Indirect Management Company, LLP. According to the filing, Wellington 0 Vested Options Management Company, LLP has shared voting power ---------- over 264,600 shares of our common stock and shared 860,000 Total dispositive power over 860,000 shares of our common stock. ========== 75 State Street Boston, Massachusetts 02109 Common Stock GREGORY B. SULLIVAN, Director, President and Chief Executive 59,800 Direct 2.58% Officer 0 Indirect 307,800 Vested Options ---------- 367,600 Total ========== Common Stock STEVEN T. DARAK, Senior Vice President and Chief Financial 140,000 Direct 1.21% Officer 0 Indirect 28,999 Vested Options ---------- 168,999 Total ========== Common Stock DONALD L. ADDINK, Senior Vice President and Treasurer 98,000 Direct * 0 Indirect 18,700 Vested Options ---------- 116,700 Total ========== Common Stock STEVEN A. TESDAHL, Senior Vice President and Chief 14,565 Direct * Information Officer 0 Indirect 20,000 Vested Options ---------- 34,565 Total ========== Common Stock CHRISTOPHER D. JENNINGS, (5) Director, indirect ownership of 6,444 Direct * a warrant to purchase 19,833 shares of our common stock held 19,833 Indirect on behalf of Mr. Jennings by Cruttenden Roth, an investment 5,000 Vested Options banking firm and previous employer of Mr. Jennings. The ---------- warrants are convertible into our common stock at any time 31,277 Total through June 21, 2001 at an exercise price of $9.45 per ========== share and are fully vested Common Stock JOHN N. MACDONOUGH, (5) Director, indirect ownership 4,444 Direct * consists of shares of our common stock acquired by Mr. 100 Indirect MacDonough's son. 5,000 Vested Options ---------- 9,544 Total ========== Common Stock FRANK P. WILLEY, (5)(6) Director 27,144 Direct 1.29% 147,400 Indirect 5,000 Vested Options ---------- 179,544 Total ========== 14 AMOUNT AND NATURE OF PERCENT OF TITLE OF CLASS NAME OF BENEFICIAL OWNER, ADDRESS AND OTHER INFORMATION(1) BENEFICIAL OWNERSHIP(#)(2)(3)(4) CLASS(2)(3)(4) - -------------- ---------------------------------------------------------- -------------------------------- -------------- Common Stock JON D. EHLINGER, Vice President, Secretary and General 2,000 Direct * Counsel 0 Indirect 3,500 Vested Options ---------- 5,500 Total ========== Common Stock RAY FIDEL, Former President, Cygnet Dealer Finance 10,000 Direct * 0 Indirect 0 Vested Options ---------- 10,000 Total ========== All directors and executive officers as a group (10 persons) 5,443,729 38.04% * Represents less than one percent of the outstanding common stock. (1) Unless otherwise noted, the address of each of the listed beneficial owners of our common stock is 2525 East Camelback Road, Suite 500, Phoenix, Arizona 85016. (2) "Vested Options" are options that the holder can exercise as of July 1, 2000. These options were issued under either the Incentive Plan or the Executive Plan and their related terms and conditions, including vesting schedules. See "Compensation of Executive Officers, Benefits and Related Matters - Long Term Incentive Plan" and " - 1998 Executive Incentive Plan." (3) Shares of our common stock that are subject to options, warrants or other rights which are currently exercisable or exercisable within 60 days (i.e., as of July 1, 2000) are treated as outstanding for purposes of computing the percentage of the person holding the option, warrant or other right, but are not treated as outstanding for computing the percentage of any other person. Except as indicated in footnote (4) below, the amounts and percentages are based upon 13,895,965 shares of our common stock outstanding as of May 1, 2000, net of shares we hold in our treasury. (4) Information in the table that is described as based on Schedule 13G and/or amendment filings was provided to us by the beneficial owner effective as of December 31, 1999, including the amount of securities beneficially owned and the percentage of class. We make no representation as to the accuracy or completeness of the information provided in these Schedule 13Gs and/or amendments or the information in the beneficial ownership table which is based solely on the filings. (5) The total and direct ownership for each independent board member includes 4,444 shares of our common stock that we granted under the Director Plan. We granted and issued shares having a value of $30,000 on or about the date of grant (i.e., 4,444 shares of our common stock) to each independent board member upon his appointment or election to our board in June 1996. Under the Director Plan, these shares generally vest over a 3-year period at an annual rate of 33%, beginning on the first anniversary date after the grant date (June 1996). (6) Possible indirect ownership of shares of Ugly Duckling acquired by Fidelity National Financial, Inc. Mr. Willey disclaims beneficial ownership of such shares. 15 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. In the most recent fiscal year, we have maintained business relationships and engaged in certain transactions with the affiliated companies and parties described below. Our plan is that any significant future transactions between us and our affiliated entities, executive officers, directors, or significant stockholders will receive approval of a majority of our independent directors, will be fair and generally will be on terms no less favorable to us than we could obtain from non-affiliated parties. On December 30, 1999 Ugly Duckling sold its Cygnet Dealer Finance division (CDF) to an entity controlled by Mr. Garcia for an amount equal to the book value of CDF, approximately $37.5 million. This transaction occurred after several attempts by Ugly Duckling to sell or finance CDF, including the retention and effort of an investment banking firm to sell CDF in the first quarter of 1999. The purchase price of CDF was paid through the assumption by the buyer of approximately $8 million of outstanding debt owed by the Company to Verde Investments, Inc., an affiliate of Mr. Garcia; a $12 million, ten-year promissory note from the buyer to the Company that is guaranteed by Verde; and the remainder in cash. The Company also received warrants to acquire up to 50% of the buyer for $1, exercisable beginning two years from close though five years after the note is paid in full. The warrants would be forfeited in the event that the $12 million note is repaid in full within one year. The percentage of the buyer purchasable under the warrants would be reduced to 25% if the note were reduced to $4 million within two years and to 10% if the warrant were paid in full within two years. As part of the transaction, the board requested and received a fairness opinion from an investment banking firm and the transaction was reviewed by the Special Transaction Committee of the Board. In December, 1999, Verde Investments Inc., an affiliated company owned by Ernest C. Garcia, II, the Company's Chairman, acquired at a 10% discount all of the sale-leaseback properties sold to an unrelated investment company in March of 1998. We acquired the option to purchase these properties at Verde's purchase price at any time until December 31, 2000. Under the terms of the sale of Cygnet Dealer, the term of the option was extended and now the option expires simultaneously with our receiving payment in full of the $12 million note receivable arising from the sale of Cygnet Dealer or December 31, 2000, whichever comes later. Verde has been one of our lenders for several years. As noted above, Ugly Duckling was released of all liability under its loan with Verde as part of the Cygnet Dealer Finance sale. Mr. Garcia, our Chairman and Chief Executive Officer, is also the President and sole stockholder of Verde. We believe that it is important for our directors and officers to be stakeholders in Ugly Duckling. With this in mind, in September 1997, our board approved a directors' and officers' stock repurchase program (D&O Stock Purchase Program). The program provided loans of up to $1.0 million in total to our directors and senior officers to assist them in purchasing our common stock on the open market from time-to-time. The D&O Stock Purchase Program provides for unsecured loans, with interest at 10% per year, and interest and principal payments due at the end of each loan term. These loans were amended to make them due on demand by Ugly Duckling effective in 1999. During 1997, senior officers purchased 50,000 shares of common stock under the program and we advanced $500,000 for these purchases. During 1998, senior officers purchased an additional 40,000 shares of common stock under the program and we advanced approximately $400,000 for these purchases. Through March 15, 2000 there were no additional purchases of common stock under the program. In addition, there have been no principal payments and minimal interest payments made to Ugly Duckling since the program began. The table that follows provides additional information on the D&O Stock Purchase Program for each of our executive officers as of year-end 1999. During August of 1999, we made loans to Mr. Darak, our Senior Vice President and Chief Financial Officer, and to Mr. Addink, our Senior Vice President and Treasurer. The loans were employee advances. The indebtedness is unsecured, with interest at 10% per year, and principal and interest due upon demand. There have been no interest or principal payments made by Mr. Darak or Mr. Addink to Ugly Duckling since the inception of the loans, or on the September 1998 or October 1998 loans to Mr. Darak. The table that follows provides additional information on outstanding loans to our executive officers. 16 PRINCIPAL NUMBER OF DATE DEBT BALANCE OF DEBT SHARES NAME & TITLE OF EXECUTIVE OFFICER NATURE OF DEBT INCURRED AT 12/31/ PURCHASED (#) - --------------------------------- -------------- -------- --------- ------------- Gregory B. Sullivan, CEO, D&O Stock Purchase Program 11/97 & 5/98 $198,126 20,000 President, & Director Steven T. Darak, Sr. VP & CFO D&O Stock Purchase Program 11/97 $100,000 10,000 Steven P. Johnson, former Sr. VP, D&O Stock Purchase Program 11/97 $100,000 10,000 General Counsel & Secretary(1) Donald L. Addink, Sr. VP - Treasurer D&O Stock Purchase Program 11/97 $100,000 10,000 Steven A. Tesdahl, Sr. VP & CIO D&O Stock Purchase Program 5/98 $ 98,126 10,000 of Ugly Duckling Car Sales Other Senior Officers(1) D&O Stock Purchase Program 11/97 $100,000 10,000 TOTAL for D&O Stock Purchase Program D&O Stock Purchase Program 11/97 & 5/98 $696,252 70,000 Steven T. Darak, Sr. VP & CFO Employee Advance 9/98, 10/98 & 8/99 $368,684 -- Don Addink, Sr. VP-Treasurer Employee Advance 8/99 $218,942 -- (1) As of December 31, 1999, Mr. Johnson and Ugly Duckling mutually agreed to terminate their employment relationship. In addition, Mr. Ray Fidel and Ugly Duckling also terminated their employment relationship on December 30, 1999. In connection with these terminations, the principal balance of the debt was reduced to zero in exchange for the company receiving the Ugly Duckling stock initially purchased by them under the D&O Stock Purchase Program. Mr. Fidel's exchange occurred in March of 2000 and Mr. Johnson's exchange occurred in May of 2000. From April 1998 to May 2000, Mr. Jennings, one of our directors, was a managing director of Friedman, Billings, Ramsey & Co., Inc., which makes a market in our common stock and from time to time may provide investment banking and other services to us. 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UGLY DUCKLING CORPORATION, a Delaware corporation By: /s/ GREGORY B. SULLIVAN ------------------------------------ Gregory B. Sullivan Its: Chief Executive Officer Date: May 10, 2000 18