10-Q 1 d80303e10-q.txt FORM 10-Q FOR QUARTER ENDED JULY 31, 2000 1 UNITED STATES 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 For the fiscal quarter ended: Commission file number: JULY 31, 2000 0-14939 CROWN GROUP, INC. (Exact name of registrant as specified in its charter) TEXAS 63-0851141 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4040 N. MACARTHUR BLVD., SUITE 100, IRVING, TEXAS (Address of principal executive offices) 75038-6424 (Zip Code) (972) 717-3423 (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. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Title of Each Class September 11, 2000 ------------------- ------------------ Common stock, par value $.01 per share 7,921,412 2 PART I ITEM 1. FINANCIAL STATEMENTS CROWN GROUP, INC. CONSOLIDATED BALANCE SHEETS
July 31, 2000 (unaudited) April 30, 2000 ------------- -------------- Assets: Cash and cash equivalents $ 4,053,609 $ 9,843,310 Accounts and other receivables, net 4,499,671 5,489,686 Mortgage loans held for sale, net 12,580,616 14,202,420 Finance receivables, net 192,050,707 183,331,361 Inventory 15,923,843 14,948,365 Prepaid and other assets 2,449,406 1,753,074 Investments 3,104,621 2,503,146 Deferred tax assets, net 14,959,897 13,859,897 Property and equipment, net 28,341,654 27,736,105 Goodwill, net 17,006,664 17,239,955 ------------ ------------ $294,970,688 $290,907,319 ============ ============ Liabilities and stockholders' equity: Accounts payable $ 8,147,359 $ 8,606,983 Accrued liabilities 11,227,053 13,557,228 Income taxes payable 5,009,493 9,599,439 Revolving credit facilities 181,546,098 172,709,224 Other notes payable 17,566,324 18,342,379 Deferred sales tax 4,743,414 4,207,117 ------------ ------------ Total liabilities 228,239,741 227,022,370 ------------ ------------ Minority interests 5,932,046 5,017,734 Commitments and contingencies Stockholders' equity: Preferred stock, par value $.01 per share, 1,000,000 shares authorized; none issued or outstanding Common stock, par value $.01 per share, 50,000,000 shares authorized; 8,085,662 issued and outstanding (8,247,762 at April 30, 2000) 80,857 82,478 Additional paid-in capital 28,126,958 28,960,793 Retained earnings 32,591,086 29,823,944 ------------ ------------ Total stockholders' equity 60,798,901 58,867,215 ------------ ------------ $294,970,688 $290,907,319 ============ ============
See accompanying notes to consolidated financial statements. 3 CONSOLIDATED STATEMENTS OF OPERATIONS CROWN GROUP, INC. (UNAUDITED)
Three Months Ended July 31, 2000 1999 ----------- ----------- Revenues: Sales $66,904,528 $40,876,106 Interest income 11,730,913 4,997,683 Gain on sale of mortgage loans 1,851,185 1,329,082 Rental income 962,406 1,067,294 Gaming 624,904 215,286 Other 376,993 70,485 ----------- ----------- 82,450,929 48,555,936 ----------- ----------- Costs and expenses: Cost of sales 38,879,279 25,096,913 Selling, general and administrative 17,201,481 11,356,568 Provision for credit losses 14,294,193 5,855,127 Interest expense 5,522,555 2,415,432 Depreciation and amortization 1,042,637 754,797 ----------- ----------- 76,940,145 45,478,837 ----------- ----------- Other income: Equity in earnings of unconsolidated subsidiaries 740,802 ----------- ----------- 740,802 ----------- ----------- Income before taxes and minority interests 5,510,784 3,817,901 Provision for income taxes 2,248,436 1,213,037 Minority interests 495,206 26,457 ----------- ----------- Net income $ 2,767,142 $ 2,578,407 =========== =========== Earnings per share: Basic $ .34 $ .26 Diluted $ .32 $ .25 Weighted average number of shares outstanding: Basic 8,179,391 10,068,220 Diluted 8,582,006 10,512,850
See accompanying notes to consolidated financial statements. 4 CONSOLIDATED STATEMENTS OF CASH FLOWS CROWN GROUP, INC. (UNAUDITED)
Three Months Ended July 31, 2000 1999 ------------ ------------ Operating activities: Net income $ 2,767,142 $ 2,578,407 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,042,637 754,797 Accretion of purchase discount (342,238) (351,796) Deferred income taxes (1,100,000) (566,867) Provision for credit losses 14,294,193 5,855,127 Minority interests 495,206 26,457 Gain on sale of mortgage loans (1,851,185) (1,329,082) Gain on sale of assets (86,446) (26,979) Equity in earnings of unconsolidated subsidiaries (740,802) Changes in assets and liabilities, net of acquisitions: Accounts and other receivables 990,016 517,358 Mortgage loans originated or acquired (45,927,877) (39,641,531) Mortgage loans sold and principal repayments 49,014,205 36,609,607 Inventory 6,576,320 4,541,916 Prepaids and other assets (468,374) (414,865) Accounts payable, accrued liabilities and deferred sales tax (1,834,396) (1,044,198) Income taxes payable (4,589,946) (2,220,093) ------------ ------------ Net cash provided by operating activities 18,979,257 4,547,456 ------------ ------------ Investing activities: Finance receivable originations (62,961,012) (36,604,371) Finance receivable collections 32,870,913 19,646,257 Purchase of property and equipment (1,664,579) (2,958,541) Sale of assets 361,831 197,902 Purchase of investments (601,475) ------------ ------------ Net cash used by investing activities (31,994,322) (19,718,753) ------------ ------------ Financing activities: Purchase of common stock (835,456) (105,646) Proceeds from revolving credit facilities, net 8,836,875 4,492,356 Proceeds from (repayments of) other debt, net (776,055) 86,728 ------------ ------------ Net cash provided by financing activities 7,225,364 4,473,438 ------------ ------------ Decrease in cash and cash equivalents (5,789,701) (10,697,859) Cash and cash equivalents at: Beginning of period 9,843,310 12,910,535 ------------ ------------ End of period $ 4,053,609 $ 2,212,676 ============ ============
See accompanying notes to consolidated financial statements. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CROWN GROUP, INC. A - DESCRIPTION OF BUSINESS Crown Group, Inc. ("Crown"), and collectively with its subsidiaries (the "Company"), is a publicly traded buy-out firm which as of July 31, 2000 owned a 97% fully diluted ownership interest in America's Car-Mart, Inc. ("Car-Mart") and 70% of Smart Choice Automotive Group, Inc. ("Smart Choice"). Smart Choice owns 100% of Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation (collectively, "Paaco"). Each of Car-Mart, Smart Choice and Paaco sell and finance used vehicles. At July 31, 2000 Crown also owned (i) 100% of Precision IBC, Inc. ("Precision"), a firm specializing in the sale and rental of intermediate bulk containers ("IBC's"), (ii) 80% of Concorde Acceptance Corporation ("Concorde"), a sub-prime mortgage lender, (iii) 90% of CG Incorporated, S.A. de C.V. ("Crown El Salvador"), an operator of two casinos in El Salvador, and (iv) minority positions in certain other entities that operate in the high technology industry or focus on Internet commerce. In addition, from time to time the Company purchases and sells small ownership interests in securities of privately held and publicly traded firms. The Company is presently focusing on (i) the development and expansion of its existing businesses, and (ii) the potential acquisition or development of other unrelated businesses. B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended July 31, 2000 are not necessarily indicative of the results that may be expected for the year ended April 30, 2001. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended April 30, 2000. Goodwill Goodwill represents the excess of the Company's cost over the fair value of net identifiable assets acquired in its purchases of Smart Choice, Paaco and Precision. Goodwill is amortized on a straight line basis over periods ranging from 15 to 25 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. At July 31, 2000 accumulated amortization of goodwill amounted to $2,098,223. Reclassifications Certain prior year amounts in the accompanying financial statements have been reclassified to conform to the fiscal 2001 presentation. C - ACQUISITION Smart Choice Purchase On December 1, 1999, Crown acquired a 70% voting and economic interest in Smart Choice directly from Smart Choice. Smart Choice operates "buy-here pay-here" used car dealerships in central Florida. The purchase price ("Purchase Price") consisted of (i) $3.0 million in cash, (ii) the conversion of $4.5 million of Smart Choice debt, which Crown had contemporaneously acquired from a third party for approximately $2.3 million cash, and (iii) the contribution of Crown's 85% interest in Paaco. In consideration for the Purchase Price, Crown received 1,371,581.47 shares of Smart Choice Series E Convertible Preferred Stock, which after Smart Choice's recent 20 for 1 reverse stock split, is convertible into 6,857,907 shares of Smart Choice common stock representing 70% of the ownership and voting rights of Smart Choice on an "as converted" basis. Contemporaneously with Crown's purchase of a 70% interest in Smart Choice, approximately $15.0 million of Smart Choice's outstanding debt and preferred stock was converted into shares of common stock representing a 20.7% interest in Smart Choice. In addition, the Paaco minority shareholders converted their 15% interest in Paaco into shares of Smart Choice Series E Convertible Preferred Stock representing a 5% voting and economic interest in Smart Choice. Paaco is now a wholly-owned subsidiary of Smart Choice. 6 Pro Forma Financial Information The following unaudited pro forma condensed consolidated results of operations of the Company for the three months ended July 31, 1999 were prepared as if the acquisition of Smart Choice had occurred on May 1, 1999 (in thousands, except per share amount). The adjustments to the historical financial statements principally consist of (i) eliminating interest income on the cash used in the acquisition, (ii) eliminating interest expense and preferred stock dividends pertaining to certain Smart Choice debt and preferred stock that was converted to Smart Choice common stock, (iii) amortizing goodwill created in the Smart Choice acquisition, (iv) adjusting interest income resulting from purchase accounting entries, and (v) adjusting income tax expense to reflect the above described adjustments.
Three Months Ended July 31, 1999 ------------------ Revenues $ 69,127 Net income 2,402 Earnings per share - diluted $ .23
The unaudited pro forma results of operations are not necessarily indicative of future results or the results that would have occurred had the acquisition taken place on the date indicated. D - FINANCE RECEIVABLES The Company originates installment sale contracts from the sale of used vehicles at its dealerships. These installment sale contracts typically include interest rates ranging from 10% to 26% per annum and provide for payments over periods ranging from 12 to 42 months. The components of finance receivables as of July 31, 2000 and April 30, 2000 are as follows:
July 31, April 30, 2000 2000 ------------- ------------- Finance receivables $ 277,439,643 $ 267,389,412 Unearned finance charges (37,422,140) (38,659,786) Allowance for credit losses (46,694,298) (43,783,529) Purchase discounts (1,272,498) (1,614,736) ------------- ------------- $ 192,050,707 $ 183,331,361 ============= =============
In accordance with APB Opinion No. 16, as of the dates the Company acquired interests in Paaco, Car-Mart and Smart Choice, the Company valued Paaco's, Car-Mart's and Smart Choice's finance receivables portfolios at market value and determined that purchase discounts of $1,577,781, $864,165 and $2,046,964, respectively, were appropriate. These discounts are being amortized into interest income over the life of the related finance receivables portfolios that existed on the dates of purchase using the interest method. Changes in the finance receivables allowance for credit losses for the three months ended July 31, 2000 and 1999 are as follows:
Three Months Ended July 31, 2000 1999 ------------ ------------ Balance at beginning of period $ 43,783,529 $ 17,045,063 Provision for credit losses 14,161,193 5,849,670 Net charge offs (11,250,424) (4,602,689) ------------ ------------ Balance at end of period $ 46,694,298 $ 18,292,044 ============ ============
In addition to the finance receivables allowance for credit losses, the Company also has an allowance for credit losses on mortgage loans held for sale ($648,900 and $515,900) and trade accounts receivable ($27,256 and $27,256) as of July 31, 2000 and April 30, 2000, respectively. 7 E - PROPERTY AND EQUIPMENT A summary of property and equipment as of July 31, 2000 and April 30, 2000 is as follows:
July 31, April 30, 2000 2000 ------------ ------------ Land and buildings $ 8,404,393 $ 8,310,614 Rental equipment 10,267,902 9,937,557 Furniture, fixtures and equipment 10,575,064 10,144,565 Leasehold improvements 3,808,769 3,292,660 Less accumulated depreciation and amortization (4,714,474) (3,949,291) ------------ ------------ $ 28,341,654 $ 27,736,105 ============ ============
For the three months ended July 31, 2000 and 1999 depreciation and amortization of property and equipment amounted to $783,647 and $451,395, respectively. F - DEBT A summary of debt as of July 31, 2000 and April 30, 2000 is as follows:
Revolving Credit Facilities ------------------------------------------------------------------------------------------------------------------------- Facility Interest Balance at Borrower Lender Amount Rate Maturity July 31, 2000 April 30, 2000 -------- ------ -------- -------- -------- ---------------- ---------------- Smart Choice Finova $100 million Prime - 2.25% Nov 2004 $ 79,533,324 $ 77,533,325 Paaco Finova $ 60 million Prime - 2.25% Nov 2004 59,007,433 52,833,680 Car-Mart Bank of America $ 30 million Prime - 1.13% Jan 2002 27,870,993 27,502,614 Concorde Bank One $ 20 million Libor - 2.00% Sep 2000 8,221,185 9,839,067 Precision Wells Fargo $ 8 million Prime Dec 2000 6,913,163 5,000,538 --------------- ---------------- $ 181,546,098 $ 172,709,224 =============== ================
Other Notes Payable ----------------------------------------------------------------------------------------------------------------------------- Facility Interest Balance at Borrower Lender Amount Rate Maturity July 31, 2000 April 30, 2000 -------- ------ -------- -------- -------- ------------- -------------- Crown Car-Mart sellers N/A 8.50% Jan 2004 $ 7,500,000 $ 7,500,000 Crown Bank of America N/A 7.00% Apr 2001 2,316,000 2,316,000 Precision South Trust Bank N/A 7.35% Jan 2014 640,923 647,743 Paaco Chase Texas N/A 8.50% May 2003 850,972 869,616 Paaco Heller Financial N/A Prime - 2.25% Dec 2015 600,324 603,084 Smart Choice Huntington N/A Prime - .75% Jul 2001 2,046,956 2,090,171 Smart Choice High Capital N/A 10.0% Nov 2001 725,000 1,000,000 Various Various N/A Various Various 2,886,149 3,315,765 ---------------- ---------------- $ 17,566,324 $ 18,342,379 ================ ================
The Company's revolving credit facilities are primarily collateralized by finance receivables, mortgage loans and IBC's. Other notes payable are primarily collateralized by equipment and real estate. Interest is payable monthly or quarterly on all of the Company's debt. The loan agreements relating to certain of the above described debt contain various reporting and performance covenants including (i) maintenance of certain financial ratios and tests, (ii) limitations on borrowings from other sources, (iii) restrictions on certain operating activities, and (iv) restrictions on the payment of dividends. At July 31, 2000 substantially all of the Company's $40.1 million equity investment in its consolidated subsidiaries was restricted due to lender covenants. The amount available to be drawn under each of the Company's revolving credit facilities is a function of the underlying collateral asset. Generally, the Company is able to borrow a specified percentage of the face value of eligible finance receivables in the case of Car-Mart, Smart Choice and Paaco, and eligible mortgage loans in the case of Concorde. Precision's 8 borrowing base is a function of the number of tanks owned and operating cash flow, as defined. The advance rates on eligible finance receivables decline from 85.0% to 70.0% for Smart Choice and from 72.0% to 67.5% for Paaco over the term of the respective credit facilities. G - EARNINGS PER SHARE A summary reconciliation of basic earnings per share to diluted earnings per share for the three months ended July 31, 2000 and 1999 is as follows:
Three Months Ended July 31, 2000 1999 ----------- ----------- Net income $ 2,767,142 $ 2,578,407 =========== =========== Average shares outstanding-basic 8,179,391 10,068,220 Dilutive options 402,615 444,630 ----------- ----------- Average shares outstanding-diluted 8,582,006 10,512,850 =========== =========== Earnings per share: Basic $ .34 $ .26 Diluted $ .32 $ .25 Antidilutive securities not included: Options 432,500 432,500 =========== ===========
H - COMMITMENTS AND CONTINGENCIES Mortgage Loan Sales In connection with the Company's sale of mortgage loans in the ordinary course of business, in certain circumstances such loan sales involve limited recourse to the Company for up to the first twelve months following the sale. Generally, the events which could give rise to these recourse provisions involve the prepayment or foreclosure of a loan, and violations of customary representations and warranties. If the recourse provisions are triggered the Company may be required to refund all or part of the premium received on the sale of such loan, and in some cases the Company may be required to repurchase the loan. Periodically, the Company estimates the potential exposure related to such recourse provisions and accrues losses where required. Severance Agreements The Company has entered into severance agreements with its three executive officers which provide for payments to the executives in the event of their termination after a change in control, as defined, of the Company. The agreements provide, among other things, for a compensation payment equal to 2.99 times the annual compensation paid to the executive, as well as accelerated vesting of any unvested options under the Company's stock option plans, in the event of such executive's termination in connection with a change in control. Smart Choice Class Action Lawsuit In March 1999, prior to Crown's ownership interest in Smart Choice, certain shareholders of Smart Choice filed two putative class action lawsuits against Smart Choice and certain of Smart Choice's officers and directors in the United States District Court for the Middle District of Florida (collectively, the "Securities Actions"). The Securities Actions purport to be brought by plaintiffs in their individual capacity and on behalf of the class of persons who purchased or otherwise acquired Smart Choice publicly traded securities between April 15, 1998 and February 26, 1999. These lawsuits were filed following Smart Choice's announcement on February 26, 1999 that a preliminary determination had been reached that the net income it had announced on February 10, 1999 for the fiscal year ended December 31, 1998 was likely overstated in a material, undetermined amount. Each of the complaints assert claims for violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission as well as a claim for the violation of Section 20(a) of the Exchange Act. The plaintiffs allege that the defendants prepared and issued deceptive and materially false and misleading statements to the public, which caused plaintiffs to purchase Smart Choice securities at artificially inflated prices. The plaintiffs seek unspecified damages. Smart Choice intends to contest these claims vigorously. The Company cannot predict the ultimate resolution of these actions. The two class action lawsuits have subsequently been consolidated. 9 Other Litigation In the ordinary course of business, the Company has become a defendant in various other types of legal proceedings. Although the Company cannot determine at this time the amount of the ultimate exposure from these ordinary course of business lawsuits, if any, management, based on the advice of counsel, does not expect the final outcome of any of these actions, individually or in the aggregate, to have a material adverse effect on the Company's financial position, results of operations or cash flows. Investment Fund In November 1998 the Company committed $2.0 million to Monarch, a private venture capital fund focusing on the investment in Internet related or emerging technology companies. As of July 31, 2000 the Company had funded approximately $1.6 million of its $2.0 million commitment. The Company expects it will fund the remaining $400,000 over the next 12 months. I - SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow disclosures for the three months ended July 31, 2000 and 1999 are as follows:
Three Months Ended July 31, 2000 1999 ---------- ---------- Inventory acquired in repossession $7,551,798 $4,492,589 Notes issued in purchase of property and equipment 700,000 Interest paid, net of amount capitalized 6,045,402 2,262,882 Income taxes paid, net of refund 7,938,382 4,000,000 Value of securities received in acquisition amendment 4,452,597
10 J - BUSINESS SEGMENTS Operating results and other financial data are presented for the four principal business segments of the Company for the three months ended July 31, 2000 and 1999. These segments are categorized by the lines of business of the Company. The segments include (i) automobile, which pertains to Car-Mart's, Smart Choice's and Paaco's selling and financing of used vehicles, (ii) IBC's, which pertains to Precision's rental and sales of intermediate bulk containers, (iii) mortgage, which pertains to Concorde's originating and selling of sub-prime mortgage loans, and (iv) other, which includes corporate operations, Home Stay, Crown El Salvador, activities of relatively inactive subsidiaries and the Company's equity investment in Casino Magic Neuquen and Atlantic Castings. The Company's business segment data for the three months ended July 31, 2000 and 1999 is as follows (in thousands):
Three Months Ended July 31, 2000 ------------------------------------------------------------------------------ Automobile IBC's Mortgage Other Eliminations Consolidated ---------- -------- -------- -------- ------------ ------------ Revenues: Sales and other $ 66,380 $ 1,718 $ 1,929 $ 693 $ 70,720 Interest income 11,141 12 473 462 $ (357) 11,731 -------- -------- -------- -------- -------- -------- Total 77,521 1,730 2,402 1,155 (357) 82,451 -------- -------- -------- -------- -------- -------- Costs and expenses: Cost of sales 38,295 584 38,879 Selling, gen. and admin. 13,402 453 1,637 1,709 17,201 Prov. for credit losses 14,161 133 14,294 Interest expense 5,136 162 379 203 (357) 5,523 Depreciation and amort. 417 276 52 298 1,043 -------- -------- -------- -------- -------- -------- Total 71,411 1,475 2,201 2,210 (357) 76,940 -------- -------- -------- -------- -------- -------- Other income -------- -------- -------- -------- -------- -------- Income (loss) before taxes and minority interests $ 6,110 $ 255 $ 201 $ (1,055) $ $ 5,511 ======== ======== ======== ======== ======== ======== Capital expenditures $ 972 $ 654 $ 32 $ 7 $ $ 1,665 ======== ======== ======== ======== ======== ======== Total assets $257,091 $ 16,324 $ 15,195 $ 75,293 $(68,932) $294,971 ======== ======== ======== ======== ======== ========
Three Months Ended July 31, 1999 ------------------------------------------------------------------------------- Automobile IBC's Mortgage Other Eliminations Consolidated --------- -------- -------- -------- ------------ ------------ Revenues: Sales and other $ 40,198 $ 1,480 $ 1,389 $ 491 $ 43,558 Interest income 4,372 7 452 620 $ (453) 4,998 -------- -------- -------- -------- -------- -------- Total 44,570 1,487 1,841 1,111 (453) 48,556 -------- -------- -------- -------- -------- -------- Costs and expenses: Cost of sales 24,635 462 25,097 Selling, gen. and admin. 8,098 457 1,344 1,458 11,357 Prov. for credit losses 5,850 (1) 6 5,855 Interest expense 2,112 137 320 299 (453) 2,415 Depreciation and amort. 122 227 48 358 755 -------- -------- -------- -------- -------- -------- Total 40,817 1,282 1,718 2,115 (453) 45,479 -------- -------- -------- -------- -------- -------- Other income 741 741 -------- -------- -------- -------- -------- -------- Income (loss) before taxes and minority interests $ 3,753 $ 205 $ 123 $ (263) $ $ 3,818 ======== ======== ======== ======== ======== ======== Capital expenditures $ 559 $ 1,186 $ 32 $ 1,182 $ $ 2,959 ======== ======== ======== ======== ======== ======== Total assets $112,777 $ 14,603 $ 16,571 $ 74,533 $(48,844) $169,640 ======== ======== ======== ======== ======== ========
11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's consolidated financial statements and notes thereto appearing elsewhere in this report. FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. Certain information included in this Quarterly Report on Form 10-Q contains, and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company or its management) contain or will contain, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words "believe," "expect," "anticipate," "estimate," "project" and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements. Such forward-looking statements address, among other things, the Company's current focus on the development and expansion of its existing businesses, and the potential acquisition or development of businesses in other fields. Such forward-looking statements are based upon management's current plans or expectations and are subject to a number of uncertainties and risks that could significantly affect current plans, anticipated actions and the Company's future financial condition and results. As a consequence, actual results may differ materially from those expressed in any forward-looking statements made by or on behalf of the Company as a result of various factors. Uncertainties and risks related to such forward-looking statements include, but are not limited to, those relating to the development of the Company's businesses, continued availability of lines of credit for the Company's businesses, changes in interest rates, changes in the industries in which the Company operates, competition, dependence on existing management, the stability of El Salvador's government, currency exchange rate fluctuations, the repatriation of funds from El Salvador, domestic or global economic conditions (particularly in the states of Texas, Arkansas and Florida), changes in foreign or domestic tax laws or the administration of such laws and changes in lending laws or regulations. Any forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. OVERVIEW Crown Group, Inc. ("Crown"), and collectively with its subsidiaries (the "Company"), is a publicly traded buy-out firm which as of July 31, 2000 owned a 97% fully diluted ownership interest in America's Car-Mart, Inc. ("Car-Mart") and 70% of Smart Choice Automotive Group, Inc. ("Smart Choice"). Smart Choice owns 100% of Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation (collectively, "Paaco"). Each of Car-Mart, Smart Choice and Paaco sell and finance used vehicles. At July 31, 2000 Crown also owned (i) 100% of Precision IBC, Inc. ("Precision"), a firm specializing in the sale and rental of intermediate bulk containers ("IBC's"), (ii) 80% of Concorde Acceptance Corporation ("Concorde"), a sub-prime mortgage lender, (iii) 90% of CG Incorporated, S.A. de C.V. ("Crown El Salvador"), an operator of two casinos in El Salvador, and (iv) minority positions in certain other entities that operate in the high technology industry or focus on Internet commerce. In addition, from time to time the Company purchases and sells small ownership interests in securities of privately held and publicly traded firms. The Company is presently focusing on (i) the development and expansion of its existing businesses, and (ii) the potential acquisition or development of other unrelated businesses. RESULTS OF OPERATIONS The Company has made a variety of acquisitions, dispositions and business investments over the last two years. All acquisitions have been accounted for using the purchase method of accounting. The Company has included the operating results of each majority-owned company from the respective acquisition date. As a result of the acquisitions, dispositions and business investments, operating results for the three months ended July 31, 2000 and 1999 are not entirely comparable. Below is a summary of the number of months of operation each companies' operating results are included in the Company's consolidated results of operations for the three months ended July 31, 2000 and 1999:
Number of Months Included in Month Crown Month Crown Three Months Ended July 31, Acquired Disposed ---------------------------- Entity or Formed or Sold 2000 1999 ------ ----------- ----------- ----------- -------- Casino Magic Neuquen 6-97 10-99 -- 3 months Concorde 6-97 3 months 3 months Paaco 2-98 3 months 3 months Precision 2-98 3 months 3 months Home Stay 5-98 12-99 -- 3 months Car-Mart 1-99 3 months 3 months Crown El Salvador 2-99 3 months 3 months Atlantic Castings 3-99 4-00 -- 3 months Smart Choice 12-99 3 months --
12 THREE MONTHS ENDED JULY 31, 2000 COMPARED TO THE THREE MONTHS ENDED JULY 31, 1999 Operating results and other financial data are presented for the four principal business segments of the Company for the three months ended July 31, 2000 and 1999. These segments are categorized by the lines of business of the Company. The segments include (i) automobile, which pertains to Car-Mart's, Smart Choice's and Paaco's selling and financing of used vehicles, (ii) IBC's, which pertains to Precision's rental and sales of intermediate bulk containers, (iii) mortgage, which pertains to Concorde's originating and selling of sub-prime mortgage loans, and (iv) other, which includes corporate operations, Home Stay, Crown El Salvador, activities of relatively inactive subsidiaries and the Company's equity investment in Casino Magic Neuquen and Atlantic Castings. The Company's business segment data for the three months ended July 31, 2000 and 1999 is as follows (in thousands):
Three Months Ended July 31, 2000 -------------------------------------------------------------------------- Automobile IBC's Mortgage Other Eliminations Consolidated ---------- ----- -------- ----- ------------ ------------ Revenues: Sales and other $66,380 $ 1,718 $ 1,929 $ 693 $70,720 Interest income 11,141 12 473 462 $ (357) 11,731 ------- ------- ------- ------- ------- ------- Total 77,521 1,730 2,402 1,155 (357) 82,451 ------- ------- ------- ------- ------- ------- Costs and expenses: Cost of sales 38,295 584 38,879 Selling, gen. and admin. 13,402 453 1,637 1,709 17,201 Prov. for credit losses 14,161 133 14,294 Interest expense 5,136 162 379 203 (357) 5,523 Depreciation and amort. 417 276 52 298 1,043 ------- ------- ------- ------- ------- ------- Total 71,411 1,475 2,201 2,210 (357) 76,940 ------- ------- ------- ------- ------- ------- Other income ------- ------- ------- ------- ------- ------- Income (loss) before taxes and minority interests $ 6,110 $ 255 $ 201 $(1,055) $ -- $ 5,511 ======= ======= ======= ======= ======= =======
Three Months Ended July 31, 1999 --------------------------------------------------------------------------- Automobile IBC's Mortgage Other Eliminations Consolidated ---------- ----- -------- ----- ------------ ------------ Revenues: Sales and other $40,198 $ 1,480 $ 1,389 $ 491 $43,558 Interest income 4,372 7 452 620 $ (453) 4,998 ------- ------- ------- ------- ------- ------- Total 44,570 1,487 1,841 1,111 (453) 48,556 ------- ------- ------- ------- ------- ------- Costs and expenses: Cost of sales 24,635 462 25,097 Selling, gen. and admin. 8,098 457 1,344 1,458 11,357 Prov. for credit losses 5,850 (1) 6 5,855 Interest expense 2,112 137 320 299 (453) 2,415 Depreciation and amort. 122 227 48 358 755 ------- ------- ------- ------- ------- ------- Total 40,817 1,282 1,718 2,115 (453) 45,479 ------- ------- ------- ------- ------- ------- Other income 741 741 ------- ------- ------- ------- ------- ------- Income (loss) before taxes and minority interests $ 3,753 $ 205 $ 123 $ (263) $ -- $ 3,818 ======= ======= ======= ======= ======= =======
Net income for the three months ended July 31, 2000 increased $.2 million compared to the same period in the prior fiscal year. The increase was primarily attributable to greater earnings in the Company's automobile segment, partially offset by a reduction of other income ($.7 million) as a result of the Company no longer having an equity investment in Casino Magic Neuquen. Revenues from sales and other for the three months ended July 31, 2000 increased $27.2 million compared to the same period in the prior fiscal year. The increase was principally the result of (i) including Smart Choice ($18.8 million) in the Company's consolidated results of operations, and (ii) higher revenues at Car-Mart ($1.7) and Paaco ($5.5 million). Interest income for the three months ended July 31, 2000 increased $6.7 million compared to the same period in the prior fiscal year. The increase was principally the result of (i) including Smart Choice ($5.5 million) in the Company's consolidated results of operations, and (ii) greater interest earned on Car-Mart's ($.3 million) and Paaco's finance receivables portfolios ($1.0 million) as a result of growth in such portfolios. 13 As a percentage of sales, cost of sales for the three months ended July 31, 2000 decreased to 58.1% from 61.4% in the same period in the prior fiscal year. The decrease is principally the result of the inclusion of Smart Choice, which has higher gross profit margins than historically generated by the Company, and improved gross profit margins at Paaco and Car-Mart as a result of a management focus on gross profit margins. Selling, general and administrative expense for the three months ended July 31, 2000 increased $5.8 million compared to the same period in the prior fiscal year. The increase is principally the result of (i) including Smart Choice ($4.5 million) in the Company's consolidated results of operations, and (ii) higher expenses at Car-Mart ($.5 million), Paaco ($.3 million) and Concorde ($.3 million) which corresponds to increased revenues at those subsidiaries. Provision for credit losses for the three months ended July 31, 2000 increased $8.4 million compared to the same period in the prior fiscal year. The increase was principally the result of (i) including Smart Choice ($5.8 million) in the Company's consolidated results of operations, and (ii) higher credit losses at Car-Mart ($.4 million) and Paaco ($2.1 million) which corresponds to an increase in the finance receivables portfolios as a result of increased sales levels. Interest expense for the three months ended July 31, 2000 increased $3.1 million compared to the same period in the prior fiscal year. The increase was principally the result of (i) including Smart Choice ($2.5 million) in the Company's consolidated results of operations, and (ii) higher interest expense at Car-Mart ($.2 million) and Paaco ($.4 million) resulting from an increase in the balance of their revolving credit facilities. The provision for income taxes for the three months ended July 31, 2000 was $2.2 million on pretax income of $5.5 million. This equates to a 40.8% effective tax rate. The provision for income taxes for the three months ended July 31, 1999 was $1.2 million on pretax income of $3.8 million. This equates to a 39.4% effective tax rate after removing from pretax income the equity in earnings of unconsolidated subsidiaries ($.7 million), which earnings are presented on an after tax basis. Minority interests pertain to the portions of consolidated subsidiaries not owned by the Company during the three months ended July 31, 2000 (Car-Mart, Smart Choice, Paaco and Crown El Salvador) and the three months ended July 31, 1999 (Paaco, Crown El Salvador and Home Stay). LIQUIDITY AND CAPITAL RESOURCES For the three months ended July 31, 2000, net cash provided by operating activities amounted to $19.0 million. The principal sources of cash resulted from (i) net income, (ii) certain non-cash expenses (provision for credit losses and depreciation and amortization), and (iii) the sale of repossessed vehicles. Net cash used by investing activities of $32.0 million included (i) an $30.1 million use of cash in finance receivables originations in excess of finance receivables collections, and (ii) a $1.7 million use of cash in the purchase of property and equipment. Net cash provided by financing activities of $7.2 million principally relates to (i) net borrowings from revolving credit facilities ($8.8 million), offset by (ii) purchases of the Company's common stock ($.8 million) and repayments of other debt ($.8 million). As of July 31, 2000 the Company's sources of liquidity included approximately (i) $4.1 million of cash on hand, of which $1.2 million was held by Crown, (ii) an aggregate of $36.5 million remaining to be drawn on the revolving credit facilities of Car-Mart, Smart Choice, Paaco, Concorde and Precision, although the majority of such additional draws may only be made in connection with a corresponding increase in the related collateral asset (i.e., finance receivables, mortgage loans held for sale and intermediate bulk containers), and (iii) the potential issuance of additional debt and/or equity, although the Company has no specific commitments or arrangements to issue such additional debt and/or equity. Based on the collateral on hand at July 31, 2000, the Company's subsidiaries could have collectively drawn an additional $4.5 million on their revolving credit facilities. The loan agreements which govern the credit facilities of Crown's subsidiaries limit dividends and other distributions from such subsidiaries to Crown. The amount available to be drawn under each of the Company's revolving credit facilities is a function of the underlying collateral asset. Generally, the Company is able to borrow a specified percentage of the face value of eligible finance receivables in the case of Car-Mart, Smart Choice and Paaco, and eligible mortgage loans in the case of Concorde. Precision's borrowing base is a function of the number of tanks owned and operating cash flow, as defined. The Company's revolving credit facilities mature at various times between September 2000 and November 2004, and bear interest at rates ranging from Libor plus 2.0% to prime plus 2.25%. The advance rates on eligible finance receivables decline from 85.0% to 70.0% for Smart Choice and from 72.0% to 67.5% for Paaco over the term of the respective credit facilities. The Company expects that it will have adequate liquidity to satisfy the reductions in advance rates over the terms of the credit facilities. The Company also expects that it will renew or refinance each of its credit facilities with the existing or a new lender on or before the scheduled maturity date of the facility. The Company is focusing on the development and expansion of its existing businesses and the potential acquisition or development of other unrelated businesses. The credit facilities of Car-Mart, Smart Choice, Paaco, Precision and Concorde are expected to be able to support the majority of their anticipated growth over the next twelve months. As of July 31, 2000 the Company had an outstanding commitment of approximately $.4 million pertaining to an investment in a private venture capital fund which focuses on the investment in Internet related or emerging technology companies. The Company plans to fund this commitment from cash on hand. In March 1996 the Company's Board of Directors approved a program, as amended, to repurchase up to 6,000,000 shares of the Company's common stock from time to time in the open market or in private transactions. As of July 31, 2000 the Company had repurchased 4,219,517 shares pursuant to this program. The timing and amount of future share repurchases, if any, will depend on various factors including market conditions, available alternative investments and the Company's financial position. 14 SEASONALITY The Company's automobile sales business is seasonal in nature. In the automobile business, the Company's third fiscal quarter (November through January) is historically the slowest period for car and truck sales. Many of the Company's operating expenses such as administrative personnel, rent and insurance are fixed and cannot be reduced during periods of decreased sales. Conversely, the Company's fourth fiscal quarter (February through April) is historically the busiest time for car and truck sales as many of the Company's customers use income tax refunds as a down payment on the purchase of a vehicle. None of the Company's other businesses experience significant seasonal fluctuations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk on its financial instruments from changes in interest rates. The Company does not use financial instruments for trading purposes or to manage interest rate risk. The Company's earnings are impacted by its 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. Financial instruments consist of fixed rate finance receivables and fixed and variable rate notes payable. The Company's finance receivables generally bear interest at fixed rates ranging from 10% to 26%. These finance receivables have scheduled maturities from one to 42 months. Financial instruments also include mortgage notes held for sale. The Company does not experience significant market risk with such mortgage notes as they are generally sold within 45 days of origination or purchase. At July 31, 2000 the majority of the Company's notes payable contained variable interest rates that fluctuate with market rates. Therefore, an increase in market interest rates would decrease the Company's net interest income and profitability. The table below illustrates the impact, which hypothetical changes in market interest rates could have on the Company's annual pretax earnings. The calculations assume (i) the increase or decrease in market interest rates remain in effect for twelve months, (ii) the amount of variable rate notes payable outstanding during the period decreases in direct proportion to decreases in finance receivables as a result of scheduled payments and anticipated charge-offs, and (iii) there is no change in prepayment rates as a result of the interest rate changes.
Change in Change in Annual Interest Rates Pretax Earnings -------------------- ------------------ (in thousands) +2% $ (2,384) +1% (1,192) -1% 1,192 -2% 2,384
15 PART II ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27.1 Financial data schedule (1). (b) Reports on Form 8-K: During the fiscal quarter ended July 31, 2000 no reports on Form 8-K were filed. ---------- (1) Filed herewith. 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CROWN GROUP, INC. By: \s\ Mark D. Slusser -------------------------------------------- Mark D. Slusser Chief Financial Officer, Vice President Finance and Secretary (Principal Financial and Accounting Officer) Dated: September 13, 2000 17 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 27.1 Financial data schedule