10-Q 1 d84877e10-q.txt FORM 10-Q FOR QUARTER ENDED JANUARY 31, 2001 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: JANUARY 31, 2001 0-14939 CROWN GROUP, INC. (Exact name of registrant as specified in its charter) TEXAS 63-0851141 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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 March 7, 2001 ------------------- ------------- Common stock, par value $.01 per share 7,304,867 2 PART I ITEM 1. FINANCIAL STATEMENTS CROWN GROUP, INC. CONSOLIDATED BALANCE SHEETS
January 31, 2001 (unaudited) April 30, 2000 ------------ -------------- Assets: Cash and cash equivalents $ 1,780,980 $ 9,843,310 Accounts and other receivables, net 5,499,459 5,489,686 Mortgage loans held for sale, net 11,907,687 14,202,420 Finance receivables, net 207,068,018 183,331,361 Inventory 14,413,857 14,948,365 Prepaid and other assets 1,558,062 1,753,074 Investments 6,547,208 2,503,146 Deferred tax assets, net 15,971,264 13,859,897 Property and equipment, net 18,566,240 27,736,105 Goodwill, net 12,746,589 17,239,955 ------------ ------------ $296,059,364 $290,907,319 ============ ============ Liabilities and stockholders' equity: Accounts payable $ 7,258,510 $ 8,606,983 Accrued liabilities 11,105,981 13,557,228 Income taxes payable 3,358,871 9,599,439 Revolving credit facilities 184,420,809 172,709,224 Other notes payable 19,492,225 18,342,379 Deferred sales tax 4,727,112 4,207,117 ------------ ------------ 230,363,508 227,022,370 ------------ ------------ Minority interests 6,073,730 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; 7,332,867 issued and outstanding (8,247,762 at April 30, 2000) 73,329 82,478 Additional paid-in capital 24,411,376 28,960,793 Retained earnings 35,137,421 29,823,944 ------------ ------------ Total stockholders' equity 59,622,126 58,867,215 ------------ ------------ $296,059,364 $290,907,319 ============ ============
See accompanying notes to consolidated financial statements. 2 3 CONSOLIDATED STATEMENTS OF OPERATIONS CROWN GROUP, INC. (UNAUDITED)
Three Months Ended Nine Months Ended January 31, January 31, 2001 2000 2001 2000 --------------- --------------- ---------------- ----------------- Revenues: Sales $ 65,720,274 $ 46,632,384 $ 206,720,904 $ 124,967,077 Interest income 11,952,824 9,123,289 35,666,803 19,173,127 Gain on sale of mortgage loans 1,752,494 1,075,075 5,331,692 3,514,169 Rental income 1,025,985 1,973,795 3,256,153 Gaming 466,067 647,111 1,602,448 1,581,981 Other 222,861 217,043 834,234 314,297 ------------- ------------- ------------- ------------- 80,114,520 58,720,887 252,129,876 152,806,804 ------------- ------------- ------------- ------------- Costs and expenses: Cost of sales 39,803,981 28,745,845 122,946,582 75,450,574 Selling, general and administrative 17,893,195 13,147,026 53,538,242 36,753,473 Provision for credit losses 14,087,854 8,669,219 44,110,204 21,387,881 Interest expense 5,885,859 4,009,144 17,337,924 9,084,277 Depreciation and amortization 1,025,887 961,977 3,159,347 2,596,944 Write-down of Crown El Salvador 800,000 ------------- ------------- ------------- ------------- 78,696,776 55,533,211 241,892,299 145,273,149 ------------- ------------- ------------- ------------- Other income: Equity in earnings of unconsolidated 79,609 (312,534) 79,609 630,309 subsidiaries Gain on sale of securities, net 4,726 123,268 4,726 10,861,100 ------------- ------------- ------------- ------------- 84,335 (189,266) 84,335 11,491,409 ------------- ------------- ------------- ------------- Income before taxes and minority interest 1,502,079 2,998,410 10,321,912 19,025,064 Provision for income taxes 649,750 1,256,205 4,325,793 7,266,343 Minority interests (144,020) 261,723 682,642 93,354 ------------- ------------- ------------- ------------- Net income $ 996,349 $ 1,480,482 $ 5,313,477 $ 11,665,367 ============= ============= ============= ============= Earnings per share: Basic $ .13 $ .17 $ .68 $ 1.23 Diluted $ .13 $ .16 $ .65 $ 1.18 Weighted average number of shares outstanding: Basic 7,474,780 8,790,490 7,856,297 9,508,064 Diluted 7,768,330 9,179,744 8,218,856 9,911,777
See accompanying notes to consolidated financial statements. 3 4 CONSOLIDATED STATEMENTS OF CASH FLOWS CROWN GROUP, INC. (UNAUDITED)
Nine Months Ended January 31, 2001 2000 ------------- ------------- Operating activities: Net income $ 5,313,477 $ 11,665,367 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,159,347 2,596,944 Accretion of purchase discount (843,126) (1,082,634) Deferred income taxes (2,431,178) (2,349,763) Provision for credit losses 44,110,204 21,387,881 Minority interests 682,642 93,354 Write-down of Crown El Salvador 800,000 Gain on sale of mortgage loans (5,331,692) (3,514,169) Gain on sale of assets (132,294) (105,840) Gain on sale of securities (4,726) (10,861,100) Equity in earnings of unconsolidated subsidiaries (79,609) (630,309) Changes in assets and liabilities, net of acquisitions: Accounts and other receivables 798,319 (611,689) Mortgage loans originated or acquired (130,735,181) (106,822,237) Mortgage loans sold and principal repayments 137,678,934 106,190,189 Inventory 22,102,755 14,660,789 Prepaids and other assets 347,654 (575,905) Accounts payable, accrued liabilities and deferred sales tax (2,390,556) (3,300,855) Income taxes payable (3,952,125) 1,677,177 ------------- ------------- Net cash provided by operating activities 69,092,845 28,417,200 ------------- ------------- Investing activities: Finance receivable originations (193,558,657) (113,364,312) Finance receivable collections 105,023,809 64,322,170 Purchase of property and equipment (3,511,400) (5,848,753) Sale of assets 650,045 856,913 Purchase of investments (905,877) Sale of securities 2,127,675 16,762,325 Dividends and collections of notes receivable from CMN 306,487 Purchase of Smart Choice, net of cash acquired (866,741) ------------- ------------- Net cash used in investing activities (90,174,405) (37,831,911) ------------- ------------- Financing activities: Sale of common stock 60,937 Purchase of common stock (3,785,670) (4,492,823) Proceeds from (repayments of) revolving credit facilities, net 18,289,271 6,228,247 Proceeds from (repayments of) other debt, net (1,545,308) (133,347) ------------- ------------- Net cash provided by financing activities 13,019,230 1,602,077 ------------- ------------- Decrease in cash and cash equivalents (8,062,330) (7,812,634) Cash and cash equivalents at: Beginning of period 9,843,310 12,910,535 ------------- ------------- End of period $ 1,780,980 $ 5,097,901 ============= =============
See accompanying notes to consolidated financial statements. 4 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 January 31, 2001, 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 January 31, 2001 Crown also owned (i) 50% 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. Effective November 1, 2000 the Company sold a 50% interest in Precision to the President of Precision, for total consideration of approximately $3.1 million (see Note C). 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 nine month period ended January 31, 2001 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. Equity Method Investments The Company accounts for subsidiaries in which it does not control (generally 50% owned or less) by the equity method of accounting. On November 1, 2000 the Company sold a 50% interest in Precision, bringing its remaining ownership interest to 50%. As a result, effective November 1, 2000 the Company began accounting for its ownership interest in Precision on the equity method. Reclassifications Certain prior year amounts in the accompanying financial statements have been reclassified to conform to the fiscal 2001 presentation. C - ACQUISITION AND DISPOSITIONS Sale of 50% of Precision Effective November 1, 2000 the Company sold a 50% interest in Precision to Van P. Finger, the President of Precision, for total consideration of approximately $3.1 million. The consideration consisted of approximately $2.2 million in cash and 170,170 shares of Crown common stock. In connection with the transaction, the Company recorded a gain of $4,726 which is included in gain on sale of securities in the consolidated statements of operations. Home Stay Sale Effective December 2, 1999 Crown sold its 80% interest in Home Stay Lodges I, Ltd. ("Home Stay") to Efficiency Lodge, Inc. for approximately $850,000, of which approximately $210,000 was paid in cash and the balance is payable over five years with interest at an annual rate of prime plus 1%. In connection with the transaction, Crown recorded a gain of approximately $.1 million which is included in gain on sale of securities in the consolidated statements of operations. 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 was subsequently converted into 6,857,907 shares of Smart Choice common stock, or 70% of the total outstanding shares. 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 5 6 minority shareholders converted their 15% interest in Paaco into shares of Smart Choice Series E Convertible Preferred Stock which was subsequently converted into 489,851 shares of Smart Choice common stock, or 5% of the total outstanding shares. Paaco is now a wholly-owned subsidiary of Smart Choice. Casino Magic Neuquen Sale Effective October 1, 1999 the Company sold its 49% interest in Casino Magic Neuquen ("CMN") and related assets for $16.5 million cash. In connection with the transaction, the Company recorded a gain of approximately $10.7 million which is included in gain on sale of securities in the consolidated statements of operations. Pro Forma Financial Information The following unaudited pro forma condensed consolidated results of operations of the Company for the three months ended January 31, 2000 were prepared as if the acquisition of Smart Choice had occurred on November 1, 1999 (in thousands, except per share amount). The following unaudited pro forma condensed consolidated results of operations of the Company for the nine months ended January 31, 2000 were prepared as if the acquisition of Smart Choice and the disposition of CMN 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, net of cash received in the disposition, (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, (v) eliminating Smart Choice's discontinued operations and write off of historical goodwill, and (vi) adjusting income tax expense to reflect the above described adjustments. The operating results of Precision and Home Stay did not have a material impact on the consolidated operating results of the Company during the periods they were included in the Company's consolidated operating results for the three and nine months ended January 31, 2001 and 2000. As a result, no adjustments to the following pro forma financial information has been made to reflect those dispositions as of the beginning of the periods.
Three Months Ended Nine Months Ended January 31, 2000 January 31, 2000 ------------------ ----------------- Revenues $ 64,907 $200,402 Net income (3,171) 2,925 Earnings per share - diluted $ (.36) $ .30
The unaudited pro forma results of operations are not necessarily indicative of future results or the results that would have occurred had the transactions taken place on the dates 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 46 months. The components of finance receivables as of January 31, 2001 and April 30, 2000 are as follows:
January 31, April 30, 2001 2000 ------------- ------------- Finance receivables $ 293,954,848 $ 267,389,412 Unearned finance charges (37,575,097) (38,659,786) Allowance for credit losses (48,481,053) (43,783,529) Purchase discounts (830,680) (1,614,736) ------------- ------------- $ 207,068,018 $ 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. 6 7 Changes in the finance receivables allowance for credit losses for the nine months ended January 31, 2001 and 2000 are as follows:
Nine Months Ended January 31, 2001 2000 ------------ ------------ Balance at beginning of period $ 43,783,529 $ 17,045,063 Acquisition of Smart Choice 23,568,788 Provision for credit losses 43,682,849 21,387,881 Net charge offs (38,985,325) (18,616,663) ------------ ------------ Balance at end of period $ 48,481,053 $ 43,385,069 ============ ============
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 ($819,100 and $515,900) and trade accounts receivable ($0 and $27,256) as of January 31, 2001 and April 30, 2000, respectively. E - INVESTMENTS A summary of investments as of January 31, 2001 and April 30, 2000 is as follows:
January 31, April 30, 2001 2000 ----------- ---------- Precision IBC, Inc. $3,138,185 Monarch Venture Partners Fund I 1,809,023 $1,503,146 Mariah Vision 3, Inc. 1,500,000 1,000,000 Web Real Estate, Inc. 100,000 ---------- ---------- $6,547,208 $2,503,146 ========== ==========
F - PROPERTY AND EQUIPMENT A summary of property and equipment as of January 31, 2001 and April 30, 2000 is as follows:
January 31, April 30, 2001 2000 ------------ ------------ Land and buildings $ 7,640,830 $ 8,310,614 Rental equipment 9,937,557 Furniture, fixtures and equipment 11,346,757 10,144,565 Leasehold improvements 4,143,017 3,292,660 Less accumulated depreciation and amortization (4,564,364) (3,949,291) ------------ ------------ $ 18,566,240 $ 27,736,105 ============ ============
For the nine months ended January 31, 2001 and 2000 depreciation and amortization of property and equipment amounted to $2,425,309 and $1,715,924, respectively. 7 8 G - DEBT A summary of debt as of January 31, 2001 and April 30, 2000 is as follows:
Revolving Credit Facilities ----------------------------------------------------------------------------------------------------------------------- Facility Interest Balance at Borrower Lender Amount Rate Maturity January 31, 2001 April 30, 2000 ------------ --------------- ------------- ------------- -------- ---------------- -------------- Smart Choice Finova $ 98 million Prime + 2.25% Nov 2004 $ 88,394,135 $ 77,533,325 Paaco Finova $ 62 million Prime + 2.00% Nov 2004 59,047,810 52,833,680 Car-Mart Bank of America $ 35 million Prime + .88% Jan 2002 28,713,631 27,502,614 Concorde Bank United $ 25 million Libor + 2.00% Sep 2001 8,265,233 9,839,067 Precision Wells Fargo $ 8 million Prime Dec 2001 5,000,538 ------------- ------------- $ 184,420,809 $ 172,709,224 ================ =============
Revolving Credit Facilities ----------------------------------------------------------------------------------------------------------------------- Facility Interest Balance at Borrower Lender Amount Rate Maturity January 31, 2001 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 Crown Regions Bank N/A Prime + .50% Nov 2002 2,000,000 Precision South Trust Bank N/A 7.35% Jan 2014 647,743 Paaco Bank United N/A 8.50% May 2003 812,877 869,616 Paaco Heller Financial N/A Prime + 2.25% Dec 2015 592,327 603,084 Smart Choice Huntington N/A Prime + .75% Jul 2001 1,960,526 2,090,171 Smart Choice High Capital N/A 10.0% Nov 2001 725,000 1,000,000 Various Various N/A Various Various 3,585,495 3,315,765 ----------- ------------- $19,492,225 $ 18,342,379 =========== =============
The Company's revolving credit facilities are primarily collateralized by finance receivables and mortgage loans. 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 January 31, 2001 substantially all of the Company's $37.6 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 assets. 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. The advance rates on eligible finance receivables decline from 85.0% to 70.0% for Smart Choice and from 70.0 % to 67.5% for Paaco over the term of the respective credit facilities. Based upon the eligible collateral on hand at January 31, 2001, Paaco and Smart Choice were collectively over-advanced on their senior credit facilities with Finova Capital Corporation ("Finova") by approximately $4.9 million. Paaco and Smart Choice presently expect to come into compliance with the terms of their credit facilities in April 2001. However, in July 2001 the Smart Choice credit facility requires a step-down in the finance receivable advance rate from 85.0% to 77.0%. Absent funding from an outside source, Smart Choice does not expect it will be able to meet this step-down. In February 2001, Smart Choice and Paaco provided Finova with their most recent financial projections and requested that the scheduled finance receivable advance rate step-downs over the next three years be modified to conform to those projections. Presently, it is the Company's expectation that Finova will either modify the scheduled finance receivable advance rate step-downs to conform to the financial projections of Smart Choice and Paaco, or provide Smart Choice and Paaco with a forbearance letter covering some period of time. However, the Company cannot predict with certainty the actions of Finova; and, under the terms of the credit facilities, Finova has the right to accelerate the maturity of the loans, thereby demanding immediate repayment, and call on Crown's guarantee of $5 million. 8 9 H - EARNINGS PER SHARE A summary reconciliation of basic earnings per share to diluted earnings per share for the three and nine months ended January 31, 2001 and 2000 is as follows:
Three Months Ended Nine Months Ended January 31, January 31, 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Net income $ 996,349 $ 1,480,482 $ 5,313,477 $11,665,367 =========== =========== =========== =========== Average shares outstanding-basic 7,474,780 8,790,490 7,856,297 9,508,064 Dilutive options 293,550 389,254 362,559 403,713 ----------- ----------- ----------- ----------- Average shares outstanding-diluted 7,768,330 9,179,744 8,218,856 9,911,777 =========== =========== =========== =========== Earnings per share: Basic $ .13 $ .17 $ .68 $ 1.23 Diluted $ .13 $ .16 $ .65 $ 1.18 Antidilutive securities not included: Options 445,000 432,500 445,000 432,500 =========== =========== =========== ===========
I - 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 purported 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 asserted 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. 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. 9 10 J - SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow disclosures for the nine months ended January 31, 2001 and 2000 are as follows:
Nine Months Ended January 31, 2001 2000 ----------- ----------- Inventory acquired in repossession $21,958,468 $14,051,983 Notes issued in purchase of property and equipment 1,329,128 2,044,000 Interest paid, net of amount capitalized 16,885,541 8,598,058 Income taxes paid, net of refund 10,709,240 8,058,829 Value of securities received in acquisition amendment 4,452,597 Value of securities received in sale of 50% of Precision 833,833
10 11 K - BUSINESS SEGMENTS Operating results and other financial data are presented for the four principal business segments of the Company for the three months ended January 31, 2001 and 2000. 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, for periods prior to November 1, 2000, 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 Precision (for periods after October 31, 2000), Casino Magic Neuquen and Atlantic Castings. The Company's business segment data for the three months ended January 31, 2001 and 2000 is as follows (in thousands):
Three Months Ended January 31, 2001 --------------------------------------------------------------------------------------- Automobile IBC's Mortgage Other Eliminations Consolidated ---------- -------- -------- -------- ------------ ------------ Revenues: Sales and other $ 65,778 $ $ 1,918 $ 466 $ 68,162 Interest income 11,380 460 380 $ (267) 11,953 -------- -------- -------- -------- -------- -------- Total 77,158 2,378 846 (267) 80,115 -------- -------- -------- -------- -------- -------- Costs and expenses: Cost of sales 39,804 39,804 Selling, gen. and admin 14,415 2,016 1,462 17,893 Prov. for credit losses 13,901 187 14,088 Interest expense 5,577 340 236 (267) 5,886 Depreciation and amort 523 58 445 1,026 -------- -------- -------- -------- -------- -------- Total 74,220 2,601 2,143 (267) 78,697 -------- -------- -------- -------- -------- -------- Security gains and other 84 84 -------- -------- -------- -------- -------- -------- Income (loss) before taxes and minority interests $ 2,938 $ -- $ (223) $ (1,213) $ -- $ 1,502 ======== ======== ======== ======== ======== ======== Capital expenditures $ 1,443 $ -- $ 32 $ 39 $ -- $ 1,514 ======== ======== ======== ======== ======== ======== Total assets $270,259 $ -- $ 14,061 $ 73,491 $(61,752) $296,059 ======== ======== ======== ======== ======== ========
Three Months Ended January 31, 2000 ------------------------------------------------------------------------------------ Automobile IBC's Mortgage Other Eliminations Consolidated ---------- --------- --------- --------- ------------ ------------ Revenues: Sales and other $ 45,929 $ 1,849 $ 1,080 $ 740 $ 49,598 Interest income 8,447 18 481 856 $ (679) 9,123 --------- --------- --------- --------- --------- --------- Total 54,376 1,867 1,561 1,596 (679) 58,721 --------- --------- --------- --------- --------- --------- Costs and expenses: Cost of sales 27,979 767 28,746 Selling, gen. and admin 9,708 474 1,290 1,675 13,147 Prov. for credit losses 8,570 29 70 8,669 Interest expense 3,785 149 366 388 (679) 4,009 Depreciation and amort 332 254 51 325 962 --------- --------- --------- --------- --------- --------- Total 50,374 1,673 1,777 2,388 (679) 55,533 --------- --------- --------- --------- --------- --------- Security gains and other (190) (190) --------- --------- --------- --------- --------- --------- Income (loss) before taxes and minority interests $ 4,002 $ 194 $ (216) $ (982) $ -- $ 2,998 ========= ========= ========= ========= ========= ========= Capital expenditures $ 289 $ 1,389 $ 14 $ 59 $ -- $ 1,751 ========= ========= ========= ========= ========= ========= Total assets $ 217,337 $ 16,326 $ 16,000 $ 76,542 $ (55,831) $ 270,374 ========= ========= ========= ========= ========= =========
11 12 The Company's business segment data for the nine months ended January 31, 2001 and 2000 is as follows (in thousands):
Nine Months Ended January 31, 2001 ------------------------------------------------------------------------------------------ Automobile IBC's Mortgage Other Eliminations Consolidated ---------- --------- --------- --------- ------------ ------------ Revenues: Sales and other $ 205,620 $ 3,487 $ 5,686 $ 1,670 $ 216,463 Interest income 33,947 22 1,405 1,211 $ (918) 35,667 --------- --------- --------- --------- --------- --------- Total 239,567 3,509 7,091 2,881 (918) 252,130 --------- --------- --------- --------- --------- --------- Costs and expenses: Cost of sales 121,767 1,180 122,947 Selling, gen. and admin 42,352 997 5,459 4,730 53,538 Prov. for credit losses 43,683 (2) 429 44,110 Interest expense 16,204 321 1,091 640 (918) 17,338 Depreciation and amort 1,373 556 166 1,064 3,159 El Salvador write-down 800 800 --------- --------- --------- --------- --------- --------- Total 225,379 3,052 7,145 7,234 (918) 241,892 --------- --------- --------- --------- --------- --------- Security gains and other 84 84 --------- --------- --------- --------- --------- --------- Income (loss) before taxes and minority interests $ 14,188 $ 457 $ (54) $ (4,269) $ -- $ 10,322 ========= ========= ========= ========= ========= ========= Capital expenditures $ 3,415 $ 1,206 $ 154 $ 66 $ -- $ 4,841 ========= ========= ========= ========= ========= ========= Total assets $ 270,259 $ -- $ 14,061 $ 73,491 $ (61,752) $ 296,059 ========= ========= ========= ========= ========= =========
Nine Months Ended January 31, 2000 ---------------------------------------------------------------------------------------- Automobile IBC's Mortgage Other Eliminations Consolidated ---------- --------- --------- --------- ------------ ------------ Revenues: Sales and other $ 122,661 $ 5,106 $ 3,596 $ 2,271 $ 133,634 Interest income 17,224 32 1,416 2,077 $ (1,576) 19,173 --------- --------- --------- --------- --------- --------- Total 139,885 5,138 5,012 4,348 (1,576) 152,807 --------- --------- --------- --------- --------- --------- Costs and expenses: Cost of sales 73,476 1,975 75,451 Selling, gen. and admin 25,544 1,449 3,848 5,912 36,753 Prov. for credit losses 21,199 82 107 21,388 Interest expense 8,158 424 1,052 1,026 (1,576) 9,084 Depreciation and amort 558 726 148 1,165 2,597 --------- --------- --------- --------- --------- --------- Total 128,935 4,656 5,155 8,103 (1,576) 145,273 --------- --------- --------- --------- --------- --------- Security gains and other 11,491 11,491 --------- --------- --------- --------- --------- --------- Income (loss) before taxes and minority interests $ 10,950 $ 482 $ (143) $ 7,736 $ -- $ 19,025 ========= ========= ========= ========= ========= ========= Capital expenditures $ 1,832 $ 3,112 $ 62 $ 2,887 $ -- $ 7,893 ========= ========= ========= ========= ========= ========= Total assets $ 217,337 $ 16,326 $ 16,000 $ 76,542 $ (55,831) $ 270,374 ========= ========= ========= ========= ========= =========
12 13 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 January 31, 2001, 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 January 31, 2001 Crown also owned (i) 50% 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. Effective November 1, 2000 the Company sold a 50% interest in Precision to the President of Precision, for total consideration of approximately $3.1 million. 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 and nine months ended January 31, 2001 and 2000 are not entirely comparable. Below is a summary of the number of months of operation each company's operating results are included in the Company's consolidated results of operations for the three and nine months ended January 31, 2001 and 2000:
Number of Months Subsidiary Included In ---------------------------------------------- Three Months Ended Nine Months Ended Month Crown Month Crown January 31, January 31, Acquired Disposed --------------------- --------------------- Entity or Formed or Sold 2001 2000 2001 2000 --------------------- ----------- ---------------- -------- -------- -------- --------- Casino Magic Neuquen 6-97 10-99 -- -- -- 5 months Concorde 6-97 3 months 3 months 9 months 9 months Paaco 2-98 3 months 3 months 9 months 9 months Precision 2-98 11-00 (50% sold) 3 months 3 months 9 months 9 months Home Stay 5-98 12-99 -- 1 month -- 7 months Car-Mart 1-99 3 months 3 months 9 months 9 months Crown El Salvador 2-99 3 months 3 months 9 months 9 months Atlantic Castings 3-99 4-00 -- 3 months -- 9 months Smart Choice 12-99 3 months 2 months 9 months 2 months
13 14 THREE MONTHS ENDED JANUARY 31, 2001 COMPARED TO THE THREE MONTHS ENDED JANUARY 31, 2000 Operating results and other financial data are presented for the four principal business segments of the Company for the three months ended January 31, 2001 and 2000. 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, for periods prior to November 1, 2000, 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 Precision (for periods after October 31, 2000), Casino Magic Neuquen and Atlantic Castings. The Company's business segment data for the three months ended January 31, 2001 and 2000 is as follows (in thousands):
Three Months Ended January 31, 2001 --------------------------------------------------------------------------------------------------- Automobile IBC's Mortgage Other Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ ------------ Revenues: Sales and other $ 65,778 $ $ 1,918 $ 466 $ 68,162 Interest income 11,380 460 380 $ (267) 11,953 ------------ ------------ ------------ ------------ ------------ ------------ Total 77,158 2,378 846 (267) 80,115 ------------ ------------ ------------ ------------ ------------ ------------ Costs and expenses: Cost of sales 39,804 39,804 Selling, gen. and admin 14,415 2,016 1,462 17,893 Prov. for credit losses 13,901 187 14,088 Interest expense 5,577 340 236 (267) 5,886 Depreciation and amort 523 58 445 1,026 ------------ ------------ ------------ ------------ ------------ ------------ Total 74,220 2,601 2,143 (267) 78,697 ------------ ------------ ------------ ------------ ------------ ------------ Security gains and other 84 84 ------------ ------------ ------------ ------------ ------------ ------------ Income (loss) before taxes and minority interests $ 2,938 $ -- $ (223) $ (1,213) $ -- $ 1,502 ============ ============ ============ ============ ============ ============
Three Months Ended January 31, 2000 ------------------------------------------------------------------------------------------------- Automobile IBC's Mortgage Other Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ ------------ Revenues: Sales and other $ 45,929 $ 1,849 $ 1,080 $ 740 $ 49,598 Interest income 8,447 18 481 856 $ (679) 9,123 ------------ ------------ ------------ ------------ ------------ ------------ Total 54,376 1,867 1,561 1,596 (679) 58,721 ------------ ------------ ------------ ------------ ------------ ------------ Costs and expenses: Cost of sales 27,979 767 28,746 Selling, gen. and admin 9,708 474 1,290 1,675 13,147 Prov. for credit losses 8,570 29 70 8,669 Interest expense 3,785 149 366 388 (679) 4,009 Depreciation and amort 332 254 51 325 962 ------------ ------------ ------------ ------------ ------------ ------------ Total 50,374 1,673 1,777 2,388 (679) 55,533 ------------ ------------ ------------ ------------ ------------ ------------ Security gains and other (190) (190) ------------ ------------ ------------ ------------ ------------ ------------ Income (loss) before taxes and minority interests $ 4,002 $ 194 $ (216) $ (982) $ -- $ 2,998 ============ ============ ============ ============ ============ ============
Net income for the three months ended January 31, 2001 decreased $.5 million compared to the same period in the prior fiscal year. The decrease was primarily attributable to a decline in Smart Choice's operating results ($2.3 million) principally due to a higher provision for credit losses, partially offset by greater earnings at Car-Mart ($.9 million) and Paaco ($.8 million). Revenues from sales and other for the three months ended January 31, 2001 increased $18.6 million compared to the same period in the prior fiscal year. The increase was principally the result of (i) including Smart Choice in the Company's consolidated results of operations for three 14 15 months in the current period versus two months in the prior period ($5.5 million), and (ii) higher revenues at Car-Mart ($6.0 million), Paaco ($6.6 million) and Smart Choice ($1.7 million), partially offset by (iii) the deconsolidation of Precision ($1.8 million) as a result of the sale of a 50% interest in that company in November 2000. Interest income for the three months ended January 31, 2001 increased $2.8 million compared to the same period in the prior fiscal year. The increase was principally the result of (i) including Smart Choice in the Company's consolidated results of operations for three months in the current period versus two months in the prior period ($1.7 million), and (ii) greater interest earned on Car-Mart's ($.4 million) and Paaco's ($1.1 million) finance receivables portfolios as a result of growth in such portfolios, partially offset by (iii) lower interest income in the months of December and January at Smart Choice ($.3 million) as a result of a decline in interest rates charged on installment loans. As a percentage of sales, cost of sales for the three months ended January 31, 2001 decreased to 60.6% from 61.6% in the same period in the prior fiscal year. The decrease was principally the result of higher gross profit margins at Car-Mart and Smart Choice. Selling, general and administrative expense for the three months ended January 31, 2001 increased $4.7 million compared to the same period in the prior fiscal year. The increase was principally the result of (i) including Smart Choice in the Company's consolidated results of operations for three months in the current period versus two months in the prior period ($1.7 million), and (ii) higher expenses at Car-Mart ($.6 million), Paaco ($1.9 million), Smart Choice ($.5 million) and Concorde ($.7 million) which corresponds to increased revenues at those subsidiaries, partially offset by (iii) the deconsolidation of Precision ($.5 million) as a result of the sale of a 50% interest in that company in November 2000. Provision for credit losses for the three months ended January 31, 2001 increased $5.4 million compared to the same period in the prior fiscal year. The increase was principally the result of (i) including Smart Choice in the Company's consolidated results of operations for three months in the current period versus two months in the prior period ($1.3 million), and (ii) higher credit losses at Car-Mart ($1.3 million) and Smart Choice ($3.5 million) which corresponds to an increase in the finance receivables portfolios as a result of increased sales levels, partially offset by (iii) a decline in credit losses at Paaco ($.8 million) resulting from improved collection results in recent months. Interest expense for the three months ended January 31, 2001 increased $1.9 million compared to the same period in the prior fiscal year. The increase was principally the result of (i) including Smart Choice in the Company's consolidated results of operations for three months in the current period versus two months in the prior period ($.9 million), and (ii) higher interest expense at Car-Mart ($.1 million), Paaco ($.4 million) and Smart Choice ($.4 million) resulting from an increase in the balance of their revolving credit facilities during the periods. The provision for income taxes for the three months ended January 31, 2001 was $.6 million on pretax income of $1.5 million. This equates to a 45.7% effective tax rate after removing from pretax income the equity in earnings of unconsolidated subsidiaries ($.1 million), which earnings are presented on an after tax basis. The provision for income taxes for the three months ended January 31, 2000 was $1.3 million on pretax income of $3.0 million. This equates to a 37.9% effective tax rate after removing from pretax income the equity in losses of unconsolidated subsidiaries ($.3 million), which losses 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 January 31, 2001 (Car-Mart, Smart Choice and Paaco) and the three months ended January 31, 2000 (Car-Mart, Smart Choice, Paaco and Home Stay). 15 16 NINE MONTHS ENDED JANUARY 31, 2001 COMPARED TO THE NINE MONTHS ENDED JANUARY 31, 2000 Operating results and other financial data are presented for the four principal business segments of the Company for the nine months ended January 31, 2001 and 2000. 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, for periods prior to November 1, 2000, 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 Precision (for periods after October 31, 2000), Casino Magic Neuquen and Atlantic Castings. The Company's business segment data for the nine months ended January 31, 2001 and 2000 is as follows (in thousands):
Nine Months Ended January 31, 2001 ----------------------------------------------------------------------------------------------- Automobile IBC's Mortgage Other Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ ------------ Revenues: Sales and other $ 205,620 $ 3,487 $ 5,686 $ 1,670 $ 216,463 Interest income 33,947 22 1,405 1,211 $ (918) 35,667 ------------ ------------ ------------ ------------ ------------ ------------ Total 239,567 3,509 7,091 2,881 (918) 252,130 ------------ ------------ ------------ ------------ ------------ ------------ Costs and expenses: Cost of sales 121,767 1,180 122,947 Selling, gen. and admin 42,352 997 5,459 4,730 53,538 Prov. for credit losses 43,683 (2) 429 44,110 Interest expense 16,204 321 1,091 640 (918) 17,338 Depreciation and amort 1,373 556 166 1,064 3,159 El Salvador write-down 800 800 ------------ ------------ ------------ ------------ ------------ ------------ Total 225,379 3,052 7,145 7,234 (918) 241,892 ------------ ------------ ------------ ------------ ------------ ------------ Security gains and other 84 84 ------------ ------------ ------------ ------------ ------------ ------------ Income (loss) before taxes and minority interests $ 14,188 $ 457 $ (54) $ (4,269) $ -- $ 10,322 ============ ============ ============ ============ ============ ============
Nine Months Ended January 31, 2000 --------------------------------------------------------------------------------------------- Automobile IBC's Mortgage Other Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ ------------ Revenues: Sales and other $ 122,661 $ 5,106 $ 3,596 $ 2,271 $ 133,634 Interest income 17,224 32 1,416 2,077 $ (1,576) 19,173 ------------ ------------ ------------ ------------ ------------ ------------ Total 139,885 5,138 5,012 4,348 (1,576) 152,807 ------------ ------------ ------------ ------------ ------------ ------------ Costs and expenses: Cost of sales 73,476 1,975 75,451 Selling, gen. and admin 25,544 1,449 3,848 5,912 36,753 Prov. for credit losses 21,199 82 107 21,388 Interest expense 8,158 424 1,052 1,026 (1,576) 9,084 Depreciation and amort 558 726 148 1,165 2,597 ------------ ------------ ------------ ------------ ------------ ------------ Total 128,935 4,656 5,155 8,103 (1,576) 145,273 ------------ ------------ ------------ ------------ ------------ ------------ Security gains and other 11,491 11,491 ------------ ------------ ------------ ------------ ------------ ------------ Income (loss) before taxes and minority interests $ 10,950 $ 482 $ (143) $ 7,736 $ -- $ 19,025 ============ ============ ============ ============ ============ ============
Net income for the nine months ended January 31, 2001 decreased $6.4 million compared to the same period in the prior fiscal year. The decrease was primarily attributable to (i) the prior period including a $7.0 million after tax gain on the sale of Casino Magic Neuquen, and (ii) the current period including a $.5 million after tax loss on the write-down of the Company's investment in Crown El Salvador, partially offset by (iii) greater earnings from the Company's automobile segment. 16 17 Revenues from sales and other for the nine months ended January 31, 2001 increased $82.8 million compared to the same period in the prior fiscal year. The increase was principally the result of (i) including Smart Choice in the Company's consolidated results of operations for nine months in the current period versus two months in the prior period ($48.1 million), and (ii) higher revenues at Car-Mart ($11.8 million), Paaco ($21.3 million) and Smart Choice ($1.7 million). Interest income for the nine months ended January 31, 2001 increased $16.5 million compared to the same period in the prior fiscal year. The increase was principally the result of (i) including Smart Choice in the Company's consolidated results of operations for nine months in the current period versus two months in the prior period ($12.8 million), and (ii) greater interest earned on Car-Mart's ($1.0 million) and Paaco's ($3.2 million) finance receivables portfolios as a result of growth in such portfolios, partially offset by (iii) lower interest income in the months of December and January at Smart Choice ($.3 million) as a result of a decline in interest rates charged on installment loans. As a percentage of sales, cost of sales for the nine months ended January 31, 2001 decreased to 59.5% from 60.4% in the same period in the prior fiscal year. The decrease was 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 Car-Mart. Selling, general and administrative expense for the nine months ended January 31, 2001 increased $16.8 million compared to the same period in the prior fiscal year. The increase was principally the result of (i) including Smart Choice in the Company's consolidated results of operations for nine months in the current period versus two months in the prior period ($11.4 million), and (ii) higher expenses at Car-Mart ($1.5 million), Paaco ($3.5 million), Smart Choice ($.5 million) and Concorde ($1.6 million) which corresponds to increased revenues at those subsidiaries, partially offset by (iii) the deconsolidation of Precision ($.5 million) as a result of the sale of a 50% interest in that company in November 2000. Provision for credit losses for the nine months ended January 31, 2001 increased $22.7 million compared to the same period in the prior fiscal year. The increase was principally the result of (i) including Smart Choice in the Company's consolidated results of operations for nine months in the current period versus two months in the prior period ($14.9 million), and (ii) higher credit losses at Car-Mart ($2.1 million), Paaco ($1.9 million) and Smart Choice ($3.5 million) which corresponds to an increase in the finance receivables portfolios as a result of increased sales levels. Interest expense for the nine months ended January 31, 2001 increased $8.3 million compared to the same period in the prior fiscal year. The increase was principally the result of (i) including Smart Choice in the Company's consolidated results of operations for nine months in the current period versus two months in the prior period ($5.9 million), and (ii) higher interest expense at Car-Mart ($.4 million), Paaco ($1.3 million) and Smart Choice ($.4 million) resulting from an increase in the balance of their revolving credit facilities. The provision for income taxes for the nine months ended January 31, 2001 was $4.3 million on pretax income of $10.3 million. This equates to a 42.2% effective tax rate after removing from pretax income the equity in earnings of unconsolidated subsidiaries ($.1 million), which earnings are presented on an after tax basis. The provision for income taxes for the nine months ended January 31, 2000 was $7.3 million on pretax income of $19.0 million. This equates to a 39.5% effective tax rate after removing from pretax income the equity in earnings of unconsolidated subsidiaries ($.6 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 nine months ended January 31, 2001 (Car-Mart, Paaco and Smart Choice) and the nine months ended January 31, 2000 (Car-Mart, Paaco, Smart Choice, Crown El Salvador and Home Stay). LIQUIDITY AND CAPITAL RESOURCES For the nine months ended January 31, 2001, net cash provided by operating activities amounted to $69.1 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 $90.2 million included (i) an $88.5 million use of cash in finance receivables originations in excess of finance receivables collections, and (ii) a $3.5 million use of cash in the purchase of property and equipment. Net cash provided by financing activities of $13.0 million principally relates to (i) net borrowings from revolving credit facilities ($18.3 million), offset by (ii) purchases of the Company's common stock ($3.8 million) and repayments of other debt ($1.5 million). As of January 31, 2001, the Company's sources of liquidity included approximately (i) $1.8 million of cash on hand, of which $.6 million was held by Crown, (ii) an aggregate of $35.6 million remaining to be drawn on the revolving credit facilities of Car-Mart, Smart Choice, Paaco and Concorde, 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 and mortgage loans held for sale), 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 January 31, 2001, the Company's subsidiaries could have collectively drawn an additional $6.3 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 assets. 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. The Company's revolving credit facilities mature at various times between September 2001 and November 2004, and bear interest at rates ranging from Libor plus 2.0% to prime plus 2.25%. The Company 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 advance rates on eligible finance receivables decline from 85.0% to 70.0% for Smart Choice and from 70.0% to 67.5% for Paaco over the term of the respective credit facilities. Based upon the eligible collateral on hand at January 31, 2001, Paaco and Smart Choice were collectively over-advanced on their senior credit facilities with Finova by approximately $4.9 million. Paaco and Smart Choice presently expect to come into compliance with the terms of their credit facilities in April 2001. However, in July 2001 the Smart Choice credit facility requires a step-down in the finance receivable advance rate from 85.0% to 77.0%. Absent funding from an outside source, Smart Choice does not expect it will be able to meet this step-down. In 17 18 February 2001, Smart Choice and Paaco provided Finova with their most recent financial projections and requested that the scheduled finance receivable advance rate step-downs over the next three years be modified to conform to those projections. Presently, it is the Company's expectation that Finova will either modify the scheduled finance receivable advance rate step-downs to conform to the financial projections of Smart Choice and Paaco, or provide Smart Choice and Paaco with a forbearance letter covering some period of time. However, the Company cannot predict with certainty the actions of Finova; and, under the terms of the credit facilities, Finova has the right to accelerate the maturity of the loans, thereby demanding immediate repayment, and call on Crown's guarantee of $5 million. 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 and Concorde are expected to be able to support the majority of their anticipated growth over the next twelve months. 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 January 31, 2001 the Company had repurchased 4,997,312 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. 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 46 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 January 31, 2001 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% $ (2,478) +1% (1,239) -1% 1,239 -2% 2,478
18 19 PART II ITEM 3. DEFAULTS UPON SENIOR SECURITIES Based upon the eligible collateral on hand at January 31, 2001, Paaco and Smart Choice were collectively over-advanced on their senior credit facilities with Finova by approximately $4.9 million. Paaco and Smart Choice presently expect to come into compliance with the terms of their credit facilities in April 2001. However, in July 2001 the Smart Choice credit facility requires a step-down in the finance receivable advance rate from 85.0% to 77.0%. Absent funding from an outside source, Smart Choice does not expect it will be able to meet this step-down. In February 2001, Smart Choice and Paaco provided Finova with their most recent financial projections and requested that the scheduled finance receivable advance rate step-downs over the next three years be modified to conform to those projections. Presently, it is the Company's expectation that Finova will either modify the scheduled finance receivable advance rate step-downs to conform to the financial projections of Smart Choice and Paaco, or provide Smart Choice and Paaco with a forbearance letter covering some period of time. However, the Company cannot predict with certainty the actions of Finova; and, under the terms of the credit facilities, Finova has the right to accelerate the maturity of the loans, thereby demanding immediate repayment, and call on Crown's guarantee of $5 million. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: None. (b) Reports on Form 8-K: During the fiscal quarter ended January 31, 2001 no reports on Form 8-K were filed. 19 20 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: March 9, 2001 20