================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                 --------------
                                    FORM 10-K
(Mark One)
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
        SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended December 31, 1998.
                                       or
[  ]   TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
        SECURITIES EXCHANGE ACT OF 1934
                 For the transition period from    to    .

                         Commission File Number 0-20841
                            UGLY DUCKLING CORPORATION
             (Exact name of registrant as specified in its charter)

                     Delaware                   86-0721358
           (State or other jurisdiction of      (I.R.S. Employer
            incorporation or organization)      Identification No.)

         2525 E. Camelback Road, Suite 500,
                   Phoenix, Arizona             85016
       (Address of principal executive          (Zip Code)
        offices)

       (Registrant's telephone number, including area code) (602) 852-6600

           Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
                 Title of Class                    Name of each Exchange on which registered
                 --------------                    -----------------------------------------
<S>                                                <C>
Cumulative 12% Subordinated Debentures Due 2003    American Stock Exchange
</TABLE>
<TABLE>
<CAPTION>

           Securities registered pursuant to Section 12(g) of the Act:

                Title of Class         Name of each Exchange on which registered
                --------------         -----------------------------------------
       <S>                                   <C>
       Common Stock, $.001 par value         The Nasdaq Stock Market
</TABLE>

    Indicate  by check mark  whether  the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

    Indicate by check mark if disclosure of delinquent  filers  pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

    At March 15,  1999,  the  aggregate  market  value of common  stock  held by
non-affiliates of the registrant was approximately $60,652,000.

              Applicable Only to Registrants Involved in Bankruptcy
                  Proceedings During the Preceding Five Years:

    Indicate by check mark whether the  registrant  has filed all  documents and
reports  required  to be  filed by  Section  12,  13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court. Yes [ ] No [ ]

                   (Applicable Only to Corporate Registrants)

   Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of March 24, 1999: 14,948,000.

                       DOCUMENTS INCORPORATED BY REFERENCE

    Portions  of the Proxy  Statement  for the June 2, 1999  Annual  Meeting  of
Stockholders are incorporated by reference into Part III
================================================================================




                                       1
<PAGE>



                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                    Page
<S>              <C>                                                                                <C>
  PART I
      Item 1     Business........................................................................     3
      Item 2     Properties......................................................................    11
      Item 3     Legal Proceedings...............................................................    11
      Item 4     Submission Of Matters To A Vote Of Security Holders.............................    11
      Item 4A    Executive Officers Of The Registrant............................................    12
  PART II
      Item 5     Market For The Registrant's Common Equity Securities And Related
                 Stockholder Matters.............................................................    13
      Item 6     Selected Consolidated Financial Data............................................    14
      Item 7     Management's Discussion And Analysis Of Financial Condition And
                 Results Of Operations...........................................................    15
      Item 7A    Quantitative And Qualitative Disclosures About Market Risk......................    39
      Item 8     Consolidated Financial Statements And Supplementary Data........................    41
      Item 9     Changes In And Disagreements With Accountants On Accounting And
                 Financial Disclosures...........................................................    67
  PART III
      Item 10    Directors And Executive Officers Of The Registrant..............................    67
      Item 11    Executive Compensation..........................................................    67
      Item 12    Security Ownership Of Certain Beneficial Owners And Management..................    67
      Item 13    Certain Relationships And Related Transactions..................................    67
  PART IV
       Item 14    Exhibits, Consolidated Financial Statement Schedules, And Reports On
                  Form 8-K.......................................................................    68
  Signatures.....................................................................................    73
</TABLE>



                                       2
<PAGE>




                                     PART I

                               ITEM 1 -- BUSINESS

General

    We operate the largest  chain of buy here-pay  here car  dealerships  in the
United  States.  We sell and finance our used  vehicles to customers  within the
sub-prime segment of the used car market.  Our  customers  will  typically  have
limited credit histories,  low incomes or past credit problems.  At December 31,
1998, we operated 56 dealerships located in several large markets, including Los
Angeles, Phoenix, Dallas, San Antonio, Atlanta, and Tampa.

    In addition to our own dealership and financing operations, we also

   o  provide financing to other independent used car dealers through our Cygnet
         dealer program,
   o  service and collect  large  portfolios of  finance  receivables  owned  by
         others, and
   o  manage  selected   financial assets  that  we  acquire  from   financially
         distressed third parties.

    From 1994 through the first quarter of 1998, we maintained a national branch
office  network that acquired and serviced  retail  installment  contracts  from
numerous  independent third party dealers.  We discontinued  these operations in
1998.

    We  direct  your  attention  to  note  24  to  the  Consolidated   Financial
Statements, which begin at page 41, where we summarize the results of operations
of our business segments.

    Below is a summary of our businesses by segment:

    [OBJECT OMITTED - DESCRIBED IN FOLLOWING PARAGRAPH]


    The chart above shows Ugly Duckling with two operating divisions. Dealership
operations  is the first  division.  Dealership  operations  has three  distinct
segments.  Retail sales is its first segment.  This is the segment that operates
our chain of Ugly Duckling Car Sales  dealerships.  Portfolio and loan servicing
is the second segment of dealership operations.  This segment holds and services
the  loan  portfolios  originated  or  acquired  by our  dealership  operations.
Finally,  dealership  operations  has an  administration  segment that  provides
corporate administration to the division. Our non-dealership operations division
also contains three segments. The first non-dealership operations segment is the
bulk  purchasing/loan  servicing  segment.  In this  segment,  we  acquire  loan
portfolios from third parties and provide loan servicing for third parties.  The
second segment of  non-dealership  operations is the Cygnet dealer program under
which we provide  various  credit  facilities to  independent  used car dealers.
Finally, the non-dealership  operations also have an administration segment that
provides corporate administration to the non-dealership operations.  Lastly, the
chart  shows our  discontinued  operations,  which  contains  our branch  office
network that we closed in February  1998 and the loans we acquired  through that
network.

    We commenced  operations  through various  entities  beginning in 1989. Ugly
Duckling  Corporation was formed in 1992 and was  reincorporated  in Delaware in
1996.

Overview of Used Car Sales and Finance Industry

    Used Car  Sales.  Used car  retail  sales  typically  occur  through  either


                                       3
<PAGE>

manufacturer's  franchised  new car  dealerships  that sell used cars or through
independent  used car  dealerships.  The market for used car sales in the United
States is significant and has steadily increased over the past five years. There
are over 23,000 franchised and 63,000 independent used car dealership  locations
in the United States.

    We participate in the sub-prime  segment of the  independent  used car sales
and finance  market.  This segment is serviced  primarily  by buy here-pay  here
dealers that sell and finance the sale of used cars to sub-prime borrowers.  Buy
here-pay here dealers  typically offer their customers  certain  advantages over
more traditional financing sources, including:

   o  expanded credit opportunities;
   o  flexible  payment  terms,   including   prorating  customer  payments  due
         within one month into several smaller payments and scheduling  payments
         to coincide with a customer's paydays; and
   o  the ability to make payments  in person. This is an important  feature  to
         many  sub-prime  borrowers  who may not have  checking  accounts or are
         otherwise  unable to make  payments by the due date  through use of the
         mail because of the timing of paychecks.

    Used Car Financing.  The automobile  financing industry is the third-largest
consumer  finance  market in the country,  after  mortgage  debt and credit card
revolving debt. This industry is served by such  traditional  lending sources as
banks,  savings  and loans,  and  captive  finance  subsidiaries  of  automobile
manufacturers, as well as by independent finance companies and buy here-pay here
dealers.  In general,  the industry is categorized  according to the type of car
sold (new versus used) and the credit characteristics of the borrower.

    The industry  statistical  information  presented in this section is derived
from information  provided to the Company by CNW  Marketing/Research  of Bandon,
Oregon.

Company Dealership Operations

    We  commenced  dealership  operations  in 1992 with the  acquisition  of two
dealerships  in Arizona,  and have  expanded  aggressively  since then through a
combination of acquisitions and development of new stores.  Our most significant
growth occurred in 1997, when

   o  we acquired from Seminole  Finance, Inc. and related companies (Seminole),
         four dealerships  in Tampa/St. Petersburg  and a contract portfolio of
         approximately $31.1 million;
   o  we purchased  from E-Z Plan,  Inc. (E-Z Plan),  seven dealerships  in  San
         Antonio and a contract portfolio of approximately $24.3 million;
   o  we purchased  from Kars-Yes Holdings,  Inc. and related  companies (Kars),
         six dealerships in the Los Angeles market, two in the Miami market, two
         in the Atlanta market, and two in the Dallas market; and
   o  we opened  our first  used car dealership  in the Las Vegas market, opened
         two  additional  dealerships in the  Albuquerque  market and opened one
         additional   dealership  in  the  Phoenix  market.  We  also  closed  a
         dealership in Arizona.

    We continued our aggressive growth in 1998, adding 17 new dealerships in our
existing  markets.  We opened one  dealership in the  Albuquerque  market,  four
dealerships in the Atlanta market,  three dealerships in the Dallas market,  two
dealerships in the Los Angeles  market,  two  dealerships in the Phoenix market,
two  dealerships in the San Antonio market,  and three  dealerships in the Tampa
market. We also closed two dealerships in Miami and exited that market.

                                       4
<PAGE>

The following table summarizes the number of stores we had in operation by major
market for the three years ended December 31, 1998:
                       Number of Stores By
                              Market

<TABLE>
<CAPTION>
                                As of December 31,
                      -------------------------------------
                         1998          1997         1996
                      -----------    ---------    ---------
<S>                   <C>            <C>          <C>
Phoenix...........        9             7            5
San Antonio.......        9             7           --
Atlanta...........        9             5           --
Los Angeles.......        8             6           --
Tampa.............        8             5           --
Dallas............        6             3           --
Tucson............        3             3            3
Albuquerque.......        3             2           --
Las Vegas.........        1             1           --
Miami.............       --             2           --

                      ===========    =========    =========
                         56            41            8
                      ===========    =========    =========
</TABLE>


   Retail Car Sales.  We  distinguish  our dealership  operations  from those of
typical buy here-pay here dealers through our:

   o  network of multiple locations,
   o  upgraded facilities,
   o  larger inventories of used cars,
   o  centralized purchasing,
   o  advertising and marketing programs, and
   o  dedication to customer service.

    Our  dealerships  are  generally  located in high  visibility,  high traffic
commercial  areas, and tend to be newer and cleaner in appearance than other buy
here-pay  here  dealerships.  This helps  promote  our image as a  friendly  and
reputable  business.  We believe this,  coupled with our  widespread  brand name
recognition,  enables us to attract  customers who might otherwise visit another
buy here-pay here dealer.

    Our dealerships  generally  maintain an average  inventory of 50 to 150 used
cars and  feature a wide  selection  of makes and models  (with  ages  generally
ranging  from 3 to 7 years) and a range of sale  prices.  This allows us to meet
the tastes and budgets of a broad range of potential  customers.  We acquire our
inventory from new or late-model used car dealers,  used car  wholesalers,  used
car auctions, and customer trade-ins.  In making purchases, we take into account
each car's retail value and the costs of buying, reconditioning,  and delivering
the car for resale.  After purchase,  cars are generally delivered to one of our
nearby inspection centers,  where they are inspected and reconditioned for sale.
Upon inspection,  certain used cars do not meet our criteria for  reconditioning
either because it will cost too much to recondition  the car, or because the car
is in a condition too poor for us to recondition  and sell. In these  instances,
we promptly sell the car in the wholesale market. Although the supply and prices
of used cars are  subject to market  variance,  we do not  believe  that we will
encounter significant difficulty in maintaining the necessary inventory levels.

    Our average  sales price per car was $7,997 for the year ended  December 31,
1998  compared to $7,443 for the year ended  December 31, 1997 and $7,107 in the
year  ended   December  31,  1996.   We  typically   require  down  payments  of
approximately  5.0% to 15.0% of the  purchase  price  with  the  balance  of the
purchase price financed at fixed interest rates ranging from 21.0% to 29.9% over
periods  ranging  from 12 to 48 months.  We sell cars on an "as is"  basis,  and
require our customers to sign an agreement at the date of sale releasing us from
any obligation with respect to vehicle-related problems that subsequently occur.
See "Legal Proceedings."

    Used Car Financing.  We finance  substantially  all of the used cars that we
sell at our dealerships  through retail  installment  contracts,  under which we
provide the financing and service the  collection of loan  payments.  Subject to
the  discretion  of our  sales  managers,  potential  customers  must  meet  our
underwriting  guidelines  before we will agree to finance the purchase of a car.


                                       5
<PAGE>

In  connection  with each sale,  customers  are  required  to  complete a credit
application.  Our  employees  then analyze and verify the  customer  application
information,   which  contains  employment  and  residence   histories,   income
information,  references,  and other information regarding the customer's credit
history.

    Our credit  underwriting  process  takes  into  account  the  ability of our
managers to make sound judgments  regarding the extension of credit to sub-prime
borrowers  and to  personalize  financing  terms to meet the needs of individual
customers.  For example,  we may schedule contract payments to coincide with the
customer's paydays, whether weekly, biweekly, semi-monthly, or monthly.

    Dealership Operations Computer Systems. We recently completed converting our
chain of dealerships  and loan service centers to a single  integrated  computer
system.  The system  allows us to make the sale, service the loan, and track the
vehicle and related loan. Once the final sales contract is generated, the system
automatically  adds the loan to our loan servicing and collections  database and
records the sale and related loan in our accounting system. We use communication
networks  that  allow  us  to  service  large  volumes  of  contracts  from  our
centralized servicing facilities, while enabling the customer the flexibility to
make payments at any of our dealership locations. In addition, we have developed
comprehensive  databases and sophisticated  management  tools,  including static
pool analysis, to analyze customer payment history and contract performance, and
to monitor underwriting effectiveness.

    Advertising and Marketing.  We have a large advertising  budget. In general,
our advertising  campaigns emphasize our multiple  locations,  wide selection of
quality used cars, and ability to provide financing to most sub-prime borrowers.
We believe  that our  marketing  approach  creates  brand name  recognition  and
promotes  our  image  as a  professional,  yet  approachable,  business.  We use
television, radio, billboard, and print advertising to market our dealerships.

    A  primary  focus  of our  marketing  strategy  is our  ability  to  finance
consumers with poor credit histories. Consequently, we have initiated innovative
marketing  programs  designed  to  attract  sub-prime  borrowers,  assist  these
customers in establishing  good credit,  reward those customers who pay on time,
develop customer loyalty, and increase referral and repeat business. Among these
programs are:

   o  The Down Payment Back Program. This program  encourages  customers to make
        timely  payments on their contracts by allowing them to receive a refund
        of their  initial down payment at the end of the contract  term,  if all
        payments have been made by the scheduled due date.

   o  The Income Tax Refund Program. During the  first quarter  of each year, we
        offer  assistance  to customers in the  preparation  of their income tax
        returns,  including  forwarding  the  customers'  tax  information  to a
        designated preparer,  paying the preparation fee (in most states),  and,
        if they get a tax refund,  crediting the refund toward the required down
        payment.  This program enables customers to purchase cars without having
        to wait to receive their income tax refund.

   o  $250 Visa Card Program. This program  encourages customers  to make timely
        payments on their  contracts  by allowing  them to receive a Visa credit
        card with an initial credit limit of $250. This program offers otherwise
        unqualified  customers the chance to obtain the  convenience of a credit
        card and rebuild their credit records.

    We also operate a loan-by-phone program using our toll-free telephone number
of   1-800-THE-DUCK,   and  accept   credit   inquiries   on  our  web  site  at
www.uglyduckling.com. Credit inquiries received over the web are reviewed by our
employees, who then contact and schedule an appointment for the customers.

   Sales Personnel and Compensation. Each dealership is run by a general manager
who has responsibility for the operations of the dealership facility, including:

   o  profitability of the dealership,
   o  final approval of sales and contract originations,
   o  inventory maintenance,
   o  the appearance and condition of the facility, and
   o  the hiring, training, and performance of dealership employees.

    We also typically staff each  dealership with a sales manager,  an assistant
sales  manager,   three  customer  service   representatives,   five  to  twelve
salespersons, and two lot attendants.

                                       6
<PAGE>

    We train our  managers  to be  contract  underwriters.  They are paid a base
salary and may earn bonuses based upon the overall  performance  of the contract
portfolio   originated  at  their  dealership,   as  well  as  the  dealership's
profitability.  Sales persons are paid on a commission basis. However, each sale
must be underwritten and approved by a manager.

Monitoring and Collections

    One of our goals is to minimize  credit losses  through close  monitoring of
contracts  in our  portfolio.  When a car sale is  completed,  the  contract  is
automatically  added  to  our  loan  servicing  database.   Our  monitoring  and
collections staff then uses our collections  software to monitor the performance
of the  contracts.  See  "Management's  Discussion  and  Analysis  of  Financial
Conditions  and Results of Operations -- Risk Factors -- We are dependent on our
data  processing  platforms and other  technology.  Our computer  systems may be
subject to a Year 2000 date failure."

    The collections  software  provides us with, among other things,  up-to-date
activity  reports,  allowing prompt  identification  of customers whose accounts
have become  past due. In  accordance  with our  policy,  collections  personnel
contact a customer with a past due account  within three days of  delinquency to
inquire as to the reasons for the  delinquency  and to suggest ways in which the
customer can resolve the underlying problem. Our early detection of a customer's
delinquent  status,  as well as our  commitment  to working with our  customers,
allows us to  identify  and address  payment  problems  quickly,  and reduce the
chance of credit loss.  See  "Management's  Discussion and Analysis of Financial
Condition and Results of Operations -- Allowance for Credit Losses."

    If our efforts to work with a customer  are  unsuccessful  and the  customer
becomes seriously  delinquent,  we will take the necessary steps to minimize our
loan loss and protect our  collateral.  Frequently,  delinquent  customers  will
recognize their inability to honor their  contractual  obligations and will work
with us to coordinate  "voluntary  repossessions" of their cars. In other cases,
we hire independent  firms to repossess the vehicles.  After  repossession and a
statutorily  mandated  waiting period,  we typically sell the repossessed car in
the wholesale  market.  See  "Management's  Discussion and Analysis of Financial
Condition and Results of Operations -- Allowance for Credit Losses."

    Unlike  most  other  used  car  dealership  chains  or  automobile   finance
companies, we permit our customers to make payments on their contracts in person
at any of our  dealerships  or at  any of our  collection  facilities.  Payments
received  at our  dealerships  account  for a  significant  portion  of  monthly
contract receipts on the dealership portfolio.

Non-Dealership Operations

    Cygnet Dealer  Program.  Many  independent  used car dealers have difficulty
obtaining working capital from traditional  financing sources. As a result, they
are forced to sell the finance  receivables that they originate from the sale of
used cars at  significant  discounts  in order to  obtain  the  working  capital
necessary to operate their  businesses.  Most  financing  programs  available to
independent  used car dealers do not allow the dealer to service the loans sold.
Yet, we believe that dealers  prefer to service the loans they originate so they
can maintain contact with the customer to more effectively  collect payments and
generate referrals or repeat business.

    To capitalize on this  opportunity,  we developed the Cygnet dealer program,
which  provides  qualified  dealers  with  warehouse  purchase   facilities  and
revolving lines of credit primarily  secured by the dealers' finance  receivable
portfolios.  The dealer remains responsible for collection of finance receivable
payments and retains control of the customer relationship. The credit facilities
are for specified amounts and are subject to various collateral coverage ratios,
maximum advance rates, and performance measurements,  depending on the financial
condition of the dealer and the quality of the finance  receivables  originated.
As a  condition  to  providing  financing,  each  dealer is  required to satisfy
certain criteria to qualify for the program,  report collection activities to us
on a daily basis and provide us with periodic financial statements. In addition,
dealers  are  "audited"  by our audit  department  on a  periodic  basis.  As of
December 31, 1998, we had lending  relationships  with a total of 63 independent
dealers  in 18  states,  with  principal  balances  totaling  approximately  $41
million.

    The dealer collection  program is the primary product offered to independent
dealers under the Cygnet dealer program. Under this program, we purchase finance
receivables at a discount from qualified dealers. The dealer remains responsible
for the collection of the contract  payments and retains control of the customer
relationship.  We typically purchase finance receivable  contracts at 65% to 75%
of the  principal  balance  subject  to a maximum of 170% of the Kelly Blue Book
wholesale price of the underlying  collateral.  All cash collections,  including
regular monthly payments, payoffs and repurchases, are deposited directly by the


                                       7
<PAGE>

dealer into a bank account  that we maintain  and  control.  We keep all regular
monthly cash payments and payoffs,  and pay the dealer a servicing fee generally
equal to 20% to 25% of the regular monthly cash payments  collected.  Generally,
each dealer pays a  nonrefundable  initial  audit fee plus a processing  fee per
contract or provides a security  deposit.  The dealer is required to  repurchase
all  finance  receivable  contracts  that  are 45  days  past  due.  The  dealer
collection  program  is full  recourse  to the  dealer  and  typically  includes
personal guarantees by the principal owners of the dealership.

    We also offer a secured  revolving line of credit to qualified dealers under
the asset based loan version of the Cygnet dealer program.  We generally advance
up to 65% of the principal amount of eligible finance  receivables  subject to a
maximum  of 170% of the  Kelly  Blue  Book  wholesale  price  of the  underlying
collateral. We also charge an annual commitment fee of 1% to 2% of the available
line and interest on any amounts outstanding at the rate of prime plus 5% to 9%.
In addition, each dealer generally pays a nonrefundable initial audit fee plus a
processing  fee per  contract.  The  dealer is  responsible  for  collection  of
contract   payments  and  maintaining  the  customer   relationship.   All  cash
collections  are  deposited  directly  into a bank  account that we maintain and
control.  Finance  receivables that are 45 days delinquent are excluded from the
calculation of the amount  available under the line of credit.  If the exclusion
of delinquent  contracts causes the line to become over funded,  then the dealer
must  either  pay  down  the  line  or  assign  additional   qualifying  finance
receivables to us. Each line of credit is full recourse to the dealer, typically
with full guarantees by the principal owners of the dealership.

    Cygnet  dealer's net  investment in finance  receivables  purchased from two
third  party  dealers   totaled   approximately   $15.1   million   representing
approximately  34% of Cygnet  dealer's net finance  receivables  portfolio as of
December  31, 1998.  There were no other third party dealer loans that  exceeded
10% of Cygnet dealer's finance receivable portfolio as of December 31, 1998.

    Bulk Purchasing and Loan Servicing Operations.  In 1997 and 1998, we entered
into several large servicing and/or bulk purchasing transactions involving third
party dealer contract portfolios.  The most significant of these transactions is
our  involvement in the bankruptcy  proceedings  of First  Merchants  Acceptance
Corporation  ("FMAC")  described below. Our  non-dealership  operations  service
loans from  facilities  in  Nashville,  Tennessee,  Aurora,  Colorado and Plano,
Texas.   As  of  December  31,  1998,  our  loan  servicing   segment   employed
approximately  450  employees  and serviced  approximately  80,000 loans with an
aggregate principal balance of $587 million.

    Our  non-dealership  operations  use  separate  computer  systems  from  our
dealership  operations.  However,  our  collection  policies and  procedures for
non-dealership operations are generally the same as those used by our dealership
operations. See "Monitoring and Collections" above.

    The following describes certain aspects of our involvement in the bankruptcy
case of FMAC and in FMAC's approved plan of reorganization which were undertaken
through our bulk  purchasing  and loan servicing  operations.  FMAC emerged from
bankruptcy on April 1, 1998.

    Senior Bank Debt Claims.  On August 21, 1997, we purchased 78% of the senior
bank debt of FMAC for approximately $69 million, which represented a discount of
10% of the outstanding  principal amount of such debt. In addition, we agreed to
pay the  selling  banks  additional  consideration  up to the amount of this 10%
discount (or  approximately  $7.6 million) if FMAC makes cash payments or issues
notes at market rates to its unsecured creditors and equity holders in excess of
10% of their allowed  claims against FMAC. In connection  with the purchase,  we
also issued to the selling  banks  warrants to purchase up to 389,800  shares of
our common  stock at an exercise  price of $20.00 per share at any time  through
February 20, 2000. We subsequently purchased the remaining senior bank debt at a
5% discount.

    The contracts  securing the senior bank debt were then sold to a third party
(the "Contract  Purchaser") at a profit. We guaranteed to the Contract Purchaser
a specified  return on the contracts that it purchased.  Our maximum exposure on
this guarantee was approximately $8.0 million at December 31, 1998.  However, we
do not  believe  that we will  be  required  to make  any  payments  under  this
guarantee.  Consequently,  we have not  accrued  any  liability  related to this
guarantee as of December 31, 1998.  We recorded a gain in the fourth  quarter of
1997 of approximately $8.1 million ($5.0 million,  net of income taxes) from the
senior bank debt transaction.

    Once the  Contract  Purchaser  has  received  its  guaranteed  return on the
contracts,  we are entitled to additional  recoveries from the contracts up to a
specified amount. FMAC has guaranteed to us on a non-recourse basis our recovery


                                       8
<PAGE>

of  this  amount,   secured  by  the  residual   interests  and  certain  equity
certificates  in  FMAC's  securitization  transactions  (collectively,   the  "B
Pieces"). However, with certain exceptions, if we do not continue to service the
contracts sold to the Contract Purchaser,  the guaranteed amount will be limited
to $10 million.

    DIP Facility.  We have agreed to provide  debtor-in-possession  financing to
FMAC (the "DIP Facility"). As of December 31, 1998, our maximum commitment under
the DIP  Facility  was  reduced to $12.4  million,  of which  $12.2  million was
outstanding.  FMAC pays  interest on the DIP  Facility at 10% per year.  The DIP
Facility is scheduled to be repaid with  certain  income tax refunds and,  after
payment of FMAC's guarantee to us, distributions from FMAC's B pieces. Under the
terms of the  agreement,  FMAC must  apply the first $10  million  of income tax
refunds to pay down the DIP Facility. These payments will permanently reduce the
maximum that FMAC can borrow under the DIP Facility. Payments from B Pieces will
also pay down and  permanently  reduce the maximum  amount FMAC can borrow under
the DIP  Facility.  Payments  made on the DIP Facility  from sources  other than
income tax refunds and B Pieces will not  permanently  reduce the maximum amount
and FMAC is allowed to  reborrow  such  amounts  under the DIP  Facility.  As of
December 31,  1998,  FMAC had applied  approximately  $9.1 million in income tax
refunds to pay down and reduce the  maximum  availability  under this  facility.
Although  we have  declared  FMAC in  default  under  the DIP  Facility,  we are
negotiating a resolution of this matter with FMAC, which may include an increase
in the DIP Facility of up to approximately $2.0 million.

    Excess Collections Split. We will split with FMAC any excess recovery on the
contracts  sold to the Contract  Purchaser and on the B Pieces,  after FMAC pays
its  guaranteed  amount to us, the DIP Facility and our fees. We are entitled to
receive 17 1/2% of the excess with the  remaining 82 1/2% being  distributed  to
FMAC (the "Excess Collections  Split").  The Excess Collections Split allocation
may be reduced or eliminated if certain  events occur.  As of December 31, 1998,
we had not  recognized  any  revenue  from  the  Excess  Collections  Split.  We
anticipate recognizing revenue on this transaction at the time collections under
the arrangement are probable and reasonably estimable. If several conditions are
met, including that our common stock is trading at $8 or more, we have the right
to issue shares of our common stock to FMAC or its unsecured creditors or equity
holders in exchange for all or part of FMAC's  portion of the Excess  Collection
Split.

    Servicing.  We service the contracts sold to the Contract  Purchaser and the
contracts  in all but one of FMAC's  securitized  pools,  and receive  servicing
fees.

    Other Matters.  On the effective date of FMAC's plan of  reorganization,  in
addition to the warrants described above, we issued warrants to FMAC to purchase
up to 325,000 shares of our common stock at $20.00 per share. These warrants are
exercisable through April 1, 2001. See "Management's  Discussion and Analysis of
Financial  Condition and Results of  Operations--Risk  Factors--We  Have Certain
Risks Relating to the FMAC Transaction".

Discontinued Operations/Split-Up of the Company

    Contract Purchasing. In 1994, we acquired Champion Financial Services, Inc.,
an  independent  automobile  finance  company.  In April 1995,  we  initiated an
aggressive plan to expand  Champion's branch office network and, by December 31,
1997, we operated 83 branch  offices  across the country.  In February  1998, we
announced our intention to close the branch office network and exit this line of
business  in the  first  quarter  of 1998.  We  recorded  a  pre-tax  charge  to
discontinued  operations totaling approximately $9.1 million (approximately $5.6
million,  net of income taxes) during the first quarter of 1998. In addition,  a
$6.0 million charge  (approximately $3.6 million, net of income taxes) was taken
during the third quarter of 1998 due primarily to higher than  anticipated  loan
losses and  servicing  expenses.  The branch  office  closure was  substantially
complete by the end of the first quarter of 1998.

    In the third  quarter of 1997,  we announced a strategic  evaluation  of our
non-dealership  operations,  including  the  possible  sale or spin-off of these
operations.  In February  1998,  in addition to closing our branch  offices,  we
announced our intent to evaluate  alternatives for our remaining  non-dealership
operations.  On April 28,  1998,  we announced  that our Board of Directors  had
directed  management  to proceed with  separating  current  operations  into two
companies  and  subsequently  formed  a  new  wholly  owned  subsidiary,  Cygnet
Financial Corporation  ("Cygnet"),  to operate the Cygnet dealer program and the
bulk purchase and third party loan servicing operations.  Since that date, these
businesses  were  classified  as  discontinued  operations  in our  consolidated
financial statements.  A proposal to split-up the two companies through a rights
offering was approved by our  stockholders  at the annual  stockholders  meeting
held in August  1998.  We  subsequently  issued  rights to our  stockholders  to
purchase  Cygnet  common  stock.  Due to a lack  of  stockholder  participation,
however,  the rights  offering was canceled.  We recorded a $2.0 million  charge
($1.2 million,  net of income tax) in the third quarter of 1998 to write off the
costs  associated  with the rights  offering.  In the first  quarter of 1999, we


                                       9
<PAGE>

discontinued  efforts to sell or spin off the  Cygnet  dealer  program  and bulk
purchasing and loan servicing  operations and have reclassified these operations
into continuing operations for all years presented in the consolidated financial
statements and this Form 10-K.

    Accordingly,  while the branch  office  network  continues to be reported as
discontinued operations,  the Cygnet dealer program and bulk purchasing and loan
servicing  operations  (including the FMAC  transaction)  have been reclassified
into continuing operations for the years ended December 31, 1998, 1997, and 1996
in our accompanying consolidated financial statements.

Regulation, Supervision, and Licensing

    Our operations are subject to ongoing regulation, supervision, and licensing
under various  federal,  state,  and local laws related to the sale of cars, the
extension of credit,  and the  collections of loans.  Among other things,  these
laws:

   o  require that we obtain and maintain certain  licenses and  qualifications,
   o  limit  or  prescribe  terms  of the  contracts  that we  originate  and/or
         purchase,
   o  require specific disclosures to customers,
   o  limit our right to repossess and sell collateral, and
   o  prohibit us from discriminating against certain customers.

    We  typically  charge  fixed  interest  rates  significantly  in  excess  of
traditional  finance  companies on the contracts  originated at our dealerships.
Currently,  a significant portion of our used car sales activities are conducted
in, and a significant  portion of the contracts we service were  originated  in,
states which do not impose limits on the interest rate that a lender may charge.
However,  we have  expanded,  and will  continue to expand our  operations  into
states that impose interest rate limits, such as Florida and Texas.

    We  believe  that  we are  currently  in  substantial  compliance  with  all
applicable material federal, state, and local laws and regulations.  However, if
we do not  remain in  compliance  with such  laws,  this  failure  could  have a
material  adverse  effect  on our  operations.  In  addition,  the  adoption  of
additional laws, changes in the interpretation of existing laws, or our entrance
into  jurisdictions  with more stringent  regulatory  requirements  could have a
material adverse effect on our business.

Trademarks and Proprietary Rights

    We have an ongoing program under which we evaluate our intellectual property
and  consider  appropriate  Federal  and  State  intellectual  property  related
filings.  We believe that the value of our  trademarks  is  increasing  with the
development of our business,  but that our business as a whole is not materially
dependent on our trademarks.  We believe we have taken  appropriate  measures to
protect our  proprietary  rights.  However,  there can be no assurance that such
efforts have been successful.

Competition

    Although the used car industry has historically been highly  fragmented,  it
has attracted significant attention from a number of large companies,  including
AutoNation,  U.S.A,  and Car Max,  all of whom have  entered  the used car sales
business or announced  plans to develop  large used car sales  operations.  Many
franchised  automobile dealers have increased their focus on the used car market
as well. We believe that these  companies are attracted by the  relatively  high
gross margins that can be achieved in this market as well as the industry's lack
of  consolidation.   Many  of  these  companies  and  franchised   dealers  have
significantly  greater  financial,  marketing and other  resources than we have.
However,   none  of  these  companies  currently  represent  significant  direct
competition in the sub-prime  market.  Currently,  our major competition for our
dealership operations is the numerous independent buy here-pay here dealers that
sell   and   finance   sales  of  used   cars  to   sub-prime   borrowers.   See
"Business--Company   Dealership   Operations"   for  a  description  of  how  we
distinguish our operations from those of typical buy here-pay here dealers.

    Our  non-dealership  operations  are  also  highly  competitive.   In  these
operations,   we  compete  with  a  variety  of  finance  companies,   financial
institutions,   and  providers  of  financial   services,   many  of  whom  have
significantly  greater resources,  including access to lower priced capital.  In
addition, there are numerous financial services companies serving, or capable or
serving,  these  markets.  While  traditional  financial  institutions,  such as
commercial  banks,  savings  and  loans,  credit  unions,  and  captive  finance
companies of major automobile  manufacturers,  have not consistently  served the
sub-prime  markets,  the  yields  earned  by  companies  involved  in  sub-prime
financing have encouraged certain of these traditional institutions to enter, or
contemplate entering these markets.


                                       10
<PAGE>

    Increased  competition may cause downward pressure on sales prices and/or on
the interest rate we charge on contracts originated at our dealerships, or cause
us to reduce or eliminate  acquisition discounts on the contracts we purchase in
our non-dealership operations.  Such events would have a material adverse affect
on us.

Employees

    At December 31, 1998, we employed approximately  2,500 persons.  None of our
employees are covered by a collective bargaining agreement.

Seasonality

    Historically,  we have  experienced  higher same store revenues in the first
two  quarters of the year than in the latter half of the year.  We believe  that
these results are due to seasonal buying patterns resulting in part because many
of our customers  receive  income tax refunds during the first half of the year,
which are a primary source of down payments on used car purchases.

                              ITEM 2 -- PROPERTIES

    As of December  31, 1998,  we leased  substantially  all of our  facilities,
including 55 dealerships, four collection facilities that service our dealership
portfolios,  four non-dealership collection facilities, four inspection centers,
and our corporate offices.  We are continuing to negotiate lease settlements and
terminations  with respect to our branch office network  closure.  Our corporate
and divisional administrative offices are located in approximately 40,000 square
feet of leased space in Phoenix, Arizona.


                           ITEM 3 -- LEGAL PROCEEDINGS

     We  sell  our  cars  on an "as is"  basis.  We  require  all  customers  to
acknowledge  in writing on the date of sale that we disclaim any  obligation for
vehicle-related problems that subsequently occur. Although we believe that these
disclaimers are enforceable  under  applicable  laws,  there can be no assurance
that they will be upheld in every instance. Despite obtaining these disclaimers,
in the  ordinary  course of  business,  we  receive  complaints  from  customers
relating to vehicle condition  problems as well as alleged violations of federal
and state consumer lending or other similar laws and regulations.  Most of these
complaints  are  made  directly  to  us  or  to  various   consumer   protection
organizations and are subsequently  resolved.  However,  customers  occasionally
name us as a defendant  in civil suits filed in state,  local,  or small  claims
courts. Additionally,  in the ordinary course of business, we are a defendant in
various other types of legal  proceedings.  Although we cannot determine at this
time the amount of the ultimate exposure from these lawsuits,  if any, we, based
on the advice of  counsel,  do not  expect the final  outcome to have a material
adverse effect on our financial position.


          ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    None.


                                       11
<PAGE>

                 ITEM 4A -- EXECUTIVE OFFICERS OF THE REGISTRANT

(a) Information Concerning Our Executive Officers as of March 24, 1999.



<TABLE>
<CAPTION>
          Name                    Age                         Position
------------------------          ---     ----------------------------------------------------
<S>                               <C>     <C>
Ernest C. Garcia II.........       41     Chairman of the Board (since 1992) and Chief Executive Officer
Gregory B. Sullivan.........       40     Director (since 1998), President and Chief Operating Officer
Steven P. Johnson...........       39     Senior Vice President, General Counsel and Secretary
Steven T. Darak.............       51     Senior Vice President and Chief Financial Officer
Donald L. Addink............       49     Senior Vice President - Senior Analyst
</TABLE>


    Ernest  C.  Garcia  II has served  as our  Chairman  of the  Board and Chief
Executive  Officer since 1992,  and served as President  from 1992 to 1996.  Mr.
Garcia is also a significant stockholder of Ugly Duckling,  owning approximately
29.8% of our stock at December 31, 1998.  Since 1991,  Mr.  Garcia has served as
President of Verde Investments,  Inc., a real estate investment corporation that
is also an affiliate of us. Mr. Garcia's  sister is married to Mr. Johnson.  See
below  "Involvement  in Certain  Legal  Proceedings  by Directors  and Executive
Officers."

    Gregory B. Sullivan has served as our President and Chief  Operating Officer
since March 1996. In 1998,  Mr.  Sullivan was elected to our Board of Directors.
Mr. Sullivan has also served as President of Ugly Duckling Car Sales, Inc. since
December 1996. From 1995 through February 1996, Mr. Sullivan was a consultant to
us. Mr. Sullivan  formerly  served as President and principal  stockholder of an
amusement  game  manufacturing  company that he  co-founded  in 1989 and sold in
1994.  Prior to 1989, Mr.  Sullivan was involved in the securities  industry and
practiced law with a large  Arizona firm. He is an inactive  member of the State
Bar of Arizona. Mr. Sullivan's sister is married to John N. MacDonough,  another
member of our Board of Directors.

    Steven P. Johnson has served as our Senior Vice President,  General  Counsel
and Secretary since 1992. Since 1991, Mr. Johnson has also served as the General
Counsel of Verde,  an affiliate of us. Prior to 1991, Mr. Johnson  practiced law
in Tucson,  Arizona.  Mr.  Johnson is licensed  to  practice  law in Arizona and
Colorado and is married to the sister of Mr. Garcia.

    Steven T. Darak has served as our Senior Vice President and Chief  Financial
Officer since  February  1994,  having  joined us in 1994 as Vice  President and
Chief  Financial  Officer.  From 1989 to 1994,  Mr.  Darak  owned  and  operated
Champion  Financial  Services,  Inc., a used car finance  company we acquired in
early 1994. Prior to 1989, Mr. Darak served in various  positions in the banking
industry and in public accounting.

    Donald L. Addink has served as our Senior Vice  President -- Senior  Analyst
since November 1998. From 1995 to November 1998, he served as our Vice President
- Senior  Analyst.  From  1988 to 1995,  Mr.  Addink  served as  Executive  Vice
President of Pima Capital Co., a life insurance holding company.  Prior to 1988,
Mr. Addink served in various  capacities with a variety of insurance  companies.
Mr.  Addink is a Fellow of the Society of Actuaries and a Member of the American
Academy of Actuaries.

    Our officers serve at the discretion of our Board of Directors.  The present
term of office for the  officers  named  above will expire on June 2, 1999 or on
their earlier retirement,  resignation,  or removal. Except as summarized above,
there is no family relationship among any of our officers.

(b)Involvement   in  Certain  Legal   Proceedings  by  Directors  and  Executive
   Officers.

    Prior to 1992,  when he founded Ugly  Duckling,  Mr.  Garcia was involved in
various  real  estate,  securities,  and  banking  ventures.  Arising out of two
transactions in 1987 between Lincoln  Savings and Loan  Association  ("Lincoln")
and entities  controlled by Mr. Garcia,  the Resolution  Trust  Corporation (the
"RTC"),  which  ultimately took over Lincoln,  asserted that Lincoln  improperly
accounted  for the  transactions  and that  Mr.  Garcia's  participation  in the
transactions  facilitated  the  improper  accounting.  Facing  severe  financial
pressures,  Mr. Garcia agreed to plead guilty to one count of bank fraud, but in
light of his cooperation  with authorities both before and after he was charged,
was sentenced to only three years  probation,  which has expired,  was fined $50


                                       12
<PAGE>

(the  minimum  fine the  court  could  assess),  and  during  the  period of his
probation, which ended in 1996, was banned from becoming an officer, director or
employee of any federally-insured  financial  institutions or a securities firms
without governmental  approval.  In separate actions arising out of this matter,
Mr. Garcia agreed not to violate the  securities  laws, and filed for bankruptcy
both  personally  and with  respect  to  certain  entities  he  controlled.  The
bankruptcies were discharged by 1993.

                                     PART II

         ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY SECURITIES
                         AND RELATED STOCKHOLDER MATTERS

    Our common stock trades on the Nasdaq Stock Market under the symbol  "UGLY."
The high and low closing sales prices of the common stock, as reported by Nasdaq
for the two most recent fiscal years are reported below.

<TABLE>
<CAPTION>
                                                             Market Price
                                                        ---------------------
                                                         High           Low
                                                        -------       -------
<S>                                                     <C>           <C>
Fiscal Year 1997:
First Quarter....................................       $ 25.75       $ 16.25
Second Quarter...................................       $ 18.06       $ 13.13
Third Quarter....................................       $ 17.00       $ 12.50
Fourth Quarter...................................       $ 16.75       $  7.69

Fiscal Year 1998:
First Quarter....................................       $ 10.88       $  6.31
Second Quarter...................................       $ 12.69       $  8.00
Third Quarter....................................       $  9.13       $  4.63
Fourth Quarter...................................       $  6.00       $  4.25
</TABLE>

    On March 22,  1999,  the last  reported  sale price of the  common  stock on
Nasdaq was $6.44 per share. On March 22, 1999 there were approximately 93 record
owners  of our  common  stock.  We  estimate  that as of such  date  there  were
approximately 2,000 beneficial owners of our common stock.

    Dividend Policy. We have never paid dividends on our common stock and do not
anticipate doing so in the foreseeable  future.  It is the current policy of our
Board of Directors to retain any earnings to finance the operation and expansion
of our business or to repurchase  our common stock pursuant to an existing stock
buy back  program.  In  addition,  the  terms of our  primary  revolving  credit
facility  prevent us from  declaring  or paying  dividends in excess of 15.0% of
each year's net earnings  available for distribution.  Our future financings may
also include such  restrictions.  See  "Management's  Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital Resources
-- Financing Resources -- Revolving Facility."

    Exchange  Offer.  In the  fourth  quarter  of  1998,  we  issued  a total of
approximately  $17.5  million  of our 12%  subordinated  debentures  due 2003 in
exchange  for  approximately  2.7  million  shares  of  our  common  stock.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations  --  Liquidity  and Capital Resources -- Supplemental  Borrowings  --
Exchange  Offer."  Beginning on March 2, 1999, the debentures  became listed and
trade on the American Stock Exchange under the ticker symbol UGY.


                                       13
<PAGE>

                 ITEM 6 -- SELECTED CONSOLIDATED FINANCIAL DATA
               (In thousands, except per share and operating data)

    The  following  table  sets  forth  our  selected  historical   consolidated
financial data for each of the years in the five-year  period ended December 31,
1998. The selected annual historical consolidated financial data for 1998, 1997,
1996,  1995,  and 1994 are derived from our  consolidated  financial  statements
audited by KPMG LLP, independent auditors. For additional  information,  see our
consolidated  financial  statements  included  elsewhere  in  this  report.  The
following table should be read in conjunction with "Management's  Discussion and
Analysis of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
                                                         Years Ended December 31,
                                      -----------------------------------------------------------
                                         1998        1997         1996        1995         1994
                                      ---------   ---------    ---------    --------     --------
                                                (In thousands, except per share amounts)
<S>                                   <C>         <C>          <C>         <C>           <C>
Statement of Operations Data:
Sales of Used Cars................    $ 287,618   $ 123,814    $  53,768   $  47,824     $ 27,768

Less:
  Cost of Used Cars Sold..........      167,014      72,358       31,879      29,733       13,604
  Provision for Credit Losses.....       67,634      23,045        9,657       8,359        8,024
                                      ---------   ---------    ---------    --------     --------
                                         52,970      28,411       12,232       9,732        6,140
                                      ---------   ---------    ---------    --------     --------

Interest Income...................       27,828      18,736        8,597       8,227        4,683
Gain on Sale of Loans.............       12,093      14,852        3,925          --           --
Servicing and Other Income........       38,631      12,681        2,537         308          556
                                      ---------   ---------    ---------    --------     --------
                                         78,552      46,269       15,059       8,535        5,239
                                      ---------   ---------    ---------    --------     --------
Income before Operating Expenses..      131,522      74,680       27,291      18,267       11,379
Operating Expenses................      118,702      55,741       18,085      16,758       10,837
                                      ---------   ---------    ---------    --------     --------
Income before Interest Expense....       12,820      18,939        9,206       1,509          542
Interest Expense..................        6,904       2,774        2,429       5,328        2,870
                                      ---------   ---------    ---------    --------     --------
Earnings (Loss) before Income
  Taxes...........................        5,916      16,165        6,777      (3,819)      (2,328)
Income Taxes (Benefit)............        2,396       6,637          100          --         (334)
                                      ---------   ---------    ---------    --------     --------
Earnings (Loss) from Continuing
  Operations......................    $   3,520   $   9,528    $   6,677   $  (3,819)    $ (1,994)
                                      =========   =========    =========   =========     ========

Earnings (Loss) per Common Share
  from Continuing Operations:
Basic ............................    $    0.19   $    0.53    $    0.73   $   (0.69)   $   (0.36)
                                      =========   =========    =========   =========    =========
Diluted...........................    $    0.19   $    0.52    $    0.69   $   (0.69)   $   (0.36)
                                      =========   =========    =========   =========    =========

EBITDA                                $  18,555   $  22,240    $  10,588     $ 3,298    $   1,513

Balance Sheet Data:
Finance Receivables, Net..........    $  163,209  $  90,573    $  17,348    $ 27,732      $14,534
Total Assets......................       345,975    276,426      117,629      60,712       29,681
Subordinated Notes Payable........        43,741     12,000       14,000      14,553       18,291
Total Debt........................       161,035     76,821       28,904      49,754       28,233
Preferred Stock...................            --         --           --      10,000           --
Common Stock......................       173,828    172,622       82,612         127           77
Treasury Stock....................      (14,510)         --           --          --           --
Total Stockholders' Equity
  (Deficit).......................    $  162,767  $ 181,774    $  82,319     $ 4,884      $(1,194)
</TABLE>

----------

Note: See "Business-Company  Dealership Operations" for a summary of significant
    acquisitions  during 1997,  and a description  of our conversion to a single
    integrated  computer  system  in  1998.  Also,  see  "Business--Discontinued
    Operations/Split-Up of the Company" for a description of significant charges
    taken  in  1998  for the  closure  of our  branch  office  network,  and our
    attempted split-up of Ugly Duckling.  Finally, see "Management's  Discussion
    and  Analysis  of  Financial   Condition   and  Results  of   Operations  --
    Securitizations  -- Dealership  Operations"  for a discussion of a change in
    our securitization structure in the fourth quarter of 1998.


                                       14
<PAGE>

                ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Overview

    We have  experienced  a number of  significant  events during the past three
years. Some of the more important events follow:

o     During 1996 we:

   o     completed  our initial  public  offering  and  secondary  offering of
         common stock generating a total of $79.4 million in cash.

o  During 1997 we:

   o  completed a private  placement of common stock in February 1997 generating
         $88.7 million in cash,
   o  completed  a  conversion   of  one  of  our  loan  servicing  systems.  We
         experienced various  transitional  problems with the conversion,  which
         resulted  in a charge of $5.7 million  (approximately $3.4 million, net
         of income  taxes) to write  down our residuals  in finance  receivables
         sold,
   o  completed  three  significant  acquisitions  and developed  new stores  to
         increase our total number of  dealerships in operation from seven to 41
         at December 31, 1997, and
   o  expanded our dealership  chain from two markets  at the end of 1996 to ten
         markets at the end of 1997.

o  During 1998 we:

   o  closed our branch  office  network  resulting in two  significant  charges
         to discontinued  operations totaling $15.1 million  (approximately $9.2
         million, net of income taxes),
   o  completed the conversion of our dealerships to a single computer system,
   o  attempted  to  split-up  the company  through  a rights  offering  to  our
         stockholders.  We  terminated  the  rights  offering  due to a lack  of
         stockholder   participation.   Although   the   rights   offering   was
         unsuccessful,  the exercise of splitting the  operations and management
         teams has proven beneficial to each of our businesses,
   o  completed   an  exchange  offer  whereby   we  issued   $17.5  million  in
         subordinated  debentures and repurchased   approximately   2.7  million
         shares of our common stock, and
   o  changed  the  way  we   structure  our  securitization   transactions  for
         accounting  purposes  from a sale  to a  financing.  The  change  had a
         significant effect on earnings in 1998.

    In this discussion and analysis we explain the general  financial  condition
and the  results  of  operations  of Ugly  Duckling  and  its  subsidiaries.  In
particular,  we  analyze  and  explain  the  annual  changes  in the  results of
operations of our various business  segments.  As you read this discussion,  you
should  refer to our  Consolidated  Financial  Statements  beginning on page 41,
which contain the results of our operations for 1998, 1997, and 1996.

Results of Operations- Years Ended December 31, 1998, 1997 and 1996

    Income items in our Statement of Operations consist of:

   o  Sales of Used Cars
          less Cost of Used Cars Sold
          less Provision for Credit Losses
   o  Interest Income
   o  Gain on Sale of Loans
   o  Servicing and Other Income

                                       15
<PAGE>

Sales of Used Cars and Cost of Used Cars Sold

<TABLE>
<CAPTION>
                                                   (dollars in thousands)
                                           1998              1997             1996
                                        ----------       -----------       ----------
<S>                                     <C>              <C>               <C>
Used Cars Sold (Units)..............        35,964            16,636            7,565
                                        ==========       ===========       ==========

Sales of Used Cars .................    $  287,618       $   123,814       $   53,768
Cost of Used Cars Sold .............       167,014            72,358           31,879
                                        ----------       -----------       ----------
Gross Margin .......................    $  120,604       $    51,456       $   21,889
                                        ==========       ===========       ==========

Gross Margin %......................         41.9%            41.6%             40.7%
                                        ==========       ===========       ==========

Per Unit Sold:
Sales ..............................    $    7,997       $     7,443       $    7,107
Cost of Used Cars Sold .............         4,644             4,349            4,214
                                        ----------       -----------       ----------
Gross Margin .......................    $    3,353       $     3,093       $    2,893
                                        ==========       ===========       ==========
</TABLE>


     The  number of cars sold  (units)  increased  by 116.2%  for the year ended
December 31, 1998 over the year ended December 31, 1997, compared to an increase
of 119.9% over the year ended  December 31,  1996.  Same store unit sales in the
year ended  December 31, 1998 were  compararable  to the year ended December 31,
1997. We anticipate  future revenue growth would come from increasing the number
of dealerships and not from higher sales volumes at existing  dealerships.  Same
store unit sales  declined by 11.6% in the year ended December 31, 1997 compared
to the year ended  December  31,  1996.  We believe  that this  decline  was due
primarily  to  the  increased  emphasis  on  underwriting  at  our  dealerships,
particularly at one dealership  where unit sales  decreased by 742 units,  which
represents 85.0% of the net decrease for the year ended December 31, 1997.

    Sales of Used  Cars  (revenues)  increased  by  132.3%  for the  year  ended
December 31, 1998 over the year ended  December  31, 1997,  compared to a 130.3%
increase  over the year ended  December 31, 1996.  The growth for these  periods
reflects  increases in the number of  dealerships  in operation  and the average
unit sales  price.  The Cost of Used Cars Sold  increased by 130.8% for the year
ended  December 31, 1998 over the year ended  December 31, 1997,  compared to an
increase of 127.0% over the year ended  December 31,  1996.  The gross margin on
used car sales  (Sales  of Used  Cars  less  Cost of Used  Cars  Sold  excluding
Provision for Credit Losses) increased by 134.4% for the year ended December 31,
1998 over the year ended  December 31,  1997,  compared to an increase of 135.1%
over the year ended December 31, 1996. The gross margin percentage has increased
over the past two years,  as we have been  successful  in  increasing  our sales
prices by more than the increase in the cost of used cars sold.

    Our  average  sales  price  per car  increased  by 7.4% for the  year  ended
December  31, 1998 over the year ended  December  31,  1997,  compared to a 4.7%
increase in the year ended  December  31, 1997 from the year ended  December 31,
1996.  The  increase in the  average  sales  price was  necessary  to offset the
increase in the Cost of Used Cars Sold.  On a per unit  basis,  the Cost of Used
Cars Sold  increased by 6.8% for the year ended  December 31, 1998 over the year
ended  December  31,  1997,  compared to an increase of 3.2% over the year ended
December 31, 1996.


                                       16
<PAGE>

Provision for Credit Losses

    We record provisions for credit losses in our dealership  operations and our
non-dealership operations.

   Dealership  Operations.  Following is a summary of the  Provision  for Credit
Losses from our dealership operations:

<TABLE>
<CAPTION>
                                                        1998         1997       1996
                                                      -------      -------     ------

<S>                                                   <C>          <C>         <C>
 Provision for Credit Losses (in thousands)...        $65,318      $22,354     $9,657
                                                      =======      =======     ======

 Provision per contract originated............          1,837      $1,397      $1,394
                                                     ========      =======     ======

 Provision as a percentage of
   principal balances originated..............          23.6%        19.1%      19.7%
                                                     ========     ========     ======
</TABLE>


      The Provision for Credit Losses in our dealership  operations increased by
192.2% in the year ended  December  31,  1998 over the year ended  December  31,
1997,  compared to an increase of 131.5% over the year ended  December 31, 1996.
The Provision for Credit Losses per unit originated at our dealerships increased
by 31.5% in the year ended  December  31, 1998 over the year ended  December 31,
1997, compared to an increase of 0.2% over the year ended December 31, 1996. The
increase in 1998 was primarily due to an increase in the average amount financed
to $7,796 per unit in the year ended  December  31, 1998 from $7,301 per unit in
the year  ended  December  31,  1997 and from the  change in our  securitization
structure beginning in the fourth quarter of 1998.

    As a percentage of dealership  contract principal balances  originated,  the
Provision for Credit Losses averaged 23.6% for the year ended December 31, 1998,
19.1% for the year  ended  December  31,  1997,  and  19.7%  for the year  ended
December  31,  1996.  When  we  changed  how we  structure  securitizations  for
accounting purposes in the fourth quarter of 1998, we also changed the timing of
providing for credit losses. For periods prior to the fourth quarter of 1998, we
generally  provided a Provision  for Credit Losses of  approximately  20% of the
loan  principal  balance  at the time of  origination  to record the loan at the
lower of cost or market. However, as a consequence of our revised securitization
structure,  we will now be retaining  securitized loans on our balance sheet and
recognizing  income  over  the  life  of the  contracts.  Therefore,  for  loans
originated in the fourth  quarter of 1998, we increased the provision for credit
losses  to 27% of the  principal  balance  at the time of  origination.  We also
increased the  provision  for credit losses to 27% on loans  originated in prior
periods that had not been securitized prior to the fourth quarter.

    Non-Dealership   Operations.   The   provision  for  credit  losses  in  our
non-dealership  operations increased by 235.2% to $2.3 million in the year ended
December  31,  1998 from  $691,000  in the year ended  December  31,  1997.  The
increase was primarily due to the significant increase in loans under the Cygnet
dealer program.  There was no provision for credit losses in our  non-dealership
operations in 1996, since there was no significant activity until 1997.

    See "Allowance for Credit Losses" below.

Interest Income

    We generate  Interest  Income from both our  dealership  operations  and our
non-dealership operations.

    Dealership  Operations.  Interest Income  consists  primarily of interest on
finance  receivables  from our  dealership  sales and income from  Residuals  in
Finance  Receivables  Sold  from  our  prior  securitizations.  Interest  Income
increased  by 37.6% to $17.3  million for the year ended  December 31, 1998 from
$12.6  million for the year ended  December 31, 1997,  which  increased by 46.1%
from $8.6  million in the year ended  December  31,  1996.  The  increases  were
primarily due to the increase in the average finance receivables retained on our
balance sheet during these periods.  However,  because we structured most of our
securitizations  to  recognize  income as sales  during  1998,  1997,  and 1996,
Interest  Income  was lower than if we had  structured  the  securitizations  as
secured financings for accounting purposes.

    A primary  element  of our sales  strategy  is to provide  financing  to our
customers,  almost all of whom are  sub-prime  borrowers.  As  summarized in the
following  table,  we continue  to  increase  the  percentage  of sales  revenue
financed, and the number of units sold.


                                       17
<PAGE>

<TABLE>
<CAPTION>
                                                1998         1997         1996
                                                ----         ----         ----
<S>                                             <C>          <C>          <C>
Percentage of sales revenue financed...         96.4%        94.4%        90.5%

Percentage of used cars sold financed..         98.9%        96.2%        91.6%
</TABLE>

    As a result of our expansion  into markets with  interest  rate limits,  the
yield  on our  dealership  receivable  contracts  has  gone  down.  The  average
effective yield on finance  receivables  from our dealerships was  approximately
25.8% for the year ended  December 31, 1998,  26.7% for the year ended  December
31,  1997,  and 29.2% for the year ended  December  31,  1996.  Our policy is to
charge 29.9% per year on our dealership contracts. However, in those states that
impose interest rate limits, we charge the maximum interest rate permitted.

    Non-Dealership  Operations.  In our non-dealership  operations,  we generate
interest income  primarily from a loan we made to FMAC as part of its bankruptcy
proceedings,  and from our Cygnet dealer program.  Interest Income from the FMAC
transaction decreased by 52.0% to $1.8 million from $3.8 million in 1997 when we
originated  the  FMAC  loan.  During  a  portion  of 1997,  in  addition  to our
debtor-in-possession  loan to FMAC,  we held other  notes  receivable  from FMAC
totaling approximately $76.3 million. We sold receivables that secured the notes
for a gain at the end of 1997.  Interest  income from the Cygnet dealer  program
increased  by 269.2% to $8.7  million  from $2.4 million in 1997 when the Cygnet
dealer program commenced significant operations. The increase in interest income
in the Cygnet dealer  program  reflects a significant  increase in the amount of
loans outstanding during 1998 compared to 1997.

Gain on Sale of Loans

    A summary of Gain on Sale of Loans follows:

<TABLE>
<CAPTION>
                                                       (dollar amounts in thousands)
                                                  1998             1997              1996
                                              -----------       ------------     ------------
<S>                                           <C>               <C>              <C>
Dealership Operations...................      $    12,093       $     6,721      $       3,925
Non-Dealership Operations...............              --              8,131                --
                                              -----------       ------------     ------------
                                              $    12,093       $    14,852      $       3,925
                                              ===========       ===========      =============

Gain on Sale of Loans as a percentage
  of principal balances securitized -
  dealership operations ................              5.4%          (1) 8.2%             6.7%
                                              ===========       ===========     ============

(1) Excluding a $5.7 million charge in 1997 described below
</TABLE>

    Dealership  Operations.  We  recorded  Gain  on  Sale of  Loans  related  to
securitization  transactions of $12.1 million during the year ended December 31,
1998, $6.7 million (net of a $5.7 million charge) during the year ended December
31, 1997,  and $3.9 million during the year ended December 31, 1996. We recorded
a $5.7 million  charge  (approximately  $3.4 million net of income taxes) in the
third  quarter  of 1997 in  order  to  adjust  our  assumptions  related  to our
previously completed securitization  transactions.  The decrease in Gain on Sale
(excluding  the  $5.7  million  charge  in 1997) as a  percentage  of  principal
balances  securitized  in 1998 compared to 1997 is primarily due to the use of a
higher  cumulative  charge off  assumption in the 1998  securitizations  and the
securitized portfolios in 1998 having a shorter weighted average life than those
in 1997.  The increase in Gain on Sale  (excluding  the $5.7  million  charge in
1997) as a percentage of principal balances securitized in 1997 compared to 1996
is primarily  due to a decrease in the weighted  average  borrowing  rate of the
underlying  Class A certificates.  See  "Securitizations-Dealership  Operations"
below for a summary of the structure of our securitizations.

    Non-Dealership  Operations.   During  1997,  our  non-dealership  operations
entered into a series of transactions with FMAC including  transactions in which
we acquired 100% of FMAC's senior bank debt. When FMAC put the finance contracts
securing this debt up for bid, we purchased the contracts by releasing the debt.
We then sold the  contracts to a third party  purchaser.  We recorded a one-time
gain  of $8.1  million  from  this  transaction.  See  "Business--Non-Dealership
Operations--Bulk Purchasing and Loan Servicing Operations."


                                       18
<PAGE>

Servicing and Other Income

    We generate  Servicing and Other Income from both our dealership  operations
and our  non-dealership  operations.  A summary of  Servicing  and Other  Income
follows (in thousands):

<TABLE>
<CAPTION>
                                                           Non-Dealership
                             Dealership Operations            Operations
                             ---------------------         ---------------

                                    Company
                        Company    Dealership   Corporate        Cygnet
                      Dealerships  Receivables  and Other    Loan Servicing        Total
                      -----------  -----------  ---------    --------------    -----------
<S>                   <C>           <C>          <C>           <C>             <C>
1998..................$      389    $  15,453    $    493      $    22,296     $    38,631
1997..................$    1,498    $   8,814    $  2,013      $       356     $    12,681
1996..................$      195    $   1,887    $    455      $        --     $     2,537
</TABLE>


    Dealership  Operations.  Servicing  and Other  Income  increased by 32.5% to
$16.3  million  in the year  ended  December  31,  1998 over the  $12.3  million
recognized  in 1997,  which was an increase  of 385.8% over the $2.5  million in
1996. We service our securitized contracts for monthly fees ranging from .25% to
 .33% of the beginning of month principal  balances (3.0% to 4.0% per year).  The
significant  increase in  Servicing  and Other  Income is  primarily  due to the
increase  in the  principal  balance  of  contracts  being  serviced  under  the
securitization program and the addition in 1997 of the Kars portfolio.  Although
we acquired several dealerships in the Kars transaction, the owners retained the
loan portfolio, which we service. In addition, the increase in 1997 was also due
to our  investment  income on the proceeds  from our private  placement  that we
closed in February  1997.  We recorded  earnings  on these  investments  of $1.2
million compared to no investment earnings in the year ended December 31, 1996.

    Non-Dealership Operations. In April 1998, we began servicing loans on behalf
of FMAC. Shortly  thereafter,  we entered into additional  agreements to service
loan portfolios on behalf of other third parties. Our servicing fee is generally
a percentage of the portfolio balance  (generally 3.25% to 4.0% per year) with a
minimum fee per loan serviced  (generally  $14 to $17 per month).  Servicing and
Other Income totaled $22.3 million in the year ended December 31, 1998, compared
to $356,000 in 1997 and $0 in 1996.

    Our  non-dealership  operations have entered into servicing  agreements with
two  companies  that have filed and  subsequently  emerged from  bankruptcy  and
continue to operate  under their  approved  plans of  reorganization.  Under the
terms  of  the   respective   servicing   agreements   and  approved   plans  of
reorganization,  once certain creditors of the bankrupt companies have been paid
in full,  we are  entitled to certain  incentive  compensation  in excess of the
servicing  fees that we have earned to date.  Under the terms of the  agreements
with FMAC, we are scheduled to receive 17.5% of all  collections of the serviced
portfolio   once  the  specified   creditors   have  been  paid  in  full.   See
"Business--Non-Dealership   Operations--Bulk   Purchasing   and  Loan  Servicing
Operations."  Under the  terms of the  second  agreement,  we are  scheduled  to
receive the first $3.25 million in collections once the specified creditors have
been paid in full and 15%  thereafter.  We are  required  to issue  warrants  to
purchase up to 150,000  shares of our common  stock to the extent we receive the
$3.25  million and, in addition,  will be required to issue 75,000  warrants for
each $1.0 million in incentive  fee income we receive after we collect the $3.25
million.  As of December 31, 1998, we estimate  that the incentive  compensation
could range from $0 to $8.0  million under both agreements.  We have not accrued
any fee income from these incentives.

Income before Operating Expenses

    As a result of our continued  expansion,  Income before  Operating  Expenses
grew by 76.1% to $131.5  million for the year ended December 31, 1998 from $74.7
million for the year ended December 31, 1997,  compared to an increase of 173.6%
from $27.3 million in 1996. Growth of Sales of Used Cars,  Interest Income, Gain
on Sale of Loans,  and Servicing and Other Income were the primary  contributors
to the increase.


                                       19
<PAGE>

Operating Expenses

    Operating Expenses consist of:

   o  Selling and Marketing Expenses,
   o  General and Administrative Expenses, and
   o  Depreciation and Amortization.

    A summary  of operating  expenses for our  business  segments for the  years
ended December 31, 1998, 1997 and 1996 follows (in thousands):

<TABLE>
<CAPTION>
                                       Dealership Operations              Non-Dealership Operations
                                       ---------------------              -------------------------


                                              Company                  Cygnet      Cygnet
                                  Company     Dealership   Corporate   Dealer       Loan       Corporate
                                Dealerships   Receivables  and Other   Program    Servicing    and Other     Total
                                -----------   -----------  ---------   -------    ---------    ---------     ------
<S>                              <C>           <C>          <C>         <C>        <C>          <C>         <C>
1998:
  Selling and Marketing......    $ 20,285      $    --      $   --      $   242    $    31      $    7      $ 20,565
  General and Administrative.      32,383       18,491       16,103       2,721     18,664       4,040        92,402
  Depreciation and
     Amortization............       2,581        1,334          997         104        614         105         5,735
                                 --------      -------      -------      ------     ------      ------      --------
                                 $ 55,249      $19,825      $17,100     $ 3,067    $19,309      $4,152      $118,702
                                 ========      =======      =======      ======    =======      ======      ========
1997:
  Selling and Marketing......    $ 10,538      $    --      $   --      $    --    $    --      $   --      $ 10,538
  General and Administrative.      17,214       12,303       9,896          917         --       1,572        41,902
  Depreciation and
     Amortization...........        1,536        1,108         504           28         --         125         3,301
                                 --------      -------      ------      -------    -------      ------      --------
                                 $ 29,288      $13,411      $10,400     $   945    $    --      $1,697      $ 55,741
                                 ========      =======      =======     =======    =======      ======      ========
1996:
  Selling and Marketing......    $  3,568      $    --      $   17      $    --    $    --      $    --     $  3,585
  General and Administrative.       6,306        2,859       3,953           --         --           --       13,118
  Depreciation and
     Amortization...........          318          769         295           --         --           --        1,382
                                 --------      -------      ------      -------    -------      -------     --------
                                 $ 10,192      $ 3,628      $4,265      $    --    $    --      $    --     $ 18,085
                                 ========      =======      ======      =======    =======      =======     ========
</TABLE>


     Selling and Marketing Expenses.  A summary of Selling and Marketing Expense
as a percentage of Sales of Used Cars and Selling and Marketing  Expense per car
sold from our dealership operations follows:

<TABLE>
<CAPTION>
                                             1998      1997      1996
                                             ----      ----      ----
<S>                                          <C>       <C>       <C>
Selling and Marketing Expense as a
  Percent of Sales of Used Cars.......       7.1%      8.5%      6.6%
                                             ====      ====      ====

Selling and Marketing Expense
  per Car  Sold.......................       $564      $633      $472
                                             ====      ====      ====
</TABLE>

    For the years ended December 31, 1998, 1997, and 1996, Selling and Marketing
Expenses consisted almost entirely of advertising costs and commissions relating
to our dealership operations.  Selling and Marketing Expenses increased by 95.2%
to $20.6 million for the year ended December 31, 1998 from $10.5 million for the
year ended December 31, 1997,  which was an increase of 193.9% from $3.6 million
in 1996. The decrease in Selling and Marketing  Expense as a percentage of Sales
of Used Cars and on a per unit basis from 1997 to 1998 is due to the significant
increase in the number of cars sold in 1998  compared  to 1997,  and to the fact
that we did not enter any new markets in 1998. The  significant  increase in per
unit  marketing  in 1997 was  primarily  due to our  expansion  into several new
markets.  We operated  dealerships in ten markets  during 1997,  compared to two
markets  in  1996.  As a  result  of this  expansion,  we  incurred  significant
marketing  costs in 1997 in new  markets  in an effort to  establish  brand name
recognition.
<PAGE>

   General and Administrative  Expenses.  General and  Administrative  Expenses
increased by 120.5% to $92.4  million for the year ended  December 31, 1998 from
$41.9  million for the year ended  December 31,  1997,  which was an increase of
219.4% from $13.1 million for the year ended  December 31, 1996. The increase in
General and  Administrative  Expenses  was  primarily a result of the  increased
number of used car dealerships in operations,  as well the expansion of our bulk
purchasing  and loan  servicing  operations,  the  Cygnet  dealer  program,  and
continued  expansion  of  infrastructure  to  administer  growth.   General  and
Administrative  expenses for the year ended 1998 includes a $2.0 million  charge

                                       20
<PAGE>

($1.2  million,  net of income  taxes) to write  off costs  associated  with the
rights offering.

     Depreciation and  Amortization.  Depreciation and Amortization  consists of
depreciation  and amortization on our property and equipment and amortization of
goodwill and trademarks.  Depreciation  and  amortization  increased by 73.7% to
$5.7 million for the year ended December  31,1998 from $3.3 million for the year
ended  December 31, 1997,  which was an increase of 138.9% over the $1.4 million
incurred in the year ended December 31, 1996. The increase in 1998 was primarily
due  to  increases  in  amortization  of  goodwill   associated  with  our  1997
acquisitions,  increased  depreciation  expense  from the  addition  of used car
dealerships  and the  addition  of four  loan  servicing  facilities  in 1998 to
support our bulk purchase and loan servicing operations.

Interest Expense

    Interest  expense  increased  by  148.9% to $6.9  million  in 1998 from $2.8
million in 1997,  which was an increase of 14.2% from $2.4 million in 1996.  The
increase in 1998 was primarily due to increased  borrowings of Notes Payable and
Subordinated  Notes  Payable.  The relatively  small  increase in 1997,  despite
significant  growth in our total assets, was primarily the result of the private
placement  of common  stock that we  completed  in  February  1997.  Our private
placement generated $88.7 million in cash which we used to pay down debt.

Income Taxes

    Income taxes totaled $2.4 million for the year ended December 31, 1998, $6.6
million for the year ended  December 31,  1997,  and $100,000 for the year ended
December 31, 1996.  Our effective tax rate was 40.5% for the year ended December
31, 1998,  41.1% for the year ended  December  31,  1997,  and 1.6% for the year
ended  December 31, 1996. In 1996,  we reversed all of the  valuation  allowance
that  existed  against our  deferred  income tax assets as of December 31, 1995,
which significantly reduced our effective income tax rate.

Discontinued Operations

    The loss from Discontinued Operations, net of income tax benefits, increased
by $9.1  million  to $9.2  million in 1998 from  $83,000  in 1997,  which was an
improvement from the $811,000 loss we incurred in 1996. The significant increase
in the loss in 1998 was due to the charges we recorded  totaling  $15.1  million
($9.2 million, net of income taxes) to close our branch office network.

Financial Position

     Total assets increased by 25.2% to $346.0 million at December 31, 1998 from
$276.4 million at December 31, 1997. The increase was due in part to an increase
in Finance  Receivables  of $72.6 million to $163.2 million at December 31, 1998
from $90.6 million at December 31, 1997. The increase in Finance Receivables was
primarily  due to a  significant  increase  in loans  under  the  Cygnet  dealer
program,  and a change in the structure of our  securitization  transactions for
accounting  purposes which resulted in us retaining on balance sheet the Finance
Receivables  we  securitized  in the  fourth  quarter  of  1998.  We  previously
structured  securitizations as sales for accounting  purposes and we removed the
related  Finance  Receivables  from  the  balance  sheet  upon   securitization.
Additionally,  our dealership  network increased from 41 dealerships at December
31,  1997  to 56 at  December  31,  1998.  The  increase  in the  number  of our
dealerships  resulted  in an  increase in  Inventory  of $11.8  million to $44.2
million at December 31, 1998 from $32.4 million at December 31, 1997.

    We financed the increases in assets primarily through additional borrowings,
represented by increases in Notes  Payable,  Collateralized  Notes Payable,  and
Subordinated  Notes  Payable.  Notes  Payable and  Collateralized  Notes Payable
increased  by $52.5  million to $117.3  million at December  31, 1998 from $64.8
million at December 31, 1997.  This  increase was primarily due to the change in
our securitization structure. We retained the debt related to the securitization
transaction  we closed  in the  fourth  quarter  of 1998 on our  balance  sheet.
Subordinated  Notes  Payable  increased  by $31.7  million  to $43.7  million at
December  31, 1998 from $12.0  million at December  31,  1997.  The  increase in
Subordinated Notes Payable was primarily due to the addition of $20.0 million in
subordinated  notes used for working  capital  and other uses and  approximately
$17.5  million used to repurchase  our common stock in an exchange  transaction.
See "Liquidity and Capital  Resources--Supplemental  Borrowings--Exchange Offer"
below.

                                       21
<PAGE>

    Growth in Finance Receivables. As a result of our rapid expansion,  contract
receivables  managed by our dealership  operations have increased  significantly
during the past three years.

    The  following  table  reflects  the  growth in period end  balances  of our
dealership  operations  measured in terms of the principal amount and the number
of contracts outstanding.

<TABLE>
<CAPTION>
                                             Total Contracts Outstanding-Dealership
                                                           Operations
                                           (In thousands, except number of contracts)
                                                       as of December 31,
                                          --------------------------------------------
                                                   1998                  1997
                                          --------------------  ----------------------
                                          Principal  No. of     Principal    No. of
                                            Amount   Contracts    Amount     Contracts
                                          --------   ---------   ---------   ---------
<S>                                       <C>           <C>      <C>          <C>
Principal Amount.....................     $292,683      49,601   $ 183,321    35,762
Less:  Portfolios Securitized and Sold     198,747      37,186     127,356    27,769
                                           -------      ------   ---------    ------
  Dealership Operations Total........     $ 93,936      12,415   $  55,965     7,993
                                          ========      ======   =========    ======
</TABLE>


     The following table reflects the growth in the principal  amount and number
of contracts generated or acquired by our dealership operations.

           Total Contracts Generated or Acquired-Dealership Operations
                        (Principal Amounts In Thousands)

<TABLE>
<CAPTION>
                                  During the Years Ended December 31,
                                  ----------------------------------
                                    1998         1997         1996
                                  --------     --------     --------
<S>                               <C>          <C>          <C>
         Principal Amount...      $277,226     $172,230     $ 48,996
         Number of Contracts        35,560       29,251        6,929
         Average Principal..      $  7,796     $  5,888     $  7,071
</TABLE>

    Finance   Receivable   principal  balances  generated  or  acquired  by  our
dealership operations during the year ended December 31, 1998 increased by 61.0%
to $277.2  million  from $172.2  million in the year ended  December  31,  1997.
During the year ended December 31, 1997, Finance  Receivable  principal balances
generated  or acquired by our  dealership  operations  included  the purchase of
approximately $55.4 million (13,250 contracts) in Finance Receivables  principal
balances in conjunction with the E-Z Plan and Seminole acquisitions.

    In  addition  to  the  loan  portfolio   summarized  above,  our  dealership
operations also serviced loan portfolios totaling  approximately  $121.2 million
($47.9 million for Kars and $73.3 million from our branch office  network) as of
December  31,  1998,  and $267.9  million  ($127.3  million  for Kars and $140.6
million from our branch office network) as of December 31, 1997.

     Our  non-dealership  operations  began servicing loans on behalf of FMAC on
April 1, 1998, and began servicing additional loan portfolios on behalf of other
third parties  throughout  1998. By December 31, 1998, our  non-dealership  bulk
purchasing/loan servicing operations were servicing a total of $587.3 million in
finance receivables (approximately 80,000 contracts).

Allowance for Credit Losses

    We have  established an Allowance for Credit Losses  ("Allowance")  to cover
anticipated  credit  losses on the  contracts  currently  in our  portfolio.  We
established  the  Allowance by recording an expense  through the  Provision  for
Credit Losses.

    For  Finance  Receivables  generated  at our  dealerships,  our policy is to
charge off a contract the earlier of:

  o  when we believe it is uncollectible, or
  o  when it is delinquent for more than 90 days.


                                       22
<PAGE>

    The  following  table  reflects  activity  in  the  Allowance,  as  well  as
information regarding charge off activity, for the years ended December 31, 1998
and 1997, in thousands.

<TABLE>
<CAPTION>
                                                      Dealership Operations
                                                      ---------------------
                                                            Years Ended
                                                           December 31,
                                                      ---------------------
                                                         1998        1997
                                                      ---------    --------
<S>                                                   <C>          <C>
Allowance Activity:
Balance, Beginning of Period.....................     $ 10,356     $ 1,625
Provision for Credit Losses......................       65,318      22,354
Allowance on Acquired Loans......................           --      15,309
Reduction Attributable to Loans Sold.............      (44,539)    (21,408)
Net Charge Offs..................................       (6,358)     (7,524)
                                                      ---------    --------
Balance, End of Period...........................     $ 24,777     $10,356
                                                      ========     =======
Allowance as Percent of Period End Principal
   Balances......................................         26.4%       18.5%
                                                      ========    ========
Charge off Activity:
  Principal Balances.............................     $ (8,410)    $(10,285)
  Recoveries, Net................................        2,052       2,761
                                                      --------     -------
Net Charge Offs..................................     $ (6,358)    $(7,524)
                                                      =========    ========
</TABLE>

    The  Allowance  on contracts  from  dealership  operations  was 26.4% of the
outstanding  principal balances as of December 31, 1998 and 18.5% of outstanding
principal balances as of December 31, 1997. The increase is due to the change in
the structure of our securitization  transactions for accounting purposes in the
fourth  quarter of 1998.  The change  resulted in us retaining  the  securitized
loans from our fourth quarter  securitization  on balance sheet. As we intend to
hold the balance sheet  portfolio for  investment and not for sale, we increased
the  provision  for  credit  losses to 27% of the  principal  balance  for loans
originated in the fourth quarter of 1998.

    The Allowance on contracts  from  non-dealership  operations was 3.9% of the
outstanding  principal  balances as of December 31, 1998 and 3.8% of outstanding
principal  balances as of December 31, 1997.  In  addition,  our  non-dealership
operations held non-refundable  discounts and security deposits from third party
dealers totaling $15.3 million, which represented 29.9% of outstanding principal
balances  as  of  December  31,  1998.  Our   non-dealership   operations   held
non-refundable discounts and security deposits from third party dealers totaling
$7.2 million,  which represented 26.0% of the outstanding  principal balances as
of December 31, 1997.

    Even though a contract is charged off, we continue to attempt to collect the
contract.  Recoveries  as a percentage  of principal  balances  charged off from
dealership  operations  averaged  24.4% for the year  ended  December  31,  1998
compared  to  26.8%  for the year  ended  December  31,  1997.  Recoveries  as a
percentage  of principal  balances  charged off from  non-dealership  operations
averaged  30.1% for the year ended December 31, 1998 compared to 0% for the year
ended  December  31,  1997,  when we  recorded  only one charge off  against the
Allowance.

    For Finance  Receivables  acquired  by our  non-dealership  operations  with
recourse  to  the  seller,  our  general  policy  is to  exercise  the  recourse
provisions in our agreements  under the Cygnet dealer program when a contract is
delinquent for 45 days. For contracts not purchased with recourse, our policy is
similar to that of our dealership operations.

Static Pool Analysis

    We use a "static pool" analysis to monitor performance for contracts we have
originated at our dealerships. In a static pool analysis, we assign each month's
originations  to a  unique  pool  and  track  the  charge  offs  for  each  pool
separately.  We  calculate  the  cumulative  net charge  offs for each pool as a
percentage of that pool's original  principal  balances,  based on the number of
complete  payments  made by the  customer  before  charge  off.  The table below
displays the cumulative net charge offs of each pool as a percentage of original
contract  cumulative  balances,  based on the quarter the loans were originated.
The table is further  stratified by the number of payments made by our customers
prior to charge off.  For periods  denoted by "x",  the pools have not  seasoned
sufficiently to allow us to compute  cumulative  losses.  For periods denoted by
"-",  the pools have not yet  reached the  indicated  cumulative  age.  While we
monitor  static pools on a monthly  basis,  for  presentation  purposes,  we are
presenting the information in the table below on a quarterly basis.

                                       23
<PAGE>

    Currently reported cumulative losses may vary from those previously reported
for the reasons listed below,  however,  management believes that such variation
will not be material:

   o  ongoing collection efforts on charged off accounts, and
   o  the  difference   between  final  proceeds  on  the  sale  of  repossessed
         collateral versus our estimates of the sale proceeds.

     The following  table sets forth as of February 28, 1999, the cumulative net
charge offs as a percentage of original  contract  cumulative  (pool)  balances,
based on the  quarter  of  origination  and  segmented  by the number of monthly
payments  completed  by  customers  before  charge off. The table also shows the
percent of principal  reduction  for each pool since  inception  and  cumulative
total net losses incurred (TLI).

          Pool's Cumulative Net Losses as Percentage of Pool's Original
                           Aggregate Principal Balance
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                     Monthly Payments Completed by Customer Before Charge Off
                              -------------------------------------------------------------------------
                  Orig.        0         3         6        12        18       24       TLI     Reduced
                  -----       ---      ----      ----      ----      ----     ----      ----    -------
<S>             <C>           <C>      <C>       <C>       <C>       <C>      <C>       <C>      <C>
1994:
  1st Quarter   $  6,305      3.4%     10.0%     13.4%     17.9%     20.3%    20.9%     21.0%    100.0%
  2nd Quarter   $  5,664      2.8%     10.4%     14.1%     19.6%     21.5%    22.0%     22.1%    100.0%
  3rd Quarter   $  6,130      2.8%      8.1%     12.0%     16.3%     18.2%    19.1%     19.2%    100.0%
  4th Quarter   $  5,490      2.4%      7.6%     11.2%     16.4%     19.3%    20.2%     20.3%    100.0%
1995:
  1st Quarter   $  8,191      1.6%      9.1%     14.7%     20.4%     22.7%    23.6%     23.8%    100.0%
  2nd Quarter   $  9,846      2.0%      8.5%     13.3%     18.1%     20.7%    22.2%     22.6%     99.9%
  3rd Quarter   $ 10,106      2.5%      7.9%     12.2%     18.8%     22.2%    23.6%     24.2%     99.1%
  4th Quarter   $  8,426      1.5%      6.6%     11.7%     18.2%     22.6%    24.1%     24.7%     98.7%
1996:
  1st Quarter   $ 13,635      1.6%      8.0%     13.7%     20.7%     24.9%    26.2%     27.1%     96.5%
  2nd Quarter   $ 13,462      2.2%      9.2%     13.4%     22.1%     26.1%    27.7%     28.9%     93.6%
  3rd Quarter   $ 11,082      1.6%      6.9%     12.5%     21.5%     25.7%    28.0%     28.5%     89.3%
  4th Quarter   $ 10,817      0.6%      8.5%     16.0%     25.0%     29.3%    31.2%     31.2%     85.3%
1997:
  1st Quarter   $ 16,279      2.1%     10.6%     17.9%     24.6%     29.6%    30.9%     30.9%     80.1%
  2nd Quarter   $ 25,875      1.5%      9.9%     15.9%     22.8%     27.3%    27.5%     27.5%     71.2%
  3rd Quarter   $ 32,147      1.4%      8.4%     13.3%     22.6%     25.3%       x      25.3%     63.1%
  4th Quarter   $ 42,529      1.5%      6.9%     12.7%     21.6%       x        --      21.9%     55.4%
1998:
  1st Quarter   $ 69,708      0.9%      6.9%     13.6%        x        --       --      18.4%     47.0%
  2nd Quarter   $ 66,908      1.1%      8.1%        x        --        --       --      14.3%     32.2%
  3rd Quarter   $ 71,027      1.0%        x        --        --        --       --       8.1%     18.0%
  4th Quarter   $ 69,583        x        --        --        --        --       --       1.6%      5.3%
</TABLE>

    The following  table  sets  forth  the  principal  balances  31 to  60  days
delinquent,  and 61 to 90 days  delinquent as a percentage of total  outstanding
contract principal balances from dealership operations.

<TABLE>
<CAPTION>
                             Retained  Securitized   Managed
                             --------  -----------   -------
<S>                          <C>       <C>           <C>
       December 31, 1998:
         31 to 60 days...        2.3%       5.2%       4.6%
         61 to 90 days...        0.5%       2.2%       1.9%
       December 31,1997:
         31 to 60 days...        2.2%       4.5%       3.6%
         61 to 90 days...        0.6%       2.2%       1.5%
</TABLE>

    In accordance with our charge off policy, there are no accounts more than 90
days delinquent as of December 31, 1998 and 1997.

Securitizations-Dealership Operations

    Structure of  Securitizations.  For the securitization  transactions  closed
prior to the fourth quarter of 1998, we recognized a Gain on Sale of Loans equal
to the difference  between the sales proceeds for the Finance  Receivables  sold
and our recorded  investment in the Finance  Receivables sold. Our investment in
Finance   Receivables   consisted  of  the  principal  balance  of  the  Finance
Receivables  securitized  net of the Allowance for Credit Losses  related to the
securitized receivables.  We then reduced our Allowance for Credit Losses by the


                                       24
<PAGE>

amount of  Allowance  for Credit  Losses  related to the loans  securitized.  We
allocated the recorded investment in the Finance Receivables between the portion
of the Finance  Receivables  sold and the portion retained based on the relative
fair values on the date of sale.

    In the fourth  quarter of 1998 we announced that we were changing the way we
structure transactions under our securitization program for accounting purposes.
Through  September 30, 1998, we had structured  these  transactions as sales for
accounting purposes.  However, beginning in the fourth quarter of 1998, we began
structuring securitizations for accounting purposes to recognize the income over
the  life  of  the   contracts.   This   change   will  not   affect  our  prior
securitizations.  Historically,  Gain on Sale of Loans has been  material to our
reported revenues and net earnings. Altering the structure of these transactions
so that no gain is recognized at the time of a  securitization  transaction will
have a material effect on our reported revenues and net earnings until such time
as we accumulate Finance Receivables on our balance sheet sufficient to generate
interest income (net of interest,  credit losses, and other expenses) equivalent
to the  revenues  that  we had  historically  recognized  on our  securitization
transactions.

    Under  our  securitization   program,   we  sell  the  securitized   Finance
Receivables to our securitization  subsidiaries who then assign and transfer the
Finance  Receivables to separate  trusts.  The trusts issue Class A certificates
and subordinated Class B certificates (Residuals in Finance Receivables Sold) to
the securitization  subsidiaries.  The securitization subsidiaries then sell the
Class A certificates  to the investors and retain the Class B  certificates.  We
continue to service the securitized contracts.

    The  Class  A  certificates  from  our   securitization   transactions  have
historically  received  investment  grade ratings.  To secure the payment of the
Class A certificates, the securitization subsidiaries have:

   o  obtained  an  insurance  policy from  MBIA  Insurance   Corporation  which
         guarantees   payment  of  amounts  to  the   holders  of  the  Class  A
         certificates (for transactions closed after July 1, 1997), and
   o  established a cash "spread" account  (essentially,  a reserve account) for
         the benefit of the certificate holders.

    Spread Account Requirements. The securitization subsidiaries make an initial
cash deposit into the spread account,  generally equivalent to 4% of the initial
underlying  Finance  Receivables  principal  balance and pledge this cash to the
spread account agent. The trustee then makes  additional  deposits to the spread
account out of collections on the  securitized  receivables as necessary to fund
the spread account to a specified percentage, ranging from 6.0% to 10.5%, of the
underlying Finance  Receivables'  principal  balance.  The trustee will not make
distributions  to the  securitization  subsidiaries  on the Class B certificates
unless:

   o  the spread account has the required balance,
   o  the required  periodic  payments to the  Class A  certificate  holders are
         current, and
   o  the trustee, servicer and other administrative costs are current.

    During 1998, we made initial spread account deposits totaling  approximately
$13.1  million.  The required  spread  account  balance  based upon the targeted
percentages was  approximately  $23.7 million at December 31, 1998 with balances
in the spread accounts  totaling  approximately  $20.6 million.  Therefore,  the
amount  remaining  to be funded to meet the targeted  balance was  approximately
$3.1 million as of December 31, 1998.

    In addition to the spread  account  balance of $20.6 million at December 31,
1998,  we also had  deposited  a total of $1.6  million  in  trust  accounts  in
conjunction with certain other agreements.  We also maintain spread accounts for
the  securitization  transactions  that  were  consummated  by our  discontinued
operations.  We had  satisfied  the spread  account  funding  obligation of $3.7
million  as  of  December  31,  1998  with   respect  to  these   securitization
transactions.

    Certain  Financial  Information  Regarding Our  Securitizations.  During the
first three  quarters of 1998, we  securitized an aggregate of $222.8 million in
contracts, issuing $161.1 million in Class A certificates,  and $61.7 million in
Class B  certificates.  During the fourth quarter of 1998, we securitized  $69.3
million in contracts, issuing $50.6 million of Class A certificates.  Due to the
revised securitization structure, the $69.3 million of loans remained classified
as  Finance  Receivables,  and the $50.6  million in Class A  certificates  were
classified as Notes Payable in our Consolidated  Balance Sheet.  During the year
ended  December  31, 1997,  we  securitized  an  aggregate of $151.7  million in
contracts, issuing $121.4 million in Class A certificates,  and $30.3 million in
Class B  certificates.  In 1996, we securitized an aggregate of $58.2 million in
contracts,  issuing $44.7 million in Class A certificates,  and $13.5 million in
Class B certificates.

                                       25
<PAGE>

    We recorded the carrying value of the Residuals in Finance  Receivables sold
at  $36.5  million  in 1998,  and  $17.7 million  in  1997.  The balance  of the
Residuals in Finance Receivables sold was $33.3 million as of December  31, 1998
and $13.3 million as of December 31, 1997.

    The table below summarizes certain attributes of our securitizations:

<TABLE>
<CAPTION>
                                                                  1998                 1997                  1996
                                                            -----------------    ------------------    ------------------
<S>                                                          <C>                   <C>                   <C>
Weighted Average Yield of Certificates Issued..........           5.9%                 6.7%                  8.4%
Range of Yields for Certificates Issued................       5.6% - 6.1%           6.3% - 8.1%           8.2% - 8.6%
Average Net Spreads (after fees and expenses)..........          17.6%                 15.8%                 17.1%
Range of Net Spreads (after fees and expenses).........      17.0% - 18.1%         13.7% - 17.8%         16.8% - 17.4%
</TABLE>

    The decrease in net spreads  from 1996 to 1997,  despite  lower  certificate
yields, is primarily the result of the decrease in the average contract yield of
the finance receivable  contracts  securitized due to our expansion into markets
with interest rate limits.

    Residuals  in Finance  Receivables  Sold,  which are a component  of Finance
Receivables,  represent our retained  portion (the Class B certificates)  of the
loans we securitized prior to the fourth quarter of 1998. We utilize a number of
assumptions  to  determine  the  initial  value  of  the  Residuals  in  Finance
Receivables  Sold.  The  Residuals in Finance  Receivables  Sold  represent  the
present value of the expected net cash flows of the securitization  trusts using
the out of the  trust  method.  The net cash  flows  out of the  trusts  are the
collections  on the loans in the  trust in  excess  of the  Class A  certificate
principal  and  interest   payments  and  certain  other  trust  expenses.   The
assumptions  used to compute the Residuals in Finance  Receivables Sold include,
but are not limited to:

   o  charge off rates,
   o  repossession recovery rates,
   o  portfolio delinquency,
   o  prepayment rates, and
   o  trust expenses.

    The  Residuals  in  Finance   Receivables   Sold  are  adjusted  monthly  to
approximate  the present  value of the expected  remaining net cash flows out of
the trust.  To the extent that actual cash flows on a  securitization  are below
our original estimates,  and those differences appear to be other than temporary
in nature, we are required to revalue Residuals in Finance  Receivables Sold and
record a charge to earnings based upon the  reduction.  During the third quarter
of 1997, we recorded a $5.7 million charge  (approximately $3.4 million,  net of
income  taxes) to  dealership  operations to write down the Residuals in Finance
Receivables  Sold.  We  determined  a write  down in the  Residuals  in  Finance
Receivables  Sold  was  necessary  due  to an  increase  in  net  losses  in the
securitized  loan portfolio.  The charge resulted in a reduction in the carrying
value of the our  Residuals  in Finance  Receivables  Sold and had the effect of
increasing  the  cumulative   net  loss  at  loan   origination   assumption  to
approximately 27.5% for the securitization transactions that took place prior to
September 30, 1997. The revised loss assumption approximates the assumption used
for the securitization transaction consummated during the third quarter of 1997.
For the  securitizations  that we  completed  during the nine month period ended
September 30, 1998,  net losses were estimated  using total expected  cumulative
net losses at loan  origination  of  approximately  29.0%,  adjusted  for actual
cumulative net losses prior to securitization.

   One of the assumptions  inherent in the valuation of the Residuals in Finance
Receivables  Sold is the projected  portfolio net charge offs. The remaining net
charge offs in the Residuals in Finance  Receivables Sold as a percentage of the
remaining principal balances of securitized contracts was approximately 14.9% as
of December 31, 1998,  compared to 17.9% as of December 31, 1997.  This decrease
is primarily due to having a more seasoned securitized  portfolio as of December
31, 1998 than at December 31, 1997.  As a greater  portion of our losses tend to
take place in the early stages of the  portfolio's  existence,  a more  seasoned
portfolio will have fewer losses remaining than a portfolio that has not aged as
much. There can be no assurance that the charge we recorded in the third quarter
of 1997 was sufficient and that we will not need to record additional charges in
the future in order to write down the Residuals in Finance Receivables Sold.

    We classify  the  residuals as "held-to-maturity"  securities  in accordance
with SFAS No. 115.

                                       26
<PAGE>

Liquidity and Capital Resources

    In recent periods, our needs for additional capital resources have increased
in connection with the growth of our business. We require capital for:

   o  increases in our contract portfolio,
   o  expansion of our dealership network,
   o  our commitments under the FMAC transaction,
   o  expansion of the Cygnet dealer program,
   o  common stock repurchases,
   o  the purchase of inventories,
   o  the purchase of property and equipment, and
   o  working capital and general corporate purposes.

    We fund our capital requirements primarily through:

   o  operating cash flow,
   o  our revolving facility with General Electric Capital Corporation,
   o  securitization transactions,
   o  supplemental borrowings, and
   o  in the past, equity offerings.

    While to date we have met our liquidity requirements as needed, there can be
no assurance that we will be able to continue to do so in the future.

Operating Cash Flow

    Net Cash Provided by Operating  Activities increased by $29.9 million in the
year ended  December 31, 1998 to $22.1  million from cash used in the year ended
December 31, 1997 of $7.8  million.  The  increase in 1998 was due  primarily to
increases in the Loss from  Discontinued  Operations,  the  Provision for Credit
Losses, and Proceeds from the Sale of Finance  Receivables,  net of decreases in
Net Earnings and  purchases of Finance  Receivables.  Net Cash Used by Operating
Activities  totaled $7.8 million in the year ended December 31, 1997 compared to
Cash Provided by Operating Activities of $23.8 million in 1996. This increase in
cash used in 1997 over cash  provided in 1996 was  primarily due to increases in
the  purchases  of  Finance  Receivables  and  Inventory,  and  a  reduction  in
collections of Finance Receivables, net of increases in the Provision for Credit
Losses and Proceeds from the Sale of Finance Receivables.

    Net Cash Used in Investing  Activities  decreased by $12.2  million to $98.7
million in the year ended  December 31, 1998 compared to $110.9 million in 1997.
The decrease is primarily due to increases in Cash Used in Investing  Activities
from purchases of Finance Receivables,  net decreases in Cash advanced under our
Notes Receivable,  increased collections of Notes Receivable, and a reduction in
payment  for  Acquisition  of  Assets.  Net Cash  Used in  Investing  Activities
increased  by $100.3  million to $110.9  million in the year ended  December 31,
1997  compared to $10.5  million in 1996.  The increase was due primarily to net
increases in Notes  Receivable of $25.9 million and Payment for  Acquisition  of
Assets of $45.2 million.

    Net Cash  Provided by Financing  Activities  decreased  by $40.5  million to
$69.0 million in the year ended  December 31, 1998 compared to $109.5 million in
the  comparable  period  in 1997.  The  decrease  is due to  increases  in Notes
Payable,  net of  increases  in  repayments  of Notes  Payable and a decrease in
proceeds  from the  issuance of common  stock.  Net Cash  Provided by  Financing
Activities  decreased  by $69.3  million  to $109.5  million  in the year  ended
December 31, 1997 compared to $40.1 million in 1996.  The increase was primarily
due to increases in the issuance of Notes  Payable,  reduction in  repayments of
Notes Payable and a lack of any redemption of Preferred Stock.

                                       27
<PAGE>

Financing Resources

    Revolving  Facility.  In September  1998,  we amended our  revolving  credit
facility with General Electric Capital Corporation ("GE Capital") increasing the
maximum  commitment  to $125.0  million.  Under the revolving  facility,  we may
borrow:

   o  up to 65.0% of the principal balance of eligible contracts originated from
         the sale of used cars,
   o  up to 86.0% of the principal balance of eligible contracts previously
         originated by our branch office network,
   o  the  lesser  of $20  million  or 58%  of  the  direct  vehicle  costs  for
         eligible vehicle inventory, and
   o  starting in January 1999, the lesser of $15 million or 50% of eligible
         contracts or loans originated under the Cygnet dealer program.

    However,  an amount up to $8.0 million of the borrowing  capacity  under the
revolving  facility  is not  available  at any time while our  guarantee  to the
purchaser   of   contracts    acquired   from   FMAC   is    outstanding.    See
"Business--Non-Dealership   Operations--Bulk   Purchasing   and  Loan  Servicing
Operations."

    The revolving  facility  expires in June 2000 and contains a provision  that
requires us to pay GE Capital a termination  fee of $200,000 if we terminate the
revolving  facility  prior to the  expiration  date. We secure the facility with
substantially all of our assets.

    As of December 31, 1998, our borrowing capacity under the revolving facility
was  $55.5  million,  the  aggregate  principal  amount  outstanding  under  the
revolving facility was approximately $52.0 million,  and the amount available to
be borrowed  under the facility was $3.5 million.  The revolving  facility bears
interest at the 30-day LIBOR plus 3.15%,  payable  daily (total rate of 8.40% as
of December 31, 1998).

    The revolving  facility contains  covenants that, among other things,  limit
our ability to do the following without GE Capital's consent:

   o   incur additional indebtedness,
   o   make any change in our capital structure,
   o   declare or pay dividends, except in accordance with all  applicable  laws
          and not in excess of fifteen percent (15%) of each year's net earnings
         available for distribution, and
   o   make certain investments and capital expenditures.

    The revolving  facility also provides that an event of default will occur if
Mr.  Ernest C. Garcia II owns less than 15.0% of our voting  stock.  Mr.  Garcia
owned approximately 29.8% of our common stock at December 31, 1998.

    In addition, we are also required to:

   o  be Year 2000  compliant no later than June 30, 1999  (see discussion below
         under "Year 2000 Readiness Disclosure"), and
   o  maintain specified  financial ratios, including a debt to equity  ratio of
         2.2 to 1 and a net worth of at least $110,000,000.

    Under the terms of the  revolving  facility,  we are required to maintain an
interest  coverage ratio and a cash flow based  interest  coverage ratio that we
failed to satisfy  during the year ended  December 31,  1998.  We failed to meet
these covenants primarily as a result of the charges we took during 1998 for the
closure of our  branch  office  network.  GE  Capital  has  waived the  covenant
violations as of December 31, 1998.

    Securitizations.  Our securitization  program  is a  primary  source  of our
working  capital.   Since  September  30,  1997,  we  have  closed  all  of  our
securitizations  with private investors through Greenwich Capital Markets,  Inc.
("Greenwich  Capital").  In March  1999,  we executed a  commitment  letter with
Greenwich Capital to act as our exclusive agent in placing up to $300 million of
surety wrapped securities under our securitization program.

    Securitizations generate cash flow for us from:

   o  the sale of Class A certificates,
   o  ongoing servicing fees, and


                                       28
<PAGE>

   o  excess  cash  flow  distributions   from  collections   on  the  contracts
         securitized after:
       o  payments on the Class A certificates sold to third party investors,
       o  payment of fees, expenses, and insurance premiums, and
       o  required deposits to the spread account.

    Securitization  also allows us to fix our cost of funds for a given contract
portfolio.  Failure to  regularly  engage in  securitization  transactions  will
adversely  affect us. See  "Management's  Discussion  and  Analysis of Financial
Condition and Results of Operations--Securitizations-Dealership  Operations" for
a more complete description of our securitization program.

Supplemental Borrowings

    Verde Debt.  Prior to our public offering in September 1996, we historically
borrowed  substantial  amounts from Verde Investments Inc.  ("Verde"),  which is
owned by our  Chairman  and  Chief  Executive  Officer,  Ernest C.  Garcia.  The
Subordinated  Notes Payable balances  outstanding to Verde totaled $10.0 million
as of  December  31,  1998 and $12 million as of  December  31,  1997.  Prior to
September  21,  1996,  these  borrowings  accrued  interest at an annual rate of
18.0%.  Effective  September  21,  1996,  the  annual  interest  rate  on  these
borrowings  was reduced to 10.0%.  Under the terms of this note, we are required
to make  monthly  payments of interest  and annual  payments of principal in the
amount of $2.0  million.  Except for the debt  incurred  related to the exchange
offer (see below),  this debt is junior to all of our other  indebtedness and we
may suspend interest and principal  payments if we are in default on obligations
to any other  creditors.  In July  1997,  our Board of  Directors  approved  the
prepayment  of the $10.0 million in  subordinated  debt after the earlier of the
following:

   o  the completion of a debt offering, or
   o  at such time as the following:
   o  the FMAC transactions have  been completed  or the cash  requirements  for
          completion of the transaction are known, or
   o  we either have cash in excess of our current needs or have funds available
          under our financing  sources in excess of our current needs.

    No such prepayment has been made as of the date of filing of this Form 10-K.
Any prepayment would require the consent of certain of our lenders.

    Senior  Subordinated  Notes.  In February 1998, we borrowed a total of $15.0
million of subordinated debt from unrelated third parties for a three year term.
We pay interest on this debt quarterly at 12% per annum. This debt is:

   o  senior  to  the   Verde  subordinated   note  (described  above)  and  the
         subordinated debentures issued in our exchange offer (described below),
         and
   o  subordinate to our other indebtedness.

    We issued  warrants  to the  lenders of this debt to  purchase up to 500,000
shares of our common stock at an exercise price of $10.00 per share, exercisable
at any time until the later of February 2001, or when the debt is paid in full.

    In July 1998, we borrowed a total of $5.0 million in subordinated  debt from
unrelated  third  parties  for a  three-year  term.  Under the terms of the loan
agreement,  we were required to issue warrants to purchase 115,000 shares of our
common stock by December 31, 1998 if the loan was not paid in full by that date.
The  warrants  were to have  been  issued  at an  exercise  price of 120% of the
average  trading price for our common stock for the 20 consecutive  trading days
prior to the issuance of the warrants.  In January 1999, we prepaid $1.8 million
of the loans and the lenders waived their right to a proportionate amount of the
warrants. We have agreed to pay $1.2 million by March 31, 1999 and the remaining
$2.0 million on June 30, 1999.  We will not be required to issue the warrants if
we repay the loans on these dates.

    Sale-Leaseback  of Real  Property.  In March 1998,  we executed an agreement
with an investment  company for the sale and leaseback of up to $37.0 million in
real property.  We sold certain real property to the investment  company for its
original  cost and leased  back the  properties  for an  initial  term of twenty
years.  We have the right to extend the leases in certain cases.  We pay monthly
rents of  approximately  one-twelfth  of 10.75% of the  purchase  price plus all
occupancy costs and taxes.  The agreement calls for annual  increases in monthly
rent of not less than 2%. As of December  31,  1998,  we had sold  approximately
$27.4 million of property under this arrangement.  However, we do not anticipate


                                       29
<PAGE>

closing any  additional  transactions  under this  agreement with the investment
company.  We used  substantially  all of the proceeds from the sales to pay down
debt.

    Exchange Offer. In the fourth quarter of 1998, we acquired approximately 2.7
million shares of our common stock in exchange for  approximately  $17.5 million
of subordinated debentures.  The debentures are unsecured and are subordinate to
all of our  existing  and  future  indebtedness.  We must  pay  interest  on the
debentures  twice a year at 12% per year.  We are required to pay the  principal
amount of the debentures on October 23, 2003.

    We issued the debentures at a premium of approximately $3.9 million over the
market  value of the shares of our  common  stock  that were  exchanged  for the
debentures.  Accordingly,  the debt was recorded at $13.6 million on our balance
sheet. The premium will be amortized over the life of the debentures and results
in an effective annual interest rate of  approximately  18.8%. We can redeem all
or part of the debentures at any time.

    As a  result  of  the  exchange  offer,  the  number  of our  common  shares
outstanding  decreased to  approximately  15,845,000  compared to  approximately
18,533,000 shares outstanding prior to the exchange offer.

    Additional Financing.  On November 12, 1998, we borrowed $15.0 million for a
term of 364 days from  Greenwich  Capital.  We pay  interest  on this loan at an
interest rate equal to LIBOR plus 400 basis points. We secured the loan with the
common  stock of our  securitization  subsidiaries.  In March 1999,  we borrowed
$20.0 million for a term of 278 days from  Greenwich  Capital.  $1.5 million was
used to repay the remaining  balance of the $15 million  Greenwich Capital loan.
The new loan was secured by the common stock of our securitization subsidiaries.
The interest  rate is at LIBOR plus 500 basis points and we paid an  origination
fee of 100 basis points.

    In March 1999,  we executed a commitment  letter with  Greenwich  Capital in
which,  subject to satisfaction of certain conditions,  Greenwich Capital agreed
to provide us with a $100  million surety-wrapped  warehouse line of credit at a
rate equal to LIBOR  plus 110 basis points.  In addition,  on March 26, 1999, we
borrowed approximately  $28.9 million  from Greenwich Capital under a repurchase
facility with a 62% advance rate, bearing interest at 8.5%, and maturing May 31,
1999.

    Debt Shelf  Registration.  In 1997,  we registered up to $200 million of our
debt securities under the Securities Act of 1933. There can be no assurance that
we will be able to use this registration  statement to sell debt securities,  or
successfully register and sell other debt securities in the future.

Capital Expenditures and Commitments

    We have  pursued  an  aggressive  growth  strategy.  During  the year  ended
December  31,  1998,  we  opened  17 new  dealerships.  We also  have  six  more
dealerships  under  development.  The  magnitude of the direct cost of opening a
dealership is primarily a function of whether we lease a facility or construct a
facility.  A leased facility costs  approximately  $650,000 to develop,  while a
facility we construct costs approximately $ 1.7 million. In addition, we require
capital to finance the  portfolio  that we carry on our  balance  sheet for each
store.  It  takes  approximately  $2.2  million  in cash to  support  a  typical
stabilized  store  portfolio  with our  existing  65% advance  rate under our GE
facility.  Additionally,  it takes approximately 30 months for a store portfolio
to reach a stabilized level.

    On July 11,  1997,  we  entered  into an  agreement  to  provide  "debtor in
possession" financing to FMAC (the "DIP Facility"). As of December 31, 1998, the
maximum  commitment  on the DIP Facility was $12.4  million and the  outstanding
balance on the DIP Facility  totaled $11.8  million.  Subsequent to December 31,
1998,  the maximum  commitment  was reduced to $11.5 million from the receipt of
certain   income  tax  refunds   received  by  FMAC  and  remitted  to  us.  See
"Business--Non-Dealership   Operations--Bulk   Purchasing   and  Loan  Servicing
Operations--DIP Facility".

    We  intend  to  finance  the  construction  of new  dealerships  and the DIP
financing  through operating cash flows and supplemental  borrowings,  including
amounts available under the revolving facility and the securitization program.

    Common Stock  Repurchase  Program.  In October 1997,  our Board of Directors
authorized a stock repurchase  program allowing us to purchase up to one million
shares of our common stock from time to time. Purchases may be made depending on
market  conditions,  share  price and  other  factors.  Our  Board of  Directors
extended the stock  repurchase  program in February  1999, to December 31, 1999.


                                       30
<PAGE>

During 1998, we repurchased  72,000 shares of common stock pursuant to the stock
repurchase   program.   Subsequent   to  December  31,  1998,   we   repurchased
approximately 928,000 additional shares of common stock under this program.

    Since January 1, 1998,  we have  repurchased  a total of  approximately  3.7
million  shares of our common stock under our stock  repurchase  program and the
exchange offer  described  above at an average cost of  approximately  $5.33 per
share.

    In September  1997,  our Board of  Directors  approved a director and senior
officer stock purchase loan program.  We may make loans of up to $1.0 million in
total  to the  directors  and  senior  officers  under  the  program  to  assist
directors'  and  officers'  purchases of common stock on the open market.  These
unsecured  loans bear  interest at 10% per year.  During 1997,  senior  officers
purchased  50,000  shares of  common  stock  under  this  program  and we loaned
$500,000  to the senior  officers  for these  purchases.  During  1998,  we made
additional loans under similar terms and conditions to senior officers  totaling
approximately $393,000 for the purchase of 40,000 shares of our common stock.

Year 2000 Readiness Disclosure

    Many older computer programs refer to years only in terms of their final two
digits. Such programs may interpret the year 2000 to mean the year 1900 instead.
The problem affects not only computer  software,  but also computer hardware and
other  systems  containing  processors  and  embedded  chips.  Business  systems
affected  by this  problem may not be able to  accurately  process  date-related
information  before,  during or after January 1, 2000. This is commonly referred
to as the Year 2000 problem. Our business could be materially adversely affected
by failures of our own business  systems due to the Year 2000 problem as well as
those  of our  suppliers  and  business  partners.  We are  in  the  process  of
addressing these issues.

    Our Year 2000 compliance program consists of:

   o  identification and assessment of critical computer programs,  hardware and
         other business equipment and systems,
   o  remediation and testing,
   o  assessment of the Year 2000 readiness of our critical  suppliers,  vendors
         and business partners, and
   o  contingency planning.

    Identification and Assessment

    The first component of our Year 2000 compliance program is complete. We have
identified our critical  computer  programs,  hardware,  and other  equipment to
determine which systems are compliant, or must be replaced or remediated.

    Remediation and Testing

    Dealership  Operations.  We recently  completed  converting  our  dealership
operations to a single  automobile  sales and loan servicing  system (the "CLASS
System"), which has reduced the scope of our compliance program. We have engaged
an outside  consulting firm to assist us with remediating our critical  computer
programs that must become Year 2000 compliant.  We have finished remediating the
program  code  and  underlying  data  in the  CLASS  System  and  are  currently
performing  regression testing on the program code modifications.  We anticipate
placing the modified  program code into  production and  performing  future date
testing on the modified code in April 1999.

    Non-Dealership  Operations.  Our  non-dealership  loan servicing  operations
currently  utilize  several loan processing and  collections  programs  provided
through third party service bureaus.  Based upon certifications we have received
from the software vendors, and independent testing we have performed, we believe
that our loan processing and collections programs are Year 2000 compliant.

    Our Cygnet  dealer  program  utilizes  one of the same loan  processing  and
collections programs used by our loan servicing  operations.  The service bureau
that  provides the program has written a custom module for us and has stated the
custom module is Year 2000  compliant.  We anticipate  performing and completing
independent Year 2000 compliance testing in May 1999.

    We believe the  remediation  of the  critical  business  systems used by our
dealership and non-dealership  operations will be substantially completed during
the second quarter of 1999.


                                       31
<PAGE>

    Assessment of Business Partners

    We have also  identified  critical  suppliers,  vendors,  and other business
partners and we are taking steps to determine their Year 2000  readiness.  These
steps include interviews,  questionnaires, and other types of inquiries. Because
of the large number of business systems that our business partners use and their
varying levels of Year 2000 readiness, it is difficult to determine how any Year
2000 issues of our business  partners will affect us. We are not currently aware
of any  business  relationships  with third  parties that we believe will likely
result in a  significant  disruption  of our  businesses.  We  believe  that our
greatest risk is with our utility suppliers,  banking and financial  institution
partners,  and  suppliers  of  telecommunications  services,  all of  which  are
operating  within  the  United  States.  Potential  consequences  if we,  or our
business partners, are not Year 2000 compliant include:

   o  failure to operate from a lack of power,
   o  shortage of cash flow,
   o  disruption or errors in loan collection and processing efforts, and
   o  delays in receiving inventory, supplies, and services.

    If any of these events  occurred,  the results could have a material adverse
impact on us and our operations.

Contingency Plans

    We are also  developing  contingency  plans to mitigate the risks that could
occur in the event of a Year 2000  business  disruption.  Contingency  plans may
include:

   o  increasing inventory levels,
   o  securing additional financing,
   o  relocating operations to unaffected sites,
   o  vendor/supplier replacement,
   o  utilizing temporary manual or spreadsheet-based processes, or
   o  other prudent actions.

    We currently  estimate that  remediation and testing of our business systems
will cost  between $2.2  million and $2.7  million.  Most of these costs will be
expensed  and  funded  by  our  operating  line  of  credit.  Expenses  to  date
approximate $1.9 million,  including  approximately  $51,000 of internal payroll
costs,   substantially   all  of  which  have  been   charged  to  general   and
administrative  expense.  We cannot  currently  estimate costs  associated  with
developing and implementing contingency measures. The scheduled completion dates
and costs  associated  with the various  components of our Year 2000  compliance
program described above are estimates and are subject to change.

Seasonality

    Historically,  we have experienced higher revenues in the first two quarters
of the year than in the latter half of the year.  We believe that these  results
are due to seasonal buying patterns because many of our customers receive income
tax  refunds  during the first half of the year,  which are a primary  source of
down payments on used car purchases.

Inflation

    Increases in inflation  generally  result in higher interest  rates.  Higher
interest  rates  on our  borrowings  would  decrease  the  profitability  of our
existing portfolio.  To date,  inflation has not had a significant impact on our
operations. We seek to limit this risk:

   o  through our securitization  program,  which allows us to fix our borrowing
        costs,
   o  by increasing the interest rate  charged for contracts  originated  at our
        dealerships (if allowed under applicable law), or
   o  by increasing  the  profit  margin on the cars  sold,  and  for  contracts
        acquired  from third party  dealers  under our  Cygnet  dealer  program,
        either by acquiring contracts at a higher discount or with a higher APR.

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<PAGE>

Accounting Matters

    In September 1997, the Financial Accounting Standards Board issued Statement
of Financial  Accounting  Standards No. 131,  "Disclosures  about Segments of an
Enterprise and Related Information" (SFAS No. 131) which became effective for us
January 1, 1998.  SFAS No. 131  establishes  standards  for the way that  public
enterprises  report  information  about operating  segments in annual  financial
statements and requires that those enterprises report selected information about
operating  segments in interim reports issued to  stockholders.  The adoption of
SFAS No. 131 did not have a material impact on us.

    In February 1998, the Financial Accounting  Standards Board issued Statement
of  Financial  Accounting  Standards  No.  132,  "Employer's  Disclosures  about
Pensions  and Other  Postretirement  Benefits"  (SFAS  No.  132)  which  becomes
effective  for us January 1, 1999.  SFAS No. 132  establishes  standards for the
information that public  enterprises report in annual financial  statements.  We
believe the adoption of SFAS No. 132 will not have a material impact on us.

    In June 1998, the Financial Accounting  Standards Board issued  Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and Hedging  Activities"  (SFAS No. 133) which becomes  effective for us July 1,
1999. We believe the adoption of SFAS No. 133 will not have a material impact on
us.

Risk Factors

    There are various  risks in  purchasing  our  securities or investing in our
business,  including those described below. You should carefully  consider these
risk factors together with all other information included in this Form 10-K.

We make forward looking statements

    This  report  contains  forward  looking  statements  within the  meaning of
Section 27A of the  Securities  Act of 1933 and  Section  21E of the  Securities
Exchange Act of 1934. The words "believe," "expect,"  "anticipate,"  "estimate,"
"project," and similar expressions  identify forward looking  statements.  These
statements may include, but are not limited to, projections of revenues, income,
or loss,  estimates  of  capital  expenditures,  plans  for  future  operations,
products or  services,  and  financing  needs or plans,  as well as  assumptions
relating to these matters.  Forward looking statements speak only as of the date
the statement was made. They are inherently  subject to risks and uncertainties,
some of which we cannot  predict or quantify.  Future events and actual  results
could differ  materially from the forward looking  statements.  When considering
each  forward  looking  statement,  you should keep in mind the risk factors and
cautionary  statements found  throughout this Form 10-K and  specifically  those
found  below.  We are not  obligated  to  publicly  update or revise any forward
looking  statements,  whether as a result of new information,  future events, or
for any other reason.

We have  incurred  net  losses in  three of the last five years and could  incur
     additional net losses in future periods.

    We began  operations in 1992 and incurred  significant  operating  losses in
1994 and 1995. Although we recorded net earnings in 1996 and 1997, we incurred a
net loss of $5.7 million in 1998. A  substantial  portion of our net earnings in
1997 and 1996 was  attributable  to the gains  recognized on our  securitization
transactions. The net loss in 1998 was due in large part to:

   o  a charge  of  approximately  $9.1  million ($5.6  million,  net of  income
         taxes) to discontinued  operations in the first quarter of 1998 for the
         closure of the branch office network,
   o  a charge  of  approximately  $6.0  million ($3.6  million,  net of  income
         taxes) to discontinued  operations during the third quarter of 1998 due
         primarily to higher than anticipated loan losses and servicing expenses
         in  connection  with the  branch  office  loan  portfolio  and to costs
         incurred in our terminated rights offering, and
   o  a change  in  the  fourth   quarter  of  1998  in  the  way  we  structure
         securitization transactions for accounting purposes.

     There  can be no  assurance  that we will be  profitable  again  in  future
periods.  Our failure to be  profitable  can  adversely  affect the value of our
outstanding securities.

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<PAGE>

   Factors  Determining  Our  Future  Profitability.   Our  ability  to  achieve
profitability will depend primarily upon our ability to:

   o  expand  our  revenue  generating  operations  while  not   proportionately
         increasing our administrative overhead,
   o  originate and purchase contracts with an acceptable  level of credit risk,
   o  effectively  collect  payments due on the contracts  in our portfolio  and
         portfolios  we service for  others,
   o  locate sufficient financing, with acceptable terms, to fund  and  maintain
         our operations, and
   o  adapt to the increasingly competitive market in which we operate.

     Our inability to achieve or maintain any or all of these  objectives  could
have a material  adverse effect on our business and the value of our outstanding
securities.  Outside  factors,  such as the economic,  regulatory,  and judicial
environments in which we operate, will also have an effect on our business.


Our operations depend significantly on external financing.

    We have borrowed,  and will continue to borrow,  substantial amounts to fund
our operations.  Our operations  require large amounts of capital.  If we cannot
obtain the  financing  we need on a timely  basis and on  favorable  terms,  our
business will be adversely  affected.  We currently obtain our financing through
three primary sources:

   o  a revolving credit facility with General Electric Capital Corporation;
   o  securitization transactions; and
   o  loans from other sources.

    Each of these  financing  sources is  described  in detail in  "Management's
Discussion  and Analysis of Financial  Condition  and Results of  Operations  --
Liquidity and Capital Resources."

    Revolving  Credit Facility with GE Capital.  Our revolving  facility with GE
Capital  is  our  primary   source  of  operating   capital.   We  have  pledged
substantially  all of our assets to GE Capital to secure the  borrowings we make
under this  facility.  Although this  facility has a maximum  commitment of $125
million,  the amount we can borrow is limited by the amount of certain  types of
assets that we own. In addition,  we cannot borrow  approximately  $8 million of
the capacity while our guarantee to the FMAC Contract Purchaser is in effect. As
of December 31, 1998,  we owed  approximately  $52.0 million under the revolving
facility,  and had the  ability  to  borrow  an  additional  $3.5  million.  The
revolving  facility  expires in June 2000.  Even if we  continue  to satisfy the
terms and conditions of the revolving facility, we may not be able to extend its
term beyond the current expiration date.

    Securitization  Transactions.  We can restore capacity under the GE facility
from time to time by securitizing portfolios of finance receivables. Our ability
to  successfully  complete  securitizations  in the  future may be  affected  by
several factors, including:

   o  the condition of securities markets generally,
   o  conditions in the asset-backed securities markets specifically,
   o  the credit quality of our loan contract portfolio, and
   o  the performance of our servicing operations.

    The  securitization   subsidiaries  are  wholly-owned   "bankruptcy  remote"
entities.   Their  assets,  including  the  line  items  "Residuals  in  Finance
Receivables  Sold" and  "Investments  Held in Trust",  which are a component  of
Finance  Receivables  on our balance  sheet,  are not  available  to satisfy the
claims of our creditors.

    On November 17, 1998,  we  announced  that we were  changing the way that we
structure  transactions  under  our  securitization  program.  In the  past,  we
structured these  transactions as sales for accounting  purposes.  In the fourth
quarter of 1998, however,  we began to structure  securitizations for accounting
purposes to retain the  financed  receivables  and  related  debt on our balance
sheet and recognize the income over the life of the contracts. In the past, gain
on sales  of  loans in  securitization  transactions  has been  material  to our
profitability.  This change will cause a material adverse effect on our reported
earnings until the net interest earnings from new contracts added to our balance
sheet  approximates  those net revenues that we  historically  recognized on our
securitization sales.

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<PAGE>

    Contractual   Restrictions.   The  revolving  facility,  the  securitization
program,  and our other credit facilities contain various restrictive  covenants
that limit our  operations.  Under these  credit  facilities,  we must also meet
certain  financial  tests.  As of  December  31,  1998,  we did not  satisfy the
interest coverage ratio and cash flow based interest coverage ratio under the GE
facility. GE Capital waived these defaults for this period. At the present time,
we  believe  that we are in  compliance  with the  terms and  conditions  of the
revolving  facility  and our other  credit  facilities.  Failure to satisfy  the
covenants in our credit facilities and/or our securitization  program could have
a material adverse effect on our operations.

We   have a high risk of credit losses because of the poor  creditworthiness  of
     our borrowers.

    Substantially  all of the sales  financing  that we extend and the contracts
that we service are with  sub-prime  borrowers.  Sub-prime  borrowers  generally
cannot obtain credit from  traditional  financial  institutions,  such as banks,
savings  and  loans,  credit  unions,  or  captive  finance  companies  owned by
automobile  manufacturers,  because of their poor  credit  histories  and/or low
incomes. We have established an Allowance for Credit Losses  approximating 26.4%
of contract  principal  balances as of  December  31, 1998 to cover  anticipated
credit  losses  on the  contracts  currently  in  our  portfolio.  Further,  the
Allowance  for Credit Losses  embedded in the  Residuals in Finance  Receivables
Sold as a  percentage  of the  remaining  principal  balances of the  underlying
contracts was  approximately  14.9% as of December 31, 1998. We believe that our
current  Allowance  for Credit  Losses is adequate to cover  anticipated  credit
losses. There is, however, no assurance that we have adequately provided for, or
will adequately  provide for, such credit risks. A significant  variation in the
timing of or increase in credit  losses on our  portfolio  would have a material
adverse effect on our net earnings.

    We also  operate our Cygnet  dealer  program,  under which we provide  third
party  dealers  who finance the sale of used cars to  sub-prime  borrowers  with
warehouse purchase facilities and operating lines of credit primarily secured by
those dealers' retail installment contract portfolios and/or inventory. While we
require  third party  dealers to meet  certain  minimum net worth and  operating
history  criteria before we loan money to them,  these dealers may not otherwise
be able to obtain debt financing from traditional lending institutions. Like our
other  financing  activities,  these  loans  subject us to a high risk of credit
losses that could have a material  adverse  effect on our operations and ability
to meet our other financing obligations.

We are affected by various industry considerations and legal contingencies.

    In recent periods,  several major used car finance  companies have announced
major downward  adjustments to their  financial  statements,  violations of loan
covenants,  related litigation,  and other events. Companies in the used vehicle
sales and  financing  market have also been named as defendants in an increasing
number of class action  lawsuits  brought by customers  claiming  violations  of
various federal and state consumer credit and similar laws and  regulations.  In
addition, certain of these companies have filed for bankruptcy protection. These
events:

   o  have lowered the value  of  securities  of  sub-prime  automobile  finance
         companies,
   o  have made it more difficult for sub-prime lenders to borrow money, and
   o  could cause more restrictive regulation of this industry.

     Compliance  with  additional  regulatory   requirements  may  increase  our
operating expenses and reduce our profitability.

Interest rates affect our profitability.

    A substantial  portion of our financing  income  results from the difference
between  the rate of  interest  we pay on the  funds we  borrow  and the rate of
interest we earn on the  contracts in our  portfolio.  While we earn interest on
the  contracts we own at a fixed rate, we pay interest on our  borrowings  under
our GE facility at a floating rate. When interest rates  increase,  our interest
expense  increases  and our net  interest  margins  decrease.  Increases  in our
interest  expense that we cannot  offset by  increases  in interest  income will
lower our profitability.

                                       35
<PAGE>

    Impact  of Laws  Limiting  Interest  Rates.  Historically,  we  conducted  a
significant  portion  of our used car sales  activities  in,  and a  significant
portion of the  contracts  we service  were  originated  in states  that did not
impose  limits on the interest rate that a lender may charge.  However,  we have
expanded,  and will  continue to expand,  into states that impose  interest rate
limitations.  When a state  limits the amount of  interest  we can charge on our
installment sales contracts, we may not be able to offset any increased interest
expense caused by rising  interest  rates or greater levels of borrowings  under
our credit facilities.  Therefore, these interest rate limitations or additional
laws,  rules,  or  regulations  that may be adopted in the future can  adversely
affect our profitability.

Our  business  is subject  to federal  and state  regulation,  supervision,  and
     licensing.

    We are  subject to ongoing  regulation,  supervision,  and  licensing  under
various federal, state, and local statutes,  ordinances, and regulations.  Among
other things, these laws:

   o  require that we obtain and maintain certain licenses and qualifications,
   o  limit or  prescribe  terms  of the  contracts  that  we  originate  and/or
         purchase,
   o  require specified disclosures to customers,
   o  limit our right to repossess and sell collateral, and
   o  prohibit us from  discriminating against certain customers.

    We  believe  that  we are  currently  in  substantial  compliance  with  all
applicable material federal, state, and local laws and regulations.  We may not,
however,  be able to remain in  compliance  with such laws.  If we do not comply
with  these  laws,  we  could be fined or  certain  of our  operations  could be
interrupted or shut down.  Failure to comply could,  therefore,  have a material
adverse  effect on our  operations.  In  addition,  the  adoption of  additional
statutes and regulations, changes in the interpretation of existing statutes and
regulations,  or our entry into  jurisdictions  with more  stringent  regulatory
requirements could also have a material adverse effect on our operations.

We are  dependent on our data  processing  platforms and other  technology.  Our
   computer systems may be subject to a Year 2000 date failure.

    Conversion of Our Data Processing Platforms. We recently converted our chain
of dealerships and related loan servicing data processing operations to a single
computer  system.  These  conversions  can  cause  various   implementation  and
integration  problems  that can affect our  servicing  operations  and result in
increases  in  contract  delinquencies  and  charge-offs  and  decreases  in our
servicing  income.  Failure  to  successfully  complete  our  conversions  could
materially affect our business and profitability.

     Year 2000  Readiness.  We are  continuing to study our computer  systems to
determine  our  exposure to Year 2000  issues.  We expect to make the  necessary
modifications  or changes  to our  computer  systems  to allow them to  properly
process  transactions  relating to the Year 2000 and beyond. We estimate that we
will spend  between  $2.2  million  to $2.7  million  for Year 2000  evaluation,
remediation,  testing, and replacement. We have spent approximately $1.9 million
to date. If we have to replace certain systems to make them Year 2000 compliant,
we will record the costs as assets and subsequently amortize them. If we have to
modify  existing  systems,  we will  expense  the costs as  incurred.  We can be
adversely  affected  by  Year  2000  problems  in the  business  systems  of our
suppliers,  vendors, and business partners,  such as utility suppliers,  banking
partners  and  telecommunication  service  providers.  We can also be  adversely
affected if Year 2000 problems  result in business  disruptions or failures that
impact our  customers'  ability to make  their loan  payments.  Failure to fully
address and resolve these Year 2000 issues could have a material  adverse effect
on our  operations.  See  "Management's  Discussion  and  Analysis of  Financial
Condition and Results of Operations--Year 2000 Readiness Disclosure."

     Our  Current  Contingency  Plan is Being  Revised.  We  depend  on our loan
servicing   and   collection   facilities   and  on   long-distance   and  local
telecommunications  access to transmit and process information among our various
facilities. We use a standard program to prepare and store off-site backup tapes
of our main system  applications and data files on a routine basis.  However, we
believe  that we need to revise  our  current  contingency  plan  because of our
recent system conversions and significant  growth.  Although we intend to update
our contingency  plan during 1999,  there could be a failure in the interim.  In
addition,  the plan as revised may not  prevent a system  failure or allow us to
timely resolve any systems failure. Also, a natural disaster, calamity, or other
significant  event that causes  long-term  damage to any of these  facilities or
that interrupts our  telecommunications  networks could have a material  adverse
effect on our operations.

                                       36
<PAGE>

We have certain risks relating to the FMAC transaction.

    We have entered into several  transactions in the bankruptcy  proceedings of
First  Merchants  Acceptance  Corporation  ("FMAC").  We purchased 78% of FMAC's
senior  bank  debt  at a 10%  discount.  We  agreed  to pay  the  selling  banks
additional consideration up to the amount of this 10% discount (or approximately
$7.6 million) if FMAC makes cash payments or issues notes at market rates to its
unsecured  creditors and equity holders in excess of 10% of their allowed claims
against FMAC. FMAC may make future cash payments to its unsecured  creditors and
equity holders from  recoveries on the contracts  which  originally  secured the
senior bank debt and from certain residual  interests in FMAC's securitized loan
pools, after FMAC pays certain other amounts ("Excess Collections").
Under FMAC's plan of reorganization, we will split these Excess Collections with
FMAC.

    If we satisfy  certain  requirements,  we may be able to issue shares of our
common  stock  in  exchange  for all or  part  of  FMAC's  share  of the  Excess
Collections.  This  would  reduce the cash  distributions  that could be made to
FMAC's unsecured  creditors and/or equity holders.  We would then be entitled to
receive  FMAC's share of the Excess  Collections.  The shares would be priced at
98% of the average  closing  price of our common  stock for the 10 trading  days
prior to the date of  issuance.  This  market  price must be at least  $8.00 per
share or we cannot exercise this option.

    Even if we are able to issue common stock for this purpose:

   o  the number of shares  that we issue may not be sufficient  to prevent FMAC
        from paying  unsecured  creditors  and equity  holders  more than 10% of
        their claims against FMAC.  Should this happen,  we would be required to
        pay the selling banks additional  consideration  for our purchase of 78%
        of FMAC's senior bank debt, and
   o  the issuance of shares would cause dilution to our common stock.

    We also have other risks in the FMAC bankruptcy case:

   o  we sold the  contracts  securing  the bank  claims at a profit  to a third
        party purchaser (the "Contract  Purchaser").  We guaranteed the Contract
        Purchaser a specified  return on the contracts with a current maximum of
        $8 million.  Although we obtained a related  guarantee from FMAC secured
        by certain  assets,  there is no assurance  that the FMAC guarantee will
        cover  all  of our  obligations  under  our  guarantee  to the  Contract
        Purchaser,
   o  we have  made  debtor-in-possession  loans to  FMAC,  secured  by  certain
        assets. We have continuing  obligations  under our  debtor-in-possession
        credit facility. FMAC is currently in default on the DIP Facility and we
        are  negotiating a settlement  with them that might increase our funding
        obligation in exchange for other concessions,
   o  we entered  into  various  agreements  to service  the  contracts  in  the
        securitized  pools  of FMAC  and  the  contracts  sold  to the  Contract
        Purchaser. If we lose our right to service these contracts,  our 17 1/2%
        share of the Excess Collections can be reduced or eliminated.

     Each of the FMAC  risks  described  in this  section  could have a material
adverse effect on our operations.

If  we  make  additional  acquisitions,   there  is no  assurance  they  will be
     successful.

    In 1997 we completed three significant acquisitions (Seminole, E-Z Plan, and
Kars).  We  intend  to  consider   additional   acquisitions,   alliances,   and
transactions  involving  other  companies  that could  complement  our  existing
business. We may not, however, be able to identify suitable acquisition parties,
joint venture candidates, or transaction counterparties.  Additionally,  even if
we can  identify  suitable  parties,  we may  not be able  to  consummate  these
transactions on terms that we find favorable.

    Furthermore,  we may not be able to  successfully  integrate any  businesses
that  we  acquire  into  our  existing  operations.  If we  cannot  successfully
integrate  acquisitions,  our operating expenses may increase in the short-term.
This increase would affect our net earnings,  which could  adversely  affect the
value of our outstanding securities.  Moreover,  these types of transactions may
result in potentially dilutive issuances of equity securities, the incurrence of
additional debt, and amortization of expenses related to goodwill and intangible
assets,  all of which could adversely affect our  profitability.  In addition to
the risks already mentioned,  these  transactions  involve numerous other risks,
including the diversion of management  attention from other  business  concerns,
entry into markets in which we have had no or only limited  experience,  and the
potential  loss of key  employees of acquired  companies.  Occurrence  of any of
these risks could have a material adverse effect on us.

                                       37
<PAGE>

Our industry is highly competitive.

    Although a large number of smaller companies have  historically  operated in
the used car sales industry,  this industry has recently  attracted  significant
attention  from a number  of large  companies.  These  large  companies  include
AutoNation,  U.S.A.,  CarMax,  and Driver's  Mart.  These  companies have either
entered the used car sales business or announced plans to develop large used car
sales operations.  Many franchised new car dealerships have also increased their
focus on the used car market.  We believe that these  companies are attracted by
the  relatively  high gross  margins that can be achieved in this market and the
industry's lack of consolidation. Many of these companies and franchised dealers
have significantly greater financial, marketing, and other resources than we do.
Among other things,  increased  competition could result in increased  wholesale
costs for used cars, decreased retail sales prices, and lower margins.

    Like the  sale of used  cars,  the  business  of  purchasing  and  servicing
contracts originated from the sale of used cars to sub-prime borrowers is highly
fragmented  and very  competitive.  In recent years,  several  consumer  finance
companies have completed public offerings. Through these public offerings, these
companies  have been able to raise the capital  necessary to fund  expansion and
support  increased  purchases of contracts.  These  companies have increased the
competition for the purchase of contracts, in many cases purchasing contracts at
higher prices than we would be willing to pay.

    There are  numerous  financial  services  companies  serving,  or capable of
serving, our market. These companies include traditional financial  institutions
such as banks,  savings and loans,  credit unions, and captive finance companies
owned by automobile  manufacturers,  as well as other  non-traditional  consumer
finance companies,  many of which have significantly greater financial and other
resources than our own. Increased competition may cause downward pressure on the
interest rates that we charge.  This pressure could affect the interest rates we
charge  on  contracts  originated  by our  dealerships  or cause us to reduce or
eliminate the acquisition discount on the contracts we purchase from third party
dealers.  Either change could have a material adverse effect on the value of our
securities.

The success of our operations depends on certain key personnel.

    We believe that our ability to successfully  implement our business strategy
and to operate  profitably  depends on the  continued  employment  of our senior
management  team.  The  unexpected  loss  of the  services  of  any  of our  key
management  personnel or our inability to attract new management  when necessary
could have a material  adverse  effect on our  operations.  We do not  currently
maintain any key person life insurance on any of our executive officers.

We   may be  required to issue stock in the future that will dilute the value of
     our existing stock.

     Issuance of any or all of the following  securities may dilute the value of
the securities that our existing stockholders now hold:

   o  we have  granted  warrants  to  purchase  a total  of  approximately  1.6
        million  shares of our common  stock to various  parties  with  exercise
        prices ranging from $6.75 to $20.00 per share,
   o  we may  be  required  to  issue   additional  warrants  in the  future  in
        connection  with both a completed and as yet unidentified  transactions,
        and
   o  we may issue common stock in the FMAC transaction in  exchange  for FMAC's
        portion of the Excess Collections.


                                       38
<PAGE>

A significant percentage of our stock is controlled by a principal stockholder.

    Mr.  Ernest C.  Garcia,  II, our  Chairman,  Chief  Executive  Officer,  and
principal  stockholder,  or  his  affiliates  held  approximately  29.8%  of our
outstanding  common  stock as of December  31, 1998.  This  percentage  includes
136,500 shares held by The Garcia Family Foundation, Inc., an Arizona non-profit
corporation,  and 88,000 shares held by Verde  Investments,  Inc., a real estate
investment  corporation  controlled by Mr. Garcia. As a result, Mr. Garcia has a
significant  influence upon our  activities as well as on all matters  requiring
approval of our stockholders. These matters include electing or removing members
of our board of directors,  engaging in transactions  with affiliated  entities,
causing or restricting our sale or merger, and changing our dividend policy. The
interests  of  Mr.   Garcia  may  conflict  with  the  interests  of  our  other
stockholders.

There is a potential anti-takeover effect if we issue preferred stock.

     Our  Certificate  of  Incorporation  authorizes  us to issue "blank  check"
preferred  stock. Our Board of Directors may fix or change from time to time the
designation,  number, voting powers, preferences, and rights of this stock. Such
issuances  could  make it more  difficult  for a third  party to  acquire  us by
reducing the voting  power or other  rights of the holders of our common  stock.
Although we have no present  intention  of issuing any shares of our  authorized
preferred stock, we may do so in the future.

      ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

   We are exposed to market risk on our  financial  instruments  from changes in
interest rates. We do not use financial  instruments for trading  purposes or to
manage  interest rate risk. Our earnings are  substantially  affected by our net
interest  income,   which  is  the  difference  between  the  income  earned  on
interest-bearing assets and the interest paid on interest bearing notes payable.
Increases   in  market   interest   rates  could  have  an  adverse   effect  on
profitability.

   Our   financial   instruments   consist   primarily  of  fixed  rate  finance
receivables,  residual  interests  in pools of fixed rate  finance  receivables,
short term variable rate revolving Notes Receivable, and variable and fixed rate
Notes  Payable.  Our finance  receivables  are  classified as subprime loans and
generally  bear  interest  at the lower of 29.9% or the  maximum  interest  rate
allowed in states that impose  interest rate limits.  At December 31, 1998,  the
scheduled maturities on our finance receivables range from one to 52 months with
a weighted  average  maturity of 31.3 months.  The interest  rates we charge our
customers on finance  receivables has not changed as a result of fluctuations in
market interest rates,  although we may increase the interest rates we charge in
the future if market interest rates  increase.  A large component of our debt at
December  31, 1998 is the  Collateralized  Note Payable  (Class A  certificates)
issued under our securitization program. Issuing debt through our securitization
program  allows us to mitigate our interest rate risk by reducing the balance of
the variable  revolving  line of credit and replacing it with a lower fixed rate
note  payable.  We are subject to interest rate risk on fixed rate Notes Payable
to the extent that future  interest  rates are higher than the interest rates on
our existing Notes Payable.

   The table below illustrates the impact that hypothetical  changes in interest
rates could have on our earnings before income taxes over a twelve month period.
We compute the impact on earnings for the period by first computing the baseline
net interest income on our financial  instruments with interest rate risk, which
are the  variable  rate  revolving  credit  lines and the  variable  rate  notes
payable. We then determine the net interest income based on each of the interest
rate  changes  listed below and compare the results to the baseline net interest
income to determine the estimated change in pretax earnings.  The table does not
give effect to our fixed rate receivables and borrowings.
<TABLE>
<CAPTION>

             Change in Interest Rates            Change in Pretax Earnings
             ------------------------            -------------------------
                                                       (in thousands)
                       <S>                           <C>
                       + 2%                          $        (1,208)
                       + 1%                          $          (604)
                       - 1%                          $            627
                       - 2%                          $          1,581
</TABLE>


                                       39
<PAGE>

In  computing  the effect of  hypothetical  changes in interest  rates,  we have
assumed that:

   o  interest rates used for the baseline and hypothetical  net interest income
         amounts are in effect for the entire twelve month period,
   o  interest for the period is calculated  on  financial  instruments  held at
         December 31, 1998 less contractually scheduled payments and maturities,
         and
   o  there is no change in prepayment  rates as a result  of the interest  rate
         changes.

    Our sensitivity to interest rate changes could be significantly different if
actual experience differs from the assumptions used to compute the estimates.


                                       40
<PAGE>

       ITEM 8 -- CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


<TABLE>
<CAPTION>


                   UGLY DUCKLING CORPORATION AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<S>                                                                         <C>
Independent Auditors' Report............................................    42
Consolidated Financial Statements:
  Consolidated Balance Sheets as of December 31, 1998 and 1997..........    43
  Consolidated Statements of Operations for the years ended December 31,
     1998, 1997 and 1996................................................    44
  Consolidated Statements of Stockholders' Equity for the years ended
     December 31, 1998, 1997, and 1996..................................    45
  Consolidated Statements of Cash Flows for the years ended December 31,
     1998, 1997 and 1996................................................    46
Notes to Consolidated Financial Statements..............................    47
</TABLE>


                                       41
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Ugly Duckling Corporation:

    We  have  audited  the  accompanying  consolidated  balance  sheets  of Ugly
Duckling  Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for each of the years in the  three-year  period ended  December 31, 1998.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

    We conducted  our audits in  accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

    In our opinion,  the  consolidated  financial  statements  referred to above
present  fairly,  in all  material  respects,  the  financial  position  of Ugly
Duckling  Corporation and subsidiaries as of December 31, 1998 and 1997, and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally  accepted
accounting principles.

                                    KPMG LLP

Phoenix, Arizona
February 18, 1999



                                       42
<PAGE>

                   UGLY DUCKLING CORPORATION AND SUBSIDIARIES

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                           December 31,
                                                                       ---------------------
                                                                         1998        1997
                                                                       ---------   ---------
                                                                      (In thousands, except
                                                                          share amounts)


<S>                                                                    <C>         <C>
ASSETS
Cash and Cash Equivalents.........................................     $   2,751   $   3,537
Finance Receivables, Net..........................................       163,209      90,573
Notes Receivable, Net.............................................        28,257      26,745
Inventory.........................................................        44,167      32,372
Property and Equipment, Net.......................................        32,970      39,827
Intangible Assets, Net............................................        15,530      17,543
Other Assets......................................................        20,575      11,246
Net Assets of Discontinued Operations.............................        38,516      54,583
                                                                       ---------   ---------
                                                                       $ 345,975   $ 276,426
                                                                       =========   =========

                           LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
  Accounts Payable................................................     $   2,479   $   2,867
  Accrued Expenses and Other Liabilities..........................        19,694      14,964
  Notes Payable...................................................        55,093      64,821
  Collateralized Notes Payable....................................        62,201          --
  Subordinated Notes Payable......................................        43,741      12,000
                                                                       ---------   ---------
          Total Liabilities.......................................       183,208      94,652
                                                                       ---------   ---------
Stockholders' Equity:
  Preferred Stock $.001 par value, 10,000,000 shares authorized,
     none issued and outstanding..................................            --          --
  Common Stock $.001 par value, 100,000,000 shares authorized,
     18,605,000 and 18,521,000 issued, respectively, and
     15,841,000 and 18,521,000 outstanding, respectively..........            19          19
  Additional Paid in Capital .....................................       173,809     172,603
  Retained Earnings...............................................         3,449       9,152
  Treasury Stock,  2,761,000 shares at cost.......................      (14,510)          --
                                                                       ---------   ---------
          Total Stockholders' Equity..............................       162,767     181,774
Commitments and Contingencies ....................................            --          --
                                                                       ---------   ---------
                                                                       $ 345,975   $ 276,426
                                                                       =========   =========
</TABLE>

          See accompanying notes to Consolidated Financial Statements.


                                       43
<PAGE>

                   UGLY DUCKLING CORPORATION AND SUBSIDIARIES

                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                  Years Ended December 31,
                                                              ---------------------------------
                                                                1998         1997        1996
                                                             ---------    ---------   ---------
                                                               (In thousands, except earnings
                                                                      per share amounts)
<S>                                                         <C>           <C>         <C>
Sales of Used Cars......................................    $ 287,618     $ 123,814   $  53,768
Less:
  Cost of Used Cars Sold................................      167,014        72,358      31,879
  Provision for Credit Losses...........................       67,634        23,045       9,657
                                                             --------     ---------   ---------
                                                               52,970        28,411      12,232
                                                             --------     ---------   ---------
Other Income:
  Interest Income.......................................       27,828        18,736       8,597
  Gain on Sale of Loans.................................       12,093        14,852       3,925
  Servicing and Other Income............................       38,631        12,681       2,537
                                                             --------     ---------   ---------
                                                               78,552        46,269      15,059
                                                             --------     ---------   ---------

Income before Operating Expenses........................      131,522        74,680      27,291
                                                             --------     ---------   ---------
Operating Expenses:
  Selling and Marketing.................................       20,565        10,538       3,585
  General and Administrative............................       92,402        41,902      13,118
  Depreciation and Amortization.........................        5,735         3,301       1,382
                                                             --------     ---------   ---------
                                                              118,702        55,741      18,085
                                                             --------     ---------   ---------

Income before Interest Expense..........................       12,820        18,939       9,206
Interest Expense........................................        6,904         2,774       2,429
                                                             --------     ---------   ---------
Earnings before Income Taxes............................        5,916        16,165       6,777
Income Taxes............................................        2,396         6,637         100
                                                             --------     ---------   ---------
Earnings from Continuing Operations.....................        3,520         9,528       6,677
Discontinued Operations:
Loss from Operations of Discontinued Operations,
     net of income tax benefit of $489, $58, and $0.....         (768)          (83)       (811)
Loss from Disposal of Discontinued Operations,
     net of income tax benefit of $5,393, $0, and $0....       (8,455)           --          --
                                                             ---------    ---------   ---------
Net Earnings (Loss).....................................     $ (5,703)    $   9,445   $   5,866
                                                             =========    =========   =========
Earnings per Common Share from Continuing Operations:
  Basic.................................................     $   0.19     $    0.53   $    0.73
                                                             ========     =========   =========
  Diluted...............................................     $   0.19     $    0.52   $    0.69
                                                             ========     =========   =========
Net Earnings (Loss) per Common Share:
  Basic.................................................     $  (0.32)    $    0.53   $    0.63
                                                             =========    =========   =========
  Diluted...............................................     $  (0.31)    $    0.52   $    0.60
                                                             =========    =========   =========
</TABLE>

          See accompanying notes to Consolidated Financial Statements.


                                       44
<PAGE>

                   UGLY DUCKLING CORPORATION AND SUBSIDIARIES

                 Consolidated Statements of Stockholders' Equity
                  Years Ended December 31, 1998, 1997, and 1996
                                 (in thousands)

<TABLE>
<CAPTION>

                                                                                                    Retained
                                       Number of Shares                 Amount ($'s)                Earnings        Total
                                -----------------------------     -------------------             (Accumulated   Stockholders'
                                Preferred  Common    Treasury    Preferred   Common     Treasury     Deficit)       Equity
                                --------   -------   --------    --------   ---------   --------   ----------     ---------
<S>                             <C>        <C>       <C>         <C>        <C>          <C>        <C>            <C>
Balances at December 31,
  1995........................     1,000     5,580         --     $10,000   $     127    $   --     $ (5,243)      $  4,884
Issuance of Common Stock
   for Cash...................       --      7,281         --          --      79,335        --           --         79,335
Conversion of Debt to
  Common Stock................       --        444         --          --       3,000        --           --          3,000
Issuance of Common Stock
   to Board of Director's.....       --         22         --          --         150        --           --            150
Redemption of Preferred          (1,000)        --         --     (10,000)         --        --           --        (10,000)
   Stock......................
Preferred Stock Dividends.....       --         --         --          --          --        --         (916)          (916)
Net Earnings for the Year.....       --         --         --          --          --        --        5,866          5,866
                                -------    -------     ------     -------   ---------    ------     --------      ---------
Balances at December 31,
  1996........................       --     13,327         --          --      82,612        --         (293)        82,319
Issuance of Common Stock
   for Cash...................       --      5,194         --          --      89,398        --           --         89,398
Issuance of Common Stock
  Warrants....................       --         --         --          --         612        --           --            612
Net Earnings for the Year.....       --         --         --          --          --        --        9,445          9,445
                                -------    -------     ------     -------   ---------    ------     --------      ---------
Balances at December 31,
  1997........................       --     18,521         --          --     172,622        --        9,152         181,774
Issuance of Common Stock
   for Casg...................       --         84         --          --         306        --           --            306
Issuance of Common Stock
  Warrants....................       --         --         --          --         900        --           --            900
Purchase of Treasury Stock
   for Cash...................       --         --        (72)         --          --      (535)          --           (535)
Acquisition of Treasury
   Stock for Subordinated
   Debentures.................       --         --     (2,689)         --          --   (13,975)          --        (13,975)
Net Loss for the Year.........       --         --                     --          --                 (5,703)        (5,703)
                                -------    -------   ---------    -------   ---------  --------     ---------     ----------

Balances at December 31,
  1998........................       --     18,605     (2,761)    $    --   $ 173,828  $(14,510)    $  3,449      $ 162,767
                                =======    =======   =========    =======   =========  =========    ========      =========
</TABLE>


          See accompanying notes to Consolidated Financial Statements.


                                       45
<PAGE>

                   UGLY DUCKLING CORPORATION AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                          Years Ended December 31,
                                                                    -----------------------------------
                                                                       1998         1997         1996
                                                                    -----------  ----------    --------
                                                                               (In thousands)
<S>                                                                 <C>          <C>           <C>
Cash Flows from Operating Activities:
  Net Earnings (Loss)..........................................     $   (5,703)  $    9,445    $  5,866
  Adjustments to Reconcile Net Earnings (Loss) to Net Cash
     Provided by (Used in) Operating Activities from
     Continuing Operations:
  Loss from Discontinued Operations............................          9,223           83         811
  Provision for Credit Losses..................................         67,634       23,045       9,657
  Gain on Sale of Loans........................................        (12,093)      (6,721)     (3,925)
  Deferred Income Taxes........................................         (3,344)       1,094         498
  Depreciation and Amortization................................          5,735        3,301       1,382
  Purchase of Finance Receivables for Sale.....................       (207,085)    (116,830)    (48,996)
  Proceeds from Sale of Finance Receivables....................        159,498       81,098      30,259
  Collections of Finance Receivables...........................         22,000       15,554      26,552
  Decrease (Increase) in Inventory.............................        (11,795)     (20,592)        778
  Increase in Other Assets.....................................         (6,020)      (2,779)     (2,155)
  Increase in Accounts Payable, Accrued Expenses, and Other
     Liabilities...............................................          5,425        6,905       2,571
  Increase (Decrease) in Income Taxes Receivable/Payable.......         (1,233)      (1,378)        535
  Other, Net...................................................           (156)          --          --
                                                                    -----------  ----------    --------
    Net Cash Provided by (Used in) Operating Activities
      of Continuing Operations.................................         22,086       (7,775)     23,833
                                                                    ----------   ----------    --------
Cash Flows from Investing Activities:
  Increase in Finance Receivables..............................       (111,467)     (20,941)         --
  Collections of Finance Receivables...........................         22,779        9,160          --
  Increase in Investments Held in Trust........................        (13,802)      (8,475)     (3,162)
  Advances under Notes Receivable..............................        (13,669)     (32,782)         --
  Repayments of Notes Receivable...............................         11,857        6,900         137
  Proceeds from disposal of Property and Equipment.............         27,413           --          --
  Purchase of Property and Equipment...........................        (21,786)     (19,509)     (5,549)
  Payment for Acquisition of Assets............................             --      (45,220)         --
  Other, Net...................................................             --           --      (1,944)
                                                                    ----------   ----------    --------
    Net Cash Used in Investing Activities of Continuing
       Operations..............................................        (98,675)    (110,867)    (10,518)
                                                                    ----------   ----------    --------
Cash Flows from Financing Activities:
  Additions to Notes Payable...................................         95,191       22,228       1,000
  Repayments of Notes Payable..................................        (43,169)          --     (28,610)
  Issuance of Subordinated Notes Payable.......................         19,630           --          --
  Repayment of Subordinated Notes Payable......................         (2,000)      (2,000)       (553)
  Redemption of Preferred Stock................................             --           --     (10,000)
  Proceeds from Issuance of Common Stock.......................            306       89,398      79,435
  Acquisition of Treasury Stock................................           (535)          --          --
  Other, Net...................................................           (464)        (178)     (1,158)
                                                                    ----------   ----------    --------
    Net Cash Provided by Financing Activities of Continuing
       Operations..............................................         68,959      109,448      40,114
                                                                    ----------   ----------    --------
Net Cash Provided by (Used in) Discontinued Operations.........          6,844       (5,724)    (36,393)
                                                                    ----------   ----------    --------
Net Increase (Decrease) in Cash and Cash Equivalents...........           (786)     (14,918)     17,036
Cash and Cash Equivalents at Beginning of Year.................          3,537       18,455       1,419
                                                                    ----------   ----------    --------
Cash and Cash Equivalents at End of Year.......................     $    2,751   $    3,537    $ 18,455
                                                                    ==========   ==========    ========
Supplemental Statement of Cash Flows Information:
  Interest Paid................................................     $   10,483   $    5,382    $  5,144
  Income Taxes Paid............................................          1,633        6,570         450
  Assumption of Debt in Connection with Acquisition of Assets..             --       29,900          --
  Conversion of Note Payable to Common Stock...................             --           --       3,000
  Purchase of Property and Equipment with Notes Payable........            825           --       8,313
  Purchase of Property and Equipment with Capital Leases.......             --          357          57
  Purchase of Treasury Stock with Subordinated Notes Payable...         13,835           --          --
  Issuance of Warrants for Subordinated Note Payable...........            900           --          --
</TABLE>

          See accompanying notes to Consolidated Financial Statements.


                                       46
<PAGE>

                   UGLY DUCKLING CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(1) Organization and Acquisitions

    Ugly  Duckling  Corporation,  a  Delaware  corporation  (the  Company),  was
incorporated  in April 1996 as the  successor to Ugly  Duckling  Holdings,  Inc.
(UDH), an Arizona corporation formed in 1992. Contemporaneous with the formation
of the Company,  UDH was merged into the Company with each share of UDH's common
stock exchanged for 1.16 shares of common stock in the Company and each share of
UDH's  preferred stock exchanged for one share of preferred stock in the Company
under  identical  terms and  conditions.  UDH was  effectively  dissolved in the
merger. The resulting effect of the merger was a recapitalization increasing the
number of authorized shares of common stock to 20,000,000 and a 1.16-to-1 common
stock split  effective April 24, 1996. The  stockholders'  equity section of the
Consolidated  Balance Sheets and the Statements of Stockholders'  Equity reflect
the number of  authorized  shares after  giving  effect to the merger and common
stock split. The Company's principal stockholder is also the sole stockholder of
Verde Investments, Inc. (Verde). The Company's subordinated debt is held by, and
the land for certain of its car  dealerships  and loan servicing  facilities was
leased from Verde until December 31, 1996, see Note 16.

    During 1997, the Company  completed several  acquisitions.  In January 1997,
the  Company  acquired  substantially  all of the  assets  of  Seminole  Finance
Corporation  and related  companies  (Seminole)  including  four  dealerships in
Tampa/St.  Petersburg and a contract portfolio of approximately $31.1 million in
exchange for approximately  $2.5 million in cash and assumption of $29.9 million
in debt. In April 1997, the Company purchased substantially all of the assets of
E-Z Plan,  Inc.  (EZ Plan),  including  seven  dealerships  in San Antonio and a
contract portfolio of approximately  $24.3 million in exchange for approximately
$26.3 million in cash. In September 1997, the Company acquired substantially all
of the  dealership  and loan  servicing  assets (but not the loan  portfolio) of
Kars-Yes Holdings Inc. and related  companies (Kars),  including six dealerships
in the Los Angeles  market,  two in the Miami market,  two in the Atlanta market
and two in the Dallas  market,  in exchange  for  approximately  $5.5 million in
cash. These  acquisitions were recorded in accordance with the "purchase method"
of accounting,  and,  accordingly,  the purchase price has been allocated to the
assets  purchased and the  liabilities  assumed  based upon the  estimated  fair
values at the date of  acquisition.  The excess of the  purchase  price over the
fair values of the net assets acquired was  approximately  $16.0 million and has
been recorded as goodwill,  which is being  amortized over periods  ranging from
fifteen to twenty years.  The results of  operations of the acquired  operations
have  been  included  in the  accompanying  statements  of  operations  from the
respective acquisition dates.

(2) Discontinued Operations

    In February  1998,  the Company  announced its intention to close its branch
office network (the "Branch Offices") through which the Company purchased retail
installment  contracts,  and exit this line of business in the first  quarter of
1998. The Company recorded a pre-tax charge to discontinued  operations of $15.1
million  (approximately $9.2 million,  net of income taxes) in 1998. The closure
was substantially  complete as of March 31, 1998 and included the termination of
approximately  400  employees,  substantially  all of whom were  employed at the
Company's  76  branches  that  were in place  on the  date of the  announcement.
Approximately  $1.7  million  of the  discontinued  operations  charge  was  for
termination benefits, $6.7 million for portfolio allowance and collection costs,
$2.5 million for write-off of pre-opening and start-up costs,  and the remainder
for lease  payments on idle  facilities,  writedowns of leasehold  improvements,
data  processing  and  other   equipment.   The  Company  has  reclassified  the
accompanying   consolidated  balance  sheets  and  consolidated   statements  of
operations of the Branch Offices to Discontinued Operations.

    In April 1998, the Company  announced  that its Board of Directors  directed
management  to  proceed  with  separating  the  Company's  operations  into  two
companies.  The Company  formed a new  subsidiary  to operate the Cygnet  Dealer
Program and Cygnet Financial Services ("Non Dealership Operations").  A proposal
to split-up the Company  through a rights  offering was approved by stockholders
at the annual meeting held in August 1998 and rights were subsequently issued to
Company  stockholders.  The  Company  had  previously  reported  the net assets,
results  of  operations,  and cash  flows of the Non  Dealership  Operations  in
Discontinued  Operations.  However,  the rights offering failed due to a lack of
shareholder  participation.  The Board of Directors  has directed  management to
cease its efforts, for the time being, to separate the Non Dealership Operations
of the  Company.  As a result of the  aforementioned,  the assets,  liabilities,
results of operations, and cash flows of the Non Dealership Operations have been
reclassified  into  continuing  operations  for the periods  presented  in these
consolidated  financial  statements.   Total  assets  and  liabilities  for  Non
Dealership Operations were $77.2 million and $8.7 million, and $49.9 million and
$559,000 at December  31, 1998 and 1997,  respectively.  Revenues  and  Earnings


                                       47
<PAGE>

(Loss) before Interest Expense were $32,837,000 and $3,993,000,  $14,664,000 and
$11,331,000,  and zero and zero, respectively,  for the years ended December 31,
1998,  1997,  and 1996. The Company did not record any charges to record the net
assets of the Non Dealership  Operations at net realizable value at the time the
separation was announced,  and, consequently,  did not reverse any loss accruals
during 1998.

    The components of Net Assets of  Discontinued  Operations as of December 31,
1998 and December 31, 1997 follow (in thousands):

<TABLE>
<CAPTION>
                                                          December 31,
                                                      -------------------
                                                        1998       1997
                                                      ---------  --------
<S>                                                   <C>        <C>
    Finance Receivables, net.....................     $ 30,649   $ 26,780
    Residuals in Finance Receivables Sold........        7,875     16,099
    Investments Held in Trust....................        3,665      7,277
    Property and Equipment.......................        1,198      1,424
    Capitalized Start-up Costs...................           --      2,453
    Other Assets, net of Accounts Payable and
      Accrued Liabilities........................        1,153        550
    Disposal Liability...........................       (6,024)        --
                                                      ---------  --------
                                                      $ 38,516   $ 54,583
                                                      ========   ========
</TABLE>

    Following  is a  summary  of  the  operating  results  of  the  Discontinued
Operations for the years ended December 31, 1998, 1997, and 1996 (in thousands):

<TABLE>
<CAPTION>
                                                       December 31,
                                             --------------------------------
                                               1998        1997        1996
                                             --------    --------     -------
<S>                                          <C>         <C>          <C>
Revenues.................................    $  3,095    $ 21,213     $ 7,768
Expenses.................................     (18,200)    (21,354)     (8,579)
                                             --------    --------     -------
Loss before Income Tax (Benefit).........     (15,105)       (141)       (811)
Income Tax Benefit.......................      (5,882)        (58)         --
                                             ---------   ---------    -------
Loss from Discontinued Operations........    $ (9,223)   $    (83)    $  (811)
                                             =========   =========    =======
</TABLE>

(3) Summary of Significant Accounting Policies

Operations

    The Company,  through its  subsidiaries,  owns and  operates  used car sales
dealerships,  a collateralized  dealer finance  program,  and a third party bulk
purchasing and loan servicing operation. Additionally, Ugly Duckling Receivables
Corporation  (UDRC)  and Ugly  Duckling  Receivables  Corporation  II (UDRC II),
"bankruptcy  remote  entities" are the Company's  wholly-owned  special  purpose
securitization   subsidiaries.   Their  assets  include   residuals  in  finance
receivables sold and investments held in trust,  including amounts classified as
discontinued   operations,   in  the  amounts  of  $7,875,000  and   $3,665,000,
respectively,  at  December  31,  1998 and in the  amounts  of  $16,099,000  and
$7,277,000,  respectively,  at December 31,  1997.  These  amounts  would not be
available to satisfy claims of creditors of the Company.

Principles of Consolidation

    The Consolidated  Financial  Statements  include the accounts of the Company
and its subsidiaries.  Significant  intercompany  accounts and transactions have
been eliminated in consolidation.

Use of Estimates

    The  preparation  of  financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect  the  reported  amount of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period.  Actual results could differ from those estimates.

                                       48
<PAGE>

Concentration of Credit Risk

    The Company  provides sales finance services in connection with the sales of
used cars to individuals  residing in numerous  metropolitan  areas. The Company
operated a total of 56, 41, and 8 used car dealerships (company  dealerships) in
nine,  ten and two  metropolitan  markets at December 31, 1998,  1997, and 1996,
respectively.

     As of December 31, 1998, the Company's  Cygnet Dealer Program had warehouse
purchase  facilities and revolving lines of credit with a total of approximately
63 third party dealers.  Cygnet  Dealer's net investment in finance  receivables
purchased  from 2 third  party  dealers  totaled  approximately  $15.1  million,
representing  approximately  34% of  Cygnet  dealer's  net  finance  receivables
portfolio as of December 31, 1998.  There were no other third party dealer loans
that exceeded 10% of the Company's finance receivables  portfolio as of December
31, 1998.

    Periodically  during  the year,  the  Company  maintains  cash in  financial
institutions in excess of the amounts insured by the federal government.

Cash Equivalents

    The Company  considers all highly  liquid debt  instruments  purchased  with
maturities  of three  months or less to be cash  equivalents.  Cash  equivalents
generally consist of interest bearing money market accounts.

Revenue Recognition

    Interest  income  is  recognized  using the  interest  method.  Direct  loan
origination  costs related to contracts  originated at Company  dealerships  are
deferred  and  charged  against  finance  income  over the  life of the  related
installment sales contract as an adjustment of yield. The accrual of interest is
suspended if  collection  becomes  doubtful,  generally 90 days past due, and is
resumed when the loan becomes  current.  Interest income also includes income on
the Company's residual interests from its Securitization Program.

    Revenue from the sales of used cars is recognized  upon  delivery,  when the
sales contract is signed and the agreed-upon down payment has been received.

Residuals in Finance  Receivables  Sold,  Investments Held in Trust, and Gain on
   Sale of Loans

    In 1996, the Company initiated a Securitization  Program under which it sold
(securitized),  on a non-recourse  basis,  finance  receivables to a trust which
used the  finance  receivables  to create  asset  backed  securities  which were
remitted to the Company in  consideration  for the sale.  The Company  then sold
senior  certificates  (A  certificates)  to third party  investors  and retained
subordinated  certificates certificates).  In consideration of such sale, the
Company received cash proceeds from the sale of certificates  collateralized  by
the  finance   receivables  and  the  right  to  future  cash  flows  under  the
subordinated  certificates  (residual in finance  receivables sold, or residual)
arising from those  receivables  to the extent not required to make  payments on
the A certificates sold to a third party or to pay associated costs.

    Gains or losses were determined based upon the difference  between the sales
proceeds for the portion of finance  receivables sold and the Company's recorded
investment in the finance  receivables  sold. The Company allocated the recorded
investment  in the  finance  receivables  between  the  portion  of the  finance
receivables  sold and the portion  retained based on the relative fair values on
the date of sale.

    To the extent that actual cash flows on a securitization  are below original
estimates and differ  materially from the original  securitization  assumptions,
and in the opinion of management,  if those differences  appear to be other than
temporary in nature, the Company's residual will be adjusted, with corresponding
charges  against  income in the  period in which the  adjustment  is made.  Such
evaluations are performed on a security by security basis,  for each certificate
or spread account retained by the Company.

    The structure of the Company's securitization transaction consummated in the
fourth  quarter  of 1998 was  changed  from the  structure  of the  transactions
previously effected under its Securitization  Program and has been accounted for
as a secured financing in accordance with SFAS 125, Accounting for Transfers and


                                       49
<PAGE>

Servicing of Financial Assets and Extinguishments of Liabilities (SFAS No. 125).
The loan contracts included in the transaction remain in Finance Receivables and
the A Certificates are reflected in Collateralized Notes Payable.

    The Company is required to make an initial  deposit  into an account held by
the trustee  (spread  account) and to pledge this cash to the trust to which the
finance  receivables  were sold.  The trustee in turn invests the cash in highly
liquid  investment  securities.  In addition,  the Company (through the trustee)
deposits  additional  cash flows  from the  residual  to the  spread  account as
necessary to attain and maintain the spread account at a specified percentage of
the  underlying  finance  receivable  principal  balances.  These  deposits  are
classified as Finance Receivables.

   Residuals in Finance  Receivables  Sold are classified as  "held-to-maturity"
securities in accordance with SFAS No. 115.

Servicing Income

    Servicing  Income is recognized when earned.  Servicing costs are charged to
expense as incurred.  In the event delinquencies  and/or losses on the portfolio
serviced exceed  specified  levels,  the Company may be required to transfer the
servicing of the portfolio to another servicer.

Finance Receivables and Allowance for Credit Losses

    Finance  receivables  consist  of  contractually   scheduled  payments  from
installment  sales contracts net of unearned finance  charges,  accrued interest
receivable,  direct loan  origination  costs,  investments held in trust, and an
allowance for credit losses, including nonaccretable discounts.

    The Company  follows the  provisions  of Statement  of Financial  Accounting
Standards No. 91,  "Accounting for Nonrefundable  Fees and Costs Associated with
Originating or Acquiring  Loans and Initial Direct Costs of Leases." Direct loan
origination  costs  represent the  unamortized  balance of costs incurred in the
origination of contracts at the Company's dealerships.

    An allowance for credit losses  (allowance)  is  established by charging the
provision  for credit  losses and the  allocation  of acquired  allowances.  For
contracts generated by the Company dealerships,  the allowance is established by
charging the provision for credit losses.  Contracts  purchased from third party
dealers are generally  purchased with an acquisition  discount  (discount).  The
discount is negotiated with third party dealers pursuant to a financing  program
that bases the discount on, among other things,  the credit risk of the borrower
and the amount to be  financed in relation  to the car's  wholesale  value.  The
discount is allocated between nonaccretable  discount and discount available for
accretion to interest income. The portion of discount allocated to the allowance
is based upon historical  performance and write-offs of contracts  acquired from
third party dealers,  as well as the general credit  worthiness of the borrowers
and the  wholesale  value of the vehicle.  The  remaining  discount,  if any, is
deferred and accreted to income using the interest method.

    To the  extent  that the  allowance  is  considered  insufficient  to absorb
anticipated credit losses,  additions to the allowance are established through a
charge to the  provision  for credit  losses.  The  evaluation  of the allowance
considers such factors as the  performance of each  dealerships  loan portfolio,
the  Company's  historical  credit  losses,  the overall  portfolio  quality and
delinquency  status,  the  review  of  specific  problem  loans,  the  value  of
underlying  collateral,  and  current  economic  conditions  that may affect the
borrower's ability to pay.

Notes Receivable

    Notes  receivable are recorded at cost, less related  allowance for impaired
notes receivable.  Management,  considering information and events regarding the
borrowers  ability to repay their  obligations,  including an  evaluation of the
estimated value of the related collateral,  considers a note to be impaired when
it is probable that the Company will be unable to collect  amounts due according
to the contractual terms of the note agreement.  When a loan is considered to be
impaired,  the amount of  impairment  is measured  based on the present value of
expected future cash flows discounted at the note's  effective  interest rate or
the fair value of the collateral if the loan is collateral dependent. Impairment
losses are included in the allowance  for credit losses  through a charge to the
provision for credit  losses.  Cash receipts on impaired  notes  receivable  are
applied to reduce the  principal  amount of such notes until the  principal  has
been received and are recognized as interest income, thereafter.

                                       50
<PAGE>

Inventory

    Inventory  consists  of used  vehicles  held for sale which is valued at the
lower of cost or market,  and  repossessed  vehicles  which are valued at market
value. Vehicle  reconditioning costs are capitalized as a component of inventory
cost. The cost of used vehicles sold is determined on a specific  identification
basis.

Property and Equipment

    Property and Equipment are stated at cost.  Depreciation  is computed  using
straight-line  and  accelerated  methods over the estimated  useful lives of the
assets  which range from three to ten years for  equipment  and thirty years for
buildings. Leasehold and land improvements are amortized using straight-line and
accelerated  methods over the shorter of the lease term or the estimated  useful
lives of the related improvements.

    The Company has  capitalized  costs related to the  development  of software
products for internal  use.  Capitalization  of costs begins when  technological
feasibility  has been  established  and ends when the software is available  for
general use.  Amortization is computed using the  straight-line  method over the
estimated economic life of five years.

Goodwill

    Goodwill,  which  represents the excess of purchase price over fair value of
net assets  acquired,  is amortized on a  straight-line  basis over the expected
periods to be benefited, generally fifteen to twenty years.

Post Sale Customer Support Programs

    A liability for the estimated cost of post sale customer support,  including
car repairs and the  Company's  down payment back and credit card  programs,  is
established at the time the used car is sold by charging Cost of Used Cars Sold.
The  liability is  evaluated  for  adequacy  through a separate  analysis of the
various programs' historical performance.

Income Taxes

    The Company utilizes the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are  recognized  for the future tax  consequences  attributable  to  differences
between  the  financial  statement  carrying  amounts  of  existing  assets  and
liabilities and their respective tax bases.  Deferred tax assets and liabilities
are measured  using enacted tax rates expected to apply to taxable income in the
years in which those  temporary  differences  are  expected to be  recovered  or
settled.  The effect on deferred tax assets and  liabilities  of a change in tax
rates is recognized in income in the period that includes the enactment date.

Stock Option Plan

    The  Company  accounts  for its stock  option  plan in  accordance  with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees,  and related  interpretations.  As such, compensation
expense is recorded on the date of grant only if the current market price of the
underlying  stock  exceeded  the  exercise  price.  The  Company has adopted the
disclosure provisions of SFAS No. 123, Accounting for Stock-Based  Compensation,
which permits  entities to provide pro forma net earnings and pro forma earnings
per share  disclosures  for employee stock option grants made in 1995 and future
years as if the  fair-value-based  method as  defined  in SFAS No.  123 had been
applied.

    The Company  uses one of the most widely used  option  pricing  models,  the
Black-Scholes  model  (Model),  for purposes of valuing its stock option grants.
The Model was developed for use in estimating  the fair value of traded  options
that have no vesting  restrictions and are fully transferable.  In addition,  it
requires  the input of highly  subjective  assumptions,  including  the expected
stock price volatility,  expected dividend yields,  the risk free interest rate,
and the expected life. Because the Company's stock options have  characteristics
significantly  different from those of traded  options,  and because  changes in
subjective input assumptions can materially  affect the fair value estimate,  in
management's  opinion,  the value  determined  by the  Model is not  necessarily
indicative of the ultimate value of the granted options.


                                       51
<PAGE>

Earnings Per Share

    Basic earnings per share is computed by dividing income  available to common
stockholders by the weighted-average number of common shares outstanding for the
period.  Diluted  earnings per share reflects the potential  dilution that could
occur if  securities  or  contracts  to issue  common  stock were  exercised  or
converted  into common  stock or resulted in the  issuance of common  stock that
then shared in the earnings of the Company.

Impairment of Long-Lived Assets

    Long-Lived  Assets and certain  identifiable  intangibles  are  reviewed for
impairment  whenever  events or changes in  circumstances  indicate the carrying
amount of an asset may not be recoverable.  Recoverability  of assets to be held
and used is  measured  by a  comparison  of the  carrying  amount of an asset to
future  undiscounted  net cash flows  expected to be generated by the asset.  If
such assets are  considered to be impaired,  the  impairment to be recognized is
measured  by the amount by which the  carrying  amount of the assets  exceed the
fair value of the assets.  Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.

Transfers and Servicing of Financial Assets and Extinguishments of Liabilities

    The Company  adopted the provisions of SFAS No. 125 on January 1, 1997. This
Statement  provides   accounting  and  reporting  standards  for  transfers  and
servicing  of  financial  assets and  extinguishments  of  liabilities  based on
consistent  application  of a  financial-components  approach  that  focuses  on
control.  It  distinguishes  transfers of  financial  assets that are sales from
transfers that are secured  borrowings.  Adoption of SFAS No. 125 did not have a
material impact on the Company.

Reclassifications

    Certain  reclassifications  have been made to the prior years'  consolidated
financial statement amounts to conform to the current year presentation.

(4) Finance Receivables and Allowance for Credit Losses

    A summary of finance  receivables  as of December  31, 1998 and 1997 follows
(in thousands):


<TABLE>
<CAPTION>
                                                                          December 31,
                                           -----------------------------------------------------------------------
                                                          1998                                  1997
                                           ----------------------------------    ---------------------------------
                                                           Non                                   Non
                                           Dealership   Dealership               Dealership   Dealership
                                           Operations   Operations     Total     Operations   Operations    Total
                                           ---------    ----------   --------    ---------    ----------   --------
<S>                                        <C>          <C>          <C>          <C>          <C>         <C>
Installment Sales Contract Principal
   Balances............................     $ 93,936     $ 51,282    $145,218     $ 55,965     $ 27,480    $ 83,445
Add: Accrued Interest Receivable.......          877          473       1,350          462          147         609
Loan Origination Costs, Net............        2,237           --       2,237        1,431           --       1,431
                                            --------     --------    --------     --------     --------    --------
Principal Balances, Net................       97,050       51,755     148,805       57,858       27,627      85,485
Residuals in Finance Receivables Sold..       33,331        2,625      35,956       13,277           --      13,277
Investments Held in Trust..............       20,564           --      20,564       10,357           --      10,357
                                            --------     --------    --------     --------     --------    --------
                                             150,945       54,380     205,325       81,492       27,627     109,119
Allowance for Credit Losses............      (24,777)      (2,024)    (26,801)     (10,356)      (1,035)    (11,391)
Discount on Acquired Loans.............           --      (15,315)    (15,315)          --       (7,155)     (7,155)
                                            --------     ---------   --------     --------     ---------   --------
Finance Receivables, net...............     $126,168     $ 37,041    $163,209     $ 71,136     $ 19,437    $ 90,573
                                            ========     ========    ========     ========     ========    ========

Classification:
Finance Receivables Held for Sale           $     --     $     --    $     --     $ 52,000     $     --    $ 52,000
Finance Receivables Held for Investment       97,050       51,755     148,805        5,858       27,627      33,485
                                            --------     --------    --------     --------     --------    --------
                                            $ 97,050     $ 51,755    $148,805     $ 57,858     $ 27,627    $ 85,485
                                            ========     ========    ========     ========     ========    ========
</TABLE>

                                       52
<PAGE>

    A summary of the allowance  for credit losses on finance receivables for the
years ended December 31, 1998, 1997 and 1996 follows (in thousands):

<TABLE>
<CAPTION>
                                                       1998                                  1997
                                         -------------------------------     -------------------------------
                                                                                                                   1996
                                                        Non                                 Non                 ----------
                                         Dealership  Dealership              Dealership  Dealership             Dealership
                                         Operations  Operations    Total     Operations  Operations    Total    Operations
                                         ----------  ----------  ---------   ----------  ----------  ---------  ----------
<S>                                      <C>         <C>         <C>         <C>         <C>         <C>        <C>
          Balances, Beginning of Year    $  10,356    $  1,035   $  11,391   $   1,625   $      --   $   1,625   $   7,500
          Provision for Credit Losses       65,318       2,016      67,334      22,354         491      22,845       9,657
          Allowance on Acquired Loans           --         801         801      15,309         550      15,859          --
          Net Charge Offs............       (6,358)     (1,828)    (8,186)      (7,524)         (6)     (7,530)     (6,202)
          Sale of Finance Receivables      (44,539)         --    (44,539)     (21,408)         --     (21,408)     (9,330)
                                         ---------   ---------   ---------   ---------    --------   ---------   ---------
          Balances, End of Year......    $  24,777   $   2,024   $  26,801   $  10,356   $   1,035   $  11,391   $   1,625
                                         =========   =========   =========   =========   =========   =========   =========
</TABLE>

    The valuation of the Residual in Finance Receivables Sold as of December 31,
1998,  which  totaled  $33.3  million,  represents  the  present  value  of  the
Dealership  Operations' interests in the distributions of future cash flows from
the underlying  portfolio out of the securitization  trusts and Investments Held
in Trust (see note 5) which  totaled  $20.6  million at December 31,  1998.  The
Company's  securitization  transactions were discounted with a rate of 12% using
the "cash out method".  For  securitizations  between June 30, 1996 and June 30,
1997, net losses were originally  estimated using total expected  cumulative net
losses  at  loan  origination  of  approximately  26.0%,   adjusted  for  actual
cumulative net losses prior to  securitization.  Prepayment rates were estimated
to be 1.5% per month of the beginning of month balances.

    During the year ended December 31, 1997, the Company recorded a $5.7 million
charge to write-down the Residuals in Finance  Receivables  Sold. The charge had
the effect of increasing  the cumulative  net loss  assumption to  approximately
27.5%,  for the  securitization  transactions  that took place prior to June 30,
1997. For the securitization  transaction that took place in September 1997, net
losses  were  estimated  using  total  expected  cumulative  net  losses at loan
origination of approximately  27.5%,  adjusted for actual  cumulative net losses
prior to securitization.  For securitization  transactions  completed during the
nine month period ended  September  30, 1998,  net losses were  estimated  using
total expected cumulative net losses at loan origination of approximately 29.0%,
adjusted for actual  cumulative net losses prior to  securitization.  Prepayment
rates were estimated to be 1% per month of the beginning of month balance.

    As of December 31, 1998 and 1997, the Residuals in Finance  Receivables Sold
for the  Company's  Dealership  Operations  were  comprised of the following (in
thousands):

<TABLE>
<CAPTION>
                                                             December 31,
                                                       ----------------------
                                                          1998         1997
                                                       --------      --------
<S>                                                   <C>           <C>
Retained interest in subordinated securities (B
     Certificates).................................   $  51,243     $  25,483
Net interest spreads, less present value discount..      25,838        10,622
Reduction for estimated credit loss................     (43,750)      (22,828)
                                                      ---------      --------
Residuals in finance receivables sold..............   $  33,331     $  13,277
                                                      =========     =========
Securitized principal balances outstanding.........   $ 198,747     $ 127,356
                                                      =========     =========
Estimated credit losses and allowances as a % of
   securitized principal balances outstanding......       22.0%           17.9%
                                                      ========      ==========
</TABLE>


    The  following  table  reflects a summary of activity  for the  Residuals in
Finance Receivables Sold for the Company's  Dealership  Operations for the years
ended December 31, 1998 and 1997, respectively (in thousands):

<TABLE>
<CAPTION>
                                                          December 31,
                                                      ---------------------
                                                        1998         1997
                                                      --------     --------
<S>                                                   <C>          <C>
 Balance, Beginning of Year.......................    $ 13,277     $  8,512
 Additions........................................      35,435       17,734
 Amortization.....................................     (15,381)      (7,242)
 Write-down of Residual in Finance Receivables Sold         --       (5,727)
                                                      --------     --------
 Balance, End of Year.............................    $ 33,331     $ 13,277
                                                      ========     ========
</TABLE>

    The Company also has an investment in subordinate certificates originated by
a third party  approximating  $2.6  million at December 31, 1998 held by its Non
Dealership Operations classified as Residuals in Finance Receivables Sold.


                                       53
<PAGE>

(5) Investments Held in Trust

    In connection with its securitization transactions,  the Company is required
to provide a credit  enhancement  to the investor.  The Company makes an initial
cash  deposit,  ranging  from  4%  to  6%  of  the  initial  underlying  finance
receivables  principal  balance,  of cash into an  account  held by the  trustee
(spread  account)  and  pledges  this  cash to the  trust to which  the  finance
receivables were sold.  Additional deposits from the residual cash flow (through
the trustee) are made to the spread  account as necessary to attain and maintain
the spread account at a specified percentage, ranging from 6.0% to 10.5%, of the
underlying finance receivables principal balance.

    In the event that the cash flows  generated by the finance  receivables  are
insufficient  to pay obligations of the trust,  including  principal or interest
due to certificate holders or expenses of the trust, the trustee will draw funds
from the spread account as necessary to pay the  obligations  of the trust.  The
spread  account must be  maintained  at a specified  percentage of the principal
balances of the finance receivables held by the trust, which can be increased in
the event delinquencies or losses exceed specified levels. If the spread account
exceeds the  specified  percentage,  the trustee will release the excess cash to
the Company from the pledged spread account. Except for releases in this manner,
the cash in the spread account is restricted from use by the Company.

    During 1998, the Company made initial spread account deposits totaling $13.1
million and additional net deposits  through the trustee  totaling $4.8 million.
The total  balance in the spread  accounts was $20.6  million as of December 31,
1998. In connection  therewith,  the specified spread account balance based upon
the  aforementioned  specified  percentages  of the  balances of the  underlying
portfolios was $23.7 million,  resulting in additional funding requirements from
future  cash flows of $3.1  million as of  December  31,  1998.  The  additional
funding  requirement will decline as the trustee deposits  additional cash flows
into the spread account and as the principal  balance of the underlying  finance
receivables declines.

    During 1997, the Company made initial spread account deposits  totaling $6.1
million and additional net deposits  through the trustee  totaling $1.8 million.
The total  balance in the spread  accounts was $10.4  million as of December 31,
1997. In connection  therewith,  the specified spread account balance based upon
the  aforementioned  specified  percentages  of the  balances of the  underlying
portfolios  as of December 31, 1997 was $10.5  million,  resulting in additional
funding requirements of $101,000 as of December 31, 1997.

(6)   Notes Receivable

         The Company's  Cygnet Dealer Program has various notes  receivable from
used  car  dealers.  Under  its  Asset  Based  Loan  program,  the  Company  had
commitments  for revolving notes  receivable  totaling $13.8 million at December
31,  1998.  These  notes have  various  maturity  dates  through  June 2001 with
interest  rates  ranging  from  prime  plus  5.00% to prime plus 9.75% per annum
(12.75% to 17.50% at December 31, 1998) payable  monthly.  The  revolving  notes
subject the borrower to borrowing  base  requirements  with advances on eligible
collateral  (retail  installment  contracts)  ranging from forty-five percent to
sixty-five  percent of the par value of the underlying  collateral.  The balance
outstanding  on notes  receivable  totaled  $8.8  million,  and $5.6  million at
December 31, 1998 and 1997,  respectively.  The  allowance for credit losses for
notes  receivable  totaled  $500,000 and $200,000 at December 31, 1998 and 1997,
respectively.

    In July  1997,  First  Merchants  Acceptance  Corporation  (FMAC)  filed for
bankruptcy.  Immediately  subsequent  to  the  bankruptcy  filing,  the  Company
executed a loan  agreement to provide FMAC with up to $10.0 million in debtor in
possession (the DIP facility)  financing.  The DIP facility  accrued interest at
12.0%,  was initially  scheduled to mature on February 28, 1998, and was secured
by substantially all of FMAC's assets. The Company and FMAC subsequently amended
the DIP facility to increase the maximum  commitment to $21.5 million,  decrease
the interest rate to 10.0% per annum, and extend the maturity date indefinitely.
In connection with the amendment, FMAC pledged the first $10.0 million of income
tax refunds  receivable,  the balance of which FMAC  anticipates  collecting  in
1999,  to the Company.  The maximum  commitment  under the DIP facility had been
reduced to $12.4 million at December 31, 1998. Once the proceeds from the income
tax refunds are remitted to the Company,  such  amounts  permanently  reduce the
maximum commitment under the DIP facility.  Thereafter,  the Company anticipates
collecting  the  balance of the DIP  facility  from  distributions  to FMAC from
FMAC's  residual   interests  in  certain   securitization   transactions.   The
outstanding  balance on the DIP facility totaled $12.2 million and $11.0 million
at December 31, 1998 and 1997, respectively.


                                       54
<PAGE>

    During the third and fourth fiscal  quarters of 1997,  the Company  acquired
the senior bank debt of FMAC from the bank group  members  holding such debt. In
December 1997, a credit bid for the outstanding  balance of the senior bank debt
plus certain fees and expenses (the "credit bid purchase price") was entered and
approved in the  bankruptcy  court  resulting in the transfer of the senior bank
debt for the loan  portfolio  which  secured  the senior  bank debt (the  "owned
loans").  Simultaneous  with the  transfer  to the  Company,  a finance  company
purchased  the  owned  loans  for  86%  of the  principal  balance  of the  loan
portfolio,  and the Company retained a 14%  participation in the loan portfolio.
FMAC has guaranteed  that the Company will receive an 11.0% return on the credit
bid purchase price from the cash flows generated by the owned loans, and further
collateralized   by  FMAC's   residual   interests  in  certain   securitization
transactions.  The balance of the  participation  totaled  $6.9 million and $9.2
million at December 31, 1998 and 1997, respectively.

    A summary of notes  receivable  as of December 31, 1998 and 1997 follows (in
thousands):

<TABLE>
<CAPTION>
                                                                  December 31,
                                                             --------   --------
                                                              1998        1997
                                                             --------   --------
<S>                                                          <C>       <C>
Notes Receivable under the Asset Based Loan Program, net
   of allowance for doubtful accounts of $500, and $200,
   respectively.........................................     $  8,311  $   5,594
FMAC Debtor in Possession Note Receivable...............       12,228     10,994
FMAC Bank Group Participation...........................        6,856      9,244
Other Notes Receivable..................................          862        913
                                                             --------   --------
Notes Receivable, net...................................     $ 28,257   $ 26,745
                                                             ========   ========
</TABLE>


(7)   Property and Equipment

    A summary of Property and Equipment as of December 31, 1998 and 1997 follows
(in thousands):

<TABLE>
<CAPTION>
                                                              December 31,
                                                        ---------------------
                                                          1998         1997
                                                        --------     --------
<S>                                                     <C>          <C>
Land................................................    $  3,721     $ 13,813
Buildings and Leasehold Improvements................       9,984       16,274
Furniture and Equipment.............................      24,373       11,668
Vehicles............................................         219          306
Construction in Process.............................       2,872        2,817
                                                        --------     --------
                                                          41,169       44,878
Less Accumulated Depreciation and Amortization......      (8,199)      (5,051)
                                                        --------     --------
Property and Equipment, Net.........................    $ 32,970     $ 39,827
                                                        ========     ========
</TABLE>

    In March 1998, the Company  executed a commitment  letter with an investment
company for the sale-leaseback of up to $37.0 million in real property. Pursuant
to the terms of the  agreement,  the Company would sell certain real property to
the  investment  company at its cost and leaseback the properties for an initial
term of twenty years.  During 1998, the Company sold approximately $27.4 million
of  property  under  this  agreement  and  recognized  no  gain  or  loss on the
sale-leaseback transactions.

    Interest  expense  capitalized  in 1998,  1997 and  1996  totaled  $135,000,
$229,000, and zero, respectively.

(8) Intangible Assets

    A summary of intangible  assets as of December 31, 1998 and 1997 follows (in
thousands):

<TABLE>
<CAPTION>
                                              December 31,
                                           ------------------
                                             1998       1997
                                           --------   -------
<S>                                        <C>        <C>
          Original Cost:
          Goodwill....................     $ 17,037   $17,945
          Trademarks..................          581       581
          Covenants not to Compete....          250       250
                                           --------   -------
                                             17,868    18,776
          Accumulated Amortization....       (2,338)   (1,233)
                                           --------   -------
          Intangibles, Net............     $ 15,530   $17,543
                                           ========   =======
</TABLE>

    Amortization  expense relating  to  intangible  assets  totaled  $1,105,000,
$857,000,  and $63,000 for the years ended  December  31,  1998,  1997 and 1996,
respectively.

                                       55
<PAGE>

(9) Other Assets

    A summary of Other  Assets as of  December  31,  1998 and 1997  follows  (in
thousands):

<TABLE>
<CAPTION>
                                                  December 31,
                                              ------------------
                                                1998       1997
                                              -------    -------
<S>                                            <C>        <C>
           Prepaid Expenses..............      $2,484     $1,957
           Income Taxes Receivable.......       2,926      1,693
           Servicing Receivables.........       4,266      1,389
           Restricted Cash...............       1,565      1,280
           Deposits......................       1,286        829
           Employee Advances.............       1,431        821
           Deferred Income Taxes.........       2,626         --
           Other.........................       3,991      3,277
                                              -------    -------
                                              $20,575    $11,246
                                              =======    =======
</TABLE>

(10) Accrued Expenses and Other Liabilities

    A summary of Accrued Expenses and Other  Liabilities as of December 31, 1998
and 1997 follows (in thousands):

<TABLE>
<CAPTION>
                                                  December 31,
                                               -----------------
                                                 1998      1997
                                               -------   -------
<S>                                            <C>       <C>
           Sales Taxes....................     $ 3,033   $ 3,909
           Accrued Payroll, Benefits & Taxes     2,192     2,366
           Collections Liability..........       3,121     1,503
           Accrued Advertising............       1,234       850
           Accrued Post Sale Support......       1,809       771
           Deferred Income Taxes..........          --       718
           Others.........................       8,305     4,847
                                               -------   -------
                                               $19,694   $14,964
                                               =======   =======
</TABLE>

    In connection  with the retail sale of vehicles,  the Company is required to
pay  sales  taxes to  certain  government  jurisdictions.  In  certain  of these
jurisdictions,  the  Company  has  elected  to pay these  taxes  using the "cash
basis",  which  requires the Company to pay the sales tax  obligation for a sale
transaction  as  principal  is  collected  over the life of the related  finance
receivable contract.

(11) Notes Payable

    A summary  of Notes  Payable  at  December  31,  1998 and 1997  follows  (in
thousands):

<TABLE>
<CAPTION>
                                                                          December 31,
                                                                       --------------------
                                                                         1998       1997
                                                                       ---------  ---------
<S>                                                                    <C>        <C>
$125,000,000 revolving loan with a finance company, interest
   payable daily at 30 day LIBOR (5.24% at December 31, 1998)
   plus 3.15% through  June 2000, secured by substantially all
   assets of the Company.............................................  $  51,765  $ 56,950
Two notes payable to a finance company totaling $7,450,000,
   monthly interest payable at the prime rate plus 1.50%
   (9.25 % at December 31, 1998) through January 1998; thereafter,
   monthly payments of $89,000 plus interest through April 1999
   when the remaining unpaid principal is due, secured by first
   deeds of trust and assignments of rents on certain real property..      3,386     7,450
Other notes bearing interest at rates ranging from 9% to 11% due
   through August 2001, secured by certain real property and
   certain  property and equipment ..................................        967       771
                                                                       ---------  ---------
          Subtotal...................................................     56,119     65,171
          Less:  Unamortized Loan Fees...............................      1,025        350
                                                                       ---------  ---------
          Total......................................................  $  55,093  $  64,821
                                                                       ========== =========
</TABLE>

    The  aforementioned  revolving loan agreement contains various reporting and
performance  covenants including the maintenance of certain ratios,  limitations
on additional  borrowings from other sources,  restrictions on certain operating
activities,  and a  restriction  on  the  payment  of  dividends  under  certain
circumstances.  The Company was in compliance with the covenants at December 31,
1998 and 1997 except for interest  coverage  ratios at December  31,  1998,  for
which the Company obtained a waiver.


                                       56
<PAGE>

(12)     Collateralized Notes Payable

    The Company has  Collateralized  Notes Payable  consisting of a note payable
under a  securitization  and a note  payable  secured by the common stock of the
Company's  securitization  subsidiaries.  These notes do not have  contractually
scheduled principal payments but require the Company to remit all collections on
the collateral to the note holders. A summary of Collateralized Notes Payable at
December 31, 1998 and 1997, respectively, follows (in thousands):

<TABLE>
<CAPTION>
                                                                          December 31,
                                                                       -------------------
                                                                         1998       1997
                                                                       --------  ---------
<S>                                                                    <C>       <C>
$50,607,000 of A Certificates issued pursuant to the Company's
   Securitization Program, interest payable monthly at 5.90%,
   secured by the pool of finance receivable contracts and spread
   account ($5.7 million at December 31, 1998), monthly principal
   payments are 73% of principal reductions of the underlying
   pool of finance receivable contracts...........................        50,607        --
$15 million note payable to a finance company, bearing interest at
   LIBOR plus 4% (9.54% at December 31, 1998), secured by the
   capital stock of UDRC and UDRC II, Lender will receive all
   UDRC II, Lender will receive all  distributions  for Residuals in
   distributions for Residuals in Finance Receivables Sold until
   until note is paid in full.....................................        12,234        --
                                                                       --------  ---------
          Subtotal................................................        62,841        --
          Less:  Unamortized Loan Fees............................           640        --
                                                                       --------  ---------
          Total...................................................     $ 62,201  $      --
                                                                       ========  =========
</TABLE>

     (13) Subordinated Notes Payable

    A summary of  Subordinated  Notes  Payable  at  December  31,  1998 and 1997
follows:

<TABLE>
<CAPTION>
                                                                          December 31,
                                                                      -------------------
                                                                         1998      1997
                                                                      ---------   -------
                                                                         (In thousands)
<S>                                                                   <C>        <C>
$17.5 million Subordinated debentures, interest at 12% per
   annum (approximately 18.8% effective rate) payable
   semi-annually with the entire principal balance due October
   23, 2003; the debentures are subordinate to all other Company
   indebtedness except the Verde note and contain certain call
   provisions at the option of the Company..........................  $  17,479  $     --
$15 million notes payable to unrelated parties, bearing interest at
   12% per annum payable quarterly, principal due February 2001
   senior to the Verde subordinated note payable and the
   subordinated debentures..........................................      15,000       --
$5 million notes payable to unrelated parties, bearing interest 12%
   per annum payable quarterly, principal due July 2001 senior to
   the Verde subordinated note payable and the subordinated
   debentures.......................................................       5,000       --
$14 million unsecured note payable with Verde, interest payable
   monthly at 10% per annum with annual principal payments of
   $2 million, maturing June 2003...................................      10,000    12,000
                                                                      ----------    ------
          Subtotal..................................................     47,479    12,000
          Less:  Unamortized Premium................................      3,738         --
                                                                      ---------   --------
          Total.....................................................   $ 43,741   $ 12,000
                                                                       ========   ========
</TABLE>

    During the year the Company issued $17.5 million of subordinated  debentures
in  exchange  for 2.7 million  shares of Company  common  stock  valued at $14.0
million  ("Exchange  Offer"),  including  $370,000  of  costs  incurred  for the
Exchange Offer. The debentures are unsecured and subordinate to all existing and
future  indebtedness  of the Company and bear  interest at 12% per annum payable
semi-annually each April and October, approximately $2.9 million per year, until
they are paid in full on October  23,  2003.  The  debentures  were  issued at a
premium of approximately  $3,874,000 in excess of the market value of the shares
tendered, which will be amortized over the life of the debentures and results in
an effective  interest rate of  approximately  18.8%. The Company is required to
pay the  principal  amount  of  debentures  on the  fifth  anniversary  of their
issuance date.

    In connection with the issuance of the $15 million senior subordinated notes
payable,  the  Company  issued  warrants,  which  were  valued at  approximately
$900,000,  to the  lenders to  purchase  up to 500,000  shares of the  Company's
Common Stock at an exercise  price of $10.00 per share  exercisable  at any time
until the later of (1)  February  2001,  or (2) such time as the notes have been
paid in full.

    Interest expense related to the subordinated note payable with Verde totaled
$1,073,000,  $1,232,000,  and  $1,933,000,  during the years ended  December 31,
1998, 1997 and 1996, respectively.

                                       57
<PAGE>

    A summary  of the  future  minimum  principal  payments  required  under the
aforementioned  notes payable and subordinated  notes payable after December 31,
1998 follows (in thousands):

<TABLE>
<CAPTION>
                                              Subordinated
         December 31,     Notes Payable      Notes Payable         Total
         ------------     -------------      -------------      ----------
<S>                       <C>                <C>                <C>
      1999..........      $       3,634      $       2,000      $    5,634
      2000..........             51,903              2,000          53,903
      2001..........                581             22,000          22,581
      2002..........                 --              2,000           2,000
      2003..........                 --             19,479          19,479
                          -------------      -------------      ----------
                            $    56,118      $      47,479      $  103,597
                            ===========      =============      ==========
</TABLE>

(14) Income Taxes

    Income taxes amounted to $2,396,000,  $6,637,000, and $100,000 for the years
ended December 31, 1998, 1997 and 1996,  respectively  (an effective tax rate of
40.5%, 41.1%, and 1.6%,  respectively).  A reconciliation between taxes computed
at the  federal  statutory  rate of 35% in 1998  and 1997 and 34% in 1996 at the
effective tax rate on earnings before income taxes follows (in thousands):

<TABLE>
<CAPTION>
                                                      December 31,
                                              -----------------------------
                                               1998       1997       1996
                                              -------    ------    --------
<S>                                           <C>        <C>       <C>
Computed "Expected" Income Taxes .......      $2,071     $5,658    $  2,142
State Income Taxes, Net of Federal Effect         96        962          41
Change in Valuation Allowance...........         735         --      (2,315)
Other, Net..............................        (506)        17         232
                                              -------    ------    --------
                                              $2,396     $6,637    $    100
                                              ======     ======    ========
</TABLE>

    Components of income taxes  (benefit) for the years ended December 31, 1998,
1997 and 1996 follow (in thousands):

<TABLE>
<CAPTION>
                                       Current  Deferred    Total
                                      --------   -------  -------
<S>                                   <C>        <C>      <C>
           1998:
             Federal..............    $    91    $ 2,158  $ 2,249
             State................          6        141      147
                                      -------    -------  -------
                                           97      2,299    2,396
             Discontinued operations     (239)    (5,643)  (5,882)
                                      --------   -------- --------
                                      $  (142)   $(3,344) $(3,486)
                                      ========   ======== ========
           1997:
             Federal..............    $ 3,743    $ 1,414  $ 5,157
             State................      1,197        283    1,480
                                      -------    -------  -------
                                        4,940      1,697    6,637
             Discontinued operations      (40)       (18)     (58)
                                      --------   -------- --------
                                      $ 4,900    $ 1,679  $ 6,579
                                      =======    =======  =======
           1996:
             Federal..............    $  (149)   $   187  $    38
             State................         --         62       62
                                      -------    -------  -------
                                      $  (149)   $   249  $   100
                                      =======    =======  =======
</TABLE>


                                       58
<PAGE>

    The tax  effects  of  temporary  differences  that give rise to  significant
portions of the deferred tax assets and deferred tax  liabilities as of December
31, 1998 and 1997 are presented below (in thousands):

<TABLE>
<CAPTION>
                                                             December 31,
                                                          -----------------
                                                            1998       1997
                                                          -------    ------
<S>                                                       <C>        <C>
Deferred Tax Assets:
  Finance Receivables, Principally Due to the
     Allowance for Credit Losses....................      $2,282     $  473
  Inventory.........................................          --        246
  Federal and State Income Tax Net Operating Loss
     Carryforwards..................................       1,224         28
  Discontinued Operations Liability.................       2,410         --
  Accrued Post Sale Support.........................         717        357
  Other.............................................         934        395
                                                          ------     ------
  Total Gross Deferred Tax Assets...................       7,567      1,499
  Less: Valuation Allowance.........................        (735)        --
                                                          -------    ------
          Net Deferred Tax Assets...................       6,832      1,499
                                                          ------     ------
Deferred Tax Liabilities:
  Software Development Costs........................      (2,191)      (237)
  Inventory.........................................      (1,176)        --
  Pre-Opening and Start Up Costs....................          --     (1,236)
  Loan Origination Fees.............................        (255)      (586)
  Other.............................................        (584)      (158)
                                                          ------     ------
     Total Gross Deferred Tax Liabilities...........      (4,206)    (2,217)
                                                          ------     -------
          Net Deferred Tax Asset (Liability)........      $2,626     $ (718)
                                                          ======     ======
</TABLE>

    The valuation  allowance for deferred tax assets as of December 31, 1998 and
1997 was $735,000 and zero, respectively.  The net change in the total valuation
allowance for the year ended December 31, 1998 was an increase of $735,000.  The
allowance is attributable  primarily to future deductions and net operating loss
carryforwards   in  certain  states  where  the  Branch  Offices   operated  and
realization  of a tax benefit is unlikely.  There was no change in the Valuation
Allowance for the year ended  December 31, 1997. In assessing the  realizability
of Deferred Tax Assets,  management considers whether it is more likely than not
that some portion or all of the  Deferred  Tax Assets will not be realized.  The
ultimate  realization  of Deferred Tax Assets is dependent  upon  generation  of
future  taxable income during the periods in which those  temporary  differences
become   deductible.   Management   considers   the  reversal  of  Deferred  Tax
Liabilities,  projected  future taxable income,  and tax planning  strategies in
making this  assessment.  Based upon the level of historical  taxable income and
projections for future taxable income over the periods in which the Deferred Tax
Assets are deductible,  management  believes it is more likely than not that the
Company will realize the benefits of these  deductible  differences,  net of the
established valuation allowance at December 31, 1998.

    At December 31, 1998, the Company had net operating loss  carryforwards  for
federal  income tax  purposes of  approximately  $1,822,000,  which,  subject to
annual  limitations,  are available to offset  future  taxable  income,  if any,
through 2011.

(15) Servicing

    Pursuant to the  Company's  securitization  program that began in 1996,  the
Company  securitizes  loan  portfolios  with  servicing  retained.  The  Company
services the securitized  portfolios for a monthly fee ranging from .25% to .33%
(generally,  3.0% to 4.0% per annum) of the beginning of month principal balance
of the serviced portfolios. The Company has retained the servicing rights on the
contracts it has sold in connection with its  securitization  transactions.  The
Company has not  established  any servicing  assets or liabilities in connection
with its securitizations as the revenues from contractually  specified servicing
fees and other  ancillary  sources  have been just  adequate to  compensate  the
Company for its servicing responsibilities.

    In 1998  the  Company's  Non  Dealership  Operations  entered  into  several
agreements  with third parties to service loan  portfolios on their behalf.  The
service fees are generally a percentage  of the  outstanding  principal  balance
ranging from  generally,  3.25% to 4.0% per annum,  subject to a minimum  dollar
amount per contract, and are paid monthly.

    The Company recognized servicing income of $33.3 million,  $8.8 million, and
$1.9 million in the years ended December 31, 1998, 1997 and 1996, respectively.

                                       59
<PAGE>

    A summary of portfolios serviced by the Company's  respective segments as of
December 31, 1998 and 1997 follows (in thousands):

<TABLE>
<CAPTION>
Dealership Operations:                                      1998         1997
                                                         -----------   ---------
<S>                                                      <C>           <C>
Finance Receivables from continuing operations.......    $    93,936   $  55,965
Finance Receivables from discontinued operations              30,219      29,965
Securitized with servicing retained..................        242,297     238,025
Servicing on behalf of others........................         47,947     127,322
                                                         -----------   ---------
Total serviced portfolios Dealership Operations .....        414,399     451,277
                                                         -----------   ---------

Non Dealership Operations:
Finance Receivables .................................          1,237          --
Servicing on behalf of others........................        586,081          --
                                                         -----------    --------
     Total serviced portfolios Non Dealership
         Operations..................................        587,318         --
                                                         -----------   ---------
      Total serviced portfolios......................    $ 1,001,717  $ 451,277
                                                         ===========  =========
</TABLE>

    Pursuant  to the terms of the various  servicing  agreements,  the  serviced
portfolios  are  subject  to  certain  performance  criteria.  In the  event the
serviced  portfolios  do not satisfy  such  criteria  the  servicing  agreements
contain  various  remedies up to and including  the removal of servicing  rights
from the Company.

(16) Lease Commitments

    The  Company  leases  used car sales  facilities,  loan  servicing  centers,
offices,  and certain office  equipment  from  unrelated  entities under various
operating  leases that expire  through March 2019.  The leases  require  monthly
rental payments aggregating  approximately  $871,000 and contain various renewal
options  from one to ten  years.  In  certain  instances,  the  Company  is also
responsible  for occupancy and maintenance  costs,  including real estate taxes,
insurance,  and utility costs. Rent expense totaled $11,419,000,  $5,398,000 and
$2,394,000 for the years ended December 31, 1998, 1997, and 1996, respectively.

    During 1996,  the Company  purchased six car lots, a vehicle  reconditioning
center,  and two office  buildings from Verde.  These  properties had previously
been rented from Verde  pursuant to various leases which called for base monthly
rents  aggregating  approximately  $123,000 plus contingent rents as well as all
occupancy and maintenance  costs,  including real estate taxes,  insurance,  and
utilities.  In connection with the purchase,  Verde returned  security  deposits
that totaled $364,000. Rent expense for the year ended December 31, 1996 totaled
$2,394,000,  which included rents paid to Verde  totaling  $1,498,000  including
contingent rents of $440,000.

    A summary of future  minimum lease  payments  required  under  noncancelable
operating leases with remaining lease terms in excess of one year as of December
31, 1998 follows (in thousands):

<TABLE>
<CAPTION>
                             Continuing  Discontinued
            December 31,     Operations   Operations     Total
            ------------     ----------  ------------  --------
<S>                            <C>          <C>        <C>
            1999..........     $11,320      $  567     $ 11,887
            2000..........      10,216         178       10,394
            2001..........       8,263          --        8,263
            2002..........       5,849          --        5,849
            2003..........       3,874          --        3,874
            Thereafter....      45,181          --       45,181
                               -------      ------     --------
                      Total    $84,703      $  745     $ 85,448
                               =======      ======     ========
</TABLE>

(17) Stockholders' Equity

    During 1998 the Company acquired approximately 2.7 million shares of Company
Common Stock with a value of approximately  $14.0 million in the Exchange Offer.
The Company also  acquired  72,000  shares of Treasury  Stock for  approximately
$535,000 under its Stock Repurchase Program.

    During 1997, the Company  completed a private  placement of 5,075,500 shares
of common stock for a total of  approximately  $88.7 million cash,  net of stock
issuance costs. The registration of the shares sold in the private placement was
effective in April 1997. During 1996, the Company completed two public offerings
in which it issued a total of 7,245,000 shares of common stock for approximately
$79.4 million cash, net of stock issuance costs.

                                       60
<PAGE>

    During 1998, the Company issued 50,000 warrants to a third party to purchase
Company common stock.  The warrants are exercisable  through February 2001 at an
exercise price of $12.50 per share of common stock.

    During 1998, the Company issued warrants,  valued at approximately $900,000,
to  purchase  500,000  shares  of  Company  common  stock  at $10 per  share  in
connection with senior  subordinated note payable  agreements.  The warrants are
exercisable  at any time until (1) February  2001,  or (2) the notes are paid in
full.

    During the year the  Company  issued  325,000  warrants  to a third party to
purchase  Company common stock at $20.00 per share. The warrants expire on April
1, 2001 and are subject to a call feature by the Company.

    During 1997, the Company issued  warrants for the right to purchase  389,800
shares of the Company's  common stock for $20.00 per share  exercisable  through
February  2000.  The  warrants  were  valued at  approximately  $612,000.  These
warrants  remained  outstanding  at December 31, 1998. In addition,  warrants to
acquire  116,000  shares of the  Company's  common  stock at $6.75 per share and
170,000 shares of the Company's common stock at $9.45 per share were outstanding
at December 31, 1997.

    On April 24, 1996,  the Company  effectuated  a 1.16-to-1  stock split.  The
effect of this stock split has been  reflected for all periods  presented in the
Consolidated Financial Statements.

    The Company's Board of Directors declared  quarterly  dividends on preferred
stock totaling  approximately  $916,000 during the year ended December 31, 1996.
There were no cumulative unpaid dividends at December 31, 1996.

(18) Earnings (Loss) Per Share

    A summary  of the  reconciliation  from basic  earnings  (loss) per share to
diluted  earnings (loss) per share for the years ended December 31, 1998,  1997,
and 1996 follows (in thousands, except for per share amounts):

<TABLE>
<CAPTION>
                                                       1998     1997       1996
                                                     -------- --------   -------
<S>                                                  <C>      <C>        <C>
Earnings From Continuing Operations..............    $ 3,520  $  9,528   $ 6,677
Less: Preferred Stock Dividends..................         --        --      (916)
                                                     -------  --------   -------
Earnings available to Common Stockholders........    $ 3,520  $  9,528   $ 5,761
                                                     =======  ========   =======
Net Earnings (Loss)..............................    $(5,703) $  9,445   $ 5,866
Less: Preferred Stock Dividends..................         --        --      (916)
                                                     -------  --------   -------
Earnings (Loss) available to Common Stockholders.    $(5,703) $  9,445   $ 4,950
                                                     ======== ========   =======
Basic Earnings Per Share From Continuing
  Operations.....................................    $  0.19  $   0.53   $  0.73
                                                     =======  ========   =======
Diluted Earnings Per Share From Continuing
  Operations.....................................    $  0.19  $   0.52   $  0.69
                                                     =======  ========   =======
Basic Earnings (Loss) Per Share..................    $ (0.32) $   0.53   $  0.63
                                                     =======  ========   =======
Diluted Earnings (Loss) Per Share................    $ (0.31) $   0.52   $  0.60
                                                     =======  ========   =======
Basic EPS-Weighted Average Shares Outstanding....     18,082    17,832     7,887
Effect of Diluted Securities:
  Warrants.......................................         41        98        71
  Stock Options..................................        282       304       340
                                                     -------  --------   -------
Dilutive EPS-Weighted Average Shares Outstanding.     18,405    18,234     8,298
                                                     =======  ========   =======
Warrants Not Included in Diluted EPS Since
   Antidilutive..................................      1,044       390        --
                                                     =======  ========   =======
Stock Options Not Included in Diluted EPS Since
  Antidilutive...................................      1,044       828        --
                                                     =======  ========   =======
</TABLE>

(19) Stock Option Plan

    In June, 1995, the Company adopted a long-term  incentive plan (Stock Option
Plan)  under  which it has set aside  1,800,000  shares  of  common  stock to be
granted to employees.  Options are to vest over a period to be determined by the
Board of Directors upon grant and will generally  expire 6 to 10 years after the
date of grant. The options generally vest over a period of 5 years.

    In August 1998, the Company's  stockholders  approved an executive incentive
stock option plan (Executive  Plan).  The Company has reserved 800,000 shares of
its common stock for issuance.  Options  granted under the plan expire ten years
after  the  grant  date and vest 20% per year  upon  completion  of each year of
service after the date of grant  (beginning 1 year after the grant date) subject
to meeting additional vesting hurdles that are based on the trading price of the
Company's  stock.  Even if these  additional  vesting  hurdles are not met,  the
options will fully vest 7 years after the date of grant.


                                       61
<PAGE>

    A summary of the aforementioned stock plan activity follows:

<TABLE>
<CAPTION>
                                Stock Option Plan            Executive Plan
                             -----------------------   -----------------------
                                           Weighted                  Weighted
                                            Average                   Average
                                           Price Per                 Price Per
                                Number       Share        Number       Share
                             -----------  ----------   -----------  ----------
<S>                          <C>          <C>          <C>          <C>
Balance, December 31, 1996       912,000  $   8.60              --  $       --
  Granted.................       582,000     15.07              --          --
  Forfeited...............       (78,000)    14.00              --          --
  Exercised...............      (118,000)     2.04              --          --
                             -----------               -----------
Balance, December 31, 1997     1,298,000     11.76              --          --
  Granted.................       925,000      7.68         525,000         8.25
  Forfeited...............      (995,000)    13.64         (25,000)        8.25
  Exercised...............       (76,000)     3.61              --          --
                             -----------               -----------
Balance, December 31, 1998     1,152,000      7.43         500,000         8.25
                             ===========               ===========
</TABLE>


    At December  31,  1998,  there were  409,000 and 300,000  additional  shares
available   for  grant  under  the  Stock  Option  Plan  and   Executive   Plan,
respectively. The per share weighted-average fair value of stock options granted
during 1998, 1997 and 1996 was $3.22, $6.54 and $8.39, respectively, on the date
of grant using the  Black-Scholes  option-pricing  model.  The following are the
weighted-average  assumptions:  1998 -- expected  dividend  yield 0%,  risk-free
interest rate of 5.25%,  expected volatility of 50.0%, and an expected life of 5
years;  1997 -- expected  dividend yield 0%,  risk-free  interest rate of 5.53%,
expected  volatility of 40.0%, and an expected life of 5 years; 1996 -- expected
dividend yield 0%, risk-free interest rate of 6.4%, expected volatility of 56.5%
and an expected life of 7 years.

    During 1998 the Board of Directors  approved  separate  plans to reprice the
Company's  outstanding stock options under the Stock Option Plan, one in January
1998 and a second in November  1998. The forfeited  options had exercise  prices
ranging from $9.75 to $20.75 and were repriced at $8.25 or $5.13 per share,  the
fair  market  value  on the  date of the  respective  repricings.  Approximately
391,000 options were issued under the repricing program.  The vesting period was
not affected for the options  repriced  under the January 1998  repricing  plan.
However,  the vesting  period started over on the repricing date for the options
issued under the November 1998 repricing plan.  Generally vesting occurs 20% per
year  beginning one year after the grant date.  The fair values of these options
were  estimated  at the  date of grant  using  the  criteria  noted  above.  The
repricing  resulted  in  additional  pro forma  compensation  expense in 1998 of
$795,000,  which is  reflected  in the pro  forma  table  below.  The  repricing
activity  has been  reflected  in table  above and is  included  in the  options
granted and forfeited in 1998.

    The  Company  applies  APB  Opinion  25 in  accounting  for  its  Plan,  and
accordingly,  no compensation  cost has been recognized for its stock options in
the consolidated financial statements.  Had the Company determined  compensation
cost based on the fair value at the grant date for its stock  options under SFAS
No. 123, the Company's net earnings  (loss) and earnings  (loss) per share would
have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                        1998           1997          1996
                                                   -------------  ------------- ---------
<S>                                                  <C>            <C>           <C>
Pro Forma Earnings from Continuing Operations
  Available to Common Stockholders.............      $    2,533     $    8,650    $    5,642
Pro forma Net Earnings (Loss) Available to
  Common Stockholders .........................      $   (6,690)    $    8,567    $    4,831
Earnings (Loss) per Share -- Basic:
  Continuing Operations Pro Forma..............      $     0.14     $     0.49    $     0.72
  Net Earnings (Loss) Pro Forma................      $    (0.37)    $     0.48    $     0.61
Earnings (Loss) per Share -- Diluted:
  Continuing Operations Pro Forma..............      $     0.14     $     0.48    $     0.72
  Net Earnings (Loss) Pro Forma................      $    (0.37)    $     0.48    $     0.61
</TABLE>


                                       62
<PAGE>

    A summary of stock options granted at December 31, 1998 follows:

<TABLE>
<CAPTION>
                            Options Outstanding                              Options Exercisable
                    -------------------------------------------------  -------------------------------
                         Number        Weighted-Avg.    Weighted-Avg.       Number       Weighted-Avg.
Range of               Outstanding       Remaining        Exercise        Exercisable      Exercise
Exercise Prices        at 12/31/98   Contractual Life       Price         at 12/31/98        Price
---------------     ---------------  ----------------    ------------  ---------------    ------------
<S>                    <C>             <C>                <C>             <C>              <C>
$ .50 to $1.00.            65,000      5.4 years          $  0.86                --        $    --
$1.50 to $7.00.           543,000      5.9 years             4.68           117,000           3.78
$8.00 to $8.25.           816,000      7.8 years             8.25                --             --
$8.30 to $18.63           228,000      5.4 years            14.71            86,000          15.76
                       ----------                         -------         ---------        -------
                        1,652,000                         $  7.68           203,000        $  8.86
                       ==========                         =======         =========        =======
</TABLE>

(20) Year 2000 Readiness Disclosure

    In 1998, the Company developed a plan to deal with the Year 2000 problem and
began modifying and testing,  or converting its computer systems to be Year 2000
compliant.  The plan  provides for the  modification,  testing,  and  conversion
efforts to be completed by June 30, 1999. The Year 2000 problem is the result of
computer  programs being written using two digits rather than four to define the
applicable year.  Management has also assessed the Year 2000 remediation efforts
of the Company's significant suppliers. Although management believes its efforts
minimize the potential  adverse effects that a supplier's  failure would have on
the Company,  there can be no absolute  assurance  that all its  suppliers  will
become Year 2000  compliant  on time.  The  Company  will  evaluate  appropriate
courses of action,  including  replacement of certain  systems whose  associated
costs would be recorded as assets and subsequently amortized, or modification of
its  existing  systems  which costs would be expensed as  incurred.  The Company
estimates it will cost between $2.2 million and $2.7 million to become Year 2000
compliant  and had incurred  $1.3  million of these costs during 1998.  However,
there can be no assurance  that the Company will be able to  completely  resolve
all Year  2000  issues  or that the  ultimate  cost to  identify  and  implement
solutions to all Year 2000 problems will not exceed the Company's estimate.

(21) Commitments and Contingencies

    The  Company's  Non  Dealership   operations  have  entered  into  servicing
agreements  with two  companies  that have filed and  subsequently  emerged from
bankruptcy and continue to operate under their approved plans of reorganization.
Under the terms of the  respective  servicing  agreements  and approved plans of
reorganization,  once certain creditors of the bankrupt companies have been paid
in full, the Company is entitled to certain incentive  compensation in excess of
the servicing fees earned to date. Under the terms of one of the agreements, the
Company  is  scheduled  to  receive  17.5% of all  collections  of the  serviced
portfolio once the specified  creditors have been paid in full.  Under the terms
of the second  agreement,  the Company is  scheduled  to receive the first $3.25
million in collections  once the specified  creditors have been paid in full and
15% thereafter.  The Company is required to issue up to 150,000  warrants to the
extent the Company  receives the $3.25  million and in addition will be required
to issue 75,000  warrants  for each $1.0  million in incentive  fee income after
collection of the $3.25 million. As of December 31, 1998,  management  estimates
that the incentive  compensation could range from $0 to $8.0 million under these
agreements.  The Company  has not accrued  any fee income  with regard  to these
incentives.

    On July 18, 1997,  the Company filed a Form S-3  registration  statement for
the purpose of registering  up to $200 million of its debt  securities in one or
more  series at prices and on terms to be  determined  at the time of sale.  The
registration  statement  has  been  declared  effective  by the  Securities  and
Exchange Commission and may be available for future debt offerings. There can be
no assurance,  however,  that the Company will be able to use this  registration
statement to sell debt or other securities.

    The  Company is  involved  in  various  claims  and  actions  arising in the
ordinary course of business. In the opinion of management, based on consultation
with legal  counsel,  the ultimate  disposition of these matters will not have a
material  adverse  effect  on the  Company.  No  provision  has been made in the
accompanying  consolidated  financial  statements for losses, if any, that might
result from the ultimate disposition of these matters.

(22) Retirement Plan

    The Company has  established  qualified  401(k)  retirement  plans  (defined
contribution  plans) which became  effective on October 1, 1995.  The plans,  as
amended,  cover  substantially all employees having no less than three months of
service,  have  attained  the age of 21, and work at least 1,000 hours per year.


                                       63
<PAGE>

Participants  may  voluntarily  contribute to the plan up to the maximum  limits
established by Internal Revenue Service regulations.

    The Company will match from 10% to 25% of the  participants'  contributions.
Participants are immediately vested in the amount of their direct  contributions
and vest over a five-year  period,  as defined by the plan,  with respect to the
Company's contribution.  Pension expense totaled $121,000,  $49,000, and $23,000
during the years ended December 31, 1998, 1997, and 1996, respectively.

(23) Disclosures About Fair Value of Financial Instruments

    Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial  Instruments",  requires that the Company disclose  estimated
fair values for its  financial  instruments.  The following  summary  presents a
description of the methodologies and assumptions used to determine such amounts.

Limitations

    Fair value  estimates are made at a specific  point in time and are based on
relevant market information and information about the financial instrument; they
are  subjective  in nature and involve  uncertainties,  matters of judgment and,
therefore,  cannot be determined with precision.  These estimates do not reflect
any premium or discount that could result from offering for sale at one time the
Company's  entire  holdings of a particular  instrument.  Changes in assumptions
could significantly affect these estimates.

    Since the fair value is  estimated  as of December  31,  1998 and 1997,  the
amounts that will actually be realized or paid in settlement of the  instruments
could be significantly different.

Cash and Cash Equivalents

    The  carrying  amount  is  estimated  to be the fair  value  because  of the
liquidity of these instruments.

Finance Receivables,  Residuals in Finance Receivables Sold, Investments Held in
   Trust, and Notes Receivable

    The  carrying  amount  is  estimated  to be the fair  value  because  of the
relative  short  maturity and  repayment  terms of the  portfolio as compared to
similar instruments.

Accounts Payable, Accrued Expenses, and Notes Payable

    The carrying amount approximates fair value because of the short maturity of
these  instruments.  The terms of the Company's  notes payable  approximate  the
terms in the market place at which they could be replaced.  Therefore,  the fair
market value approximates the carrying value of these financial instruments.

Subordinated Notes Payable

    The terms of the Company's  subordinated notes payable approximate the terms
in the market place at which they could be replaced.  Therefore,  the fair value
approximates the carrying value of these financial instruments.

(24) Business Segments

    Operating  results and other  financial data are presented for the principal
business  segments of the Company for the years ended  December 31, 1998,  1997,
and 1996, respectively. The Company has 6 distinct business segments. Within the
Dealership  Operations  division,  these consist of retail car sales  operations
(Company  dealerships),  the  income  generated  from  the  finance  receivables
generated at the Company dealerships and corporate and other operations.  Within
the Non  Dealership  Operations  division,  these  consist of the Cygnet  dealer
program, bulk purchasing and loan servicing, and corporate and other operations.

    In computing operating profit by business segment,  the following items were
considered  in the  Corporate  and Other  category:  portions of  administrative
expenses,  interest  expense and other  items not  considered  direct  operating
expenses.  Identifiable assets by business segment are those assets used in each
segment of Company operations.


                                       64
<PAGE>

<TABLE>
<CAPTION>
                                           Dealership Operations               Non Dealership Operations
                                     ----------------------------------   -----------------------------------

                                                  Company                               Cygnet
                                     Company    Dealership   Corporate     Cygnet        Loan       Corporate
                                    Dealerships Receivables  and Other     Dealer      Servicing    and Other       Total
                                    ----------  -----------  ----------   ---------    ----------   ---------     ---------
                                                                         (In thousands)
<S>                                  <C>          <C>         <C>         <C>         <C>          <C>            <C>
December 31, 1998:
Sales of Used Cars...............    $ 287,618    $      --   $      --   $      --   $       --   $       --     $ 287,618
Less: Cost of Cars Sold..........      167,014           --          --          --           --           --       167,014
Provision for Credit Losses......       59,770        5,548          --       2,316           --           --        67,634
                                     ---------    ---------   ---------   ---------   ----------   ----------     ---------
                                        60,834       (5,548)         --      (2,316)          --           --        52,970
Interest Income..................           --       16,946         341       8,709        1,832           --        27,828
Gain on Sale of Loans............           --       12,093          --          --           --           --        12,093
Service Fee and Other Income.....          389       15,453         493          --       22,296           --        38,631
                                     ---------    ---------   ---------   ---------   ----------   ----------     ---------
Income before Operating Expenses.       61,223       38,944         834       6,393       24,128           --       131,522
                                     ---------    ---------   ---------   ---------   ----------   ----------     ---------
Operating Expenses:
Selling and Marketing............       20,285           --          --         242           31            7        20,565
General and Administrative.......       32,383       18,491      16,103       2,721       18,664        4,040        92,402
Depreciation and Amortization....        2,581        1,334         997         104          614          105         5,735
                                     ---------    ---------------------   ---------   ----------   ----------     ---------
                                        55,249       19,825      17,100       3,067       19,309        4,152       118,702
                                     ---------    ---------   ---------   ---------   ----------   ----------     ---------
Income (loss) before Interest
   Expense.......................    $   5,974    $  19,119   $ (16,266)  $   3,326   $    4,819   $   (4,152)    $  12,820
                                     =========    =========   =========   =========   ==========   ===========    =========
Capital Expenditures.............    $  14,265    $   1,297   $   2,352   $     449   $    2,260   $    1,163     $  21,786
                                     =========    =========   =========   =========   ==========   ==========     =========
Identifiable Assets..............    $  75,366    $ 145,880   $  47,543   $  44,250   $   31,589   $    1,347     $ 345,975
                                     =========    =========   =========   =========   ==========   ==========     =========

December 31, 1997:
Sales of Used Cars...............    $ 123,814    $      --   $      --   $      --   $       --   $       --     $ 123,814
Less: Cost of Cars Sold..........       72,358           --          --          --           --           --        72,358
Provision for Credit Losses......       22,354           --          --         691           --           --        23,045
                                     ---------    ---------   ---------   ---------   ----------   ----------     ---------
                                        29,102           --          --        (691)          --           --        28,411
Interest Income..................           --       12,559          --       2,359        3,818           --        18,736
Gain on Sale of Loans............           --        6,721          --          --        8,131           --        14,852
Service Fee and Other Income.....        1,498        8,814       2,013         356           --           --        12,681
                                     ---------    ---------   ---------   ---------   ----------   ----------     ---------
Income before Operating Expenses.       30,600       28,094       2,013       2,024       11,949           --        74,680
                                     ---------    ---------   ---------   ---------   ----------   ----------     ---------
Operating Expenses:
Selling and Marketing............       10,538           --          --          --           --           --        10,538
General and Administrative.......       17,214       12,303       9,896         917           --        1,572        41,902
Depreciation and Amortization....        1,536        1,108         504          28           --          125         3,301
                                     ---------    ---------   ---------   ---------   ----------   ----------     ---------
                                        29,288       13,411      10,400         945           --        1,697        55,741
                                     ---------    ---------   ---------   ---------   ----------   ----------     ---------
Income (loss) before Interest
   Expense.......................    $   1,312    $  14,683   $  (8,387)  $   1,079   $   11,949   $   (1,697)    $  18,939
                                     =========    =========   =========   =========   ==========   ===========    =========
Capital Expenditures.............    $  13,571    $   3,791   $   2,104   $      19   $       --   $       24     $  19,509
                                     =========    =========   =========   =========   ==========   ==========     =========
Identifiable Assets..............    $  74,287    $  78,514   $  72,799   $  27,539   $   22,318   $      969     $ 276,426
                                     =========    =========   =========   =========   ==========   ==========     =========

December 31, 1996:
Sales of Used Cars...............    $  53,768    $      --   $      --   $      --   $       --   $       --     $  53,768
Less: Cost of Cars Sold..........       31,879           --          --          --           --           --        31,879
Provision for Credit Losses......        9,657           --          --          --           --           --         9,657
                                     ---------    ---------   ---------   ---------   ----------   ----------     ---------
                                        12,232           --          --          --           --           --        12,232
Interest Income..................           --        8,426         171          --           --           --         8,597
Gain on Sale of Loans............           --        3,925          --          --           --           --         3,925
Service Fee and Other Income.....          195        1,887         455          --           --           --         2,537
                                     ---------    ---------   ---------   ---------   ----------   ----------     ---------
Income before Operating Expenses.       12,427       14,238         626          --           --           --        27,291
                                     ---------    ---------   ---------   ---------   ----------   ----------     ---------
Operating Expenses:
Selling and Marketing............        3,568           --          17          --           --           --         3,585
General and Administrative.......        6,306        2,859       3,953          --           --           --        13,118
Depreciation and Amortization....          318          769         295          --           --           --         1,382
                                     ---------    ---------   ---------   ---------   ----------   ----------     ---------
                                        10,192        3,628       4,265          --           --           --        18,085
                                     ---------    ---------   ---------   ---------   ----------   ----------     ---------
Income (loss) before Interest
   Expense.......................    $   2,235    $  10,610   $  (3,639)  $      --   $       --   $       --     $   9,206
                                     =========    =========   =========   =========   ==========   ==========     =========
Capital Expenditures.............    $   4,530    $     455   $     564   $      --   $       --   $       --     $   5,549
                                     =========    =========   =========   =========   ==========   ==========     =========
Identifiable Assets..............    $  20,698    $  12,775   $  84,156   $      --   $       --   $       --     $ 117,629
                                     =========    =========   =========   =========   ==========   ==========     =========
</TABLE>


                                       65
<PAGE>

(25) Quarterly Financial Data -- unaudited

    A summary of the quarterly  data for the years ended  December 31, 1998, and
1997 follows:

<TABLE>
<CAPTION>
                                          First      Second      Third     Fourth
                                         Quarter     Quarter    Quarter    Quarter      Total
                                        --------    --------   --------   --------   ---------
                                               (In thousands, except per share amounts)
<S>                                     <C>         <C>        <C>        <C>        <C>
1998:
  Total Revenue.....................    $ 87,777    $ 88,819   $ 96,714   $ 92,860   $ 366,170
                                        ========    ========   ========   ========   =========
  Income before Operating Expenses..      31,246      32,678     37,653     29,945     131,522
                                        ========    ========   ========   ========   =========
  Operating Expenses................      23,514      26,359     33,542     35,287     118,702
                                        ========    ========   ========   ========   =========
  Income (Loss) before Interest
     Expense........................       7,732       6,319      4,111     (5,342)     12,820
                                        ========    ========   ========   ========   =========
  Earnings (Loss) from Continuing
     Operations.....................    $  3,729    $  2,942   $  1,527   $ (4,678)  $   3,520
                                        ========    ========   ========   =========  =========
  (Loss) from Discontinued Operations     (5,595)         --     (3,628)        --      (9,223)
                                        =========   ========   ========   ========   ==========
  Net Earnings (Loss)...............    $ (1,866)   $  2,942   $ (2,101)  $ (4,678)  $  (5,703)
                                        =========   ========   ========   =========  ==========
  Basic Earnings (Loss) Per Share from
     Continuing Operations..........    $    0.20   $   0.16   $   0.08   $  (0.28)  $     0.19
                                        =========   ========   ========   ========   ==========
  Diluted Earnings (Loss) Per Share
     from Continuing Operations.....    $    0.20   $   0.16   $   0.08   $  (0.28)  $    0.19
                                        =========   ========   ========   ========   =========
  Basic Earnings (Loss) Per Share...    $   (0.10)  $   0.16   $  (0.11)  $  (0.28)  $   (0.32)
                                        ==========  ========   ========   =========  ==========
  Diluted Earnings (Loss) Per Share.    $   (0.10)  $   0.16   $  (0.11)  $  (0.28)  $   (0.31)
                                        ==========  ========   ========   =========  ==========
1997:
  Total Revenue.....................    $ 22,301    $ 36,279   $ 45,737   $ 65,766   $ 170,083
                                        ========    ========   ========   ========   =========
  Income before Operating Expenses..       9,101      15,480     19,415     30,684      74,680
                                        ========    ========   ========   ========   =========
  Operating Expenses................       8,133      11,988     14,780     20,840      55,741
                                        ========    ========   ========   ========   =========
  Income before Interest Expense....         968       3,492      4,635      9,844      18,939
                                        ========    ========   ========   ========   =========
  Earnings from Continuing Operations   $    408    $  1,896   $  2,220   $  5,004   $   9,528
                                        ========    ========   ========   ========   =========
  Earnings (Loss) from Discontinued
     Operations.....................       2,854       2,415     (4,048)    (1,304)        (83)
                                        ========    ========   =========  =========  ==========
  Net Earnings (Loss)...............    $  3,262    $  4,311   $ (1,828)  $  3,700   $   9,445
                                        ========    ========   ========   ========   =========
  Basic Earnings Per Share from
     Continuing Operations..........    $    0.03   $   0.10   $   0.12   $   0.27   $     0.53
                                        =========   ========   ========   ========   ==========
  Diluted Earnings Per Share from
     Continuing Operations..........    $    0.02   $   0.10   $   0.12   $   0.26   $     0.52
                                        =========   ========   ========   ========   ==========
  Basic Earnings (Loss) Per Share...    $    0.21   $   0.23   $  (0.10)  $   0.20   $     0.53
                                        =========   ========   ========   ========   ==========
  Diluted Earnings (Loss) Per Share.    $    0.20   $   0.23   $  (0.10)  $   0.20   $     0.52
                                        =========   ========   ========   ========   ==========
</TABLE>


                                       66
<PAGE>

             ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                     ON ACCOUNTING AND FINANCIAL DISCLOSURES

    The Company has had no  disagreements  with its  independent  accountants in
regard  to  accounting  and  financial   disclosure  and  has  not  changed  its
independent accountants during the two most recent fiscal years.

                                    PART III

          ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    Information  required by this Item pertaining to executive  officers of Ugly
Duckling  is set  forth  above in Part I of this Form  10-K  under the  caption,
"Executive  Officers of the  Registrant,"  and is incorporated by reference into
this Item.  Information  concerning  directors  of the  registrant  and  persons
nominated to become  directors is  incorporated by reference from the text under
the captions, "Board of Directors, Board Committees and Other Board Information"
and "Proposal to Be Voted on -- Item No. 1 --Election of Directors" in the Proxy
Statement  for the June 2, 1999  Annual  Meeting  of  Stockholders.  Information
required  by this  Item  pertaining  to  compliance  with  Section  16(a) of the
Securities Act of 1934 is set forth under the caption, "Section 16(a) Beneficial
Ownership  Reporting  Compliance"  in the Proxy  Statement  for the June 2, 1999
Annual Meeting of Stockholders and is incorporated by reference into this Item.

                        ITEM 11 -- EXECUTIVE COMPENSATION

    Information  concerning executive  compensation is incorporated by reference
from  the  text  under  the  captions,   "Certain   Relationships   and  Related
Transactions"  and  "Compensation  of Executive  Officers,  Benefits and Related
Matters"  (excluding  the material  under the headings  "Compensation  Committee
Report on Executive  Compensation" and "Stockholder  Return  Performance  Graph"
therein)  in the  Proxy  Statement  for  the  June 2,  1999  Annual  Meeting  of
Stockholders.

    ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    Information  concerning  ownership of equity stock of the Company by certain
beneficial  owners and  management is  incorporated  by reference  from the text
under  the  caption,  "Security  Ownership  of  Certain  Beneficial  Owners  and
Management--Beneficial  Ownership  Table" in the Proxy Statement for the June 2,
1999 Annual Meeting of Stockholders.

            ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    Information  concerning certain  relationships and related transactions with
officers and  directors  is  incorporated  by reference  from the text under the
caption, "Certain Relationships and Related Transactions" in the Proxy Statement
for the June 2, 1999 Annual Meeting of Stockholders.


                                       67
<PAGE>

                                     PART IV

        ITEM 14 -- EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES,
                             AND REPORTS ON FORM 8-K

    (a) Consolidated Financial Statements.

    The following consolidated financial statements of Ugly Duckling Corporation
are filed as part of this Form 10-K.

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Independent Auditors' Report.............................................     42
Consolidated Financial Statements and Notes thereto of Ugly Duckling
    Corporation:
Consolidated Balance Sheets--December 31, 1998 and 1997..................     43
Consolidated Statements of Operations--for the years ended
    December 31, 1998, 1997 and 1996.....................................     44
Consolidated Statements of Stockholders' Equity--for the years ended
   December 31, 1998, 1997 and 1996......................................     45
Consolidated Statements of Cash Flows--for the years ended
    December 31, 1998, 1997 and 1996.....................................     46
Notes to Consolidated Financial Statements...............................     47
All schedules have been omitted because they are not applicable, not
   required, or the information has been disclosed in the consolidated
   financial statements and related notes thereto or otherwise in this
   Form 10-K Report.
</TABLE>

(b) Reports on Form 8-K.

    During the fourth  quarter of 1998,  the Company  filed five reports on Form
8-K.  The first report on Form 8-K,  dated  October 8, 1998 and filed on October
13,  1998,  pursuant  to  Items  5 and 7 (1)  reported  an  expected  charge  to
Discontinued  Operations  totaling  approximately  $4.8  million  (net of income
taxes) in the third quarter ended  September 30, 1998, and (2) filed as exhibits
to the Form  8-K a  Supplement  No.  2 dated  October  9,  1998 to the  Offering
Circular for the Exchange  Offer  regarding  the third  quarter  charge and Ugly
Duckling Corporation's press release dated October 8, 1998 titled "Ugly Duckling
Corporation  Announces Third Quarter Charges to  Discontinued  Operations."  The
second report on Form 8-K, dated October 20, 1998 and filed on October 21, 1998,
pursuant  to  Items 5 and 7 (1)  reported  the  events  described  in two  press
releases,  and (2) filed as exhibits to the Form 8-K said press  releases  dated
October  21,  1998 and  October  20,  1998  titled  "Ugly  Duckling  Corporation
Announces Third Quarter 1998 Results" and "Ugly Duckling  Corporation  Announces
Successful Completion of Exchange Offer," respectively. The third report on Form
8-K,  dated and filed  November  18,  1998,  pursuant  to Items 5 and 7 filed as
exhibits to the Form 8-K a press  release  dated  November 18, 1998 titled "Ugly
Duckling Corporation to Discontinue Gain-on-Sale  Accounting." The fourth report
on Form 8-K,  dated and filed  November 23, 1998,  pursuant to Items 5 and 7 (1)
reported  the  initiation  of a  supplemental  offer by the  Company to exchange
shares  of its  Common  Stock  for  subordinated  debentures,  and (2)  filed as
exhibits to the Form 8-K the offering circular describing the exchange offer and
Ugly Duckling  Corporation's  press release dated November 23, 1998 titled "Ugly
Duckling Corporation Announces Supplemental Exchange Offer." The fifth report on
Form 8-K, dated and filed December 23, 1998,  pursuant to Items 5 and 7 filed as
an exhibit to the Form 8-K a press release dated  December 23, 1998 titled "Ugly
Duckling Corporation Announces Completion of Supplemental Exchange Offer." After
the  fourth  quarter of 1998,  the  Company  filed one report on Form 8-K.  This
report on Form 8-K,  dated and filed March 16,  1999,  pursuant to Items 5 and 7
filed as an exhibit to the Form 8-K a press  release dated March 16, 1999 titled
"Ugly  Duckling  Corporation  Announces  Reclassification  of Cygnet Dealer Into
Continuing Operations and Anticipated First Quarter Results."


                                       68
<PAGE>
 (c) Exhibits.


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                              DESCRIPTION OF EXHIBITS

<S>           <C>
3.1           Certificate of Incorporation of the Registrant Amended and Restated as of May 15, 1997(16)
3.2           Bylaws of the Registrant (5)
4.1           Certificate of Incorporation of the Registrant (filed as Exhibit 3.1)
4.2           Warrant Agreement between the Registrant and Harris Trust Company of California, as warrant agent, with respect to
              the FMAC Warrants, dated as of April 1, 1998 (with form of warrant attached as Exhibit A, thereto)**
4.3           Form of Certificate representing Common Stock
4.4           10% Subordinated Debenture of the Registrant issued to Verde Investments, Inc. (13)
4.5           Form of Warrant issued to Cruttenden Roth Incorporated as Representative of the several underwriters (1)
4.6           Form of Warrant issued to SunAmerica Life Insurance Company (1)
4.7           Warrant Agreement between the Registrant and Harris Trust Company of California, as warrant agent, with respect to
              Bank Group Warrants (6)
4.8           Form of 12% Senior Subordinated Note between Registrant and Kayne Anderson related entities, each as a lender
              executed in February 1998 (12)
4.9           Warrant Agreement dated as of February 12, 1998 between Registrant and each of the Kayne Anderson related lenders
              named therein (12)
4.10          Form of Warrant issued to Kayne Anderson related entities issued in February 1998 (12)
4.11          Warrant Agreement between the Registrant and Reliance Acceptance Corporation and Harris Trust of California, as
              warrant agent, dated as of February 9, 1998 (w/form of warrant attached as Exhibit A, thereto) (15)
4.12          Certificate of Designation of the Preferred Stock (par value $.001 per share) (filed as part of Exhibit 3.1) (16)
4.13          Indenture dated as of October 15, 1998 between Registrant and Harris Trust and Savings Bank, as Trustee ("Harris")
              ("Indenture") (18)
4.13(a)       First Supplemental Indenture dated as of October 15, 1998 between Registrant and Harris (18)
4.13(b)       Form of 12% Subordinated Debenture due 2003**
10.1          Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between Registrant and General
              Electric Capital Corporation (8)
10.1(a)       Assumption and Amendment Agreement between the Registrant and General Electric Capital Corporation (2)
10.1(b)       Amendment  No. 1 to Amended and Restated  Motor  Vehicle  Installment  Contract  Loan and Security  Agreement  between
              Registrant and General Electric Capital Corporation dated December 22, 1997 (13)
10.1(c)       Letter Agreement to Amend the Amended and Restated Loan and Security Agreement between Registrant and General
              Electric Capital Corp. ("GECC"), dated as of October 20, 1997(15)
10.1(d)       Letter agreement to Amend the Amended and Restated Loan Agreement between Registrant and GECC, dated as of March 25,
              1998 (15)
10.1(e)       Amendment No. 2 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between
              Registrant and General Electric Capital Corporation dated September 9, 1998 (17)
10.1(f)       Amendment No. 3 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between
              Registrant and General Electric Capital Corporation dated January 19, 1999 **
10.2          Note Purchase Agreement between the Registrant and SunAmerica Life Insurance Company (1)
10.2(a)       First Amendment to Note Purchase Agreement between the Registrant and SunAmerica Life Insurance Company  (1)
10.2(b)       Second Amendment to Note Purchase Agreement between the Registrant and SunAmerica Life Insurance Company (1)
10.2(c)       Third Amendment to Note Purchase Agreement between the Registrant and SunAmerica Life Insurance Company  (1)
10.2(d)       Fourth Amendment to Note Purchase Agreement between the Registrant and SunAmerica Life Insurance Company  (1)
10.2(e)       Commitment Letter entered into between the Registrant and SunAmerica Life Insurance Company (1)
10.2(f)       Letter Agreement regarding Note Conversion between the Registrant and SunAmerica Life Insurance Company (1)
10.3          Amended and Restated Registration Rights Agreement between the Registrant and SunAmerica Life Insurance Company (1)
10.4          Loan Purchase Agreement dated as of August 20, 1997 among the Registrant and certain banks (6)
10.4(a)       Assignment of Loan and Bank Claim dated as of August 20, 1997 among the Registrant and certain banks, as assignors (6)
10.4(b)       Security Agreement dated as of August 20, 1997 among the Registrant, as obligor, and certain banks (6)
10.4(c)       Payment Guaranty dated as of August 20, 1997 of certain affiliates of the Registrant, as guarantors (6)
</TABLE>


                                       69
<PAGE>
<TABLE>

<S>           <C>
10.5          Restated (as of March 14, 1997) Ugly Duckling Corporation Long-Term Incentive Plan (5)*
10.5(a)       Amended and Restated Long Term Incentive Plan (as of January 15, 1998) (17)*
10.6          Employment Agreement between the Registrant and Ernest C. Garcia II (1)*
10.6(a)       Amendment to Employment Agreement between the Registrant and Ernest C. Garcia II */**
10.7          Employment Agreement between the Registrant and Steven T. Darak (1)*
10.8          Employment Agreement between the Registrant and Wally Vonsh (1)*
10.8(a)       Modification of Employment Agreement between Registrant and Wally Vonsh (13)*
10.8(b)       Amended and Restated Employment Agreement between Registrant and Walter Vonsh, dated May 26, 1998 (16)*
10.9          Amended and Restated Employment Agreement between the Registrant and Donald L. Addink  (8)*
10.10         Employment Agreement between the Registrant and Russell Grisanti (5)*
10.11         Employment Agreement between the Registrant and Steven A. Tesdahl (8)*
10.11(a)      Modification of Terms of Employment between Registrant and Steven A. Tesdahl (16)*
10.12         Land Lease Agreement between the Registrant and Verde  Investments, Inc. for property located at 5104 West Glendale
              Avenue in Glendale, Arizona (1)
10.13         Building Lease Agreement between the Registrant and Verde Investments,  Inc. for property and buildings located at
              9630 and 9650 North 19th Avenue in Phoenix, Arizona (1)
10.14         Land Lease Agreement between the Registrant and Verde Investments,  Inc. for property located at 330 North 24th Street
              in Phoenix, Arizona (1)
10.15         Land Lease Agreement between the Registrant and Verde Investments,  Inc. for property located at 333 South Alma School
              Road in Mesa, Arizona (1)
10.16         Lease Agreements  between the Registrant and Blue Chip Motors, the Registrant and S & S Holding Corporation, and the
              Registrant and Edelman Brothers for  certain properties located at 3901 East Speedway Boulevard in Tucson, Arizona (1)
10.17         Real Property Lease between the Registrant and Peter and Alva Keesal for property located at 3737 South Park Avenue
              in Tucson, Arizona (1)
10.18         Land Lease Agreement between the Registrant and Verde Investments, Inc. for property located at 2301 North Oracle
              Road in Tucson, Arizona (1)
10.19         Related Party Transactions Modification Agreement between the Registrant and Verde Investments, Inc.(1)
10.20         Form of Indemnity Agreement between the Registrant and its directors and officers (1)
10.21         Ugly Duckling Corporation 1996 Director Incentive Plan (1)*
10.22         Purchase Agreement, dated February 10, 1997 between the Registrant and Friedman, Billings, Ramsey & Co., Inc. (10)
10.23         Agreement of Purchase and Sale of Assets dated as of December 31, 1998 (3)
10.23(a)      First Amendment to Agreement of Purchase and Sale of Assets dated as of June 6, 1997(5)
10.24         Agreement of Purchase and Sale of Assets among the Registrant, E-Z Plan, Inc., shareholders of E-Z Plan, Inc., and
              certain lessors, dated as of March 5, 1997 (4)
10.25         Agreement for Purchase and Sale of Certain Assets among Registrant,  Kars-Yes Holdings Inc. and certain other parties,
              dated as of September 15, 1997 (7)
10.26         Portfolio Servicing Agreement among Registrant, Kars-Yes Financial, Inc., and certain other parties, dated as of
              September 15, 1997 (7)
10.26(a)      Subservicing Agreement among Registrant, Kars-Yes Financial, Inc., and certain other parties, dated as of September
              15, 1997 (7)
10.27         Binding Agreement to Propose and Support Modified Plan Agreement dated as of December 15, 1997 among the Registrant,
              FMAC and the Official Committee of Unsecured Creditors of FMAC (11)
10.28         Purchase Agreement dated as of December 18, 1997 by and among Contract Purchaser, Registrant and LaSalle National
              Bank, as Agent (11)
10.29         Guaranty dated as of December 18, 1997 by Registrant in favor of Contract Purchaser (11)
10.30         Servicing Agreement dated as of December 15, 1997 between Registrant and Contract Purchaser  (11)
10.31         FMAC Guaranty and Stock Pledge Agreement among FMAC, Registrant and certain banks (14)
10.32         Contribution Agreement between Registrant and FMAC (13)
10.33         Indemnification Agreement between the Company and FMAC (14)
10.34         Loan Agreement dated as of February 12, 1998 between the Registrant and each of the Kayne Anderson related Lenders
              named therein (12)
10.35         Credit and Security Agreement between Registrant and First Merchants Acceptance  Corp., dated as of July 17, 1997 (15)
10.35(a)      First Amendment to Credit and Security Agreement between Registrant and FMAC, dated as of January 21, 1998 (15)
10.35(b)      Second Amendment to Credit and Security Agreement between Registrant and FMAC, dated as of April 1, 1998 (15)
</TABLE>


                                       70
<PAGE>
<TABLE>
<CAPTION>
<S>           <C>
10.36         Service Agreement among Reliance Acceptance Corporation, Registrant, Bank America Business Credit, Inc. and certain
              other parties dated as of February 9, 1998 (17)
10.37         Agreement of Understanding among Reliance Acceptance Group, Inc., Reliance Acceptance  Corporation and Registrant,
              dated as of February 9, 1998 (17)
10.38         Purchase and Sale-Leaseback Agreement and Joint Escrow Instructions between Champion Acceptance Corporation, Ugly
              Duckling Car Sales, Inc., Ugly Duckling Car Sales New Mexico, Inc., Ugly Duckling Car Sales Florida,  Inc. and Ugly
              Duckling Car Sales Texas, LLP, date as of May 13, 1998 (16)
10.39         Loan Agreement by and among the Registrant, Kayne Anderson Non-Traditional Investments, LP, and certain other lenders,
              dated July 20, 1998 (17)
10.40         Payment Guaranty by Registrant in favor of Kayne Anderson and the Lenders, dated as of July 20, 1998(17)
10.41         Agreement of Purchase and Sale of Assets made as of July 31, 1998, by and among Cygnet Financial Services, Inc. and
              Mountain Parks Financial Services, Inc. (17)
10.42         1998 Executive Incentive Plan (17)*
10.43         Loan agreement between Greenwich Capital Financial Products, Inc. and Registrant dated November 12, 1998 **
10.43(a)      Stock Pledge Agreement among Greenwich Capital Financial Products, Inc., Registrant and certain related parties,
              dated November 12, 1998 **
10.44         KPMG Year 2000 Renovation Project Service Proposal to and Engagement Letter with the Registrant, dated November 12,
              1998**
11            Earnings (Loss) per Share Computation (see Note 18 to Notes to Consolidated Financial Statements)**
12            Statement on Computation of Ratios **
21            List of Subsidiaries **
23            Consent of KPMG LLP **
24.1          Special Power of Attorney for R. Abrahams **
24.2          Special Power of Attorney for C. Jennings **
24.3          Special Power of Attorney for J. MacDonough **
24.4          Special Power of Attorney for F. Willey **
24.5          Special Power of Attorney for Ernest C. Garcia II **
24.6          Special Power of Attorney for Gregory Sullivan **
24.7          Special Power of Attorney for Steven Darak **
27.1          Financial Data Schedule for the year ending December 31, 1998**
27.2          Financial Data Schedule for the year ending December 31, 1997**
27.3          Financial Data Schedule for the year ending December 31, 1996**
27.4          Financial Data Schedule for the three months ending September 30, 1998**
27.5          Financial Data Schedule for the three months ending June 30, 1998**
27.6          Financial Data Schedule for the three months ending March 31, 1998**
27.7          Financial Data Schedule for the three months ending September 30, 1997**
27.8          Financial Data Schedule for the three months ending June 30, 1997**
27.9          Financial Data Schedule for the three months ending March 31, 1997**

</TABLE>

---------------------------



*             Management contract or compensatory plan, contract or arrangement.
**            Filed with this Form 10-K.
(1)           Incorporated by reference to the Company's Registration Statement
              on Form S-1 (Registration No. 333-3998), effective June 18, 1996.
(2)           Incorporated by reference to the Company's Registration Statement 
              on Form S-1 (Registration No. 333-13755), effective October 30, 
              1996.
(3)           Incorporated by reference to the Company's Current Report on Form 
              8-K, filed January 30, 1997.
(4)           Incorporated by reference to the Company's Annual Report on Form 
              10-K, filed March 31, 1997.
(5)           Incorporated by reference to the Company's Quarterly Report on 
              Form 10-Q, filed August 14, 1997.
(6)           Incorporated by reference to the Company's Current Report on Form 
              8-K, filed September 5, 1997.
(7)           Incorporated by reference to the Company's Current Report on Form 
              8-K, filed October 3, 1997.
(8)           Incorporated by reference to the Company's Quarterly Report on 
              Form 10-Q, filed November 14, 1997.



                                       71
<PAGE>


(9)           Incorporated by reference to the Company's Current Report on Form 
              8-K, filed November 20, 1997.
(10)          Incorporated by reference to the Company's Registration Statement
              on Form S-1 (Registration No. 333-22237).
(11)          Incorporated by reference to the Company's Current Report on Form 
              8-K, filed January 2, 1998.
(12)          Incorporated by reference to the Company's Current Report on Form
              8-K, filed February 20, 1998.
(13)          Incorporated by reference to the Company's Registration Statement 
              on Form S-1 (Registration No. 333-42973), effective February 11, 
              1998.
(14)          Incorporated by reference to the Company's Annual Report on Form
              10-K, filed March 31 1998.
(15)          Incorporated by reference to the Company's Quarterly Report on 
              Form 10-Q, filed May 15, 1998.
(16)          Incorporated by reference to the Company's Quarterly Report on 
              Form 10-Q, filed August 10, 1998.
(17)          Incorporated by reference to the Company's Quarterly Report on 
              Form 10-Q, filed November 13, 1998.
(18)          Incorporated by reference to the Company's Form T-3 for 
              Application for Qualification of Indentures under the Trust
              Indenture Act of 1939, filed November 20, 1998 
              (File  No. 022-22415), effective December 21, 1998.





                                       72
<PAGE>



                                   SIGNATURES

    Pursuant  to the  requirements  of  Section  13 or 15(d)  of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                              UGLY DUCKLING CORPORATION,
                              a Delaware corporation

                              By:   /s/ ERNEST C. GARCIA II
                                    -----------------------
                                      Ernest C. Garcia II
                                      Its: Chief Executive Officer
                                      and Chairman of the Board

Date: March 29, 1999

    Pursuant to the  requirements  of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
        Name and Signature                               Title                            Date

<S>                                        <C>                                      <C>
/s/ ERNEST C. GARCIA II                    Chief Executive Officer and Chairman     March 29, 1999
----------------------------------         of the Board of Directors (Principal
Ernest C. Garcia II                        Executive Officer and Director)



/s/ GREGORY B. SULLIVAN                    President, Chief Operating Officer        March 29, 1999
----------------------------------         and Director (Director)
Gregory B. Sullivan

/s/ STEVEN T. DARAK                        Senior Vice President and Chief           March 29, 1999
----------------------------------         Financial Officer (Principal Financial
Steven T. Darak                            and Accounting Officer)


                *                          Director                                  March 29, 1999
----------------------------------
Robert J. Abrahams

                *                          Director                                  March 29, 1999
----------------------------------
Christopher D. Jennings

                *                          Director                                  March 29, 1999
----------------------------------
John N. MacDonough


                *                          Director                                  March 29, 1999
----------------------------------
Frank P. Willey
</TABLE>



 *By: /s/ ERNEST C. GARCIA II
      -----------------------
         Ernest C. Garcia II
         Attorney-in-Fact


                                       73
<PAGE>

                                  EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                              DESCRIPTION
<S>           <C>
3.1           Certificate of Incorporation of the Registrant Amended and Restated as of May 15, 1997(16)
3.2           Bylaws of the Registrant (5)
4.1           Certificate of Incorporation of the Registrant (filed as Exhibit 3.1)
4.2           Warrant Agreement between the Registrant and Harris Trust Company of California, as warrant agent, with respect to
              the FMAC Warrants, dated as of April 1, 1998 (with form of warrant attached as Exhibit A, thereto)**
4.3           Form of Certificate representing Common Stock
4.4           10% Subordinated Debenture of the Registrant issued to Verde Investments, Inc. (13)
4.5           Form of Warrant issued to Cruttenden Roth Incorporated as Representative of the several underwriters (1)
4.6           Form of Warrant issued to SunAmerica Life Insurance Company (1)
4.7           Warrant Agreement between the Registrant and Harris Trust Company of California, as warrant agent, with respect to
              Bank Group Warrants (6)
4.8           Form of 12% Senior Subordinated Note between Registrant and Kayne Anderson related entities, each as a lender
              executed in February 1998 (12)
4.9           Warrant Agreement dated as of February 12, 1998 between Registrant and each of the Kayne Anderson related lenders
              named therein (12)
4.10          Form of Warrant issued to Kayne Anderson related entities issued in February 1998 (12)
4.11          Warrant Agreement between the Registrant and Reliance Acceptance Corporation and Harris Trust of California, as
              warrant agent, dated as of February 9, 1998 (w/form of warrant attached as Exhibit A, thereto) (15)
4.12          Certificate of Designation of the Preferred Stock (par value $.001 per share) (filed as part of Exhibit 3.1) (16)
4.13          Indenture dated as of October 15, 1998 between Registrant and Harris Trust and Savings Bank, as Trustee ("Harris")
              ("Indenture") (18)
4.13(a)       First Supplemental Indenture dated as of October 15, 1998 between Registrant and Harris (18)
4.13(b)       Form of 12% Subordinated Debenture due 2003**
10.1          Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between Registrant and General
              Electric Capital Corporation (8)
10.1(a)       Assumption and Amendment Agreement between the Registrant and General Electric Capital Corporation (2)
10.1(b)       Amendment  No. 1 to Amended and Restated  Motor  Vehicle  Installment  Contract  Loan and Security  Agreement  between
              Registrant and General Electric Capital Corporation dated December 22, 1997 (13)
10.1(c)       Letter Agreement to Amend the Amended and Restated Loan and Security Agreement between Registrant and General
              Electric Capital Corp. ("GECC"), dated as of October 20, 1997(15)
10.1(d)       Letter agreement to Amend the Amended and Restated Loan Agreement between Registrant and GECC, dated as of March 25,
              1998 (15)
10.1(e)       Amendment No. 2 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between
              Registrant and General Electric Capital Corporation dated September 9, 1998 (17)
10.1(f)       Amendment No. 3 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between
              Registrant and General Electric Capital Corporation dated January 19, 1999 **
10.2          Note Purchase Agreement between the Registrant and SunAmerica Life Insurance Company (1)
10.2(a)       First Amendment to Note Purchase Agreement between the Registrant and SunAmerica Life Insurance Company  (1)
10.2(b)       Second Amendment to Note Purchase Agreement between the Registrant and SunAmerica Life Insurance Company (1)
10.2(c)       Third Amendment to Note Purchase Agreement between the Registrant and SunAmerica Life Insurance Company  (1)
10.2(d)       Fourth Amendment to Note Purchase Agreement between the Registrant and SunAmerica Life Insurance Company  (1)
10.2(e)       Commitment Letter entered into between the Registrant and SunAmerica Life Insurance Company (1)
10.2(f)       Letter Agreement regarding Note Conversion between the Registrant and SunAmerica Life Insurance Company (1)
10.3          Amended and Restated Registration Rights Agreement between the Registrant and SunAmerica Life Insurance Company (1)
10.4          Loan Purchase Agreement dated as of August 20, 1997 among the Registrant and certain banks (6)
10.4(a)       Assignment of Loan and Bank Claim dated as of August 20, 1997 among the Registrant and certain banks, as assignors (6)
10.4(b)       Security Agreement dated as of August 20, 1997 among the Registrant, as obligor, and certain banks (6)
10.4(c)       Payment Guaranty dated as of August 20, 1997 of certain affiliates of the Registrant, as guarantors (6)
</TABLE>


<PAGE>
<TABLE>

<S>           <C>
10.5          Restated (as of March 14, 1997) Ugly Duckling Corporation Long-Term Incentive Plan (5)*
10.5(a)       Amended and Restated Long Term Incentive Plan (as of January 15, 1998) (17)*
10.6          Employment Agreement between the Registrant and Ernest C. Garcia II (1)*
10.6(a)       Amendment to Employment Agreement between the Registrant and Ernest C. Garcia II */**
10.7          Employment Agreement between the Registrant and Steven T. Darak (1)*
10.8          Employment Agreement between the Registrant and Wally Vonsh (1)*
10.8(a)       Modification of Employment Agreement between Registrant and Wally Vonsh (13)*
10.8(b)       Amended and Restated Employment Agreement between Registrant and Walter Vonsh, dated May 26, 1998 (16)*
10.9          Amended and Restated Employment Agreement between the Registrant and Donald L. Addink  (8)*
10.10         Employment Agreement between the Registrant and Russell Grisanti (5)*
10.11         Employment Agreement between the Registrant and Steven A. Tesdahl (8)*
10.11(a)      Modification of Terms of Employment between Registrant and Steven A. Tesdahl (16)*
10.12         Land Lease Agreement between the Registrant and Verde  Investments, Inc. for property located at 5104 West Glendale
              Avenue in Glendale, Arizona (1)
10.13         Building Lease Agreement between the Registrant and Verde Investments,  Inc. for property and buildings located at
              9630 and 9650 North 19th Avenue in Phoenix, Arizona (1)
10.14         Land Lease Agreement between the Registrant and Verde Investments,  Inc. for property located at 330 North 24th Street
              in Phoenix, Arizona (1)
10.15         Land Lease Agreement between the Registrant and Verde Investments,  Inc. for property located at 333 South Alma School
              Road in Mesa, Arizona (1)
10.16         Lease Agreements  between the Registrant and Blue Chip Motors, the Registrant and S & S Holding Corporation, and the
              Registrant and Edelman Brothers for  certain properties located at 3901 East Speedway Boulevard in Tucson, Arizona (1)
10.17         Real Property Lease between the Registrant and Peter and Alva Keesal for property located at 3737 South Park Avenue
              in Tucson, Arizona (1)
10.18         Land Lease Agreement between the Registrant and Verde Investments, Inc. for property located at 2301 North Oracle
              Road in Tucson, Arizona (1)
10.19         Related Party Transactions Modification Agreement between the Registrant and Verde Investments, Inc.(1)
10.20         Form of Indemnity Agreement between the Registrant and its directors and officers (1)
10.21         Ugly Duckling Corporation 1996 Director Incentive Plan (1)*
10.22         Purchase Agreement, dated February 10, 1997 between the Registrant and Friedman, Billings, Ramsey & Co., Inc. (10)
10.23         Agreement of Purchase and Sale of Assets dated as of December 31, 1998 (3)
10.23(a)      First Amendment to Agreement of Purchase and Sale of Assets dated as of June 6, 1997(5)
10.24         Agreement of Purchase and Sale of Assets among the Registrant, E-Z Plan, Inc., shareholders of E-Z Plan, Inc., and
              certain lessors, dated as of March 5, 1997 (4)
10.25         Agreement for Purchase and Sale of Certain Assets among Registrant,  Kars-Yes Holdings Inc. and certain other parties,
              dated as of September 15, 1997 (7)
10.26         Portfolio Servicing Agreement among Registrant, Kars-Yes Financial, Inc., and certain other parties, dated as of
              September 15, 1997 (7)
10.26(a)      Subservicing Agreement among Registrant, Kars-Yes Financial, Inc., and certain other parties, dated as of September
              15, 1997 (7)
10.27         Binding Agreement to Propose and Support Modified Plan Agreement dated as of December 15, 1997 among the Registrant,
              FMAC and the Official Committee of Unsecured Creditors of FMAC (11)
10.28         Purchase Agreement dated as of December 18, 1997 by and among Contract Purchaser, Registrant and LaSalle National
              Bank, as Agent (11)
10.29         Guaranty dated as of December 18, 1997 by Registrant in favor of Contract Purchaser (11)
10.30         Servicing Agreement dated as of December 15, 1997 between Registrant and Contract Purchaser  (11)
10.31         FMAC Guaranty and Stock Pledge Agreement among FMAC, Registrant and certain banks (14)
10.32         Contribution Agreement between Registrant and FMAC (13)
10.33         Indemnification Agreement between the Company and FMAC (14)
10.34         Loan Agreement dated as of February 12, 1998 between the Registrant and each of the Kayne Anderson related Lenders
              named therein (12)
10.35         Credit and Security Agreement between Registrant and First Merchants Acceptance  Corp., dated as of July 17, 1997 (15)
10.35(a)      First Amendment to Credit and Security Agreement between Registrant and FMAC, dated as of January 21, 1998 (15)
10.35(b)      Second Amendment to Credit and Security Agreement between Registrant and FMAC, dated as of April 1, 1998 (15)
</TABLE>


<PAGE>

<TABLE>
<CAPTION>

<S>           <C>
10.36         Service Agreement among Reliance Acceptance Corporation, Registrant, Bank America Business Credit, Inc. and certain
              other parties dated as of February 9, 1998 (17)
10.37         Agreement of Understanding among Reliance Acceptance Group, Inc., Reliance Acceptance  Corporation and Registrant,
              dated as of February 9, 1998 (17)
10.38         Purchase and Sale-Leaseback Agreement and Joint Escrow Instructions between Champion Acceptance Corporation, Ugly
              Duckling Car Sales, Inc., Ugly Duckling Car Sales New Mexico, Inc., Ugly Duckling Car Sales Florida,  Inc. and Ugly
              Duckling Car Sales Texas, LLP, date as of May 13, 1998 (16)
10.39         Loan Agreement by and among the Registrant, Kayne Anderson Non-Traditional Investments, LP, and certain other lenders,
              dated July 20, 1998 (17)
10.40         Payment Guaranty by Registrant in favor of Kayne Anderson and the Lenders, dated as of July 20, 1998(17)
10.41         Agreement of Purchase and Sale of Assets made as of July 31, 1998, by and among Cygnet Financial Services, Inc. and
              Mountain Parks Financial Services, Inc. (17)
10.42         1998 Executive Incentive Plan (17)*
10.43         Loan agreement between Greenwich Capital Financial Products, Inc. and Registrant dated November 12, 1998 **
10.43(a)      Stock Pledge Agreement among Greenwich Capital Financial Products, Inc., Registrant and certain related parties,
              dated November 12, 1998 **
10.44         KPMG Year 2000 Renovation Project Service Proposal to and Engagement Letter with the Registrant, dated November 12,
              1998**
11            Earnings (Loss) per Share Computation (see Note 18 to Notes to Consolidated Financial Statements)**
12            Statement on Computation of Ratios **
21            List of Subsidiaries **
23            Consent of KPMG LLP **
24.1          Special Power of Attorney for R. Abrahams **
24.2          Special Power of Attorney for C. Jennings **
24.3          Special Power of Attorney for J. MacDonough **
24.4          Special Power of Attorney for F. Willey **
24.5          Special Power of Attorney for Ernest C. Garcia II **
24.6          Special Power of Attorney for Gregory Sullivan **
24.7          Special Power of Attorney for Steven Darak **
27.1          Financial Data Schedule for the year ending December 31, 1998**
27.2          Financial Data Schedule for the year ending December 31, 1997**
27.3          Financial Data Schedule for the year ending December 31, 1996**
27.4          Financial Data Schedule for the three months ending September 30, 1998**
27.5          Financial Data Schedule for the three months ending June 30, 1998**
27.6          Financial Data Schedule for the three months ending March 31, 1998**
27.7          Financial Data Schedule for the three months ending September 30, 1997**
27.8          Financial Data Schedule for the three months ending June 30, 1997**
27.9          Financial Data Schedule for the three months ending March 31, 1997**

</TABLE>

---------------------------



*             Management contract or compensatory plan, contract or arrangement.
**            Filed with this Form 10-K.
(1)           Incorporated by reference to the Company's Registration Statement
              on Form S-1 (Registration No. 333-3998), effective June 18, 1996.
(2)           Incorporated by reference to the Company's Registration Statement 
              on Form S-1 (Registration No. 333-13755), effective October 30, 
              1996.
(3)           Incorporated by reference to the Company's Current Report on Form 
              8-K, filed January 30, 1997.
(4)           Incorporated by reference to the Company's Annual Report on Form 
              10-K, filed March 31, 1997.
(5)           Incorporated by reference to the Company's Quarterly Report on 
              Form 10-Q, filed August 14, 1997.
(6)           Incorporated by reference to the Company's Current Report on Form 
              8-K, filed September 5, 1997.
(7)           Incorporated by reference to the Company's Current Report on Form 
              8-K, filed October 3, 1997.
(8)           Incorporated by reference to the Company's Quarterly Report on 
              Form 10-Q, filed November 14, 1997.



<PAGE>




(9)           Incorporated by reference to the Company's Current Report on Form 
              8-K, filed November 20, 1997.
(10)          Incorporated by reference to the Company's Registration Statement
              on Form S-1 (Registration No. 333-22237).
(11)          Incorporated by reference to the Company's Current Report on Form 
              8-K, filed January 2, 1998.
(12)          Incorporated by reference to the Company's Current Report on Form
              8-K, filed February 20, 1998.
(13)          Incorporated by reference to the Company's Registration Statement 
              on Form S-1 (Registration No. 333-42973), effective February 11, 
              1998.
(14)          Incorporated by reference to the Company's Annual Report on Form
              10-K, filed March 31 1998.
(15)          Incorporated by reference to the Company's Quarterly Report on 
              Form 10-Q, filed May 15, 1998.
(16)          Incorporated by reference to the Company's Quarterly Report on 
              Form 10-Q, filed August 10, 1998.
(17)          Incorporated by reference to the Company's Quarterly Report on 
              Form 10-Q, filed November 13, 1998.
(18)          Incorporated by reference to the Company's Form T-3 for 
              Application for Qualification of Indentures under the Trust
              Indenture Act of 1939, filed November 20, 1998 
              (File  No. 022-22415), effective December 21, 1998.