-----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, Atlyykl0K6am4GprshkmwtXCWx1ugOUP7whOJK238w4fntfO+/FiRSHGC6U7nKaE Uh0oTST0AGaX79wT+ku/kg== 0000950134-99-008315.txt : 19990917 0000950134-99-008315.hdr.sgml : 19990917 ACCESSION NUMBER: 0000950134-99-008315 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981031 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: 99712559 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-QUARTER END 10/31/98 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: OCTOBER 31, 1998 0-14939 CROWN GROUP, INC. (Exact name of registrant as specified in its charter) TEXAS 63-0851141 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) 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 December 10, 1998 ------------------- ----------------- Common stock, par value $.01 per share 9,945,313 2 PART I ITEM 1. FINANCIAL STATEMENTS CROWN GROUP, INC. CONSOLIDATED BALANCE SHEETS
October 31, 1998 (unaudited) April 30, 1998 ---------------- ---------------- (Restated) (Restated) Assets: Cash and cash equivalents $ 1,712,004 $ 6,481,706 Marketable equity securities 17,316,545 4,742,180 Accounts and other receivables, net 3,575,389 1,936,055 Mortgage loans held for sale, net 9,731,175 14,350,437 Finance receivables, net 43,300,782 33,918,014 Inventory 4,185,215 3,798,800 Prepaid and other assets 552,098 572,089 Property and equipment, net 15,473,145 9,165,703 Investment in CMN and related assets, net 5,501,547 6,606,114 Goodwill, net 12,308,572 10,631,737 --------------- --------------- $ 113,656,472 $ 92,202,835 =============== =============== Liabilities and stockholders' equity: Accounts payable $ 2,106,937 $ 2,514,081 Accrued liabilities 1,755,206 1,952,828 Income taxes payable 107,678 142,572 Revolving credit facilities 44,853,274 41,164,524 Other notes payable 8,610,017 4,870,074 Deferred sales tax 2,683,859 2,090,303 Deferred income taxes 6,036,326 1,855,058 --------------- --------------- Total liabilities 66,153,297 54,589,440 --------------- --------------- Minority interests 1,836,660 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; 9,945,336 issued and outstanding (9,433,963 at April 30, 1998) 99,453 94,340 Additional paid-in capital 37,070,219 35,547,369 Accumulated deficit (1,709,055) (2,520,885) Unrealized appreciation of securities 10,205,898 1,930,500 --------------- --------------- Total stockholders' equity 45,666,515 35,051,324 --------------- --------------- $ 113,656,472 $ 92,202,835 =============== ===============
See accompanying notes to consolidated financial statements. 3 CONSOLIDATES STATEMENTS OF OPERATIONS CROWN GROUP, INC. (UNAUDITED)
Three Months Ended October 31, 1998 1997 ------------ ------------ (Restated) Revenues: Sales $ 14,801,080 Rental income 642,957 Gain on sale of mortgage loans 1,171,458 Interest income 2,745,432 $ 415,299 Interest, fees and rentals from CMN 358,711 126,334 Other 30,386 14,000 ------------ ------------ 19,750,024 555,633 ------------ ------------ Costs and expenses: Cost of sales 9,862,523 Selling, general and administrative 5,774,728 1,017,167 Provision for credit losses 2,410,640 Interest expense 1,478,277 1,614 Depreciation and amortization 531,146 127,191 ------------ ------------ 20,057,314 1,145,972 ------------ ------------ Other income: Equity in earnings of CMN 147,807 167,806 Gain on sale of securities 23,674 ------------ ------------ 147,807 191,480 ------------ ------------ Loss before taxes and minority interests (159,483) (398,859) Benefit for income taxes (110,021) (348,030) Minority interests (95,675) ------------ ------------ Net income (loss) $ 46,213 (50,829) ============ ============ Earnings (loss) per share: Basic $ 0.00 $ (0.01) Diluted $ 0.00 $ (0.01) Weighted average number of shares outstanding: Basic 10,071,689 9,870,063 Diluted 10,177,528 9,870,063
See accompanying notes to consolidated financial statements. 4 CONSOLIDATED STATEMENTS OF OPERATIONS CROWN GROUP, INC. (UNAUDITED)
Six Months Ended October 31, 1998 1997 ------------ ------------ (Restated) Revenues: Sales $ 31,314,081 Rental income 1,272,015 Gain on sale of mortgage loans 2,313,653 Interest income 5,269,502 $ 794,347 Interest, fees and rentals from CMN 609,013 216,301 Other 41,550 39,195 ------------ ------------ 40,819,814 1,049,843 ------------ ------------ Costs and expenses: Cost of sales 20,763,335 Selling, general and administrative 11,524,459 2,127,454 Provision for credit losses 4,391,961 Interest expense 2,789,702 1,614 Depreciation and amortization 1,041,356 219,555 ------------ ------------ 40,510,813 2,348,623 ------------ ------------ Other income (expense): Equity in earnings of CMN 716,428 407,685 Gain (loss) on sale of securities (74,403) 23,674 ------------ ------------ 642,025 431,359 ------------ ------------ Income (loss) before taxes and minority interests 951,026 (867,421) Provision (benefit) for income taxes 150,989 (507,199) Minority interests (11,793) ------------ ------------ Net income (loss) $ 811,830 $ (360,222) ============ ============ Earnings (loss) per share: Basic $ 0.08 $ (0.04) Diluted $ 0.08 $ (0.04) Weighted average number of shares outstanding: Basic 10,143,969 10,055,465 Diluted 10,305,483 10,055,465
See accompanying notes to consolidated financial statements. 5 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME CROWN GROUP, INC. (UNAUDITED)
Three Months Ended Six Months Ended October 31, October 31, 1998 1997 1998 1997 ----------- ----------- ----------- ----------- (Restated) (Restated) Net income (loss) $ 46,213 $ (50,829) $ 811,830 $ (360,222) Unrealized appreciation of securities arising during period 3,489,754 8,275,398 ----------- ----------- ----------- ----------- Comprehensive income (loss) $ 3,535,967 $ (50,829) $ 9,087,228 $ (360,222) =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. 6 CONSOLIDATED STATEMENTS OF CASH FLOWS CROWN GROUP, INC. (UNAUDITED)
Six Months Ended October 31, 1998 1997 ------------ ------------ (Restated) Operating activities: Net income (loss) $ 811,830 $ (360,222) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 1,041,356 219,555 Amortization of finance receivable discount (479,208) Deferred income taxes 4,123 (1,315,000) Provision for credit losses 4,391,961 Minority interests (11,793) Gain on sale of mortgage loans (2,313,653) Gain on sale of assets (85,629) (Gain) loss on sale of securities 74,403 (23,674) Equity in earnings of CMN (716,428) (407,685) Changes in assets and liabilities, net of transactions: Accounts and other receivables (804,417) (318,466) Mortgage loans originated or acquired (45,185,853) (6,204,821) Mortgage loans sold and principal repayments 52,068,737 Inventory 2,888,153 Prepaids and other assets 78,214 (61,057) Accounts payable, accrued liabilities and deferred sales tax 265,840 (218,535) Income taxes payable (34,894) 445,000 ------------ ------------ Net cash provided (used) by operating activities 11,992,742 (8,244,905) ------------ ------------ Investing activities: Finance receivable originations (28,219,935) Finance receivable collections 11,167,831 Purchase of property and equipment (8,131,647) (755,950) Sale of assets 501,356 15,250,000 Purchase of securities (471,266) (339,207) Sale of securities 360,984 221,995 Dividends and collections of notes receivable from CMN 1,665,685 304,250 Purchase of CMN and related assets (7,000,001) ------------ ------------ Net cash provided (used) by investing activities (23,126,992) 7,681,087 ------------ ------------ Financing activities: Capital contribution from minority owner 60,000 Purchase of common stock (1,124,145) (1,426,063) Proceeds from revolving credit facilities, net 3,688,750 Proceeds from other debt, net 3,739,943 ------------ ------------ Net cash provided (used) by financing activities 6,364,548 (1,426,063) ------------ ------------ Decrease in cash and cash equivalents (4,769,702) (1,989,881) Cash and cash equivalents at: Beginning of period 6,481,706 21,117,960 ------------ ------------ End of period $ 1,712,004 $ 19,128,079 ============ ============
See accompanying notes to consolidated financial statements. 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 October 31, 1998 owned (i) 65% of Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation (collectively, "Paaco"), a vertically integrated used car sales and finance company, (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, and (v) 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. In December 1998 the Company entered into an agreement to acquire Fleeman Holding Company, including its wholly-owned subsidiary America's Car-Mart, Inc. ("Car-Mart"), for $41 million. Car-Mart is a used car sales and finance company that operates 30 dealerships in four states (see note N). 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 six month period ended October 31, 1998 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 October 31, 1998 the Company held 222,222 shares 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. The Company's Inktomi shares are not registered, and thus the Company may not sell such shares in the public markets until the completion of a one year holding period which ends on February 25, 1999. However, the Company is free to sell its Inktomi shares in a private transaction. The Company valued its Inktomi shares based upon the closing stock price of $84.3125 per share on October 31, 1998, less a 10% discount to reflect the restrictions on such shares. Accordingly, at October 31, 1998 the carrying value of the Company's Inktomi stock was $16,862,500 which reflects a gross unrealized gain of $15,787,500 over the Company's cost of $1,075,000. 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 October 31, 1998 accumulated amortization of goodwill amounted to $525,170. Reclassifications Certain prior year amounts in the accompanying financial statements have been reclassified to conform to the fiscal 1999 presentation. 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 the Company acquired an additional 12% interest in Paaco directly from the Paaco Management Shareholders. With this purchase the Company owns 65% of Paaco as of October 31, 1998. The purchase price of $1.5 million was paid by issuing 375,000 shares of the Company's common stock. 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. D - CMN OPERATING RESULTS The operating results of CMN for the six months ended October 31, 1998 and 1997 were as follows (in thousands):
Six Months Ended October 31, 1998 1997 ------------ ------------ Revenues $ 10,945 $ 8,821 Costs and expenses 7,944 6,357 Interest, fees and rentals to shareholders 832 1,077 Provision for income taxes 707 413 ------------ ------------ Net income $ 1,462 $ 974 ============ ============
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 18 to 26% per annum and provide for payments over periods ranging from 24 to 36 months. A summary of finance receivables as of October 31, 1998 and April 30, 1998 is as follows:
October 31, April 30, 1998 1998 ------------ ------------ (Restated) (Restated) Finance receivables $ 61,493,712 $ 48,776,278 Unearned finance charges (11,707,514) (9,420,164) Allowance for credit losses (6,001,423) (4,727,679) Valuation discount (483,993) (710,421) ------------ ------------ $ 43,300,782 $ 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), the Company valued Paaco's finance receivable portfolios at market value and determined that an aggregate valuation discount of $1,215,966 was appropriate. This discount is being amortized into interest income over the life of the related finance receivable portfolios that existed on the purchase date using the interest method. 9 A summary of the restated finance receivables allowance for credit losses for the period from April 30, 1998 to October 31, 1998 is as follows: Balance at April 30, 1998 $ 4,727,679 Provision for credit losses 4,306,361 Net charge offs (3,032,617) ----------- Balance at October 31, 1998 $ 6,001,423 ===========
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 ($102,600) and trade accounts receivable ($12,500) as of October 31, 1998. F - PROPERTY AND EQUIPMENT A summary of property and equipment as of October 31, 1998 and April 30, 1998 is as follows:
October 31, April 30, 1998 1998 ------------ ------------ Land and buildings $ 2,778,117 $ 2,332,750 Construction in progress 3,577,646 Rental equipment 6,000,009 4,749,652 Furniture, fixtures and equipment 3,221,152 1,904,536 Leasehold improvements 1,122,728 920,583 Less accumulated depreciation and amortization (1,226,507) (741,818) ------------ ------------ $ 15,473,145 $ 9,165,703 ============ ============
G - DEBT A summary of debt at October 31, 1998 is as follows:
Revolving Credit Facilities ------------------------------------------------------------------------------------------------------------- Facility Interest Primary Balance at Borrower Lender Amount Rate Maturity Collateral October 31, 1998 --------- ------------- ----------- -------------- --------- -------------- ----------------- Paaco Finova $38 million Prime + 3.00% Apr 2000 Finance rec. $ 34,927,375 Concorde Bank One $20 million Libor + 2.25% Jan 1999 Mortgage loans 5,572,149 Precision Wells Fargo $5 million Prime June 2000 IBC's and rec. 3,853,750 Paaco Comerica $500,000 Prime + 2.00% Demand Vehicle inv. 500,000 ------------ $ 44,853,274 ============
Other Notes Payable ------------------------------------------------------------------------------------------------------------- Facility Interest Primary Balance at Borrower Lender Amount Rate Maturity Collateral October 31, 1998 --------- ------------- ----------- -------------- --------- ------------- ----------------- Home Stay Bank of Pensacola $5.4 million 8.50% Feb 2004 Real estate $ 3,231,883 Paaco Chase Texas N/A 8.50% Oct 2003 Real estate 973,054 Paaco Heller Financial N/A Prime + 2.25% Dec 2015 Real estate 624,957 Paaco Various N/A Various 1998 to 1999 None 3,780,123 ----------- $ 8,610,017 ===========
10 H - COMPREHENSIVE INCOME INFORMATION Supplemental comprehensive income disclosures for the six months ended October 31, 1998 are as follows:
Six Months Ended October 31, 1998 ---------------- Gross unrealized appreciation of securities arising during period $ 12,538,482 Provision for income taxes 4,263,084 ---------------- Unrealized appreciation of securities arising during period $ 8,275,398 ================
Changes to unrealized appreciation of securities for the six months ended October 31, 1998 are as follows:
Six Months Ended October 31, 1998 ---------------- Balance at April 30, 1998 $ 1,930,500 Current period change 8,275,398 ---------------- Balance at October 31, 1998 $ 10,205,898 ================
I - EARNINGS PER SHARE A summary reconciliation of basic earnings per share to diluted earnings per share for the six months ended October 31, 1998 and 1997 is as follows:
Six Months Ended October 31, 1998 1997 ------------ ------------ (Restated) Net income (loss) $ 811,830 $ (360,222) ============ ============ Average shares outstanding-basic 10,143,969 10,055,465 Dilutive options 143,543 Dilutive warrants 17,971 ------------ ------------ Average shares outstanding-diluted 10,305,483 10,055,465 ============ ============ Earnings (loss) per share: Basic $ 0.08 $ (0.04) Diluted $ 0.08 $ (0.04) Antidilutive securities not included: Options 185,000 814,643 ============ ============ Warrants 391,198 1,184,246 ============ ============
11 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. 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. Such additional consideration, if any, is to be paid in Company common stock valued at $4.00 per share. 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. L - SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow disclosures for the six months ended October 31, 1998 and 1997 are as follows:
Six Months Ended October 31, 1998 1997 ---------- ---------- Conversion of a portion of CMN note to equity $2,516,493 Value of stock issued in acquisitions $2,652,108 Inventory acquired in repossession 3,274,568 Interest paid, net of amount capitalized 2,738,257 1,614 Income taxes paid 100,000 300,000
12 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 October 31, 1998 and 1997. These segments are categorized by legal entity, which also corresponds to the lines of business of the Company. The segments include (i) Paaco, which sells and finances used vehicles, (ii) Precision, which rents and sells intermediate bulk containers, (iii) Concorde, which originates and sells 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 October 31, 1998 and 1997 is as follows (in thousands):
Three Months Ended October 31, 1998 (Restated) -------------------------------------------------------------------------------------------- Paaco Precision Concorde Other Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ ------------ Revenues: Sales and other $ 14,049 $ 1,395 $ 1,205 $ 356 $ 17,005 Interest income 2,108 3 393 385 $ (144) 2,745 ------------ ------------ ------------ ------------ ------------ ------------ Total 16,157 1,398 1,598 741 (144) 19,750 ------------ ------------ ------------ ------------ ------------ ------------ Costs and expenses: Costs of sales 9,312 551 9,863 Selling, gen. and admin. 3,614 319 1,116 726 5,775 Prov. for credit losses 2,369 10 32 2,411 Interest expense 1,220 98 304 (144) 1,478 Depreciation and amort. 66 163 41 261 531 ------------ ------------ ------------ ------------ ------------ ------------ Total 16,581 1,141 1,493 987 (144) 20,058 ------------ ------------ ------------ ------------ ------------ ------------ CMN earnings and other 148 148 ------------ ------------ ------------ ------------ ------------ ------------ Income (loss) before taxes and minority interests $ (424) $ 257 $ 105 $ (98) $ -- $ (160) ============ ============ ============ ============ ============ ============ Capital expenditures $ 147 $ 1,103 $ 77 $ 2,347 $ -- $ 3,674 ============ ============ ============ ============ ============ ============ Total assets $ 52,465 $ 11,438 $ 10,981 $ 65,502 $ (26,730) $ 113,656 ============ ============ ============ ============ ============ ============
Three Months Ended October 31, 1997 -------------------------------------------------------------------------------------------- Paaco Precision Concorde Other Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ ------------ Revenues: Sales and other $ 141 $ 141 Interest income $ 82 368 $ (35) 415 ------------ ------------ ------------ ------------ Total 82 509 (35) 556 ------------ ------------ ------------ ------------ Costs and expenses: Selling, gen. and admin. 384 633 1,017 Interest expense 37 (35) 2 Depreciation and amort. 6 121 127 ------------ ------------ ------------ ------------ Total 427 754 (35) 1,146 ------------ ------------ ------------ ------------ CMN earnings and other 191 191 ------------ ------------ ------------ ------------ Income (loss) before taxes and minority interests $ (345) $ (54) $ -- $ (399) ============ ============ ============ ============ Capital expenditures $ 198 $ 429 $ -- $ 627 ============ ============ ============ ============ Total assets $ 7,626 $ 42,551 $ (14,700) $ 35,477 ============ ============ ============ ============
13 The Company's business segment data for the six months ended October 31, 1998 and 1997 is as follows (in thousands):
Six Months Ended October 31, 1998 (Restated) -------------------------------------------------------------------------------------------- Paaco Precision Concorde Other Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ ------------ Revenues: Sales and other $ 29,909 $ 2,677 $ 2,356 $ 608 $ 35,550 Interest income 3,919 3 804 803 $ (259) 5,270 ------------ ------------ ------------ ------------ ------------ ------------ Total 33,828 2,680 3,160 1,411 (259) 40,820 ------------ ------------ ------------ ------------ ------------ ------------ Costs and expenses: Costs of sales 19,755 1,008 20,763 Selling, gen. and admin. 7,393 629 2,223 1,280 11,525 Prov. for credit losses 4,306 10 76 4,392 Interest expense 2,250 190 609 (259) 2,790 Depreciation and amort. 135 315 73 518 1,041 ------------ ------------ ------------ ------------ ------------ ------------ Total 33,839 2,152 2,981 1,798 (259) 40,511 ------------ ------------ ------------ ------------ ------------ ------------ CMN earnings and other 642 642 ------------ ------------ ------------ ------------ ------------ ------------ Income before taxes and minority interests $ (11) $ 528 $ 179 $ 255 $ -- $ 951 ============ ============ ============ ============ ============ ============ Capital expenditures $ 374 $ 2,168 $ 219 $ 5,371 $ -- $ 8,132 ============ ============ ============ ============ ============ ============ Total assets $ 52,465 $ 11,438 $ 10,981 $ 65,502 $ (26,730) $ 113,656 ============ ============ ============ ============ ============ ============
Six Months Ended October 31, 1997 -------------------------------------------------------------------------------------------- Paaco Precision Concorde Other Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ ------------ Revenues: Sales and other $ 1 $ 255 $ 256 Interest income 94 735 $ (35) 794 ------------ ------------ ------------ ------------ Total 95 990 (35) 1,050 ------------ ------------ ------------ ------------ Costs and expenses: Selling, gen. and admin. 584 1,543 2,127 Interest expense 37 (35) 2 Depreciation and amort. 7 213 220 ------------ ------------ ------------ ------------ Total 628 1,756 (35) 2,349 ------------ ------------ ------------ ------------ CMN earnings and other 432 432 ------------ ------------ ------------ ------------ Loss before taxes and minority interests $ (533) $ (334) $ -- $ (867) ============ ============ ============ ============ Capital expenditures $ 198 $ 558 $ -- $ 756 ============ ============ ============ ============ Total assets $ 7,626 $ 42,551 $ (14,700) $ 35,477 ============ ============ ============ ============
14 N - SUBSEQUENT EVENT In December 1998 the Company entered into a definitive stock purchase agreement to acquire 100% of the outstanding common stock of Fleeman Holding Company, the parent company of Car-Mart, for $41 million. The purchase price consists of $33.5 million in cash, and a $7.5 million note with interest payable monthly at 8.5% per annum and the principal due in five years. Closing of the transaction is subject to certain conditions, including obtaining financing for a portion of the purchase price. 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. As of May 31, 1998 Car-Mart's finance receivable portfolio consisted of approximately 15,000 accounts representing $45 million in receivables. For the year ended May 31, 1998 Car-Mart reported revenues of approximately $52 million. The transaction is scheduled to close in January 1999. O - 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 six months ended October 31, 1998 is set forth below (in thousands, except per share amounts):
Three Months Ended October 31, 1998 Six Months Ended October 31, 1998 ------------------------------------ ---------------------------------- As Previously As As Previously As Reported Restated Reported Restated ----------------- ----------------- ---------------- ---------------- Revenues $ 19,750 $ 19,750 $ 40,820 $ 40,820 Income (loss) before taxes and minority interests 921 (160) 2,591 951 Net income 501 46 1,508 812 Earnings per share (diluted) $ .05 $ .00 $ .15 $ .08
October 31, 1998 ------------------------------ As Previously As Reported Restated ------------- --------- Finance receivables, net $ 46,210 $ 43,301 Inventory 4,863 4,185 Goodwill, net 11,107 12,309 Total assets 116,417 113,656 Accounts payable 1,480 2,107 Deferred income taxes 7,734 6,036 Total liabilities 67,225 66,153 Minority interests 2,849 1,837 Stockholders' equity 46,344 45,667
15 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), 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 October 31, 1998 owned (i) 65% of Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation (collectively, "Paaco"), a vertically integrated used car sales and finance company, (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, and (v) 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. In December 1998 the Company entered into a definitive stock purchase agreement to acquire 100% of the outstanding common stock of Fleeman Holding Company, the parent company of America's Car-Mart, Inc. ("Car-Mart"), for $41 million. The purchase price consists of $33.5 million in cash, and a $7.5 million note with interest payable monthly at 8.5% per annum and the principal due in five years. Car-Mart is a used car sales and finance company that operates 30 dealerships in four states. 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 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 cash. Approximately $4.9 million of Paaco common stock was purchased directly from 16 Paaco, and the remaining $4.2 million was purchased from Paaco management personnel who prior to this transaction were the sole shareholders of Paaco. Effective May 1, 1998 the Company purchased an additional 12% interest in Paaco from the management shareholders. The purchase price of $1.5 million was paid by issuing 375,000 shares of the Company's common stock. Paaco is a vertically integrated used car sales and finance company which operates eight used car dealerships in the Dallas-Ft. Worth metropolitan area. Paaco is in the process of opening two dealerships in Houston, Texas. Paaco sells, underwrites and finances used cars and 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. 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 six months ended October 31, 1997 only includes five months of CMN operating results. Concorde was formed in June 1997, and, as a result, only had limited operations during the three and six months ended October 31, 1997. 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 six months ended October 31, 1997. As a result of the above transactions, the Company's operating results for the three and six months ended October 31, 1998 and 1997 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 receivable 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 O to the consolidated financial statements for a summary of the impact of the required adjustments on the Company's consolidated financial statements as of October 31, 1998 and for the three and six 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 THREE MONTHS ENDED OCTOBER 31, 1998 COMPARED TO THE THREE MONTHS ENDED OCTOBER 31, 1997 Below is a presentation of the operating results for the four principal business segments of the Company for the three months ended October 31, 1998 and 1997. The segments include (i) Paaco, which sells and finances used vehicles, (ii) Precision, which rents and sells intermediate bulk containers, (iii) Concorde, which originates and sells 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 October 31, 1998 and 1997 is as follows (in thousands):
Three Months Ended October 31, 1998 (Restated) -------------------------------------------------------------------------------------------- Paaco Precision Concorde Other Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ ------------ Revenues: Sales and other $ 14,049 $ 1,395 $ 1,205 $ 356 $ 17,005 Interest income 2,108 3 393 385 $ (144) 2,745 ------------ ------------ ------------ ------------ ------------ ------------ Total 16,157 1,398 1,598 741 (144) 19,750 ------------ ------------ ------------ ------------ ------------ ------------ Costs and expenses: Costs of sales 9,312 551 9,863 Selling, gen. and admin. 3,614 319 1,116 726 5,775 Prov. for credit losses 2,369 10 32 2,411 Interest expense 1,220 98 304 (144) 1,478 Depreciation and amort. 66 163 41 261 531 ------------ ------------ ------------ ------------ ------------ ------------ Total 16,581 1,141 1,493 987 (144) 20,058 ------------ ------------ ------------ ------------ ------------ ------------ CMN earnings and other 148 148 ------------ ------------ ------------ ------------ ------------ ------------ Income (loss) before taxes and minority interests $ (424) $ 257 $ 105 $ (98) $ -- $ (160) ============ ============ ============ ============ ============ ============
Three Months Ended October 31, 1997 -------------------------------------------------------------------------------------------- Paaco Precision Concorde Other Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ ------------ Revenues: Sales and other $ 141 $ 141 Interest income $ 82 368 $ (35) 415 ------------ ------------ ------------ ------------ Total 82 509 (35) 556 ------------ ------------ ------------ ------------ Costs and expenses: Selling, gen. and admin. 384 633 1,017 Interest expense 37 (35) 2 Depreciation and amort. 6 121 127 ------------ ------------ ------------ ------------ Total 427 754 (35) 1,146 ------------ ------------ ------------ ------------ CMN earnings and other 191 191 ------------ ------------ ------------ ------------ Income (loss) before taxes and minority interests $ (345) $ (54) $ -- $ (399) ============ ============ ============ ============
Revenues from sales and rental income pertain to the businesses of Paaco and Precision, which were acquired during the fourth quarter of fiscal 1998. Interest income for the three months ended October 31, 1998 increased $2.3 million compared to the same period in the prior fiscal year. The increase resulted principally from (i) interest earned on Paaco's finance receivable portfolio ($2.1 million), and (ii) greater interest earned on Concorde's mortgage loans ($.3 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 Paaco and Precision. Provision for credit losses pertains principally to Paaco's operations. Selling, general and administrative expenses for the three months ended October 31, 1998 increased $4.8 million compared to the same period in the prior fiscal year. The increase resulted principally from (i) expenses relating to Paaco and Precision ($3.9 million), and (ii) the development of Concorde's mortgage based lending business ($.7 million). Interest expense for the three months ended October 31, 1998 increased $1.5 million compared to the same period in the prior fiscal year. The increase resulted from interest associated with the debt of Paaco, Precision and Concorde. Depreciation and amortization expense for the three months ended October 31, 1998 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 ($185,275), (ii) depreciating the assets of Paaco and Precision ($186,030), and (iii) greater depreciation at Concorde ($33,693). 18 The benefit for income taxes for the three months ended October 31, 1998 was $110,021 on a pretax loss of $159,483. This equates to an effective tax rate of 35.8% after removing from pretax income the equity in earnings of CMN ($147,807), which earnings are presented on an after tax basis. The benefit for income taxes for the three months ended October 31, 1997 was $348,030 on a pretax loss of $398,859. 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 October 31, 1998 ($95,675) pertain principally to the portion of Paaco (35%) not owned by the Company during the period. Net income for the three months ended October 31, 1998 increased $97,042 compared to the same period in the prior fiscal year. The increase was the result of (i) including the results of operations of Precision in the current period, and (ii) Concorde reporting pretax earnings in the current period ($105,360) compared to a pretax loss ($345,034) in the prior period, partially offset by losses at Paaco during the period. SIX MONTHS ENDED OCTOBER 31, 1998 COMPARED TO THE SIX MONTHS ENDED OCTOBER 31, 1997 The Company's business segment data for the six months ended October 31, 1998 and 1997 is as follows (in thousands):
Six Months Ended October 31, 1998 (Restated) -------------------------------------------------------------------------------------------- Paaco Precision Concorde Other Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ ------------ Revenues: Sales and other $ 29,909 $ 2,677 $ 2,356 $ 608 $ 35,550 Interest income 3,919 3 804 803 $ (259) 5,270 ------------ ------------ ------------ ------------ ------------ ------------ Total 33,828 2,680 3,160 1,411 (259) 40,820 ------------ ------------ ------------ ------------ ------------ ------------ Costs and expenses: Costs of sales 19,755 1,008 20,763 Selling, gen. and admin. 7,393 629 2,223 1,280 11,525 Prov. for credit losses 4,306 10 76 4,392 Interest expense 2,250 190 609 (259) 2,790 Depreciation and amort. 135 315 73 518 1,041 ------------ ------------ ------------ ------------ ------------ ------------ Total 33,839 2,152 2,981 1,798 (259) 40,511 ------------ ------------ ------------ ------------ ------------ ------------ CMN earnings and other 642 642 ------------ ------------ ------------ ------------ ------------ ------------ Income before taxes and minority interests $ (11) $ 528 $ 179 $ 255 $ -- $ 951 ============ ============ ============ ============ ============ ============
Six Months Ended October 31, 1997 -------------------------------------------------------------------------------------------- Paaco Precision Concorde Other Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ ------------ Revenues: Sales and other $ 1 $ 255 $ 256 Interest income 94 735 $ (35) 794 ------------ ------------ ------------ ------------ Total 95 990 (35) 1,050 ------------ ------------ ------------ ------------ Costs and expenses: Selling, gen. and admin 584 1,543 2,127 Interest expense 37 (35) 2 Depreciation and amort 7 213 220 ------------ ------------ ------------ ------------ Total 628 1,756 (35) 2,349 ------------ ------------ ------------ ------------ CMN earnings and other 432 432 ------------ ------------ ------------ ------------ Loss before taxes and minority interests $ (533) $ (334) $ -- $ (867) ============ ============ ============ ============
19 Revenues from sales and rental income pertain to the businesses of Paaco and Precision, which were acquired during the fourth quarter of fiscal 1998. Interest income for the six months ended October 31, 1998 increased $4.5 million compared to the same period in the prior fiscal year. The increase resulted principally from (i) interest earned on Paaco's finance receivable portfolio ($3.9 million), and (ii) greater interest earned on Concorde's mortgage loans ($.7 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 Paaco and Precision. Provision for credit losses pertains principally to Paaco's operations. Selling, general and administrative expenses for the six months ended October 31, 1998 increased $9.4 million compared to the same period in the prior fiscal year. The increase resulted principally from (i) expenses relating to Paaco and Precision ($8.0 million), and (ii) the development of Concorde's mortgage based lending business ($1.6 million), offset partially by a decrease in costs associated with defending and settling certain lawsuits ($.5 million). Interest expense for the six months ended October 31, 1998 increased $2.8 million compared to the same period in the prior fiscal year. The increase resulted from interest associated with the debt of Paaco, Precision and Concorde. Depreciation and amortization expense for the six months ended October 31, 1998 increased $.8 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 ($370,490), (ii) depreciating the assets of Paaco and Precision ($364,165), and (iii) greater depreciation at Concorde ($66,645). The provision for income taxes for the six months ended October 31, 1998 was $150,989 on pretax income of $951,026. This equates to an effective tax rate of 64.4% after removing from pretax income the equity in earnings of CMN ($716,428), which earnings are presented on an after tax basis. The benefit for income taxes for the six months ended October 31, 1997 was $507,199 on a pretax loss of $867,421. This equates to an effective tax rate of 39.8% after removing from the pretax loss the equity in earnings of CMN ($407,685), which earnings are presented on an after tax basis. Minority interests for the six months ended October 31, 1998 ($11,793) pertain principally to the portion of Paaco (35%) not owned by the Company during the period. Net income for the six months ended October 31, 1998 increased $1,172,052 compared to the same period in the prior fiscal year. The increase was the result of (i) including the results of operations of Precision in the current period, and (ii) Concorde reporting pretax earnings in the current period ($178,499) compared to a pretax loss ($532,565) in the prior period. LIQUIDITY AND CAPITAL RESOURCES For the six months ended October 31, 1998 net cash provided by operating activities amounted to $12.0 million. The principal source of cash resulted from the sale of mortgage loans. The excess of mortgage loans sold and principal repayments over mortgage loans originated or acquired was $6.9 million. Net cash used by investing activities of $23.1 million included (i) a $17.0 million use of cash in finance receivable originations in excess of finance receivable collections, and (ii) an $8.1 million use of cash in the purchase of assets (rental and other equipment and the construction of lodging facilities). Net cash provided by financing activities of $6.4 million principally relates to $3.7 million of cash provided by the asset based revolving credit facilities of Paaco, Concorde and Precision, and $3.7 million of proceeds from the issuance of other debt (Home Stay construction loan and financing of Paaco real estate). As of October 31, 1998 the Company's sources of liquidity included approximately (i) $2 million of cash on hand, of which $1 million was held by Crown, (ii) $17 million of marketable equity securities held by Crown, (iii) $21 million remaining to be drawn on the credit facilities of 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 other than in connection with the Car-Mart acquisition described below. The loan agreements which govern the credit facilities of Crown's subsidiaries limit dividends and other distributions from such subsidiaries to Crown. The acquisition of Car-Mart requires that the Company (i) pay the sellers $33.5 million in cash, and (ii) issue a $7.5 million promissory note bearing interest at 8.5% per annum with the principal balance due in five years. In connection with the cash portion of the purchase price, the Company anticipates it will (i) enter into an asset based revolving credit facility with a commercial bank or finance company for up to $35 million, and (ii) sell all or part of the Company's marketable equity securities. The Company is presently evaluating a number of proposals from several potential lenders which range from $15 million to $35 million. Each proposal is subject to the satisfaction of certain conditions. The Company expects to complete the acquisition of Car-Mart in January 1999. The Company is also focusing on the development and expansion of its existing businesses and the potential acquisition or development of other unrelated businesses. Precision's and Home Stay's credit facilities can support the majority of their expected growth over the next twelve months. Concorde's $20 million revolving credit facility, which expires in January 1999, is in the process of being renewed. Upon renewal, which is expected to be completed in January 1999, the Company believes such facility will be sufficient to meet Concorde's borrowing needs over the next twelve months. Paaco and its principal lender are in the process of increasing Paaco's revolving credit facility. Paaco expects such facility will be increased to $60 million in January 1999. Upon such increase the Company believes such facility will be sufficient to meet Paaco's borrowing needs over the next twelve months. 20 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 October 31, 1998 the Company had repurchased 2,722,029 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. 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 October 31, 1998 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 is 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 has yet to determine whether its tank tracking, database and lock box communication software is year 2000 compliant. All of Precision's data processing equipment, which consists principally of personal computers, is year 2000 compliant. By January 1999, Precision expects to determine the year 2000 compliance of all its software packages. 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. 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 of these third parties as to their year 2000 compliance, but has yet to complete this process. 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. 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. 21 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's 1998 annual meeting of shareholders was held on October 15, 1998. The record date for such meeting was August 21, 1998 on which date there were a total of 10,118,231 shares of common stock outstanding and entitled to vote. At such meeting the election of directors was approved by the Company's shareholders with a summary of the voting as follows:
Votes Votes Votes Director For Against Abstained -------- ----- ------- --------- Edward R. McMurphy 8,443,360 114,315 50,485 T.J. Falgout, III 8,443,360 114,315 50,485 David J. Douglas 8,436,290 121,385 50,485 J. David Simmons 8,437,060 120,615 50,485 Gerald L. Adams 8,444,822 112,853 50,485 Robert J. Kehl 8,441,860 115,815 50,485 Gerard M. Jacobs 8,447,360 110,315 50,485
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27.1 Financial data schedule (1). (b) Reports on Form 8-K: No reports on Form 8-K were filed during the fiscal quarter ended October 31, 1998. - ----------------------- (1) Filed herewith. 22 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 23 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 27.1 Financial data schedule (1).
- ----------------------- (1) Filed herewith. EX-27.1 2 FINANCIAL DATA SCHEDULE
5 6-MOS APR-30-1999 OCT-31-1998 1,712,004 17,316,545 62,723,869 (6,116,523) 4,185,215 0 16,699,652 (1,226,507) 113,656,472 0 0 0 0 99,453 45,567,062 113,656,472 31,314,081 40,819,814 20,763,335 0 12,565,815 4,391,961 2,789,702 951,026 150,989 811,830 0 0 0 81,830 .08 .08
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