<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2000
Commission File Number 000-20841
UGLY DUCKLING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 86-0721358
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification no.)
2525 E. Camelback Road, Suite 500,
Phoenix, Arizona 85016
(Address of principal executive offices) (Zip Code)
(602) 852-6600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
---------------
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE:
At November 10, 2000, there were approximately 12,378,000 shares of Common
Stock, $0.001 par value, outstanding.
This document serves both as a resource for analysts, shareholders, and
other interested persons, and as the quarterly report on Form 10-Q of Ugly
Duckling Corporation (Ugly Duckling) to the Securities and Exchange Commission,
which has taken no action to approve or disapprove the report or pass upon its
accuracy or adequacy. Additionally, this document is to be read in conjunction
with the consolidated financial statements and notes thereto included in Ugly
Duckling's Annual Report on Form 10-K, for the year ended December 31, 1999.
<PAGE>
UGLY DUCKLING CORPORATION
FORM 10-Q
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Part I - FINANCIAL STATEMENTS
<S> <C> <C>
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets-- September 30, 2000 and December 31, 1999.......................1
Condensed Consolidated Statements of Operations-- Three and Nine Months Ended
September 30, 2000 and 1999......................................................................2
Condensed Consolidated Statements of Cash Flows-- Nine Months Ended September 30, 2000 and 1999........3
Notes to Condensed Consolidated Financial Statements...................................................4
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................10
Item 3. MARKET RISK...........................................................................................25
Part II. -- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.....................................................................................26
Item 2. CHANGES IN SECURITIES.................................................................................26
Item 3. DEFAULTS UPON SENIOR SECURITIES.......................................................................26
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................................26
Item 5. OTHER INFORMATION 26
Item 6. EXHIBITS AND REPORTS ON FORM 8-K......................................................................26
SIGNATURES............................................................................................27
</TABLE>
<PAGE>
ITEM 1.
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(unaudited)
---------------- ---------------
ASSETS
<S> <C> <C>
Cash and Cash Equivalents $ 6,555 $ 3,683
Finance Receivables, net 491,880 365,586
Notes Receivable from Related Party 12,000 12,000
Inventory 43,739 62,865
Property and Equipment, net 35,604 31,752
Intangible Assets, Net 12,767 14,618
Other Assets 11,727 12,327
Net Assets of Discontinued Operations 4,211 33,880
--------------- --------------
$ 618,483 $ 536,711
================ ===============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
<S> <C> <C>
Accounts Payable $ 2,813 $ 3,185
Accrued Expenses and Other Liabilities 40,815 26,905
Notes Payable - Portfolio 362,255 275,774
Other Notes Payable 17,930 36,556
Subordinated Notes Payable 36,148 28,611
--------------- --------------
Total Liabilities 459,961 371,031
---------------- --------------
Stockholders' Equity:
Common Stock 19 19
Additional Paid-in Capital 173,721 173,273
Retained Earnings 24,223 12,709
Treasury Stock (39,441) (20,321)
---------------- ---------------
Total Stockholders' Equity 158,522 165,680
---------------- ---------------
$ 618,483 $ 536,711
================ ===============
</TABLE>
Page 1
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended September 30, 2000 and 1999
(In thousands, except earnings per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -------------------------------
2000 1999 2000 1999
-------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Sales of Used Cars $ 126,636 $103,314 $ 380,949 $ 307,633
Less:
Cost of Used Cars Sold 70,760 57,764 212,119 173,395
Provision for Credit Losses 36,092 27,561 102,877 81,113
-------------- ------------- ------------- ---------------
19,784 17,989 65,953 53,125
-------------- ------------- ------------- ---------------
Other Income (Expense):
Interest Income 31,436 19,775 86,838 45,904
Portfolio Interest Expense (7,318) (4,042) (18,344) (9,255)
Servicing Income 308 1,794 1,701 6,988
-------------- -------------- ------------- ---------------
24,426 17,527 70,195 43,637
-------------- -------------- ------------- ---------------
Income before Operating Expenses 44,210 35,516 136,148 96,762
Operating Expenses:
Selling and Marketing 7,187 6,023 22,748 17,959
General and Administrative 27,831 20,294 79,954 61,763
Depreciation and Amortization 2,285 1,763 6,724 5,036
-------------- -------------- ------------- ---------------
37,303 28,080 109,426 84,758
-------------- -------------- ------------- ---------------
Operating Income 6,907 7,436 26,722 12,004
Interest Expense, Other 2,360 877 7,237 1,736
-------------- -------------- ------------- ---------------
Earnings before Income Taxes 4,547 6,559 19,485 10,268
Income Taxes 1,864 2,902 7,971 4,200
-------------- -------------- ------------- ---------------
Earnings from Continuing Operations 2,683 3,657 11,514 6,068
Loss from Discontinued Operations, net - 525 - 5
-------------- -------------- ------------- ---------------
Net Earnings $ 2,683 $ 4,182 $ 11,514 $ 6,073
============== ============== ============= ===============
Earnings per Common Share from Continuing Operations:
Basic $ 0.21 $ 0.25 $ 0.83 $ 0.40
============== ============== ============= ===============
Diluted $ 0.21 $ 0.24 $ 0.82 $ 0.39
============== ============== ============= ===============
Net Earnings per Common Share:
Basic $ 0.21 $ 0.28 $ 0.83 $ 0.40
============== ============== ============= ===============
Diluted $ 0.21 $ 0.28 $ 0.82 $ 0.39
============== ============== ============= ===============
Shares Used in Computation:
Basic 12,597 14,903 13,847 15,161
============== ============== ============= ===============
Diluted 12,747 15,167 14,044 15,384
============== ============== ============= ===============
Page 2
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2000 and 1999
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
2000 1999
--------- ---------
Cash Flows from Operating Activities:
Net Earnings $ 11,514 $ 6,073
Adjustments to Reconcile Net Earnings to Net Cash Provided
by Operating Activities:
Provision for Credit Losses 102,877 81,113
Depreciation and Amortization 10,453 5,775
Loss from Disposal of Property and Equipment 3 23
Loss from Discontinued Operations - 5
Deferred Income Taxes - (3,769)
Collections from Residuals in Finance Receivables Sold 13,055 13,755
(Increase) Decrease in Inventory 19,126 (737)
Decrease in Other Assets 600 1,465
Increase in Accounts Payable, Accrued Expenses and Other Liabilities 14,040 16,354
Increase (Decrease) in Income Taxes Payable (558) 4,470
--------- ---------
Net Cash Provided by Operating Activities 171,110 124,527
--------- ---------
Cash Flows Used in Investing Activities:
Increase in Finance Receivables (392,788) (358,067)
Collections of Finance Receivables 157,067 99,962
Decrease in Investments Held in Trust on Finance Receivables Sold 7,969 3,641
Advances under Notes Receivable - (650)
Proceeds from Disposal of Property and Equipment 3,142 72
Purchase of Property and Equipment (11,625) (6,426)
Payment for Acquisition of Assets - (12,095)
Increase in Intangible Assets from Acquisitions - (464)
--------- ---------
Net Cash Used in Investing Activities (236,235) (274,027)
--------- ---------
Cash Flows from Financing Activities:
Initial Deposits at Securitization into Investments Held in Trust (20,738) (10,914)
Additional Deposits into Investments Held in Trust (10,849) (18,144)
Collections from Investments Held in Trust 17,544 3,844
Additions to Notes Payable Portfolio 554,153 561,853
Repayment of Notes Payable Portfolio (469,481) (419,046)
Additions to Other Notes Payable 1,267 55,943
Repayment of Other Notes Payable (20,133) (36,136)
Net Issuance of Subordinated Notes Payable (1,500) (1,664)
Proceeds from Issuance of Common Stock 437 -
Repurchase of Warrants - (552)
Acquisition of Treasury Stock (11,114) (5,811)
--------- ---------
Net Cash Provided by Financing Activities 39,586 129,373
--------- ---------
Net Cash Provided by Discontinued Operations 28,411 19,876
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 2,872 (251)
Cash and Cash Equivalents at Beginning of Period 3,683 2,544
--------- ---------
Cash and Cash Equivalents at End of Period .............................. $ 6,555 $ 2,293
========= =========
Supplemental Statement of Cash Flows Information:
Interest Paid ...................................................... $ 20,712 $ 14,178
========= =========
Income Taxes Paid .................................................. $ 8,524 $ (270)
========= =========
Acquisition of Treasury Stock with Subordinated Debt ............... $ 8,005 $ -
========= =========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
Page 3
<PAGE>
UGLY DUCKLING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
Our accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and pursuant to rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for a complete financial statement presentation. In our opinion, such unaudited
interim information reflects all adjustments, consisting only of normal
recurring adjustments, necessary to present our financial position and results
of operations for the periods presented. Our results of operations for interim
periods are not necessarily indicative of the results to be expected for a full
fiscal year. Our Condensed Consolidated Balance Sheet as of December 31, 1999
was derived from our audited consolidated financial statements as of that date
but does not include all the information and footnotes required by generally
accepted accounting principles. We suggest that these condensed consolidated
financial statements be read in conjunction with the audited consolidated
financial statements included in our Annual Report on Form 10-K, for the year
ended December 31, 1999.
Note 2. Summary of Finance Receivables
A summary of Finance Receivables, net, follows ($ in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
2000 1999
---------------- ----------------
Contractually Scheduled Payments $ 697,527 $ 492,937
Unearned Finance Charges (184,764) (134,119)
---------------- ----------------
Principal Balances, net 512,763 358,818
Accrued Interest 5,272 3,741
Loan Origination Costs 7,466 5,079
---------------- ----------------
Principal Balances, net 525,501 367,638
Residuals in Finance Receivables Sold 3,632 17,382
Investments Held in Trust 62,790 56,716
---------------- ----------------
Finance Receivables 591,923 441,736
Allowance for Credit Losses (100,043) (76,150)
---------------- ----------------
Finance Receivables, net $ 491,880 $ 365,586
================ ================
</TABLE>
Investments Held in Trust represent funds held by trustees on behalf of our
securitization lenders. The balance of Investments Held in Trust increased
slightly from December 31, 1999 due to deposits into the trust accounts arising
from additional securitizations, partially offset by distribution of funds
associated with of portfolios securitized during prior periods.
Residuals in Finance Receivables Sold represent our subordinated interest in
loans sold through securitizations. The decrease from December 31, 1999 to
September 30, 2000 is attributable to no additional loans sold through
securitization with servicing retained, amortization and release of cash, as
well as the runoff of portfolios securitized and sold during prior periods.
A summary of Residuals in Finance Receivables Sold follows ($ in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
<S> <C> <C>
2000 1999
------------------ --------------
Retained interest in subordinated securities (B Certificates)............ 3,493 17,335
Net interest spreads, less present value discount........................ 640 6,113
Reduction for estimated credit losses.................................... (501) (6,066)
------- --------
Residuals in finance receivables sold.................................... 3,632 $ 17,382
=========== ===========
Securitized principal balances outstanding............................... 12,735 $ 65,662
=========== ===========
Estimated credit losses as a % of securitized principal balances
outstanding.............................................................. 3.9% 9.2%
Page 4
<PAGE>
</TABLE>
Note 3. Notes Receivable- Related Party
The Note Receivable - Related Party originated from the Company's December
1999 sale of its Cygnet Dealer Finance subsidiary to Cygnet Capital Corporation,
an entity controlled by Ernest C. Garcia II, Chairman and principal shareholder
of the Company. The $12.0 million note from Cygnet Capital Corporation has a 10
year term, with interest payable quarterly at 9%, due December 2009. The note is
secured by the capital stock of Cygnet Capital Corporation and guaranteed by
Verde Investments, Inc., an affiliate of Mr. Garcia. Under the terms of the
agreement, Mr. Garcia will be allowed to reduce the principal balance up to a
maximum of $8 million by surrendering to the Company shares of Ugly Duckling
common stock (valued at 98% of the average of the closing prices of the stock on
NASDAQ for the ten trading days prior to the surrender) as long as Mr. Garcia's
ownership interest of the Company voting stock does not fall below 15% and the
acceptance of such stock by the Company does not result in a breach of a
covenant.
Note 4. Notes Payable
Notes Payable, Portfolio
A summary of Notes Payable, Portfolio at September 30, 2000 and December
31, 1999 follows ($ in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
<S> <C> <C>
September 30, December 31,
2000 1999
---------- ----------
Revolving facility for $125.0 million with GE Capital, secured by substantially all
assets of the Company, including $104.9 million in finance receivables......... $ 50,222 $ 41,717
Class A obligations issued pursuant to the Company's Securitization Program, secured
by underlying pools of finance receivables and investments held in trust totaling
$477.0 million at September 30, 2000........................................... 314,725 236,555
---------- --------------
Subtotal....................................................................... 364,947 278,272
Less: Unamortized Loan Fees................................................... 2,692 2,498
---------- --------------
Total.......................................................................... $ 362,255 $ 275,774
=========== ==============
</TABLE>
The revolving facility note payable has interest payable daily at 30 day
LIBOR plus 3.15% (9.77% at September 30, 2000) through June 2001. The revolving
facility agreement contains various reporting and performance covenants,
including the maintenance of certain ratios, limitations on additional
borrowings from other sources, restrictions on certain operating activities, and
a restriction on the payment of dividends under certain circumstances. The
Company is currently in compliance with these covenants.
Class A obligations have interest payable monthly at rates ranging from 5.6%
to 7.26%. Monthly principal reductions on Class A obligations approximate 70% of
the principal reductions on the underlying pool of finance receivable loans.
Other Notes Payable
A summary of Other Notes Payable at September 30, 2000 and December 31, 1999
follows ($ in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
<S> <C> <C>
2000 1999
------------- ------------
Note payable, secured by the capital stock of UDRC and UDRC II and certain other
receivables......................................................... $ 16,339 $ 33,900
Other notes payable bearing interest at rates ranging from 7.5% to 11% due through
July 2003, secured by certain real property and certain property and
Equipment........................................................... 1,658 2,939
------------- --------------
17,997 36,839
Less: Unamortized Loan Fees.......................................... 67 283
------------- --------------
Total................................................................. $ 17,930 $ 36,556
============== ==============
</TABLE>
Page 5
<PAGE>
Subordinated Notes Payable
A summary of Subordinated Notes Payable at September 30, 2000 and December
31, 1999 follows ($ in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
2000 1999
-------------- -------------
$13.5 million senior subordinated notes payable to unrelated parties,
bearing interest at 15% per annum payable quarterly, principal due
February 2003 and senior to subordinated debentures.................. $ 13,500 $ 15,000
$17.5 million subordinated debentures, interest at 12% per annum (approximately
18.8% effective rate) payable semi-annually, principal balance due October
23, 2003............................................................. 17,479 17,479
$11.9 million subordinated debentures, interest at 11% per annum
(approximately 19.7% effective rate) payable semi-annually, principal
balance due April 15, 2007............................................ 11,940
------------- ------------
Subtotal................................................................... 42,919 32,479
Less: Unamortized Loan Fees............................................... 162 605
Unamortized Discount - subordinated debentures.................. 6,609 3,263
------------ ------------
Total...................................................................... $ 36,148 $ 28,611
============ ============
</TABLE>
Note 5. Common Stock Equivalents
Net Earnings per common share amounts are based on the weighted average
number of common shares and common stock equivalents outstanding for the three
and nine-month periods ended September 30, 2000, and 1999. During July 2000,
the Company repurchased approxamatly 1.5 million shares of its common stock
pursuant to its stock repurchase program.
Net earnings per common share are as follows ($ and shares in thousands,
except for per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2000 1999 2000 1999
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Earnings from Continuing Operations $ 2,683 $ 3,657 $ 11,514 $ 6,068
=============== ============== =============== ==============
Net Earnings $ 2,683 $ 4,182 $ 11,514 $ 6,073
=============== ============== =============== ==============
Basic Earnings Per Share From Continuing Operations $ 0.21 $ 0.25 $ 0.83 $ 0.40
=============== ============== =============== ==============
Diluted Earnings Per Share From Continuing Operations $ 0.21 $ 0.24 $ 0.82 $ 0.39
=============== ============== =============== ==============
Basic Earnings Per Share $ 0.21 $ 0.28 $ 0.83 $ 0.40
=============== ============== =============== ==============
Diluted Earnings Per Share $ 0.21 $ 0.28 $ 0.82 $ 0.39
=============== ============== =============== ==============
Basic EPS-Weighted Average Shares Outstanding 12,597 14,903 13,847 15,161
Effect of Diluted Securities:
Warrants 3 11 10 -
Stock Options 147 253 187 223
--------------- -------------- --------------- --------------
Dilutive EPS-Weighted Average Shares Outstanding 12,747 15,167 14,044 15,384
=============== ============== =============== ==============
Warrants Not Included in Diluted EPS Since Antidilutive 1,124 1,049 1,124 1,170
=============== ============== =============== ==============
Stock Options Not Included in Diluted EPS Since Antidilutive 845 979 857 1,054
=============== ============== =============== ==============
</TABLE>
Page 6
<PAGE>
Note 6. Business Segments
The Company has three distinct business segments. These consist of retail
car sales operations (Retail Operations), the income resulting from the finance
receivables generated at the Company dealerships (Portfolio Operations), and
corporate and other operations (Corporate Operations). In computing operating
profit by business segment, the following items were considered in the Corporate
Operations category: portions of administrative expenses, interest expense and
other items not considered direct operating expenses. Identifiable assets by
business segment are those assets used in each segment of Company operations.
A summary of operating activity by business segment for the three and nine
month periods ended September 30, 2000 and 1999 follows ($ in thousands):
<TABLE>
<CAPTION>
Retail Portfolio Corporate Total
<S> <C> <C> <C> <C>
Three Months Ended September 30, 2000:
Sales of Used Cars $ 126,636 $ - $ - $ 126,636
Less: Cost of Cars Sold 70,760 - - 70,760
Provision for Credit Losses 26,162 9,930 - 36,092
------- --------- ---------- ------
Net Interest Income 29,714 (9,930) - 19,784
- 24,006 112 24,118
Servicing and Other Income - 308 - 308
------- --------- ---------- ------
Income before Operating Expenses 29,714 14,384 112 44,210
------- --------- ---------- ------
Operating Expenses:
Selling and Marketing 7,187 - - 7,187
General and Administrative 14,570 7,719 5,542 27,831
Depreciation and Amortization 1,201 278 806 2,285
------ --------- ---------- ------
22,958 7,997 6,348 37,303
------ --------- ---------- ------
Operating Income $ 6,756 $ 6,387 $ (6,236) $ 6,907
====== ========= ========== =======
Capital Expenditures $ 2,161 $ 615 $ 2,338 $ 5,114
====== ========= ========== =======
Identifiable Assets $ 78,542 $516,337 $ 19,353 $ 614,272
====== ========= ========== =======
Three Months Ended September 30, 1999:
Sales of Used Cars $ 103,314 $ - $ - 103,314
Less: Cost of Cars Sold 57,764 - - 57,764
Provision for Credit Losses 21,528 6,033 - 27,561
------- --------- --------- --------
24,022 (6,033) - 17,989
Net Interest Income - 15,555 178 15,733
Servicing and Other Income - 1,794 - 1,794
------- --------- --------- -------
Income before Operating Expenses 24,022 11,316 178 35,516
------- --------- --------- -------
Operating Expenses:
Selling and Marketing 6,023 - - 6,023
General and Administrative 11,187 4,796 4,311 20,294
Depreciation and Amortization 920 278 565 1,763
------- --------- --------- -------
18,130 5,074 4,876 28,080
------- --------- --------- -------
Operating Income $ 5,892 $ 6,242 $ (4,698) $ 7,436
======= ========= ========= =======
Capital Expenditures $ 1,339 $ 346 $ 376 $ 2,061
======= ========= ========= =======
</TABLE>
Page 7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Retail Portfolio Corporate Total
Nine Months Ended September 30, 2000
Sales of Used Cars $ 380,949 $ - $ - $ 380,949
Less: Cost of Cars Sold 212,119 - - 212,119
Provision for Credit Losses 77,994 24,883 - 102,877
------- --------- ---------- ---------
90,836 (24,883) - 65,953
Net Interest Income - 68,162 332 68,494
Servicing and Other Income - 1,701 - 1,701
-------- --------- ---------- ---------
Income before Operating Expenses 90,836 44,980 332 136,148
-------- --------- ---------- ---------
Operating Expenses:
Selling and Marketing 22,748 - - 22,748
General and Administrative 43,353 20,605 15,996 79,954
Depreciation and Amortization 3,405 858 2,461 6,724
-------- --------- ---------- ---------
69,506 21,463 18,457 109,426
-------- --------- ---------- ---------
Operating Income $ 21,330 $ 23,517 $ (18,125) $ 26,722
======== ========= ========== =========
Capital Expenditures $ 5,654 $ 909 $ 5,062 $ 11,625
======== ========= ========== =========
Identifiable Assets $ 78,542 $ 516,377 $ 19,353 $ 614,272
======== ========= ========== =========
Nine Months Ended September 30, 1999:
Sales of Used Cars $ 307,633 $ - $ - $ 307,633
Less: Cost of Cars Sold 173,395 - - 173,395
Provision for Credit Losses 63,552 17,561 - 81,113
--------- -------- --------- --------
70,686 (17,561) - 53,125
Net Interest Income - 36,301 348 36,649
Servicing and Other Income - 6,988 - 6,988
--------- -------- --------- --------
Income before Operating Expenses 70,686 25,728 348 96,762
--------- -------- --------- --------
Operating Expenses:
Selling and Marketing 17,959 - - 17,959
General and Administrative 33,685 13,963 14,115 61,763
Depreciation and Amortization 2,572 841 1,623 5,036
--------- -------- --------- --------
54,216 14,804 15,738 84,758
--------- -------- --------- --------
Operating Income $ 16,470 $ 10,924 $ (15,390) $ 12,004
========= ======== ========= ========
Capital Expenditures $ 4,854 $ 674 $ 1,021 $ 6,549
========= ======== ========= ========
</TABLE>
Note 7. Discontinued Operations
In February 1998, we announced our intention to close our branch office
network, through which we purchased retail installment contracts from third
party dealers, and exit this line of business. We completed the branch office
closure as of March 31, 1998. As a result of the branch office network closure,
we reclassified the results of operations of the branch office network in the
accompanying condensed consolidated balance sheets and condensed consolidated
statements of operations to discontinued operations.
Effective December 31, 1999, the Company adopted a formal plan to abandon
any effort for its third party dealer operations to acquire loans or servicing
rights to additional portfolios. Accordingly, our Cygnet Servicing and the
associated Cygnet Corporate segment also are reported as components of
discontinued operations. The Company plans to complete servicing the portfolios
that it currently services.
Page 8
<PAGE>
The components of Net Assets of Discontinued Operations as of September 30,
2000 and December 31, 1999 follow ($ in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
2000 1999
---------------- -----------------
Finance Receivables, net $ 6,949 $ 14,837
Residuals in Finance Receivables Sold 2,040 3,742
Investments Held in Trust - 1,545
Property and Equipment 457 2,114
Notes Receivable, net of Sub. Notes Payable - 6,697
Servicing Receivable 4,234 6,125
Other Assets, net of Accounts Payable and Accrued
Liabilities (9,469) (1,180)
---------------- -----------------
Net Assets of Discontinued Operations $ 4,211 $ 33,880
================ =================
</TABLE>
Note 8. Use of Estimates
The preparation of our condensed consolidated financial statements requires
us to make estimates and assumptions that affect the reported amount of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from our estimates.
Note 9. Reclassifications
We have made certain reclassifications to previously reported information to
conform to the current presentation.
Note 10. Subsequent Events
On November 9, 2000, Verde Investments, Inc. ("Verde"), an affiliate of Mr.
Ernest Garcia II, our chairman and largest shareholder, purchased a certain
property located in Phoenix, Arizona and simultaneously leased the property to
us pursuant to, among other terms, the following: 20 year term ending December
21, 2020, rent payable monthly with 5% annual rent adjustments; triple net
lease; four five-year options to renew; and, pursuant to a separate option
agreement which expires December 31, 2002, and an option to purchase the
property upon prior notice and at Verde's cost through December 31, 2020. We
intend to build a new headquarters at this location over the next several
months, obtain permanent financing upon completion of construction and exercise
our option to purchase the property.
On October 3, 2000, as previously announced, Mr. Ernest Garcia, II, made an
offer to the board of directors to purchase all of the outstanding shares of our
common stock not already held by him. Our board of directors established a
special transaction committee to evaluate and make a recommendation to the full
board. On October 27, 2000, after discussions with us, the board and the special
transaction committee, Mr. Garcia withdrew his offer. Several lawsuits were
filed in Delaware as a result of this offer. At this time, these lawsuits are
not being actively litigated and we do not know what will be the ultimate
outcome of these filings. If the plaintiffs do not dismiss the lawsuits, we
intend to vigorously defend against them. In his filings with the Securities and
Exchange Commission, Mr. Garcia has expressed a continuing interest in acquiring
all of the Company's outstanding common stock.
Page 9
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Introduction
We operate the largest chain of buy here-pay here used car dealerships in
the United States. At September 30, 2000, we operated 77 dealerships located in
eleven metropolitan areas in eight states. We have one primary line of business:
to sell and finance quality used vehicles to customers within what is referred
to as the sub-prime segment of the used car market. The sub-prime market is
comprised of customers who typically have limited credit histories, low incomes
or past credit problems.
As a buy here-pay here dealer, we offer the customer certain advantages over
more traditional financing sources including:
o expanded credit opportunities,
o flexible payment terms, including structuring loan payment due
dates as weekly or biweekly, often coinciding with a customer's
payday,
o the ability to make payments in person at the dealerships. This is
an important feature to many sub-prime borrowers who may not have
checking accounts or are otherwise unable to make payments by the
due date through use of the mail due to the timing of paydays.
We distinguish our retail operations from those of typical buy here-pay here
dealers through our:
o dedication to customer service, o advertising and marketing programs,
o larger inventories of used cars, o upgraded facilities, and
o network of multiple locations, o centralized purchasing.
We finance substantially all of the used cars that we sell at our
dealerships through retail installment loan contracts. Subject to the discretion
of our dealership or sales managers, potential customers must meet our formal
underwriting guidelines before we will agree to finance the purchase of a
vehicle. Our employees analyze and verify the customer credit application
information and subsequently make a determination whether to provide financing
to the customer.
Our business is divided into three operating segments; retail, portfolio and
corporate. Information regarding our operating segments can be found in Note (6)
of the Notes to Condensed Consolidated Financial Statements contained herein.
Operating segment information is also included in "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Business Segment
Information" found below.
In December 1999, we sold the Cygnet Dealer Finance (CDF) subsidiary and
also decided to abandon any efforts to acquire third party loans or servicing
rights to additional third party portfolios. As a result, CDF, Cygnet Servicing
and the associated Cygnet Corporate segment activities are classified as
discontinued operations for 1999. We plan to complete the servicing of the
portfolios that we currently service.
In the following discussion and analysis, we explain the results of
operations and general financial condition of Ugly Duckling and its
subsidiaries. In particular, we analyze and explain the changes in the results
of operations of our business segments for the three and nine month periods
ended September 30, 2000 and September 30, 1999.
Page 10
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA (unaudited)
UGLY DUCKLING CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
(Unaudited)
<TABLE>
<CAPTION>
At or for the Three Months Ended
---------------------------------------------------------------------------------------
Selected Financial Data Sept June Mar Dec Sept June Mar
2000 2000 2000 1999 1999 1999 1999
---------------------------------------------------------------------------------------
Operating Data: ($ and shares in millions, except per share, per unit data and number of loan data)
<S> <C> <C> <C> <C> <C> <C> <C>
Total Revenues $ 158.4 $ 152.0 $ 159.1 $ 105.4 $ 124.9 $ 115.9 $ 119.7
Sales of Used Cars $ 126.6 $ 121.5 $ 132.8 $ 82.3 $ 103.3 $ 97.9 $ 106.4
Earnings per Share - Continuing Operations $ 0.21 $ 0.31 $ 0.30 $ 0.17 $ 0.24 $ 0.12 $ 0.04
EBITDA $ 16.5 $ 18.2 $ 17.1 $ 13.0 $ 13.2 $ 8.6 $ 4.5
E-Commerce Revenue as % of Used Car Sales 9.5% 5.3% 4.3% 4.7% 2.6% 1.5% 0.0%
Number Dealerships in Operation 77 77 75 72 67 59 58
Average Sales per Dealership per Month 64 62 70 45 61 64 73
Number of Used Cars Sold 14,825 14,369 15,802 9,731 12,219 11,416 12,754
Sales Price - Per Car Sold $ 8,542 $ 8,458 $ 8,403 $ 8,455 $ 8,455 $ 8,574 $ 8,346
Cost of Sales - Per Car Sold $ 4,773 $ 4,761 $ 4,616 $ 4,690 $ 4,727 $ 4,865 $ 4,712
Gross Margin - Per Car Sold $ 3,769 $ 3,696 $ 3,787 $ 3,765 $ 3,728 $ 3,708 $ 3,634
Provision - Per Car Sold $ 2,435 $ 2,242 $ 2,188 $ 2,245 $ 2,256 $ 2,259 $ 2,177
Total Operating Expense - Per Car Sold $ 2,516 $ 2,466 $ 2,322 $ 2,763 $ 2,298 $ 2,427 $ 2,274
Total Operating Income - Per Car Sold $ 466 $ 691 $ 626 $ 587 $ 609 $ 321 $ 70
Total Operating Income $ 6.9 $ 9.9 $ 9.9 $ 5.7 $ 7.4 $ 3.7 $ 0.9
Earnings before Income Taxes $ 4.5 $ 7.3 $ 7.6 $ 4.4 $ 6.6 $ 2.8 $ 0.9
Cost of Used Cars as Percent of Sales 55.9% 56.3% 54.9% 55.5% 55.9% 56.7% 56.5%
Gross Margin as Percent of Sales 44.1% 43.7% 45.1% 44.5% 44.1% 43.3% 43.5%
Provision - % of Originations 29.0% 27.1% 27.0% 27.0% 26.9% 26.8% 27.0%
Total Operating Exp. - % of Total Revenues 23.6% 23.3% 23.1% 25.5% 22.5% 23.9% 24.2%
Segment Operating Expense Data:
Retail Operating Expense - Per Car Sold $ 1,549 $ 1,611 $ 1,481 $ 1,775 $ 1,484 $ 1,562 $ 1,431
Retail Operating Expense-% of Used Car Sales 18.1% 19.1% 17.6% 21.0% 17.5% 18.2% 17.1%
Corporate/Other Expense - Per Car Sold $ 428 $ 418 $ 387 $ 357 $ 399 $ 440 $ 458
Corporate/Other Expense - % of Total Revenue 4.0% 3.9% 3.8% 3.3% 3.9% 4.3% 4.9%
Portfolio Exp. Annualized - Managed Principal 6.1% 5.0% 6.2% 6.8% 4.7% 5.1% 5.7%
Balance Sheet Data:
Finance Receivables, net $ 491.9 $ 451.2 $ 407.3 $ 365.6 $ 321.7 $ 254.8 $ 190.1
Inventory $ 43.7 $ 45.9 $ 49.1 $ 62.9 $ 45.8 $ 37.7 $ 39.9
Total Assets $ 618.5 $ 577.5 $ 548.0 $ 536.7 $ 516.5 $ 467.0 $ 400.2
Notes Payable - Portfolio $ 362.3 $ 316.0 $ 282.9 $ 275.8 $ 244.4 $ 195.2 $ 171.5
Subordinated Notes Payable $ 36.1 $ 37.3 $ 28.9 $ 28.6 $ 37.1 $ 36.9 $ 38.3
Total Debt $ 416.3 $ 381.0 $ 345.2 $ 340.9 $ 317.4 $ 269.7 $ 210.4
Common Stock $ 173.7 $ 173.7 $ 173.7 $ 173.3 $ 173.3 $ 173.9 $ 173.8
Treasury Stock $ (39.4) $ (28.4) $ (20.3) $ (20.3) $ (20.3) $ (19.8) $ (19.8)
Total Stockholders' Equity $ 158.5 $ 166.8 $ 170.6 $ 165.7 $ 162.5 $ 159.4 $ 157.9
Common Shares Outstanding - End of Period
12,378 13,899 14,980 14,888 14,889 14,943 14,939
Book Value per Share $ 12.81 $ 12.00 $ 11.39 $ 11.13 $ 10.91 $ 10.67 $ 10.57
Tangible Book Value per Share $ 11.78 $ 11.02 $ 10.43 $ 10.15 $ 9.95 $ 9.73 $ 9.62
Total Debt to Equity 2.6 2.3 2.0 2.1 2.0 1.7 1.3
Loan Portfolio Data:
Interest Income $ 31.4 $ 29.9 $ 25.5 $ 22.7 $ 19.8 $ 15.8 $ 10.4
Average Yield on Portfolio 26.1% 26.8% 26.2% 25.4% 25.9% 26.3% 26.2%
Principal Balances Originated $ 124.4 $ 118.8 $ 128.1 $ 80.9 $ 102.6 $ 96.1 $ 102.7
Principal Balances Originated as % of Sales 98.2% 97.7% 96.5% 98.3% 99.3% 98.2% 96.5%
Number of Loans Originated 14,748 14,291 15,721 9,650 12,137 11,335 12,634
Average Original Amount Financed $ 8,433 $ 8,311 $ 8,150 $ 8,384 $ 8,453 $ 8,478 $ 8,131
# of Loans Originated as % of Units Sold 99.5% 99.5% 99.5% 99.2% 99.3% 99.3% 99.1%
Managed Portfolio Delinquencies:
Current 72.4% 71.9% 74.8% 63.2% 61.5% 63.6% 73.2%
1 to 30 days 19.3% 20.9% 19.9% 28.2% 28.2% 29.1% 21.3%
31 to 60 days 4.9% 4.5% 3.4% 5.7% 6.8% 4.7% 3.5%
Over 60 days 3.4% 2.7% 1.9% 2.9% 3.5% 2.6% 1.9%
Principal Outstanding - Managed $ 525.5 $ 500.0 $ 461.8 $ 424.5 $ 427.4 $ 383.6 $ 341.0
Principal Outstanding - Retained $ 512.8 $ 472.3 $ 418.9 $ 358.8 $ 332.0 $ 256.6 $ 182.2
Number of Loans Outstanding - Managed 85,240 81,407 75,496 70,450 68,420 61,661 56,333
Number of Loans Outstanding - Retained 79,848 71,518 62,459 53,081 45,874 34,065 27,924
</TABLE>
Page 11
<PAGE>
Third Quarter highlights include:
o Earnings from continuing operations totaled $2.7 million, or $0.21 per
diluted share, compared with earnings from continuing operations of $3.7
million, or $0.24 per share in the year-ago quarter
o Total revenues from continuing operations increased 27% to $158.4 million
from $124.9 million in the year-ago quarter
o E-Commerce provided $12.0 million in revenue and 1,417 cars sold during
the third quarter of 2000 compared with $6.5 million in revenue and 763
cars sold during the second quarter of 2000
o On-balance sheet loan portfolio principal balances reached $512.8
million, representing a 9% sequential increase over the second quarter of
2000 and a 55% rise over the year-ago quarter
o Provision for loan losses increased 2% to 29% of amount financed
(announced September 8, 2000)
o New loan originations reached $124.4 million, a 21% increase over
the year-ago quarter
Sales of Used Cars and Cost of Used Cars Sold
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, Percentage September 30, Percentage
------------------------- -------------------------
2000 1999 Change 2000 1999 Change
----------- ------------ ------------ ------------ ----------- -------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Number of Used Cars Sold 14,825 12,219 21.3% 44,996 36,389 23.7%
=========== ============ ============ ===========
Sales of Used Cars $ 126,636 $ 103,314 22.6% $ 380,949 $ 307,633 23.8%
Cost of Used Cars Sold 70,760 57,764 22.5% 212,119 173,395 22.3%
----------- ------------ ------------ -----------
Gross Margin $ 55,876 $ 45,550 22.7% $ 168,830 $134,238 25.8%
=========== ============ ============ ===========
Gross Margin % 44.1% 44.1% 44.3% 43.6%
Per Car Sold:
Sales $ 8,542 $ 8,455 1.0% $ 8,466 $ 8,454 0.1%
Cost of Used Cars Sold 4,773 4,727 1.0% 4,714 4,765 (1.1)%
----------- ------------ ------------ -----------
Gross Margin $ 3,769 $ 3,728 1.1% $ 3,752 $ 3,689 1.7%
=========== ============ ============ ===========
</TABLE>
For the three and nine-month periods ended September 30, 2000, the number of
cars sold increased by 21.3% and 23.7% and Used Car Sales revenues increased by
22.6% and 23.8%, respectively, over the same periods in 1999. The increase in
both units sold and revenues is primarily the result of an increase in the
number of dealerships in operation coupled with an increase in E-commerce
related business.
During 1999, we expanded our marketing efforts to include E-commerce by
accepting credit applications from potential customers via our website, located
at http://www.uglyduckling.com. Credit inquiries received over the web are
reviewed by our employees, who then contact the customers and schedule
appointments. We continue to monitor and enhance our Internet application
levels. These efforts continue to provide an increasing number of used cars
sold. During the third quarter of 2000, we sold 1,417 cars generating $12.0
million in revenue versus 763 cars totaling $6.5 million in revenue during the
second quarter and up from 561 cars sold and $4.7 million in revenue during the
first quarter of 2000. The E-commerce customer group generally outperforms
other customers in terms of loan performance.
Same store unit sales for the three months ended September 30, 2000
decreased approximately 2% from the same three month period of 1999. For the
nine months ended September 30, 2000, same store sales decreased almost 3% from
the corresponding period of the previous year. The decrease is primarily due to
the increased emphasis on underwriting and obtaining higher quality loans.
The Cost of Used Cars Sold for the three and nine month periods ended
September 30, 2000, increased by 22.5% and 22.3%, respectively, over the
comparable periods of the previous year. The increases for these periods reflect
a rise in the volume of cars sold due to the increase in number of dealerships
in operation and E-commerce related business as previously mentioned. The Cost
of Used Cars Sold on a per car basis increased 1.0% for the three months ended
September 30, 2000 versus a decrease of 1.1% for the nine months ended September
30, 2000 over the same periods of the prior year. The increase for the quarter
was more than offset by an increase in the revenue earned per car. The overall
decrease in the cost of cars sold for the nine
Page 12
<PAGE>
month period contributed to an improvement in the year to date gross margin
percent. The gross margin on used car sales (Sales of Used Cars less Cost of
Used Cars Sold excluding Provision for Credit Losses) as a percentage of related
revenue remained constant at 44.1% for the three months ended September 30, 2000
and 1999, and increased .7% for the nine month period ended September 30, 2000,
to 44.3% from 43.6% for the same period of the prior year. On a per car sold
basis, gross margin increased slightly to $3,769 per car for the three month
period ended September 30, 2000 from $3,728 during the same quarter of the
previous year and rose 1.7% to $3,752 per car for the nine month period ended
September 30, 2000 as compared to the corresponding period of 1999. The increase
in both overall gross margin as well as on a per car sold basis for the nine
months ended September 30, 2000 is attributable to a decrease in the cost of
used cars sold coupled with an increase in average revenue per car sold.
We finance substantially all of our used car sales. The percentage of cars
sold financed has remained relatively constant from 1999 versus 2000. The
percentage of sales revenue financed has decreased for the quarter ended
September 30, 2000 to 98.2% as compared to 99.3% for the same quarter of the
previous year. The year to date percentage for 2000 has also decreased to 97.5%
from 98.0% for 1999. This decrease can be attributed to the change in the
minimum down payment requirement from $500 to $600 in May 2000. The following
table indicates the percentage of sales units and revenue financed:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
2000 1999 2000 1999
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Percentage of used cars sold financed 99.5% 99.3% 99.5% 99.2%
===== ===== ===== =====
Percentage of sales revenue financed 98.2% 99.3% 97.5% 98.0%
===== ===== ===== =====
Provision for Credit Losses
</TABLE>
The following is a summary of the Provision for Credit Losses:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, Percentage September 30, Percentage
-------------------------- --------------------------
2000 1999 Change 2000 1999 Change
------------ ------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Provision for Credit Losses (in thousands) $ 36,092 $ 27,561 31.0% $ 102,877 $ 81,113 26.8%
============ ============= ============ =============
Provision per loan originated $ 2,447 $ 2,271 7.8% $ 2,298 $ 2,247 2.3%
============ ============= ============ =============
Provision as a percentage of
principal balances originated 29.0% 26.9% 27.7% 26.9%
============ ============= ============ =============
</TABLE>
The Provision for Credit Losses is the amount we charge to current
operations on each car sold to establish an allowance for credit losses. The
Provision for Credit Losses for the three and nine month periods ended September
30, 2000 increased 31.0% and 26.8%, respectively, over the comparable periods of
the prior year. The increase was primarily due to an increase in the volume of
loans originated in addition to an increase in the overall provision charged
from 27% of loans originated to 29%, effective beginning with the third quarter
of 2000 to establish an adequate allowance for the on balance sheet portfolio.
The average amount financed for the three month period ended September 30, 2000
decreased $20 to $8,433 per unit versus the same period of the previous year.
The average amount financed for the nine month period ended September 30, 2000
decreased $53 to $8,295 per unit as compared to the corresponding nine months of
the previous year. The decrease is primarily due to a change in the required
minimum down payment from $500 to $600, effective May 1, 2000. The average down
payment for the third quarter of 2000, the first full quarter with the increased
down payment requirement, was $718 versus $665 during the third quarter of 1999.
See Management's Discussion and Analysis - "Static Pool Analysis" for
further Provision for Credit Loss discussion.
Page 13
<PAGE>
Net Interest Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, Percentage September 30, Percentage
-------------------------- Change ------------------- Change
2000 1999 2000 1999
------------ ------------ ------------ ------------ ------------- ------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income $ 31,436 $ 19,775 59.0% $ 86,838 $ 45,904 89.2%
Portfolio Interest Expense 7,318 4,042 81.0% 18,344 9,255 98.2%
------------ ------------ ------------ -------------
Net Interest Income $ 24,118 $ 15,733 53.3% $ 68,494 $ 36,649 86.9%
============ ============ ============ =============
Average Effective Yield 26.1% 25.9% 0.8% 26.4% 26.1% 1.1%
Average Borrowing Cost 10.7% 11.6% (7.8)% 10.5% 10.9% (3.7)%
</TABLE>
Interest Income consists primarily of interest on finance receivable
principal balances retained on our balance sheet. Retained principal balances
grew to $512.8 million at September 30, 2000 from $332.0 million at September
30, 1999 primarily as a result of the change in the way we structure our
securitizations to the collateralized borrowing method during the fourth quarter
of 1998. Prior to the fourth quarter of 1998, securitized loans were transferred
off of our balance sheet and a gain on sale was recorded. Under the
collateralized borrowing method, the securitized loans are retained on our
balance sheet and the income and associated costs are recognized over the life
of the loan.
Servicing Income
We generate Servicing Income primarily from servicing the remaining loan
portfolios securitized under the gain on sale method. A summary of Servicing
Income follows for the three and nine months ended September 30, 2000 and 1999
($ in thousands):
<TABLE>
<CAPTION>
Three Months Ended Percentage Nine Months Ended Percentage
September 30, Change September 30, Change
----------------------- -------------- ----------------------- --------------
2000 1999 2000 1999
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Servicing Income $ 308 $ 1,794 (82.8)% $1,701 $ 6,988 (75.7)%
========== =========== ============== ========== =========== ==============
</TABLE>
We service loans for monthly fees ranging from .25% to .33% of the beginning
of month principal balances (3.0% to 4.0% per year). The decrease in Servicing
Income for the three and nine month periods ended September 30, 2000 is due to
the decrease in remaining principal balances securitized and serviced under the
gain on sale method from $95.5 million at September 30, 1999 to $12.7 million at
September 30, 2000. We expect the remaining principal balance of $12.7 million
to completely runoff by December 31, 2000.
Income before Operating Expenses
Income before Operating Expenses grew by 24.5% to $44.2 million for the
three month period ended September 30, 2000 and increased 40.7% to $136.1
million for the nine month period ended September 30, 2000. Income before
Operating Expenses for the three and nine month periods ended September 30, 1999
was $35.5 million and $96.8 million, respectively. Growth in Sales of Used Cars,
an increase in gross margins and an increase in Interest Income were the primary
contributors to the increase.
Page 14
<PAGE>
Operating Expenses
<TABLE>
<CAPTION>
Three Months Ended Percentage Nine Months Ended Percentage
September 30, Change September 30, Change
2000 1999 2000 1999
--------- --------- -------------- --------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Operating Expenses (in thousands).......$ 37,303 $ 28,080 32.8% $ 109,426 $ 84,758 29.1%
Per Car Sold............................$ 2,516 $ 2,298 9.5% $ 2,432 $ 2,329 4.4%
-------- ------------ ------------- ------------
As % of Total Revenues.................. 23.6% 22.5% 23.3% 23.5%
========= =========== ========== ==========
</TABLE>
Operating expenses, which consist of selling, marketing, general and
administrative and depreciation/amortization expenses, increased as a result of
overall growth in our operations. The increase in operating expenses as a
percentage of total revenues for the three months ended September 30, 2000 is
primarily the result an increase in salary and benefit related costs. The slight
decrease for the nine month period ended September 30, 2000 versus 1999 was
primarily due to increased economies of scale related to marketing efforts with
the addition of more dealerships in existing markets, efficiencies gained from
enhanced management information systems and an increase in interest income,
offset by the additional accruals mentioned above.
Interest Expense
Portfolio interest expense increased to $7.3 million and $18.3 million for
the three and nine month periods ending September 30, 2000 versus $4.0 million
and $9.3 million for the same periods of the previous year. The increase is due
to the increase in Portfolio Notes Payable which consist of our Class A
obligations related to our securitization program along with our revolving
credit facility with GE Capital. The majority of the increase is attributable to
the securitization related on balance sheet debt which has grown due to the
change in the way we record our securitization transactions from the gain on
sale method to the collateralized borrowing method during the fourth quarter of
1998. This increase in interest expense is offset by the additional interest
income earned from the growth in finance receivables retained on our balance
sheet as previously mentioned.
Interest expense arising from our subordinated debt totaled $2.4 million for
the three months ended September 30, 2000 versus $0.9 million for the three
months ended September 30, 1999. For the nine month periods ended September 30,
2000 and 1999, interest expense was $7.2 million and $1.7 million, respectively.
While we have additional interest expense arising from subordinated notes
payable, a portion of this interest expense was attributed to the financing of
assets and activities reported as discontinued operations. As the assets and
activities of discontinued operations diminish, we do not expect to retire the
subordinated notes payable but rather use these borrowings to fund our growth.
Accordingly, we would expect to have a disproportionate increase in interest
expense allocated to continuing operations in future periods as existing
subordinated debt is used to fund our growth and the allocation of this interest
to discontinued operations decreases. Subordinated debt carries interest rates
generally higher than those charged on borrowings collateralized by our finance
receivables.
Income Taxes
Income taxes totaled $1.9 million and $8.0 million for the three and nine
month periods ended September 30, 2000, respectively, and $2.9 million and $4.2
million for the three and nine months ended September 30, 1999, respectively.
Our effective tax rate was 41% for the three and nine months ended September 30,
2000 versus 44% and 41% for the three and nine months ended September 30, 1999,
respectively.
Earnings from Continuing Operations
Earnings from continuing operations totaled $2.7 million and $11.5 million
for the three and nine months ended September 30, 2000, respectively, versus
$3.7 million and $6.1 million, respectively, for the same three and nine month
periods of the previous year. The decrease for the three months ended September
30, 2000 is primarily a result of the increase in the provision for credit loss
from 27% to 29% of originations effective on loans originated beginning with the
third quarter of 2000, partially offset by an increase in the amount of used
cars sold. The increase for the nine months ended September 30, 2000 is
primarily due to an increase in the volume of used cars sold, increases in gross
margin and growth in interest income. These improvements were offset by a
decrease in servicing income resulting from the decline in remaining principal
balances securitized and serviced under the gain on sale method.
Discontinued Operations
Page 15
<PAGE>
Discontinued operations provided no income or loss for the three and nine
months ended September 30, 2000 versus income, net of income tax benefits, of
$.5 million and approximately break even for the three and nine months ended
September 30, 1999, respectively. Effective December 31, 1999, we adopted a
formal plan to abandon any effort for our third party dealer operations to
acquire loans or servicing rights to additional portfolios. Accordingly, our
Cygnet Servicing and the associated Cygnet Corporate segment are reported as
components of discontinued operations. We plan to complete servicing the
portfolios that we currently service.
Business Segment Information
We report our operations based on three operating segments. These segments
are reported as Retail, Portfolio and Corporate. These segments were previously
reported as Company Dealership, Company Dealership Receivables and Corporate and
Other, respectively.
Operating Expenses for our business segments, along with a description of
the included activities, for the three and nine month periods ended September
30, 2000 and 1999 are as follows:
Retail Operations. Operating expenses for our Retail segment consist of
Company marketing efforts, maintenance and development of dealership and
inspection center sites, and direct management oversight of used car
acquisition, reconditioning and sales activities. A summary of retail operating
expenses follows ($ in thousands except per car sold data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, Percentage September 30, Percentage
-------------------------- --------------------------
2000 1999 Change 2000 1999 Change
------------ ------------ ------------- ----------- ------------ --------------
Retail Operations:
<S> <C> <C> <C> <C> <C> <C>
Selling and Marketing $ 7,187 $ 6,023 19.3% $ 22,748 $ 17,959 26.7%
General and Administrative 14,570 11,187 30.2% 43,353 33,685 28.7%
Depreciation and Amortization 1,201 920 30.5% 3,405 2,572 32.4%
------------ ------------ ----------- ------------
$22,958 $18,130 26.6% $ 69,506 $ 54,216 28.2%
============ ============ =========== ============
Per Car Sold:
Selling and Marketing $ 485 $ 493 (1.6)% $ 506 $ 494 2.4%
General and Administrative 983 916 7.3% 963 925 4.1%
Depreciation and Amortization 81 75 8.0% 76 71 7.0%
------------ ------------ ----------- ------------
$ 1,549 $ 1,484 4.4% $ 1,545 $ 1,490 3.7%
============ ============ =========== ============
As % of Used Cars Sold Revenue:
Selling and Marketing 5.7% 5.8% 6.0% 5.8%
General and Administrative 11.5% 10.8% 11.3% 10.9%
Depreciation and Amortization 0.9% 0.9% 0.9% 0.8%
------------ ------------ ----------- ------------
18.1% 17.5% 18.2% 17.6%
============ ============ =========== ============
</TABLE>
Selling and Marketing expenses as a percentage of related revenue remained
relatively constant for the three months ended September 30, 2000 versus the
same period of the previous year. For the nine month period ended September 30,
2000, selling and marketing expenses increased slightly to 6.0% from 5.8% over
the same period of 1999. Economies of scale gained from additional dealerships
in existing markets and the additional revenue from internet based sales have
allowed the Selling and Marketing expenses as a percentage of related revenue to
remain relatively stable but have increased on a per car sold basis primarily
resulting from an increase in commission related expenses.
General and Administrative expenses increased for the three and nine month
periods ended September 30, 2000, principally as a result of increases in salary
and benefit costs but have shown a slight decrease from the second quarter of
2000 due to the implementation of a cost reduction plan.
Page 16
<PAGE>
Portfolio Operations. Operating expenses for our Portfolio segment consist
of loan servicing and collection efforts, securitization activities, and other
operations pertaining directly to the administration and collection of the loan
portfolio ($ in thousands except expense per month per loan serviced).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, Percentage September 30, Percentage
----------------------- ------------------------
2000 1999 Change 2000 1999 Change
----------- ----------- -------------- ------------ ----------- -------------
Portfolio Expense:
<S> <C> <C> <C> <C> <C> <C>
General and Administrative $ 7,719 $ 4,796 60.9% $20,605 $ 13,963 47.6%
Depreciation and Amortization 278 278 0.0% 858 841 2.0%
----------- ----------- ------------ -----------
Portfolio Expense $ 7,997 $ 5,074 57.6% $21,463 $ 14,804 45.0%
=========== =========== ============ ===========
Expense per Month per Loan Serviced $ 29.89 $ 20.50 $ 27.57 $ 20.47
=========== =========== ============ ===========
Annualized Expense as % of Managed
Principal Balances 6.1% 4.7% 5.4% 4.6%
=========== =========== ============ ===========
</TABLE>
The increase in operating expenses as well as the expense per month per loan
serviced for the three and nine month periods ended September 30, 2000 for our
Portfolio segment is primarily a result of the increased number of loans in our
portfolio. Also attributing to the increase were costs incurred resulting from
the deployment of collectors out to our dealerships, market adjustments made to
collection staff wages and a decrease in the number of delinquent accounts
serviced per collector. We expect the portfolio expense and the expense per
month per loan serviced to remain at or about current levels as we have
completed the deployment of collectors to our dealerships. However, we believe
the increase in expense will be more than offset by lower delinquencies and
ultimately lower loan losses.
Corporate Operations. Operating expenses for our Corporate segment consist
of costs to provide managerial oversight and reporting for the Company, develop
and implement policies and procedures, and provide expertise to the Company in
areas such as finance, legal, human resources and information technology.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, Percentage September 30, Percentage
----------------------- -------------------------
($ in thousands except per car sold 2000 1999 Change 2000 1999 Change
data)
---------- ----------- ------------ ----------- ------------ ------------
Corporate Expense:
<S> <C> <C> <C> <C> <C> <C>
General and Administrative $ 5,542 $ 4,311 28.6% $15,996 $ 14,115 13.3%
Depreciation and Amortization 806 565 42.7% 2,461 1,623 51.6%
---------- ----------- ----------- ------------
Corporate Expense $ 6,348 $ 4,876 30.2% $18,457 $ 15,738 17.3%
========== =========== =========== ============
Per Car Sold $ 428 $ 399 $ 410 $ 432
========== =========== =========== ============
As % of Total Revenues 4.0% 3.9% 3.9% 4.4%
========== =========== =========== ============
</TABLE>
Operating expenses related to our Corporate segment as a percent of total
revenue remained relatively consistent for both the three and nine months ended
September 30, 2000, versus the same periods of 1999. However, on a per car sold
basis corporate expenses increased $29 per car for the quarter ended September
30, 2000, as compared to the same quarter of the previous year. The increase is
primarily attributable to an increase in employee benefit related accruals. For
the year to date period ended September 30, 2000, corporate expenses on a per
car sold basis decreased $22 primarily due to various operating efficiencies
including those gained by the consolidation of all accounting and management
information to a single computer system in early 1999, partially offset by the
increase in employee benefit related accruals mentioned above. Further, as new
dealerships opened in existing markets, revenue and units sold increased while
related expenditures increased at a lesser rate. Finally, as our retained
portfolio increased, there is a proportionate increase in net interest income
thereby improving the ratio of corporate expenses to total revenues.
Page 17
<PAGE>
Financial Position
The following table represents key components of our financial position ($
in thousands):
<TABLE>
<CAPTION>
September 30, December 31, Percentage
2000 1999 Change
----------------- ------------------ ------------
<S> <C> <C> <C>
Total Assets $ 618,483 $ 536,711 15.2%
Inventory 43,739 62,865 (30.4)%
Finance Receivables, net 491,880 365,586 34.5%
Net Assets of Discontinued Operations 4,211 33,880 (87.6)%
Total Debt 416,333 340,941 22.1%
Notes Payable - Portfolio 362,255 275,774 31.4%
Other Notes Payable 17,930 36,556 51.0)%
Subordinated Notes Payable 36,148 28,611 26.3%
Stockholders' Equity $ 158,522 $ 165,680 (4.3)%
</TABLE>
Total Assets. The increase in total assets is primarily due to the growth in
Finance Receivables, Net, offset by the decrease in Inventory and Net Assets of
Discontinued Operations.
Inventory. Inventory represents the acquisition and reconditioning costs of
used cars located at our dealerships and our inspection centers. The change in
inventory from December 31, 1999 to September 30, 2000 is due to management's
decision to increase inventory levels at the end of 1999 in preparation for the
strong seasonal sale periods, which are typically the first and second quarters
of the year. We generally acquire our used car inventory from three sources:
approximately 50% from auctions, 30% from wholesalers and 20% from new car
dealerships.
Growth in Finance Receivables, net. Due to the growth in the volume of cars
sold, Finance Receivables, net as of September 30, 2000 increased 34.5% from
December 31, 1999. See Note (2) to the Condensed Consolidated Financial
Statements for the details of the components of Finance Receivables, net.
The following table reflects the growth in principal balances retained on
our balance sheet measured in terms of the principal amount ($ in thousands) and
the number of loans outstanding.
<TABLE>
<CAPTION>
Managed Loans Outstanding
------------------------------------------------------------------
Principal Balances Number of Loans
------------------------------- ---------------------------------
September 30, December 31, September 30, December 31,
2000 1999 2000 1999
------------------------------- ---------------------------------
------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Principal - Managed......................... $ 525,498 $ 424,480 85,240 70,450
Less: Principal - Securitized and Sold..... 12,735 65,662 5,392 17,369
------------------------------- ---------------------------------
Principal - Retained on Balance Sheet....... $ 512,763 $ 358,818 79,848 53,081
=============================== =================================
</TABLE>
The increase in Principal Balances - Retained on Balance Sheet was primarily
due to growth in finance receivables as a result of increased used car sales and
financing, partially offset by the principal balance runoff of loans originated
in prior periods. Used Car Sales totaled 14,825 for the quarter ended September
30, 2000, versus sales of 12,219 used cars during the same quarter of the prior
year. Used Car Sales for the nine months ended September 30, 2000 were 44,996 as
compared to sales of 36,389 for the nine months ended September 30, 1999.
Page 18
<PAGE>
The following table reflects activity in the Allowance for Credit Losses, as
well as information regarding charge off activity, for the three and nine months
ended September 30, 2000 and 1999 ($ in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2000 1999 2000 1999
------------- ------------ ------------- ------------
Allowance Activity:
<S> <C> <C> <C> <C>
Balance, Beginning of Period $ 98,533 $ 66,905 $ 76,150 $ 24,777
Provision for Credit Losses 36,092 27,561 102,877 81,113
Other Allowance Activity (1,250) 3,738 (2,250) 3,835
Net Charge Offs (33,332) (17,506) (76,734) (29,027)
------------- ------------ ------------- ------------
Balance, End of Period $100,043 $80,698 $100,043 $ 80,698
============ ============ ============= ============
Allowance as a Percent of Period End Balances 19.5% 24.3% 19.5% 24.3%
============ ============ ============= ============
Charge off Activity:
Principal Balances $ (41,934) $ (22,030) $ (99,076) $ (36,610)
Recoveries, net 8,602 4,524 22,342 7,583
------------- ------------ ------------- ------------
Net Charge Offs $ (33,332) $ (17,506) $ (76,734) $ (29,027)
============= ============ ============= ============
</TABLE>
Even though a contract is charged off, we continue to attempt to collect the
contract. Recoveries as a percentage of principal balances charged off from
retail operations averaged 20.5% for the three months ended September 30, 2000
and 1999. Recoveries as a percentage of principal balances charged off from
retail operations averaged 22.6% for the nine months ended September 30, 2000
versus 20.7% for the same period of 1999. The increase is due to the initiatives
taken to retain qualified loan service staff and reduce the number of
delinquencies serviced per collector.
The Allowance for Credit Losses is maintained at a level that in
management's judgment is adequate to provide for estimated probable credit
losses inherent in our retail portfolio. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Static Pool
Analysis" below.
Static Pool Analysis
We use a "static pool" analysis to monitor performance for loans we have
originated at our dealerships. In a static pool analysis, we assign each month's
originations to a unique pool and track the charge offs for each pool
separately. We calculate the cumulative net charge offs for each pool as a
percentage of that pool's original principal balances, based on the number of
complete payments made by the customer before charge off. The table below
displays the cumulative net charge offs of each pool as a percentage of original
loan cumulative balances, based on the quarter the loans were originated. The
table is further stratified by the number of payments made by our customers
prior to charge off. For periods denoted by "x", the pools have not seasoned
sufficiently to allow us to compute cumulative losses. For periods denoted by
"-", the pools have not yet reached the indicated cumulative age. While we
monitor static pools on a monthly basis, for presentation purposes we are
presenting the information in the table below on a quarterly basis.
Page 19
<PAGE>
Currently reported cumulative losses may vary from those previously reported
due to ongoing collection efforts on charged off accounts, and the difference
between final proceeds on the sale of repossessed collateral versus our
estimates of the sale proceeds. Management, however, believes that such
variation will not be material.
The following table sets forth as of October 31, 2000, the cumulative net
charge offs as a percentage of original loan cumulative (pool) balances, based
on the quarter of origination and segmented by the number of monthly payments
completed by customers before charge off. The table also shows the percent of
principal reduction for each pool since inception and cumulative total net
losses incurred (TLI).
Pool's Cumulative Net Losses as Percentage of Pool's Original
Aggregate Principal Balance
($ in thousands)
<TABLE>
<CAPTION>
Monthly Payments Completed by Customer Before Charge Off
--------------------------------------------------------------------
Orig. 0 3 6 12 18 24 TLI Reduced
---------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993 $ 12,984 9.1% 22.1% 28.5% 33.8% 35.9% 36.5% 36.8% 100.0%
1994 $ 23,589 5.3% 14.8% 19.9% 25.6% 28.0% 28.7% 28.8% 100.0%
1995 $ 36,569 2.0% 8.1% 13.2% 19.2% 22.3% 23.6% 24.1% 100.0%
1996:
1st Quarter $ 13,635 1.7% 8.1% 13.8% 20.8% 24.8% 26.1% 27.1% 100.0%
2nd Quarter $ 13,462 2.3% 9.3% 13.4% 22.0% 25.9% 27.6% 29.0% 100.0%
3rd Quarter $ 11,082 1.7% 6.9% 12.5% 21.3% 25.4% 27.5% 28.6% 100.0%
4th Quarter $ 10,817 0.7% 8.4% 15.9% 24.8% 29.1% 30.9% 32.0% 99.9%
1997:
1st Quarter $ 16,279 2.1% 10.8% 18.2% 24.9% 30.0% 32.2% 33.7% 99.7%
2nd Quarter $ 25,875 1.5% 9.9% 15.8% 22.8% 27.4% 29.5% 30.7% 99.0%
3rd Quarter $ 32,147 1.4% 8.4% 13.2% 22.5% 27.0% 29.3% 30.6% 98.2%
4th Quarter $ 42,529 1.4% 6.8% 12.6% 21.9% 26.2% 28.9% 29.9% 97.0%
1998:
1st Quarter $ 69,708 0.9% 6.9% 13.5% 21.0% 26.5% 28.9% 29.8% 95.6%
2nd Quarter $ 66,908 1.1% 8.1% 14.2% 21.8% 27.4% 29.4% 29.8% 92.4%
3rd Quarter $ 71,027 1.0% 7.9% 13.4% 23.1% 27.9% x 30.2% 90.1%
4th Quarter $ 69,583 0.9% 6.6% 13.1% 24.4% 29.3% - 30.4% 83.6%
1999:
1st Quarter $ 102,733 0.8% 7.5% 15.1% 23.7% x - 28.7% 75.8%
2nd Quarter $ 96,098 1.1% 9.9% 16.8% 25.6% - - 28.1% 66.6%
3rd Quarter $ 102,599 1.0% 8.3% 14.2% x - - 23.8% 56.5%
4th Quarter $ 80,900 0.7% 6.0% 12.9% - - - 17.4% 43.4%
2000: - - -
1st Quarter $ 128,123 0.3% 6.6% x 11.8% 32.0%
2nd Quarter $ 118,778 0.6% x - - - - 5.9% 18.1%
3rd Quarter $ 124,367 x - - - - - 0.5% 2.1%
</TABLE>
Page 20
<PAGE>
The following table sets forth the principal balances delinquency
status as a percentage of total outstanding
contract principal balances from dealership operations.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------------- ----------------
Days Delinquent:
<S> <C> <C>
Current 72.4% 63.2%
1-30 Days 19.3% 27.8%
31-60 Days 4.9% 5.9%
61-90 Days 3.4% 3.1%
---------------- ----------------
Total Portfolio 100.0% 100.0%
================ ================
</TABLE>
In accordance with our charge off policy, there are no accounts more than 90
days delinquent as of September 30, 2000.
Although loan losses on recently originated loan pools indicate improved
loan performance over those loan pools originated in prior years, based on an
extensive review of delinquency trends, historical loan losses and projected
charge offs for the entire on balance sheet portfolio, we have increased our
provision for credit losses effective with loans originated during the third
quarter of 2000. The increase provides for a provision of an additional 2% of
loans originated, which results in 29% of the amount financed. The increase
provides an allowance for credit loss at quarter end within the targeted range
for estimated net charge offs for the entire on balance sheet portfolio for the
next 12 to 15 months. We will continue to monitor the on balance sheet loan
portfolio performance to evaluate the on going adequacy of our provision for
credit losses.
Securitizations
Under the current legal structure of our securitization program, we sell
loans to our bankruptcy remote subsidiaries that then securitize the loans by
transferring them to separate trusts that issue several classes of notes and
certificates collateralized by the loans. The securitization subsidiaries then
sell Class A notes or certificates (Class A obligations or Notes Payable) to
investors and subordinate classes are retained by us. We continue to service the
securitized loans.
The Class A obligations have historically received investment grade ratings.
To secure the payment of the Class A obligations, the securitization
subsidiaries obtain an insurance policy from MBIA Insurance Corporation that
guarantees payment of amounts to the holders of the Class A obligations.
Additionally, we also establish a cash "reserve" account for the benefit of the
Class A obligation holders. The reserve accounts are classified in our condensed
consolidated financial statements as Investments Held in Trust and are a
component of Finance Receivables, net.
Reserve Account Requirements. Under our current securitization structure, we
make an initial cash deposit into a reserve account, generally equivalent to 4%
of the initial underlying Finance Receivables principal balance, and pledge this
cash to the reserve account agent. The trustee then makes additional deposits to
the reserve account out of collections on the securitized receivables as
necessary to fund the reserve account to a specified percentage, ranging from
8.0% to 12.0%, of the underlying Finance Receivables' principal balance. The
trustee makes distributions to us when:
o the reserve account balance exceeds the specified percentage,
o the required periodic payments to the Class A certificate holders are current,
and
o the trustee, servicer and other administrative costs are current.
With our existing securitizations, we are required to maintain certain cash
balances in the reserve accounts. These balances vary by trust and may change
based on the level of delinquencies and charge offs on the loans of the
respective trusts. As of October 15, 2000, primarily due to an increase in
delinquencies on loans in certain trusts, the targeted reserve account balances
for two trusts were increased and the actual balances were $5.8 million
collectively under the increased specified levels. While these increased
targeted reserve account requirements continue, collections on receivables in
these trusts in excess of amounts required to pay the A certificates, our
servicing fees and certain other amounts will be used to satisfy the increased
reserve account amount and will not be distributed to us. Due to the normal
reduction of the portfolios in these trusts, and historical seasonality declines
in delinquency levels, we expect the targeted reserve account balances for these
trusts to return to their prior levels sometime during the first quarter of
2001, and at that time any accumulated excess cash will be released. The
balances deposited in the reserve accounts totaled $41.0 million at
September 30, 2000.
Page 21
<PAGE>
Certain Financial Information Regarding Our Securitizations
During August 2000, we closed a securitized borrowing transaction in which
we securitized $153.0 million of loans, issuing $108.6 million in Class A
certificates with an annual interest rate of 7.26%.
Liquidity and Capital Resources
In recent periods, our needs for additional capital resources have increased
in connection with the growth of our business. We require capital for:
increases in our loan portfolio, common stock repurchases,
expansion of our dealership network, the purchase of inventories, and
working capital and general corporate purposes, the purchase of property and
equipment.
We fund our capital requirements primarily through:
operating cash flow, our revolving facility with GE Capital, and
securitization transactions, supplemental borrowings.
While to date we have met our liquidity requirements as needed, there can be
no assurance that we will be able to continue to do so in the future.
Cash Flow
Net Cash Provided by Operating Activities increased by $46.6 million in the
nine months ended September 30, 2000 to $171.1 million compared to cash
generated of $124.5 million for the nine months ended September 30,1999. The
increase is primarily due to an increase in net earnings coupled with a
significant decrease in inventory from year end 1999, resulting from
management's policy to increase inventory levels at year end in preparation for
the high seasonal sales, which typically occur in the first quarter of the year,
partially offset by decrease in income taxes payable.
Net cash used by investing activities decreased to $236.2 million for the
nine months ended September 30, 2000 versus $274.0 million for the same period
of the previous year. The decrease is due to a significant decrease in
Investments Held in Trust as principal balances securitized under the gain on
sale method declined, coupled with proceeds used for the purchase of assets
related to dealership acquisitions during the third quarter of 1999.
Financing activities generated $39.6 million for the nine months ended
September 30, 2000 as compared to $129.4 million generated for the corresponding
period of 1999. The reason for the decrease is primarily due to net repayment of
notes payable and an increase in funds used for the acquisition of treasury
stock.
Financing Resources
Revolving Facility. Under our $125 million revolving facility, our borrowing
base consists of up to 65.0% of the principal balance of eligible loans
originated from the sale of used cars and the lesser of $25 million or 58% of
the direct vehicle costs for eligible vehicle inventory. The revolving facility
expires in June 2001 if not renewed or extended by a mutual agreement by both
parties. The revolving facility contains a provision that requires us to pay GE
Capital a termination fee of $200,000 if we terminate the revolving facility
prior to the expiration date. We secure the facility with substantially all of
our assets.
As of September 30, 2000, our borrowing capacity under the revolving
facility was $80.8 million, the aggregate principal amount outstanding under the
revolving facility was approximately $50.2 million, and the amount available to
be borrowed under the facility was $30.6 million. The revolving facility bears
interest at the 30-day LIBOR plus 3.15%, payable daily (total rate of 9.77% as
of September 30, 2000).
The revolving facility contains covenants that, among other things, limit
our ability to take certain actions without GE Capital's consent, including
incur additional indebtedness, make any change in our capital structure, declare
or pay dividends, and make certain investments and capital expenditures. The
revolving facility also provides that an event of default will occur if
Page 22
<PAGE>
Mr. Ernest C. Garcia II owns less than 15.0% of our voting stock. Mr. Garcia
owned approximately 36.5% of our common stock at September 30, 2000.
In addition, we are also required to maintain specified financial ratios. As
of September 30, 2000, we were in compliance with the covenants of this
agreement.
Securitizations. Our securitization program is a primary source of our
working capital. Securitizations generate cash flow for us from the sale of
Class A obligations, ongoing servicing fees, and excess cash flow distributions
from collections on the loans securitized after payments on the Class A
obligations, payment of fees, expenses, and insurance premiums, and required
deposits to the reserve account.
Securitization also allows us to fix our cost of funds for a given loan
portfolio. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Securitizations" for a more complete description of our
securitization program.
Capital Expenditures and Commitments
During the nine months ended September 30, 2000, we developed five new
dealerships in existing markets, three in the first quarter and two in the
second quarter. In the fourth quarter of 1999, we obtained five dealerships,
including vehicle inventory and a loan portfolio of approximately $8.0 million,
from Virginia Auto Mart. The direct cost of opening a dealership is primarily a
function of whether we lease a facility or construct a facility. A leased
facility costs approximately $650,000 to develop, while a facility we construct
costs approximately $1.7 million. In addition, we require capital to finance the
portfolio that we carry on our balance sheet for each store. It takes
approximately $2.2 million in cash to support a typical stabilized store
portfolio with our existing 65% advance rate under our GE facility.
Additionally, it takes approximately 34 months for a store portfolio to reach a
stabilized level.
We intend to finance the construction of new dealerships through operating
cash flows and supplemental borrowings, including amounts available under the
revolving facility and the securitization program.
In April 1999, our Board of Directors authorized a stock repurchase program
allowing us to repurchase up to 2.5 million shares of our common stock from time
to time. Purchases may be made depending on market conditions, share price,
lender approval and other factors. During July 2000, we repurchased
approximately 1.5 million shares pursuant to the stock repurchase program. We
have repurchased 1,589,425 shares under this program.
In September 2000, we entered into an agreement with the beneficiaries
and/or representative of the estate ("Addink"), of Don Addink, our former Senior
Vice President and Treasurer who died in July of this year, in which the
following was agreed to: we would purchase all of his shares of our common stock
at $7.00/share, approximately 98,000 shares; Addink's stock options became fully
vested, Addink waived and released all claims under the options and we paid
Addink $86,250; and we waived all principal and interest due under two
promissory notes owed to us by Addink with aggregate principal and accrued
interest of $351,393.
We continue to believe that the repurchase of our stock is currently a
better investment of our capital than new stores. As additional capital is
secured, we will consider whether to resume or accelerate our expansion plans or
to continue repurchasing our stock. At this time, we will not commit to growth
prior to securing the capital to support it, unless the acquisition would
require little to no capital. We continue to attempt to secure capital for
further growth. We do not expect a slow down in growth to adversely impact
revenues or earnings in 2001 and any impact on subsequent years will depend upon
the number and timing of future acquisitions.
With respect to the month of September, 2000, we were not in compliance with
a provision related to cash flows under that certain Senior Secured Loan
Agreement dated as of May 14, 1999 for securitization residual term financing.
The Lenders under the Loan Agreement permanently waived the failure to comply
and agreed it was not a default or event of default under the Loan Agreement.
Among other terms, we pledged certain securitization residuals from our 2000-B
securitization to the Lenders as additional collateral.
On September 30, 2000, the Loan Agreement, Warrants and Warrant Agreements
between us and certain Lenders under that Loan Agreement dated as of February
12, 1998, as amended on September 30 of 1999, was amended to: reduce the
Page 23
<PAGE>
outstanding principal balance under the Loan Agreement from $15 million to $13.5
million; require us to take out one of the lenders in the facility by paying off
that lender's $1.5 million share of the loan (which occurred), and cancel the
number of outstanding warrants attributable to that portion of the loan;
increase the interest rate under the Loan Agreement to 15%, extend the term of
the Loan Agreement to February 12, 2003; and provide for the repayment of
principal and the corresponding reduction of warrants under certain terms and
conditions.
On November 9, 2000, Verde Investments, Inc. ("Verde"), an affiliate of Mr.
Earnest Garcia II, our chairman, purchased a certain property located in
Phoenix, Arizona and simultaneously leased the property to us pursuant to among
other terms the following: 20 year term which expires December 31, 2002; rent
payable monthly with 5% annual rent adjustments; triple net lease; four
five-year options to renew; and an option to purchase the property upon prior
notice and at Verde's cost. We intend to build a new headquarters at this
location over the next several months, obtain permanent financing upon
completion of construction and exercise our option to purchase the property.
Accounting Matters
In September 2000, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No.
140). SFAS No. 140 replaces SFAS No. 125 and revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral. This statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001. This
statement is effective for recognition and reclassification of collateral and
for disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. Management does not expect the
adoption of SFAS No. 140 to have a material impact on the company.
In June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" (SFAS No. 138). SFAS No. 138 amends
a limited number of issues causing implementation difficulties for entities that
apply SFAS No. 133. SFAS No. 138 is effective for fiscal years beginning after
June 15, 2000. Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS No. 133) required
all derivatives to be recorded on the balance sheet at fair value and
establishes new accounting rules for hedging instruments. Management does not
expect the adoption of SFAS No. 138 or No. 133 to have a material impact on the
Company.
We Make Forward Looking Statements
Our Quarterly Report on Form 10-Q includes statements that constitute
forward-looking statements within the meaning of the safe harbor provisions of
the Private and Securities Litigation Reform Act of 1995. We claim the
protection of the safe-harbor for our forward looking statements.
Forward-looking statements are often characterized by the words "may",
"anticipates", "believes," "estimates," "projects," "expects" or similar
expressions and do not reflect historical facts. Forward-looking statements in
this report relate, among other matters, to: anticipated financial results, such
as continuing growth of sales, other revenues and loan portfolios, and
improvements in loan performance, including delinquencies; anticipated roll-out
of collectors to the Company's dealerships, anticipated repurchases of Company
stock and the level of growth in our dealerships through acquisitions and de
novo dealership openings; and e-commerce related growth and loan performance.
Forward looking statements include risks, uncertainties and other factors which
may cause our actual results, performance or achievements to be materially
different from those expressed or implied by such forward looking statements.
Factors that could affect our results and cause or contribute to differences
from these forward-looking statements include, but are not limited to: any
decline in consumer acceptance of our car sales strategies or marketing
campaigns; any inability of the Company to finance its operations in light of a
tight credit market for the sub-prime industry; any deterioration in the used
car finance industry or increased competition in the used car sales and finance
industry; any inability of the Company to monitor and improve its underwriting
and collection processes; any changes in estimates and assumptions in, and the
ongoing adequacy of, our allowance for credit losses; any inability of the
Company to continue to reduce operating expenses as a percentage of sales; any
material litigation against us or material, unexpected developments in existing
litigation; and any new or revised accounting, tax or legal guidance that
adversely affect used car sales or financing. Other factors are detailed in the
sections entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Risk Factors," "Factors That May Affect Future
Results and Financial Condition" and "Factors That May Affect Future Stock
Performance" in our most recent reports on Form 10-K, in Exhibit 99 attached to
this Quarterly Report on Form 10-Q and elsewhere in our Securities and Exchange
Commission filings. In addition, the foregoing factors may affect generally our
business, results of operations and financial position. There may also be other
factors that we are currently unable to identify or quantify, but may arise or
become known in the future. Forward looking statements speak only as of the
dated the statement was made. By making these forward-looking statements, we
undertake no obligation to update these statements for revisions or changes
after the date of this report. References to Ugly Duckling Corporation as the
largest chain of buy-here pay-here used car dealerships in the United States is
management's belief based upon the knowledge of the industry and not on any
current independent third party study.
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ITEM 3.
Market Risk
We are exposed to market risk on our financial instruments from changes
in interest rates. We do not use instruments for trading purposes or to manage
interest rate risk. Our earnings are substantially affected by our net interest
income, which is the difference between the income earned on interest-bearing
assets and the interest paid on interest bearing notes payable. Increases in
market interest rates could have an adverse effect on profitability.
Our financial instruments consist primarily of fixed rate finance
receivables, residual interests in pools of fixed rate finance receivables,
short term variable rate revolving Notes Receivable, and variable and fixed rate
Notes Payable. Our finance receivables are classified as subprime loans and
generally bear interest at the lower of 29.9% or the maximum interest rate
allowed in states that impose interest rate limits. At September 30, 2000, the
scheduled maturities on our finance receivables range from one to 52 months with
a weighted average maturity of 31.3 months. The interest rates we charge our
customers on finance receivables has not changed as a result of fluctuations in
market interest rates, although we may increase the interest rates we charge in
the future if market interest rates increase. A large component of our debt at
September 30, 2000 is the Collateralized Notes Payable (senior and junior
securities) issued under our securitization program. Issuing debt through our
securitization program allows us to mitigate our interest rate risk by reducing
the balance of the variable revolving line of credit and replacing it with a
lower fixed rate note payable. We are subject to interest rate risk on fixed
rate Notes Payable to the extent that future interest rates are higher than the
interest rates on our existing Notes Payable.
We believe that our market risk information has not changed materially
from December 31, 1999.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We sell our cars on an "as is" basis. We require all customers to
acknowledge in writing on the date of sale that we disclaim any obligation for
vehicle-related problems that subsequently occur. Although we believe that these
disclaimers are enforceable under applicable laws, there can be no assurance
that they will be upheld in every instance. Despite obtaining these disclaimers,
in the ordinary course of business, we receive complaints from customers
relating to vehicle condition problems as well as alleged violations of federal
and state consumer lending or other similar laws and regulations. Most of these
complaints are made directly to us or to various consumer protection
organizations and are subsequently resolved. However, customers occasionally
name us as a defendant in civil suits filed in state, local, or small claims
courts. Additionally, in the ordinary course of business, we are a defendant in
various other types of legal proceedings, and are the subject of regulatory or
governmental investigations. Although we cannot determine at this time the
amount of the ultimate exposure from such matters, if any, we do not expect the
final outcome to have a material adverse effect on the Company.
Item 2. Changes in Securities and Use of Proceeds.
(a) None
(b) None
(c) See Exhibit 4.1 and discussion included in "Management's Discussion and
Analysis - Capital Expenditures and Commitments"
(d) Not Applicable
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 4.1 - Second Amendment to Warrant Agreement dated February 12, 1998
between Registrant and each of the Kayne Anderson related lenders named therein,
dated as of September 30, 2000.
Exhibit 10.1 - Amendment and waiver letter agreement to Senior Secured Loan
Agreement dated May 14, 1999 between CIBC Inc., SunAmerica, etc. and the
Registrant dated October 12, 2000.
Exhibit 10.2 - Letter agreement between the beneficiaries and/or representatives
of the estate of Don Addink and the Registrant dated September 14, 2000.
Exhibit 27 -- Financial Data Schedule
Exhibit 99 - Statement Regarding Forward Looking Statements and Risk Factors
(b) Reports on Form 8-K.
Since June 30, 2000, the Company has filed two reports on Form 8-K. The
first report on Form 8-K, dated October 5, 2000 and filed October 10, 2000,
reported Ugly Duckling's receipt of the offer to purchase the Company by Mr.
Ernest C. Garcia II, the Company's Chairman and largest shareholder and filed as
an exhibit to the Form 8-K, a press release dated October 5, 2000 entitled "Ugly
Duckling Confirms Receipt of Offer to Purchase Company from Chairman/Largest
Shareholder". The second report on Form 8-K dated and filed October 30, 2000,
reported the withdrawal of the offer to purchase the Company from Mr. Ernest C.
Garcia, II, the Company's Chairman and largest shareholder. Filed as an exhibit
to the Form 8-K was a press release dated October 27, 2000 entitled "Ugly
Duckling Reports Withdrawal of the Chairman's Offer to Purchase Outstanding
Common Stock"
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UGLY DUCKLING CORPORATION
/s/ STEVEN T. DARAK
-----------------------
Steven T. Darak
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: November 13, 2000
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EXHIBIT INDEX
Exhibit
Number Description
4.1 Second Amendment to Warrant Agreement dated
February 12, 1998 between 4.1 Registrant and each of the
Kayne Anderson related lenders named therein, dated as of
September 30, 2000
10.1 Amendment and waiver letter agreement to Senior Secured
Loan Agreement dated May 14, 1999 between CIBC Inc.,
SunAmerica, etc. and the Registrant dated October 12, 2000
10.2 Letter agreement between the beneficiaries and/or
representatives of the estate of Don Addink and the
Registrant dated September 14, 2000
27 Financial Data Schedule
99 Statement Regarding Forward Looking Statements and Risk
Factors
