-----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, LROyfEghT2YOBSVuKDWegQLmlel0VUYceznrljDY5L8rcUnqDP32KIl1Ao0/z0yx ix1ElL05fOQkm0iyKeLD0A== 0000950134-99-011062.txt : 19991216 0000950134-99-011062.hdr.sgml : 19991216 ACCESSION NUMBER: 0000950134-99-011062 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991031 FILED AS OF DATE: 19991215 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 SEC ACT: SEC FILE NUMBER: 000-14939 FILM NUMBER: 99774970 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 1 FORM 10-Q FOR QUARTER ENDED OCTOBER 31, 1999 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal quarter ended: Commission file number: OCTOBER 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 December 13, 1999 ------------------- ----------------- Common stock, par value $.01 per share 8,846,462 2 PART I ITEM 1. FINANCIAL STATEMENTS CROWN GROUP, INC. CONSOLIDATED BALANCE SHEETS
October 31, 1999 (unaudited) April 30, 1999 ---------------- -------------- Assets: Cash and cash equivalents $ 11,541,662 $ 12,910,535 Accounts and other receivables, net 3,683,005 2,572,535 Mortgage loans held for sale, net 14,068,036 10,636,933 Finance receivables, net 100,201,176 88,424,897 Inventory 7,229,010 9,290,272 Prepaid and other assets 4,672,163 2,748,831 Property and equipment, net 26,706,848 22,055,174 Investment in CMN and related assets, net 5,167,161 Goodwill, net 9,498,359 14,328,241 ------------- ------------ $177,600,259 $168,134,579 ============ ============ Liabilities and stockholders' equity: Accounts payable $ 3,377,659 $ 4,747,358 Accrued liabilities 6,041,324 5,040,007 Income taxes payable 7,116,931 3,875,583 Revolving credit facilities 78,662,205 78,928,121 Other notes payable 18,726,500 17,259,544 Deferred sales tax 3,481,607 2,713,914 Deferred income taxes 797,437 ------------- ------------ Total liabilities 117,406,226 113,361,964 ------------- ------------ Minority interests 1,200,170 1,713,731 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; 9,229,212 issued and outstanding (10,096,842 at April 30, 1999) 92,292 100,968 Additional paid-in capital 33,729,161 37,970,391 Retained earnings 25,172,410 14,987,525 ------------- ------------ Total stockholders' equity 58,993,863 53,058,884 ------------- ------------ $177,600,259 $168,134,579 ============ ============
See accompanying notes to consolidated financial statements. 2 3 CONSOLIDATED STATEMENTS OF OPERATIONS CROWN GROUP, INC. (UNAUDITED)
Three Months Ended October 31, 1999 1998 ----------- ----------- Revenues: Sales $37,458,587 $14,801,080 Rental income 1,162,874 642,957 Gain on sale of mortgage loans 1,110,012 1,171,458 Gaming 719,584 Interest income 5,052,155 2,745,432 Interest, fees and rentals from CMN 358,711 Other 26,769 30,386 ----------- ----------- 45,529,981 19,750,024 ----------- ----------- Costs and expenses: Cost of sales 21,607,816 9,862,523 Selling, general and administrative 11,749,879 5,774,728 Provision for credit losses 6,863,535 2,410,640 Interest expense 2,659,701 1,478,277 Depreciation and amortization 880,170 531,146 ----------- ----------- 43,761,101 20,057,314 ----------- ----------- Other income: Equity in earnings of unconsolidated subsidiaries 202,041 147,807 Gain on sale of securities, net 10,237,832 ----------- ----------- 10,439,873 147,807 ----------- ----------- Income (loss) before taxes and minority interests 12,208,753 (159,483) Provision (benefit) for income taxes 4,797,101 (110,021) Minority interests (194,826) (95,675) ----------- ----------- Net income $ 7,606,478 $ 46,213 =========== =========== Earnings per share: Basic $ 0.79 $ 0.00 Diluted $ 0.76 $ 0.00 Weighted average number of shares outstanding: Basic 9,665,483 10,071,689 Diluted 10,038,033 10,177,528
See accompanying notes to consolidated financial statements. 3 4 CONSOLIDATED STATEMENTS OF OPERATIONS CROWN GROUP, INC. (UNAUDITED)
Six Months Ended October 31, 1999 1998 ----------- ----------- Revenues: Sales $78,334,693 $31,314,081 Rental income 2,230,168 1,272,015 Gain on sale of mortgage loans 2,439,094 2,313,653 Gaming 934,870 Interest income 10,049,838 5,269,502 Interest, fees and rentals from CMN 609,013 Other 97,254 41,550 ----------- ----------- 94,085,917 40,819,814 ----------- ----------- Costs and expenses: Cost of sales 46,704,729 20,763,335 Selling, general and administrative 23,106,447 11,524,459 Provision for credit losses 12,718,662 4,391,961 Interest expense 5,075,133 2,789,702 Depreciation and amortization 1,634,967 1,041,356 ----------- ----------- 89,239,938 40,510,813 ----------- ----------- Other income: Equity in earnings of unconsolidated subsidiaries 942,843 716,428 Gain (loss) on sale of securities, net 10,237,832 (74,403) ----------- ----------- 11,180,675 642,025 ----------- ----------- Income before taxes and minority interests 16,026,654 951,026 Provision for income taxes 6,010,138 150,989 Minority interests (168,369) (11,793) ----------- ----------- Net income $10,184,885 $ 811,830 =========== =========== Earnings per share: Basic $ 1.03 $ 0.08 Diluted $ 0.99 $ 0.08 Weighted average number of shares outstanding: Basic 9,866,852 10,143,969 Diluted 10,277,549 10,305,483
See accompanying notes to consolidated financial statements. 4 5 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME CROWN GROUP, INC. (UNAUDITED)
Three Months Ended Six Months Ended October 31, October 31, 1999 1998 1999 1998 ---------- ---------- ----------- ---------- Net income $7,606,478 $ 46,213 $10,184,885 $ 811,830 Unrealized appreciation of securities arising during period 3,489,754 8,275,398 ---------- ---------- ----------- ---------- Comprehensive income $7,606,478 $3,535,967 $10,184,885 $9,087,228 ========== ========== =========== ==========
See accompanying notes to consolidated financial statements. 5 6 CONSOLIDATED STATEMENTS OF CASH FLOWS CROWN GROUP, INC. (UNAUDITED)
Six Months Ended October 31, 1999 1998 ------------- ------------- Operating activities: Net income $ 10,184,885 $ 811,830 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,634,967 1,041,356 Amortization of finance receivable discount (594,177) (479,208) Deferred income taxes (2,275,501) 4,123 Provision for credit losses 12,718,662 4,391,961 Minority interests (168,369) (11,793) Gain on sale of mortgage loans (2,439,094) (2,313,653) Gain on sale of assets (80,187) (85,629) (Gain) loss on sale of securities (10,237,832) 74,403 Equity in earnings of unconsolidated subsidiaries (942,843) (716,428) Changes in assets and liabilities: Accounts and other receivables 83,294 (804,417) Mortgage loans originated or acquired (74,865,125) (45,185,853) Mortgage loans sold and principal repayments 73,836,516 52,068,737 Inventory 9,678,049 2,888,153 Prepaids and other assets (564,388) 78,214 Accounts payable, accrued liabilities and deferred sales tax (100,689) 265,840 Income taxes payable 3,241,347 (34,894) ------------- ------------- Net cash provided by operating activities 19,109,515 11,992,742 ------------- ------------- Investing activities: Finance receivable originations (70,594,548) (28,219,935) Finance receivable collections 39,166,972 11,167,831 Purchase of property and equipment (4,098,480) (8,131,647) Sale of assets 494,134 501,356 Purchase of securities (471,266) Sale of securities 16,500,000 360,984 Dividends and collections of notes receivable from CMN 306,487 1,665,685 ------------- ------------- Net cash used by investing activities (18,225,435) (23,126,992) ------------- ------------- Financing activities: Capital contribution from minority owner 60,000 Purchase of common stock (2,009,993) (1,124,145) Proceeds from (repayments of) revolving credit facilities, net (265,916) 3,688,750 Proceeds from other debt, net 22,956 3,739,943 ------------- ------------- Net cash provided (used) by financing activities (2,252,953) 6,364,548 ------------- ------------- Decrease in cash and cash equivalents (1,368,873) (4,769,702) Cash and cash equivalents at: Beginning of period 12,910,535 6,481,706 ------------- ------------- End of period $ 11,541,662 $ 1,712,004 ============ =============
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 October 31, 1999 owned (i) 100% of America's Car-Mart, Inc. ("Car-Mart") and 85% 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) 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, (v) 80% of Home Stay Lodges I, Ltd. ("Home Stay"), a partnership focusing on the development and operation of extended-stay lodging facilities, and (vi) 45% of Atlantic Castings, Inc. ("Atlantic Castings"), an investment casting manufacturer of turbine engine components. 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 1999 the Company (i) acquired a 70% interest in Smart Choice Automotive Group, Inc., a vertically integrated used car sales and finance company based in Titusville, Florida, and (ii) sold its 80% interest in Home Stay (see Note M). 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, 1999 are not necessarily indicative of the results that may be expected for the year ended April 30, 2000. 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, 1999. 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, 1999 accumulated amortization of goodwill amounted to $1,313,456. Recent Accounting Pronouncements In June 1998 the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" which, as amended by SFAS No. 137, is effective for all fiscal quarters and years beginning after June 15, 2000. SFAS No. 133 standardizes the accounting for derivative instruments and hedging activities, including certain derivative instruments imbedded in other contracts. Under this standard, entities are required to carry all derivative instruments in the statement of financial position at fair value. The Company does not believe the adoption of SFAS No. 133 will have a material impact on its financial position or results of operations. Reclassifications Certain prior year amounts in the accompanying financial statements have been reclassified to conform to the fiscal 2000 presentation. 7 8 C - ACQUISITION 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 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. The activities of Car-Mart have been included in the Company's consolidated results of operation since the acquisition date. Car-Mart was founded in 1981 and operates "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 16,000 retail installment contracts. Car-Mart's revenues for the fiscal years ended May 31, 1998 and 1997 were approximately $65.7 million and $58.1 million, respectively. Pro Forma Financial Information The following unaudited pro forma condensed consolidated results of operations of the Company for the six months ended October 31, 1998 were prepared as if the Car-Mart acquisition had occurred on May 1, 1998 (in thousands, except per share amount). The adjustments to the historical financial statements principally consist of (i) eliminating interest income on the cash used in the acquisition, (ii) recording interest expense on the debt issued in the Car-Mart acquisition, (iii) adjusting interest income resulting from purchase accounting entries, and (iv) adjusting income tax expense to reflect the above described adjustments.
Six Months Ended October 31, 1998 ---------------- Revenues $ 77,740 Net income 3,708 Earnings per share - diluted $ .36
The unaudited pro forma results of operations are not necessarily indicative of future results or the results that would have occurred had the acquisition taken place on the date indicated. D - SALE OF CASINO MAGIC NEUQUEN Effective October 1, 1999 the Company sold its 49% interest in Casino Magic Neuquen ("CMN") and related assets for $16.5 million cash resulting in a gain before income taxes of $10.2 million. The gain, which is net of a $.5 million bonus pursuant to the Company's executive compensation program, is included in gain on sale of securities in the consolidated statements of operations. The operating results of CMN for the five months ended September 30, 1999 and the six months ended October 31, 1998 are as follows (in thousands):
Five Months Six Months Ended Ended September 30, October 31, 1999 1998 ------------- ----------- Revenues $ 9,929 $ 10,945 Costs and expenses 6,732 7,944 Interest, fees, and rentals to shareholders 832 Provision for income taxes 1,135 707 --------- --------- Net income $ 2,062 $ 1,462 ========= =========
8 9 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 22% per annum and provide for payments over periods ranging from 12 to 36 months. A summary of finance receivables as of October 31, 1999 and April 30, 1999 is as follows:
October 31, April 30, 1999 1999 ------------- ------------- Finance receivables $ 128,650,958 $ 123,142,202 Unearned finance charges (7,888,805) (16,669,411) Allowance for credit losses (20,152,323) (17,045,063) Valuation discount (408,654) (1,002,831) ------------- ------------- $ 100,201,176 $ 88,424,897 ============= =============
In accordance with APB Opinion No. 16, as of the dates the Company acquired interests in Paaco 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 $1,577,781 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 finance receivables allowance for credit losses for the period from April 30, 1999 to October 31, 1999 is as follows: Balance at April 30, 1999 $ 17,045,063 Provision for credit losses 12,628,688 Net charge offs (9,521,428) ------------ Balance at October 31, 1999 $ 20,152,323 ============ 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 ($227,200) and trade accounts receivable ($50,000) as of October 31, 1999. F - PROPERTY AND EQUIPMENT A summary of property and equipment as of October 31, 1999 and April 30, 1999 is as follows:
October 31, April 30, 1999 1999 ----------- ----------- Land and buildings $ 9,955,247 $ 8,651,003 Rental equipment 8,870,466 7,644,949 Furniture, fixtures and equipment 8,080,852 5,691,910 Leasehold improvements 2,746,513 2,003,575 Less accumulated depreciation and amortization (2,946,230) (1,936,263) ----------- ----------- $26,706,848 $22,055,174 =========== ===========
9 10 G - DEBT A summary of debt as of October 31, 1999 is as follows: Revolving Credit Facilities
------------------------------------------------------------------------------------------------------------------- Facility Interest Primary Balance at Borrower Lender Amount Rate Maturity Collateral October 31, 1999 ------------- -------------- ----------- ------------ ---------- ------------- ----------------- Paaco Finova $60 million Prime + 3.00% Jun 2000 Finance rec. $ 43,833,680 Car-Mart Bank of America $30 million Prime + 1.13% Jan 2002 Finance rec. 25,564,028 Concorde Bank One $20 million Libor + 2.00% Sep 2000 Mortgage loans 9,049,649 Precision Wells Fargo $8 million Prime Dec 2000 IBC's and rec. 214,848 ------------- $ 78,662,205 ============= Other Notes Payable ------------------------------------------------------------------------------------------------------------------- Facility Interest Primary Balance at Borrower Lender Amount Rate Maturity Collateral October 31, 1999 ------------- -------------- ----------- ------------ ---------- ------------- ----------------- Crown Car-Mart sellers N/A 8.50% Jan 2004 Finance rec $ 7,500,000 Crown Bank of America N/A 7.00% Apr 2001 Equipment 2,316,000 Home Stay Bank of Pensacola N/A 8.50% Feb 2004 Real estate 5,348,137 Precision South Trust Bank N/A 7.35% Jan 2014 Real estate 661,007 Paaco Chase Texas N/A 8.50% May 2003 Real estate 905,515 Paaco Heller Financial N/A Prime + 2.25% Dec 2015 Real estate 610,689 Various Various N/A Various Various Real estate 1,385,152 ----------- $ 18,726,500 ============
Interest is payable monthly or quarterly on all of the Company's debt. The loan agreements relating to certain of the above described debt contain various reporting and performance covenants including (i) maintenance of certain financial ratios and tests, (ii) limitations on borrowings from other sources, (iii) restrictions on certain operating activities, and (iv) restrictions on the payment of dividends. The Company was in compliance with all of its loan agreements as of October 31, 1999, except for Paaco's and Car-Mart's revolving credit facilities. Paaco's financial covenant violation was subsequently cured by amendment and Car-Mart's non-financial covenant violation is expected to be cured by amendment in the immediate future. 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 ===========
10 11 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 Unrealized appreciation of securities arising during period 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, 1999 and 1998 is as follows:
Six Months Ended October 31, 1999 1998 ----------- ----------- Net income $10,184,885 $ 811,830 =========== =========== Average shares outstanding-basic 9,866,852 10,143,969 Dilutive options 410,697 143,543 Dilutive warrants 17,971 ----------- ----------- Average shares outstanding-diluted 10,277,549 10,305,483 =========== =========== Earnings per share: Basic $ 1.03 $ .08 Diluted $ .99 $ .08 Antidilutive securities not included: Options 432,500 185,000 =========== =========== Warrants -- 391,198 =========== ===========
J - CAPITAL STOCK In July 1999, upon discovering certain accounting errors and irregularities at Paaco, the Company and the shareholders from whom the Company purchased an interest in Paaco amended and restated the three prior purchase agreements such that the Company received approximately $4 million in consideration and an additional 5% interest in Paaco. A portion of the consideration received consisted of (i) 315,046 shares of the Company's common stock and (ii) a commitment to deliver 355,265 shares of the Company's common stock by April 30, 2000, or, in the absence of receiving such shares, a commitment to deliver a promissory note in the amount of $1,776,325. Between October and December 1999 the Company received the 355,265 shares of its common stock which delivery had been pending. The total value of the consideration received in this transaction ($4.5 million) was recorded as a reduction of goodwill in July 1999. 11 12 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. Litigation In the ordinary course of business, the Company has become a defendant in various types of legal proceedings. Although the Company cannot determine at this time the amount of the ultimate exposure from these lawsuits, if any, management, based on the advice of counsel, does not expect the final outcome of any of these actions, individually or in the aggregate, to have a material adverse effect on the Company's financial position, results of operations or cash flows. Investment Fund In November 1998 the Company committed $2.0 million to Monarch Venture Partners' Fund L.L.P. ("Monarch"), a private venture capital fund focusing on high technology businesses, such as Internet related concerns. As of October 31, 1999 the Company had funded approximately $1.3 million of its $2.0 million commitment. The Company expects it will fund the remaining $.7 million over the next 12 months. L - SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow disclosures for the six months ended October 31, 1999 and 1998 are as follows:
Six Months Ended October 31, 1999 1998 ----------- ---------- Value of stock issued in acquisitions $2,652,108 Value of securities received in acquisition amendment $4,452,597 Inventory acquired in repossession 7,616,786 3,274,568 Notes issued in purchase of property and equipment 2,044,000 Interest paid, net of amount capitalized 4,838,700 2,738,257 Income taxes paid, net of refund 5,058,829 100,000
M - SUBSEQUENT EVENTS Purchase of Smart Choice On December 1, 1999, pursuant to a definitive stock purchase agreement, Crown acquired a 70% voting and economic interest in Smart Choice Automotive Group, Inc. ("Smart Choice") directly from Smart Choice. The purchase price ("Purchase Price") consisted of (i) $3.0 million cash, (ii) the conversion to equity of $4.5 million of Smart Choice debt, which Crown had contemporaneously acquired from a third party for approximately $2.3 million cash, and (iii) the contribution of Crown's 85% interest in Paaco. In consideration for the Purchase Price, Crown received 1,371,581.47 shares of Smart Choice Series E Convertible Preferred Stock, which is convertible into 137,158,147 shares of Smart Choice common stock representing 70% of the ownership and voting rights of Smart Choice on an "as converted" basis. The preferred stock carries voting rights equal to the number of common shares into which the preferred stock may be converted. Contemporaneously with Crown's purchase of a 70% interest in Smart Choice, approximately $15.0 million of Smart Choice's outstanding debt and preferred stock was converted into shares of common stock representing a 20.7% interest in Smart Choice. In addition, the Paaco minority shareholders converted their 15% interest in Paaco into shares of Smart Choice Series E Convertible Preferred Stock representing a 5% voting and economic interest in Smart Choice. Paaco is now a wholly-owned subsidiary of Smart Choice. In connection with the transactions, each of Paaco and Smart Choice amended and restructured their senior finance receivables and inventory credit facilities on more favorable terms than the facilities they replaced. 12 13 Excluding Paaco, Smart Choice operates eleven "buy-here pay-here" used car dealerships in central Florida. Smart Choice's assets consist principally of (i) finance receivables originated in the sale of used vehicles, and (ii) inventory. For its most recent fiscal year ended December 31, 1998, Smart Choice reported revenues from continuing operations of $95.4 million and a loss from continuing operations of $7.3 million. For the nine months ended September 30, 1999, Smart Choice reported revenues of $71.4 million and a loss from continuing operations of $24.2 million. Sale of Home Stay Effective December 2, 1999 Crown sold its 80% interest in Home Stay to Efficiency Lodge, Inc. for approximately $850,000, of which approximately $210,000 was paid in cash and the balance is payable over five years with interest at an annual rate of prime plus 1%. In connection with the transaction, Crown has been released as a guarantor of Home Stay's mortgage debt of approximately $5.4 million. The Company anticipates reporting a small gain in connection with the transaction. 13 14 N - 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, 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, Crown El Salvador, activities of relatively inactive subsidiaries and the Company's equity investments in CMN and Atlantic Castings. The Company's business segment data for the three months ended October 31, 1999 and 1998 is as follows (in thousands):
Three Months Ended October 31, 1999 ---------------------------------------------------------------------------------------- Automobile IBC's Mortgage Other Eliminations Consolidated ---------- -------- -------- -------- ------------ ------------ Revenues: Sales and other $ 36,534 $ 1,777 $ 1,127 $ 1,040 $ 40,478 Interest income 4,405 7 483 601 $ (444) 5,052 -------- -------- -------- -------- -------- -------- Total 40,939 1,784 1,610 1,641 (444) 45,530 -------- -------- -------- -------- -------- -------- Costs and expenses: Cost of sales 20,862 746 21,608 Selling, gen. and admin. 7,738 518 1,214 2,279 11,749 Prov. for credit losses 6,779 54 31 -- 6,864 Interest expense 2,261 138 366 339 (444) 2,660 Depreciation and amort. 104 245 49 482 880 -------- -------- -------- -------- -------- -------- Total 37,744 1,701 1,660 3,100 (444) 43,761 -------- -------- -------- -------- -------- -------- Security gains and other 10,440 10,440 -------- -------- -------- -------- -------- -------- Income (loss) before taxes and minority interests $ 3,195 $ 83 $ (50) $ 8,981 $ -- $ 12,209 ======== ======== ======== ======== ======== ======== Capital expenditures $ 260 $ 537 $ 16 $ 326 $ -- $ 1,139 ======== ======== ======== ======== ======== ======== Total assets $113,817 $ 15,224 $ 15,499 $ 86,475 $(53,415) $177,600 ======== ======== ======== ======== ======== ========
Three Months Ended October 31, 1998 --------------------------------------------------------------------------------------------- Automobile IBC's Mortgage 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: Cost 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 --------- --------- --------- --------- --------- --------- Security gains 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 ========= ========= ========= ========= ========= =========
14 15 The Company's business segment data for the six months ended October 31, 1999 and 1998 is as follows (in thousands):
Six Months Ended October 31, 1999 -------------------------------------------------------------------------------------- Automobile IBC's Mortgage Other Eliminations Consolidated ---------- -------- -------- -------- ------------ ------------ Revenues: Sales and other $ 76,732 $ 3,257 $ 2,516 $ 1,531 $ 84,036 Interest income 8,777 14 935 1,221 $ (897) 10,050 -------- -------- -------- -------- -------- -------- Total 85,509 3,271 3,451 2,752 (897) 94,086 -------- -------- -------- -------- -------- -------- Costs and expenses: Cost of sales 45,497 1,208 46,705 Selling, gen. and admin. 15,836 975 2,558 3,737 23,106 Prov. for credit losses 12,629 53 37 12,719 Interest expense 4,373 275 686 638 (897) 5,075 Depreciation and amort. 226 472 97 840 1,635 -------- -------- -------- -------- -------- -------- Total 78,561 2,983 3,378 5,215 (897) 89,240 -------- -------- -------- -------- -------- -------- Security gains and other 11,181 11,181 -------- -------- -------- -------- -------- -------- Income (loss) before taxes and minority interests $ 6,948 $ 288 $ 73 $ 8,718 $ -- $ 16,027 ======== ======== ======== ======== ======== ======== Capital expenditures $ 819 $ 1,723 $ 48 $ 1,508 $ -- $ 4,098 ======== ======== ======== ======== ======== ======== Total assets $113,817 $ 15,224 $ 15,499 $ 86,475 $(53,415) $177,600 ======== ======== ======== ======== ======== ========
Six Months Ended October 31, 1998 ----------------------------------------------------------------------------------------- Automobile IBC's Mortgage 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: Cost 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 -------- -------- -------- -------- -------- -------- Security gains and other 642 642 -------- -------- -------- -------- -------- -------- Income (loss) 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 ======== ======== ======== ======== ======== ========
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 report contains, and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company or its management) contain or will contain, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words "believe," "expect," "anticipate," "estimate," "project" and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements. Such forward-looking statements address, among other things, the Company's current focus on the development and expansion of its existing businesses, and the potential acquisition or development of businesses in other fields. Such forward-looking statements are based upon management's current plans or expectations and are subject to a number of uncertainties and risks that could significantly affect current plans, anticipated actions and the Company's future financial condition and results. As a consequence, actual results may differ materially from those expressed in any forward-looking statements made by or on behalf of the Company as a result of various factors. Uncertainties and risks related to such forward-looking statements include, but are not limited to, those relating to the development of the Company's businesses, continued availability of lines of credit for the Company's businesses, changes in interest rates, changes in the industries in which the Company operates, competition, dependence on existing management, the stability of El Salvador's government, currency exchange rate fluctuations, the repatriation of funds from El Salvador, domestic or global economic conditions (particularly in the states of Texas and 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 October 31, 1999 owned (i) 100% of America's Car-Mart, Inc. ("Car-Mart") and 85% 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) 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, (v) 80% of Home Stay Lodges I, Ltd. ("Home Stay"), a partnership focusing on the development and operation of extended-stay lodging facilities, and (vi) 45% of Atlantic Castings, Inc. ("Atlantic Castings"), an investment casting manufacturer of turbine engine components. In addition, from time to time the Company purchases and sells small ownership interests in securities of privately held and publicly traded firms. For a summary of the Company's operating results and other financial data by business segment, see Note N of the Company's consolidated financial statements appearing elsewhere in this report. 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 1999 the Company (i) acquired a 70% interest in Smart Choice Automotive Group, Inc., a vertically integrated used car sales and finance company based in Titusville, Florida, and (ii) sold its 80% interest in Home Stay (see Note M of the Company's consolidated financial statements appearing elsewhere in this report). 16 17 RESULTS OF OPERATIONS The Company has made a variety of acquisitions and business investments over the last two years. Acquisitions involving the purchase of greater than a 50% interest have been accounted for using the purchase method of accounting. The Company has included the operating results of each majority-owned company from the respective acquisition date. As a result of the acquisitions and business investments occurring throughout the last two fiscal years, operating results for the six month periods ending October 31, 1999 and 1998 are not entirely comparable. Below is a summary of the number of months of operation each companies' operating results are included in the Company's consolidated results of operations for the six month periods ending October 31, 1999 and 1998. 1999 1998 -------- -------- Casino Magic Neuquen 5 months 6 months Concorde 6 months 6 months Paaco 6 months 6 months Precision 6 months 6 months Home Stay 6 months 6 months Car-Mart 6 months - Crown El Salvador 6 months - Atlantic Castings 6 months - 17 18 THREE MONTHS ENDED OCTOBER 31, 1999 COMPARED TO THE THREE MONTHS ENDED OCTOBER 31, 1998 Below is a presentation of the operating results for the four principal business segments of the Company for the three months ended October 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, Crown El Salvador, activities of relatively inactive subsidiaries and the Company's equity investments in CMN and Atlantic Castings. The Company's business segment data for the three months ended October 31, 1999 and 1998 is as follows (in thousands):
Three Months Ended October 31, 1999 --------------------------------------------------------------------------------------- Automobile IBC's Mortgage Other Eliminations Consolidated ---------- -------- -------- -------- ------------ ------------ Revenues: Sales and other $ 36,534 $ 1,777 $ 1,127 $ 1,040 -- $ 40,478 Interest income 4,405 7 483 601 $ (444) 5,052 -------- -------- -------- -------- -------- -------- Total 40,939 1,784 1,610 1,641 (444) 45,530 -------- -------- -------- -------- -------- -------- Costs and expenses: Cost of sales 20,862 746 -- -- -- 21,608 Selling, gen. and 7,738 518 1,214 2,279 11,749 admin Prov. for credit 6,779 54 31 -- -- 6,864 losses Interest expense 2,261 138 366 339 (444) 2,660 Depreciation and 104 245 49 482 880 amort -------- -------- -------- -------- -------- -------- Total 37,744 1,701 1,660 3,100 (444) 43,761 -------- -------- -------- -------- -------- -------- Security gains and other -- -- -- 10,440 -- 10,440 -------- -------- -------- -------- -------- -------- Income (loss) before taxes and minority interests $ 3,195 $ 83 $ (50) $ 8,981 $ -- $ 12,209 ======== ======== ======== ======== ======== ========
Three Months Ended October 31, 1998 ------------------------------------------------------------------------------------ Automobile IBC's Mortgage 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: Cost of sales 9,312 551 -- -- -- 9,863 Selling, gen. and 3,614 319 1,116 726 -- 5,775 admin Prov. for credit 2,369 10 32 -- -- 2,411 losses Interest expense 1,220 98 304 (144) 1,478 Depreciation and 66 163 41 261 531 amort ------- ------- ------- ------- ------- ------- Total 16,581 1,141 1,493 987 (144) 20,058 ------- ------- ------- ------- ------- ------- Security gains and other -- -- -- 148 -- 148 ------- ------- ------- ------- ------- ------- Income (loss) before taxes and minority interests $ (424) $ 257 $ 105 $ (98) $ -- $ (160) ======= ======= ======= ======= ======= =======
Revenues from sales and other for the three months ended October 31, 1999 increased $23.5 million compared to the same period in the prior fiscal year. The increase was principally the result of (i) including Car-Mart ($19.6 million) and Crown El Salvador ($.7 million) in the Company's consolidated results of operations, and (ii) higher revenues at Paaco ($2.9 million) and Precision ($.4 million). Interest income for the three months ended October 31, 1999 increased $2.3 million compared to the same period in the prior fiscal year. The increase was principally the result of (i) including Car-Mart in the Company's consolidated results of operations ($1.6 million) and (ii) greater interest earned on Paaco's finance receivables portfolio ($.7 million) as a result of growth in the portfolio. As a percentage of sales, cost of sales for the three months ended October 31, 1999 decreased to 57.7% from 66.6% in the same period in the prior fiscal year. The decrease is principally the result of including Car-Mart, which has higher gross profit margins as a result of selling 18 19 lower priced vehicles, in the Company's consolidated results of operations. Selling, general and administrative expense for the three months ended October 31, 1999 increased $6.0 million compared to the same period in the prior fiscal year. The increase is principally the result of (i) including Car-Mart ($3.3 million) and Crown El Salvador ($1.2 million) in the Company's consolidated results of operations, and (ii) higher expenses at Paaco ($.8 million), Precision ($.2 million), Concorde ($.1 million) and Home Stay ($.2 million) which corresponds to increased revenues at those subsidiaries. Provision for credit losses for the three months ended October 31, 1999 increased $4.5 million compared to the same period in the prior fiscal year. The increase was principally the result of (i) including Car-Mart in the Company's consolidated results of operations ($3.8 million), and (ii) higher credit losses at Paaco ($.6 million) partially attributable to increased sales levels. Interest expense for the three months ended October 31, 1999 increased $1.2 million compared to the same period in the prior fiscal year. The increase was principally the result of (i) including Car-Mart in the Company's consolidated results of operations ($.8 million), and (ii) higher interest expense at Paaco ($.2 million) resulting from an increase in the balance of its revolving credit facility. The provision for income taxes for the three months ended October 31, 1999 was $4.8 million on pretax income of $12.2 million. This equates to a 40.0% effective tax rate after removing from pretax income the equity in earnings of unconsolidated subsidiaries ($.2 million), which earnings are presented on an after tax basis. The benefit for income taxes for the three months ended October 31, 1998 was $.1 million on a pretax loss of $.2 million. This equates to a 35.8% effective tax rate after removing from pretax income the equity in earnings of unconsolidated subsidiaries ($.1 million), which earnings are presented on an after tax basis. Minority interests pertain to the portions of consolidated subsidiaries not owned by the Company during the three months ended October 31, 1999 (Paaco, Crown El Salvador, and Home Stay) and the three months ended October 31, 1998 (Paaco and Home Stay). SIX MONTHS ENDED OCTOBER 31, 1999 COMPARED TO THE SIX MONTHS ENDED OCTOBER 31, 1998 Below is a presentation of the operating results for the four principal business segments of the Company for the six months ended October, 31, 1999 and 1998 (in thousands):
Six Months Ended October 31, 1999 ---------------------------------------------------------------------------------- Automobile IBC's Mortgage Other Eliminations Consolidated ---------- ------- -------- ----- ------------ ------------ Revenues: Sales and other $76,732 $ 3,257 $ 2,516 $ 1,531 -- $84,036 Interest income 8,777 14 935 1,221 $ (897) 10,050 ------- ------- ------- ------- ------- ------- Total 85,509 3,271 3,451 2,752 (897) 94,086 ------- ------- ------- ------- ------- ------- Costs and expenses: Cost of sales 45,497 1,208 -- -- -- 46,705 Selling, gen. and 15,836 975 2,558 3,737 -- 23,106 admin Prov. for credit 12,629 53 37 -- -- 12,719 losses Interest expense 4,373 275 686 638 (897) 5,075 Depreciation and amort 226 472 97 840 1,635 ------- ------- ------- ------- ------- ------- Total 78,561 2,983 3,378 5,215 (897) 89,240 ------- ------- ------- ------- ------- ------- Security gains and other -- -- -- 11,181 -- 11,181 ------- ------- ------- ------- ------- ------- Income (loss) before taxes and minority interests $ 6,948 $ 288 $ 73 $ 8,718 $ -- $16,027 ======= ======= ======= ======= ======= =======
19 20
Six Months Ended October 31, 1998 ------------------------------------------------------------------------------------------- Automobile IBC's Mortgage 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: Cost of sales 19,755 1,008 20,763 Selling, gen. and 7,393 629 2,223 1,280 11,525 admin Prov. for credit 4,306 10 76 4,392 losses 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 -------- -------- -------- -------- -------- -------- Security gains and other 642 642 -------- -------- -------- -------- -------- -------- Income (loss) before taxes and minority interests $ (11) $ 528 $ 179 $ 255 $ -- $ 951 ======== ======== ======== ======== ======== ========
Revenues from sales and other for the six months ended October 31, 1999 increased $48.5 million compared to the same period in the prior fiscal year. The increase was principally the result of (i) including Car-Mart ($40.2 million) and Crown El Salvador ($.9 million) in the Company's consolidated results of operations, and (ii) higher revenues at Paaco ($6.6 million), Precision ($.6 million) and Concorde ($.2 million). Interest income for the six months ended October 31, 1999 increased $4.8 million compared to the same period in the prior fiscal year. The increase was principally the result of (i) including Car-Mart in the Company's consolidated results of operations ($3.1 million) and (ii) greater interest earned on Paaco's finance receivable portfolio ($1.8 million) as a result of growth in the portfolio. As a percentage of sales, cost of sales for the six months ended October 31, 1999 decreased to 59.6% from 66.3% in the same period in the prior fiscal year. The decrease is principally the result of including Car-Mart, which has higher gross profit margins as a result of selling lower priced vehicles, in the Company's consolidated results of operations. Selling, general and administrative expense for the six months ended October 31, 1999 increased $11.6 million compared to the same period in the prior fiscal year. The increase is principally the result of (i) including Car-Mart ($6.4 million) and Crown El Salvador ($1.4 million) in the Company's consolidated results of operations, and (ii) higher expenses at Paaco ($2.1 million), Precision ($.3 million), Concorde ($.3 million) and Home Stay ($.3 million) which corresponds to increased revenues at those subsidiaries. Provision for credit losses for the six months ended October 31, 1999 increased $8.3 million compared to the same period in the prior fiscal year. The increase was principally the result of (i) including Car-Mart in the Company's consolidated results of operations ($7.0 million), and (ii) higher credit losses at Paaco ($1.3 million) partially attributable to increased sales levels. Interest expense for the six months ended October 31, 1999 increased $2.3 million compared to the same period in the prior fiscal year. The increase was principally the result of (i) including Car-Mart in the Company's consolidated results of operations ($1.6 million), and (ii) higher interest expense at Paaco ($.6 million) resulting from an increase in the balance of its revolving credit facility. The provision for income taxes for the six months ended October 31, 1999 was $6.0 million on pretax income of $16.0 million. This equates to a 39.8% effective tax rate after removing from pretax income the equity in earnings of unconsolidated subsidiaries ($.9 million), which earnings are presented on an after tax basis. The provision for income taxes for the six months ended October 31, 1998 was $.2 million on pretax income of $1.0 million. This equates to a 64.4% effective tax rate after removing from pretax income the equity in earnings of unconsolidated subsidiaries ($.7 million), which earnings are presented on an after tax basis. Minority interests pertain to the portions of consolidated subsidiaries not owned by the Company during the six months ended October 31, 1999 (Paaco, Crown El Salvador, and Home Stay) and the six months ended October 31, 1998 (Paaco and Home Stay). LIQUIDITY AND CAPITAL RESOURCES For the six months ended October 31, 1999 net cash provided by operating activities amounted to $19.1 million. The principal sources of cash resulted from (i) net income generated by the Company, and (ii) certain non cash expenses (provision for credit losses and depreciation and amortization). Net cash used by investing activities of $18.2 million included (i) a $31.4 million use of cash in finance receivable originations in excess of finance receivable collections, and (ii) a $4.1 million use of cash in the purchase of property and equipment, offset by a $16.5 million source of cash resulting from the sale of the Company's 49% interest in Casino Magic Neuquen. Net cash used by financing activities of $2.3 million principally relates to the purchase of the Company's common stock. As of October 31, 1999 the Company's sources of liquidity included approximately (i) $11.5 million of cash on hand, of which $11.3 million was held by Crown, (ii) $39.3 million remaining to be drawn on the revolving credit facilities of Car-Mart, Paaco, Concorde and Precision, although the majority of such additional draws may only be made in connection with a corresponding increase in the related collateral 20 21 asset (i.e., finance receivables, mortgage loans held for sale and intermediate bulk containers), and (iii) the potential issuance of additional debt and/or equity, although the Company has no specific commitments or arrangements to issue such additional debt and/or equity. The loan agreements which govern the credit facilities of Crown's subsidiaries limit dividends and other distributions from such subsidiaries to Crown. The amount available to be drawn under each of the Company's revolving credit facilities is a function of the underlying collateral asset. Generally, the Company is able to borrow a specified percentage of the face value of eligible finance receivables in the case of Car-Mart and Paaco, and eligible mortgage loans in the case of Concorde. Precision's borrowing base is a function of the number of tanks owned and operating cash flow, as defined. The Company's revolving credit facilities mature at various times between September 2000 and January 2002, and bear interest at rates ranging from libor plus 2.0% to prime plus 2.25%. As of October 31, 1999 the Company was in compliance with all of its loan agreements, except for Paaco's and Car-Mart's revolving credit facilities. Paaco's financial covenant violation was subsequently cured by amendment and Car-Mart's non-financial covenant violation is expected to be cured by amendment in the immediate future. In December 1999 Crown acquired a 70% voting and economic interest in Smart Choice Automotive Group, Inc. The cash utilized in this transaction amounted to $5.3 million. Also in December 1999 Crown sold its 80% interest in Home Stay for $.2 million cash and a $.6 million five year promissory note. 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 and Concorde's credit facilities can support the majority of their expected growth over the next twelve months. As of October 31, 1999 the Company had an outstanding commitment of approximately $.7 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 on hand. In March 1996 the Company's Board of Directors approved a program, as amended, to repurchase up to 4,000,000 shares of the Company's common stock from time to time in the open market. As of October 31, 1999 the Company had repurchased 3,274,717 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. The Company believes that all of its significant hardware, software and networking systems are year 2000 compliant. This belief is based upon (i) detailed review of the Company's hardware, software and networking systems, (ii) year 2000 compliance letters obtained from vendors (particularly software vendors), (iii) testing performed by Company personnel, and (iv) testing performed by independent third parties. 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 has not incurred any appreciable costs in its process of becoming year 2000 compliant, nor does it expect to do so in the future. While the Company believes its significant data processing systems are year 2000 compliant, it plans to take precautionary measures to backup, store and print hard copies of significant financial, accounting and operating records on December 31, 1999. It has also made certain contingency plans in the event some of its systems prove to not be year 2000 compliant. 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 be reduced during periods of decreased sales. None of the Company's other businesses experience significant seasonal fluctuations. 21 22 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk on its financial instruments from changes in interest rates. The Company does not use financial instruments for trading purposes or to manage interest rate risk. The Company's earnings are impacted by its net interest income, which is the difference between the income earned on interest-bearing assets and the interest paid on interest bearing notes payable. Increases in market interest rates could have an adverse effect on profitability. Financial instruments consist of fixed rate finance receivables and fixed and variable rate notes payable. The Company's finance receivables generally bear interest at fixed rates ranging from 10% to 22%. These finance receivables have scheduled maturities from one to 36 months. Financial instruments also include mortgage notes held for sale. The Company does not experience significant market risk with such mortgage notes as they are generally sold within 30 to 45 days of origination. The majority of the Company's notes payable contain variable interest rates that fluctuate with market rates. Therefore, an increase in market interest rates would decrease the Company's net interest income and profitability. The table below illustrates the impact which hypothetical changes in market interest rates could have on the Company's pretax earnings. The calculations assume (i) the increase or decrease in market interest rates remain in effect for twelve months, (ii) the amount of variable rate notes payable outstanding during the period decreases in direct proportion to decreases in finance receivables as a result of scheduled payments, and (iii) there is no change in prepayment rates as a result of the interest rate changes. Change in Change in Interest Rates Pretax Earnings -------------- --------------- (in thousands) +2% $ (960) +1% (480) 0% 0 -1% 480 -2% 960 22 23 PART II ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's 1999 annual meeting of shareholders was held on October 25, 1999. The record date for such meeting was August 27, 1999 on which date there were a total of 9,741,796 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 5,590,866 259 9,300 T.J. Falgout, III 5,590,766 359 9,300 David J. Douglas 5,590,866 259 9,300 J. David Simmons 5,472,866 118,259 9,300 Gerald L. Adams 5,590,866 259 9,300 Robert J. Kehl 5,590,766 359 9,300 Gerard M. Jacobs 5,590,866 259 9,300
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27.1 Financial data schedule (1). (b) Reports on Form 8-K: During the fiscal quarter ended October 31, 1999 the Company filed a report on Form 8-K dated October 25, 1999 (event date October 20, 1999) respecting the dismissal of PricewaterhouseCoopers LLP as the Company's independent accountants and the engagement of Grant Thornton LLP as the Company's new independent accountants. ----------------------- (1) Filed herewith. 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: December 15, 1999 24 25 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- ----------- 27.1 Financial data schedule (1).
----------------------- (1) Filed herewith. EX-27.1 2 FINANCIAL DATA SCHEDULE
5 6-MOS APR-30-1999 OCT-31-1999 11,541,662 0 138,381,740 (20,429,523) 7,229,010 0 29,653,078 (2,946,230) 177,600,259 0 0 0 0 92,292 58,901,571 177,600,259 78,334,693 94,085,917 46,704,729 0 24,741,414 12,718,662 5,075,133 16,026,654 6,010,138 10,184,885 0 0 0 10,184,885 1.03 .99
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