10-Q 1 f10q_1stqtxt.txt FIRST QUARTER - 2001 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: March 31, 2001 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 (Zip Code) offices) (602) 852-6600 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE: At May 11, 2001, there were approximately 12,301,000 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, 2000. ================================================================================ UGLY DUCKLING CORPORATION FORM 10-Q TABLE OF CONTENTS Part I - FINANCIAL STATEMENTS Page
Item 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets-- March 31, 2001 and December 31, 2000...........................1 Condensed Consolidated Statements of Operations-- Three Months Ended March 31, 2001 and 2000..........................................................................2 Condensed Consolidated Statements of Cash Flows-- Three Months Ended March 31, 2001 and 2000............................................................................3 Notes to Condensed Consolidated Financial Statements...................................................4 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................9 Item 3. MARKET RISK...........................................................................................22 Part II.-- OTHER INFORMATION Item 1. LEGAL PROCEEDINGS.....................................................................................23 Item 2. CHANGES IN SECURITIES.................................................................................23 Item 3. DEFAULTS UPON SENIOR SECURITIES.......................................................................23 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................................23 Item 5. OTHER INFORMATION 23 Item 6. EXHIBITS AND REPORTS ON FORM 8-K......................................................................24 SIGNATURES............................................................................................25
ITEM 1. UGLY DUCKLING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
March 31, December 31, 2001 2000 ---------------- ------------------ ASSETS Cash and Cash Equivalents $ 8,579 $ 8,805 Finance Receivables, Net 522,893 500,469 Note Receivable from Related Party 12,000 12,000 Inventory 43,434 63,742 Property and Equipment, Net 39,215 38,679 Intangible Assets, Net 12,288 12,527 Other Assets 17,779 11,724 Net Assets of Discontinued Operations 3,282 4,175 ---------------- ------------------ $ 659,470 $ 652,121 ================ ================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts Payable $ 1,782 $ 2,239 Accrued Expenses and Other Liabilities 29,600 36,830 Notes Payable - Portfolio 390,615 406,551 Other Notes Payable 39,444 16,579 Subordinated Notes Payable 40,807 34,522 ---------------- ------------------ Total Liabilities 502,248 496,721 ---------------- ------------------ Stockholders' Equity: Preferred Stock $.001 par value, 10,000 shares authorized none issued and outstanding - - Common Stock $.001 par value, 100,000 shares authorized, 18,764 issued and 12,292 outstanding 19 19 Additional Paid-in Capital 173,723 173,723 Retained Earnings 23,594 21,772 Treasury Stock, at cost (40,114) (40,114) ---------------- ------------------ Total Stockholders' Equity 157,222 155,400 Commitments and Contingencies - - ---------------- ------------------ $ 659,470 $ 652,121 ================ ==================
See accompanying notes to Condensed Consolidated Financial Statements. 1 UGLY DUCKLING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three months Ended March 31, 2001 and 2000 (In thousands, except earnings per share amounts) (unaudited) Three Months Ended March 31, ---------------------------- 2001 2000 ------------- -------------
Cars Sold 14,851 15,802 ============= ============= Total Revenues $ 164,030 $ 158,317 ============= ============= Sales of Used Cars $ 130,186 $ 132,786 Less: Cost of Used Cars Sold 72,841 72,942 Provision for Credit Losses 39,020 34,573 ------------- ------------- 18,325 25,271 ------------- ------------- Other Income (Expense): Interest Income 33,844 25,531 Portfolio Interest Expense (8,519) (5,029) ------------- ------------- Net Interest Income 25,325 20,502 ------------- ------------- Income before Operating Expenses 43,650 45,773 Operating Expenses: Selling and Marketing 7,626 8,135 General and Administrative 27,438 25,538 Depreciation and Amortization 2,407 2,208 ------------- ------------- Operating Expenses 37,471 35,881 ------------- ------------- Income before Other Interest Expense 6,179 9,892 Other Interest Expense 3,091 2,292 ------------- ------------- Earnings before Income Taxes 3,088 7,600 Income Taxes 1,266 3,117 ------------- ------------- Net Earnings $ 1,822 $ 4,483 ============= ============= Net Earnings per Common Share: Basic $ 0.15 $ 0.30 ============= ============= Diluted $ 0.15 $ 0.30 ============= ============= Shares Used in Computation: Basic Weighted Average Shares Outstanding 12,292 14,905 ============= ============= Diluted Weighted Average Shares Outstanding 12,325 15,153 ============= =============
See accompanying notes to Condensed Consolidated Financial Statements. 2 UGLY DUCKLING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended March 31, 2001 and 2000 (In thousands) (unaudited)
Three Months Ended March 31, ---------------------------- 2001 2000 ------------ --------------- Cash Flows from Operating Activities: Net Earnings $ 1,822 $ 4,483 Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities: Provision for Credit Losses 39,020 34,573 Depreciation and Amortization 3,564 3,239 Loss from Disposal of Property and Equipment 423 3 Collections from Residuals in Finance Receivables Sold 1,136 3,994 Decrease in Inventory 20,308 13,807 Inrease in Other Assets 945 (309) Increase (Decrease) in Accounts Payable, Accrued Expenses and Other (7,866) 3,353 liabilities Increase (Decrease) in Income Taxes Payable 179 (1,208) ------------ --------------- Net Cash Provided by Operating Activities 59,531 61,935 ------------ --------------- Cash Flows Used in Investing Activities: Increase in Finance Receivables (119,405) (133,887) Collections on Finance Receivables 62,726 49,974 Decrease in Investments Held in Trust on Finance Receivables Sold 1,398 4,354 Proceeds from Disposal of Property and Equipment 46 1,330 Purchase of Property and Equipment (3,173) (2,278) ------------ -------------- Net Cash Used in Investing Activities (58,408) (80,507) ------------ -------------- Cash Flows from Financing Activities: Initial Deposits at Securitization into Investments Held in Trust (3,532) - Additional Deposits into Investments Held in Trust (29,688) (14,168) Collections from Investments Held in Trust 25,921 13,479 Additions to Notes Payable Portfolio 161,691 96,700 Repayment of Notes Payable Portfolio (178,288) (90,302) Additions to Other Notes Payable 22,792 - Repayment of Other Notes Payable (138) (3,220) Repayment of Subordinated Notes Payable (1,000) - Proceeds from Issuance of Common Stock - 390 ------------ --------------- Net Cash Provided (Used) by Financing Activities (2,242) 2,879 ------------ --------------- Net Cash Provided by Discontinued Operations 893 18,340 ------------ --------------- Net Increase (Decrease) in Cash and Cash Equivalents (226) 2,647 Cash and Cash Equivalents at Beginning of Period 8,805 3,683 ------------ --------------- Cash and Cash Equivalents at End of Period $ 8,579 $ 6,330 ============ =============== Supplemental Statement of Cash Flows Information: Interest Paid $ 9,795 $ 7,140 ============ =============== Income Taxes Paid $ 1,445 $ 4,325 ============ ===============
See accompanying notes to Condensed Consolidated Financial Statements. 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 accounting principles generally accepted in the United States of America 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 such accounting principles generally accepted in the United States of America 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, 2000 was derived from our audited consolidated financial statements as of that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States of America. 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, 2000. Note 2. Summary of Finance Receivables A summary of Finance Receivables, net, follows ($ in thousands): March 31, December 31, 2001 2000 -------------- -----------------
Contractually Scheduled Payments $ 726,515 $ 696,220 Unearned Finance Charges (191,476) (181,274) -------------- ----------------- Principal Balances, net 535,039 514,946 Accrued Interest 5,213 5,655 Loan Origination Costs 7,601 7,293 -------------- ----------------- Principal Balances, net 547,853 527,894 Investments Held in Trust 77,040 71,139 Residuals in Finance Receivables Sold - 1,136 -------------- ----------------- Finance Receivables 624,893 600,169 Allowance for Credit Losses (102,000) (99,700) -------------- ----------------- Finance Receivables, net $ 522,893 $ 500,469 ============== ================= Allowance as % of Ending Principal Balances, net 19.1% 19.4% ============== =================
Investments Held in Trust represent funds held by trustees on behalf of our securitization bond holders. The balance of Investments Held in Trust increased from December 31, 2000 due to deposits into the trust accounts arising from an additional securitization completed during the first quarter of 2001, partially offset by distribution of funds associated with portfolios securitized during prior periods. Residuals in Finance Receivables Sold represent our subordinated interest in loans sold through securitizations. The reduction to zero from the balance at December 31, 2000 is attributable to the repurchase of the sole remaining trust recorded as gain on sale, thus, the balance of the remaining residual interest is now included in finance receivables. At March 31, 2001 and December 31, 2000, the balance of securitized principal outstanding was zero and $4.1 million, respectively. 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, the Company's chairman of the board and largest shareholder. 4 Under the terms of the agreement, Mr. Garcia will be allowed to reduce the principal balance up to a maximum of $8 million by surrendering to the Company shares of Ugly Duckling common stock (valued at 98% of the average of the closing prices of the stock on NASDAQ for the ten trading days prior to the surrender) as long as Mr. Garcia's ownership interest of the Company voting stock does not fall below 15% and the acceptance of such stock by the Company does not result in a breach of a covenant. Note 4. Notes Payable Notes Payable, Portfolio A summary of Notes Payable, Portfolio at March 31, 2001 and December 31, 2000 follows ($ in thousands): March 31, December 31, 2001 2000 ------------------- -----------------
Revolving Facility for $125.0 million with GE Capital, secured by substantially all assets of the Company, including $49.5 million in finance receivables $ 21,256 $ 53,326 Class A obligations issued pursuant to the Company's Securitization Program, secured by underlying pools of finance receivables and Investments Held in Trust totaling $562.7 million at March 31, 2001 372,234 355,972 ------------------- ----------------- Subtotal 393,490 409,298 Less: Unamortized Loan Fees 2,875 2,747 ------------------- ----------------- Total $ 390,615 $ 406,551 =================== =================
The revolving facility note payable has interest payable daily at 30 day LIBOR plus 3.15% (8.68% at March 31, 2001) 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. At March 31, 2001, the Company was in compliance with these covenants with the exception of interest coverage ratios, for which the Company has obtained a waiver. Effective April 2001, the Company has replaced the warehouse receivables portion of this facility and has secured an option to extend the $25 million inventory line of credit portion of the facility from June 30, 2001 until December 31, 2001. The extension on the inventory line of credit with GE Capital requires the payment of a fee for each quarterly extension after June 30, 2001, and, after June 30, 2001, the interest rate on the line increases by 50 basis points to LIBOR plus 3.65%. The Company continues to search for replacement financing for the inventory line of credit. The new revolving facility allows for maximum borrowings of $75 million during the period May 1 through November 30 and increases to $100 million during the period December 1 through April 30. The term of the facility is 364 days with a renewal option, upon mutual consent, for an additional 364-day period. The borrowing base consists of up to 65% of the principal balance of eligible loans originated from the sale of used cars. The lender maintains an option to adjust the advance rate on the principal to reflect changes in market conditions or portfolio performance. The interest rate on the facility is LIBOR plus 2.80%. The facility is secured with substantially all Company assets. The line is subject to several covenants, including certain financial and loan portfolio related covenants. Class A obligations have interest payable monthly at rates ranging from 5.09% to 7.26%. Monthly principal reductions on Class A obligations approximate 70% of the principal reductions on the underlying pool of finance receivable loans. See "Management's Discussion and Analysis - Securitizations" for further information on the Class A bonds. 5 Other Notes Payable A summary of Other Notes Payable at March 31, 2001 and December 31, 2000 follows ($ in thousands): March 31, December 31, 2001 2000 --------------- ----------------
Note payable, secured by the capital stock of UDRC and UDRC II and certain other receivables $ 35,000 $ 11,141 Other notes payable bearing interest at rates ranging from 7.5% to 11.0% due through July 2003, secured by certain real property and certain property and equipment 5,500 5,637 --------------- ---------------- Subtotal 40,500 16,778 Less: Unamortized Loan Fees 1,056 199 --------------- ---------------- Total $ 39,444 $ 16,579 =============== ================
Subordinated Notes Payable A summary of Subordinated Notes Payable at March 31, 2001 and December 31, 2000 follows ($ in thousands): March 31, December 31, 2001 2000 -------------- -----------------
$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 $ 10,500 $ 11,500 $7.0 million senior subordinated note payable to a related party, bearing interest at LIBOR plus 6% per annum payable quarterly, principal due February 2010 7,000 - $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 11,940 -------------- ----------------- Subtotal 46,919 40,919 Less: Unamortized Loan Fees - 31 Unamortized Discount - subordinated debentures 6,112 6,366 -------------- ----------------- Total $ 40,807 $ 34,522 ============== =================
6 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-month periods ended March 31, 2001, and 2000. Net earnings per common share are as follows ($ and shares in thousands, except for per share amounts): Three Months Ended March 31, ------------------------------------ 2001 2000 ----------------- -----------------
Net Earnings $ 1,822 $ 4,483 ================= ================= Basic Net Earnings Per Share $ 0.15 $ 0.30 ================= ================= Diluted Net Earnings Per Share $ 0.15 $ 0.30 ================= ================= Basic EPS-Weighted Average Shares Outstanding 12,292 14,905 Effect of Diluted Securities: Warrants - 14 Stock Options 33 234 ----------------- ----------------- Dilutive EPS-Weighted Average Shares Outstanding 12,325 15,153 ================= ================= Warrants Not Included in Diluted EPS Since Antidilutive 1,195 1,156 ================= ================= Stock Options Not Included in Diluted EPS Since Antidilutive 1,446 875 ================= =================
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 March 31, 2001 and 2000 follows ($ in thousands): Retail Portfolio Corporate Total --------------- -------------- -------------- ---------------
March 31, 2001: Sales of Used Cars $ 130,186 $ - $ - $ 130,186 Less: Cost of Cars Sold 72,841 - - 72,841 Provision for Credit Losses 26,652 12,368 - 39,020 --------------- -------------- -------------- ---------------- 30,693 (12,368) - 18,325 Net Interest Income - 25,195 130 25,325 --------------- -------------- -------------- ---------------- Income before Operating Expenses 30,693 12,827 130 43,650 Operating Expenses: Selling and Marketing 7,626 - - 7,626 General and Administrative 14,658 8,008 4,772 27,438 Depreciation and Amortization 1,326 264 817 2,407 --------------- -------------- -------------- ---------------- 23,610 8,272 5,589 37,471 --------------- -------------- -------------- ---------------- Income (loss) before Other Interest Expense $ 7,083 $ 4,555 $ (5,459) $ 6,179 =============== ============== ============== ================ Capital Expenditures $ 2,087 $ 229 $ 857 $ 3,173 =============== ============== ============== ================ Identifiable Assets $ 85,204 $ 525,773 $ 45,211 $ 656,188 =============== ============== ============== ================ 7 Retail Portfolio Corporate Total --------------- -------------- -------------- ---------------- March 31, 2000: Sales of Used Cars $ 132,786 $ - $ - $ 132,786 Less: Cost of Cars Sold 72,942 - - 72,942 Provision for Credit Losses 27,094 7,479 - 34,573 ---------------- -------------- -------------- ---------------- 32,750 (7,479) - 25,271 Net Interest Income - 20,392 110 20,502 ---------------- -------------- -------------- ---------------- Income before Operating Expenses 32,750 12,913 110 45,773 ---------------- -------------- -------------- ---------------- Operating Expenses: Selling and Marketing 8,135 - - 8,135 General and Administrative 14,190 6,077 5,271 25,538 Depreciation and Amortization 1,071 300 837 2,208 ---------------- -------------- -------------- ---------------- 23,396 6,377 6,108 35,881 ---------------- -------------- -------------- ---------------- Income (loss) before Other Interest Expense $ 9,354 $ 6,536 $ (5,998) $ 9,892 ================ ============== ============== ================ Capital Expenditures $ 1,273 $ 99 $ 906 $ 2,278 ================ ============== ============== ================
Note 7. 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 8. Reclassifications We have made certain reclassifications to previously reported information to conform to the current presentation. Note 9. Subsequent Events On April 16, 2001, as previously announced, Mr. Ernest Garcia, II, made an offer to the board of directors to purchase all of the outstanding shares the Company common stock not already held by him. The Company's board of directors established a special transaction committee, composed of disinterested directors, to evaluate the proposal and make a recommendation to the full board. Under the terms of the offer, the holders of the outstanding shares of common stock would receive $7.00 per share, $2.00 in cash and $5.00 in subordinated debentures from the acquiring company. The subordinated debentures would have interest payable at 10%, interest only payments semiannually until maturity and a ten-year term. Mr. Garcia's offer also states that Greg Sullivan, chief executive officer and president of the Company, would receive an option to purchase a 20% interest in the acquiring company. In April 2001, Verde Investments, Inc., an affiliate of Mr. Ernest Garcia, II, purchased one property at book value, including land and building, currently owned by the Company, for approximately $1.7 million. This purchase was made in connection with the purchase options granted to Verde Investments, Inc. as part of the $7 million loan to the Company required by the $35 senior secured loan agreement originated in January 2001. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction We operate the largest chain of buy here-pay here used car dealerships in the United States. At March 31, 2001, 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 customer's payday, and 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 certain underwriting standards and 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 assets and liabilities are classified as net assets from discontinued operations. 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-month periods ended March 31, 2001 and 2000. 9 UGLY DUCKLING CORPORATION SELECTED CONSOLIDATED FINANCIAL DATA ($ in millions, except per car sold and per share data) (Unaudited)
At or For the Three Months Ended ----------------------------------------------------------------------------- Operating Data: March 2001 Dec 2000 Sept 2000 June 2000 March 2000 ---------- -------- --------- --------- ---------- Total Revenues $ 164.0 $ 135.2 $ 158.1 $ 151.4 $ 158.3 Sales of Used Cars $ 130.2 $ 102.3 $ 126.6 $ 121.5 $ 132.8 Earnings per Share $ 0.15 $ (0.20) $ 0.21 $ 0.31 $ 0.30 EBITDA $ 17.1 $ 8.7 $ 16.5 $ 18.2 $ 17.1 E-Commerce Revenue as % of Used Car Sales 11.6% 13.6% 9.5% 5.3% 4.3% Number Dealerships in Operation 77 77 77 77 75 Average Sales per Dealership per Month 64 51 64 62 70 Number of Used Cars Sold 14,851 11,874 14,825 14,369 15,802 Sales Price - Per Car Sold $ 8,766 $ 8,618 $ 8,542 $ 8,458 $ 8,403 Cost of Sales - Per Car Sold $ 4,905 $ 4,727 $ 4,773 $ 4,761 $ 4,616 Gross Margin - Per Car Sold $ 3,861 $ 3,891 $ 3,769 $ 3,696 $ 3,787 Provision - Per Car Sold $ 2,627 $ 3,292 $ 2,435 $ 2,242 $ 2,188 Total Operating Expense - Per Car Sold $ 2,523 $ 2,832 $ 2,495 $ 2,425 $ 2,271 Total Operating Income - Per Car Sold $ 416 $ (168) $ 466 $ 691 $ 626 Total Operating Income $ 6.2 $ (2.0) $ 6.9 $ 9.9 $ 9.9 Earnings (loss) before Income Taxes $ 3.1 $ (4.2) $ 4.5 $ 7.3 $ 7.6 Cost of Used Cars as Percent of Sales 56.0% 54.8% 55.9% 56.3% 54.9% Gross Margin as Percent of Sales 44.0% 45.2% 44.1% 43.7% 45.1% Provision - % of Originations 31.0% 38.8% 29.0% 27.1% 27.0% Total Operating Expense - % of Total Revenues 22.8% 24.9% 23.4% 23.0% 22.7% Segment Operating Expense Data: Retail Operating Expense - Per Car Sold $ 1,590 $ 1,710 $ 1,549 $ 1,611 $ 1,481 Retail Operating Expense-% of Used Car Sales 18.1% 19.8% 18.1% 19.1% 17.6% Corporate/Other Expense - Per Car Sold $ 376 $ 417 $ 428 $ 418 $ 387 Corporate/Other Expense - % of Total Revenue 3.4% 3.7% 4.0% 4.0% 3.9% Portfolio Exp. Annualized - % of EOP Managed Principal 6.2% 6.7% 6.1% 5.0% 5.5% Balance Sheet Data: Finance Receivables, net $ 522.9 $ 500.5 $ 491.9 $ 451.2 $ 407.3 Inventory $ 43.4 $ 63.7 $ 43.7 $ 45.9 $ 49.1 Total Assets $ 659.5 $ 652.1 $ 618.5 $ 577.5 $ 548.0 Notes Payable - Portfolio $ 390.6 $ 406.6 $ 362.3 $ 316.0 $ 282.9 Subordinated Notes Payable $ 40.8 $ 34.5 $ 36.1 $ 37.3 $ 28.9 Total Debt $ 470.9 $ 457.7 $ 416.3 $ 381.0 $ 345.2 Common Stock $ 173.7 $ 173.7 $ 173.7 $ 173.7 $ 173.7 Treasury Stock $(40.1) $(40.1) $ (39.4) $ (28.4) $ (20.3) Total Stockholder's Equity $ 157.2 $ 155.4 $ 158.5 $ 166.8 $ 170.6 Common Shares Outstanding - End of Period 12,292 12,292 12,378 13,899 14,980 Book Value per Share $ 12.79 $ 12.64 $ 12.81 $ 12.00 $ 11.39 Tangible Book Value per Share $ 11.79 $ 11.62 $ 11.78 $ 11.02 $ 10.43 Total Debt to Equity 3.0 2.9 2.6 2.3 2.0 Loan Portfolio Data: Interest Income $ 33.8 $ 32.9 $ 31.4 $ 29.9 $ 25.5 Average Yield on Portfolio 26.3% 26.1% 26.1% 26.8% 26.2% Principal Balances Originated $ 126.0 $ 100.8 $ 124.4 $ 118.8 $ 128.1 Principal Balances Originated as % of Sales 96.8% 98.5% 98.2% 97.7% 96.5% Number of Loans Originated 14,776 11,906 14,748 14,291 15,721 Average Original Amount Financed $ 8,528 $ 8,468 $ 8,433 $ 8,311 $ 8,150 Number of Loans Originated as % of Units Sold 99.5% 100.3% 99.5% 99.5% 99.5% Managed Portfolio Delinquencies: Current 78.6% 66.1% 72.4% 71.9% 74.8% 1 to 30 days 15.7% 26.1% 19.3% 20.9% 19.9% 31 to 60 days 3.3% 4.7% 4.9% 4.5% 3.4% Over 60 days 2.4% 3.1% 3.4% 2.7% 1.9% Principal Outstanding - Managed $ 535.0 $ 519.0 $ 525.5 $ 500.0 $ 461.8 Principal Outstanding - Retained $ 535.0 $ 514.9 $ 512.8 $ 472.3 $ 418.9 Number of Loans Outstanding - Managed 87,033 84,864 85,240 81,407 75,496 Number of Loans Outstanding - Retained 87,033 82,598 79,848 71,518 62,459
10 First Quarter highlights include: o Total revenues were $164.0 million o E-Commerce generated $15.1 million in revenues and 1,725 cars sold during the first quarter of 2001 as compared to $13.7 illion in revenues and 1,553 cars sold during the fourth quarter of 2000 o Loan portfolio principal balance reached $535.0 million, representing a 28% increase over the year-ago quarter o New loan originations were $126.0 million, consistent with the year ago quarter o Entered into a $35 million Senior Secured Loan facility to replace our previous $38 million Senior Secured facility o Entered into a $75-$100 million warehouse receivables line of credit with Greenwich Capital Financial Products, Inc. o Secured an option to extend until December 31, 2001, our existing $25 million inventory line of credit o Closed 19th Securitization with loan principal balances of approximately $117.7 million and Class A bonds issued of $83.6 million o Incurred $368,000 after tax charge to earnings in connection with the closing of Florida and Texas collection and loan administration centers o Our Chairman of the Board and largest shareholder, Ernest C. Garcia II, made an offer to purchase all of our outstanding stock Sales of Used Cars and Cost of Used Cars Sold Three Months Ended March 31, -----------------------------------
($ in thousands) 2001 2000 % Change ------------------------------- ---------------- -------------- ------------- Number of Used Cars Sold 14,851 15,802 (6.0)% ================ ============== Sales of Used Cars $ 130,186 $ 132,786 (2.0)% Cost of Used Cars Sold 72,841 72,942 (0.1)% ---------------- -------------- Gross Margin $ 57,345 $ 59,844 (4.2)% ================ ============== Gross Margin % 44.0% 45.1% Per Car Sold: Sales $ 8,766 $ 8,403 4.3% Cost of Used Cars Sold 4,905 4,616 6.3% ---------------- -------------- Gross Margin $ 3,861 $ 3,787 2.0% ================ ==============
For the three-month period ended March 31, 2001, the number of cars sold decreased by 6% and Used Car Sales revenues decreased by 2% over the same period in 2000. During 2000, we developed a risk management department, which is currently focusing on credit risk modeling techniques. The decrease in both units sold and revenues is primarily the result of initiatives which have put more stringent guidelines in place regarding income qualifications and down payment requirements in an effort to improve the quality of loans generated from used car sales. Our Internet site continues to be a valuable tool generating an increasing number of credit applications. We accept credit applications from potential customers via our website, located at http://www.uglyduckling.com. Credit inquiries received over the web are reviewed by our employees, who then contact the customers and schedule appointments. We continue to monitor and enhance our Internet application levels. These efforts continue to provide an increasing number of used cars sold. During the first quarter of 2001, we sold 1,725 cars generating $15.1 million in revenue versus 1,553 cars totaling $13.7 million in revenue during the fourth quarter of 2000 and up from 1,417 cars sold and $12.0 million in revenue during the third quarter of 2000. The E-commerce customer group generally outperforms other customers in terms of loan performance. The Cost of Used Cars Sold for the three-month period ended March 31, 2001, remained consistent with the comparable period of the previous year. The Cost of Used Cars Sold on a per car basis increased 6.3% for the three months ended March 31, 2001 over the same period of the prior year. The increase is due to an effort to purchase higher quality vehicles as a result 11 of research completed by our risk management department, which indicated better loan performance on the loans associated with the higher cost inventory. This increase was more than offset by an increase in the sales price earned per car. 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 decreased to 44.0% for the three months ended March 31, 2001 versus 45.1% for the three-month period ended March 31, 2000. The decrease is due to the cost of used cars sold rising at a higher pace than the related revenues. On a per car sold basis, gross margin increased slightly to $3,861 per car for the three month period ended March 31, 2001 from $3,787 during the same quarter of the previous year. This increase is due to an increase in the overall revenue earned per car, partially offset by the increase in the per unit cost of used cars sold. We finance substantially all of our used car sales. The percentage of cars sold financed has remained constant in 2001 versus 2000. The percentage of sales revenue financed has also remained relatively constant for the quarter ended March 31, 2001. The following table indicates the percentage of sales units and revenue financed:
Three Months Ended March 31, ---------------------------------- 2001 2000 ------------------ --------------- Percentage of used cars sold financed 99.5% 99.5% ================== =============== Percentage of sales revenue financed 96.8% 96.5% ================== ===============
Provision for Credit Losses The following is a summary of the Provision for Credit Losses:
Three Months Ended March 31, --------------------------- 2001 2000 % Change -------------- ------------ -------------- Provision for Credit Losses ($ in thousands) $ 39,020 $ 34,573 12.9% ============== ============ Provision per loan originated $ 2,641 $ 2,199 20.1% ============== ============ Provision as a percentage of principal balances originated 31.0% 27.0% ============== ============
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-month period ended March 31, 2001 increased 12.9% over the comparable period of the prior year. The increase was primarily due to an increase in the overall provision charged from 27% of loans originated in the first quarter of 2000 to 31% of loans originated during the first quarter of 2001. The increase was necessary to establish an adequate allowance for the on balance sheet portfolio. The provision per loan originated increased 20.1% over the same period of the previous year due to the increase in the overall provision mentioned above, coupled with an increase of $378 in the average amount financed for the three-month period ended March 31, 2001 of $8,528 per unit versus $8,150 during the same period of the previous year. See "Static Pool Analysis" below for further Provision for Credit Loss discussion. 12 Net Interest Income
Three Months Ended March 31, --------------------------------- 2001 2000 % Change ---------------- ---------------- ----------------- ($ in thousands) Interest Income $ 33,844 $ 25,531 32.6% Portfolio Interest Expense 8,519 5,029 69.4% ---------------- ---------------- Net Interest Income $ 25,325 $ 20,502 23.5% ================ ================ Average Retained Prinicpal Balance $ 525,465 $ 386,824 ================ ================ Average Effective Yield 26.1% 26.5% ================ ================ Average Notes Payable Balance $ 384,121 $ 280,241 ================ ================ Average Borrowing Cost 8.9% 8.0% ================ ================
Interest Income consists primarily of interest on finance receivable principal balances retained on our balance sheet. Retained principal balances grew to $522.9 million at March 31, 2001 from $407.3 million at March 31, 2000. The growth in retained principal balances is primarily due to the change in the way we structure our securitizations to the collateralized borrowing method during the fourth quarter of 1998. Since that time, all securitized loans are retained on our balance sheet and the income is recognized over the life of the loan. Portfolio interest expense increased to $8.5 million for the three-month period ending March 31, 2001 versus $5.0 million for the same period 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. This increase in interest expense is offset by the additional interest income earned from the growth in finance receivables retained on our balance sheet. Income before Operating Expenses Income before Operating Expenses decreased 4.6% to $43.7 million for the three-month period ended March 31, 2001 as compared to $45.8 million for the three-month period ended March 31, 2000. The decrease resulted from an increase in the amount charged to current operations for the provision for credit losses from 27% in the first quarter of 2000 to 31% in the first quarter of 2001, and an increase in interest expense resulting from additional portfolio notes payable, partially offset by an increase in interest income due to the growth in the finance receivables portfolio. Operating Expenses
Three Months Ended March 31, ---------------- ---------------- 2001 2000 % Change ---------------- ---------------- ---------------- ($ in thousands) Operating Expenses $ 37,471 $ 35,881 4.4% ================ ================ Per Car Sold $ 2,523 $ 2,271 11.1% ================ ================ As % of Total Revenue 22.8% 22.7% ================ ================
Operating expenses, which consist of selling, marketing, general and administrative and depreciation/amortization expenses, increased quarter over quarter but remained constant as a percentage of total revenues. Included in these expenses is a pre-tax charge of approximately $600,000 for the closing of the collection and loan administration centers in Florida and Texas. During the first quarter of 2001, we initiated a plan to close our collections and loan administration operations in Clearwater, Florida, Plano, Texas and Dallas, Texas and move them to our stores or to our Gilbert, Arizona collection facility. As a result of these closings, we took an after tax charge of approximately $368,000 to cover payroll, severance and certain property related expenses. We expect to take an additional restructuring charge in the second quarter related to costs of abandoned assets still in use with a carrying value of approximately $500,000. 13 The estimated impact resulting from the shut down of these operations, including the impact of future charges, is estimated to be break even over the remainder of 2001 and to decrease operating expenses by $1.5 million annually beginning in 2002. 13 Interest Expense Interest expense arising from our other, non-portfolio debt totaled $3.1 million for the three months ended March 31, 2001 versus $2.3 million for the three months ended March 31, 2000. The increase is primarily attributable to interest expense arising from our exchange debt on the exchange offer completed in April 2000. Income Taxes Income taxes totaled $1.3 million and $3.1 million for the three-month period ended March 31, 2001 and 2000, respectively. Our effective tax rate was 41% for both periods presented. Net Earnings Net Earnings operations totaled $1.8 million and $4.5 million for the three months ended March 31, 2001 and 2000, respectively. The decrease for the three months ended March 31, 2001 is primarily a result of the increase in the provision for credit loss from 27% to 31% of originations and an increase in portfolio interest expense, partially offset by an increase in interest income. Business Segment Information We report our operations based on three operating segments. These segments are reported as Retail, Portfolio and Corporate. These segments were previously reported as Company Dealership, Company Dealership Receivables and Corporate and Other, respectively. See Note 6 to the Condensed Consolidated Financial Statements. Operating Expenses for our business segments, along with a description of the included activities, for the three-month periods ended March 31, 2001 and 2000 are as follows: Retail Operations. Operating expenses for our Retail segment consist of Company marketing efforts, maintenance and development of dealership and inspection center sites, and direct management oversight of used car acquisition, reconditioning and sales activities. A summary of retail operating expenses follows ($ in thousands, except per car sold data):
Three Months Ended March 31, -------------------------- 2001 2000 % Change ------------ ------------ ------------ Retail Operations: Selling and Marketing $ 7,626 $ 8,135 (6.3)% General and Administrative 14,658 14,190 3.3% Depreciation and Amortization 1,326 1,071 23.8% ------------ ------------ Retail Expense $ 23,610 $ 23,396 0.9% ============ ============ Per Car Sold: Selling and Marketing $ 514 $ 515 (0.2)% General and Administrative 987 898 9.9% Depreciation and Amortization 89 68 30.9% ------------ ------------ $ 1,590 $ 1,481 7.4% ============ ============ As % of Used Cars Sold Revenue: Selling and Marketing 5.9% 6.1% General and Administrative 11.3% 10.7% Depreciation and Amortization 1.0% 0.8% ------------ ------------ 18.2% 17.6% ============ ============
14 Selling and Marketing expenses both as a percentage of related revenue and on a per car sold basis have remained relatively constant for the three months ended March 31, 2001 versus the same period of the previous year. General and Administrative expenses increased only slightly as a percentage of related revenue for the three-month period ended March 31, 2001, principally as a result of increases in salary and benefit costs, but have grown almost 10% on a per car sold basis over the first quarter of 2000. The reason for the slight increase as a percentage of revenue is due to expenses increasing along with an increase in the average selling price per car to $8,766 for the first quarter of 2001, compared to $8,403 for the first quarter of 2000. The expense increase is more apparent on a per car sold basis as the expenses have risen but the volume of cars sold has decreased, primarily due to more stringent underwriting guidelines. Portfolio Operations. Operating expenses for our Portfolio segment consist of loan servicing and collection efforts, securitization activities, and other operations pertaining directly to the administration and collection of the loan portfolio ($ in thousands, except expense per month per loan serviced).
Three Months Ended March 31, -------------------------- 2001 2000 % Change ----------- ------------ ------------ Portfolio Operations: General and Administrative $ 8,008 $ 6,077 Depreciation and Amortization 264 300 (12.0)% ----------- ------------ Portfolio Expense $ 8,272 $ 6,377 29.7% =========== ============ Expense per Month per Loan Serviced $ 31.33 $ 28.75 =========== ============ Annualized Expense as % of EOP Managed Principal Balances 6.2% 6.2% =========== ============
The increase in portfolio expenses as well as the expense per month per loan serviced for the three-month period ended March 31, 2001 for our Portfolio segment is primarily a result of the increased number of loans in our portfolio. Also attributing to the increase were approximately $600,000 in costs accrued in relation to the closing of the collection and loan administration facilities in Florida and Texas, mentioned previously. Corporate Operations. Operating expenses for our Corporate segment consist of costs to provide managerial oversight and reporting for the Company, develop and implement policies and procedures, and provide expertise to the Company in areas such as finance, legal, human resources and information technology ($ in thousands, except per car sold data).
Three Months Ended March 31, -------------------------- 2001 2000 % Change ----------- ------------ ------------ Corporate Operations: General and Administrative $ 4,772 $ 5,271 (9.5)% Depreciation and Amortization 817 837 (2.4)% ----------- ------------ Corporate Expense $ 5,589 $ 6,108 (8.5)% =========== ============ Per Car Sold $ 376 $ 387 =========== ============ As % of Total Revenues 3.4% 3.9% =========== ============
Operating expenses related to our Corporate segment as a percent of total revenue remained relatively consistent for the three months ended March 31, 2001, versus the same period of 2000. However, on a per car sold basis corporate expenses decreased $11 per car for the quarter ended March 31, 2001, as compared to the same quarter of the previous year. 15 Financial Position The following table represents key components of our financial position ($ in thousands):
March 31, December 31, 2001 2000 % Change --------------------------------------- --------------- Total Assets $ 659,470 $ 652,121 1.1% =================== ================== Inventory 43,434 63,742 (31.9)% Finance Receivables, Net 522,893 500,469 4.5% Net Assets of Discontinued Operations 3,282 4,175 (21.4)% Total Debt $ 470,866 $ 457,652 2.9% =================== ================== Notes Payable - Portfolio $ 390,615 $ 406,551 (3.9)% Other Notes Payable 39,444 16,579 137.9% Subordinated Notes Payable 40,807 34,522 18.2% Stockholders' Equity $ 157,222 $ 155,400 1.2% =================== ==================
Total Assets. Total assets has remained relatively stable as the increase in Finance Receivables, Net, was offset by the decrease in Inventory. 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, 2000 to March 31, 2001 is due to management's decision to increase inventory levels at the end of the year 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 lack of growth in the volume of cars sold, Finance Receivables, net as of March 31, 2001 increased only 4.5% from December 31, 2000. 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 balances ($ in thousands) and the number of loans outstanding.
Managed Loans ------------------------------------------------------------------------------ Principal Balances Number of Loans March 31, December 31, March 31, December 31, 2001 2000 2001 2000 ---------------- ----------------- ---------------- ----------------- Principal-Managed $ 535,039 $ 519,005 $ 87,033 $ 84,864 Less: Principal - Securitized and Sold - 4,059 - 2,266 ---------------- ----------------- ---------------- ----------------- Principal - Retained on Balance Sheet $ 535,039 $ 514,946 $ 87,033 $ 82,598 ================ ================= ================ =================
At March 31, 2001, the entire loan portfolio is on-balance sheet. Principal Balances - Retained on Balance Sheet has increased 3.9%. As we continue to focus on the underwriting guidelines, we do not expect the portfolio balance grow as significantly as in past quarters. Although the volume of loans is leveling, we anticipate the quality of the loans written to improve, with the ultimate goal of improving loan losses. The number of used cars sold totaled 14,851 for the quarter ended March 31, 2001, versus sales of 15,802 used cars during the same quarter of the prior year. 16 The following table reflects activity in the Allowance for Credit Losses, as well as information regarding charge off activity, for the three months ended March 31, 2001 and 2000 ($ in thousands):
March 31, --------------------------------------- 2001 2000 ------------------- ------------------ Allowance Activity: Balance, Beginning of Period $ 99,700 $ 76,150 Provision for Credit Losses 39,020 34,573 Other Allowance Activity 42 104 Net Charge Offs (36,762) (23,242) ------------------- ------------------ Balance, End of Period $ 102,000 $ 87,585 =================== ================== Allowance as % Ending Principal Balances 19.1% 20.9% =================== ================== Charge off Activity: Principal Balances $ (47,156) $ (31,166) Recoveries, Net 10,394 7,924 ------------------- ------------------ Net Charge Offs $ (36,762) $ (23,242) =================== ==================
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. Currently reported cumulative losses may vary from those previously reported due to ongoing collection efforts on charged off accounts, and the difference between final proceeds on the sale of repossessed collateral versus our estimates of the sale proceeds. Management, however, believes that such variation will not be material. The following table sets forth as of April 30, 2001, 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). 17 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 8.8% 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 1.9% 8.1% 13.1% 19.0% 22.2% 23.5% 24.1% 100.0% 1996: $ 48,996 1.5% 8.1% 13.9% 22.1% 26.2% 27.9% 28.9% 100.0% 1997: 1st Quarter $ 16,279 2.1% 10.7% 18.2% 24.8% 29.8% 32.0% 33.5% 100.0% 2nd Quarter $ 25,875 1.5% 9.9% 15.8% 22.7% 27.4% 29.5% 30.6% 99.9% 3rd Quarter $ 32,147 1.4% 8.3% 13.2% 22.4% 26.9% 29.1% 30.6% 99.8% 4th Quarter $ 42,529 1.4% 6.8% 12.6% 21.8% 26.1% 28.8% 30.0% 99.6% 1998: 1st Quarter $ 69,708 0.9% 6.9% 13.4% 20.9% 26.4% 28.8% 29.9% 99.1% 2nd Quarter $ 66,908 1.1% 8.1% 14.2% 21.7% 27.3% 29.2% 30.2% 98.3% 3rd Quarter $ 71,027 1.0% 7.9% 13.3% 23.0% 27.8% 30.3% 30.9% 97.6% 4th Quarter $ 69,583 0.9% 6.6% 13.1% 24.3% 29.0% 31.5% 31.8% 94.1% 1999: 1st Quarter $ 103,068 0.8% 7.5% 15.1% 23.6% 29.5% x 31.4% 88.9% 2nd Quarter $ 95,768 1.1% 9.9% 16.7% 25.4% 31.5% -- 32.5% 82.5% 3rd Quarter $ 102,585 1.0% 8.3% 14.2% 25.3% x -- 30.3% 75.6% 4th Quarter $ 80,641 0.7% 5.9% 12.6% 23.7% -- -- 25.7% 65.9% 2000: 1st Quarter $ 128,123 0.3% 6.5% 14.6% x -- -- 23.0% 56.5% 2nd Quarter $ 118,778 0.6% 8.6% 16.0% -- -- -- 19.6% 45.1% 3rd Quarter $ 124,367 0.7% 7.8% x -- -- -- 12.5% 31.2% 4th Quarter $ 100,823 0.6% x -- -- -- -- 5.1% 16.7% 2001: 1st Quarter $ 126,015 x -- -- -- -- -- 0.3% 6.5%
18 The following table sets forth the principal balances delinquency status as a percentage of total outstanding contract principal balances from dealership operations. March 31, December 31, 2001 2000 ---------------- ---------------- Days Delinquent: Current 78.6% 66.1% 1-30 Days 15.7% 26.1% 31-60 Days 3.3% 4.7% 61-90 Days 2.4% 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 March 31, 2001. Primarily as a result of our in dealership collectors, our current accounts, those accounts not one day delinquent, have continued to improve both over the same quarter of 2000 as well as over the third and fourth quarters of 2000. Current accounts at March 31, 2001 were 78.6% versus 66.1% at December 31, 2000. Current accounts at the end of the third quarter of 2000 were 72.4% and were 74.8% at the end of the first quarter of 2000. As a result of the apparent success of the in store collectors, we are in the process of adding in store collectors to service the 31-60 day delinquent accounts at the dealerships in addition to the 1-30 days delinquent accounts currently serviced. The 31+ day accounts have remained relatively constant at 5.7% at the end of the first quarter of 2001, as compared to 5.3% at the end of the same quarter of 2000. Based upon our continued review of the adequacy of the Allowance for Credit Losses, we have recorded a provision for loan losses for the three months ended March 31, 2001 at 31% of originations. The 31% provision is 1% higher than the effective 30% provision for 2000 and 4% greater than the 27% recorded during the first quarter of 2000, as losses on our existing, older portfolio continue to emerge at higher than expected levels. With the provision recorded during this quarter, we believe the Allowance balance as of March 31, 2001 remains at a level that we estimate to be adequate to cover net charge offs for the next 12 to 15 months. 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) representing 71% of the total finance receivable balance for the most recent securitizations to investors and subordinate classes are retained by us. We continue to service the securitized loans. The Class A obligations have historically been structured as to receive 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 cash 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 3.0%-6.0% 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 11.0%, 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. 19 Certain Financial Information Regarding Our Securitizations During March 2001, we closed our 19th securitization in which we securitized $117.7 million of loans, issuing $83.6 million in Class A certificates with an annual interest rate of 5.09%, a significant rate improvement from our securitizations closed during 2000. 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: o increases in our loan portfolio, o the seasonal purchase of inventories, o working capital and general and, corporate purposes, o the purchase of property o common stock repurchases, and equipment. We fund our capital requirements primarily through: o operating cash flow, o our revolving warehouse and inventory o securitization transactions, credit lines and, o 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 decreased $2.4 million to $59.5 million in the three months ended March 31, 2001. The decrease is primarily due to a significant decrease in accrued liabilities at March 31, 2001 offset by a decrease in inventory levels. Net cash used in investing activities decreased $22.1 million to $58.4 million during the three months ended March 31, 2001 as compared to $80.5 million used during the same period of 2000. The reason for the decrease is due to increased collections on finance receivables and a lower increase in finance receivables. Financing activities used $2.2 million for the three months ended March 31, 2001, versus generating $2.9 million during the three months ended March 31, 2000. The change is due to net payments made on Notes Payable. Financing Resources Revolving Facility. Under our $125 million revolving facility with GE Capital, 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. As of March 31, 2001, our borrowing capacity under the revolving facility was $28.8 million, the aggregate principal amount outstanding under the revolving facility was approximately $21.3 million, and the amount available to be borrowed under the facility was $7.5 million. The revolving facility bears interest at the 30-day LIBOR plus 3.15%, payable daily (total rate of 8.68% as of March 31, 2001). In addition, we are also required to maintain specified financial ratios. As of March 31, 2001, we were in compliance with the covenants of this agreement with the exception of interest coverage ratios, for which we have received a waiver. In April 2001, we replaced the warehouse receivables portion of this facility and have secured an option to extend the $25 million inventory line of credit portion of this facility from June 20, 2001 until December 31, 2001. Our new revolving facility allows for maximum borrowings of $75 million during the period May 1 through November 30 and increases to $100 million during the period December 1 through April 30. The term of the facility is 364 days with a renewal option, upon mutual consent, for an additional 364-day period. The borrowing base consists of up to 65% of the principal balance of eligible loans originated from the sale of used cars. The lender maintains an option to adjust the advance rate to reflect changes in market conditions or portfolio performance. The interest rate on the facility is LIBOR plus 2.80%. The facility is secured with substantially all Company assets. The line is subject to several covenants, including certain financial and loan portfolio related covenants. 20 The extension on the inventory line of credit requires us to pay a fee for each quarterly extension after June 30, 2001, and after June 30, 2001, the interest rate on the line increases by 50 basis points to LIBOR plus 3.65%. We continue to search for replacement financing for our inventory line of credit. Securitizations. Our securitization program is a primary source of our working capital. Securitizations generate cash flow for us from the sale of Class A obligations, ongoing servicing fees, and excess cash flow distributions from collections on the loans securitized after payments on the Class A obligations, payment of fees, expenses, and insurance premiums, and required deposits to the reserve account. Securitization also allows us to fix our cost of funds for a given loan portfolio. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Securitizations" for a more complete description of our securitization program. Supplemental Borrowings. In May 1999, we borrowed approximately $38.0 million from an unrelated party for a term of two years maturing on May 1, 2001 (Residual Loan). The note called for monthly principal payments of generally not less than $800,000 through May 2000 and not less than $1.7 million thereafter, plus interest at a rate equal to LIBOR plus 550 basis points. The loan balance was $11.1 million at December 31, 2000. This loan agreement was replaced in January 2001. The new agreement has a $35 million principal due February 2003 with interest payable monthly at LIBOR plus 600 basis points. The new loan, like the previous loan, is secured by our Residuals in Finance Receivables Sold and certain Finance Receivables. As a condition to the $35 million senior secured loan agreement, Verde Investments, Inc., an affiliate of Mr. Garcia, was required to invest $7 million in us through a subordinated loan. The funds were placed in escrow as additional collateral for the $35 million senior secured loan. The funds will be released in July 2001 if, among other conditions, we have at least $7 million in pre-tax income through June of 2001 and, at that time, Mr. Garcia guarantees 33.3% of the $35 million facility. If the loan with Verde and the guarantee of the $35 million senior secured loan are not removed by July 25, 2001, Mr. Garcia is entitled to receive warrants from us for 1.5 million shares of stock, vesting over a one-year period, at an exercise price of $4.50 subject to certain conditions. Also as consideration for the loan, we released all options to purchase real estate that is currently owned by Verde and leased to us. We also granted Verde the option to purchase, at book value, any or all properties currently owned by us, or acquired by us prior to the earlier of December 31, 2001, or the date the loan is repaid. Verde agreed to lease the properties back to us, on terms similar to our current leases, if it exercises its option to purchase any of the properties. The loan is secured by residual interests in our securitization transactions but is subordinate to the senior secured loan facility. The loan requires quarterly interest payments at LIBOR plus 600 basis points and is subject to pro rata reductions if certain conditions are met. An independent committee of our board reviewed and negotiated terms of this subordinated loan and we also received an opinion from an investment banker, which deemed the loan fair from a financial point of view both to our shareholders and us. Capital Expenditures and Commitments In November 2000, Verde Investments, Inc. ("Verde"), an affiliate of Mr. Garcia, 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, 2020; 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. Subsequently, we surrendered this option as part of the $7 million subordinated loan with Verde. We are in the process of building a new headquarters at this location. 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 us. 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 21 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. The adoption of SFAS No. 138 or No. 133 did not have a material effect on us. We Make Forward Looking Statements This report includes statements that constitute forward-looking statements within the meaning of the safe harbor provisions of the Private 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, improvements in underwriting, adequacy of the allowance for credit losses, and improvements in recoveries and loan performance, including delinquencies and charge offs; roll-out of collectors to our dealerships; 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, some of which we cannot predict or quantify. 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 to finance our operations in light of a tight credit market for the sub-prime industry and our current financial circumstances; any deterioration in the used car finance industry or increased competition in the used car sales and finance industry; any inability to monitor and improve our underwriting and collection processes; any changes in estimates and assumptions in, and the ongoing adequacy of, our allowance for credit losses; any inability to continue to reduce operating expenses as a percentage of sales; any material litigation against us or material, unexpected developments in existing litigation; any new or revised accounting, tax or legal guidance that adversely affect used car sales or financing and Mr. Garcia's offer to take us private. Forward-looking statements speak only as of the date the statement was made. Future events and actual results could differ materially from the forward-looking statements. When considering each forward-looking statement, you should keep in mind the risk factors and cautionary statements found 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 report 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. We are not obligated to publicly update or revise any forward looking statements, whether as a result of new information, future events, or for any other reason. 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. ITEM 3. Market Risk We are exposed to market risk on our financial instruments from changes in interest rates. We do not use financial instruments for trading purposes or to manage interest rate risk. Our earnings are substantially affected by our net interest income, which is the difference between the income earned on interest-bearing assets and the interest paid on interest bearing notes payable. Increases in market interest rates could have an adverse effect on profitability. Our financial instruments consist primarily of fixed rate finance receivables, residual interests in pools of fixed rate finance receivables, short-term variable rate revolving Notes Receivable, and variable and fixed rate Notes Payable. Our finance receivables are classified as subprime loans and generally bear interest at the lower of 29.9% or the maximum interest rate allowed in states that impose interest rate limits. At March 31, 2001, the scheduled maturities on our finance receivables ranged from one to 48 months, with a weighted average maturity of 23.6 months. The interest rates we charge our customers on finance receivables has not changed as a result of fluctuations in market interest rates, although we may increase the interest rates we charge in the future if market interest rates increase. A large component of our debt at March 31, 2001 is the Collateralized Notes Payable (Class A obligations) 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 lower than the interest rates on our existing Notes Payable. We believe that our market risk information has not changed materially from December 31, 2000. 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings. We sell our cars on an "as is" basis. We require all customers to acknowledge in writing on the date of sale that we disclaim any obligation for vehicle-related problems that subsequently occur. Although we believe that these disclaimers are enforceable under applicable laws, there can be no assurance that they will be upheld in every instance. Despite obtaining these disclaimers, in the ordinary course of business, we receive complaints from customers relating to vehicle condition problems as well as alleged violations of federal and state consumer lending or other similar laws and regulations. Most of these complaints are made directly to us or to various consumer protection organizations and are subsequently resolved. However, customers occasionally name us as a defendant in civil suits filed in state, local, or small claims courts. Additionally, in the ordinary course of business, we are a defendant in various other types of legal proceedings, and are the subject of regulatory or governmental investigations. Although we cannot determine at this time the amount of the ultimate exposure from such matters, if any, we do not expect the final outcome to have a material adverse effect on the Company. There has also been litigation filed in connection with or related to the intent and/or offer of our chairman, Mr. Garcia, to purchase all of our outstanding common stock not owned by him (See Item 5 below). On March 20, 2001, a shareholder derivative complaint was filed, purportedly on behalf of Ugly Duckling Corporation, in the Court of Chancery for the State of Delaware in New Castle County, captioned Berger v. Garcia, et al., No. 18746NC. The complaint alleges that the Company's current directors breached fiduciary duties owed to the Company in connection with certain transactions between the Company and Mr. Garcia and various entities controlled by Mr. Garcia. The complaint was amended on April 17, 2001 to add a second cause of action, on behalf of all persons who own the Company's common stock, and their successors in interest, which alleges that the Company's current directors breached fiduciary duties in connection with the proposed acquisition by Mr. Garcia of all of the outstanding shares of the Company's common stock. The Company is named as a nominal defendant in the action. The original cause of action seeks to void all transactions deemed to have been approved in breach of fiduciary duty and recovery by the Company of alleged compensatory damages sustained as a result of the transactions. The second cause of action seeks to enjoin the Company from proceeding with the proposed acquisition by Mr. Garcia, or, in the alternative, awarding compensatory damages to the class. Following Mr. Garcia's offer in early April 2001, five additional and separate purported shareholder class action complaints were filed between April 17 and April 25, 2001 in the Court of Chancery for the State of Delaware in New Castle County. They are captioned Turberg v. Ugly Duckling Corp., et al., No. 18828NC, Brecher v. Ugly Duckling Corp., et al., No. 18829NC, Suprina v. Ugly Duckling Corporation, et al., No. 18830NC, Benton v. Ugly Duckling Corp., et al., No. 18838NC, and Don Hankey Living Trust v. Ugly Duckling Corporation, et al., No. 18843NC. Each complaint alleges that the Company, and its directors, breached fiduciary duties in connection with the proposed acquisition by Mr. Garcia of all of the outstanding shares of the Company's common stock. The complaints seek to enjoin the proposed acquisition by Mr. Garcia and to recover compensatory damages caused by the proposed acquisition and the alleged breach of fiduciary duties. We expect all of these cases to be consolidated and intend to vigorously defend the allegations in the complaints and believe that the actions are without merit. Item 2. Changes in Securities and Use of Proceeds. (a) None (b) None (c) None (d) Not Applicable Item 3. Defaults Upon Senior Securities. We recently obtained waiver letters for financial ratio covenant breaches under our revolving credit facility and our senior secured loan facility. Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. On April 16, 2001, 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. The Company's board of directors established a special transaction committee, composed of disinterested directors, to evaluate the proposal and make a recommendation to the 23 full board. Under the terms of the offer, the holders of the outstanding shares of common stock would receive $7.00 per share, $2.00 in cash and $5.00 in subordinated debentures from the acquiring company. The subordinated debentures would have interest payable at 10%, interest only payments semiannually until maturity and a ten-year term. Mr. Garcia's offer also states that Greg Sullivan, chief executive officer and president of the Company, would receive an option to purchase a 20% interest in the acquiring company. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit 10.1 - Covenant Waiver Letter dated May 9, 2001 between the Registrant and Sun America Life Insurance Company. Exhibit 10.2 - Covenant Waiver Letter dated May 14, 2001 between the Registrant and GE Capital Corporation Exhibit 99 - Statement Regarding Forward Looking Statements and Risk Factors (b) Reports on Form 8-K. During the first quarter of 2001, the Company filed two reports on Form 8-K. The first report on Form 8-K, dated January 15, 2001 and filed January 16, 2001, reported Ugly Duckling's closing of a senior secured loan facility and subordinated loan, and filed as an exhibit to the form 8-K, a press release dated January 15, 2001, entitled "Ugly Duckling Announces Closing of Senior Secured Loan Facility and Subordinated Loan with Chairman and Largest Shareholder." The second report on Form 8-K dated and filed February 26, 2001, reported Ugly Duckling's 2000 earnings, and filed as an exhibit to the Form 8-K was a press release dated February 21, 2001 entitled "Ugly Duckling Reports Financial Results for 2000" 24 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UGLY DUCKLING CORPORATION /s/ STEVEN T. DARAK ----------------------------------------------------------------------- Steven T. Darak Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Date: May 14, 2001 25 EXHIBIT INDEX Exhibit Number Description 10.1 Covenant Waiver Letter dated May 9, 2001 between the Registrant and Sun America Life Insurance Company. 10.2 Covenant Waiver Letter dated May 14, 2001 between the Registrant and GE Capital Corporation 99 Statement Regarding Forward Looking Statements and Risk Factors 26