================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 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 May 1, 2000, there were approximately 13,896,000
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.
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<PAGE>
.........
<TABLE>
<CAPTION>
UGLY DUCKLING CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Page
Part I - FINANCIAL STATEMENTS
<S> <C> <C>
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets-- March 31, 2000 and December 31, 1999................................ 1
Condensed Consolidated Statements of Operations-- Three Months Ended March 31, 2000 and
March 31, 1999........................................................................................... 2
Condensed Consolidated Statements of Cash Flows--Three Months Ended March 31, 2000 and
March 31, 1999........................................................................................... 3
Notes to Condensed Consolidated Financial Statements........................................................ 4
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 9
Item 3. MARKET RISK................................................................................................. 21
Part II. -- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS........................................................................................... 22
Item 2. CHANGES IN SECURITIES....................................................................................... 22
Item 3. DEFAULTS UPON SENIOR SECURITIES............................................................................. 22
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................................... 22
Item 5. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................................ 22
SIGNATURES.................................................................................................. 23
</TABLE>
<PAGE>
Page 1
<TABLE>
<CAPTION>
ITEM 1.
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2000 1999
---------------- ---------------
ASSETS
<S> <C> <C>
Cash and Cash Equivalents............................................. $ 6,330 $ 3,683
Finance Receivables, Net.............................................. 407,267 365,586
Notes Receivable from Related Party................................... 12,000 12,000
Inventory............................................................. 49,058 62,865
Property and Equipment, Net........................................... 32,141 31,752
Intangible Assets, Net................................................ 14,359 14,618
Other Assets.......................................................... 12,636 12,327
Net Assets of Discontinued Operations................................. 14,162 33,880
------------ -------------
$ 547,953 $ 536,711
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts Payable................................................... $ 2,928 $ 3,185
Accrued Expenses and Other Liabilities............................. 29,289 26,905
Notes Payable Portfolio............................................ 282,865 275,774
Other Notes Payable................................................ 33,418 36,556
Subordinated Notes Payable......................................... 28,900 28,611
------------ -------------
Total Liabilities................................................ 377,400 371,031
------------ -------------
Stockholders' Equity:
Common Stock.......................................................... 19 19
Additional Paid in Capital............................................ 173,663 173,273
Retained Earnings..................................................... 17,192 12,709
Treasury Stock........................................................ (20,321) (20,321)
------------ -------------
Total Stockholders' Equity........................................ 170,553 165,680
------------ -------------
$ 547,953 $ 536,711
============ =============
See accompanying notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
Page 2
<TABLE>
<CAPTION>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2000 and 1999
(In thousands, except earnings per share amounts)
March 31,
-----------------------------
2000 1999
--------- ---------
<S> <C> <C>
Sales of Used Cars............................................. $ 132,786 $ 106,443
Less:
Cost of Used Cars Sold...................................... 72,942 60,088
Provision for Credit Losses................................. 34,573 27,763
------------ -------------
25,271 18,592
Other Income:
Interest Income............................................. 25,531 10,373
Portfolio Interest Expense.................................. (5,029) (1,995)
Servicing and Other Income.................................. 807 2,899
------------ -------------
807
21,309 11,277
Income before Operating Expenses............................... 46,580 29,869
------------ -------------
Operating Expenses:
Selling and Marketing....................................... 8,135 6,366
General and Administrative.................................. 26,345 21,009
Depreciation and Amortization............................... 2,208 1,595
36,688 28,970
Income before Other Interest Expense........................... 9,892 899
Other Interest Expense......................................... 2,292 --
------------ -------------
Earnings before Income Taxes................................... 7,600 899
Income Taxes................................................... 3,117 355
------------ -------------
Earnings from Continuing Operations............................ 4,483 544
Loss from Discontinued Operations, net of income tax benefit
of $75 -- (121)
------------ -------------
Net Earnings................................................... $ 4,483 $ 423
============ =============
Earnings per Common Share - Continuing Operations:
Basic....................................................... $ 0.30 $ 0.04
============ =============
Diluted..................................................... $ 0.30 $ 0.04
============ =============
Net Earnings per Common Share:
Basic....................................................... $ 0.30 $ 0.03
============ =============
Diluted..................................................... $ 0.30 $ 0.03
============ =============
See accompanying notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
Page 3
<TABLE>
<CAPTION>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2000 and 1999
(In thousands)
2000 1999
-------------- --------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Earnings........................................................... $ 4,483 $ 423
Adjustments to Reconcile Net Earnings to Net Cash Provided
by Operating Activities:
Provision for Credit Losses............................................. 34,573 27,763
Depreciation and Amortization .......................................... 3,239 1,719
Loss from Disposal of Property and Equipment............................ 3 33
Loss from Discontinued Operations....................................... -- 121
Deferred Income Taxes................................................... -- (5,188)
Collections of Finance Receivables...................................... 3,994 4,851
Decrease in Inventory................................................... 13,807 4,267
(Increase) Decrease in Other Assets..................................... (309) 911
Increase in Accounts Payable, Accrued Expenses and Other Liabilities.... 3,353 9,053
Increase (Decrease) in Income Taxes Payable............................. (1,208) 6,969
-------------- ---------------
Net Cash Provided by Operating Activities 61,935 50,922
-------------- ---------------
Cash Flows from Investing Activities:
Increase in Finance Receivables......................................... (133,887) (124,323)
Collections of Finance Receivables...................................... 49,974 29,928
(Increase) Decrease in Investments Held in Trust........................ 3,665 (2,114)
Advances under Notes Receivable......................................... -- (600)
Proceeds from Disposal of Property and Equipment........................ 1,330 65
Purchase of Property and Equipment...................................... (2,278) (2,279)
-------------- ---------------
-------------- ---------------
Net Cash Used in Investing Activities (81,196) (99,323)
-------------- ---------------
Cash Flows from Financing Activities:
Additions to Notes Payable Portfolio.................................... 96,700 109,476
Repayment of Notes Payable Portfolio.................................... (90,302) (62,525)
Additions to Other Notes Payable........................................ -- 18,349
Repayment of Other Notes Payable........................................ (3,220) (10,750)
Net Issuance of Subordinated Notes Payable.............................. -- 75
Proceeds from Issuance of Common Stock.................................. 390 8
Acquisition of Treasury Stock........................................... -- (5,307)
-------------- ---------------
Net Cash Provided by Financing Activities 3,568 49,326
-------------- ---------------
Net Cash Provided by Discontinued Operations................................ 18,340 918
-------------- ---------------
Net Increase in Cash and Cash Equivalents................................... 2,647 1,843
Cash and Cash Equivalents at Beginning of Period............................ 3,683 2,544
-------------- ---------------
Cash and Cash Equivalents at End of Period.................................. $ 6,330 $ 4,387
============== ===============
Supplemental Statement of Cash Flows Information:
Interest Paid.......................................................... $ 7,140 $ 3,072
============== ===============
Income Taxes Paid...................................................... $ 4,325 $ 1,504
============== ===============
See accompanying notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
Page 4
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>
March 31, December 31,
2000 1999
----------------- -----------------
<S> <C> <C>
Contractually Scheduled Payments..................................... $ 574,664 $ 492,937
Unearned Finance Charges............................................. (155,751) (134,119)
----------- -----------
Principal - Retained on Balance 418,913 358,818
Sheet................................
Accrued Interest Receivable.......................................... 4,101 3,741
Loan Origination Costs, Net.......................................... 6,094 5,079
----------- -----------
Principal Balances, Net.............................................. 429,108 367,638
Investments Held in Trust............................................ 53,051 56,716
Residuals in Finance Receivables Sold................................ 12,693 17,382
----------- -----------
Finance Receivables............................................... 494,852 441,736
Allowance for Credit Losses.......................................... (87,585) (76,150)
----------- -----------
Finance Receivables, Net.......................................... $ 407,267 $ 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 remained
relatively constant from the fourth quarter of 1999 as compared to the first
quarter of 2000 as there were no securitization transactions completed during
the first quarter of 2000.
Residuals in Finance Receivables Sold represent our subordinated interest in
loans sold through securitizations. The decrease from December 31, 1999 to March
31, 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 (Residuals) follows ($ in
thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------------ ----------------
<S> <C> <C>
Retained interest in subordinated securities (B Certificates)........ $ 13,279 $ 17,335
Net interest spreads, less present value discount.................... 2,579 6,113
Reduction for estimated credit losses................................ (3,165) (6,066)
----------- -----------
Residuals in finance receivables sold................................ $ 12,693 $ 17,382
============ ===========
Securitized principal balances outstanding........................... $ 42,911 $ 65,662
============ ===========
outstanding.......................................................... 7.4% 9.2%
============ ===========
</TABLE>
<PAGE>
Page 5
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 $8 million by surrendering to the Company shares of Ugly Duckling
common stock (valued at 98% of the average of the closing prices of the stock on
NASDAQ for the ten trading days prior to the surrender) as long as Mr. Garcia's
ownership interest of the Company voting stock does not fall below 15% and the
acceptance of such stock in the Company does not result in a breach of a
covenant. Note 4. Notes Payable
Notes Payable, Portfolio
A summary of Notes Payable, Portfolio at March 31, 2000 and December 31,
1999 follows ($ in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Revolving facility for $125.0 Million with GE Capital, secured by substantially
all assets of the Company, including $172.7 million in finance receivables..... $ 89,122 $ 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 $273.5 million at March 31, 2000................................ 195,860 236,555
---------- ----------
Subtotal....................................................................... 284,982 278,272
Less: Unamortized Loan Fees................................................... 2,117 2,498
---------- ----------
Total.......................................................................... $ 282,865 $ 275,774
=========== ==========
</TABLE>
The revolving facility note payable has interest payable daily at 30 day
LIBOR plus 3.15% (9.04% at March 31, 2000) through June 2000. The revolving
facility is subject to a one-year extension provision upon mutual consent of
both parties. The revolving facility agreement also contains various reporting
and performance covenants, including the maintenance of certain ratios,
limitations on additional borrowings from other sources, restrictions on certain
operating activities, and a restriction on the payment of dividends under
certain circumstances. The Company is currently in compliance with these
covenants.
Class A obligations have interest payable monthly at rates ranging from 5.7%
to 6.8%. 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 March 31, 2000 and December 31, 1999
follows ($ in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------------- ---------------
<S> <C> <C>
Note payable, secured by the capital stock of UDRC and UDRC II.................. $ 31,500 $ 33,900
Other notes payable bearing interest at rates ranging from 7.5% to 11% due
through August 2001, secured by certain real property and certain property and
equipment....................................................................... 2,119 2,939
------------- --------------
33,619 36,839
Less: Unamortized Loan Fees............................................... 201 283
------------- --------------
Total........................................................................ $ 33,418 $ 36,556
============== ==============
</TABLE>
<PAGE>
Page 6
Subordinated Notes Payable
A summary of Subordinated Notes Payable at March 31, 2000 and December 31,
1999 follows ($ in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- -------------
<S> <C> <C>
$15 million senior subordinated notes payable to unrelated parties,
bearing interest at 12% per annum payable quarterly, principal due
February 2001 and senior to subordinated debentures.................. $ 15,000 $ 15,000
$17.5 million subordinated debentures, interest at 12% per annum
(approximately 18.8% effective rate) payable semi-annually, principal
balance due October 23, 2003......................................... 17,479 17,479
------------ ------------
Subtotal............................................................ 32,479 32,479
Less: Unamortized Loan Fees........................................ 464 605
Unamortized Premium - subordinated debentures................ 3,115 3,263
------------ ------------
Total............................................................... $ 28,900 $ 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 periods
ended March 31, 2000, and 1999 as follows ($ in thousands, except for per share
amounts): <TABLE>
<CAPTION>
March 31, March 31,
2000 1999
----------- -----------
<S> <C> <C>
Earnings from Continuing Operations........................................ $ 4,483 $ 544
=========== ==========
Net Earnings............................................................... $ 4,483 $ 423
=========== ==========
Basic Earnings Per Share From Continuing Operations........................ $ 0.30 $ 0.04
=========== ==========
Diluted Earnings Per Share From Continuing Operations...................... $ 0.30 $ 0.04
=========== ==========
Basic Earnings Per Share................................................... $ 0.30 $ 0.03
=========== ==========
Diluted Earnings Per Share................................................. $ 0.30 $ 0.03
=========== ==========
Basic EPS-Weighted Average Shares Outstanding.............................. 14,905 15,650
Effect of Diluted Securities:
Warrants................................................................ 14 --
Stock Options........................................................... 234 135
----------- ----------
Dilutive EPS-Weighted Average Shares Outstanding........................... 15,153 15,785
=========== ==========
Warrants Not Included in Diluted EPS Since Antidilutive.................... 1,156 1,556
=========== ==========
Stock Options Not Included in Diluted EPS Since Antidilutive......... 875 1,153
=========== ==========
</TABLE>
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.
<PAGE>
Page 7
A summary of operating activity by business segment for the three month
periods ended March 31, 2000 and 1999 follows ($ in thousands):
<TABLE>
<CAPTION>
Retail Portfolio Corporate Total
March 31, 2000:
<S> <C> <C> <C> <C>
Sales of Used Cars......................... $ 132,786 $ -- $ -- $ 132,786
Less: Cost of Cars Sold.................... 72,942 -- -- 72,942
Provision for Credit Losses......... 27,094 7,479 -- 34,573
------------- ------------- ------------- -------------
32,750 (7,479) -- 25,271
Net Interest Income........................ -- 20,392 110 20,502
Servicing and Other Income................. -- 807 -- 807
------------- ------------- ------------- -------------
Income before Operating Expenses........... 32,750 13,720 110 46,580
------------- ------------- ------------- -------------
Operating Expenses:
Selling and Marketing...................... 8,135 -- -- 8,135
General and Administrative................. 14,190 6,884 5,271 26,345
Depreciation and Amortization.............. 1,071 300 837 2,208
------------- ------------- ------------- -------------
23,396 7,184 6,108 36,688
------------- ------------- ------------- -------------
Income (loss) before Other Interest Expense $ 9,354 $ 6,536 $ (5,998) $ 9,892
============= ============= ============= =============
Capital Expenditures....................... $ 1,273 $ 99 $ 906 $ 2,278
============= ============= ============= =============
Identifiable Assets........................ $ 75,435 $ 430,334 $ 28,022 $ 533,791
============= ============= ============= =============
March 31, 1999:
Sales of Used Cars......................... $ 106,443 $ -- $ -- $ 106,443
Less: Cost of Cars Sold.................... 60,088 -- -- 60,088
Provision for Credit Losses......... 21,893 5,870 -- 27,763
------------- ------------- ------------- -------------
24,462 (5,870) -- 18,592
Net Interest Income........................ -- 8,317 61 8,378
Servicing and Other Income................. -- 2,899 -- 2,899
------------- ------------- ------------- -------------
Income before Operating Expenses........... 24,462 5,346 61 29,869
------------- ------------- ------------- -------------
Operating Expenses:
Selling and Marketing...................... 6,366 -- -- 6,366
General and Administrative................. 11,094 4,601 5,314 21,009
Depreciation and Amortization.............. 791 283 521 1,595
------------- ------------- ------------- -------------
18,251 4,884 5,835 28,970
------------- ------------- ------------- -------------
Income (loss) before Other Interest Expense $ 6,211 $ 462 $ (5,774) $ 899
============= ============= ============= =============
Capital Expenditures....................... $ 1,735 $ 179 $ 365 $ 2,279
============= ============= ============= =============
</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>
Page 8
The components of Net Assets of Discontinued Operations as of March 31, 2000
and December 31, 1999 follow ($ in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------- ----------
<S> <C> <C>
Finance Receivables, Net........................... $ 9,558 $ 14,837
Residuals in Finance Receivables Sold.............. 3,254 3,742
Investments Held in Trust.......................... 1,053 1,545
Property and Equipment............................. 604 2,114
Notes Receivable, net of Sub. Notes Payable........ 919 6,697
Servicing Receivable............................... 6,125 6,125
Other Assets, net of Accounts Payable and Accrued
Liabilities........................................ (7,351) (1,180)
------------- ------------
Net Assets of Discontinued Operations.............. $ 14,162 $ 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 Event
On February 22, 2000, we commenced an exchange offer to acquire up to 2.5
million shares of our common stock. The offer expired April 13, 2000 and on
April 20, 2000, we acquired approximately 1.1 million shares of our common stock
in exchange for approximately $11.9 million of seven year subordinated
debentures bearing interest at 11% payable bi-annually and principal due April
15, 2007. Under the terms of the offer, each share of stock was exchangeable for
$11.00 principal amount of debentures. The debentures were issued at a premium,
which will be amortized over the life of the debentures and results in an
effective annual interest rate of 19.3%.
<PAGE>
Page 9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Introduction
We operate the largest chain of buy here-pay here used car dealerships in
the United States. At March 31, 2000, we operated 75 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:
<TABLE>
<CAPTION>
<S> <C>
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.
</TABLE>
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 quarterly period ended March 31,
2000 compared to the quarterly period ended March 31,1999.
<PAGE>
Page 10
SELECTED CONSOLIDATED FINANCIAL DATA (unaudited)
<TABLE>
<CAPTION>
At or For the Three Months Ended:
------------------------------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
2000 1999 1999 1999 1999
---------- ---------- ---------- ---------- ----------
Operating Data: ($ in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Total Revenues $ 159,124 $ 105,429 $ 124,883 $ 115,927 $ 119,715
Sales of Used Cars $ 132,786 $ 82,275 $ 103,315 $ 97,875 $ 106,443
Number of Used Cars Sold 15,802 9,731 12,219 11,416 12,754
Sales Price - Per Car Sold $ 8,403 $ 8,455 $ 8,455 $ 8,574 $ 8,346
Cost of Sales - Per Car Sold $ 4,616 $ 4,690 $ 4,727 $ 4,865 $ 4,712
Gross Margin Per Car Sold $ 3,787 $ 3,765 $ 3,728 $ 3,708 $ 3,634
Provision - Per Car Sold $ 2,188 $ 2,245 $ 2,256 $ 2,259 $ 2,177
Total Operating Expense - Per Car Sold $ 2,322 $ 2,764 $ 2,298 $ 2,427 $ 2,274
Cost of Used Cars as Percent of Sales 54.9% 55.5% 55.9% 56.7% 56.5%
Gross Margin as Percent of Sales 45.1% 44.5% 44.1% 43.3% 43.5%
Provision - % of Originations 27.0% 27.0% 26.9% 26.8% 27.0%
Total Oper. Exp. - % of Total Revenues 23.1% 25.5% 22.5% 23.9% 24.2%
Segment Operating Expense Data:
Retail Expense - Per Car Sold $ 1,481 $ 1,775 $ 1,484 $ 1,562 $ 1,431
Retail Exp. - % of Used Car Sales 17.6% 21.0% 17.6% 18.2% 17.1%
Corp./Other Exp. - Per Car Sold $ 387 $ 357 $ 399 $ 440 $ 458
Corp./Other Exp. - % of Total Revenue 3.8% 3.3% 3.9% 4.3% 4.9%
Portfolio Exp. Annualized - % of End of
Period Managed Principal 6.2% 6.8% 4.7% 5.1% 5.7%
Balance Sheet Data:
Finance Receivables, Net $ 407,267 $ 365,586 $ 321,739 $ 256,085 $ 190,063
Inventory $ 49,058 $ 62,865 $ 45,768 $ 37,737 $ 39,878
Total Assets $ 547,953 $ 536,711 $ 516,513 $ 460,718 $ 400,247
Notes Payable Portfolio $ 282,865 $ 275,774 $ 244,363 $ 195,244 $ 171,543
Subordinated Notes Payable $ 28,900 $ 28,611 $ 37,077 $ 36,943 $ 38,279
Total Debt $ 345,183 $ 340,941 $ 317,440 $ 269,687 $ 210,358
Common Stock $ 173,682 $ 173,292 $ 173,276 $ 173,883 $ 173,836
Treasury Stock $ (20,321) $ (20,321) $ (20,321) $ (19,824) $ (19,817)
Total Stockholders' Equity $ 170,553 $ 165,680 $ 162,477 $ 159,398 $ 157,890
Shares Outstanding - End of Period 14,980 14,888 14,889 14,943 14,939
Book Value per Share $ 11.39 $ 11.13 $ 10.91 $ 10.67 $ 10.57
Tangible Book Value per Share $ 10.43 $ 10.15 $ 9.95 $ 9.74 $ 9.62
Total Debt to Equity 2.0 2.1 2.0 1.7 1.3
Loan Portfolio Data:
Interest Income $ 25,531 $ 22,670 $ 19,775 $ 15,756 $ 10,373
Average Yield on Portfolio 26.17% 25.41% 25.90% 26.27% 26.19%
Principal Balances Originated $ 128,123 $ 80,900 $ 102,599 $ 96,098 $ 102,733
Principal Balances Orig. as % of Sales 96.5% 98.3% 99.3% 98.2% 96.5%
Principal Balances Acquired -- $ 6,811 $ 14,596 -- --
Number of Loans Originated 15,721 9,650 12,137 11,335 12,634
Average Original Amount Financed $ 8,150 $ 8,383 $ 8,453 $ 8,478 $ 8,131
Number of Loan Orig. % of Units Sold 99.5% 99.2% 99.3% 99.3% 99.1%
Number of Loans Acquired -- 2,586 2,543 -- --
Managed Portfolio Delinquencies:
31 to 60 days 3.4% 5.7% 6.8% 4.7% 3.5%
Over 60 days 1.9% 2.9% 3.5% 2.6% 1.9%
Principal Outstanding - Managed $ 461,824 $ 424,480 $ 427,439 $ 383,596 $ 341,040
Principal Outstanding - Retained $ 418,913 $ 358,818 $ 331,982 $ 256,645 $ 182,150
</TABLE>
<PAGE>
Page 11
First Quarter highlights include:
o Net earnings from continuing operations totaled $4.5 million, or
$0.30 per diluted share, the highest quarterly EPS ever for the
Company, versus earnings from continuing operations of $0.5
million or $0.04 per diluted share in the corresponding quarter
of the prior year.
o Total revenues increased 33% to $159.1 million from $119.7 million
in the corresponding quarter of the prior year.
o E-Commerce provided $5.9 million in revenue and 701 cars sold during
the first quarter of 2000 versus $3.9 million in revenue and 415
cars sold during the fourth quarter of 1999.
o On-balance sheet loan portfolio principal balance reached $418.9
million, representing a 17% increase over the fourth quarter and
a 130% rise over the year-ago quarter.
o New loan originations reached $128.1 million, a 25% increase over
the same quarter of the prior year.
Sales of Used Cars and Cost of Used Cars Sold
<TABLE>
<CAPTION>
March 31,
---------------------------------- Percentage
($ in thousands) 2000 1999 Change
----------- ----------- ----------
<S> <C> <C> <C>
Number of Used Cars Sold ........... 15,802 12,754 23.9%
=========== ===========
Sales of Used Cars ................. $ 132,786 $ 106,443 24.7%
Cost of Used Cars Sold ............. 72,942 60,088 21.4%
----------- -----------
Gross Margin ....................... $ 59,844 $ 46,355 29.1%
=========== ===========
Gross Margin %...................... 45.1% 43.5%
=========== ===========
Per Car Sold:
Sales .............................. $ 8,403 $ 8,346 0.7%
Cost of Used Cars Sold ............. 4,616 4,711 (2.0%)
----------- -----------
Gross Margin ....................... $ 3,787 $ 3,635 4.2%
=========== ===========
</TABLE>
The number of cars sold increased by 23.9% and Used Car Sales revenues
increased by 24.7% for the three months ended March 31, 2000 over the same
period 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.
We expanded our marketing efforts during 1999 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 first quarter of 2000, we sold 701 cars totaling $5.9 million
in revenue, up from 415 used cars sold and $3.9 million in revenue during the
fourth quarter of 1999. We are also finding that the E-commerce customer group
is outperforming all other customers in terms of loan performance.
Same store unit sales for the three months ended March 31, 2000 decreased
approximately 3% from the first quarter of 1999. We anticipate future revenue
growth will come from increasing the number of our dealerships and not from
higher sales volumes at existing dealerships.
The Cost of Used Cars Sold increased by 21.4% for the three months ended
March 31, 2000 over the comparable period of the previous year. The increase for
this period reflects 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 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 increased to 45.1% for the three months ended March 31, 2000 versus
43.5% for the same period of the previous year. The gross margin per car sold
for the three months ended March 31, 2000 increased 4.2% over the three months
ended March 31, 1999. The increase in both overall gross margin as well as on a
per car sold basis is the result of an increase in average revenue per car sold
coupled with a decrease in average Cost per Used Car Sold.
<PAGE>
Page 12
The Company finances substantially all of its sales. The following table
indicates the percentage of sales units and revenue financed:
<TABLE>
<CAPTION>
March 31,
-----------------------------------
2000 1999
------------ ----------
<S> <C> <C>
Percentage of used cars sold financed....................... 99.5% 99.1%
============ ===========
Percentage of sales revenue financed........................ 96.5% 96.5%
============ ===========
</TABLE>
Provision for Credit Losses
The following is a summary of the Provision for Credit Losses:
<TABLE>
<CAPTION>
Percentage
March 31, Change
---------------------------- -------------
2000 1999
--------- -------
<S> <C> <C> <C>
Provision for Credit Losses (in thousands)........ $ 34,573 $ 27,763 24.5%
========== ==========
Provision per loan originated .................... $ 2,199 $ 2,198 --
========== ==========
Provision as % of principal balances originated... 27.0% 27.0%
========== ==========
</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 months ended March 31, 2000 increased
24.5% over the comparable period of the prior year. The increase was primarily
due to an increase in the volume of loans originated. The average amount
financed increased slightly to $8,150 per unit in the period ended March 31,
2000 from $8,131 per unit in the quarter ended March 31, 1999.
Net Interest Income
<TABLE>
<CAPTION>
Percentage
March 31, Change
---------------------------- -------------
($ in thousands) 2000 1999
--------- -------
<S> <C> <C> <C>
Interest Income................................... $ 25,531 $ 10,373 146.1%
Portfolio Interest Expense........................ 5,029 1,995 152.1%
---------- ------------
Net Interest Income............................... $ 20,502 $ 8,378 144.7%
========== ==========
Average Effective Yield........................... 26.2% 25.3% 3.6%
========== ========== ==========
Average Effective Borrowing Cost.................. 8.0% 9.5% 10.1%
========== ========== ==========
</TABLE>
Interest Income consists primarily of interest on finance receivable
principal balances retained on our balance sheet. Retained principal balances
grew to $418.9 million at March 31, 2000 from $182.2 million at March 31, 1999
primarily as a result of the change in the way we structure our securitizations
to the collateralized borrowing method during the fourth quarter of 1998. Prior
to the fourth quarter of 1998, securitized loans were transferred off of our
balance sheet and a gain on sale was recorded. Under the collateralized
borrowing method, the securitized loans are retained on our balance sheet and
the income and associated costs are recorded over the life of the loan.
Servicing Income
We generate Servicing Income primarily from servicing the remaining loan
portfolios securitized under the gain on sale method. A summary of Servicing
Income follows for the three months ended March 31, 2000 and 1999 ($ in
thousands):
<TABLE>
<CAPTION>
Percentage
March 31, Change
------------------------- --------------
2000 1999
------- -------
<S> <C> <C> <C>
Servicing Income.................................. $ 807 $ 2,899 (72.2%)
======= ======= =======
</TABLE>
<PAGE>
Page 13
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 quarter ended March 31, 2000 is due to the decrease in remaining
principal balances securitized and serviced under the gain on sale method from
$158.9 million at March 31, 1999 to $42.9 million at March 31, 2000.
Income before Operating Expenses
Income before Operating Expenses grew by 55.9% to $46.6 million for the
three months ended March 31, 2000 from $29.9 million for the three months ended
March 31,1999. Growth in Sales of Used Cars, an increase in gross margins and an
increase in Interest Income were the primary contributors to the increase.
<TABLE>
<CAPTION>
Operating Expenses
March 31,
------------------------------------ Percentage
2000 1999 Change
------------- ------------- -----------
<S> <C> <C> <C>
Operating Expenses (in thousands)... $ 36,688 $ 28,970 26.6%
=========== ===========
Per Car Sold........................ $ 2,322 $ 2,271 2.2%
=========== ===========
As % of Total Revenues.................. 23.1% 24.2%
=========== ===========
</TABLE>
Operating expenses, which consist of selling, marketing, general and
administrative and depreciation/amortization expenses, increased as a result of
overall growth in the operations of the Company. The decrease in operating
expenses as a percentage of total revenues is primarily the result of increased
economies of scale related to marketing efforts with the addition of more
dealerships in existing markets, efficiencies gained from enhanced management
information systems and an increase in interest income.
Interest Expense
Interest expense arising from our subordinated debt totaled $2.3 million
for the three months ended March 31, 2000 versus none for the three months ended
March 31, 1999. While the Company has 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, the Company does
not expect to retire the subordinated notes payable but rather use these
borrowings to fund our growth. Accordingly, the Company 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 $3.1 million for the three months ended March 31, 2000,
and $.3 million for the three months ended March 31,1999. Our effective tax rate
was 41% for the three months ended March 31, 2000 and 40% for the three months
ended March 31,1999.
Earnings from Continuing Operations
Earnings from continuing operations totaled $4.5 million for the three
months ended March 31, 2000 versus $0.5 million for the same three months of the
previous year. The increase is primarily due to an increase in the volume of
used cars sold and growth in interest income. The interest income is due to the
increase in our retained portfolio along with an increase in gross margins on
used cars sold. These improvements were offset by a decrease in servicing income
resulting from the decline in remaining principal balances securitized and
serviced under the gain on sale method.
Discontinued Operations
Discontinued operations provided no income or loss for the three months
ended March 31, 2000 versus a loss, net of income tax benefits, of $121,000 for
the three months ended March 31, 1999. Effective December 31, 1999, the Company
adopted a formal plan to abandon any effort for its third party dealer
operations to acquire loans or servicing rights to additional portfolios.
Accordingly, our Cygnet Servicing and the associated Cygnet Corporate segment
are reported as components of discontinued operations. The Company plans to
complete servicing the portfolios that it currently services.
<PAGE>
Page 14
Business Segment Information
The Company reports its operations based on three operating segments. These
segments are reported herein as Retail, Portfolio and Corporate. These segments
were previously reported as Company Dealership, Company Dealership Receivables
and Corporate and Other, respectively.
Operating Expenses for our business segments, along with a description of
the included activities, for the three month periods ended March 31, 2000 and
1999 are as follows:
Retail Operations. Operating expenses for our retail segment consist of
Company marketing efforts, maintenance and development of dealership and
inspection center sites, and direct management oversight of used car
acquisition, reconditioning and sales activities. A summary of retail operating
expenses follows ($ in thousands except per car sold data):
<TABLE>
<CAPTION>
March 31,
-------------------------------- Percentage
2000 1999 Change
------------- ------------- ------------
<S> <C> <C> <C>
Selling and Marketing............. $ 8,135 $ 6,366 27.8%
General and Administrative........ 14,190 11,094 27.9%
Depreciation and Amortization..... 1,071 791 35.4%
----------- -----------
$ 23,396 $ 18,251 28.2%
=========== ===========
Per Car Sold:
Selling and Marketing............. $ 515 $ 499 3.2%
General and Administrative........ 898 870 3.2%
Depreciation and Amortization..... 68 62 9.7%
----------- -----------
$ 1,481 $ 1,431 3.5%
=========== ===========
As % of Used Cars Sold Revenue:
Selling and Marketing............. 6.1% 6.0%
General and Administrative........ 10.7% 10.4%
Depreciation and Amortization..... 0.8% 0.7%
-------- --------
Total............................. 17.6% 17.1%
======== ========
</TABLE>
Selling and Marketing expenses as a percentage of related revenue remained
relatively constant at 6% for the first quarter of 2000 as compared to the first
quarter of 1999. The additional revenue from internet based sales, as well as an
overall increase in average sales price per vehicle, have allowed the Selling
and Marketing expenses as a percentage of related revenue to remain stable but
have increased slightly on a per car sold basis.
General and Administrative expenses increased quarter over quarter
principally as a result of increases in salary and benefits costs.
Portfolio Operations. Operating expenses for our portfolio segment consist
of loan servicing and collection efforts, securitization activities, and other
operations pertaining directly to the administration and collection of the loan
portfolio ($ in thousands except expense per month per loan serviced).
<TABLE>
<CAPTION>
March 31,
------------------------------- Percentage
2000 1999 Change
------------- ------------- ---------
<S> <C> <C> <C>
General and Administrative................ $ 6,884 $ 4,601 49.6%
Depreciation and Amortization............. 300 283 6.0%
---------- -----------
$ 7,184 $ 4,884 47.1%
========== ===========
Expense per month per loan serviced....... $ 28.75 $ 20.70
========== ===========
Annualized Expense as % of Managed
Principal Balances........................ 6.2% 5.7%
========== ===========
</TABLE>
The increase in operating expenses from the first quarter of 1999 to the
first quarter of 2000 for our portfolio segment is primarily a result of the
increased number of loans in our portfolio. Also attributing to the increase
were market adjustments made to collection staff wages and a decrease in the
number of delinquent accounts serviced per collector due to loan servicing
<PAGE>
Page 15
inefficiencies experienced in the latter half of 1999. As of result of these
initiatives, we have seen a significant decline in delinquency levels as
discussed in the "Static Pool Analysis" section below.
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>
Operating Expenses
March 31,
---------------------------------- Percentage
($ in thousands) 2000 1999 Change
-------------- -------------- -----------
<S> <C> <C> <C>
General and Administrative......... $ 5,271 $ 5,314 (0.8%)
Depreciation and Amortization...... 837 521 60.7%
------------ ------------
$ 6,108 $ 5,835 4.7%
============ ============
Per Car Sold....................... $ 387 $ 458 (15.5%)
============ ============
As % of Total Revenues............. 3.8% 4.9%
============ ============
</TABLE>
Operating expenses related to our Corporate segment decreased on both a per
car sold basis and as a percent of total revenue primarily as a result of
various operating efficiencies. These efficiencies include those gained by the
consolidation of all accounting and management information to a single computer
system in early 1999. Further, as new dealerships opened in existing markets,
revenue and units sold increased while related expenditures increased at a
lesser rate. Finally, as our retained portfolio increased, there is a
proportionate increase in net interest income thereby significantly improving
the ratio of corporate expenses to total revenues.
Financial Position
The following table represents key components of our financial position ($
in thousands):
<TABLE>
<CAPTION>
March 31, December 31, Percentage
2000 1999 Change
-------------- -------------- -----------
<S> <C> <C> <C>
Total Assets............................... $ 547,953 $ 536,711 2.1%
Inventory.................................. 49,058 62,865 (22.0%)
Finance Receivables, Net................... 407,267 365,586 11.4%
Net Assets of Discontinued Operations...... 14,162 33,880 (58.2%)
Total Debt................................. 345,183 340,941 1.2%
Notes Payable - Portfolio.................. 282,865 275,774 2.6%
Other Notes Payable........................ 33,418 36,556 (8.6%)
Subordinated Notes Payable................. 28,900 28,611 1.0%
Stockholders' Equity....................... $ 170,553 $ 165,680 2.9%
</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 March 31, 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 March 31, 2000 has increased approximately
11% from December 31, 1999. See Note 2 to the Condensed Consolidated Financial
Statements for detail of the components of Finance Receivables, Net.
<PAGE>
Page 16
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
March 31, December 31, March 31, December 31,
2000 1999 2000 1999
------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Principal - Managed........................ $ 461,824 $ 424,480 75,496 70,450
Less: Principal - Securitized and Sold.... 42,911 65,662 13,037 17,369
------------ ------------ ------------ ------------
Principal - Retained on Balance Sheet...... $ 418,913 $ 358,818 62,459 53,081
============ ============ ============ ============
</TABLE>
The increase in Principal Balances - Retained on Balance Sheet was primarily
due to growth in loans receivable 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 15,802 for the quarter ended March 31,
2000, versus sales of 9,731 used cars during the quarter ended December 31,
1999.
The following table reflects activity in the Allowance for Credit Losses, as
well as information regarding charge off activity, for the three months ended
March 31, 2000 and December 31, 1999 ($ in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------- --------------
Allowance Activity:
<S> <C> <C>
Balance, Beginning of Period.................. $ 76,150 $ 80,698
Provision for Credit Losses................... 34,573 23,133
Other Allowance Activity...................... 104 1,245
Net Charge Offs............................... (23,242) (28,926)
------------ ------------
Balance, End of Period........................ $ 87,585 $ 76,150
============ ============
Allowance as % Ending Principal Balances...... 20.9% 21.2%
============ ============
Charge off Activity:
Principal Balances......................... $ (31,166) $ (34,667)
Recoveries, Net............................ 7,924 5,741
------------ ------------
Net Charge Offs............................... $ (23,242) $ (28,926)
============ ============
</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 25.4% for the three months ended March 31, 2000
compared to 16.6% for the three months ended December 31, 1999. This 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>
Page 17
Currently reported cumulative losses may vary from those previously reported
due to ongoing collection efforts on charged off accounts, and the difference
between final proceeds on the sale of repossessed collateral versus our
estimates of the sale proceeds. Management, however, believes that such
variation will not be material.
The following table sets forth as of April 30, 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).
<TABLE>
<CAPTION>
Pool's Cumulative Net Losses as Percentage of Pool's Original
Aggregate Principal Balance
($ in thousands)
Monthly Payments Completed by Customer Before Charge Off
--------------------------------------------------------------------
Orig. 0 3 6 12 18 24 TLI Reduced
---------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <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 1.6% 8.0% 13.7% 20.6% 24.7% 26.0% 27.2% 100.0%
2nd Quarter $ 13,462 2.3% 9.3% 13.4% 22.0% 25.9% 27.6% 29.0% 99.9%
3rd Quarter $ 11,082 1.7% 6.9% 12.6% 21.4% 25.5% 27.7% 28.8% 99.7%
4th Quarter $ 10,817 0.7% 8.5% 15.9% 24.9% 29.3% 31.1% 32.2% 99.2%
1997:
1st Quarter $ 16,279 2.1% 10.8% 18.2% 24.9% 30.0% 32.3% 33.6% 98.1%
2nd Quarter $ 25,875 1.5% 9.9% 15.9% 22.8% 27.6% 29.7% 30.7% 95.7%
3rd Quarter $ 32,147 1.4% 8.4% 13.2% 22.6% 27.1% 29.4% 30.3% 93.5%
4th Quarter $ 42,529 1.4% 6.9% 12.7% 22.0% 26.3% 29.1% 29.4% 90.6%
1998:
1st Quarter $ 69,708 1.0% 6.9% 13.5% 21.1% 26.8% x 28.9% 87.4%
2nd Quarter $ 66,908 1.1% 8.1% 14.3% 22.0% 27.7% -- 28.4% 81.5%
3rd Quarter $ 71,027 1.0% 8.0% 13.5% 23.5% x -- 27.7% 76.5%
4th Quarter $ 69,583 0.9% 6.7% 13.3% 25.0% -- -- 26.6% 67.5%
1999:
1st Quarter $ 102,733 0.8% 7.6% 15.5% x -- -- 22.9% 57.5%
2nd Quarter $ 96,098 1.1% 10.2% 17.2% -- -- -- 20.3% 45.9%
3rd Quarter $ 102,599 1.0% 8.5% x -- -- -- 12.5% 32.0%
4th Quarter $ 80,900 0.7% x -- -- -- -- 4.5% 16.1%
2000:
1st Quarter $ 128,123 x -- -- -- -- -- 0.4% 6.6%
</TABLE>
<PAGE>
Page 18
The following table sets forth the principal balances 31 to 60 days
delinquent, and 61 to 90 days delinquent as a percentage of total outstanding
contract principal balances from dealership operations.
<TABLE>
<CAPTION>
March 31, December 31,
-----------------------------------------
2000 1999
---------------- ----------------
Days Delinquent: 31-60 61-90 31-60 61-90
----- ----- ----- -----
<S> <C> <C> <C> <C>
Retained on Balance Sheet..................... 3.3% 1.8% 5.3% 2.8%
Securitized - Gain on Sale.................... 4.8% 2.8% 7.6% 3.7%
---- ------- ---- -------
Total Portfolio............................... 3.4% 1.9% 5.7% 2.9%
==== ======= ==== =======
</TABLE>
In accordance with our charge off policy, there are no accounts more than 90
days delinquent as of March 31, 2000.
Delinquencies have improved dramatically as of the end of the first quarter
of 2000 versus the fourth quarter of 1999. As a result of loan servicing
inefficiencies experienced in the second and third quarters of 1999, initiatives
were put into place to retain qualified loan servicing staff and to reduce the
number of delinquent accounts serviced per collector. As exemplified in the
decline in delinquency levels, the initiatives have proven to be effective.
However, due to the first quarter of the year typically being our strongest
sales quarter, finance receivables increased significantly during this period.
As a result, delinquency levels appear lower due to the influx of receivables in
the latter months of the first quarter. Consequently, we cannot expect to
maintain the current delinquency levels in future periods.
Securitizations
Under the current legal structure of our securitization program, we sell
loans to our 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 or our subsidiaries. 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 10.5%, of the underlying Finance Receivables' principal balance. The
trustee makes distributions to us when:
o the reserve account balance exceeds the specified percentage,
o the required periodic payments to the Class A certificate holders
are current,and
o the trustee, servicer and other administrative costs are current.
During the second and third quarters of 1999, we experienced loan servicing
inefficiencies that resulted in increased delinquency and charge off levels. As
a result, certain reserve account requirements were increased until delinquency
and charge off levels returned to contractually specified percentages. As of
March 31, 2000, all increases in reserve account requirements have been
eliminated and we met the targeted reserve account balances under our
securitization agreements of $34.6 million.
Certain Financial Information Regarding Our Securitizations
We did not enter into any securitization transactions during the first
quarter of 2000 or 1999.
<PAGE>
Page 19
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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
o increases in our loan portfolio, o common stock repurchases,
o expansion of our dealership network, o the purchase of inventories, and
o working capital and general corporate purposes, o the purchase of property and equipment.
</TABLE>
We fund our capital requirements primarily through:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
o operating cash flow, o our revolving facility with GE Capital, and
o securitization transactions, o supplemental borrowings.
</TABLE>
While to date we have met our liquidity requirements as needed, there can be
no assurance that we will be able to continue to do so in the future.
Operating Cash Flow
Net Cash Provided by Operating Activities increased by $11.0 million in the
three months ended March 31, 2000 to $61.9 million compared to cash generated of
$50.9 million for the three months ended March 31,1999. The increase is
primarily due to an increase in net earnings coupled with a significant decrease
in inventory from year end 1999, resulting from management's decision to
increase inventory levels at the end of 1999 in preparation for the high
seasonal sales, which typically occur in the first quarter of the year.
Net cash used by investing activities decreased to $81.2 million for the
quarter ended March 31, 2000 versus $99.3 million for the same quarter of the
previous year. The decrease is due a significant decrease in Investments Held in
Trust due to the decline in principal balances securitized, offset by
collections on finance receivables.
Financing activities generated $3.6 million for the quarter ended March 31,
2000 as compared to $49.3 million generated for the quarter ended March 31,
1999. The reason for the decrease is primarily due to net repayment of notes
payable.
Financing Resources
Revolving Facility. Under our $125 million revolving facility, our borrowing
base consists of up to 65.0% of the principal balance of eligible loans
originated from the sale of used cars and the lesser of $25 million or 58% of
the direct vehicle costs for eligible vehicle inventory. The revolving facility
expires in June 2000 and includes a provision for a one year extension upon
agreement by both parties. Although there can be no assurance, we expect this
agreement to be extended for an additional year. The revolving facility also
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 March 31, 2000, our borrowing capacity under the revolving facility
was $121.9 million, the aggregate principal amount outstanding under the
revolving facility was approximately $89.1 million, and the amount available to
be borrowed under the facility was $32.8 million. The revolving facility bears
interest at the 30-day LIBOR plus 3.15%, payable daily (total rate of 9.04% as
of March 31, 2000).
The revolving facility contains covenants that, among other things, limit
our ability to take certain actions without GE Capital's consent, including
incur additional indebtedness, make any change in our capital structure, declare
or pay dividends, and make certain investments and capital expenditures. The
revolving facility also provides that an event of default will occur if Mr.
Ernest C. Garcia II owns less than 15.0% of our voting stock. Mr. Garcia owned
approximately 32.2% of our common stock at March 31, 2000.
In addition, we are also required to maintain specified financial ratios. As
of March 31, 2000, we were were compliance with the covenants in this agreement.
<PAGE>
Page 20
Securitizations. Our securitization program is a primary source of our
working capital. Securitizations generate cash flow for us from the sale of
Class A obligations, ongoing servicing fees, and excess cash flow distributions
from collections on the loans securitized after payments on the Class A
obligations, payment of fees, expenses, and insurance premiums, and required
deposits to the reserve account.
Securitization also allows us to fix our cost of funds for a given loan
portfolio. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Securitizations" for a more complete description of our
securitization program.
Supplemental Borrowings
2000 Exchange Offer. On February 22, 2000, we commenced a new exchange offer
to acquire up to 2.5 million shares of our common stock. This offer expired
April 13, 2000 and we acquired approximately 1.1 millions shares of our common
stock in exchange for approximately $11.9 million of seven year subordinated
debentures due April 15, 2007. Under the terms of the offer, each share of stock
was exchangeable for $11.00 principal amount of debentures. The debentures were
issued at a premium, which will be amortized over the life of the debentures and
results in an effective annual interest rate of 19.3%. We must pay interest
bi-annually at 11% per year.
General Electric Capital Corporation Lease. In March 2000, we entered into
an agreement with General Electric Capital Corporation to provide lease
financing in the aggregate of $4.7 million. The lease provides for 36 monthly
payments bearing interest at 9.42%. The lease is being treated as an operating
lease for accounting purposes.
Capital Expenditures and Commitments
During the three months ended March 31, 2000, we developed three new
dealerships in existing markets. In the fourth quarter of 1999, we obtained five
dealerships, including 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 30 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.
Accounting Matters
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No.133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133). The adoption of SFAS No. 133 was delayed
by the issuance of SFAS 137. The statement requires all derivatives to be
recorded on the balance sheet at fair value and establishes new accounting rules
for hedging instruments. In June 1999, the FASB deferred the effective date of
SFAS No. 133 for one year until fiscal years beginning after June 15, 2000.
Management does not expect the adoption of SFAS No. 133 to have a material
impact on the Company.
Risk Factors
There are various risks in purchasing our securities and investing in our
business. We believe that our risk information has not changed materially from
the risk factors described in our Form 10-K for the year ended December 31,
1999.
We Make Forward Looking Statements
Our Quarterly Report on Form 10-Q includes statements that constitute
forward-looking statements within the meaning of the safe harbor provisions of
the Private and Securities Litigation Reform Act of 1995. Forward-looking
statements are often characterized by the words "believes," "estimates,"
"projects," "expects" or similar expressions. Forward-looking statements in this
report relate, among other matters, to: anticipated financial results, such as
continuing growth sales, other revenues and loan portfolios, and improvements in
loan performance, including delinquencies; growth in our dealerships through
acquisitions and de novo dealership openings; and e-commerce related growth and
loan performance. Factors that could cause or contribute to differences from
these forward-looking statements include, but are not limited to: any decline in
consumer acceptance of our car sales strategies or marketing campaigns; any
<PAGE>
Page 21
inability of the Company to finance its operations in light of a tight credit
market for the sub-prime industry; any deterioration in the used car finance
industry or increased competition in the used car sales and finance industry;
any inability of the Company to monitor and improve its underwriting and
collection processes; any changes in estimates and assumptions in, and the
ongoing adequacy of, our allowance for credit losses; any inability of the
Company to continue to reduce operating expenses as a percentage of sales; and
any new or revised accounting, tax or legal guidance that adversely affect used
car sales or financing. Other factors are detailed in the sections entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors," "Factors That May Affect Future Results and
Financial Condition" and "Factors That May Affect Future Stock Performance" in
our most recent reports on Form 10-K and this Quarterly Report on Form 10-Q
(including Exhibit 99 hereto), and elsewhere in our Securities and Exchange
Commission filings. By making these forward-looking statements, we undertake no
obligation to update these statements for revisions or changes after the date of
this report. References to Ugly Duckling Corporation as the largest and fastest
growing operator of used car dealerships focused exclusively on the sub-prime
market is management's belief based upon the knowledge of the industry and not
on any current independent third party study.
ITEM 3.
Market Risk
We are exposed to market risk on our financial instruments from changes
in interest rates. We do not use instruments for trading purposes or to manage
interest rate risk. Our earnings are substantially affected by our net interest
income, which is the difference between the income earned on interest-bearing
assets and the interest paid on interest bearing notes payable. Increases in
market interest rates could have an adverse effect on profitability.
Our financial instruments consist primarily of fixed rate finance
receivables, residual interests in pools of fixed rate finance receivables,
short term variable rate revolving Notes Receivable, and variable and fixed rate
Notes Payable. Our finance receivables are classified as subprime loans and
generally bear interest at the lower of 29.9% or the maximum interest rate
allowed in states that impose interest rate limits. At March 31, 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
March 31, 2000 is the Collateralized Notes Payable (senior and junior
securities) issued under our securitization program. Issuing debt through our
securitization program allows us to mitigate our interest rate risk by reducing
the balance of the variable revolving line of credit and replacing it with a
lower fixed rate note payable. We are subject to interest rate risk on fixed
rate Notes Payable to the extent that future interest rates are higher than the
interest rates on our existing Notes Payable.
We believe that our market risk information has not changed materially
from December 31, 1999.
<PAGE>
Page 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We sell our cars on an "as is" basis. We require all customers to
acknowledge in writing on the date of sale that we disclaim any obligation for
vehicle-related problems that subsequently occur. Although we believe that these
disclaimers are enforceable under applicable laws, there can be no assurance
that they will be upheld in every instance. Despite obtaining these disclaimers,
in the ordinary course of business, we receive complaints from customers
relating to vehicle condition problems as well as alleged violations of federal
and state consumer lending or other similar laws and regulations. Most of these
complaints are made directly to us or to various consumer protection
organizations and are subsequently resolved. However, customers occasionally
name us as a defendant in civil suits filed in state, local, or small claims
courts. Additionally, in the ordinary course of business, we are a defendant in
various other types of legal proceedings, and are the subject of regulatory or
governmental investigations. Although we cannot determine at this time the
amount of the ultimate exposure from such matters, if any, we, based on the
advice of counsel, do not expect the final outcome to have a material adverse
effect on the Company.
Item 2. Changes in Securities and Use of Proceeds.
(a) None
(b) None
(c) None
(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 10.1 -- First Amendment to $38 Million Senior Secured Loan
Agreement between CIBC Inc., SunAmerica, etc. and the Registrant
dated November 12, 1999
Exhibit 10.2 -- Second Amendement to $38 Million Senior Secured Loan
Agreement between CIBC Inc., SunAmerica, etc. and the Registrant
dated February 15, 2000
Exhibit 11 -- Statement regarding computation of per share earnings
(see note 5 of Notes to Condensed Consolidated Financial Statements)
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K.
During the first quarter of 2000, the Company filed three reports on Form
8-K. The first report on Form 8-K, dated December 31, 1999 and filed January 5,
2000 pursuant to Item 2, reported the sale of stock of Cygnet Dealer Finance,
Inc. to an entity controlled by Ernest C. Garcia II. The second report on Form
8-K, dated February 17, 2000 and filed February 17, 2000, reported Ugly
Duckling's financial results for 1999 and filed as an exhibit to the Form 8-K a
press release dated February 16, 2000 entitled "Ugly Duckling Reports Financial
Results for 1999." The third report on Form 8-K, dated February 22, 2000 and
filed on February 22, 2000, announced the commencement of Ugly Duckling's offer
to exchange subordinated debt for up to 2.5 million shares of its common stock.
The Company also filed a Form 8-K/A on March 14, 2000 amending the Form 8-K
dated December 31, 1999 by adding the pro forma financial information relating
to the sale of the stock of Cygnet Dealer Finance, Inc. to an entity controlled
by Ernest C. Garcia II.
<PAGE>
Page 23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UGLY DUCKLING CORPORATION
/s/ STEVEN T. DARAK
-----------------------
Steven T. Darak
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: May 11, 2000
<PAGE>
Page 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
--------- -------------
<S> <C>
10.1 First Amendment to $38 Million Senior Secured Loan Agreement between CIBC Inc., SunAmerica, etc.
and the Registrant dated November 12, 1999
10.2 Second Amendement to $38 Million Senior Secured Loan Agreement between CIBC Inc., SunAmerica, etc.
and the Registrant dated February 15, 2000
11 Statement regarding computation of per share earnings (see note 5 of Notes
to Condensed Consolidated Financial Statements)
27 Financial Data Schedule
</TABLE>
Sprentd\PHX\745195.3 8
Sprentd\PHX\745195.3
November 12, 1999
SAI Investment Adviser, Inc.
1 SunAmerica Center, 34th Floor
Century City
Los Angeles, CA 90067-6022
SunAmerica Life Insurance Company
1 SunAmerica Center, 34th Floor
Century City
Los Angeles, CA 90067-6022
KZH Soleil-2 LLC
c/o The Chase Manhattan Bank
450 West 33rd Street, 15th Floor
New York, New York 10001
Harris Trust & Savings Bank
111 West Monroe Street
Chicago, Illinois 60603
Ladies and Gentlemen:
Reference is made to that certain Senior Secured Loan Agreement dated
as of May 14, 1999 (the "Loan Agreement") among Ugly Duckling Corporation, a
Delaware corporation ("Borrower"), Harris Trust & Savings Bank, as Collateral
Agent (the "Collateral Agent") and the Lenders party thereto (together with
their respective successors and assigns, "Lenders"). All capitalized terms used
herein and not otherwise defined shall have the meanings given to such terms in
the Loan Agreement.
Borrower has previously advised Collateral Agent and Lenders that with
respect to the month of September 1999, Borrower is not in compliance with
Section 6.16 of the Loan Agreement (entitled "Minimum B Piece Cash Flows").
By countersigning this letter, Collateral Agent and Lenders hereby
permanently waive such failure to comply with Section 6.16 of the Loan Agreement
for such month (and only for such month) and agree that such failure shall not
constitute a Default or Event of Default pursuant to the Loan Agreement or the
other Loan Documents.
In consideration of the foregoing waiver and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Loan Documents are, upon execution hereof by Collateral Agent
and the Required Lenders, hereby amended as follows:
1. The definition of "B-Piece Cash Flows" in the Loan Agreement is hereby
amended and restated in its entirety to read as follows:
"B-Piece Cash Flows" means, for any period, all cash
distributions with respect to a B-Piece together with all
related spread account distributions, in each case during such
period; provided, however, upon termination of a
Securitization Trust at recapture or the exercise of an
optional repurchase right, the B-Piece Cash Flows for such
Securitization Trust in the month of such termination shall be
(i) the B-Piece Value of such Securitization Trust as of the
Calculation Date immediately preceding the date of termination
multiplied by (ii) the Advance Rate applicable to such
Securitization Trust on such preceding Calculation Date.
2. The definition of "Monthly Amortization Amount" in the Loan Agreement is
hereby amended and restated in its entirety to read as follows:
"Monthly Amortization Amount" means:
---------------------------
(i) with respect to any Payment Date occurring prior
to November 15, 1999, the greater of (A) $500,000.00,
and (B) subject to Section 2.6, the amount, if any,
by which the then Outstanding Principal Amount of the
Loan exceeds the Borrowing Base as of such date as
set forth in the Collateral Servicing Report required
to be delivered with respect to such Payment Date;
(ii) with respect to the November 15, 1999 Payment
Date and each Payment Date thereafter prior to June
15, 2000, the greater of (A) $800,000.00, and (B)
subject to Section 2.6, the amount, if any, by which
the then Outstanding Principal Amount of the Loan
exceeds the Borrowing Base as of such date as set
forth in the Collateral Servicing Report required to
be delivered with respect to such Payment Date; and
(iii) with respect to any Payment Date occurring on
or after June 15, 2000, the greatest of (A)
$1,700,000.00, (B) 50% of the aggregate B-Piece Cash
Flows for the then most recently ended monthly period
as set forth in the Collateral Servicing Report
required to be delivered with respect to such Payment
Date, and (C) the amount, if any, by which the then
Outstanding Principal Amount of the Loan exceeds the
Borrowing Base as of such date as set forth in the
Collateral Servicing Report required to be delivered
with respect to such Payment Date.
3. The definition of "Securitization Period" in the Loan Agreement is hereby
amended and restated in its entirety to read as follows:
"Securitization Period" shall mean the period from and
including the date hereof to and including the date
immediately following the date on which Borrower completes
securitizations of at least $75,000,000 of Ugly Duckling
Collateral in the year 2000; provided, however, that if
Borrower has not completed a securitization of Ugly Duckling
Collateral during the month of November or December 1999, the
Securitization Period shall extend until Borrower has
completed two (2) securitizations of Ugly Duckling Collateral
with an aggregate value of Ugly Duckling Collateral subject to
such securitizations of not less than $150,000,000.
4. The second and third paragraphs of Section 2.6 of the Loan Agreement are
hereby amended and restated in their entirety to read as follows:
Any provision hereof to the contrary notwithstanding, if, at
any time prior to June 15, 2000, immediately after giving
effect to the payment of any Monthly Amortization Amount, the
aggregate amount of all principal payments actually made by
Borrower hereunder and received by the Lenders (as of any date
of determination, the "Actual Amortization Amount") since the
date hereof exceeds the sum of (i) the product of $500,000.00
multiplied by the number of Payment Dates that have occurred
prior to November 15, 1999, plus (ii) the product of
$800,000.00 multiplied by the number of Payment Dates that
have occurred from and after November 15, 1999 (as of any date
of determination, the "Required Amortization Amount"), then
Borrower, upon written request to the Collateral Agent (with a
copy to the Lenders), may reduce the amount of any subsequent
Monthly Amortization Amount with respect to any Payment Date
occurring prior to June 15, 2000, by such amount as would not
cause the Actual Amortization Amount to be less than the
Required Amortization Amount immediately following such
Payment Date.
With respect to any Payment Date prior to November 15, 1999,
in the event clause (i)(B) of the definition of Monthly
Amortization Amount would result in a Monthly Amortization
Amount with respect to any Payment Date in excess of
$500,000.00, Borrower may elect by written notice to
Collateral Agent and Lenders received at least one Business
Day in advance of such Payment Date, to repay only $500,000.00
of the Outstanding Principal Amount on such Payment Date and,
in lieu of repaying the remainder of any such excess on such
Payment Date, elect to have such excess remain in the
Collateral Account (to be held by Collateral Agent pursuant to
the Collateral Account Agreement and this Section 2.6). With
respect to any Payment Date from and after November 15, 1999,
in the event clause (ii)(B) of the definition of Monthly
Amortization Amount would result in a Monthly Amortization
Amount with respect to any Payment Date in excess of
$800,000.00, Borrower may elect by written notice to
Collateral Agent and Lenders received at least one Business
Day in advance of such Payment Date, to repay only $800,000.00
of the Outstanding Principal Amount on such Payment Date and,
in lieu of repaying the remainder of any such excess on such
Payment Date, elect to have such excess remain in the
Collateral Account (to be held by Collateral Agent pursuant to
the Collateral Account Agreement and this Section 2.6).
5. Section 6.16 of the Loan Agreement is hereby amended and restated in its
entirety to read as follows:
6.16 Minimum B-Piece Cash Flows. Not permit aggregate B-Piece
Cash Flows deposited to the Collateral Account with respect to
any month to be less than the following amounts determined as
of the applicable Payment Date (it being understood that for
purposes of determining compliance with this Section 6.16 the
amount deemed deposited with respect to any B-Piece may not
exceed the B-Piece Cash Flow with respect to such B-Piece):
(a) For Payment Dates through and including September
15, 1999 (which represent B-Piece Cash Flows with
respect to months through August 1999), $2,000,000.
(b) For Payment Dates from October 15, 1999, through
and including March 15, 2000, $900,000 (which
represent B-Piece Cash Flows with respect to months
from September 1999 through February 2000)
(c) For the Payment Date on April 15, 2000 (which
represents B-Piece Cash Flows with respect to the
month of March 2000), $1,200,000.
(d) For the Payment Date on May 15, 2000, and
thereafter, $2,000,000.
6. Section 8.1(j) of the Loan Agreement is hereby amended to provide as follows:
(j) If a default or event of default occurs under the GECC
Agreement or under the terms of any other Indebtedness (other
than Non-Recourse Debt) aggregating in excess of $3,000,000
(with respect to any particular item of Indebtedness or in the
aggregate and in each case after any applicable cure or grace
period) regardless of whether such default or event of default
is waived or amended.
7. A new Section 6.22 is hereby added to the Loan Agreement to provide as
follows:
6.22 Required Number of Securitization Trusts. Borrower agrees
that as of each Payment Date the number of Securitization
Trusts with respect to which Borrower has either pledged the
stock of a bankruptcy remote entity pursuant to the Stock
Pledge Agreement or otherwise pledged B Certificates pursuant
to the Loan Documents shall not be less than the following:
(i) For the period ending on July 14, 2000, the result of
dividing (A) the unpaid principal balance of the Loan as of
such Payment Date (after giving effect to any payments then
being made) by (B) $5,000,000; and
(ii) For the period from and after July 15, 2000, the result
of dividing (A) the unpaid principal balance of the Loan as of
such Payment Date (after giving effect to any payments then
being made) by (B) $4,000,000.
8. Section 3(ii) of the Cash Collateral Account Agreement is amended and
restated in its entirety to read as follows:
(ii) If, at any time prior to June 15, 2000, immediately after
giving effect to the payment of any Monthly Amortization
Amount, the aggregate amount of all principal payments
actually made by UDC and received by the Lenders (as of any
date of determination, the "Actual Amortization Amount") since
the date hereof exceeds the sum of (A) the product of
$500,000.00 multiplied by the number of Payment Dates that
have occurred prior to November 15, 1999, plus (B) the product
of $800,000.00 multiplied by the number of Payment Dates that
have occurred from and after November 15, 1999 (as of any date
of determination, the "Required Amortization Amount"), then
UDC, upon written request to Secured Party (with a copy to the
Lenders), may reduce the amount of any subsequent Monthly
Amortization Amount with respect to any Payment Date occurring
prior to June 15, 2000, by such amount as would not cause the
Actual Amortization Amount to be less than the Required
Amortization Amount immediately following such Payment Date.
9. Section 3(iii) of the Cash Collateral Account Agreement is amended and
restated in its entirety to read as follows:
With respect to any Payment Date prior to November 15, 1999,
in the event clause (i)(B) of the definition of Monthly
Amortization Amount would result in a Monthly Amortization
Amount with respect to any Payment Date in excess of
$500,000.00, UDC may elect, by written notice to Secured Party
and Lenders received at least 1 Business Day in advance of
such Payment Date, to have Secured Party pay only $500,000.00
of the Outstanding Principal Amount on such Payment Date and,
in lieu of paying the remainder of any such excess on such
Payment Date, elect to have such excess remain in the
Collateral Account. With respect to any Payment Date from and
after November 15, 1999, in the event clause (ii)(B) of the
definition of Monthly Amortization Amount would result in a
Monthly Amortization Amount with respect to any Payment Date
in excess of $800,000.00, UDC may elect, by written notice to
Secured Party and Lenders received at least 1 Business Day in
advance of such Payment Date, to have Secured Party pay only
$800,000.00 of the Outstanding Principal Amount on such
Payment Date and, in lieu of paying the remainder of any such
excess on such Payment Date, elect to have such excess remain
in the Collateral Account.
10. Section 7(c) of the Stock Pledge Agreement is hereby amended to add the
words "During the Securitization Period," at the beginning of such Section.
Except as specifically modified by this waiver and agreement, all of
the terms and provisions of the Loan Agreement, each other Loan Document and
each of the documents referred to therein or delivered in connection therewith
shall remain in full force and effect. The waivers set forth herein shall be
limited precisely as written and shall not be deemed, except as expressly set
forth herein, (a) to be a consent to any modification or waiver of other terms
or conditions of the Loan Agreement, any other Loan Document or any of the
documents referred to therein or delivered in connection therewith or (b) to
prejudice any right, remedy, power or privilege which any party hereto or any
party consenting hereto now has or may have in the future under or in connection
with the Loan Agreement, any other Loan Document or any of the documents
referred to therein or delivered in connection therewith. Without limiting the
generality of the foregoing, the Security Documents and all of the Collateral
described therein do and shall, to the extent set forth therein, continue to
secure the payment of all obligations and liabilities of the Borrower under the
Loan Agreement and/or any of the other Loan Documents, in each case as amended
hereby.
Upon the execution and delivery hereof by the Required Lenders and
Collateral Agent, Borrower shall pay to Lenders, ratably, a modification fee in
the aggregate amount of $50,000.
The Borrower shall promptly pay the reasonable out-of-pocket expenses
incurred by the Collateral Agent and the Lenders in connection with the
preparation of this waiver and agreement including the reasonable fees,
disbursements and other charges of its counsel
This letter agreement shall be governed by and construed in accordance
with the laws of the State of New York.
Borrower hereby represents and warrants to Collateral Agent and Lenders
as follows:
(i) The execution, delivery and performance of this Letter Agreement by
Borrower and Guarantor has been duly authorized by all necessary corporate
action of Borrower and Guarantor.
(ii) This Letter Agreement has been duly executed and delivered by
Borrower and Guarantor and constitutes the legal, valid and binding obligation
of Borrower and Guarantor in accordance with its terms, except as enforcement
may be limited by equitable principles or by bankruptcy, insolvency,
reorganization, moratorium, or similar laws relating to or limiting creditors'
rights generally.
(iii) As of the date hereof, the representations and warranties of
Borrower and Guarantor set forth in the Loan Documents are true and correct in
all material respects.
(iv) As of the date hereof and after giving effect to the execution and
delivery of this Letter Agreement by Borrower, Collateral Agent and Lenders, no
Default or Event of Default has occurred and is continuing.
This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which taken
together shall constitute one and the same instrument.
<PAGE>
Please sign and return the enclosed copy of this letter.
Very truly yours,
UGLY DUCKLING CORPORATION, a Delaware corporation
By: /S/ DONALD L. ADDINK
-------------------------
Name: Donald L. Addink
Title: Vice President
<PAGE>
CONSENTED:
GALAXY CLO 1999-1, LTD.
By: SAI Investment Adviser, Inc.,
its Collateral Manager
By: /S/ JAMES K. HUNT
----------------------
Name: James K. Hunt
Title: Executive Vice President
SUNAMERICA LIFE INSURANCE
COMPANY
By: /S/ JOHN L?????????
- ------------------------
Name: John L???????????
Title: Authorized Agent
KZH SOLEIL-2 LLC
By:/S/ PETER CHIN
- -----------------
Name: Peter Chin
Title: Authorized Agent
HARRIS TRUST & SAVINGS BANK,
as Collateral Agent
By: /S/ MEGAN CARMODY
- ----------------------
Name: Megan Carmody
Title: Assistant Vice President
<PAGE>
Guarantor hereby consents and agrees to the foregoing and agrees that
the Guaranty remains in full force and effect and that the Guaranteed
Obligations (as defined in the Guaranty) include, without limitation, payment of
the obligations of Borrower pursuant to the foregoing Letter Agreement and the
Loan Documents as amended by the foregoing Letter Agreement.
UGLY DUCKLING CAR SALES AND FINANCE
CORPORATION, an Arizona corporation
By: /S/ JON D. EHLINGER
------------------------
Name: Jon D. Ehlinger
Title: Secretary
Sprentd\PHX\785667.7 6
Sprentd\PHX\785667.7
As of February 15, 2000
SAI Investment Adviser, Inc.
1 SunAmerica Center, 34th Floor
Century City
Los Angeles, CA 90067-6022
SunAmerica Life Insurance Company
1 SunAmerica Center, 34th Floor
Century City
Los Angeles, CA 90067-6022
KZH Soleil-2 LLC
c/o The Chase Manhattan Bank
450 West 33rd Street, 15th Floor
New York, New York 10001
Harris Trust & Savings Bank
111 West Monroe Street
Chicago, Illinois 60603
Ladies and Gentlemen:
Reference is made to that certain Senior Secured Loan Agreement dated
as of May 14, 1999 (as previously amended, the "Loan Agreement") among Ugly
Duckling Corporation, a Delaware corporation ("Borrower"), Harris Trust &
Savings Bank, as Collateral Agent (the "Collateral Agent") and the Lenders party
thereto (together with their respective successors and assigns, "Lenders").
Reference is also made to that certain letter, dated February 7, 2000 from
Borrower to John Lapham of SunAmerica Life Insurance Company (the "Request
Letter") which describes a proposed tender offer (the "Tender Offer") under
which the Borrower would tender for up to 2.5 million shares of the Borrower's
stock at a price of $11 per share (the "Exchange") and pursuant to which the
purchase price would be paid in subordinated debt securities of the Borrower
(the "Exchange Debt"). All capitalized terms used herein and not otherwise
defined shall have the meanings given to such terms in the Loan Agreement.
For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the Loan Documents are, upon execution hereof by
Collateral Agent and the Required Lenders, hereby amended as follows:
1. The Lenders and Collateral Agent hereby consent to the Tender Offer
and the Exchange, as described in the Request Letter, notwithstanding any
provision of the Loan Agreement or the Loan Documents to the contrary including,
without limitation, Section 7.8 of the Loan Agreement (Distributions) and
Section 7.13 of the Loan Agreement (Transactions With Affiliates) (which may be
applicable by virtue of the fact that the Tender Offer and the Exchange involves
a transaction with Borrower's shareholders, who include Ernest C. Garcia II and
certain other directors and officers). The Lenders also agree that so long as
the Exchange Debt is (a) subject to the subordination provisions of the
Indenture, dated October 15, 1998 (the "Indenture"), from Borrower to Harris
Trust and Savings Bank, as trustee (pursuant to which existing Subordinated Debt
described on Exhibit G to the Loan Agreement was issued and the Exchange Debt
will be issued) as in effect on the date hereof and (b) issued pursuant to a
supplemental indenture in substantially the form delivered to the Lenders prior
to the date hereof, the Exchange Debt shall be Subordinated Debt as defined in
the Loan Agreement. Borrower hereby designates the Loan as "Designated Senior
Indebtedness" pursuant to the Indenture and agrees to maintain such designation
at all times. Borrower will promptly notify the trustee under the Indenture of
such designation and in connection with each supplemental indenture hereafter
entered into in connection with the Indenture, Borrower will cause such
supplemental indenture to provide that the Loan is included as "Designated
Senior Indebtedness."
2. Section 6.13 of the Loan Agreement is hereby amended in its entirety to
provide as follows:
6.13. Tangible Net Worth. Borrower shall maintain a
consolidated Tangible Net Worth of not less than the sum of (i)
$100,000,000, plus (ii) 50% of the cumulative net earnings (but only to
the extent positive) after taxes of the Borrower and its Subsidiaries
on a consolidated basis determined in accordance with generally
accepted accounting principles for each period ending after December
31, 1999, plus (iii) 75% of the cumulative net proceeds of the issuance
of any additional shares of capital stock of Borrower after February
15, 2000, and minus (iv) the cumulative amount of payments received by
Borrower pursuant to that Promissory Note, dated December 30, 1999 made
by Cygnet Capital Corporation to Ugly Duckling Finance Corporation in
the original principal amount of $12,000,000 through the retirement of
stock in Borrower held by Ernest C. Garcia II. As used in this Section
6.13, "net proceeds" of the issuance of capital stock shall mean the
gross cash proceeds of such issuance less reasonable and customary fees
and expenses actually incurred in connection therewith, including,
without limitation, underwriting fees, investment banking fees,
attorneys' and accountant's fees, regulatory and listing fees and due
diligence costs and expenses.
3. A new Section 6.13A is hereby added to the Loan Agreement to provide as
follows:
6.13A. Tangible Net Worth and Subordinated Debt. The sum of
(i) the consolidated Tangible Net Worth of Borrower and (ii) the
outstanding amount of indebtedness of Borrower as to which the
repayment of principal and interest is subordinated to repayment of the
Loan, shall not be less than $150,000,000.
4. Section 6.14 of the Loan Agreement is hereby amended in its entirety to
provide as follows:
6.14 Consolidated EBITDA to Consolidated Interest Expense. As
of the end of each quarterly fiscal period of Borrower for the fiscal
quarter then ended and the immediately preceding three (3) fiscal
quarters taken as a whole (each a "Test Period"), Borrower shall
maintain a ratio of Consolidated EBITDA to Consolidated Interest
Expense of not less than the amount set forth below for each Test
Period ending during the period set forth below:
Period Ratio
Closing to and including June 30, 1999 0.60 to 1.0
July 1, 1999 to and including September 30, 1999 0.85 to 1.0
October 1, 1999 to and including December 31, 1999 1.00 to 1.0
January 1, 2000 to and including March 31, 2000 1.35 to 1.0
April 1, 2000 and thereafter 1.50 to 1.0
5. A new Section 6.14A is hereby added to the Loan Agreement to provide as
follows:
6.14A. Quarterly Consolidated EBITDA to Consolidated Interest
Expense. As of the end of each fiscal quarter of Borrower commencing
with the fiscal quarter ending March 31, 2000, Borrower shall maintain
a ratio of Consolidated EBITDA to Consolidated Interest Expense of not
less than 1.1 to 1.0 for such fiscal quarter.
Except as specifically modified by this agreement, all of the terms and
provisions of the Loan Agreement, each other Loan Document and each of the
documents referred to therein or delivered in connection therewith shall remain
in full force and effect. The amendments set forth herein shall be limited
precisely as written and shall not be deemed, except as expressly set forth
herein, (a) to be a consent to any modification or waiver of other terms or
conditions of the Loan Agreement, any other Loan Document or any of the
documents referred to therein or delivered in connection therewith or (b) to
prejudice any right, remedy, power or privilege which any party hereto or any
party consenting hereto now has or may have in the future under or in connection
with the Loan Agreement, any other Loan Document or any of the documents
referred to therein or delivered in connection therewith. Without limiting the
generality of the foregoing, the Security Documents and all of the Collateral
described therein do and shall, to the extent set forth therein, continue to
secure the payment of all obligations and liabilities of the Borrower under the
Loan Agreement and/or any of the other Loan Documents, in each case as amended
hereby.
The Borrower shall promptly pay the reasonable out-of-pocket expenses
incurred by the Collateral Agent and the Lenders in connection with the
preparation of this agreement including the reasonable fees, disbursements and
other charges of its counsel. The Borrower agrees to pay a modification fee of
$25,000 to the Lenders upon the execution and delivery of this agreement by the
parties hereto.
This Letter Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
Borrower hereby represents and warrants to Collateral Agent and Lenders
as follows:
(i) The execution, delivery and performance of this Letter Agreement by
Borrower and Guarantor has been duly authorized by all necessary corporate
action of Borrower and Guarantor.
(ii) This Letter Agreement has been duly executed and delivered by
Borrower and Guarantor and constitutes the legal, valid and binding obligation
of Borrower and Guarantor in accordance with its terms, except as enforcement
may be limited by equitable principles or by bankruptcy, insolvency,
reorganization, moratorium, or similar laws relating to or limiting creditors'
rights generally.
(iii) As of the date hereof, the representations and warranties of
Borrower and Guarantor set forth in the Loan Documents are true and correct in
all material respects.
(iv) As of the date hereof and after giving effect to the execution and
delivery of this Letter Agreement by Borrower, Collateral Agent and Lenders, no
Default or Event of Default has occurred and is continuing.
This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which taken
together shall constitute one and the same instrument.
Please sign and return the enclosed copy of this letter.
Very truly yours,
UGLY DUCKLING CORPORATION, a Delaware corporation
By: /S/ Jon D. Ehlinger
-----------------------
Name: Jon E. Ehlinger
Title: Secretary
<PAGE>
CONSENTED:
GALAXY CLO 1999-1, LTD.
By: SAI Investment Adviser, Inc.,
its Collateral Manager
By:
Name:
Title:
SUNAMERICA LIFE INSURANCE
COMPANY
By:
Name:
Title:
KZH SOLEIL-2 LLC
By:
Name:
Title:
HARRIS TRUST & SAVINGS BANK,
as Collateral Agent
By:
Name:
Title:
<PAGE>
Guarantor hereby consents and agrees to the foregoing and agrees that
the Guaranty remains in full force and effect and that the Guaranteed
Obligations (as defined in the Guaranty) include, without limitation, payment of
the obligations of Borrower pursuant to the foregoing Letter Agreement and the
Loan Documents as amended by the foregoing Letter Agreement.
UGLY DUCKLING CAR SALES AND FINANCE
CORPORATION, an Arizona corporation
By: /S/ JON D. EHLINGER
-----------------------
Name: Jon D. Ehlinger
Title: Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001012704
<NAME> Ugly Duckling Corp.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-1-2000
<PERIOD-END> MAR-31-2000
<CASH> 6,330
<SECURITIES> 0
<RECEIVABLES> 494,852
<ALLOWANCES> 87,585
<INVENTORY> 49,058
<CURRENT-ASSETS> 0
<PP&E> 48,413
<DEPRECIATION> 16,272
<TOTAL-ASSETS> 547,953
<CURRENT-LIABILITIES> 377,400
<BONDS> 0
0
0
<COMMON> 153,361
<OTHER-SE> 17,192
<TOTAL-LIABILITY-AND-EQUITY> 547,953
<SALES> 132,786
<TOTAL-REVENUES> 159,124
<CGS> 72,942
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<OTHER-EXPENSES> 36,688
<LOSS-PROVISION> 34,573
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<INCOME-PRETAX> 7,600
<INCOME-TAX> 3,117
<INCOME-CONTINUING> 4,483
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