UGLY DUCKLING CORPORATION
November 1, 2001
Xxxx Xxxxxxxx
Chief Financial Officer
Automotive Finance Corporation
000 Xxxx 00xx Xxxxxx
Xxxxx 000
Xxxxxxxxxxxx, XX 00000
RE: Ugly Duckling Corporation Master Loan and Security Agreement dated as of
August 24, 2001
Dear Sir:
With this letter we are requesting a waiver of the Cashflow Interest Coverage
Ratio contained in 11.6 (c) of the above referenced loan agreement for the
quarter ended September 30, 2001 and the quarter ending December 31, 2001. We
are in compliance with all other covenants of the agreement.
The reason for the current and expected shortfall in this covenant is due to a
number of changes we are making in the business to improve long term portfolio
performance. These changes include:
1. Enhancing underwriting criteria through the implementation of credit
scoring and increasing down payment requirements, resulting in slower
sales, a smaller portfolio than forecasted and lower interest income
from the smaller portfolio.
2. The increase of loan loss reserves to the balance sheet resulting from
higher than expected losses from older portfolios and a smaller base
of originations in the quarter, as previously discussed.
In addition to the above, we are also making provision for the impact of a
recession in the economy. Although we are making many improvements in our
business model and we are confident we are underwriting better loans, we do not
have the history to accurately assess the impact of a recession on our customer
base. We have chosen to assume the portfolio in 2001 will not perform better
than the portfolio of 2000 and adjusted the provision accordingly in the quarter
and will take an additional provision in the last quarter of the year.
We would also like to request a waiver of Section 12.2 of the above referenced
loan agreement to repurchase up to $10 million in our stock and/or bonds. Our
stock is currently trading at less than 25% of book value and the purchase of
our bonds would produce a return in excess of 20% based on the last trades. We
recently received approval from our Board of Directors to complete either of
these transactions in aggregate up to the $10 million limit.
Thank you for your time and consideration. I have provided an area on an
attached page for your signature authorizing the waiver. Please call me with any
further questions at 000-000-0000.
Sincerely,
/s/ XXX XXXXXX
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Xxx Xxxxxx
Treasurer
Ugly Duckling Corporation
The undersigned hereby waive the covenants requested:
Automotive Finance Corporation
By: /s/ XXXXXX X. XXXXXXXX
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Name: Xxxxxx X. Xxxxxxxx
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Title: CFO
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