<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QA
AMENDMENT NO. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal quarter ended: Commission file number:
OCTOBER 31, 1998 0-14939
CROWN GROUP, INC.
(Exact name of registrant as specified in its charter)
TEXAS 63-0851141
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4040 N. MACARTHUR BLVD., SUITE 100, IRVING, TEXAS
(Address of principal executive offices)
75038-6424
(Zip Code)
(972) 717-3423
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Title of Each Class December 10, 1998
------------------- -----------------
Common stock, par value $.01 per share 9,945,313
<PAGE> 2
PART I
ITEM 1. FINANCIAL STATEMENTS CROWN GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, 1998
(unaudited) April 30, 1998
---------------- ----------------
(Restated) (Restated)
<S> <C> <C>
Assets:
Cash and cash equivalents $ 1,712,004 $ 6,481,706
Marketable equity securities 17,316,545 4,742,180
Accounts and other receivables, net 3,575,389 1,936,055
Mortgage loans held for sale, net 9,731,175 14,350,437
Finance receivables, net 43,300,782 33,918,014
Inventory 4,185,215 3,798,800
Prepaid and other assets 552,098 572,089
Property and equipment, net 15,473,145 9,165,703
Investment in CMN and related assets, net 5,501,547 6,606,114
Goodwill, net 12,308,572 10,631,737
--------------- ---------------
$ 113,656,472 $ 92,202,835
=============== ===============
Liabilities and stockholders' equity:
Accounts payable $ 2,106,937 $ 2,514,081
Accrued liabilities 1,755,206 1,952,828
Income taxes payable 107,678 142,572
Revolving credit facilities 44,853,274 41,164,524
Other notes payable 8,610,017 4,870,074
Deferred sales tax 2,683,859 2,090,303
Deferred income taxes 6,036,326 1,855,058
--------------- ---------------
Total liabilities 66,153,297 54,589,440
--------------- ---------------
Minority interests 1,836,660 2,562,071
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share, 1,000,000 shares
authorized; none issued or outstanding
Common stock, par value $.01 per share, 50,000,000 shares
authorized; 9,945,336 issued and outstanding (9,433,963
at April 30, 1998) 99,453 94,340
Additional paid-in capital 37,070,219 35,547,369
Accumulated deficit (1,709,055) (2,520,885)
Unrealized appreciation of securities 10,205,898 1,930,500
--------------- ---------------
Total stockholders' equity 45,666,515 35,051,324
--------------- ---------------
$ 113,656,472 $ 92,202,835
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 3
CONSOLIDATES STATEMENTS OF OPERATIONS CROWN GROUP, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
1998 1997
------------ ------------
(Restated)
<S> <C> <C>
Revenues:
Sales $ 14,801,080
Rental income 642,957
Gain on sale of mortgage loans 1,171,458
Interest income 2,745,432 $ 415,299
Interest, fees and rentals from CMN 358,711 126,334
Other 30,386 14,000
------------ ------------
19,750,024 555,633
------------ ------------
Costs and expenses:
Cost of sales 9,862,523
Selling, general and administrative 5,774,728 1,017,167
Provision for credit losses 2,410,640
Interest expense 1,478,277 1,614
Depreciation and amortization 531,146 127,191
------------ ------------
20,057,314 1,145,972
------------ ------------
Other income:
Equity in earnings of CMN 147,807 167,806
Gain on sale of securities 23,674
------------ ------------
147,807 191,480
------------ ------------
Loss before taxes and minority interests (159,483) (398,859)
Benefit for income taxes (110,021) (348,030)
Minority interests (95,675)
------------ ------------
Net income (loss) $ 46,213 (50,829)
============ ============
Earnings (loss) per share:
Basic $ 0.00 $ (0.01)
Diluted $ 0.00 $ (0.01)
Weighted average number of shares outstanding:
Basic 10,071,689 9,870,063
Diluted 10,177,528 9,870,063
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
CONSOLIDATED STATEMENTS OF OPERATIONS CROWN GROUP, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
October 31,
1998 1997
------------ ------------
(Restated)
<S> <C> <C>
Revenues:
Sales $ 31,314,081
Rental income 1,272,015
Gain on sale of mortgage loans 2,313,653
Interest income 5,269,502 $ 794,347
Interest, fees and rentals from CMN 609,013 216,301
Other 41,550 39,195
------------ ------------
40,819,814 1,049,843
------------ ------------
Costs and expenses:
Cost of sales 20,763,335
Selling, general and administrative 11,524,459 2,127,454
Provision for credit losses 4,391,961
Interest expense 2,789,702 1,614
Depreciation and amortization 1,041,356 219,555
------------ ------------
40,510,813 2,348,623
------------ ------------
Other income (expense):
Equity in earnings of CMN 716,428 407,685
Gain (loss) on sale of securities (74,403) 23,674
------------ ------------
642,025 431,359
------------ ------------
Income (loss) before taxes and minority interests 951,026 (867,421)
Provision (benefit) for income taxes 150,989 (507,199)
Minority interests (11,793)
------------ ------------
Net income (loss) $ 811,830 $ (360,222)
============ ============
Earnings (loss) per share:
Basic $ 0.08 $ (0.04)
Diluted $ 0.08 $ (0.04)
Weighted average number of shares outstanding:
Basic 10,143,969 10,055,465
Diluted 10,305,483 10,055,465
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME CROWN GROUP, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
1998 1997 1998 1997
----------- ----------- ----------- -----------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Net income (loss) $ 46,213 $ (50,829) $ 811,830 $ (360,222)
Unrealized appreciation of securities arising
during period 3,489,754 8,275,398
----------- ----------- ----------- -----------
Comprehensive income (loss) $ 3,535,967 $ (50,829) $ 9,087,228 $ (360,222)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOWS CROWN GROUP, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
October 31,
1998 1997
------------ ------------
(Restated)
<S> <C> <C>
Operating activities:
Net income (loss) $ 811,830 $ (360,222)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 1,041,356 219,555
Amortization of finance receivable discount (479,208)
Deferred income taxes 4,123 (1,315,000)
Provision for credit losses 4,391,961
Minority interests (11,793)
Gain on sale of mortgage loans (2,313,653)
Gain on sale of assets (85,629)
(Gain) loss on sale of securities 74,403 (23,674)
Equity in earnings of CMN (716,428) (407,685)
Changes in assets and liabilities, net of transactions:
Accounts and other receivables (804,417) (318,466)
Mortgage loans originated or acquired (45,185,853) (6,204,821)
Mortgage loans sold and principal repayments 52,068,737
Inventory 2,888,153
Prepaids and other assets 78,214 (61,057)
Accounts payable, accrued liabilities and deferred sales tax 265,840 (218,535)
Income taxes payable (34,894) 445,000
------------ ------------
Net cash provided (used) by operating activities 11,992,742 (8,244,905)
------------ ------------
Investing activities:
Finance receivable originations (28,219,935)
Finance receivable collections 11,167,831
Purchase of property and equipment (8,131,647) (755,950)
Sale of assets 501,356 15,250,000
Purchase of securities (471,266) (339,207)
Sale of securities 360,984 221,995
Dividends and collections of notes receivable from CMN 1,665,685 304,250
Purchase of CMN and related assets (7,000,001)
------------ ------------
Net cash provided (used) by investing activities (23,126,992) 7,681,087
------------ ------------
Financing activities:
Capital contribution from minority owner 60,000
Purchase of common stock (1,124,145) (1,426,063)
Proceeds from revolving credit facilities, net 3,688,750
Proceeds from other debt, net 3,739,943
------------ ------------
Net cash provided (used) by financing activities 6,364,548 (1,426,063)
------------ ------------
Decrease in cash and cash equivalents (4,769,702) (1,989,881)
Cash and cash equivalents at: Beginning of period 6,481,706 21,117,960
------------ ------------
End of period $ 1,712,004 $ 19,128,079
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CROWN GROUP, INC.
A - HISTORY AND DESCRIPTION OF BUSINESS
Crown Group, Inc. ("Crown"), and collectively with its subsidiaries (the
"Company"), is a publicly traded buy-out firm which as of October 31, 1998
owned (i) 65% of Paaco Automotive Group, Inc. and Premium Auto Acceptance
Corporation (collectively, "Paaco"), a vertically integrated used car sales and
finance company, (ii) 100% of Precision IBC, Inc. ("Precision"), a firm
specializing in the sale and rental of intermediate bulk containers, (iii) 80%
of Concorde Acceptance Corporation ("Concorde"), a sub-prime mortgage lender,
(iv) 49% of Casino Magic Neuquen S.A. ("CMN"), a casino operator in the
Province of Neuquen, Argentina, and (v) 80% of Home Stay Lodges I, Ltd. ("Home
Stay"), a partnership focusing on the development and operation of
extended-stay lodging facilities. In addition, from time to time the Company
purchases and sells small ownership interests in securities of privately held
and publicly traded firms. The Company is presently focusing on (i) the
development and expansion of its existing businesses, and (ii) the potential
acquisition or development of other unrelated businesses. In December 1998 the
Company entered into an agreement to acquire Fleeman Holding Company, including
its wholly-owned subsidiary America's Car-Mart, Inc. ("Car-Mart"), for $41
million. Car-Mart is a used car sales and finance company that operates 30
dealerships in four states (see note N).
Since its inception in 1983 through June 1993 the Company was engaged in
various facets of the cable and related programming businesses. From June 1993
until November 1996, the Company's primary business focus was that of owning,
operating and developing casino gaming properties. In November 1996 the Company
decided to expand its business interests beyond casino gaming and began
pursuing business opportunities in other fields. As a result the Company has
acquired or formed several businesses in a variety of industries.
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six month period ended October 31, 1998 are
not necessarily indicative of the results that may be expected for the year
ended April 30, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended April 30, 1998.
Marketable Equity Securities
Investments in marketable equity securities are recorded at market value
based upon closing stock prices as quoted on national stock exchanges or the
NASDAQ stock market. The Company considers all of its equity securities to be
"available for sale" securities, and the difference between the Company's cost
and such security's market value is included as a separate component of
stockholders' equity entitled "unrealized appreciation of securities," on a net
of tax basis.
As of April 30, 1998 and October 31, 1998 the Company held 222,222 shares
of Inktomi Corporation common stock, which company completed its initial public
offering ("IPO") on or about June 9, 1998. The Company's Inktomi shares were
subject to an underwriter's lock-up agreement which restricted the Company from
selling its Inktomi stock until December 8, 1998. The Company's Inktomi shares
are not registered, and thus the Company may not sell such shares in the public
markets until the completion of a one year holding period which ends on
February 25, 1999. However, the Company is free to sell its Inktomi shares in a
private transaction. The Company valued its Inktomi shares based upon the
closing stock price of $84.3125 per share on October 31, 1998, less a 10%
discount to reflect the restrictions on such shares. Accordingly, at October
31, 1998 the carrying value of the Company's Inktomi stock was $16,862,500
which reflects a gross unrealized gain of $15,787,500 over the Company's cost
of $1,075,000.
Goodwill
Goodwill represents the excess of the Company's cost over the fair value of
net identifiable assets acquired in its purchases of Paaco and Precision.
Goodwill is amortized on a straight line basis over periods ranging from 15 to
25 years. The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operation. At October 31, 1998 accumulated amortization of goodwill
amounted to $525,170.
Reclassifications
Certain prior year amounts in the accompanying financial statements have
been reclassified to conform to the fiscal 1999 presentation.
<PAGE> 8
C - ACQUISITIONS
Paaco Purchase
Effective February 1, 1998 the Company acquired 53% of the common stock of
Paaco for a purchase price of approximately $9.1 million in cash. Approximately
$4.9 million of Paaco common stock was purchased directly from Paaco, and the
remaining $4.2 million was purchased from Paaco management personnel who prior
to this transaction were the sole shareholders of Paaco (the "Paaco Management
Shareholders"). Effective May 1, 1998 the Company acquired an additional 12%
interest in Paaco directly from the Paaco Management Shareholders. With this
purchase the Company owns 65% of Paaco as of October 31, 1998. The purchase
price of $1.5 million was paid by issuing 375,000 shares of the Company's
common stock.
Precision Purchase
On February 3, 1998 the Company acquired 80% of the common stock of
Precision IBC, Incorporated ("Original Precision") for a purchase price of
approximately $2.4 million in cash. On March 5, 1998 the Company acquired 80%
of the common stock of M&S Tank Rentals, Inc. ("M&S") for a purchase price of
$1.65 million in cash. Original Precision and M&S were subsequently merged
together into a newly formed corporation, Precision IBC, Inc. ("Precision").
Effective May 1, 1998 the Company acquired the remaining 20% interest in
Precision it did not previously own by issuing 288,027 shares of the Company's
common stock to the minority shareholders of Precision in a private placement.
D - CMN OPERATING RESULTS
The operating results of CMN for the six months ended October 31, 1998 and
1997 were as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended
October 31,
1998 1997
------------ ------------
<S> <C> <C>
Revenues $ 10,945 $ 8,821
Costs and expenses 7,944 6,357
Interest, fees and rentals to shareholders 832 1,077
Provision for income taxes 707 413
------------ ------------
Net income $ 1,462 $ 974
============ ============
</TABLE>
E - FINANCE RECEIVABLES
The Company originates installment sale contracts from the sale of used
vehicles at its dealerships. These installment sale contracts typically include
interest rates ranging from 18 to 26% per annum and provide for payments over
periods ranging from 24 to 36 months. A summary of finance receivables as of
October 31, 1998 and April 30, 1998 is as follows:
<TABLE>
<CAPTION>
October 31, April 30,
1998 1998
------------ ------------
(Restated) (Restated)
<S> <C> <C>
Finance receivables $ 61,493,712 $ 48,776,278
Unearned finance charges (11,707,514) (9,420,164)
Allowance for credit losses (6,001,423) (4,727,679)
Valuation discount (483,993) (710,421)
------------ ------------
$ 43,300,782 $ 33,918,014
============ ============
</TABLE>
In accordance with APB Opinion No. 16, as of the dates the Company acquired
an interest in Paaco (53% on February 1, 1998 and 12% on May 1, 1998), the
Company valued Paaco's finance receivable portfolios at market value and
determined that an aggregate valuation discount of $1,215,966 was appropriate.
This discount is being amortized into interest income over the life of the
related finance receivable portfolios that existed on the purchase date using
the interest method.
<PAGE> 9
A summary of the restated finance receivables allowance for credit losses
for the period from April 30, 1998 to October 31, 1998 is as follows:
<TABLE>
<S> <C>
Balance at April 30, 1998 $ 4,727,679
Provision for credit losses 4,306,361
Net charge offs (3,032,617)
-----------
Balance at October 31, 1998 $ 6,001,423
===========
</TABLE>
In addition to the finance receivables allowance for credit losses the
Company also has an allowance for credit losses on mortgage loans held for sale
($102,600) and trade accounts receivable ($12,500) as of October 31, 1998.
F - PROPERTY AND EQUIPMENT
A summary of property and equipment as of October 31, 1998 and April 30,
1998 is as follows:
<TABLE>
<CAPTION>
October 31, April 30,
1998 1998
------------ ------------
<S> <C> <C>
Land and buildings $ 2,778,117 $ 2,332,750
Construction in progress 3,577,646
Rental equipment 6,000,009 4,749,652
Furniture, fixtures and equipment 3,221,152 1,904,536
Leasehold improvements 1,122,728 920,583
Less accumulated depreciation and amortization (1,226,507) (741,818)
------------ ------------
$ 15,473,145 $ 9,165,703
============ ============
</TABLE>
G - DEBT
A summary of debt at October 31, 1998 is as follows:
<TABLE>
<CAPTION>
Revolving Credit Facilities
-------------------------------------------------------------------------------------------------------------
Facility Interest Primary Balance at
Borrower Lender Amount Rate Maturity Collateral October 31, 1998
--------- ------------- ----------- -------------- --------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Paaco Finova $38 million Prime + 3.00% Apr 2000 Finance rec. $ 34,927,375
Concorde Bank One $20 million Libor + 2.25% Jan 1999 Mortgage loans 5,572,149
Precision Wells Fargo $5 million Prime June 2000 IBC's and rec. 3,853,750
Paaco Comerica $500,000 Prime + 2.00% Demand Vehicle inv. 500,000
------------
$ 44,853,274
============
</TABLE>
<TABLE>
<CAPTION>
Other Notes Payable
-------------------------------------------------------------------------------------------------------------
Facility Interest Primary Balance at
Borrower Lender Amount Rate Maturity Collateral October 31, 1998
--------- ------------- ----------- -------------- --------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Home Stay Bank of Pensacola $5.4 million 8.50% Feb 2004 Real estate $ 3,231,883
Paaco Chase Texas N/A 8.50% Oct 2003 Real estate 973,054
Paaco Heller Financial N/A Prime + 2.25% Dec 2015 Real estate 624,957
Paaco Various N/A Various 1998 to 1999 None 3,780,123
-----------
$ 8,610,017
===========
</TABLE>
<PAGE> 10
H - COMPREHENSIVE INCOME INFORMATION
Supplemental comprehensive income disclosures for the six months ended
October 31, 1998 are as follows:
<TABLE>
<CAPTION>
Six Months
Ended
October 31, 1998
----------------
<S> <C>
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
================
</TABLE>
Changes to unrealized appreciation of securities for the six months ended
October 31, 1998 are as follows:
<TABLE>
<CAPTION>
Six Months
Ended
October 31, 1998
----------------
<S> <C>
Balance at April 30, 1998 $ 1,930,500
Current period change 8,275,398
----------------
Balance at October 31, 1998 $ 10,205,898
================
</TABLE>
I - EARNINGS PER SHARE
A summary reconciliation of basic earnings per share to diluted earnings
per share for the six months ended October 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Six Months Ended
October 31,
1998 1997
------------ ------------
(Restated)
<S> <C> <C>
Net income (loss) $ 811,830 $ (360,222)
============ ============
Average shares outstanding-basic 10,143,969 10,055,465
Dilutive options 143,543
Dilutive warrants 17,971
------------ ------------
Average shares outstanding-diluted 10,305,483 10,055,465
============ ============
Earnings (loss) per share:
Basic $ 0.08 $ (0.04)
Diluted $ 0.08 $ (0.04)
Antidilutive securities not included:
Options 185,000 814,643
============ ============
Warrants 391,198 1,184,246
============ ============
</TABLE>
<PAGE> 11
J - COMMON STOCK ISSUANCES
Effective May 1, 1998 the Company issued 375,000 and 288,027 shares of its
common stock in the purchases of an additional 12% interest in Paaco and an
additional 20% interest in Precision, respectively (see Note C). Furthermore,
in June 1998 the Company issued 169,941 shares of its common stock to Nomura
Holding America, Inc. ("Nomura") in connection with Nomura's full exercise of a
warrant held by them to purchase 508,414 shares of the Company's common stock.
Nomura exercised the warrant pursuant to its "cashless exercise" feature.
K - COMMITMENTS AND CONTINGENCIES
Mortgage Loan Sales
In connection with the Company's sale of mortgage loans in the ordinary
course of business, in certain circumstances such loan sales involve limited
recourse to the Company for up to the first twelve months following the sale.
Generally, the events which could give rise to these recourse provisions
involve the prepayment or foreclosure of a loan, and violations of customary
representations and warranties. If the recourse provisions are triggered the
Company may be required to refund all or part of the premium received on the
sale of such loan, and in some cases the Company may be required to repurchase
the loan. Periodically, the Company estimates the potential exposure related to
such recourse provisions and accrues a percentage of the total potential
liability.
Severance Agreements
The Company has entered into severance agreements with its three executive
officers which provide for payments to the executives in the event of their
termination after a change in control, as defined, of the Company. The
agreements provide, among other things, for a compensation payment equal to
2.99 times the annual compensation paid to the executive, as well as
accelerated vesting of any unvested options under the Company's stock option
plans, in the event of such executive's termination in connection with a change
in control.
Paaco Purchase Contingent Consideration
In connection with the Company's purchase of an additional 12% interest in
Paaco effective May 1, 1998, the Company agreed to pay the sellers as
additional consideration an amount equal to 60% of the excess of Paaco's pretax
income in excess of $2.5 million for the twelve months ending January 31, 1999.
Such additional consideration, if any, is to be paid in Company common stock
valued at $4.00 per share.
Litigation
In August 1998 an action was filed against the Company in the 8th Judicial
District Court of Clark County, Nevada by Resort Properties of America ("RPA").
In this action RPA alleges it had a verbal agreement with the Company
pertaining to the sale of the Company's Las Vegas land which was sold in
September 1997. RPA claims it is due a brokerage commission of $450,000 plus
attorney's fees. The Company has denied the material allegations of the claim
and intends to vigorously contest any liability in the matter. While no
assurance can be given as to the ultimate outcome of this litigation,
management believes that the resolution of this matter will not have a material
adverse effect on the Company.
L - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures for the six months ended October 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Six Months Ended
October 31,
1998 1997
---------- ----------
<S> <C> <C>
Conversion of a portion of CMN note to equity $2,516,493
Value of stock issued in acquisitions $2,652,108
Inventory acquired in repossession 3,274,568
Interest paid, net of amount capitalized 2,738,257 1,614
Income taxes paid 100,000 300,000
</TABLE>
<PAGE> 12
M - BUSINESS SEGMENTS
Operating results and other financial data are presented for the four
principal business segments of the Company for the three months ended October
31, 1998 and 1997. These segments are categorized by legal entity, which also
corresponds to the lines of business of the Company. The segments include (i)
Paaco, which sells and finances used vehicles, (ii) Precision, which rents and
sells intermediate bulk containers, (iii) Concorde, which originates and sells
sub-prime mortgage loans, and (iv) other, which includes corporate operations,
Home Stay, activities of relatively inactive subsidiaries and the Company's
equity investment in CMN. The Company's business segment data for the three
months ended October 31, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended October 31, 1998 (Restated)
--------------------------------------------------------------------------------------------
Paaco Precision Concorde Other Eliminations Consolidated
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other $ 14,049 $ 1,395 $ 1,205 $ 356 $ 17,005
Interest income 2,108 3 393 385 $ (144) 2,745
------------ ------------ ------------ ------------ ------------ ------------
Total 16,157 1,398 1,598 741 (144) 19,750
------------ ------------ ------------ ------------ ------------ ------------
Costs and expenses:
Costs of sales 9,312 551 9,863
Selling, gen. and admin. 3,614 319 1,116 726 5,775
Prov. for credit losses 2,369 10 32 2,411
Interest expense 1,220 98 304 (144) 1,478
Depreciation and amort. 66 163 41 261 531
------------ ------------ ------------ ------------ ------------ ------------
Total 16,581 1,141 1,493 987 (144) 20,058
------------ ------------ ------------ ------------ ------------ ------------
CMN earnings and other 148 148
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) before taxes
and minority interests $ (424) $ 257 $ 105 $ (98) $ -- $ (160)
============ ============ ============ ============ ============ ============
Capital expenditures $ 147 $ 1,103 $ 77 $ 2,347 $ -- $ 3,674
============ ============ ============ ============ ============ ============
Total assets $ 52,465 $ 11,438 $ 10,981 $ 65,502 $ (26,730) $ 113,656
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended October 31, 1997
--------------------------------------------------------------------------------------------
Paaco Precision Concorde Other Eliminations Consolidated
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other $ 141 $ 141
Interest income $ 82 368 $ (35) 415
------------ ------------ ------------ ------------
Total 82 509 (35) 556
------------ ------------ ------------ ------------
Costs and expenses:
Selling, gen. and admin. 384 633 1,017
Interest expense 37 (35) 2
Depreciation and amort. 6 121 127
------------ ------------ ------------ ------------
Total 427 754 (35) 1,146
------------ ------------ ------------ ------------
CMN earnings and other 191 191
------------ ------------ ------------ ------------
Income (loss) before taxes
and minority interests $ (345) $ (54) $ -- $ (399)
============ ============ ============ ============
Capital expenditures $ 198 $ 429 $ -- $ 627
============ ============ ============ ============
Total assets $ 7,626 $ 42,551 $ (14,700) $ 35,477
============ ============ ============ ============
</TABLE>
<PAGE> 13
The Company's business segment data for the six months ended October 31,
1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended October 31, 1998 (Restated)
--------------------------------------------------------------------------------------------
Paaco Precision Concorde Other Eliminations Consolidated
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other $ 29,909 $ 2,677 $ 2,356 $ 608 $ 35,550
Interest income 3,919 3 804 803 $ (259) 5,270
------------ ------------ ------------ ------------ ------------ ------------
Total 33,828 2,680 3,160 1,411 (259) 40,820
------------ ------------ ------------ ------------ ------------ ------------
Costs and expenses:
Costs of sales 19,755 1,008 20,763
Selling, gen. and admin. 7,393 629 2,223 1,280 11,525
Prov. for credit losses 4,306 10 76 4,392
Interest expense 2,250 190 609 (259) 2,790
Depreciation and amort. 135 315 73 518 1,041
------------ ------------ ------------ ------------ ------------ ------------
Total 33,839 2,152 2,981 1,798 (259) 40,511
------------ ------------ ------------ ------------ ------------ ------------
CMN earnings and other 642 642
------------ ------------ ------------ ------------ ------------ ------------
Income before taxes
and minority interests $ (11) $ 528 $ 179 $ 255 $ -- $ 951
============ ============ ============ ============ ============ ============
Capital expenditures $ 374 $ 2,168 $ 219 $ 5,371 $ -- $ 8,132
============ ============ ============ ============ ============ ============
Total assets $ 52,465 $ 11,438 $ 10,981 $ 65,502 $ (26,730) $ 113,656
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended October 31, 1997
--------------------------------------------------------------------------------------------
Paaco Precision Concorde Other Eliminations Consolidated
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other $ 1 $ 255 $ 256
Interest income 94 735 $ (35) 794
------------ ------------ ------------ ------------
Total 95 990 (35) 1,050
------------ ------------ ------------ ------------
Costs and expenses:
Selling, gen. and admin. 584 1,543 2,127
Interest expense 37 (35) 2
Depreciation and amort. 7 213 220
------------ ------------ ------------ ------------
Total 628 1,756 (35) 2,349
------------ ------------ ------------ ------------
CMN earnings and other 432 432
------------ ------------ ------------ ------------
Loss before taxes
and minority interests $ (533) $ (334) $ -- $ (867)
============ ============ ============ ============
Capital expenditures $ 198 $ 558 $ -- $ 756
============ ============ ============ ============
Total assets $ 7,626 $ 42,551 $ (14,700) $ 35,477
============ ============ ============ ============
</TABLE>
<PAGE> 14
N - SUBSEQUENT EVENT
In December 1998 the Company entered into a definitive stock purchase
agreement to acquire 100% of the outstanding common stock of Fleeman Holding
Company, the parent company of Car-Mart, for $41 million. The purchase price
consists of $33.5 million in cash, and a $7.5 million note with interest
payable monthly at 8.5% per annum and the principal due in five years. Closing
of the transaction is subject to certain conditions, including obtaining
financing for a portion of the purchase price.
Car-Mart was founded in 1981 and presently operates thirty "buy-here
pay-here" used car dealerships located in niche markets throughout Arkansas,
Oklahoma, Texas and Missouri. Car-Mart underwrites, finances and services
retail installment contracts generated at its dealerships. As of May 31, 1998
Car-Mart's finance receivable portfolio consisted of approximately 15,000
accounts representing $45 million in receivables. For the year ended May 31,
1998 Car-Mart reported revenues of approximately $52 million. The transaction
is scheduled to close in January 1999.
O - RESTATEMENT
In connection with the April 30, 1999 year end closing process and
subsequent analyses performed, the Company identified certain accounting errors
and irregularities at Paaco relating principally to finance receivables,
inventory and drafts payable. Such errors and irregularities existed at and
subsequent to the Company's purchase of a 53% interest in Paaco on February 1,
1998. To correct for such errors and irregularities, the Company has restated
its previously issued consolidated financial statements for the year ended
April 30, 1998 and has amended each of its quarterly reports on Form 10-Q with
respect to the fiscal quarters during the year ended April 30, 1999. A summary
of the impact of these corrections on the Company's consolidated financial
statements for the three and six months ended October 31, 1998 is set forth
below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended October 31, 1998 Six Months Ended October 31, 1998
------------------------------------ ----------------------------------
As Previously As As Previously As
Reported Restated Reported Restated
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues $ 19,750 $ 19,750 $ 40,820 $ 40,820
Income (loss) before taxes and minority
interests 921 (160) 2,591 951
Net income 501 46 1,508 812
Earnings per share (diluted) $ .05 $ .00 $ .15 $ .08
</TABLE>
<TABLE>
<CAPTION>
October 31, 1998
------------------------------
As Previously As
Reported Restated
------------- ---------
<S> <C> <C>
Finance receivables, net $ 46,210 $ 43,301
Inventory 4,863 4,185
Goodwill, net 11,107 12,309
Total assets 116,417 113,656
Accounts payable 1,480 2,107
Deferred income taxes 7,734 6,036
Total liabilities 67,225 66,153
Minority interests 2,849 1,837
Stockholders' equity 46,344 45,667
</TABLE>
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto appearing elsewhere in this
report.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. Certain information included in
this Quarterly Report on Form 10-Q contains, and other materials filed or to be
filed by the Company with the Securities and Exchange Commission (as well as
information included in oral statements or other written statements made or to
be made by the Company or its management) contain or will contain,
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, and Section 27A of the Securities Act of
1933, as amended. Such forward-looking statements address, among other things,
the Company's current focus on the development and expansion of its existing
businesses, and the potential acquisition or development of businesses in other
fields. Such forward-looking statements are based upon management's current
plans or expectations and are subject to a number of uncertainties and risks
that could significantly affect current plans, anticipated actions and the
Company's future financial condition and results. As a consequence, actual
results may differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company as a result of various factors.
Uncertainties and risks related to such forward-looking statements include, but
are not limited to, those relating to the development of the Company's
businesses, continued availability of lines of credit for the Company's
businesses, changes in interest rates, changes in the industries in which the
Company operates, competition, dependence on existing management, the stability
of Argentina's government, currency exchange rate fluctuations, the
repatriation of funds from Argentina, domestic or global economic conditions
(particularly in the Dallas/Ft. Worth area), changes in foreign or domestic tax
laws or the administration of such laws and changes in gaming or lending laws
or regulations. Any forward-looking statements are made pursuant to the Private
Securities Litigation Reform Act of 1995 and, as such, speak only as of the
date made.
OVERVIEW
Crown Group, Inc. ("Crown"), and collectively with its subsidiaries (the
"Company"), is a publicly traded buy-out firm which as of October 31, 1998
owned (i) 65% of Paaco Automotive Group, Inc. and Premium Auto Acceptance
Corporation (collectively, "Paaco"), a vertically integrated used car sales and
finance company, (ii) 100% of Precision IBC, Inc. ("Precision"), a firm
specializing in the sale and rental of intermediate bulk containers, (iii) 80%
of Concorde Acceptance Corporation ("Concorde"), a sub-prime mortgage lender,
(iv) 49% of Casino Magic Neuquen S.A. ("CMN"), a casino operator in the
Province of Neuquen, Argentina, and (v) 80% of Home Stay Lodges I, Ltd. ("Home
Stay"), a partnership focusing on the development and operation of
extended-stay lodging facilities. In addition, from time to time the Company
purchases and sells small ownership interests in securities of privately held
and publicly traded firms. The Company is presently focusing on (i) the
development and expansion of its existing businesses, and (ii) the potential
acquisition or development of other unrelated businesses. In December 1998 the
Company entered into a definitive stock purchase agreement to acquire 100% of
the outstanding common stock of Fleeman Holding Company, the parent company of
America's Car-Mart, Inc. ("Car-Mart"), for $41 million. The purchase price
consists of $33.5 million in cash, and a $7.5 million note with interest
payable monthly at 8.5% per annum and the principal due in five years. Car-Mart
is a used car sales and finance company that operates 30 dealerships in four
states.
Since its inception in 1983 through June 1993 the Company was engaged in
various facets of the cable and related programming businesses. From June 1993
until November 1996, the Company's primary business focus was that of owning,
operating and developing casino gaming properties. In November 1996 the Company
decided to expand its business interests beyond casino gaming and began
pursuing business opportunities in other fields. As a result the Company has
acquired or formed several businesses in a variety of industries as follows:
CMN - In June 1997 the Company acquired a 49% interest in CMN for a
purchase price of $7 million cash. CMN operates casinos in the cities
of Neuquen and San Martin de los Andes in the Province of Neuquen,
Argentina under an exclusive concession contract.
CONCORDE - In June 1997 the Company, along with certain newly hired
management personnel, formed Concorde. Concorde is in the business of
originating, purchasing, servicing and selling sub-prime mortgage loans
which are secured primarily by first and second liens on residential
properties. These loans are sold in privately negotiated transactions
to institutional investors and other third parties.
PAACO - In February 1998 the Company acquired 53% of the common stock
of Paaco for a purchase price of approximately $9.1 million cash.
Approximately $4.9 million of Paaco common stock was purchased directly
from
<PAGE> 16
Paaco, and the remaining $4.2 million was purchased from Paaco
management personnel who prior to this transaction were the sole
shareholders of Paaco. Effective May 1, 1998 the Company purchased an
additional 12% interest in Paaco from the management shareholders. The
purchase price of $1.5 million was paid by issuing 375,000 shares of
the Company's common stock. Paaco is a vertically integrated used car
sales and finance company which operates eight used car dealerships in
the Dallas-Ft. Worth metropolitan area. Paaco is in the process of
opening two dealerships in Houston, Texas. Paaco sells, underwrites and
finances used cars and trucks with a focus on the Hispanic market.
PRECISION - In February 1998 the Company acquired 80% of the common
stock of Precision IBC, Incorporated ("Original Precision") for a
purchase price of approximately $2.4 million in cash. In March 1998 the
Company acquired 80% of the common stock of M&S Tank Rentals, Inc.
("M&S") for a purchase price of $1.65 million in cash. Original
Precision and M&S were subsequently merged together into a newly formed
corporation, Precision IBC, Inc. ("Precision"). Effective May 1, 1998
the Company purchased the remaining 20% of Precision. The purchase
price of approximately $1.1 million was paid by issuing 288,027 shares
of the Company's common stock. Precision is in the business of renting,
selling, testing and servicing principally stainless steel intermediate
bulk containers.
HOME STAY - In May 1998 the Company, along with a minority holder,
formed Home Stay. Home Stay is in the business of constructing and
operating extended-stay lodging facilities.
RESULTS OF OPERATIONS
The Company's 49% investment in CMN is accounted for on the equity method.
Since the Company's investment in CMN was completed in June 1997, the six
months ended October 31, 1997 only includes five months of CMN operating
results. Concorde was formed in June 1997, and, as a result, only had limited
operations during the three and six months ended October 31, 1997. Paaco and
Precision were acquired in February 1998, and, as a result, are not reflected
in the Company's operating results for the three and six months ended October
31, 1997. As a result of the above transactions, the Company's operating
results for the three and six months ended October 31, 1998 and 1997 are not
entirely comparable.
During the course of its fiscal 1999 year end closing process, the Company
discovered certain accounting errors and irregularities at Paaco, as a result
of which fiscal 1999 earnings of the Company were reduced by certain finance
receivable and inventory write-downs, together with an increase in finance
receivable reserves and drafts payable. Such errors and irregularities existed
at and subsequent to the Company's initial purchase of its interest in Paaco in
February 1998. The investigation at Paaco has also resulted in a restatement of
fiscal 1998 results of operations and the quarterly financial statements during
fiscal 1999. See Note O to the consolidated financial statements for a summary
of the impact of the required adjustments on the Company's consolidated
financial statements as of October 31, 1998 and for the three and six months
then ended. As a result of its investigation of Paaco, management of the
Company has restructured Paaco's management organization and has implemented
cost reductions at that subsidiary, while taking steps to ensure the integrity
of Paaco's accounting and reporting procedures in future periods. Daniel Chu,
former President of Paaco, resigned in July 1999.
<PAGE> 17
THREE MONTHS ENDED OCTOBER 31, 1998 COMPARED TO THE THREE MONTHS ENDED
OCTOBER 31, 1997
Below is a presentation of the operating results for the four principal
business segments of the Company for the three months ended October 31, 1998
and 1997. The segments include (i) Paaco, which sells and finances used
vehicles, (ii) Precision, which rents and sells intermediate bulk containers,
(iii) Concorde, which originates and sells sub-prime mortgage loans, and (iv)
other, which includes corporate operations, Home Stay, activities of relatively
inactive subsidiaries and the Company's equity investment in CMN. The Company's
business segment data for the three months ended October 31, 1998 and 1997 is
as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended October 31, 1998 (Restated)
--------------------------------------------------------------------------------------------
Paaco Precision Concorde Other Eliminations Consolidated
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other $ 14,049 $ 1,395 $ 1,205 $ 356 $ 17,005
Interest income 2,108 3 393 385 $ (144) 2,745
------------ ------------ ------------ ------------ ------------ ------------
Total 16,157 1,398 1,598 741 (144) 19,750
------------ ------------ ------------ ------------ ------------ ------------
Costs and expenses:
Costs of sales 9,312 551 9,863
Selling, gen. and admin. 3,614 319 1,116 726 5,775
Prov. for credit losses 2,369 10 32 2,411
Interest expense 1,220 98 304 (144) 1,478
Depreciation and amort. 66 163 41 261 531
------------ ------------ ------------ ------------ ------------ ------------
Total 16,581 1,141 1,493 987 (144) 20,058
------------ ------------ ------------ ------------ ------------ ------------
CMN earnings and other 148 148
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) before taxes
and minority interests $ (424) $ 257 $ 105 $ (98) $ -- $ (160)
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended October 31, 1997
--------------------------------------------------------------------------------------------
Paaco Precision Concorde Other Eliminations Consolidated
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other $ 141 $ 141
Interest income $ 82 368 $ (35) 415
------------ ------------ ------------ ------------
Total 82 509 (35) 556
------------ ------------ ------------ ------------
Costs and expenses:
Selling, gen. and admin. 384 633 1,017
Interest expense 37 (35) 2
Depreciation and amort. 6 121 127
------------ ------------ ------------ ------------
Total 427 754 (35) 1,146
------------ ------------ ------------ ------------
CMN earnings and other 191 191
------------ ------------ ------------ ------------
Income (loss) before taxes
and minority interests $ (345) $ (54) $ -- $ (399)
============ ============ ============ ============
</TABLE>
Revenues from sales and rental income pertain to the businesses of Paaco
and Precision, which were acquired during the fourth quarter of fiscal 1998.
Interest income for the three months ended October 31, 1998 increased $2.3
million compared to the same period in the prior fiscal year. The increase
resulted principally from (i) interest earned on Paaco's finance receivable
portfolio ($2.1 million), and (ii) greater interest earned on Concorde's
mortgage loans ($.3 million) as a result of an increase in the average amount
of mortgage loans held for sale.
Cost of sales pertains to the operations of Paaco and Precision. Provision
for credit losses pertains principally to Paaco's operations. Selling, general
and administrative expenses for the three months ended October 31, 1998
increased $4.8 million compared to the same period in the prior fiscal year.
The increase resulted principally from (i) expenses relating to Paaco and
Precision ($3.9 million), and (ii) the development of Concorde's mortgage based
lending business ($.7 million). Interest expense for the three months ended
October 31, 1998 increased $1.5 million compared to the same period in the
prior fiscal year. The increase resulted from interest associated with the debt
of Paaco, Precision and Concorde. Depreciation and amortization expense for the
three months ended October 31, 1998 increased $.4 million compared to the same
period in the prior fiscal year. The increase resulted principally from (i)
amortizing goodwill that was created in the acquisitions of Paaco and Precision
($185,275), (ii) depreciating the assets of Paaco and Precision ($186,030), and
(iii) greater depreciation at Concorde ($33,693).
<PAGE> 18
The benefit for income taxes for the three months ended October 31, 1998
was $110,021 on a pretax loss of $159,483. This equates to an effective tax
rate of 35.8% after removing from pretax income the equity in earnings of CMN
($147,807), which earnings are presented on an after tax basis. The benefit for
income taxes for the three months ended October 31, 1997 was $348,030 on a
pretax loss of $398,859. The prior period benefit differed from the amount
determined by applying the 34% federal statutory rate principally as a result
of (i) equity in earnings of CMN being reported on an after tax basis, and (ii)
a change in the valuation allowance of certain deferred tax assets. Minority
interests for the three months ended October 31, 1998 ($95,675) pertain
principally to the portion of Paaco (35%) not owned by the Company during the
period. Net income for the three months ended October 31, 1998 increased
$97,042 compared to the same period in the prior fiscal year. The increase was
the result of (i) including the results of operations of Precision in the
current period, and (ii) Concorde reporting pretax earnings in the current
period ($105,360) compared to a pretax loss ($345,034) in the prior period,
partially offset by losses at Paaco during the period.
SIX MONTHS ENDED OCTOBER 31, 1998 COMPARED TO THE SIX MONTHS ENDED
OCTOBER 31, 1997
The Company's business segment data for the six months ended October 31, 1998
and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended October 31, 1998 (Restated)
--------------------------------------------------------------------------------------------
Paaco Precision Concorde Other Eliminations Consolidated
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other $ 29,909 $ 2,677 $ 2,356 $ 608 $ 35,550
Interest income 3,919 3 804 803 $ (259) 5,270
------------ ------------ ------------ ------------ ------------ ------------
Total 33,828 2,680 3,160 1,411 (259) 40,820
------------ ------------ ------------ ------------ ------------ ------------
Costs and expenses:
Costs of sales 19,755 1,008 20,763
Selling, gen. and admin. 7,393 629 2,223 1,280 11,525
Prov. for credit losses 4,306 10 76 4,392
Interest expense 2,250 190 609 (259) 2,790
Depreciation and amort. 135 315 73 518 1,041
------------ ------------ ------------ ------------ ------------ ------------
Total 33,839 2,152 2,981 1,798 (259) 40,511
------------ ------------ ------------ ------------ ------------ ------------
CMN earnings and other 642 642
------------ ------------ ------------ ------------ ------------ ------------
Income before taxes
and minority interests $ (11) $ 528 $ 179 $ 255 $ -- $ 951
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended October 31, 1997
--------------------------------------------------------------------------------------------
Paaco Precision Concorde Other Eliminations Consolidated
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other $ 1 $ 255 $ 256
Interest income 94 735 $ (35) 794
------------ ------------ ------------ ------------
Total 95 990 (35) 1,050
------------ ------------ ------------ ------------
Costs and expenses:
Selling, gen. and admin 584 1,543 2,127
Interest expense 37 (35) 2
Depreciation and amort 7 213 220
------------ ------------ ------------ ------------
Total 628 1,756 (35) 2,349
------------ ------------ ------------ ------------
CMN earnings and other 432 432
------------ ------------ ------------ ------------
Loss before taxes
and minority interests $ (533) $ (334) $ -- $ (867)
============ ============ ============ ============
</TABLE>
<PAGE> 19
Revenues from sales and rental income pertain to the businesses of Paaco
and Precision, which were acquired during the fourth quarter of fiscal 1998.
Interest income for the six months ended October 31, 1998 increased $4.5
million compared to the same period in the prior fiscal year. The increase
resulted principally from (i) interest earned on Paaco's finance receivable
portfolio ($3.9 million), and (ii) greater interest earned on Concorde's
mortgage loans ($.7 million) as a result of an increase in the average amount
of mortgage loans held for sale.
Cost of sales pertains to the operations of Paaco and Precision. Provision
for credit losses pertains principally to Paaco's operations. Selling, general
and administrative expenses for the six months ended October 31, 1998 increased
$9.4 million compared to the same period in the prior fiscal year. The increase
resulted principally from (i) expenses relating to Paaco and Precision ($8.0
million), and (ii) the development of Concorde's mortgage based lending
business ($1.6 million), offset partially by a decrease in costs associated
with defending and settling certain lawsuits ($.5 million). Interest expense
for the six months ended October 31, 1998 increased $2.8 million compared to
the same period in the prior fiscal year. The increase resulted from interest
associated with the debt of Paaco, Precision and Concorde. Depreciation and
amortization expense for the six months ended October 31, 1998 increased $.8
million compared to the same period in the prior fiscal year. The increase
resulted principally from (i) amortizing goodwill that was created in the
acquisitions of Paaco and Precision ($370,490), (ii) depreciating the assets of
Paaco and Precision ($364,165), and (iii) greater depreciation at Concorde
($66,645).
The provision for income taxes for the six months ended October 31, 1998
was $150,989 on pretax income of $951,026. This equates to an effective tax
rate of 64.4% after removing from pretax income the equity in earnings of CMN
($716,428), which earnings are presented on an after tax basis. The benefit for
income taxes for the six months ended October 31, 1997 was $507,199 on a pretax
loss of $867,421. This equates to an effective tax rate of 39.8% after removing
from the pretax loss the equity in earnings of CMN ($407,685), which earnings
are presented on an after tax basis. Minority interests for the six months
ended October 31, 1998 ($11,793) pertain principally to the portion of Paaco
(35%) not owned by the Company during the period. Net income for the six months
ended October 31, 1998 increased $1,172,052 compared to the same period in the
prior fiscal year. The increase was the result of (i) including the results of
operations of Precision in the current period, and (ii) Concorde reporting
pretax earnings in the current period ($178,499) compared to a pretax loss
($532,565) in the prior period.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended October 31, 1998 net cash provided by operating
activities amounted to $12.0 million. The principal source of cash resulted
from the sale of mortgage loans. The excess of mortgage loans sold and
principal repayments over mortgage loans originated or acquired was $6.9
million. Net cash used by investing activities of $23.1 million included (i) a
$17.0 million use of cash in finance receivable originations in excess of
finance receivable collections, and (ii) an $8.1 million use of cash in the
purchase of assets (rental and other equipment and the construction of lodging
facilities). Net cash provided by financing activities of $6.4 million
principally relates to $3.7 million of cash provided by the asset based
revolving credit facilities of Paaco, Concorde and Precision, and $3.7 million
of proceeds from the issuance of other debt (Home Stay construction loan and
financing of Paaco real estate).
As of October 31, 1998 the Company's sources of liquidity included
approximately (i) $2 million of cash on hand, of which $1 million was held by
Crown, (ii) $17 million of marketable equity securities held by Crown, (iii)
$21 million remaining to be drawn on the credit facilities of Paaco, Concorde,
Precision and Home Stay, although the majority of such additional draws may
only be made in connection with a corresponding increase in the related
collateral asset (i.e., finance receivables, mortgage loans held for sale,
intermediate bulk containers and lodging facilities), and (iv) the potential
issuance of additional debt and/or equity, although the Company has no specific
commitments or arrangements to issue such additional debt and/or equity other
than in connection with the Car-Mart acquisition described below. The loan
agreements which govern the credit facilities of Crown's subsidiaries limit
dividends and other distributions from such subsidiaries to Crown.
The acquisition of Car-Mart requires that the Company (i) pay the sellers
$33.5 million in cash, and (ii) issue a $7.5 million promissory note bearing
interest at 8.5% per annum with the principal balance due in five years. In
connection with the cash portion of the purchase price, the Company anticipates
it will (i) enter into an asset based revolving credit facility with a
commercial bank or finance company for up to $35 million, and (ii) sell all or
part of the Company's marketable equity securities. The Company is presently
evaluating a number of proposals from several potential lenders which range
from $15 million to $35 million. Each proposal is subject to the satisfaction
of certain conditions. The Company expects to complete the acquisition of
Car-Mart in January 1999.
The Company is also focusing on the development and expansion of its
existing businesses and the potential acquisition or development of other
unrelated businesses. Precision's and Home Stay's credit facilities can support
the majority of their expected growth over the next twelve months. Concorde's
$20 million revolving credit facility, which expires in January 1999, is in the
process of being renewed. Upon renewal, which is expected to be completed in
January 1999, the Company believes such facility will be sufficient to meet
Concorde's borrowing needs over the next twelve months. Paaco and its principal
lender are in the process of increasing Paaco's revolving credit facility.
Paaco expects such facility will be increased to $60 million in January 1999.
Upon such increase the Company believes such facility will be sufficient to
meet Paaco's borrowing needs over the next twelve months.
<PAGE> 20
In March 1996 the Company's Board of Directors approved a program, as
amended, to repurchase up to 3,000,000 shares of the Company's common stock
from time to time in the open market. As of October 31, 1998 the Company had
repurchased 2,722,029 shares pursuant to this program. The timing and amount of
future share repurchases, if any, will depend on various factors including
market conditions, available alternative investments and the Company's
financial position.
DATA PROCESSING AND YEAR 2000
Each of Crown and its subsidiaries operate their data processing systems
independently. Almost all of the software utilized by the Company is licensed
from third parties. Most of the Company's hardware, software and networking
systems are year 2000 compliant, however, a more complete description on a
company by company basis as of October 31, 1998 is as follows:
PAACO - Paaco utilizes two primary software packages (operating and
accounting), and several secondary software packages (word processing,
spreadsheet and database) in the operation of its business. Each of its
operating, accounting and secondary software applications are year 2000
compliant. Paaco utilizes two local area networking systems, both of
which are year 2000 compliant. All of Paaco's data processing hardware
is year 2000 compliant.
CONCORDE - Concorde utilizes three primary software packages (front-end
origination and processing, mortgage servicing and accounting), and
approximately nine secondary software packages (document generation,
scanning, telephone management, E-mail, database, fax, credit bureau,
word processing and spreadsheet) in the operation of its business. All
of its software applications are year 2000 compliant. In addition,
Concorde's local area networking software and all of its data
processing hardware is year 2000 compliant.
PRECISION - Precision utilizes two primary software packages (tank
tracking and accounting), and approximately five secondary software
packages (word processing, database, spreadsheet, desktop publishing
and lock box communication) in the operation of its business.
Precision's accounting software and most of its secondary software
applications are year 2000 compliant. Precision has yet to determine
whether its tank tracking, database and lock box communication software
is year 2000 compliant. All of Precision's data processing equipment,
which consists principally of personal computers, is year 2000
compliant. By January 1999, Precision expects to determine the year
2000 compliance of all its software packages.
CMN - CMN utilizes one primary software package (accounting), and a few
secondary software packages (word processing and spreadsheet) in the
operation of its business. All of CMN's software applications are year
2000 compliant. CMN's data processing equipment, which consists
principally of personal computers, is year 2000 compliant.
CROWN - Crown utilizes one primary software package (accounting), and
approximately three secondary software packages (word processing,
spreadsheet and desktop publishing) in the operation of its business.
All of its software applications are year 2000 compliant. In addition,
Crown's local area networking software and all of its data processing
hardware is year 2000 compliant.
Each of Crown and its subsidiaries rely to varying degrees on third parties
in the operation of their businesses. Such third parties include banking
institutions, telecommunications companies, utilities, manufacturers and parts
suppliers. The Company has made inquiries of some of these third parties as to
their year 2000 compliance, but has yet to complete this process. The Company
believes to the extent a particular third party vendor does not become year
2000 compliant, and such lack of compliance is expected to have a material
impact on such vendor's ability to effectively provide goods or services, the
Company could replace such vendor to obtain the goods or services it needs. The
Company plans to monitor its more material third party relationships and take
appropriate action as necessary.
The Company has not incurred any appreciable costs in its process of
becoming year 2000 compliant, nor does it expect to do so in the future. The
Company does not presently have a contingency plan with respect to its year
2000 compliance as it expects to be fully compliant prior to the year 2000.
SEASONALITY
The Company's automobile sales operation is seasonal in nature. In the
automobile business, the Company's third fiscal quarter (November through
January) is historically the slowest period of time for car and truck sales.
Many of the Company's operating expenses such as administrative personnel, rent
and insurance are fixed and cannot easily be reduced during periods of
decreased sales. None of the Company's other businesses experience significant
seasonal fluctuations.
<PAGE> 21
PART II
ITEM 1. LEGAL PROCEEDINGS
In August 1998 an action was filed against the Company in the 8th Judicial
District Court of Clark County, Nevada by Resort Properties of America ("RPA").
In this action RPA alleges it had a verbal agreement with the Company
pertaining to the sale of the Company's Las Vegas land which was sold in
September 1997. RPA claims it is due a brokerage commission of $450,000 plus
attorney's fees. The Company has denied the material allegations of the claim
and intends to vigorously contest any liability in the matter. While no
assurance can be given as to the ultimate outcome of this litigation,
management believes that the resolution of this matter will not have a material
adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1998 annual meeting of shareholders was held on October 15,
1998. The record date for such meeting was August 21, 1998 on which date there
were a total of 10,118,231 shares of common stock outstanding and entitled to
vote. At such meeting the election of directors was approved by the Company's
shareholders with a summary of the voting as follows:
<TABLE>
<CAPTION>
Votes Votes Votes
Director For Against Abstained
-------- ----- ------- ---------
<S> <C> <C> <C>
Edward R. McMurphy 8,443,360 114,315 50,485
T.J. Falgout, III 8,443,360 114,315 50,485
David J. Douglas 8,436,290 121,385 50,485
J. David Simmons 8,437,060 120,615 50,485
Gerald L. Adams 8,444,822 112,853 50,485
Robert J. Kehl 8,441,860 115,815 50,485
Gerard M. Jacobs 8,447,360 110,315 50,485
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial data schedule (1).
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fiscal quarter
ended October 31, 1998.
- -----------------------
(1) Filed herewith.
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CROWN GROUP, INC.
By: \s\ Mark D. Slusser
------------------------------------
Mark D. Slusser
Chief Financial Officer, Vice
President Finance and Secretary
(Principal Financial and Accounting
Officer)
Dated: September 16, 1999
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27.1 Financial data schedule (1).
</TABLE>
- -----------------------
(1) Filed herewith.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> OCT-31-1998
<CASH> 1,712,004
<SECURITIES> 17,316,545
<RECEIVABLES> 62,723,869
<ALLOWANCES> (6,116,523)
<INVENTORY> 4,185,215
<CURRENT-ASSETS> 0
<PP&E> 16,699,652
<DEPRECIATION> (1,226,507)
<TOTAL-ASSETS> 113,656,472
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 99,453
<OTHER-SE> 45,567,062
<TOTAL-LIABILITY-AND-EQUITY> 113,656,472
<SALES> 31,314,081
<TOTAL-REVENUES> 40,819,814
<CGS> 20,763,335
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,565,815
<LOSS-PROVISION> 4,391,961
<INTEREST-EXPENSE> 2,789,702
<INCOME-PRETAX> 951,026
<INCOME-TAX> 150,989
<INCOME-CONTINUING> 811,830
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81,830
<EPS-BASIC> .08
<EPS-DILUTED> .08
</TABLE>
