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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2001
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) Identification
no.)
2525 E. Camelback Road, Suite 500,
Phoenix, Arizona 85016
(Address of principal executive (Zip Code)
offices)
(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 May 11, 2001, there were approximately 12,301,000 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, 2000.
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UGLY DUCKLING CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Part I - FINANCIAL STATEMENTS Page
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets-- March 31, 2001 and December 31, 2000...........................1
Condensed Consolidated Statements of Operations-- Three Months Ended
March 31, 2001 and 2000..........................................................................2
Condensed Consolidated Statements of Cash Flows-- Three Months Ended
March 31, 2001 and 2000............................................................................3
Notes to Condensed Consolidated Financial Statements...................................................4
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................9
Item 3. MARKET RISK...........................................................................................22
Part II.-- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.....................................................................................23
Item 2. CHANGES IN SECURITIES.................................................................................23
Item 3. DEFAULTS UPON SENIOR SECURITIES.......................................................................23
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................................23
Item 5. OTHER INFORMATION 23
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)
March 31, December 31,
2001 2000
---------------- ------------------
ASSETS
Cash and Cash Equivalents $ 8,579 $ 8,805
Finance Receivables, Net 522,893 500,469
Note Receivable from Related Party 12,000 12,000
Inventory 43,434 63,742
Property and Equipment, Net 39,215 38,679
Intangible Assets, Net 12,288 12,527
Other Assets 17,779 11,724
Net Assets of Discontinued Operations 3,282 4,175
---------------- ------------------
$ 659,470 $ 652,121
================ ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts Payable $ 1,782 $ 2,239
Accrued Expenses and Other Liabilities 29,600 36,830
Notes Payable - Portfolio 390,615 406,551
Other Notes Payable 39,444 16,579
Subordinated Notes Payable 40,807 34,522
---------------- ------------------
Total Liabilities 502,248 496,721
---------------- ------------------
Stockholders' Equity:
Preferred Stock $.001 par value, 10,000 shares authorized
none issued and outstanding - -
Common Stock $.001 par value, 100,000 shares authorized,
18,764 issued and 12,292 outstanding 19 19
Additional Paid-in Capital 173,723 173,723
Retained Earnings 23,594 21,772
Treasury Stock, at cost (40,114) (40,114)
---------------- ------------------
Total Stockholders' Equity 157,222 155,400
Commitments and Contingencies - -
---------------- ------------------
$ 659,470 $ 652,121
================ ==================
See accompanying notes to Condensed Consolidated Financial Statements.
1
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months Ended March 31, 2001 and 2000
(In thousands, except earnings per share amounts)
(unaudited)
Three Months Ended
March 31,
----------------------------
2001 2000
------------- -------------
Cars Sold 14,851 15,802
============= =============
Total Revenues $ 164,030 $ 158,317
============= =============
Sales of Used Cars $ 130,186 $ 132,786
Less:
Cost of Used Cars Sold 72,841 72,942
Provision for Credit Losses 39,020 34,573
------------- -------------
18,325 25,271
------------- -------------
Other Income (Expense):
Interest Income 33,844 25,531
Portfolio Interest Expense (8,519) (5,029)
------------- -------------
Net Interest Income 25,325 20,502
------------- -------------
Income before Operating Expenses 43,650 45,773
Operating Expenses:
Selling and Marketing 7,626 8,135
General and Administrative 27,438 25,538
Depreciation and Amortization 2,407 2,208
------------- -------------
Operating Expenses 37,471 35,881
------------- -------------
Income before Other Interest Expense 6,179 9,892
Other Interest Expense 3,091 2,292
------------- -------------
Earnings before Income Taxes 3,088 7,600
Income Taxes 1,266 3,117
------------- -------------
Net Earnings $ 1,822 $ 4,483
============= =============
Net Earnings per Common Share:
Basic $ 0.15 $ 0.30
============= =============
Diluted $ 0.15 $ 0.30
============= =============
Shares Used in Computation:
Basic Weighted Average Shares Outstanding 12,292 14,905
============= =============
Diluted Weighted Average Shares Outstanding 12,325 15,153
============= =============
See accompanying notes to Condensed Consolidated Financial Statements.
2
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2001 and 2000
(In thousands)
(unaudited)
Three Months Ended
March 31,
----------------------------
2001 2000
------------ ---------------
Cash Flows from Operating Activities:
Net Earnings $ 1,822 $ 4,483
Adjustments to Reconcile Net Earnings to Net Cash Provided
by Operating Activities:
Provision for Credit Losses 39,020 34,573
Depreciation and Amortization 3,564 3,239
Loss from Disposal of Property and Equipment 423 3
Collections from Residuals in Finance Receivables Sold 1,136 3,994
Decrease in Inventory 20,308 13,807
Inrease in Other Assets 945 (309)
Increase (Decrease) in Accounts Payable, Accrued Expenses and Other (7,866) 3,353
liabilities
Increase (Decrease) in Income Taxes Payable 179 (1,208)
------------ ---------------
Net Cash Provided by Operating Activities 59,531 61,935
------------ ---------------
Cash Flows Used in Investing Activities:
Increase in Finance Receivables (119,405) (133,887)
Collections on Finance Receivables 62,726 49,974
Decrease in Investments Held in Trust on Finance Receivables Sold 1,398 4,354
Proceeds from Disposal of Property and Equipment 46 1,330
Purchase of Property and Equipment (3,173) (2,278)
------------ --------------
Net Cash Used in Investing Activities (58,408) (80,507)
------------ --------------
Cash Flows from Financing Activities:
Initial Deposits at Securitization into Investments Held in Trust (3,532) -
Additional Deposits into Investments Held in Trust (29,688) (14,168)
Collections from Investments Held in Trust 25,921 13,479
Additions to Notes Payable Portfolio 161,691 96,700
Repayment of Notes Payable Portfolio (178,288) (90,302)
Additions to Other Notes Payable 22,792 -
Repayment of Other Notes Payable (138) (3,220)
Repayment of Subordinated Notes Payable (1,000) -
Proceeds from Issuance of Common Stock - 390
------------ ---------------
Net Cash Provided (Used) by Financing Activities (2,242) 2,879
------------ ---------------
Net Cash Provided by Discontinued Operations 893 18,340
------------ ---------------
Net Increase (Decrease) in Cash and Cash Equivalents (226) 2,647
Cash and Cash Equivalents at Beginning of Period 8,805 3,683
------------ ---------------
Cash and Cash Equivalents at End of Period $ 8,579 $ 6,330
============ ===============
Supplemental Statement of Cash Flows Information:
Interest Paid $ 9,795 $ 7,140
============ ===============
Income Taxes Paid $ 1,445 $ 4,325
============ ===============
See accompanying notes to Condensed Consolidated Financial Statements.
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 accounting principles generally accepted in the
United States of America 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 such accounting
principles generally accepted in the United States of America 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, 2000
was derived from our audited consolidated financial statements as of that date
but does not include all the information and footnotes required by accounting
principles generally accepted in the United States of America. 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, 2000.
Note 2. Summary of Finance Receivables
A summary of Finance Receivables, net, follows ($ in thousands):
March 31, December 31,
2001 2000
-------------- -----------------
Contractually Scheduled Payments $ 726,515 $ 696,220
Unearned Finance Charges (191,476) (181,274)
-------------- -----------------
Principal Balances, net 535,039 514,946
Accrued Interest 5,213 5,655
Loan Origination Costs 7,601 7,293
-------------- -----------------
Principal Balances, net 547,853 527,894
Investments Held in Trust 77,040 71,139
Residuals in Finance Receivables Sold - 1,136
-------------- -----------------
Finance Receivables 624,893 600,169
Allowance for Credit Losses (102,000) (99,700)
-------------- -----------------
Finance Receivables, net $ 522,893 $ 500,469
============== =================
Allowance as % of Ending Principal Balances, net 19.1% 19.4%
============== =================
Investments Held in Trust represent funds held by trustees on behalf of our
securitization bond holders. The balance of Investments Held in Trust increased
from December 31, 2000 due to deposits into the trust accounts arising from an
additional securitization completed during the first quarter of 2001, partially
offset by distribution of funds associated with portfolios securitized during
prior periods.
Residuals in Finance Receivables Sold represent our subordinated interest
in loans sold through securitizations. The reduction to zero from the balance at
December 31, 2000 is attributable to the repurchase of the sole remaining trust
recorded as gain on sale, thus, the balance of the remaining residual interest
is now included in finance receivables. At March 31, 2001 and December 31, 2000,
the balance of securitized principal outstanding was zero and $4.1 million,
respectively.
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, the Company's chairman of
the board and largest shareholder.
4
Under the terms of the agreement, Mr. Garcia will be allowed to reduce the
principal balance up to a maximum of $8 million by surrendering to the Company
shares of Ugly Duckling common stock (valued at 98% of the average of the
closing prices of the stock on NASDAQ for the ten trading days prior to the
surrender) as long as Mr. Garcia's ownership interest of the Company voting
stock does not fall below 15% and the acceptance of such stock by the Company
does not result in a breach of a covenant.
Note 4. Notes Payable
Notes Payable, Portfolio A summary of Notes Payable, Portfolio at
March 31, 2001 and December 31, 2000 follows ($ in thousands):
March 31, December 31,
2001 2000
------------------- -----------------
Revolving Facility for $125.0 million with GE Capital, secured by substantially
all assets of the Company, including $49.5 million in finance receivables $ 21,256 $ 53,326
Class A obligations issued pursuant to the Company's Securitization Program,
secured by underlying pools of finance receivables and Investments Held in
Trust totaling $562.7 million at March 31, 2001 372,234 355,972
------------------- -----------------
Subtotal 393,490 409,298
Less: Unamortized Loan Fees 2,875 2,747
------------------- -----------------
Total $ 390,615 $ 406,551
=================== =================
The revolving facility note payable has interest payable daily at 30 day
LIBOR plus 3.15% (8.68% at March 31, 2001) 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. At March
31, 2001, the Company was in compliance with these covenants with the exception
of interest coverage ratios, for which the Company has obtained a waiver.
Effective April 2001, the Company has replaced the warehouse receivables
portion of this facility and has secured an option to extend the $25 million
inventory line of credit portion of the facility from June 30, 2001 until
December 31, 2001. The extension on the inventory line of credit with GE Capital
requires the payment of a fee for each quarterly extension after June 30, 2001,
and, after June 30, 2001, the interest rate on the line increases by 50 basis
points to LIBOR plus 3.65%. The Company continues to search for replacement
financing for the inventory line of credit.
The new revolving facility allows for maximum borrowings of $75 million
during the period May 1 through November 30 and increases to $100 million during
the period December 1 through April 30. The term of the facility is 364 days
with a renewal option, upon mutual consent, for an additional 364-day period.
The borrowing base consists of up to 65% of the principal balance of eligible
loans originated from the sale of used cars. The lender maintains an option to
adjust the advance rate on the principal to reflect changes in market conditions
or portfolio performance. The interest rate on the facility is LIBOR plus 2.80%.
The facility is secured with substantially all Company assets. The line is
subject to several covenants, including certain financial and loan portfolio
related covenants.
Class A obligations have interest payable monthly at rates ranging from
5.09% to 7.26%. Monthly principal reductions on Class A obligations approximate
70% of the principal reductions on the underlying pool of finance receivable
loans. See "Management's Discussion and Analysis - Securitizations" for further
information on the Class A bonds.
5
Other Notes Payable
A summary of Other Notes Payable at March 31, 2001 and December 31, 2000
follows ($ in thousands):
March 31, December 31,
2001 2000
--------------- ----------------
Note payable, secured by the capital stock of UDRC and UDRC II and certain other
receivables $ 35,000 $ 11,141
Other notes payable bearing interest at rates ranging from 7.5% to 11.0% due through
July 2003, secured by certain real property and certain property and
equipment 5,500 5,637
--------------- ----------------
Subtotal 40,500 16,778
Less: Unamortized Loan Fees 1,056 199
--------------- ----------------
Total $ 39,444 $ 16,579
=============== ================
Subordinated Notes Payable
A summary of Subordinated Notes Payable at March 31, 2001 and December 31,
2000 follows ($ in thousands):
March 31, December 31,
2001 2000
-------------- -----------------
$13.5 million senior subordinated notes payable to unrelated parties, bearing
interest at 15% per annum payable quarterly, principal due February 2003
and senior to subordinated debentures $ 10,500 $ 11,500
$7.0 million senior subordinated note payable to a related party, bearing
interest at LIBOR plus 6% per annum payable quarterly, principal due February 2010 7,000 -
$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 11,940
-------------- -----------------
Subtotal 46,919 40,919
Less: Unamortized Loan Fees - 31
Unamortized Discount - subordinated debentures 6,112 6,366
-------------- -----------------
Total $ 40,807 $ 34,522
============== =================
6
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-month periods ended March 31, 2001, and 2000.
Net earnings per common share are as follows ($ and shares in thousands,
except for per share amounts):
Three Months Ended
March 31,
------------------------------------
2001 2000
----------------- -----------------
Net Earnings $ 1,822 $ 4,483
================= =================
Basic Net Earnings Per Share $ 0.15 $ 0.30
================= =================
Diluted Net Earnings Per Share $ 0.15 $ 0.30
================= =================
Basic EPS-Weighted Average Shares Outstanding 12,292 14,905
Effect of Diluted Securities:
Warrants - 14
Stock Options 33 234
----------------- -----------------
Dilutive EPS-Weighted Average Shares Outstanding 12,325 15,153
================= =================
Warrants Not Included in Diluted EPS Since Antidilutive 1,195 1,156
================= =================
Stock Options Not Included in Diluted EPS Since Antidilutive 1,446 875
================= =================
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 nine
month periods ended March 31, 2001 and 2000 follows ($ in thousands):
Retail Portfolio Corporate Total
--------------- -------------- -------------- ---------------
March 31, 2001:
Sales of Used Cars $ 130,186 $ - $ - $ 130,186
Less: Cost of Cars Sold 72,841 - - 72,841
Provision for Credit Losses 26,652 12,368 - 39,020
--------------- -------------- -------------- ----------------
30,693 (12,368) - 18,325
Net Interest Income - 25,195 130 25,325
--------------- -------------- -------------- ----------------
Income before Operating Expenses 30,693 12,827 130 43,650
Operating Expenses:
Selling and Marketing 7,626 - - 7,626
General and Administrative 14,658 8,008 4,772 27,438
Depreciation and Amortization 1,326 264 817 2,407
--------------- -------------- -------------- ----------------
23,610 8,272 5,589 37,471
--------------- -------------- -------------- ----------------
Income (loss) before Other Interest Expense $ 7,083 $ 4,555 $ (5,459) $ 6,179
=============== ============== ============== ================
Capital Expenditures $ 2,087 $ 229 $ 857 $ 3,173
=============== ============== ============== ================
Identifiable Assets $ 85,204 $ 525,773 $ 45,211 $ 656,188
=============== ============== ============== ================
7
Retail Portfolio Corporate Total
--------------- -------------- -------------- ----------------
March 31, 2000:
Sales of Used Cars $ 132,786 $ - $ - $ 132,786
Less: Cost of Cars Sold 72,942 - - 72,942
Provision for Credit Losses 27,094 7,479 - 34,573
---------------- -------------- -------------- ----------------
32,750 (7,479) - 25,271
Net Interest Income - 20,392 110 20,502
---------------- -------------- -------------- ----------------
Income before Operating Expenses 32,750 12,913 110 45,773
---------------- -------------- -------------- ----------------
Operating Expenses:
Selling and Marketing 8,135 - - 8,135
General and Administrative 14,190 6,077 5,271 25,538
Depreciation and Amortization 1,071 300 837 2,208
---------------- -------------- -------------- ----------------
23,396 6,377 6,108 35,881
---------------- -------------- -------------- ----------------
Income (loss) before Other Interest Expense $ 9,354 $ 6,536 $ (5,998) $ 9,892
================ ============== ============== ================
Capital Expenditures $ 1,273 $ 99 $ 906 $ 2,278
================ ============== ============== ================
Note 7. 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 8. Reclassifications
We have made certain reclassifications to previously reported information
to conform to the current presentation.
Note 9. Subsequent Events
On April 16, 2001, as previously announced, Mr. Ernest Garcia, II, made an
offer to the board of directors to purchase all of the outstanding shares the
Company common stock not already held by him. The Company's board of directors
established a special transaction committee, composed of disinterested
directors, to evaluate the proposal and make a recommendation to the full board.
Under the terms of the offer, the holders of the outstanding shares of common
stock would receive $7.00 per share, $2.00 in cash and $5.00 in subordinated
debentures from the acquiring company. The subordinated debentures would have
interest payable at 10%, interest only payments semiannually until maturity and
a ten-year term. Mr. Garcia's offer also states that Greg Sullivan, chief
executive officer and president of the Company, would receive an option to
purchase a 20% interest in the acquiring company.
In April 2001, Verde Investments, Inc., an affiliate of Mr. Ernest Garcia,
II, purchased one property at book value, including land and building, currently
owned by the Company, for approximately $1.7 million. This purchase was made in
connection with the purchase options granted to Verde Investments, Inc. as part
of the $7 million loan to the Company required by the $35 senior secured loan
agreement originated in January 2001.
8
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 March 31, 2001, 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 customer's payday, and
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 certain
underwriting standards and 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 assets and liabilities are
classified as net assets from discontinued operations. 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-month periods ended March
31, 2001 and 2000.
9
UGLY DUCKLING CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
($ in millions, except per car sold and per share data)
(Unaudited)
At or For the Three Months Ended
-----------------------------------------------------------------------------
Operating Data: March 2001 Dec 2000 Sept 2000 June 2000 March 2000
---------- -------- --------- --------- ----------
Total Revenues $ 164.0 $ 135.2 $ 158.1 $ 151.4 $ 158.3
Sales of Used Cars $ 130.2 $ 102.3 $ 126.6 $ 121.5 $ 132.8
Earnings per Share $ 0.15 $ (0.20) $ 0.21 $ 0.31 $ 0.30
EBITDA $ 17.1 $ 8.7 $ 16.5 $ 18.2 $ 17.1
E-Commerce Revenue as % of Used Car Sales 11.6% 13.6% 9.5% 5.3% 4.3%
Number Dealerships in Operation 77 77 77 77 75
Average Sales per Dealership per Month 64 51 64 62 70
Number of Used Cars Sold 14,851 11,874 14,825 14,369 15,802
Sales Price - Per Car Sold $ 8,766 $ 8,618 $ 8,542 $ 8,458 $ 8,403
Cost of Sales - Per Car Sold $ 4,905 $ 4,727 $ 4,773 $ 4,761 $ 4,616
Gross Margin - Per Car Sold $ 3,861 $ 3,891 $ 3,769 $ 3,696 $ 3,787
Provision - Per Car Sold $ 2,627 $ 3,292 $ 2,435 $ 2,242 $ 2,188
Total Operating Expense - Per Car Sold $ 2,523 $ 2,832 $ 2,495 $ 2,425 $ 2,271
Total Operating Income - Per Car Sold $ 416 $ (168) $ 466 $ 691 $ 626
Total Operating Income $ 6.2 $ (2.0) $ 6.9 $ 9.9 $ 9.9
Earnings (loss) before Income Taxes $ 3.1 $ (4.2) $ 4.5 $ 7.3 $ 7.6
Cost of Used Cars as Percent of Sales 56.0% 54.8% 55.9% 56.3% 54.9%
Gross Margin as Percent of Sales 44.0% 45.2% 44.1% 43.7% 45.1%
Provision - % of Originations 31.0% 38.8% 29.0% 27.1% 27.0%
Total Operating Expense - % of Total Revenues 22.8% 24.9% 23.4% 23.0% 22.7%
Segment Operating Expense Data:
Retail Operating Expense - Per Car Sold $ 1,590 $ 1,710 $ 1,549 $ 1,611 $ 1,481
Retail Operating Expense-% of Used Car Sales 18.1% 19.8% 18.1% 19.1% 17.6%
Corporate/Other Expense - Per Car Sold $ 376 $ 417 $ 428 $ 418 $ 387
Corporate/Other Expense - % of Total Revenue 3.4% 3.7% 4.0% 4.0% 3.9%
Portfolio Exp. Annualized - % of EOP Managed Principal 6.2% 6.7% 6.1% 5.0% 5.5%
Balance Sheet Data:
Finance Receivables, net $ 522.9 $ 500.5 $ 491.9 $ 451.2 $ 407.3
Inventory $ 43.4 $ 63.7 $ 43.7 $ 45.9 $ 49.1
Total Assets $ 659.5 $ 652.1 $ 618.5 $ 577.5 $ 548.0
Notes Payable - Portfolio $ 390.6 $ 406.6 $ 362.3 $ 316.0 $ 282.9
Subordinated Notes Payable $ 40.8 $ 34.5 $ 36.1 $ 37.3 $ 28.9
Total Debt $ 470.9 $ 457.7 $ 416.3 $ 381.0 $ 345.2
Common Stock $ 173.7 $ 173.7 $ 173.7 $ 173.7 $ 173.7
Treasury Stock $(40.1) $(40.1) $ (39.4) $ (28.4) $ (20.3)
Total Stockholder's Equity $ 157.2 $ 155.4 $ 158.5 $ 166.8 $ 170.6
Common Shares Outstanding - End of Period 12,292 12,292 12,378 13,899 14,980
Book Value per Share $ 12.79 $ 12.64 $ 12.81 $ 12.00 $ 11.39
Tangible Book Value per Share $ 11.79 $ 11.62 $ 11.78 $ 11.02 $ 10.43
Total Debt to Equity 3.0 2.9 2.6 2.3 2.0
Loan Portfolio Data:
Interest Income $ 33.8 $ 32.9 $ 31.4 $ 29.9 $ 25.5
Average Yield on Portfolio 26.3% 26.1% 26.1% 26.8% 26.2%
Principal Balances Originated $ 126.0 $ 100.8 $ 124.4 $ 118.8 $ 128.1
Principal Balances Originated as % of Sales 96.8% 98.5% 98.2% 97.7% 96.5%
Number of Loans Originated 14,776 11,906 14,748 14,291 15,721
Average Original Amount Financed $ 8,528 $ 8,468 $ 8,433 $ 8,311 $ 8,150
Number of Loans Originated as % of Units Sold 99.5% 100.3% 99.5% 99.5% 99.5%
Managed Portfolio Delinquencies:
Current 78.6% 66.1% 72.4% 71.9% 74.8%
1 to 30 days 15.7% 26.1% 19.3% 20.9% 19.9%
31 to 60 days 3.3% 4.7% 4.9% 4.5% 3.4%
Over 60 days 2.4% 3.1% 3.4% 2.7% 1.9%
Principal Outstanding - Managed $ 535.0 $ 519.0 $ 525.5 $ 500.0 $ 461.8
Principal Outstanding - Retained $ 535.0 $ 514.9 $ 512.8 $ 472.3 $ 418.9
Number of Loans Outstanding - Managed 87,033 84,864 85,240 81,407 75,496
Number of Loans Outstanding - Retained 87,033 82,598 79,848 71,518 62,459
10
First Quarter highlights include:
o Total revenues were $164.0 million
o E-Commerce generated $15.1 million in revenues and 1,725 cars sold
during the first quarter of 2001 as compared to $13.7 illion in revenues
and 1,553 cars sold during the fourth quarter of 2000
o Loan portfolio principal balance reached $535.0 million, representing a 28%
increase over the year-ago quarter
o New loan originations were $126.0 million, consistent with the year ago
quarter
o Entered into a $35 million Senior Secured Loan facility to replace our
previous $38 million Senior Secured facility
o Entered into a $75-$100 million warehouse receivables line of credit with
Greenwich Capital Financial Products, Inc.
o Secured an option to extend until December 31, 2001, our existing $25
million inventory line of credit
o Closed 19th Securitization with loan principal balances of approximately
$117.7 million and Class A bonds issued of $83.6 million
o Incurred $368,000 after tax charge to earnings in connection with the
closing of Florida and Texas collection and loan administration centers
o Our Chairman of the Board and largest shareholder, Ernest C. Garcia II,
made an offer to purchase all of our outstanding stock
Sales of Used Cars and Cost of Used Cars Sold
Three Months Ended
March 31,
-----------------------------------
($ in thousands) 2001 2000 % Change
- ------------------------------- ---------------- -------------- -------------
Number of Used Cars Sold 14,851 15,802 (6.0)%
================ ==============
Sales of Used Cars $ 130,186 $ 132,786 (2.0)%
Cost of Used Cars Sold 72,841 72,942 (0.1)%
---------------- --------------
Gross Margin $ 57,345 $ 59,844 (4.2)%
================ ==============
Gross Margin % 44.0% 45.1%
Per Car Sold:
Sales $ 8,766 $ 8,403 4.3%
Cost of Used Cars Sold 4,905 4,616 6.3%
---------------- --------------
Gross Margin $ 3,861 $ 3,787 2.0%
================ ==============
For the three-month period ended March 31, 2001, the number of cars sold
decreased by 6% and Used Car Sales revenues decreased by 2% over the same period
in 2000. During 2000, we developed a risk management department, which is
currently focusing on credit risk modeling techniques. The decrease in both
units sold and revenues is primarily the result of initiatives which have put
more stringent guidelines in place regarding income qualifications and down
payment requirements in an effort to improve the quality of loans generated from
used car sales.
Our Internet site continues to be a valuable tool generating an increasing
number of credit applications. We accept 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 first quarter of 2001, we sold 1,725 cars
generating $15.1 million in revenue versus 1,553 cars totaling $13.7 million in
revenue during the fourth quarter of 2000 and up from 1,417 cars sold and $12.0
million in revenue during the third quarter of 2000. The E-commerce customer
group generally outperforms other customers in terms of loan performance.
The Cost of Used Cars Sold for the three-month period ended March 31, 2001,
remained consistent with the comparable period of the previous year. The Cost of
Used Cars Sold on a per car basis increased 6.3% for the three months ended
March 31, 2001 over the same period of the prior year. The increase is due to an
effort to purchase higher quality vehicles as a result
11
of research completed by our risk management department, which indicated better
loan performance on the loans associated with the higher cost inventory. This
increase was more than offset by an increase in the sales price earned per car.
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
decreased to 44.0% for the three months ended March 31, 2001 versus 45.1% for
the three-month period ended March 31, 2000. The decrease is due to the cost of
used cars sold rising at a higher pace than the related revenues. On a per car
sold basis, gross margin increased slightly to $3,861 per car for the three
month period ended March 31, 2001 from $3,787 during the same quarter of the
previous year. This increase is due to an increase in the overall revenue earned
per car, partially offset by the increase in the per unit cost of used cars
sold.
We finance substantially all of our used car sales. The percentage of cars
sold financed has remained constant in 2001 versus 2000. The percentage of sales
revenue financed has also remained relatively constant for the quarter ended
March 31, 2001. The following table indicates the percentage of sales units and
revenue financed:
Three Months Ended
March 31,
----------------------------------
2001 2000
------------------ ---------------
Percentage of used cars sold financed 99.5% 99.5%
================== ===============
Percentage of sales revenue financed 96.8% 96.5%
================== ===============
Provision for Credit Losses
The following is a summary of the Provision for Credit Losses:
Three Months Ended
March 31,
---------------------------
2001 2000 % Change
-------------- ------------ --------------
Provision for Credit Losses ($ in thousands) $ 39,020 $ 34,573 12.9%
============== ============
Provision per loan originated $ 2,641 $ 2,199 20.1%
============== ============
Provision as a percentage of
principal balances originated 31.0% 27.0%
============== ============
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-month period ended March 31, 2001
increased 12.9% over the comparable period of the prior year. The increase was
primarily due to an increase in the overall provision charged from 27% of loans
originated in the first quarter of 2000 to 31% of loans originated during the
first quarter of 2001. The increase was necessary to establish an adequate
allowance for the on balance sheet portfolio. The provision per loan originated
increased 20.1% over the same period of the previous year due to the increase in
the overall provision mentioned above, coupled with an increase of $378 in the
average amount financed for the three-month period ended March 31, 2001 of
$8,528 per unit versus $8,150 during the same period of the previous year.
See "Static Pool Analysis" below for further Provision for Credit Loss
discussion.
12
Net Interest Income
Three Months Ended
March 31,
---------------------------------
2001 2000 % Change
---------------- ---------------- -----------------
($ in thousands)
Interest Income $ 33,844 $ 25,531 32.6%
Portfolio Interest Expense 8,519 5,029 69.4%
---------------- ----------------
Net Interest Income $ 25,325 $ 20,502 23.5%
================ ================
Average Retained Prinicpal Balance $ 525,465 $ 386,824
================ ================
Average Effective Yield 26.1% 26.5%
================ ================
Average Notes Payable Balance $ 384,121 $ 280,241
================ ================
Average Borrowing Cost 8.9% 8.0%
================ ================
Interest Income consists primarily of interest on finance receivable
principal balances retained on our balance sheet. Retained principal balances
grew to $522.9 million at March 31, 2001 from $407.3 million at March 31, 2000.
The growth in retained principal balances is primarily due to the change in the
way we structure our securitizations to the collateralized borrowing method
during the fourth quarter of 1998. Since that time, all securitized loans are
retained on our balance sheet and the income is recognized over the life of the
loan.
Portfolio interest expense increased to $8.5 million for the three-month
period ending March 31, 2001 versus $5.0 million for the same period of the
previous year. The increase is due to the increase in Portfolio Notes Payable,
which consist of our Class A obligations, related to our securitization program
along with our revolving credit facility with GE Capital. This increase in
interest expense is offset by the additional interest income earned from the
growth in finance receivables retained on our balance sheet.
Income before Operating Expenses
Income before Operating Expenses decreased 4.6% to $43.7 million for the
three-month period ended March 31, 2001 as compared to $45.8 million for the
three-month period ended March 31, 2000. The decrease resulted from an increase
in the amount charged to current operations for the provision for credit losses
from 27% in the first quarter of 2000 to 31% in the first quarter of 2001, and
an increase in interest expense resulting from additional portfolio notes
payable, partially offset by an increase in interest income due to the growth in
the finance receivables portfolio.
Operating Expenses
Three Months Ended
March 31,
---------------- ----------------
2001 2000 % Change
---------------- ---------------- ----------------
($ in thousands)
Operating Expenses $ 37,471 $ 35,881 4.4%
================ ================
Per Car Sold $ 2,523 $ 2,271 11.1%
================ ================
As % of Total Revenue 22.8% 22.7%
================ ================
Operating expenses, which consist of selling, marketing, general and
administrative and depreciation/amortization expenses, increased quarter over
quarter but remained constant as a percentage of total revenues. Included in
these expenses is a pre-tax charge of approximately $600,000 for the closing of
the collection and loan administration centers in Florida and Texas. During the
first quarter of 2001, we initiated a plan to close our collections and loan
administration operations in Clearwater, Florida, Plano, Texas and Dallas, Texas
and move them to our stores or to our Gilbert, Arizona collection facility. As a
result of these closings, we took an after tax charge of approximately $368,000
to cover payroll, severance and certain property related expenses. We expect to
take an additional restructuring charge in the second quarter related to costs
of abandoned assets still in use with a carrying value of approximately
$500,000.
13
The estimated impact resulting from the shut down of these operations, including
the impact of future charges, is estimated to be break even over the remainder
of 2001 and to decrease operating expenses by $1.5 million annually beginning in
2002. 13
Interest Expense
Interest expense arising from our other, non-portfolio debt totaled $3.1
million for the three months ended March 31, 2001 versus $2.3 million for the
three months ended March 31, 2000. The increase is primarily attributable to
interest expense arising from our exchange debt on the exchange offer completed
in April 2000.
Income Taxes
Income taxes totaled $1.3 million and $3.1 million for the three-month
period ended March 31, 2001 and 2000, respectively. Our effective tax rate was
41% for both periods presented.
Net Earnings
Net Earnings operations totaled $1.8 million and $4.5 million for the three
months ended March 31, 2001 and 2000, respectively. The decrease for the three
months ended March 31, 2001 is primarily a result of the increase in the
provision for credit loss from 27% to 31% of originations and an increase in
portfolio interest expense, partially offset by an increase in interest income.
Business Segment Information
We report our operations based on three operating segments. These segments
are reported as Retail, Portfolio and Corporate. These segments were previously
reported as Company Dealership, Company Dealership Receivables and Corporate and
Other, respectively. See Note 6 to the Condensed Consolidated Financial
Statements.
Operating Expenses for our business segments, along with a description of
the included activities, for the three-month periods ended March 31, 2001 and
2000 are as follows:
Retail Operations. Operating expenses for our Retail segment consist of
Company marketing efforts, maintenance and development of dealership and
inspection center sites, and direct management oversight of used car
acquisition, reconditioning and sales activities. A summary of retail operating
expenses follows ($ in thousands, except per car sold data):
Three Months Ended
March 31,
--------------------------
2001 2000 % Change
------------ ------------ ------------
Retail Operations:
Selling and Marketing $ 7,626 $ 8,135 (6.3)%
General and Administrative 14,658 14,190 3.3%
Depreciation and Amortization 1,326 1,071 23.8%
------------ ------------
Retail Expense $ 23,610 $ 23,396 0.9%
============ ============
Per Car Sold:
Selling and Marketing $ 514 $ 515 (0.2)%
General and Administrative 987 898 9.9%
Depreciation and Amortization 89 68 30.9%
------------ ------------
$ 1,590 $ 1,481 7.4%
============ ============
As % of Used Cars Sold Revenue:
Selling and Marketing 5.9% 6.1%
General and Administrative 11.3% 10.7%
Depreciation and Amortization 1.0% 0.8%
------------ ------------
18.2% 17.6%
============ ============
14
Selling and Marketing expenses both as a percentage of related revenue and
on a per car sold basis have remained relatively constant for the three months
ended March 31, 2001 versus the same period of the previous year.
General and Administrative expenses increased only slightly as a percentage
of related revenue for the three-month period ended March 31, 2001, principally
as a result of increases in salary and benefit costs, but have grown almost 10%
on a per car sold basis over the first quarter of 2000. The reason for the
slight increase as a percentage of revenue is due to expenses increasing along
with an increase in the average selling price per car to $8,766 for the first
quarter of 2001, compared to $8,403 for the first quarter of 2000. The expense
increase is more apparent on a per car sold basis as the expenses have risen but
the volume of cars sold has decreased, primarily due to more stringent
underwriting guidelines.
Portfolio Operations. Operating expenses for our Portfolio segment consist
of loan servicing and collection efforts, securitization activities, and other
operations pertaining directly to the administration and collection of the loan
portfolio ($ in thousands, except expense per month per loan serviced).
Three Months Ended
March 31,
--------------------------
2001 2000 % Change
----------- ------------ ------------
Portfolio Operations:
General and Administrative $ 8,008 $ 6,077
Depreciation and Amortization 264 300 (12.0)%
----------- ------------
Portfolio Expense $ 8,272 $ 6,377 29.7%
=========== ============
Expense per Month per Loan Serviced $ 31.33 $ 28.75
=========== ============
Annualized Expense as % of EOP Managed
Principal Balances 6.2% 6.2%
=========== ============
The increase in portfolio expenses as well as the expense per month per
loan serviced for the three-month period ended March 31, 2001 for our Portfolio
segment is primarily a result of the increased number of loans in our portfolio.
Also attributing to the increase were approximately $600,000 in costs accrued in
relation to the closing of the collection and loan administration facilities in
Florida and Texas, mentioned previously.
Corporate Operations. Operating expenses for our Corporate segment consist
of costs to provide managerial oversight and reporting for the Company, develop
and implement policies and procedures, and provide expertise to the Company in
areas such as finance, legal, human resources and information technology ($ in
thousands, except per car sold data).
Three Months Ended
March 31,
--------------------------
2001 2000 % Change
----------- ------------ ------------
Corporate Operations:
General and Administrative $ 4,772 $ 5,271 (9.5)%
Depreciation and Amortization 817 837 (2.4)%
----------- ------------
Corporate Expense $ 5,589 $ 6,108 (8.5)%
=========== ============
Per Car Sold $ 376 $ 387
=========== ============
As % of Total Revenues 3.4% 3.9%
=========== ============
Operating expenses related to our Corporate segment as a percent of total
revenue remained relatively consistent for the three months ended March 31,
2001, versus the same period of 2000. However, on a per car sold basis corporate
expenses decreased $11 per car for the quarter ended March 31, 2001, as compared
to the same quarter of the previous year.
15
Financial Position
The following table represents key components of our financial position
($ in thousands):
March 31, December 31,
2001 2000 % Change
--------------------------------------- ---------------
Total Assets $ 659,470 $ 652,121 1.1%
=================== ==================
Inventory 43,434 63,742 (31.9)%
Finance Receivables, Net 522,893 500,469 4.5%
Net Assets of Discontinued Operations 3,282 4,175 (21.4)%
Total Debt $ 470,866 $ 457,652 2.9%
=================== ==================
Notes Payable - Portfolio $ 390,615 $ 406,551 (3.9)%
Other Notes Payable 39,444 16,579 137.9%
Subordinated Notes Payable 40,807 34,522 18.2%
Stockholders' Equity $ 157,222 $ 155,400 1.2%
=================== ==================
Total Assets. Total assets has remained relatively stable as the increase
in Finance Receivables, Net, was offset by the decrease in Inventory.
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, 2000 to March 31, 2001 is due to management's
decision to increase inventory levels at the end of the year 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 lack of growth in the volume
of cars sold, Finance Receivables, net as of March 31, 2001 increased only 4.5%
from December 31, 2000. See Note (2) to the Condensed Consolidated Financial
Statements for the details 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 balances ($ in thousands)
and the number of loans outstanding.
Managed Loans
------------------------------------------------------------------------------
Principal Balances Number of Loans
March 31, December 31, March 31, December 31,
2001 2000 2001 2000
---------------- ----------------- ---------------- -----------------
Principal-Managed $ 535,039 $ 519,005 $ 87,033 $ 84,864
Less: Principal - Securitized and Sold - 4,059 - 2,266
---------------- ----------------- ---------------- -----------------
Principal - Retained on Balance Sheet $ 535,039 $ 514,946 $ 87,033 $ 82,598
================ ================= ================ =================
At March 31, 2001, the entire loan portfolio is on-balance sheet. Principal
Balances - Retained on Balance Sheet has increased 3.9%. As we continue to focus
on the underwriting guidelines, we do not expect the portfolio balance grow as
significantly as in past quarters. Although the volume of loans is leveling, we
anticipate the quality of the loans written to improve, with the ultimate goal
of improving loan losses. The number of used cars sold totaled 14,851 for the
quarter ended March 31, 2001, versus sales of 15,802 used cars during the same
quarter of the prior year.
16
The following table reflects activity in the Allowance for Credit Losses,
as well as information regarding charge off activity, for the three months ended
March 31, 2001 and 2000 ($ in thousands):
March 31,
---------------------------------------
2001 2000
------------------- ------------------
Allowance Activity:
Balance, Beginning of Period $ 99,700 $ 76,150
Provision for Credit Losses 39,020 34,573
Other Allowance Activity 42 104
Net Charge Offs (36,762) (23,242)
------------------- ------------------
Balance, End of Period $ 102,000 $ 87,585
=================== ==================
Allowance as % Ending Principal Balances 19.1% 20.9%
=================== ==================
Charge off Activity:
Principal Balances $ (47,156) $ (31,166)
Recoveries, Net 10,394 7,924
------------------- ------------------
Net Charge Offs $ (36,762) $ (23,242)
=================== ==================
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.
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.
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 April 30, 2001, 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).
17
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 8.8% 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 1.9% 8.1% 13.1% 19.0% 22.2% 23.5% 24.1% 100.0%
1996: $ 48,996 1.5% 8.1% 13.9% 22.1% 26.2% 27.9% 28.9% 100.0%
1997:
1st Quarter $ 16,279 2.1% 10.7% 18.2% 24.8% 29.8% 32.0% 33.5% 100.0%
2nd Quarter $ 25,875 1.5% 9.9% 15.8% 22.7% 27.4% 29.5% 30.6% 99.9%
3rd Quarter $ 32,147 1.4% 8.3% 13.2% 22.4% 26.9% 29.1% 30.6% 99.8%
4th Quarter $ 42,529 1.4% 6.8% 12.6% 21.8% 26.1% 28.8% 30.0% 99.6%
1998:
1st Quarter $ 69,708 0.9% 6.9% 13.4% 20.9% 26.4% 28.8% 29.9% 99.1%
2nd Quarter $ 66,908 1.1% 8.1% 14.2% 21.7% 27.3% 29.2% 30.2% 98.3%
3rd Quarter $ 71,027 1.0% 7.9% 13.3% 23.0% 27.8% 30.3% 30.9% 97.6%
4th Quarter $ 69,583 0.9% 6.6% 13.1% 24.3% 29.0% 31.5% 31.8% 94.1%
1999:
1st Quarter $ 103,068 0.8% 7.5% 15.1% 23.6% 29.5% x 31.4% 88.9%
2nd Quarter $ 95,768 1.1% 9.9% 16.7% 25.4% 31.5% -- 32.5% 82.5%
3rd Quarter $ 102,585 1.0% 8.3% 14.2% 25.3% x -- 30.3% 75.6%
4th Quarter $ 80,641 0.7% 5.9% 12.6% 23.7% -- -- 25.7% 65.9%
2000:
1st Quarter $ 128,123 0.3% 6.5% 14.6% x -- -- 23.0% 56.5%
2nd Quarter $ 118,778 0.6% 8.6% 16.0% -- -- -- 19.6% 45.1%
3rd Quarter $ 124,367 0.7% 7.8% x -- -- -- 12.5% 31.2%
4th Quarter $ 100,823 0.6% x -- -- -- -- 5.1% 16.7%
2001:
1st Quarter $ 126,015 x -- -- -- -- -- 0.3% 6.5%
18
The following table sets forth the principal balances delinquency status as
a percentage of total outstanding contract principal balances from dealership
operations.
March 31, December 31,
2001 2000
---------------- ----------------
Days Delinquent:
Current 78.6% 66.1%
1-30 Days 15.7% 26.1%
31-60 Days 3.3% 4.7%
61-90 Days 2.4% 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 March 31, 2001.
Primarily as a result of our in dealership collectors, our current
accounts, those accounts not one day delinquent, have continued to improve both
over the same quarter of 2000 as well as over the third and fourth quarters of
2000. Current accounts at March 31, 2001 were 78.6% versus 66.1% at December 31,
2000. Current accounts at the end of the third quarter of 2000 were 72.4% and
were 74.8% at the end of the first quarter of 2000. As a result of the apparent
success of the in store collectors, we are in the process of adding in store
collectors to service the 31-60 day delinquent accounts at the dealerships in
addition to the 1-30 days delinquent accounts currently serviced. The 31+ day
accounts have remained relatively constant at 5.7% at the end of the first
quarter of 2001, as compared to 5.3% at the end of the same quarter of 2000.
Based upon our continued review of the adequacy of the Allowance for Credit
Losses, we have recorded a provision for loan losses for the three months ended
March 31, 2001 at 31% of originations. The 31% provision is 1% higher than the
effective 30% provision for 2000 and 4% greater than the 27% recorded during the
first quarter of 2000, as losses on our existing, older portfolio continue to
emerge at higher than expected levels. With the provision recorded during this
quarter, we believe the Allowance balance as of March 31, 2001 remains at a
level that we estimate to be adequate to cover net charge offs for the next 12
to 15 months.
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)
representing 71% of the total finance receivable balance for the most recent
securitizations to investors and subordinate classes are retained by us. We
continue to service the securitized loans.
The Class A obligations have historically been structured as to receive
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 cash 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
3.0%-6.0% 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 11.0%, 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.
19
Certain Financial Information Regarding Our Securitizations
During March 2001, we closed our 19th securitization in which we
securitized $117.7 million of loans, issuing $83.6 million in Class A
certificates with an annual interest rate of 5.09%, a significant rate
improvement from our securitizations closed during 2000.
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 the seasonal purchase of inventories,
o working capital and general and,
corporate purposes, o the purchase of property
o common stock repurchases, and equipment.
We fund our capital requirements primarily through:
o operating cash flow, o our revolving warehouse and inventory
o securitization transactions, credit lines and,
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.
Cash Flow
Net cash provided by operating activities decreased $2.4 million to $59.5
million in the three months ended March 31, 2001. The decrease is primarily due
to a significant decrease in accrued liabilities at March 31, 2001 offset by a
decrease in inventory levels.
Net cash used in investing activities decreased $22.1 million to $58.4
million during the three months ended March 31, 2001 as compared to $80.5
million used during the same period of 2000. The reason for the decrease is due
to increased collections on finance receivables and a lower increase in finance
receivables.
Financing activities used $2.2 million for the three months ended March 31,
2001, versus generating $2.9 million during the three months ended March 31,
2000. The change is due to net payments made on Notes Payable.
Financing Resources
Revolving Facility. Under our $125 million revolving facility with GE
Capital, 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. As of
March 31, 2001, our borrowing capacity under the revolving facility was $28.8
million, the aggregate principal amount outstanding under the revolving facility
was approximately $21.3 million, and the amount available to be borrowed under
the facility was $7.5 million. The revolving facility bears interest at the
30-day LIBOR plus 3.15%, payable daily (total rate of 8.68% as of March 31,
2001). In addition, we are also required to maintain specified financial ratios.
As of March 31, 2001, we were in compliance with the covenants of this agreement
with the exception of interest coverage ratios, for which we have received a
waiver.
In April 2001, we replaced the warehouse receivables portion of this
facility and have secured an option to extend the $25 million inventory line of
credit portion of this facility from June 20, 2001 until December 31, 2001.
Our new revolving facility allows for maximum borrowings of $75 million
during the period May 1 through November 30 and increases to $100 million during
the period December 1 through April 30. The term of the facility is 364 days
with a renewal option, upon mutual consent, for an additional 364-day period.
The borrowing base consists of up to 65% of the principal balance of eligible
loans originated from the sale of used cars. The lender maintains an option to
adjust the advance rate to reflect changes in market conditions or portfolio
performance. The interest rate on the facility is LIBOR plus 2.80%. The facility
is secured with substantially all Company assets. The line is subject to several
covenants, including certain financial and loan portfolio related covenants.
20
The extension on the inventory line of credit requires us to pay a fee for
each quarterly extension after June 30, 2001, and after June 30, 2001, the
interest rate on the line increases by 50 basis points to LIBOR plus 3.65%. We
continue to search for replacement financing for our inventory line of credit.
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. In May 1999, we borrowed approximately $38.0
million from an unrelated party for a term of two years maturing on May 1, 2001
(Residual Loan). The note called for monthly principal payments of generally not
less than $800,000 through May 2000 and not less than $1.7 million thereafter,
plus interest at a rate equal to LIBOR plus 550 basis points. The loan balance
was $11.1 million at December 31, 2000. This loan agreement was replaced in
January 2001. The new agreement has a $35 million principal due February 2003
with interest payable monthly at LIBOR plus 600 basis points. The new loan, like
the previous loan, is secured by our Residuals in Finance Receivables Sold and
certain Finance Receivables.
As a condition to the $35 million senior secured loan agreement, Verde
Investments, Inc., an affiliate of Mr. Garcia, was required to invest $7 million
in us through a subordinated loan. The funds were placed in escrow as additional
collateral for the $35 million senior secured loan. The funds will be released
in July 2001 if, among other conditions, we have at least $7 million in pre-tax
income through June of 2001 and, at that time, Mr. Garcia guarantees 33.3% of
the $35 million facility. If the loan with Verde and the guarantee of the $35
million senior secured loan are not removed by July 25, 2001, Mr. Garcia is
entitled to receive warrants from us for 1.5 million shares of stock, vesting
over a one-year period, at an exercise price of $4.50 subject to certain
conditions. Also as consideration for the loan, we released all options to
purchase real estate that is currently owned by Verde and leased to us. We also
granted Verde the option to purchase, at book value, any or all properties
currently owned by us, or acquired by us prior to the earlier of December 31,
2001, or the date the loan is repaid. Verde agreed to lease the properties back
to us, on terms similar to our current leases, if it exercises its option to
purchase any of the properties. The loan is secured by residual interests in our
securitization transactions but is subordinate to the senior secured loan
facility. The loan requires quarterly interest payments at LIBOR plus 600 basis
points and is subject to pro rata reductions if certain conditions are met. An
independent committee of our board reviewed and negotiated terms of this
subordinated loan and we also received an opinion from an investment banker,
which deemed the loan fair from a financial point of view both to our
shareholders and us.
Capital Expenditures and Commitments
In November 2000, Verde Investments, Inc. ("Verde"), an affiliate of Mr.
Garcia, purchased a certain property located in Phoenix, Arizona and
simultaneously leased the property to us pursuant to among other terms the
following: 20 year term which expires December 31, 2020; rent payable monthly
with 5% annual rent adjustments; triple net lease; four five-year options to
renew; and an option to purchase the property upon prior notice and at Verde's
cost. Subsequently, we surrendered this option as part of the $7 million
subordinated loan with Verde. We are in the process of building a new
headquarters at this location.
Accounting Matters
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No.
140). SFAS No. 140 replaces SFAS No. 125 and revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral. This statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001. This
statement is effective for recognition and reclassification of collateral and
for disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. Management does not expect the
adoption of SFAS No. 140 to have a material impact on us.
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. Statement of Financial Accounting Standards No. 133, "Accounting
for
21
Derivative Instruments and Hedging Activities" (SFAS No. 133) required all
derivatives to be recorded on the balance sheet at fair value and establishes
new accounting rules for hedging instruments. The adoption of SFAS No. 138 or
No. 133 did not have a material effect on us.
We Make Forward Looking Statements
This report includes statements that constitute forward-looking statements
within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. We claim the protection of the safe-harbor for
our forward looking statements. Forward-looking statements are often
characterized by the words "may," "anticipates," "believes," "estimates,"
"projects," "expects" or similar expressions and do not reflect historical
facts. 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, improvements in underwriting, adequacy of the
allowance for credit losses, and improvements in recoveries and loan
performance, including delinquencies and charge offs; roll-out of collectors to
our dealerships; and e-commerce related growth and loan performance. Forward
looking statements include risks, uncertainties and other factors which may
cause our actual results, performance or achievements to be materially different
from those expressed or implied by such forward looking statements, some of
which we cannot predict or quantify. Factors that could affect our results and
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 to finance our operations
in light of a tight credit market for the sub-prime industry and our current
financial circumstances; any deterioration in the used car finance industry or
increased competition in the used car sales and finance industry; any inability
to monitor and improve our underwriting and collection processes; any changes in
estimates and assumptions in, and the ongoing adequacy of, our allowance for
credit losses; any inability to continue to reduce operating expenses as a
percentage of sales; any material litigation against us or material, unexpected
developments in existing litigation; any new or revised accounting, tax or legal
guidance that adversely affect used car sales or financing and Mr. Garcia's
offer to take us private. Forward-looking statements speak only as of the date
the statement was made. 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 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 report 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. In addition, the foregoing factors may affect
generally our business, results of operations and financial position. There may
also be other factors that we are currently unable to identify or quantify, but
may arise or become known in the future. Forward looking statements speak only
as of the dated the statement was made. 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. 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 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 March 31, 2001, the
scheduled maturities on our finance receivables ranged from one to 48 months,
with a weighted average maturity of 23.6 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 March 31, 2001 is the Collateralized Notes Payable (Class A obligations)
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 lower than the interest rates on
our existing Notes Payable.
We believe that our market risk information has not changed materially from
December 31, 2000.
22
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 do not expect the
final outcome to have a material adverse effect on the Company.
There has also been litigation filed in connection with or related to the
intent and/or offer of our chairman, Mr. Garcia, to purchase all of our
outstanding common stock not owned by him (See Item 5 below). On March 20, 2001,
a shareholder derivative complaint was filed, purportedly on behalf of Ugly
Duckling Corporation, in the Court of Chancery for the State of Delaware in New
Castle County, captioned Berger v. Garcia, et al., No. 18746NC. The complaint
alleges that the Company's current directors breached fiduciary duties owed to
the Company in connection with certain transactions between the Company and Mr.
Garcia and various entities controlled by Mr. Garcia. The complaint was amended
on April 17, 2001 to add a second cause of action, on behalf of all persons who
own the Company's common stock, and their successors in interest, which alleges
that the Company's current directors breached fiduciary duties in connection
with the proposed acquisition by Mr. Garcia of all of the outstanding shares of
the Company's common stock. The Company is named as a nominal defendant in the
action. The original cause of action seeks to void all transactions deemed to
have been approved in breach of fiduciary duty and recovery by the Company of
alleged compensatory damages sustained as a result of the transactions. The
second cause of action seeks to enjoin the Company from proceeding with the
proposed acquisition by Mr. Garcia, or, in the alternative, awarding
compensatory damages to the class.
Following Mr. Garcia's offer in early April 2001, five additional and
separate purported shareholder class action complaints were filed between April
17 and April 25, 2001 in the Court of Chancery for the State of Delaware in New
Castle County. They are captioned Turberg v. Ugly Duckling Corp., et al., No.
18828NC, Brecher v. Ugly Duckling Corp., et al., No. 18829NC, Suprina v. Ugly
Duckling Corporation, et al., No. 18830NC, Benton v. Ugly Duckling Corp., et
al., No. 18838NC, and Don Hankey Living Trust v. Ugly Duckling Corporation, et
al., No. 18843NC. Each complaint alleges that the Company, and its directors,
breached fiduciary duties in connection with the proposed acquisition by Mr.
Garcia of all of the outstanding shares of the Company's common stock. The
complaints seek to enjoin the proposed acquisition by Mr. Garcia and to recover
compensatory damages caused by the proposed acquisition and the alleged breach
of fiduciary duties.
We expect all of these cases to be consolidated and intend to vigorously
defend the allegations in the complaints and believe that the actions are
without merit.
Item 2. Changes in Securities and Use of Proceeds.
(a) None
(b) None
(c) None
(d) Not Applicable
Item 3. Defaults Upon Senior Securities.
We recently obtained waiver letters for financial ratio covenant breaches
under our revolving credit facility and our senior secured loan facility.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
On April 16, 2001, as previously announced, Mr. Ernest Garcia, II, made an
offer to the board of directors to purchase all of the outstanding shares of our
common stock not already held by him. The Company's board of directors
established a special transaction committee, composed of disinterested
directors, to evaluate the proposal and make a recommendation to the
23
full board. Under the terms of the offer, the holders of the outstanding shares
of common stock would receive $7.00 per share, $2.00 in cash and $5.00 in
subordinated debentures from the acquiring company. The subordinated debentures
would have interest payable at 10%, interest only payments semiannually until
maturity and a ten-year term. Mr. Garcia's offer also states that Greg Sullivan,
chief executive officer and president of the Company, would receive an option to
purchase a 20% interest in the acquiring company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 10.1 - Covenant Waiver Letter dated May 9, 2001 between the Registrant
and Sun America Life Insurance Company.
Exhibit 10.2 - Covenant Waiver Letter dated May 14, 2001 between the Registrant
and GE Capital Corporation
Exhibit 99 - Statement Regarding Forward Looking Statements and Risk Factors
(b) Reports on Form 8-K.
During the first quarter of 2001, the Company filed two reports on Form
8-K. The first report on Form 8-K, dated January 15, 2001 and filed January 16,
2001, reported Ugly Duckling's closing of a senior secured loan facility and
subordinated loan, and filed as an exhibit to the form 8-K, a press release
dated January 15, 2001, entitled "Ugly Duckling Announces Closing of Senior
Secured Loan Facility and Subordinated Loan with Chairman and Largest
Shareholder." The second report on Form 8-K dated and filed February 26, 2001,
reported Ugly Duckling's 2000 earnings, and filed as an exhibit to the Form 8-K
was a press release dated February 21, 2001 entitled "Ugly Duckling Reports
Financial Results for 2000"
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: May 14, 2001
25
EXHIBIT INDEX
Exhibit
Number Description
10.1 Covenant Waiver Letter dated May 9, 2001
between the Registrant and Sun America Life
Insurance Company.
10.2 Covenant Waiver Letter dated May 14, 2001
between the Registrant and GE Capital
Corporation
99 Statement Regarding Forward Looking Statements
and Risk Factors
26