<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal quarter ended: Commission file number:
JANUARY 31, 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 Identification No.)
incorporation or organization)
4040 N. MACARTHUR BLVD., SUITE 100, IRVING, TEXAS
(Address of principal executive offices)
75038-6424
(Zip Code)
(972) 717-3423
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Title of Each Class March 13, 1998
------------------- --------------
Common stock, par value $.01 per share 9,497,820
<PAGE> 2
PART I
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS Crown Group, Inc.
<TABLE>
<CAPTION>
January 31, 1998 April 30,
(Unaudited) 1997
---------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,029,565 $ 21,117,960
Notes and other receivables 888,906 345,780
Mortgage loans held for sale, net 8,708,076
Prepaids and other assets 418,492 37,674
Land held for sale 15,150,000
------------ ------------
Total current assets 26,045,039 36,651,414
------------ ------------
Property and equipment:
Furniture, fixtures and equipment 2,818,907 1,811,581
Less accumulated depreciation (271,851) (226,404)
------------ ------------
2,547,056 1,585,177
------------ ------------
Note receivable from Paaco 3,000,000
Note receivable from CMN 1,172,000
Investment in CMN and related assets 5,630,559
------------ ------------
$ 38,394,654 $ 38,236,591
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 232,458 $ 41,284
Accrued liabilities 378,615 422,609
Income taxes payable 87,500 335,000
Deferred income taxes 1,325,000
Warehouse line of credit 4,189,889
------------ ------------
Total current liabilities 4,888,462 2,123,893
------------ ------------
Deferred income taxes, less current portion 351,431 400,000
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
9,569,020 issued and outstanding (10,394,585 at April 30, 1997) 95,690 103,946
Additional paid-in capital 36,293,649 38,496,803
Accumulated deficit (3,234,578) (2,888,051)
------------ ------------
Total stockholders' equity 33,154,761 35,712,698
------------ ------------
$ 38,394,654 $ 38,236,591
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
CONSOLIDATED STATEMENTS OF OPERATIONS Crown Group, Inc.
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
January 31,
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Interest income $ 586,423 $ 297,600
Gain on sale of mortgage loans 430,434
Fees and rentals from CMN 132,981
Other income 14,800
----------- -----------
1,164,638 297,600
----------- -----------
Costs and expenses:
General and administrative 1,202,306 659,023
Depreciation and amortization 130,803 38,978
Gaming development 2,108
Gaming acquisition abandonment 696,009
----------- -----------
1,333,109 1,396,118
----------- -----------
Other income (expense):
Equity in earnings of CMN 125,203
Interest expense (80,081) (18,946)
Gain (loss) on sale of securities 40,895 (4,728,488)
----------- -----------
86,017 (4,747,434)
----------- -----------
Loss before income taxes (82,454) (5,845,952)
Benefit for income taxes (96,149) (2,315,000)
----------- -----------
Net income (loss) $ 13,695 $(3,530,952)
=========== ===========
Earnings (loss) per share:
Basic $ .00 $ (.34)
=========== ===========
Diluted $ .00 $ (.34)
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
CONSOLIDATED STATEMENTS OF OPERATIONS Crown Group, Inc.
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
January 31,
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Interest income $ 1,380,770 $ 1,252,299
Gain on sale of mortgage loans 430,434
Fees and rentals from CMN 349,282
Other income 53,995 500,000
------------ ------------
2,214,481 1,752,299
------------ ------------
Costs and expenses:
General and administrative 3,329,760 2,189,476
Depreciation and amortization 350,358 130,452
Gaming development 40,933
Gaming acquisition abandonment 696,009
------------ ------------
3,680,118 3,056,870
------------ ------------
Other income (expense):
Equity in earnings of CMN 532,888
Interest expense (81,695) (68,713)
Gain (loss) on sale of securities 64,569 (5,254,858)
Gain on sale of SCGC 14,934,543
------------ ------------
515,762 9,610,972
------------ ------------
Income (loss) before income taxes (949,875) 8,306,401
Benefit for income taxes (603,348) (1,315,000)
------------ ------------
Net income (loss) $ (346,527) $ 9,621,401
============= ============
Earnings (loss) per share:
Basic $ (.03) $ .87
============ ============
Diluted $ (.03) $ .86
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOWS Crown Group, Inc.
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
January 31,
1998 1997
------------ ------------
<S> <C> <C>
Operating activities:
Net income (loss) $ (346,527) $ 9,621,401
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and amortization 350,358 130,452
Deferred income taxes (1,373,569) (1,750,000)
Provision for credit losses 21,500
Gain on sale of mortgage loans (430,434)
(Gain) loss on sale of securities (64,569) 5,254,858
Gain on sale of SCGC (14,934,543)
Write-down of assets 696,009
Equity in earnings of CMN (532,888)
Changes in assets and liabilities:
Notes and other receivables (543,126) 413,680
Mortgage loans originated or acquired (17,252,309)
Mortgage loans sold and principal repayments 8,953,167
Prepaids and other assets (165,649) 32,645
Accounts payable and accrued liabilities 32,180 15,324
Income taxes payable (247,500) (435,000)
------------ ------------
Net cash used by operating activities (11,599,366) (955,174)
------------ ------------
Investing activities:
Purchase of assets (1,105,157) (875,060)
Sale of land/assets 15,250,000 325,000
Purchase of securities (1,939,285) (4,023,118)
Sale of securities 1,788,685 11,593,260
Loan to Paaco (3,000,000)
Sale/collection of notes receivable 538,250 19,200,000
Purchase of CMN and related assets (7,000,001)
------------ ------------
Net cash provided by investing activities 4,532,492 26,220,082
------------ ------------
Financing activities:
Purchase of common stock (2,211,410) (3,258,595)
Borrowings under warehouse line of credit, net 4,189,889
Payments of debt and capital lease obligations (985,898)
------------ ------------
Net cash provided (used) by financing activities 1,978,479 (4,244,493)
------------ ------------
Increase (decrease) in cash and cash equivalents (5,088,395) 21,020,415
Cash and cash equivalents at: Beginning of period 21,117,960 668,853
------------ ------------
End of period $ 16,029,565 $ 21,689,268
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Crown Group, Inc.
FOR THE NINE MONTHS ENDED JANUARY 31, 1998
(UNAUDITED)
NOTE A - HISTORY AND DESCRIPTION OF BUSINESS
Crown Group, Inc., formerly Crown Casino Corporation, ("Crown" or the "Company")
is a holding company which presently owns (i) 79% of Concorde Acceptance
Corporation ("Concorde"), a sub-prime mortgage lender, (ii) 53% of Paaco, Inc.
("Paaco"), a vertically integrated used car sales and finance company, (iii) 80%
of Precision IBC, Incorporated ("Precision") and M & S Tank Rentals, Inc. ("M &
S"), suppliers of intermediate bulk containers, and (iv) 49% of Casino Magic
Neuquen S.A. ("CMN"), the owner and operator of two casinos in the Province of
Neuquen, Argentina. The Company is presently focusing on the development and
expansion of its existing businesses, and the potential acquisition or
development of businesses in other fields.
From June 1993, with the acquisition of 100% of St. Charles Gaming Company, Inc.
("SCGC"), until November 1996, the Company's primary business focus was that of
owning, operating and developing casino gaming properties. SCGC owns and
operates a riverboat gaming casino located in Calcasieu Parish, Louisiana, which
had been in the development stage until opening in July 1995. In June 1995 the
Company sold a 50% interest in SCGC to Louisiana Riverboat Gaming Partnership
("LRGP") and in May 1996 sold its remaining 50% interest in SCGC to Casino
America, Inc. ("Casino America") (see Note F).
In November 1996 the Company decided to cease pursuing gaming opportunities in
the United States and began pursuing business opportunities in fields unrelated
to casino gaming. As a result 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 collateralized primarily by first or second liens on residential properties.
These loans are presently being sold in privately negotiated transactions to
institutional investors, and in the future may be sold in the secondary market
through securitization programs.
Also in June 1997 the Company acquired a 49% interest in CMN and related assets
from Casino Magic Corp. ("Casino Magic"). CMN owns and operates casinos in the
cities of Neuquen and San Martin de los Andes in the Province of Neuquen,
Argentina under an exclusive concession contract (see Note C).
In February 1998 the Company acquired 53% of the common stock of Paaco. Paaco is
a vertically integrated used car sales and finance company which operates eight
used car dealerships in the Dallas-Ft. Worth area (see Note D).
In February and March 1998 the Company acquired 80% of the common stock of
Precision and M & S, respectively. Precision and M & S are in the business of
renting, selling, testing and servicing principally stainless steel intermediate
bulk containers (see Note E).
In October 1997, upon receiving shareholder approval, the Company changed its
name from Crown Casino Corporation to Crown Group, Inc. to more accurately
reflect the diversified nature of the Company's business.
NOTE B - BASIS OF PRESENTATION
General
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine month period ended January 31,
1998 are not necessarily indicative of the results that may be expected for the
year ended April 30, 1998. 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, 1997.
6
<PAGE> 7
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of aggregate cost or
market value. Market value is determined by current investor yield requirements.
Origination Fees and Costs
The Company earns various fees and incurs certain costs in connection with the
origination of mortgage loans. Such loan origination fees, net of direct loan
costs, are deferred until such time as the related loan is sold, whereupon such
net fees are recognized as a component in the calculation of the gain on sale of
mortgage loans.
Investment in CMN
The Company accounts for its 49% interest in CMN using the equity method of
accounting. The Company's investment in CMN is translated into U.S. Dollars from
Argentine Pesos based upon the exchange rate in effect on the balance sheet
date. CMN's net operating results are translated into U.S. Dollars based upon
the average exchange rate during the period.
Amortization of CMN Related Assets
As discussed in Note C the Company acquired interests in certain agreements and
other assets in connection with its purchase of 49% of CMN. The management and
royalty agreements are being amortized over 9 1/2 years which represents the
remaining term of the concession contract. The slot equipment and lease are
being amortized over five years. Accumulated amortization of such agreements and
equipment amounted to $207,080 as of January 31, 1998.
Income Taxes
The provision for income taxes differs from the amount by applying the statutory
federal income tax rate primarily as a result of available foreign tax credits
on the Company's portion of earnings generated by CMN.
Reclassifications
Certain prior year amounts in the accompanying financial statements have been
reclassified to conform to the fiscal 1998 presentation.
Earnings (Loss) Per Share:
Effective November 1, 1997 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128 "Earnings Per Share ("EPS")," which replaces the
presentation of primary EPS with a presentation of basic EPS. Basic EPS excludes
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding during the period.
Fully diluted EPS remains the same under SFAS No. 128 but is referred to as
diluted EPS. Calculations of basic and diluted EPS are as follows. Prior period
EPS data has been restated to conform with the provisions of SFAS No. 128.
<TABLE>
<CAPTION>
For the Three Months Ended
-----------------------------------------------------------------------------------------------
January 31, 1998 January 31, 1997
------------------------------------------ -----------------------------------------
Income Shares EPS Income (loss) Shares EPS
---------- ----------- ---------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $ 13,695 9,742,747 $ .00 $ (3,530,952) 10,424,961 $ (.34)
========== =========
Options 195,243
Warrants 21,653
---------- ----------- -------------- -----------
Diluted EPS $ 13,695 9,959,643 $ .00 $ (3,530,952) 10,424,961 $ (.34)
========== =========== ========== ============== =========== =========
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
For the Nine Months Ended
--------------------------------------------------------------------------------------------------
January 31, 1998 January 31, 1997
---------------------------------------------- -----------------------------------------
Income (loss) Shares EPS Income Shares EPS
------------- ------------ ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $ (346,527) 9,951,226 $ (.03) $ 9,621,401 11,018,631 $ .87
========== ========
Options 160,392
------------- ------------ ----------- -----------
Diluted EPS $ (346,527) 9,951,226 $ (.03) $ 9,621,401 11,179,023 $ .86
============= ============ ========== =========== =========== ========
</TABLE>
Options and warrants to purchase an aggregate of 1,983,889 shares of Common
Stock at prices ranging from $.41 to $12.00 per share were outstanding as of
January 31, 1998 but were not included in the computation of diluted EPS for the
nine months then ended because inclusion of such potentially diluting shares
would be antidilutive. These options and warrants expire between March 1998 and
July 2007.
NOTE C - ACQUISITION OF 49% OF CMN
On June 2, 1997 the Company acquired 49% of the capital stock of CMN, as well as
interests in certain other assets and contracts related to CMN, from Casino
Magic for a purchase price of $7 million. CMN owns and operates casinos in the
cities of Neuquen and San Martin de los Andes in the Province of Neuquen,
Argentina under an exclusive concession contract that expires in 2007, but can
be extended by CMN for an additional five years under certain circumstances. The
interests in certain other assets and contracts included (i) a demand promissory
note in the amount of $4,226,743 issued by CMN, (ii) a 16.4% interest in a
certain management agreement relating to CMN, and (iii) a 49% interest in (a)
slot machines and a related lease agreement, and (b) a certain royalty agreement
relating to CMN.
Pursuant to the various CMN agreements, the Company receives its respective
share of fees and rental payments due under such agreements.
The Company has allocated the purchase price as follows (in thousands):
<TABLE>
<S> <C>
Purchase price:
Cash $ 7,000
Transaction costs 15
--------
$ 7,015
========
Purchase price allocation:
Note receivable $ 4,226
Management and royalty agreements 504
Slot equipment and lease 1,290
Stock of CMN 995
--------
$ 7,015
========
</TABLE>
8
<PAGE> 9
In October 1997, each of the Company and Casino Magic converted approximately
$2.5 million of principal due on certain notes receivable from CMN into shares
of CMN capital stock such that each party retained the same ownership percentage
of CMN as previously held. At January 31, 1998 CMN had assets, liabilities and
stockholders' equity of approximately $12.3 million, $4.2 million, and $8.1
million, respectively. For the nine months ended January 31, 1998 CMN's
summarized unaudited results of operations were as follows (in thousands):
<TABLE>
<S> <C>
Revenues $ 13,382
Costs and expenses 11,572
Provision for income taxes 581
---------
Net income $ 1,229
=========
</TABLE>
The following unaudited condensed pro forma results of operations of the Company
for the nine months ended January 31, 1998 and 1997 were prepared as if the
acquisition of 49% of CMN and related assets had occurred on May 1, 1997 and May
1, 1996, respectively (in thousands, except per share amounts). The adjustments
to the historical financial statements principally consist of (i) recognizing
the Company's pro-rata share of CMN earnings and contractual fees, (ii)
recording interest income on the note receivable from CMN, (iii) eliminating
interest income on the $7 million used to acquire 49% of CMN and related assets,
and (iv) amortizing the CMN related agreements and equipment.
<TABLE>
<CAPTION>
Nine Months Ended
January 31,
1998 1997
---- ----
<S> <C> <C>
Revenue $ 2,257 $ 2,116
Net income (loss) (266) 9,942
Earnings (loss) per share $ (.03) $ .89
</TABLE>
The unaudited condensed pro forma results of operations are not necessarily
indicative of future results or the results that would have occurred had the
acquisition of 49% of CMN and related assets taken place on the dates indicated.
NOTE D - ACQUISITION OF 53% OF PAACO
Effective February 1, 1998 the Company acquired 53% of the common stock of Paaco
for a purchase price of approximately $9.1 million. The purchase price was
funded from cash on hand and the conversion of a $3 million note receivable from
Paaco. 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").
Paaco is a vertically integrated used car sales and finance company which
operates eight used car dealerships in the Dallas-Ft. Worth area. Paaco sells,
underwrites and finances used cars and trucks with a focus on the Hispanic
market. For the year ended December 31, 1997 Paaco's unaudited revenues were
approximately $48 million.
In connection with the Paaco transaction, Crown and the Paaco Management
Shareholders entered into a Shareholders' Agreement (the "Paaco Shareholders'
Agreement") which provides, among other things, that in the event either the
Company or any Paaco Management Shareholder desires to sell their interest in
Paaco such shareholder must first offer to sell such interest to Paaco and the
other shareholders in accordance with the provisions of the Paaco Shareholders'
Agreement.
NOTE E - ACQUISITION OF 80% OF PRECISION AND M & S
On February 3, 1998 the Company acquired 80% of the common stock of Precision
for a purchase price of approximately $2.4 million. The shares of Precision
common stock were purchased directly from Precision's President, Van P. Finger,
who previously was the sole shareholder of Precision. In connection with this
transaction, the Company loaned Precision approximately $3.1 million, the
proceeds of which were used to pay off existing bank debt.
On March 5, 1998 the Company acquired 80% of the common stock of M & S for a
purchase price of $1.65 million. The shares were purchased directly from M & S's
President, Mark McAdams, who previously was the sole shareholder of M & S.
9
<PAGE> 10
Precision and M & S are in the business of renting, selling, testing and
servicing principally stainless steel intermediate bulk containers to customers
primarily in the petroleum and chemical industries. For the year ended December
31, 1997 Precision's and M & S's unaudited revenues were approximately $3.3
million and $.8 million, respectively. It is the Company's intention to merge
Precision and M & S together.
As part of the Precision and M & S transactions, the Company entered into a
Right of First Refusal and Put Agreement ( the "First Refusal and Put
Agreement") with each of Mr. Finger and Mr. McAdams. The First Refusal and Put
Agreements provide among other things, that in the event Mr. Finger or Mr.
McAdams desire to sell their interest in Precision or M & S, as the case may be,
they must first offer to sell such interest to Crown under the terms and
conditions provided in the agreements. Pursuant to these agreements, each of Mr.
Finger and Mr. McAdams have the right to make an election during the months of
June 2000 or June 2001 to cause Crown to purchase all of their shares of
Precision or M & S common stock, as the case may be, based upon the Fair Market
Value of their stock, as such term is defined in the First Refusal and Put
Agreements.
NOTE F - SALE OF SCGC INTEREST
On May 3, 1996 the Company sold its remaining 50% interest in SCGC to Casino
America for (i) 1,850,000 shares of Casino America common stock, which the
Company valued at $6.50 per share, (ii) the exchange of the $20 million LRGP
Note for LRGP Note A and LRGP Note B, each in the principal amount of $10
million and bearing interest at 11.5% per annum, and (iii) an additional
non-detachable five-year warrant to purchase up to another 416,667 shares of
Casino America common stock at an exercise price of $12 per share. In connection
with this transaction, in May 1996, the Company recorded a gain before income
taxes of approximately $14.9 million.
Other than a guarantee of certain leases, for which the Company has been
indemnified by LRGP, the Company is not liable for any obligations of SCGC.
NOTE G - WAREHOUSE LINE OF CREDIT
In December 1997 Concorde entered into a $20 million warehouse line of credit
with a bank. Borrowings under the warehouse line may be used for the origination
or purchase of mortgage loans. The warehouse line matures in December 1998 and
borrowings under such facility bear interest principally at the U.S. Federal
Funds rate plus 2.25%. The warehouse line is collateralized by certain mortgage
loans.
NOTE H - STOCK REPURCHASE PROGRAM
In March 1996 the Company's Board of Directors approved a program, as amended,
to repurchase up to 3,000,000 shares of the Company's common stock from time to
time in the open market. As of January 31, 1998 the Company had repurchased
2,106,539 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.
NOTE I - COMMITMENTS AND CONTINGENCIES
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 options under the Company's incentive stock option plan, in the event
of such executive's termination in connection with a change in control.
The Company has also made a commitment to acquire an additional 11% interest in
CMN (bringing the Company's ownership interest up to 60%) for a purchase price
of $2 million. Such potential purchase is subject to a number of conditions, and
presently the Company can not predict the likelihood of whether such conditions
will be satisfied.
10
<PAGE> 11
In connection with the Company's sale of mortgage loans in the ordinary course
of business, such loan sales involve limited recourse to the Company for the
first few months following the sale. Generally, the events which could give
rise to these recourse provisions involve (i) the prepayment of a loan within
six months of the sale, and (ii) the foreclosure of a loan that results in a
loss within 120 days of such sale. Considering the relatively short time frame
in which these events must occur in order to give rise to the recourse
provisions, management believes the risk of loss associated with these recourse
provisions is minimal.
NOTE J - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures are as follows for the nine months ended
January 31, 1998 and 1997:
<TABLE>
<CAPTION>
Nine Months Ended
January 31,
1998 1997
------ -----
<S> <C> <C>
Conversion of a portion of CMN note to equity $2,516,493
Stock received for sale of second 50% interest in SCGC $12,025,000
Income taxes paid 925,000
Interest paid 58,620 68,713
</TABLE>
11
<PAGE> 12
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 appearing elsewhere in this report.
OVERVIEW
Crown Group, Inc., formerly Crown Casino Corporation, ("Crown" or the "Company")
is a holding company which presently owns (i) 79% of Concorde Acceptance
Corporation ("Concorde"), a sub-prime mortgage lender, (ii) 53% of Paaco, Inc.
("Paaco"), a vertically integrated used car sales and finance company, (iii) 80%
of Precision IBC, Incorporated ("Precision") and M & S Tank Rentals, Inc. ("M &
S"), suppliers of intermediate bulk containers, and (iv) 49% of Casino Magic
Neuquen S.A. ("CMN"), the owner and operator of two casinos in the Province of
Neuquen, Argentina. The Company is presently focusing on the development and
expansion of its existing businesses, and the potential acquisition or
development of businesses in other fields.
From June 1993, with the acquisition of 100% of St. Charles Gaming Company, Inc.
("SCGC"), until November 1996, the Company's primary business focus was that of
owning, operating and developing casino gaming properties. SCGC owns and
operates a riverboat gaming casino located in Calcasieu Parish, Louisiana, which
had been in the development stage until opening in July 1995. In June 1995 the
Company sold a 50% interest in SCGC to Louisiana Riverboat Gaming Partnership
("LRGP") and in May 1996 sold its remaining 50% interest in SCGC to Casino
America, Inc.
In November 1996 the Company decided to cease pursuing gaming opportunities in
the United States and began pursuing business opportunities in fields unrelated
to casino gaming. As a result 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 collateralized primarily by first or second liens on residential properties.
These loans are presently being sold in privately negotiated transactions to
institutional investors, and in the future may be sold in the secondary market
through securitization programs.
Also in June 1997 the Company acquired a 49% interest in CMN and related assets
from Casino Magic Corp. for a purchase price of $7 million. CMN owns and
operates casinos in the cities of Neuquen and San Martin de los Andes in the
Province of Neuquen, Argentina under an exclusive concession contract.
In February 1998 the Company acquired 53% of the common stock of Paaco for a
purchase price of approximately $9.1 million. Paaco is a vertically integrated
used car sales and finance company which operates eight used car dealerships in
the Dallas-Ft. Worth area.
In February and March 1998 the Company acquired 80% of the common stock of
Precision and M & S, respectively, for an aggregate purchase price of
approximately $4.0 million. Precision and M & S are in the business of renting,
selling, testing and servicing principally stainless steel intermediate bulk
containers.
RESULTS OF OPERATIONS
Three months ended January 31, 1998 compared to the three months ended January
31, 1997
Interest income for the three months ended January 31, 1998 increased $288,823
compared to the same period in the prior fiscal year. The increase was
principally the result of an increase in the amount of mortgage loans
outstanding during the current fiscal period.
General and administrative expenses for the three months ended January 31, 1998
increased $543,283 compared to the same period in the prior fiscal year. The
increase was principally the result of approximately $650,000 of expenses
associated with operating Concorde's mortgage based lending business, partially
offset by decreases in compensation, consulting and travel expenses.
Depreciation and amortization for the three months ended January 31, 1998
increased $91,825 compared to the same period in the prior fiscal year. The
increase was principally the result of amortizing certain CMN related assets and
agreements, and depreciating certain new equipment acquired in connection with
Concorde's mortgage based lending business.
Interest expense for the three months ended January 31, 1998 increased $61,135
compared to the same period in the prior fiscal year. The increase was the
result of borrowings on a warehouse line of credit in connection with Concorde's
mortgage based lending business.
12
<PAGE> 13
Nine months ended January 31, 1998 compared to the nine months ended January 31,
1997
Interest income for the nine months ended January 31, 1998 increased $128,471
compared to the same period in the prior fiscal year. The increase was
principally the result of an increase in the amount of mortgage loans
outstanding during the current fiscal period, partially offset by a decrease in
interest income resulting from the sale and payoff of $20 million of notes due
from LRGP which had been earning interest at 11.5% per annum during a portion of
the prior fiscal period. Other income in the prior fiscal period pertains to a
fee earned by the Company in assisting another company complete an acquisition.
General and administrative expenses for the nine months ended January 31, 1998
increased $1,140,284 compared to the same period in the prior fiscal year. The
increase was principally the result of (i) approximately $1,100,000 of expenses
associated with the operation of Concorde's mortgage based lending business and
(ii) approximately $520,000 of costs associated with defending and settling
certain lawsuits, partially offset by (iii) decreases in compensation,
consulting and travel expenses. Depreciation and amortization for the nine
months ended January 31, 1998 increased $219,906 compared to the same period in
the prior fiscal year. The increase was the result of amortizing certain CMN
related assets and agreements, and depreciating certain new equipment acquired
in connection with Concorde's mortgage based lending business. Gaming
development costs for the nine months ended January 31, 1998 decreased $40,933
compared to the same period in the prior fiscal year as a result of the
Company's decision to cease pursuing gaming opportunities in the United States.
LIQUIDITY AND CAPITAL RESOURCES
As of March 13, 1998 the Company's sources of liquidity included (i)
approximately $4 million of cash on hand, (ii) approximately $12 million of
mortgage and other notes receivable, (iii) approximately $12 million available
to be drawn under a $20 million warehouse line of credit with a bank, and (iv)
the issuance of debt and/or equity.
The Company intends to focus on the development and expansion of its existing
businesses, and the potential acquisition or development of businesses in other
fields. The Company anticipates it will obtain a revolving credit facility of
approximately $5 million in connection with Precision's and M & S's intermediate
bulk container rental businesses. Proceeds from such facility will be used to
(i) repay approximately $3.3 million of monies the Company has advanced to
Precision, and (ii) expand the number of tanks in Precision's and M & S's rental
fleets. The Company has also made a commitment to acquire an additional 11%
interest in CMN (bringing the Company's ownership interest up to 60%) for a
purchase price of $2 million. Such potential purchase is subject to a number of
conditions, and presently the Company can not predict the likelihood of whether
such conditions will be satisfied. Presently management believes that the
Company's capital resources are sufficient to satisfy its identified capital
needs for the next twelve months.
In March 1996 the Company's Board of Directors approved a program, as amended,
to repurchase up to 3,000,000 shares of the Company's common stock from time to
time in the open market. As of January 31, 1998 the Company had repurchased
2,106,539 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.
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, the risk that the Company may not expand its existing
businesses, or acquire or develop businesses in other fields, or if so acquired
or developed, operate such businesses profitably. 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.
13
<PAGE> 14
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. Crown Group, Inc.
(a) Exhibits:
27 Financial data schedule (1).
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed in the third fiscal
quarter of the current year.
- -----------------------
(1) Filed herewith.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CROWN GROUP, INC.
By: /s/ Mark D. Slusser
------------------------
Mark D. Slusser
Chief Financial Officer,
Vice President Finance
and Secretary
(Principal Financial and
Accounting Officer)
Dated: March 16, 1998
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27 Financial data schedule (1).
</TABLE>
- ---------------------
(1) Filed herewith.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> JAN-31-1998
<CASH> 16,029,565
<SECURITIES> 215,156
<RECEIVABLES> 13,790,482
<ALLOWANCES> (21,500)
<INVENTORY> 0
<CURRENT-ASSETS> 26,045,039
<PP&E> 2,818,907
<DEPRECIATION> (271,851)
<TOTAL-ASSETS> 38,394,654
<CURRENT-LIABILITIES> 4,888,462
<BONDS> 0
0
0
<COMMON> 95,690
<OTHER-SE> 33,059,071
<TOTAL-LIABILITY-AND-EQUITY> 38,394,654
<SALES> 0
<TOTAL-REVENUES> 2,214,481
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,658,618
<LOSS-PROVISION> 21,500
<INTEREST-EXPENSE> 81,695
<INCOME-PRETAX> (949,875)
<INCOME-TAX> (603,348)
<INCOME-CONTINUING> (346,527)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (346,527)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
