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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
Commission File Number 000-20841
U G L Y D U C K L I N G C O R P O R A T I O N
(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 1150
Phoenix, Arizona 85016
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 852-6600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
-----
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE:
At August 13, 1997, there were 18,453,080 shares of Common Stock, $0.001 par
value, outstanding.
This document serves both as a resource for analysts, shareholders, and other
interested persons, and as the quarterly report on Form 10-Q of Ugly Duckling
Corporation (Company) to the Securities and Exchange Commission, which has
taken no action to approve or disapprove the report or pass upon its accuracy
or adequacy. Additionally, this document is to be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K, as amended, for the year ended December
31, 1996.
UGLY DUCKLING CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Part I. - FINANCIAL STATEMENTS
Page
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets - June 30, 1997 and
December 31, 1996 3
Condensed Consolidated Statements of Operations -Three Months and Six
Months Ended June 30, 1997 and June 30, 1996 4
Condensed Consolidated Statements of Cash Flows -Three Months and Six
Months Ended June 30, 1997 and June 30, 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
Part II. - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 21
Item 2. CHANGES IN SECURITIES 21
Item 3. DEFAULTS UPON SENIOR SECURITIES 21
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
Item 5. OTHER INFORMATION 21
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURES S-1
Exhibit 3.a. i
Exhibit 3.b. ii
Exhibit 10.a. iii
Exhibit 10.b. iv
Exhibit 10.c. v
Exhibit 11 vi
Exhibit 27 vii
Exhibit 99 viii
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1997 1996
---------------- --------------
(UNAUDITED- IN THOUSANDS)
ASSETS
Cash and Cash Equivalents $ 41,149 $ 18,455
Finance Receivables:
Held for Investment 22,746 52,188
Held for Sale 50,000 7,000
---------------- --------------
Principal Balances, Net 72,746 59,188
Less: Allowance for Credit Losses (14,435) (8,125)
---------------- --------------
Finance Receivables, Net 58,311 51,063
---------------- --------------
Residuals in Finance Receivables Sold 27,441 9,889
Investments Held in Trust 8,807 3,479
Notes Receivable 9,263 1,063
Inventory 16,576 5,752
Property and Equipment, Net 31,143 20,652
Goodwill and Trademarks, Net 13,705 2,150
Other Assets 11,615 5,580
---------------- --------------
$ 218,010 $ 118,083
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts Payable $ 4,194 $ 2,132
Accrued Expenses and Other Liabilities 14,891 6,728
Notes Payable 8,328 12,904
Subordinated Notes Payable 12,000 14,000
---------------- --------------
Total Liabilities 39,413 35,764
---------------- --------------
Stockholders' Equity:
Common Stock 171,317 82,612
Retained Earnings (Accumulated Deficit) 7,280 (293)
---------------- --------------
Total Stockholders' Equity 178,597 82,319
---------------- --------------
$ 218,010 $ 118,083
================ ==============
See accompanying notes to Condensed Consolidated Financial Statements.
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except earnings per common share - Unaudited)
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
-------------- -------------- -------------- ---------------
Sales of Used Cars $ 27,802 $ 15,096 $ 46,013 $ 30,177
Less:
Cost of Used Cars Sold 14,836 8,510 24,000 16,858
Provision for Credit Losses 4,848 2,566 8,829 5,172
-------------- -------------- --------------- --------------
8,118 4,020 13,184 8,147
-------------- -------------- --------------- --------------
Interest Income 6,168 4,029 12,608 7,691
Gain on Sale of Finance Receivables 8,231 639 12,810 1,178
-------------- -------------- --------------- --------------
14,399 4,668 25,418 8,869
-------------- -------------- --------------- --------------
Other Income 2,070 317 3,574 431
-------------- -------------- --------------- --------------
Income before Operating Expenses 24,587 9,005 42,176 17,447
Operating Expenses 16,705 6,284 28,111 12,010
-------------- -------------- --------------- --------------
Operating Income 7,882 2,721 14,065 5,437
Interest Expense 567 1,638 1,336 3,289
-------------- -------------- --------------- --------------
Earnings before Income Taxes 7,315 1,083 12,729 2,148
Income Taxes 3,004 - 5,156 -
-------------- -------------- --------------- --------------
Net Earnings $ 4,311 $ 1,083 $ 7,573 $ 2,148
============== ============== =============== ==============
Earnings per Share $ 0.23 $ 0.13 $ 0.43 $ 0.26
============== ============== =============== ==============
Shares Used in Computation 18,980 6,380 17,780 6,136
============== ============== =============== ==============
See accompanying notes to Condensed Consolidated Financial Statements.
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
1997 1996
--------------- ---------
(UNAUDITED - IN THOUSANDS)
Cash Flows from Operating Activities:
Net Earnings $ 7,573 $ 2,148
Adjustments to Reconcile Net Earnings to Net
Cash Provided by Operating Activities:
Provision for Credit Losses 8,829 5,172
Gain on Sale of Finance Receivables (12,810) (1,178)
Finance Receivables Held for Sale (91,252) (579)
Proceeds from Sale of Finance Receivables 113,785 -
Decrease (Increase) in Deferred Income Taxes 105 (226)
Depreciation and Amortization 1,458 701
Increase in Inventory (6,820) (57)
Decrease (Increase) in Other Assets (5,189) 136
Increase in Accounts Payable, Accrued Expenses, and
Other Liabilities 7,997 2,710
Increase in Income Taxes Receivable/Payable 2,302 1,360
--------------- ---------
Net Cash Provided by Operating Activities 25,978 10,187
--------------- ---------
Cash Flows from Investing Activities:
Increase in Finance Receivables (26,160) (44,300)
Collections of Finance Receivables 24,855 19,010
Proceeds from Sale of Finance Receivables - 18,410
Increase in Investments Held in Trust (5,328) (5,995)
Increase in Notes Receivable (8,853) -
Collections of Notes Receivable 652 75
Purchase of Property and Equipment (10,600) (2,056)
Payment for Purchase of Assets of Seminole Finance Co.
and EZ Plan, Inc. (29,920) -
Other, Net - (12)
--------------- ---------
Net Cash Used in Investing Activities (55,354) (14,868)
--------------- ---------
Cash Flows from Financing Activities:
Repayments of Notes Payable (34,476) (79)
Net Repayment of Subordinated Notes Payable (2,000) (10,221)
Proceeds from Issuance of Common Stock 88,705 14,945
Other, Net (159) (1,120)
--------------- ---------
Net Cash Provided by Financing Activities 52,070 3,525
--------------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 22,694 (1,156)
Cash and Cash Equivalents at Beginning of Period 18,455 1,419
--------------- ---------
Cash and Cash Equivalents at End of Period $ 41,149 $ 263
=============== =========
See accompanying notes to Condensed Consolidated Financial Statements.
UGLY DUCKLING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
-----------------------
The accompanying unaudited condensed consolidated financial statements of Ugly
Duckling Corporation (Company) have been prepared in accordance with generally
accepted accounting principles for interim financial information and pursuant
to rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for a complete financial statement
presentation. In the opinion of management, such unaudited interim
information reflects all adjustments, consisting only of normal recurring
adjustments, necessary to present the Company's financial position and results
of operations for the periods presented. The results of operations for
interim periods are not necessarily indicative of the results to be expected
for a full fiscal year. The Condensed Consolidated Balance Sheet as of
December 31, 1996 was derived from audited consolidated financial statements
as of that date but does not include all the information and footnotes
required by generally accepted accounting principles. It is suggested that
these condensed consolidated financial statements be read in conjunction with
the Company's audited consolidated financial statements included in the
Company's Annual Report on Form 10-K, as amended, for the year ended December
31, 1996.
NOTE 2. SUMMARY OF FINANCE RECEIVABLES PRINCIPAL BALANCES, NET
------------------------------------------------------------
Following is a summary of Finance Receivables Principal Balances, Net, as of
June 30, 1997 and December 31, 1996 (in thousands):
June 30, December 31,
1997 1996
--------- -------------
Principal Balances $ 71,663 $ 58,281
Add: Accrued Interest 642 718
Loan Origination Costs 441 189
--------- -------------
Principal Balances, Net $ 72,746 $ 59,188
========= =============
NOTE 3. COMMON STOCK EQUIVALENTS
--------------------------
Net Earnings per common share amounts are based on the weighted average number
of common shares and common stock equivalents outstanding as reflected on
Exhibit 11 to this Quarterly Report on Form 10-Q.
NOTE 4. ACQUISITIONS
------------
On January 15, 1997, the Company acquired substantially all of the assets of
Seminole Finance Corporation and related companies ("Seminole"), including
five dealerships in Tampa/St. Petersburg and a contract portfolio of
approximately $31.1 million (6,953 contracts) in exchange for approximately
$2.5 million in cash and assumption of $29.9 million in debt. The combination
of the Company's audited consolidated statement of operations for the year
ended December 31, 1996 and Seminole's audited combined statement of
operations for the same period (as if the Seminole acquisition had taken place
on January 1, 1996) results in a combined net loss for the year ended December
31, 1996 of $(3.6) million. These pro forma results are not necessarily
indicative of the future results of operations of the Company or the results
that would have been obtained had the Seminole acquisition occurred on January
1, 1996. In addition, the pro forma results are not intended to be a
projection of future results. The Company expects the results of operations in
1997 for the assets acquired from Seminole to differ materially from 1996
results because the Company's management intends to significantly alter the
type of vehicles sold at the newly acquired car dealerships, the methodology
by which the acquired operations acquire, recondition, and market used cars,
and the methodology by which the related finance receivables are underwritten
and collected, which management believes will result in the acquired
operations being profitable in 1997. Furthermore, Seminole's audited combined
statement of operations for 1996 was impacted by several factors that are not
expected to have an impact on future operations. Such factors were related to
the deterioration of its loan portfolio, which the Company believes resulted
from poor underwriting and ineffective collection efforts. First, due to the
deterioration of its loan portfolio in 1996, Seminole recorded a total of $7.1
million in provision for credit losses. Second, the deterioration of its loan
portfolio also reduced its borrowing capacity, thereby reducing Seminole's
liquidity. As a result, in order to raise cash, Seminole sold vehicles at
substantially lower margins and sold a portfolio of notes in December 1996 for
a loss of approximately $1.5 million.
On April 1, 1997, the Company purchased substantially all of the assets of EZ
Plan, Inc. (EZ Plan), a Company engaged in the business of selling and
financing used motor vehicles, including seven dealerships in San Antonio and
a contract portfolio of approximately $24.3 million (6,297 contracts) in
exchange for $26.3 million in cash. The combination of the Company's audited
consolidated statement of operations for the year ended December 31, 1996 and
EZ Plan's audited combined statement of operations for the same period (as if
the EZ Plan acquisition had taken place on January 1, 1996) results in
combined net earnings for the year ended December 31, 1996 of $5.9 million.
These pro forma results are not necessarily indicative of the future results
of operations of the Company or the results that would have been obtained had
the EZ Plan acquisition occurred on January 1, 1996. In addition, the pro
forma results are not intended to be a projection of future results. The
Company expects the results of operations in 1997 for the assets acquired from
EZ Plan to differ materially from 1996 results because the Company's
management intends to alter the type of vehicles sold at the newly acquired
car dealerships, the methodology by which the acquired operations acquire,
recondition, and market used cars, and the methodology by which the related
finance receivables are underwritten and collected.
The following summary, prepared on a pro forma basis combines the consolidated
results of operations (unaudited) for the six months ended June 30, 1997 as if
the acquisitions had been consummated as of January 1, 1997. Comparative
information for 1996 for the acquired businesses is not available (in
thousands, except per share data).
Six Months Ended
June 30, 1997
-----------------
Sales of Used Cars $ 61,173
Interest Income 27,082
Other Income 4,571
-----------------
Total Revenues $ 92,826
=================
Net Earnings $ 4,971
=================
Earnings per Share $ 0.28
=================
NOTE 5. USE OF ESTIMATES
----------------
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statement and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 6. RECLASSIFICATIONS
-----------------
Certain reclassifications have been made to previously reported information to
conform to the current presentation.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward looking statements.
Additional written or oral forward looking statements may be made by the
Company from time to time in filings with the Securities and Exchange
Commission or otherwise. Such forward looking statements are within the
meaning of that term in Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934 as, amended. Such
statements may include, but not be limited to, projections of revenues,
income, or loss, capital expenditures, plans for future operations, financing
needs or plans, and plans relating to products or services of the Company, as
well as assumptions relating to the foregoing. The words "believe," "expect,"
"anticipate," "estimate," "project," and similar expressions identify forward
looking statements. Forward looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified.
Future events and actual results could differ materially from those set forth
in, contemplated by, or underlying the forward looking statements. The Company
undertakes no obligation to publicly update or revise any forward looking
statements, whether as a result of new information, future events, or other-
wise. Statements in this Quarterly Report, including the Notes to the Condensed
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," describe factors, among others,
that could contribute to or cause such differences. Additional risk factors
that could cause actual results to differ materially from those expressed in
such forward looking statements are set forth in Exhibit 99 which is attached
hereto and incorporated by reference into this Quarterly Report of Form 10-Q.
INTRODUCTION
General. The Company commenced its used car sales and finance operations with
the acquisition of two Company Dealerships in 1992. During 1993, the Company
acquired three additional Company Dealerships. In 1994, the Company
constructed and opened four new Company Dealerships that were built
specifically to meet the Company's new standards of appearance, reconditioning
capabilities, size, and location. During 1994, the Company closed one Company
Dealership because the facility failed to satisfy these new standards and, at
the end of 1995, closed its Gilbert, Arizona dealership. In January 1997, the
Company acquired selected assets of a group of companies engaged in the
business of selling and financing used motor vehicles, including four
dealerships located in the Tampa Bay/St. Petersburg market (Seminole). In
March 1997, the Company opened its first used car dealership in the Las Vegas
market. In April 1997, the Company acquired selected assets of a Company in
the business of selling and financing used motor vehicles, including seven
dealerships located in the San Antonio market (EZ Plan). In addition, the
Company opened two additional dealerships in the Albuquerque market and one
additional dealership in the Phoenix market during the second quarter of 1997.
In 1994, the Company acquired Champion Financial Services, Inc., an
independent automobile finance company, primarily for its management expertise
and contract servicing software and systems. Champion had one office and a
portfolio of approximately $1.9 million in sub-prime contracts averaging
approximately $2,000 in principal amount. For the balance of 1994, the Company
purchased an additional $1.7 million in contracts.
In April 1995, the Company initiated an aggressive plan to expand the number
of contracts purchased from its Third Party Dealer network. By June 30, 1997,
the Company had 72 branch offices in 19 states. This expansion enabled the
Company to leverage its existing infrastructure and increase its contract
portfolio much more quickly than it could through the expansion of its Company
Dealerships. The Company is in the process of further expanding its Third
Party Dealer operations and diversifying its earning asset base by
implementing the Cygnet Dealer Program pursuant to which the Company provides
Third Party Dealers with operating credit lines primarily secured by the
dealers' retail installment contract portfolios and inventory.
In 1996 the Company completed an initial public offering and a secondary
offering in which it sold common stock for a total of $82.3 million. In
February 1997, the Company completed a private placement of common stock for a
total of $88.7 million, net of expenses. The registration of the resale of
the shares sold in the private placement was effective in April 1997.
On July 11, 1997, the Company entered into an agreement in principle with the
senior bank group of First Merchants Acceptance Corporation ("FMAC") to
purchase the secured debt of FMAC held by such group. The debt totals approx-
imately $103 million. FMAC filed for reorganization under Chapter 11 of the
Federal Bankruptcy Code on that date. In connection with the bankruptcy
proceedings, the Company, which owns approximately 2 1/2% of FMAC's outstanding
common stock with a cost basis of approximately $1.5 million, agreed to provide
up to $10 million of "debtor in possession" financing to FMAC, of which approx-
imately $3.0 million was outstanding at August 14, 1997. The more significant
terms of the proposed purchase of senior debt provide, among other things, for
(i) purchase by the Company of the debt at a 10% discount of the outstanding
principal amount; (ii) short-term financing by the bank group to the Company
for the purchase, with interest accruing at LIBOR plus 2% and an up-front
payment by the Company to the bank group equal to 20% of the purchase price;
and (iii) issuance of stock warrants to the bank group to purchase up to
500,000 shares of the Company's common stock at an exercise price of $20 per
share over a thirty-month term and subject to a call feature by the Company.
The purchase is subject to certain conditions, including, but not limited to,
bankruptcy court approval, unless waived by the bank group, and execution of
definitive agreements.
The following discussion and analysis provides information regarding the
Company's consolidated financial position as of June 30, 1997 and December 31,
1996, and its results of operations for the three month periods ended June 30,
1997 and 1996, respectively, and the six month periods ended June 30, 1997
and 1996, respectively.
Growth in Finance Receivables. As a result of the Company's rapid expansion,
contract receivables serviced increased by 111% to $231.7 million at June 30,
1997 (including $160.0 million in contracts serviced under the Company's
Securitization Program) from $109.9 million at December 31, 1996 (including
$51.7 million in contracts serviced under the Company's Securitization
Program). The Company operated 24 and 7 dealerships at June 30, 1997 and
1996, respectively, and 72 and 13 branch offices at June 30, 1997 and 1996,
respectively.
The following tables reflect the growth in period end balances measured in
terms of the principal amount and the number of contracts.
TOTAL CONTRACTS OUTSTANDING
(IN THOUSANDS, EXCEPT NUMBER OF CONTRACTS)
JUNE 30, DECEMBER 31,
----------------------- -----------------------
1997 1996
----------------------- -----------------------
PRINCIPAL NO. OF PRINCIPAL NO. OF
AMOUNT CONTRACTS AMOUNT CONTRACTS
----------- ---------- ----------- ----------
Company Dealerships $ 110,972 23,904 $ 49,066 9,615
Third Party Dealers 120,734 25,188 60,878 12,942
----------- ---------- ----------- ----------
Total Portfolio Serviced 231,706 49,092 109,944 22,557
----------- ---------- ----------- ----------
Less Portfolio Securitized and Sold (160,043) (32,638) (51,663) (10,612)
----------- ---------- ----------- ----------
Company Total $ 71,663 16,454 $ 58,281 11,945
=========== ========== =========== ==========
The following tables reflect the growth in contract originations by Company
Dealerships and contract purchases from Third Party Dealers measured in terms
of the principal amount and the number of contracts.
TOTAL CONTRACTS ORIGINATED/PURCHASED
(IN THOUSANDS, EXCEPT NUMBER OF CONTRACTS)
THREE MONTHS ENDED JUNE 30,
------------------------------------------
1997 1996
--------------------- ---------------------
PRINCIPAL NO. OF PRINCIPAL NO. OF
AMOUNT CONTRACTS AMOUNT CONTRACTS
---------- --------- ---------- ---------
Company Dealerships $ 52,034 10,006 $ 13,462 1,852
Third Party Dealers 50,139 9,374 10,017 1,844
---------- --------- ---------- ---------
Total $ 102,173 19,380 $ 23,479 3,696
========== ========= ========== =========
TOTAL CONTRACTS ORIGINATED/PURCHASED
(IN THOUSANDS, EXCEPT NUMBER OF CONTRACTS)
SIX MONTHS ENDED JUNE 30,
--------------------------------------------
1997 1996
--------------------- ---------------------
PRINCIPAL NO. OF PRINCIPAL NO. OF
AMOUNT CONTRACTS AMOUNT CONTRACTS
---------- --------- --------- ---------
Company Dealerships $ 99,379 19,069 $ 27,097 3,838
Third Party Dealers 91,649 16,911 17,203 3,112
---------- --------- ---------- ---------
Total $ 191,028 35,980 $ 44,300 6,950
========== ========= ========== =========
Finance Receivable Principal Balances originated/purchased during the three
months ended June 30, 1997 increased by 335.2% to $102.2 million, including
$24.3 million in conjunction with the EZ Plan acquisition, from $23.5 million
in the three month period ended June 30, 1996. For the six month period ended
June 30, 1997, Finance Receivable Principal Balances originated/purchased
increased by 331.2% to $191.0 million, including $55.4 million from the
Seminole and EZ Plan acquisitions, from $44.3 million in the six month period
ended June 30, 1996.
RESULTS OF OPERATIONS
FOR THREE MONTHS ENDED JUNE 30, 1997
COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
The prices at which the Company sells its cars and the interest rates that it
charges to finance these sales take into consideration that the Company's
primary customers are high-risk borrowers, many of whom ultimately default.
The Provision for Credit Losses reflects these factors and is treated by the
Company as a cost of both the future interest income derived on the contract
receivables originated at Company Dealerships as well as a cost of the sale of
the cars themselves. Accordingly, unlike traditional car dealerships, the
Company does not present gross profits in its Statements of Operations
calculated as Sales of Used Cars less Cost of Used Cars Sold.
Sales of Used Cars. Sales of Used Cars increased by 84.2% to $27.8 million
for the three month period ended June 30, 1997 from $15.1 million for the
three month period ended June 30, 1996. This growth reflects a significant
increase in the number of used car dealerships in operation. Units sold
increased by 84.0% to 3,806 units in the three month period ended June 30,
1997 from 2,069 units in the three month period ended June 30, 1996. Same
store unit sales declined by 21.1% in the three months ended June 30, 1997
compared to the three months ended June 30, 1996. This is primarily due to
the increased emphasis on underwriting at the Company Dealerships,
particularly one dealership where unit sales decreased by 252 units, which
represents 55.9% of the decrease for the three month period ended June 30,
1997 compared to the same period in 1996.
The average sales price per car increased slightly to $7,305 for the three
month period ended June 30, 1997 from $7,296 for the three month period ended
June 30, 1996.
Cost of Used Cars Sold and Gross Margin. The Cost of Used Cars Sold increased
by 74.3% to $14.8 million for the three month period ended June 30, 1997 from
$8.5 million for the three month period ended June 30, 1996. On a per unit
basis, the Cost of Used Cars Sold decreased by 5.2% to $3,898 for the three
month period ended June 30, 1997 from $4,113 for the three month period ended
June 30, 1996. The gross margin on used car sales (Sales of Used Cars less
Cost of Used Cars Sold excluding Provision for Credit Losses) increased by
96.9% to $13.0 million for the three month period ended June 30, 1997 from
$6.6 million for the three month period ended June 30, 1996. As a percentage
of sales, the gross margin was 46.6% and 43.6% for the three month periods
ended June 30, 1997 and 1996, respectively. On a per unit basis, the gross
margin per car sold was $3,407 and $3,183 for the three month periods ended
June 30, 1997 and 1996, respectively.
Provision for Credit Losses. A high percentage of Company Dealership
customers ultimately do not make all of their contractually scheduled
payments, requiring the Company to charge off the remaining principal balance
due. As a result, the Company recognizes a Provision for Credit Losses in
order to establish an Allowance for Credit Losses sufficient to absorb
anticipated future losses. The Provision for Credit Losses increased by 88.9%
to $4.8 million in the three month period ended June 30, 1997 from $2.6
million for the three month period ended June 30, 1996. On a percentage basis,
the Provision for Credit Losses per unit originated at Company Dealerships
decreased by 2.0% to $1,358 per unit in the three month period ended June 30,
1997 from $1,386 per unit in the three month period ended June 30, 1996. As a
percentage of contract balances originated, the Provision for Credit Losses
averaged 18.7% and 19.1%, for the for the three month periods ended June 30,
1997 and 1996, respectively.
The Company charges its Provision for Credit Losses to current operations and
does not recognize any portion of the unearned interest income as a component
of its Allowance for Credit Losses. Accordingly, the Company's unearned
finance income is comprised of the full annual percentage rate ("APR") on its
contracts less amortization of loan origination costs.
Interest Income. Interest Income consists primarily of interest on finance
receivables from Company Dealership sales , interest on Third Party Dealer
finance receivables, and income from Residuals in Finance Receivables Sold.
Company Dealership Receivables - Interest Income increased by 10.1% to $2.8
million for the three month period ended June 30, 1997 from $2.6 million for
the three month period ended June 30, 1996. Interest Income was adversely
affected by sales of $104.0 million in Company Dealership contract principal
balances since inception of the Securitization Program, including sales of
$30.7 million in Company Dealerships contract principal balances in the
quarter ended June 30, 1997, and will continue to be affected in future
periods by additional securitizations. A primary element of the Company's
sales strategy is to provide financing to customers with poor credit histories
who are unable to obtain automobile financing through traditional sources.
The Company financed 93.1% of sales revenue and 95.4% of the used cars sold at
Company Dealerships for the three month period ended June 30, 1997 compared to
89.2% of sales revenue and 89.5% of the used cars sold for the three month
period ended June 30, 1996. The average amount financed decreased to $7,246
for the three month period ended June 30, 1997 from $7,269 for the three month
period ended June 30, 1996. Primarily as a result of its expansion into
markets with interest rate limits, the Company's yield on its Company Dealer-
ship Receivable contract portfolio has trended downward. The effective yield
on Finance Receivables from Company Dealerships was 26.0% and 28.9%, for the
three month periods ended June 30, 1997 and 1996, respectively. The Company
charges the maximum interest rate permitted in those states that impose usury
limits.
Third Party Dealer Receivables - Interest Income increased by 129.3% to $3.3
million for the three month period ended June 30, 1997 from $1.5 million in
the three month period ended June 30, 1996. Interest Income was adversely
affected by sales of $106.0 million in Third Party Dealer contract principal
balances since inception of the Securitization Program, including sales of
$50.4 million in Third Party Dealer contract principal balances in the quarter
ended June 30, 1997, and will continue to be effected in future periods by
additional securitizations. Interest income has increased in conjunction with
the increases in Third Party Dealer contracts purchased and outstanding.
Primarily as a result of its expansion into markets with interest rate limits,
the Company's yield on its Third Party Dealer contract portfolio has trended
downward. Portfolio yield was 24.1% and 26.2%, for the three month periods
ended June 30, 1997 and 1996, respectively.
Interest income is effected by the impact of the Company's Residuals in
Finance Receivables Sold. To the extent that cash flows are deficient,
charge-offs of finance receivables exceed original estimates, or assumptions
that were applied at the time of the securitization to the underlying
portfolio are not realized, the Company is required to revalue the residual
portion of the securitization which it retains, and record a charge to
operations. During the three months ended June 30, 1997, the Company recorded
a loss on its Residuals in Finance Receivables Sold of $661,000 due to the
level of charge offs in the underlying portfolios. As of June 30, 1997,
management does not believe that there is an impairment in the valuation of
the Residuals in Finance Receivables Sold.
Gain on Sale of Finance Receivables. Champion Receivables Corporation
("CRC"), a "bankruptcy remote entity" is the Company's wholly-owned special
purpose securitization subsidiary. During the first quarter of 1996, the
Company initiated a Securitization Program under which CRC sells securities
backed by contracts to SunAmerica Life Insurance Company ("SunAmerica"). Under
the Securitization Program, CRC assigns and transfers the contracts to
separate trusts (the "Trusts") pursuant to Pooling and Servicing Agreements
(the "Pooling Agreements"). Pursuant to the Pooling Agreements, Class A
Certificates and subordinated Class B Certificates are issued to CRC. CRC then
sells the Class A Certificates to SunAmerica or its nominees. The transferred
contracts are serviced by Champion Acceptance Corporation ("CAC"), another
subsidiary of the Company. To obtain a "BBB" rating from Standard & Poors,
CRC is required to provide a credit enhancement by establishing and
maintaining a cash spread account for the benefit of the certificate holders.
CRC makes an initial cash deposit into the spread account, ranging from 3% to
4% of the initial underlying finance receivables principal balance and pledges
this cash to the Trusts. CRC is also required to then make additional deposits
to the spread account from the residual cash flow (through the trustees) as
necessary to attain and maintain the spread account at a specified percentage,
ranging from 6.0% to 8.0%, of the underlying finance receivables principal
balance. Distributions are not made to CRC on the Class B Certificates unless
the spread account has the required balance, the required periodic payments to
the Class A Certificate holders are current, and the trustee, servicer and
other administrative costs are current.
During the three months ended June 30, 1997, CRC made initial spread account
deposits totaling $3.2 million. Additional net deposits through the trustees
during the three months ended June 30, 1997 totaled $739,000 resulting in a
total balance in the spread accounts of $7.9 million as of June 30, 1997. In
connection therewith, the specified spread account balance, based upon the
aforementioned specified percentages of the balances of the underlying port-
folios, as of June 30, 1997 was $11.9 million, resulting in additional funding
requirements from future cash flows as of June 30, 1997 of $4.0 million. The
additional funding requirements will decline as the trustees deposit additional
cash flows into the spread account and as the principal balance of the under-
lying finance receivables declines.
The contracts transferred to the Trusts were purchased by CRC from either CAC,
Champion Financial Services ("CFS"), or Ugly Duckling Car Sales Florida, Inc.
("UDCSF"), other subsidiaries of the Company in "true sale" transactions
pursuant to separate purchase agreements. The obligations of CAC, as servicer,
pursuant to the Pooling Agreements are guaranteed by the Company and certain
other subsidiaries of the Company, other than CRC, CAC, CFS, and UDCSF.
The Company recognizes a Gain on Sale of Finance Receivables equal to the
difference between the yield earned on the contract portfolio securitized and
the return on the securities sold. The amount of any Gain on Sale of Loans is
based upon certain estimates, which may not subsequently be realized. The
amount of Gain on Sale of Loans recognized is a function of a number of items
including, but not limited to, the seasoning, remaining term, and weighted
average net interest rate spread of the portfolio sold, as well as the amount
of Allowance for Credit Losses available for release. The amount of Allowance
for Credit Losses available for release is evaluated in light of the adequacy
of the Allowance for Credit Losses as a percentage of contract principal
balances outstanding. To the extent that actual cash flows on a
securitization are materially below estimates, the Company would be required
to revalue the residual portion of the securitization which it retains, and
record a charge to earnings based upon the reduction.
The Company utilizes a number of estimates in arriving at the Gain on Sale of
Loans. With the exception of the Company's first two securitization
transactions which took place during the first six months of 1996, the
estimated cash flows into the Trusts were discounted with a rate of 16%. The
two securitization transactions that took place during the first six months of
1996 were discounted with a rate of 25%. For contracts originated at Company
Dealerships, net losses were estimated using total expected cumulative net
losses at loan origination of approximately 26.0%, adjusted for actual
cumulative net losses prior to securitization. For contracts purchased from
Third Party Dealers, net losses were estimated using total expected cumulative
net losses at loan origination of approximately 13.5%, adjusted for actual
cumulative net losses prior to securitization. Losses are discounted at an
assumed risk free rate. Prepayment rates were estimated to be 1.5% per month
of the beginning of month balance. The assumptions utilized in prior
securitizations may not necessarily be the same as those utilized in future
securitizations, if any. The Company classifies the residuals as
"held-to-maturity" securities in accordance with SFAS No. 115.
The Company securitized an aggregate of $81.1 million in contracts, issuing
$65.2 million in securities to SunAmerica during the three months ended June
30, 1997. Pursuant to these transactions, the Company reduced its Allowance
for Credit Losses by $14.9 million during the three months ended June 30, 1997
and retained a residual in the contracts sold of $27.4 million at June 30,
1997. The Company also recorded Gain on Sale of Loans during the three months
ended June 30, 1997 of $8.2 million, net of expenses, compared to $639,000 for
the same period in 1996. The gain on sale of loans as a percentage of
principal balance securitized in the three month period ended June 30, 1997
was 9.8% and 10.4% for the Company Dealership and Third Party Dealer
portfolios securitized, respectively, compared to 5.7% for the Company
Dealership portfolio securitized in the three month period ended June 30,
1996. The significant difference in the gain percentage is primarily due to
the fact that the portfolios securitized in the three month period ended June
30, 1996 were much more seasoned, resulting in a much shorter remaining life
than the portfolios securitized in the three month period ended June 30, 1997.
During the three months ended June 30, 1997, the Trusts issued certificates to
Sun America at a weighted average yield of 7.46% with the yields ranging from
7.13% to 7.71%, resulting in net spreads, after servicing and trustee fees,
ranging from 13.4% to 17.8%, and averaging 14.2%.
The Company's net earnings may fluctuate from quarter to quarter in the future
as a result of the timing and size of its securitizations.
As of June 30, 1997, the Company has substantially utilized its maximum commit-
ment from, and does not expect to complete any further securitizations with
SunAmerica under the Securitization Program.
Other Income. Other Income consists primarily of servicing income, insurance
premiums earned on force placed insurance policies, earnings on investments
from the Company's cash and cash equivalents, and franchise fees from the
Company's rent-a-car franchisees. This income increased by 553.0% to $2.0
million for three months ended June 30, 1997 from $317,000 for the three
months ended June 30, 1996. The Company services the $210.0 million in
contracts sold for monthly fees ranging from .25% to .33% of beginning of
period principal balances (3% to 4% annualized). Servicing Income for the
three months ended June 30, 1997 increased to $1.1 million from $194,000 in
the three month period ended June 30, 1996. The significant increase is due
to the increase in the principal balance of contracts being serviced pursuant
to the Securitization Program. The increase is also due to an increase in
earnings on investments of $500,000, compared to no investment earnings in the
three month period ended June 30, 1996. The Company no longer actively
engages in the rent-a-car franchise business.
Income before Operating Expenses. As a result of the Company's continued
expansion, Income before Operating Expenses grew by 173.0% to $24.6 million
for the three month period ended June 30, 1997 from $9.0 million for the three
month period ended June 30, 1996. Growth of Sales of Used Cars, Interest
Income on the loan portfolios and Gain on Sale of Loans were the primary
contributors to the increase.
Operating Expenses. Operating Expenses consist of Selling and Marketing
Expenses, General and Administrative Expenses, and Depreciation and
Amortization.
Selling and Marketing Expenses. For the three month periods ended June 30,
1997 and 1996, Selling and Marketing Expenses were comprised almost entirely
of advertising costs and commissions relating to Company Dealership
operations. Selling and Marketing Expenses increased by 84.8% to $2.3 million
for the three month period ended June 30, 1997 from $1.2 million for the three
month period ended June 30, 1996. As a percentage of Sales of Used Cars, these
expenses averaged 8.1% for each of the three month periods ended June 30,
1997 and 1996. On a per unit sold basis, Selling and Marketing Expenses of
Company Dealerships increased marginally to $593 per unit for the three month
period ended June 30, 1997 from $591 per unit for the three month period ended
June 30, 1996.
General and Administrative Expenses. General and Administrative Expenses
increased by 189.6% to $13.6 million for the three month period ended June 30,
1997 from $4.7 million for the three month period ended June 30, 1996. These
expenses represented 30.7% and 23.4% of total revenues for three month periods
ended June 30, 1997, and 1996, respectively. For the three month period ended
June 30, 1997 approximately 36.0% of General and Administrative Expenses were
attributable to Company Dealership sales, approximately 21.9% to portfolio
servicing activities, approximately 23.1% to Third Party Dealer activities,
and approximately 19.0% to corporate overhead. For the three month period
ended June 30, 1996, approximately 45.0% of General and Administrative
Expenses were attributable to Company Dealership sales, approximately 19.6% to
portfolio servicing activities, approximately 13.8% to Third Party Dealer
activities, and approximately 21.6% to corporate overhead. The increase in
General and Administrative Expenses is a result of the Company's increased
number of used car dealerships, and significant expansion of its Third Party
Dealer financing operations as well as continued expansion of infrastructure
to administer growth.
Depreciation and Amortization. Depreciation and Amortization consists of
depreciation and amortization on the Company's property and equipment and
amortization of the Company's goodwill and trademarks. Depreciation and
amortization increased by 131.7% to $855,000 for the three month period ended
June 30, 1997 from $369,000 for the three month period ended June 30, 1996.
The increase was due primarily to the increase in amortization of goodwill
associated with the Company's recent acquisitions, and increased depreciation
expense from the addition of used car dealerships and Third Party Dealer
Branch offices. For the three month period ended June 30, 1997, approximately
41.9% of these expenses were attributable to Company Dealership sales,
approximately 30.5% to portfolio servicing activities, approximately 10.2% to
Third Party Dealer activities, and approximately 17.4% to corporate overhead.
For the three month period ended June 30, 1996, approximately 20.6% of these
expenses were attributable to Company Dealership sales, approximately 51.5% to
portfolio servicing activities, approximately 11.2% to Third Party Dealer
activities, and approximately 16.7% to corporate overhead.
Interest Expense. Interest expense decreased by 65.4% to $567,000 in the
three month period ended June 30, 1997 from $1.6 million in the three month
period ended June 30, 1996. The decrease in 1997, despite significant growth
in Company assets, is the direct result of the two public offerings that were
completed in 1996, and a private placement that was completed in February of
1997 which generated, in the aggregate, approximately $168.1 million in cash,
and the Company's Securitization Program which generated cash from the sale of
Finance Receivables which the Company utilized to pay down debt. Further,
concurrent with the Company's initial public offering on June 21, 1996, the
Company restructured its Subordinated Notes Payable reducing the borrowing
rate on that debt from 18% to 10% per annum.
Income Taxes. Income taxes totaled $3.0 million in the three month period
ended June 30, 1997, an effective rate of 41.1%. In the three month period
ended June 30, 1996, no income tax was incurred due to income tax benefits
realized from the Company's reduction in its valuation allowance for deferred
income tax assets.
RESULTS OF OPERATIONS
FOR SIX MONTHS ENDED JUNE 30, 1997
COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Sales of Used Cars. Sales of Used Cars increased by 52.5% to $46.0 million
for the six month period ended June 30, 1997 from $30.2 million for the six
month period ended June 30, 1996. This growth reflects increases in the number
of used car dealerships in operation, and average unit sales price. Units sold
increased by 49.9% to 6,278 units in the six month period ended June 30, 1997
from 4,188 units in the six month period ended June 30, 1996. Same store unit
sales declined by 18.1% in the six months ended June 30, 1997 compared to the
six months ended June 30, 1996. This is due to the increased emphasis on
underwriting at the Company Dealerships, particularly one dealership where
unit sales decreased by 562 units, which represents 71.0% of the decrease for
the six month period ended June 30, 1997 compared to the same period in 1996.
The average sales price per car increased by 1.7% to $7,329 for the six month
period ended June 30, 1997 from $7,205 for the six month period ended June 30,
1996.
Cost of Used Cars Sold and Gross Margin. The Cost of Used Cars Sold increased
by 42.4% to $24.0 million for the six month period ended June 30, 1997 from
$16.9 million for the six month period ended June 30, 1996. On a per unit
basis, the Cost of Used Cars Sold decreased by 5.0% to $3,823 for the six
month period ended June 30, 1997 from $4,025 for the six month period ended
June 30, 1996. The gross margin on used car sales (Sales of Used Cars less
Cost of Used Cars Sold excluding Provision for Credit Losses) increased by
65.3% to $22.0 million for the six month period ended June 30, 1997 from $13.3
million for the six month period ended June 30, 1996. As a percentage of
sales, the gross margin was 47.8% and 44.1% for the six month periods ended
June 30, 1997 and 1996, respectively. On a per unit basis, the gross margin
per car sold was $3,506 and $3,180 for the six month periods ended June 30,
1997 and 1996, respectively.
Provision for Credit Losses. The Provision for Credit Losses increased by
70.7% to $8.8 million in the six month period ended June 30, 1997 over $5.2
million for the six month period ended June 30, 1996. This includes an
increase of $720,000 in the Provision for Credit Losses in the six month
period ended June 30, 1997 for Third Party Dealer Finance Receivables over the
six month period ended June 30, 1996 when the Company recorded no Provision
for Credit Losses for Third Party Dealer Finance Receivables. On a percentage
basis, the Provision for Credit Losses per unit originated at Company
Dealerships increased by 12.6% to $1,517 per unit in the six month period
ended June 30, 1997 over $1,348 per unit in the six month period ended June
30, 1996. As a percentage of contract balances originated, the Provision for
Credit Losses averaged 17.5% and 19.1%, for the six month periods ended June
30, 1997 and 1996, respectively.
Interest Income. Interest Income consists primarily of interest on finance
receivables from Company Dealership sales, interest on Third Party Dealer
finance receivables, and income from Residuals and Finance Receivables Sold.
Company Dealership Receivables - Interest Income increased by 13.9% to $5.9
million for the six month period ended June 30, 1997 from $5.2 million for the
six month period ended June 30, 1996. Interest Income was adversely affected
by sales of $104.0 million in Company Dealership contract principal balances
since inception of the Securitization Program, including sales of $45.8
million in Company Dealership contract principal balances in the six months
ended June 30, 1997, and will continue to be affected in future periods by
additional securitizations. The Company financed 91.6% of sales revenue and
92.7% of the used cars sold at Company Dealerships for the six month period
ended June 30, 1997 compared to 89.8% of sales revenue and 91.6% of the used
cars sold for the six month period ended June 30, 1996. The average amount
financed increased to $7,244 for the six month period ended June 30, 1997 from
$7,060 for the six month period ended June 30, 1996. As a result of its expan-
sion into markets with interest rate limits, the Company's yield on its Company
Dealership Receivable contract portfolio has trended downward. The effective
yield on Finance Receivables from Company Dealerships was 27.9% and 28.9%, for
the six month periods ended June 30, 1997 and 1996, respectively. The Company
charges the maximum interest rate permitted in those states that impose usury
limits.
Third Party Dealer Receivables - Interest Income increased by 166.4% to $6.7
million for the six month period ended June 30, 1997 from $2.5 million in the
six month period ended June 30, 1996. Interest Income was adversely affected
by sales of $106.0 million in Third Party Dealer contract principal balances
since inception of the Securitization Program, including sales of $96.0 million
in Third Party Dealer contract principal balances in the six months ended June
30, 1997, and will continue to be effected in future periods by additional
securitizations. Interest income has increased in conjunction with the
increases in Third Party Dealer contracts purchased and outstanding. As a
result of its expansion into markets with interest rate limits, the Company's
yield on its Third Party Dealer contract portfolio has trended downward.
Portfolio yield was 25.1%, and 26.5%, for the six month periods ended June 30,
1997 and 1996, respectively.
Gain on Sale of Finance Receivables. Through June 30, 1997, the Company had
securitized an aggregate of $210.0 million in contracts, issuing $170.4
million in securities to SunAmerica. Pursuant to these transactions, the
Company reduced its Allowance for Credit Losses by $21.8 million during the
six months ended June 30, 1997. The Company also recorded Gain on Sale of
Loans during the six months ended June 30, 1997 of $12.8 million, net of
expenses, compared to $1.2 million for the same period in 1996. The Gain on
Sale of Loans as a percentage of principal balance securitized was 9.0% for
each of the Company Dealership and Third Party Dealer portfolios securitized
in the six month period ended June 30, 1997, compared to 4.9% for the Company
Dealership portfolio securitized in the six month period ended June 30, 1996.
The significant difference in the gain percentage is due to the fact that the
portfolios securitized in the first six months of 1996 were more seasoned,
resulting in a much shorter remaining life than the portfolios securitized in
the first six months of 1997.
During the six months ended June 30, 1997, the Company made initial spread
account deposits totaling $3.2 million. Additional net deposits through the
trustees during the six months ended June 30, 1997 totaled $1.9 million
resulting in a total balance in the spread accounts of $7.9 million as of June
30, 1997.
Since inception of the securitization program with Sun America, the Trusts have
issued certificates to Sun America at a weighted average yield of 7.95% with
the yields ranging from 7.13% to 8.62%, resulting in net spreads, after
servicing and trustee fees, ranging from 12.5% to 17.8%, and averaging 14.7%.
Other Income. Other Income which consists primarily of servicing income,
insurance premiums earned on force placed insurance policies, earnings on
investments from the Company's cash and cash equivalents, and franchise fees
from the Company's rent-a-car franchisees increased by 729.2% to $3.6 million
for six months ended June 30, 1997 from $431,000 for the six months ended June
30, 1996. The Company services the $210.0 million in contracts sold for
monthly fees ranging from .25% to .33% of beginning of period principal
balances (3% to 4% annualized). Servicing Income for the six months ended
June 30, 1997 increased to $1.7 million from $248,000 in the six month period
ended June 30, 1996. The significant increase is due to the increase in the
principal balance of contracts being serviced pursuant to the Securitization
Program. The increase is also due to an increase in earnings on investments
of $1.2 million compared to no investment earnings in the six month period
ended June 30, 1996. The Company no longer actively engages in the rent-a-car
franchise business.
Income before Operating Expenses. As a result of the Company's continued
expansion, Income before Operating Expenses grew by 141.7% to $42.2 million
for the six month period ended June 30, 1997 from $17.4 million for the six
month period ended June 30, 1996. Growth of Sales of Used Cars, Interest
Income on the loan portfolios and Gain on Sale of Loans were the primary
contributors to the increase.
Operating Expenses. Operating Expenses consist of Selling and Marketing
Expenses, General and Administrative Expenses, and Depreciation and
Amortization.
Selling and Marketing Expenses. For the six month periods ended June 30, 1997
and 1996, Selling and Marketing Expenses were comprised almost entirely of
advertising costs and commissions relating to Company Dealership operations.
Selling and Marketing Expenses increased by 67.6% to $3.8 million for the six
month period ended June 30, 1997 from $2.3 million for the six month period
ended June 30, 1996. As a percentage of Sales of Used Cars, these expenses
averaged 8.2% and 7.5% for the six month periods ended June 30, 1997, and
1996, respectively. On a per unit sold basis, Selling and Marketing Expenses
of Company Dealerships increased by 11.8% to $604 per unit for the six month
period ended June 30, 1997 from $540 per unit for the six month period ended
June 30, 1996. This increase is primarily due to increased marketing
production costs, and an increase in marketing in the Tampa Bay/St.
Petersburg, San Antonio, Las Vegas, and Albuquerque markets where the Company
initially commenced operations in the six month period ended June 30, 1997,
combined with a decrease in same store unit sales.
General and Administrative Expenses. General and Administrative Expenses
increased by 152.7% to $22.9 million for the six month period ended June 30,
1997 from $9.0 million for the six month period ended June 30, 1996. These
expenses represented 30.5% and 22.9% of total revenues for six month periods
ended June 30, 1997, and 1996, respectively. For the six month period ended
June 30, 1997 approximately 35.6% of General and Administrative Expenses were
attributable to Company Dealership sales, approximately 20.0% to portfolio
servicing activities, approximately 23.8% to Third Party Dealer activities,
and approximately 20.6% to corporate overhead. For the six month period ended
June 30, 1996, approximately 46.7% of General and Administrative Expenses were
attributable to Company Dealership sales, approximately 19.1% to portfolio
servicing activities, approximately 13.4% to Third Party Dealer activities,
and approximately 20.8% to corporate overhead. The increase in General and
Administrative Expenses is a result of the Company's increased number of used
car dealerships and significant expansion of its Third Party Dealer financing
operations as well as continued expansion of infrastructure to administer
growth.
Depreciation and Amortization. Depreciation and Amortization consists of
depreciation and amortization on the Company's property and equipment and
amortization of the Company's goodwill and trademarks. Depreciation and
amortization increased by 108.0% to $1.5 million for the six month period
ended June 30, 1997 from $701,000 for the six month period ended June 30,
1996. The increase was due primarily to the increase in amortization of
goodwill associated with the Company's recent acquisitions, and increased
depreciation expense from the addition of used car dealerships and Third Party
Dealer offices. For the six month period ended June 30, 1997, approximately
38.3% of these expenses were attributable to Company Dealership sales,
approximately 32.0% to portfolio servicing activities, approximately 11.0% to
Third Party Dealer activities, and approximately 18.7% to corporate overhead.
For the six month period ended June 30, 1996, approximately 21.4% of these
expenses were attributable to Company Dealership sales, approximately 52.4% to
portfolio servicing activities, approximately 10.7% to Third Party Dealer
activities, and approximately 15.5% to corporate overhead.
Interest Expense. Interest expense decreased by 59.4% to $1.3 million in the
six month period ended June 30, 1997 from $3.3 million in the six month period
ended June 30, 1996. The decrease in 1997, despite significant growth in
Company assets, is the direct result of the two public offerings that were
completed in 1996, and a private placement that was completed in February of
1997 which generated, in the aggregate, approximately $168.1 million in cash,
and the Company's Securitization Program which generated cash from the sale of
Finance Receivables which the Company utilized to pay down debt. Further,
concurrent with the Company's initial public offering on June 21, 1996, the
Company restructured its Subordinated Notes Payable reducing the borrowing
rate on that debt from 18% to 10% per annum.
Income Taxes. Income taxes totaled $5.2 million in the six month period ended
June 30, 1997, an effective rate of 40.5%. In the six month period ended June
30, 1996, no income tax was incurred due to income tax benefits realized from
the Company's reduction in its valuation allowance for deferred income tax
assets.
ALLOWANCE FOR CREDIT LOSSES
The Company has established an Allowance for Credit Losses ("Allowance") to
cover anticipated credit losses on the contracts currently in its portfolio.
The Allowance has been established through the Provision for Credit Losses,
and through nonrefundable acquisition discounts on contracts purchased from
Third Party Dealers. The Allowance on contracts originated at Company
Dealerships increased to 23.3% of outstanding principal balances as of June
30, 1997 compared to 23.0% as of December 31, 1996. The Allowance as a
percentage of Third Party Dealer contracts increased to 15.5% from 12.7% over
the same period. The Allowance as a percentage of the Company's combined
contract portfolio increased to 20.1% at June 30, 1997 from 13.9% at December
31, 1996. The increase in the Allowance percentage is primarily due to the
composition of the total portfolio with an increase in the Company Dealership
Receivable portfolio relative to the total portfolio compared to December 31,
1996.
The following table reflects activity in the Allowance, as well as information
regarding charge off activity, for the three month periods ended June 30, 1997
and 1996, in thousands.
COMPANY DEALERSHIPS THIRD PARTY DEALERS
------------------------ -------------------
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------
1997 1996 1997 1996
----------- ----------- --------- -------
Allowance Activity:
Balance, Beginning of Period $ 9,223 $ 6,400 $ 6,219 $1,350
Provision for Credit Losses 4,848 2,566 - -
Discount Acquired 6,708 - 5,782 1,109
Reduction Attributable to Loans Sold (8,414) (1,265) (6,509) -
Net Charge Offs (2,436) (1,727) (986) (385)
----------- ---------- --------- -------
Balance, End of Period $ 9,929 $ 5,974 $ 4,506 $2,074
=========== ========== ========= =======
Charge off Activity:
Principal Balances:
Collateral Recovered $ (2,406) $ (1,342) $ (1,210) $ (525)
Collateral Not Recovered (548) (815) (196) (134)
----------- ---------- --------- -------
Total Principal Balances (2,954) (2,157) (1,406) (659)
Accrued Interest - (205) - (29)
Recoveries, Net 518 635 420 303
----------- ---------- --------- -------
Net Charge Offs $ (2,436) $ (1,727) $ (986) $ (385)
=========== ========== ========== =======
Net Charge Offs as % of Average
Principal Outstanding 4.2% 5.8% 2.0% 2.9%
=========== ========== ========== =======
The following table reflects activity in the Allowance, as well as information
regarding charge off activity, for the six month periods ended June 30, 1997
and 1996, in thousands.
COMPANY DEALERSHIPS THIRD PARTY DEALERS
------------------------ ---------------------
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ---------------------
1997 1996 1997 1996
----------- ----------- ----------- --------
Allowance Activity:
Balance, Beginning of Period $ 1,625 $ 7,500 $ 6,500 $ 1,000
Provision for Credit Losses 8,109 5,172 720 -
Discount Acquired 15,309 - 11,132 1,830
Discount accreted to interest income - - (642) -
Reduction Attributable to Loans Sold (11,082) (2,924) (10,742) -
Net Charge Offs (4,032) (3,774) (2,462) (756)
----------- ----------- ----------- --------
Balance, End of Period $ 9,929 $ 5,974 $ 4,506 $ 2,074
=========== =========== =========== ========
Allowance as Percent of Period
Ended Principal Balance 23.3% 23.6% 15.5% 8.1%
=========== =========== =========== ========
Charge off Activity:
Principal Balances:
Collateral Recovered $ (4,546) $ (3,596) $ (2,807) $(1,067)
Collateral Not Recovered (670) (1,277) (660) (225)
----------- ----------- ----------- --------
Total Principal Balances (5,216) (4,873) (3,467) (1,292)
Accrued Interest - (372) - (59)
Recoveries, Net 1,184 1,471 1,005 595
----------- ----------- ----------- --------
Net Charge Offs $ (4,032) $ (3,774) $ (2,462) $ (756)
=========== =========== =========== ========
Net Charge Offs as % of Average
Principal Outstanding 10.4% 11.7% 3.7% 4.0%
=========== =========== =========== ========
The Company's policy is to charge off contracts when they are deemed
uncollectible, but in any event at such time as a contract is delinquent for
90 days.
Net Charge Offs - Company Dealerships. Net Charge Offs for contracts
originated at Company dealerships in the three month period ended June 30,
1997 were 4.2% of the average principal balance outstanding compared to 5.8%
in the three month period ended June 30, 1996.
Recoveries as a percentage of principal balances charged off where collateral
has been recovered averaged 26.0% for the six month period ended June 30, 1997
compared to 40.9% for the six month period ended June 30, 1996. The decrease
is primarily due to a decrease in the amounts received upon disposition of
collateral.
Net Charge Offs - Third Party Dealers. Net Charge Offs for contracts
purchased from Third Party Dealers in the three month period ended June 30,
1997 were 2.0% of the average principal balance outstanding compared to 2.9%
in the three month period ended June 30, 1996. The Company purchases contracts
from Third Party Dealers, at discounts averaging approximately 11.6%,
contracts with average principal balances of approximately $5,550 and bearing
an average APR of 24.1%.
Recoveries as a percentage of principal balances charged off where collateral
has been recovered averaged 35.8% for the six month period ended June 30, 1997
compared to 55.8% for the six month period ended June 30, 1996. The decrease
is primarily due to a decrease in the amounts received upon disposition of
collateral.
The Company's Net Charge Offs on its Third Party Dealer contract portfolio are
significantly lower than those incurred on its Company Dealership contract
portfolio. This is attributable to the relationship of the average amount
financed to the underlying collateral's wholesale value and to a lesser degree
the generally more creditworthy customers served by Third Party Dealers. In
its Third Party Dealer portfolio, the Company generally limits the amount
financed to not more than 120.0% of the wholesale value of the underlying car,
although the Company will make exceptions on a case-by-case basis.
Static Pool Analysis. To monitor contract performance, beginning in June
1995, the Company implemented "static pool" analysis for contracts originated
since January 1, 1993. Static pool analysis is a monitoring methodology by
which each month's originations and subsequent charge offs are assigned a
unique pool and the pool performance is monitored separately. Improving or
deteriorating performance is measured based on cumulative gross and net charge
offs as a percentage of original principal balances, based on the number of
complete payments made by the customer before charge off. The table below sets
forth the cumulative net charge offs as a percentage of original contract
cumulative balances, based on the quarter of origination and segmented by the
number of payments made prior to charge off. For periods denoted by "x", the
pools have not seasoned sufficiently to allow for computation of cumulative
losses. For periods denoted by "-", the pools have not yet attained the
indicated cumulative age. While the Company monitors its static pools on a
monthly basis, for presentation purposes the information in the tables are
presented on a quarterly basis.
Effective January 1, 1997, the Company retroactively implemented a methodology
to more reasonably compute "Monthly Payments Completed by Customer Before
Charge Off" as it relates to loan balances charged off after final insurance
settlements and on loans modified from their original terms. Resulting
adjustments affect the timing of previously reported interim cumulative losses
and do not impact ending cumulative losses. For loan balances charged off
after insurance settlement principal reductions, the revised calculation
method only gives credit for payments actually made by the customer and
excludes credit for reductions arising from insurance proceeds. For modified
loans, completed payments now reflect customer payments made both before and
after the loan was modified. The numbers presented below reflect the adoption
of the revised calculation method.
Currently reported cumulative losses may also vary from those previously
reported due to ongoing collection efforts on charged off accounts and the
difference between final proceeds on the liquidation of repossessed collateral
versus original accounting estimates. Management believes that such variation
will be insignificant.
CONTRACTS ORIGINATED AT COMPANY DEALERSHIPS
The following table sets forth the cumulative net charge offs as a percentage
of original contract cumulative balances, based on the quarter of origination
and segmented by the number of monthly payments completed by customer before
charge off.
POOL'S CUMULATIVE NET LOSSES AS PERCENTAGE OF POOL'S ORIGINAL
AGGREGATE PRINCIPAL BALANCE
MONTHLY PAYMENTS COMPLETED BY CUSTOMER BEFORE CHARGE OFF
- --------------------------------------------------------
0 3 6 12 18 24
---- ----- ----- ----- ----- -----
1993:
1st Quarter 6.9% 18.7% 26.5% 31.8% 33.9% 35.1%
2nd Quarter 7.2% 18.9% 25.1% 29.4% 31.7% 32.1%
3rd Quarter 8.6% 19.6% 23.7% 28.5% 30.7% 31.6%
4th Quarter 6.3% 16.1% 21.6% 27.0% 28.9% 29.5%
1994:
1st Quarter 3.4% 10.0% 13.4% 18.1% 20.5% 21.2%
2nd Quarter 2.8% 10.5% 14.2% 19.7% 21.9% 22.4%
3rd Quarter 2.8% 8.2% 12.2% 16.5% 18.6% 19.5%
4th Quarter 2.4% 7.7% 11.3% 16.9% 20.0% 21.0%
1995:
1st Quarter 1.1% 7.4% 12.5% 17.8% 20.3% 21.4%
2nd Quarter 1.7% 7.1% 12.1% 16.7% 19.6% x
3rd Quarter 2.0% 7.0% 11.1% 18.1% 21.7%. -
4th Quarter 1.2% 5.6% 10.8% 17.7% x -
1996:
1st Quarter 1.4% 7.6% 13.2% 20.5% - -
2nd Quarter 2.2% 9.2% 14.0% x - -
3rd Quarter 1.6% 7.2% 12.9% - - -
4th Quarter 1.6% 8.7% x - - -
1997:
1st Quarter 2.5% x - - - -
2nd Quarter x - - - - -
Trends set forth in the table above indicate a deterioration in the
performance of the associated loan portfolio. Management believes the
deterioration is primarily attributable to less effective collection
procedures resulting from a loan servicing and collection data processing
system conversion in the first and second quarters of 1997 rather than from
any fundamental change in loan quality or underwriting. However, should the
trend continue, an increase in the Allowance for Credit Losses may be
necessary via a charge to the Provision for Credit Losses, and a write-down in
the Residual in Finance Receivables Sold may also be necessary.
Analysis of portfolio delinquencies is also considered in evaluating the
adequacy of the Allowance. Principal balances 31 to 60 days delinquent as a
percentage of total outstanding contract principal balances totaled 4.0% and
2.3% as of June 30, 1997 and December 31, 1996, respectively. Principal
balances 61 to 90 days delinquent as a percentage of total outstanding
contract principal balances totaled 1.4% and 0.6% as of June 30, 1997 and
December 31, 1996, respectively. In accordance with the Company's charge off
policy, there are no accounts more than 90 days delinquent as of June 30, 1997
and December 31, 1996.
CONTRACTS PURCHASED FROM THIRD PARTY DEALERS
Non-refundable acquisition discount ("Discount") acquired totaled $5.8 million
and $1.1 million for the three month periods ended June 30, 1997 and 1996,
respectively. The Discount, attributable to Third Party Dealer branch
purchases, averaged approximately 11.6% as a percentage of principal balances
purchased in the three month period ended June 30, 1997, compared to 11.1% in
the three month period ended June 30, 1996. For the six months ended June 30,
1997 and 1996, Discount acquired totaled $11.1 million and $1.8 million,
respectively. As a percentage of contracts purchased, Discount averaged 11.6%
and 10.6% during the same periods, respectively. Beginning in 1996, the
Company expanded into markets with interest rate limits. While contractual
interest rates on these contracts are limited by law, the Company has been
able to purchase these contracts at a reasonably consistent effective yield
and, therefore, Discounts have trended upward.
The following table sets forth the cumulative net charge offs as a percentage
of original contract cumulative balances, based on the quarter of origination
and segmented by the number of monthly payments completed by customer before
charge off.
POOL'S CUMULATIVE NET LOSSES AS PERCENTAGE OF POOL'S ORIGINAL
AGGREGATE PRINCIPAL BALANCE
MONTHLY PAYMENTS COMPLETED BY CUSTOMER BEFORE CHARGE OFF
- --------------------------------------------------------
0 3 6 12 18 24
---- ---- ---- ----- ---- -----
1995:
2nd Quarter 0.9% 4.1% 5.7% 7.7% 9.4% 10.2%
3rd Quarter 1.2% 3.7% 4.6% 6.3% 7.5% x
4th Quarter 1.0% 4.3% 6.7% 9.2% x -
1996:
1st Quarter 0.8% 3.7% 6.9% 10.8% - -
2nd Quarter 1.6% 6.2% 9.7% x - -
3rd Quarter 1.3% 6.1% 9.4% - - -
4th Quarter 1.5% 7.5% x - - -
1997:
1st Quarter 1.3% x - - - -
2nd Quarter x - - - - -
Trends set forth in the table above indicate a deterioration in the
performance of the associated loan portfolio. Management believes the
deterioration is primarily attributable to less effective collection
procedures resulting from a loan servicing and collection data processing
system conversion in the first and second quarters of 1997 rather than from
any fundamental change in loan quality or underwriting. However, should the
trend continue, an increase in the Allowance for Credit Losses may be
necessary via a charge to the Provision for Credit Losses, and a write-down in
the Residual in Finance Receivables Sold may also be necessary.
Beginning April 1, 1995, the Company initiated a new purchasing program for
Third Party Dealer contracts which included an emphasis on higher quality
contracts. As of March 31, 1995, the Third Party Dealer portfolio originated
under the prior program had a principal balance of $2.0 million, and are not a
material consideration for management's evaluation of the current Third Party
Dealer portfolio. Therefore, contract performance under this prior program has
been excluded from the table above.
While the static pool information is developing, management augments its
evaluation of the adequacy of the Allowance for Third Party Dealers through
comparisons in the characteristics of collateral ratios and borrowers on Third
Party Dealer contracts versus those of the Company Dealership contracts, as
well as through comparisons of portfolio delinquency, actual contract
performance and, to the extent information is available, industry statistics.
Analysis of portfolio delinquencies is also considered in evaluating the
adequacy of the Allowance. Principal balances 31 to 60 days delinquent as a
percentage of total outstanding contract principal balances totaled 3.8% and
3.1% as of June 30, 1997 and December 31, 1996, respectively. Principal
balances 61 to 90 days delinquent as a percentage of total outstanding
contract principal balances totaled 1.7% and 1.1% as June 30, 1997 and
December 31, 1996, respectively. In accordance with the Company's charge off
policy there are no Third Party Dealer contracts more than 90 days delinquent
as of June 30, 1997 and December 31, 1996.
During 1996 and continuing throughout 1997, the Company elected to extend the
time period before repossession is ordered with respect to those customers who
exhibit a willingness and capacity to bring their contracts current. As a
result of this revised repossession policy, delinquencies increased as
expected. Further, the Company underwent a conversion of its loan servicing
system on February 1, 1997. In the opinion of management, delinquencies were
adversely effected by the conversion process due to the need for employees to
completely acquaint themselves with the Company's new systems.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to support increases in its contract portfolio,
expansion of Company Dealerships and Branch Offices, the purchase of
inventories, the purchase of property and equipment, and for working capital
and general corporate purposes. The Company funds its capital requirements
through equity offerings, operating cash flow, the sale of finance
receivables, and supplemental borrowings.
The Company's Net Cash Provided by Operating Activities increased by 155.0% to
$26.0 million for the six month period ended June 30, 1997 from $10.2 million
in the six month period ended June 30, 1996. The increase was primarily due to
an increase in proceeds from sales of finance receivables, provision for
credit losses, and increases in Accounts Payable, Accrued Liabilities and
Other Liabilities offset by increases in Finance Receivables Held for Sale,
Gain on Sale of Finance Receivables, and increases in Inventory and Other
Assets.
The Net Cash Used in Investing Activities increased by 272.3% to $55.4 million
in the six months ended June 30, 1997 from $14.9 million in the six months
ended June 30, 1996. The increase was due to an increase in notes receivable
of $8.9 million, an increase in the purchase of property and equipment of $8.5
million, and the purchase of the assets of Seminole and EZ Plan for $29.9
million.
The Company's Net Cash Provided by Financing Activities increased to $52.1
million in the six months ended June 30, 1997 from $3.5 million in the six
months ended June 30, 1996. This increase was primarily the result of the
$88.7 million in proceeds from the Company's sale of common stock, net of the
$34.5 million of repayment of Notes Payable and the repayment of subordinated
notes payable of $2.0 million.
Revolving Facility. The Company maintains a Revolving Facility with GE Capital
that has a maximum commitment of up to $50.0 million. Under the Revolving
Facility, the Company may borrow up to 65.0% of the principal balance of
eligible Company Dealership contracts and up to 90.0% of the principal balance
of eligible Third Party Dealer contracts. The Revolving Facility expires in
September 1997, at which time the Company has the option to renew the Revolving
Facility for one additional year. The facility is secured by substantially all
of the Company's assets. As of June 30, 1997, the Company's borrowing capacity
under the Revolving Facility was $49.9 million, the aggregate principal amount
outstanding under the Revolving Facility was approximately $100,000, and the
amount available to be borrowed under the facility was $35.5 million. The
Revolving Facility bears interest at the 30-day LIBOR plus 3.60%, payable daily
(total rate of 9.30% as of June 30, 1997).
The Revolving Facility contains covenants that, among other things, limit the
Company's ability to, without GE Capital's consent: (i) incur additional
indebtedness; (ii) make unsecured loans or other advances of money to
officers, directors, employees, stockholders or affiliates in excess of
$25,000 in total; (iii) engage in securitization transactions (other than the
Securitization Program with Sun America, for which GE Capital has consented);
(iv) merge with, consolidate with, acquire or otherwise combine with any other
person or entity, transfer any division or segment of its operations to
another person or entity, or form new subsidiaries; (v) make any change in its
capital structure; (vi) declare or pay dividends except in accordance with all
applicable laws and not in excess of fifteen percent (15%) of each year's net
earnings available for distribution; (vii) make certain investments and
capital expenditures; and (viii) engage in certain transactions with
affiliates. These covenants also require the Company to maintain specified
financial ratios, including a debt ratio of 2.0 to 1 and a net worth of at
least $75,000,000, and to comply with all laws relating to the Company's
business. The Revolving Facility also provides that a transfer of ownership of
the Company that results in less than 15.0% of the Company's voting stock
being owned by Mr. Ernest C. Garcia II, will result in an event of default
under the Revolving Facility.
The Company recently completed negotiations to modify the terms of its
Revolving Facility, and expects to execute a definitive agreement in the near
future. Under the modified terms of the agreement, the commitment will be
raised from $50 million to $100 million, the Company may borrow up to 65.0% of
the principal balance of eligible Company Dealership contracts and up to 86.0%
of the principal balance of eligible Third Party Dealer contracts, the interest
rate will be reduced to 30-day LIBOR plus 3.15%, payable daily, and the
Revolving Facility will expire in December 1998. Certain of the definitive
terms may vary from those set forth herein. No assurance can be given that
definitive agreements will ultimately be executed.
Subordinated Indebtedness and Preferred Stock. The Company has historically
borrowed substantial amounts from Verde Investments Inc. ("Verde"), an
affiliate of the Company. The Subordinated Notes Payable balances outstanding
to Verde totaled $12.0 and $14.0 million as of June 30, 1997 and December 31,
1996, respectively. Prior to June 21, 1996, these borrowings accrued interest
at an annual rate of 18.0%. Effective June 21, 1996 the annual interest rate
on these borrowings was reduced to 10.0%. The Company is required to make
monthly payments of interest and annual payments of principal in the amount of
$2.0 million. This debt is junior to all of the Company's other indebtedness
and the Company may suspend interest and principal payments in the event it is
in default on obligations to any other creditors. Subsequent to June 30,
1997, the Company's Board of Directors approved the prepayment of the $12.0
million in subordinated debt subject to certain conditions including the
Company's completion of a debt offering. No such prepayment has been made as
of the date of filing of this form 10-Q.
On December 31, 1995, Verde converted $10.0 million of subordinated debt to
Preferred Stock of the Company. Prior to June 21, 1996, the Preferred Stock
accrued a dividend of 12.0% annually, increasing one percent per year up to a
maximum of 18.0%. Effective June 21, 1996, the dividend on the Preferred Stock
was decreased from 12.0% to 10.0%. During the six month period ended June 30,
1996, the Company paid a total of $567,000 in dividends to Verde on the
Preferred Stock which was redeemed in November 1996. As the preferred stock
was redeemed in 1996, there were no dividends paid in 1997.
Securitizations. SunAmerica and the Company have entered into the
Securitization Program under which SunAmerica may purchase up to $175.0
million of certificates secured by contracts. The Securitization Program
has provided the Company with a source of funding in addition to the Revolving
Facility. At the closing of each securitization, CRC receives payment from
SunAmerica for the certificates sold (net of Investments Held in Trust). The
Company also generates cash flow under this program from ongoing servicing
fees and excess cash flow distributions resulting from the difference between
the payments received from customers on the contracts and the payments paid to
SunAmerica. In addition, securitization allows the Company to fix its
cost of funds for a given contract portfolio, broadens the Company's capital
source alternatives, and provides a higher advance rate than that available
under the Revolving Facility. As of June 30, 1997, the Company had
substantially utilized its maximum commitment from, and does not expect to
complete any further securitizations with SunAmerica under the Securitization
Program. The Company is actively seeking to identify alternative securitization
participants. Failure to identify new securitization participants and to
periodically engage in securitization transactions will adversely affect the
Company.
In connection with its securitization transactions with SunAmerica, CRC is
required to make an initial cash deposit into an account held by the trustee
(spread account) and to pledge this cash to the Trust to which the finance
receivables were sold. The Trust in turn invests the cash in high quality
liquid investment securities. In addition, the Company (through the trustee)
deposits additional cash flows from the residual to the spread account as
necessary to attain and maintain the spread account at a specified per-
centage of the underlying finance receivables principal balance. In the event
that the cash flows generated by the finance receivables sold to the Trust are
insufficient to pay obligations of the Trust, including principal or interest
due to certificate holders or expenses of the Trust, the trustee will draw
funds from the spread account as necessary to pay the obligations of the Trust.
The spread account must be maintained at a specified percentage of the princi-
pal balances of the finance receivables held by the Trust, which can be
increased in the event delinquencies or losses exceed specified levels. If the
spread account exceeds the specified percentage, the trustee will release the
excess cash to CRC from the pledged spread account.
On July 18, 1997, the Company filed a Form S-3 registration statement for the
purpose of registering up to $200 million of its debt securities in one or
more series at prices and on terms to be determined at the time of sale. The
registration statement was declared effective by the Securities and Exchange
Commission in July 1997.
Capital Expenditures and Commitments. The Company is pursuing an aggressive
growth strategy. In the fourth quarter of 1996, the Company acquired the
leasehold rights to an existing dealership in Las Vegas, Nevada, which
commenced operations in March 1997, and has opened a new dealership in
Phoenix, Arizona and two new dealerships in Albuquerque, New Mexico, and has
three other dealerships in Phoenix, Arizona currently under development. In
addition, the Company opened 30 new Branch Offices during the second quarter
of 1997, and recently completed expansion of its contract servicing and
collection facility.
On April 1, 1997, the Company completed the purchase of substantially all of
the assets of a Company engaged in the business of selling and financing used
motor vehicles, including seven dealerships in San Antonio and a contract
portfolio of approximately $24.3 million for a purchase price of $26.3 million
in cash. In addition, the Company intends to open 10 or more new Branch
Offices and three or more Company Dealerships through the end of 1997. The
Company believes that it will expend approximately $50,000 to establish each
new Branch Office. New Company Dealerships cost approximately $1.5 to $1.7
million to construct (excluding inventory). Further, on July 11, 1997, the
Company entered into an agreement to provide "debtor in possession" financing
to First Merchants Acceptance Corporation in an amount up to $10.0 million.
The Company intends to finance these expenditures through operating cash flows
and supplemental borrowings, including amounts available under the Revolving
Facility and Securitization Program, if any.
SEASONALITY
Historically, the Company has experienced higher revenues in the first two
quarters of the year than in the latter half of the year. The Company believes
that these results are due to seasonal buying patterns resulting in part from
the fact that many of its customers receive income tax refunds during the
first half of the year, which are a primary source of down payments on used
car purchases.
INFLATION
Increases in inflation generally result in higher interest rates. Higher
interest rates on the Company's borrowings would decrease the profitability of
the Company's existing portfolio. The Company will seek to limit this risk
through its Securitization Program and, to the extent market conditions
permit, for contracts originated at Company Dealerships, either by increasing
the interest rate charged, or the profit margin on, the cars sold, or for
contracts acquired from Third Party Dealers, either by acquiring contracts at
a higher discount or with a higher APR. To date, inflation has not had a
significant impact on the Company's operations.
ACCOUNTING MATTERS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128).
This statement is effective for both interim and annual periods ending after
December 15, 1997, and replaces the presentation of "primary" earnings per
share with "basic" earnings per share and the presentation of "fully diluted"
earnings per share with "diluted" earnings per share. Earlier application is
not permitted. When adopted, all previously reported earnings per common
share amounts must be restated based upon the provisions of the new standard.
Management of the Company does not expect that adoption of SFAS No. 128 will
have a material impact on the Company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
No. 130). This statement is effective for interim and fiscal periods
beginning after December 15, 1997, and requires the Company to classify items
of other comprehensive income by their nature in a financial statement, and to
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of the
statement of financial position. Management of the Company does not expect
that the adoption of SFAS No. 130 will have a material impact on the Company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). This statement is
effective for fiscal years beginning after December 15, 1997, and requires the
Company to report information about operating segments in its annual financial
statements and further requires the Company to disclose selected information
about operating segments in interim reports to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Management of the Company does not
expect that the adoption of SFAS No. 131 will have a material impact on the
Company.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company sells its cars on an "as is" basis, and requires all
customers to sign an agreement on the date of sale pursuant to which the
Company disclaims any obligation for vehicle-related problems that
subsequently occur. Although the Company believes that such disclaimers are
enforceable under applicable state, federal and other laws and regulations,
there can be no assurance that they will be upheld in every instance. Despite
obtaining these disclaimers, the Company, in the ordinary course of business,
receives complaints from customers relating to such vehicle-related problems
as well as alleged violations of federal and state consumer lending or other
similar laws and regulations. While most of these complaints are made directly
to the Company or to various consumer protection organizations and are
subsequently resolved, the Company is named as a defendant in civil suits
filed by customers in state, local, or small claims courts. Additionally, in
the ordinary course of business, the Company is a defendant in various other
types of legal proceedings. There can be no assurance that the Company will
not be a target of similar claims and legal proceedings in the future. The
Company believes that the ultimate disposition of these matters on a cumulative
basis will not have a material adverse effect on the Company. However, there
can be no assurance in this regard.
In connection with the Seminole acquisition, a purported creditor of the
sellers filed, on January 21, 1997, to enjoin the sale as a fraudulent
conveyance. Alternatively, the suit seeks to void any transfer of the assets
that has already occurred, to attach the assets that have been transferred, or
to appoint a receiver to take charge of the assets transferred. The Company
has not been named in this action, has received a specific indemnity from the
sellers relating to this action, and has been advised by the sellers that, in
their view, the claim is without merit. The Company believes that the
ultimate disposition of this matter will not have a material adverse effect
on the Company.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 3.a - Certification of Incorporation of the Company
Amended and Restated as of May 15, 1997
Exhibit 3.b - By-laws of the Company
Exhibit 10.a - Employment Agreement between the Company and
Russell Grisanti
Exhibit 10.b - Company's Long-Term Incentive Plan Restated as of
March 14, 1997
Exhibit 10.c - First Amendment to Agreement of Purchase and Sale of
Assets dated June 6, 1997 to agreement dated December
31, 1996.
Exhibit 11 - Statement Regarding Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
Exhibit 99 - Cautionary Statement Regarding Forward Looking
Statements
(b) Reports on Form 8-K.
During the second quarter of 1997, the Company filed, pursuant to Items 5
and 7, four reports on Form 8-K or Form 8-K/A. The first report on Form 8-K
dated April 1, 1997 and filed April 15, 1997, reported the closing of the
acquisition of certain assets from third parties (referred to as E-Z Plan),
indicated that financial information in connection with the E-Z Plan acqui-
sition will be filed later when it is available and incorporated by reference
the previously filed agreement of purchase and sale of assets for the acqui-
sition. The second report on Form 8-K dated April 21, 1997 and filed April 22,
1997, reported that the Company's registration statement relating to the
resale of the common stock issued in a private placement had been declared
effective. The third report on Form 8-K/A2 dated January 15, 1997 and filed
May 14, 1997, revised certain financial statements related to the Seminole
acquisition by the Company. The fourth report on Form 8-K/A1 dated April 1,
1997 and filed June 11, 1997, amended an earlier Form 8-K to add financial
statements and pro forma information related to the E-Z Plan acquisition by
the Company. After the second quarter 1997, the Company filed, pursuant to
Items 5 and 7, one report on Form 8-K. This report on Form 8-K dated July 17,
1997 and filed July 18, 1997, included a copy of the Company's press release
entitled "Ugly Duckling Corporation to Purchase Secured Bank Debt of First
Merchants Acceptance Corporation."
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
Date: August 14, 1997
-----------------
/s/ Steven T. Darak
- ----------------------
Steven T. Darak
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
S-1
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.a Certification of Incorporation of the Company Amended and
Restated as of May 15, 1997
3.b By-Laws of the Company
10.a Employment Agreement Between the Company and Russell Grisanti
10.b Company's Long-Term Incentive Plan Restated as of March 14, 1997
10.c First Amendment to Agreement of Purchase and Sale of Assets
Dated June 6, 1997 to Agreement Dated December 31, 1996.
11 Statement Regarding Computation of Earnings Per Share
27 Financial Data Schedule
99 Cautionary Statement Regarding Forward Looking Statements