================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2000
Commission File Number 000-20841
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) Identificationn no.)
2525 E. Camelback Road, Suite 500,
Phoenix, Arizona 85016
(Address of principal executive offices) (Zip Code)
(602) 852-6600
(Registrant's telephone number, including area code)
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.
[X] Yes [ ] No
---------------
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE:
At August 10, 2000, there were approximately
12,377,000 shares of Common Stock, $0.001 par value, outstanding.
This document serves both as a resource for analysts, shareholders, and
other interested persons, and as the quarterly report on Form 10-Q of Ugly
Duckling Corporation (Ugly Duckling) to the Securities and Exchange Commission,
which has taken no action to approve or disapprove the report or pass upon its
accuracy or adequacy. Additionally, this document is to be read in conjunction
with the consolidated financial statements and notes thereto included in Ugly
Duckling's Annual Report on Form 10-K, for the year ended December 31, 1999.
================================================================================
UGLY DUCKLING CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Page
Part I - FINANCIAL STATEMENTS
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets-- June 30, 2000 and December 31, 1999............................1
Condensed Consolidated Statements of Operations-- Three and Six Months Ended June 30,
2000 and 1999........................................................................................2
Condensed Consolidated Statements of Cash Flows-- Six Months Ended June 30, 2000 and
1999.................................................................................................3
Notes to Condensed Consolidated Financial Statements...................................................4
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...............................................................................10
Item 3. MARKET RISK...........................................................................................23
Part II. -- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.....................................................................................24
Item 2. CHANGES IN SECURITIES.................................................................................24
Item 3. DEFAULTS UPON SENIOR SECURITIES.......................................................................24
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................................24
Item 5. OTHER INFORMATION.....................................................................................24
Item 6. EXHIBITS AND REPORTS ON FORM 8-K......................................................................24
SIGNATURES............................................................................................25
ITEM 1.
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2000 1999
(unaudited)
--------------- ----------------
ASSETS
Cash and Cash Equivalents $ 4,127 $ 3,683
Finance Receivables, net 451,238 365,586
Notes Receivable from Related Party 12,000 12,000
Inventory 45,865 62,865
Property and Equipment, net 33,870 31,752
Intangible Assets, Net 13,671 14,618
Other Assets 12,011 12,327
Net Assets of Discontinued Operations 4,702 33,880
--------------- ----------------
$ 577,484 $ 536,711
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts Payable $ 772 $ 3,185
Accrued Expenses and Other Liabilities 28,910 26,905
Notes Payable - Portfolio 315,952 275,774
Other Notes Payable 27,759 36,556
Subordinated Notes Payable 37,260 28,611
--------------- ----------------
Total Liabilities: 410,653 371,031
--------------- ----------------
Stockholders' Equity:
Common Stock 19 19
Additional Paid in Capital 173,712 173,273
Retained Earnings 21,540 12,709
Treasury Stock 28,440) (20,321)
Total Stockholders' Equity --------------- ----------------
166,831 165,680
--------------- ----------------
$ 577,484 $ 536,711
=============== ================
Page 1
See accompanying notes to condensed Consolidated Financial Statements.
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Six Months Ended June 30, 2000 and 1999
(In thousands, except earnings per share amounts)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -------------------------------
2000 1999 2000 1999
-------------- -------------- ------------- ---------------
Sales of Used Cars $ 121,527 $ 97,876 $ 254,313 $ 204,319
Less:
Cost of Used Cars Sold 68,417 55,543 141,359 115,631
Provision for Credit Losses 32,212 25,789 66,785 53,552
-------------- -------------- ------------- ---------------
20,898 16,544 46,169 35,136
Other Income (Expense):
Interest Income 29,871 15,756 55,402 26,129
Portfolio Interest Expense (5,997) (3,218) (11,026) (5,213)
Servicing and Other Income 586 2,295 1,393 5,194
-------------- -------------- ------------- ---------------
24,460 14,833 45,769 26,110
-------------- -------------- ------------- ---------------
Income before Operating Expenses 45,358 31,377 91,938 61,246
Operating Expenses:
Selling and Marketing 7,426 5,570 15,561 11,936
General and Administrative 25,778 20,460 52,123 41,469
Depreciation and Amortization 2,231 1,678 4,439 3,273
-------------- -------------- ------------- ---------------
35,435 27,708 72,123 56,678
-------------- -------------- ------------- ---------------
Operating Income 9,923 3,669 19,815 4,568
Interest Expense, Other 2,585 859 4,877 859
-------------- -------------- ------------- ---------------
Earnings before Income Taxes 7,338 2,810 14,938 3,709
Income Taxes 2,990 1,018 6,107 1,298
-------------- -------------- ------------- ---------------
Earnings from Continuing Operations 4,348 1,792 8,831 2,411
Loss from Discontinued Operations, net - (324) - (520)
-------------- -------------- ------------- ---------------
Net Earnings $ 4,348 $ 1,468 $ 8,831 $ 1,891
============== ============== ============= ===============
Earnings per Common Share from Continuing Operations:
Basic $ 0.31 $ 0.12 $ 0.61 $ 0.16
============== ============== ============= ===============
Diluted $ 0.31 $ 0.12 $ 0.60 $ 0.16
============== ============== ============= ===============
Net Earnings per Common Share:
Basic $ 0.31 $ 0.10 $ 0.61 $ 0.12
============== ============== ============= ===============
Diluted $ 0.31 $ 0.10 $ 0.60 $ 0.12
============== ============== ============= ===============
Shares Used in Computation:
Basic 14,052 14,940 14,479 15,292
============== ============== ============= ===============
Diluted 14,248 15,210 14,700 15,495
============== ============== ============= ===============
Page 2
See accompanying notes to Condensed Consolidated Financial Statements.
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2000 and 1999
(In thousands)
(unaudited)
2000 1999
------------- --------------
Cash Flows from Operating Activities:
Net Earnings $ 8,831 $ 1,891
Adjustments to Reconcile Net Earnings to Net Cash Provided
by Operating Activities:
Provision for Credit Losses 66,785 53,552
Depreciation and Amortization 6,459 3,961
Loss from Disposal of Property and Equipment 3 24
Loss from Discontinued Operations - 520
Deferred Income Taxes - (5,188)
Collections from Residuals in Finance Receivables Sold 8,743 10,772
Decrease in Inventory 17,000 6,408
Decrease in Other Assets 316 1,844
Increase in Accounts Payable, Accrued Expenses and Other
liabilities 1,860 17,325
Increase (Decrease) in Income Taxes Payable (2,300) 4,664
------------- --------------
Net Cash Provided by Operating Activities 107,697 95,773
------------- --------------
Cash Flows Used in Investing Activities:
Increase in Finance Receivables (261,882) (241,069)
Collections of Finance Receivables 102,059 62,844
Decrease in Investments Held in Trust on Finance Receivables Sold 5,937 2,335
Advances under Notes Receivable - (688)
Proceeds from Disposal of Property and Equipment 1,766 69
Purchase of Property and Equipment (6,511) (4,488)
------------- --------------
Net Cash Used in Investing Activities (158,631) (180,997)
------------- --------------
Cash Flows from Financing Activities:
Initial Deposits at Securitization into Investments
Held in Trust (14,619) (5,983)
Additional Deposits into Investments Held in Trust (3,767) (13,629)
Collections from Investments Held in Trust 11,526 1,260
Additions to Notes Payable Portfolio 314,456 333,941
Repayment of Notes Payable Portfolio (275,483) (240,097)
Additions to Other Notes - Payable 881 55,943
Repayment of Other Notes - Payable (9,854) (34,636)
Net Repayment of Subordinated Notes Payable - (1,778)
Proceeds from Issuance of Common Stock 432 55
Acquisition of Treasury Stock (114) (5,314)
------------- --------------
Net Cash Provided by Financing Activities 23,458 89,762
------------- --------------
Net Cash Provided by (used in) Discontinued Operations 27,920 (1,377)
------------- --------------
Net Increase in Cash and Cash Equivalents 444 3,161
Cash and Cash Equivalents at Beginning of Period 3,683 2,544
------------- --------------
Cash and Cash Equivalents at End of Period $ 4,127 $ 5,705
============= ==============
Supplemental Statement of Cash Flows Information:
Interest Paid $ 15,678 $ 10,336
============= ==============
Income Taxes Paid $ 8,405 $ 3,315
============= ==============
Acquisition of Treasury Stock with Subordinated Debt $ 8,005 -
============= ==============
See accompanying notes to Condensed Consolidated Financial Statements.
Page 3
UGLY DUCKLING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
Our accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and pursuant to rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for a complete financial statement presentation. In our opinion, such unaudited
interim information reflects all adjustments, consisting only of normal
recurring adjustments, necessary to present our financial position and results
of operations for the periods presented. Our results of operations for interim
periods are not necessarily indicative of the results to be expected for a full
fiscal year. Our Condensed Consolidated Balance Sheet as of December 31, 1999
was derived from our audited consolidated financial statements as of that date
but does not include all the information and footnotes required by generally
accepted accounting principles. We suggest that these condensed consolidated
financial statements be read in conjunction with the audited consolidated
financial statements included in our Annual Report on Form 10-K, for the year
ended December 31, 1999.
Note 2. Summary of Finance Receivables
A summary of Finance Receivables, net, follows ($ in thousands):
June 30, December 31,
2000 1999
------------- ----------------
Contractually Scheduled Payments $ 645,485 $ 492,937
Unearned Finance Charges (173,174) (134,119)
------------- ----------------
Principal Balances, net 472,311 358,818
Accrued Interest 4,952 3,741
Loan Origination Costs 6,925 5,079
------------- ----------------
Principal Balances, net 484,188 367,638
Residuals in Finance Receivables Sold 7,944 17,382
Investments Held in Trust 57,639 56,716
------------- ----------------
Finance Receivables 549,771 441,736
Allowance for Credit Losses (98,533) (76,150)
------------- ----------------
Finance Receivables, net $ 451,238 $ 365,586
============= ================
Investments Held in Trust represent funds held by trustees on behalf of our
securitization lenders. The balance of Investments Held in Trust increased
slightly from December 31, 1999 due to an additional securitization during the
second quarter of 2000, partially offset by the runoff of portfolios securitized
during prior periods.
Residuals in Finance Receivables Sold represent our subordinated interest in
loans sold through securitizations. The decrease from December 31, 1999 to June
30, 2000 is attributable to no additional loans sold through securitization with
servicing retained, amortization and release of cash, as well as the runoff of
portfolios securitized and sold during prior periods.
A summary of Residuals in Finance Receivables Sold follows ($ in thousands):
June 30, December 31,
2000 1999
------------------ ------------------
Retained interest in subordinated securities (B Certificates)............ $ 7,645 $ 17,335
Net interest spreads, less present value discount........................ 1,849 6,113
Reduction for estimated credit losses.................................... (1,550) (6,066)
------------ --------------
Residuals in finance receivables sold.................................... 7,944 $ 17,382
======== ================
Securitized principal balances outstanding............................... 27,721 $ 65,662
======== ================
Estimated credit losses as a % of securitized principal balances.........
outstanding.............................................................. 5.6% 9.2%
======== ================
Page 4
Note 3. Notes Receivable- Related Party
The Note Receivable - Related Party originated from the Company's December
1999 sale of its Cygnet Dealer Finance subsidiary to Cygnet Capital Corporation,
an entity controlled by Ernest C. Garcia II, Chairman and principal shareholder
of the Company. The $12.0 million note from Cygnet Capital Corporation has a 10
year term, with interest payable quarterly at 9%, due December 2009. The note is
secured by the capital stock of Cygnet Capital Corporation and guaranteed by
Verde Investments, Inc., an affiliate of Mr. Garcia. Under the terms of the
agreement, Mr. Garcia will be allowed to reduce the principal balance up to a
maximum of $8 million by surrendering to the Company shares of Ugly Duckling
common stock (valued at 98% of the average of the closing prices of the stock on
NASDAQ for the ten trading days prior to the surrender) as long as Mr. Garcia's
ownership interest of the Company voting stock does not fall below 15% and the
acceptance of such stock by the Company does not result in a breach of a
covenant.
Note 4. Notes Payable
Notes Payable, Portfolio
A summary of Notes Payable, Portfolio at June 30, 2000 and December 31,
1999 follows ($ in thousands):
June 30, December 31,
2000 1999
-------------- ------------
Revolving facility for $125.0 million with GE Capital, secured by substantially all
assets of the Company, including $139.5 million in finance receivables......... $ 60,711 $ 41,717
Class A obligations issued pursuant to the Company's Securitization Program, secured
by underlying pools of finance receivables and investments held in trust totaling
$340.4 million at June 30, 2000................................................ 255,397 236,555
---------- --------------
Subtotal....................................................................... 316,108 278,272
Less: Unamortized Loan Fees................................................... 156 2,498
---------- --------------
Total.......................................................................... $ 315,952 $ 275,774
=========== ==============
The revolving facility note payable has interest payable daily at 30 day
LIBOR plus 3.15% (9.69% at June 30, 2000) through June 2001. The revolving
facility 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 is currently in compliance with these covenants.
Class A obligations have interest payable monthly at rates ranging from 5.7%
to 7.2%. Monthly principal reductions on Class A obligations approximate 70% of
the principal reductions on the underlying pool of finance receivable loans.
Other Notes Payable
A summary of Other Notes Payable at June 30, 2000 and December 31, 1999
follows ($ in thousands):
June 30, December 31,
2000 1999
--------------- ------------
Note payable, secured by the capital stock of UDRC and UDRC II and certain other
receivables.................................................................. $ 25,710 $ 33,900
Other notes payable bearing interest at rates ranging from 7.5% to 11% due through
August 2001, secured by certain real property and certain property and
equipment...................................................................... 2,180 2,939
------------- --------------
27,890 36,839
Less: Unamortized Loan Fees.................................................. 131 283
------------- --------------
Total......................................................................... $ 27,759 $ 36,556
============== ==============
Page 5
Subordinated Notes Payable
A summary of Subordinated Notes Payable at June 30, 2000 and December 31,
1999 follows ($ in thousands):
June 30, December 31,
2000 1999
-------------- -------------
$15 million senior subordinated notes payable to unrelated parties,
bearing interest at 12% per annum payable quarterly, principal due
February 2001 and senior to subordinated debentures.................. $ 15,000 $ 15,000
$17.5 million subordinated debentures, interest at 12% per annum (approximately
18.8% effective rate) payable semi-annually, principal balance due October
23, 2003............................................................. 17,479 17,479
$11.9 million subordinated debentures, interest at 11% per annum
(approximately 19.7% effective rate) payable semi-annually, principal
balance due April 15, 2007............................................ 11,940
--------------
Subtotal................................................................... 44,419 32,479
Less: Unamortized Loan Fees............................................... 322 605
Unamortized Discount - subordinated debentures................... 6,837 3,263
------------ ------------
Total...................................................................... $ 37,260 $ 28,611
============ ============
Note 5. Common Stock Equivalents
Net Earnings per common share amounts are based on the weighted average
number of common shares and common stock equivalents outstanding for the three
and six-month periods ended June 30, 2000, and 1999 as follows ($ and shares in
thousands, except for per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2000 1999 2000 1999
--------------- -------------- --------------- --------------
Earnings from Continuing Operations $ 4,348 $ 1,792 $ 8,831 $ 2,411
=============== ============== =============== ==============
Net Earnings $ 4,348 $ 1,468 $ 8,831 $ 1,891
=============== ============== =============== ==============
Basic Earnings Per Share From Continuing Operations $ 0.31 $ 0.12 $ 0.61 $ 0.16
=============== ============== =============== ==============
Diluted Earnings Per Share From Continuing Operations $ 0.31 $ 0.12 $ 0.60 $ 0.16
=============== ============== =============== ==============
Basic Earnings Per Share $ 0.31 $ 0.10 $ 0.61 $ 0.12
=============== ============== =============== ==============
Diluted Earnings Per Share $ 0.31 $ 0.10 $ 0.60 $ 0.12
=============== ============== =============== ==============
Basic EPS-Weighted Average Shares Outstanding 14,052 14,940 14,479 15,292
Effect of Diluted Securities:
Warrants 12 - 13 -
Stock Options 184 270 208 203
--------------- -------------- --------------- --------------
Dilutive EPS-Weighted Average Shares Outstanding 14,248 15,210 14,700 15,495
=============== ============== =============== ==============
Warrants Not Included in Diluted EPS Since Antidilutive 1,124 1,439 1,124 1,510
=============== ============== =============== ==============
Stock Options Not Included in Diluted EPS Since Antidilutive 846 905 864 1,035
=============== ============== =============== ==============
Page 6
Note 6. Business Segments
The Company has three distinct business segments. These consist of retail
car sales operations (Retail Operations), the income resulting from the finance
receivables generated at the Company dealerships (Portfolio Operations), and
corporate and other operations (Corporate Operations). In computing operating
profit by business segment, the following items were considered in the Corporate
Operations 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.
A summary of operating activity by business segment for the three and six
month periods ended June 30, 2000 and 1999 follows ($ in thousands):
Retail Portfolio Corporate Total
Three Months Ended June 30, 2000:
Sales of Used Cars $ 121,527 $ - $ - $ 121,527
Less: Cost of Cars Sold 68,417 - - 68,417
Provision for Credit Losses 24,738 7,474 - 32,212
---------- ---------- -------- ----------
28,372 (7,474) - 20,898
Net Interest Income - 23,764 110 23,874
Servicing and Other Income - 586 - 586
---------- ---------- -------- ----------
Income before Operating Expenses 28,372 16,876 110 45,358
---------- ---------- -------- ----------
Operating Expenses:
Selling and Marketing 7,426 - - 7,426
General and Administrative 14,593 6,002 5,183 25,778
Depreciation and Amortization 1,133 280 818 2,231
--------- ------- -------- ----------
23,152 6,282 6,001 35,435
--------- ------- -------- ----------
Operating Income $ 5,220 $ 10,594 $ (5,891) $ 9,923
========== =========== ========== ==========
Capital Expenditures $ 2,220 $ 195 $ 1,818 $ 4,233
========== =========== ========== ==========
Identifiable Assets $ 73,038 $ 471,431 $ 28,313 $ 572,782
========== =========== ========== ==========
Three Months Ended June 30, 1999:
Sales of Used Cars $ 97,876 $ - $ - $ 97,876
Less: Cost of Cars Sold $ 55,543 - - 55,543
Provision for Credit Losses 20,131 5,658 - 25,789
--------- ----------- ---------- ---------
22,202 (5,658) - 16,544
Net Interest Income - 12,429 109 12,538
Servicing and Other Income - 2,295 - 2,295
--------- ----------- ---------- ---------
Income before Operating Expenses 22,202 9,066 109 31,377
--------- ----------- ---------- ---------
Operating Expenses:
Selling and Marketing 5,570 - - 5,570
General and Administrative 11,404 4,566 4,490 20,460
Depreciation and Amortization 861 280 537 1,678
--------- ---------- ---------- ---------
17,835 4,846 5,027 27,708
--------- ---------- ---------- ---------
Operating Income $ 4,367 $ 4,220 $ (4,918) $ 3,669
========= ========== ========== =========
Capital Expenditures $ 1,780 $ 149 $ 280 $ 2,209
========= ========== ========== =========
Page 7
Retail Portfolio Corporate Total
Six Months Ended June 30, 2000
Sales of Used Cars $254,313 $ - $ - $254,313
Less: Cost of Cars Sold 141,359 - - 141,359
Provision for Credit Losses 51,832 14,953 - 66,785
--------- ---------- ---------- ---------
61,122 (14,953) - 46,169
Net Interest Income - 44,156 220 44,376
Servicing and Other Income - 1,393 - 1,393
--------- ---------- ---------- ---------
Income before Operating Expenses 61,122 30,596 220 91,938
--------- ---------- ---------- ---------
Operating Expenses:
Selling and Marketing 15,561 - - 15,561
General and Administrative 28,783 12,886 10,454 52,123
Depreciation and Amortization 2,204 580 1,655 4,439
--------- ---------- ---------- ---------
46,548 13,466 12,109 72,123
--------- ---------- ---------- ---------
Operating Income $ 14,574 $ 17,130 $ (11,889) $ 19,815
========= ========== ========== =========
Capital Expenditures $ 3,493 $ 294 $ 2,724 $ 6,511
Identifiable Assets $ 73,038 $ 471,431 $ 28,313 $ 572,782
========= ========== ========== =========
Six Months Ended June 30, 1999:
Sales of Used Cars $204,319 $ - $ - $ 204,319
Less: Cost of Cars Sold 115,631 - - 115,631
Provision for Credit Losses 42,024 11,528 - 53,552
--------- ---------- ---------- ---------
46,664 (11,528) - 35,136
Net Interest Income - 20,746 170 20,916
Servicing and Other Income - 5,194 - 5,194
--------- ---------- ---------- ---------
Income before Operating Expenses 46,664 14,412 170 61,246
--------- ---------- ---------- ---------
Operating Expenses:
Selling and Marketing 11,936 - - 11,936
General and Administrative 22,498 9,167 9,804 41,469
Depreciation and Amortization 1,652 563 1,058 3,273
--------- ---------- ---------- ---------
36,086 9,730 10,862 56,678
--------- ---------- ---------- ---------
Operating Income $ 10,578 $ 4,682 $ (10,692) $ 4,568
========= ========== ========== =========
Capital Expenditures 3,515 $ 328 $ 645 $ 4,488
========= ========== ========== =========
Note 7. Discontinued Operations
In February 1998, we announced our intention to close our branch office
network, through which we purchased retail installment contracts from third
party dealers, and exit this line of business. We completed the branch office
closure as of March 31, 1998. As a result of the branch office network closure,
we reclassified the results of operations of the branch office network in the
accompanying condensed consolidated balance sheets and condensed consolidated
statements of operations to discontinued operations.
Effective December 31, 1999, the Company adopted a formal plan to abandon
any effort for its third party dealer operations to acquire loans or servicing
rights to additional portfolios. Accordingly, our Cygnet Servicing and the
associated Cygnet Corporate segment also are reported as components of
discontinued operations. The Company plans to complete servicing the portfolios
that it currently services.
Page 8
The components of Net Assets of Discontinued Operations as of June 30, 2000
and December 31, 1999 follow ($ in thousands):
June 30, December 31,
2000 1999
-------------- -----------------
Finance Receivables, net $ 11,103 $ 14,837
Residuals in Finance Receivables Sold 2,467 3,742
Investments Held in Trust - 1,545
Property and Equipment 570 2,114
Notes Receivable, net of Sub. Notes Payable - 6,697
Servicing Receivable 5,795 6,125
Other Assets, net of Accounts Payable and Accrued
Liabilities (15,233) (1,180)
-------------- -----------------
Net Assets of Discontinued Operations $ 4,702 $ 33,880
============== =================
Note 8. Use of Estimates
The preparation of our condensed consolidated financial statements requires
us 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 our estimates.
Note 9. Reclassifications
We have made certain reclassifications to previously reported information to
conform to the current presentation.
Page 9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Introduction
We operate the largest chain of buy here-pay here used car dealerships in
the United States. At June 30, 2000, we operated 77 dealerships located in
eleven metropolitan areas in eight states. We have one primary line of business:
to sell and finance quality used vehicles to customers within what is referred
to as the sub-prime segment of the used car market. The sub-prime market is
comprised of customers who typically have limited credit histories, low incomes
or past credit problems.
As a buy here-pay here dealer, we offer the customer certain advantages over
more traditional financing sources including:
o expanded credit opportunities,
o flexible payment terms, including structuring loan payment
due dates as weekly or biweekly, often coinciding with a
customer's payday,
o the ability to make payments in person at the dealerships. 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 due to the timing of
paydays.
We distinguish our retail operations from those of typical buy here-pay here
dealers through our:
o dedication to customer service, o advertising and marketing programs,
o larger inventories of used cars, o upgraded facilities, and
o network of multiple locations, o centralized purchasing
We finance substantially all of the used cars that we sell at our
dealerships through retail installment loan contracts. Subject to the discretion
of our dealership or sales managers, potential customers must meet our formal
underwriting guidelines before we will agree to finance the purchase of a
vehicle. Our employees analyze and verify the customer credit application
information and subsequently make a determination whether to provide financing
to the customer.
Our business is divided into three operating segments; retail, portfolio and
corporate. Information regarding our operating segments can be found in Note (6)
of the Notes to Condensed Consolidated Financial Statements contained herein.
Operating segment information is also included in "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Business Segment
Information" found below.
In December 1999, we sold the Cygnet Dealer Finance (CDF) subsidiary and
also decided to abandon any efforts to acquire third party loans or servicing
rights to additional third party portfolios. As a result, CDF, Cygnet Servicing
and the associated Cygnet Corporate segment activities are classified as
discontinued operations for 1999. We plan to complete the servicing of the
portfolios that we currently service.
In the following discussion and analysis, we explain the results of
operations and general financial condition of Ugly Duckling and its
subsidiaries. In particular, we analyze and explain the changes in the results
of operations of our business segments for the three and six month periods ended
June 30, 2000 and June 30,1999.
Page 10
SELECTED CONSOLIDATED FINANCIAL DATA (unaudited)
At or For for the Three Months Ended
--------------------------------------------------------------------------------------
Selected Consolidated Financial Data June 30, March 31, December 31, September 30, June 30, March 31,
2000 2000 1999 1999 1999 1999
--------------------------------------------------------------------------------------
($ and shares in thousands, except per share and per car data)
(anaudited)
Operating Data:
Total Revenues $ 151,984 $ 159,124 $ 105,429 $ 124,883 $ 115,927 $ 119,715
Sales of Used Cars $ 121,527 $ 132,786 $ 82,275 $ 103,315 $ 97,876 $ 106,443
Dealerships 77 75 72 67 59 58
Average Sales per Dealership per Month $ 62 $ 70 $ 45 $ 61 $ 64 $ 70
Number of Used Cars Sold 14,369 15,802 9,731 12,219 11,416 12,754
Sales Price - Per Car Sold $ 8,458 $ 8,403 $ 8,455 $ 8,455 $ 8,574 $ 8,346
Cost of Sales - Per Car Sold $ 4,761 $ 4,616 $ 4,690 $ 4,727 $ 4,865 $ 4,712
Gross Margin Per Car Sold $ 3,696 $ 3,787 $ 3,765 $ 3,728 $ 3,708 $ 3,634
Provision - Per Car Sold $ 2,242 $ 2,188 $ 2,245 $ 2,256 $ 2,259 $ 2,177
Total Operating Expense - Per Car Sold $ 2,466 $ 2,322 $ 2,763 $ 2,298 $ 2,427 $ 2,274
Total Operating Income - Per Car Sold $ 691 $ 626 $ 587 $ 608 $ 321 $ 70
Cost of Used Cars as Percent of Sales 56.3% 54.9% 55.5% 55.9% 56.7% 56.5%
Gross Margin as Percent of Sales 43.7% 45.1% 44.5% 44.1% 43.3% 43.5%
Provision - % of Originations 27.1% 27.0% 27.0% 26.9% 26.8% 27.0%
Total Operating Expense - % of Total 23.3% 23.1% 25.5% 22.5% 23.9% 24.2%
Revenues
Segment Operating Expense Data:
Retail Operating Expense - Per Car Sold $ 1,611 $ 1,481 $ 1,775 $ 1,484 $ 1,562 $ 1,431
Retail Operating Expense-% of Used Car Sales 19.1% 17.6% 21.0% 17.6% 18.2% 17.1%
Corporate/Other Expense - Per Car Sold $ 418 $ 387 $ 357 $ 399 $ 440 $ 458
Corporate/Other Expense - % of Total Revenue 4.0% 3.8% 3.3% 3.9% 4.3% 4.9%
Portfolio Exp. Annualized - % of End of Period
Managed Principal 5.0% 6.2% 6.8% 4.7% 5.1% 5.7%
Balance Sheet Data:
Finance Receivables, net $ 451,238 $ 407,267 $ 365,586 $ 321,739 $ 254,753 $ 190,063
Inventory $ 45,865 $ 49,058 $ 62,865 $ 45,768 $ 37,737 $ 39,878
Total Assets $ 577,484 $ 547,953 $ 536,711 $ 516,513 $ 467,048 $ 400,247
Notes Payable - Portfolio $ 315,952 $ 282,865 $ 275,774 $ 244,363 $ 195,244 $ 171,543
Subordinated Notes Payable $ 37,260 $ 28,900 $ 28,611 $ 37,077 $ 36,943 $ 38,279
Total Debt $ 380,971 $ 345,183 $ 340,941 $ 317,440 $ 269,687 $ 210,358
Common Stock $ 173,731 $ 173,682 $ 173,292 $ 173,276 $ 173,883 $ 173,836
Treasury Stock $ (28,440) $ (20,321) $ (20,321) $ (20,321) $ (19,824) $ (19,817)
Total Stockholders' Equity $ 166,831 $ 170,553 $ 165,680 $ 162,477 $ 159,398 $ 157,890
Common Shares Outstanding - End of Period $ 13,899 $ 14,980 $ 14,888 $ 14,889 $ 14,943 $ 14,939
Book Value per Share $ 12.00 $ 11.39 $ 11.13 $ 10.91 $ 10.67 $ 10.57
Tangible Book Value per Share $ 11.02 $ 10.43 $ 10.15 $ 9.95 $ 9.73 $ 9.62
Total Debt to Equity 2.3 2.0 2.1 2.0 1.7 1.3
Loan Portfolio Data:
Interest Income $ 29,871 $ 25,531 $ 22,670 $ 19,775 $ 15,756 $ 10,373
Average Yield on Portfolio 26.8% 26.2% 25.4% 25.9% 26.3% 26.2%
Principal Balances Originated $ 118,778 $ 128,123 $ 80,905 $ 102,599 $ 96,098 $ 102,733
Principal Balances Originated as % of Sales 97.7% 96.5% 98.3% 99.3% 98.2% 96.5%
Principal Balances Acquired $ - $ - $ 6,811 $ 14,596 $ - $ -
Number of Loans Originated 14,291 15,721 9,650 12,137 11,335 12,634
Average Original Amount Financed $ 8,311 $ 8,150 $ 8,384 $ 8,453 $ 8,478 $ 8,131
Number of Loans Originated as % of Units Sold 99.5% 99.5% 99.2% 99.3% 99.3% 99.1%
Number of Loans Acquired - - 2,586 2,543 - -
Managed Portfolio Delinquencies:
31 to 60 days 4.5% 3.4% 5.7% 6.8% 4.7% 3.5%
Over 60 days 2.7% 1.9% 2.9% 3.5% 2.6% 1.9%
Principal Outstanding - Managed $ 500,032 $ 461,824 $ 424,480 $ 427,439 $ 383,596 $ 341,040
Principal Outstanding - Retained $ 472,311 $ 418,913 $ 358,818 $ 331,982 $ 256,645 $ 182,150
Number of Loans Outstanding - Managed 81,407 75,496 70,450 68,420 61,661 56,333
Number of Loans Outstanding - Retained 71,518 62,459 53,081 45,874 34,065 27,924
Page 11
Second Quarter highlights include:
o Earnings from continuing operations totaled $4.3 million, or $0.31 per
diluted share, our highest quarterly EPS ever, versus earnings from
continuing operations of $1.8 million or $0.12 per diluted share in
the corresponding quarter of the prior year.
o Total revenues increased 31% to $152.0 million from $115.9 million in
the same quarter of the prior year.
o E-Commerce provided $6.5 million in revenue and 763 cars sold during
the second quarter of 2000 versus $4.7 million in revenue and 561
cars sold during the first quarter of 2000.
o On-balance sheet loan portfolio principal balance reached $472.3
million, representing a 13% sequential increase over the first quarter
of 2000 and an 84% rise over the year-ago quarter.
o New loan originations reached $118.8 million, a 24% increase over the
same quarter of the prior year.
o Through the date of this report, the Company has acquired over 2.6
million shares of its common stock since March 31, 2000.
Sales of Used Cars and Cost of Used Cars Sold
Three Months Ended Six Months Ended
June 30, Percentage June 30, Percentage
------------------------- -------------------------
2000 1999 Change 2000 1999 Change
----------- ------------ ------------ ------------ ----------- -------------
($ in thousands)
Number of Used Cars Sold 14,369 11,416 25.9% 30,171 24,170 24.8%
=========== ============ ============ ===========
Sales of Used Cars $ 121,527 $ 97,876 24.2% $ 254,313 $ 204,319 24.5%
Cost of Used Cars Sold 68,417 55,543 23.2% 141,359 115,631 22.3%
----------- ------------ ------------ -----------
Gross Margin $ 53,110 $ 42,333 25.5% $ 112,954 $ 88,688 27.4%
=========== ============ ============ ===========
Gross Margin % 43.7% 43.3% 44.4% 43.4%
Per Car Sold:
Sales $ 8,458 $ 8,574 1.4)% $ 8,429 $ 8,453 (0.3)%
Cost of Used Cars Sold 4,761 4,865 (2.1)% 4,685 4,784 (2.1)%
----------- ------------ ------------ -----------
Gross Margin $ 3,696 $ 3,708 (0.3)% $ 3,744 $ 3,669 2.0%
=========== ============ ============ ===========
For the three and six-month periods ended June 30, 2000, the number of cars
sold increased by 25.9% and 24.8% and Used Car Sales revenues increased by 24.2%
and 24.5%, respectively, over the same periods in 1999. The increase in both
units sold and revenues is primarily the result of an increase in the number of
dealerships in operation coupled with an increase in E-commerce related
business.
During 1999, we expanded our marketing efforts to include E-commerce by
accepting credit applications from potential customers via our website, located
at http://www.uglyduckling.com. Credit inquiries received over the web are
reviewed by our employees, who then contact the customers and schedule
appointments. We continue to monitor and enhance our internet application
levels. These efforts continue to provide an increasing number of used cars
sold. During the second quarter of 2000, we sold 763 cars totaling $6.5 million
in revenue, up from 561 cars sold and $4.7 million in revenue during the first
quarter of 2000. We continue to find that the E-commerce customer group
outperforms all other customers in terms of loan performance.
Same store unit sales for the three and six months ended June 30, 2000
decreased approximately 3% from the same three and six month periods of 1999.
The decrease is primarily due to the increased emphasis on underwriting and
obtaining higher quality loans.
The Cost of Used Cars Sold for the three and six month periods ended June
30, 2000, increased by 23.2% and 22.3%, respectively, over the comparable
periods of the previous year. The increases for these periods reflect a rise in
the volume of cars sold due to the increase in number of dealerships in
operation and E-commerce related business as previously mentioned. The Cost of
Used Cars Sold on a per car basis decreased 2.1% for the three and six months
ended June 30, 2000 versus the corresponding periods of the prior year, thus
improving the overall gross margins. The gross margin on used car sales (Sales
of Used Cars less Cost of Used Cars Sold excluding Provision for Credit Losses)
as a percentage of related revenue was 43.7% for the three months ended June 30,
2000, which is relatively constant with the same period of the previous year,
but increased 1% for the
Page 12
six month period ended June 30, 2000, to 44.4% from
43.4% for the same period of the prior year. On a per car sold basis, gross
margin remained relatively constant at $3,696 per car for the three month period
ended June 30, 2000 as compared to the same quarter of the previous year and
rose 2.0% to $3,744 per car for the six month period ended June 30, 2000 as
compared to the corresponding period of 1999. The increase in both overall gross
margin as well as on a per car sold basis for the six months ended June 30, 2000
is attributable to a decrease in the cost of used cars sold, partially offset by
a decrease in average revenue per car sold .
We finance substantially all of our sales. The following table indicates the
percentage of sales units and revenue financed:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
2000 1999 2000 1999
--------- ---------- ---------- ----------
Percentage of used cars sold financed 99.5% 99.3% 99.5% 99.2%
===== ===== ===== =====
Percentage of sales revenue financed 97.7% 98.2% 97.1% 97.3%
===== ===== ===== =====
Provision for Credit Losses
The following is a summary of the Provision for Credit Losses:
Three Months Ended Six Months Ended
June 30, Percentage June 30, Percentage
-------------------------- -------------------------- Change
2000 1999 Change 2000 1999
------------ ------------- ------------ ------------ ------------- -------------
Provision for Credit Losses (in thousands) $32,212 $25,789 24.9% $66,785 $53,552 24.7%
============ ============= ============ =============
Provision per loan originated $2,254 $2,275 (0.9)% $2,225 $2,234 (0.4)%
============ ============= ============ =============
Provision as a percentage of
principal balances originated 27.1% 26.8% 27.0% 26.9%
============ ============= ============ =============
The Provision for Credit Losses is the amount we charge to current
operations on each car sold to establish an allowance for credit losses. The
Provision for Credit Losses for the three and six month periods ended June 30,
2000 increased 24.9% and 24.7%, respectively, over the comparable period of the
prior year. The increase was primarily due to an increase in the volume of loans
originated. The average amount financed for the three month period ended June
30, 2000 decreased $167 to $8,311 per unit. The average amount financed for the
six month period ended June 30, 2000 decreased $89 to $8,206 per unit. The
decrease is primarily due to an overall decrease in average sales price per car
sold coupled with a change in the required minimum down payment from $500 to
$600, effective May 1, 2000. See Management's Discussion and Analysis - "Static
Pool Analysis" for further Provision for Credit Loss discussion.
Net Interest Income
Three Months Ended Six Months Ended
June 30, Percentage June 30, Percentage
-------------------------- --------------------------
2000 1999 Change 2000 1999 Change
----------- ------------ ------------ ------------ ------------- ------------
($ in thousands)
Interest Income $ 29,871 $ 15,756 89.6% $ 55,402 $ 26,129 112.0%
Portfolio Interest Expense 5,997 3,218 86.4% 11,026 5,213 111.5%
----------- ------------ ----------- -------------
Net Interest Income $ 23,874 $ 12,538 90.4% $ 44,376 $ 20,916 112.2%
============ ============ ============ ============
Average Effective Yield 26.8% 26.3% 1.9% 26.5% 26.3% 0.6%
Average Borrowing Cost 9.7% 10.4% (6.4)% 9.4% 10.0% (6.5)%
Interest Income consists primarily of interest on finance receivable
principal balances retained on our balance sheet. Retained principal balances
grew to $472.3 million at June 30, 2000 from $256.6 million at June 30, 1999
primarily as a result of the change in the way we structure our securitizations
to the collateralized borrowing method during the fourth quarter of 1998. Prior
to the fourth quarter of 1998, securitized loans were transferred off of our
balance sheet and a gain on sale was recorded. Under the
Page 13
collateralized borrowing method, the securitized loans are retained on our
balance sheet and the income and associated costs are recognized over the life
of the loan.
Servicing Income
We generate Servicing Income primarily from servicing the remaining loan
portfolios securitized under the gain on sale method. A summary of Servicing
Income follows for the three and six months ended June 30, 2000 and 1999 ($ in
thousands):
Three Months Ended Percentage Six Months Ended Percentage
June 30, Change June 30, Change
----------------------- ------------- ---------------------- --------------
2000 1999 2000 1999
---------- ----------- ---------- ----------
Servicing Income $ 586 $ 2,295 (74.5)% $ 1,393 $ 5,194 (73.2)%
========== =========== ============== ========== ========== ==============
We service loans for monthly fees ranging from .25% to .33% of the beginning
of month principal balances (3.0% to 4.0% per year). The decrease in Servicing
Income for the three and six month periods ended June 30, 2000 is due to the
decrease in remaining principal balances securitized and serviced under the gain
on sale method from $126.9 million at June 30, 1999 to $27.7 million at June 30,
2000.
Income before Operating Expenses
Income before Operating Expenses grew by 44.6% to $45.4 million for the
three month period ended June 30, 2000 and increased 50.1% to $91.9 million for
six month period ended June 30, 2000. Income before Operating Expenses for the
three and six month periods ended June 30, 1999 was $31.4 million and $61.2
million, respectively. Growth in Sales of Used Cars, an increase in gross
margins and an increase in Interest Income were the primary contributors to the
increase.
Operating Expenses
Three Months Ended Percentage Six Months Ended Percentage
June 30, Change June 30, Change
------------------------- -------------- ---------------------------- -------------
2000 1999 2000 1999
--------- --------- --------- -------
Operating Expenses (in thousands).......$ 35,435 $ 27,708 27.9% $ 72,123 $ 56,678 27.3%
Per Car Sold............................ 2,466 2,427 1.6% 2,391 2,345 2.0%
-------- ------------ ------------ ----------
As % of Total Revenues.................. 23.3% 23.9% 23.2% 24.1%
========== ========== ========== ==========
Operating expenses, which consist of selling, marketing, general and
administrative and depreciation/amortization expenses, increased as a result of
overall growth in our operations. The decrease in operating expenses as a
percentage of total revenues is primarily the result of increased economies of
scale related to marketing efforts with the addition of more dealerships in
existing markets, efficiencies gained from enhanced management information
systems and an increase in interest income.
Interest Expense
Interest expense arising from our subordinated debt totaled $2.6 million for
the three months ended June 30, 2000 versus $0.9 million for the three months
ended June 30, 1999. For the six month periods ended June 30, 2000 and 1999,
interest expense was $4.9 million and $0.9 million, respectively. While we have
additional interest expense arising from subordinated notes payable, a portion
of this interest expense was attributed to the financing of assets and
activities reported as discontinued operations. As the assets and activities of
discontinued operations diminish, we do not expect to retire the subordinated
notes payable but rather use these borrowings to fund our growth. Accordingly,
we would expect to have a disproportionate increase in interest expense
allocated to continuing operations in future periods as existing subordinated
debt is used to fund our growth and the allocation of this interest to
discontinued operations decreases. Subordinated debt carries interest rates
generally higher than those charged on borrowings collateralized by our finance
receivables.
Page 14
Income Taxes
Income taxes totaled $3.0 million and $6.1 million for the three and six
month periods ended June 30, 2000, respectively, and $1.0 million and $1.3
million for the three and six months ended June 30, 1999. Our effective tax rate
was 41% for the three and six months ended June 30, 2000 versus 36% and 35% for
the three and six months ended June 30, 1999, respectively.
Earnings from Continuing Operations
Earnings from continuing operations totaled $4.3 million and $8.8 million
for the three and six months ended June 30, 2000, respectively, versus $1.8
million and $2.4 million, respectively, for the same three and six month periods
of the previous year. The increase is primarily due to an increase in the volume
of used cars sold, increases in gross margin and growth in interest income. The
interest income is due to the increase in our retained portfolio. These
improvements were offset by a decrease in servicing income resulting from the
decline in remaining principal balances securitized and serviced under the gain
on sale method.
Discontinued Operations
Discontinued operations provided no income or loss for the three and six
months ended June 30, 2000 versus a loss, net of income tax benefits, of
$324,000 and $520,000 for the three and six months ended June 30, 1999.
Effective December 31, 1999, we adopted a formal plan to abandon any effort for
our third party dealer operations to acquire loans or servicing rights to
additional portfolios. Accordingly, our Cygnet Servicing and the associated
Cygnet Corporate segment are reported as components of discontinued operations.
We plan to complete servicing the portfolios that we currently service.
Business Segment Information
We report our operations based on three operating segments. These segments
are reported as Retail, Portfolio and Corporate. These segments were previously
reported as Company Dealership, Company Dealership Receivables and Corporate and
Other, respectively.
Operating Expenses for our business segments, along with a description of
the included activities, for the three and six month periods ended June 30, 2000
and 1999 are as follows:
Retail Operations. Operating expenses for our Retail segment consist of
Company marketing efforts, maintenance and development of dealership and
inspection center sites, and direct management oversight of used car
acquisition, reconditioning and sales activities. A summary of retail operating
expenses follows ($ in thousands except per car sold data):
Three Months Ended Six Months Ended
June 30, Percentage June 30, Percentage
-------------------------- --------------------------
2000 1999 Change 2000 1999 Change
------------ ------------ ------------- ----------- ------------ --------------
Retail Operations:
Selling and Marketing $ 7,426 $ 5,570 33.3% $ 15,561 $ 11,936 30.4%
General and Administrative 14,593 11,404 28.0% 28,783 22,498 27.9%
Depreciation and Amortization 1,133 861 31.6% 2,204 1,652 33.4%
------------ ------------ ------------ ------------
$23,152 $17,835 29.8% $ 46,548 $ 36,086 29.0%
============ ============ =========== ============
Per Car Sold:
Selling and Marketing $ 517 $ 488 5.9% $ 516 $ 494 4.5%
General and Administrative 1,016 999 1.7% 954 931 2.5%
Depreciation and Amortization 79 75 5.3% 73 68 7.4%
------------ ------------ ----------- ------------
$ 1,611 $ 1,562 3.1% $ 1,543 $ 1,493 3.3%
============ ============ =========== ============
As % of Used Cars Sold Revenue:
Selling and Marketing 6.1% 5.7% 6.1% 5.8%
General and Administrative 12.0% 11.7% 11.3% 11.0%
Depreciation and Amortization 0.9% 0.9% 0.9% 0.8%
------------ ------------ ----------- ------------
19.1% 18.2% 18.3% 17.7%
============ ============ =========== ============
Page 15
Selling and Marketing expenses as a percentage of related revenue increased
slightly to 6.1% for the three and six month periods ended June 30, 2000, from
5.7% and 5.8%, respectively, over the same periods of 1999. Economies of scale
gained from additional dealerships in existing markets and the additional
revenue from internet based sales have allowed the Selling and Marketing
expenses as a percentage of related revenue to remain relatively stable but have
increased on a per car sold basis primarily resulting from an increase in
commission related expenses.
General and Administrative expenses increased slightly for the quarter and
six month periods ended June 30, 2000, principally as a result of increases in
salary and benefit costs.
Portfolio Operations. Operating expenses for our Portfolio segment consist
of loan servicing and collection efforts, securitization activities, and other
operations pertaining directly to the administration and collection of the loan
portfolio ($ in thousands except expense per month per loan serviced).
Three Months Ended Six Months Ended
June 30, Percentage June 30, Percentage
----------------------- ------------------------
2000 1999 Change 2000 1999 Change
----------- ----------- -------------- ------------ ----------- -------------
Portfolio Expense:
General and Administrative $ 6,002 $ 4,566 31.4% $12,886 $ 9,167 40.6%
Depreciation and Amortization 280 280 0.0% 580 563 3.0%
----------- ----------- -------------- ------------ -----------
Portfolio Expense $ 6,282 $ 4,846 29.6% $13,466 $ 9,730 38.4%
=========== =========== ============== ============ ===========
Expense per Month per Loan Serviced $ 24.06 $ 20.22 $ 26.36 $ 20.46
=========== =========== ============ ===========
Annualized Expense as % of Managed
Principal Balances 5.0% 4.7% 5.3% 4.7%
=========== =========== ============ ===========
The increase in operating expenses as well as the expense per month per loan
serviced for the three and six month periods ended June 30, 2000 for our
Portfolio segment is primarily a result of the increased number of loans in our
portfolio. Also attributing to the increase were costs incurred resulting from
the deployment of collectors out to our dealerships, market adjustments made to
collection staff wages and a decrease in the number of delinquent accounts
serviced per collector. We expect the portfolio expense and the expense per
month per loan serviced to increase as we continue the deployment of collectors
to our dealerships, which is scheduled to be completed prior to year end.
However, we believe the increase in expense will be more than offset by lower
delinquencies and ultimately lower loan losses.
Corporate Operations. Operating expenses for our Corporate segment consist
of costs to provide managerial oversight and reporting for the Company, develop
and implement policies and procedures, and provide expertise to the Company in
areas such as finance, legal, human resources and information technology.
Three Months Ended Six Months Ended
June 30, Percentage June 30, Percentage
------------------------ -------------------------
($ in thousands except per car sold 2000 1999 Change 2000 1999 Change
data) ---------- ------------ ------------ ----------- ------------ -------------
Corporate Expense:
General and Administrative $ 5,183 $ 4,490 15.4% $10,454 $ 9,804 6.6%
Depreciation and Amortization 818 537 52.3% 1,655 1,058 56.4%
---------- ------------ ----------- ------------
Corporate Expense $ 6,001 $ 5,027 19.4% $12,109 $10,862 11.5%
========== ============ =========== ============
Per Car Sold $ 418 $ 440 $ 401 $ 449
========== ============ =========== ============
As % of Total Revenues 4.0% 4.3% 3.9% 4.6%
========== ============ =========== ============
Operating expenses related to our Corporate segment decreased both on a
per car sold basis and as a percent of total revenue primarily as a result of
various operating efficiencies. These efficiencies include those gained by the
consolidation of all accounting and management information to a single computer
system in early 1999. Further, as new dealerships opened in existing markets,
revenue and units sold increased while related expenditures increased at a
lesser rate. Finally, as our retained portfolio increased, there is a
proportionate increase in net interest income thereby significantly improving
the ratio of corporate expenses to total revenues.
Page 16
Financial Position
The following table represents key components of our financial position
($ in thousands):
June 30, December 31, Percentage
2000 1999 Change
----------------- ------------------ ------------------
Total Assets $ 577,484 $ 536,711 7.6%
Inventory 45,865 62,865 (27.0)%
Finance Receivables, net 451,238 365,586 23.4%
Net Assets of Discontinued Operations 4,702 33,880 (86.1)%
Total Debt 380,971 340,941 11.7%
Notes Payable - Portfolio 315,952 275,774 14.6%
Other Notes Payable 27,759 36,556 (24.1)%
Subordinated Notes Payable 37,260 28,611 30.2%
Stockholders' Equity $ 166,831 $ 165,680 0.7%
Total Assets. The increase in total assets is primarily due to the growth in
Finance Receivables, Net, offset by the decrease in Inventory and Net Assets of
Discontinued Operations.
Inventory. Inventory represents the acquisition and reconditioning costs of
used cars located at our dealerships and our inspection centers. The change in
inventory from December 31, 1999 to June 30, 2000 is due to management's
decision to increase inventory levels at the end of 1999 in preparation for the
strong seasonal sale periods, which are typically the first and second quarters
of the year. We generally acquire our used car inventory from three sources;
approximately 50% from auctions, 30% from wholesalers and 20% from new car
dealerships.
Growth in Finance Receivables, net. Due to the growth in the volume of cars
sold, Finance Receivables, net as of June 30, 2000 increased 23.4% from December
31, 1999. See Note (2) to the Condensed Consolidated Financial Statements for
detail of the components of Finance Receivables, net.
The following table reflects the growth in principal balances retained on
our balance sheet measured in terms of the principal amount ($ in thousands) and
the number of loans outstanding.
Managed Loans Outstanding
---------------------------------------------------------------
Principal Balances Number of Loans
------------------------------ ----------------------------
------------------------------ ----------------------------
June 30, December 31, June 30, December 31,
2000 1999 2000 1999
------------------------------ ----------------------------
Principal - Managed..............................$ 500,032 $ 424,480 81,407 70,450
Less: Principal - Securitized and Sold....... 27,721 65,662 9,889 17,369
------------------------------ ----------------------------
Principal - Retained on Balance Sheet....... $ 472,311 $ 358,818 71,518 53,081
============================== ============================
The increase in Principal Balances - Retained on Balance Sheet was primarily
due to growth in finance receivables as a result of increased used car sales and
financing, partially offset by the principal balance runoff of loans originated
in prior periods. Used Car Sales totaled 14,369 for the quarter ended June 30,
2000, versus sales of 11,416 used cars during the same quarter of the prior
year. Used Car Sales for the six months ended June 30, 2000 were 30,171 as
compared to sales of 24,170 for the six months ended June 30, 1999.
Page 17
The following table reflects activity in the Allowance for Credit Losses, as
well as information regarding charge off activity, for the three and six months
ended June 30, 2000 and 1999 ($ in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ---------- ----------- ----------
Allowance Activity:
Balance, Beginning of Period $ 87,585 $ 48,628 $ 76,150 $ 24,777
Provision for Credit Losses 32,212 25,789 66,785 53,552
Other Allowance Activity (1,104) 33 (1,000) 97
Net Charge Offs (20,160) (7,545) (43,402) (11,521)
----------- ---------- ----------- ----------
Balance, End of Period $ 98,533 $ 66,905 $98,533 $ 66,905
=========== ========== =========== ==========
Allowance as a Percent of Period End Balances 20.9% 26.1% 20.9% 26.1%
=========== =========== =========== ==========
Charge off Activity:
Principal Balances $(25,976) $ (9,570) $(57,142) $(14,580)
Recoveries, net 5,816 2,025 13,740 3,059
----------- ---------- ----------- ----------
Net Charge Offs $(20,160) $ (7,545) $(43,402) $(11,521)
=========== ========== =========== ==========
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
retail operations averaged 22.4% for the three months ended June 30, 2000 versus
21.2% for the same period of 1999. Recoveries as a percentage of principal
balances charged off from retail operations averaged 24.1% for the six months
ended June 30, 2000 versus 21.0% for the same period of 1999. The increase is
due to the initiatives taken to retain qualified loan service staff and reduce
the number of delinquencies serviced per collector.
The Allowance for Credit Losses is maintained at a level that in
management's judgment is adequate to provide for estimated probable credit
losses inherent in our retail portfolio. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Static Pool
Analysis" below.
Stockholder's Equity. During June 2000, we issued 75,000 warrants to a group
of unrelated third parties to purchase Company common stock for $10.81 per share
exercisable through April 12, 2001.
Static Pool Analysis
We use a "static pool" analysis to monitor performance for loans we have
originated at our dealerships. In a static pool analysis, we assign each month's
originations to a unique pool and track the charge offs for each pool
separately. We calculate the cumulative net charge offs for each pool as a
percentage of that pool's original principal balances, based on the number of
complete payments made by the customer before charge off. The table below
displays the cumulative net charge offs of each pool as a percentage of original
loan cumulative balances, based on the quarter the loans were originated. The
table is further stratified by the number of payments made by our customers
prior to charge off. For periods denoted by "x", the pools have not seasoned
sufficiently to allow us to compute cumulative losses. For periods denoted by
"-", the pools have not yet reached the indicated cumulative age. While we
monitor static pools on a monthly basis, for presentation purposes we are
presenting the information in the table below on a quarterly basis.
Page 18
Currently reported cumulative losses may vary from those previously reported
due to ongoing collection efforts on charged off accounts, and the difference
between final proceeds on the sale of repossessed collateral versus our
estimates of the sale proceeds. Management, however, believes that such
variation will not be material.
The following table sets forth as of July 31, 2000, the cumulative net
charge offs as a percentage of original loan cumulative (pool) balances, based
on the quarter of origination and segmented by the number of monthly payments
completed by customers before charge off. The table also shows the percent of
principal reduction for each pool since inception and cumulative total net
losses incurred (TLI).
Pool's Cumulative Net Losses as Percentage of Pool's Original
Aggregate Principal Balance
($ in thousands)
Monthly Payments Completed by Customer Before Charge Off
--------------------------------------------------------------------
Orig. 0 3 6 12 18 24 TLI Reduced
---------- -------- -------- -------- -------- -------- -------- -------- --------
1993 $ 12,984 9.1% 22.1% 28.5% 33.8% 35.9% 36.5% 36.8% 100.0%
1994 $ 23,589 5.3% 14.8% 19.9% 25.6% 28.0% 28.7% 28.8% 100.0%
1995 $ 36,569 2.0% 8.1% 13.2% 19.2% 22.3% 23.6% 24.1% 100.0%
1996:
1st Quarter $ 13,635 1.7% 8.1% 13.8% 20.8% 24.8% 26.1% 27.1% 100.0%
2nd Quarter $ 13,462 2.3% 9.3% 13.4% 22.0% 25.9% 27.6% 29.0% 100.0%
3rd Quarter $ 11,082 1.7% 6.9% 12.5% 21.3% 25.4% 27.6% 28.7% 99.9%
4th Quarter $ 10,817 0.7% 8.4% 15.9% 24.9% 29.2% 31.0% 32.1% 99.7%
1997:
1st Quarter $ 16,279 2.1% 10.8% 18.2% 24.9% 30.0% 32.3% 33.6% 99.2%
2nd Quarter $ 25,875 1.5% 9.9% 15.8% 22.8% 27.5% 29.6% 30.6% 97.6%
3rd Quarter $ 32,147 1.4% 8.4% 13.2% 22.5% 27.0% 29.3% 30.4% 96.3%
4th Quarter $ 42,529 1.4% 6.9% 12.6% 21.9% 26.2% 28.9% 29.7% 94.3%
1998:
1st Quarter $ 69,708 0.9% 6.9% 13.5% 21.0% 26.6% 29.0% 29.3% 92.0%
2nd Quarter $ 66,908 1.1% 8.1% 14.3% 21.9% 27.4% x 29.0% 87.3%
3rd Quarter $ 71,027 1.0% 8.0% 13.4% 23.2% 28.0% -- 28.9% 83.9%
4th Quarter $ 69,583 0.9% 6.6% 13.2% 24.5% x -- 28.6% 76.0%
1999:
1st Quarter $ 102,733 0.8% 7.5% 15.2% 23.8% -- -- 25.6% 66.8%
2nd Quarter $ 96,098 1.1% 10.0% 16.8% x -- -- 23.9% 56.2%
3rd Quarter $ 102,599 1.0% 8.3% 14.3% -- -- -- 17.8% 44.1%
4th Quarter $ 80,900 0.7% 6.0% x -- -- -- 10.4% 29.3%
2000:
1st Quarter $ 128,123 0.3% x -- -- -- -- 3.7% 17.0%
2nd Quarter $ 118,778 x -- -- -- -- -- 0.4% 5.2%
Page 19
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.
June 30, December 31,
2000 1999
------------- ----------------
Days Delinquent:
Current 71.9% 63.2%
1-30 Days 20.9% 27.8%
31-60 Days 4.5% 5.9%
61-90 Days 2.7% 3.1%
------------- ----------------
Total Portfolio 100.0% 100.0%
============= ================
In accordance with our charge off policy, there are no accounts more than 90
days delinquent as of June 30, 2000.
Delinquencies have improved as of the end of the second quarter of 2000
versus the fourth quarter of 1999. The primary reason for the improvement is the
success of moving collectors out to our dealerships along with initiatives put
into place to retain qualified loan servicing staff and to reduce the number of
delinquent accounts serviced per collector. As indicated by the decline in
delinquency levels, the initiatives seem to be effective. However, due to the
first and second quarters of the year typically being our strongest sales
quarters, finance receivables increased significantly during this period. As a
result, delinquency levels appear lower due to the influx of receivables.
Consequently, we cannot expect to maintain the current delinquency levels in
future periods.
Based on current loan loss trends, we believe that our current allowance for
credit losses, which has been established through the 27% provision charged to
operations, will be sufficient to cover inherent losses in our current
portfolio. However, if we were to experience increased charge-offs above levels
presently estimated, it may be necessary to increase the provision percentage
charged to operations in future quarters.
Securitizations
Under the current legal structure of our securitization program, we sell
loans to our bankruptcy remote subsidiaries that then securitize the loans by
transferring them to separate trusts that issue several classes of notes and
certificates collateralized by the loans. The securitization subsidiaries then
sell Class A notes or certificates (Class A obligations or Notes Payable) to
investors and subordinate classes are retained by us. We continue to service the
securitized loans.
The Class A obligations have historically received investment grade ratings.
To secure the payment of the Class A obligations, the securitization
subsidiaries obtain an insurance policy from MBIA Insurance Corporation that
guarantees payment of amounts to the holders of the Class A obligations.
Additionally, we also establish a cash "reserve" account for the benefit of the
Class A obligation holders. The reserve accounts are classified in our condensed
consolidated financial statements as Investments Held in Trust and are a
component of Finance Receivables, net.
Reserve Account Requirements. Under our current securitization structure, we
make an initial cash deposit into a reserve account, generally equivalent to 4%
of the initial underlying Finance Receivables principal balance and pledge this
cash to the reserve account agent. The trustee then makes additional deposits to
the reserve account out of collections on the securitized receivables as
necessary to fund the reserve account to a specified percentage, ranging from
8.0% to 12.0%, of the underlying Finance Receivables' principal balance. The
trustee makes distributions to us when:
o the reserve account balance exceeds the specified percentage,
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 the second and third quarters of 1999, we experienced loan servicing
inefficiencies that resulted in increased delinquency and charge off levels. As
a result, certain reserve account requirements were increased until delinquency
and charge off levels returned to contractually specified percentages. As of
June 30, 2000, all increases in reserve account requirements have been
eliminated and we met the targeted reserve account balances under our
securitization agreements of $36.3 million.
Page 20
Certain Financial Information Regarding Our Securitizations
During April 2000, we closed a securitized borrowing transaction in which we
securitized $145.5 million of loans, issuing $103.3 million in Class A
certificates with an annual interest rate of 7.1%.
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 loan portfolio, o common stock repurchases,
o expansion of our dealership network, o the purchase of inventories, and
o working capital and general o the purchase of property and equipment.
corporate purposes,
We fund our capital requirements primarily through:
o operating cash flow, o our revolving facility with GE Capital, and
o securitization transactions, o supplemental borrowings.
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 $11.9 million in the
six months ended June 30, 2000 to $107.7 million compared to cash generated of
$95.8 million for the six months ended June 30,1999. The increase is primarily
due to an increase in net earnings coupled with a significant decrease in
inventory from year end 1999, resulting from management's decision to increase
inventory levels at the end of 1999 in preparation for the high seasonal sales,
which typically occur in the first quarter of the year, partially offset by
decrease in income taxes payable.
Net cash used by investing activities decreased to $158.6 million for the
six months ended June 30, 2000 versus $181.0 million for the same period of the
previous year. The decrease is due to a significant decrease in Investments Held
in Trust due to the decline in principal balances securitized under the
gain on sale method, offset by collections on finance receivables.
Financing activities generated $23.5 million for the six months ended June
30, 2000 as compared to $89.8 million generated for the corresponding period of
1999. The reason for the decrease is primarily due to net repayment of notes
payable.
Financing Resources
Revolving Facility. Under our $125 million revolving facility, our borrowing
base consists of up to 65.0% of the principal balance of eligible loans
originated from the sale of used cars and the lesser of $25 million or 58% of
the direct vehicle costs for eligible vehicle inventory. The revolving facility
expires in June 2001 if not renewed or extended by a mutual agreement by both
parties. The revolving facility 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 June 30, 2000, our borrowing capacity under the revolving facility was
$122.0 million, the aggregate principal amount outstanding under the revolving
facility was approximately $60.7 million, and the amount available to be
borrowed under the facility was $61.3 million. The revolving facility bears
interest at the 30-day LIBOR plus 3.15%, payable daily (total rate of 9.69% as
of June 30, 2000).
The revolving facility contains covenants that, among other things, limit
our ability to take certain actions without GE Capital's consent, including
incur additional indebtedness, make any change in our capital structure, declare
or pay dividends, and 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 32.2% of our common stock at June 30, 2000 and owns approximately
36.5% as of July 31, 2000.
In addition, we are also required to maintain specified financial ratios. As
of June 30, 2000, we were compliance with the covenants in this agreement.
Page 21
Securitizations. Our securitization program is a primary source of our
working capital. Securitizations generate cash flow for us from the sale of
Class A obligations, ongoing servicing fees, and excess cash flow distributions
from collections on the loans securitized after payments on the Class A
obligations, payment of fees, expenses, and insurance premiums, and required
deposits to the reserve account.
Securitization also allows us to fix our cost of funds for a given loan
portfolio. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Securitizations" for a more complete description of our
securitization program.
Supplemental Borrowings
2000 Exchange Offer. On February 22, 2000, we commenced a new exchange offer
to acquire up to 2.5 million shares of our common stock. This offer expired
April 13, 2000 and we acquired approximately 1.1 million shares of our common
stock in exchange for approximately $11.9 million of seven year subordinated
debentures due April 15, 2007. Under the terms of the offer, each share of stock
was exchangeable for $11.00 principal amount of debentures. The debentures were
issued at a premium, which will be amortized over the life of the debentures and
results in an effective annual interest rate of 19.3%. We must pay interest
bi-annually at 11% per year.
Capital Expenditures and Commitments
During the six months ended June 30, 2000, we developed five new dealerships
in existing markets, three in the first quarter and two in the second quarter.
In the fourth quarter of 1999, we obtained five dealerships, including vehicle
inventory and a loan portfolio of approximately $8.0 million, from Virginia Auto
Mart. 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 34 months for a store portfolio to reach a
stabilized level.
We intend to finance the construction of new dealerships through operating
cash flows and supplemental borrowings, including amounts available under the
revolving facility and the securitization program.
In April 1999, our Board of Directors authorized a stock repurchase program
allowing us to repurchase up to 2.5 million shares of our common stock from time
to time. Purchases may be made depending on market conditions, share price,
lender approval and other factors. During July 2000, we repurchased
approximately 1.5 million shares pursuant to the stock repurchase program.
We believe that the repurchase of our stock is currently a better investment
of our capital than new stores and, as a result, have accelerated our stock
buyback program. As additional capital is secured, we will consider whether to
resume or accelerate our expansion plans or to continue repurchasing our stock.
At this time, we will not commit to growth prior to securing the capital to
support it, unless the acquisition would require little to no capital. We are
currently attempting to secure capital for further growth. We do not expect a
slow down in growth to adversely impact revenues or earnings in 2001 and any
impact on subsequent years will depend upon the number and timing of future
acquisitions.
Accounting Matters
In June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" (SFAS No. 138). SFAS No. 138 amends
a limited number of issues causing implementation difficulties for entities that
apply SFAS No. 133. SFAS No. 138 is effective for fiscal years beginning after
June 15,2000, and is not expected to have a material effect on the Company.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation (an interpretation of APB Opinion No. 25). This interpretation
provides guidance regarding the application of APB Opinion 25 to Stock
Compensation involving employees. This interpretation is effective June 1, 2000
and is not expected to have a material effect on the Company.
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). The adoption of SFAS No. 133 was delayed
by the issuance of SFAS 137. The statement requires all derivatives to be
recorded on the balance sheet at fair value and establishes new accounting
rules for hedging instruments. In June 1999, the FASB deferred the effective
date of SFAS No. 133 for one year until fiscal years beginning after June 15,
2000. Management does not expect the adoption of SFAS No.133 to have a material
impact on the Company.
Page 22
We Make Forward Looking Statements
Our Quarterly Report on Form 10-Q includes statements that constitute
forward-looking statements within the meaning of the safe harbor provisions of
the Private and Securities Litigation Reform Act of 1995. Forward-looking
statements are often characterized by the words "believes," "estimates,"
"projects," "expects" or similar expressions. Forward-looking statements in this
report relate, among other matters, to: anticipated financial results, such as
continuing growth of sales, other revenues and loan portfolios, and improvements
in loan performance, including delinquencies; anticipated roll-out of collectors
to the Company's dealerships, anticipated repurchases of Company stock and the
level of growth in our dealerships through acquisitions and de novo dealership
openings; and e-commerce related growth and loan performance. Factors that could
cause or contribute to differences from these forward-looking statements
include, but are not limited to: any decline in consumer acceptance of our car
sales strategies or marketing campaigns; any inability of the Company to finance
its operations in light of a tight credit market for the sub-prime industry; any
deterioration in the used car finance industry or increased competition in the
used car sales and finance industry; any inability of the Company to monitor and
improve its underwriting and collection processes; any changes in estimates and
assumptions in, and the ongoing adequacy of, our allowance for credit losses;
any inability of the Company to continue to reduce operating expenses as a
percentage of sales; and any new or revised accounting, tax or legal guidance
that adversely affect used car sales or financing. Other factors are detailed in
the sections entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Factors," "Factors That May Affect
Future Results and Financial Condition" and "Factors That May Affect Future
Stock Performance" in our most recent reports on Form 10-K, in Exhibit 99
attached to this Quarterly Report on Form 10-Q, and elsewhere in our
Securities and Exchange Commission filings.By making these forward-looking
statements, we undertake no obligation to update these statements for revisions
or changes after the date of this report. References to Ugly Duckling
Corporation as the largest chain of buy-here pay-here used car dealerships in
the United States is management's belief based upon the knowledge of the
industry and not on any current independent third party study.
ITEM 3.
Market Risk
We are exposed to market risk on our financial instruments from changes
in interest rates. We do not use 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 June 30, 2000, 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
June 30, 2000 is the Collateralized Notes Payable (senior and junior securities)
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.
We believe that our market risk information has not changed materially
from December 31, 1999.
Page 23
PART II. OTHER INFORMATION
Item 1. 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, and are the subject of regulatory or
governmental investigations. Although we cannot determine at this time the
amount of the ultimate exposure from such matters, if any, we, based on the
advice of counsel, do not expect the final outcome to have a material adverse
effect on the Company.
Item 2. Changes in Securities and Use of Proceeds.
(a) None
(b) None
(c) On June 5, 2000, we issued warrants to purchase up to 75,000 shares of our
common stock at $10.81 per share to a group of our existing lenders in
consideration for their prior consent in connection with the sale of our Cygnet
Dealer subsidiary. The warrants are exercisable through April 12, 2001. The
warrants were issued in reliance on the private placement exemption under
Section 4(2) of the Securities Act of 1933.
(d) Not Applicable
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
We held our annual meeting on July 27, 2000. The meeting was rescheduled and
adjourned until July 31, 2000. Two items were on the ballot for the meeting: the
election of directors, with the current slate of directors standing for
re-election, and the approval and adoption of Amendment 2 to our Certificate of
Incorporation which authorizes the creation of "Blank Check" common stock. The
shareholders approved both items on the ballot: Election of directors - all
directors received votes in excess of 85% of the votes cast; and "Blank Check"
common stock proposal received 51.8% in favor.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 4.1 -- Form of Amendment to Warrant Agreement dated June 5,
2000 and Warrant Agreements between the Registrant and
Formost Insurance Company, Glacier Water Services, Inc.,
Kayne Anderson Non-Traditional Investments, L.P., Kayne
Anderson Off-Shore Limited, TOPA Insurance Company and
ARBCO Associates, L.P., dated as of June 5, 2000, (w/
form of warrant agreement attached as Exhibit A,
thereto)
Exhibit 10.1 --Amendment No. 11 to Amended and Restated Motor Vehicle
Installment Contract Loan and Security Agreement
between Registrant and General Electric Capital
Corporation
Exhibit 27 -- Financial Data Schedule
Exhibit 99 -- Statement Regarding Forward Looking Statements and Risk
Factors
(b) Reports on Form 8-K.
During the second quarter of 2000, the Company filed two reports on Form
8-K. The first report on Form 8-K, dated and filed April 14, 2000, reported
Ugly Duckling's completion of exchange offer and filed as an exhibit to the
Form 8-K a press release dated April 14, 2000 entitled "Ugly Duckling Announces
Successful Completion of Exchange Offer". The second report on Form 8-K dated
April 20,2000 and filed May 3, 2000 pursuant to Item 5, reported the completion
of the exchange offer which 1,085,415 shares of Common Stock were tendered in
exchange for $11,939,565 in subordinated debentures.
Page 24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UGLY DUCKLING CORPORATION
/s/ STEVEN T. DARAK
-----------------------
Steven T. Darak
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: August 10, 2000
Page 25
EXHIBIT INDEX
Exhibit
Number Description
- ---------- ----------------
4.1 Form of Amendment to Warrant Agreement dated June 5,2000 and Warrant Agreements between the Registrant and Foremost Insurance
Company, Glacier Water Services, Inc., Kayne Anderson Non-Traditional Investments, L.P., Kayne Anderson Off-Shore Limited, TOPA
Insurance Company and ARBCO Associates, L.P., dated as of June 5, 2000, (w/form of warrant agreement attached as Exibit A,
thereto)
10.1 Amendment No. 11 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between Registrant and
General Electric Capital Corporation
27 Financial Data Schedule
99 Statement Regarding Forward Looking Statements and Risk Factors
Page 26