<PAGE>   1
 
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-Q
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934
                                       OR
[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934
 
                         FOR THE QUARTERLY PERIOD ENDED
 
                                 JUNE 30, 1998
 
                        COMMISSION FILE NUMBER 000-20841
 
                           UGLY DUCKLING CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                         <C>
         DELAWARE                   86-0721358
     (STATE OR OTHER             (I.R.S. EMPLOYER
     JURISDICTION OF           IDENTIFICATION NO.)
     INCORPORATION OR
      ORGANIZATION)
</TABLE>
 
                            2525 E. CAMELBACK ROAD,
                                   SUITE 1150
                             PHOENIX, ARIZONA 85016
              (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (602) 852-6600
 
     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 THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE:
 
     At August 4, 1998, there were 18,604,441 shares of Common Stock, $0.001 par
value, outstanding.
 
     This document serves both as a resource for analysts, shareholders, and
other interested persons, and as the quarterly report on Form 10-Q of Ugly
Duckling Corporation (Company) to the Securities and Exchange Commission, which
has taken no action to approve or disapprove the report or pass upon its
accuracy or adequacy. Additionally, this document is to be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
--------------------------------------------------------------------------------
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<PAGE>   2
 
                           UGLY DUCKLING CORPORATION
 
                                   FORM 10-Q
 
                               TABLE OF CONTENTS
 
                        PART I. -- FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Item 1.  FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets -- June 30, 1998 and
  December 31, 1997.........................................    3
Condensed Consolidated Statements of Operations -- Three
  Months and Six Months Ended June 30, 1998 and June 30,
  1997......................................................    4
Condensed Consolidated Statements of Cash Flows -- Six
  Months Ended June 30, 1998 and June 30, 1997..............    5
Notes to Condensed Consolidated Financial Statements........    6
Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
         OPERATIONS AND FINANCIAL CONDITION OF THE
         CONTINUING COMPANY BUSINESSES......................   13
 
                  PART II. -- OTHER INFORMATION
Item 1.  LEGAL PROCEEDINGS..................................   36
Item 2.  CHANGES IN SECURITIES..............................   36
Item 3.  DEFAULTS UPON SENIOR SECURITIES....................   36
Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
  HOLDERS...................................................   36
Item 5.  OTHER INFORMATION..................................   36
Item 6.  EXHIBITS AND REPORTS ON FORM 8-K...................   38
SIGNATURE...................................................   39
  Exhibit 3.1 ..............................................
  Exhibit 4 ................................................
  Exhibit 10.1 .............................................
  Exhibit 10.2 .............................................
  Exhibit 10.3 .............................................
  Exhibit 10.4 .............................................
  Exhibit 10.5 .............................................
  Exhibit 10.6 .............................................
  Exhibit 10.7 .............................................
  Exhibit 11................................................
  Exhibit 27................................................
  Exhibit 99................................................
</TABLE>
 
                                        2
<PAGE>   3
 
                   UGLY DUCKLING CORPORATION AND SUBSIDIARIES
 
                     CONDENSED CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                              JUNE 30,    DECEMBER 31,
                                                                1998          1997
                                                              --------    ------------
                                                                   (IN THOUSANDS)
<S>                                                           <C>         <C>
                                        ASSETS
Cash and Cash Equivalents...................................  $  1,652      $  3,537
Finance Receivables, Net....................................    55,728        60,778
Investments Held in Trust...................................    17,894        11,637
Inventory...................................................    34,690        32,372
Property and Equipment, Net.................................    27,785        39,182
Intangible Assets, Net......................................    14,715        16,366
Other Assets................................................    11,614         9,350
Net Assets of Discontinued Operations.......................   114,767       102,411
                                                              --------      --------
                                                              $278,845      $275,633
                                                              ========      ========
                         LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
  Accounts Payable..........................................  $  2,964      $  2,867
  Accrued Expenses and Other Liabilities....................    19,200        13,821
  Notes Payable.............................................    47,891        65,171
  Subordinated Notes Payable................................    25,000        12,000
                                                              --------      --------
     Total Liabilities......................................    95,055        93,859
                                                              --------      --------
Stockholders' Equity:
  Preferred Stock...........................................        --            --
  Common Stock..............................................        19            19
  Additional Paid-in Capital................................   173,775       172,603
  Retained Earnings.........................................    10,228         9,152
  Treasury Stock............................................      (232)           --
                                                              --------      --------
     Total Stockholders' Equity.............................   183,790       181,774
                                                              --------      --------
                                                              $278,845      $275,633
                                                              ========      ========
</TABLE>
 
     See accompanying notes to Condensed Consolidated Financial Statements.
                                        3
<PAGE>   4
 
                   UGLY DUCKLING CORPORATION AND SUBSIDIARIES
 
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
               (IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED     SIX MONTHS ENDED
                                                               JUNE 30,              JUNE 30,
                                                          ------------------    -------------------
                                                           1998       1997        1998       1997
                                                          -------    -------    --------    -------
<S>                                                       <C>        <C>        <C>         <C>
Sales of Used Cars......................................  $69,519    $27,802    $142,491    $46,013
Less:
  Cost of Used Cars Sold................................   40,850     15,951      81,213     25,890
  Provision for Credit Losses...........................   14,274      4,848      29,308      8,109
                                                          -------    -------    --------    -------
                                                           14,395      7,003      31,970     12,014
                                                          -------    -------    --------    -------
Interest Income.........................................    3,560      3,179       7,439      4,691
Gain on Sale of Finance Receivables.....................    3,659      3,012       8,273      4,143
Servicing Income........................................    4,025      1,635       7,861      2,649
Other Income............................................      146        519         293        947
                                                          -------    -------    --------    -------
                                                           11,390      8,345      23,866     12,430
                                                          -------    -------    --------    -------
Income before Operating Expenses........................   25,785     15,348      55,836     24,444
Operating Expenses:
  Selling and Marketing.................................    4,894      2,240      10,220      3,772
  General and Administrative............................   14,846      8,470      31,515     14,074
  Depreciation and Amortization.........................    1,175        737       2,327      1,266
                                                          -------    -------    --------    -------
                                                           20,915     11,447      44,062     19,112
                                                          -------    -------    --------    -------
Operating Income........................................    4,870      3,901      11,774      5,332
Interest Expense........................................      517        263       1,164        440
                                                          -------    -------    --------    -------
Earnings before Income Taxes............................    4,353      3,638      10,610      4,892
Income Taxes............................................    1,763      1,488       4,274      1,987
                                                          -------    -------    --------    -------
Earnings from Continuing Operations.....................    2,590      2,150       6,336      2,905
Discontinued Operations:
Earnings (Loss) from Operations of Discontinued
  Operations, net of income taxes of $244, $1,516,
  $(248) and $3,169, respectively.......................      358      2,161        (487)     4,668
Loss on Disposal of Discontinued Operations, net of
  income tax benefit of $3,024..........................       --         --      (4,767)        --
                                                          -------    -------    --------    -------
Net Earnings............................................  $ 2,948    $ 4,311    $  1,082    $ 7,573
                                                          =======    =======    ========    =======
Earnings per Common Share from Continuing Operations:
  Basic.................................................  $  0.14    $  0.12    $   0.34    $  0.17
                                                          =======    =======    ========    =======
  Diluted...............................................  $  0.14    $  0.11    $   0.33    $  0.16
                                                          =======    =======    ========    =======
Net Earnings per Common Share:
  Basic.................................................  $  0.16    $  0.23    $   0.06    $  0.44
                                                          =======    =======    ========    =======
  Diluted...............................................  $  0.16    $  0.23    $   0.06    $  0.43
                                                          =======    =======    ========    =======
Shares Used in Computation -- Continuing Operations:
  Basic.................................................   18,590     18,450      18,570     17,200
                                                          =======    =======    ========    =======
  Diluted...............................................   18,980     19,000      18,930     17,800
                                                          =======    =======    ========    =======
Shares Used in Computation -- Net Earnings:
  Basic.................................................   18,590     18,450      18,570     17,200
                                                          =======    =======    ========    =======
  Diluted...............................................   18,980     19,000      18,930     17,800
                                                          =======    =======    ========    =======
</TABLE>
 
     See accompanying notes to Condensed Consolidated Financial Statements.
                                        4
<PAGE>   5
 
                   UGLY DUCKLING CORPORATION AND SUBSIDIARIES
 
          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED
                    SIX MONTHS ENDED JUNE 30, 1998 AND 1997
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                1998         1997
                                                              ---------    --------
<S>                                                           <C>          <C>
Cash Flows from Operating Activities:
  Net Earnings..............................................  $   1,082    $  7,573
     Adjustments to Reconcile Net Earnings to Net Cash
      Provided by Operating Activities:
  Earnings (Loss) from Discontinued Operations..............     (5,254)      4,668
  Provision for Credit Losses...............................     29,308       8,109
  Gain on Sale of Finance Receivables.......................     (8,273)     (4,143)
  Purchase of Finance Receivables...........................   (136,705)    (44,172)
  Proceeds from Sale of Finance Receivables.................    109,711      35,923
  Collections of Finance Receivables........................     12,444       4,790
  Increase in Deferred Income Taxes.........................       (675)       (195)
  Depreciation and Amortization.............................      2,327       1,266
  Increase in Inventory.....................................     (2,317)     (6,312)
  Increase in Other Assets..................................     (2,506)     (3,616)
  Increase in Accounts Payable, Accrued Expenses, and Other
     Liabilities............................................      5,790       7,904
  Increase in Income Taxes Receivable/Payable...............        703         315
                                                              ---------    --------
     Net Cash Provided by Operating Activities..............      5,635      12,110
                                                              ---------    --------
Cash Flows Used In Investing Activities:
  Increase in Investments Held in Trust.....................     (6,256)     (2,046)
  Net Decrease in Notes Receivable..........................         75          75
  Purchase of Property and Equipment........................    (12,535)    (11,093)
  Proceeds from disposal of Property and Equipment..........     21,821          --
  Payment for Acquisition of Assets.........................         --     (18,071)
                                                              ---------    --------
     Net Cash Provided by (Used in) Investing Activities....      3,105     (31,135)
                                                              ---------    --------
Cash Flows from Financing Activities:
  Issuance of Notes Payable.................................     30,000          --
  Repayment of Notes Payable................................    (47,462)    (34,635)
  Issuance (Repayment) of Subordinated Notes Payable........     13,000      (2,000)
  Proceeds from Issuance of Common Stock....................        202      88,662
  Other, Net................................................       (163)         43
                                                              ---------    --------
     Net Cash Provided by (Used in) Financing Activities....     (4,423)     52,070
                                                              ---------    --------
Cash Used in Discontinued Operations........................     (6,202)    (10,351)
                                                              ---------    --------
Net Increase (Decrease) in Cash and Cash Equivalents........     (1,885)     22,694
Cash and Cash Equivalents at Beginning of Period............      3,537      18,455
                                                              ---------    --------
Cash and Cash Equivalents at End of Period..................  $   1,652    $ 41,149
                                                              =========    ========
Supplemental Statement of Cash Flows Information:
  Interest Paid.............................................  $   2,706    $    893
                                                              =========    ========
  Income Taxes Paid.........................................  $   1,106    $     15
                                                              =========    ========
  Assumption of Debt in Connection with Acquisition of
     Assets.................................................  $      --    $ 29,900
                                                              =========    ========
  Purchase of Property and Equipment with Capital Leases....  $      --    $    211
                                                              =========    ========
</TABLE>
 
     See accompanying notes to Condensed Consolidated Financial Statements.
                                        5
<PAGE>   6
 
                           UGLY DUCKLING CORPORATION
 
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
 
NOTE 1.  BASIS OF PRESENTATION
 
     The accompanying unaudited condensed consolidated financial statements of
Ugly Duckling Corporation (Company) have been prepared in accordance with
generally accepted accounting principles for interim financial information and
pursuant to rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for a complete financial statement
presentation. In the opinion of management, such unaudited interim information
reflects all adjustments, consisting only of normal recurring adjustments,
necessary to present the Company's financial position and results of operations
for the periods presented. The results of operations for interim periods are not
necessarily indicative of the results to be expected for a full fiscal year. The
Condensed Consolidated Balance Sheet as of December 31, 1997 was derived from
audited consolidated financial statements as of that date but does not include
all the information and footnotes required by generally accepted accounting
principles. It is suggested that these condensed consolidated financial
statements be read in conjunction with the Company's audited consolidated
financial statements included in the Company's Annual Report on Form 10-K, for
the year ended December 31, 1997.
 
NOTE 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 closure was substantially complete as of March 31, 1998. The Company
is continuing to negotiate lease settlements and terminations with respect to
its Branch Office network closure. Further, in April 1998, the Company announced
that its Board of Directors had directed management to proceed with separating
current operations into two publicly held companies. The Company's continuing
operations are focusing exclusively on the retail sale of used cars through its
chain of dealerships, as well as the collection and servicing of the resulting
loans. The Company has retained its securitization program (the "Securitization
Program") and the residual interests in all securitization transactions
previously effected by the Company, its existing insurance operations relating
to its dealership activities, and its rent-a-car franchise business (which is
generally inactive) (the "Continuing Operations"). In June 1998 the Company
formed a new wholly owned subsidiary, Cygnet Financial Corporation, to
effectuate the anticipated split-up (the "Split-up") and operate the
non-dealership activities. As a result of these two announcements, the Company
has retroactively restated the accompanying condensed consolidated balance
sheets and condensed consolidated statements of operations to reflect the
Company's discontinued operations, including the Split-up Businesses and the
Company's third party dealer branch office network in accordance with Accounting
Principles Board Opinion No. 30 "Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions."
 
     Included within the Company's discontinued operations is a collateralized
dealer financing program ("Cygnet Dealer Program"), pursuant to which the
Company provides qualified independent used car dealers ("Third Party Dealers")
with warehouse purchase facilities and operating credit lines primarily secured
by the dealers' retail installment contract portfolio. Discontinued operations
also include the bulk purchase and/or servicing of contracts originated by other
subprime lenders. The Company intends to transfer certain assets and liabilities
related to the Cygnet Dealer Program and the operations that bulk purchase
and/or service contracts by other subprime lenders. Further, discontinued
operations include the Branch Offices which the Company closed in February 1998
and which will not be transferred pursuant to the anticipated Split-up.
 
                                        6
<PAGE>   7
                           UGLY DUCKLING CORPORATION
 
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The components of Net Assets of Discontinued Operations as of June 30, 1998
and December 31, 1997 follow (in thousands):
 
<TABLE>
<CAPTION>
                                                              JUNE 30,    DECEMBER 31,
                                                                1998          1997
                                                              --------    ------------
<S>                                                           <C>         <C>
Branch Office Finance Receivables, net......................  $ 42,180      $ 26,780
Residuals in Finance Receivables Sold.......................    11,446        16,099
Investments Held in Trust...................................     5,500         7,277
Notes Receivable -- FMAC....................................    18,135        25,686
Cygnet Dealer Finance Portfolio.............................    32,974        19,438
Furniture and Equipment -- Cygnet...........................     1,943         2,070
Capitalized Start-up Costs..................................        --         2,453
Other Assets, net of Accounts Payable and Accrued
  Liabilities...............................................     2,589         2,608
                                                              --------      --------
                                                              $114,767      $102,411
                                                              ========      ========
</TABLE>
 
     Following is a summary of the operating results of the Discontinued
Operations for the periods ended June 30, 1998 and 1997 (in thousands):
 
<TABLE>
<CAPTION>
                                             THREE MONTHS ENDED     SIX MONTHS ENDED
                                                  JUNE 30,              JUNE 30,
                                             ------------------    -------------------
                                              1998       1997        1998       1997
                                             -------    -------    --------    -------
<S>                                          <C>        <C>        <C>         <C>
Revenues...................................  $10,415    $ 8,681    $ 16,935    $17,535
Expenses...................................   (9,813)    (5,004)    (25,461)    (9,698)
                                             -------    -------    --------    -------
Earnings (Loss) before Income Taxes........      602      3,677      (8,526)     7,837
Income Taxes (Benefit).....................      244      1,516      (3,272)     3,169
                                             -------    -------    --------    -------
Earnings (Loss) from Discontinued
  Operations...............................  $   358    $ 2,161    $ (5,254)   $ 4,668
                                             =======    =======    ========    =======
</TABLE>
 
NOTE 3.  SUMMARY OF FINANCE RECEIVABLES PRINCIPAL BALANCES, NET
 
     Following is a summary of Finance Receivables Principal Balances, Net, as
of June 30, 1998 and December 31, 1997 (in thousands):
 
<TABLE>
<CAPTION>
                                                              JUNE 30,    DECEMBER 31,
                                                                1998          1997
                                                              --------    ------------
<S>                                                           <C>         <C>
Installment Sales Contract Principal Balances...............  $32,156       $ 55,965
Add: Accrued Interest.......................................      393            461
  Loan Origination Costs....................................      711          1,431
                                                              -------       --------
Principal Balances, net.....................................   33,260         57,857
Residuals in Finance Receivables Sold.......................   28,418         13,277
                                                              -------       --------
                                                               61,678         71,134
Less Allowance for Credit Losses............................   (5,950)       (10,356)
                                                              -------       --------
Finance Receivables, net....................................  $55,728       $ 60,778
                                                              =======       ========
The finance receivables are classified as follows:
Finance Receivables Held for Sale...........................  $30,000       $ 52,000
Finance Receivables Held for Investment.....................    3,260          5,857
                                                              -------       --------
                                                              $33,260       $ 57,857
                                                              =======       ========
</TABLE>
 
                                        7
<PAGE>   8
                           UGLY DUCKLING CORPORATION
 
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     As of June 30, 1998 and December 31, 1997, the Residuals in Finance
Receivables Sold were comprised of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                              JUNE 30,    DECEMBER 31,
                                                                1998          1997
                                                              --------    ------------
<S>                                                           <C>         <C>
Retained interest in subordinated securities (B
  Certificates).............................................  $ 54,370      $ 25,483
Net interest spreads, less present value discount...........    26,364        10,622
Reduction for estimated credit losses.......................   (52,316)      (22,828)
                                                              --------      --------
Residuals in finance receivables sold.......................  $ 28,418      $ 13,277
                                                              ========      ========
Securitized principal balances outstanding..................  $217,197      $127,356
                                                              ========      ========
Estimated credit losses as a % of securitized principal
  balances outstanding......................................      24.1%         17.9%
                                                              ========      ========
</TABLE>
 
     The following table reflects a summary of activity for the Residuals in
Finance Receivables Sold for the periods ended June 30, 1998 and 1997,
respectively (in thousands).
 
<TABLE>
<CAPTION>
                                              THREE MONTHS ENDED     SIX MONTHS ENDED
                                                   JUNE 30,              JUNE 30,
                                              ------------------    ------------------
                                               1998       1997       1998       1997
                                              -------    -------    -------    -------
<S>                                           <C>        <C>        <C>        <C>
Balance, Beginning of Period................  $24,741    $10,082    $13,277    $ 8,512
Additions...................................   10,396      3,854     24,254      6,193
Amortization................................   (6,719)    (1,385)    (9,113)    (2,154)
                                              -------    -------    -------    -------
Balance, End of Period......................  $28,418    $12,551    $28,418    $12,551
                                              =======    =======    =======    =======
</TABLE>
 
NOTE 4.  NOTES PAYABLE
 
     Following is a summary of Notes Payable as of June 30, 1998 and December
31, 1997 (in thousands):
 
<TABLE>
<CAPTION>
                                                              JUNE 30,    DECEMBER 31,
                                                                1998          1997
                                                              --------    ------------
<S>                                                           <C>         <C>
Revolving Facility with GE Capital..........................  $41,795       $56,950
Mortgage loan with finance company..........................    6,000         7,450
Others......................................................       96           771
                                                              -------       -------
                                                              $47,891       $65,171
                                                              =======       =======
</TABLE>
 
                                        8
<PAGE>   9
                           UGLY DUCKLING CORPORATION
 
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 5.  COMMON STOCK EQUIVALENTS
 
     Net Earnings per common share amounts are based on the weighted average
number of common shares and common stock equivalents outstanding for the periods
ended June 30, 1998 and 1997 as follows (in thousands, except for per share
amounts):
 
<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED    SIX MONTHS ENDED
                                                         JUNE 30,             JUNE 30,
                                                    -------------------   -----------------
                                                      1998       1997      1998      1997
                                                    --------   --------   -------   -------
<S>                                                 <C>        <C>        <C>       <C>
Earnings from Continuing Operations...............  $ 2,590    $ 2,150    $ 6,336   $ 2,905
                                                    =======    =======    =======   =======
Net Earnings......................................  $ 2,948    $ 4,311    $ 1,082   $ 7,573
                                                    =======    =======    =======   =======
Basic EPS-Weighted Average Shares Outstanding.....   18,590     18,450     18,570    17,200
                                                    =======    =======    =======   =======
Basic Earnings Per Share from:
  Continuing Operations...........................  $  0.14    $  0.12    $  0.34   $  0.17
                                                    =======    =======    =======   =======
  Net Earnings....................................  $  0.16    $  0.23    $  0.06   $  0.44
                                                    =======    =======    =======   =======
Basic EPS-Weighted Average Shares Outstanding.....   18,590     18,450     18,570    17,200
Effect of Diluted Securities:
  Warrants........................................       44        136         35       157
  Stock Options...................................      346        414        325       443
                                                    -------    -------    -------   -------
Dilutive EPS-Weighted Average Shares
  Outstanding.....................................   18,980     19,000     18,930    17,800
                                                    =======    =======    =======   =======
Diluted Earnings Per Share from:
  Continuing Operations...........................  $  0.14    $  0.11    $  0.33   $  0.16
                                                    =======    =======    =======   =======
  Net Earnings....................................  $  0.16    $  0.23    $  0.06   $  0.43
                                                    =======    =======    =======   =======
Warrants Not Included in Diluted EPS
  Since Antidilutive..............................    1,214         --        715        --
                                                    =======    =======    =======   =======
Stock Options Not Included in Diluted EPS
  Since Antidilutive..............................      571        461         96       785
                                                    =======    =======    =======   =======
</TABLE>
 
NOTE 6.  BUSINESS SEGMENTS
 
     The Company has three distinct business segments. These consist of retail
car sales operations (Company Dealerships), operations attributable to the
administration and collection of finance receivables generated at the Company
Dealerships (Company Dealership Receivables), and corporate and other
operations. These segments exclude the activities of the discontinued
operations.
 
                                        9
<PAGE>   10
                           UGLY DUCKLING CORPORATION
 
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     A summary of Operating Activity by business segment for the periods ended
June 30, 1998 and 1997, respectively, follows:
 
<TABLE>
<CAPTION>
                                                                  COMPANY
                                                   COMPANY      DEALERSHIP     CORPORATE
                                                 DEALERSHIPS    RECEIVABLES    AND OTHER     TOTAL
                                                 -----------    -----------    ---------    --------
                                                                     (IN THOUSANDS)
<S>                                              <C>            <C>            <C>          <C>
Three months ended June 30, 1998:
Sales of Used Cars.............................   $ 69,519        $    --       $    --     $ 69,519
Less: Cost of Cars Sold........................     40,850             --            --       40,850
  Provision for Credit Losses..................     14,264             10            --       14,274
                                                  --------        -------       -------     --------
                                                    14,405            (10)           --       14,395
Interest Income................................         --          3,506            54        3,560
Gain on Sale of Loans..........................         --          3,659            --        3,659
Servicing Income...............................         --          4,025            --        4,025
Other Income (Expense).........................         99             (9)           56          146
                                                  --------        -------       -------     --------
Income before Operating Expenses...............     14,504         11,171           110       25,785
                                                  --------        -------       -------     --------
Operating Expenses:
  Selling and Marketing........................      4,894             --            --        4,894
  General and Administrative...................      7,117          4,272         3,457       14,846
  Depreciation and Amortization................        615            311           249        1,175
                                                  --------        -------       -------     --------
                                                    12,626          4,583         3,706       20,915
                                                  --------        -------       -------     --------
Earnings (Loss) before Interest Expense........   $  1,878        $ 6,588       $(3,596)    $  4,870
                                                  ========        =======       =======     ========
Three months ended June 30, 1997:
Sales of Used Cars.............................   $ 27,802        $    --       $    --     $ 27,802
Less: Cost of Cars Sold........................     15,951             --            --       15,951
  Provision for Credit Losses..................      4,848             --            --        4,848
                                                  --------        -------       -------     --------
                                                     7,003             --            --        7,003
Interest Income................................         --          3,179            --        3,179
Gain on Sale of Loans..........................         --          3,012            --        3,012
Servicing Income...............................         --          1,635            --        1,635
Other Income...................................        398             83            38          519
                                                  --------        -------       -------     --------
Income before Operating Expenses...............      7,401          7,909            38       15,348
                                                  --------        -------       -------     --------
Operating Expenses:
  Selling and Marketing........................      2,240             --            --        2,240
  General and Administrative...................      3,812          2,983         1,675        8,470
  Depreciation and Amortization................        358            261           118          737
                                                  --------        -------       -------     --------
                                                     6,410          3,244         1,793       11,447
                                                  --------        -------       -------     --------
Earnings (Loss) before Interest Expense........   $    991        $ 4,665       $(1,755)    $  3,901
                                                  ========        =======       =======     ========
</TABLE>
 
                                       10
<PAGE>   11
                           UGLY DUCKLING CORPORATION
 
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                  COMPANY
                                                   COMPANY      DEALERSHIP     CORPORATE
                                                 DEALERSHIPS    RECEIVABLES    AND OTHER     TOTAL
                                                 -----------    -----------    ---------    --------
                                                                     (IN THOUSANDS)
<S>                                              <C>            <C>            <C>          <C>
Six months ended June 30, 1998:
Sales of Used Cars.............................   $142,491        $    --       $    --     $142,491
Less: Cost of Cars Sold........................     81,213             --            --       81,213
  Provision for Credit Losses..................     29,298             10            --       29,308
                                                  --------        -------       -------     --------
                                                    31,980            (10)           --       31,970
Interest Income................................         --          7,321           118        7,439
Gain on Sale of Loans..........................         --          8,273            --        8,273
Servicing Income...............................         --          7,861            --        7,861
Other Income (Expense).........................        200             (9)          102          293
                                                  --------        -------       -------     --------
Income before Operating Expenses...............     32,180         23,436           220       55,836
                                                  --------        -------       -------     --------
Operating Expenses:
  Selling and Marketing........................     10,184             --            36       10,220
  General and Administrative...................     16,653          8,527         6,335       31,515
  Depreciation and Amortization................      1,228            649           450        2,327
                                                  --------        -------       -------     --------
                                                    28,065          9,176         6,821       44,062
                                                  --------        -------       -------     --------
Earnings (Loss) before Interest Expense........   $  4,115        $14,260       $(6,601)    $ 11,774
                                                  ========        =======       =======     ========
Six months ended June 30, 1997:
Sales of Used Cars.............................   $ 46,013        $    --       $    --     $ 46,013
Less: Cost of Cars Sold........................     25,890             --            --       25,890
  Provision for Credit Losses..................      8,109             --            --        8,109
                                                  --------        -------       -------     --------
                                                    12,014             --            --       12,014
Interest Income................................         --          4,691            --        4,691
Gain on Sale of Loans..........................         --          4,143            --        4,143
Servicing Income...............................         --          2,649            --        2,649
Other Income...................................        602             83           262          947
                                                  --------        -------       -------     --------
Income before Operating Expenses...............     12,616         11,566           262       24,444
                                                  --------        -------       -------     --------
Operating Expenses:
  Selling and Marketing........................      3,765             --             7        3,772
  General and Administrative...................      6,281          4,471         3,322       14,074
  Depreciation and Amortization................        558            467           241        1,266
                                                  --------        -------       -------     --------
                                                    10,604          4,938         3,570       19,112
                                                  --------        -------       -------     --------
Earnings (Loss) before Interest Expense........   $  2,012        $ 6,628       $(3,308)    $  5,332
                                                  ========        =======       =======     ========
</TABLE>
 
NOTE 7.  ACQUISITIONS
 
     On January 15, 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 (6,953 contracts) in exchange for approximately $2.5
million in cash and the assumption of $29.9 million in debt. On April 1, 1997,
the Company purchased substantially all of the assets of EZ Plan, Inc. (EZ
Plan), a Company engaged in the business of selling and financing used motor
vehicles, including seven dealerships in San Antonio and a contract portfolio of
approximately $24.3
 
                                       11
<PAGE>   12
                           UGLY DUCKLING CORPORATION
 
      NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
million (6,297 contracts) in exchange for $26.3 million in cash. The following
summary, prepared on a pro forma basis, combines the consolidated results of
operations (unaudited) for the six months ended June 30, 1997 as if the
acquisitions had been consummated as of January 1, 1997. These pro forma results
are not necessarily indicative of the future results of operations of the
Company or the results that would have been obtained had the acquisitions taken
place on January 1, 1997 (in thousands, except per share data).
 
<TABLE>
<CAPTION>
                                                              SIX MONTHS ENDED
                                                               JUNE 30, 1997
                                                              ----------------
<S>                                                           <C>
Sales of Used Cars..........................................      $61,173
Interest Income.............................................       10,498
Other Income................................................        4,593
                                                                  -------
Total Revenues..............................................       76,264
Earnings (Loss) from Continuing Operations..................       (1,026)
Net Earnings................................................          395
Earnings (Loss) per share from Continuing Operations:
  Basic.....................................................        (0.06)
  Diluted...................................................        (0.06)
Net Earnings per share:
  Basic.....................................................         0.02
  Diluted...................................................         0.02
</TABLE>
 
NOTE 8.  USE OF ESTIMATES
 
     The preparation of financial statements 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 statement and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. These
include the provision for loss on discontinued operations that was recorded in
the accompanying condensed consolidated financial statements for the six month
period ended June 30, 1998, which provision is based upon management's best
estimate of the amounts expected to be realized from the closure of the Branch
Office network as well as from the Split-up of certain operations. The amounts
the Company will ultimately realize could differ materially from the amounts
assumed in arriving at the loss anticipated on disposal of the discontinued
operations.
 
NOTE 9.  BANKRUPTCY REMOTE ENTITIES
 
     Ugly Duckling Receivables Corporation ("UDRC") and Ugly Duckling
Receivables Corporation II ("UDRC II"), formally known as Champion Receivables
Corporation ("CRC") and Champion Receivables Corporation II ("CRC II"),
respectively, (collectively referred to as "Securitization Subsidiaries"), are
the Company's wholly-owned special purpose "bankruptcy remote" entities. Their
assets, including assets in Discontinued Operations, are comprised of Residuals
in Finance Receivables Sold and Investments Held In Trust, in the amounts of
approximately $39.9 million and $22.1 million, respectively, at June 30, 1998,
which amounts would not be available to satisfy claims of creditors of the
Company on a consolidated basis.
 
NOTE 10.  RECLASSIFICATIONS
 
     Certain reclassifications have been made to previously reported information
to conform to the current presentation.
 
                                       12
<PAGE>   13
 
                                    ITEM 2.
 
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
                 CONDITION OF THE CONTINUING COMPANY BUSINESSES
 
     This Quarterly Report on Form 10-Q contains forward looking statements.
Additional written or oral forward looking statements may be made by the Company
from time to time in filings with the Securities and Exchange Commission or
otherwise. Such forward looking statements are within the meaning of that term
in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements may include, but
not be limited to, projections of revenues, income, or loss, capital
expenditures, plans for future operations, including plans for the anticipated
Split-up (as defined below) of the Company's operations and related Rights
Offering (as defined below), financing needs or plans, and plans relating to
products or services of the Company, as well as assumptions relating to the
foregoing. The words "believe," "expect," "intend," "anticipate," "estimate,"
"project," and similar expressions identify forward looking statements, which
speak only as of the date the statement was made. Forward looking statements are
inherently subject to risks and uncertainties, some of which cannot be predicted
or quantified. Future events and actual results could differ materially from
those set forth in, contemplated by, or underlying the forward looking
statements. The Company undertakes no obligation to publicly update or revise
any forward looking statements, whether as a result of new information, future
events, or otherwise. Statements in this Quarterly Report, including the Notes
to the Condensed Consolidated Financial Statements and "Management's Discussion
and Analysis of Results of Operations and Financial Condition of the Continuing
Company Businesses," describe factors, among others, that could contribute to or
cause such differences. Additional risk factors that could cause actual results
to differ materially from those expressed in such forward looking statements are
set forth in Exhibit 99 which is attached hereto and incorporated by reference
into this Quarterly Report on Form 10-Q and the Company's definitive proxy
statement on Schedule 14A filed with the Securities and Exchange Commission on
August 4, 1998, which is incorporated by reference into this Quarterly Report on
Form 10-Q. Further, risk and uncertainties, in connection with the Split-up
transaction and related Rights Offering are also set forth in more detail in the
"Risk Factors" section of the Cygnet prospectus dated August 4, 1998 and
elsewhere therein.
 
INTRODUCTION
 
     General.  Ugly Duckling Corporation ("Company") operates a chain of "buy
here-pay here" used car dealerships in the United States and underwrites,
finances, and services retail installment contracts generated from the sale of
used cars by its dealerships ("Company Dealerships") and by third party used car
dealers ("Third Party Dealers") located in selected markets throughout the
country. As part of its financing activities, the Company has initiated a
collateralized dealer financing program ("Cygnet Dealer Program") pursuant to
which it provides qualified independent used car dealers with warehouse
facilities and operating lines of credit secured by the dealers' retail
installment contract portfolios and inventory. The Company targets its products
and services to the sub-prime segment of the automobile financing industry,
which focuses on selling and financing the sale of used cars to persons who have
limited credit histories, low incomes, or past credit problems.
 
     The Company commenced its used car sales and finance operations with the
acquisition of two Company Dealerships in 1992. During 1993, the Company
acquired three additional Company Dealerships. In 1994, the Company constructed
and opened four new Company Dealerships that were built specifically to meet the
Company's new standards of appearance, reconditioning capabilities, size, and
location. During 1994, the Company closed one Company Dealership because the
facility failed to satisfy these new standards and, at the end of 1995, closed
its Gilbert, Arizona dealership. In January 1997, the Company acquired selected
assets of a group of companies engaged in the business of selling and financing
used motor vehicles, including four dealerships located in the Tampa Bay/St.
Petersburg market ("Seminole"). In March 1997, the Company opened its first used
car dealership in the Las Vegas market. In April 1997, the Company acquired
selected assets of a company in the business of selling and financing used motor
vehicles, including seven dealerships located in the San Antonio market ("EZ
Plan"). In addition, the Company opened two additional dealerships in the
Albuquerque market and one additional dealership in the Phoenix market during
the second quarter of
 
                                       13
<PAGE>   14
 
1997. In August 1997, the Company closed a dealership in Prescott, Arizona. In
September 1997, the Company acquired selected assets of a company in the
business of selling used motor vehicles, including six dealerships in the Los
Angeles market, two in the Miami market, two in the Atlanta market and two in
the Dallas market ("Kars"). Although the Company did not acquire the loan
portfolio of Kars, it did acquire Kars' loan servicing assets and began
servicing Kars retained portfolio and portfolios previously securitized by Kars.
During the first quarter of 1998, the Company opened one store in the Phoenix,
Tampa and Dallas markets, respectively. The Company opened one store in the
Phoenix, Tampa, Dallas, San Antonio, and Atlanta markets, respectively, and
closed both of its dealerships in the Miami, Florida market during the second
quarter of 1998. The Company operated 50 and 22 dealerships at June 30, 1998 and
1997, respectively.
 
     In 1994, the Company acquired Champion Financial Services, Inc., an
independent automobile finance company. In April 1995, the Company initiated an
aggressive plan to expand the number of contracts purchased from its Third Party
Dealer Branch Office network (the "Branch Offices"). The Company operated 83
Branch Offices at December 31, 1997. In February 1998, the Company announced its
intention to close its Branch Office network, and exit this line of business in
the first quarter of 1998. The Company 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. The restructuring was
substantially complete by the end of the first quarter of 1998 and included the
termination of approximately 400 employees, substantially all of whom were
employed at the Company's Branch Offices that were in place on the date of the
announcement. The Company is continuing to negotiate lease settlements and
terminations with respect to its Branch Office network closure.
 
SPLIT-UP OF THE COMPANY
 
     In the third quarter of 1997, the Company announced a strategic evaluation
of its third party dealer operations, including the possible sale or spin-off of
these operations. In February 1998, the Company announced its intention to close
its third party dealer contract buying office network, and to focus instead on
its Cygnet dealer finance program, which offers warehouse purchase facilities
and lines of credit to selected independent used car dealers, and the bulk
purchase and/or servicing of large contract portfolios. The Company further
announced that it was continuing to evaluate alternatives for these third party
dealer operations. On April 28, 1998, the Company announced that its Board of
Directors had directed management to proceed with separating current operations
into two publicly held companies and subsequently formed a new wholly owned
subsidiary, Cygnet Financial Corporation ("Cygnet"), to effectuate the Split-up.
A proposal to split-up the two Companies (the "Split-up Proposal") will be
presented to stockholders of the Company for approval at the upcoming annual
meeting of stockholders.
 
     There can be no assurance that all of the conditions to the Split-up or the
Rights Offering will be satisfied or that the Split-up will be effected or that
the Rights (as defined below) will be issued. See the "Risk Factors" section of
the Company's definitive proxy statement dated August 4, 1998. In addition, the
Rights Offering is subject to a number of risks and uncertainties, and for a
more complete discussion of these matters, see the "Risk Factors" section of the
Cygnet prospectus dated August 4, 1998. The registration statement relating to
the Rights Offering has been filed with and declared effective by the Securities
and Exchange Commission. This discussion of the Split-up and the related Rights
Offering shall not constitute an offer to sell or the solicitation of an offer
to buy nor shall there be any sale of these securities in any state in which
such offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such state. The securities sold
in the Rights Offering will be offered only by means of a Cygnet prospectus.
Copies of the notice and proxy statement of the Company relating to the Split-up
and copies of the prospectus of Cygnet relating to the Rights Offering may be
obtained by contacting: Steven P. Johnson, General Counsel of the Company, 2525
E. Camelback Road, Phoenix, AZ 85016. A copy of the prospectus is also being
distributed to stockholders of the Company with the upcoming notice and proxy
statement, pursuant to which the Company's stockholders will vote on the
Split-up. For more complete information about the Split-up and the related
Rights Offering, and their impact on the Company and Cygnet obtain a proxy
statement and prospectus as indicated above. Read these documents carefully
before you invest or send money. See "Part II. -- Item 5. Other Information."
 
                                       14
<PAGE>   15
 
     The Company's Board of Directors believes that the separation of the
Company into two publicly traded companies would be beneficial to each of the
Company's current businesses, because, among other things:
 
     - It would separate businesses with distinct financial, investment, and
       operating characteristics so that each could adopt strategies and pursue
       objectives more appropriate to its specific operations than is possible
       under the Company's present combined structure.
 
     - It would allow each separate business group to attract and compensate
       qualified employees with stock-based compensation and incentive plans
       directly related to the performance of its business.
 
     - It would allow investors, lenders, and employees to better evaluate the
       performance and investment characteristics of each business group,
       enhancing the likelihood that each will achieve appropriate market
       recognition of its performance.
 
     If the Split-up Proposal is approved and certain other conditions are
satisfied, the Company and its subsidiaries will transfer to Cygnet and
subsidiaries of Cygnet certain assets and liabilities (the "Transferred Assets")
on the effective date of the Split-up (the "Effective Date"). The Transferred
Assets will include (i) the Company's bulk purchase and servicing operations
with respect to finance receivables originated by independent used car
dealerships ("Third Party Dealers"); (ii) the assets and related liabilities of
Cygnet Dealer Finance, Inc., which operates the Cygnet Dealer Program; (iii)
substantially all of the Company's rights and certain obligations pursuant to
certain transactions with First Merchants Acceptance Corporation ("FMAC"),
including the servicing platform and rights and certain other rights and
residual interests, and the assumption by Cygnet of certain funding obligations
and guarantees of the Company in connection with the FMAC transaction but
excluding certain rights and liabilities retained by the Company as described
under "Risk Factors -- Risks to the Company Relating to the FMAC Transaction"
and in "Management's Discussion and Analysis of Results of Operations and
Financial Condition of the Continuing Company Businesses -- Transactions
Regarding First Merchants Acceptance Corporation"; and (iv) substantially all of
the Company's rights and certain obligations pursuant to certain transactions
with Reliance Acceptance Group, Inc. ("Reliance"), described generally under
"Risk Factors -- Risks to the Company Relating to the Reliance Transaction" and
in "Management's Discussion and Analysis of Results of Operations and Financial
Condition of the Continuing Company Businesses -- Reliance Transaction,"
including the servicing platform and certain servicing and transition servicing
arrangements. The Transferred Assets had a net book value of approximately $54.7
million and a net appraised value of approximately $54.9 million as of June 30,
1998. However, it is expected that the book value of the Transferred Assets will
increase prior to the transfer contemplated herein as additional contracts are
acquired under warehouse purchase facilities, additional advances are made under
operating credit lines through the Cygnet Dealer Program, or additional
transactions are consummated.
 
     The Company would retain its used car dealership operations, its
securitization program, the servicing rights and its interests in the bankruptcy
remote subsidiaries that own residual interests in all securitization
transactions previously effected by the Company, and its rent-a-car franchise
business (which is generally inactive). The Company would continue to service,
through its loan servicing and collection facilities located in Phoenix,
Arizona, San Antonio, Texas, Dallas, Texas, and Tampa, Florida, the automobile
receivables in its various securitized pools, receivables purchased through its
Branch Office network that was closed in the first quarter of 1998 (whether
securitized or retained), as well as the receivables serviced pursuant to the
transactions effected in September 1997 with Kars. The Company would also retain
certain rights and direct obligations relating to the FMAC and Reliance
transactions. See "Risk Factors -- Risks to the Company Relating to the FMAC
Transaction" and "-- Risks to the Company Relating to the Reliance Transaction."
References herein to the "Continuing Company Businesses" shall mean those
businesses of the Company that the Company would continue to own and operate if
the Split-up is successfully effected and concluded.
 
     As consideration for the Transferred Assets, on the Effective Date, Cygnet
would issue to the Company 40,000 shares of Cumulative Convertible Preferred
Stock, Series A, $.001 par value per share (the "Cygnet Preferred Stock"), with
an aggregate liquidation preference of $40 million and make a cash or equivalent
payment (the "Cash Payment") equal to the difference between the greater of the
appraised value or the book value of the Transferred Assets (in each case net of
assumed liabilities) (except with respect to intangible
                                       15
<PAGE>   16
 
assets with a current book value of approximately $955,000 as to which no value
has been assigned by the parties) and the $40 million of Cygnet Preferred Stock.
 
     In addition to issuing the Cygnet Preferred Stock, Cygnet would be further
capitalized through a rights offering to stockholders of the Company ("Rights
Offering"). Each stockholder of the Company on August 17, 1998, the record date
for the Rights Offering, would receive one (1) transferable Right for every four
(4) shares of Company common stock held by him (the "Rights"). Each Right would
allow the holder to purchase one (1) share of Cygnet common stock at a
subscription price of $7.00 per share (the "Subscription Price"). The Rights
would be exercisable for a limited period of 20 days unless extended (the
"Offering Period"). Holders of Rights who exercise all of their Rights may
subscribe for an additional number of shares of Cygnet common stock at the
Subscription Price out of the pool of shares underlying unexercised Rights on
the expiration date of the Rights Offering up to the number of shares purchased
upon exercise of such holder's Rights. See "Part II. -- Item 5. Other
Information."
 
     The Company has incurred subordinated indebtedness to Verde Investments,
Inc. ("Verde"), an affiliate of the Company wholly-owned by Mr. Ernest C. Garcia
II, the Company's principal shareholder and Chief Executive Officer. As of July
1, 1998, the balance of such indebtedness was $10 million. The Company intends
to utilize a portion of the Cash Payment to repay the Verde indebtedness in
full. Alternatively, Verde may deposit the Verde Note or any part thereof with
Cygnet in payment of all or any portion of the Subscription Price for exercise
of Rights acquired from Mr. Garcia or otherwise, the related Over-Subscription
Privilege (defined below), and the Standby Purchase Obligation (defined below).
In such case, Cygnet would transfer the Verde Note to the Company for
cancellation in lieu of the payment of a portion of the Cash Payment. The
Company believes that the terms of the Verde Note are equivalent to those that
could have been obtained through arm's length negotiations.
 
     The Cash Payment, which is expected to range from $10 million to $20
million, will be used (i) first, to repay the $10 million Verde indebtedness,
which carries an interest rate of 10% per annum, and (ii) the balance (estimated
to be zero to $10 million) will be utilized by the Company to pay down the
Company's revolving credit facility with General Electric Capital Corporation,
which bears interest at 30-day LIBOR plus 3.15% (8.80% at June 30, 1998).
 
     The Company is in the process of evaluating a number of transactions and
may identify and pursue other transactions ("Interim Transactions") that, if
consummated prior to the Split-up, would be assigned to, or concluded by,
Cygnet. In addition, Cygnet has recently closed two Interim Transactions. The
Company does not believe any of the Interim Transactions recently concluded or
currently under consideration are material to its financial condition or results
of operations, individually or in the aggregate, or that any of such
transactions, would constitute the acquisition of a business for which separate
financial statements would be required to be publicly disclosed by The Company.
None of the transactions described below requires stockholder approval of the
Company, nor are any of such transactions with an affiliate of the Company. The
consummation of any of these transactions currently under consideration is
subject to a number of contingencies, which may include the negotiation and
preparation of definitive agreements, completion of due diligence, and the
receipt of required consents from third parties. As a result, there can be no
assurance that any of these potential transactions will be completed by the
Company.
 
     To effect any Interim Transactions, Cygnet may borrow money from a third
party lender ("Third Party Loans"), or from the Company ("Interim Company
Loans"). Third Party Loans made to Cygnet prior to the Effective Date may be
guaranteed by the Company, and Cygnet and the Company will seek to have any such
guarantee released as of the Effective Date, with Cygnet likely providing a
replacement guarantee. Interim Company Loans may become due and payable on the
Effective Date. Moreover, on the business day immediately preceding the
Effective Date, Cygnet will distribute to the Company all earnings accrued to
such date. In addition, Cygnet will pay to the Company on the Effective Date the
excess, if any, of the aggregate appraised value of the assets and rights and
related liabilities acquired by Cygnet in any Interim Transactions (the "Interim
Assets"), as of the Effective Date, over the aggregate book value of the Interim
Assets (the "Interim Consideration"). The Company and Cygnet may agree to other
terms with respect to how Interim Transactions will be structured or treated if
the Company believes that such structure or treatment results in
 
                                       16
<PAGE>   17
 
adequate consideration to the Company at the time of the Split-up with respect
to the Interim Assets. The purpose for the payment by Cygnet to the Company of
the Interim Consideration is to place both parties as close as possible to the
economic situation each would confront if the Interim Transactions were effected
by the Company rather than Cygnet.
 
     Interim Transactions recently concluded include the following:
 
     Servicing Agreement.  On July 31, 1998, Cygnet closed a transaction
pursuant to which the Company will service a $50 million portfolio of automobile
finance receivables owned by a third party. Preliminary terms of the servicing
agreement provide that: (i) Cygnet would receive a servicing fee equal to the
greater of 3.75% of the outstanding principal balance or $17.50 for each
contract in the portfolio that is not a defaulted contract and 63.75% of all net
collections and proceeds on defaulted contracts, provided that if the net losses
of the portfolio do not exceed 7%, Cygnet would receive an additional servicing
fee of .25% on defaulted contracts, (ii) Cygnet would receive all late fees and
certain other fees and reimbursable expenses associated with the servicing; and
(iii) the servicing agreement could be terminated without cause upon payment to
Cygnet of 3 months of servicing fees. Cygnet would also purchase all assets
utilized by the current owner in servicing the portfolio including furniture,
fixtures and equipment, for a purchase price of $500,000, and would assume the
existing lease of the service facility and all amounts due thereunder from and
after the closing date.
 
     Until the Effective Date of the Split-up, the Company would provide
subservicing of the portfolio on the same terms as the proposed servicing
agreement, after which the agreement would be assumed by Cygnet.
 
     Assumption of Servicing Agreements.  Cygnet recently closed a transaction
pursuant to which the Company will assume the obligations of an existing special
servicer of six pools of automobile finance receivables, including four
securitized pools. Cygnet would receive a monthly servicing fee equal to the
greater of 4% of the outstanding principal balance of each contract or $14.00
per contract. Cygnet would also be paid certain incentive fees, will be
reimbursed for certain fees, and will be indemnified by the parent company of
the existing special servicer for certain obligations being assumed. During an
interim period, which should not exceed 60 days, while certain modifications are
being made to the special servicing agreements to be assumed by the Company and
certain consents are being obtained, the company will act as special subservicer
of the pools on the same terms as outlined above, but will not be responsible
for such indemnified obligations. If such modifications are not effected or such
consents not obtained, the company can be removed as special subservicer
following this interim period. The Company has agreed upon the resignation or
removal of the servicer of the pools to assume the obligations of servicer for
no additional compensation.
 
     Cygnet has also agreed to purchase the charged off receivables from five of
the pools for a purchase price of $600,000.
 
     Until the Effective Date of the Split-up, the Company will provide
subservicing of these portfolios on the same terms as the servicing and related
agreements, after which Cygnet would assume the agreements.
 
     Transactions under consideration include the following:
 
     Insurance Agency.  The Company is currently evaluating the acquisition of
or a management arrangement with an operating insurance agency, which offers
insurance-related products and services designed to reduce the risk of loss to
holders of portfolios of automobile finance receivables and residential mortgage
loans, including banks, savings and loan associations, finance companies, credit
unions, securitization participants and automobile dealers, among others. Cygnet
anticipates paying approximately $4 million for this business.
 
     Charge-Offs.  The Company is negotiating the purchase of a pool of
charged-off automobile finance receivables of approximately $33.3 million (as of
February 28, 1998) for a purchase price based upon a formula. If purchased by
the Company, the pool would be transferred to Cygnet at the effective date of
the Split-up.
 
     Purchase of Bank Debt.  Cygnet has agreed to purchase the interests of a
bank in a bank group credit facility. The purchased interest is 18% of the
approximately $48 million current outstanding principal balance of the facility
(or approximately $8.6 million). The purchase price for the interest equals
90.5% of the principal amount of the interest as of the closing date of the
purchase (expected to approximate $7.8 million).
                                       17
<PAGE>   18
 
The purchase price will be paid $3 million in cash, with the balance evidenced
by a promissory note providing for interest at a fixed rate based on LIBOR plus
150 basis points. This promissory note will be guaranteed by the Company until
the occurrence of both (i) the Split-up and (ii) Cygnet having a total
shareholders' equity of at least $50 million (which is expected to occur at the
time of the Split-up). The credit facility is secured by a pool of receivables
and a residual interest in a securitized pool of receivables.
 
     Loan, Servicing Agreement and Investment.  Cygnet is negotiating a
transaction in which Cygnet would make a loan to a third party entity
("Borrower") of $2 million (the "Loan") with interest payable at 12% per annum
and maturing on October 31, 1998; provided that if, prior to October 31, 1998,
Borrower either receives an equity investment from a third party of (i) not less
than $10 million or (ii) not less than $5 million and receives a loan of not
less than $5 million that is subordinate to the Loan and other existing credit
facilities of Borrower, then the maturity date of the Loan will be extended to
the second anniversary of the closing date of the Loan. The Loan is expected to
be secured by all of Borrower's assets, subject to a senior security interest
supporting Borrower's $35 million senior secured credit facility. In
consideration for the Loan, Cygnet would receive warrants to purchase up to 5%
of Borrower's outstanding common stock as of the closing date exerciseable for
three years at an exercise price of $.0l per share. Cygnet would also be granted
certain additional investment rights in Borrower and would obtain the right to
service a portfolio of receivables for a fee equal to the greater of 4% per
annum of the outstanding principal balance of the receivables or $17.50 for each
contract in the portfolio, plus all collected late fees and modification fees
and reimbursement of costs and expenses. Borrower would have the right to
terminate Cygnet as servicer for cause or without cause after the later of (i)
six months after commencement of servicing and (iii) payment in full of the Loan
upon payment of a termination fee equal to three months servicing fees.
 
     Until the Effective Date of the Split-up, the Company will provide
subservicing of the portfolio on the same terms as the servicing agreement
described above after which Cygnet would assume the agreements.
 
     The following discussion and analysis provides information regarding the
Company's consolidated financial position as of June 30, 1998 and December 31,
1997, and its results of operations for the three month periods ended June 30,
1998 and 1997, respectively, and the six month periods ended June 30, 1998 and
1997, respectively.
 
     Growth in Finance Receivables.  Contract receivables serviced increased by
36.0% to $249.4 million on June 30, 1998 (including $217.2 million in contracts
serviced under the Company's Securitization Program) from $183.3 million at
December 31, 1997 (including $127.4 million in contracts serviced under the
Company's Securitization Program).
 
     The following tables reflect the growth in period end balances measured in
terms of the principal amount and the number of contracts arising from
continuing operations.
 
                          TOTAL CONTRACTS OUTSTANDING:
                   (IN THOUSANDS, EXCEPT NUMBER OF CONTRACTS)
 
<TABLE>
<CAPTION>
                                               JUNE 30, 1998           DECEMBER 31, 1997
                                           ----------------------    ----------------------
                                           PRINCIPAL     NO. OF      PRINCIPAL     NO. OF
                                            AMOUNT      CONTRACTS     AMOUNT      CONTRACTS
                                           ---------    ---------    ---------    ---------
<S>                                        <C>          <C>          <C>          <C>
Principal Amount.........................  $249,353      42,899      $183,321      35,762
Less: Portfolios Securitized and Sold....   217,197      38,413       127,356      27,769
                                           --------      ------      --------      ------
Company Total............................  $ 32,156       4,486      $ 55,965       7,993
                                           ========      ======      ========      ======
</TABLE>
 
     In addition to the loan portfolio summarized above, the Company also
services loan portfolios totaling approximately $197.3 million ($79.2 million
for Kars and $118.1 million from Branch Office originations) as of June 30, 1998
and $267.9 million ($127.3 million for Kars and $140.6 million from Branch
Office originations) as of December 31, 1997.
 
                                       18
<PAGE>   19
 
                     TOTAL CONTRACTS ORIGINATED/PURCHASED:
        (IN THOUSANDS, EXCEPT NUMBER OF CONTRACTS AND AVERAGE PRINCIPAL)
 
<TABLE>
<CAPTION>
                                             THREE MONTHS ENDED     SIX MONTHS ENDED
                                                  JUNE 30,              JUNE 30,
                                             ------------------    -------------------
                                              1998       1997        1998       1997
                                             -------    -------    --------    -------
<S>                                          <C>        <C>        <C>         <C>
Principal Amount...........................  $66,908    $52,034    $136,616    $99,379
Number of Contracts........................    8,518     10,006      17,857     19,069
Average Principal..........................  $ 7,855    $ 5,200    $  7,651    $ 5,212
</TABLE>
 
     Finance Receivable Principal Balances originated/purchased during the three
months ended June 30, 1998 increased by 28.6% to $66.9 million from $52.0
million in the three month period ended June 30, 1997. During the three month
period ended June 30, 1997, Finance Receivable Principal Balances
originated/purchased were affected by the purchase of approximately $24.3
million (6,297 contracts) in finance receivables in conjunction with the EZ Plan
acquisition. For the six month period ended June 30, 1998, Finance Receivable
Principal Balances originated/purchased increased by 37.5% to $136.6 million
from $99.4 million in the six month period ended June 30, 1997. During the six
month period ended June 30, 1997, Finance Receivable Principal Balances
originated/purchased included the purchase of approximately $55.4 million
(13,250 contracts) in finance receivables in conjunction with the Seminole and
EZ Plan acquisitions.
 
                                       19
<PAGE>   20
 
RESULTS OF OPERATIONS
 
  For Three Months Ended June 30, 1998 Compared To Three Months Ended June 30,
1997
 
     The prices at which the Company sells its cars and the interest rates that
it charges to finance these sales take into consideration that the Company's
primary customers are high-risk borrowers, many of whom ultimately default. The
Provision for Credit Losses reflects these factors and is treated by the Company
as a cost of both the future interest income derived on the contract receivables
originated at Company Dealerships as well as a cost of the sale of the cars
themselves. Accordingly, unlike traditional car dealerships, the Company does
not present gross profits in its Statements of Operations calculated as Sales of
Used Cars less Cost of Used Cars Sold.
 
     Sales of Used Cars.  Sales of Used Cars increased by 150.1% to $69.5
million for the three month period ended June 30, 1998 from $27.8 million for
the three month period ended June 30, 1997. This growth reflects a significant
increase in the number of used car dealerships in operation from 22 dealerships
in operation during the three month period ended June 30, 1997 compared to 50
dealerships in operation during the three month period ended June 30, 1998.
Units sold increased by 126.8% to 8,631 units in the three month period ended
June 30, 1998 from 3,806 units in the three month period ended June 30, 1997.
Same store sales increased by 20.6% in the three month period ended June 30,
1998 compared to the three month period ended June 30, 1997. The increase in
same store sales was a result of certain stores operating for the entire three
months of the quarter ended June 30, 1998 while operating less than the entire
three months in the comparable quarter in 1997. Management expects same store
sales to remain relatively stable in future periods.
 
     The average sales price per car increased 10.3% to $8,055 for the three
month period ended June 30, 1998 from $7,305 for the three month period ended
June 30, 1997.
 
     Cost of Used Cars Sold and Gross Margin.  The Cost of Used Cars Sold
increased by 156.1% to $40.9 million for the three month period ended June 30,
1998 from $16.0 million for the three month period ended June 30, 1997. On a per
unit basis, the Cost of Used Cars Sold increased by 12.9% to $4,733 for the
three month period ended June 30, 1998 from $4,191 for the three month period
ended June 30, 1997. The gross margin on used car sales (Sales of Used Cars less
Cost of Used Cars Sold excluding Provision for Credit Losses) increased by
141.9% to $28.7 million for the three month period ended June 30, 1998 from
$11.9 million for the three month period ended June 30, 1997. As a percentage of
sales, the gross margin was 41.2% and 42.6% for the three month periods ended
June 30, 1998 and 1997, respectively. On a per unit basis, the gross margin per
car sold was $3,322 and $3,114 for the three month periods ended June 30, 1998
and 1997, respectively. The increase in the average cost per unit and for the
decline in gross margin percent is primarily the result of an increase in
vehicle reconditioning costs from the prior comparable period.
 
     Provision for Credit Losses.  A high percentage of Company Dealership
customers ultimately do not make all of their contractually scheduled payments,
requiring the Company to charge off the remaining principal balance due. As a
result, the Company recognizes a Provision for Credit Losses in order to
establish an Allowance for Credit Losses sufficient to absorb anticipated future
losses. The Provision for Credit Losses increased by 194.4% to $14.3 million in
the three month period ended June 30, 1998 from $4.8 million for the three month
period ended June 30, 1997. On a percentage basis, the Provision for Credit
Losses per unit originated at Company Dealerships increased by 25.6% to $1,641
per unit in the three month period ended June 30, 1998 from $1,307 per unit in
the three month period ended June 30, 1997. As a percentage of contract balances
originated, the Provision for Credit Losses averaged 21.3% and 18.7%, for the
three month periods ended June 30, 1998 and 1997, respectively.
 
     The Company charges its Provision for Credit Losses to current operations
and does not recognize any portion of the unearned interest income as a
component of its Allowance for Credit Losses. Accordingly, the Company's
unearned finance income is comprised of the full annual percentage rate ("APR")
on its contracts less amortization of loan origination costs.
 
     Interest Income.  Interest Income consists primarily of interest on finance
receivables from Company Dealership sales and income from Residuals in Finance
Receivables Sold. Interest Income increased by 12.0% to
 
                                       20
<PAGE>   21
 
$3.6 million for the three month period ended June 30, 1998 from $3.2 million
for the three month period ended June 30, 1997. Interest Income was reduced by
the sale of finance receivables with remaining principal balances of $217.2
million and $70.5 million as of June 30, 1998 and 1997, respectively, pursuant
to the Securitization Program, and will continue to be affected in future
periods by additional securitizations. A primary element of the Company's sales
strategy is to provide financing to customers with poor credit histories who are
unable to obtain automobile financing through traditional sources. The Company
financed 96.2% of sales revenue and 98.7% of the used cars sold at Company
Dealerships for the three month period ended June 30, 1998, compared to 93.1% of
sales revenue and 95.4% of the used cars sold for the three month period ended
June 30, 1997. The average amount financed increased to $7,855 for the three
month period ended June 30, 1998 from $7,246 for the three month period ended
June 30, 1997. The increase in the average amount financed is due primarily to
an increase in the average sales price from the comparable period in the prior
year. Primarily as a result of its expansion into markets with interest rate
limits, the Company's yield on its Company Dealership Receivable portfolio has
trended downward. The effective yield on Finance Receivables from Company
Dealerships was 25.3% and 26.0%, for the three month periods ended June 30, 1998
and 1997, respectively. The Company's policy is to charge 29.9% per annum on its
Company Dealership contracts. However, in those states that impose usury limits,
the Company charges the maximum interest rate permitted.
 
     Gain on Sale of Finance Receivables.  Ugly Duckling Receivables Corporation
("UDRC") and Ugly Duckling Receivables Corporation II ("UDRC II"), formerly
known as Champion Receivables Corporation ("CRC") and Champion Receivables
Corporation II ("CRC II"), respectively, (collectively referred to as
"Securitization Subsidiaries"), are the Company's wholly owned special purpose
"bankruptcy remote" entities. During the first quarter of 1996, the Company
initiated a Securitization Program under which UDRC sold securities backed by
contracts to SunAmerica Life Insurance Company ("SunAmerica"). Beginning with
the third fiscal quarter of 1997, the Company expanded the Securitization
Program to include UDRC II and sales of UDRC II securities through private
placement of securities to investors other than SunAmerica. Under the
Securitization Program, the Securitization Subsidiaries assign and transfer the
contracts to separate trusts ("Trusts") pursuant to Pooling and Servicing
Agreements (the "Pooling Agreements"). Pursuant to the Pooling Agreements, Class
A Certificates and subordinated Class B Certificates are issued to the
Securitization Subsidiaries. The Securitization Subsidiaries then sell the Class
A Certificates to the investors. The transferred contracts are serviced by
Champion Acceptance Corporation ("CAC"), another subsidiary of the Company. For
the Company's securitizations that took place prior to July 1, 1997, the
Company's Class A Certificates received ratings from Standard & Poors ranging
from "BBB" to "A". To obtain these ratings from Standard & Poors, UDRC was
required to provide a credit enhancement by establishing and maintaining a cash
spread account for the benefit of the certificate holders. For the
securitization transactions that were consummated after July 1, 1997, the
Company's Class A Certificates received a "AAA" rating from Standard & Poors,
and a "Aaa" rating from Moody's Investors Service. To obtain these ratings, UDRC
II (1) obtained an insurance policy from MBIA Insurance Corporation which
unconditionally and irrevocably guaranteed full and complete payment of the
Class A guaranteed distribution (as defined), and (2) provided a credit
enhancement by establishing and maintaining a cash spread account for the
benefit of the certificate holders. The Securitization Subsidiaries make an
initial cash deposit into the spread account, ranging from 3% to 4% of the
initial underlying finance receivables principal balance and pledge this cash to
the Trusts. The Securitization Subsidiaries are also required to then make
additional deposits to the spread account from the residual cash flow (through
the trustees) as necessary to attain and maintain the spread account at a
specified percentage, ranging from 6.0% to 8.0%, of the underlying finance
receivables principal balance. Distributions are not made to the Securitization
Subsidiaries on the Class B Certificates unless the spread account has the
required balance, the required periodic payments to the Class A Certificate
holders are current, and the trustee, servicer and other administrative costs
are current.
 
     The Company recognizes a Gain on Sale of Loans equal to the difference
between the sales proceeds for the finance receivables sold and the Company's
recorded investment in the finance receivables sold. The Company's investment in
finance receivables consists of the principal balance of the finance
receivables, as well as the allowance for credit losses related thereto.
Therefore, once the Company securitizes a pool of loans, the Company reduces the
allowance for credit losses for the amount of allowance for credit losses
related to the loans
 
                                       21
<PAGE>   22
 
securitized. The Company allocates 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, those differences appear to be other than
temporary in nature, the Company would be required to revalue the Residuals in
Finance Receivables Sold and record a charge to earnings based upon the
reduction.
 
     UDRC made an initial spread account deposit totaling $2.6 million during
the three months ended June 30, 1998 in conjunction with a single
securitization. Based upon securitizations in effect as of June 30, 1998, the
Company's continuing operations were required to maintain an aggregate balance
in its spread accounts of $17.5 million, a portion of which may be funded over
time. As of June 30, 1998, the Company maintained an aggregate spread account
balance of $16.6 million, which satisfied the funding requirement for all of the
securitization transactions consummated prior to the three month period ended
June 30, 1998. Accordingly, an additional $900,000 related to the securitization
consummated during the three month period ended June 30, 1998 will need to be
funded from future cash flows. The additional funding requirements will decline
as the trustees deposit additional cash flows into the spread account and as the
principal balance of the underlying finance receivables declines. In addition to
the spread account balance of $16.6 million, the Company had deposited a total
of $1.3 million in trust accounts in conjunction with certain other agreements.
 
     The Company also maintains spread accounts for the securitization
transactions that were consummated by the Company's discontinued operations. The
Company had satisfied its funding obligation of $5.5 million as of June 30,
1998, with respect to these securitization transactions.
 
     The assumptions utilized in prior securitizations may not necessarily be
the same as those utilized in future securitizations. The Company classifies the
residuals as "held-to-maturity" securities in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS No.
115).
 
     During the three months ended June 30, 1998, the Company securitized an
aggregate of $66.0 million in contracts, issuing $47.5 million in Class A
securities, and $18.5 million in Class B securities (Residuals in Finance
Receivables Sold). During the three months ended June 30, 1997, the Company
securitized an aggregate of $32.8 million in contracts issuing $24.7 million in
Class A securities and $8.1 million in Class B securities. The Company recorded
the carrying value of the Residuals in Finance Receivables sold at $10.8 million
and $6.3 million, respectively, for the securitization transactions consummated
during the three months ended June 30, 1998. The Company recorded Gain on Sale
of Loans of $3.7 million (5.6% of principal sold) and $3.0 million (9.1% of
principal sold), net of expenses related to securitization transactions during
the three months ended June 30, 1998 and 1997, respectively. The decrease in the
gain on sale percentage was due to the utilization of a higher cumulative net
loss assumption for the securitization transaction consummated during the three
months ended June 30, 1998.
 
     During the three month period ended June 30, 1998, the Trust issued
certificates at a yield of 6.10% resulting in net spread, before net credit
losses and after servicing, insurer, and trustee fees, of 17.5%.
 
     The Company's net earnings may fluctuate from quarter to quarter in the
future as a result of the timing and size of its securitizations.
 
     The Securitization Subsidiaries are the Company's wholly-owned special
purpose "bankruptcy remote" entities. Their assets, including assets included in
Discontinued Operations, include Residuals in Finance Receivables Sold and
Investments Held In Trust, in the amounts of approximately $39.9 million and
$22.1 million, respectively, at June 30, 1998, which amounts would not be
available to satisfy claims of creditors of the Company on a consolidated basis.
 
     Servicing Income.  Servicing Income for the three months ended June 30,
1998 increased 146.2% to $4.0 million from $1.6 million in the three month
period ended June 30, 1998. The Company serviced contracts totaling $446.7 at
June 30, 1998 million for monthly fees ranging from .25% to .33% of beginning of
period principal balances (3% to 4% annualized). The significant increase was
due to the increase in the principal balance of contracts serviced.
 
                                       22
<PAGE>   23
 
     Income before Operating Expenses.  As a result of the Company's continued
expansion, Income before Operating Expenses grew by 68.0% to $25.8 million for
the three month period ended June 30, 1998 from $15.3 million for the three
month period ended June 30, 1997. Growth of Sales of Used Cars, Interest Income
on the loan portfolios, Servicing Income, and Gain on Sale of Loans were the
primary contributors to the increase.
 
     Operating Expenses.  Operating Expenses consist of Selling and Marketing
Expenses, General and Administrative Expenses, and Depreciation and
Amortization.
 
     Selling and Marketing Expenses.  For the three month periods ended June 30,
1998 and 1997, Selling and Marketing Expenses were comprised almost entirely of
advertising costs and commissions relating to Company Dealership operations.
Selling and Marketing Expenses increased by 118.5 % to $4.9 million for the
three month period ended June 30, 1998 from $2.2 million for the three month
period ended June 30, 1997. As a percentage of Sales of Used Cars, these
expenses averaged 7.0% for the three month period ended June 30, 1998 and 8.1%
for the three month period ended June 30, 1997. On a per unit sold basis,
Selling and Marketing Expenses of Company Dealerships decreased slightly to $567
per unit for the three month period ended June 30, 1998 from $589 per unit for
the three month period ended June 30, 1997. The Company incurred significantly
higher marketing costs in markets it entered in the first half of 1997 in order
to establish brand name recognition. The Company did not enter any new markets
in the first half of 1998 and, accordingly, incurred a lower marketing cost per
unit for the three months ended June 30, 1998.
 
     General and Administrative Expenses.  General and Administrative Expenses
increased by 75.3% to $14.8 million for the three month period ended June 30,
1998 from $8.5 million for the three month period ended June 30, 1997. These
expenses represented 18.3% and 23.4% of total revenues for three month periods
ended June 30, 1998, and 1997, respectively. The increase in General and
Administrative Expenses was a result of the overall growth of the Company. The
number of used car dealerships increased over the comparable prior year period,
loan servicing operations expanded to accommodate the resulting growth in the
portfolio serviced, and corporate expenses increased to support the growth in
both Company Dealership and loan servicing operations. General and
Administrative Expenses also continue to reflect the inefficiencies inherent in
utilizing multiple origination and loan servicing systems. The Company is in the
process of consolidating operations to one of its current systems. The decrease
in General and Administrative Expenses as a percent of total revenues, however,
was due primarily to the disproportionate increase in revenues over the
incremental costs required to manage the Company as it expands.
 
     Depreciation and Amortization.  Depreciation and Amortization consists of
depreciation and amortization on the Company's property and equipment and
amortization of the Company's goodwill and trademarks. Depreciation and
amortization increased by 59.4% to $1.2 million for the three month period ended
June 30, 1998 from $737,000 for the three month period ended June 30, 1997. The
increase was due primarily to the increase in amortization of goodwill
associated with the Company's recent acquisitions, and increased depreciation
expense from the addition of Company Dealerships.
 
     Interest Expense.  Interest expense increased by 96.6% to $517,000 in the
three month period ended June 30, 1998 from $263,000 in the three month period
ended June 30, 1997. The increase in interest expense over the prior comparable
period was due primarily to increased borrowings to support the Company's
increasing finance receivable portfolio, property and equipment and inventory.
 
     Income Taxes.  Income taxes totaled $1.8 million and $1.5 million which
resulted in an effective rate of 40.5% and 40.9% in the three month periods
ended June 30, 1998 and 1997, respectively.
 
     Earnings from Discontinued Operations.  Discontinued operations consist
primarily of the Company's Cygnet Dealer Program, the Branch Office network, the
Company's bulk purchasing and loan servicing operations, and transactions
related to FMAC.
 
     Earnings from discontinued operations, net of income taxes, decreased to
$358,000 for the three months ended June 30, 1998 compared to $2.2 million for
the three months ended June 30, 1997. Earnings from discontinued operations were
impacted by the $5.0 million securitization gain (before income taxes)
recognized on the sale of Branch Office network loans in the three months ended
June 30, 1997.
 
                                       23
<PAGE>   24
 
RESULTS OF OPERATIONS
 
  For Six Months Ended June 30, 1998 Compared To Six Months Ended June 30, 1997
 
     Sales of Used Cars.  Sales of Used Cars increased by 209.7% to $142.5
million for the six month period ended June 30, 1998 from $46.0 million for the
six month period ended June 30, 1997. This growth reflected a significant
increase in the number of used cars sold. Units sold increased by 187.8% to
18,070 units in the six month period ended June 30, 1998 from 6,278 units in the
six month period ended June 30, 1997. Same store sales increased by 18.2% in the
six month period ended June 30, 1998 compared to the six month period ended June
30, 1997. The increase in same store sales was a result of certain stores
operating for the entire six months of the period ended June 30, 1998 while
operating less than the entire six months in the comparable period in 1997.
Management expects same store sales to remain relatively stable in future
periods.
 
     The average sales price per car increased to $7,886 for the six month
period ended June 30, 1998 from $7,329 for the six month period ended June 30,
1997.
 
     Cost of Used Cars Sold and Gross Margin.  The Cost of Used Cars Sold
increased by 213.7% to $81.2 million for the six month period ended June 30,
1998 from $25.9 million for the six month period ended June 30, 1997. On a per
unit basis, the Cost of Used Cars Sold increased by 9.0% to $4,494 for the six
month period ended June 30, 1998 from $4,124 for the six month period ended June
30, 1997. The gross margin on used car sales (Sales of Used Cars less Cost of
Used Cars Sold excluding Provision for Credit Losses) increased by 204.5% to
$61.3 million for the six month period ended June 30, 1998 from $20.1 million
for the six month period ended June 30, 1997. As a percentage of sales, the
gross margin was 43.0% and 43.7% for the six month periods ended June 30, 1998
and 1997, respectively. On a per unit basis, the gross margin per car sold was
$3,391 and $3,205 for the six month periods ended June 30, 1998 and 1997,
respectively. The increase in the average cost per unit and the decline in gross
margin percent and gross margin per car sold were primarily the result of an
increase in vehicle reconditioning costs from the prior comparable period.
 
     Provision for Credit Losses.  The Provision for Credit Losses increased by
261.4% to $29.3 million in the six month period ended June 30, 1998 compared to
$8.1 million for the six month period ended June 30, 1997. On a percentage
basis, the Provision for Credit Losses per unit originated at Company
Dealerships increased by 16.4% to $1,641 per unit in the six month period ended
June 30, 1998 compared to $1,394 per unit in the six month period ended June 30,
1997. As a percentage of contract balances originated, the Provision for Credit
Losses averaged 21.4% and 18.4%, respectively, for the six month periods ended
June 30, 1998 and 1997.
 
     Interest Income.  Interest Income consists primarily of interest on finance
receivables from Company Dealership sales and income from Residuals and Finance
Receivables Sold. Interest Income increased by 58.6% to $7.4 million for the
three month period ended June 30, 1998 from $4.7 million for the three month
period ended June 30, 1997. Interest Income was reduced by the sale of finance
receivables with remaining principal balances of $217.2 million and $70.5
million as of June 30, 1998 and 1997, respectively, pursuant to the
Securitization Program, and will continue to be affected in future periods by
additional securitizations. The Company financed 95.9% of sales revenue and
98.8% of the used cars sold at Company Dealerships for the six month period
ended June 30, 1998, compared to 91.6% of sales revenue and 92.7% of the used
cars sold for the six month period ended June 30, 1997. The average amount
financed increased to $7,656 for the six month period ended June 30, 1998 from
$7,244 for the six month period ended June 30, 1997. The increase in the average
amount financed, was primarily due to an increase in the average sales price
from the comparable period in the prior year. Primarily as a result of its
expansion into markets with interest rate limits, the Company's yield on its
Company Dealership Receivable portfolio has trended downward. The effective
yield on Finance Receivables from Company Dealerships was 25.7% and 27.9%, for
the six month periods ended June 30, 1998 and 1997, respectively. The Company's
policy is to charge 29.9% per annum on its Company Dealership contracts.
However, in those states that impose usury limits, the Company charges the
maximum interest rate permitted.
 
     Gain on Sale of Finance Receivables.  During the six months ended June 30,
1998, the Company securitized an aggregate of $152.6 million in contracts,
issuing $110.1 million in Class A securities, and $42.5
 
                                       24
<PAGE>   25
 
million in Class B securities (Residuals in Finance Receivables Sold). During
the six months ended June 30, 1997, the Company securitized an aggregate of
$48.0 million in contracts issuing $36.3 million in Class A securities and $11.7
million in Class B securities. The Company recorded the carrying value of the
Residuals in Finance Receivables sold at $25.5 million and $8.5 million,
respectively. The Company recorded Gain on Sale of Loans of $8.3 million (5.4%
of principal sold) and $4.1 million (9.0% of principal sold), net of expenses
related to securitization transactions during the six months ended June 30, 1998
and 1997, respectively. The decrease in the gain on sale percentage was due to
the utilization of a higher cumulative net loss assumption for the 1998
securitization.
 
     During the six month period ended June 30, 1998, the Trust issued
certificates at an average yield of 6.11% resulting in net spread, before net
credit losses and after servicing, insurer, and trustee fees, of 17.2%.
 
     Servicing Income.  Servicing Income for the six months ended June 30, 1998
increased 196.8% to $7.9 million from $2.6 million in the six month period ended
June 30, 1998. The Company serviced contracts totaling $446.7 at June 30, 1998
million for monthly fees ranging from .25% to .33% of beginning of period
principal balances (3% to 4% annualized). The significant increase was due to
the increase in the principal balance of contracts serviced.
 
     Income before Operating Expenses.  As a result of the Company's continued
expansion, Income before Operating Expenses grew by 128.4% to $55.8 million for
the six month period ended June 30, 1998 from $24.4 million for the six month
period ended June 30, 1997. Growth of Sales of Used Cars, Interest Income and
Servicing Income, and Gain on Sale of Loans were the primary contributors to the
increase.
 
     Operating Expenses.  Operating Expenses consist of Selling and Marketing
Expenses, General and Administrative Expenses, and Depreciation and
Amortization.
 
     Selling and Marketing Expenses.  For the six month periods ended June 30,
1998 and 1997, Selling and Marketing Expenses were comprised almost entirely of
advertising costs and commissions relating to Company Dealership operations.
Selling and Marketing Expenses increased by 170.9% to $10.2 million for the six
month period ended June 30, 1998 from $3.8 million for the six month period
ended June 30, 1997. As a percentage of Sales of Used Cars, these expenses
averaged 7.2% for the six month period ended June 30, 1998 and 8.2% for the six
month period ended June 30, 1997. On a per unit sold basis, Selling and
Marketing Expenses of Company Dealerships decreased to $566 per unit for the six
month period ended June 30, 1998 from $601 per unit for the six month period
ended June 30, 1997. The Company incurred significantly higher marketing costs
in markets it entered in the first half of 1997 in order to establish brand name
recognition. The Company did not enter any new markets in the first half of 1998
and, accordingly, incurred a lower marketing cost per unit for the six months
ended June 30, 1998.
 
     General and Administrative Expenses.  General and Administrative Expenses
increased by 123.9% to $31.5 million for the six month period ended June 30,
1998 from $14.1 million for the six month period ended June 30, 1997. These
expenses represented 18.9% and 24.1% of total revenues for the six month periods
ended June 30, 1998, and 1997, respectively. The increase in General and
Administrative Expenses was a result of the overall growth of the Company. The
number of used car dealerships increased over the comparable prior year period,
loan servicing operations expanded to accommodate the resulting growth in the
portfolio serviced, and corporate expenses increased to support the growth in
both Company Dealership and loan servicing operations. General and
Administrative Expenses also continue to reflect the inefficiencies inherent in
utilizing multiple origination and loan servicing systems. The Company is in the
process of consolidating operations to one of its current systems. The decrease
in General and Administrative Expenses, however, as a percent of total revenues
was due primarily to the disproportionate increase in revenues over the
incremental costs required to manage the Company as it expands.
 
     Depreciation and Amortization.  Depreciation and Amortization consists of
depreciation and amortization on the Company's property and equipment and
amortization of the Company's goodwill and trademarks. Depreciation and
amortization increased by 83.8% to $2.3 million for the six month period ended
June 30, 1998 from $1.3 million for the six month period ended June 30, 1997.
The increase was due primarily to the
 
                                       25
<PAGE>   26
 
increase in amortization of goodwill associated with the Company's recent
acquisitions, and increased depreciation expense from the addition of used car
dealerships.
 
     Interest Expense.  Interest expense increased by 164.5% to $1.2 million in
the six month period ended June 30, 1998 from $440,000 in the six month period
ended June 30, 1997. The increase in interest expense over the prior comparable
period was due primarily to increased borrowings to support the Company's
increasing finance receivable portfolio, property and equipment and inventory.
 
     Income Taxes.  Income taxes totaled $4.3 million and $2.0 million, which
resulted in an effective rate of 40.3% and 40.6% in the six month periods ended
June 30, 1998 and 1997, respectively.
 
     Earnings (Loss) from Discontinued Operations.  Discontinued operations
consist primarily of the Company's Cygnet Dealer Program, the Branch Office
network, the Company's bulk purchasing and loan servicing operations, and
transactions related to FMAC.
 
     The loss from discontinued operations, net of income taxes, totaled $5.3
million for the six months ended June 30, 1998 compared to earnings of $4.7
million for the six months ended June 30, 1997. The loss from discontinued
operations for the six months ended June 30, 1998 was comprised of a $487,000
loss from operations, net of income taxes, of discontinued operations and a loss
of $4.8 million from the closure of the Branch Offices. Earnings from
discontinued operations were significantly impacted by the $8.5 million
securitization gain (before income taxes) recognized on the sale of Branch
Office network loans in the six months ended June 30, 1997.
 
ALLOWANCE FOR CREDIT LOSSES
 
     The Company has established an Allowance for Credit Losses ("Allowance") to
cover anticipated credit losses on the contracts currently in its portfolio. The
Allowance has been established through the Provision for Credit Losses.
 
     The following table reflects activity in the Allowance, as well as
information regarding charge off activity, for the three and six month periods
ended June 30, 1998 and 1997, in thousands.
 
<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED     SIX MONTHS ENDED
                                                    JUNE 30,              JUNE 30,
                                               ------------------    -------------------
                                                 1998      1997        1998       1997
                                               --------   -------    --------   --------
<S>                                            <C>        <C>        <C>        <C>
Allowance Activity:
Balance, Beginning of Period.................  $  6,153   $ 9,223    $ 10,356   $  1,625
Provision for Credit Losses..................    14,274     4,848      29,308      8,109
Allowance on Acquired Loans..................        --     6,708          --     15,309
Reduction Attributable to Loans Sold.........   (13,082)   (8,414)    (30,722)   (11,082)
Net Charge Offs..............................    (1,395)   (2,436)     (2,992)    (4,032)
                                               --------   -------    --------   --------
Balance, End of Period.......................  $  5,950   $ 9,929    $  5,950   $  9,929
                                               ========   =======    ========   ========
Allowance as Percent of Period End
  Balances...................................      18.5%     23.3%       18.5%      23.3%
                                               ========   =======    ========   ========
Charge off Activity:
  Principal Balances.........................  $ (2,069)  $(2,954)   $ (4,332)  $ (5,216)
  Recoveries, Net............................       674       518       1,340      1,184
                                               --------   -------    --------   --------
Net Charge Offs..............................  $ (1,395)  $(2,436)   $ (2,992)  $ (4,032)
                                               ========   =======    ========   ========
Net Charge Offs as % of Average Principal
  Outstanding................................      2.97%      4.2%        5.0%      10.4%
                                               ========   =======    ========   ========
</TABLE>
 
     The Allowance on contracts was 18.5% of outstanding principal balances as
of June 30, 1998 and December 31, 1997 and 23.3% at June 30, 1997. The Allowance
at June 30, 1997 was significantly effected by the Seminole portfolio
acquisition in which the Company obtained $9.0 million of discount acquired on a
total
 
                                       26
<PAGE>   27
 
loan portfolio of $31.1 million, resulting in a significant increase in the
Allowance as a percentage of outstanding principal balances.
 
     The Company's policy is to charge off contracts when they are deemed
uncollectible, but in any event at such time as a contract is delinquent for 90
days.
 
     Recoveries as a percentage of principal balances charged off averaged 32.6%
for the three month period ended June 30, 1998 compared to 29.0% for the three
month period ended June 30, 1997. Recoveries as a percentage of principal
balances charged off for the six month periods ended June 30, 1998 and 1997
averaged 31.0% and 22.7%, respectively.
 
     Static Pool Analysis.  To monitor contract performance the Company
implemented "static pool" analysis for contracts originated since January 1,
1993. Static pool analysis is a monitoring methodology by which each month's
originations and subsequent charge offs are assigned a unique pool and the pool
performance is monitored separately. Improving or deteriorating performance is
measured based on cumulative gross and net charge offs as a percentage of
original principal balances, based on the number of complete payments made by
the customer before charge off. The table below sets forth the cumulative net
charge offs as a percentage of original contract cumulative balances, based on
the quarter of origination and segmented by the number of payments made prior to
charge off. For periods denoted by "x", the pools have not seasoned sufficiently
to allow for computation of cumulative losses. For periods denoted by "--", the
pools have not yet attained the indicated cumulative age. While the Company
monitors its static pools on a monthly basis, for presentation purposes the
information in the tables is presented on a quarterly basis.
 
     Currently reported cumulative losses may also vary from those previously
reported due to ongoing collection efforts on charged off accounts and the
difference between final proceeds on the liquidation of repossessed collateral
versus original accounting estimates. Management believes that such variation
will not be material.
 
     The following table sets forth as of July 31, 1998, 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 customer before charge off. Additionally, set forth is the
percent of principal reduction for each pool since inception and cumulative
total net losses incurred (TLI). Such data contains a revision of previously
reported data as a result of a recently detected computational error.
 
                                       27
<PAGE>   28
 
         POOL'S CUMULATIVE NET LOSSES AS PERCENTAGE OF POOL'S ORIGINAL
                          AGGREGATE PRINCIPAL BALANCE
 
<TABLE>
<CAPTION>
                                             MONTHLY PAYMENTS COMPLETED BY CUSTOMER BEFORE CHARGE OFF
                                          ---------------------------------------------------------------
                                 ORIG.     0       3       6      12      18      24      TLI    REDUCED
                                -------   ----   -----   -----   -----   -----   -----   -----   --------
<S>                             <C>       <C>    <C>     <C>     <C>     <C>     <C>     <C>     <C>
1993:
  1st Quarter.................  $ 2,326   6.9%   18.7%   26.5%   31.8%   33.9%   35.1%   35.4%    100.0%
  2nd Quarter.................  $ 2,942   7.2%   18.9%   25.1%   29.4%   31.7%   32.1%   32.4%    100.0%
  3rd Quarter.................  $ 3,455   8.6%   19.5%   23.7%   28.5%   30.7%   31.6%   31.9%    100.0%
  4th Quarter.................  $ 4,261   6.3%   16.1%   21.6%   27.0%   28.9%   29.5%   29.6%    100.0%
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   1.1%    7.3%   12.2%   17.3%   19.8%   20.7%   20.8%     99.8%
  2nd Quarter.................  $ 9,846   1.7%    7.0%   11.8%   16.3%   19.1%   20.7%   21.0%     99.1%
  3rd Quarter.................  $10,106   1.9%    6.8%   10.8%   17.6%   21.4%   23.0%   23.4%     96.5%
  4th Quarter.................  $ 8,426   1.2%    5.6%   10.7%   17.5%   22.1%   23.7%   23.9%     94.5%
1996:
  1st Quarter.................  $13,635   1.3%    7.5%   13.2%   20.7%   24.7%   26.0%   26.2%     89.6%
  2nd Quarter.................  $13,462   2.2%    9.2%   13.9%   22.8%   26.7%      x    27.9%     83.6%
  3rd Quarter.................  $11,082   1.6%    7.1%   13.1%   21.8%   26.0%     --    26.5%     77.4%
  4th Quarter.................  $10,817   1.6%    8.9%   16.4%   24.8%      x      --    27.9%     71.7%
1997:
  1st Quarter.................  $16,279   2.2%   10.6%   17.6%   24.3%     --      --    25.4%     64.0%
  2nd Quarter.................  $25,875   1.5%   10.0%   16.1%      x      --      --    21.7%     50.9%
  3rd Quarter.................  $32,147   1.3%    8.5%   13.4%     --      --      --    17.0%     37.6%
  4th Quarter.................  $42,529   1.5%    7.1%      x      --      --      --    11.7%     26.8%
1998:
  1st Quarter.................  $69,708   1.0%      x      --      --      --      --     5.7%     14.4%
  2nd Quarter.................  $66,908     x      --      --      --      --      --     0.5%      2.5%
</TABLE>
 
     The following table sets forth the principal balances 31 to 60 days
delinquent, and 61 to 90 days delinquent as a percentage of total outstanding
Company Dealership contract principal balances.
 
<TABLE>
<CAPTION>
                                                              RETAINED    SECURITIZED    MANAGED
                                                              --------    -----------    -------
<S>                                                           <C>         <C>            <C>
June 30, 1998:
  31 to 60 days.............................................    1.1%          3.6%         3.2%
  61 to 90 days.............................................    2.2%          1.5%         1.6%
December 31,1997:
  31 to 60 days.............................................    2.2%          4.5%         3.6%
  61 to 90 days.............................................    0.6%          2.2%         1.5%
</TABLE>
 
     In accordance with the Company's charge off policy, there are no accounts
more than 90 days delinquent as of June 30, 1998 and December 31, 1997.
 
RESIDUALS IN FINANCE RECEIVABLES SOLD
 
     Residuals in Finance Receivables Sold represent the Company's retained
portion of the securitization assets. The Company utilizes a number of estimates
in arriving at the initial valuation of the Residuals in
 
                                       28
<PAGE>   29
 
Finance Receivables Sold, which represent the expected present value of net cash
flows into the Trust in excess of those required to pay principal and interest
on the Class A certificates. The present value of expected cash flows are a
function of a number of items including, but not limited to, charge off rates,
repossession recovery rates, portfolio delinquency, prepayment rates, and Trust
expenses. Subsequent to the initial recording of the Residuals in Finance
Receivables Sold, the carrying value is adjusted for the actual cash flows into
the respective Trusts in order to maintain a carrying value which approximates
the present value of the expected net cash flows into the Trust in excess of
those required to pay all obligations of the respective Trust other than the
obligations to the Class B certificates. To the extent that actual cash flows on
a securitization are below original estimates, differ materially from the
original securitization assumptions, and in the opinion of management, those
differences appear to be other than temporary in nature, the Company would be
required to revalue the residual portion of the securitization which it retains,
and record a charge to earnings based upon the reduction. During the third
fiscal quarter of 1997, the Company recorded a $5.7 million charge
(approximately $3.4 million, net of income taxes) to continuing operations to
write down the Residuals in Finance Receivables Sold. The Company 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 which
resulted in a reduction in the carrying value of the Company's Residuals in
Finance Receivables Sold 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 June 30, 1997 which approximates the
assumption used for the securitization transactions consummated during the third
quarter of 1997. For the securitizations that were completed during the six
month period ended June 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.
 
     The remaining allowance for credit losses inherent in the securitization
assumptions as a percentage of the remaining principal balances of securitized
contracts was approximately 24.1% as of June 30, 1998, compared to 17.9% as of
December 31, 1997. There can be no assurance that the charge taken by the
Company was sufficient and that the Company will not record additional charges
in the future in order to write down the Residuals in Finance Receivables Sold.
 
     The assumptions utilized in prior securitizations may not necessarily be
the same as those utilized in future securitizations. The Company classifies the
residuals as "held-to-maturity" securities in accordance with SFAS No. 115.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company requires capital to support increases in its contract
portfolio, expansion of Company Dealerships, the purchase of inventories, the
purchase of property and equipment, and for working capital and general
corporate purposes. In addition, the Company intends to continue to acquire
loans under the Cygnet Dealer Program until the Split-up is complete and pursue
other opportunities within the discontinued operations. The Company funds its
capital requirements through equity offerings, operating cash flow, the sale of
finance receivables, and supplemental borrowings.
 
     The Company's Net Cash Provided by Operating Activities decreased by 53.5%
or $6.5 million to $5.6 million for the six month period ended June 30, 1998
from $12.1 million in the six month period ended June 30, 1997. The decrease was
primarily due to the loss from discontinued operations.
 
     The Net Cash Provided by Investing Activities increased by 110.0% or $34.2
million to $3.1 million in the six months ended June 30, 1998 from $31.1 million
Used In Investing Activities in the six months ended June 30, 1997. The increase
was a result of the Company receiving cash proceeds of $21.8 million from the
sale of property and equipment during the six months ended June 30, 1998. (See
the explanation of this transaction below under the caption "Sale -- Leaseback
of Real Property.") The Company did not consummate any such transaction during
the six months ended June 30, 1997. The Company paid cash totaling $18.1 million
for acquired assets during the six months ended June 30, 1997 and $0 in the
comparable period in 1998. In addition, the Increase in Net Cash Provided by
Investing Activities was effected by an increase in Investments Held in Trust
and a decrease in the purchase of Property and Equipment.
 
                                       29
<PAGE>   30
 
     The Company's Net Cash Used In Financing Activities decreased 108.5% or
$56.5 million to $4.4 million in the six month period ended June 30, 1998
compared to $52.1 million Net Cash Provided by Financing Activities in the six
month period ended June 30, 1997. This decrease was primarily the result of the
$88.7 million in proceeds from the Company's sale of common stock in the six
month period ended June 30, 1997, and a decrease in the net repayment of notes
payable.
 
     The Company's Net Cash Used in Discontinued Operations decreased by 40.1%
or $4.1 million to $6.2 million in the six month period ended June 30, 1998 from
$10.4 million in the six month period ended June 30, 1997 due primarily to a
decrease in finance receivables originated and retained by the discontinued
operations.
 
     Revolving Facility.  The Company maintains a revolving credit facility (the
"Revolving Facility") with General Electric Capital Corporation ("GE Capital")
that has a maximum commitment of up to $100.0 million. Under the Revolving
Facility, the Company may borrow up to 65.0% of the principal balance of
eligible contracts originated from the sale of used cars and up to 86.0% of the
principal balance of eligible contracts originated by the Branch Offices.
However, an amount up to $10 million of the borrowing capacity under the
Revolving Facility is not available at any time when the guarantee of the
Company to the Contract Purchaser (defined below under "Transactions Regarding
First Merchants Acceptance Corporation") is in effect. The Revolving Facility
expires in December 1998. The facility is secured by substantially all of the
Company's assets. As of June 30, 1998, the Company's borrowing capacity under
the Revolving Facility was $58.2 million, the aggregate principal amount
outstanding under the Revolving Facility was approximately $41.8 million, and
the amount available to be borrowed under the facility was $10.6 million. The
Revolving Facility bears interest at the 30-day LIBOR plus 3.15%, payable daily
(total rate of 8.80% as of June 30, 1998).
 
     The Revolving Facility contains covenants that, among other things, limit
the Company's ability to, without GE Capital's consent: (i) incur additional
indebtedness; (ii) make unsecured loans or other advances of money to officers,
directors, employees, stockholders or affiliates in excess of $25,000 in total;
(iii) engage in securitization transactions (other than the Securitization
Program, for which GE Capital has consented); (iv) merge with, consolidate with,
acquire or otherwise combine with any other person or entity, transfer any
division or segment of its operations to another person or entity, or form new
subsidiaries; (v) make any change in its capital structure; (vi) 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;
(vii) make certain investments and capital expenditures; and (viii) engage in
certain transactions with affiliates. These covenants also require the Company
to maintain specified financial ratios, including a debt ratio of 2.1 to 1 and a
net worth of at least $75,000,000, and to comply with all laws relating to the
Company's business. The Revolving Facility also provides that a transfer of
ownership of the Company that results in less than 15.0% of the Company's voting
stock being owned by Mr. Ernest C. Garcia II will result in an event of default
under the Revolving Facility.
 
     Under the terms of the Revolving Facility, the Company is required to
maintain an interest coverage ratio which the Company failed to satisfy during
the six month period ended June 30, 1998. This was primarily as a result of the
charges taken in the first quarter of 1998 with respect to the closure of the
Branch Office network, for which the Company incurred a loss from discontinued
operations of $5.6 million (net of income tax benefit of $3.5 million.) GE
Capital has waived the covenant violation as of June 30, 1998.
 
     The Company's Revolving Facility currently contains provision for
borrowings based upon eligible finance receivable contracts and does not provide
for borrowings based upon contracts or notes receivable acquired or issued
pursuant to the Cygnet Dealer Program. Further, the Revolving Facility does not
contain provision for borrowing against the Company's inventory. The Company
considers these assets to be sources of additional liquidity and, therefore, is
currently exploring alternatives regarding obtaining financing secured by the
assets generated by the Cygnet Dealer Program and the Company's inventory.
 
     Subordinated Indebtedness and Preferred Stock.  Prior to its public
offering in June 1996, the Company historically borrowed substantial amounts
from Verde Investments Inc. ("Verde"), an affiliate of the Company. The
Subordinated Notes Payable balances outstanding to Verde totaled $10.0 million
and $12.0 million as of June 30, 1998 and December 31, 1997, respectively. Prior
to June 21, 1996, these borrowings
                                       30
<PAGE>   31
 
accrued interest at an annual rate of 18.0%. Effective June 21, 1996 the annual
interest rate on these borrowings was reduced to 10.0%. The Company is required
to make monthly payments of interest and annual payments of principal in the
amount of $2.0 million. This debt is junior to all of the Company's other
indebtedness and the Company may suspend interest and principal payments in the
event it is in default on obligations to any other creditors. In July 1997, the
Company's Board of Directors approved the prepayment of the $10.0 million in
subordinated debt after the earlier of (1) the Company's completion of a debt
offering; or (2) at such time as (a) the FMAC transactions (described below
under "Transactions with First Merchants Acceptance Corporation") have been
completed or the cash requirements for completion of said transaction are known,
and (b) the company either has cash in excess of its current needs or has funds
available under its financing sources in excess of its current needs. No such
prepayment has been made as of the date of filing of this Form 10-Q. Any such
prepayment would require the consent of certain lenders to the Company. It is
the Company's intent to pay off the $10.0 subordinated Note Payable to Verde at
the time the Split-up is effectuated.
 
     In February 1998, the Company executed senior subordinated notes payable
agreements with unrelated parties for a total of $15.0 million in subordinated
debt. The unsecured three year notes call for interest at 12% per annum payable
quarterly and are senior to the Verde subordinated note payable. In connection
with the issuance of the 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.
 
     As of July 20, 1998, Cygnet secured a subordinated loan of $5 million from
a third party lender for a three-year term. On the effective date of the
Split-up transaction, Cygnet will be required to issue to the lender warrants to
purchase up to 115,000 shares of Cygnet common stock at an exercise price of
$8.40 per share, subject to a call feature by Cygnet if the closing price of the
Cygnet common stock equals or exceeds $13.44 per share for a period of 20
consecutive trading days. The loan is guaranteed by the Company. Also on the
effective date of the Split-up transaction, the Company's guarantee will be
released. If the Split-up has not occurred by December 31, 1998, and the loan is
not repaid, the Company will be required to issue warrants to purchase 115,000
shares of Company common stock at an exercise price of 120% of the average
trading price for the Company common stock for the 20 consecutive trading days
prior to the issuance of such warrants, subject to a call feature if the closing
price of the Company common stock equals or exceeds 160% of the warrant exercise
price for a period of 20 consecutive trading days.
 
     Additional Financing.  On January 28, 1998, the Company executed a $7.0
million note payable which accrued interest at 9.5% per annum. The Company paid
this note payable in full on April 1, 1998.
 
     On February 19, 1998, the Company and certain of its affiliates executed a
second short term $30.0 million standby repurchase credit facility. Pursuant to
the terms of this facility, the lender agreed to purchase, subject to repurchase
rights of the Company and its subsidiaries, certain eligible sub-prime
automobile finance receivables originated and or purchased by the Company's
affiliates for a purchase price (and corresponding repurchase obligation) of no
more than $30.0 million. During the six month period ended June 30, 1998, the
lender purchased approximately $30.0 million in contracts pursuant to the
facility which accrued interest at a rate of 9.5% per annum. The Company
exercised its repurchase obligation on March 24, 1998.
 
     Securitizations.  The Company's Securitization Program is a primary source
of funding for the Company. Under this program, the Company sold approximately
$170.4 million in certificates secured by contracts to SunAmerica through
securitizations effected prior to June 30, 1997. Since June 30, 1997, the
Company has consummated additional securitizations under the Securitization
Program with private investors through Greenwich Capital Markets, Inc.
("Greenwich Capital"). In February 1998, the Company executed a commitment
letter with Greenwich Capital under which, among other things, Greenwich Capital
will become the exclusive securitization agent for the Company for up to $1.0
billion of AAA-rated surety wrapped securities as part of the Company's ongoing
Securitization Program.
 
     At the closing of each securitization, the Securitization Subsidiaries
receive payment for the certificates sold (net of Investments Held in Trust).
The Company also generates cash flow under this program from
 
                                       31
<PAGE>   32
 
ongoing servicing fees and excess cash flow distributions resulting primarily
from the difference between the payments received from customers on the
contracts and the payments paid on the Class A Certificates. In addition,
securitization allows the Company to fix its cost of funds for a given contract
portfolio, and broadens the Company's capital source alternatives. Failure to
periodically engage in securitization transactions will adversely affect the
Company.
 
     In connection with its securitization transactions, the Securitization
Subsidiaries are required to make an initial cash 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 Trust in turn invests the cash in high
quality liquid investment securities. In addition, the cash flows due to the B
Certificates first are deposited into the spread account as necessary to attain
and maintain the spread account at a specified percentage of the underlying
finance receivables principal balance. In the event that the cash flows
generated by the finance receivables sold to the Trust 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
Securitization Subsidiaries from the pledged spread account.
 
     Debt Shelf Registration.  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 is available for future debt offerings.
 
     Transactions Regarding First Merchants Acceptance Corporation.  The Company
was actively involved in the bankruptcy proceedings of First Merchants
Acceptance Corporation ("FMAC"). FMAC was in the business of purchasing and
securitizing loans made primarily to sub-prime borrowers by various Third Party
Dealers. In various transactions relating to the FMAC bankruptcy proceedings,
the Company, among other things, (l) purchased the secured claims of certain
creditors of FMAC, sold the contracts securing such claims at a profit to a
third party purchaser, guaranteed the purchaser a specified return on the
contracts and obtained a related guarantee from FMAC secured by, among other
things, the stock of certain entities holding residual interests and certain
equity certificates in various securitized loan pools of FMAC, and entered into
servicing arrangements with respect to such contracts; (2) made
debtor-in-possession loans to FMAC, secured as described above, and received
interest income therefrom; (3) entered into various servicing agreements with
respect to receivables in the securitized pools of FMAC; (4) obtained rights to
receive certain payments with respect to distributions on residual interests in
such securitized pools and obtained certain interests in charged off receivables
in such pools; (5) obtained rights to certain fees; (6) obtained the FMAC
servicing platform; and (7) issued certain warrants to purchase Company Common
Stock consisting of (a) warrants issued to FMAC's bank group to purchase up to
389,800 shares of the Company's Common Stock at an exercise price of $20.00 per
share at any time through February 20, 2000, and subject to a call feature by
the Company if the closing market price of the Company's Common Stock equals or
exceeds $27.00 per share for a period of five consecutive trading days, and (h)
warrants issued to FMAC to purchase 325,000 shares of the Company's Common Stock
at any time through April 1, 200l at a price of $20.00 per share, subject to a
call feature by the Company if the closing market price of the Company's Common
Stock equals or exceeds $28.50 per share for a period of 10 consecutive trading
days. The Company also contributed to FMAC all of its shares of FMAC common
stock in exchange for the assets constituting FMAC's servicing platform.
 
     It is the Company's intent to transfer substantially all of the rights and
liabilities related to the FMAC transaction (except cash received by the Company
prior to the Effective Date) to Cygnet in conjunction with the Split-up.
However, the Company will remain liable as to certain liabilities in the FMAC
transaction. For additional information concerning the FMAC transaction, and the
liabilities that will be retained by the Company with respect thereto following
the Split-up, see "Risk Factors -- Risks Relating to the FMAC Transaction." The
transactions described above were consummated primarily by the Company's
discontinued operations.
 
                                       32
<PAGE>   33
 
     Industry Considerations.  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.
In addition, certain of these companies have filed for bankruptcy protection.
These announcements have had a disruptive effect on the market for securities of
sub-prime automobile finance companies, have resulted in a tightening of credit
to the sub-prime markets, and could lead to enhanced regulatory oversight. A
reduction in access to the capital markets or to credit sources could have an
adverse affect on the Company.
 
     Capital Expenditures and Commitments.  The Company is pursuing an
aggressive growth strategy. In the first six months of 1998, the Company has
opened eight new dealerships. Further, the Company currently has 10 dealerships
under development. The Company believes that it will expend approximately $1.5
to $1.7 million to construct (excluding inventory) each Company Dealership.
 
     On July 11, 1997, the Company entered into an agreement, as amended, to
provide "debtor in possession" financing to FMAC in an amount up to $21.5
million to be adjusted downward from time to time. As of June 30, 1998, the
maximum commitment was reduced to $12.4 million and the outstanding balance on
the DIP totaled $9.8 million. The Company expects the maximum commitment to be
further reduced to $11.5 million as FMAC receives income tax refunds from
various taxing jurisdictions. The FMAC commitment will be transferred to Cygnet
in conjunction with the Split-up as described generally under "Risk
Factors -- Risks to the Company Relating to the FMAC Transaction."
 
     The Company intends to finance these expenditures through operating cash
flows and supplemental borrowings, including amounts available under the
Revolving Facility and the Securitization Program, if any.
 
     Sale-Leaseback of Real Property.  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 for its
original cost and leaseback the properties for an initial term of twenty years.
The Company retains certain extension options, and pays 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 the monthly rents
of not less than 2%. On or about May 14, 1998, the Company completed the first
closing of the sales-leaseback transaction. In conjunction with this closing,
the Company sold property for approximately $21.8 million. Substantially all of
the proceeds from the sale were utilized to pay down the Revolving Facility.
 
     Common Stock Repurchase Program.  In October 1997 the Company's Board of
Directors authorized a stock repurchase program by which the Company may acquire
up to one million shares of its common stock from time to time on the open
market. Under the program, purchases may be made depending on market conditions,
share price and other factors. The stock repurchase program will terminate on
December 31, 1998, unless extended by the Company's Board of Directors, and may
be discontinued at any time. As of the date of filing of this Form 10-Q, the
Company had repurchased 28,000 shares of common stock.
 
     Stock Option Grants.  Effective January 15, 1998, the Compensation
Committee of the Company's Board of Directors awarded 775,000 stock options to
key officers of the Company at an exercise price of $8.25 per share, the market
value of the Common Stock on the date of grant ("Awards"). Of these Awards,
500,000 options were granted to Gregory B. Sullivan, President and Chief
Operating Officer of the Company. Two Hundred Fifty Thousand of the options
granted to Mr. Sullivan were granted under the existing Ugly Duckling Long Term
Incentive Plan, pursuant to the plan's general terms, including vesting in equal
increments over a five-year period beginning on the first anniversary date of
the grant. The other 250,000 options to Mr. Sullivan and the remaining 225,000
options granted to the other key officers were granted under the new Ugly
Duckling 1998 Executive Incentive Plan, subject to approval of the stockholders
at the upcoming 1998 Annual Meeting ("Existing Grants"). These options contain
time and price vesting requirements. The Existing Grants will vest in equal
increments over five years subject to continued employment by the Company and
will also be subject to additional vesting hurdles based on the market value of
the Company's Common Stock as traded on Nasdaq. The price hurdle for the first
year of the grants is a 20% increase in such market value over the exercise
price of the options, with the price hurdles increased for the next four years
in additional 20% increments over the exercise price of the options. In order
for the price hurdles to be met, the Common Stock
                                       33
<PAGE>   34
 
must trade at the targeted value for a period of 10 consecutive trading days.
The price hurdles can be met at any time before or after the time vesting
requirements are satisfied, and will be completely met at such time as the
Common Stock trades at 100% in excess of the exercise price of the options for
10 consecutive trading days. In any event, the Existing Grants will become fully
vested on January 15, 2005, unless sooner exercised or forfeited. The Company
believes that the Awards are material in the aggregate. As such, they will have
the effect of diluting the ownership interest of existing stockholders of the
Company.
 
     Reliance Transaction.  In February 1998, the Company entered into servicing
and transition servicing arrangements with Reliance Acceptance Group, Inc.
("Reliance"), which company also filed a voluntary petition for relief under
Chapter 11 of the Bankruptcy Code that same month. It is the Company's intent to
transfer all contract rights and liabilities related to, and assets (except cash
received by the Company prior to the Effective Date) obtained in, the Reliance
transaction to the Company's discontinued operations in conjunction with the
Split-up. However, the Company will remain liable as to certain obligations in
the Reliance transaction. See "Risk Factors -- Risks Relating to the Reliance
Transaction." The following is a general description of the Reliance
transaction.
 
     Pursuant to the servicing agreement entered into between the Company and
Reliance (the "Servicing Agreement"), as amended, following the Effective Date,
the Company will service certain receivables of Reliance in exchange for (i) a
monthly servicing fee of the greater of four percent (4%) per annum of the
aggregate outstanding principal balance of all non-defaulted receivables
computed monthly on the basis of the declining balance of the receivables
portfolio (consisting of Reliance's portfolio of (A) prime receivables and (B)
sub-prime receivables), or fifteen dollars ($15.00) per receivable per month
plus reimbursement of certain costs and expenses; (ii) $1.3 million in proceeds
realized from the sale of a pool of charged off receivables existing as of the
Reliance petition date ("Charged-Off Proceeds"); (iii) a total of (A) four
percent (4%) of the outstanding principal balance of each receivable (exclusive
of defaulted and certain other receivables) sold in any bulk sale to a person
other than the Company or an affiliate of the Company, and (B) $3.25 million in
net collections, recovery, and sale proceeds from the receivables portfolio and
certain other cash receipts of Reliance reduced by any amount previously paid
under clause (A) above, following payment of Reliance's primary bank debt and,
if applicable, repayment to Reliance of any proceeds of litigation, the Reliance
Warrants (as defined below), and equity proceeds used by Reliance to pay its
primary bank debt ("Post-Bank Debt Proceeds"); and (iv) following the Company's
receipt of the Post-Bank Debt Proceeds, fifteen percent (15%) of the net
collections, recovery, and sale proceeds from the receivables portfolio and
certain other cash receipts of Reliance (the "Incentive Fee"). Reliance, in
consideration for entering into the Servicing Agreement will receive privately
issued warrants ("Reliance Warrants") to purchase shares of Common Stock of the
Company as follows: fifty thousand (50,000) Reliance Warrants will be granted to
Reliance upon the Company's receipt of the Charged-Off Proceeds; up to one
hundred thousand (100,000) Reliance Warrants will be granted to Reliance based
upon the Company's receipt of up to $3.25 million of Post-Bank Debt Proceeds;
and Reliance will be granted an additional seventy-five thousand (75,000)
Reliance Warrants for every $1 million actually received by the Company through
the Incentive Fee. The Reliance Warrants will have a strike price of twelve
dollars and 50/100 ($12.50) for the first one hundred fifty thousand (150,000)
Reliance Warrants and a strike price for all other Reliance Warrants of the
greater of twelve dollars and 50/100 ($12.50) or one hundred twenty percent
(120%) of the market price of the Common Stock on the date of issuance of the
Reliance Warrants. The Reliance Warrants will be exercisable as follows: (i) the
first 50,000 Reliance Warrants will be exercisable for three years from the
Reliance Petition Date and (ii) ail remaining Reliance Warrants will be
exercisable for three years from the date of issuance.
 
     As of the close of business on the effective date of Reliance's plan of
reorganization (July 31, 1998), the Company purchased Reliance's furniture,
fixtures, and equipment, including computer software and hardware and related
licenses for $250,000, payable in twelve equal monthly installments over a
period of one year beginning August 15, 1998, and has a period of sixty days to
require Reliance to assume and assign to the Company any of the leases or other
contracts not previously rejected by Reliance.
 
     Year 2000.  The Company has commenced certain limited reviews and
assessments of its computer systems in order to evaluate its exposure to year
2000 issues. The Company has incurred costs and expenses of approximately
$25,000 to date in evaluating its year 2000 issues. The Company expects to make
modifications
                                       34
<PAGE>   35
 
or changes to its computer information systems to enable proper processing of
transactions relating to the year 2000 and beyond. The Company estimates total
costs and expenses to be between $500,000 to $1,000,000 to modify its existing
systems and make it year 2000 compliant. The Company considers year 2000 costs
and expenses to be material to its operation and financial position. 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 expended
as incurred. Resolution of all year 2000 issues is critical to the Company's
business. There can be no assurance that the Company will be able to completely
resolve all year 2000 issues in a timely fashion or that the ultimate cost to
identify and implement solutions to all year 2000 problems will not be material
to the Company.
 
     Seasonality.  Historically, the Company has experienced higher revenues in
the first two quarters of the year than in the latter half of the year. The
Company believes that these results are due to seasonal buying patterns
resulting in part from the fact that many of its customers receive income tax
refunds during the first half of the year, which are a primary source of down
payments on used car purchases.
 
     Properties.  As of June 30, 1998, the Company leased substantially all of
its facilities, of which 39 were Branch Office locations that the Company closed
in 1998. The Company is continuing to negotiate lease settlements and
terminations with respect to its Branch Office network closure. The Company's
corporate headquarters is located in approximately 30,000 square feet of leased
space in Phoenix, Arizona. Following the Split-up, the Company expects to move
to new office space under a lease of similar terms and conditions, at or near
the current location.
 
     Inflation.  Increases in inflation generally result in higher interest
rates. Higher interest rates on the Company's borrowings would decrease the
profitability of the Company's existing portfolio. The Company will seek to
limit this risk through its Securitization Program and, to the extent market
conditions permit, for contracts originated at Company Dealerships, either by
increasing the interest rate charged or the profit margin on the cars sold. To
date, inflation has not had a significant impact on the Company's operations.
 
     Accounting Matters.  In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) which became effective for the Company
January 1, 1998. SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components in a full set of general-purpose
financial statements. The adoption of SFAS No. 130 did not have a material
impact on the Company.
 
     In June 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
the Company 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 the Company.
 
     The Securities and Exchange Commission has approved rule amendments to
clarify and expand existing disclosure requirements for derivative financial
instruments. The amendments require enhanced disclosure of accounting policies
for derivative financial instruments in the footnotes to the financial
statements. In addition, the amendments expand existing disclosure requirements
to include quantitative and qualitative information about market risk inherent
in market risk sensitive instruments. The required quantitative and qualitative
information are to be disclosed outside the financial statements and related
notes thereto. As the Company believes that the derivative financial instrument
disclosure contained within the notes to the consolidated financial statements
of its 1997 Form 10-K substantially conform with the accounting policy
requirements of these amendments, no further interim period disclosure has been
provided.
 
                                       35
<PAGE>   36
 
                          PART II.  OTHER INFORMATION
 
ITEM 1.  LEGAL PROCEEDINGS.
 
     Except for vehicles sold in Arizona under a limited warranty program, the
Company sells its cars on an "as is" basis, and requires all customers to sign
an agreement on the date of sale pursuant to which the Company disclaims any
obligation for vehicle-related problems that subsequently occur. Although the
Company believes that such disclaimers are enforceable under applicable state,
federal and other laws and regulations, there can be no assurance that they will
be upheld in every instance. Despite obtaining these disclaimers, the Company,
in the ordinary course of business, receives complaints from customers relating
to such vehicle-related problems as well as alleged violations of federal and
state consumer lending or other similar laws and regulations. While most of
these complaints are made directly to the Company or to various consumer
protection organizations and are subsequently resolved, the Company is named
occasionally as a defendant in civil suits filed by customers in state, local,
or small claims courts. There can be no assurance that the Company will not be a
target of similar claims in the future. Although the amount of the ultimate
exposure of the above, if any, cannot be determined at this time, the Company,
based on the advice of counsel, does not expect the final outcome to have a
material adverse effect on the Company. Additionally, in the ordinary course of
business, the Company is a defendant in various other types of legal
proceedings. There can be no assurance that the Company will not be a target of
similar claims and legal proceedings in the future. The Company believes that
the ultimate disposition of these matters on a cumulative basis will not have a
material adverse effect on the Company. However, there can be no assurance in
this regard.
 
ITEM 2.  CHANGES IN SECURITIES.
 
     (a) None.
 
     (b) None.
 
     (c) During the three months ended March 31, 1998, warrants to purchase
500,000 shares of common stock of the Company at an exercise price of $10.00 per
share were issued in a private placement under Section 4(2) of the Securities
Act of 1933 to certain lenders in connection with the execution of loan
documents with such lenders. For certain stock option grants during the first
quarter of 1998, see a description of stock option grants to key officers of the
Company. Further, the Company has executed certain agreements with Reliance
regarding the issuance of warrants. See a description of these transaction
herein under "Management's Discussion and Analysis of Results of Operations and
Financial Condition of the Continuing Company Businesses -- Liquidity and
Capital Resources". For the three month period beginning April 1, 1998 and
ending June 30, 1998, there were no equity securities of the Company sold by it
during such period that were not registered under the Securities Act of 1933.
 
     (d) None.
 
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.
 
     See "Management's Discussion and Analysis of Results of Operations and
Financial Condition of the Continuing Company Businesses -- Liquidity and
Capital Resources -- Revolving Facility".
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
     None.
 
ITEM 5.  OTHER INFORMATION.
 
     On August 4, 1998, the Company announced that the registration statement
filed with the Securities and Exchange Commission ("SEC") by Cygnet, relating to
the previously disclosed plan to separate UDC into two publicly traded companies
(i.e., the Split-up), was declared effective by the SEC on August 4, 1998. As
discussed above in this Form 10-Q, as part of the Split-up, Cygnet would acquire
and operate substantially all of the non-dealer finance operations currently
conducted by the Company, including its bulk purchasing and
                                       36
<PAGE>   37
 
certain servicing operations and its third-party dealer financing operations.
The Company would retain and continue to operate its "buy here-pay here"
dealerships and to service the finance receivables generated by those
dealerships. If the Split-up transaction were completed, the Company and Cygnet
would be owned, operated and managed as separate public companies. The Cygnet
registration statement (File No. 333-57323) provides for a rights offering (the
"Rights Offering"), which includes, among other things, (a) the distribution of
transferable rights to holders of Company common stock to subscribe for shares
of common stock of Cygnet (i.e., the Rights), and (b) the sale of shares of
Cygnet common stock upon exercise of these Rights. Pursuant to the Rights
Offering, each holder of Company common stock as of August 17, 1998 would
receive one Right for every four shares of Company common stock. Each Right
would represent the right to subscribe for one share of Cygnet common stock at
an exercise price of $7.00. The Rights Offering is expected to commence on or
about September 1, 1998, assuming that the Company's stockholders approve the
Split-up transaction at the Annual Meeting of Stockholders of the Company
scheduled for Monday, August 31, 1998 at 4:00 p.m. in Phoenix. The Split-up
transaction, including the transfer of assets from the Company to Cygnet and the
issuance of the Rights and Cygnet common stock, is subject to a number of
contingencies and incentives. These contingencies and incentives include,
without limitation, the approval of the Split-up by the stockholders of the
Company, the finalization of appraisals of the assets to be transferred, certain
income tax consequences of the Rights Offering and the sale of the transferred
assets from the Company to Cygnet, and various other consents and approvals.
There can be no assurance that all of the conditions to the Split-up or the
Rights Offering will be satisfied or that the Split-up will be effected or the
Rights will be issued. See "Part I -- Item 2. Management's Discussion and
Analysis of Results of Operations and Financial Condition of the Continuing
Company Businesses. -- Split-up of the Company."
 
     The above summary of the Split-up and Rights Offering includes statements
that may constitute forward-looking statements, usually containing the words
"believe," "estimate," "project," "expects" or similar expressions. These
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements inherently
involve risks and uncertainties that could cause actual results to differ
materially from the forward-looking statements. By making these forward-looking
statements, the Company undertakes no obligation to update these statements for
revisions or changes after the date of this Form 10-Q. Factors that would cause
or contribute to such differences include, but are not limited to, factors
detailed in the sections and subsections entitled "Risk Factors," "Factors That
May Affect Future Results and Financial Condition" and "Factors That May Affect
Future Stock Performance" in the Company's most recent reports on Form 10-K and
Form 10-Q (including this Form 10-Q), factors detailed in the section "Risk
Factors" in the Company's definitive proxy statement dated August 4, 1998, and
elsewhere in the Company's Securities and Exchange Commission filings. In
addition, the Rights Offering is subject to a number of additional risks and
uncertainties, and for a more complete discussion of these matters, see the
"Risk Factors" section of the Cygnet prospectus dated August 4, 1998.
 
     The registration statement relating to the Cygnet securities (Rights and
common stock) has been filed with and declared effective by the Securities and
Exchange Commission. This discussion of the Split-up and the related Rights
Offering shall not constitute an offer to sell or the solicitation of an offer
to buy nor shall there be any sale of these securities in any state in which
such offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such state. The securities sold
in the Rights Offering will be offered only by means of a Cygnet prospectus.
Copies of the definitive notice and proxy statement of the Company relating to
the Split-up and copies of the prospectus of Cygnet relating to the Rights
Offering may be obtained by contacting Steven P. Johnson, General Counsel of the
Company, 2525 E. Camelback Road, Phoenix, AZ 85016. A copy of the prospectus is
also being distributed to stockholders of the Company with the notice and proxy
statement, pursuant to which the Company's stockholders will vote on the
Split-up. For more complete information about the Split-up and the related
Rights Offering, and their impact on the Company and Cygnet obtain a definitive
proxy statement and prospectus as indicated above. Read these documents
carefully before you invest or send money.
 
                                       37
<PAGE>   38
 
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.
 
     (a) Exhibits.
 
<TABLE>
    <S>           <C>  <C>
    Exhibit 3.1   --   Amended and Restated Certificate of Incorporation of the
                       Registrant (as of May 15, 1997)
    Exhibit 4     --   Certificate of Designation of the Preferred Stock (par value
                       $.001 per share) (filed as part of Exhibit 3.1)
    Exhibit 10.1  --   Letter Agreement for Modification of Terms of Employment
                       between Registrant and Steven A. Tesdahl, dated May 21,
                       1998*
    Exhibit 10.2  --   Amended and Restated Employment Agreement between Registrant
                       and Walter Vonsh, dated May 26, 1998*
    Exhibit 10.3  --   Letter Agreement for Terms of Employment between Cygnet
                       Financial                Corporation and Gregory R.
                       Ciccolini, dated May 14, 1998*
    Exhibit 10.4  --   Letter Agreement for Terms of Employment between Cygnet
                       Financial Corporation and Eric J . Splaver, dated June 12,
                       1998*
    Exhibit 10.5  --   Service Agreement among Reliance Acceptance Corporation,
                       Registrant, BankAmerica Business Credit, Inc. and certain
                       other parties dated as of February 9, 1998
    Exhibit 10.6  --   Agreement of Understanding among Reliance Acceptance Group
                       Inc., Reliance Acceptance Corporation and Registrant, dated
                       as of February 9, 1998
    Exhibit 10.7  --   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, L.L.P., date as of May 13, 1998
    Exhibit 11    --   Statement re Computation of Per Share Earnings (see Note 5
                       to Notes to Condensed Consolidated Financial Statements)
    Exhibit 27    --   Financial Data Schedule
    Exhibit 99    --   Cautionary Statement Regarding Forward Looking Statements
                       and Risk Factors
</TABLE>
 
---------------
*  Management contract or compensatory plan, contract or arrangement.
 
     (b) Reports on Form 8-K.
 
     During the second quarter 1998, the Company filed two reports on Form 8-K.
The first report on Form 8-K, dated June 11, 1998 and filed June 16, 1998,
pursuant to Items 5 and 7 (1) reported additional information on the Company's
strategic evaluation of its businesses and operations, including additional
information on the Split-up of the Company whereby Cygnet would operate all
non-dealership operations, and (2) filed as an exhibit to the Form 8-K
retroactively restating, in accordance with applicable accounting literature,
certain historical consolidated financial statements reflecting the Company's
discontinued operations, including, without limitation, the Split-up businesses
of the Company. The second report on Form 8-K, dated June 19, 1998 and filed
June 25, 1998, pursuant to Item 5 and 7(1) reported the filing of an initial
registration statement for Cygnet in connection with the Split-up of the Company
and the related Rights Offering, and (2) filed as an exhibit to the Form 8-K,
Ugly Duckling Corporation's press release dated June 22, 1998 titled "Ugly
Duckling Corporation Split-up: Cygnet Financial Corporation Files Initial
Registration Statement to Register Securities for Split-up." After the second
quarter 1998, the Company has, thus far, not filed any reports on Form 8-K.
 
                                       38
<PAGE>   39
 
                                   SIGNATURE
 
     Pursuant to the requirements 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
 
                                          /s/ STEVEN T. DARAK
                                          --------------------------------------
                                          Steven T. Darak
                                          Senior Vice President and
                                          Chief Financial Officer
                                          (Principal Financial and Accounting
                                          Officer)
 
Date: August 10, 1998
 
                                       39
<PAGE>   40
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
   3.1    Amended and Restated Certificate of Incorporation of the
          Registrant
   4      Certificate of Designation of the Preferred Stock (par value
          $.001 per share) (filed as part of Exhibit 3.1)
  10.1    Letter Agreement for Modification of Terms of Employment
          between Registrant and Steven A. Tesdahl, dated May 21,
          1998*
  10.2    Amended and Restated Employment Agreement between Registrant
          and Walter Vonsh, dated May 26, 1998*
  10.3    Letter Agreement for Terms of Employment between Cygnet
          Financial Corporation and Gregory R. Ciccolini, dated May
          14, 1998*
  10.4    Letter Agreement for Terms of Employment between Cygnet
          Financial Corporation and Eric J. Splaver, dated June 12,
          1998*
  10.5    Service Agreement among Reliance Acceptance Corporation,
          Registrant, BankAmerica Business Credit, Inc. and certain
          other parties dated as of February 9, 1998
  10.6    Agreement of Understanding among Reliance Acceptance Group
          Inc., Reliance Acceptance Corporation and Registrant, dated
          as of February 9, 1998
  10.7    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, L.L.P., date as of May 13, 1998
  11.0    Statement re Computation of Per Share Earnings (see Note 5
          to Notes to Condensed Consolidated Financial Statement)
  27      Financial Data Schedule
  99      Cautionary Statement Regarding Forward Looking Statements
          and Risk Factors
</TABLE>
 
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* Management contract or compensatory plan, contract or arrangement.