THIS REPORT HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION
VIA EDGAR
- -----------------------------------------------------------------------------
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, 1996
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 No X*
---------- ----------
*This is registrant's first required filing.
Indicate the number of shares outstanding of each class of the issuer's
classes of common stock, as of the latest practicable date:
At August 12, 1996, there were 8,691,264 shares of Common Stock, $0.001 par
value, outstanding.
<PAGE>
Ugly Duckling Corporation
FORM 10-Q
TABLE OF CONTENTS
Part I. - FINANCIAL STATEMENTS
Page
Item 1 FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets - June 30, 1996 and
December 31, 1995.....................................................3
Condensed Consolidated Statements of Operations - Three
Months and Six Months Ended June 30, 1996 and June 30, 1995..........4
Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 1996 and June 30, 1995.........................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
<PAGE>
<TABLE>
<CAPTION>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share data)
June 30, December 31,
Assets 1996 1995
------------ --------------
(Unaudited) (Note 1)
<S> <C> <C>
Cash and Cash Equivalents $ 263 $ 1,419
Finance Receivables:
Principal Balances, Net 51,660 49,226
Less: Allowance for Credit Losses (8,048) (8,500)
------------ --------------
Finance Receivables, Net 43,612 40,726
Residual in Finance Receivables Sold 5,001 -
Investments Held in Trust 1,574 -
Inventory, at Cost 6,386 6,329
Property and Equipment, Net 9,477 8,883
Deferred and Refundable Income Taxes 1,151 1,775
Other Assets 2,678 1,658
------------ --------------
$ 70,142 $ 60,790
============ ==============
Liabilities and Stockholders' Equity
Liabilities:
Accounts Payable and Accrued Liabilities $ 7,879 $ 5,169
Notes Payable and Other Liabilities 23,802 33,184
Subordinated Notes Payable 14,000 17,553
------------ --------------
Total Liabilities 45,681 55,906
Stockholders' Equity:
Preferred Stock, $.001 Par Value; Authorized
10,000,000 Shares; 1,000,000 and 1,000,000
Shares Issued and Outstanding at December 31,
1995 and June 30, 1996, respectively 10,000 10,000
Common Stock, $.001 Par Value; Authorized
20,000,000 Shares; 5,579,600 and 8,691,264
Shares Issued and Outstanding at December 31,
1995 and June 30, 1996, respectively. 18,122 127
Accumulated Deficit (3,661) (5,243)
------------ --------------
Total Stockholders' Equity 24,461 4,884
------------ --------------
$ 70,142 $ 60,790
============ ==============
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands, except earnings per common share - Unaudited)
3 Mos 3 Mos 6 Mos 6 Mos
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Dealership Revenues:
Sales of Used Cars $ 15,096 $ 12,765 $ 30,177 $ 22,448
Income on Finance Receivables 2,101 1,911 4,591 3,475
Gain on Sales of Finance
Receivables 639 - 1,178 -
Income on Residual in Finance
Receivables Sold 476 - 579 -
---------- ---------- ---------- ----------
18,312 14,676 36,525 25,923
---------- ---------- ---------- ----------
Cost of Dealership Revenues:
Cost of Used Cars Sold 8,510 7,030 16,858 11,888
Provision for Credit Losses 2,566 2,344 5,172 4,404
---------- ---------- ---------- ----------
11,076 9,374 22,030 16,292
---------- ---------- ---------- ----------
Net Revenues from Dealership
Activities 7,236 5,302 14,495 9,631
Other Income 1,769 299 2,952 597
---------- ---------- ---------- ----------
Income before Operating
Expenses 9,005 5,601 17,447 10,228
Operating Expenses 6,284 4,646 12,010 8,616
---------- ---------- ---------- ----------
Operating Income 2,721 955 5,437 1,612
Interest Expense:
Subordinated Notes Payable 605 802 1,237 1,594
Others 1,033 436 2,052 766
---------- ---------- ---------- ----------
1,638 1,238 3,289 2,360
---------- ---------- ---------- ----------
Income (Loss) before Income
Taxes 1,083 (283) 2,148 (748)
Income Tax Expense (Benefit) - - - -
---------- ---------- ---------- ----------
Net Earnings (Loss) 1,083 (283) 2,148 (748)
Preferred Stock Dividend (267) - (567) -
---------- ---------- ---------- ----------
Net Earnings (Loss) Available
to Common Shares $ 816 ($283) $ 1,581 ($748)
========== ========== ========== ==========
Earnings (Loss) per Common
Share:
Primary $ 0.13 ($0.05) $ 0.26 ($0.13)
========== ========== ========== ==========
Fully Diluted $ 0.13 ($0.05) $ 0.26 ($0.13)
========== ========== ========== ==========
Weighted Average Common and
Common Equivalent Shares
Outstanding:
Primary 6,380 5,892 6,136 5,892
========== ========== ========== ==========
Fully Diluted 6,398 5,892 6,145 5,892
========== ========== ========== ==========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands - Unaudited)
6 Mos 6 Mos
Ended Ended
June 30, June 30,
1996 1995
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Earnings (Loss) $ 2,148 $ (748)
Adjustments to Reconcile Net Earnings (Loss) to Net
Cash Provided by Operating Activities:
Provision for Credit Losses 5,172 4,404
Gain on Sale of Finance Receivables (1,178) -
Income on Residual in Finance Receivables Sold (579) -
Compensation Expense Related to Sale of Common Stock - 45
Increase in Deferred Income Taxes (226) (584)
Depreciation and Amortization 701 545
Decrease in Refundable Income Taxes 1,360 174
Changes in Assets and Liabilities:
Increase in Inventory (57) (1,140)
Decrease (Increase) in Other Assets 136 (252)
Increase in Accounts Payable and Accrued Expenses 2,710 1,706
---------- ----------
Net Cash Provided by Operating Activities 10,187 4,150
---------- ----------
Cash Flows Provided by (Used in) Investing Activities:
Increase in Finance Receivables (44,300) (23,507)
Proceeds from Sales of Finance Receivables 18,410 -
Collections on Finance Receivables 19,010 7,832
Increase in Investments Arising from Finance
Receivables Sold (5,995) -
Repayments of Notes Receivable 63 -
Purchases of Property and Equipment (2,056) (1,838)
---------- ----------
Net Cash Used in Investing Activities (14,868) (17,513)
---------- ----------
Cash Flows from Financing Activities:
Repayments of Obligations Under Capital Leases (79) (51)
Net Additions (Repayments) of Notes Payable (10,221) 11,847
Net Issuance (Repayments) of Subordinated Notes
Payable (553) 1,709
Preferred Stock Dividends Paid (567) -
Proceeds from Issuance of Common Stock 14,945 5
---------- ----------
Net Cash Provided by Financing Activities 3,525 13,510
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents (1,156) 147
Cash and Cash Equivalents at Beginning of Period 1,419 168
---------- ----------
Cash and Cash Equivalents at End of Period $ 263 $ 315
========== ==========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
<PAGE>
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, 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 complete financial statements. In the
opinion of management, such unaudited interim information reflect 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, 1995 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 principals. It is suggested that these financial statements be
read in conjunction with the Company's consolidated financial statements for
the year ended December 31, 1995, included in the Company's prospectus, dated
June 17, 1996, filed with the Securities and Exchange Commission pursuant to
Rule 424(b) of the Securities Act of 1933, as amended.
NOTE 2. SUMMARY OF PRINCIPAL BALANCES, NET
Following is a summary of Principal Balances, net, as of June 30, 1996 and
December 31, 1995.
<TABLE>
<CAPTION>
June 30, Dec. 31,
1996 1995
---------- ----------
<S> <C> <C>
Contractually Scheduled Payments $ 72,363 $ 66,425
Less: Unearned Finance Charges (21,581) (18,394)
---------- ----------
Principal Balances 50,782 48,031
Add: Accrued Interest 548 613
Loan Origination Costs 330 582
---------- ----------
Principal Balances, Net $ 51,660 $ 49,226
========== ==========
</TABLE>
NOTE 3. PRESENTATION OF DEALERSHIP REVENUES AND COST OF REVENUES
Revenues from Company Dealership operations consist of Sales of Used Cars,
Income on Finance Receivables, Gain on Sale of Finance Receivables and Income
on Residual in Finance Receivables Sold. Cost of Revenues of Dealership
operations is comprised of Cost of Used Cars Sold and the Provision for Credit
Losses.
The prices at which the Company sells its cars and the interest rate 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 finance 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 profit/margin in its Statement of Operations
calculated as Sales of Used Cars less Cost of Used Cars Sold.
<PAGE>
NOTE 4. PUBLIC OFFERING
On June 21, 1996, the Company completed its initial public offering of
2,300,000 shares of its Common Stock. Further, on June 28, 1996, the
underwriters of the offering exercised their over-allotment option to purchase
an additional 345,000 shares of the Company's Common Stock. The net proceeds
from the offering (approximately $14.9 million) were used to reduce borrowings
under the Company's revolving credit facility.
Effective upon the closing of the initial public offering, SunAmerica Life
Insurance Company ("SunAmerica") converted $3.0 million of subordinated debt
into Common Stock at the initial public offering price. SunAmerica received
444,444 shares of Common Stock in the Company. The 12.5% subordinated note
was originated in August of 1995.
Effective upon the closing of the initial public offering, Verde Investments,
Inc.(Verde), an affiliate of the Company whose sole shareholder is also the
Chairman, Chief Executive Officer, and majority stockholder of the Company,
lowered the rental rates on eleven properties leased to the Company by Verde.
Verde also granted the Company the right to purchase nine properties owned by
Verde and assign its leasehold interests in the two properties it subleases to
the Company. In addition, the interest rate on $14.0 million of subordinated
debt payable to Verde was lowered from 18% to 10%.
On June 21, 1996, prior to the closing of the initial public offering, the
Board of Directors declared a dividend on the Company's Preferred Stock at an
annualized rate of 12% in the amount of $267,000 covering the period from
April 1, 1996 through June 21, 1996. Effective upon completion of the
offering, the dividend rate on $10.0 million of Preferred Stock held by Verde
was lowered to 10% through the end of 1997. Future dividends shall be paid
when declared by a majority of the Company's independent Board of Directors.
The Company expects to pay the Preferred Stock dividend each quarter.
NOTE 5. COMMON STOCK EQUIVALENTS
Net Earnings (Loss) 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 6. RECLASSIFICATIONS
Certain reclassifications have been made to previously reported information to
conform with classifications made as of June 30, 1996 and for the three and
six month periods then ended.
<PAGE>
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.
Forward looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results could differ materially from those set forth in, contemplated by, or
underlying the forward looking statements. Statements in this 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 factors that could cause actual results to
differ materially from those expressed in such forward looking statements are
set forth in Exhibit 99 to this Quarterly Report on Form 10-Q.
INTRODUCTION
The Company is a fully integrated used car sales and finance company that
operates the largest chain of "buy here-pay here" used car dealerships in
Arizona. As part of its activities, the Company underwrites, finances, and
services installment contracts generated by its dealerships ("Company
Dealerships") and by third party used car dealerships ("Third Party Dealers")
located in selected markets throughout the United States. The Company targets
customers who have limited credit histories, low incomes, or past credit
problems ("Sub-Prime Borrowers").
BUSINESS OPERATIONS 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 (the "Gilbert
Dealership").
The Gilbert Dealership was used by the Company to evaluate the sale of later
model used cars. These cars had an average age of approximately three years,
which is two to five years newer than the cars typically sold at Company
Dealerships, and cost more than twice that of typical Company Dealership cars.
The Company determined that its standard financing program could not be
implemented on these higher cost cars. Furthermore, operation of this
dealership required additional corporate infrastructure to support its market
niche, such as distinct advertising and marketing programs, which the Company
was unable to leverage across its other operations. Accordingly, the Company
terminated this program and sold the land, dealership building, and other
assets to a third party. During the three months ended June 30, 1995, the
Gilbert Dealership produced sales of $2.6 million (average of $9,256 per car
sold) and gross profits (Sales of Used Cars less Cost of Used Cars Sold) of
$697,000 (average of $2,462 per car sold), and the Company incurred selling
and marketing expenses of $177,000 (average of $625 per car sold). During the
six months ended June 30, 1995, the Gilbert Dealership produced sales of $3.6
million (average of $8,191 per car sold) and gross profits of $1.1 million
(average of $2,591 per car sold), and the Company incurred selling and
marketing expenses of $217,000 (average of $492 per car sold). The pro forma
results of operations discussed below have been adjusted as if the Gilbert
Dealership had been terminated as of December 31, 1994, as management believes
these pro forma results are more indicative of ongoing operations.
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 a portfolio of
approximately $1.9 million in sub-prime contracts averaging $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 for purchasing
contracts from Third Party Dealers and by June 30, 1996 had opened thirteen
Third Party Dealer contract buying offices ("Branch Offices") in six states
serving over 500 Third Party Dealers.
INITIAL PUBLIC OFFERING AND RECAPITALIZATION TRANSACTIONS On June 21, 1996,
the Company completed its initial public offering of 2,300,000 shares of
Common Stock. On June 28, 1996, the underwriters of the offering exercised
their overallotment option to purchase an additional 345,000 shares of the
Company's Common Stock. The net proceeds from the offering (approximately
$14.9 million) were used to reduce borrowings under the Company's revolving
credit facility ("Revolving Facility") with General Electric Capital
Corporation ("GE Capital").
Effective upon the closing of the initial public offering, Verde Investments,
Inc. ("Verde"), an affiliate of the Company whose sole stockholder is the
Chairman, Chief Executive Officer, and majority stockholder of the Company,
agreed to sell to the Company, subject to financing, nine properties owned by
Verde and leased to the Company at the lower of $7.45 million or the appraised
value (as determined by an independent third party), and, pending such sale,
to lower the rental rates on such properties to an aggregate of $745,000 per
year, which the Company believes approximates the financing costs to be
incurred in connection with the purchase of such properties. In addition,
Verde agreed to assign to the Company its leasehold interests in two
properties it previously subleased to the Company, lowered the interest rate
on $14 million of subordinated debt payable to Verde from 18% to 10% per
annum, and lowered the dividend rate on $10 million of Preferred Stock held by
Verde (which previously accrued a dividend of 12% annually, increasing one
percent annually to a maximum of 18%) to 10% through 1997. Also effective
upon the closing of the offering, SunAmerica Life Insurance Company
("SunAmerica"), a significant funding source of the Company, converted $3.0
million of subordinated debt into Common Stock at the public offering price.
GROWTH IN FINANCE RECEIVABLES Total assets of the Company grew from $60.8
million at December 31, 1995 to $70.1 million at June 30, 1996 primarily as a
result of growth in finance receivable related assets. This growth excludes
$20.5 million in principal balances outstanding and serviced by the Company
under securitization sales agreements at June 30, 1996, all of which were sold
during 1996.
<PAGE>
The following table reflects finance receivables principal balances for both
managed and owned contracts as of June 30, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
FINANCE RECEIVABLES PRINCIPAL BALANCES
June 30, June 30, December 31 December 31
1996 1996 1995 1995
----------- --------- ------------- ------------
Principal Number Principal Number
<S> <C> <C> <C> <C>
(000 (000
Source of Contracts: Omitted) (Actual) Omitted) (Actual)
- --------------------------- ----------- --------- ------------- ------------
Originated at Company
Dealerships $ 45,776 9,407 $ 34,227 8,049
Purchased From Third Party
Dealers 25,476 5,028 13,804 2,733
----------- --------- ------------- ------------
Total Managed Portfolio 71,252 14,435 48,031 10,782
Less Balances on Portfolio
Securitized and Sold (20,470) (5,154) - -
----------- --------- ------------- ------------
Total Owned Portfolio $ 50,782 9,281 $ 48,031 10,782
=========== ========= ============= ============
</TABLE>
The following tables detail finance receivables activity for contracts
originated at Company Dealerships and purchased from Third Party Dealers for
the three and six months ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
FINANCE RECEIVABLE PRINCIPAL BALANCES ORIGINATED/PURCHASED
3 Mos 3 Mos 3 Mos 3 Mos
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1996 1996 1995 1995
----------- --------- ----------- ---------
Principal Number Principal Number
<S> <C> <C> <C> <C>
(000 (000
Source of Contracts: Omitted) (Actual) Omitted) (Actual)
- -------------------------- ----------- --------- ----------- ---------
Originated at Company
Dealerships $ 13,462 1,852 $ 9,837 1,686
Purchased From Third Party
Dealers 10,017 1,844 4,573 760
----------- --------- ----------- ---------
$ 23,479 3,696 $ 14,410 2,446
=========== ========= =========== =========
</TABLE>
<TABLE>
<CAPTION>
FINANCE RECEIVABLE PRINCIPAL BALANCES ORIGINATED/PURCHASED
6 Mos 6 Mos 6 Mos 6 Mos
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1996 1996 1995 1995
----------- --------- ----------- ---------
Principal Number Principal Number
<S> <C> <C> <C> <C>
(000 (000
Source of Contracts: Omitted) (Actual) Omitted) (Actual)
- -------------------------- ----------- --------- ----------- ---------
Originated at Company
Dealerships $ 27,097 3,838 $ 18,002 3,156
Purchased From Third Party
Dealers 17,203 3,112 5,505 1,244
----------- --------- ----------- ---------
$ 44,300 6,950 $ 23,507 4,400
=========== ========= =========== =========
</TABLE>
<PAGE>
RESULTS OF OPERATIONS
FOR THREE MONTHS ENDED JUNE 30, 1996
COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
DEALERSHIP REVENUES
SALES OF USED CARS - Sales of Used Cars during the three months ended June 30,
1996, were $15.1 million versus sales of $10.1 million (pro forma) for the
comparable three month period in 1995, reflecting an increase in same store
sales of 49.5%. During the three months ended June 30, 1996, 2,069 used cars
were sold with an average sales price of $7,296. For the three months ended
June 30, 1995, 1,674 (pro forma) used cars were sold with an average sales
price of $6,061 (pro forma). The increase in revenue is attributable both to
Management's decision to sell higher quality vehicles, resulting in a higher
average sales price, and the increase in the number of cars sold which is
attributed to the success of the Company's business strategy, most notably its
advertising and marketing programs.
The Company's sales strategy is to provide financing to customers with poor
credit histories or who are unable to obtain financing through traditional
sources. The Company Dealerships financed approximately 89.2% of sales
revenue and 89.5% of the units sold for three month period ended June 30, 1996
compared to 89.0% (pro forma) of sales revenue and 93.2% (pro forma) of the
units sold for the comparable period in 1995.
INCOME ON FINANCE RECEIVABLES - Income on Finance Receivables from Dealership
sales was $2.1 million for the three months ended June 30, 1996 versus $1.9
million for the comparable three month period in 1995, an increase of 10.5%.
The $200,000 increase in income was primarily due to the $2.8 million increase
in average contract balances outstanding during the period ended June 30,
1996, which was impacted by the Company's sale of $11.1 million in receivables
in mid-June 1996. The Company Dealership portfolio of contracts had an
average balance of $29.5 million for the three month period ending June 30,
1996 with an effective yield for the three month period of 28.9%. The Company
Dealership portfolio averaged $26.7 million for the three months ended June
30, 1995 with an effective yield for the period of 29.0%.
GAIN ON SALES OF FINANCE RECEIVABLES - For the three months ended June 30,
1996, the Company recorded a Gain on Sale of Finance Receivables of $639,000.
The Company completed its first securitization (Trust 1996A or Trust) in March
1996. Under terms of the Trust, for a period of 90 days following the
original closing date, the Company was allowed to sell additional contracts to
the Trust under the same terms and conditions as the original sale. In June,
1996, the Company sold additional contracts to the Trust having an aggregate
principal balance of approximately $11.1 million. The Company reduced its
Allowance for Credit Losses (Allowance) by $1.3 million and retained a
residual interest in the contracts sold of $2.4 million. As was the case for
the sale closed in the first quarter of 1996, the estimated excess cash flows
in the Trust were discounted at 25% in determining gain on sale. The Company
plans to undertake a securitization transaction approximately every three to
four months, but future securitizations may include the sale of receivables
acquired from Third Party Dealers.
INCOME ON RESIDUAL IN FINANCE RECEIVABLES SOLD - Income on Residual in Finance
Receivables Sold totaled $476,000 for the three months ended June 30, 1996.
With the close of the second sale of contracts to the Trust, the Company's
Residual in Finance Receivables Sold asset increased to $5.0 million at June
30, 1996 from $2.6 million at March 31, 1996.
<PAGE>
COST OF DEALERSHIP REVENUES
COST OF USED CARS SOLD - Cost of Used Cars Sold were $8.5 million for the
three month period ended June 30, 1996 versus $5.1 million (pro forma) for the
comparable three month period in 1995, an increase of 66.7%. This increase is
attributable to both the increase in the number of used cars sold and an
increase in, on a percentage basis, the average purchase price of the used
cars sold. On a percentage basis, Cost of Used Cars Sold increased from 50.3%
(pro forma) of sales for the three month period ended June 30, 1995 to 56.4%
of sales for the comparable period in 1996. In 1996, Management continued its
strategy to increase the quality, and therefore the cost, of cars sold while
targeting a consistent dollar gross margin. For the three months ended June
30, 1996, on a per car sold basis, the average gross margin was $3,183 versus
$3,010 (pro forma) for the same period in 1995.
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. The Company maintains an Allowance for Credit Losses to absorb such
losses. To fund the Allowance as it relates to cars financed through Company
Dealerships, a direct charge to revenues is recorded through the Provision for
Credit Losses for each contract originated. The Provision for Credit Losses
(Provision) was $2.6 million for the three months ended June 30, 1996 versus
$2.1 million (pro forma) in the comparable three month period in 1995, an
increase of 23.8% (pro forma). This increase is attributable to the increases
in both the number of contracts originated as well as the average amount
financed in the three month period ending June 30, 1996. As a percentage of
sales financed, the Provision averaged 19.1% for the three months ended June
30, 1996 versus 23.8% (pro forma) for the comparable three month period in
1995. The decrease in the percentage provided in 1996 reflects the positive
trends in net charge offs as supported by the Company's static pool loss
experience as well as an increase in the ratio of the wholesale value of the
collateral to the amount financed (resulting from an increase in the Cost of
Used Cars Sold versus Sales of Used Cars). The average amount financed
increased 25.6% to $7,268 for the three months ended June 30, 1996 versus
$5,786 (pro forma) for the comparable three month period in 1995. Also see
the discussion of the "Allowance for Credit Losses" below.
OTHER INCOME
Other Income, which consists primarily of income on Third Party Dealer finance
receivables, increased in conjunction with Third Party Dealer contracts
originated and outstanding to $1.5 million for the three months ended June 30,
1996 from $221,000 for the three months ended June 30, 1995, an increase of
579%. The Third Party Dealer portfolio had an average balance of $22.9
million for the three month period ending June 30, 1996, with an effective
yield for the three month period of 26.2%. This portfolio averaged $2.9
million for the three months ended June 30, 1995, with an effective yield of
30.5%
INCOME BEFORE OPERATING EXPENSES
As a result of the Company's continued expansion, Income before Operating
Expenses grew to $9.0 million for the three months ended June 30, 1996 versus
$5.1 million (pro forma) for the three months ended June 30, 1995. Net
Revenue from Dealership Activity was the primary contributor to the increase.
The increase also reflects the growth of the Company's Third Party Dealer
operations.
<PAGE>
OPERATING EXPENSES
Operating Expenses consist of selling and marketing expenses, general and
administrative expenses and depreciation and amortization. Operating Expenses
were $6.3 million for the three months ended June 30, 1996 versus $4.6 million
for the three months ended June 30, 1995, an increase of 37.0%. The increase
reflects additional expenses attributable to the expansion of the Third Party
Dealer network from one branch office at March 31, 1995 to thirteen as of June
30, 1996 with an additional eight branches slated to open in July 1996, for
which pre-opening expenses in excess of $60,000 were incurred. This increase
also reflects the continued development of corporate infrastructure, including
the implementation of contract servicing facilities and systems, to
accommodate anticipated future growth. Expenses attributable to the Company
Dealership sales and financing activities, including real property rent
expense, also increased proportionately to the Company Dealership revenue
growth. Through June 21, 1996, the Company Dealerships paid rents to Verde
based on a percentage of Company Dealership revenues. Effective June 21, 1996
these rents have been reduced to a fixed amount. Had the new fixed rents been
in place for the three months ended June 30, 1996 and 1995, rent expense for
the three months periods would have been reduced by $481,000 and $347,000 (pro
forma), respectively. The Company also continues to expand its advertising
and marketing efforts.
Operating Expenses represented 31.3% of total revenues for the three months
ended June 30, 1996 and 31.0% of total revenue for the three months ended June
30, 1995.
INTEREST EXPENSE
SUBORDINATED NOTES PAYABLE - Interest expense on Subordinated Notes Payable
totaled $605,000 for the three months ended June 30, 1996 versus $802,000 for
the comparable three month period in 1995. The decrease was due to a decrease
in the average Subordinated Note balance from $17.8 million for the three
months ended June 30, 1995 to $14 million for the three months ended June 30,
1996. In addition, the interest rate on the Subordinated Note was decreased
from 18% to 10% effective June 21, 1996. Had the rate decrease been effective
for the three month periods ended June 30, 1996 and 1995, interest expense
would have been reduced by $269,000 and $357,000, respectively.
INTEREST, OTHERS - Interest, Others consisted primarily of the cost of
borrowing under the Revolving Facility with GE Capital. Interest, Others
totaled $1.0 million for the three months ended June 30, 1996 versus $436,000
for the comparable three month period in 1995. For the three month period
ended June 30, 1996, the amount outstanding under the Revolving Facility
averaged $34.1 million with an average borrowing cost of 10.4%. For the three
month period ended June 30, 1995, the amount outstanding under the Revolving
Facility averaged $16.3 million with an average borrowing rate of 11.2%.
RESULTS OF OPERATIONS
FOR SIX MONTHS ENDED JUNE 30, 1996
COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
DEALERSHIP REVENUES
SALES OF USED CARS - Used Car Sales during the six months ended June 30, 1996,
were $30.2 million versus sales of $18.8 million (pro forma) for the
comparable six month period in 1995, reflecting an increase in same store
sales of over 60.6%. During the six months ended June 30, 1996, 4,188 used
cars were sold with an average sales price of $7,205. For the six months
ended June 30, 1995, 3,170 (pro forma) used cars were sold with an average
sales price of $5,942 (pro forma). The increase in revenue is attributable
both to Management's decision to sell higher quality vehicles, resulting in a
higher average sales price, and the increase in the number of cars sold, which
is attributed to the success of the Company's business strategy, most notably
its advertising and marketing programs.
<PAGE>
The Company Dealerships financed approximately 89.8% of sales revenue and
91.6% of the units sold for six month period ended June 30, 1996 compared to
87.3% (pro forma) of sales revenue and 91.5% (pro forma) of the units sold for
the comparable period in 1995.
INCOME ON FINANCE RECEIVABLES - Income on Finance Receivables from Dealership
sales was $4.6 million for the six months ended June 30, 1996 versus $3.5
million for the six month period ended June 30, 1995, an increase of 31.4%.
The $1.1 million increase in income was primarily due to the $8.1 million
increase in average contract balances outstanding during the six months ended
June 30, 1996 as impacted by the Company's sale of $13.0 million in
receivables in mid-March 1996 and an additional $11.1 million in receivables
in mid-June 1996. The Company Dealership portfolio of contracts had an
average balance of $32.1 million for the six month period ending June 30, 1996
with an effective yield for the six month period of 28.9%. The Company
Dealership portfolio averaged $24.0 million for the six months ended June 30,
1995 with an effective yield for the period of 28.9%
GAIN ON SALES OF FINANCE RECEIVABLES - The Company completed the
securitization and sale of approximately $24.1 million in contracts originated
at its Dealerships during the six month period ended June 1996 from which the
Company recognized gains on sales of $1.2 million.
INCOME ON RESIDUAL IN FINANCE RECEIVABLES SOLD - Income on Residual in Finance
Receivables Sold totaled $579,000 for the six months ended June 30, 1996.
With the close of the second sale of contracts to Trust 1996A in mid-June
1996, the Company's Residual in Finance Receivables Sold asset increased to
$5.0 million at June 30, 1996 from its original balance of approximately $2.6
million at March 12, 1996.
COST OF DEALERSHIP REVENUES
COST OF USED CARS SOLD - Cost of Used Cars Sold was $16.8 million for the six
month period ended June 30, 1996 versus $9.4 million (pro forma) for the
comparable six month period in 1995, an increase of 78.7%. This increase is
attributable to both the increase in the number of used cars sold and an
increase in, on a percentage basis, the average purchase price of the used
cars sold. On a percentage basis, Cost of Used Cars Sold increased from 50.0%
(pro forma) of sales for the six month period ended June 30, 1995 to 55.9% of
sales for the comparable period in 1996. In 1996, Management continued its
strategy to increase the quality, and therefore the cost, of cars sold while
targeting a consistent dollar gross margin. For the six months ended June 30,
1996, on a per car sold basis, the average gross margin was $3,180 versus
$2,971 (pro forma) for the same period in 1995.
PROVISION FOR CREDIT LOSSES - The Provision was $5.2 million for the six
months ended June 30, 1996 versus $4.0 million (pro forma) in the comparable
six months in 1995, an increase of 30.0%. This increase is attributable to
the increases in both the number of contracts originated as well as the
average amount financed in the six month period ending June 30, 1996. As a
percentage of sales financed, the Provision averaged 19.1% for the six months
ended June 30, 1996 versus 24.4% (pro forma) for the comparable six month
period in 1995. The decrease in the percentage provided in 1996 reflects the
positive trends in net charge offs as supported by the Company's static pool
loss experience as well as an increase in the ratio of the wholesale value of
the collateral to the amount financed (resulting from an increase in the Cost
of Used cars Sold versus Sales of Used Cars). The average amount financed
increased 24.4% to $7,060 for the six months ended June 30, 1996 versus $5,674
(pro forma) for the comparable six month period in 1995. Also, see the
discussion of the "Allowance for Credit Losses" below.
<PAGE>
OTHER INCOME - Other Income, which consists primarily of income on Third
Party Dealer finance receivables, increased to $2.5 million for the six months
ended June 30, 1996 from $438,000 for the six months ended June 30, 1995, an
increase of 471%. The Third Party Dealer portfolio of contracts had an
average balance of $18.8 million for the six month period ended June 30, 1996,
with an effective yield for the six month period of 26.5%. This portfolio
averaged $2.8 million for the six months ended June 30, 1995, with an
effective yield for the period of 30.5%.
INCOME BEFORE OPERATING EXPENSES
As a result of the Company's continued expansion, Income before Operating
Expenses grew to $17.4 million for the six months ended June 30, 1996, versus
$9.5 million (pro forma) for the six months ended June 30, 1995. Net Revenue
from Dealership Activity was the primary contributor to the increase. The
increase also reflects the growth of the Company's Third Party Dealer
operations.
OPERATING EXPENSES - Operating Expenses consist of selling and marketing
expenses, general and administrative expenses and depreciation and
amortization. Operating Expenses were $12.0 million for the six months ended
June 30, 1996, versus $8.6 million for the six months ended June 30, 1995, an
increase of 39.5%. The increase reflects additional expenses attributable to
the expansion of the Third Party Dealer network from one branch office at
March 31, 1995, to thirteen as of June 30, 1996 with an additional eight
branches slated to open in July 1996, for which pre-opening expenses in excess
of $60,000 were incurred. The increase also reflects the continued development
of corporate infrastructure, including the implementation of contract
servicing facilities and systems, to accommodate anticipated future growth.
Expenses attributable to the Company Dealership sales and financing
activities, including real property rent expense, also increased
proportionately to the Company Dealership revenue growth. Until June 21,
1996, the Company Dealerships paid rents to Verde based on a percentage of
Company Dealership total revenues. Effective June 21, 1996, these rents have
been reduced to a fixed amount. Had the new fixed rents been in place for the
six months ended June 30, 1996 and 1995, rent expense for the six month
periods would have been reduced by $961,000 and $653,000 (pro forma),
respectively. The Company also continues to expand its advertising and
marketing efforts.
Operating Expenses represented 30.4% of total revenues for the six months
ended June 30, 1996 and 32.5% of total revenue for the six months ended June
30, 1995.
INTEREST EXPENSE
SUBORDINATED NOTES PAYABLE - Interest expense on Subordinated Notes Payable
totaled $1.2 million for the six months ended June 30, 1996 versus $1.6
million for the comparable six month period in 1995. The decrease was due to
a decrease in the average Subordinated Note balance from $17.8 million for the
six months ended June 30, 1995 to $13.8 million for the six months ended June
30, 1996. In addition, effective June 21, 1996 the interest rate on the
Subordinated Note was decreased from 18% to 10%. Had the interest rate
decrease been effective for the six month periods ended June 30, 1996 and
1995, interest expense would have been reduced $550,000 and $709,000,
respectively.
INTEREST, OTHERS - Interest, Others consisted primarily of the cost of
borrowing under the Revolving Facility with GE Capital. Interest, Others
totaled $2.1 million for the six months ended June 30, 1996 versus $766,000
for the comparable six month period in 1995. For the six month period ended
June 30, 1996 the amount outstanding under the Revolving Facility averaged
$34.3 million with an average borrowing rate of 10.5%. For the six month
period ended June 30, 1995, the amount outstanding under the Revolving
Facility averaged $13.5 million with an average borrowing rate of 11.3%.
<PAGE>
ALLOWANCE FOR CREDIT LOSSES
The Company has established an Allowance for Credit Losses (Allowance) to
cover anticipated credit losses on contracts currently in its portfolio. The
Allowance is established through a Provision for Credit Losses on contracts
originated at Company Dealerships, and through Nonrefundable Acquisition
Discounts (Discount) on contracts purchased from Third Party Dealers. The
aggregate Allowance as a percentage of principal balances was 15.6% as of June
30, 1996 and 16.7% as of December 31, 1995. For the reasons discussed below,
since December 31, 1995, the Allowance as a percentage of principal balances
for both contracts originated at Company Dealerships and for those purchased
from Third Party Dealers has increased while the total Allowance as a
percentage of total principal has decreased. This percentage decrease in the
Allowance relative to the total portfolio is due to the disproportionate
growth in the portfolio arising from contracts purchased from Third Party
Dealers, for which a lower level of Allowance is required.
CONTRACTS ORIGINATED AT COMPANY DEALERSHIPS - The Allowance on contracts
originated at Company Dealerships increased to 23.6% of outstanding principal
balance as of June 30, 1996. The Allowance on contracts originated at Company
Dealerships was 23.0% and 21.9% as of March 31, 1996 and December 31, 1995,
respectively.
The following table reflects activity in the Allowance, as well as information
regarding charge off activity, on contracts originated at Company Dealerships
for the three and six month periods ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
3 Mos 3 Mos 6 Mos 6 Mos
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balances at beginning of
period $ 6,400 $ 6,745 $ 7,500 $ 6,050
Provision for credit losses 2,566 2,344 5,172 4,404
Reduction attributable to
loans sold (1,265) - (2,924) -
Net Charge offs (1,727) (1,214) (3,774) (2,579)
---------- ---------- ---------- ----------
Balances at end of
period $ 5,974 $ 7,875 $ 5,974 $ 7,875
========== ========== ========== ==========
Charge off Activity:
- ---------------------------
Principal Balances:
Collateral Repossessed $ (1,342) $ (1,345) $ (3,596) $ (2,498)
Other (815) (489) (1,277) (904)
---------- ---------- ---------- ----------
Total Principal Balances (2,157) (1,834) (4,873) (3,402)
Accrued interest (205) (123) (372) (243)
Recoveries, net 635 743 1,471 1,066
---------- ---------- ---------- ----------
Net Charge Offs $ (1,727) $ (1,214) $ (3,774) $ (2,579)
========== ========== ========== ==========
</TABLE>
For contracts originated at Company Dealerships, static pool loss experience
trends for both the three and six month periods ended June 30, 1996 continued
to improve. The following table details the Company's historical loss
experience on a static pool basis beginning January 1993 on contracts
originated at Company Dealerships.
<PAGE>
<TABLE>
<CAPTION>
Pool's Cumulative Net Losses as Percentage of Pool's Original
Aggregate Principal Balance
Payments Completed by Customer Before Charge Off
0 3 6 12 18 24
--------- ---------- --------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
1993:
1st Quarter 6.6% 18.3% 26.6% 33.2% 35.1% 35.3%
2nd Quarter 7.7% 18.4% 26.2% 30.6% 32.1% 32.3%
3rd Quarter 8.5% 19.9% 25.2% 30.4% 31.5% 31.7%
4th Quarter 7.1% 16.9% 23.4% 27.7% 28.9% 29.5%
1994:
1st Quarter 3.5% 10.8% 14.3% 17.7% 19.3% x
2nd Quarter 3.7% 11.3% 15.3% 19.7% 21.7% -
3rd Quarter 3.5% 8.5% 12.9% 17.0% x -
4th Quarter 2.9% 9.1% 13.3% 18.0% - -
1995:
1st Quarter 1.6% 8.3% 13.8% x - -
2nd Quarter 2.5% 7.9% 12.7% - - -
3rd Quarter 1.9% 6.5% x - - -
4th Quarter 1.1% x - - - -
1996:
1st Quarter 1.0% - - - - -
</TABLE>
For periods denoted by an "x", the pools have not seasoned sufficiently to
allow for computation of cumulative losses. With respect to periods denoted
by a "-", the pools have not yet attained the indicated cumulative age.
However, management has factored the improved trends indicated by its static
pool analysis into its determination of the adequacy of the Allowance for
Credit Losses for these periods.
Major factors in determining the collectability and performance of the
Company's contract portfolio are current delinquencies and historical trends.
The following table details portfolio delinquency ratios as of June 30, 1996
with comparative information for March 31, 1996 and December 31, 1995. Trend
analysis reveals no significant changes in the expected collectability and
performance of the portfolio.
<TABLE>
<CAPTION>
June 30, March 31, December 31,
1996 1996 1995
--------- ---------- -------------
<S> <C> <C> <C>
Delinquency Percentages:
Principal balances current 96.2% 96.3% 94.7%
Principal balances 31 to 60 days 2.8% 2.6% 4.2%
Principal balances over 60 days 1.0% 1.1% 1.1%
</TABLE>
Due primarily to its customers using income tax refunds as a source of down
payments, Company car sales and resulting finance contracts originated are
higher in the first six months of the year. Accordingly, the increase in the
Allowance at June 30, 1996 over March 31, 1996 and December 31, 1995 is
primarily attributable to the timing of the increase in the Allowance
resulting from the increased volume and associated Provision for Credit Losses
taken at the time of sale on each contract versus reductions (charge offs) in
the Allowance, which have not yet had sufficient time to occur.
CONTRACTS PURCHASED FROM THIRD PARTY DEALERS - The Allowance on contracts
purchased from Third Party Dealers increased to 8.1% of the outstanding
principal balance as of June 30, 1996. The Allowance was 7.3% and 7.2% as of
March 31, 1996 and December 31, 1995, respectively. For these contracts, the
Company continues to credit all Discount acquired with the purchase of
contracts from Third Party Dealers to the Allowance.
<PAGE>
The following table reflects activity in the Allowance, as well as
information regarding charge off activity, on contracts purchased from Third
Party Dealers for the three and six month periods ended June 30, 1996 and
1995.
<TABLE>
<CAPTION>
3 Mos 3 Mos 6 Mos 6 Mos
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balances at beginning of period $ 1,350 $ 151 $ 1,000 $ 160
Provision for credit losses - -
Discount acquired 1,109 579 1,830 681
Net Charge offs (385) (80) (756) (191)
---------- ---------- ---------- ----------
Balances at end of period $ 2,074 $ 650 $ 2,074 $ 650
========== ========== ========== ==========
Charge off Activity:
- -------------------------------
Principal Balances:
Collateral Repossessed $ (525) $ (68) $ (1,067) $ (122)
Other (134) (5) (225) (53)
---------- ---------- ---------- ----------
Total Principal Balances (659) (73) (1,292) (175)
Accrued interest (29) (7) (59) (16)
Recoveries, net 303 - 595 -
---------- ---------- ---------- ----------
Net Charge Offs $ (385) $ (80) $ (756) $ (191)
========== ========== ========== ==========
</TABLE>
Discount acquired totaled $1.1 million for the three months ended June 30,
1996 versus $579,000 for the comparable three month period in 1995. As a
percentage of principal balances purchased the Discount averaged 11.1% for the
three months ended June 30, 1996, versus 12.6% for the comparable period in
1995. For the six months ended June 30, 1996 and 1995, Discount acquired
totaled $1.8 million and $681,000 respectively. As a percentage of contracts
purchased, Discount averaged 10.6% and 12.4%, respectively. In the three
months ended June 30, 1995, the Company had just begun its expansion of the
Third Party Dealer branch network and significantly curtailed the purchase of
lesser quality contracts, which were purchased at a higher discounts.
Accordingly, the lower percentage level of Discount for both the three month
and six month periods in 1996 versus comparable periods in 1995 is
attributable to this transition to higher quality contracts, purchased at
lower discounts.
Although the Company intends to apply static pool analysis to its Third Party
Dealer portfolio, this portfolio has not had sufficient seasoning for
meaningful analysis. While the static pool information is developing,
Management evaluates the adequacy of the Allowance for the Third Party Dealer
portfolio through comparison in the characteristics of borrowers and
collateral ratios of this portfolio versus those originated at the Company
Dealerships, as well as through comparison of the contracts' actual
performance, and portfolio delinquency.
Major factors in determining the expected collectability and performance of
the Company's Third Party Dealer portfolio are current delinquencies and
historical trends. The following table details portfolio delinquency ratios
as of June 30, 1996 with comparative information for March 31, 1996 and
December 31, 1995. Trend analysis reveals no significant changes in the
expected collectability and performance of the portfolio.
<TABLE>
<CAPTION>
June 30, March 31, December 31,
1996 1996 1995
--------- ---------- -------------
<S> <C> <C> <C>
Delinquency Percentages:
Principal balances current 98.4% 99.0% 98.4%
Principal balances 31 to 60 days 1.4% 0.9% 1.2%
Principal balances over 60 days 0.2% 0.1% 0.4%
</TABLE>
<PAGE>
The Third Party Dealer portfolio continued to grow rapidly for the three month
and six month periods ended June 30, 1996. Accordingly, the increase in the
Allowance at June 30, 1996 over March 31, 1996 and December 31, 1995 is
attributable to the Discount acquired at purchase and credited to the
Allowance, which has not yet been reduced by expected charge offs.
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 funding sources available to the Company
include operating cash flow, proceeds from the sale of finance receivables,
and supplemental borrowings.
The Company's Net Cash Provided by Operating Activities increased by 143% from
$4.2 million for the six months ended June 30, 1995 to $10.2 million for the
six months ended June 30, 1996. The increase was primarily due to increases
in Net Earnings, Provision for Credit Losses, Accounts Payable and Accrued
Expenses, and Other Liabilities and a decrease in Refundable Income Taxes
offset by the Gain on Sale of Finance Receivables.
The Net Cash Used in Investing Activities decreased by 15.3% from $17.6
million in the six months ended June 30, 1995 to $14.9 million in the six
months ended June 30, 1996. The $18.4 million provided by the sale of finance
receivables and the $19.0 million provided by collections on finance
receivables were offset by the $44.3 million used in the increase in finance
receivables, $6.0 million used for the increase in Investments Arising from
Finance Receivables Sold, and $2.0 million used for the purchases of property
and equipment.
The Company's Net Cash Provided by Financing Activities decreased by 74.1%
from $13.5 million in the six months ended June 30, 1995 to $3.5 million in
the six months ended June 30, 1996. The primary financing activities in the
first six months of 1996 were the $14.9 million in proceeds from the issuance
of common stock and corresponding $10.2 million reduction of the Revolving
Facility with GE Capital.
REVOLVING FACILITY - The Revolving Facility with GE Capital 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, 1996, the Company's borrowing capacity under
the Revolving Facility was approximately $38.0 million, the aggregate
principal amount outstanding under the Revolving Facility was $20.6 million,
and the amount available to be borrowed under the facility was $17.4 million.
The Revolving Facility bears interest at the 30-day LIBOR plus 4.25%, payable
daily (total rate of 9.7% as of June 30, 1996).
SUBORDINATED NOTES PAYABLE - The Company has historically borrowed
substantial amounts from Verde, an affiliate of the Company. The subordinated
notes payable balances outstanding to Verde totaled $14.6 million as of
December 31, 1995 ($24.6 million prior to the conversion of $10.0 million to
Preferred Stock as discussed below), and $14.0 million as of June 30, 1996.
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. The Company may
suspend interest and principal payments in the event it is in default on
obligations to any other creditors.
<PAGE>
PREFERRED STOCK - On December 31, 1995, Verde Investments 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 to 10.0% through December 31,
1997, at which time the rate will be raised to, and remain at, 12.0%.
CONVERTIBLE NOTE - In August 1995, the Company entered into a note purchase
agreement with SunAmerica pursuant to which SunAmerica purchased a $3.0
million convertible subordinated note. Effective June 21, 1996, SunAmerica
exercised its conversion rights. In return for the early exercise of its
conversion rights, the Company granted SunAmerica a ten-year warrant to
purchase 116,000 shares of Common Stock at $6.75 per share, the initial public
offering price, and paid fees to SunAmerica totaling $150,000.
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 is
intended to provide the Company with an additional source of funding to the
Revolving Facility. At the closing of each securitization, the Company
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.
CAPITAL EXPENDITURES AND COMMITMENTS - Pursuant to its growth strategy, the
Company anticipates developing or acquiring five new Company Dealerships and
opening 15 to 20 new Branch Offices by December 31, 1997. The Company
estimates that it will cost an aggregate of approximately $7.5 million to
develop these Company Dealerships and an additional $750,000 to $1.0 million
to establish the Branch Offices. The Company intends to finance these
expenditures through operating cash flows and supplemental borrowings,
including under the Revolving Facility.
SEASONALITY
Historically, the Company has experienced higher revenues in the first two
quarters (particularly in the first quarter) 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 interest rate. To date, inflation has not
had a significant impact on the Company's operations.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The registrant and its subsidiary are not the subject of legal
proceedings which, in the opinion of management, will have a material effect
on the financial position of the registrant or its results of operations.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
Pursuant to an Action by Unanimous Written Consent of the stockholders of the
Company, effective as of May 29, 1996, the stockholders unanimously approved
and adopted: (i) a Director Incentive Plan, pursuant to which the Company
reserved 50,000 shares of its Common Stock for issuance to nonemployee
directors of the Company in accordance with the terms of the plan; and (ii) an
amendment to the Company's Certificate of Incorporation to elect not to be
governed by Section 203 of the Delaware General Corporation Law.
Pursuant to an Action by Unanimous Written Consent of the stockholders of the
Company, effective as of May 29, 1996, the stockholders unanimously approved
and adopted an amendment to the Company's Long-Term Incentive Plan to increase
the number of shares for issuance under the plan to 800,000.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 11 - Statement regarding Computation of Earning per Share
Exhibit 27 - Financial Data Schedule - Regulation S-X Article 5
Exhibit 99 - Statement regarding Forward-looking Information
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for which this
report is filed.
<PAGE>
Pursuant to the requirements of the Securities and 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 13, 1996
/s/ Steven T. Darak
- -----------------------------------------------
Steven T. Darak
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
S-1
EXHIBIT 11
<TABLE>
<CAPTION>
Ugly Duckling Corporation
Schedule of Computation of Earnings Per Common Share
3 Mos 3 Mos 3 Mos 3 Mos
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1996 1996 1995 1995
----------- ---------- ---------- ----------
Fully Fully
Primary Diluted Primary Diluted
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net earnings (loss) $1,083,000 1,083,000 (283,000) (283,000)
Preferred dividends (267,000) (267,000) - -
----------- ---------- ---------- ----------
Net earnings (loss)available to common
shares 816,000 816,000 (283,000) (283,000)
=========== ========== ========== ==========
Earnings (loss) per common share $ 0.13 0.13 (0.05) (0.05)
=========== ========== ========== ==========
Weighted average common shares outstanding 5,984,480 5,984,480 5,521,600 5,521,600
Common equivalent shares outstanding
using the treasury stock method 395,552 413,824 370,513 370,513
----------- ---------- ---------- ----------
Weighted average common and common
equivalent shares outstanding 6,380,032 6,398,304 5,892,113 5,892,113
=========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Ugly Duckling Corporation
Schedule of Computation of Earnings Per Common Share, continued
3 Mos 3 Mos 3 Mos 3 Mos
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1996 1996 1995 1995
----------- ---------- ---------- ----------
Fully Fully
Primary Diluted Primary Diluted
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net earnings (loss) $2,148,000 2,148,000 (748,000) (748,000)
Preferred dividends (567,000) (567,000) - -
----------- ---------- ---------- ----------
Net earnings (loss)available to common
shares 1,581,000 1,581,000 (748,000) (748,000)
=========== ========== ========== ==========
Earnings (loss) per common share $ 0.26 0.26 (0.13) (0.13)
=========== ========== ========== ==========
Weighted average common shares outstanding 5,753,040 5,753,040 5,521,600 5,521,600
Common equivalent shares outstanding
using the treasury stock method 383,033 392,169 370,513 370,513
----------- ---------- ---------- ----------
Weighted average common and common
equivalent shares outstanding 6,136,073 6,145,209 5,892,113 5,892,113
=========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's unaudited financial statements as of and for the three months
and six months ended June 30, 1996, and is qualified in its entirety by
reference to such statements.
</LEGEND>
<CIK> 0001012704
<NAME> UGLY DUCKLING CORP
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 263 263
<SECURITIES> 6,575 6,575
<RECEIVABLES> 51,660 51,660
<ALLOWANCES> 8,048 8,048
<INVENTORY> 6,386 6,386
<CURRENT-ASSETS> 0<F1> 0<F1>
<PP&E> 11,572 11,572
<DEPRECIATION> 2,095 2,095
<TOTAL-ASSETS> 70,142 70,142
<CURRENT-LIABILITIES> 0<F1> 0<F1>
<BONDS> 0 0
0 0
10,000 10,000
<COMMON> 18,122 18,122
<OTHER-SE> (3,661) (3,661)
<TOTAL-LIABILITY-AND-EQUITY> 70,142 70,142
<SALES> 15,096 30,177
<TOTAL-REVENUES> 20,081 39,477
<CGS> 8,510 16,858
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 6,284 12,010
<LOSS-PROVISION> 2,566 5,172
<INTEREST-EXPENSE> 1,638 3,289
<INCOME-PRETAX> 1,083 2,148
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,083 2,148
<EPS-PRIMARY> .13 .26
<EPS-DILUTED> .13 .26
<FN>
<F1>UNCLASSIFIED BALANCE SHEET
</FN>
</TABLE>
EXHIBIT 99
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
The Company wishes to take advantage of the new "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995 and is filing this
cautionary statement in connection with such safe harbor legislation. The
Company's Form 10-K, this Form 10-Q, any other Form 10-Q, any Form 8-K, or any
other written or oral statements made by or on behalf of the Company may
include forward looking statements which reflect the Company's current views
with respect to future events and financial performance. The words "believe,"
"expect," "anticipate," "intends," "forecast," "project," and similar
expressions identify forward looking statements.
The Company wishes to caution investors that any forward looking statements
made by or on behalf of the Company are subject to uncertainties and other
factors that could cause actual results to differ materially from such
statements. These uncertainties and other factors include, but are not
limited to, the Risk Factors listed below (many of which have been discussed
in prior SEC filings by the Company). Though the Company has attempted to
list comprehensively these important factors, the Company wishes to caution
investors that other factors may in the future prove to be important in
affecting the Company's results of operations. New factors emerge from time
to time and it is not possible for management to predict all of such factors,
nor can it assess the impact of each such factor on the business or the extent
to which any factor, or combination of factors, may cause actual results to
differ materially from forward looking statements.
Investors are further cautioned not to place undue reliance on such forward
looking statements as they speak only of the Company's views as of the date
the statement was made. The Company undertakes no obligation to publicly
update or revise any forward looking statements, whether as a result of new
information, future events, or otherwise.
RISK FACTORS
NO HISTORY OF PROFITABLE OPERATIONS;
NO ASSURANCE OF CONTINUED PROFITABILITY
The Company, which began operations in 1992, incurred significant losses in
1994 and 1995, although it achieved profitability during the six months
ended June 30, 1996. The Company's business strategy calls for aggressive
growth in its sales and financing activities, including developing or
acquiring approximately five new Company Dealerships and opening 15 to 20 new
Branch Offices over the next two years. The Company's ability to remain
profitable as it pursues this business strategy will depend upon its ability
to: (i) expand its revenue generating operations while not proportionately
increasing its administrative overhead; (ii) originate and purchase contracts
with an acceptable level of credit risk; (iii) locate sufficient financing,
with acceptable terms, to fund the expansion of used car sales and the
origination and purchase of additional contracts; and (iv) adapt to the
increasingly competitive market in which it operates. Outside factors, such
as the economic, regulatory, and judicial environments in which it operates,
will also have an effect on the Company's business. The Company's inability
to achieve or maintain any or all of these goals could have a material adverse
effect on the Company's operations, profitability, and growth.
<PAGE>
POOR CREDITWORTHINESS OF BORROWERS;
HIGH RISK OF CREDIT LOSSES
Substantially all of the contracts that the Company originates, acquires, or
services are with customers with limited credit histories, low incomes, or
past credit problems ("Sub-Prime Borrowers"). Due to their poor credit
histories, Sub-Prime Borrowers are generally unable to obtain credit from
traditional financial institutions, such as banks, savings and loans, credit
unions, or captive finance companies owned by automobile manufacturers. The
Company typically charges a fixed interest rate of 29.9% on contracts
originated at its wholly owned dealerships ("Company Dealerships") while rates
range from 21.0% to 29.9% on the contracts it purchases from third party
dealers ("Third Party Dealers"). In addition, the Company has established an
Allowance for Credit Losses to cover anticipated credit losses on the
contracts currently in its portfolio. The Company believes its Allowance for
Credit Losses is adequate to absorb anticipated credit losses. However, no
assurance can be given that the Company has adequately provided for, or will
adequately provide for, such credit risks or that credit losses in excess of
reserves will not occur in the future. A significant variation in the timing
of or increase in credit losses on the Company's portfolio would have a
material adverse effect on the Company's profitability.
HIGHLY COMPETITIVE INDUSTRY
Although the used car sales industry has historically been highly fragmented,
it has attracted significant attention recently from a number of large
companies, including Circuit City's CarMax, AutoNation, U.S.A., Driver's Mart,
and CarChoice, which have entered the used car sales business or announced
plans to develop large used car sales operations. Many franchised new car
dealerships have also increased their focus on the used car market. The
Company believes that these companies are attracted by the relatively high
gross margins that can be achieved in this market and the industry's lack of
consolidation. Many of these companies and franchised dealers have
significantly greater financial, marketing, and other resources than the
Company. Among other things, increased competition could result in increased
wholesale costs for used cars, decreased retail sales prices, and lower
margins.
Like the sale of used cars, the business of purchasing and servicing contracts
originated from the sale of used cars to Sub-Prime Borrowers is a highly
fragmented and very competitive market. In recent periods, several consumer
finance companies have completed public offerings in order to raise the
capital necessary to fund expansion and support increased purchases of
contracts. These companies have increased the competition for the purchase of
contracts, in many cases purchasing contracts at prices that the Company
believes are not commensurate with the associated risk. There are numerous
financial services companies serving, or capable of serving, this market,
including traditional financial institutions such as banks, savings and loans,
credit unions, and captive finance companies owned by automobile
manufacturers, and other non-traditional consumer finance companies, many of
which have significantly greater financial and other resources than the
Company. Increased competition may cause downward pressure on the interest
rates the Company charges on contracts originated by its Company Dealerships
or cause the Company to reduce or eliminate the nonrefundable acquisition
discount on the contracts it purchases from Third Party Dealers, which could
have a material adverse effect on the Company's profitability.
The Company believes that recent demographic, economic, and industry trends
favor growth in the used car sales and Sub-Prime Borrower financing markets.
To the extent such trends do not continue, however, the Company's
profitability may be materially and adversely affected.
<PAGE>
GENERAL ECONOMIC CONDITIONS
The Company's business is directly related to sales of used cars, which are
affected by employment rates, prevailing interest rates, and other general
economic conditions. While the Company believes that current economic
conditions favor continued growth in the markets it serves and those in which
it seeks to expand, a future economic slowdown or recession could lead to
increased delinquencies, repossessions, and credit losses that could hinder
the Company's planned expansion. Because of the Company's focus on Sub-Prime
Borrowers, its actual rate of delinquencies, repossessions, and credit losses
on contracts could be higher under adverse conditions than those experienced
in the used car sales and finance industry in general. Economic changes are
uncertain, and sluggish sales of used cars and weakness in the economy could
have an adverse effect on the Company's business and that of the Third Party
Dealers from which it purchases contracts.
NEED TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH THIRD PARTY DEALERS
The Company enters into nonexclusive agreements with Third Party Dealers,
which may be terminated by either party at any time, pursuant to which the
Company purchases contracts originated by such dealers that meet the Company's
established terms and conditions. The Company's Third Party Dealer financing
activities depend in large part upon its ability to establish and maintain
relationships with such dealers. While the Company believes that it has been
successful in developing and maintaining relationships with Third Party
Dealers in the markets that it currently serves, there can be no assurance
that the Company will be successful in maintaining or increasing its existing
Third Party Dealer base, or that such dealers will continue to generate a
volume of contracts comparable to the volume of contracts historically
generated by such dealers.
GEOGRAPHIC CONCENTRATION
The Company's direct used car sales and financing operations are currently
conducted in the Phoenix and Tucson, Arizona, metropolitan areas. In
addition, as of June 30, 1996, the Company had opened thirteen contract
purchasing offices ("Branch Offices"), five of which were located in Arizona,
two each in Colorado, Indiana, and Texas, and one each in Florida, and Nevada.
A substantial majority of the contracts owned by the Company at June 30, 1996
were originated in Arizona. Because of this concentration, the Company's
business may be adversely affected in the event of a downturn in the general
economic conditions existing in Arizona and the southwestern United States.
DEPENDENCE ON EXTERNAL FINANCING
The Company has borrowed, and will continue to borrow, substantial amounts to
fund its operations from financing companies and other lenders, some of which
are affiliated with the Company. Currently, the Company receives financing
pursuant to a revolving credit facility (the "Revolving Facility") with
General Electric Capital Corporation, which has a maximum commitment of $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 it for one additional year. The Revolving Facility is
secured by substantially all of the Company's assets and contains numerous
covenants that limit the Company's ability to undertake certain transactions,
requires it to meet specified financial ratios, and requires it to comply with
all laws relating to the Company's business. There can be no assurance that
the Company will be able to continue to satisfy the terms and conditions of
the Revolving Facility or that it will be extended beyond its current
expiration date. In addition, the Company has agreed to terms with SunAmerica
Life Insurance Company ("SunAmerica") pursuant to which SunAmerica may
purchase up to $175.0 million of the Company's asset-backed securities
<PAGE>
created pursuant to the terms of a securitization program. The Company
retains a residual in the contracts sold and records a gain on sale. The
Company's intention is to periodically securitize an amount of contracts
commensurate with the amount of contracts produced during a period. Through
the recognition of a gain on sale of finance receivables, the Company
effectively present values the income from finance receivables generated from
the sale of used cars, net of all associated administrative, servicing, credit
loss, and financing costs. To the extent that the amount of finance
receivables generated from used car sales in a period is equal to the amount
of receivables sold, the Company's results of operations in a given period
will more closely reflect the profitability of used car sales and financing
for such period. Such sales will also have the effect of reducing the
Company's future finance income. The securitization program is subject to
numerous terms and conditions, including the Company's ability to achieve
investment-grade ratings on its asset-backed securities. The Company and
SunAmerica have completed two securitization sales. Management expects
ongoing funding costs will be lower under the securitization program than
under the Revolving Facility. There can be no assurance, however, that any
further securitizations will be completed or that the Company will be able to
secure additional financing when and as needed in the future, or on terms
acceptable to the Company.
SUBSTANTIAL LEVERAGE
In connection with its growth over the past several years, the Company has
incurred substantial indebtedness, resulting in a highly leveraged capital
structure. The Company's substantial leverage could have important
consequences, including limiting its ability to obtain additional financing,
requiring the Company to use substantial portions of operating cash flow to
meet interest and principal repayment obligations, exposing the Company to
interest rate fluctuations due to floating interest rates, increasing the
Company's vulnerability to changes in general economic conditions and
competitive pressures, and limiting the Company's ability to realize some or
all of the benefits of significant business opportunities. In addition, the
Revolving Facility contains various covenants that limit, among other things,
the Company's ability to engage in mergers and acquisitions, incur additional
indebtedness, and pay dividends or make other distributions. The covenants
also require the Company to meet certain financial tests. Although the
Company believes that it is currently in compliance with the terms and
conditions of its borrowing arrangements, a default thereunder could have a
material adverse effect on the Company's financial condition and results of
operations.
SENSITIVITY TO INTEREST RATES;
IMPACT OF USURY LAWS
A substantial portion of the Company's financing income results from the
difference between the rate of interest it pays on the funds it borrows and
the rate of interest it earns under the contracts in its portfolio. While the
contracts the Company services bear interest at a fixed rate, the indebtedness
that the Company incurs under its Revolving Facility bears interest at a
floating rate. In the event the Company's interest expense increases, it
would seek to compensate for such increases by raising the interest rates on
its Company Dealership contracts, increasing the acquisition discount at which
it purchases Third Party Dealer contracts, or raising the retail sales prices
of its used cars. To the extent the Company were unable to do so, the
Company's net interest margins would decrease, thereby adversely affecting the
Company's profitability.
The Company typically charges a fixed interest rate of 29.9% on the contracts
originated at Company Dealerships, while rates range from 21.0% to 29.9% on
the Third Party Dealer contracts it purchases. Currently, all of the
Company's used car sales activities are conducted in, and a majority of the
contracts the Company services are originated in, Arizona, which does not
<PAGE>
impose limits on the rate that a lender may charge. The Company has expanded,
and will continue to expand, its operations into states that impose usury
limits. The Company attempts to mitigate these rate restrictions by
purchasing contracts originated in these states at a higher discount. The
Company's inability to achieve adequate discounts in states imposing usury
limits would adversely affect the Company's planned expansion and its results
of operations. There can be no assurance that Arizona will not adopt a usury
statute or that Arizona or other jurisdictions in which the Company operates
will not adopt additional laws, rules, and regulations that could adversely
affect the Company's business.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Historically, the Company has experienced higher revenues in the first two
quarters of the year (particularly in the first quarter) 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 part of the year, which are a
primary source of down payments on used car purchases. Given the possibility
of such fluctuations, the Company believes that quarterly comparisons of the
results of its operations during any fiscal year are not necessarily
meaningful and that results for any one fiscal quarter should not be relied
upon as an indication of future performance.
DEPENDENCE UPON KEY PERSONNEL
The Company's future success will depend upon the continued services of the
Company's senior management as well as the Company's ability to attract
additional members to its management team with experience in the used car
sales and financing industry. The unexpected loss of the services of any of
the Company's key management personnel, or its inability to attract new
management when necessary, could have a material adverse effect upon the
Company. The Company has entered into employment agreements (which include
limited non-competition provisions) with certain of its officers.
REGULATION, SUPERVISION, AND LICENSING
The Company's operations are subject to ongoing regulation, supervision, and
licensing under various federal, state, and local statutes, ordinances, and
regulations. Among other things, these laws require that the Company obtain
and maintain certain licenses and qualifications, limit or prescribe terms of
the contracts that the Company originates and/or purchases, require specified
disclosures to customers, limit the Company's right to repossess and sell
collateral, and prohibit the Company from discriminating against certain
customers. The Company is also subject to federal and state franchising and
insurance laws.
The Company believes that it is currently in substantial compliance with all
applicable federal, state, and local laws and regulations. There can be no
assurance, however, that the Company will be able to remain in compliance with
such laws, and such failure could have a material adverse effect on the
operations of the Company. In addition, the adoption of additional statutes
and regulations, changes in the interpretation of existing statutes and
regulations, or the Company's entrance into jurisdictions with more stringent
regulatory requirements could have a material adverse effect on the Company's
business.
POSSIBLE VOLATILITY OF STOCK PRICES
The market price of the Common Stock could be subject to significant
fluctuations in response to such factors as, among others, variations in the
anticipated or actual results of operations of the Company or other companies
in the used car sales and finance industry, changes in conditions affecting
the economy generally, analyst reports, or general trends in the industry.
