Ugly Duckling Corp. is unique among public companies, a business that took low-end used-car lots to Wall Street.

But the Phoenix-based company, a nationwide chain of 77 dealers that makes high-interest auto loans to people with bad credit, is facing one of the basic realities of its risky enterprise: Too many high-risk borrowers are failing to pay back their car loans, according to a Feb. 22 story by Bob Golfen in The Arizona Republic.

According to Golfen, the problem was reflected Feb. 21 in Ugly Duckling's quarterly financial report, which showed a growth in revenue for the fourth quarter and the 2000 fiscal year, but a decline in earnings due to higher-than-expected defaults on car loans.

Ugly Duckling reported a $2.45 million loss on $133 million revenue in the fourth quarter, which included an after-tax charge of $5.9 million to allow for loan losses. In the same quarter of 1999, the company made $2.6 million on $105 million in revenue.

Ugly Duckling expects a fairly high percentage of people to default on their loans in what's known as subprime lending, according to Steven Darak, senior vice present and chief financial officer, but the reality was worse than the projections. The corporation expected about 27 percent of the dollars lent on used cars to be lost, but in the third quarter, it was 32 percent.

The 5 percentage point gap resulted in the $5.9 million charge.

"The leverage on loan losses is terrific," Darak told the Republic. "When you're financing 98 percent of what you sell, the real money is on your ability to collect on loans."

The actual rate of default and vehicle repossessions averages 55 percent in relation to the number of vehicles financed, Darak said. This is one reason why the company charges such high interest rates, about 28 percent over an average of 34 months. In Arizona, there is no limit on interest rates for sales financing.

For the year, Ugly Duckling reported earnings of $9 million on revenue of $605 million, compared with $17.7 million for 1999 on $466 million in revenue.

The company, founded by Ernest Garcia, chief executive officer, went public in 1996.

Garcia, a former real-estate entrepreneur and banker, built up the business from a single dealership in Phoenix. He got into the business after serving three years' probation for pleading guilty to one count of felony bank fraud in October 1990, according to the Republic.

In all of the company's 77 dealerships, the loans are made on cars sold for around $8,600 to low-income people who have had problems with their credit. Though closely run by the company, each dealership is a self-contained unit complete with a collections branch.

Ugly Duckling's competitors are the thousands of small used-car dealerships that dot the country, according to Darak. But the main competition, he added, comes from the customers themselves.

"We are competing with all the other challenges in the customers' lives," he told the Republic. "We're competing against rent payments, movie tickets, clothing, holidays. Our customers live payday to payday, and it's hard to make them understand that making their car payments is an important thing."

Darak said Ugly Duckling is trying to address the loan default issue by increasing the down payment by $100 to an average $900. It's also trying to improve the quality of vehicles sold to attract a higher caliber of buyer.

Ugly Duckling's stock value has plummeted since Aug. 15, 2000, dropping from a high of $7.13, to $3.88, at closing Feb. 21, down 16 cents for the day, according to Golfen's story.

But Darak believes the company is on the right track to improve its performance. "There are a lot of things that are negative," he said. "But we're getting pretty close to refining this business model.

"We're such a unique animal. There really are no peers in the subprime industry. There is a lot of skepticism in the minds of investors as to whether this market really works."