-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B0qC4D39SjcpsyUR8qo6ryb2jmWcl6PGu/O/YXsbjlwxyjE1O0wYTNklq42yw90O kAeTgehyatJm2AbUEFKeWw== /in/edgar/work/0001012704-00-000077/0001012704-00-000077.txt : 20001115 0001012704-00-000077.hdr.sgml : 20001115 ACCESSION NUMBER: 0001012704-00-000077 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UGLY DUCKLING CORP CENTRAL INDEX KEY: 0001012704 STANDARD INDUSTRIAL CLASSIFICATION: [6141 ] IRS NUMBER: 860721358 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14759 FILM NUMBER: 765156 BUSINESS ADDRESS: STREET 1: 2525 E CAMELBACK ROAD STREET 2: STE 500 CITY: PHOENIX STATE: AZ ZIP: 85016 BUSINESS PHONE: 6028526600 MAIL ADDRESS: STREET 1: 2525 E CAMELBACK RD STREET 2: STE 1150 CITY: PHOENIX STATE: AZ ZIP: 85016 10-Q 1 0001.txt 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: September 30, 2000 Commission File Number 000-20841 UGLY DUCKLING CORPORATION (Exact name of registrant as specified in its charter) Delaware 86-0721358 (State or other jurisdiction of (I.R.S. employer incorporation or organization) Identification no.) 2525 E. Camelback Road, Suite 500, Phoenix, Arizona 85016 (Address of principal executive offices) (Zip Code) (602) 852-6600 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No --------------- INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE: At November 10, 2000, there were approximately 12,378,000 shares of Common Stock, $0.001 par value, outstanding. This document serves both as a resource for analysts, shareholders, and other interested persons, and as the quarterly report on Form 10-Q of Ugly Duckling Corporation (Ugly Duckling) to the Securities and Exchange Commission, which has taken no action to approve or disapprove the report or pass upon its accuracy or adequacy. Additionally, this document is to be read in conjunction with the consolidated financial statements and notes thereto included in Ugly Duckling's Annual Report on Form 10-K, for the year ended December 31, 1999. UGLY DUCKLING CORPORATION FORM 10-Q
TABLE OF CONTENTS Part I - FINANCIAL STATEMENTS Item 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets-- September 30, 2000 and December 31, 1999.......................1 Condensed Consolidated Statements of Operations-- Three and Nine Months Ended September 30, 2000 and 1999......................................................................2 Condensed Consolidated Statements of Cash Flows-- Nine Months Ended September 30, 2000 and 1999........3 Notes to Condensed Consolidated Financial Statements...................................................4 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................10 Item 3. MARKET RISK...........................................................................................25 Part II. -- OTHER INFORMATION Item 1. LEGAL PROCEEDINGS.....................................................................................26 Item 2. CHANGES IN SECURITIES.................................................................................26 Item 3. DEFAULTS UPON SENIOR SECURITIES.......................................................................26 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................................26 Item 5. OTHER INFORMATION 26 Item 6. EXHIBITS AND REPORTS ON FORM 8-K......................................................................26 SIGNATURES............................................................................................27
ITEM 1. UGLY DUCKLING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
September 30, December 31, 2000 1999 (unaudited) ---------------- --------------- ASSETS Cash and Cash Equivalents $ 6,555 $ 3,683 Finance Receivables, net 491,880 365,586 Notes Receivable from Related Party 12,000 12,000 Inventory 43,739 62,865 Property and Equipment, net 35,604 31,752 Intangible Assets, Net 12,767 14,618 Other Assets 11,727 12,327 Net Assets of Discontinued Operations 4,211 33,880 --------------- -------------- $ 618,483 $ 536,711 ================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts Payable $ 2,813 $ 3,185 Accrued Expenses and Other Liabilities 40,815 26,905 Notes Payable - Portfolio 362,255 275,774 Other Notes Payable 17,930 36,556 Subordinated Notes Payable 36,148 28,611 --------------- -------------- Total Liabilities 459,961 371,031 ---------------- -------------- Stockholders' Equity: Common Stock 19 19 Additional Paid-in Capital 173,721 173,273 Retained Earnings 24,223 12,709 Treasury Stock (39,441) (20,321) ---------------- --------------- Total Stockholders' Equity 158,522 165,680 ---------------- --------------- $ 618,483 $ 536,711 ================ ===============
Page 1 See accompanying notes to Condensed Consolidated Financial Statements. UGLY DUCKLING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three and Nine Months Ended September 30, 2000 and 1999 (In thousands, except earnings per share amounts) (unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------ ------------------------------- 2000 1999 2000 1999 -------------- -------------- ------------- --------------- Sales of Used Cars $ 126,636 $103,314 $ 380,949 $ 307,633 Less: Cost of Used Cars Sold 70,760 57,764 212,119 173,395 Provision for Credit Losses 36,092 27,561 102,877 81,113 -------------- ------------- ------------- --------------- 19,784 17,989 65,953 53,125 -------------- ------------- ------------- --------------- Other Income (Expense): Interest Income 31,436 19,775 86,838 45,904 Portfolio Interest Expense (7,318) (4,042) (18,344) (9,255) Servicing Income 308 1,794 1,701 6,988 -------------- -------------- ------------- --------------- 24,426 17,527 70,195 43,637 -------------- -------------- ------------- --------------- Income before Operating Expenses 44,210 35,516 136,148 96,762 Operating Expenses: Selling and Marketing 7,187 6,023 22,748 17,959 General and Administrative 27,831 20,294 79,954 61,763 Depreciation and Amortization 2,285 1,763 6,724 5,036 -------------- -------------- ------------- --------------- 37,303 28,080 109,426 84,758 -------------- -------------- ------------- --------------- Operating Income 6,907 7,436 26,722 12,004 Interest Expense, Other 2,360 877 7,237 1,736 -------------- -------------- ------------- --------------- Earnings before Income Taxes 4,547 6,559 19,485 10,268 Income Taxes 1,864 2,902 7,971 4,200 -------------- -------------- ------------- --------------- Earnings from Continuing Operations 2,683 3,657 11,514 6,068 Loss from Discontinued Operations, net - 525 - 5 -------------- -------------- ------------- --------------- Net Earnings $ 2,683 $ 4,182 $ 11,514 $ 6,073 ============== ============== ============= =============== Earnings per Common Share from Continuing Operations: Basic $ 0.21 $ 0.25 $ 0.83 $ 0.40 ============== ============== ============= =============== Diluted $ 0.21 $ 0.24 $ 0.82 $ 0.39 ============== ============== ============= =============== Net Earnings per Common Share: Basic $ 0.21 $ 0.28 $ 0.83 $ 0.40 ============== ============== ============= =============== Diluted $ 0.21 $ 0.28 $ 0.82 $ 0.39 ============== ============== ============= =============== Shares Used in Computation: Basic 12,597 14,903 13,847 15,161 ============== ============== ============= =============== Diluted 12,747 15,167 14,044 15,384 ============== ============== ============= =============== Page 2
See accompanying notes to Condensed Consolidated Financial Statements. UGLY DUCKLING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 2000 and 1999 (In thousands) (unaudited)
2000 1999 --------- --------- Cash Flows from Operating Activities: Net Earnings $ 11,514 $ 6,073 Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities: Provision for Credit Losses 102,877 81,113 Depreciation and Amortization 10,453 5,775 Loss from Disposal of Property and Equipment 3 23 Loss from Discontinued Operations - 5 Deferred Income Taxes - (3,769) Collections from Residuals in Finance Receivables Sold 13,055 13,755 (Increase) Decrease in Inventory 19,126 (737) Decrease in Other Assets 600 1,465 Increase in Accounts Payable, Accrued Expenses and Other Liabilities 14,040 16,354 Increase (Decrease) in Income Taxes Payable (558) 4,470 --------- --------- Net Cash Provided by Operating Activities 171,110 124,527 --------- --------- Cash Flows Used in Investing Activities: Increase in Finance Receivables (392,788) (358,067) Collections of Finance Receivables 157,067 99,962 Decrease in Investments Held in Trust on Finance Receivables Sold 7,969 3,641 Advances under Notes Receivable - (650) Proceeds from Disposal of Property and Equipment 3,142 72 Purchase of Property and Equipment (11,625) (6,426) Payment for Acquisition of Assets - (12,095) Increase in Intangible Assets from Acquisitions - (464) --------- --------- Net Cash Used in Investing Activities (236,235) (274,027) --------- --------- Cash Flows from Financing Activities: Initial Deposits at Securitization into Investments Held in Trust (20,738) (10,914) Additional Deposits into Investments Held in Trust (10,849) (18,144) Collections from Investments Held in Trust 17,544 3,844 Additions to Notes Payable Portfolio 554,153 561,853 Repayment of Notes Payable Portfolio (469,481) (419,046) Additions to Other Notes Payable 1,267 55,943 Repayment of Other Notes Payable (20,133) (36,136) Net Issuance of Subordinated Notes Payable (1,500) (1,664) Proceeds from Issuance of Common Stock 437 - Repurchase of Warrants - (552) Acquisition of Treasury Stock (11,114) (5,811) --------- --------- Net Cash Provided by Financing Activities 39,586 129,373 --------- --------- Net Cash Provided by Discontinued Operations 28,411 19,876 --------- --------- Net Increase (Decrease) in Cash and Cash Equivalents 2,872 (251) Cash and Cash Equivalents at Beginning of Period 3,683 2,544 --------- --------- Cash and Cash Equivalents at End of Period .............................. $ 6,555 $ 2,293 ========= ========= Supplemental Statement of Cash Flows Information: Interest Paid ...................................................... $ 20,712 $ 14,178 ========= ========= Income Taxes Paid .................................................. $ 8,524 $ (270) ========= ========= Acquisition of Treasury Stock with Subordinated Debt ............... $ 8,005 $ - ========= =========
See accompanying notes to Condensed Consolidated Financial Statements. Page 3 UGLY DUCKLING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Basis of Presentation Our accompanying unaudited condensed consolidated financial statements have been prepared in accordance with 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):
September 30, December 31, 2000 1999 ---------------- ---------------- Contractually Scheduled Payments $ 697,527 $ 492,937 Unearned Finance Charges (184,764) (134,119) ---------------- ---------------- Principal Balances, net 512,763 358,818 Accrued Interest 5,272 3,741 Loan Origination Costs 7,466 5,079 ---------------- ---------------- Principal Balances, net 525,501 367,638 Residuals in Finance Receivables Sold 3,632 17,382 Investments Held in Trust 62,790 56,716 ---------------- ---------------- Finance Receivables 591,923 441,736 Allowance for Credit Losses (100,043) (76,150) ---------------- ---------------- Finance Receivables, net $ 491,880 $ 365,586 ================ ================
Investments Held in Trust represent funds held by trustees on behalf of our securitization lenders. The balance of Investments Held in Trust increased slightly from December 31, 1999 due to deposits into the trust accounts arising from additional securitizations, partially offset by distribution of funds associated with of portfolios securitized during prior periods. Residuals in Finance Receivables Sold represent our subordinated interest in loans sold through securitizations. The decrease from December 31, 1999 to September 30, 2000 is attributable to no additional loans sold through securitization with servicing retained, amortization and release of cash, as well as the runoff of portfolios securitized and sold during prior periods. A summary of Residuals in Finance Receivables Sold follows ($ in thousands):
September 30, December 31, 2000 1999 ------------------ -------------- Retained interest in subordinated securities (B Certificates)............ 3,493 17,335 Net interest spreads, less present value discount........................ 640 6,113 Reduction for estimated credit losses.................................... (501) (6,066) ------- -------- Residuals in finance receivables sold.................................... 3,632 $ 17,382 =========== =========== Securitized principal balances outstanding............................... 12,735 $ 65,662 =========== =========== Estimated credit losses as a % of securitized principal balances outstanding.............................................................. 3.9% 9.2% Page 4
Note 3. Notes Receivable- Related Party The Note Receivable - Related Party originated from the Company's December 1999 sale of its Cygnet Dealer Finance subsidiary to Cygnet Capital Corporation, an entity controlled by Ernest C. Garcia II, Chairman and principal shareholder of the Company. The $12.0 million note from Cygnet Capital Corporation has a 10 year term, with interest payable quarterly at 9%, due December 2009. The note is secured by the capital stock of Cygnet Capital Corporation and guaranteed by Verde Investments, Inc., an affiliate of Mr. Garcia. Under the terms of the agreement, Mr. Garcia will be allowed to reduce the principal balance up to a maximum of $8 million by surrendering to the Company shares of Ugly Duckling common stock (valued at 98% of the average of the closing prices of the stock on NASDAQ for the ten trading days prior to the surrender) as long as Mr. Garcia's ownership interest of the Company voting stock does not fall below 15% and the acceptance of such stock by the Company does not result in a breach of a covenant. Note 4. Notes Payable Notes Payable, Portfolio A summary of Notes Payable, Portfolio at September 30, 2000 and December 31, 1999 follows ($ in thousands): September 30, December 31, 2000 1999 ---------- ---------- Revolving facility for $125.0 million with GE Capital, secured by substantially all assets of the Company, including $104.9 million in finance receivables......... $ 50,222 $ 41,717 Class A obligations issued pursuant to the Company's Securitization Program, secured by underlying pools of finance receivables and investments held in trust totaling $477.0 million at September 30, 2000........................................... 314,725 236,555 ---------- -------------- Subtotal....................................................................... 364,947 278,272 Less: Unamortized Loan Fees................................................... 2,692 2,498 ---------- -------------- Total.......................................................................... $ 362,255 $ 275,774 =========== ==============
The revolving facility note payable has interest payable daily at 30 day LIBOR plus 3.15% (9.77% at September 30, 2000) through June 2001. The revolving facility agreement contains various reporting and performance covenants, including the maintenance of certain ratios, limitations on additional borrowings from other sources, restrictions on certain operating activities, and a restriction on the payment of dividends under certain circumstances. The Company is currently in compliance with these covenants. Class A obligations have interest payable monthly at rates ranging from 5.6% to 7.26%. Monthly principal reductions on Class A obligations approximate 70% of the principal reductions on the underlying pool of finance receivable loans. Other Notes Payable A summary of Other Notes Payable at September 30, 2000 and December 31, 1999 follows ($ in thousands):
September 30, December 31, 2000 1999 ------------- ------------ Note payable, secured by the capital stock of UDRC and UDRC II and certain other receivables......................................................... $ 16,339 $ 33,900 Other notes payable bearing interest at rates ranging from 7.5% to 11% due through July 2003, secured by certain real property and certain property and Equipment........................................................... 1,658 2,939 ------------- -------------- 17,997 36,839 Less: Unamortized Loan Fees.......................................... 67 283 ------------- -------------- Total................................................................. $ 17,930 $ 36,556 ============== ==============
Page 5 Subordinated Notes Payable A summary of Subordinated Notes Payable at September 30, 2000 and December 31, 1999 follows ($ in thousands):
September 30, December 31, 2000 1999 -------------- ------------- $13.5 million senior subordinated notes payable to unrelated parties, bearing interest at 15% per annum payable quarterly, principal due February 2003 and senior to subordinated debentures.................. $ 13,500 $ 15,000 $17.5 million subordinated debentures, interest at 12% per annum (approximately 18.8% effective rate) payable semi-annually, principal balance due October 23, 2003............................................................. 17,479 17,479 $11.9 million subordinated debentures, interest at 11% per annum (approximately 19.7% effective rate) payable semi-annually, principal balance due April 15, 2007............................................ 11,940 ------------- ------------ Subtotal................................................................... 42,919 32,479 Less: Unamortized Loan Fees............................................... 162 605 Unamortized Discount - subordinated debentures.................. 6,609 3,263 ------------ ------------ Total...................................................................... $ 36,148 $ 28,611 ============ ============
Note 5. Common Stock Equivalents Net Earnings per common share amounts are based on the weighted average number of common shares and common stock equivalents outstanding for the three and nine-month periods ended September 30, 2000, and 1999. During July 2000, the Company repurchased approxamatly 1.5 million shares of its common stock pursuant to its stock repurchase program. Net earnings per common share are as follows ($ and shares in thousands, except for per share amounts):
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------ ------------------------------ 2000 1999 2000 1999 --------------- -------------- --------------- -------------- Earnings from Continuing Operations $ 2,683 $ 3,657 $ 11,514 $ 6,068 =============== ============== =============== ============== Net Earnings $ 2,683 $ 4,182 $ 11,514 $ 6,073 =============== ============== =============== ============== Basic Earnings Per Share From Continuing Operations $ 0.21 $ 0.25 $ 0.83 $ 0.40 =============== ============== =============== ============== Diluted Earnings Per Share From Continuing Operations $ 0.21 $ 0.24 $ 0.82 $ 0.39 =============== ============== =============== ============== Basic Earnings Per Share $ 0.21 $ 0.28 $ 0.83 $ 0.40 =============== ============== =============== ============== Diluted Earnings Per Share $ 0.21 $ 0.28 $ 0.82 $ 0.39 =============== ============== =============== ============== Basic EPS-Weighted Average Shares Outstanding 12,597 14,903 13,847 15,161 Effect of Diluted Securities: Warrants 3 11 10 - Stock Options 147 253 187 223 --------------- -------------- --------------- -------------- Dilutive EPS-Weighted Average Shares Outstanding 12,747 15,167 14,044 15,384 =============== ============== =============== ============== Warrants Not Included in Diluted EPS Since Antidilutive 1,124 1,049 1,124 1,170 =============== ============== =============== ============== Stock Options Not Included in Diluted EPS Since Antidilutive 845 979 857 1,054 =============== ============== =============== ==============
Page 6 Note 6. Business Segments The Company has three distinct business segments. These consist of retail car sales operations (Retail Operations), the income resulting from the finance receivables generated at the Company dealerships (Portfolio Operations), and corporate and other operations (Corporate Operations). In computing operating profit by business segment, the following items were considered in the Corporate Operations category: portions of administrative expenses, interest expense and other items not considered direct operating expenses. Identifiable assets by business segment are those assets used in each segment of Company operations. A summary of operating activity by business segment for the three and nine month periods ended September 30, 2000 and 1999 follows ($ in thousands):
Retail Portfolio Corporate Total Three Months Ended September 30, 2000: Sales of Used Cars $ 126,636 $ - $ - $ 126,636 Less: Cost of Cars Sold 70,760 - - 70,760 Provision for Credit Losses 26,162 9,930 - 36,092 ------- --------- ---------- ------ Net Interest Income 29,714 (9,930) - 19,784 - 24,006 112 24,118 Servicing and Other Income - 308 - 308 ------- --------- ---------- ------ Income before Operating Expenses 29,714 14,384 112 44,210 ------- --------- ---------- ------ Operating Expenses: Selling and Marketing 7,187 - - 7,187 General and Administrative 14,570 7,719 5,542 27,831 Depreciation and Amortization 1,201 278 806 2,285 ------ --------- ---------- ------ 22,958 7,997 6,348 37,303 ------ --------- ---------- ------ Operating Income $ 6,756 $ 6,387 $ (6,236) $ 6,907 ====== ========= ========== ======= Capital Expenditures $ 2,161 $ 615 $ 2,338 $ 5,114 ====== ========= ========== ======= Identifiable Assets $ 78,542 $516,337 $ 19,353 $ 614,272 ====== ========= ========== ======= Three Months Ended September 30, 1999: Sales of Used Cars $ 103,314 $ - $ - 103,314 Less: Cost of Cars Sold 57,764 - - 57,764 Provision for Credit Losses 21,528 6,033 - 27,561 ------- --------- --------- -------- 24,022 (6,033) - 17,989 Net Interest Income - 15,555 178 15,733 Servicing and Other Income - 1,794 - 1,794 ------- --------- --------- ------- Income before Operating Expenses 24,022 11,316 178 35,516 ------- --------- --------- ------- Operating Expenses: Selling and Marketing 6,023 - - 6,023 General and Administrative 11,187 4,796 4,311 20,294 Depreciation and Amortization 920 278 565 1,763 ------- --------- --------- ------- 18,130 5,074 4,876 28,080 ------- --------- --------- ------- Operating Income $ 5,892 $ 6,242 $ (4,698) $ 7,436 ======= ========= ========= ======= Capital Expenditures $ 1,339 $ 346 $ 376 $ 2,061 ======= ========= ========= =======
Page 7
Retail Portfolio Corporate Total Nine Months Ended September 30, 2000 Sales of Used Cars $ 380,949 $ - $ - $ 380,949 Less: Cost of Cars Sold 212,119 - - 212,119 Provision for Credit Losses 77,994 24,883 - 102,877 ------- --------- ---------- --------- 90,836 (24,883) - 65,953 Net Interest Income - 68,162 332 68,494 Servicing and Other Income - 1,701 - 1,701 -------- --------- ---------- --------- Income before Operating Expenses 90,836 44,980 332 136,148 -------- --------- ---------- --------- Operating Expenses: Selling and Marketing 22,748 - - 22,748 General and Administrative 43,353 20,605 15,996 79,954 Depreciation and Amortization 3,405 858 2,461 6,724 -------- --------- ---------- --------- 69,506 21,463 18,457 109,426 -------- --------- ---------- --------- Operating Income $ 21,330 $ 23,517 $ (18,125) $ 26,722 ======== ========= ========== ========= Capital Expenditures $ 5,654 $ 909 $ 5,062 $ 11,625 ======== ========= ========== ========= Identifiable Assets $ 78,542 $ 516,377 $ 19,353 $ 614,272 ======== ========= ========== ========= Nine Months Ended September 30, 1999: Sales of Used Cars $ 307,633 $ - $ - $ 307,633 Less: Cost of Cars Sold 173,395 - - 173,395 Provision for Credit Losses 63,552 17,561 - 81,113 --------- -------- --------- -------- 70,686 (17,561) - 53,125 Net Interest Income - 36,301 348 36,649 Servicing and Other Income - 6,988 - 6,988 --------- -------- --------- -------- Income before Operating Expenses 70,686 25,728 348 96,762 --------- -------- --------- -------- Operating Expenses: Selling and Marketing 17,959 - - 17,959 General and Administrative 33,685 13,963 14,115 61,763 Depreciation and Amortization 2,572 841 1,623 5,036 --------- -------- --------- -------- 54,216 14,804 15,738 84,758 --------- -------- --------- -------- Operating Income $ 16,470 $ 10,924 $ (15,390) $ 12,004 ========= ======== ========= ======== Capital Expenditures $ 4,854 $ 674 $ 1,021 $ 6,549 ========= ======== ========= ========
Note 7. Discontinued Operations In February 1998, we announced our intention to close our branch office network, through which we purchased retail installment contracts from third party dealers, and exit this line of business. We completed the branch office closure as of March 31, 1998. As a result of the branch office network closure, we reclassified the results of operations of the branch office network in the accompanying condensed consolidated balance sheets and condensed consolidated statements of operations to discontinued operations. Effective December 31, 1999, the Company adopted a formal plan to abandon any effort for its third party dealer operations to acquire loans or servicing rights to additional portfolios. Accordingly, our Cygnet Servicing and the associated Cygnet Corporate segment also are reported as components of discontinued operations. The Company plans to complete servicing the portfolios that it currently services. Page 8 The components of Net Assets of Discontinued Operations as of September 30, 2000 and December 31, 1999 follow ($ in thousands):
September 30, December 31, 2000 1999 ---------------- ----------------- Finance Receivables, net $ 6,949 $ 14,837 Residuals in Finance Receivables Sold 2,040 3,742 Investments Held in Trust - 1,545 Property and Equipment 457 2,114 Notes Receivable, net of Sub. Notes Payable - 6,697 Servicing Receivable 4,234 6,125 Other Assets, net of Accounts Payable and Accrued Liabilities (9,469) (1,180) ---------------- ----------------- Net Assets of Discontinued Operations $ 4,211 $ 33,880 ================ =================
Note 8. Use of Estimates The preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from our estimates. Note 9. Reclassifications We have made certain reclassifications to previously reported information to conform to the current presentation. Note 10. Subsequent Events On November 9, 2000, Verde Investments, Inc. ("Verde"), an affiliate of Mr. Ernest Garcia II, our chairman and largest shareholder, purchased a certain property located in Phoenix, Arizona and simultaneously leased the property to us pursuant to, among other terms, the following: 20 year term ending December 21, 2020, rent payable monthly with 5% annual rent adjustments; triple net lease; four five-year options to renew; and, pursuant to a separate option agreement which expires December 31, 2002, and an option to purchase the property upon prior notice and at Verde's cost through December 31, 2020. We intend to build a new headquarters at this location over the next several months, obtain permanent financing upon completion of construction and exercise our option to purchase the property. On October 3, 2000, as previously announced, Mr. Ernest Garcia, II, made an offer to the board of directors to purchase all of the outstanding shares of our common stock not already held by him. Our board of directors established a special transaction committee to evaluate and make a recommendation to the full board. On October 27, 2000, after discussions with us, the board and the special transaction committee, Mr. Garcia withdrew his offer. Several lawsuits were filed in Delaware as a result of this offer. At this time, these lawsuits are not being actively litigated and we do not know what will be the ultimate outcome of these filings. If the plaintiffs do not dismiss the lawsuits, we intend to vigorously defend against them. In his filings with the Securities and Exchange Commission, Mr. Garcia has expressed a continuing interest in acquiring all of the Company's outstanding common stock. Page 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction We operate the largest chain of buy here-pay here used car dealerships in the United States. At September 30, 2000, we operated 77 dealerships located in eleven metropolitan areas in eight states. We have one primary line of business: to sell and finance quality used vehicles to customers within what is referred to as the sub-prime segment of the used car market. The sub-prime market is comprised of customers who typically have limited credit histories, low incomes or past credit problems. As a buy here-pay here dealer, we offer the customer certain advantages over more traditional financing sources including: o expanded credit opportunities, o flexible payment terms, including structuring loan payment due dates as weekly or biweekly, often coinciding with a customer's payday, o the ability to make payments in person at the dealerships. This is an important feature to many sub-prime borrowers who may not have checking accounts or are otherwise unable to make payments by the due date through use of the mail due to the timing of paydays. We distinguish our retail operations from those of typical buy here-pay here dealers through our: o dedication to customer service, o advertising and marketing programs, o larger inventories of used cars, o upgraded facilities, and o network of multiple locations, o centralized purchasing. We finance substantially all of the used cars that we sell at our dealerships through retail installment loan contracts. Subject to the discretion of our dealership or sales managers, potential customers must meet our formal underwriting guidelines before we will agree to finance the purchase of a vehicle. Our employees analyze and verify the customer credit application information and subsequently make a determination whether to provide financing to the customer. Our business is divided into three operating segments; retail, portfolio and corporate. Information regarding our operating segments can be found in Note (6) of the Notes to Condensed Consolidated Financial Statements contained herein. Operating segment information is also included in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Business Segment Information" found below. In December 1999, we sold the Cygnet Dealer Finance (CDF) subsidiary and also decided to abandon any efforts to acquire third party loans or servicing rights to additional third party portfolios. As a result, CDF, Cygnet Servicing and the associated Cygnet Corporate segment activities are classified as discontinued operations for 1999. We plan to complete the servicing of the portfolios that we currently service. In the following discussion and analysis, we explain the results of operations and general financial condition of Ugly Duckling and its subsidiaries. In particular, we analyze and explain the changes in the results of operations of our business segments for the three and nine month periods ended September 30, 2000 and September 30, 1999. Page 10 SELECTED CONSOLIDATED FINANCIAL DATA (unaudited) UGLY DUCKLING CORPORATION SELECTED CONSOLIDATED FINANCIAL DATA (Unaudited)
At or for the Three Months Ended --------------------------------------------------------------------------------------- Selected Financial Data Sept June Mar Dec Sept June Mar 2000 2000 2000 1999 1999 1999 1999 --------------------------------------------------------------------------------------- Operating Data: ($ and shares in millions, except per share, per unit data and number of loan data) Total Revenues $ 158.4 $ 152.0 $ 159.1 $ 105.4 $ 124.9 $ 115.9 $ 119.7 Sales of Used Cars $ 126.6 $ 121.5 $ 132.8 $ 82.3 $ 103.3 $ 97.9 $ 106.4 Earnings per Share - Continuing Operations $ 0.21 $ 0.31 $ 0.30 $ 0.17 $ 0.24 $ 0.12 $ 0.04 EBITDA $ 16.5 $ 18.2 $ 17.1 $ 13.0 $ 13.2 $ 8.6 $ 4.5 E-Commerce Revenue as % of Used Car Sales 9.5% 5.3% 4.3% 4.7% 2.6% 1.5% 0.0% Number Dealerships in Operation 77 77 75 72 67 59 58 Average Sales per Dealership per Month 64 62 70 45 61 64 73 Number of Used Cars Sold 14,825 14,369 15,802 9,731 12,219 11,416 12,754 Sales Price - Per Car Sold $ 8,542 $ 8,458 $ 8,403 $ 8,455 $ 8,455 $ 8,574 $ 8,346 Cost of Sales - Per Car Sold $ 4,773 $ 4,761 $ 4,616 $ 4,690 $ 4,727 $ 4,865 $ 4,712 Gross Margin - Per Car Sold $ 3,769 $ 3,696 $ 3,787 $ 3,765 $ 3,728 $ 3,708 $ 3,634 Provision - Per Car Sold $ 2,435 $ 2,242 $ 2,188 $ 2,245 $ 2,256 $ 2,259 $ 2,177 Total Operating Expense - Per Car Sold $ 2,516 $ 2,466 $ 2,322 $ 2,763 $ 2,298 $ 2,427 $ 2,274 Total Operating Income - Per Car Sold $ 466 $ 691 $ 626 $ 587 $ 609 $ 321 $ 70 Total Operating Income $ 6.9 $ 9.9 $ 9.9 $ 5.7 $ 7.4 $ 3.7 $ 0.9 Earnings before Income Taxes $ 4.5 $ 7.3 $ 7.6 $ 4.4 $ 6.6 $ 2.8 $ 0.9 Cost of Used Cars as Percent of Sales 55.9% 56.3% 54.9% 55.5% 55.9% 56.7% 56.5% Gross Margin as Percent of Sales 44.1% 43.7% 45.1% 44.5% 44.1% 43.3% 43.5% Provision - % of Originations 29.0% 27.1% 27.0% 27.0% 26.9% 26.8% 27.0% Total Operating Exp. - % of Total Revenues 23.6% 23.3% 23.1% 25.5% 22.5% 23.9% 24.2% Segment Operating Expense Data: Retail Operating Expense - Per Car Sold $ 1,549 $ 1,611 $ 1,481 $ 1,775 $ 1,484 $ 1,562 $ 1,431 Retail Operating Expense-% of Used Car Sales 18.1% 19.1% 17.6% 21.0% 17.5% 18.2% 17.1% Corporate/Other Expense - Per Car Sold $ 428 $ 418 $ 387 $ 357 $ 399 $ 440 $ 458 Corporate/Other Expense - % of Total Revenue 4.0% 3.9% 3.8% 3.3% 3.9% 4.3% 4.9% Portfolio Exp. Annualized - Managed Principal 6.1% 5.0% 6.2% 6.8% 4.7% 5.1% 5.7% Balance Sheet Data: Finance Receivables, net $ 491.9 $ 451.2 $ 407.3 $ 365.6 $ 321.7 $ 254.8 $ 190.1 Inventory $ 43.7 $ 45.9 $ 49.1 $ 62.9 $ 45.8 $ 37.7 $ 39.9 Total Assets $ 618.5 $ 577.5 $ 548.0 $ 536.7 $ 516.5 $ 467.0 $ 400.2 Notes Payable - Portfolio $ 362.3 $ 316.0 $ 282.9 $ 275.8 $ 244.4 $ 195.2 $ 171.5 Subordinated Notes Payable $ 36.1 $ 37.3 $ 28.9 $ 28.6 $ 37.1 $ 36.9 $ 38.3 Total Debt $ 416.3 $ 381.0 $ 345.2 $ 340.9 $ 317.4 $ 269.7 $ 210.4 Common Stock $ 173.7 $ 173.7 $ 173.7 $ 173.3 $ 173.3 $ 173.9 $ 173.8 Treasury Stock $ (39.4) $ (28.4) $ (20.3) $ (20.3) $ (20.3) $ (19.8) $ (19.8) Total Stockholders' Equity $ 158.5 $ 166.8 $ 170.6 $ 165.7 $ 162.5 $ 159.4 $ 157.9 Common Shares Outstanding - End of Period 12,378 13,899 14,980 14,888 14,889 14,943 14,939 Book Value per Share $ 12.81 $ 12.00 $ 11.39 $ 11.13 $ 10.91 $ 10.67 $ 10.57 Tangible Book Value per Share $ 11.78 $ 11.02 $ 10.43 $ 10.15 $ 9.95 $ 9.73 $ 9.62 Total Debt to Equity 2.6 2.3 2.0 2.1 2.0 1.7 1.3 Loan Portfolio Data: Interest Income $ 31.4 $ 29.9 $ 25.5 $ 22.7 $ 19.8 $ 15.8 $ 10.4 Average Yield on Portfolio 26.1% 26.8% 26.2% 25.4% 25.9% 26.3% 26.2% Principal Balances Originated $ 124.4 $ 118.8 $ 128.1 $ 80.9 $ 102.6 $ 96.1 $ 102.7 Principal Balances Originated as % of Sales 98.2% 97.7% 96.5% 98.3% 99.3% 98.2% 96.5% Number of Loans Originated 14,748 14,291 15,721 9,650 12,137 11,335 12,634 Average Original Amount Financed $ 8,433 $ 8,311 $ 8,150 $ 8,384 $ 8,453 $ 8,478 $ 8,131 # of Loans Originated as % of Units Sold 99.5% 99.5% 99.5% 99.2% 99.3% 99.3% 99.1% Managed Portfolio Delinquencies: Current 72.4% 71.9% 74.8% 63.2% 61.5% 63.6% 73.2% 1 to 30 days 19.3% 20.9% 19.9% 28.2% 28.2% 29.1% 21.3% 31 to 60 days 4.9% 4.5% 3.4% 5.7% 6.8% 4.7% 3.5% Over 60 days 3.4% 2.7% 1.9% 2.9% 3.5% 2.6% 1.9% Principal Outstanding - Managed $ 525.5 $ 500.0 $ 461.8 $ 424.5 $ 427.4 $ 383.6 $ 341.0 Principal Outstanding - Retained $ 512.8 $ 472.3 $ 418.9 $ 358.8 $ 332.0 $ 256.6 $ 182.2 Number of Loans Outstanding - Managed 85,240 81,407 75,496 70,450 68,420 61,661 56,333 Number of Loans Outstanding - Retained 79,848 71,518 62,459 53,081 45,874 34,065 27,924
Page 11 Third Quarter highlights include: o Earnings from continuing operations totaled $2.7 million, or $0.21 per diluted share, compared with earnings from continuing operations of $3.7 million, or $0.24 per share in the year-ago quarter o Total revenues from continuing operations increased 27% to $158.4 million from $124.9 million in the year-ago quarter o E-Commerce provided $12.0 million in revenue and 1,417 cars sold during the third quarter of 2000 compared with $6.5 million in revenue and 763 cars sold during the second quarter of 2000 o On-balance sheet loan portfolio principal balances reached $512.8 million, representing a 9% sequential increase over the second quarter of 2000 and a 55% rise over the year-ago quarter o Provision for loan losses increased 2% to 29% of amount financed (announced September 8, 2000) o New loan originations reached $124.4 million, a 21% increase over the year-ago quarter Sales of Used Cars and Cost of Used Cars Sold
Three Months Ended Nine Months Ended September 30, Percentage September 30, Percentage ------------------------- ------------------------- 2000 1999 Change 2000 1999 Change ----------- ------------ ------------ ------------ ----------- ------------- ($ in thousands) Number of Used Cars Sold 14,825 12,219 21.3% 44,996 36,389 23.7% =========== ============ ============ =========== Sales of Used Cars $ 126,636 $ 103,314 22.6% $ 380,949 $ 307,633 23.8% Cost of Used Cars Sold 70,760 57,764 22.5% 212,119 173,395 22.3% ----------- ------------ ------------ ----------- Gross Margin $ 55,876 $ 45,550 22.7% $ 168,830 $134,238 25.8% =========== ============ ============ =========== Gross Margin % 44.1% 44.1% 44.3% 43.6% Per Car Sold: Sales $ 8,542 $ 8,455 1.0% $ 8,466 $ 8,454 0.1% Cost of Used Cars Sold 4,773 4,727 1.0% 4,714 4,765 (1.1)% ----------- ------------ ------------ ----------- Gross Margin $ 3,769 $ 3,728 1.1% $ 3,752 $ 3,689 1.7% =========== ============ ============ ===========
For the three and nine-month periods ended September 30, 2000, the number of cars sold increased by 21.3% and 23.7% and Used Car Sales revenues increased by 22.6% and 23.8%, respectively, over the same periods in 1999. The increase in both units sold and revenues is primarily the result of an increase in the number of dealerships in operation coupled with an increase in E-commerce related business. During 1999, we expanded our marketing efforts to include E-commerce by accepting credit applications from potential customers via our website, located at http://www.uglyduckling.com. Credit inquiries received over the web are reviewed by our employees, who then contact the customers and schedule appointments. We continue to monitor and enhance our Internet application levels. These efforts continue to provide an increasing number of used cars sold. During the third quarter of 2000, we sold 1,417 cars generating $12.0 million in revenue versus 763 cars totaling $6.5 million in revenue during the second quarter and up from 561 cars sold and $4.7 million in revenue during the first quarter of 2000. The E-commerce customer group generally outperforms other customers in terms of loan performance. Same store unit sales for the three months ended September 30, 2000 decreased approximately 2% from the same three month period of 1999. For the nine months ended September 30, 2000, same store sales decreased almost 3% from the corresponding period of the previous year. The decrease is primarily due to the increased emphasis on underwriting and obtaining higher quality loans. The Cost of Used Cars Sold for the three and nine month periods ended September 30, 2000, increased by 22.5% and 22.3%, respectively, over the comparable periods of the previous year. The increases for these periods reflect a rise in the volume of cars sold due to the increase in number of dealerships in operation and E-commerce related business as previously mentioned. The Cost of Used Cars Sold on a per car basis increased 1.0% for the three months ended September 30, 2000 versus a decrease of 1.1% for the nine months ended September 30, 2000 over the same periods of the prior year. The increase for the quarter was more than offset by an increase in the revenue earned per car. The overall decrease in the cost of cars sold for the nine Page 12 month period contributed to an improvement in the year to date gross margin percent. The gross margin on used car sales (Sales of Used Cars less Cost of Used Cars Sold excluding Provision for Credit Losses) as a percentage of related revenue remained constant at 44.1% for the three months ended September 30, 2000 and 1999, and increased .7% for the nine month period ended September 30, 2000, to 44.3% from 43.6% for the same period of the prior year. On a per car sold basis, gross margin increased slightly to $3,769 per car for the three month period ended September 30, 2000 from $3,728 during the same quarter of the previous year and rose 1.7% to $3,752 per car for the nine month period ended September 30, 2000 as compared to the corresponding period of 1999. The increase in both overall gross margin as well as on a per car sold basis for the nine months ended September 30, 2000 is attributable to a decrease in the cost of used cars sold coupled with an increase in average revenue per car sold. We finance substantially all of our used car sales. The percentage of cars sold financed has remained relatively constant from 1999 versus 2000. The percentage of sales revenue financed has decreased for the quarter ended September 30, 2000 to 98.2% as compared to 99.3% for the same quarter of the previous year. The year to date percentage for 2000 has also decreased to 97.5% from 98.0% for 1999. This decrease can be attributed to the change in the minimum down payment requirement from $500 to $600 in May 2000. The following table indicates the percentage of sales units and revenue financed:
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ------------------------ 2000 1999 2000 1999 --------- ---------- ---------- ---------- Percentage of used cars sold financed 99.5% 99.3% 99.5% 99.2% ===== ===== ===== ===== Percentage of sales revenue financed 98.2% 99.3% 97.5% 98.0% ===== ===== ===== ===== Provision for Credit Losses
The following is a summary of the Provision for Credit Losses:
Three Months Ended Nine Months Ended September 30, Percentage September 30, Percentage -------------------------- -------------------------- 2000 1999 Change 2000 1999 Change ------------ ------------- ------------ ------------ ------------- ------------- Provision for Credit Losses (in thousands) $ 36,092 $ 27,561 31.0% $ 102,877 $ 81,113 26.8% ============ ============= ============ ============= Provision per loan originated $ 2,447 $ 2,271 7.8% $ 2,298 $ 2,247 2.3% ============ ============= ============ ============= Provision as a percentage of principal balances originated 29.0% 26.9% 27.7% 26.9% ============ ============= ============ =============
The Provision for Credit Losses is the amount we charge to current operations on each car sold to establish an allowance for credit losses. The Provision for Credit Losses for the three and nine month periods ended September 30, 2000 increased 31.0% and 26.8%, respectively, over the comparable periods of the prior year. The increase was primarily due to an increase in the volume of loans originated in addition to an increase in the overall provision charged from 27% of loans originated to 29%, effective beginning with the third quarter of 2000 to establish an adequate allowance for the on balance sheet portfolio. The average amount financed for the three month period ended September 30, 2000 decreased $20 to $8,433 per unit versus the same period of the previous year. The average amount financed for the nine month period ended September 30, 2000 decreased $53 to $8,295 per unit as compared to the corresponding nine months of the previous year. The decrease is primarily due to a change in the required minimum down payment from $500 to $600, effective May 1, 2000. The average down payment for the third quarter of 2000, the first full quarter with the increased down payment requirement, was $718 versus $665 during the third quarter of 1999. See Management's Discussion and Analysis - "Static Pool Analysis" for further Provision for Credit Loss discussion. Page 13 Net Interest Income
Three Months Ended Nine Months Ended September 30, Percentage September 30, Percentage -------------------------- Change ------------------- Change 2000 1999 2000 1999 ------------ ------------ ------------ ------------ ------------- ------------ ($ in thousands) Interest Income $ 31,436 $ 19,775 59.0% $ 86,838 $ 45,904 89.2% Portfolio Interest Expense 7,318 4,042 81.0% 18,344 9,255 98.2% ------------ ------------ ------------ ------------- Net Interest Income $ 24,118 $ 15,733 53.3% $ 68,494 $ 36,649 86.9% ============ ============ ============ ============= Average Effective Yield 26.1% 25.9% 0.8% 26.4% 26.1% 1.1% Average Borrowing Cost 10.7% 11.6% (7.8)% 10.5% 10.9% (3.7)%
Interest Income consists primarily of interest on finance receivable principal balances retained on our balance sheet. Retained principal balances grew to $512.8 million at September 30, 2000 from $332.0 million at September 30, 1999 primarily as a result of the change in the way we structure our securitizations to the collateralized borrowing method during the fourth quarter of 1998. Prior to the fourth quarter of 1998, securitized loans were transferred off of our balance sheet and a gain on sale was recorded. Under the collateralized borrowing method, the securitized loans are retained on our balance sheet and the income and associated costs are recognized over the life of the loan. Servicing Income We generate Servicing Income primarily from servicing the remaining loan portfolios securitized under the gain on sale method. A summary of Servicing Income follows for the three and nine months ended September 30, 2000 and 1999 ($ in thousands):
Three Months Ended Percentage Nine Months Ended Percentage September 30, Change September 30, Change ----------------------- -------------- ----------------------- -------------- 2000 1999 2000 1999 ---------- ----------- ---------- ----------- Servicing Income $ 308 $ 1,794 (82.8)% $1,701 $ 6,988 (75.7)% ========== =========== ============== ========== =========== ==============
We service loans for monthly fees ranging from .25% to .33% of the beginning of month principal balances (3.0% to 4.0% per year). The decrease in Servicing Income for the three and nine month periods ended September 30, 2000 is due to the decrease in remaining principal balances securitized and serviced under the gain on sale method from $95.5 million at September 30, 1999 to $12.7 million at September 30, 2000. We expect the remaining principal balance of $12.7 million to completely runoff by December 31, 2000. Income before Operating Expenses Income before Operating Expenses grew by 24.5% to $44.2 million for the three month period ended September 30, 2000 and increased 40.7% to $136.1 million for the nine month period ended September 30, 2000. Income before Operating Expenses for the three and nine month periods ended September 30, 1999 was $35.5 million and $96.8 million, respectively. Growth in Sales of Used Cars, an increase in gross margins and an increase in Interest Income were the primary contributors to the increase. Page 14 Operating Expenses
Three Months Ended Percentage Nine Months Ended Percentage September 30, Change September 30, Change 2000 1999 2000 1999 --------- --------- -------------- --------- ------- ------------- Operating Expenses (in thousands).......$ 37,303 $ 28,080 32.8% $ 109,426 $ 84,758 29.1% Per Car Sold............................$ 2,516 $ 2,298 9.5% $ 2,432 $ 2,329 4.4% -------- ------------ ------------- ------------ As % of Total Revenues.................. 23.6% 22.5% 23.3% 23.5% ========= =========== ========== ==========
Operating expenses, which consist of selling, marketing, general and administrative and depreciation/amortization expenses, increased as a result of overall growth in our operations. The increase in operating expenses as a percentage of total revenues for the three months ended September 30, 2000 is primarily the result an increase in salary and benefit related costs. The slight decrease for the nine month period ended September 30, 2000 versus 1999 was primarily due to increased economies of scale related to marketing efforts with the addition of more dealerships in existing markets, efficiencies gained from enhanced management information systems and an increase in interest income, offset by the additional accruals mentioned above. Interest Expense Portfolio interest expense increased to $7.3 million and $18.3 million for the three and nine month periods ending September 30, 2000 versus $4.0 million and $9.3 million for the same periods of the previous year. The increase is due to the increase in Portfolio Notes Payable which consist of our Class A obligations related to our securitization program along with our revolving credit facility with GE Capital. The majority of the increase is attributable to the securitization related on balance sheet debt which has grown due to the change in the way we record our securitization transactions from the gain on sale method to the collateralized borrowing method during the fourth quarter of 1998. This increase in interest expense is offset by the additional interest income earned from the growth in finance receivables retained on our balance sheet as previously mentioned. Interest expense arising from our subordinated debt totaled $2.4 million for the three months ended September 30, 2000 versus $0.9 million for the three months ended September 30, 1999. For the nine month periods ended September 30, 2000 and 1999, interest expense was $7.2 million and $1.7 million, respectively. While we have additional interest expense arising from subordinated notes payable, a portion of this interest expense was attributed to the financing of assets and activities reported as discontinued operations. As the assets and activities of discontinued operations diminish, we do not expect to retire the subordinated notes payable but rather use these borrowings to fund our growth. Accordingly, we would expect to have a disproportionate increase in interest expense allocated to continuing operations in future periods as existing subordinated debt is used to fund our growth and the allocation of this interest to discontinued operations decreases. Subordinated debt carries interest rates generally higher than those charged on borrowings collateralized by our finance receivables. Income Taxes Income taxes totaled $1.9 million and $8.0 million for the three and nine month periods ended September 30, 2000, respectively, and $2.9 million and $4.2 million for the three and nine months ended September 30, 1999, respectively. Our effective tax rate was 41% for the three and nine months ended September 30, 2000 versus 44% and 41% for the three and nine months ended September 30, 1999, respectively. Earnings from Continuing Operations Earnings from continuing operations totaled $2.7 million and $11.5 million for the three and nine months ended September 30, 2000, respectively, versus $3.7 million and $6.1 million, respectively, for the same three and nine month periods of the previous year. The decrease for the three months ended September 30, 2000 is primarily a result of the increase in the provision for credit loss from 27% to 29% of originations effective on loans originated beginning with the third quarter of 2000, partially offset by an increase in the amount of used cars sold. The increase for the nine months ended September 30, 2000 is primarily due to an increase in the volume of used cars sold, increases in gross margin and growth in interest income. These improvements were offset by a decrease in servicing income resulting from the decline in remaining principal balances securitized and serviced under the gain on sale method. Discontinued Operations Page 15 Discontinued operations provided no income or loss for the three and nine months ended September 30, 2000 versus income, net of income tax benefits, of $.5 million and approximately break even for the three and nine months ended September 30, 1999, respectively. Effective December 31, 1999, we adopted a formal plan to abandon any effort for our third party dealer operations to acquire loans or servicing rights to additional portfolios. Accordingly, our Cygnet Servicing and the associated Cygnet Corporate segment are reported as components of discontinued operations. We plan to complete servicing the portfolios that we currently service. Business Segment Information We report our operations based on three operating segments. These segments are reported as Retail, Portfolio and Corporate. These segments were previously reported as Company Dealership, Company Dealership Receivables and Corporate and Other, respectively. Operating Expenses for our business segments, along with a description of the included activities, for the three and nine month periods ended September 30, 2000 and 1999 are as follows: Retail Operations. Operating expenses for our Retail segment consist of Company marketing efforts, maintenance and development of dealership and inspection center sites, and direct management oversight of used car acquisition, reconditioning and sales activities. A summary of retail operating expenses follows ($ in thousands except per car sold data):
Three Months Ended Nine Months Ended September 30, Percentage September 30, Percentage -------------------------- -------------------------- 2000 1999 Change 2000 1999 Change ------------ ------------ ------------- ----------- ------------ -------------- Retail Operations: Selling and Marketing $ 7,187 $ 6,023 19.3% $ 22,748 $ 17,959 26.7% General and Administrative 14,570 11,187 30.2% 43,353 33,685 28.7% Depreciation and Amortization 1,201 920 30.5% 3,405 2,572 32.4% ------------ ------------ ----------- ------------ $22,958 $18,130 26.6% $ 69,506 $ 54,216 28.2% ============ ============ =========== ============ Per Car Sold: Selling and Marketing $ 485 $ 493 (1.6)% $ 506 $ 494 2.4% General and Administrative 983 916 7.3% 963 925 4.1% Depreciation and Amortization 81 75 8.0% 76 71 7.0% ------------ ------------ ----------- ------------ $ 1,549 $ 1,484 4.4% $ 1,545 $ 1,490 3.7% ============ ============ =========== ============ As % of Used Cars Sold Revenue: Selling and Marketing 5.7% 5.8% 6.0% 5.8% General and Administrative 11.5% 10.8% 11.3% 10.9% Depreciation and Amortization 0.9% 0.9% 0.9% 0.8% ------------ ------------ ----------- ------------ 18.1% 17.5% 18.2% 17.6% ============ ============ =========== ============
Selling and Marketing expenses as a percentage of related revenue remained relatively constant for the three months ended September 30, 2000 versus the same period of the previous year. For the nine month period ended September 30, 2000, selling and marketing expenses increased slightly to 6.0% from 5.8% over the same period of 1999. Economies of scale gained from additional dealerships in existing markets and the additional revenue from internet based sales have allowed the Selling and Marketing expenses as a percentage of related revenue to remain relatively stable but have increased on a per car sold basis primarily resulting from an increase in commission related expenses. General and Administrative expenses increased for the three and nine month periods ended September 30, 2000, principally as a result of increases in salary and benefit costs but have shown a slight decrease from the second quarter of 2000 due to the implementation of a cost reduction plan. Page 16 Portfolio Operations. Operating expenses for our Portfolio segment consist of loan servicing and collection efforts, securitization activities, and other operations pertaining directly to the administration and collection of the loan portfolio ($ in thousands except expense per month per loan serviced).
Three Months Ended Nine Months Ended September 30, Percentage September 30, Percentage ----------------------- ------------------------ 2000 1999 Change 2000 1999 Change ----------- ----------- -------------- ------------ ----------- ------------- Portfolio Expense: General and Administrative $ 7,719 $ 4,796 60.9% $20,605 $ 13,963 47.6% Depreciation and Amortization 278 278 0.0% 858 841 2.0% ----------- ----------- ------------ ----------- Portfolio Expense $ 7,997 $ 5,074 57.6% $21,463 $ 14,804 45.0% =========== =========== ============ =========== Expense per Month per Loan Serviced $ 29.89 $ 20.50 $ 27.57 $ 20.47 =========== =========== ============ =========== Annualized Expense as % of Managed Principal Balances 6.1% 4.7% 5.4% 4.6% =========== =========== ============ ===========
The increase in operating expenses as well as the expense per month per loan serviced for the three and nine month periods ended September 30, 2000 for our Portfolio segment is primarily a result of the increased number of loans in our portfolio. Also attributing to the increase were costs incurred resulting from the deployment of collectors out to our dealerships, market adjustments made to collection staff wages and a decrease in the number of delinquent accounts serviced per collector. We expect the portfolio expense and the expense per month per loan serviced to remain at or about current levels as we have completed the deployment of collectors to our dealerships. However, we believe the increase in expense will be more than offset by lower delinquencies and ultimately lower loan losses. Corporate Operations. Operating expenses for our Corporate segment consist of costs to provide managerial oversight and reporting for the Company, develop and implement policies and procedures, and provide expertise to the Company in areas such as finance, legal, human resources and information technology.
Three Months Ended Nine Months Ended September 30, Percentage September 30, Percentage ----------------------- ------------------------- ($ in thousands except per car sold 2000 1999 Change 2000 1999 Change data) ---------- ----------- ------------ ----------- ------------ ------------ Corporate Expense: General and Administrative $ 5,542 $ 4,311 28.6% $15,996 $ 14,115 13.3% Depreciation and Amortization 806 565 42.7% 2,461 1,623 51.6% ---------- ----------- ----------- ------------ Corporate Expense $ 6,348 $ 4,876 30.2% $18,457 $ 15,738 17.3% ========== =========== =========== ============ Per Car Sold $ 428 $ 399 $ 410 $ 432 ========== =========== =========== ============ As % of Total Revenues 4.0% 3.9% 3.9% 4.4% ========== =========== =========== ============
Operating expenses related to our Corporate segment as a percent of total revenue remained relatively consistent for both the three and nine months ended September 30, 2000, versus the same periods of 1999. However, on a per car sold basis corporate expenses increased $29 per car for the quarter ended September 30, 2000, as compared to the same quarter of the previous year. The increase is primarily attributable to an increase in employee benefit related accruals. For the year to date period ended September 30, 2000, corporate expenses on a per car sold basis decreased $22 primarily due to various operating efficiencies including those gained by the consolidation of all accounting and management information to a single computer system in early 1999, partially offset by the increase in employee benefit related accruals mentioned above. Further, as new dealerships opened in existing markets, revenue and units sold increased while related expenditures increased at a lesser rate. Finally, as our retained portfolio increased, there is a proportionate increase in net interest income thereby improving the ratio of corporate expenses to total revenues. Page 17 Financial Position The following table represents key components of our financial position ($ in thousands):
September 30, December 31, Percentage 2000 1999 Change ----------------- ------------------ ------------ Total Assets $ 618,483 $ 536,711 15.2% Inventory 43,739 62,865 (30.4)% Finance Receivables, net 491,880 365,586 34.5% Net Assets of Discontinued Operations 4,211 33,880 (87.6)% Total Debt 416,333 340,941 22.1% Notes Payable - Portfolio 362,255 275,774 31.4% Other Notes Payable 17,930 36,556 51.0)% Subordinated Notes Payable 36,148 28,611 26.3% Stockholders' Equity $ 158,522 $ 165,680 (4.3)%
Total Assets. The increase in total assets is primarily due to the growth in Finance Receivables, Net, offset by the decrease in Inventory and Net Assets of Discontinued Operations. Inventory. Inventory represents the acquisition and reconditioning costs of used cars located at our dealerships and our inspection centers. The change in inventory from December 31, 1999 to September 30, 2000 is due to management's decision to increase inventory levels at the end of 1999 in preparation for the strong seasonal sale periods, which are typically the first and second quarters of the year. We generally acquire our used car inventory from three sources: approximately 50% from auctions, 30% from wholesalers and 20% from new car dealerships. Growth in Finance Receivables, net. Due to the growth in the volume of cars sold, Finance Receivables, net as of September 30, 2000 increased 34.5% from December 31, 1999. See Note (2) to the Condensed Consolidated Financial Statements for the details of the components of Finance Receivables, net. The following table reflects the growth in principal balances retained on our balance sheet measured in terms of the principal amount ($ in thousands) and the number of loans outstanding.
Managed Loans Outstanding ------------------------------------------------------------------ Principal Balances Number of Loans ------------------------------- --------------------------------- September 30, December 31, September 30, December 31, 2000 1999 2000 1999 ------------------------------- --------------------------------- ------------------------------- --------------------------------- Principal - Managed......................... $ 525,498 $ 424,480 85,240 70,450 Less: Principal - Securitized and Sold..... 12,735 65,662 5,392 17,369 ------------------------------- --------------------------------- Principal - Retained on Balance Sheet....... $ 512,763 $ 358,818 79,848 53,081 =============================== =================================
The increase in Principal Balances - Retained on Balance Sheet was primarily due to growth in finance receivables as a result of increased used car sales and financing, partially offset by the principal balance runoff of loans originated in prior periods. Used Car Sales totaled 14,825 for the quarter ended September 30, 2000, versus sales of 12,219 used cars during the same quarter of the prior year. Used Car Sales for the nine months ended September 30, 2000 were 44,996 as compared to sales of 36,389 for the nine months ended September 30, 1999. Page 18 The following table reflects activity in the Allowance for Credit Losses, as well as information regarding charge off activity, for the three and nine months ended September 30, 2000 and 1999 ($ in thousands):
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 2000 1999 2000 1999 ------------- ------------ ------------- ------------ Allowance Activity: Balance, Beginning of Period $ 98,533 $ 66,905 $ 76,150 $ 24,777 Provision for Credit Losses 36,092 27,561 102,877 81,113 Other Allowance Activity (1,250) 3,738 (2,250) 3,835 Net Charge Offs (33,332) (17,506) (76,734) (29,027) ------------- ------------ ------------- ------------ Balance, End of Period $100,043 $80,698 $100,043 $ 80,698 ============ ============ ============= ============ Allowance as a Percent of Period End Balances 19.5% 24.3% 19.5% 24.3% ============ ============ ============= ============ Charge off Activity: Principal Balances $ (41,934) $ (22,030) $ (99,076) $ (36,610) Recoveries, net 8,602 4,524 22,342 7,583 ------------- ------------ ------------- ------------ Net Charge Offs $ (33,332) $ (17,506) $ (76,734) $ (29,027) ============= ============ ============= ============
Even though a contract is charged off, we continue to attempt to collect the contract. Recoveries as a percentage of principal balances charged off from retail operations averaged 20.5% for the three months ended September 30, 2000 and 1999. Recoveries as a percentage of principal balances charged off from retail operations averaged 22.6% for the nine months ended September 30, 2000 versus 20.7% for the same period of 1999. The increase is due to the initiatives taken to retain qualified loan service staff and reduce the number of delinquencies serviced per collector. The Allowance for Credit Losses is maintained at a level that in management's judgment is adequate to provide for estimated probable credit losses inherent in our retail portfolio. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Static Pool Analysis" below. Static Pool Analysis We use a "static pool" analysis to monitor performance for loans we have originated at our dealerships. In a static pool analysis, we assign each month's originations to a unique pool and track the charge offs for each pool separately. We calculate the cumulative net charge offs for each pool as a percentage of that pool's original principal balances, based on the number of complete payments made by the customer before charge off. The table below displays the cumulative net charge offs of each pool as a percentage of original loan cumulative balances, based on the quarter the loans were originated. The table is further stratified by the number of payments made by our customers prior to charge off. For periods denoted by "x", the pools have not seasoned sufficiently to allow us to compute cumulative losses. For periods denoted by "-", the pools have not yet reached the indicated cumulative age. While we monitor static pools on a monthly basis, for presentation purposes we are presenting the information in the table below on a quarterly basis. Page 19 Currently reported cumulative losses may vary from those previously reported due to ongoing collection efforts on charged off accounts, and the difference between final proceeds on the sale of repossessed collateral versus our estimates of the sale proceeds. Management, however, believes that such variation will not be material. The following table sets forth as of October 31, 2000, the cumulative net charge offs as a percentage of original loan cumulative (pool) balances, based on the quarter of origination and segmented by the number of monthly payments completed by customers before charge off. The table also shows the percent of principal reduction for each pool since inception and cumulative total net losses incurred (TLI). Pool's Cumulative Net Losses as Percentage of Pool's Original Aggregate Principal Balance ($ in thousands)
Monthly Payments Completed by Customer Before Charge Off -------------------------------------------------------------------- Orig. 0 3 6 12 18 24 TLI Reduced ---------- -------- -------- -------- -------- -------- -------- -------- -------- 1993 $ 12,984 9.1% 22.1% 28.5% 33.8% 35.9% 36.5% 36.8% 100.0% 1994 $ 23,589 5.3% 14.8% 19.9% 25.6% 28.0% 28.7% 28.8% 100.0% 1995 $ 36,569 2.0% 8.1% 13.2% 19.2% 22.3% 23.6% 24.1% 100.0% 1996: 1st Quarter $ 13,635 1.7% 8.1% 13.8% 20.8% 24.8% 26.1% 27.1% 100.0% 2nd Quarter $ 13,462 2.3% 9.3% 13.4% 22.0% 25.9% 27.6% 29.0% 100.0% 3rd Quarter $ 11,082 1.7% 6.9% 12.5% 21.3% 25.4% 27.5% 28.6% 100.0% 4th Quarter $ 10,817 0.7% 8.4% 15.9% 24.8% 29.1% 30.9% 32.0% 99.9% 1997: 1st Quarter $ 16,279 2.1% 10.8% 18.2% 24.9% 30.0% 32.2% 33.7% 99.7% 2nd Quarter $ 25,875 1.5% 9.9% 15.8% 22.8% 27.4% 29.5% 30.7% 99.0% 3rd Quarter $ 32,147 1.4% 8.4% 13.2% 22.5% 27.0% 29.3% 30.6% 98.2% 4th Quarter $ 42,529 1.4% 6.8% 12.6% 21.9% 26.2% 28.9% 29.9% 97.0% 1998: 1st Quarter $ 69,708 0.9% 6.9% 13.5% 21.0% 26.5% 28.9% 29.8% 95.6% 2nd Quarter $ 66,908 1.1% 8.1% 14.2% 21.8% 27.4% 29.4% 29.8% 92.4% 3rd Quarter $ 71,027 1.0% 7.9% 13.4% 23.1% 27.9% x 30.2% 90.1% 4th Quarter $ 69,583 0.9% 6.6% 13.1% 24.4% 29.3% - 30.4% 83.6% 1999: 1st Quarter $ 102,733 0.8% 7.5% 15.1% 23.7% x - 28.7% 75.8% 2nd Quarter $ 96,098 1.1% 9.9% 16.8% 25.6% - - 28.1% 66.6% 3rd Quarter $ 102,599 1.0% 8.3% 14.2% x - - 23.8% 56.5% 4th Quarter $ 80,900 0.7% 6.0% 12.9% - - - 17.4% 43.4% 2000: - - - 1st Quarter $ 128,123 0.3% 6.6% x 11.8% 32.0% 2nd Quarter $ 118,778 0.6% x - - - - 5.9% 18.1% 3rd Quarter $ 124,367 x - - - - - 0.5% 2.1%
Page 20 The following table sets forth the principal balances delinquency status as a percentage of total outstanding contract principal balances from dealership operations.
September 30, December 31, 2000 1999 ---------------- ---------------- Days Delinquent: Current 72.4% 63.2% 1-30 Days 19.3% 27.8% 31-60 Days 4.9% 5.9% 61-90 Days 3.4% 3.1% ---------------- ---------------- Total Portfolio 100.0% 100.0% ================ ================
In accordance with our charge off policy, there are no accounts more than 90 days delinquent as of September 30, 2000. Although loan losses on recently originated loan pools indicate improved loan performance over those loan pools originated in prior years, based on an extensive review of delinquency trends, historical loan losses and projected charge offs for the entire on balance sheet portfolio, we have increased our provision for credit losses effective with loans originated during the third quarter of 2000. The increase provides for a provision of an additional 2% of loans originated, which results in 29% of the amount financed. The increase provides an allowance for credit loss at quarter end within the targeted range for estimated net charge offs for the entire on balance sheet portfolio for the next 12 to 15 months. We will continue to monitor the on balance sheet loan portfolio performance to evaluate the on going adequacy of our provision for credit losses. Securitizations Under the current legal structure of our securitization program, we sell loans to our bankruptcy remote subsidiaries that then securitize the loans by transferring them to separate trusts that issue several classes of notes and certificates collateralized by the loans. The securitization subsidiaries then sell Class A notes or certificates (Class A obligations or Notes Payable) to investors and subordinate classes are retained by us. We continue to service the securitized loans. The Class A obligations have historically received investment grade ratings. To secure the payment of the Class A obligations, the securitization subsidiaries obtain an insurance policy from MBIA Insurance Corporation that guarantees payment of amounts to the holders of the Class A obligations. Additionally, we also establish a cash "reserve" account for the benefit of the Class A obligation holders. The reserve accounts are classified in our condensed consolidated financial statements as Investments Held in Trust and are a component of Finance Receivables, net. Reserve Account Requirements. Under our current securitization structure, we make an initial cash deposit into a reserve account, generally equivalent to 4% of the initial underlying Finance Receivables principal balance, and pledge this cash to the reserve account agent. The trustee then makes additional deposits to the reserve account out of collections on the securitized receivables as necessary to fund the reserve account to a specified percentage, ranging from 8.0% to 12.0%, of the underlying Finance Receivables' principal balance. The trustee makes distributions to us when: o the reserve account balance exceeds the specified percentage, o the required periodic payments to the Class A certificate holders are current, and o the trustee, servicer and other administrative costs are current. With our existing securitizations, we are required to maintain certain cash balances in the reserve accounts. These balances vary by trust and may change based on the level of delinquencies and charge offs on the loans of the respective trusts. As of October 15, 2000, primarily due to an increase in delinquencies on loans in certain trusts, the targeted reserve account balances for two trusts were increased and the actual balances were $5.8 million collectively under the increased specified levels. While these increased targeted reserve account requirements continue, collections on receivables in these trusts in excess of amounts required to pay the A certificates, our servicing fees and certain other amounts will be used to satisfy the increased reserve account amount and will not be distributed to us. Due to the normal reduction of the portfolios in these trusts, and historical seasonality declines in delinquency levels, we expect the targeted reserve account balances for these trusts to return to their prior levels sometime during the first quarter of 2001, and at that time any accumulated excess cash will be released. The balances deposited in the reserve accounts totaled $41.0 million at September 30, 2000. Page 21 Certain Financial Information Regarding Our Securitizations During August 2000, we closed a securitized borrowing transaction in which we securitized $153.0 million of loans, issuing $108.6 million in Class A certificates with an annual interest rate of 7.26%. Liquidity and Capital Resources In recent periods, our needs for additional capital resources have increased in connection with the growth of our business. We require capital for: increases in our loan portfolio, common stock repurchases, expansion of our dealership network, the purchase of inventories, and working capital and general corporate purposes, the purchase of property and equipment. We fund our capital requirements primarily through: operating cash flow, our revolving facility with GE Capital, and securitization transactions, supplemental borrowings. While to date we have met our liquidity requirements as needed, there can be no assurance that we will be able to continue to do so in the future. Cash Flow Net Cash Provided by Operating Activities increased by $46.6 million in the nine months ended September 30, 2000 to $171.1 million compared to cash generated of $124.5 million for the nine months ended September 30,1999. The increase is primarily due to an increase in net earnings coupled with a significant decrease in inventory from year end 1999, resulting from management's policy to increase inventory levels at year end in preparation for the high seasonal sales, which typically occur in the first quarter of the year, partially offset by decrease in income taxes payable. Net cash used by investing activities decreased to $236.2 million for the nine months ended September 30, 2000 versus $274.0 million for the same period of the previous year. The decrease is due to a significant decrease in Investments Held in Trust as principal balances securitized under the gain on sale method declined, coupled with proceeds used for the purchase of assets related to dealership acquisitions during the third quarter of 1999. Financing activities generated $39.6 million for the nine months ended September 30, 2000 as compared to $129.4 million generated for the corresponding period of 1999. The reason for the decrease is primarily due to net repayment of notes payable and an increase in funds used for the acquisition of treasury stock. Financing Resources Revolving Facility. Under our $125 million revolving facility, our borrowing base consists of up to 65.0% of the principal balance of eligible loans originated from the sale of used cars and the lesser of $25 million or 58% of the direct vehicle costs for eligible vehicle inventory. The revolving facility expires in June 2001 if not renewed or extended by a mutual agreement by both parties. The revolving facility contains a provision that requires us to pay GE Capital a termination fee of $200,000 if we terminate the revolving facility prior to the expiration date. We secure the facility with substantially all of our assets. As of September 30, 2000, our borrowing capacity under the revolving facility was $80.8 million, the aggregate principal amount outstanding under the revolving facility was approximately $50.2 million, and the amount available to be borrowed under the facility was $30.6 million. The revolving facility bears interest at the 30-day LIBOR plus 3.15%, payable daily (total rate of 9.77% as of September 30, 2000). The revolving facility contains covenants that, among other things, limit our ability to take certain actions without GE Capital's consent, including incur additional indebtedness, make any change in our capital structure, declare or pay dividends, and make certain investments and capital expenditures. The revolving facility also provides that an event of default will occur if Page 22 Mr. Ernest C. Garcia II owns less than 15.0% of our voting stock. Mr. Garcia owned approximately 36.5% of our common stock at September 30, 2000. In addition, we are also required to maintain specified financial ratios. As of September 30, 2000, we were in compliance with the covenants of this agreement. Securitizations. Our securitization program is a primary source of our working capital. Securitizations generate cash flow for us from the sale of Class A obligations, ongoing servicing fees, and excess cash flow distributions from collections on the loans securitized after payments on the Class A obligations, payment of fees, expenses, and insurance premiums, and required deposits to the reserve account. Securitization also allows us to fix our cost of funds for a given loan portfolio. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Securitizations" for a more complete description of our securitization program. Capital Expenditures and Commitments During the nine months ended September 30, 2000, we developed five new dealerships in existing markets, three in the first quarter and two in the second quarter. In the fourth quarter of 1999, we obtained five dealerships, including vehicle inventory and a loan portfolio of approximately $8.0 million, from Virginia Auto Mart. The direct cost of opening a dealership is primarily a function of whether we lease a facility or construct a facility. A leased facility costs approximately $650,000 to develop, while a facility we construct costs approximately $1.7 million. In addition, we require capital to finance the portfolio that we carry on our balance sheet for each store. It takes approximately $2.2 million in cash to support a typical stabilized store portfolio with our existing 65% advance rate under our GE facility. Additionally, it takes approximately 34 months for a store portfolio to reach a stabilized level. We intend to finance the construction of new dealerships through operating cash flows and supplemental borrowings, including amounts available under the revolving facility and the securitization program. In April 1999, our Board of Directors authorized a stock repurchase program allowing us to repurchase up to 2.5 million shares of our common stock from time to time. Purchases may be made depending on market conditions, share price, lender approval and other factors. During July 2000, we repurchased approximately 1.5 million shares pursuant to the stock repurchase program. We have repurchased 1,589,425 shares under this program. In September 2000, we entered into an agreement with the beneficiaries and/or representative of the estate ("Addink"), of Don Addink, our former Senior Vice President and Treasurer who died in July of this year, in which the following was agreed to: we would purchase all of his shares of our common stock at $7.00/share, approximately 98,000 shares; Addink's stock options became fully vested, Addink waived and released all claims under the options and we paid Addink $86,250; and we waived all principal and interest due under two promissory notes owed to us by Addink with aggregate principal and accrued interest of $351,393. We continue to believe that the repurchase of our stock is currently a better investment of our capital than new stores. As additional capital is secured, we will consider whether to resume or accelerate our expansion plans or to continue repurchasing our stock. At this time, we will not commit to growth prior to securing the capital to support it, unless the acquisition would require little to no capital. We continue to attempt to secure capital for further growth. We do not expect a slow down in growth to adversely impact revenues or earnings in 2001 and any impact on subsequent years will depend upon the number and timing of future acquisitions. With respect to the month of September, 2000, we were not in compliance with a provision related to cash flows under that certain Senior Secured Loan Agreement dated as of May 14, 1999 for securitization residual term financing. The Lenders under the Loan Agreement permanently waived the failure to comply and agreed it was not a default or event of default under the Loan Agreement. Among other terms, we pledged certain securitization residuals from our 2000-B securitization to the Lenders as additional collateral. On September 30, 2000, the Loan Agreement, Warrants and Warrant Agreements between us and certain Lenders under that Loan Agreement dated as of February 12, 1998, as amended on September 30 of 1999, was amended to: reduce the Page 23 outstanding principal balance under the Loan Agreement from $15 million to $13.5 million; require us to take out one of the lenders in the facility by paying off that lender's $1.5 million share of the loan (which occurred), and cancel the number of outstanding warrants attributable to that portion of the loan; increase the interest rate under the Loan Agreement to 15%, extend the term of the Loan Agreement to February 12, 2003; and provide for the repayment of principal and the corresponding reduction of warrants under certain terms and conditions. On November 9, 2000, Verde Investments, Inc. ("Verde"), an affiliate of Mr. Earnest Garcia II, our chairman, purchased a certain property located in Phoenix, Arizona and simultaneously leased the property to us pursuant to among other terms the following: 20 year term which expires December 31, 2002; rent payable monthly with 5% annual rent adjustments; triple net lease; four five-year options to renew; and an option to purchase the property upon prior notice and at Verde's cost. We intend to build a new headquarters at this location over the next several months, obtain permanent financing upon completion of construction and exercise our option to purchase the property. Accounting Matters In September 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No. 140). SFAS No. 140 replaces SFAS No. 125 and revises the standards for accounting for securitizations and other transfers of financial assets and collateral. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. This statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Management does not expect the adoption of SFAS No. 140 to have a material impact on the company. In June 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" (SFAS No. 138). SFAS No. 138 amends a limited number of issues causing implementation difficulties for entities that apply SFAS No. 133. SFAS No. 138 is effective for fiscal years beginning after June 15, 2000. Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133) required all derivatives to be recorded on the balance sheet at fair value and establishes new accounting rules for hedging instruments. Management does not expect the adoption of SFAS No. 138 or No. 133 to have a material impact on the Company. We Make Forward Looking Statements Our Quarterly Report on Form 10-Q includes statements that constitute forward-looking statements within the meaning of the safe harbor provisions of the Private and Securities Litigation Reform Act of 1995. We claim the protection of the safe-harbor for our forward looking statements. Forward-looking statements are often characterized by the words "may", "anticipates", "believes," "estimates," "projects," "expects" or similar expressions and do not reflect historical facts. Forward-looking statements in this report relate, among other matters, to: anticipated financial results, such as continuing growth of sales, other revenues and loan portfolios, and improvements in loan performance, including delinquencies; anticipated roll-out of collectors to the Company's dealerships, anticipated repurchases of Company stock and the level of growth in our dealerships through acquisitions and de novo dealership openings; and e-commerce related growth and loan performance. Forward looking statements include risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward looking statements. Factors that could affect our results and cause or contribute to differences from these forward-looking statements include, but are not limited to: any decline in consumer acceptance of our car sales strategies or marketing campaigns; any inability of the Company to finance its operations in light of a tight credit market for the sub-prime industry; any deterioration in the used car finance industry or increased competition in the used car sales and finance industry; any inability of the Company to monitor and improve its underwriting and collection processes; any changes in estimates and assumptions in, and the ongoing adequacy of, our allowance for credit losses; any inability of the Company to continue to reduce operating expenses as a percentage of sales; any material litigation against us or material, unexpected developments in existing litigation; and any new or revised accounting, tax or legal guidance that adversely affect used car sales or financing. Other factors are detailed in the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Factors," "Factors That May Affect Future Results and Financial Condition" and "Factors That May Affect Future Stock Performance" in our most recent reports on Form 10-K, in Exhibit 99 attached to this Quarterly Report on Form 10-Q and elsewhere in our Securities and Exchange Commission filings. In addition, the foregoing factors may affect generally our business, results of operations and financial position. There may also be other factors that we are currently unable to identify or quantify, but may arise or become known in the future. Forward looking statements speak only as of the dated the statement was made. By making these forward-looking statements, we undertake no obligation to update these statements for revisions or changes after the date of this report. References to Ugly Duckling Corporation as the largest chain of buy-here pay-here used car dealerships in the United States is management's belief based upon the knowledge of the industry and not on any current independent third party study. Page 24 ITEM 3. Market Risk We are exposed to market risk on our financial instruments from changes in interest rates. We do not use instruments for trading purposes or to manage interest rate risk. Our earnings are substantially affected by our net interest income, which is the difference between the income earned on interest-bearing assets and the interest paid on interest bearing notes payable. Increases in market interest rates could have an adverse effect on profitability. Our financial instruments consist primarily of fixed rate finance receivables, residual interests in pools of fixed rate finance receivables, short term variable rate revolving Notes Receivable, and variable and fixed rate Notes Payable. Our finance receivables are classified as subprime loans and generally bear interest at the lower of 29.9% or the maximum interest rate allowed in states that impose interest rate limits. At September 30, 2000, the scheduled maturities on our finance receivables range from one to 52 months with a weighted average maturity of 31.3 months. The interest rates we charge our customers on finance receivables has not changed as a result of fluctuations in market interest rates, although we may increase the interest rates we charge in the future if market interest rates increase. A large component of our debt at September 30, 2000 is the Collateralized Notes Payable (senior and junior securities) issued under our securitization program. Issuing debt through our securitization program allows us to mitigate our interest rate risk by reducing the balance of the variable revolving line of credit and replacing it with a lower fixed rate note payable. We are subject to interest rate risk on fixed rate Notes Payable to the extent that future interest rates are higher than the interest rates on our existing Notes Payable. We believe that our market risk information has not changed materially from December 31, 1999. Page 25 PART II. OTHER INFORMATION Item 1. Legal Proceedings. We sell our cars on an "as is" basis. We require all customers to acknowledge in writing on the date of sale that we disclaim any obligation for vehicle-related problems that subsequently occur. Although we believe that these disclaimers are enforceable under applicable laws, there can be no assurance that they will be upheld in every instance. Despite obtaining these disclaimers, in the ordinary course of business, we receive complaints from customers relating to vehicle condition problems as well as alleged violations of federal and state consumer lending or other similar laws and regulations. Most of these complaints are made directly to us or to various consumer protection organizations and are subsequently resolved. However, customers occasionally name us as a defendant in civil suits filed in state, local, or small claims courts. Additionally, in the ordinary course of business, we are a defendant in various other types of legal proceedings, and are the subject of regulatory or governmental investigations. Although we cannot determine at this time the amount of the ultimate exposure from such matters, if any, we do not expect the final outcome to have a material adverse effect on the Company. Item 2. Changes in Securities and Use of Proceeds. (a) None (b) None (c) See Exhibit 4.1 and discussion included in "Management's Discussion and Analysis - Capital Expenditures and Commitments" (d) Not Applicable Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit 4.1 - Second Amendment to Warrant Agreement dated February 12, 1998 between Registrant and each of the Kayne Anderson related lenders named therein, dated as of September 30, 2000. Exhibit 10.1 - Amendment and waiver letter agreement to Senior Secured Loan Agreement dated May 14, 1999 between CIBC Inc., SunAmerica, etc. and the Registrant dated October 12, 2000. Exhibit 10.2 - Letter agreement between the beneficiaries and/or representatives of the estate of Don Addink and the Registrant dated September 14, 2000. Exhibit 27 -- Financial Data Schedule Exhibit 99 - Statement Regarding Forward Looking Statements and Risk Factors (b) Reports on Form 8-K. Since June 30, 2000, the Company has filed two reports on Form 8-K. The first report on Form 8-K, dated October 5, 2000 and filed October 10, 2000, reported Ugly Duckling's receipt of the offer to purchase the Company by Mr. Ernest C. Garcia II, the Company's Chairman and largest shareholder and filed as an exhibit to the Form 8-K, a press release dated October 5, 2000 entitled "Ugly Duckling Confirms Receipt of Offer to Purchase Company from Chairman/Largest Shareholder". The second report on Form 8-K dated and filed October 30, 2000, reported the withdrawal of the offer to purchase the Company from Mr. Ernest C. Garcia, II, the Company's Chairman and largest shareholder. Filed as an exhibit to the Form 8-K was a press release dated October 27, 2000 entitled "Ugly Duckling Reports Withdrawal of the Chairman's Offer to Purchase Outstanding Common Stock" Page 26 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UGLY DUCKLING CORPORATION /s/ STEVEN T. DARAK ----------------------- Steven T. Darak Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Date: November 13, 2000 Page 27 EXHIBIT INDEX Exhibit Number Description 4.1 Second Amendment to Warrant Agreement dated February 12, 1998 between 4.1 Registrant and each of the Kayne Anderson related lenders named therein, dated as of September 30, 2000 10.1 Amendment and waiver letter agreement to Senior Secured Loan Agreement dated May 14, 1999 between CIBC Inc., SunAmerica, etc. and the Registrant dated October 12, 2000 10.2 Letter agreement between the beneficiaries and/or representatives of the estate of Don Addink and the Registrant dated September 14, 2000 27 Financial Data Schedule 99 Statement Regarding Forward Looking Statements and Risk Factors EX-4.1 2 0002.txt SECOND AMENDMENT TO WARRANTY AGREEMENT SECOND AMENDMENT TO LOAN AGREEMENT, WARRANT AGREEMENT AND WARRANTS (Ugly Duckling) This Amendment is entered into as of the 30th day of September, 2000 (the "Effective Date") by and among UGLY DUCKLING CORPORATION, a Delaware corporation (the "Company") and each lender signatory hereto (each, a "Lender" and collectively the "Lenders"). RECITALS A. The Company and Lenders are parties to a Loan Agreement, dated as of February 12, 1998 as amended on September 30, 1999 (as amended, the "Loan Agreement") pursuant to which the Lenders made a loan to the Company in the original principal amount of Fifteen Million Dollars ($15,000,000). B. The Company and Lenders are parties to a Warrant Agreement, dated as of February 12, 1998, as amended on June 5, 2000 (as amended, the "Warrant Agreement") and Warrants for 575,000 shares of Company common stock (the "Warrants"). The Company and Lenders desire to amend the Loan Agreement, the Warrant Agreement and the Warrants on the terms and conditions set forth in this Amendment. C. Foremost, one of the Lenders, has requested, and the parties agree, to the pay off of Foremost Insurance Company ("Foremost") and the reduction of the principal amount of the Loan Agreement from $15 million to $13.5 million. In consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by each of the parties hereto, the parties agree as follows: 1. Defined Terms. Unless otherwise specified herein, all capitalized terms used in this Amendment shall have the same meaning given to such terms in the Loan Agreement, the Warrant Agreement and/or the Warrants, as applicable. 2. Amendment to Section 2.2 of Loan Agreement. Effective as of October 1, 2000, the interest rate under Section 2.02 (a) shall change from 12% to 15%. 3. Amendment to Loan Agreement. Effective as of the Effective Date the definitions of "Aggregate Commitment" and "Maturity Date" in the Loan Agreement are amended in their entirety to provide as follows: "Aggregate Commitment" means the amount of Thirteen Million Five Hundred Thousand Dollars (($13,500,000). "Maturity Date" means February 12, 2003. 4. Pay Off and Removal of Foremost as Lender. Company shall pay to Foremost $1.5 million, plus accrued interest ("Pay Off Amount") by no later than the Effective Date. Upon receipt by Foremost of the Pay Off Amount in good funds, Foremost shall have no further interests, obligations or liabilities under the Loan Agreement and its Warrant Agreement, Company shall be released from any further liability to Foremost under the Loan Agreement and the Warrant Agreement, the principal balance under the Loan Agreement shall be reduced from $15 million to $13.5 million, the maturity date under the Loan Agreement shall change to February 12, 2003, all of the Warrants issued to Foremost in connection with the Warrant Agreement, and the Warrant Agreement with Foremost, shall be void and terminated, the total number of Warrants outstanding under the Warrant Agreement shall be 517,500, and Foremost shall be deleted from and shall no longer be a Lender under the Loan Agreement 5. Amendment to Section 2 of Loan Agreement. Effective as of the date hereof, a new Section 2.08 shall be added to the Loan Agreement and shall provide as follows: "2.08 Principal Repayments. The Lenders may, at any time, upon 45 days prior written notice to the Company, demand and the Company shall make, a principal payment in the amount of Three Million Five Hundred Thousand Dollars ($3,500,000). In addition, upon at least 30 days prior written notice before the end of a quarter (e.g., March 31, June 30, September 30 and December 31 of each year), the Lenders may request a principal payment of no more than One Million Dollars ($1,000,000) ("Quarterly Principal Payment") to be paid at the same time as accrued interest is payable under Section 2.02 (b). In the event that Lenders do not request the payment of the Quarterly Principal Payment in a quarter, such amount shall carry forward to the following quarters ("Carry Over Amount") until paid or the Maturity Date. For any quarter, Lenders may request the payment of the Carry Over Amount and the current Quarterly Principal Payment; provided, however, that in no event shall such a request for payment exceed Three Million Dollars ($3,000,000) in any one quarter. If the Carry Over Amount plus the current Quarterly Principal Payment in any quarter in which a Three Million Dollar ($3,000,000) payment is requested exceeds Three Million Dollars ($3,000,000), the balance shall carry forward to subsequent quarters. For example, assume four quarters elapse and no Quarterly Principal Payment is requested by Lenders and in the fifth quarter, Lenders timely request a payment of Three Million Dollars ($3,000,000). The Company would be required to pay the Three Million Dollars ($3,000,000) and the Carry Over Amount of Two Million Dollars ($2,000,000) would carry over to the next quarter. 6. Amendment of the Warrant Agreement and Warrants. Effective as of the Effective Date, the number of outstanding Warrants (as modified or amended pursuant to the terms of the Warrant Agreement), 517,500 (with the removal of the Foremost Warrants), available to the Lenders under the Warrant Agreement and the Warrants shall be reduced pro rata by the amount of any and all principal reductions made by Company as follows: (Principal reduction) = ( x ). ------------------- --------------- $13,500,000 Original Warrant Amount 517,500 minus X equals Y (number of Warrants to be deducted from the total outstanding). 517,500 minus Y equals the reduced aggregate outstanding number of Warrants held by Lenders. The reduction in Warrants shall be allocated proportionately among all Lenders. For purposes of these calculations, the "Original Warrant Amount" used in the denominator above shall be 517,500, as that number may be amended or modified under the terms of the Warrant Agreement or by agreement of the parties (a "Modification"), but not as that number may be or is modified under the terms of this Section 6. Further, if the number of outstanding Warrants has been reduced pursuant to this Section 6, and a Modification occurs, then the Modification shall apply proportionately to the reduced number of outstanding Warrants, unless otherwise agreed to by the parties. For example, if Company makes a principal reduction of One Million Three Hundred Fifty Thousand Dollars ($1,350,000), or ten percent (10%) of the original principal loan balance, then the outstanding Warrants would be reduced by ten percent (10%) or 51,750, and the total outstanding Warrants would then be reduced from 517,500 to 465,750, the reduction to be split proportionately among all Lenders (i.e., each Lender would have a 10% reduction in the Warrants held by them). Assuming there was not a Modification, if there was then a subsequent principal reduction of the same amount, then there would be another 10% reduction in the number of outstanding Warrants of 51,750, reducing the total outstanding number of Warrants held by Lenders to 414,000. 7. Incorporation of Amendment. The parties acknowledge and agree that this Amendment is incorporated into and made a part of, as applicable, the Loan Agreement, the Warrant Agreement and/or the Warrants, the terms and provisions of which are hereby affirmed and ratified and remain in full force and effect, except as amended hereby. To the extent that any term or provision of this Amendment is or may be deemed inconsistent with any term or provision of the Loan Agreement, the Warrant Agreement and/or the Warrants, as applicable, the terms and provisions of this Amendment shall control. Each reference to the Loan Agreement, the Warrant Agreement and/or the Warrants, shall be a reference to the agreements as amended by this Amendment. This Amendment, taken together with the provisions of the Loan Agreement, the Warrant Agreement and/or the Warrants, as previously amended, which are all affirmed and ratified by the Company, contains the entire agreement among the parties regarding the transactions described herein and supersedes all prior agreements, written or oral, with respect thereto. 8. Heading. The paragraph headings contained in this Amendment are for convenience of reference only and shall not be considered a part of this Amendment in any respect. 9. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of California. 10. Assignments, Participation, Etc. Each Lender acknowledges that it is currently a Lender under the Loan Agreement, and parties to the Warrant Agreement and the Warrants, that it has authority to execute and deliver this Amendment and that it has not assigned any of its rights under the Loan Agreement, the Warrant Agreement or the Warrants, except to another Lender which is party to this Amendment. 11. Execution in Counterparts. This Amendment 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. [Balance of Page Intentionally Left Blank] UGLY DUCKLING CORPORATION By: ______________________ Its:______________________ ARBCO ASSOCIATES, L.P. By: Kayne Anderson Capital Advisors, L.P. Its: General Partner By: Kayne Anderson Investment Management, Inc. Its: General Partner By: ______________________ Title: ___________________ KAYNE ANDERSON NON- TRADITIONAL INVESTMENTS, L.P. By: Kayne Anderson Capital Advisors, L.P. Its: General Partner By: Kayne Anderson Investment Management, Inc. Its: General Partner By: ______________________ Name: ____________________ Title: ___________________ KAYNE ANDERSON OFF-SHORE LIMITED By: Kayne Anderson Capital Advisors, L.P. Its: General Partner By: Kayne Anderson Investment Management, Inc. Its: Manager By: _______________________ Name: _____________________ Title: ____________________ GLACIER WATER SERVICES, INC. By: _______________________ Name: _____________________ Title: ____________________ FOREMOST INSURANCE COMPANY By: _______________________ Name: _____________________ Title: ____________________ TOPA INSURANCE COMPANY By: _______________________ Name: _____________________ Its: ______________________ EX-10.1 3 0003.txt AMENDMENT AND WAIVER LETTER AGREEMENT October 12, 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 The Bank of New York, as Collateral Agent 2 North LaSalle Street Chicago, IL 60602 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"), The Bank of New York (as successor-in-interest to 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 2000, 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 (i) execution hereof by Collateral Agent and the Required Lenders and (ii) compliance with the provisions of Section 3.1 of the Loan Agreement with respect to the 2000-B Included Certificates (as defined below), hereby amended as follows: 1. 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 and including 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 Dates from and including May 15, 2000, through and including September 15, 2000 (which represent B Piece Cash Flows with respect to the months from April 2000 through August 2000), $2,000,000. (e) For the Payment Dates from and including October 15, 2000, through and including March 15, 2001 (which represent B Piece Cash Flows with respect to the months from September 2000 through February 2001), $900,000. (f) For the Payment Date on April 15, 2001, and for each Payment Date thereafter $2,000,000. 2. Notwithstanding the terms and provisions of the Loan Agreement, the other Loan Documents, and the Letter Agreement dated August 30, 2000, the 2000-B Included Certificates shall, subject to the last paragraph of the definition of the term "Borrowing Base" set forth in the Loan Agreement, constitute Additional Class B Certificates and shall be included in the computation of the Borrowing Base even though not issued during the Securitization Period. The foregoing shall not be deemed to extend the Securitization Period. As used herein, the term "2000-B Included Certificates" means all of the "Class B Notes," "Class C Certificates" and "Class D Certificates" issued in connection with the 2000-B Securitization excluding the "Class C Certificate" in the face amount of $2,600,599.98 issued to Ugly Duckling Finance Corporation. As used herein the term "2000-B Securitization" means the securitization accomplished pursuant to the following documents: (a) Sale and Servicing Agreement dated as of August 28, 2000 (the "2000-B SSA") among Ugly Duckling Receivables Corp. II (formerly known as Champion Receivables Corp. II) ("UDRC II"), Duck Auto Owner Trust 2000-B, a Delaware business trust, as Issuer (the "2000-B Issuer"), Ugly Duckling Credit Corp. (formerly known as Champion Acceptance Corporation) ("UDCC"), and The Bank of New York, as Indenture Trustee (the "2000-B Indenture Trustee"). (b) Trust Agreement (Duck Owner Trust 2000-B) dated as of August 28, 2000 (the "2000-B Owner Trust Agreement") between UDRC II, as Seller, and Wilmington Trust Company, as Owner Trustee (the "2000-B Owner Trustee"). (c) Indenture dated as of August 28, 2000 (the "2000-B Indenture") between the 2000-B Issuer and the 2000-B Indenture Trustee. 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. Concurrently with the execution and delivery of this letter agreement and as a condition precedent to the effectiveness thereof, UDC shall pay to Lenders an aggregate waiver/modification fee of $25,000, which shall be distributed to the Lenders on a pro rata basis. 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. Please sign and return the enclosed copy of this letter. Very truly yours, UGLY DUCKLING CORPORATION, a Delaware corporation By: Name: Title: CONSENTED AND AGREED: 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: THE BANK OF NEW YORK, as Collateral Agent By: Name: Title: 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: Name: Title: EX-10.2 4 0004.txt LETTER AGREEMENT WITH DON ADDINK ESTATE VI.DAE:CJVE2 September 14, 2000 VIA FACSIMILE 520-577-7441 John Van Egmond President & CEO Ozona Corporation 6900 North Ozona Drive Tucson, Arizona 85718 Re: Don Addink Dear John: The purpose of this letter is to state the material terms of the agreements between Ugly Duckling Corporation ("UDC") and the beneficiaries and/or representative of the estate of Don Addink ("Addink"). UDC and Addink have agreed to the following: 1. Addink holds approximately 96,000 shares of common stock of UDC (the "UDC Stock"). The UDC Stock is held by the brokerage firm of Roth Capital Partners, Inc. ("Roth"). Provided UDC obtains the required approval of its creditor - General Electric, UDC shall purchase and Addink shall sell all UDC Stock pursuant to a trade executed by Roth within 30 days after UDC obtains the required approval. The purchase price of the UDC Stock shall be $672,000.00 ($7.00/share). UDC shall pay the purchase price for the UDC Stock directly to Roth for application and disbursement by Roth. 2. Addink holds options to acquire 78,500 shares of common stock of UDC (the "UDC Options"). UDC agrees to vest all unvested UDC Options so that all UDC Options held by Addink are fully vested and may be exercised at the prices provided in the Option Agreements. The current value of the UDC Options is estimated to be approximately $86,250.00 (the "UDC Options Value"). Addink hereby waives, releases and cancels the UDC Options in consideration of a payment by UDC to Addink of an amount equal to the UDC Options Value. The UDC Options Value amount shall be paid by UDC to Addink within 10 days after the date of this Agreement. 3. Addink is indebted to UDC under two Promissory Notes, one in the original principal amount of $100,000.00, dated November 24, 1997, and one in the original principal amount of $200,000.00, dated September 3, 1998 (the "Promissory Notes"). The principal balance due under the Promissory Notes is $300,000.00. The interest accrued and due under the Promissory Notes due through June 30, 2000, is $51,392.89. UDC hereby waives all principal and interest due under the Promissory Notes. Page Two John Van Egmond September 14, 2000 If this letter accurately states the material terms of our agreements regarding the transactions between UDC and Addink, please acknowledge acceptance by signing this letter and returning it to me at your earliest convenience. If you have any questions or comments regarding this statement of the material terms of the agreements, please contact me at 602-778-5003. John, your assistance and cooperation in these matters is greatly appreciated by everyone at Ugly Duckling Corporation. Very truly yours, Ernie Garcia Chairman cc: Greg Sullivan Steven P. Johnson Accepted this ___ day of September, 2000. - ----------------------------- John Van Egmond Under Power of Attorney for Mary Addink EX-27.1 5 0005.txt FINANCIAL DATA SCHEDULE
5 0001012704 Ugly Duckling Corp. 1,000 9-MOS DEC-31-2000 JAN-1-2000 SEP-30-2000 6,555 0 591,923 100,043 43,739 0 55,671 20,067 618,483 459,961 0 0 0 134,298 24,223 618,483 380,949 469,488 212,119 0 109,426 102,877 25,581 19,485 7,971 11,514 0 0 0 11,514 0.83 0.82
EX-99 6 0006.txt FORWARD LOOKING STATEMENT AND RISK EXHIBIT-99 RISK FACTORS There are various risks in purchasing our securities and investing in our business, including those described below. You should carefully consider these risk factors together with all other information included in this Form 10-Q. Future losses could impair our ability to raise capital or borrow money and consequently affect our stock price. Although we recorded earnings from continuing operations of $11.5 million for the nine months ended September 30, 2000, $8.7 million for the twelve months ended December 31, 1999 and $3.5 million in 1998, we cannot assure you that we will be profitable in future periods. Losses in future periods could impair our ability to raise additional capital or borrow money as needed, and could decrease our stock price. We may not be able to obtain the financing we need to fund our operations and, as a result, our profitability could be reduced. Our operations require large amounts of capital. We have borrowed, and will continue to borrow, substantial amounts to fund our operations. If we cannot obtain the financing we need on a timely basis and on favorable terms, our business and profitability could be materially adversely affected. We currently obtain our financing through three primary sources: a revolving credit facility with General Electric Capital Corporation, securitization transactions, and loans from other sources. Revolving Credit Facility with GE Capital. Our revolving facility with GE Capital is our primary source of operating capital. We have pledged substantially all of our assets to GE Capital to secure the borrowings we make under this facility. Although this facility has a maximum commitment of $125 million, the amount we can borrow is limited by the amount of certain types of assets that we own. When we have used all our capacity under the revolving facility, our liquidity can be adversely affected unless we can find alternative financing sources. The revolving facility expires in June 2001 and, even if we continue to satisfy the terms and conditions of the revolving facility, we may not be able to extend its term beyond the current expiration date. If we cannot extend the term of the revolving facility or replace that facility with a substitute facility, our operations would be materially adversely affected. Securitization Transactions - We can restore capacity under the GE facility from time to time by securitizing portfolios of finance receivables. Our ability to successfully complete securitizations and how favorable the terms of our securitizations will be to us may be affected by several factors, including: o the condition of securities markets generally; o conditions in the asset-backed securities markets specifically; o the credit quality of our loan portfolio; and o the performance of our servicing operations. Contractual Restrictions - The revolving facility, the securitization program, and our other credit facilities contain various restrictive covenants. Under these credit facilities, we must also meet certain financial tests. Failure to satisfy the covenants in our credit facilities or our securitization program could preclude us from further borrowing under the defaulted facility, could cause cross defaults to our other debt, and could prevent us from securing alternate sources of funds necessary to operate our business. Recent Waivers. From time to time, we incur technical or other breaches under our material credit facilities, and we have obtained waivers from the applicable lenders. There can be no assurance that we will continue to receive waivers and our inability to obtain these waivers may have a material impact on our ability to obtain or retain operating capital. We have a high risk of credit losses because of the poor creditworthiness of our borrowers. Substantially all of the sales financing that we extend and the loans that we service are with sub-prime borrowers. Sub-prime borrowers generally cannot borrow money from traditional lending institutions, such as banks, savings and loans, credit unions, and captive finance companies owned by automobile manufacturers, because of their poor credit histories and/or low incomes. Loans to sub-prime borrowers are difficult to collect and are subject to a high risk of loss. We have established an allowance for credit losses to cover our anticipated credit losses. We periodically review and may make upward or downward adjustments to the allowance based upon whether we believe the allowance is adequate to cover our anticipated credit losses. However, our allowance may not be sufficient to cover our credit losses or we may need to increase our provision or allowance if certain adverse factors arise, including unanticipated or material increases in delinquencies or charge offs. A significant variation in the timing of or increase in credit losses in our portfolio, or a substantial increase in our allowance or provision for credit losses, would have a material adverse effect on our net earnings. Interest rates affect our profitability. Much of our financing income results from the difference between the rate of interest that we pay on the funds we borrow and the rate of interest that we earn on the loans in our portfolio. While we earn interest on the loans that we own at a fixed rate, we pay interest on our borrowings under our revolving facility at a floating rate. When interest rates increase, our interest expense increases and our net interest margins decrease. Increases in our interest expense that we cannot offset by increases in interest income will lower our profitability. Laws that limit the interest rates that we can charge can adversely affect our profitability. We operate in many states that impose limits on the interest rate that a lender may charge. When a state limits the amount of interest that we can charge on our installment sales loans, we may not be able to offset any increased interest expense caused by rising interest rates or greater levels of borrowings under our credit facilities. Therefore, these interest rate limitations can adversely affect our profitability. Government regulation may limit our ability to recover and enforce receivables or to repossess and sell collateral. We are subject to ongoing regulation, supervision, and licensing under various federal, state, and local statutes, ordinances, and regulations. If we do not comply with these laws, we could be fined or certain of our operations could be interrupted or shut down. Failure to comply could, therefore, have a material adverse effect on our operations. Among other things, these laws: o require that we obtain and maintain certain licenses and qualifications; o limit or prescribe terms of the loans that we originate and/or purchase; o require specified disclosures to customers; o limit our right to repossess and sell collateral; and o prohibit us from discriminating against certain customers. We believe that we are currently in substantial compliance with all applicable material federal, state, and local laws and regulations. We may not, however, be able to remain in compliance with such laws. In addition, the adoption of additional statutes and regulations, changes in the interpretation of existing statutes and regulations, or our entry into jurisdictions with more stringent regulatory requirements could also have a material adverse effect on our operations. We are subject to pending actions and investigations relating to our compliance with various laws and regulations. While we do not believe that ultimate resolution of these matters will result in a material adverse effect on our business or financial condition (such as fines, injunctions or damages), there can be no assurance in this regard. Events happening to other companies in our industry can adversely affect our operations and the value of our securities. In past years, several major used car finance companies have announced major downward adjustments to their financial statements, violations of loan covenants, related litigation, and other events. Companies in the used vehicle sales and financing market have also been named as defendants in an increasing number of class action lawsuits brought by customers claiming violations of various federal and state consumer credit and similar laws and regulations. In addition, some of these companies have filed for bankruptcy protection. These events: o have lowered the value of securities of sub-prime automobile finance companies; o have made it more difficult for sub-prime lenders to borrow money; and o could cause more restrictive regulation of this industry. If our current contingency plan is inadequate, we could have a system failure, which could adversely affect our ability to collect on loans, and comply with statutory requirements. We depend on our loan servicing and collection facilities and on long-distance and local telecommunications access to transmit and process information among our various facilities. We use a standard program to prepare and store off-site backup tapes of our main system applications and data files on a routine basis. We regularly revise our contingency plan; however, the plan as revised may not prevent a systems failure or allow us to timely resolve any systems failures. Also, a natural disaster, calamity, or other significant event that causes long-term damage to any of these facilities or that interrupts our telecommunications networks could have a material adverse effect on our operations. We have continuing risks relating to the First Merchants transaction. We have entered into several transactions in the bankruptcy proceedings of First Merchants Acceptance Corporation. We have the right to 17 1/2% of recoveries on First Merchants' residual interests in certain securitized loan pools and other loans. However, if we lose our right to service these loans, our share of these residual interests can be reduced or eliminated. This could affect our future cash flow and profitability. In addition, if we meet certain conditions, we have the right to issue our common stock to First Merchants or its unsecured creditors or equity holders in exchange for a portion of First Merchants' 82 1/2% share of collections on the residual interests. However, we must estimate anticipated collections in advance to determine the amount of stock to issue, and if our estimates are not accurate we could issue too many shares of our common stock and dilute our shareholders. We have slowed our growth which eventually could negatively affect our earnings and profitability or, even if we make acquisitions, they may be unsuccessful or strain or divert our resources from more profitable operations. In 1999, we completed two acquisitions. Although we have decided to slow our growth for the foreseeable future and have not made any acquisitions thus far this year, we intend to consider additional acquisitions, alliances, and transactions involving other companies that could complement our existing business if we can do so with little to no capital or if we can raise additional capital for any such transactions. However, we may not be able to raise additional capital or identify suitable acquisition parties, joint venture candidates, or transaction counterparties. Also, even if we can identify suitable parties, we may not be able to consummate these transactions on terms that we find favorable. Further, a failure to grow, or obtain capital for or allocate sufficient resources to the growth of our business, could eventually negatively affect our earnings and/or profitability, which could adversely affect the value of our outstanding securities. We may also not be able to successfully integrate any businesses that we acquire into our existing operations. If we cannot successfully integrate acquisitions, our operating expenses may increase. This increase would affect our net earnings, which could adversely affect the value of our outstanding securities. Moreover, these types of transactions may result in potentially dilutive issuance of equity securities, the incurrence of additional debt, and amortization of expenses related to goodwill and intangible assets, all of which could adversely affect our profitability. These transactions involve numerous other risks as well, including the diversion of management attention from other business concerns, entry into markets in which we have had no or only limited experience, and the potential loss of key employees of acquired companies. Occurrence of any of these risks could have a material adverse effect on us. Increased competition could adversely affect our operations and profitability. Our primary competitors are the numerous small buy-here pay-here used car dealers that operate in the sub-prime segment of the used car sales industry. We attempt to distinguish ourselves from our competitors through name recognition and other factors. However the advertising and infrastructure required by these efforts increase our operating expenses. There is no assurance that we can successfully distinguish ourselves and compete in this industry. In addition, in recent years, a number of larger companies with significant financial and other resources, have entered or announced plans to enter the used car sales industry. Although these companies do not currently compete with us in the sub-prime segment of the market, they compete with us in the purchase of inventory, which can result in increased wholesale costs for used cars and lower margins. They could also enter the sub-prime segment of the market at any time. Increased competition may cause downward pressure on the interest rates that we charge on loans originated by our dealerships. Either change could have a material effect on the value of our securities. The success of our operations depends on certain key personnel. We believe that our ability to successfully implement our business strategy and to operate profitably depends on the continued employment of our senior management team. The unexpected loss of the services of any of our key management personnel or our inability to attract new management when necessary could have a material adverse effect on our operations. We do not currently maintain key person life insurance on any member of our senior management team other than Gregory B. Sullivan, our President and Chief Executive Officer. We may issue stock in the future that will dilute the value of our existing stock. We have the ability to issue common stock or securities exercisable for or convertible into common stock, which may dilute the securities our existing stockholders now hold. In particular, issuance of any or all of the following securities may dilute the value of the securities that our existing stockholders now hold: o we have granted warrants to purchase a total of approximately 1.2 million shares of our common stock to various parties, with exercise prices ranging from $6.75 to $20.00 per share; o we may issue additional warrants in connection with future transactions; o we may issue common stock under our various stock option plans; and o we may issue common stock in the First Merchants transaction in exchange for an increased share of collections on certain loans that we service for First Merchants. The voting power of our principal stockholder may limit your voting rights. Mr. Ernest C. Garcia, II, our Chairman, or his affiliates held approximately 32.2% of our outstanding common stock as of December 31, 1999, which percentage has increased as a result of our 2000 Exchange Offer and stock repurchases. As of September 30, Mr. Garcia owned approximately 36.5% of our outstanding common stock. As a result, Mr. Garcia has a significant influence upon our activities as well as on all matters requiring approval of our stockholders. These matters include electing or removing members of our board of directors, engaging in transactions with affiliated entities, causing or restricting our sale or merger, and changing our dividend policy. The interests of Mr. Garcia may conflict with the interests of our other stockholders. If we continue to purchase our common stock or if our principal shareholder purchases our common stock, doing so will enhance his ability to take over and/or control us. On October 3, 2000, our chairman and principal shareholder, Mr. Garcia, made an offer to the board of directors to purchase all of our outstanding shares of common stock not already held by him. While Mr. Garcia has since withdrawn his offer, he has indicated in his filings with the Securities and Exchange Commission that he has a continuing interest in acquiring all of our outstanding common stock. He may or may not make another offer. If we continue to repurchase our outstanding shares of common stock, engage in any exchange offers for our common stock as we have done in the past or if Mr. Garcia purchases our common stock, the percentage of the company owned by Mr. Garcia will increase. If this happens, it will enhance Mr. Garcia's ability to take over and/or control us. There is a potential anti-takeover or dilutive effect if we issue preferred stock. Our certificate of incorporation authorizes us to issue "blank check" preferred stock. Our board of directors may fix or change from time to time the designation, number, voting powers, preferences, and rights of this stock. Such issuance's could make it more difficult for a third party to acquire us by reducing the voting power or other rights of the holders of our common stock. Preferred stock can also reduce the market value of the common stock. There may be adverse consequences from issuing blank check common stock, including a potential anti-takeover or dilutive effect. We have approval from our shareholders to amend and have amended our certificate of incorporation to authorize us to issue additional series of common stock which we refer to as "blank check" common stock. Upon the filing of such an amendment to our certificate of incorporation, our board of directors may create new series of common stock from time to time in addition to the existing common stock and may fix: o the designation, voting powers, liquidation rights, conversion rights, redemption rights, dividends and distributions, preferences and relative, participating, optional and other rights, if any, of each such series; o the qualifications, limitations or restrictions, if any, of each such series; and o the number of shares constituting each such series. Blank check common stock could also: o negatively affect shareholder rights and the value of existing common stock; o have rights that are preferential or superior to the existing common stock; o track the performance of certain assets, groups of assets, businesses or subsidiaries of the company; o increase the complexity and administrative costs of our capital structure, which could negatively impact our financial condition and the value of our common stock; o create potential conflicts of interest and our board of directors could make decisions that adversely affect holders of our existing common stock; and/or o give rise to occasions when the interests of holders of one series might diverge or appear to diverge from the interests of holders of another series. Blank check common stock also may be viewed as being an "anti-takeover" device. Our board could create and issue series of common stock with terms that could make a takeover attempt by a third party more difficult to complete and such stock may also be used in connection with the issuance of a stockholder rights plan, sometimes called a "poison pill." -----END PRIVACY-ENHANCED MESSAGE-----