<PAGE>   1
 
                           UGLY DUCKLING CORPORATION
                      2525 EAST CAMELBACK ROAD, SUITE 500
                             PHOENIX, ARIZONA 85016
 
To the Holders of Our Common Stock:
 
     Enclosed are materials relating to our offer to exchange up to $16,486,582
aggregate principal amount of our 12% Subordinated Debentures due 2003 (the
"Debentures") for up to 2,536,397 shares of our common stock, par value $.001
per share ("Common Stock"), as described in the enclosed Offering Circular dated
November 20, 1998 (the "Exchange Offer").
 
     This exchange would be made on the following basis:
 
--------------------------------------------------------------------------------
                      $6.50 PRINCIPAL AMOUNT OF DEBENTURES
                         FOR EACH SHARE OF COMMON STOCK
--------------------------------------------------------------------------------
 
     Interest on the Debentures will accrue from October 23, 1998, and will be
payable in cash semiannually on each April 15 and October 15, commencing April
15, 1999, until the Debentures are paid in full. The Debentures will be issued
under an Indenture Supplement dated October 15, 1998 pursuant to which the
Company previously issued $16,013,418 principal amount of Debentures in an
exchange offer that expired on October 19, 1998. The terms of the Debentures
being offered hereby are identical to the terms of the Debentures previously
issued by the Company.
 
     The principal purpose of the Exchange Offer is to reduce the number of
shares of Common Stock outstanding, thereby offering the potential for increased
earnings per share in the future. To effect this reduction, the Company is
offering to purchase outstanding shares of its Common Stock at a purchase price
of $6.50 per share, representing a premium of approximately 30% above its market
price as reported on the Nasdaq National Market on November 18, 1998, which the
Company does not believe adequately reflects the underlying value of its Common
Stock, all as more fully described in the enclosed materials. The Exchange Offer
is contingent upon certain conditions as described herein. Executive officers
and directors of the Company have advised the Company that they do not intend to
tender any shares of Common Stock in the Exchange Offer.
 
                 PLEASE READ THE ENCLOSED MATERIALS CAREFULLY.
 
     For further assistance or additional copies of any of the enclosed
materials, please call Corporate Investor Communications, Inc. at 1-888-673-4478
(toll free).
 
                                          Very truly yours,
 
                                          /s/ Ernest C. Garica II
                                          ERNEST C. GARCIA, II
                                          Chairman of the Board and
                                            Chief Executive Officer
                                          Ugly Duckling Corporation
 
November 20, 1998
Phoenix, Arizona
<PAGE>   2
 
                           UGLY DUCKLING CORPORATION
 
                               OFFER TO EXCHANGE
              UP TO $16,486,582 AGGREGATE PRINCIPAL AMOUNT OF ITS
                      12% SUBORDINATED DEBENTURES DUE 2003
                       FOR UP TO 2,536,397 SHARES OF ITS
                                  COMMON STOCK
 
     Ugly Duckling Corporation, a Delaware corporation ("Ugly Duckling" or the
"Company"), hereby offers to exchange, upon the terms and subject to the
conditions set forth herein and in the accompanying Letter of Transmittal (which
together constitute the "Exchange Offer"), up to $16,486,582 aggregate principal
amount of its 12% Subordinated Debentures due 2003 (the "Debentures") for up to
2,536,397 shares ("Shares") of its common stock, $.001 par value per share
("Common Stock") on the basis of $6.50 principal amount of Debentures for each
Share of Common Stock.
 
     On November 18, 1998, the closing price of the Common Stock as reported on
Nasdaq's National Market System ("Nasdaq") was $5.00. For a further description
of the Common Stock, see "Description of Capital Stock." The Company does not
intend to apply for listing or quotation of the Debentures on any exchange or
automated quotation system. Accordingly, there can be no assurance that any
public market will develop for the Debentures. See "Risk Factors -- Possible
Lack of Trading Market for the Debentures."
 
     On October 23, 1998, the Company issued $16,013,418 principal amount of the
Debentures in exchange for 2,463,603 shares of its Common Stock, which were
tendered in an exchange offer that expired on October 19, 1998 (the "Original
Exchange Offer"). The terms of the Debentures being offered pursuant to this
Exchange Offer are identical to the Debentures issued in connection with the
Original Exchange Offer and will be issued pursuant to the terms of an Indenture
Supplement dated October 15, 1998, under which the existing Debentures were
issued. Other than the dates of commencement and expiration, and the lack of a
minimum offering condition, the terms of the Exchange Offer are substantially
identical to the terms of the Original Exchange Offer.
 
     The Debentures will be unsecured obligations of the Company subordinated
and subject in right of payment to all existing and future senior indebtedness
of the Company. As of September 30, 1998, the Company's outstanding senior
indebtedness aggregated approximately $78.3 million. The Debentures will bear
interest at 12% per annum from October 23, 1998, payable semiannually on each
April 15 and October 15, commencing April 15, 1999, until the Debentures are
paid in full. The Company will be required to repay the principal amount of the
Debentures on October 23, 2003. The Debentures will be redeemable, at the
Company's option, in whole at any time or in part from time to time, at the
principal amount to be redeemed plus accrued and unpaid interest thereon to the
redemption date. The Debentures will be issued pursuant to an Indenture between
the Company and Harris Trust and Savings Bank, as Trustee. The Company will be
subject to certain limited financial covenants as more fully described in the
Indenture. See "Description of the Debentures."
 
     THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON TUESDAY,
DECEMBER 22, 1998, UNLESS EXTENDED.
 
     The Company will accept up to 2,536,397 Shares if tendered (representing
approximately 16% of the Shares outstanding as of November 18, 1998). If more
than 2,536,397 shares of Common Stock are tendered, the Company will accept no
more than 2,536,397 of the tendered Shares, to be allocated among tendering
stockholders on a pro rata basis. The Exchange Offer is subject to a number of
additional conditions as described herein and may be amended or withdrawn in
certain circumstances. See "The Exchange Offer -- Conditions to and Amendment of
the Exchange Offer."
 
 THESE SECURITIES ARE BEING OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION
 WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION").
THE COMMISSION DOES NOT PASS UPON THE MERITS OF ANY SECURITIES NOR DOES IT PASS
  UPON THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR OTHER SELLING
                                  LITERATURE.
 
            THE DATE OF THIS OFFERING CIRCULAR IS NOVEMBER 20, 1998
<PAGE>   3
 
     For a discussion of certain risks and other factors to be considered in
connection with the Exchange Offer, see "Risk Factors."
 
     The Company, its Board of Directors and its executive officers make no
recommendations as to whether any stockholders should tender any or all of such
stockholders' Shares pursuant to the Exchange Offer. Each stockholder must make
his, her or its own decision whether to tender Shares of Common Stock and, if
so, how many Shares to tender. Executive officers and directors of the Company
have advised the Company that they do not intend to tender their Shares in the
Exchange Offer.
 
     The Company has made no arrangements for and has no understanding with any
dealer, salesman or other person regarding the solicitation of tenders
hereunder, and no person has been authorized to give any information or to make
any representation not contained in this Offering Circular in connection with
the Exchange Offer, and, if given or made, such information or representation
must not be relied upon as having been authorized by the Company or any other
person. Neither the delivery of this Offering Circular nor any exchange or sale
made hereunder shall, under any circumstances, create any implication that there
has been no change in the affairs of the Company since the respective dates as
of which information is given herein.
 
     This Offering Circular does not constitute an offer to exchange or sell, or
a solicitation of an offer to exchange or buy, any securities other than the
securities covered by this Offering Circular by the Company or any other person,
or any such offer or solicitation of such securities by the Company or any such
other person in any state or other jurisdiction to any person to whom it is
unlawful to make any such offer or solicitation. In any state or other
jurisdiction where it is required that the securities offered by this Offering
Circular be qualified for offering or that the offering be approved pursuant to
tender offer statutes in such state or jurisdiction, no offer is hereby being
made to, and tenders will not be accepted from residents of any such state or
jurisdiction unless and until such requirements have been satisfied.
<PAGE>   4
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
AVAILABLE INFORMATION.......................................    3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.............    3
SUMMARY OF EXCHANGE OFFER...................................    4
RISK FACTORS................................................   10
THE EXCHANGE OFFER..........................................   17
  General...................................................   17
  Expiration Time, Extensions, Termination and Amendments...   17
  How to Tender.............................................   18
  Withdrawal Rights.........................................   19
  Acceptance of Shares for Exchange; Delivery of Debentures
     to be Exchanged........................................   20
  Denominations; Fractional Interests.......................   20
  Proration if Shares Tendered Exceed Maximum...............   20
  Conditions to and Amendment of the Exchange Offer.........   21
  Exchange Agent............................................   21
  Information Agent.........................................   22
  No Financial Advisor......................................   22
  Payment of Expenses.......................................   22
BACKGROUND, PURPOSE AND EFFECT OF THE EXCHANGE OFFER........   23
CAPITALIZATION..............................................   25
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA................   26
CERTAIN PRO FORMA FINANCIAL INFORMATION.....................   28
PRICE RANGE OF COMMON STOCK.................................   30
DIVIDENDS...................................................   30
BUSINESS....................................................   31
DESCRIPTION OF THE DEBENTURES...............................   34
DESCRIPTION OF CAPITAL STOCK................................   42
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES.......   43
</TABLE>
 
                                        2
<PAGE>   5
 
                             AVAILABLE INFORMATION
 
     Corporate Investor Communications, Inc. (toll free telephone no.
1-888-673-4478) will act as Information Agent in connection with the Exchange
Offer. See "The Exchange Offer -- Information Agent."
 
     Ugly Duckling is subject to the periodic reporting and other informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information may be inspected and copied at
the public reference facilities maintained by the Commission at Judiciary Plaza,
450 Fifth Street, NW, Washington, D.C. 20549, and at the following regional
offices of the Commission; Seven World Trade Center, Suite 1300, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials can be obtained by mail from the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street,
NW, Washington, D.C. 20549, at prescribed rates. In addition, the Commission
maintains a site on the World Wide Web that contains reports, proxy and
information statements and other information filed electronically by Ugly
Duckling with the Commission which can be accessed over the Internet at
http:\\www.sec.gov.
 
                INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
 
     The following documents filed with the Commission are incorporated by
reference into this Offering Circular: (i) Ugly Duckling's Annual Report on Form
10-K for the fiscal year ended December 31, 1997, as amended; (ii) Ugly
Duckling's Quarterly Reports on Form 10-Q for the quarters ended March 31, June
30, and September 30, 1998 (a copy of which accompanies this Offering Circular),
respectively; (iii) Ugly Duckling's Reports on Form 8-K filed with the
Commission on January 2, February 9, February 10, February 20, June 16, June 25,
September 2, October 13, October 21, and November 18, 1998, respectively; (iv)
Ugly Duckling's Notice and Proxy Statement dated August 4, 1998; and (v) Cygnet
Financial Corporation's Prospectus dated August 26, 1998. If any statement
contained in any of the foregoing documents incorporated by reference herein is
modified or superseded by a statement in this Offering Circular, the statement
in any such foregoing document will be deemed for the purposes of this Offering
Circular to have been modified or superseded by such statement in this Offering
Circular, and the statement in any such foregoing document is incorporated by
reference herein only as modified or to the extent it is not superseded. All
documents subsequently filed by the Company during the period of the Exchange
Offer pursuant to Sections 13, 14 or 15(d) of the Exchange Act shall be deemed
to be incorporated by reference in this Offering Circular and to be a part
hereof from the date of filing such documents.
 
                                        3
<PAGE>   6
 
                           SUMMARY OF EXCHANGE OFFER
 
     The following is a summary of certain features of the Exchange Offer and
other matters, and all statements contained herein are qualified in their
entirety by reference to the more detailed information and financial statements
hereinafter set forth.
 
                                  THE COMPANY
 
GENERAL
 
     The Company operates a chain of buy here-pay here used car dealerships and
underwrites, finances and services retail installment contracts generated from
the sale of used cars by its Company dealerships and by third party dealers
located in selected markets throughout the country. 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
("Sub-Prime Borrowers").
 
     Dealership Operations and Related Securitization Program.  As of the date
of this Offering Circular, the Company was operating 55 used car dealerships
("Company Dealerships") located in nine metropolitan areas and seven states. The
Company distinguishes its Company Dealership operations from those of typical
buy here -- pay here dealers through its network of multiple locations, upgraded
facilities, large inventories of used cars, regional centralized purchasing,
value-added marketing programs, and dedication to customer service. For the nine
months ended September 30, 1998, the Company generated revenues from its
continuing dealership operations of $216.1 million and net earnings of $8.6
million, compared to $79.5 million in revenues and $4.3 million in net earnings,
respectively, for the same period of 1997.
 
     During the first quarter of 1996, the Company initiated a Securitization
Program under which special purpose "bankruptcy remote" subsidiaries sell
securities backed by finance contracts to investors. In February 1998, the
Company executed a commitment letter with Greenwich Capital Markets, Inc.
("Greenwich Capital") under which, among other things, Greenwich Capital retains
the right to be the exclusive securitization agent for the Company for up to $1
billion of AAA-rated, surety wrapped securities as part of the Company's ongoing
Securitization Program. The agreement contains certain provisions that would not
oblige Greenwich Capital or require the Company to fulfill the remaining
commitment under the agreement.
 
     Third Party Operations.  Beginning in 1994 with the acquisition of Champion
Financial Services, Inc. ("Champion"), an independent automobile finance
company, the Company has been involved in the acquisition and servicing of
retail installment contracts generated by third party car dealers, typically
involving Sub-Prime Borrowers. From the acquisition of Champion through the
first quarter of 1998, the Company pursued an aggressive growth plan, setting up
a national third party branch office network pursuant to which it acquired
retail installment contracts from numerous independent third party car dealers.
 
     In 1997, the Company began to engage in the purchase of loan portfolios in
bulk and the servicing of loan portfolios on behalf of third parties, including
companies that were experiencing financial difficulties. The Company maintains
loan servicing facilities in Nashville, Tennessee, Denver, Colorado, San
Antonio, Texas, and Dallas, Texas to support its bulk servicing operations. In
recent periods, the Company has entered into several large servicing or bulk
purchasing transactions involving independent third party finance receivable
portfolios and, in some cases, has sold or securitized these portfolios, with
servicing retained. The two most significant of such transactions were
transactions with First Merchants Acceptance Corporation and Reliance Acceptance
Group.
 
     The Company has also initiated a program pursuant to which the Company
provides qualified independent used car dealers with warehouse purchase
facilities and operating credit lines primarily secured by the dealer's retail
installment contract portfolio (the "Cygnet Dealer Program").
 
                                        4
<PAGE>   7
 
RECENT DEVELOPMENTS
 
     Discontinued Operations.  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 branch office network and exit this line of
business. The closure was substantially complete as of March 31, 1998, although
the Company is continuing to negotiate lease settlements and terminations and to
service the associated loan portfolio. 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. In addition, a
$6.0 million charge ($3.6 million net of income taxes) was taken during the
third quarter of 1998 due primarily to higher than anticipated loan losses and
servicing expenses in connection with the branch office loan portfolio.
 
     In April 1998, the Company announced that its Board of Directors had
directed management to proceed with separating its dealership operations from
the Cygnet Dealer Program and the Company's bulk purchase and third party loan
servicing operations. Since that date, these businesses have been classified as
discontinued operations in the Company's Consolidated Financial Statements.
 
     The Company subsequently formed a new wholly owned subsidiary, Cygnet
Financial Corporation ("Cygnet") to effectuate the separation of the Company's
dealership and non-dealership operations. At the Company's annual meeting held
on August 31, 1998, stockholders of the Company approved a split-up proposal
under which the assets and liabilities of the non-dealership businesses would be
transferred to Cygnet and Cygnet would become a separate public company through
a rights offering to stockholders of the Company. Due to a lack of stockholder
participation in the offering, however, the rights offering was terminated and
the Company recorded a $1.2 million after tax charge relating to the costs
incurred for this terminated rights offering during the third quarter of 1998.
 
     The Company is continuing to explore alternatives for formally separating
its dealership and non-dealership operations, although there can be no assurance
that the Company will ultimately be successful in this regard. Although the
Company was not successful in formally separating its non-dealership operations
as contemplated, it has completed the internal process of establishing separate
management teams and infrastructures for the dealership and non-dealership
operations. The Company believes this structure enhances each segment's ability
to focus on its own operations and facilitates the Company's goal of formally
separating them. Individuals contemplating whether to participate in the
Exchange Offer should consider the possibility that Ugly Duckling could later
decide to retain rather than separate its non-dealership operations, in which
case Ugly Duckling's Consolidated Financial Statements would require restatement
to reflect the integration of certain financial results currently attributed to
discontinued operations.
 
     Securitization Accounting Change.  On November 17, 1998 the Company
announced a change in the way it will structure transactions under its
Securitization Program. Previously, the Company structured its securitization
transactions as sales for accounting purposes. Beginning in the fourth quarter
of 1998, however, the Company will structure securitizations for accounting
purposes to retain the Finance Receivables and the related debt on the Company's
balance sheet and recognize the income over the life of the contracts. The
Company will no longer recognize a Gain on Sale of Finance Receivables as
previously recognized by the Company. This change will not affect the Company's
prior securitizations.
 
     The fundamentals of the Company's continuing business, particularly its
revenues, should be unaffected by this change. The Company expects to continue
to finance its receivables through securitization. There will, however, be a
significant adverse impact on earnings per share for the next few periods as the
Company builds its on-balance sheet portfolio. The Company expects to incur a
significant loss in the fourth quarter of 1998 and this change will continue to
have a material adverse effect on reported earnings until the Company's interest
earnings, net of interest and other related expenses, from the additional
contracts added to the Company's balance sheet approximates the revenues the
Company has historically recognized on its securitization transactions. The
Company believes that this change will enhance the long-term value of the
Company through greater earnings stability and predictability, as well as
instill higher confidence in those earnings from the investment community,
although there can be no assurance in this regard.
 
                                        5
<PAGE>   8
 
     Initial Exchange Offer.  On September 17, 1998, the Company initiated an
exchange offer (the "Original Exchange Offer") to exchange up to 5,000,000
shares of its Common Stock for 12%, five-year subordinated debentures of the
Company due October 23, 2003 with terms identical to those being offered
hereunder. The exchange ratio was $6.50 principal amount of Debentures for each
share of Common Stock validly tendered.
 
     The Original Exchange Offer expired on October 19, 1998 with a total of
2,463,603 shares of Common Stock being tendered in exchange for $16,013,418
aggregate principal amount of the Debentures (the "Existing Debentures").
 
              BACKGROUND, PURPOSE AND EFFECT OF THE EXCHANGE OFFER
 
     Ugly Duckling completed its initial public offering in June 1996 with the
sale of 2,300,000 Shares of its Common Stock at a price of $6.75 per share.
Following the initial public offering, the price of the Company's Common Stock
increased significantly, to a high of $25.75 per share in the first quarter of
1997, reflecting a stock market with generally increasing stock prices, a
healthy used car sales and finance industry, and growth in the Company's
revenues and earnings. In recent periods, however, the used car sales and
financing industry has encountered difficulties, with several used car companies
announcing 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 difficulties have
corresponded with a general decline in the stock prices of companies involved in
this industry. At the same time, stock prices of small-cap companies have
recently experienced a broad-based decline. Consistent with this market decline,
particularly with respect to companies in the used car sales and finance
industry, the price of the Company's Common Stock has decreased to $5.00 as of
November 18, 1998, a price that is near the low end of its 52-week trading
range.
 
     The Company does not believe that recent prices reflect the underlying
value of its Common Stock. In this regard, in establishing a tender price that
is significantly higher than the market price of the Shares as of November 18,
1998, the Company considered the following factors, among others.
 
     - The closing price of $5.00 per Share as of November 18, 1998, two
       business days prior to the announcement of the Exchange Offer, represents
       an 81% decline from its all-time high in the first quarter of 1997 and a
       61% decline from its high in 1998. See "Price Range of Common Stock."
 
     - The recent Share price reflects a discount of approximately 49% to the
       Company's book value per share as of September 30, 1998. See "Summary
       Selected Consolidated Financial Data."
 
     - The Company's recent and historical financial results, including the
       Company's increase in revenues ($216.1 million compared to $79.5 million)
       and basic earnings per share from continuing operations ($0.46 compared
       to $0.25) for the nine month period ended September 30, 1998 as compared
       to the nine month period ended September 30, 1997. See "Summary Selected
       Consolidated Financial Data."
 
     The principal purpose of the Exchange Offer is to reduce the number of
Shares of Common Stock outstanding by offering to purchase Shares in the
Exchange Offer, thereby offering the potential for increased earnings per share
in the future. The Company believes that if it is able to increase earnings per
share, this development could have a positive influence on the price of its
Common Stock. The increased indebtedness resulting from the Exchange Offer,
however, will significantly increase the Company's debt service requirements and
could negatively affect earnings per share. See "Risk Factors -- Increased
Leverage and Debt Service Obligations" and "-- No Assurance of Increased
Earnings Per Share."
 
     Holders of Shares of Common Stock electing to participate in the Exchange
Offer will realize the following benefits.
 
     - In exchange for Shares, tendering stockholders will receive a debt
       security with a principal amount approximately 30% greater than the
       market price of the Shares as of November 18, 1998.
 
                                        6
<PAGE>   9
 
     - The Debentures will bear interest at 12% per annum from October 23, 1998,
       payable each April 15 and October 15 until the Debentures are paid in
       full.
 
     - The Debentures, although subordinated in right of payment to all other
       existing and future senior indebtedness of the Company, represent a claim
       on the Company's assets senior to any claim of the holders of the
       Company's Common Stock.
 
     Notwithstanding the benefits to tendering stockholders summarized above,
holders of Shares contemplating the Exchange Offer should take into account the
following considerations.
 
     - Tendering stockholders receiving Debentures will relinquish the right to
       share in any capital appreciation of the Company's Common Stock.
 
     - Unlike the Shares, the Debentures will not be listed on any exchange or
       automated quotation system and there can be no assurance that a trading
       market will develop.
 
     - Unlike holders of Common Stock, holders of the Debentures will have no
       rights to vote on matters submitted to the Company's stockholders.
 
     - The Company has the right to prepay the Debentures at any time without
       penalty or premium by paying the unpaid principal amount and accrued
       interest on the Debentures.
 
     - Tendering stockholders will be subject to certain tax consequences that
       may differ from those that would be realized if the Shares were sold for
       cash.
 
     Finally, holders of Shares contemplating the Exchange Offer should consider
that the Company has not retained any financial advisor or investment banking
firm to assist the Company in determining the price and terms of the Debentures
or whether the consideration offered in the Exchange Offer is adequate to
tendering stockholders. The Company also has not requested any report, opinion,
or appraisal relating to the fairness of the consideration being offered
pursuant to the Exchange Offer. For a discussion of risk factors that should be
taken into account in considering the Exchange Offer, see "Risk Factors."
 
                                        7
<PAGE>   10
 
                               THE EXCHANGE OFFER
 
EXPIRATION TIME...............   5:00 p.m., New York City time, on Tuesday,
                                 December 22, 1998, unless extended (the
                                 "Expiration Time").
 
EXCHANGE RATIO................   $6.50 principal amount of Debentures for each
                                 share of Common Stock validly tendered.
 
ACCEPTANCE OF SHARES;
CONDITIONS OF THE EXCHANGE
  OFFER.......................   The Company will accept up to 2,536,397 Shares
                                 (representing approximately 16% of the
                                 outstanding Shares of the Company's Common
                                 Stock as of November 18, 1998) in the Exchange
                                 Offer. If more than 2,536,397 Shares are
                                 tendered, the Company will accept no more than
                                 2,536,397 Shares of Common Stock, to be
                                 allocated among the tendering stockholders on a
                                 pro rata basis. The Exchange Offer is subject
                                 to a number of conditions as described herein.
                                 See "The Exchange Offer -- Conditions to and
                                 Amendment of the Exchange Offer."
 
DESCRIPTION OF DEBENTURES.....   The Debentures will be unsecured obligations of
                                 the Company subordinated and subject in right
                                 of payment to all existing and future senior
                                 indebtedness of the Company. As of September
                                 30, 1998, the Company's outstanding senior
                                 indebtedness aggregated approximately $78.3
                                 million, including the Company's revolving
                                 credit facility with General Electric Capital
                                 Corporation and $5.0 million of subordinated
                                 notes included in the Company's discontinued
                                 operations. The Debentures will bear interest
                                 at 12% per annum from October 23, 1998, payable
                                 semiannually on each April 15 and October 15,
                                 commencing April 15, 1999, until the Debentures
                                 are paid in full. The Company will be required
                                 to repay the principal amount of the Debentures
                                 on October 23, 2003. The Debentures will be
                                 redeemable, at the Company's option, in whole
                                 at any time or in part from time to time, at
                                 the principal amount to be redeemed plus
                                 accrued and unpaid interest thereon to the
                                 redemption date. The Debentures will be issued
                                 pursuant to an Indenture between the Company
                                 and Harris Trust and Savings Bank, as Trustee.
                                 The Company will be subject to certain limited
                                 financial covenants and other restrictions as
                                 more fully described in the Indenture. See
                                 "Description of the Debentures."
 
HOW TO TENDER.................   A holder of Shares wishing to accept the
                                 Exchange Offer must either (a) complete the
                                 accompanying Letter of Transmittal and forward
                                 it with the certificates representing the
                                 Shares to be tendered and any other required
                                 documents to Harris Trust and Savings Bank (the
                                 "Exchange Agent") or (b) request a broker or
                                 bank to effect the transaction. Holders of
                                 Shares registered in the name of a broker,
                                 dealer, bank, trust company, or other nominee
                                 must contact such institution to tender their
                                 Shares. Certificates representing the Shares
                                 may be physically delivered after effecting a
                                 valid tender pursuant to certain guaranteed
                                 delivery procedures. Physical delivery is not
                                 required if confirmation of book-entry
                                 transfers of such Shares to the Exchange
                                 Agent's account at The Depository Trust Company
                                 ("DTC") is delivered in a timely fashion. See
                                 "The Exchange Offer -- How to Tender."
 
                                        8
<PAGE>   11
 
DELIVERY OF SECURITIES........   The Company will deliver Debentures in exchange
                                 for Shares pursuant to the Exchange Offer as
                                 soon as practicable after the Expiration Time.
                                 See "The Exchange Offer -- Acceptance of Shares
                                 for Exchange; Delivery of Debentures to be
                                 Exchanged."
 
WITHDRAWAL RIGHTS.............   Tenders of Shares pursuant to the Exchange
                                 Offer may be withdrawn prior to 5:00 p.m., New
                                 York City time, on December 22, 1998, and, if
                                 the Company has not previously accepted such
                                 Shares for exchange, after January 22, 1999.
                                 Except for such rights of withdrawal, all
                                 tenders are irrevocable.
 
CERTAIN UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES.......   See "Certain United States Federal Income Tax
                                 Consequences" for a discussion of certain
                                 federal income tax consequences associated with
                                 the Exchange Offer and the ownership of the
                                 Debentures, and "Risk Factors -- Certain United
                                 States Federal Income Tax Risks."
 
LISTING AND TRADING OF
SECURITIES....................   The Company's Common Stock (symbol: UGLY) is
                                 listed on Nasdaq's National Market System. On
                                 November 18, 1998, two business days before the
                                 announcement of the Exchange Offer, the closing
                                 per share price for the Common Stock as
                                 reported by Nasdaq was $5.00. No market
                                 currently exists with respect to the
                                 Debentures, and the Company does not intend to
                                 list the Debentures for trading on any exchange
                                 or automated quotation system. Accordingly,
                                 there can be no assurance that any trading
                                 market will develop for the Debentures or, if
                                 developed, as to any price at which they might
                                 be traded. See "Risk Factors -- Possible Lack
                                 of Trading Market for the Debentures."
 
EXCHANGE AGENT AND TRUSTEE....   Harris Trust and Savings Bank will serve as the
                                 Exchange Agent for the Exchange Offer and as
                                 Trustee under the Indenture. See "The Exchange
                                 Offer -- Exchange Agent" and "Description of
                                 the Debentures -- The Indenture."
 
INFORMATION AGENT.............   Corporate Investor Communications, Inc. will
                                 serve as the Information Agent in connection
                                 with the Exchange Offer (the "Information
                                 Agent") telephone no. 1-888-673-4478
                                 (toll-free). See "The Exchange
                                 Offer -- Information Agent."
 
COMMON STOCK OUTSTANDING......   Approximately 16,070,000 Shares were
                                 outstanding as of November 18, 1998.
 
                                        9
<PAGE>   12
 
                                  RISK FACTORS
 
     Investment in the Debentures is subject to certain risks and other factors,
including but not limited to those set forth below. In considering the Exchange
Offer, an investor should carefully consider the following risk factors, as well
as the risk factors appearing in the Company's filings with the Commission and
incorporated herein by reference, including the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 1998, a copy of which accompanies
this Offering Circular, and all other information appearing in this Offering
Circular, as well as his or her particular financial circumstances, investment
objectives and tax situation.
 
EXCHANGE OFFER SUBJECT TO CERTAIN CONTINGENCIES
 
     The Exchange Offer is subject to certain contingencies that are not within
the control of the Company. First, the Company will accept no more than
2,536,397 Shares in the Exchange Offer. If more than 2,536,397 Shares are
validly tendered, the Company will allocate Debentures among the tendering
stockholders on a pro-rata basis based on the number of Shares tendered. In
addition, the Exchange Offer requires qualification of the Indenture under the
Trust Indenture Act and may require certain approvals or consents from
government regulatory agencies, self regulatory organizations, and other third
parties. Certain consents may be obtained only if the Company is willing to
provide certain concessions to third parties. There can be no assurance that all
required conditions, consents, or regulatory approvals will be obtained or
achieved in a timely manner. Moreover, the Exchange Offer may be modified or
withdrawn in certain circumstances subject to the discretion of the Company's
Board of Directors. See "The Exchange Offer -- Conditions to and Amendment of
the Exchange Offer."
 
LOSS OF RIGHTS ASSOCIATED WITH COMMON STOCK
 
     To the extent that stockholders exchange their Shares for Debentures, they
will be relinquishing certain rights available to holders of Common Stock in
exchange for acquiring rights as holders of debt. Stockholders whose Shares are
validly tendered and accepted for exchange will lose the right to share in any
capital appreciation of the Company's Common Stock, will not be entitled to vote
upon any matters submitted to the Company's stockholders, and will no longer be
entitled to dividends paid, if any, on the Company's Common Stock. In addition,
because there is an established trading market for the Shares and no established
trading market for the Debentures, the liquidity of a tendering stockholder's
investment in the Company will likely be reduced.
 
MARKET ISSUES
 
     If successful, the Exchange Offer will reduce the Company's stockholder's
equity and increase its indebtedness, thereby increasing the Company's debt to
equity ratio and its debt service obligations. There can be no assurance that
the market will not regard these results unfavorably and that the price of the
Company's Common Stock will not be adversely affected. To the extent that the
market does not regard the Exchange Offer as favorable, the market price of the
Debentures also could be adversely affected. In addition, although the Company
believes that the Exchange Offer complies with all applicable listing and
maintenance requirements imposed by the Nasdaq National Market, there can be no
assurance that issues regarding the Common Stock's listing status will not
arise.
 
POSSIBLE LACK OF TRADING MARKET FOR DEBENTURES
 
     No market currently exists for the Debentures, and the Company does not
intend to list the Debentures on any exchange or automated quotation system.
Accordingly, no assurance can be given generally as to the liquidity of the
Debentures after their issuance or the prices at which they may trade, or that a
trading market will develop.
 
     The terms of the Debentures to be issued in this Exchange Offer are
identical to the terms of the Debentures issued in the Original Exchange Offer.
As a result, the Exchange Offer will increase the number, principal amount, and
holders of the Debentures, which the Company believes may positively impact the
liquidity of the trading market for the Debentures. There can be no assurance,
however, that issuance of the new Debentures will positively impact the trading
market for the Debentures, particularly if the Debentures issued in the Exchange
Offer are not considered to be part of the same "issue" (for tax purposes) as
the Debentures issued in the Original Exchange Offer. See "Certain United States
Federal Income Tax
 
                                       10
<PAGE>   13
 
Consequences -- Certain Federal Income Tax Consequences to Prospective Holders
of Debentures" and "-- Original Issue Discount -- Trading of Debentures."
 
INCREASED PERCENTAGE OF SHARES HELD BY MANAGEMENT
 
     As of November 18, 1998, the Company's officers and directors beneficially
owned approximately 35% of the outstanding Shares of the Company's Common Stock,
with Mr. Ernest Garcia II, the Company's Chairman of the Board and Chief
Executive Officer, beneficially owning approximately 29%. The Company's
executive officers and directors have advised the Company that they do not
intend to participate in the Exchange Offer. Assuming the maximum number of
Shares is exchanged in the Exchange Offer, the Company's officers and directors
will beneficially own approximately 41% of the Company's outstanding Shares of
Common Stock (with Mr. Garcia owning approximately 35%).
 
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
 
     The Indenture will contain certain covenants that, among other things, will
require the Company not to allow its Consolidated Leverage Ratio (as defined
herein) to exceed 6 to 1 and to maintain at all times a Consolidated Net Worth
(as defined herein) of at least $100,000,000. If the Company fails to meet these
covenants, such failure will constitute an Event of Default (as defined herein)
under the Indenture. See "Description of the Debentures." In addition, the
Company expects that the change in its securitization structure will result in
significant additional indebtedness, which will have an adverse impact on the
Company's leverage ratio. There can be no assurance that the Company will be
able to satisfy these financial covenants and any other covenants contained in
the Indenture. If the Company is unable to cure an Event of Default on a timely
basis, the principal amount of the Debentures may become immediately due and
payable. There can also be no assurance that these financial covenants will not
materially and adversely affect the Company's ability to finance its future
operations or capital needs or to engage in other business activities, including
implementation of its business and growth strategies.
 
ARBITRARY DETERMINATION OF TERMS OF DEBENTURES
 
     The Company has determined the terms of the Debentures without retaining
any independent financial advisor or investment banking firm. Accordingly, there
can be no assurance that the terms of the Debentures are fair from a financial
point of view to tendering stockholders. In this regard, there can be no
assurance that if the Company were to issue subordinated debt in the capital
markets, the interest rate on such debt would not be higher than 12% per annum,
or that the financial and other covenants would not be more restrictive. For
example, companies that issue unsecured, non-investment grade subordinated debt
similar to the Debentures typically are subject to more restrictions than those
imposed by the Indenture with respect to the Debentures, including restrictions
on incurring additional indebtedness above a specified amount or in violation of
a specified formula, paying dividends or making certain other distributions,
payments and investments, creating liens, and engaging in transactions with
affiliates or in unrelated businesses, among others. In addition, the terms of
such securities typically include a change of control provision, which typically
provides a right to debt holders to force a company to redeem their debt in the
event of a change of control of that company's voting securities. As a result,
stockholders who tender their Shares in exchange for Debentures may not receive
the same level of protection that typically would be afforded to holders of
unsecured, non-investment grade subordinated debt issued by other similarly
situated companies. Because the Debentures contain terms that may be less
attractive than other similar types of securities issued in the market, there
can be no assurance that the Company will not record the Debentures at a
discount from their principal amount. In addition, the relative lack of standard
restrictive covenants may adversely affect the liquidity of the Debentures.
 
NO ASSURANCE OF INCREASED EARNINGS PER SHARE
 
     Although the primary purpose of the Exchange Offer is to reduce the number
of the Company's outstanding shares of Common Stock, thereby offering the
potential for increased earnings per share in the future, the reduction in
equity and corresponding increase in indebtedness could have a negative effect
on earnings per share. In this regard, the table set forth in the Section
entitled "Certain Pro Forma Financial Information," which shows the pro forma
effects of the Exchange Offer on the Company's financial results assuming the
maximum number of Shares tendered, indicates that earnings per share from
continuing operations for the nine months ended September 30, 1998 would have
decreased slightly on a pro forma basis. For the year ended December 31, 1997,
the table shows that earnings per share from continuing operations
 
                                       11
<PAGE>   14
 
would have decreased significantly assuming the maximum number of Shares was
exchanged. Further, following the Exchange Offer, the Company expects that the
Debentures will be recorded at the fair market value of the Shares tendered in
exchange as of the date the Shares are exchanged, with the difference being
amortized over the term of the Debentures as additional interest expense, which
would have a negative effect on earnings per share.
 
MARGINABILITY
 
     Generally speaking, the Debentures should be margin stock for purposes of
Regulation T which governs the extension of credit by brokers and dealers, but
will likely not be margin stock under Regulation U which governs the extension
of credit by other lenders because it is not listed on the Nasdaq National
Market System. Under Regulation T, the required margin for the Debentures will
likely be the margin required by the creditor in good faith or the percentage
set by the regulatory authority where the trade occurs, whichever is greater.
Under Regulation U, the maximum loan value of non-margin stock and other
collateral is their good faith loan value.
 
     In addition, under Regulation U, to enable a customer to participate in an
exchange offer that is made to holders of an issue of margin stock, a lender may
allow substitution of the securities received in the exchange, and a non-margin,
non-exempted security acquired in exchange for a margin stock will be treated as
if it were a margin stock for a period of 60 days following the exchange.
 
     Stockholders contemplating an exchange of Common Stock for Debentures
should consult with their brokers concerning the marginability of the Debentures
and the required margin therefor.
 
INCREASED LEVERAGE AND DEBT SERVICE OBLIGATIONS
 
     Following the Exchange Offer, the Company will be more highly leveraged and
will have incurred substantial additional debt service in addition to operating
expenses and planned capital expenditures. At September 30, 1998, as adjusted to
give effect to the $16,013,418 of Debentures issued in October 1998 in the
Original Exchange Offer and the issuance of the maximum $16,486,582 principal
amount of the Debentures, the total indebtedness of the Company would have been
approximately $103.5 million including $5.0 million of subordinated notes
included in the Company's discontinued operations. Assuming the issuance of the
maximum $16,486,582 principal amount of the Debentures pursuant to the Exchange
Offer, the Company would incur additional debt service of approximately
$1,978,390 annually, which is in addition to the $1,921,610 of annual interest
payments the Company is obligated to pay on the Existing Debentures.
Additionally, the Company anticipates incurring a significant amount of
additional debt from future securitization transactions.
 
     The Company's increased level of indebtedness may have several important
effects on its future operations, including, without limitation, (i) a
substantial portion of the Company's cash flow from operations must be dedicated
to the payment of interest and principal on its indebtedness, reducing the funds
available for operations and for capital expenditures, including acquisitions,
(ii) covenants contained in the Indenture will require the Company to meet
certain financial tests, and other restrictions may limit its ability to borrow
additional funds or to dispose of assets, and may affect the Company's
flexibility in planning for, and reacting to, changes in its business, including
possible acquisition activities, (iii) the Company's leveraged position will
substantially increase its vulnerability to adverse changes in general economic,
industry and competitive conditions, (iv) the Company's ability to obtain
additional financing for working capital, capital expenditures, acquisitions,
general corporate and other purposes may be limited, and (v) the Company's
leveraged position and the various covenants contained in the Indenture may
place the Company at a relative competitive disadvantage as compared to certain
of its competitors. The Company's ability to meet its debt service obligations
and to reduce its total indebtedness will be dependent upon the Company's future
performance, which will be subject to general economic, industry and competitive
conditions and to financial, business and other factors affecting the operations
of the Company, many of which are beyond its control, or its ability to raise
additional equity. There can be no assurance that the Company's business will
continue to generate cash flow at or above current levels. If the Company is
unable to generate sufficient cash flow from operations in the future to service
its debt, it may be required, among other things, to seek additional financing
in the debt or equity markets, to refinance or restructure all or a portion of
its indebtedness, including the Debentures, to sell selected assets, or to
reduce or delay planned capital expenditures and growth or business strategies.
There can
 
                                       12
<PAGE>   15
 
be no assurance that any such measures would be sufficient to enable the Company
to service its debt, or that any of these measures could be effected on
satisfactory terms, if at all.
 
     If the Company fails to pay any required payment of interest or principal
with respect to the Debentures on a timely basis, such failure will constitute a
default under the terms of the Indenture. An event of default under the
Indenture also may trigger an event of default under certain other existing
obligations of the Company, including its revolving credit facility (the
"Revolving Facility") with General Electric Capital Corporation ("GE Capital").
As a result, the incurrence of additional debt resulting from the Exchange Offer
will increase the risk of possible default by the Company with respect to its
current and future obligations.
 
SUBORDINATION
 
     The Debentures will be unsecured obligations of the Company and will be
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined in the Indenture), which will include borrowings under the Company's
Revolving Facility with GE Capital, the Verde Note (as defined herein), and debt
the Company will incur from future securitization transactions. The Debentures
will rank senior only to other indebtedness of the Company that expressly
provides that it is subordinated in right of payment to the Debentures, if any.
In the event of bankruptcy, liquidation, insolvency, reorganization or similar
proceeding relating to the Company, the assets of the Company will be available
to pay obligations on the Debentures only after all Senior Indebtedness has been
paid in full, and there may not be sufficient assets remaining to pay amounts
due on any or all of the Debentures outstanding. The Company may not pay
principal of or interest on the Debentures, make any deposit pursuant to
defeasance provisions or repurchase or redeem or otherwise retire any Debentures
(i) if any payment obligation on Senior Indebtedness is not paid when due or
(ii) if any other event of default on Senior Indebtedness occurs that permits
the holders of such Senior Indebtedness to accelerate the maturity of such
Senior Indebtedness, in accordance with its terms, and the Trustee for the
Debentures receives a notice of such default unless, in either case, the default
has been cured or waived, any such acceleration has been rescinded or such
Senior Indebtedness has been paid in full or, in the case of any default other
than a payment default, 179 days have passed since the default notice is given.
In addition, if there exists an event of default, as such term is defined in any
instrument creating or evidencing any Designated Senior Indebtedness (described
below), on any Designated Senior Indebtedness or if an executive officer of the
Company has actual knowledge of a default on any Designated Senior Indebtedness,
which with notice or lapse of time or both would become an event of default,
then no payment can be made on the Debentures for a period of 179 days from the
date of such event of default or the date that an executive officer of the
Company obtains actual knowledge that there is such a default unless such
default is cured or waived or a representative of such Designated Senior
Indebtedness terminates the payment blockage period. Moreover, even if there is
an event of default with respect to the Debentures and the Debentures are
declared due and payable as a result thereof, no payment can be made on the
Debentures while any Designated Senior Indebtedness is outstanding without the
consent of the Designated Senior Indebtedness. In the event that there is an
event of default under the Designated Senior Indebtedness or an executive
officer of the Company has actual knowledge of a default under Designated Senior
Indebtedness and a payment is made on the Debentures in violation of the above
provisions, holders of Debentures receiving such payment may be required to
return the monies paid for the benefit of the Senior Indebtedness. In addition,
in an insolvency, bankruptcy or liquidation scenario, there is always the risk
that senior creditors would seek to recover any monies paid on the Debentures.
Designated Senior Indebtedness includes the Revolving Facility with GE Capital,
as amended from time to time and any refundings or replacements thereof, as well
as any other Senior Indebtedness designated by the Company from time to time as
Designated Senior Indebtedness. There are no restrictions in the Indenture on
the ability of the Company to designate Senior Indebtedness as Designated Senior
Indebtedness. As of September 30, 1998, without including any indebtedness under
the Debentures, the Company had approximately $78.3 million of indebtedness
outstanding, all of which would be Senior Indebtedness and $44.9 million of
which would be Designated Senior Indebtedness under the Revolving Facility with
GE Capital. However, although there was only $44.9 million outstanding under the
Revolving Facility with GE Capital as of September 30, 1998, the Company may,
under certain circumstances and if certain conditions are satisfied, borrow up
to $125 million under that facility. Additionally, the Company anticipates
incurring a significant amount of additional debt from future securitization
transactions. Moreover, there is always the possibility that the maximum
commitment on the facility could be increased. Additional Senior Indebtedness
may be incurred by the Company and its subsidiaries from time to time, subject
to certain
 
                                       13
<PAGE>   16
 
restrictions imposed by the Indenture, the Revolving Facility with GE Capital
and other agreements of the Company. See "Description of the
Debentures -- Subordination" and "-- Certain Covenants."
 
HOLDING COMPANY STRUCTURE; EFFECTS OF ASSET ENCUMBRANCES
 
     The Debentures will be unsecured obligations of the Company and will be
subordinated in right of payment to all existing and future Senior Indebtedness
of the Company. The Debentures will also be structurally subordinated to all
indebtedness and other liabilities of the Company's subsidiaries. Substantially
all of the Company's operating income is generated by its subsidiaries and the
Company from time to time will not hold assets other than the stock of its
subsidiaries. As a result, the Company will rely on dividends and other payments
received from its subsidiaries to provide substantially all of the funds
necessary to meet its debt service obligations, including the payment of
principal of and interest on the Debentures. Certain agreements of the Company
may now or in the future limit the ability of its subsidiaries in certain
situations to pay dividends to the Company or to repay intercompany debt. The
Debentures are not guaranteed by any of the subsidiaries of the Company, and
therefore, should the Company fail to satisfy any payment obligation under the
Debentures, the holders would not have a direct claim therefor against the
subsidiaries. Any indebtedness incurred directly by the subsidiaries of the
Company, including guarantees, will be senior in right of payment to the common
stock of such subsidiaries. This means that in the event of any liquidation or
bankruptcy of a subsidiary, all debt of such subsidiary would be entitled to be
paid before any amounts would be available to the Company by virtue of ownership
of the common stock. Except as described above under "Risk
Factors -- Restrictions Imposed by Terms of Indebtedness" and under "Description
of the Debentures -- Certain Covenants," the Indenture will not limit the
ability of the Company and its subsidiaries to incur additional indebtedness,
including Senior Indebtedness. Moreover, certain Senior Indebtedness of the
Company is now and may in the future be guaranteed by, and secured by the assets
of, the Company's subsidiaries. In the event of a default under any such Senior
Indebtedness, the lenders thereunder would be entitled to a claim on the assets
securing such indebtedness. Accordingly, because of any or all of the above, the
Company may not have sufficient monies available from its subsidiaries or from
other means, or assets remaining after payment of prior claims from time to
time, to pay amounts due on the Debentures. In addition, 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, 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 $44.7 million and $23.4 million, respectively, at September 30,
1998, which amounts would not be available to satisfy claims of creditors of the
Company on a consolidated basis.
 
RISK OF PREPAYMENT
 
     The Debentures are subject to redemption at the option of the Company in
whole at any time or in part from time to time without penalty or premium upon
notice to the holders of the Debentures. As a result, the holders of the
Debentures will be subject to a risk of prepayment at a time when interest rates
may be generally declining. In such case, holders of Debentures that are
redeemed who tendered their Shares to acquire an interest-bearing security will
no longer have the right to receive interest and may be forced to reinvest the
redemption proceeds in securities with a lower rate of interest.
 
FRAUDULENT TRANSFER STATUTES
 
     Various fraudulent conveyance laws enacted for the protection of creditors
may apply to the issuance of the Debentures. Under federal or state fraudulent
transfer laws, if a court were to find that, at the time the Debentures were
issued, the Company (i) issued the Debentures with the intent of hindering,
delaying or defrauding current or future creditors or (ii) (A) received less
than fair consideration or reasonably equivalent value for incurring the
indebtedness represented by the Debentures and (B) (1) was insolvent or was
rendered insolvent or contemplated insolvency by reason of the issuance of the
Debentures, (2) was engaged, or about to engage, in a business or transaction
for which its assets or capital were unreasonably small or (3) intended to
incur, or believed (or should have believed) it would incur, debts beyond its
ability to pay as such debts mature (as all of the foregoing terms are defined
in or interpreted under such fraudulent transfer statutes), such court could
void all or a portion of the Company's obligations to the holders of the
Debentures, or void or
 
                                       14
<PAGE>   17
 
subordinate the Company's obligations to the holders of the Debentures, and take
other action detrimental to the holders of the Debentures, including in certain
circumstances, invalidating the Debentures. In that event, there would be no
assurance that any repayment on the Debentures would ever be recovered by the
holders of the Debentures.
 
     The definition of insolvency for purposes of the foregoing consideration
varies among jurisdictions depending upon the federal or state law that is being
applied in any such proceeding. Generally, however, the Company would be
considered insolvent at the time it incurs the indebtedness constituting the
Debentures, if (i) the fair market value (or fair saleable value) of its assets
is less than the amount required to pay its total existing debts and liabilities
(including the probable liability on contingent liabilities) as they become
absolute or matured or (ii) it is incurring debts beyond its ability to pay as
such debts mature. Based upon financial and other information, the Company
believes that it is solvent and will continue to be solvent after issuing the
Debentures, will have sufficient capital for carrying on its business after such
issuance and will be able to pay its debts as they mature. There can be no
assurance, however, that a court passing on such standards would agree with the
Company. There can also be no assurance as to what standard a court would apply
in order to determine whether the Company was "insolvent" as of the date the
Debentures were issued, or that, regardless of the method of valuation, a court
would not determine that the Company was insolvent on that date or otherwise
agree with the Company with respect to the above standards.
 
CERTAIN UNITED STATES FEDERAL INCOME TAX RISKS
 
  Tax Consequences of Exchange Offer
 
     The exchange of Shares for Debentures by a tendering stockholder pursuant
to the Exchange Offer will be a taxable event treated for United States federal
income tax purposes as either (1) a sale or exchange of the stockholder's Shares
or (2) a deemed distribution of property by the Company with respect to such
Shares.
 
     Sale or exchange treatment will result if a tendering stockholder satisfies
any of three tests under Section 302 of the Code which measure reductions in a
stockholder's overall equity interest. If treated as a sale or exchange, a
stockholder should recognize capital gain or loss in an amount equal to the
difference between (a) the sum of the cash received (if any) plus the "issue
price" of the Debentures and (b) the stockholder's adjusted tax basis of the
Shares exchanged pursuant to the Exchange Offer. In general, the "issue price"
of the Debentures should be the value of the Shares as of the time of the
Original Exchange Offer ($5.0667). However, if the value of the Shares as of the
time of this Exchange Offer is greater than the value of the Shares as of the
time of the Original Exchange Offer, there is a risk that the Internal Revenue
Service may assert that the "issue price" of the Debentures is the value of the
Shares as of the time of this Exchange Offer.
 
     If none of the Section 302 tests is satisfied, then to the extent of the
Company's current or accumulated "earnings and profits" (as determined for
federal income tax purposes), a tendering stockholder will be treated as having
received a dividend taxable as ordinary income in an amount equal to the sum of
the cash received (if any) plus the fair market value (as of the time of the
exchange) of the Debentures received without reduction for the adjusted tax
basis of the Shares exchanged pursuant to the Exchange Offer. The stockholder's
adjusted tax basis in the Shares exchanged will be added to the stockholder's
remaining Shares; however, if the stockholder retains no Shares following the
exchange, the benefit of such basis will be permanently lost. To the extent, if
any, that the sum of the cash plus the fair market value of the Debentures
exceeds the Company's current and accumulated earnings and profits (as
determined for federal income tax purposes), the excess will be treated first as
a tax-free return of such stockholder's tax basis in the Shares and thereafter
as capital gain. Corporate stockholders receiving a dividend must assess the
applicability of the dividends-received deduction to the extent applicable and
the impact of Section 1059 governing "extraordinary distributions."
 
     In determining whether any one of the Section 302 tests is satisfied, a
tendering stockholder must take into account not only the Shares actually owned
by such stockholder but also Shares which are constructively owned by the
stockholder by reason of attribution rules contained in Section 318 of the Code.
The Company cannot predict whether or to what extent the Exchange Offer will be
oversubscribed. If the Exchange Offer is oversubscribed, proration of the
tenders pursuant to the Exchange Offer will cause the Company to accept fewer
Shares than are tendered. Therefore, a stockholder can be given no assurance
that a sufficient number of such stockholder's Shares will be exchanged pursuant
to the Exchange Offer to ensure that such exchange will
 
                                       15
<PAGE>   18
 
satisfy one or more of the Section 302 tests and be treated as a sale, rather
than as a dividend, for United States federal income tax purposes.
 
     If a stockholder sells Shares to persons other than the Company at or about
the same time such holder also exchanges Shares pursuant to the Exchange Offer
and the various sales effected by the stockholder are part of a plan to reduce
or terminate the stockholder's proportionate equity interest in the Company,
then sales to persons other than the Company may, for United States federal
income tax purposes, be integrated with the stockholder's exchange of Shares
pursuant to the Exchange Offer and, if integrated, should be taken into account
in determining whether a tendering stockholder satisfies any of the Section 302
tests.
 
     See "Certain United States Federal Income Tax Consequences" -- "Certain
Federal Income Tax Consequences to Tendering Stockholders" -- "Characterization
of the Exchange."
 
  Interest on Debentures -- General
 
     In general, interest will be taxable as ordinary income to a holder of a
Debenture at the time such amounts are accrued or received in accordance with
the holder's method of accounting. See "Certain United States Federal Income Tax
Consequences" -- "Certain Federal Income Tax Consequences to Tendering
Stockholders" -- "Interest on the Debentures -- General". Depending upon a
stockholder's particular circumstances, the tax consequences of holding
Debentures may be less advantageous than the consequences of holding Shares
because, for example, interest payments on the Debentures will not be eligible
for any dividends-received deduction that might otherwise be available to
corporate stockholders. Purchasers of Debentures will be credited with interest
from October 23, 1998.
 
  Original Issue Discount on Debentures
 
     The Debentures will be issued with significant "original issue discount"
("OID") for United States federal income tax purposes. Consequently, holders of
the Debentures will be required to recognize significant amounts of income in
advance of receipt of the cash payments to which the income is attributable for
United States federal income tax consequences, regardless of the holders'
methods of accounting. See "Certain United States Federal Income Tax
Consequences" -- "Certain Federal Income Tax Consequences to Prospective Holders
of Debentures" -- "Original Issue Discount on Debentures" and "Taxation of
Original Issue Discount on Debentures." This OID will accrue to purchasers of
Debentures from October 23, 1998.
 
     STOCKHOLDERS CONTEMPLATING AN EXCHANGE OF SHARES FOR DEBENTURES PURSUANT TO
THE EXCHANGE OFFER ARE URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE
SPECIFIC FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF EXCHANGES
MADE BY THEM PURSUANT TO THE EXCHANGE OFFER AS WELL AS THE SPECIFIC FEDERAL,
STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES ASSOCIATED WITH THE OWNERSHIP
OF DEBENTURES RECEIVABLE IN THE EXCHANGE.
 
FORWARD LOOKING STATEMENTS
 
     This Offering Circular contains certain forward looking statements.
Additional written or oral forward looking statements may be made by the Company
from time to time in filings with the Commission or otherwise. Such statements
may include, but not be limited to, estimates of the value of the Company's
Common Stock, projections of revenues, income, earnings per share, loss, capital
expenditures, plans for future operations, financing needs or plans, the
Company's ability to service its debt obligations, and plans relating to
products or services of the Company as well as assumptions relating to the
foregoing. The words "believe," "expect," "anticipate," "estimate," "project,"
and similar expressions identify forward looking statements. 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. Statements in this Offering Circular, including those
contained in the section entitled "Risk Factors," and in the section entitled
"Background, Purpose and Effect of the Exchange Offer," describe factors, among
others, that could contribute to or cause such differences. The Company
undertakes no obligation to update any forward looking statements.
 
                                       16
<PAGE>   19
 
                               THE EXCHANGE OFFER
 
GENERAL
 
     The Company hereby offers, upon the terms and subject to the conditions set
forth herein and in the accompanying Letter of Transmittal, to exchange up to
$16,486,582 aggregate principal amount of its Debentures for up to 2,536,397
Shares of its outstanding Common Stock on the basis of $6.50 principal amount of
Debentures for each Share of Common Stock outstanding. Pursuant to the Original
Exchange Offer, the Company issued $16,013,418 principal amount of its
Debentures in exchange for 2,463,603 shares of its Common Stock in October 1998.
The terms of the Debentures being offered pursuant to the Exchange Offer are
identical to the Debentures issued in connection with the Original Exchange
Offer and will be issued pursuant to the terms of the Indenture Supplement dated
October 15, 1998, under which $16,013,418 principal amount of Debentures were
originally issued on October 23, 1998.
 
     If more than 2,536,397 Shares are tendered, the Company will accept no more
than 2,536,397 Shares of Common Stock, with Debentures to be allocated among the
tendering stockholders on a pro rata basis. The Exchange Offer is subject to a
number of additional conditions. See "The Exchange Offer -- Conditions to and
Amendment of the Exchange Offer."
 
     Stockholders who do not tender will retain their Shares of Common Stock and
stockholders who tender will receive Debentures with the following rights
compared to those associated with the ownership of Common Stock.
 
<TABLE>
<CAPTION>
                COMMON STOCK                                        DEBENTURES
--------------------------------------------       --------------------------------------------
<S>                                                <C>
Equity; pro rata claim to assets of the            Debt; right to receive specified principal
Company after payment of all debt                  amount with senior claim to assets of the
obligations, plus right to share in capital        Company compared to holders of equity, but
appreciation.                                      subordinated to all other senior debt
                                                   obligations of the Company, plus the right
                                                   to receive interest, but no right to capital
                                                   appreciation.
No interest payable on Common Stock,               Interest at 12% year annum, payable
although dividends are possible.                   semiannually in cash on each April 15 and
                                                   October 15, commencing April 15, 1999.
Voting rights on all matters submitted to          No voting rights.
stockholders.
Shares are listed on Nasdaq and are subject        Debentures will not be listed on any
to established trading market.                     exchange or automated quotation system; no
                                                   assurance of any trading market.
</TABLE>
 
     The foregoing table is set forth for comparative purposes only and does not
take into account all factors relating to a comparison of the Shares to the
Debentures, nor does it take into account any factors relating to the tax
consequences of accepting the Exchange Offer. For a more complete description of
the Debentures and the Common Stock, see "Description of the Debentures" and
"Description of Capital Stock." See also "Certain United States Federal Income
Tax Consequences."
 
     Tendering stockholders will not be obligated to pay brokerage commissions
or fees or, subject to Instruction 9 of the Letter of Transmittal, transfer
taxes with respect to the exchange of Shares for Debentures pursuant to the
Exchange Offer. The Company will pay all charges and expenses of the Exchange
Agent, the Information Agent, and the Trustee in connection with the Exchange
Offer. See "The Exchange Offer -- Payment of Expenses."
 
EXPIRATION TIME, EXTENSIONS, TERMINATION AND AMENDMENTS
 
     The Exchange Offer will terminate at 5:00 p.m., New York City time, on
Tuesday, December 22, 1998, unless extended by the Company in its sole
discretion. During any extension of the Exchange Offer, all Shares
 
                                       17
<PAGE>   20
 
previously tendered and not yet exchanged will remain subject to the Exchange
Offer (subject to withdrawal rights specified herein) and may be accepted for
exchange by the Company. The later of 5:00 p.m., New York City time, on Tuesday,
December 22, 1998, or the latest time and date to which the Exchange Offer may
be extended, is referred to herein as the "Expiration Time."
 
     The Company expressly reserves the right, at any time or from time to time,
to extend the period of time for which the Exchange Offer is to remain open by
giving oral or written notice to Harris Trust and Savings Bank (the "Exchange
Agent") of such extension prior to 9:00 a.m., New York City time, on the
business day after the previously scheduled Expiration Time. The Company also
expressly reserves the right (i) to terminate the Exchange Offer and not accept
for exchange any Shares not theretofore accepted for exchange upon the
occurrence of any of the events set forth herein under "The Exchange
Offer -- Conditions to and Amendment of the Exchange Offer" or (ii) to amend the
Exchange Offer. Any such extension, termination or amendment will be followed as
promptly as practicable by public announcement thereof, such announcement in the
case of an extension to be issued no later than 9:00 a.m., New York City time,
on the next business day after the previously scheduled Expiration Time. Without
limiting the manner in which the Company may choose to make such public
announcement, the Company shall not, unless otherwise required by law, have an
obligation to publish, advertise or otherwise communicate any such public
announcement other than by making a release to the Dow Jones News Service.
 
HOW TO TENDER
 
     Except as set forth below, for a stockholder to duly tender Shares pursuant
to the Exchange Offer, certificates representing the Shares (or a confirmation
of a book-entry transfer of the Shares into the Exchange Agent's account at The
Depository Trust Company ("DTC") as described below), together with a properly
completed and duly executed Letter of Transmittal or facsimile thereof, with any
required signature guarantees and any other required documents, must be
transmitted to and received by the Exchange Agent on or prior to the Expiration
Time at one of the addresses specified below under "The Exchange Offer --
Exchange Agent." LETTERS OF TRANSMITTAL AND CERTIFICATES REPRESENTING THE SHARES
SHOULD NOT BE SENT TO UGLY DUCKLING OR TO THE INFORMATION AGENT. Signatures on
Letters of Transmittal need not be guaranteed by a firm which is a member of a
registered national securities exchange or a member of the National Association
of Securities Dealers, Inc. ("NASD") or by a commercial bank or trust company
having an office in the United States ("Eligible Institution"), provided the
Shares tendered pursuant thereto are tendered (i) by a registered holder of the
Shares who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In all other cases, signatures
must be guaranteed by an Eligible Institution. If Shares are registered in the
name of a person other than the signer of the Letter of Transmittal, the
certificates representing the Shares must be endorsed by, or be accompanied by,
a written instrument or instruments of transfer or exchange in form satisfactory
to the Company, duly executed by the registered holder, with the signature
thereon guaranteed as aforesaid.
 
     The Exchange Agent has established an account with respect to the Shares at
DTC and any financial institution which is a participant in the DTC system may
make book-entry delivery of the Shares by causing DTC to transfer such Shares
into the Exchange Agent's account in accordance with DTC's procedure for such
transfer. However, although delivery of Shares may be effected through
book-entry transfer into the Exchange Agent's account at DTC, the Letter of
Transmittal (or facsimile thereof), with any required signature guarantees and
any other required documents, must in any case be transmitted to and received by
the Exchange Agent prior to the Expiration Time at one of the addresses
specified below under "The Exchange Offer -- Exchange Agent", or the guaranteed
delivery procedure described below must be complied with. Delivery of documents
to DTC in accordance with DTC's procedures does not constitute delivery to the
Exchange Agent.
 
     Tendering stockholders are required under federal income tax law to provide
a correct Taxpayer Identification Number on a Substitute Form W-9, which is
included, together with guidelines relating to the form, with the Letter of
Transmittal. Failure to complete and return this Substitute Form W-9 to the
Exchange Agent may subject a stockholder to a $50 penalty imposed by the
Internal Revenue Service and will
 
                                       18
<PAGE>   21
 
result in backup withholding of 31% on interest and other payments with respect
to the Debentures and cash in lieu of fractional interests in the Debentures.
 
     The method of delivery of certificates representing the Shares and all
other required documents is at the election and risk of the tendering
stockholder but delivery by registered mail with return receipt requested,
properly insured, is recommended.
 
     If a stockholder desires to tender Shares and certificates representing the
Shares are not immediately available or time will not permit such holder's
Letter of Transmittal, certificates representing the Shares or other required
documents to reach the Exchange Agent before the Expiration Time, such holder's
tender may be effected if:
 
          (a) such tender is made through an Eligible Institution;
 
          (b) prior to the Expiration Time, the Exchange Agent has received a
     telegram, facsimile transmission or letter from such Eligible Institution
     setting forth the name and address of the holder of such Shares and the
     number of the Shares tendered and stating that the tender is being made
     thereby and guaranteeing that, within three Nasdaq trading days after the
     date of such telegram, facsimile transmission or letter, the Letter of
     Transmittal, together with certificates representing the Shares (or
     confirmation of book-entry transfer of such Shares into the Exchange
     Agent's account with DTC as described above) and any other documents
     required by the Letter of Transmittal, will be deposited by such Eligible
     Institution with the Exchange Agent; and
 
          (c) such Letter of Transmittal and certificates representing the
     Shares, in proper form for transfer (or confirmation of book-entry transfer
     of such Shares into the Exchange Agent's account at DTC as described
     above), and other required documents are received by the Exchange Agent
     within three Nasdaq trading days after the date of such telegram, facsimile
     transmission or letter.
 
     The acceptance by a stockholder of the Exchange Offer pursuant to one of
the procedures set forth above will constitute an agreement between the
stockholder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the accompanying Letter of Transmittal.
 
     The Company will accept Shares by giving notice thereof to the Exchange
Agent.
 
     All questions as to the form of all documents and the validity (including
time of receipt) and acceptance of all tenders will be determined by the
Company, in its sole discretion, which determination shall be final and binding.
The Company reserves the absolute right to reject any and all tenders not in
proper form or the acceptance of which would, in the opinion of the Company's
counsel, be unlawful. The Company also reserves the absolute right to waive any
of the conditions of the Exchange Offer or any defect or irregularity in the
tender of any of the Shares. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the Letter of Transmittal and the
instructions thereto) will be final. No tender of Shares will be deemed to have
been properly made until all defects and irregularities have been cured or
waived. Neither the Company, the Information Agent, the Exchange Agent nor any
other person shall be under any duty to give notification of any defects or
irregularities in tenders, nor shall any of them incur any liability for failure
to give such notification.
 
WITHDRAWAL RIGHTS
 
     All tenders duly and validly made are irrevocable, except that Shares
tendered pursuant to the Exchange Offer may be withdrawn prior to the Expiration
Time, and, unless theretofore accepted for exchange as provided in the Exchange
Offer, may also be withdrawn after 5:00 p.m., New York City time, on January 22,
1999.
 
     To be effective, a written, telegraphic or facsimile transmission notice of
withdrawal must be received by the Exchange Agent on a timely basis at one of
the addresses specified under "The Exchange Offer -- Exchange Agent." Any notice
of withdrawal must specify the name of the person having tendered the Shares to
be withdrawn, the names in which the Shares are registered if different from
that of the tendering stockholder and the number of Shares to be withdrawn. If
certificates representing the Shares have been
 
                                       19
<PAGE>   22
 
physically delivered to the Exchange Agent, then prior to the release of such
certificates, the tendering stockholder must also submit the certificate number
of the certificates representing the Shares to be withdrawn and the signature on
such holder's notice of withdrawal must be guaranteed by an Eligible
Institution. If certificates representing the Shares have been delivered
pursuant to the book-entry procedures set forth above under "The Exchange
Offer -- How to Tender," any notice of withdrawal must specify the name and
number of the participant's account at DTC to be credited with the withdrawn
Shares. All questions as to validity, form and eligibility (including time of
receipt) of notices of withdrawal will be determined by the Company, in its sole
discretion, which determination shall be final and binding. Any Shares
effectively withdrawn will be deemed not to have been duly tendered for purposes
of the Exchange Offer.
 
     None of the Company, the Information Agent or any other person will be
under any duty to give notification of any defects or irregularities in any
notice of withdrawal or incur any liability for failure to give such
notification. However, the Exchange Agent will attempt to correct any defective
tenders by contacting the tendering stockholder. Withdrawals of tenders of
Shares may not be rescinded, and any Shares properly withdrawn will thereafter
be deemed not validly tendered for purposes of the Exchange Offer. However,
withdrawn Shares may be returned by following one of the procedures described
under "The Exchange Offer -- How to Tender" at any time prior to the Expiration
Time.
 
ACCEPTANCE OF SHARES FOR EXCHANGE;
DELIVERY OF DEBENTURES TO BE EXCHANGED
 
     Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of Shares validly tendered and not withdrawn will be
made promptly after the Expiration Time. For purposes of the Exchange Offer, the
Company will be deemed to have accepted for exchange validly tendered Shares
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering
stockholders for the purposes of receiving Debentures from the Company and
transmitting such securities to such stockholders. If the Company should extend
the Exchange Offer or be delayed in consummation of the Exchange Offer for any
reason, then, without prejudice to the Company's rights under the Exchange
Offer, the Exchange Agent acting on behalf of the Company may retain tendered
Shares, and such Shares may not be withdrawn, subject to the withdrawal rights
of tendering stockholders set forth above under "The Exchange
Offer -- Withdrawal Rights." Tendered Shares not accepted for exchange by the
Company because of an invalid tender, the termination of the Exchange Offer as a
result of the existence of a condition set forth below under "The Exchange
Offer -- Conditions to and Amendment of the Exchange Offer" or for any other
reason, will be returned without expense to the tendering stockholders (or, in
the case of Shares delivered by book-entry transfer within DTC, will be credited
to the account maintained within DTC by the participant in the DTC system who
delivered such Shares) as promptly as practicable following the expiration or
termination of the Exchange Offer.
 
     Delivery of Debentures in exchange for Shares tendered pursuant to the
Exchange Offer will be made by the Company to the Exchange Agent, as agent for
the tendering stockholders, only after receipt by the Exchange Agent of
certificates representing the tendered Shares (or confirmation of the book-entry
transfer of such Shares into the Exchange Agent's account at DTC), a properly
completed and duly executed Letter of Transmittal (or facsimile thereof), and
any other required documents.
 
DENOMINATIONS; FRACTIONAL INTERESTS
 
     The Debentures will be issued only in denominations of $1.00 and integral
multiples thereof. Fractional interests with respect to the Debentures will not
be distributed to tendering stockholders. Instead, the Company will pay cash in
lieu of such interests.
 
PRORATION IF SHARES TENDERED EXCEED MAXIMUM
 
     If stockholders tendering Shares validly tender more than 2,536,397 shares,
the Company will accept for exchange no more than 2,536,397 Shares. In such
event, Debentures will be allocated to tendering stockholders on a pro rata
basis based on the number of Shares tendered by each tendering stockholder. The
 
                                       20
<PAGE>   23
 
Company will accept from each tendering stockholder that number of Shares equal
to 2,536,397 multiplied by a fraction, the numerator of which is the total
number of Shares validly tendered by such tendering stockholder and the
denominator of which is the total number of Shares validly tendered by all
tendering stockholders. The number of Shares will be rounded up or down as
nearly as practicable to result in the tender of whole Shares rather than
fractional Shares. Any Shares not accepted by the Company as a result of the
allocation described above will be returned promptly to the tendering
stockholder.
 
CONDITIONS TO AND AMENDMENT OF THE EXCHANGE OFFER
 
     The Company may accept up to 2,536,397 Shares validly tendered
(representing approximately 16% of the outstanding Shares of the Company's
Common Stock as of November 18, 1998). If more than 2,536,397 Shares are
tendered, the Company will accept no more than 2,536,397 Shares of Common Stock,
to be allocated among the tendering stockholders on a pro rata basis as
described under "-- Proration if Shares Tendered Exceed Maximum." The Exchange
Offer is subject to other conditions described below.
 
     An application will be filed with the Commission for qualification of the
Indenture under which the Debentures will be issued under the Trust Indenture
Act of 1939 (the "Trust Indenture Act"). The Exchange Offer is conditioned upon
the Indenture being qualified under the Trust Indenture Act. In addition to the
foregoing conditions, the Company may decline to accept any Shares in exchange
for Debentures and may withdraw the Exchange Offer as to Shares not then
accepted if, before the time of acceptance, there shall have occurred any of the
following events which, in the Company's sole judgment, makes it inadvisable to
proceed with such acceptance:
 
          (a) any government agency or other person shall have instituted or
     threatened any action or proceeding before any court or administrative
     agency (i) challenging the acquisition of Shares pursuant to the Exchange
     Offer or otherwise in any manner relating to the Exchange Offer or (ii)
     otherwise materially adversely affecting the Company, or there shall have
     occurred any existing action or proceeding with respect to the Company; or
 
          (b) any statute, rule or regulation shall have been proposed or
     enacted, or any action shall have been taken by any governmental authority,
     which would or might prohibit, restrict or delay consummation of the
     Exchange Offer or materially impair the contemplated benefits of the
     Exchange Offer to the Company; or
 
          (c) any state of war, national emergency, banking moratorium or
     suspension of payments by banks in the State of New York shall have
     occurred, or any currency or exchange control laws or regulations or
     general suspension of trading or limitation on prices on Nasdaq shall have
     been imposed or there shall have occurred a material adverse change in the
     securities markets generally; or
 
          (d) any required consents or approvals from third parties or
     government regulatory agencies shall not have been obtained; or
 
          (e) the Exchange Offer would result in the Company's Shares being
     delisted from the Nasdaq National Market; or
 
          (f) any change, or development involving a prospective change, in or
     affecting the business or financial affairs of the Company shall have
     occurred.
 
     The Company reserves the right to waive any of the foregoing conditions.
The Company also reserves the right to amend the Exchange Offer by public
announcement of any amendment. The Exchange Offer, however, may not be amended
or withdrawn unless the amendment or the circumstances described above regarding
withdrawal occur prior to the Expiration Time.
 
EXCHANGE AGENT
 
     Harris Trust and Savings Bank has been appointed as Exchange Agent for the
Exchange Offer. All correspondence in connection with the Exchange Offer and the
Letter of Transmittal should be addressed to the Exchange Agent, as follows:
 
                                       21
<PAGE>   24
 
HARRIS TRUST AND SAVINGS BANK
 
<TABLE>
<S>                             <C>                             <C>
       Mailing Address:           Facsimile Copy Number (For       Hand/Overnight Delivery:
       c/o Harris Trust          Eligible Institutions Only):   Harris Trust and Savings Bank
     Company of New York                 212-701-7636            c/o Harris Trust Company of
        P.O. Box 1010            Confirm Receipt of Facsimile              New York
     Wall Street Station                 By Telephone             88 Pine Street, 19th Floor
  New York, N.Y. 10268-1010              212-701-7624                 New York, NY 10005
</TABLE>
 
     DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION VIA A
FACSIMILE NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE VALID
DELIVERY.
 
INFORMATION AGENT
 
     Corporate Investor Communications, Inc. will act as Information Agent in
connection with the Exchange Offer. For further assistance or additional copies
of documents call the Information Agent toll-free at 1-888-673-4478 or write to
the Information Agent at:
 
<TABLE>
<S>                             <C>                             <C>
       Mailing Address:             Facsimile Copy Number:              Hand Delivery:
      Corporate Investor                 201-804-8693                 Corporate Investor
     Communications, Inc.                                            Communications, Inc.
      111 Commerce Road                                               111 Commerce Road
   Carlstadt, NJ 07072-2586                                        Carlstadt, NJ 07072-2586
</TABLE>
 
     LETTERS OF TRANSMITTAL AND CERTIFICATES REPRESENTING THE SHARES SHOULD NOT
BE SENT TO THE INFORMATION AGENT. See "The Exchange Offer -- How to Tender."
 
NO FINANCIAL ADVISOR
 
     No financial advisor has been retained to render, and no financial advisor
has rendered, an opinion as to the fairness of the Exchange Offer to holders of
the Company's Common Stock or to solicit exchanges of Common Stock for
Debentures.
 
PAYMENT OF EXPENSES
 
     The Exchange Offer is being made by the Company in reliance on the
exemption from the registration requirements of the Securities Act of 1933, as
amended, afforded by Section 3(a)(9) thereof. Therefore, the Company will not
pay any commission or other remuneration to any broker, dealer, salesman or
other person for soliciting tenders of the Shares. However, regular employees of
the Company (who will not be additionally compensated therefor) may solicit
tenders and will answer inquiries concerning the Exchange Offer.
 
     The Company will pay the Exchange Agent and the Information Agent
reasonable and customary fees for their services and will reimburse such parties
for their reasonable out-of-pocket expenses in connection therewith. The Company
will also pay brokerage houses and other custodians, nominees and fiduciaries
the reasonable out-of-pocket expenses incurred by them in forwarding copies of
this Offering Circular and related documents to the beneficial owners of the
Shares held of record by such persons and in handling or forwarding tenders and
consents for their customers.
 
                                       22
<PAGE>   25
 
              BACKGROUND, PURPOSE AND EFFECT OF THE EXCHANGE OFFER
 
     Ugly Duckling completed its initial public offering in June 1996 with the
sale of 2,300,000 Shares of its Common Stock at a price of $6.75 per share.
Following the initial public offering, the price of the Company's Common Stock
increased significantly, to a high of $25.75 per share in the first quarter of
1997, reflecting a stock market with generally increasing stock prices, a
healthy used car sales and finance industry, and growth in the Company's
revenues and earnings. In recent periods, however, the used car sales and
financing industry has encountered difficulties, with several used car companies
announcing 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 difficulties have
corresponded with a general decline in the stock prices of companies involved in
this industry. At the same time, stock prices of small-cap companies have
recently experienced a broad-based decline. Consistent with this market decline,
particularly with respect to companies in the used car sales and finance
industry, the price of the Company's Common Stock decreased to $5.00 as of
November 18,, 1998, a price that is near the low end of its 52-week trading
range.
 
     The Company does not believe that recent prices reflect the underlying
value of its Common Stock. In this regard, in establishing a tender price that
is significantly higher than the market price of the Shares as of November 18,
1998, the Company considered the following factors, among others.
 
     - The closing price of $5.00 per Share as of November 18, 1998, two
       business days prior to the announcement of the Exchange Offer, represents
       an 81% decline from its all-time high in the first quarter of 1997 and a
       61% decline from its high in 1998. See "Price Range of Common Stock."
 
     - The recent Share price reflects a discount of approximately 49% to the
       Company's book value per share as of September 30, 1998. See "Summary
       Selected Consolidated Financial Data."
 
     - The Company's recent and historical financial results, including the
       Company's increase in revenues ($216.1 million compared to $79.5 million)
       and basic earnings per share from continuing operations ($0.46 compared
       to $0.25) for the nine month period ended September 30, 1998 as compared
       to the nine month period ended September 30, 1997. See "Summary Selected
       Consolidated Financial Data."
 
     The principal purpose of the Exchange Offer is to reduce the number of
Shares of Common Stock outstanding by offering to purchase Shares in the
Exchange Offer, thereby offering the potential for increased earnings per share
in the future. The Company believes that if it is able to increase earnings per
share, this development could have a positive influence on the price of its
Common Stock. The increased indebtedness resulting from the Exchange Offer,
however, will significantly increase the Company's debt service requirements and
could negatively affect earnings per share. See "Risk Factors -- Increased
Leverage and Debt Service Obligations" and "-- No Assurance of Increased
Earnings Per Share."
 
     Holders of Shares of Common Stock electing to participate in the Exchange
Offer will realize the following benefits.
 
     - In exchange for Shares, tendering stockholders will receive a debt
       security with a principal amount approximately 30% greater than the
       market price of the Shares as of November 18, 1998.
 
     - The Debentures will bear interest at 12% per annum, payable each April 15
       and October 15 until the Debentures are paid in full.
 
     - The Debentures, although subordinated in right of payment to all other
       existing and future senior indebtedness of the Company, represent a claim
       on the Company's assets senior to any claim of the holders of the
       Company's Common Stock.
 
     Notwithstanding the benefits to tendering stockholders summarized above,
holders of Shares contemplating the Exchange Offer should take into account the
following considerations.
 
     - Tendering stockholders receiving Debentures will relinquish the right to
       share in any capital appreciation of the Company's Common Stock.
 
                                       23
<PAGE>   26
 
     - Unlike the Shares, the Debentures will not be listed on any exchange or
       automated quotation system and there can be no assurance that a trading
       market will develop.
 
     - Unlike holders of Common Stock, holders of the Debentures will have no
       rights to vote on matters submitted to the Company's stockholders.
 
     - The Company has the right to prepay the Debentures at any time without
       penalty or premium by paying the unpaid principal amount and accrued
       interest on the Debentures.
 
     - Tendering stockholders will be subject to certain tax consequences that
       may differ from those that would be realized if the Shares were sold for
       cash.
 
     Finally, holders of Shares contemplating the Exchange Offer should consider
that the Company has not retained any financial advisor or investment banking
firm to assist the Company in determining the price and terms of the Indentures
or whether the consideration offered in the Exchange Offer is adequate to
tendering stockholders. The Company also has not requested any report, opinion,
or appraisal relating to the fairness of the consideration being offered
pursuant to the Exchange Offer. For a discussion of risk factors which should be
taken into account in considering the Exchange Offer, see "Risk Factors."
 
     If the Exchange Offer is completed, the Shares accepted for exchange will
be held by the Company as treasury stock.
 
                                       24
<PAGE>   27
 
                                 CAPITALIZATION
 
     The following table sets forth the capitalization of the Company at
September 30, 1998 and pro forma to give effect to the exchange of Debentures
assuming the maximum number of Shares were tendered as if such exchange had
occurred on September 30, 1998. The pro forma Original Exchange Offer Shares
exchanged reflect the 2,463,603 Shares exchanged in October 1998 at a weighted
average price of $5.05 per Share. The pro forma information for the maximum
number of Shares exchanged assumes that the total number of Shares exchanged are
the 5,000,000 Shares tendered pursuant to both the Original Exchange Offer and
this Exchange Offer valued at $5.00 per Share, which approximates the price of
the Company's Common Stock as of November 18, 1998.
 
<TABLE>
<CAPTION>
                                                                                PRO FORMA
                                                                      -----------------------------
                                                                               AS ADJUSTED
                                                                      -----------------------------
                                                                         ORIGINAL         MAXIMUM
                                                                      EXCHANGE OFFER      NO. OF
                                                                          SHARES          SHARES
                                                            ACTUAL      EXCHANGED        EXCHANGED
                                                           --------   --------------    -----------
                                                                 (IN THOUSANDS AND UNAUDITED)
<S>                                                        <C>        <C>               <C>
Debt:
  Revolving Facility.....................................  $ 44,852      $ 44,852        $ 44,852
  Notes Payable..........................................     3,480         3,480           3,480
  Subordinated Notes Payable(1)..........................    25,000        25,000          25,000
  12% Subordinated Debentures due 2003(3)................        --        12,441          25,123
                                                           --------      --------        --------
          Total Debt(1)..................................    73,332        85,773          98,455
                                                           --------      --------        --------
Stockholders' Equity:
  Common Stock; $.001 par value, 100,000,000 shares
  authorized, 18,560,000 issued and outstanding (Actual),
  13,567,000 and 17,567,000 issued and outstanding,
  respectively (As Adjusted)(1)(2).......................   173,285       160,354         147,672
  Retained Earnings......................................     8,133         8,133           8,133
                                                           --------      --------        --------
          Total Stockholders' Equity.....................   181,418       168,487         155,805
                                                           --------      --------        --------
          Total Capitalization(1)........................  $254,750      $254,260        $254,260
                                                           ========      ========        ========
</TABLE>
 
---------------
(1) Excludes $5 million of subordinated notes payable included within the
    Company's discontinued operations.
 
(2) Excludes (i) approximately 1,556,000 shares of Common Stock issuable upon
    exercise of warrants issued and outstanding, (ii) up to 175,000 shares of
    Common Stock issuable upon reaching certain milestones related to the
    transaction with Reliance Acceptance Group, (iii) approximately 1,298,000
    shares of Common Stock issuable upon exercise of stock options issued and
    outstanding under the Company's Long-Term Incentive Plan as of November 18,
    1998, and (iv) 500,000 shares of Common Stock issuable upon exercise of
    stock options issued and outstanding under the 1998 Executive Incentive Plan
    as of November 18, 1998.
 
(3) The amounts represent the principal amount of the Debentures less the
    discount.
 
                                       25
<PAGE>   28
 
                           UGLY DUCKLING CORPORATION
 
                  SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
 
     The selected data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" for, and as of the end of, each of the
years in the five-year period ended December 31, 1997, are derived from the
consolidated financial statements of the Company, which consolidated financial
statements have been audited by KPMG Peat Marwick LLP, independent certified
public accountants. The selected data presented below for the nine-month periods
ended September 30, 1998 and 1997, and as of September 30, 1998 and 1997, are
derived from the unaudited condensed consolidated financial statements of the
Company. The information presented below under the caption "Dealership Operating
Data" is unaudited. In the opinion of management, such unaudited data reflect
all adjustments, consisting only of normally recurring adjustments, necessary to
fairly present the Company's financial position and results of operations for
the periods presented. The results of operations of any interim period are not
necessarily indicative of results to be expected for a full fiscal year. For
additional information, see the Consolidated Financial Statements and notes
thereto of the Company included in the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1998.
 
<TABLE>
<CAPTION>
                                                           NINE MONTHS ENDED
                                                             SEPTEMBER 30,                  YEARS ENDED DECEMBER 31,
                                                          -------------------   -------------------------------------------------
                                                            1998       1997       1997       1996      1995      1994      1993
                                                          --------   --------   --------   --------   -------   -------   -------
                                                                     (IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<S>                                                       <C>        <C>        <C>        <C>        <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA:
Sales of Used Cars......................................  $216,111   $ 79,543   $123,814   $ 53,768   $47,824   $27,768   $13,969
Less:
  Cost of Used Cars Sold................................   123,976     45,902     72,358     31,879    29,733    13,604     6,606
  Provision for Credit Losses...........................    45,053     14,193     22,354      9,657     8,359     8,024     3,292
                                                          --------   --------   --------   --------   -------   -------   -------
                                                            47,082     19,448     29,102     12,232     9,732     6,140     4,071
                                                          --------   --------   --------   --------   -------   -------   -------
Interest Income.........................................    12,031      8,511     12,559      8,597     8,227     4,683     1,629
Gain on Sale of Finance Receivables.....................    12,093      6,155      6,721      3,925        --        --        --
Servicing Income........................................    11,834      5,114      8,738      1,887        --        --        --
Other Income............................................       404      1,964      3,587        650       308       556       879
                                                          --------   --------   --------   --------   -------   -------   -------
                                                            36,362     21,744     31,605     15,059     8,535     5,239     2,508
                                                          --------   --------   --------   --------   -------   -------   -------
Income before Operating Expenses........................    83,444     41,192     60,707     27,291    18,267    11,379     6,579
Operating Expenses:
  Selling and Marketing.................................    15,462      6,663     10,538      3,585     3,856     2,402     1,293
  General and Administrative............................    48,412     24,469     39,412     12,221    11,677     7,722     3,108
  Depreciation and Amortization.........................     3,534      2,128      3,150      1,382     1,225       713       557
                                                          --------   --------   --------   --------   -------   -------   -------
                                                            67,408     33,260     53,100     17,188    16,758    10,837     4,958
                                                          --------   --------   --------   --------   -------   -------   -------
Income before Interest Expense..........................    16,036      7,932      7,607     10,103     1,509       542     1,621
Interest Expense........................................     1,687        630        706      2,429     5,328     2,870       893
                                                          --------   --------   --------   --------   -------   -------   -------
Earnings (Loss) before Income Taxes.....................    14,349      7,302      6,901      7,674    (3,819)   (2,328)      728
Income Taxes (Benefit)..................................     5,777      2,966      2,820        694        --      (334)       30
                                                          --------   --------   --------   --------   -------   -------   -------
Earnings (Loss) from Continuing Operations..............     8,572      4,336      4,081      6,980    (3,819)   (1,994)      698
Discontinued Operations:
Earnings (Loss) from Discontinued Operations, net of
  income taxes..........................................    (9,591)     1,409      5,364     (1,114)     (153)       27        --
                                                          --------   --------   --------   --------   -------   -------   -------
Net Earnings (Loss).....................................  $ (1,019)  $  5,745   $  9,445   $  5,866   $(3,972)  $(1,967)  $   698
                                                          ========   ========   ========   ========   =======   =======   =======
</TABLE>
<TABLE>
Earnings (Loss) per Common Share from Continuing Operations:
<S>                                                           <C>        <C>        <C>        <C>        <C>       <C>
Basic...............................................          $    .46   $   0.25   $   0.23   $   0.77   $ (0.69)  $ (0.36)
                                                              ========   ========   ========   ========   =======   =======
Diluted.............................................          $    .46   $   0.24   $   0.22   $   0.73   $ (0.69)  $ (0.36)
                                                              ========   ========   ========   ========   =======   =======
Net Earnings (Loss) per Common Share:
Basic...............................................          $  (0.05)  $   0.33   $   0.53   $   0.63   $ (0.72)  $ (0.35)
                                                              ========   ========   ========   ========   =======   =======
Diluted.............................................          $  (0.05)  $   0.32   $   0.52   $   0.60   $ (0.72)  $ (0.35)
                                                              ========   ========   ========   ========   =======   =======
 
<CAPTION>
Earnings (Loss) per Common Share from Continuing Operations:
<S>                                                           <C>
Basic...............................................          $  0.14
                                                              =======
Diluted.............................................          $  0.14
                                                              =======
Net Earnings (Loss) per Common Share:
Basic...............................................          $  0.14
                                                              =======
Diluted.............................................          $  0.14
                                                              =======
</TABLE>
 
                                       26
<PAGE>   29
 
<TABLE>
Shares Used in Computation --
<S>                                                       <C>        <C>        <C>        <C>        <C>       <C>       <C>
Basic Shares............................................    18,600     17,620     17,832      7,887     5,522     5,584     5,011
                                                          ========   ========   ========   ========   =======   =======   =======
Diluted Shares..........................................    18,800     18,200     18,234      8,298     5,522     5,584     5,011
                                                          ========   ========   ========   ========   =======   =======   =======
Earnings to Fixed Charges(a)............................      4.48       5.91       3.91       2.62        (b)       (b)     1.69
                                                          ========   ========   ========   ========   =======   =======   =======
BALANCE SHEET DATA:
Cash and Cash Equivalents...............................  $    955   $  4,401   $  3,537   $ 18,455   $ 1,419   $   168   $    79
Finance Receivables, Net................................    60,684     29,920     60,778     14,186    27,732    14,534     7,089
  Total Assets..........................................   278,788    217,994    275,633    117,629    60,712    29,681    11,936
Subordinated Notes Payable..............................    25,000     12,000     12,000     14,000    14,553    18,291     8,941
  Total Debt............................................    73,332     20,352     77,171     26,904    49,754    28,233     9,380
Preferred Stock.........................................        --         --         --         --    10,000        --        --
Common Stock............................................   173,285    171,943    172,622     82,612       127        77         1
  Total Stockholders' Equity (Deficit)..................   181,418    177,395    181,774     82,319     4,884    (1,194)      697
Principal Balances Serviced:
Dealership Sales........................................  $ 30,089   $ 16,546   $ 55,965   $  7,068   $34,226   $19,881   $ 9,588
Securitized with Servicing Retained.....................   306,650    228,995    238,025     51,662        --        --        --
Discontinued Operations.................................    33,884     25,182     29,965     49,772    13,805     1,620        --
Servicing on Behalf of Others...........................    61,100    162,000    127,322         --        --        --        --
                                                          --------   --------   --------   --------   -------   -------   -------
  Total Serviced Portfolios.............................  $431,723   $432,723   $451,277   $108,502   $48,031   $21,501   $ 9,588
                                                          ========   ========   ========   ========   =======   =======   =======
DEALERSHIP OPERATING DATA (UNAUDITED):
Average Sales Price per Car.............................  $  7,946   $  7,364   $  7,443   $  7,107   $ 6,478   $ 5,269   $ 4,159
Number of Used Cars Sold................................    27,198     10,801     16,636      7,565     7,383     5,270     3,359
Company Dealerships.....................................        51         35         41          8         8         8         5
Number of Contracts Originated..........................    26,915     10,208     16,001      6,929     6,129     4,731     3,093
Principal Balances Originated (000 Omitted).............  $207,643   $ 76,126   $116,830   $ 48,996   $36,568   $23,589   $12,984
Retained Portfolio:
Number of Contracts Outstanding.........................     4,025      2,665      7,993      1,045     8,049     5,515     2,929
Allowance as % of Outstanding Principal.................      18.5%      20.0%      18.5%      23.0%     21.9%     30.4%     30.0%
Average Principal Balance Outstanding...................  $  7,476   $  6,231   $  7,002   $  6,764   $ 4,252   $ 3,605   $ 3,273
Average Yield on Contracts..............................      25.8%      26.0%      26.7%      29.2%     28.0%     28.2%     26.4%
Delinquencies -- Retained Portfolio:
Principal Balances 31 to 60 Days........................       0.8%       1.5%       2.2%       2.3%      4.2%      5.1%     10.5%
Principal Balances over 60 Days.........................       2.5%       2.8%       0.6%       0.6%      1.1%      1.3%     15.0%
</TABLE>
 
---------------
(a) For the purposes of these computations, "earnings" are defined as the sum of
    pre-tax income from continuing operations plus fixed charges of the Company
    and its subsidiaries, adjusted to exclude the amount of any interest
    capitalized during the period, but adding the amount of previously
    capitalized interest amortized during the period; "fixed charges" consist of
    interest on debt, amortization of debt discount, premium, and expense, and
    that portion of rents which is representative of the interest factor.
 
(b) Earnings did not cover fixed charges by $3.9 million and $2.5 million in the
    years ended December 31, 1995 and 1994, respectively.
 
                                       27
<PAGE>   30
 
                    CERTAIN PRO FORMA FINANCIAL INFORMATION
 
     The table set forth below shows the pro forma effects the Exchange Offer
would have had on the adjusted financial condition and results of operations of
the Company for the year ended December 31, 1997 and for the nine months ended
September 30, 1998, assuming the maximum number of Shares had been exchanged on
the first day of the respective periods. The pro forma Original Exchange Offer
Shares exchanged reflect the 2,463,603 Shares exchanged in October 1998 at a
weighted average price of $5.05 per Share. The pro forma information for the
maximum number of Shares exchanged assumes that the total number of Shares
exchanged are the 5,000,000 Shares tendered pursuant to both the Original
Exchange Offer and this Exchange Offer valued at $5.00 per Share, which
approximates the price of the Company's Common Stock as of November 18, 1998.
 
<TABLE>
<CAPTION>
                                           NINE MONTHS ENDED SEPTEMBER 30, 1998              YEAR ENDED DECEMBER 31, 1997
                                        -------------------------------------------   -------------------------------------------
                                                              PRO FORMA                                     PRO FORMA
                                                   --------------------------------              --------------------------------
                                                       ORIGINAL          MAXIMUM                     ORIGINAL          MAXIMUM
                                                    EXCHANGE OFFER    NO. OF SHARES               EXCHANGE OFFER    NO. OF SHARES
                                         ACTUAL    SHARES EXCHANGED     EXCHANGED      ACTUAL    SHARES EXCHANGED     EXCHANGED
                                        --------   ----------------   -------------   --------   ----------------   -------------
                                                            (IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<S>                                     <C>        <C>                <C>             <C>        <C>                <C>
Sales of Used Cars....................  $216,111       $216,111         $216,111      $123,814       $123,814         $123,814
Less:
 Cost of Used Cars Sold...............   123,976        123,976          123,976        72,358         72,358           72,358
 Provision for Credit Losses..........    45,053         45,053           45,053        22,354         22,354           22,354
                                        --------       --------         --------      --------       --------         --------
                                          47,082         47,082           47,082        29,102         29,102           29,102
                                        --------       --------         --------      --------       --------         --------
Interest Income.......................    12,031         12,031           12,031        12,559         12,559           12,559
Gain on Sale of Finance
 Receivables..........................    12,093         12,093           12,093         6,721          6,721            6,721
Servicing Income......................    11,834         11,834           11,834         8,738          8,738            8,738
Other Income..........................       404            404              404         3,587          3,587            3,587
                                        --------       --------         --------      --------       --------         --------
                                          36,362         36,362           36,362        31,605         31,605           31,605
                                        --------       --------         --------      --------       --------         --------
Income before Operating Expenses......    83,444         83,444           83,444        60,707         60,707           60,707
Operating Expenses:
 Selling and Marketing................    15,462         15,462           15,462        10,538         10,538           10,538
 General and Administrative...........    48,412         48,412           48,412        39,412         39,412           39,412
 Depreciation and Amortization........     3,534          3,534            3,534         3,150          3,150            3,150
                                        --------       --------         --------      --------       --------         --------
                                          67,408         67,408           67,408        53,100         53,100           53,100
                                        --------       --------         --------      --------       --------         --------
Income before Interest Expense........    16,036         16,036           16,036         7,607          7,607            7,607
Interest Expense......................     1,687          3,664(1)       5,719(1)          706          3,342(1)         6,081(1)
                                        --------       --------         --------      --------       --------         --------
Earnings before Income Taxes..........    14,349         12,372           10,317         6,901          4,265            1,526
Income Taxes..........................     5,777          4,986(2)       4,164(2)        2,820          1,743(2)           624(2)
                                        --------       --------         --------      --------       --------         --------
Earnings from Continuing
 Operations...........................  $  8,572       $  7,386         $  6,153      $  4,081       $  2,522         $    902
                                        ========       ========         ========      ========       ========         ========
Earnings per Common Share from
 Continuing Operations:
 Basic................................  $   0.46       $   0.46         $   0.45      $   0.23       $   0.16         $   0.07
                                        ========       ========         ========      ========       ========         ========
 Diluted..............................  $   0.46       $   0.45         $   0.45      $   0.22       $   0.16         $   0.07
                                        ========       ========         ========      ========       ========         ========
</TABLE>
 
                                       28
<PAGE>   31
 
<TABLE>
<CAPTION>
                                           NINE MONTHS ENDED SEPTEMBER 30, 1998              YEAR ENDED DECEMBER 31, 1997
                                        -------------------------------------------   -------------------------------------------
                                                              PRO FORMA                                     PRO FORMA
                                                   --------------------------------              --------------------------------
                                                       ORIGINAL          MAXIMUM                     ORIGINAL          MAXIMUM
                                                    EXCHANGE OFFER    NO. OF SHARES               EXCHANGE OFFER    NO. OF SHARES
                                         ACTUAL    SHARES EXCHANGED     EXCHANGED      ACTUAL    SHARES EXCHANGED     EXCHANGED
                                        --------   ----------------   -------------   --------   ----------------   -------------
                                               (IN THOUSANDS, EXCEPT SHARES USED IN COMPUTATION AND BOOK VALUE PER SHARE)
<S>                                     <C>        <C>                <C>             <C>        <C>                <C>
Shares Used in Computation:
 Basic................................    18,600         16,136           13,600        17,832         15,368           12,832
                                        ========       ========         ========      ========       ========         ========
 Diluted..............................    18,800         16,336           13,800        18,234         15,770           13,234
                                        ========       ========         ========      ========       ========         ========
BALANCE SHEET DATA:
Cash and Cash Equivalents.............  $    955       $    955         $    955      $  3,537       $  3,537         $  3,537
Finance Receivables, Net..............    60,684         60,684           60,684        60,778         60,778           60,778
 Total Assets.........................   278,788        278,788          278,788       275,633        275,633          275,633
Subordinated Notes Payable............    25,000         37,441(3)        50,123(3)     12,000         24,441(3)        37,123(3)
 Total Debt...........................    73,332         85,773           98,455        77,171         89,612          102,294
Preferred Stock.......................        --             --               --            --             --               --
Common Stock..........................   173,285        160,354(3)       147,672(3)    172,622        159,691(3)       147,009(3)
 Total Stockholders' Equity...........   181,418        168,487          155,805       181,774        168,843          156,161
Common Shares Outstanding.............    18,533         16,069           13,533        18,521         16,057           13,521
Book Value per share..................      9.79          10.49            11.51          9.81          10.52            11.55
</TABLE>
 
---------------
(1) To reflect the effect of the additional debt service and discount amortized
    over the life of the Debentures.
 
<TABLE>
<CAPTION>
                                                                NINE MONTHS ENDED
                                                                SEPTEMBER 30, 1998            YEAR ENDED DECEMBER 31, 1997
                                                         --------------------------------   --------------------------------
                                                             ORIGINAL          MAXIMUM          ORIGINAL          MAXIMUM
                                                          EXCHANGE OFFER    NO. OF SHARES    EXCHANGE OFFER    NO. OF SHARES
                                                         SHARES EXCHANGED     EXCHANGED     SHARES EXCHANGED     EXCHANGED
                                                         ----------------   -------------   ----------------   -------------
                                                                                   (IN THOUSANDS)
<S>                                                      <C>                <C>             <C>                <C>
Par Value of Debentures Issued.........................      $ 16,013          $32,500          $16,013           $32,500
                                                             ========          =======          =======           =======
Interest Incurred During the Period at 12%.............      $  1,441          $ 2,925          $ 1,922           $ 3,900
Amortization of the Discount of $3,572,000 and
  $7,377,000 for the Original Exchange Offer and
  Maximum Shares Exchanged, Respectively...............           536            1,107              714             1,475
                                                             --------          -------          -------           -------
Interest Expense Adjustment............................      $  1,977          $ 4,032          $ 2,636           $ 5,375
                                                             ========          =======          =======           =======
</TABLE>
 
(2) To record the income tax effects of the interest expense adjustment.
 
(3) To reflect the increase in Subordinated Notes Payable and the decrease in
    Common Stock pursuant to the Exchange Offer.
 
<TABLE>
<CAPTION>
                                                                NINE MONTHS ENDED
                                                                SEPTEMBER 30, 1998            YEAR ENDED DECEMBER 31, 1997
                                                         --------------------------------   --------------------------------
                                                             ORIGINAL          MAXIMUM          ORIGINAL          MAXIMUM
                                                          EXCHANGE OFFER    NO. OF SHARES    EXCHANGE OFFER    NO. OF SHARES
                                                         SHARES EXCHANGED     EXCHANGED     SHARES EXCHANGED     EXCHANGED
                                                         ----------------   -------------   ----------------   -------------
                                                                                   (IN THOUSANDS)
<S>                                                      <C>                <C>             <C>                <C>
Par Value of Subordinated Debentures...................      $16,013           $32,500          $16,013           $32,500
Less: Discount.........................................        3,572             7,377            3,572             7,377
                                                             -------           -------          -------           -------
Carrying Value of Debentures Payable...................       12,441            25,123           12,441            25,123
Estimated Stock Acquisition Costs......................          490               490              490               490
                                                             -------           -------          -------           -------
Common Stock Acquired..................................      $12,931           $25,613          $12,931           $25,613
                                                             =======           =======          =======           =======
</TABLE>
 
                                       29
<PAGE>   32
 
                          PRICE RANGE OF COMMON STOCK
 
     The Company's Common Stock trades on the Nasdaq Stock Market under the
symbol "UGLY." The Company's initial public offering was effected on June 17,
1996 at a price of $6.75 per share. The high and low closing sales prices of the
Common Stock as reported by Nasdaq since that date are reported below.
 
<TABLE>
<CAPTION>
                                                                MARKET PRICE
                                                              ----------------
                                                               HIGH      LOW
                                                              ------    ------
<S>                                                           <C>       <C>
FISCAL YEAR 1996:
Second Quarter (from June 18, 1996).........................  $10.00    $ 8.50
Third Quarter...............................................  $15.50    $ 8.13
Fourth Quarter..............................................  $21.63    $13.00
FISCAL YEAR 1997:
First Quarter...............................................  $25.75    $16.25
Second Quarter..............................................  $18.06    $13.13
Third Quarter...............................................  $17.00    $12.50
Fourth Quarter..............................................  $16.75    $ 7.69
FISCAL YEAR 1998:
First Quarter...............................................  $10.88    $ 6.31
Second Quarter..............................................  $12.70    $ 8.00
Third Quarter...............................................  $ 9.13    $ 4.63
</TABLE>
 
     On November 18, 1998, there were approximately 78 holders of record of the
Company's Common Stock.
 
     Ugly Ducking's capital stock consists of 100,000,000 shares of Common
Stock, of which approximately 16,070,000 shares were outstanding as of November
18, 1998 and 10,000,000 shares of Preferred Stock, none of which were issued and
outstanding as of November 18, 1998.
 
                                   DIVIDENDS
 
     Cash dividends have never been paid on Ugly Duckling's Common Stock. The
Company presently intends to retain earnings and does not anticipate that cash
dividends will be paid on its Common Stock in the foreseeable future. Under the
terms of the Revolving Facility with GE Capital, the Company may not declare or
pay dividends in excess of 15% of each year's net earnings available for
distribution.
 
                                       30
<PAGE>   33
 
                                    BUSINESS
 
GENERAL
 
     The Company operates a chain of buy here-pay here used car dealerships and
underwrites, finances and services retail installment contracts generated from
the sale of used cars by its Company dealerships and by third party dealers
located in selected markets throughout the country. 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
("Sub-Prime Borrowers").
 
     Dealership Operations and Related Securitization Program.  As of the date
of this Offering Circular, the Company was operating 55 used car dealerships
("Company Dealerships") located in nine metropolitan areas and seven states. The
Company distinguishes its Company Dealership operations from those of typical
buy here -- pay here dealers through its network of multiple locations, upgraded
facilities, large inventories of used cars, regional centralized purchasing,
value-added marketing programs, and dedication to customer service. Company
Dealerships are typically located in high visibility, high traffic commercial
areas, and generally are newer and cleaner in appearance than other buy
here -- pay here dealers, helping promote the Company's image as a friendly and
reputable business. For the nine months ended September 30, 1998, the Company
generated revenues from its continuing dealership operations of $216.1 million
and net earnings of $8.6 million, compared to $79.5 million in revenues and $4.3
million in net earnings, respectively, for the same period of 1997.
 
     During the first quarter of 1996, the Company initiated a Securitization
Program under which special "bankruptcy remote" subsidiaries sell securities
backed by finance contracts to investors. In February 1998, the Company executed
a commitment letter with Greenwich Capital Markets, Inc. ("Greenwich Capital")
under which, among other things, Greenwich Capital retains the right to be the
exclusive securitization agent for the Company for up to $1 billion of AAA
surety wrapped securities as part of the Company's ongoing Securitization
Program. The agreement contains certain provisions that would not oblige
Greenwich Capital or require the Company to fulfill the remaining commitment
under the agreement.
 
     Third Party Operations.  Beginning in 1994 with the acquisition of Champion
Financial Services, Inc. ("Champion"), an independent automobile finance
company, the Company has been involved in the acquisition and servicing of
retail installment contracts generated by third party car dealers, typically
involving Sub-Prime Borrowers. From the acquisition of Champion through the
first quarter of 1998, the Company pursued an aggressive growth plan, setting up
a national third party branch office network pursuant to which it acquired
retail installment contracts from numerous independent third party car dealers.
 
     In 1997, the Company began to engage in the purchase of loan portfolios in
bulk and the servicing of loan portfolios on behalf of third parties, including
companies that were experiencing financial difficulties. The Company maintains
loan servicing facilities in Nashville, Tennessee, Denver, Colorado, San
Antonio, Texas, and Dallas, Texas to support its bulk servicing operations,
which are included in discontinued operations. In recent periods, the Company
has entered into several large servicing or bulk purchasing transactions
involving independent third party finance receivable portfolios and, in some
cases, has sold or securitized these portfolios, with servicing retained. The
two most significant of such transactions involved transactions with First
Merchants Acceptance Corporation and with Reliance Acceptance Group. The total
contract portfolio serviced by the Company's third party loan servicing
operations totaled $725.1 million as of September 30, 1998.
 
     The Company has also initiated a program pursuant to which the Company
provides qualified independent used car dealers with warehouse purchase
facilities and operating credit lines primarily secured by the dealer's retail
installment contract portfolio (the "Cygnet Dealer Program"). The Cygnet Dealer
Program's contract portfolio totaled $39.4 million as of September 30, 1998.
 
                                       31
<PAGE>   34
 
RECENT DEVELOPMENTS
 
     Discontinued Operations.  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 branch office network and exit this line of
business. The closure was substantially complete as of March 31, 1998, although
the Company is continuing to negotiate lease settlements and terminations, and
to service the associated loan portfolio. 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. In
addition, a $6.0 million charge ($3.6 million net of income taxes) was taken
during the third quarter of 1998 due primarily to higher than anticipated loan
losses and servicing expenses in connection with the branch office loan
portfolio.
 
     In April 1998, the Company announced that its Board of Directors had
directed management to proceed with separating its dealership operations from
the Cygnet Dealer Program and the Company's bulk purchase and third party loan
servicing operations. Since that date, these businesses have been classified as
discontinued operations in the Company's Consolidated Financial Statements.
 
     The Company subsequently formed a new wholly owned subsidiary, Cygnet
Financial Corporation ("Cygnet") to effectuate the separation of the Company's
dealership and non-dealership operations. At the Company's annual meeting held
on August 31, 1998, stockholders of the Company approved a split-up proposal
under which the assets and liabilities of the non-dealership businesses would be
transferred to Cygnet and Cygnet would become a separate public company through
a rights offering to stockholders of the Company. Due to a lack of stockholder
participation in the offering, however, the rights offering was terminated. In
the third quarter of 1998, the Company recorded an after tax charge of
approximately $1.2 million relating to the costs incurred for the terminated
right offering.
 
     The Company is continuing to explore alternatives for formally separating
its dealership and non-dealership operations, although there can be no assurance
that the Company will ultimately be successful in this regard. Although the
Company was not successful in formally separating its non-dealership operations
as contemplated, it has completed the internal process of establishing separate
management teams and infrastructures for the dealership and non-dealership
operations. The Company believes this structure enhances each segment's ability
to focus on its own operations and facilitates the Company's goal of formally
separating them.
 
     Individuals contemplating whether to participate in the Exchange Offer
should consider the possibility that Ugly Duckling could later decide to retain
rather than separate its non-dealership operations, in which case Ugly
Duckling's consolidated financial statements would require restatement to
reflect the integration of certain financial results currently attributed to
discontinued operations.
 
     Securitization Accounting Change.  On November 17, 1998 the Company
announced a change in the way it structures transactions under its
Securitization Program. Previously, the Company structured its securitization
transactions as sales for accounting purposes. Beginning in the fourth quarter
of 1998, however, the Company will structure securitizations for accounting
purposes to retain the Finance Receivables and the related debt on the Company's
balance sheet and recognize the income over the life of the contracts. The
Company will no longer recognize a Gain on Sale of Finance Receivables as
previously recognized by the Company. This change will not affect the Company's
prior securitizations.
 
     The fundamentals of the Company's continuing business should be unaffected
by this change. The Company expects to continue to finance its receivables
through securitization. There will, however, be a significant adverse impact on
earnings per share for the next few periods as the Company builds its on-balance
sheet portfolio. The Company expects to incur a significant loss in the fourth
quarter of 1998 and this change will continue to have a material adverse effect
on reported earnings until the Company's interest earnings, net of interest and
other related expenses, from the additional contracts added to the Company's
balance sheet approximates the revenues the Company has historically recognized
on its securitization transactions. However, the Company believes that this
change will enhance the long-term value of the Company through
 
                                       32
<PAGE>   35
 
greater earnings stability and predictability, as well as instill higher
confidence in those earnings from the investment community.
 
     Initial Exchange Offer.  On September 17, 1998, the Company initiated an
exchange offer (the "Original Exchange Offer") to exchange up to 5,000,000
shares of its Common Stock for 12%, five-year subordinated debentures of the
Company due October 23, 2003 with terms identical to those being offered
hereunder. The exchange ratio was $6.50 principal amount of Debentures for each
share of Common Stock validly tendered.
 
     The Original Exchange Offer expired on October 19, 1998 with a total of
2,463,603 shares of Common Stock being tendered for $16,013,418 aggregate
principal amount of the Debentures in connection with the offer (the "Existing
Debentures").
 
                                       33
<PAGE>   36
 
                         DESCRIPTION OF THE DEBENTURES
 
     The Debentures will be issued under an Indenture, as supplemented and
amended by the First Supplemental Indenture thereto (collectively, the
"Indenture"), by and between the Company and Harris Trust and Savings Bank, as
Trustee (the "Trustee"). The following summary of certain provisions of the
Indenture does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, the Trust Indenture Act, and to all of the
provisions of the Indenture, including the definitions of certain terms therein
and those terms made a part of the Indenture by reference to the Trust Indenture
Act as in effect on the date of the Indenture. A copy of the Indenture will be
filed with the Commission as an exhibit to the Form T-3 filed in connection with
the qualification of the Indenture under the Trust Indenture Act.
 
     The Indenture allows the issuance of debt securities of the Company ("Debt
Securities"), in one or more series, in an aggregate principal amount up to
$100,000,000. The First Supplemental Indenture establishes the Debentures as a
series of Debt Securities under the Indenture.
 
PRINCIPAL, MATURITY AND INTEREST
 
     The Debentures are limited in aggregate principal amount to $32,500,000,
$16,486,582 principal amount of which may be issued in this Exchange Offer, and
will mature on October 23, 2003. Interest on the Debentures will accrue from
October 23, 1998 at the rate of 12% per annum and will be payable semiannually
in cash on each April 15 and October 15 (each, an "Interest Payment Date"),
commencing on April 15, 1999, to the registered holders of the Debentures
("Holders") at the close of business on the April 1 and October 1 immediately
preceding the applicable Interest Payment Date. Interest is payable on the
Debentures from the most recent date to which interest has been paid or, if no
interest has been paid, from and including the date of issuance.
 
     The Debentures will be unsecured obligations of the Company and will not be
entitled to the benefit of any mandatory sinking fund.
 
PAYMENT AND PAYING AGENTS
 
     Payment of interest on a Debenture on any Interest Payment Date will be
made to the Person in whose name such Debenture (or one or more Predecessor
Debentures) is registered at the close of business on the Regular Record Date
for such interest. (Section 307).
 
     Principal of and interest on the Debentures will be payable at the office
of such Paying Agent or Paying Agents as the Company may designate for such
purpose from time to time, except that at the option of the Company payment of
any interest may be made by check mailed to the address of the Person entitled
thereto as such address appears in the Security Register. (Section 307). The
corporate trust office of the Trustee in Chicago, Illinois will be designated as
the Company's Paying Agent for payments with respect to the Debentures. The
Company may at any time designate additional Paying Agents or rescind the
designation of any Paying Agent or approve a change in the office through which
any Paying Agent acts, except that the Company will be required to maintain a
Paying Agent in each Place of Payment for the Debentures. (Section 1002).
 
     All moneys paid by the Company to a Paying Agent for the payment of the
principal of or any premium or interest on any Debentures which remain unclaimed
at the end of two years after such principal, premium, or interest has become
due and payable will be repaid to the Company, subject to certain publication
requirements, and the Holder of such Debentures thereafter may look only to the
Company for payment thereof. (Section 1003).
 
FORM, EXCHANGE, AND TRANSFER
 
     The Debentures will be issuable only in fully registered form without
coupons and in denominations of $1.00 and any integral multiple thereof.
(Section 302).
 
                                       34
<PAGE>   37
 
     At the option of the Holder, subject to the terms of the Indenture,
Debentures will be exchangeable for other Debentures, of any authorized
denomination and of like tenor and aggregate principal amount. (Section 305).
Subject to the terms of the Indenture, Debentures may be presented for exchange
as provided above or for registration of transfer (duly endorsed or with the
form of transfer endorsed thereon duly executed) at the office of any transfer
agent designated by the Company for such purpose. No service charge will be made
for any registration of transfer or exchange of Debentures, but, with certain
limited exceptions, the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith. The
Company has appointed the Trustee as Security Registrar and transfer agent for
the Debentures. (Section 305). The Company may at any time designate additional
transfer agents or rescind the designation of any transfer agent or approve a
change in the office through which any transfer agent acts, except that the
Company will be required to maintain a transfer agent in each Place of Payment
for the Debentures. (Section 1002).
 
     If the Debentures are to be redeemed, the Company will not be required to
(i) issue, register the transfer of, or exchange any Debentures during a period
beginning at the opening of business 15 days before the day of mailing of a
notice of redemption of any such Debentures that may be selected for redemption
and ending at the close of business on the day of such mailing or (ii) register
the transfer of or exchange any Debenture so selected for redemption, in whole
or in part, except the unredeemed portion of any such Debenture being redeemed
in part. (Section 305).
 
REDEMPTION
 
     The Debentures will be redeemable, at the Company's option, in whole at any
time or in part from time to time, upon not less than 30 nor more than 60 days'
notice, at the principal amount to be redeemed, plus, in each case, accrued and
unpaid interest thereon, if any, to the date of redemption.
 
SELECTION AND NOTICE OF REDEMPTION
 
     In the event that less than all of the Debentures are to be redeemed at any
time, selection of such Debentures for redemption will be made by the Trustee,
on a pro rata basis, by lot or by such method as the Trustee shall deem fair and
appropriate. Notice of redemption shall be mailed by first-class mail at least
30 but not more than 60 days before the redemption date to each Holder of
Debentures to be redeemed at its registered address. If any Debenture is to be
redeemed in part only, the notice of redemption that relates to such Debenture
shall state the portion of the principal amount thereof to be redeemed. A new
Debenture in a principal amount equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancellation of the original
Debenture. On and after the redemption date, interest will cease to accrue on
Debentures or portions thereof called for redemption as long as the Company has
deposited with the Paying Agent funds in satisfaction of the applicable
redemption price pursuant to the Indenture. Each notice of redemption may
include a statement that such redemption shall be conditional upon the receipt
by the Trustee on or prior to the Redemption Date of amounts sufficient to pay
principal of, and interest on, the Debentures to be redeemed, and that if such
amounts shall not have been so received, said notice shall be of no force and
effect, the Debentures to be redeemed will not become due and payable on the
Redemption Date, and the Company shall not be required to redeem such Debentures
on such date. If such a Conditional Notice is given, failure by the Company to
deposit money necessary to effect the redemption on or prior to the Redemption
Date will not result in a default under the Indenture.
 
SUBORDINATION
 
     The payment of all obligations on the Debentures is subordinated in right
of payment to the prior payment in full of all obligations on Senior
Indebtedness. Upon any payment or distribution of assets of the Company of any
kind or character, whether in cash, property or securities, to creditors upon
any liquidation, dissolution, winding up, assignment for the benefit of
creditors or marshaling of assets of the Company or in a bankruptcy,
reorganization, insolvency, receivership or other similar proceeding relating to
the Company or its property, whether voluntary or involuntary, all Obligations
(as hereafter defined) due or to become due upon all Senior Indebtedness shall
first be paid in full, or such payment duly provided for to the satisfaction of
the
 
                                       35
<PAGE>   38
 
holders of Senior Indebtedness, before any payment or distribution of any kind
or character is made on account of any Obligations on the Debentures, or for the
acquisition of any of the Debentures for cash or property or otherwise. If any
default occurs and is continuing in the payment when due, whether at maturity,
upon any redemption, by acceleration or otherwise, of any principal of, premium
or interest on any Senior Indebtedness, no payment of any kind or character
shall be made by or on behalf of the Company or any other Person on its behalf
with respect to any Obligations on the Debentures or to acquire any of the
Debentures for cash or property or otherwise.
 
     In addition, if any other event of default occurs and is continuing with
respect to any Senior Indebtedness, other than the Designated Senior
Indebtedness (as hereafter defined), as such event of default is defined in the
instrument creating or evidencing such Senior Indebtedness, permitting the
holders of such Senior Indebtedness then outstanding to immediately accelerate
the maturity thereof and if a representative for such issue of Senior
Indebtedness gives written notice of the event of default to the Trustee (a
"Default Notice"), then, unless and until all events of default with respect to
such Senior Indebtedness have been cured or waived in writing or have ceased to
exist or the Trustee receives notice from such representative for the respective
issue of Senior Indebtedness terminating the Blockage Period (as defined below),
during the 179 days after the delivery of such Default Notice (the "Blockage
Period"), neither the Company nor any other Person on its behalf shall (x) make
any payment of any kind or character with respect to any Obligations on the
Debentures or (y) acquire any of the Debentures for cash or property or
otherwise. Notwithstanding the above, in no event will a Blockage Period extend
beyond 179 days from the date the payment on the Debentures was due and only one
such Blockage Period may be commenced within any 365 consecutive days
irrespective of the number of defaults with respect to Senior Indebtedness
during such period. In no event may the total number of days during which any
Blockage Period is or Blockage Periods are in effect exceed 179 days in the
aggregate during any consecutive 365 day period. No event of default which
existed or was continuing on the date of the commencement of any Blockage Period
with respect to the Senior Indebtedness shall be, or be made, the basis for
commencement of a second Blockage Period by a representative of such Senior
Indebtedness unless such event of default shall have been cured or waived for a
period of not less than 90 consecutive days. However, any subsequent action, or
any breach of any financial covenants for a period commencing after the date of
commencement of such Blockage Period that, in either case, would give rise to an
event of default pursuant to any provisions under which an event of default
previously existed or was continuing shall constitute a new event of default for
this purpose.
 
     In addition, if any event of default (as defined in the instrument creating
or evidencing any Designated Senior Indebtedness) occurs and is continuing with
respect to any Designated Senior Indebtedness or an executive officer of the
Company has actual knowledge of a default under any Designated Senior
Indebtedness, which with notice or lapse of time or both would result in an
event of default under such Designated Senior Indebtedness, then the Company
shall give notice thereof to the Trustee and, regardless of the giving of such
notice, no payment of any kind or character shall be made by or on behalf of the
Company or any other Person on its behalf with respect to any Obligations on the
Debentures or to acquire any of the Debentures for cash or property or otherwise
for a period of 179 days from the date of each such event of default or the date
that an executive officer obtains actual knowledge that there is such a default
(a "Designated Senior Indebtedness Blockage Period"), unless and until all such
events of defaults or defaults with respect to such Designated Senior
Indebtedness have been cured or waived in writing pursuant to the Designated
Senior Indebtedness or have ceased to exist or the Trustee receives notice from
a representative for the applicable issue of Designated Senior Indebtedness
terminating the Designated Senior Indebtedness Blockage Period. In the event any
Debenture is declared due and payable before its expressed maturity under
Section 502 of the Indenture, (i) the Company will give prompt notice in writing
of such happening to the holders of Designated Senior Indebtedness and (ii) no
payment of any kind or character shall be made by or on behalf of the Company or
any other Person on its behalf with respect to any obligations on the Debentures
or to assume any of the Debentures for cash or property or otherwise without the
consent of the Designated Senior Indebtedness.
 
                                       36
<PAGE>   39
 
     By reason of such subordination, in the event of the insolvency of the
Company, creditors of the Company who are not holders of Senior Indebtedness,
including the Holders of the Debentures, may recover less, ratably, than holders
of Senior Indebtedness. See also "Risk Factors -- Subordination."
 
     For purposes of the subordination provisions of the Debentures, the
following definitions apply:
 
     "Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
 
     "Credit Agreement" means the Amended and Restated Motor Vehicle Installment
Contract Loan and Security Agreement dated as of August 15, 1997 among the
Company, General Electric Capital Corporation, and certain other parties, as
such agreement may be amended, restated, modified, renewed, refunded, replaced
or refinanced from time to time, including any notes, guarantees, security or
pledge agreements, letters of credit and other documents or instruments executed
pursuant thereto and any exhibits or schedules to any of the foregoing.
 
     "Designated Senior Indebtedness" means (i) all Indebtedness outstanding
under the Credit Agreement and (ii) any other Senior Indebtedness designated by
the Company as "Designated Senior Indebtedness" from time to time.
 
     "Indebtedness" means with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all Capitalized Lease Obligations of such Person, (iv) all obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other similar accrued
liabilities arising in the ordinary course of business and payable in accordance
with customary terms), (v) all obligations for the reimbursement of any obligor
on any letter of credit, banker's acceptance or similar credit transaction, (vi)
guarantees and other contingent obligations in respect of Indebtedness referred
to in clauses (i) through (v) above and clause (viii) below, (vii) all
obligations of any other Person of the type referred to in clauses (i) through
(vi) which are secured by any lien on any property or asset of such Person, the
amount of such obligation being deemed to be the lesser of the fair market value
of such property or asset or the amount of the obligation so secured, and (viii)
all obligations under currency agreements and interest swap agreements of such
Person.
 
     "Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
 
     "Senior Indebtedness" means all Obligations on any Indebtedness of the
Company, whether outstanding on the date of original issuance of the Debentures
or thereafter created, incurred or assumed, unless, in the case of any
particular Indebtedness, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides that such
Indebtedness shall not be senior in right of payment to the Debentures.
Notwithstanding the foregoing, "Senior Indebtedness" shall not include (i) any
Indebtedness of the Company to a Subsidiary of the Company, (ii) Indebtedness
to, or guaranteed on behalf of, any shareholder, director, officer or employee
of the Company (including, without limitation, amounts owed for compensation),
(iii) any liability for federal, state, local or other taxes owed or owing by
the Company, and (iv) Indebtedness which, when incurred and without respect to
any election under Section 1111(b) of Title 11, United States Code, is without
recourse to the Company.
 
     Except to the extent described below under "Certain Covenants," the
Indenture does not limit the aggregate amount of Senior Indebtedness that the
Company or its subsidiaries may issue. As of September 30, 1998, outstanding
Senior Indebtedness of the Company and its consolidated subsidiaries aggregated
approximately $78.3 million.
 
     The Company also has outstanding a $10 million subordinated note payable to
Verde Investments, Inc., an affiliate of the Company (the "Verde Note"), which
will be senior in right of payment to the Debentures.
 
                                       37
<PAGE>   40
 
     The subordination provisions apply only to Debentures that are Outstanding.
Debentures will not be deemed to be Outstanding if, among other circumstances,
money in the necessary amount has been deposited with the Trustee or any Paying
Agent (other than the Company) in trust, or set aside and segregated in trust by
the Company (if it acts as its own Paying Agent) for the redemption of such
Debentures and notice of redemption has been given as required in the Indenture
or provision therefor satisfactory to the Trustee has been made. In addition,
upon the effectiveness of any Defeasance or Covenant Defeasance as described
below under the heading "Defeasance and Covenant Defeasance," the Debentures
then Outstanding shall cease to be subordinated under the Indenture.
 
CERTAIN COVENANTS
 
     The Indenture will contain, among others, the following covenants provided
for the Debentures:
 
     Consolidated Leverage Ratios.  The Company will not allow its Consolidated
Leverage Ratio to exceed 6.0 to 1.0. "Consolidated Leverage Ratio" means, as of
any date of determination, the ratio of (i) the total liabilities of the Company
and its consolidated Subsidiaries (determined in accordance with generally
accepted accounting principles ("GAAP")), excluding all Junior Subordinated
Obligations, to (ii) the Consolidated Net Worth of the Company. "Junior
Subordinated Obligation" means any indebtedness of the Company that by its terms
is expressly subordinated in right of payment to the Debentures. "Consolidated
Net Worth" means, as of any date of determination, the consolidated
stockholders' equity of the Company and its consolidated Subsidiaries
(determined in accordance with GAAP), plus all Junior Subordinated Obligations
of the Company. The change in the securitization structure will result in a
significant additional amount of debt, which will negatively impact the
Company's leverage ratio.
 
     Minimum Equity.  The Company will at all times maintain Consolidated Net
Worth (defined above) of at least $100,000,000.
 
EVENTS OF DEFAULT
 
     Each of the following will constitute an Event of Default under the
Indenture with respect to Debt Securities of any series: (a) failure to pay
principal of or any premium on any Debt Securities of that series when due; (b)
failure to pay any interest on any Debt Securities of that series when due,
continued for 30 days; (c) failure to deposit any sinking fund payment, when
due, in respect of any Debt Securities of that series; (d) failure to perform
any other covenant of the Company in the Indenture (other than a covenant
included in the Indenture solely for the benefit of a series other than that
series), that continues for 90 days after written notice has been given by the
Trustee, or the Holders of at least 25% in principal amount of the Outstanding
Debt Securities of that series, as provided in the Indenture; (e) certain events
in bankruptcy, insolvency, or reorganization, and (f) any other Event of Default
specified for such series in the supplemental indenture or Board Resolution
creating or governing such series. (Section 501). There are no additional Events
of Default provided for the Debentures.
 
     If an Event of Default (other than an Event of Default described in clause
(e) above) with respect to the Debt Securities of any series at the time
Outstanding shall occur and be continuing, either the Trustee or the Holders of
at least 25% in aggregate principal amount of the Outstanding Debt Securities of
that series by notice as provided in the Indenture may declare the principal
amount of the Debt Securities of that series (or, in the case of any Debt
Security that is an Original Issue Discount Security or the principal amount of
which is not then determinable, such portion of the principal amount of such
Debt Security, or such other amount in lieu of such principal amount, as may be
specified in the terms of such Debt Security) to be due and payable immediately.
If an Event of Default described in clause (e) above with respect to the Debt
Securities of any series at the time Outstanding shall occur, the principal
amount of all the Debt Securities of that series (or, in the case of any such
Original Issue Discount Security or other Debt Security, such specified amount)
will automatically, and without any action by the Trustee or any Holder, become
immediately due and payable. After any such acceleration, but before a judgment
or decree based on acceleration, the Holders of a majority in aggregate
principal amount of the Outstanding Debt Securities of that series may rescind
and annul such acceleration if all Events of Default, other than the non-payment
of accelerated principal (or other specified
 
                                       38
<PAGE>   41
 
amount), have been cured or waived as provided in the Indenture and payment of
all overdue interest and certain other payments are made by the Company.
(Section 502). For information as to waiver of defaults, see "Modification and
Waiver."
 
     Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the Holders, unless such Holders
shall have offered to the Trustee reasonable indemnity. (Section 603). Subject
to such provisions for the indemnification of the Trustee and to certain other
conditions, the Holders of a majority in principal amount of the Outstanding
Debt Securities of any series will have the right to direct the time, method,
and place of conducting any proceeding for any remedy available to the Trustee,
or exercising any trust or power conferred on the Trustee, with respect to the
Debt Securities of that series. (Section 512).
 
     No Holder of a Debt Security of any series will have any right to institute
any proceeding with respect to the Indenture, or for the appointment of a
receiver or a trustee, or for any other remedy thereunder, unless (i) such
Holder has previously given to the Trustee written notice of a continuing Event
of Default with respect to the Debt Securities of that series, (ii) the Holders
of at least 25% in aggregate principal amount of the Outstanding Debt Securities
of that series have made written request, and such Holder or Holders have
offered reasonable indemnity, to the Trustee to institute such proceeding as
trustee, and (iii) the Trustee has failed to institute such proceeding, and has
not received from the Holders of a majority in aggregate principal amount of the
Outstanding Debt Securities of that series a direction inconsistent with such
request, within 60 days after such notice, request, and offer. (Section 507).
However, such limitations do not apply to a suit instituted by a Holder of a
Debt Security for the enforcement of payment of the principal of or any premium
or interest on such Debt Security on or after the applicable due date specified
in such Debt Security. (Section 508).
 
     The Company will be required to furnish to the Trustee annually a statement
by certain of its officers as to whether or not the Company, to their knowledge,
is in default in the performance or observance of any of the terms, provisions,
and conditions of the Indenture and, if so, specifying all such known defaults.
(Section 1004).
 
     If a default occurs under the Indenture with respect to Debt Securities of
any series, the Trustee shall give the Holders of Securities of such series
notice of such default as required by the Trust Indenture Act, provided that in
the case of a default described in clause (d) in the first paragraph under
"Events of Default" herein, no such notice to Holders shall be given until at
least 30 days after the occurrence of such default.
 
MODIFICATION AND WAIVER
 
     Modifications and amendments of the Indenture may be made by the Company
and the Trustee at any time and from time to time without the consent of the
Holders of any of the Debt Securities in certain limited cases. (Section 901).
In addition, modifications and amendments of the Indenture may be made by the
Company and the Trustee with the consent of the Holders of not less than a
majority in aggregate principal amount of the Outstanding Debt Securities of
each series affected by such modification or amendment; provided, however, that
no such modification or amendment may, without the consent of the Holder of each
Outstanding Debt Security affected thereby, (a) change the Stated Maturity of
the principal of, or any installment of principal of or interest on, any Debt
Security, (b) reduce the principal amount of, or any premium or interest on, any
Debt Security, (c) reduce the amount of principal of an Original Issue Discount
Security or any other Debt Security payable upon acceleration of the Maturity
thereof, (d) change the place or currency of payment of principal of, or any
premium or interest on, any Debt Security, (e) impair the right to institute
suit for the enforcement of any payment on or with respect to any Debt Security,
(f) reduce the percentage in principal amount of Outstanding Debt Securities of
any series, the consent of whose Holders is required for modification or
amendment of the Indenture, reduce the percentage in principal amount of
Outstanding Debt Securities of any series necessary for waiver of compliance
with certain provisions of the Indenture or for waiver of certain defaults, or
modify such provisions with respect to modification and waiver. (Section 902).
 
                                       39
<PAGE>   42
 
     The Holders of not less than a majority in aggregate principal amount of
the Outstanding Debt Securities of any series may waive compliance by the
Company with certain restrictive provisions of the Indenture. (Section 1008).
The Holders of a majority in principal amount of the Outstanding Debt Securities
of any series may waive any past default under the Indenture with respect to
such series, except a default in the payment of principal, premium, or interest
and certain covenants and provisions of the Indenture which cannot be amended
without the consent of the Holder of each Outstanding Debt Security of such
series affected. (Section 513).
 
     The Indenture provides that in determining whether the Holders of the
requisite principal amount of the Outstanding Debt Securities have given or
taken any request, demand, authorization, direction, notice, consent, waiver, or
other action under the Indenture as of any date, (i) the principal amount of an
Original Issue Discount Security that will be deemed to be Outstanding will be
the amount of the principal thereof that would be due and payable as of such
date upon acceleration of the Maturity thereof to such date, (ii) if, as of such
date, the principal amount payable at the Stated Maturity of a Debt Security is
not determinable (for example, because it is based on an index), the principal
amount of such Debt Security deemed to be Outstanding as of such date will be an
amount determined in the manner prescribed for such Debt Security, and (iii) the
principal amount of a Debt Security denominated in one or more foreign
currencies or currency units that will be deemed to be Outstanding will be the
U.S. dollar equivalent, determined as of such date in the manner prescribed for
such Debt Security, of the principal amount of such Debt Security (or, in the
case of a Debt Security described in clause (i) or (ii) above, of the amount
described in such clause). Certain Debt Securities, including those for whose
payment or redemption money has been deposited or set aside in trust for the
Holders and those that have been fully defeased pursuant to Section 1302 of the
Indenture, will not be deemed to be Outstanding. (Section 101).
 
     Except in certain limited circumstances, the Company will be entitled to
set any day as a record date for the purpose of determining the Holders of
Outstanding Debt Securities of any series entitled to give or take any request,
demand, authorization, direction, notice, consent, waiver, or other action under
the Indenture, in the manner and subject to the limitations provided in the
Indenture. In certain limited circumstances, the Trustee will be entitled to set
a record date for action by Holders. If a record date is set for any action to
be taken by Holders of a particular series, such action may be taken only by
persons who are Holders of Outstanding Debt Securities of that series on the
record date. To be effective, such action must be taken by Holders of the
requisite principal amount of such Debt Securities within a specified period
following the record date. For any particular record date, this period will be
180 days or such other shorter period as may be specified by the Company (or the
Trustee, if it sets the record date), and may be shortened or lengthened (but
not beyond 180 days) from time to time. (Section 104).
 
DEFEASANCE AND COVENANT DEFEASANCE
 
     The provisions of Section 1302, relating to defeasance and discharge of
indebtedness, and Section 1303, relating to defeasance of certain restrictive
covenants in the Indenture, will apply to the Debentures.
 
     Defeasance and Discharge.  Pursuant to Section 1302, the Company will be
discharged from all its obligations with respect to the Debentures (except for
certain obligations to exchange or register the transfer of Debentures, to
replace stolen, lost, or mutilated Debentures, to maintain paying agencies, and
to hold moneys for payment in trust) upon satisfaction of certain conditions,
including the deposit in trust for the benefit of the Holders of Debentures of
money or U.S. Government Obligations, or both, which, through the payment of
principal and interest in respect thereof in accordance with their terms, will
provide money in an amount sufficient to pay the principal of and any premium
and interest on the Debentures on the respective Stated Maturities or on any
Redemption Date established for the Debentures in accordance with the terms of
the Indenture and such Debentures. Such defeasance or discharge may occur only
if, among other things, the Company has delivered to the Trustee an Opinion of
Counsel to the effect that the Company has received from, or there has been
published by, the Internal Revenue Service a ruling, or there has been a change
in tax law, in either case to the effect that Holders of the Debentures will not
recognize gain or loss for federal income tax purposes as a result of such
deposit, defeasance, and discharge and will be subject to federal
 
                                       40
<PAGE>   43
 
income tax on the same amount, in the same manner, and at the same times as
would have been the case if such deposit, defeasance, and discharge were not to
occur. (Sections 1302 and 1304).
 
     Defeasance of Certain Covenants.  Pursuant to Section 1303, if certain
conditions are satisfied, the Company may omit to comply with certain
restrictive covenants in the Indenture, and the occurrence of certain Events of
Default, which are described above in clause (d) (with respect to such
restrictive covenants) under "Events of Default," will be deemed not to be or
result in an Event of Default and the provisions of Article Fourteen relating to
subordination will cease to be effective, in each case with respect to the
Debentures. The Company, in order to exercise such option, will be required to
deposit, in trust for the benefit of the Holders of the Debentures, money or
U.S. Government Obligations, or both, which, through the payment of principal
and interest in respect thereof in accordance with their terms, will provide
money in an amount sufficient to pay the principal of and any premium and
interest on the Debentures on the respective Stated Maturities or on any
Redemption Dates established for the Debentures in accordance with the terms of
the Indenture and the Debentures. The Company will also be required, among other
things, to deliver to the Trustee an Opinion of Counsel to the effect that
Holders of the Debentures will not recognize gain or loss for federal income tax
purposes as a result of such deposit and defeasance of certain obligations and
will be subject to federal income tax on the same amount, in the same manner,
and at the same times as would have been the case if such deposit and defeasance
were not to occur. In the event the Company exercised this option with respect
to the Debentures and the Debentures were declared due and payable because of
the occurrence of any Event of Default, the amount of money and U.S. Government
Obligations so deposited in trust would be sufficient to pay amounts due on the
Debentures at the time of their respective Stated Maturities, but may not be
sufficient to pay amounts due on the Debentures upon any acceleration resulting
from such Event of Default. In such case, the Company would remain liable for
such payments. (Sections 1303 and 1304).
 
SATISFACTION AND DISCHARGE
 
     The Indenture will also be deemed to be satisfied and discharged, except as
to certain limited provisions, as to Debentures that have become due and payable
or will become due and payable at their Stated Maturity within one year from the
date of determination or are to be called for redemption within one year under
arrangements satisfactory to the Trustee, but only if the Company deposits money
in an amount sufficient to pay the entire principal, premium, and interest to
the date of deposit (as to Debentures that have become due and payable) or to
the Stated Maturity or Redemption Date, as the case may be, and certain other
conditions are satisfied. (Section 401). See also "Defeasance and Covenant
Defeasance."
 
NOTICES
 
     Notices to Holders of Debentures will be given by mail to the addresses of
such Holders as they may appear in the Security Register. (Sections 101 and
106).
 
TITLE
 
     The Company, the Trustee, and any agent of the Company or the Trustee may
treat the Person in whose name a Debenture is registered as the absolute owner
thereof (whether or not such an Debenture may be overdue) for the purpose of
making payment and for all other purposes. (Section 308).
 
GOVERNING LAW
 
     The Indenture and the Debt Securities will be governed by, and construed in
accordance with, the law of the State of Arizona (Section 112).
 
REGARDING THE TRUSTEE
 
     The Trustee under the Indenture is Harris Trust and Savings Bank. The
Company maintains normal banking arrangements with the Trustee, which include
the use of an affiliated company, Harris Trust Company of California, as the
transfer agent for the Common Stock.
 
                                       41
<PAGE>   44
 
                          DESCRIPTION OF CAPITAL STOCK
 
     The Company is a Delaware corporation and its affairs are governed by its
Certificate of incorporation and Bylaws and the Delaware General Corporation
Law. The following description of the Company's capital stock, which is complete
in all material respects, is qualified in its entirety by reference to the
provisions of the Company's Certificate of Incorporation and Bylaws, as amended.
 
     The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, par value $.001 per share, and 10,000,000 shares of Preferred
Stock, par value $.001 per share. As of November 18, 1998, approximately
16,070,000 shares of Common Stock were issued and outstanding. As of November
18, 1998, there were no issued and outstanding shares of Preferred Stock. As of
November 18, 1998, the Company's officers and directors beneficially owned
approximately 35% of the outstanding Shares of the Company's Common Stock, with
Mr. Ernest Garcia II, the Company's Chairman of the Board and Chief Executive
Officer, beneficially owning approximately 29%. The Company's executive officers
and directors have advised the Company that they do not intend to participate in
the Exchange Offer. Assuming the maximum number of Shares is exchanged in the
Exchange Offer, the Company's officers and directors will beneficially own
approximately 41% of the Company's outstanding shares of Common Stock (with Mr.
Garcia owning approximately 35%).
 
COMMON STOCK
 
     Holders of Common Stock are entitled to one vote for each share held of
record on all matters on which stockholders are entitled to vote. Holders of
Common Stock do not have cumulative voting rights, and therefore holders of a
majority of the shares voting for the election of directors can elect all of the
directors. In such event, the holders of the remaining shares will not be able
to elect any directors.
 
     Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The Company does not anticipate paying cash dividends in the
foreseeable future. See "Dividend Policy." In the event of liquidation,
dissolution, or winding up of the Company, the holders of Common Stock are
entitled to share ratably in any corporate assets remaining after payment of all
debts, subject to any preferential rights of any outstanding Preferred Stock.
 
     Holders of Common Stock have no preemptive, conversion, or redemption
rights and are not subject to further calls or assessments by the Company. All
of the outstanding shares of Common Stock are validly issued, fully paid, and
nonassessable.
 
PREFERRED STOCK
 
     The Board of Directors of the Company has the authority, without further
action by the Company's stockholders, to issue from time to time up to
10,000,000 shares of Preferred Stock in one or more series and to fix the number
of shares, designations, voting powers, preferences, optional and other special
rights, and the restrictions or qualifications thereof. The rights, preferences,
privileges, and restrictions or qualifications of different series of Preferred
Stock may differ with respect to dividend rates, amounts payable on liquidation,
voting rights, conversion rights, redemption provisions, sinking fund
provisions, and other matters. The issuance of Preferred Stock could: (i)
decrease the amount of earnings and assets available for distribution to holders
of Common Stock; (ii) adversely affect the rights and powers, including voting
rights, of holders of Common Stock; and (iii) have the effect of delaying,
deferring, or preventing a change in control of the Company.
 
                                       42
<PAGE>   45
 
             CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
 
GENERAL
 
     The following discussion summarizes certain United States federal income
tax consequences associated with the Exchange Offer and the ownership of
Debentures. The discussion is intended only as a summary and does not purport to
be a complete analysis of all potential tax considerations that may be relevant
in connection with the Exchange Offer. The discussion is based upon the Internal
Revenue Code of 1986, as amended to the date hereof (the "Code"), existing and
proposed United States Treasury regulations promulgated thereunder, current
administrative pronouncements and judicial decisions, changes to any of which
could materially affect the continued validity of the discussion herein and
could be made on a retroactive basis. No rulings will be sought from the
Internal Revenue Service with respect to the treatment of the Exchange Offer and
no assurance may be given that contrary positions may not be taken by the
Internal Revenue Service or by a court of law.
 
SCOPE
 
     The discussion relating to stockholders who participate in the Exchange
Offer addresses only stockholders who are "United States persons" and who hold
Shares as capital assets within the meaning of Section 1221 of the Code, and
does not address all of the tax consequences that may be relevant to particular
stockholders in light of their personal circumstances, or to certain types of
stockholders (such as certain financial institutions, dealers in securities or
commodities, insurance companies, tax-exempt organizations, persons who acquired
Shares as compensation and persons who hold Shares as a position in a "straddle"
or as a part of a "hedging" or "conversion" transaction for United States
federal income tax purposes). In the context of the discussion pertaining to the
Debentures, the discussion describes certain tax consequences applicable only to
original holders of the Debentures. The discussion does not include any
description of the tax laws of any state, local, or non-U.S. government that may
be applicable to a particular stockholder. As used herein, a "United States
person" means (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States, any State or any political subdivision thereof, (iii)
an estate the income of which is subject to United States federal income
taxation regardless of its source, or (iv) a trust if a court within the United
States is able to exercise primary supervision of the administration of the
trust and one or more United States persons have the authority to control all
substantial decisions of the trust.
 
     THE SUMMARY DISCUSSION SET FORTH HEREIN IS INCLUDED FOR GENERAL INFORMATION
ONLY. THE TAX CONSEQUENCES OF AN EXCHANGE OF SHARES FOR DEBENTURES PURSUANT TO
THE EXCHANGE OFFER MAY VARY DEPENDING UPON, AMONG OTHER THINGS, THE PARTICULAR
SITUATION AND CIRCUMSTANCES OF THE TENDERING STOCKHOLDER. ALL STOCKHOLDERS ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE SPECIFIC FEDERAL,
STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF EXCHANGES MADE BY THEM
PURSUANT TO THE EXCHANGE OFFER, INCLUDING THE EFFECT OF THE STOCK OWNERSHIP
ATTRIBUTION RULES DESCRIBED HEREIN.
 
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO TENDERING STOCKHOLDERS
 
  Characterization of the Exchange
 
     An exchange of Shares for Debentures by a stockholder pursuant to the
Exchange Offer will be a taxable transaction for United States federal income
tax purposes. The United States federal income tax consequences of such exchange
to a Stockholder may vary depending upon the Stockholder's particular facts and
circumstances. Depending on such facts and circumstances, the exchange will be
treated as either a sale or a distribution for United States federal income tax
purposes.
 
     Under Section 302 of the Code, an exchange of Shares for Debentures
pursuant to the Exchange Offer will be treated as a "sale or exchange" of such
Shares for United States federal income tax purposes (rather
 
                                       43
<PAGE>   46
 
than as a deemed distribution by the Company with respect to Shares continued to
be held (or deemed to be held) by the tendering stockholder) if the receipt of
Debentures upon such exchange (i) is "substantially disproportionate" with
respect to the stockholder, (ii) results in a "complete termination" of the
stockholder's interest in the Company, or (iii) is "not essentially equivalent
to a dividend" with respect to the stockholder. These tests (the "Section 302
tests") are explained more fully below. See "Section 302 Tests" below.
 
     If any of the Section 302 tests is satisfied and the exchange of the
tendered Shares is, therefore, treated as a "sale or exchange" of such Shares
for United States federal income tax purposes, the tendering stockholder should
recognize capital gain or loss equal to the difference between (a) the sum of
the cash received (if any) plus the "issue price" of the Debentures and (b) the
stockholder's adjusted tax basis in the Shares exchanged pursuant to the
Exchange Offer. As set forth below under the caption "Issue Price of Debentures
Defined," the Company believes that the "issue price" of the Debentures should
be the issue price of the Debentures issued in the Original Exchange Offer
($5.0667). Such capital gain or loss will generally be long-term capital gain or
loss if the tendering stockholder held the tendered Shares for more than 12
months. Under current law, any such gain or loss recognized by individuals,
trusts or estates will be subject to a maximum 20 percent tax rate if the Shares
have been held for more than 12 months. Particularly if the fair market value of
the Shares as of the date of the exchange contemplated by this Exchange Offer
exceeds $5.0667, there is a risk that the Internal Revenue Service may assert
that a stockholder should recognize capital gain equal to the difference between
(a) the sum of the cash received (if any) plus the fair market value of the
Shares at the time of the exchange and (b) the stockholder's adjusted basis in
the Shares. See "Issue Price of Debentures Defined."
 
     If none of the Section 302 tests is satisfied, then, to the extent of the
Company's current and accumulated earnings and profits (as determined for
federal income tax purposes), the tendering stockholder will generally be
treated as having received a dividend taxable as ordinary income in an amount
equal to the sum of the cash plus the fair market value of the Debentures
received by the stockholder pursuant to the Exchange Offer (without reduction
for the adjusted tax basis of the Shares tendered pursuant to the Exchange
Offer), no loss will be recognized, and (subject to reduction as described below
for corporate stockholders eligible for the dividends-received deduction) the
tendering stockholder's adjusted tax basis in the Shares exchanged pursuant to
the Exchange Offer will be added to such stockholder's adjusted tax basis in the
stockholder's remaining Shares, if any. If a tendering stockholder does not
retain any Shares, such stockholder may lose tax basis entirely. If the exchange
of Shares by a stockholder is not treated as a sale or exchange for federal
income tax purposes, the amount (if any) by which the sum of the cash plus the
fair market value of the Debentures exceeds the current or accumulated earnings
and profits of the Company (as determined for federal income tax purposes) will
be treated, first, as a nontaxable return of capital to the extent of the
stockholder's basis in the Shares, and thereafter, as taxable capital gain.
 
  Constructive Ownership of Stock
 
     In determining whether any of the Section 302 tests is satisfied, a
stockholder must take into account not only the Shares which are actually owned
by the stockholder, but also Shares which are constructively owned by the
stockholder by reason of the attribution rules contained in Section 318 of the
Code. Under Section 318 of the Code, a stockholder may be treated as owning (i)
Shares that are actually owned, and in some cases constructively owned, by
certain related individuals or entities in which the stockholder owns an
interest, or, in the case of stockholders that are entities, by certain
individuals or entities that own an interest in the stockholder and (ii) Shares
which the stockholder has the right to acquire by exercise of an option or a
conversion right contained in another instrument held by the stockholder.
 
  Section 302 Tests
 
     One of the following tests must be satisfied in order for the exchange of
Shares pursuant to the Exchange Offer to be treated as a sale or exchange for
federal income tax purposes.
 
                                       44
<PAGE>   47
 
     a. Substantially Disproportionate Test.  The exchange of Shares for
        Debentures by a stockholder will be "substantially disproportionate" if
        the percentage of the outstanding Shares actually and constructively
        owned by the stockholder immediately following the exchange of Shares
        pursuant to the Exchange Offer (treating as not being outstanding all
        Shares exchanged pursuant to the Exchange Offer) is less than 80% of the
        percentage of the outstanding Shares actually and constructively owned
        by such stockholder immediately before the exchange of Shares pursuant
        to the Exchange Offer (treating as outstanding all Shares exchanged
        pursuant to the Exchange Offer). Stockholders should consult their own
        tax advisors with respect to the application of the "substantially
        disproportionate" test to their particular situation and circumstances.
 
     b. Complete Termination Test.  The exchange of Shares for Debentures will
        be a "complete termination" of a stockholder's interest in the Company
        if either (i) all of the Shares actually and constructively owned by the
        stockholder are exchanged pursuant to the Exchange Offer or (ii) all of
        the Shares actually owned by the stockholder are exchanged pursuant to
        the Exchange Offer and, with respect to the Shares constructively owned
        by the stockholder which are not exchanged pursuant to the Exchange
        Offer, the stockholder is eligible to waive (and effectively waives)
        constructive ownership of all such Shares under procedures described in
        Section 302(c) of the Code. Stockholders considering making such a
        waiver should do so in consultation with their own tax advisors.
 
     c. Not Essentially Equivalent to a Dividend Test.  Even if the exchange of
        Shares for Debentures fails to result in satisfaction of the
        "substantially disproportionate" test and the "complete termination"
        test, a stockholder may nevertheless satisfy the "not essentially
        equivalent to a dividend" test if the stockholder's exchange of Shares
        pursuant to the Exchange Offer results in a "meaningful reduction" in
        the stockholder's proportionate interest in the Company. Whether the
        receipt of Debentures by a stockholder who exchanges Shares pursuant to
        the Exchange Offer will be "not essentially equivalent to a dividend"
        will depend upon the stockholder's particular facts and circumstances.
        The Internal Revenue Service has indicated in published revenue rulings
        that even a small reduction in the proportionate interest of a small
        minority stockholder in a publicly held corporation who exercises no
        control over corporate affairs may constitute such a "meaningful
        reduction." The Internal Revenue Service held, for example, in Rev. Rul.
        76-385, 1976-2 C.B. 92, that a reduction in the percentage ownership
        interest of a stockholder in a publicly held corporation from .0001118%
        to .0001081% (a reduction of only 3.3% in the stockholder's prior
        percentage ownership interest) would constitute a "meaningful
        reduction." Stockholders expecting to rely on the "not essentially
        equivalent to a dividend" test should consult their own tax advisors as
        to its application to their particular situation and circumstances.
 
     The Company cannot predict whether or to what extent the Exchange Offer
will be oversubscribed. If the Exchange Offer is oversubscribed, proration of
the tenders pursuant to the Exchange Offer will cause the Company to accept
fewer Shares than are tendered. Therefore, a stockholder can be given no
assurance that a sufficient number of such stockholder's Shares will be
exchanged pursuant to the Exchange Offer to ensure that such exchange will
satisfy one or more of the Section 302 tests and be treated as a sale, rather
than as a dividend, for United States federal income tax purposes pursuant to
the rules discussed above.
 
     Contemporaneous dispositions or acquisitions of Shares by a stockholder or
related individuals or entities may be deemed to be part of a single integrated
transaction which will be taken into account in determining whether any of the
Section 302 tests has been satisfied in connection with Shares exchanged
pursuant to the Exchange Offer. Thus, for example, if a stockholder sells Shares
to persons other than the Company at or about the time such stockholder also
exchanges Shares pursuant to the Exchange Offer, and the various sales effected
by the stockholder are part of an overall plan to reduce or terminate such
stockholder's proportionate interest in the Company, then the sales to persons
other than the Company may, for United States federal income tax purposes, be
integrated with the stockholder's exchange of Shares pursuant to the Exchange
Offer and, if integrated, should be taken into account in determining whether
the holder satisfies any of the three tests described above.
 
                                       45
<PAGE>   48
 
     STOCKHOLDERS CONTEMPLATING AN EXCHANGE OF DEBENTURES FOR SHARES ARE URGED
TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE SECTION 302 TESTS, INCLUDING THE
EFFECT OF THE ATTRIBUTION RULES AND THE POSSIBILITY THAT A SUBSTANTIALLY
CONTEMPORANEOUS SALE OF SHARES TO PERSONS OTHER THAN THE COMPANY MAY ASSIST IN
SATISFYING ONE OR MORE OF THE SECTION 302 TESTS, AS WELL AS THE SPECIFIC
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF EXCHANGES MADE BY
THEM PURSUANT TO THE EXCHANGE OFFER.
 
  Corporate Stockholder Dividend Treatment
 
     If an exchange of Shares pursuant to the Exchange Offer by a corporate
stockholder is treated as a dividend, the corporate stockholder (other than an S
corporation) may be entitled to claim the dividends-received deduction
(generally 70%, but 80% under certain circumstances) with respect to the gross
dividend under Section 243 of the Code, subject to applicable limitations. With
respect to specific limitations on claiming the dividends-received deduction,
corporate stockholders should consider the effect of Section 246(c) of the Code,
which disallows the dividends-received deduction with respect to any dividend on
any share of stock that is held for 45 days or less during the 90-day period
beginning on the date which is 45 days before the date on which such share
becomes ex-dividend with respect to such dividend. For this purpose, the length
of time a taxpayer is deemed to have held stock may be reduced by periods during
which the taxpayer's risk of loss with respect to the stock is diminished by
reason of the existence of certain options or other hedging transactions.
Additionally, corporate stockholders that have incurred indebtedness directly
attributable to an investment in Shares should consider the effect of Section
246A of the Code which reduces the dividends-received deduction by a percentage
generally computed based on the amount of such indebtedness and the
stockholder's total adjusted tax basis in the Shares.
 
     In addition, any amount received by a corporate stockholder pursuant to the
Exchange Offer that is treated as a dividend may constitute an "extraordinary
dividend" under Section 1059 of the Code. Accordingly, a corporate stockholder
may be required under Section 1059(a) of the Code to reduce its adjusted tax
basis (but not below zero) in its Shares by the non-taxed portion of the
extraordinary dividend (i.e. the portion of the dividend for which a deduction
is allowed), and, if such portion exceeds the stockholder's adjusted tax basis
in its Shares, to treat the excess as gain from the sale of such Shares in the
year in which the dividend is received. These basis reductions and gain
recognition rules would be applied by taking account only the stockholder's
adjusted tax basis in the Shares that were exchanged, without regard to other
Shares that the stockholder may continue to own. CORPORATE STOCKHOLDERS SHOULD
CONSULT THEIR OWN TAX ADVISORS AS TO THE APPLICATION OF SECTION 1059 OF THE CODE
TO THE EXCHANGE OFFER AND ANY DIVIDENDS WHICH MAY BE TREATED AS PAID WITH
RESPECT TO SHARES EXCHANGED PURSUANT TO THE EXCHANGE OFFER.
 
  "Issue Price" of Debentures Defined
 
     Because of the identity in the terms of the Debentures issued in the
Original Exchange Offer and the Debentures issued in this Exchange Offer and
because of the close proximity in time of the Original Exchange Offer and this
Exchange Offer, the Company believes that all of the Debentures issued in the
Original Exchange Offer and this Exchange Offer are part of the same "issue"
within the meaning of the regulations issued under Sections 1271-1275 of the
Code. As a consequence, so long as the Shares continue to be traded on an
established securities market throughout the 60 day period ending 30 days after
the Expiration Time, as is likely, the "issue price" of the Debentures issued in
this Exchange Offer should be the same as the "issue price" of the Debentures
issued in the Original Exchange Offer. Hence, the "issue price" of the
Debentures should be the fair market value of the Shares exchanged therefor as
of the time of the Original Exchange Offer ($5.0667). There is a risk that the
Internal Revenue Service may assert that the Debentures issued in this Exchange
Offer are not part of the same "issue" as those issued in connection with the
Original Exchange Offer. If the Internal Revenue Service were to prevail with
respect to such assertion, the "issue price" of the Debentures issued in this
Exchange Offer would be determined as follows. If the Shares were traded on an
 
                                       46
<PAGE>   49
 
established securities market throughout the 60 day period ending 30 days after
the Expiration Time, the "issue price" of the Debentures would be the fair
market value of the Shares exchanged therefor as of the date of the exchange
contemplated by this Exchange Offer. If the Shares were not traded on an
established securities market within the applicable period, the "issue price" of
the Debentures would be their "stated redemption price at maturity" (generally,
the face value of the Debentures) unless either (i) the Debentures did not bear
"adequate stated interest" within the meaning of Section 1274 of the Code, which
is unlikely, or (ii) also unlikely, the Debentures were issued in a so-called
"potentially abusive situation" as defined in the Treasury Regulations under
Section 1274 of the Code, in which case the "issue price" of the Debentures
would be the present value of all payments to be made on the Debenture,
discounted at the applicable federal rate.
 
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO PROSPECTIVE HOLDERS OF DEBENTURES
 
  Interest on the Debentures -- General
 
     With respect to stockholders who exchange Shares for Debentures in the
Exchange Offer, interest on the Debentures will, except as provided below (See
"Original Issue Discount on Debentures" and "Taxation of Original Issue
Discount"), be taxable as ordinary interest income at the time such amounts are
accrued or received in accordance with the holder's method of accounting for
United States federal income tax purposes. Holders of Debentures will be
credited with interest from October 23, 1998.
 
  Original Issue Discount on Debentures
 
     If the "stated redemption price at maturity" of the Debentures exceeds the
"issue price" of the Debentures by more than a de minimis amount (0.25% of the
"stated redemption price at maturity" multiplied by the number of years to
maturity), the Debentures will be treated as having original issue discount
("OID") to the extent of such excess.
 
     The "stated redemption price at maturity" of the Debentures will equal the
total of all payments under the Debentures, other than payments of "qualified
stated interest." "Qualified stated interest" generally is stated interest that
is unconditionally payable in cash or other property (other than an additional
debt instrument of the issuer) at least annually at a single fixed rate.
 
     The "issue price" of the Debentures is defined generally above under the
caption "Issue Price of Debentures Defined" and should equal the fair market
value of the Shares as of the time of the Original Exchange Offer ($5.0667). On
the other hand, it is possible that in the context of the receipt of Debentures
by a stockholder in a transaction treated as other than a sale or exchange for
federal income tax purposes (See "Certain Federal Income Tax Consequences to
Tendering Stockholders" -- "Characterization of the Exchange"), the "issue
price" of the Debentures for purposes of computing OID could equal the face
value of the Debentures. Such a result would produce a divergence in the "issue
price" of the Debentures for purposes of computing OID based on the status of
the exchange of Shares for Debentures as either a sale or exchange or a
distribution for federal income tax purposes. Because such a result appears
anomalous and would generate substantial administrative difficulties, the
Company intends to treat the "issue price" of the Debentures in all cases as the
fair market value of the Shares as of the time of the Original Exchange Offer so
long as the Shares continue to be traded on an established securities market.
See "Issue Price of Debentures Defined."
 
     The "stated redemption price at maturity" of the Debentures should be $6.50
for each Share tendered by a stockholder. This amount exceeds the $5.0667
intended "issue price" of the Debentures. Accordingly, the Debentures will have
significant OID. If the "issue price" of the Debentures is held to be greater
than $5.0667, the amount of OID with respect to the Debentures would be smaller.
 
  Taxation of Original Issue Discount on Debentures
 
     Each holder of a Debenture with OID will be required to include in gross
income an amount equal to the sum of the "daily portions" of the OID for all
days during the taxable year in which such holder holds or is deemed to hold the
Debenture regardless of the holder's method of accounting and even though the
cash to
 
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<PAGE>   50
 
which such income is attributable may not be received until the sale,
redemption, or maturity of the Debenture. The daily portions of OID required to
be included in a holder's gross income in a taxable year will be determined
under a constant yield method by allocating to each day during the taxable year
in which the holder holds or is deemed to hold the Debenture a pro rata portion
of the OID thereon which is attributable to the accrual period in which such day
is included. The amount of the OID attributable to each accrual period will be
the "adjusted issue price" of the Debenture at the beginning of such accrual
period multiplied by the "yield to maturity" of the Debenture (properly adjusted
for the length of the accrual period). The adjusted issue price of a Debenture
at the beginning of an accrual period will be the original issue price of the
Debenture plus the aggregate amount of OID that accrued in all prior accrual
periods, less any cash payments on the Debenture. The "yield to maturity" is the
discount rate that, when used in computing the present value of all principal
and interest payments to be made under the Debentures, produces an amount equal
to the "issue price" of the Debentures. The Company believes that purchasers of
all of the Debentures will be deemed to have held the Debentures since October
23, 1998 and will accrue OID from such date.
 
     The Company will cause to be furnished annually to the Internal Revenue
Service and to record holders of the Debentures information relating to the OID,
if any, accruing during the calendar year. Such information will be based on the
amount of OID that would have accrued to a holder who acquired the Debentures in
the Exchange Offer.
 
     If a stockholder receives Debentures in a transaction treated as other than
a sale or exchange for federal income tax purposes (See "Certain Federal Income
Tax Consequences to Tendering Stockholders" -- "Characterization of the
Exchange") and the fair market value of the Debentures exceeds the "issue price"
of the Debentures (generally, the trading value of the Shares (See "Issue Price
of Debentures Defined")), the stockholder could, in connection with the receipt
and holding of the Debentures, recognize ordinary income (excluding "qualified
stated interest") in an aggregate amount in excess of the face amount of the
Debentures received. In such case, the OID recognition would result in an
increase to the initial tax basis of the Debentures (See "Redemption or Sale of
Debentures" below) and could provide the stockholder with a taxable loss at the
time of the sale or redemption of the Debentures; however, such loss could be a
capital loss the deductibility of which may be limited under the Code. It is not
known whether the fair market value of the Debentures exceeds the "issue price"
of the Debentures. Alternatively, if the "issue price" of a Debenture received
in a transaction treated as other than a sale or exchange for federal income tax
purpose is the face value of such Debenture (See "Original Issue Discount on
Obligations"), any such taxable loss may not occur.
 
     BECAUSE THE RULES GOVERNING OID MAY REQUIRE HOLDERS OF DEBENTURES TO PAY
FEDERAL INCOME TAXES ON INCOME IN ADVANCE OF RECEIPT OF THE CASH ATTRIBUTABLE TO
SUCH INCOME, STOCKHOLDERS CONTEMPLATING AN EXCHANGE OF SHARES FOR DEBENTURES
PURSUANT TO THE EXCHANGE OFFER ARE URGED TO CONSULT THEIR OWN TAX ADVISORS. OID
WILL ACCRUE ON THE DEBENTURES FROM OCTOBER 23, 1998.
 
  Original Issue Discount -- Trading of Debentures
 
     Because of the identity in the terms of the Debentures issued in the
Original Exchange Offer and the Debentures issued in this Exchange Offer and
because of the close proximity in time of the Original Exchange Offer and this
Exchange Offer, the Company believes that all of the Debentures issued in the
Original Exchange Offer and this Exchange Offer are part of the same "issue"
within the meaning of the regulations issued under Sections 1271-1275 of the
Code. (See "Characterization of the Exchange" and "Issue Price of Debentures
Defined" above.) If all of the Debentures are treated as part of the same
"issue," the amount of OID with respect to the Debentures issued in this
Exchange Offer will be the same as the amount of OID with respect to the
Debentures issued in the Original Exchange Offer. The Company believes that as a
result of the identity in the amount of OID with respect to all Debentures and
as a consequence of other factors, all of the Debentures should trade
interchangeably, which could positively impact the development of a trading
market for the Debentures.
 
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<PAGE>   51
 
     There is, however, a risk that the Internal Revenue Service may assert that
the Debentures issued in this Exchange Offer are not part of the same "issue" as
those issued in connection with the Original Exchange Offer. If the Internal
Revenue Service were to prevail with respect to such assertion and if the value
of the Shares as of the time of this Exchange Offer differed from the value of
the Shares as of the time of the Original Exchange Offer, the amount of OID with
respect to the Debentures issued in this Exchange Offer would differ from the
amount of OID with respect to the Debentures issued in the Original Exchange
Offer. Because variations in the amount of OID with respect to specific
Debentures would be difficult or impossible to account for and maintain
administratively, the ability to trade the Debentures issued in this Exchange
Offer interchangeably with the Debentures issued in the Original Exchange Offer
could be adversely affected. Further, if there were variations in the amount of
OID and if the value of the Debentures at any time were less than the "issue
price" of either group of Debentures, prospective purchasers might prefer one
group of Debentures over another group because of perceived benefits in
acquiring Debentures with a smaller amount of OID than other Debentures, thereby
also potentially adversely impacting the ability of the Debentures to trade
interchangeably.
 
  Bond Premium
 
     If the "issue price" of a Debenture were determined to exceed its stated
principal amount, which is unlikely, the Debenture would be treated as having
been issued with amortizable bond premium, in which case a holder thereof would
be entitled to amortize such bond premium over the life of the Debenture if an
election under Section 171 of the Code is made or is already in effect. An
election under Section 171 of the Code is available only if the Debenture is
held as a capital asset. This election is revocable only with the consent of the
Internal Revenue Service and applies to all obligations owned or subsequently
acquired by the holder on or after the first day of the taxable year to which
the election applies. To the extent the excess is deducted as amortizable bond
premium, the holder's adjusted tax basis in the Debentures will be reduced. The
amortizable bond premium is treated as an offset to interest income on the
Debentures rather than as a separate deduction item.
 
  Redemption or Sale of Debentures
 
     Generally, any redemption or sale of the Debentures by a holder will result
in taxable gain or loss equal to the difference between the sum of the amount of
cash and the fair market value of the other property received (except to the
extent attributable to accrued but previously untaxed interest) and the holder's
adjusted basis in the Debentures. The initial tax basis of a holder's Debentures
will generally equal the excess of the "issue price" of the Debentures; however,
in the case of a stockholder who receives the Debentures in a transaction
treated as other than a sale or exchange, the initial tax basis of a holder's
Debentures will be the fair market value of the Debentures as of the time of the
exchange. A holder's initial tax basis in the Debentures will be increased by
any OID with respect to the Debenture included in the holder's income prior to
sale or redemption of the Debenture and will be reduced by the amount of any
amortizable bond premium applied against the holder's income prior to sale or
redemption of the Debenture and by any cash payments other than payments of
qualified stated interest.
 
     Except to the extent attributable to accrued but previously untaxed
interest, such gain or loss will generally be long-term capital gain or loss if
the holder's holding period for the Debentures exceeds twelve months and if the
Debenture is held as a capital asset by the holder. However, if for any reason
the "issue price" of a holder's Debenture exceeds the holder's adjusted tax
basis in the Debentures at the time of the issuance of the Debenture, which
appears unlikely in the present circumstances given the Company's intent with
respect to the computation of OID (See "Original Issue Discount on Debentures"
above), an additional portion of such gain will be ordinary in character. Thus,
for example, if the "issue price" of a Debenture issued in a transaction treated
as other than a sale or exchange for federal income tax purposes (i.e., a
dividend transaction) were the face value of the Debenture (See "Original Issue
Discount on Debentures" above) and the stockholder recognized dividend income in
an amount smaller than the face value of the Debentures, an additional portion
of the gain on disposition of the Debenture could be ordinary in character.
HOLDERS OF DEBENTURES CONTEMPLATING A SALE OF THE DEBENTURES ARE URGED TO
CONSULT
 
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<PAGE>   52
 
THEIR OWN TAX ADVISORS REGARDING THE TAX EFFECTS OF SUCH SALE PRIOR TO
CONSUMMATING THE SALE.
 
  Backup Withholding
 
     Backup withholding at a rate of 31% may apply to interest (including OID)
payments and the proceeds from a redemption of the Debentures unless the holder
(i) is a corporation or comes within certain other exempt categories and
demonstrates such fact or (ii) provides a correct taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with all applicable requirements of the backup withholding
rules. The backup withholding tax is not an additional tax and may be credited
against a holder's United States federal income tax liability provided that
correct information is provided to the Internal Revenue Service. Stockholders
may furnish their correct taxpayer identification number and otherwise comply
with the backup withholding rules by completing and returning the Substitute
Form W-9, included as a part of the Letter of Transmittal.
 
TAX CONSEQUENCES TO COMPANY
 
     The Company will recognize no gain or loss in connection with the
acquisition of Shares in exchange for Debentures.
 
                                       50