Ugly Duckling Reports Third Quarter and Nine Month Results
PHOENIX--Oct. 25, 2001--Ugly Duckling Corporation , the largest used car sales company focused exclusively on the sub-prime market, today reported its third quarter and nine month financial results for 2001.The Company's results for third quarter of 2001 reflect a significant increase in the Provision for Loan Losses (Provision) to 44.7% of the total amount financed versus 31% in the prior quarters of 2001, and versus 29% in the third quarter of 2000. While early indications reflect actual improvements in loss experience on 2001 originations due to improvement in underwriting, it was necessary to increase the quarter's Provision as a percent of the quarter's loan originations due to resulting lower loan origination volume. Company policy is to maintain an Allowance for Credit Losses (Allowance) for all loans in its portfolio to cover estimated net charge offs for the next 12 months. Our loans have experienced lifetime losses in the 31% to 34% range for the past few years. With origination growth over this time we have been able to maintain an adequate Allowance in accordance with Company policy and with GAAP by providing between 27% to 31% of the quarter's amount financed. As the speed of portfolio growth has slowed due to the reduced loan originations, an increase to the Provision as a percentage of lower originations is necessary unless there were a significant decrease in loss rates.
The increase in the Provision was also due to loss levels for prior years' originations emerging at levels higher than previously estimated as well as the economic environment and its likely effect on our portfolio performance. More specifically, with the economic and political events occurring in the third quarter of 2001, management intensified its review of general trends in the economy, specific economic events in many of its markets and the impact of such factors on the market segments in which its customers are employed. As a result of this evaluation, management concluded that these factors offset other evidence that supported that its 2001 originations will ultimately perform better than loans originated in fiscal year 1999 and 2000. While the Company believes loans originated in 2001 were underwritten to higher credit standards and its transition to a dealership centered collection methodology will produce more effective collection results, uncertainties in the economy and our customers' ongoing employment opportunities could offset these positive factors. Accordingly, the Company adjusted upward its estimate of loan losses for its 2001 originations to a level generally equal to that actually being experienced on its fiscal year 2000 originations.
Based on all of these factors, the Company increased its Provision to a level sufficient to bring the Allowance balance as of September 30, 2001 to a level adequate to cover this revised estimate of net charge offs for the next 12 months.
Greg Sullivan, President and Chief Executive Officer stated, "We certainly are disappointed by the need to take a large increase to our Provision this quarter. This was due to many factors, including higher than expected losses in 2001 on 2000 and earlier originations, the reduced growth in our portfolio due to reduced sales and concern over the downturn in the economy, particularly higher unemployment. Although we believe that loan credit scoring and better inventory are resulting in better loan originations in 2001, we are not forecasting improvement in loss performance in the short-term due to the economy."
Mr. Sullivan continued, "Although we will likely see a Provision significantly above 31% again in the fourth quarter, as we look to 2002, we believe that we are well positioned. We are strongly committed to credit scoring and believe that it will ultimately lead to lower losses and increased profitability. In time, we anticipate more individuals will find themselves falling into the subprime category, while many lenders will likely back away from the higher losses and servicing expenses inherent in this market. We believe that we will benefit from this environment in the long run with more and better customers, which should ultimately lead to higher profitability. In the meantime, we are focused on improving all phases of our operations and reducing operating expenses where it makes sense. Fortunately, our liquidity position is strong and the interest rate environment is quite favorable for our borrowings."
Quarter over Quarter Results
For the three months ended September 30, 2001, the Company reported a net loss of $6,817,000, or $(0.56) per diluted share, compared with net earnings for the same period of 2000 of $2,683,000, or $0.21 per diluted share. As discussed above, the decrease in earnings in 2001 is primarily attributable to the Company's decision to increase its Allowance for Credit Losses through an increased Provision for Credit Losses and also a decreased sales volume. The Provision was $48,755,000, an amount approximating 44.7% of originations. This Provision for the three months ended September 30, 2001 as a percent of the quarter's originations is 15.7% higher than the 29.0% Provision as a percent of originations recorded for the three months ended September 30, 2000. The percent used in 2001 results in a $17,105,000 increase, or $0.82 per diluted share, over that which would have been recorded in 2001 had the rate used in 2000 been applicable.
Total revenues for the third quarter of 2001 declined to $145,237,000 from $158,072,000 for the third quarter of 2000, a decrease of approximately 8.1%. The decrease in total revenue is due to a 19.7% reduction in the number of cars sold from 14,825 in 2000 to 11,907 in 2001, partially offset by an increase in interest income. The decrease in sales is primarily due to the Company's commitment to originating higher quality loans as well as a general weakening in the economy.
While used car sales declined during the third quarter of 2001 versus 2000, the loan portfolio continued to grow leading to a 11.3% increase in interest income to $35,000,000 in the third quarter of 2001 from $31,436,000 in the third quarter of 2000. The Company's loan portfolio principal balance totaled $537,946,000 at September 30, 2001 compared to $512,763,000 at September 30, 2000. New loan originations for the quarter totaled $109,139,000 declining 12.2% from $124,367,000 during the third quarter of 2000. The effect of decreased used car sales was partially offset by an increase in the quarter's average amount financed to $9,215 in 2001 from $8,433 in the third quarter of 2000. The increase in the average amount financed is due to an increase in the overall average sales price to $9,258 for the third quarter of 2001 versus $8,542 for the same period of the previous year. The increase in sales price is due to the Company's decision to purchase a larger number of higher end vehicles than have been purchased in the past. The Company has generally maintained a consistent dollar net profit margin thereby passing the entire benefit of the more expensive car on to the customer.
Operating expenses for the third quarter of 2001 decreased 4.7% to $35,230,000 versus $36,955,000 for the third quarter of 2000. Beginning in the third quarter of 2001, the Company began the process of implementing numerous cost savings initiatives to reduce operating expenses including the relocation of its corporate headquarters. Further, in early October of 2001 the Company continued this process by implementing a reduction in force of primarily corporate staff. Beginning in 2002, this reduction in staff, the relocation of its corporate headquarters and other cost saving initiatives are expected to decrease annual operating expenses by approximately $6.0 million. Third quarter 2001 operating expenses include approximately $500,000 in non-recurring costs associated with the corporate relocation.
Nine-Month Results
For the nine months ended September 30, 2001, the Company reported a net loss of $3,631,000, or $(0.30) per diluted share, compared with net earnings for the same period of 2000 of $11,514,000, or $0.82 per diluted share. The Provision was $119,985,000, an amount approximating 35.4% of originations, for the nine months ended September 30, 2001. This Provision as a percent of the nine-month period's originations is 7.7% higher than the 27.7% Provision as a percent of originations recorded for the nine months ended September 30, 2000. The percent used in 2001 results in a $26,146,000 increase in the Provision, or $1.25 per diluted share, over that which would have been recorded in 2001 had the rate used in 2000 been applicable.
Total revenues declined to $450,086,000 for the nine months of 2001 from $467,787,000 for the nine months ended September 30, 2000, a decrease of approximately 3.8% due to a decline in used cars sold partially offset by an increase in interest income. For the reasons discussed above, the number of cars sold decreased 14.7% to 38,365 cars sold in the nine-month period ended September 30, 2001 from 44,996 cars sold in the nine-month period ended September 30, 2000. Offsetting the impact of lower sales was an increase in interest income for the nine months ended September 30, 2001 of 19.5% to $103,744,000 versus $86,838,000 for the comparable nine-month period in 2000.
New loan originations have declined 8.8% from $371,268,000 during the first nine months of 2000 to $338,769,000 during the first nine months of 2001, also a result of the decrease in cars sold. The effect of decreased used car sales was partially offset by an increase in the average amount financed to $8,873 in 2001 from $8,295 in 2000. The increase in the average amount financed is due to an increase in the overall average sales price to $9,028 for the nine months ended September 30, 2001 versus $8,466 for the same period of the previous year.
Operating expenses for the nine months ended September 30, 2001 increased slightly to $108,588,000 versus $107,725,000 for the nine months ended September 30, 2000. As previously mentioned, the Company has been and continues to implement cost savings initiatives to reduce future operating expenses.
Loan Charge-offs
Loan charge offs for the three months ended September 30, 2001 and 2000, net of recoveries, were $35,717,000 and $33,332,000, respectively. As a percentage of quarter's average principal balances, net charge offs for the two quarters were 6.6% and 6.7%, respectively. For the nine-month periods ended September 30, 2001 and 2000, net charge offs were $105,052,000 and $76,734,000, respectively. Net charge offs as a percentage of average principal balances for the same periods were 19.7% and 17.0%, respectively.
Closing of 21st Securitization
The Company announced that earlier this month it completed its 21st securitization, consisting of approximately $109,400,000 in principal balances and the issuance of approximately $103,600,000 in Class A bonds, including a pre-funded amount of approximately $25,902,000. The Company will subsequently provide an additional $36,481,000 in loans as collateral for the pre-funded amount. The coupon rate on the Class A bonds is 3.44%, the initial deposit into the reserve account was 2.25% and the reserve account maximum is 8%, all substantial improvements over the terms of Company securitizations closed earlier this year and during 2000.
Working Capital
As announced in a press release dated September 9, 2001, we closed a new inventory warehouse facility revolving line of credit in the third quarter. The two-year deal for $36,000,000 is an increase of $11,000,000 from our prior facility, and includes an improved advance rate and bears interest at the lender's prime rate plus 600 basis points.
This inventory warehouse line and the loan warehouse line consummated in the first quarter of 2001 replace the financing previously provided by GE Capital, which announced its intention to exit the sub-prime market in December of 2000.
Withdrawal of Offer to Purchase Outstanding Company Stock
As previously announced, the Company confirmed the withdrawal of an offer from Mr. Ernest C. Garcia II, the Company's Chairman of the Board and largest shareholder, to the Board of Directors to purchase all of the outstanding shares of the Company's common stock not already owned by him. Costs incurred by the Company related to this offer totaled approximately $350,000 and were charged to operations during the third quarter of 2001.
Conference Call/Rescheduled Conference Call Time
Ugly Duckling will be holding an investor conference call to discuss the Company's financial and operational results at 12:30 pm eastern standard time (9:30 am Phoenix time) on October 25, 2001. Investors will have the opportunity to listen to the conference call over the Internet through Ugly Duckling's website at http://www.uglyduckling.com/ and click on investor information (or go directly to http://www.uglyduckling.com/investor/index.asp) and then click on "3rd Quarter Earnings Call." To listen to the live call, please go to the website at least fifteen minutes early to register, download, and install any necessary audio software. For those who cannot listen to the live broadcast, a replay will be available shortly after the call on the Company's website at http://www.uglyduckling.com. The replay will be available for 30 days.
Headquartered in Phoenix, Arizona, Ugly Duckling Corporation is the largest operator of used car dealerships focused exclusively on the sub-prime market. The Company underwrites, finances and services sub-prime contracts generated at its 76 Ugly Duckling dealerships, located in 11 metropolitan areas in eight states.
This press release 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 release may relate, among other matters, to: adverse economic conditions; anticipated financial results, such as a return to and/or higher profitability; the ultimate success of the Company's business model; improvements in collection and loan performance; improving operating performance and the realization of reduced operating expenses from cost savings initiatives; continued ability to securitize loans and do so on favorable terms including interest rates; our continued access to the credit markets; our ability to retain our inventory and warehouse lines of credit; return of credit enhancements to more traditional levels; the continued success of e-commerce; and an improving interest rate environment. 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 of financial condition generally 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; increased competition in the used car sales and finance industry; adverse economic conditions; 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 and Form 10-Q (including Exhibit 99 attached to any such Form 10-Q) and elsewhere in our Securities and Exchange Commission filings. There may also be other factors that we are currently unable to identify or quantify, but that may arise or become known in the future. Forward-looking statements speak only as of the date 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.
UGLY DUCKLING CORPORATION
Consolidated Operating Results
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------
2001 2000 2001 2000
------------------------------------------
Used Cars Sold 11,907 14,825 38,365 44,996
==========================================
Total Revenues $145,237 $158,072 $450,086 $467,787
==========================================
Sales of Used Cars $110,237 $126,636 $346,342 $380,949
Less:
Cost of Used Cars Sold 62,622 70,760 196,102 212,119
Provision for Credit Losses 48,755 36,092 119,985 102,877
------------------------------------------
(1,140) 19,784 30,255 65,953
------------------------------------------
Other Income (Expense):
Interest Income 35,000 31,436 103,744 86,838
Portfolio Interest Expense (7,489) (7,318) (23,500) (18,344)
------------------------------------------
Net Interest Income 27,511 24,118 80,244 68,494
------------------------------------------
Income before Operating Expenses 26,371 43,902 110,499 134,447
Operating Expenses:
Selling and Marketing 6,084 7,187 19,945 22,748
General and Administrative 26,807 27,523 81,462 78,253
Depreciation and Amortization 2,339 2,285 7,181 6,724
------------------------------------------
Operating Expenses 35,230 36,995 108,588 107,725
------------------------------------------
Income (loss) before Other
Interest Expense (8,859) 6,907 1,911 26,722
Other Interest Expense 2,695 2,360 8,648 7,237
------------------------------------------
Earnings (loss) before
Income Taxes (11,554) 4,547 (6,737) 19,485
Income Taxes (4,737) 1,864 (2,762) 7,971
------------------------------------------
Earnings (loss) before
Extraordinary Item (6,817) 2,683 (3,975) 11,514
Extraordinary Item -- Gain on
early extinguishment of debt,
net - - 344 -
------------------------------------------
Net Earnings (Loss) $ (6,817) $ 2,683 $ (3,631) $ 11,514
==========================================
Earnings (loss) per Common Share
before Extraordinary Item:
Basic $ (0.56) $ 0.21 $ (0.32) $ 0.83
==========================================
Diluted $ (0.56) $ 0.21 $ (0.32) $ 0.82
==========================================
Net Earnings (loss) per
Common Share:
Basic $ (0.56) $ 0.21 $ (0.30) $ 0.83
==========================================
Diluted $ (0.56) $ 0.21 $ (0.30) $ 0.82
==========================================
Weighted Average Shares Used
in Computation:
Basic Shares Outstanding 12,276 12,597 12,289 13,847
==========================================
Diluted Shares Outstanding 12,276 12,747 12,289 14,044
==========================================
UGLY DUCKLING CORPORATION
Consolidated Operating Expenses and Related Information
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------
Segment Information: 2001 2000 2001 2000
-------------------- ------------------------------------------
Retail Operations:
Selling and Marketing $ 6,084 $ 7,187 $ 19,945 $ 22,748
General and Administrative 13,867 14,570 43,380 43,353
Depreciation and Amortization 1,419 1,201 4,108 3,405
------------------------------------------
Retail Operations 21,370 22,958 67,433 69,506
------------------------------------------
Portfolio Expense:
Portfolio -- General and
Administrative 7,286 7,411 22,653 18,904
Portfolio -- Depreciation
and Amortization 236 278 732 858
------------------------------------------
Portfolio Expense 7,522 7,689 23,385 19,762
------------------------------------------
Corporate Expense:
Corporate -- General and
Administrative 5,654 5,542 15,429 15,996
Corporate -- Depreciation
and Amortization 684 806 2,341 2,461
------------------------------------------
Corporate Expense 6,338 6,348 17,770 18,457
------------------------------------------
Total Operating Expense $ 35,230 $ 36,995 $108,588 $107,725
==========================================
Total Operating Exp. -- % of
Total Revenues 24.3% 23.4% 24.1% 23.1%
==========================================
Other Information:
------------------
Dealerships Open -- End of period 76 77 76 77
==========================================
Used Cars Sold 11,907 14,825 38,365 44,996
==========================================
Principal Balances Originated $109,139 $124,367 $338,769 $371,268
==========================================
Provision as % of Originations 44.7% 29.0% 35.4% 27.7%
==========================================
Provision -- Per Car Sold $ 4,095 $ 2,435 $ 3,127 $ 2,286
==========================================
Retail Operating Data -- Per Car Sold:
--------------------------------------
Sales Price $ 9,258 $ 8,542 $ 9,028 $ 8,466
Cost of Used Cars Sold 5,259 4,773 5,111 4,714
Selling and Marketing 511 485 520 506
General and Administrative 1,165 983 1,131 963
Depreciation and Amortization 119 81 107 76
------------------------------------------
Retail Operating Expense --
Per Car Sold $ 1,795 $ 1,549 $ 1,758 $ 1,545
==========================================
Corporate Expenses:
-------------------
Per Car Sold $ 532 $ 428 $ 463 $ 410
==========================================
As % of Total Revenues 4.4% 4.0% 3.9% 3.9%
==========================================
Loan Servicing Expenses -- % of Loan Portfolio:
-----------------------------------------------
Principal Balances, managed $537,946 $525,498 $537,946 $525,498
==========================================
Loan Servicing Expenses
(Annualized) as % of
Managed Principal Balances 5.6% 5.8% 5.8% 5.0%
==========================================
UGLY DUCKLING CORPORATION
Consolidated Balance Sheets
(Unaudited)
(In thousands)
September 30, December 31,
2001 2000
-------------------------------
ASSETS
Cash and Cash Equivalents $ 7,384 $ 8,805
Finance Receivables, Net 501,048 500,469
Note Receivable from Related Party 12,000 12,000
Inventory 47,414 63,742
Property and Equipment, Net 39,487 38,679
Intangible Assets, Net 11,808 12,527
Other Assets 34,555 11,724
Net Assets of Discontinued Operations 4,044 4,175
-------------------------------
$657,740 $652,121
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts Payable $ 3,104 $ 2,239
Accrued Expenses and Other Liabilities 42,268 36,830
Notes Payable -- Portfolio 386,572 406,551
Other Notes Payable 41,646 16,579
Subordinated Notes Payable 32,600 34,522
-------------------------------
Total Liabilities 506,190 496,721
-------------------------------
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
12,275 and 12,292 outstanding,
respectively 19 19
Additional Paid-in Capital 173,741 173,723
Retained Earnings 18,141 21,772
Treasury Stock, at cost (40,351) (40,114)
-------------------------------
Total Stockholders' Equity 151,550 155,400
Commitments and Contingencies - -
-------------------------------
$657,740 $652,121
===============================
UGLY DUCKLING CORPORATION
Finance Receivables and Allowance for Credit Losses Information
(Unaudited -- Dollars in thousands)
Sept. 30, Sept. 30, Dec. 31,
2001 2000 2000
----------------------------------
Contractually Scheduled Payments $ 727,051 $ 697,527 $ 696,220
Unearned Finance Charges (189,105) (184,764) (181,274)
----------------------------------
Principal Balances, net 537,946 512,763 514,946
Accrued Interest 5,981 5,272 5,655
Loan Origination Costs 7,233 7,466 7,293
----------------------------------
Principal Balances, net 551,160 525,501 527,894
Investments Held in Trust 64,388 62,790 71,139
Residuals in Finance Receivables Sold - 3,632 1,136
----------------------------------
Finance Receivables 615,548 591,923 600,169
Allowance for Credit Losses (114,500) (100,043) (99,700)
----------------------------------
Finance Receivables, net $ 501,048 $ 491,880 $ 500,469
==================================
Allowance as % of Ending Principal
Balances, net 21.3% 19.5% 19.4%
==================================
Three Months Ended Nine Months Ended
September 30, September 30,
Allowance Activity: 2001 2000 2001 2000
----------------------------------------
Balance, Beginning of Period $101,589 $ 98,533 $ 99,700 $ 76,150
Provision for Credit Losses 48,755 36,092 119,985 102,877
Other Allowance Activity (127) (1,250) (133) (2,250)
Net Charge Offs (35,717) (33,332) (105,052) (76,734)
----------------------------------------
Balance, End of Period $114,500 $100,043 $114,500 $100,043
========================================
Allowance as % Ending Principal
Balances 21.3% 19.5% 21.3% 19.5%
========================================
Charge off Activity:
Principal Balances $(45,655) $(41,934) $(134,416) $(99,076)
Recoveries, Net 9,938 8,602 29,364 22,342
----------------------------------------
Net Charge Offs $(35,717) $(33,332) $(105,052) $(76,734)
========================================
Net Charge Offs as % of Average
Principal Balance 6.6% 6.7% 19.7% 17.0%
========================================
Sept. 30, Sept. 30, Dec. 31,
Days Delinquent: 2001 2000 2000
----------------------------------
Current 67.4% 72.4% 66.1%
1-30 Days 24.0% 19.3% 26.1%
31-60 Days 5.3% 4.9% 4.7%
61-90 Days 3.3% 3.4% 3.1%
----------------------------------
Total Portfolio 100.0% 100.0% 100.0%
==================================