-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JaWjin6q9gubeUq0UTaM3TpfuDMorYUIDDqoSNj/oAFpXgnSxckNoRXgJHLOutqX uIq3L4qdRRkLMbF43JrFhQ== 0000950134-99-008314.txt : 19990917 0000950134-99-008314.hdr.sgml : 19990917 ACCESSION NUMBER: 0000950134-99-008314 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990131 FILED AS OF DATE: 19990916 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CROWN GROUP INC /TX/ CENTRAL INDEX KEY: 0000799850 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 630851141 STATE OF INCORPORATION: TX FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-14939 FILM NUMBER: 99712558 BUSINESS ADDRESS: STREET 1: 4040 N. MACARTHUR BLVD. STREET 2: SUITE 100 CITY: IRVING STATE: TX ZIP: 75038 BUSINESS PHONE: 9727173423 MAIL ADDRESS: STREET 1: 4040 N. MACARTHUR BLVD. STREET 2: SUITE 100 CITY: IRVING STATE: TX ZIP: 75038 FORMER COMPANY: FORMER CONFORMED NAME: CROWN CASINO CORP DATE OF NAME CHANGE: 19931104 FORMER COMPANY: FORMER CONFORMED NAME: SKYLINK AMERICA INC DATE OF NAME CHANGE: 19920703 10-Q/A 1 AMENDMENT NO. 1 TO FORM 10-Q FOR QTR END 1/31/99 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QA AMENDMENT NO. 1 [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, 1999 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 15, 1999 ------------------- -------------- Common stock, par value $.01 per share 10,156,837
1 2 PART I ITEM 1. FINANCIAL STATEMENTS CROWN GROUP, INC CONSOLIDATED BALANCE SHEETS
January 31, 1999 (unaudited) April 30, 1998 ----------------- ----------------- (Restated) (Restated) Assets: Cash and cash equivalents $ 3,713,699 $ 6,481,706 Marketable equity securities 8,659,385 4,742,180 Accounts and other receivables, net 6,710,088 1,936,055 Mortgage loans held for sale, net 11,726,315 14,350,437 Finance receivables, net 83,997,099 33,918,014 Inventory 6,321,585 3,798,800 Prepaid and other assets 1,388,045 572,089 Property and equipment, net 18,792,131 9,165,703 Investment in CMN and related assets, net 5,461,909 6,606,114 Goodwill, net 12,123,327 10,631,737 ------------ ------------ $158,893,583 $ 92,202,835 ============ ============ Liabilities and stockholders' equity: Accounts payable $ 3,325,035 $ 2,514,081 Accrued liabilities 5,581,655 1,952,828 Income taxes payable 2,698,216 142,572 Revolving credit facilities 71,770,744 41,164,524 Other notes payable 18,005,345 4,870,074 Deferred sales tax 2,838,942 2,090,303 Deferred income taxes 1,933,169 1,855,058 ------------ ------------ Total liabilities 106,153,106 54,589,440 ------------ ------------ Minority interests 1,485,738 2,562,071 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; 9,930,438 issued and outstanding (9,433,963 at April 30, 1998) 99,304 94,340 Additional paid-in capital 36,980,767 35,547,369 Retained earnings (accumulated deficit) 10,145,993 (2,520,885) Unrealized appreciation of securities 4,028,675 1,930,500 ------------ ------------ Total stockholders' equity 51,254,739 35,051,324 ------------ ------------ $158,893,583 $ 92,202,835 ============ ============
See accompanying notes to consolidated financial statements. 2 3 CONSOLIDATED STATEMENTS OF OPERATIONS CROWN GROUP, INC (UNAUDITED)
Three Months Ended January 31, 1999 1998 ------------ ------------ (Restated) Revenues: Sales $ 18,283,991 Rental income 637,044 Gain on sale of mortgage loans 788,361 $ 430,434 Interest income 3,172,473 586,423 Interest, fees and rentals from CMN 133,818 132,981 Other 273,279 14,800 ------------ ------------ 23,288,966 1,164,638 ------------ ------------ Costs and expenses: Cost of sales 11,675,453 Selling, general and administrative 6,958,791 1,180,806 Provision for credit losses 3,986,452 21,500 Interest expense 1,653,052 80,081 Depreciation and amortization 598,654 130,803 ------------ ------------ 24,872,402 1,413,190 ------------ ------------ Other income: Equity in earnings of CMN 38,017 125,203 Gain on sale of securities, net 18,964,236 40,895 ------------ ------------ 19,002,253 166,098 ------------ ------------ Income (loss) before taxes and minority interests 17,418,817 (82,454) Provision (benefit) for income taxes 5,914,692 (96,149) Minority interests (350,923) ------------ ------------ Net income $ 11,855,048 $ 13,695 ============ ============ Earnings per share: Basic $ 1.19 $ .00 Diluted $ 1.14 $ .00 Weighted average number of shares outstanding: Basic 9,942,386 9,742,747 Diluted 10,372,333 9,959,643
See accompanying notes to consolidated financial statements. 3 4 CONSOLIDATED STATEMENTS OF OPERATIONS CROWN GROUP, INC (UNAUDITED)
Nine Months Ended January 31, 1999 1998 ------------ ------------ (Restated) Revenues: Sales $ 49,598,072 Rental income 1,909,059 Gain on sale of mortgage loans 3,102,014 $ 430,434 Interest income 8,441,975 1,380,770 Interest, fees and rentals from CMN 742,831 349,282 Other 314,829 53,995 ------------ ------------ 64,108,780 2,214,481 ------------ ------------ Costs and expenses: Cost of sales 32,438,788 Selling, general and administrative 18,483,250 3,308,260 Provision for credit losses 8,378,413 21,500 Interest expense 4,442,754 81,695 Depreciation and amortization 1,640,010 350,358 ------------ ------------ 65,383,215 3,761,813 ------------ ------------ Other income: Equity in earnings of CMN 754,445 532,888 Gain on sale of securities, net 18,889,833 64,569 ------------ ------------ 19,644,278 597,457 ------------ ------------ Income (loss) before taxes and minority interests 18,369,843 (949,875) Provision (benefit) for income taxes 6,065,681 (603,348) Minority interests (362,716) ------------ ------------ Net income (loss) $ 12,666,878 $ (346,527) ============ ============ Earnings (loss) per share: Basic $ 1.26 $ (0.03) Diluted $ 1.23 $ (0.03) Weighted average number of shares outstanding: Basic 10,076,775 9,951,226 Diluted 10,335,480 9,951,226
See accompanying notes to consolidated financial statements. 4 5 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME CROWN GROUP, INC (UNAUDITED)
Three Months Ended Nine Months Ended January 31, January 31, 1999 1998 1999 1998 ------------- ------------- -------------- -------------- (Restated) (Restated) Net income (loss) $ 11,855,048 $ 13,695 $ 12,666,878 $ (346,527) Change in unrealized appreciation of securities, net of tax: Unrealized appreciation arising during period 6,339,173 14,565,465 Less realized gain included in net income (12,516,396) (12,467,290) ------------- ------------- -------------- -------------- (6,177,223) 2,098,175 ------------- ------------- -------------- -------------- Comprehensive income (loss) $ 5,677,825 $ 13,695 $ 14,765,053 $ (346,527) ============= ============= ============== ==============
See accompanying notes to consolidated financial statements. 5 6 CONSOLIDATED STATEMENTS OF CASH FLOWS CROWN GROUP, INC (UNAUDITED)
Nine Months Ended January 31, 1999 1998 ------------- ------------ (Restated) Operating activities: Net income (loss) $ 12,666,878 $ (346,527) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 1,640,010 350,358 Amortization of finance receivable discount (695,869) Deferred income taxes (206,002) (1,373,569) Provision for credit losses 8,378,413 21,500 Minority interests (362,716) Gain on sale of mortgage loans (3,102,014) (430,434) Gain on sale of assets (265,387) Gain on sale of securities (18,889,833) (64,569) Equity in earnings of CMN (754,445) (532,888) Changes in assets and liabilities, net of acquisition: Accounts and other receivables (1,512,746) (543,126) Mortgage loans originated or acquired (67,572,153) (17,252,309) Mortgage loans sold and principal repayments 73,203,758 8,953,167 Inventory 4,754,843 Prepaids and other assets (197,171) (165,649) Accounts payable, accrued liabilities and deferred sales tax 2,621,532 32,180 Income taxes payable 1,282,248 (247,500) ------------- ------------ Net cash provided (used) by operating activities 10,989,346 (11,599,366) ------------- ------------ Investing activities: Finance receivable originations (44,465,402) Finance receivable collections 18,629,316 Purchase of property and equipment (12,184,078) (1,105,157) Sale of assets 1,802,286 15,250,000 Purchase of securities (1,995,030) (1,939,285) Sale of securities 21,122,595 1,788,685 Dividends and collections of notes receivable from CMN 1,665,685 538,250 Loan to Paaco (3,000,000) Purchase of CMN and related assets (7,000,001) Purchase of Car-Mart, net of cash acquired (33,420,470) ------------- ------------ Net cash provided (used) by investing activities (48,845,098) 4,532,492 ------------- ------------ Financing activities: Capital contribution from minority owner 60,000 Purchase of common stock (1,213,746) (2,211,410) Proceeds from revolving credit facilities, net 30,606,220 4,189,889 Proceeds from other debt, net 5,635,271 ------------- ------------ Net cash provided by financing activities 35,087,745 1,978,479 ------------- ------------ Decrease in cash and cash equivalents (2,768,007) (5,088,395) Cash and cash equivalents at: Beginning of period 6,481,706 21,117,960 ------------- ------------ End of period $ 3,713,699 $ 16,029,565 ============= ============
See accompanying notes to consolidated financial statements. 6 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CROWN GROUP, INC. A - HISTORY AND 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, 1999 owned (i) 100% of America's Car-Mart, Inc. ("Car-Mart") and 80% of Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation (collectively, "Paaco"), vertically integrated used car sales and finance companies, (ii) 100% of Precision IBC, Inc. ("Precision"), a firm specializing in the sale and rental of intermediate bulk containers ("IBC's"), (iii) 80% of Concorde Acceptance Corporation ("Concorde"), a sub-prime mortgage lender, (iv) 49% of Casino Magic Neuquen S.A. ("CMN"), a casino operator in the Province of Neuquen, Argentina, (v) 50.1% of CG Incorporated, S.A. de C.V. ("Crown El Salvador"), a newly formed company focusing on the development and operation of casinos in El Salvador, and (vi) 80% of Home Stay Lodges I, Ltd. ("Home Stay"), a partnership focusing on the development and operation of extended-stay lodging facilities. 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. Since its inception in 1983 through June 1993 the Company was engaged in various facets of the cable and related programming businesses. From June 1993 until November 1996, the Company's primary business focus was that of owning, operating and developing casino gaming properties. In November 1996 the Company decided to expand its business interests beyond casino gaming and began pursuing business opportunities in other fields. As a result the Company has acquired or formed several businesses in a variety of industries. 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, 1999 are not necessarily indicative of the results that may be expected for the year ended April 30, 1999. 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, 1998. Marketable Equity Securities Investments in marketable equity securities are recorded at market value based upon closing stock prices as quoted on national stock exchanges or the NASDAQ stock market. The Company considers all of its equity securities to be "available for sale" securities, and the difference between the Company's cost and such security's market value is included as a separate component of stockholders' equity entitled "unrealized appreciation of securities," on a net of tax basis. As of April 30, 1998 and January 31, 1999 the Company held 444,444 and 124,444 shares respectively, of Inktomi Corporation common stock, which company completed its initial public offering ("IPO") on or about June 9, 1998. The Company's Inktomi shares were subject to an underwriter's lock-up agreement which restricted the Company from selling its Inktomi stock until December 8, 1998. From December 9, 1998 through February 25, 1999 the Company could only sell its Inktomi shares in private transactions in that these shares were not registered and had not as yet met the one year holding period. The Company valued its Inktomi shares based upon the closing stock price of $71.875 per share on January 31, 1999, less a 10% discount on all unregistered shares. Accordingly, at January 31, 1999 the carrying value of the Company's Inktomi stock was $8,193,750 which reflects a gross unrealized gain of $6,417,364 over the Company's cost of $1,776,386. Beginning in December 1998 through January 31, 1999 the Company sold 340,000 shares of its Inktomi common stock for approximately $20.8 million, which net of a management bonus of $.9 million and the Company's basis in the securities resulted in a gain of approximately $19.0 million. In February and March 1999 the Company sold the balance of its Inktomi common stock resulting in a gain of approximately $6 million. The Company uses the specific identification method for accounting for securities transactions. Goodwill Goodwill represents the excess of the Company's cost over the fair value of net identifiable assets acquired in its purchases of 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 January 31, 1999 accumulated amortization of goodwill amounted to $710,415. Reclassifications Certain prior year amounts in the accompanying financial statements have been reclassified to conform to the fiscal 1999 presentation. 7 8 C - ACQUISITIONS Paaco Purchase Effective February 1, 1998 the Company acquired 53% of the common stock of Paaco for a purchase price of approximately $9.1 million in cash. Approximately $4.9 million of Paaco common stock was purchased directly from Paaco, and the remaining $4.2 million was purchased from Paaco management personnel who prior to this transaction were the sole shareholders of Paaco (the "Paaco Management Shareholders"). Effective May 1, 1998 and February 1, 1999 the Company acquired an additional 12% and 15%, respectively, interests in Paaco directly from the Paaco Management Shareholders. The May 1, 1998 purchase price of $1.5 million was paid by issuing 375,000 shares of the Company's common stock. The February 1, 1999 purchase price of $2.6 million was paid by issuing 257,813 shares of the Company's common stock and paying approximately $1.0 million in cash. Precision Purchase On February 3, 1998 the Company acquired 80% of the common stock of Precision IBC, Incorporated ("Original Precision") for a purchase price of approximately $2.4 million in cash. On March 5, 1998 the Company acquired 80% of the common stock of M&S Tank Rentals, Inc. ("M&S") for a purchase price of $1.65 million in cash. Original Precision and M&S were subsequently merged together into a newly formed corporation, Precision IBC, Inc. ("Precision"). Effective May 1, 1998 the Company acquired the remaining 20% interest in Precision it did not previously own by issuing 288,027 shares of the Company's common stock to the minority shareholders of Precision in a private placement. Car-Mart Purchase On January 15, 1999 the Company acquired 100% of the outstanding common stock of Fleeman Holding Company, including its wholly-owned subsidiary America's Car-Mart, Inc., ("Car-Mart") for $41.35 million. The purchase price consisted of $33.85 million in cash and the issuance of promissory notes aggregating $7.5 million (the "Notes"). The Notes bear interest at 8.5% per annum payable quarterly, with the principal due in five years. Approximately $24 million of the cash portion of the purchase price was obtained pursuant to a $30 million revolving credit facility with a major banking institution. The remaining $9.85 million was funded from cash on hand. Car-Mart was founded in 1981 and presently operates thirty "buy-here-pay-here" used car dealerships located in niche markets throughout Arkansas, Oklahoma, Texas and Missouri. Car-Mart underwrites, finances and services retail installment contracts generated at its dealerships. The majority of Car-Mart's assets consist of over 15,000 retail installment contracts. The activities of Car-Mart have been included in the Company's consolidated results of operations since the acquisition date. The acquisition of Car-Mart has been accounted for using the purchase method of accounting with existing assets and liabilities being marked to market. The preliminary purchase price and purchase price allocation are as follows (in thousands): Purchase Price: Cash $ 33,850 Notes to sellers 7,500 Transaction costs 648 -------- $ 41,998 ======== Purchase Price Allocation: Cash $ 1,077 Finance receivables, net 37,579 Inventory 2,220 Other 4,446 Liabilities assumed (3,324) -------- $ 41,998 ========
Pro Forma Financial Information The following unaudited pro forma condensed consolidated results of operations of the Company for the nine months ended January 31, 1999 were prepared as if the Car-Mart acquisition had occurred on May 1, 1998, and the following unaudited pro forma condensed consolidated results of operations of the Company for the nine months ended January 31, 1998 were prepared as if the acquisitions of Paaco (65%), Precision and Car-Mart had occurred on May 1, 1997, (in thousands, except per share amounts). The adjustments to the historical financial statements principally consist of (i) eliminating interest income on the cash used in the acquisitions, (ii) amortizing goodwill resulting from the acquisitions, (iii) recording interest expense on the debt issued in the Car-Mart acquisition, (iv) adjusting depreciation expense and interest income resulting from purchase accounting entries, and (v) adjusting income tax expense to reflect the elimination of an S-corporation in the case of Precision and to take into account the above described adjustments.
Nine Months Ended January 31, 1999 1998 ------------- ------------- (Restated) Revenues $ 113,903 $ 93,003 Net income 15,913 888 Earnings per share - diluted $ 1.54 $ .08
8 9 D - CMN OPERATING RESULTS The operating results of CMN for the nine months ended January 31, 1999 and 1998 were as follows (in thousands):
Nine Months Ended January 31, 1999 1998 --------------- ---------------- Revenues $ 16,081 $ 13,382 Costs and expenses 10,296 10,078 Lawsuit settlement and costs 917 Interest, fees, and rentals to shareholders 1,070 1,494 Provision for income taxes 1,513 581 --------------- ---------------- Net income $ 2,285 $ 1,229 =============== ================
For the nine months ended January 31, 1999, the Company recorded an after tax charge of approximately $365,000 relating to its share of the estimated costs of a dispute between CMN and the City of Neuquen with respect to entrance taxes being charged by the City of Neuquen for each patron entering CMN's casinos. Such amount has been included in "equity in earnings of CMN" on the accompanying statements of operations. E - 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 14 to 36 months. A summary of finance receivables as of January 31, 1999 and April 30, 1998 is as follows:
January 31, April 30, 1999 1998 --------------- ---------------- (Restated) (Restated) Finance receivables $ 116,106,159 $ 48,776,278 Unearned finance charges (15,616,325) (9,420,164) Allowance for credit losses (15,361,238) (4,727,679) Valuation discount (1,131,497) (710,421) --------------- ---------------- $ 83,997,099 $ 33,918,014 =============== ================
In accordance with APB Opinion No. 16, as of the dates the Company acquired an interest in Paaco (53% on February 1, 1998 and 12% on May 1, 1998) and Car-Mart, the Company valued Paaco's and Car-Mart's finance receivable portfolios at market value and determined that an aggregate valuation discount of $1,215,966 in the case of Paaco, and $864,165 in the case of Car-Mart, was appropriate. These discounts are being amortized into interest income over the life of the related finance receivable portfolios that existed on the dates of purchase using the interest method. A summary of the restated finance receivables allowance for credit losses for the period from April 30, 1998 to January 31, 1999 is as follows: Balance at April 30, 1998 $ 4,727,679 Acquisition of Car-Mart 8,726,309 Provision for credit losses 8,235,234 Net charge offs (6,327,984) ------------- Balance at January 31, 1999 $ 15,361,238 =============
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 ($147,100) and trade accounts receivable ($25,000) as of January 31, 1999. 9 10 F - PROPERTY AND EQUIPMENT A summary of property and equipment as of January 31, 1999 and April 30, 1998 is as follows:
January 31, April 30, 1999 1998 ------------ ------------ Land and buildings $ 3,417,979 $ 2,332,750 Construction in progress 4,505,003 Rental equipment 6,234,027 4,749,652 Furniture, fixtures and equipment 4,790,937 1,904,536 Leasehold improvements 1,367,172 920,583 Less accumulated depreciation and amortization (1,522,987) (741,818) ------------ ------------ $ 18,792,131 $ 9,165,703 ============ ============
G - DEBT A summary of debt at January 31, 1999 is as follows:
Revolving Credit Facilities -------------------------------------------------------------------------------------------------------------------- Facility Interest Primary Balance at Borrower Lender Amount Rate Maturity Collateral January 31, 1999 ----------- ------------- ----------- ------------ ---------- ------------- ------------------ Paaco Finova $60 million Prime + 3.00% Jun 2000 Finance rec. $ 37,447,375 Car-Mart Bank America $30 million Prime + 1.13% Jan 2002 Finance rec. 22,139,722 Concorde Bank One $20 million Libor + 2.00% Jan 2000 Mortgage loans 7,991,604 Precision Wells Fargo $5 million Prime Jun 2000 IBC's and rec. 3,692,043 Paaco Comerica $500,000 Prime + 2.00% Demand Vehicle inv. 500,000 ------------------ $ 71,770,744 ==================
Other Notes Payable -------------------------------------------------------------------------------------------------------------------- Facility Interest Primary Balance at Borrower Lender Amount Rate Maturity Collateral January 31, 1999 ----------- ------------- ----------- ------------ ---------- ------------- ------------------ Crown Car-Mart sellers N/A 8.50% Jan 2004 Finance rec $ 7,500,000 Home Stay Bank of Pensacola $5.4 million 8.50% Feb 2004 Real estate 4,530,376 Precision South Trust Bank N/A 7.35% Jan 2014 Real estate 680,000 Paaco Chase Texas N/A 8.50% Oct 2003 Real estate 956,883 Paaco Heller Financial N/A Prime + 2.25% Dec 2015 Real estate 622,417 Paaco Various N/A Various 1999 None 3,715,669 ------------------ $ 18,005,345 ==================
10 11 H - COMPREHENSIVE INCOME INFORMATION Supplemental comprehensive income disclosures for the nine months ended January 31, 1999 are as follows:
Nine Months Ended January 31, 1999 ---------------- Gross unrealized appreciation of securities arising during period $ 22,068,886 Provision for income taxes 7,503,421 ---------------- Unrealized appreciation of securities arising during period $ 14,565,465 ================
Changes to unrealized appreciation of securities for the nine months ended January 31, 1999 are as follows:
Nine Months Ended January 31, 1999 ---------------- Balance at April 30, 1998 $ 1,930,500 Unrealized appreciation of securities arising during period 14,565,465 Less realized gain included in net income (12,467,290) ---------------- Balance at January 31, 1999 $ 4,028,675 ================
I - EARNINGS PER SHARE A summary reconciliation of basic earnings per share to diluted earnings per share for the nine months ended January 31, 1999 and 1998 is as follows:
Nine Months Ended January 31, 1999 1998 --------------- ---------------- (Restated) Net income (loss) $ 12,666,878 $ (346,527) =============== ================ Average shares outstanding-basic 10,076,775 9,951,226 Dilutive options 240,555 Dilutive warrants 18,150 --------------- ---------------- Average shares outstanding-diluted 10,335,480 9,951,226 =============== ================ Earnings (loss) per share: Basic $ 1.26 $ (.03) Diluted $ 1.23 $ (.03) Antidilutive securities not included: Options 295,000 899,643 =============== ================ Warrants 391,198 1,084,246 =============== ================
11 12 J - COMMON STOCK ISSUANCES Effective May 1, 1998 the Company issued 375,000 and 288,027 shares of its common stock in the purchases of an additional 12% interest in Paaco and an additional 20% interest in Precision, respectively (see Note C). Furthermore, in June 1998 the Company issued 169,941 shares of its common stock to Nomura Holding America, Inc. ("Nomura") in connection with Nomura's full exercise of a warrant held by them to purchase 508,414 shares of the Company's common stock. Nomura exercised the warrant pursuant to its "cashless exercise" feature. Effective February 1, 1999 the Company issued 257,813 shares of its common stock as partial consideration in the purchase of an additional 15% interest in Paaco. Also effective February 1, 1999 the Company issued 37,500 shares of its common stock in satisfaction of a liability in connection with the May 1, 1998 purchase of an additional 12% interest in Paaco (see note K). K - 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 a percentage of the total potential liability. 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. Paaco Purchase Contingent Consideration In connection with the Company's purchase of an additional 12% interest in Paaco effective May 1, 1998, the Company agreed to pay the sellers as additional consideration an amount equal to 60% of the excess of Paaco's pretax income in excess of $2.5 million for the twelve months ending January 31, 1999. Effective February 1, 1999 the Company issued 37,500 shares of its common stock to satisfy its obligation to pay such additional consideration. Litigation In August 1998 an action was filed against the Company in the 8th Judicial District Court of Clark County, Nevada by Resort Properties of America ("RPA"). In this action RPA alleges it had a verbal agreement with the Company pertaining to the sale of the Company's Las Vegas land which was sold in September 1997. RPA claims it is due a brokerage commission of $450,000 plus attorney's fees. The Company has denied the material allegations of the claim and intends to vigorously contest any liability in the matter. While no assurance can be given as to the ultimate outcome of this litigation, management believes that the resolution of this matter will not have a material adverse effect on the Company. Investment Fund In November 1998 the Company committed $2.0 million to Monarch Venture Partners' Fund I, L.P. ("Monarch"), a private venture capital fund focusing on high technology businesses, such as Internet related concerns. As of January 31, 1999 the Company had funded approximately $.5 million of its $2.0 million commitment. The Company expects it will fund the remaining $1.5 million over the next 12 months. Principals of Monarch assisted the Company in its investment in Inktomi common stock (see Note B). L - SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow disclosures for the nine months ended January 31, 1999 and 1998 are as follows:
Nine Months Ended January 31, 1999 1998 ------------- --------------- Issuance of notes in acquisition $ 7,500,000 Value of stock issued in acquisitions 2,652,108 Inventory acquired in repossession 5,057,773 Interest paid, net of amount capitalized 4,274,642 $ 58,620 Income taxes paid 4,954,189 925,000 Conversion of a portion of CMN note to equity 2,516,493
12 13 M - 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, 1999 and 1998. These segments are categorized by the lines of business of the Company. The segments include (i) automobile, which pertains to Car-Mart'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, activities of relatively inactive subsidiaries and the Company's equity investment in CMN. The Company's business segment data for the three months ended January 31, 1999 and 1998 is as follows (in thousands):
Three Months Ended January 31, 1999 (Restated) --------------------------------------------------------------------------------------------- Automobile IBC's Mortgage Other Eliminations Consolidated ------------ ------------ ----------- ----------- ------------- ------------- Revenues: Sales and other $ 17,765 $ 1,188 $ 890 $ 274 $ 20,117 Interest income 2,542 3 388 429 $ (190) 3,172 ------------ ------------ ----------- ----------- ------------- ------------- Total 20,307 1,191 1,278 703 (190) 23,289 ------------ ------------ ----------- ----------- ------------- ------------- Costs and expenses: Cost of sales 11,314 362 11,676 Selling, gen. and admin. 4,292 392 1,074 1,200 6,958 Prov. for credit losses 3,929 13 44 3,986 Interest expense 1,433 93 281 36 (190) 1,653 Depreciation and amort. 112 185 42 260 599 ------------ ------------ ----------- ----------- ------------- ------------- Total 21,080 1,045 1,441 1,496 (190) 24,872 ------------ ------------ ----------- ----------- ------------- ------------- Security gains and other 19,002 19,002 ------------ ------------ ----------- ----------- ------------- ------------- Income (loss) before taxes and minority interest $ (773) $ 146 $ (163) $ 18,209 $ -- $ 17,419 ============ ============ =========== =========== ============= ============= Capital expenditures $ 339 $ 670 $ 11 $ 3,032 $ -- $ 4,052 ============ ============ =========== =========== ============= ============= Total assets $ 97,648 $ 12,213 $ 13,539 $ 79,799 $ (44,305) $ 158,894 ============ ============ =========== =========== ============= =============
Three Months Ended January 31, 1998 --------------------------------------------------------------------------------------------- Automobile IBC's Mortgage Other Eliminations Consolidated ------------ ------------ ----------- ----------- ------------- ------------- Revenues: Sales and other $ 429 $ 148 $ 577 Interest income 322 448 $ (183) 587 ----------- ----------- ------------- ------------- Total 751 596 (183) 1,164 ----------- ----------- ------------- ------------- Costs and expenses: Selling, gen. and admin. 627 555 1,182 Prov. for credit losses 21 21 Interest expense 249 14 (183) 80 Depreciation and amort. 11 119 130 ----------- ----------- ------------- ------------- Total 908 688 (183) 1,413 ----------- ----------- ------------- ------------- Security gains and other 166 166 ----------- ----------- ------------- ------------- Income (loss) before taxes and minority interest $ (157) $ 74 $ -- $ (83) =========== =========== ============= ============= Capital expenditures $ 244 $ 105 $ -- $ 349 =========== =========== ============= ============= Total assets $ 16,134 $ 41,254 $ (18,993) $ 38,395 =========== =========== ============= =============
13 14 The Company's business segment data for the nine months ended January 31, 1999 and 1998 is as follows (in thousands):
Nine Months Ended January 31, 1999 (Restated) --------------------------------------------------------------------------------------------- Automobile IBC's Mortgage Other Eliminations Consolidated ------------ ------------ ----------- ----------- ------------- ------------- Revenues: Sales and other $ 47,674 $ 3,865 $ 3,246 $ 882 $ 55,667 Interest income 6,461 6 1,192 1,232 $ (449) 8,442 ------------ ------------ ----------- ----------- ------------- ------------- Total 54,135 3,871 4,438 2,114 (449) 64,109 ------------ ------------ ----------- ----------- ------------- ------------- Costs and expenses: Cost of sales 31,069 1,370 32,439 Selling, gen. and admin. 11,685 1,021 3,297 2,480 18,483 Prov. for credit losses 8,235 23 120 8,378 Interest expense 3,683 283 890 36 (449) 4,443 Depreciation and amort. 247 500 115 778 1,640 ------------ ------------ ----------- ----------- ------------- ------------- Total 54,919 3,197 4,422 3,294 (449) 65,383 ------------ ------------ ----------- ----------- ------------- ------------- Security gains and other 19,644 19,644 ------------ ------------ ----------- ----------- ------------- ------------- Income before taxes and minority interest $ (784) $ 674 $ 16 $ 18,464 $ -- $ 18,370 ============ ============ =========== =========== ============= ============= Capital expenditures $ 713 $ 2,838 $ 230 $ 8,403 $ -- $ 12,184 ============ ============ =========== =========== ============= ============= Total assets $ 97,648 $ 12,213 $ 13,539 $ 79,799 $ (44,305) $ 158,894 ============ ============ =========== =========== ============= =============
Nine Months Ended January 31, 1998 --------------------------------------------------------------------------------------------- Automobile IBC's Mortgage Other Eliminations Consolidated ------------ ------------ ----------- ----------- ------------- ------------- Revenues: Sales and other $ 430 $ 403 $ 833 Interest income 416 1,183 $ (218) 1,381 ----------- ----------- ------------- ------------- Total 846 1,586 (218) 2,214 ----------- ----------- ------------- ------------- Costs and expenses: Selling, gen. and admin. 1,211 2,098 3,309 Prov. for credit losses 21 21 Interest expense 286 14 (218) 82 Depreciation and amort. 18 332 350 ----------- ----------- ------------- ------------- Total 1,536 2,444 (218) 3,762 ----------- ----------- ------------- ------------- Security gains and other 598 598 ----------- ----------- ------------- ------------- Loss before taxes and minority interest $ (690) $ (260) $ -- $ (950) =========== =========== ============= ============= Capital expenditures $ 442 $ 663 $ -- $ 1,105 =========== =========== ============= ============= Total assets $ 16,134 $ 41,254 $ (18,993) $ 38,395 =========== =========== ============= =============
14 15 N - RESTATEMENT In connection with the April 30, 1999 year end closing process and subsequent analyses performed, the Company identified certain accounting errors and irregularities at Paaco relating principally to finance receivables, inventory and drafts payable. Such errors and irregularities existed at and subsequent to the Company's purchase of a 53% interest in Paaco on February 1, 1998. To correct for such errors and irregularities, the Company has restated its previously issued consolidated financial statements for the year ended April 30, 1998 and has amended each of its quarterly reports on Form 10-Q with respect to the fiscal quarters during the year ended April 30, 1999. A summary of the impact of these corrections on the Company's consolidated financial statements for the three and nine months ended January 31, 1999 is set forth below (in thousands, except per share amounts):
Three Months Ended January 31, 1999 Nine Months Ended January 31, 1999 -------------------------------------- ------------------------------------ As Previously As As Previously As Reported Restated Reported Restated ---------------- --------------- -------------- -------------- Revenues $ 23,289 $ 23,289 $ 64,109 $ 64,109 Income before taxes and minority interests 19,176 17,419 21,767 18,370 Net income 12,587 11,855 14,095 12,667 Earnings per share (diluted) $ 1.21 $ 1.14 $ 1.36 $ 1.23
January 31, 1999 -------------------------------------- As Previously As Reported Restated ---------------- --------------- Finance receivables, net $ 88,227 $ 83,997 Inventory 7,458 6,322 Goodwill, net 10,943 12,123 Total assets 163,454 158,894 Accounts payable 2,741 3,325 Deferred income taxes 4,273 1,933 Total liabilities 107,909 106,153 Minority interests 2,880 1,486 Stockholders' equity 52,664 51,255
15 16 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. 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 Argentina's government, currency exchange rate fluctuations, the repatriation of funds from Argentina, domestic or global economic conditions (particularly in the Dallas/Ft. Worth area and the State of Arkansas), changes in foreign or domestic tax laws or the administration of such laws and changes in gaming or 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, 1999 owned (i) 100% of America's Car-Mart, Inc. ("Car-Mart") and 80% of Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation (collectively, "Paaco"), vertically integrated used car sales and finance companies (ii) 100% of Precision IBC, Inc. ("Precision"), a firm specializing in the sale and rental of intermediate bulk containers, (iii) 80% of Concorde Acceptance Corporation ("Concorde"), a sub-prime mortgage lender, (iv) 49% of Casino Magic Neuquen S.A. ("CMN"), a casino operator in the Province of Neuquen, Argentina, (v) 50.1% of CG Incorporated, S.A. de C.V. ("Crown El Salvador"), a newly formed company focusing on the development and operation of casinos in El Salvador, and (vi) 80% of Home Stay Lodge I, Ltd. ("Home Stay"), a partnership focusing on the development and operation of extended-stay lodging facilities. 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. Since its inception in 1983 through June 1993 the Company was engaged in various facets of the cable and related programming businesses. From June 1993 until November 1996, the Company's primary business focus was that of owning, operating and developing casino gaming properties. In November 1996 the Company decided to expand its business interests beyond casino gaming and began pursuing business opportunities in other fields. As a result the Company has acquired or formed several businesses in a variety of industries as follows: CMN - In June 1997 the Company acquired a 49% interest in CMN for a purchase price of $7 million in cash. CMN operates casinos in the cities of Neuquen and San Martin de los Andes in the Province of Neuquen, Argentina under an exclusive concession contract. CONCORDE - In June 1997 the Company, along with certain newly hired management personnel, formed Concorde. Concorde is in the business of originating, purchasing, servicing and selling sub-prime mortgage loans which are secured primarily by first and second liens on residential properties. These loans are sold in privately negotiated transactions to institutional investors and other third parties. PAACO - In February 1998 the Company acquired 53% of the common stock of Paaco for a purchase price of approximately $9.1 million in cash. Approximately $4.9 million of Paaco common stock was purchased directly from Paaco, and the remaining $4.2 million was purchased from Paaco management who prior to this transaction were the sole shareholders of Paaco. Effective May 1, 1998 and February 1, 1999 the Company purchased an additional 12% and 15% interest, respectively, in Paaco from the management shareholders. The May 1, 1998 purchase price of $1.5 million was paid by issuing 375,000 shares of the Company's common stock. The February 1, 1999 purchase price of approximately $2.6 million consisted of 257,813 shares of the Company's common stock and approximately $1.0 million in cash. Paaco is a vertically integrated used car sales and finance company which operates eight used car dealerships in the Dallas-Ft. Worth metropolitan area and one dealership in Houston, Texas. Paaco sells, underwrites and finances used cars and 16 17 trucks with a focus on the Hispanic market. PRECISION - In February 1998 the Company acquired 80% of the common stock of Precision IBC, Incorporated ("Original Precision") for a purchase price of approximately $2.4 million in cash. In March 1998 the Company acquired 80% of the common stock of M&S Tank Rentals, Inc. ("M&S") for a purchase price of $1.65 million in cash. Original Precision and M&S were subsequently merged together into a newly formed corporation, Precision IBC, Inc. ("Precision"). Effective May 1, 1998 the Company purchased the remaining 20% of Precision. The purchase price of approximately $1.1 million was paid by issuing 288,027 shares of the Company's common stock. Precision is in the business of renting, selling, testing and servicing principally stainless steel intermediate bulk containers. HOME STAY - In May 1998 the Company, along with a minority holder, formed Home Stay. Home Stay is in the business of constructing and operating extended-stay lodging facilities. CAR-MART - In January 1999 the Company acquired 100% of the outstanding common stock of Fleeman Holding Company, including its wholly-owned subsidiary America's Car-Mart, Inc. ("Car-Mart") for $41.35 million. The purchase price consisted of $33.85 million in cash and the issuance of promissory notes aggregating $7.5 million. Car-Mart operates thirty "Buy-Here Pay-Here" used car dealerships located in niche markets throughout Arkansas, Oklahoma, Texas and Missouri. Car-Mart sells, underwrites and finances used cars and trucks. CROWN EL SALVADOR - In March 1999 the Company, along with minority holders, formed Crown El Salvador. Crown El Salvador is in the business of developing and operating casino properties in El Salvador. RESULTS OF OPERATIONS The Company's 49% investment in CMN is accounted for on the equity method. Since the Company's investment in CMN was completed in June 1997, the nine months ended January 31, 1998 only includes eight months of CMN operating results. Concorde was formed in June 1997, and, as a result, only had limited operations during the three and nine months ended January 31, 1998. Paaco and Precision were acquired in February 1998, and, as a result, are not reflected in the Company's operating results for the three and nine months ended January 31, 1998. Car-Mart was acquired on January 15, 1999, and, as a result, only reflects 17 days of activity during the nine months ended January 31, 1999. As a result, of the above transactions, the Company's operating results for the three and nine months ended January 31, 1999 and 1998 are not entirely comparable. During the course of its fiscal 1999 year end closing process, the Company discovered certain accounting errors and irregularities at Paaco, as a result of which fiscal 1999 earnings of the Company were reduced by certain finance receivable and inventory write-downs, together with an increase in finance receivables reserves and drafts payable. Such errors and irregularities existed at and subsequent to the Company's initial purchase of its interest in Paaco in February 1998. The investigation at Paaco has also resulted in a restatement of fiscal 1998 results of operations and the quarterly financial statements during fiscal 1999. See Note N to the consolidated financial statements for a summary of the impact of the required adjustments on the Company's consolidated financial statements as of January 31, 1999 and for the three and nine months then ended. As a result of its investigation of Paaco, management of the Company has restructured Paaco's management organization and has implemented cost reductions at that subsidiary, while taking steps to ensure the integrity of Paaco's accounting and reporting procedures in future periods. Daniel Chu, former President of Paaco, resigned in July 1999. 17 18 THREE MONTHS ENDED JANUARY 31, 1999 COMPARED TO THE THREE MONTHS ENDED JANUARY 31, 1998 Below is a presentation of the operating results for the four principal business segments of the Company for the three months ended January 31, 1999 and 1998. The segments include (i) automobile, which pertains to Car-Mart'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, activities of relatively inactive subsidiaries and the Company's equity investment in CMN. The Company's business segment data for the three months ended January 31, 1999 and 1998 is as follows (in thousands):
Three Months Ended January 31, 1999 (Restated) --------------------------------------------------------------------------------------------- Automobile IBC's Mortgage Other Eliminations Consolidated ------------ ------------ ----------- ----------- ------------- ------------- Revenues: Sales and other $ 17,765 $ 1,188 $ 890 $ 274 $ 20,117 Interest income 2,542 3 388 429 $ (190) 3,172 ------------ ------------ ----------- ----------- ------------- ------------- Total 20,307 1,191 1,278 703 (190) 23,289 ------------ ------------ ----------- ----------- ------------- ------------- Costs and expenses: Cost of sales 11,314 362 11,676 Selling, gen. and admin. 4,292 392 1,074 1,200 6,958 Prov. for credit losses 3,929 13 44 3,986 Interest expense 1,433 93 281 36 (190) 1,653 Depreciation and amort. 112 185 42 260 599 ------------ ------------ ----------- ----------- ------------- ------------- Total 21,080 1,045 1,441 1,496 (190) 24,872 ------------ ------------ ----------- ----------- ------------- ------------- Security gains and other 19,002 19,002 ------------ ------------ ----------- ----------- ------------- ------------- Income (loss) before taxes and minority interest $ (773) $ 146 $ (163) $ 18,209 $ -- $ 17,419 ============ ============ =========== =========== ============= =============
Three Months Ended January 31, 1998 --------------------------------------------------------------------------------------------- Automobile IBC's Mortgage Other Eliminations Consolidated ------------ ------------ ----------- ----------- ------------- ------------- Revenues: Sales and other $ 429 $ 148 $ 577 Interest income 322 448 $ (183) 587 ----------- ----------- ------------- ------------- Total 751 596 (183) 1,164 ----------- ----------- ------------- ------------- Costs and expenses: Selling, gen. and admin. 627 555 1,182 Prov. for credit losses 21 21 Interest expense 249 14 (183) 80 Depreciation and amort. 11 119 130 ----------- ----------- ------------- ------------- Total 908 688 (183) 1,413 ----------- ----------- ------------- ------------- Security gains and other 166 166 ----------- ----------- ------------- ------------- Income (loss) before taxes and minority interest $ (157) $ 74 $ -- $ (83) =========== =========== ============= =============
Net income for the three months ended January 31, 1999 increased $11,841,353 compared to the same period in the prior fiscal year. The increase was the result of (i) recognizing a gain of $19.0 million on the sale of certain securities (principally Inktomi common stock) and (ii) including the results of operations of Car-Mart and Precision in the current period, partially offset by losses at Paaco during the period. Revenues from sales and rental income pertain to the businesses of Car-Mart, Paaco and Precision. Interest income for the three months ended January 31, 1999 increased $2.6 million compared to the same period in the prior fiscal year. The increase resulted principally from (i) interest earned on Car-Mart's and Paaco's finance receivable portfolios ($2.5 million), and (ii) greater interest earned on Concorde's mortgage loans ($.1 million) as a result of an increase in the average amount of mortgage loans held for sale. Cost of sales pertains to the operations of Car-Mart, Paaco and Precision. Provision for credit losses pertains principally to Car-Mart's and Paaco's operations. Selling, general and administrative expenses for the three months ended January 31, 1999 increased $5.8 million compared to the same period in the prior fiscal year. The increase resulted principally from (i) expenses relating to Car-Mart, Paaco and Precision ($4.7 million), (ii) the development of Concorde's mortgage based lending business ($.4 million), and (iii) Crown's abandonment 18 19 of certain business ventures which it had been pursuing ($.5 million). Interest expense for the three months ended January 31, 1999 increased $1.6 million compared to the same period in the prior fiscal year. The increase resulted from interest associated with the debt of Car-Mart, Paaco, Precision and Concorde. Depreciation and amortization expense for the three months ended January 31, 1999 increased $.4 million compared to the same period in the prior fiscal year. The increase resulted principally from (i) amortizing goodwill that was created in the acquisitions of Paaco and Precision ($185,731), (ii) depreciating the assets of Car-Mart, Paaco and Precision ($260,893), and (iii) greater depreciation at Concorde ($30,588). The provision for income taxes for the three months ended January 31, 1999 was $5,914,692 on pretax income of $17,418,817. This equates to an effective tax rate of 34.0% after removing from pretax income the equity in earnings of CMN ($38,017), which earnings are presented on an after tax basis. The benefit for income taxes for the three months ended January 31, 1998 was $96,149 on a pretax loss of $82,454. The prior period benefit differed from the amount determined by applying the 34% federal statutory rate principally as a result of (i) equity in earnings of CMN being reported on an after tax basis, and (ii) a change in the valuation allowance of certain deferred tax assets. Minority interests for the three months ended January 31, 1999 ($350,923) pertain principally to the portion of Paaco (35%) not owned by the Company during the period. NINE MONTHS ENDED JANUARY 31, 1999 COMPARED TO THE NINE MONTHS ENDED JANUARY 31, 1998 The Company's business segment data for the nine months ended January 31, 1999 and 1998 is as follows (in thousands):
Nine Months Ended January 31, 1999 (Restated) --------------------------------------------------------------------------------------------- Automobile IBC's Mortgage Other Eliminations Consolidated ------------ ------------ ----------- ----------- ------------- ------------- Revenues: Sales and other $ 47,674 $ 3,865 $ 3,246 $ 882 $ 55,667 Interest income 6,461 6 1,192 1,232 $ (449) 8,442 ------------ ------------ ----------- ----------- ------------- ------------- Total 54,135 3,871 4,438 2,114 (449) 64,109 ------------ ------------ ----------- ----------- ------------- ------------- Costs and expenses: Cost of sales 31,069 1,370 32,439 Selling, gen. and admin. 11,685 1,021 3,297 2,480 18,483 Prov. for credit losses 8,235 23 120 8,378 Interest expense 3,683 283 890 36 (449) 4,443 Depreciation and amort. 247 500 115 778 1,640 ------------ ------------ ----------- ----------- ------------- ------------- Total 54,919 3,197 4,422 3,294 (449) 65,383 ------------ ------------ ----------- ----------- ------------- ------------- Security gains and other 19,644 19,644 ------------ ------------ ----------- ----------- ------------- ------------- Income before taxes and minority interest $ (784) $ 674 $ 16 $ 18,464 $ -- $ 18,370 ============ ============ =========== =========== ============= =============
Nine Months Ended January 31, 1998 --------------------------------------------------------------------------------------------- Automobile IBC's Mortgage Other Eliminations Consolidated ------------ ------------ ----------- ----------- ------------- ------------- Revenues: Sales and other $ 430 $ 403 $ 833 Interest income 416 1,183 $ (218) 1,381 ----------- ----------- ------------- ------------- Total 846 1,586 (218) 2,214 ----------- ----------- ------------- ------------- Costs and expenses: Selling, gen. and admin. 1,211 2,098 3,309 Prov. for credit losses 21 21 Interest expense 286 14 (218) 82 Depreciation and amort. 18 332 350 ----------- ----------- ------------- ------------- Total 1,536 2,444 (218) 3,762 ----------- ----------- ------------- ------------- Security gains and other 598 598 ----------- ----------- ------------- ------------- Loss before taxes and minority interest $ (690) $ (260) $ -- $ (950) =========== =========== ============= =============
19 20 Net income for the nine months ended January 31, 1999 increased $13.0 million compared to the same period in the prior fiscal year. The increase was the result of (i) recognizing a gain of $19.0 million on the sale of certain securities (principally Inktomi common stock), (ii) including the results of operations of Car-Mart and Precision in the current period, and (iii) Concorde reporting pretax earnings in the current period ($15,374) compared to a pretax loss ($690,496) in the prior period, partially offset by losses at Paaco. Revenues from sales and rental income pertain to the businesses of Car-Mart, Paaco and Precision. Interest income for the nine months ended January 31, 1999 increased $7.1 million compared to the same period in the prior fiscal year. The increase resulted principally from (i) interest earned on Car-Mart's and Paaco's finance receivable portfolios ($6.5 million), and (ii) greater interest earned on Concorde's mortgage loans ($.8 million) as a result of an increase in the average amount of mortgage loans held for sale. Cost of sales pertains to the operations of Car-Mart, Paaco and Precision. Provision for credit losses pertains principally to Car-Mart's and Paaco's operations. Selling, general and administrative expenses for the nine months ended January 31, 1999 increased $15.2 million compared to the same period in the prior fiscal year. The increase resulted principally from (i) expenses relating to Car-Mart, Paaco and Precision ($12.7 million), (ii) the development of Concorde's mortgage based lending business ($2.1 million), and (iii) Crown's abandonment of certain business ventures which it had been pursuing ($.5 million), offset partially by a decrease in costs associated with defending and settling certain lawsuits ($.5 million). Interest expense for the nine months ended January 31, 1999 increased $4.4 million compared to the same period in the prior fiscal year. The increase resulted from interest associated with the debt of Car-Mart, Paaco, Precision and Concorde. Depreciation and amortization expense for the nine months ended January 31, 1999 increased $1.2 million compared to the same period in the prior fiscal year. The increase resulted principally from (i) amortizing goodwill that was created in the acquisitions of Paaco and Precision ($.6 million), (ii) depreciating the assets of Car-Mart, Paaco and Precision ($.6 million), and (iii) greater depreciation at Concorde ($.1 million). The provision for income taxes for the nine months ended January 31, 1999 was $6,065,681 on pretax income of $18,369,843. This equates to an effective tax rate of 34.4% after removing from pretax income the equity in earnings of CMN ($754,445), which earnings are presented on an after tax basis. The benefit for income taxes for the nine months ended January 31, 1998 was $603,348 on a pretax loss of $949,875. This equates to an effective tax rate of 40.7% after removing from the pretax loss the equity in earnings of CMN ($532,888), which earnings are presented on an after tax basis. Minority interests for the nine months ended January 31, 1999 ($362,716) pertain principally to the portion of Paaco (35%) not owned by the Company during the period. LIQUIDITY AND CAPITAL RESOURCES For the nine months ended January 31, 1999 net cash provided by operating activities amounted to $11.0 million. The principal sources of cash resulted from the sale of mortgage loans and net income generated by the Company. The excess of mortgage loans sold and principal repayments over mortgage loans originated or acquired was $5.6 million. Net cash used by investing activities of $48.8 million included (i) a $33.4 million use of cash in the acquisition of Car-Mart, (ii) a $25.8 million use of cash in finance receivable originations in excess of finance receivable collections, (iii) a $12.2 million use of cash in the purchase of assets (rental and other equipment and the construction of lodging facilities), and (iv) a $21.1 million source of cash from the sale of securities (principally Inktomi common stock). Net cash provided by financing activities of $35.1 million principally relates to (i) $30.6 million of cash provided by the asset based revolving credit facilities of Car-Mart, Paaco and Precision, and (ii) $5.6 million of proceeds from the issuance of other debt (Home Stay construction loan and financing of Paaco and Precision real estate). As of January 31, 1999 the Company's sources of liquidity included approximately (i) $3.7 million of cash on hand, of which $3.2 million was held by Crown, (ii) $8.7 million of marketable equity securities held by Crown, (iii) $44.6 million remaining to be drawn on the credit facilities of Car-Mart, Paaco, Concorde, Precision and Home Stay, 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, intermediate bulk containers and lodging facilities), and (iv) 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. The loan agreements which govern the credit facilities of Crown's subsidiaries limit dividends and other distributions from such subsidiaries to Crown. The Company is focusing on the development and expansion of its existing businesses and the potential acquisition or development of other unrelated businesses. Car-Mart's, Paaco's, Precision's, Concorde's, and Home Stay's credit facilities can support the majority of their expected growth over the next twelve months. As of January 31, 1999 the Company had an outstanding commitment of approximately $1.5 million pertaining to an investment in a private venture capital fund which focuses on high technology businesses, such as Internet related concerns. The Company plans to fund this commitment from cash and liquid securities on hand. In March 1996 the Company's Board of Directors approved a program, as amended, to repurchase up to 3,000,000 shares of the Company's common stock from time to time in the open market. As of January 31, 1999 the Company had repurchased 2,736,927 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. 20 21 DATA PROCESSING AND YEAR 2000 Each of Crown and its subsidiaries operate their data processing systems independently. Almost all of the software utilized by the Company is licensed from third parties. Most of the Company's hardware, software and networking systems are year 2000 compliant, however, a more complete description on a company by company basis as of January 31, 1999 is as follows: PAACO - Paaco utilizes two primary software packages (operating and accounting), and several secondary software packages (word processing, spreadsheet and database) in the operation of its business. Each of its operating, accounting and secondary software applications are year 2000 compliant. Paaco utilizes two local area networking systems, both of which are year 2000 compliant. All of Paaco's data processing hardware is year 2000 compliant. CONCORDE - Concorde utilizes three primary software packages (front-end origination and processing, mortgage servicing and accounting), and approximately nine secondary software packages (document generation, scanning, telephone management, E-mail, database, fax, credit bureau, word processing and spreadsheet) in the operation of its business. All of its software applications are year 2000 compliant. In addition, Concorde's local area networking software and all of its data processing hardware are year 2000 compliant. PRECISION - Precision utilizes two primary software packages (tank tracking and accounting), and approximately five secondary software packages (word processing, database, spreadsheet, desktop publishing and lock box communication) in the operation of its business. Precision's accounting software and most of its secondary software applications are year 2000 compliant. Precision's tank tracking, database and lock box communication software are not presently year 2000 compliant. Precision has purchased new tank tracking and database software that is year 2000 compliant and is in the process of transferring the data files to such new software. The bank which designed Precision's lock box communication software is in the process of making such software year 2000 compliant. All of Precision's data processing equipment, which consists principally of personal computers, is year 2000 compliant. Precision expects all of its software applications to be year 2000 compliant by July 1999. CMN - CMN utilizes one primary software package (accounting), and a few secondary software packages (word processing and spreadsheet) in the operation of its business. All of CMN's software applications are year 2000 compliant. CMN's data processing equipment, which consists principally of personal computers, is year 2000 compliant. CROWN - Crown utilizes one primary software package (accounting), and approximately three secondary software packages (word processing, spreadsheet and desktop publishing) in the operation of its business. All of its software applications are year 2000 compliant. In addition, Crown's local area networking software and all of its data processing hardware is year 2000 compliant CAR-MART - Car-Mart utilizes two primary software packages (operating and accounting), and several secondary software packages (word processing, spreadsheet, database and communication) in the operation of its business. The present version of the operating software utilized by Car-Mart is not year 2000 compliant, but a more recent version is available that is year 2000 compliant. The accounting software utilized by Car-Mart is not year 2000 compliant, however, Car-Mart recently purchased new accounting software that is year 2000 compliant and it plans to install such new software by May 1999. All of Car-Mart's secondary software packages are year 2000 compliant. The majority of Car-Mart's data processing hardware is year 2000 compliant, and the portion that is not will be updated or replaced by July 1999. Each of Crown and its subsidiaries rely to varying degrees on third parties in the operation of their businesses. Such third parties include banking institutions, telecommunications companies, utilities, manufacturers and parts suppliers. The Company has made inquiries of some, but not all, of these third parties as to their year 2000 compliance. The Company believes to the extent a particular third party vendor does not become year 2000 compliant, and such lack of compliance is expected to have a material impact on such vendor's ability to effectively provide goods or services, the Company could replace such vendor to obtain the goods or services it needs. The Company plans to monitor its more material third party relationships and take appropriate action as necessary. The Company has not incurred any appreciable costs in its process of becoming year 2000 compliant, nor does it expect to do so in the future. The Company does not presently have a contingency plan with respect to its year 2000 compliance as it expects to be fully compliant prior to the year 2000. 21 22 SEASONALITY The Company's automobile sales operation is seasonal in nature. In the automobile business, the Company's third fiscal quarter (November through January) is historically the slowest period of time for car and truck sales. Many of the Company's operating expenses such as administrative personnel, rent and insurance are fixed and cannot easily be reduced during periods of decreased sales. None of the Company's other businesses experience significant seasonal fluctuations. 22 23 PART II ITEM 1. LEGAL PROCEEDINGS In August 1998 an action was filed against the Company in the 8th Judicial District Court of Clark County, Nevada by Resort Properties of America ("RPA"). In this action RPA alleges it had a verbal agreement with the Company pertaining to the sale of the Company's Las Vegas land which was sold in September 1997. RPA claims it is due a brokerage commission of $450,000 plus attorney's fees. The Company has denied the material allegations of the claim and intends to vigorously contest any liability in the matter. While no assurance can be given as to the ultimate outcome of this litigation, management believes that the resolution of this matter will not have a material adverse effect on the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS In January 1999 in connection with the acquisition of Car-Mart, the Company issued six promissory notes aggregating $7.5 million (the "Notes"). The Notes bear interest at 8.5% per annum payable quarterly and mature in January 2005. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 4.7.1 First Amended and Restated Loan and Security Agreement by and among Finova Capital Corporation, Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation including the Schedule to First Amended and Restated Loan and Security Agreement and the Twelfth Amended and Restated Promissory Note. (2) 27.1 Financial data schedule (1). (b) Reports on Form 8-K: During the fiscal quarter ended January 31, 1999 the Company filed a report on Form 8-K dated January 28, 1999 (event date January 15, 1999) respecting the acquisition of 100% of Car-Mart. ----------------------- (1) Filed herewith. (2) Previously filed with 10-K on August 13, 1999. 23 24 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 16, 1999 24 25 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 4.7.1 First Amended and Restated Loan and Security Agreement by and among Finova Capital Corporation, Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation including the Schedule to First Amended and Restated Loan and Security Agreement and the Twelfth Amended and Restated Promissory Note. (2) 27.1 Financial data schedule (1).
- ----------- (1) Filed herewith. (2) Previously filed with 10-K on August 13, 1999. EX-27.1 2 FINANCIAL DATA SCHEDULE
5 9-MOS APR-30-1999 JAN-31-1999 3,713,699 8,659,385 117,966,840 (15,533,338) 6,321,585 0 20,315,118 (1,522,987) 158,893,583 0 89,776,089 0 0 99,304 51,155,435 158,893,583 49,598,072 64,108,780 32,438,788 0 20,123,260 8,378,413 4,442,754 18,369,843 6,065,681 12,666,878 0 0 0 12,666,878 1.26 1.23
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