<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:
OCTOBER 31, 1999 0-14939
CROWN GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
TEXAS 63-0851141
<S> <C>
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
4040 N. MACARTHUR BLVD., SUITE 100, IRVING, TEXAS
(Address of principal executive offices)
75038-6424
(Zip Code)
(972) 717-3423
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Title of Each Class December 13, 1999
------------------- -----------------
Common stock, par value $.01 per share 8,846,462
<PAGE> 2
PART I
ITEM 1. FINANCIAL STATEMENTS CROWN GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, 1999
(unaudited) April 30, 1999
---------------- --------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 11,541,662 $ 12,910,535
Accounts and other receivables, net 3,683,005 2,572,535
Mortgage loans held for sale, net 14,068,036 10,636,933
Finance receivables, net 100,201,176 88,424,897
Inventory 7,229,010 9,290,272
Prepaid and other assets 4,672,163 2,748,831
Property and equipment, net 26,706,848 22,055,174
Investment in CMN and related assets, net 5,167,161
Goodwill, net 9,498,359 14,328,241
------------- ------------
$177,600,259 $168,134,579
============ ============
Liabilities and stockholders' equity:
Accounts payable $ 3,377,659 $ 4,747,358
Accrued liabilities 6,041,324 5,040,007
Income taxes payable 7,116,931 3,875,583
Revolving credit facilities 78,662,205 78,928,121
Other notes payable 18,726,500 17,259,544
Deferred sales tax 3,481,607 2,713,914
Deferred income taxes 797,437
------------- ------------
Total liabilities 117,406,226 113,361,964
------------- ------------
Minority interests 1,200,170 1,713,731
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share, 1,000,000 shares
authorized; none issued or outstanding
Common stock, par value $.01 per share, 50,000,000 shares authorized;
9,229,212 issued and outstanding (10,096,842 at April 30, 1999) 92,292 100,968
Additional paid-in capital 33,729,161 37,970,391
Retained earnings 25,172,410 14,987,525
------------- ------------
Total stockholders' equity 58,993,863 53,058,884
------------- ------------
$177,600,259 $168,134,579
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
CONSOLIDATED STATEMENTS OF OPERATIONS CROWN GROUP, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
1999 1998
----------- -----------
<S> <C> <C>
Revenues:
Sales $37,458,587 $14,801,080
Rental income 1,162,874 642,957
Gain on sale of mortgage loans 1,110,012 1,171,458
Gaming 719,584
Interest income 5,052,155 2,745,432
Interest, fees and rentals from CMN 358,711
Other 26,769 30,386
----------- -----------
45,529,981 19,750,024
----------- -----------
Costs and expenses:
Cost of sales 21,607,816 9,862,523
Selling, general and administrative 11,749,879 5,774,728
Provision for credit losses 6,863,535 2,410,640
Interest expense 2,659,701 1,478,277
Depreciation and amortization 880,170 531,146
----------- -----------
43,761,101 20,057,314
----------- -----------
Other income:
Equity in earnings of unconsolidated subsidiaries 202,041 147,807
Gain on sale of securities, net 10,237,832
----------- -----------
10,439,873 147,807
----------- -----------
Income (loss) before taxes and minority interests 12,208,753 (159,483)
Provision (benefit) for income taxes 4,797,101 (110,021)
Minority interests (194,826) (95,675)
----------- -----------
Net income $ 7,606,478 $ 46,213
=========== ===========
Earnings per share:
Basic $ 0.79 $ 0.00
Diluted $ 0.76 $ 0.00
Weighted average number of shares outstanding:
Basic 9,665,483 10,071,689
Diluted 10,038,033 10,177,528
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
CONSOLIDATED STATEMENTS OF OPERATIONS CROWN GROUP, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
October 31,
1999 1998
----------- -----------
<S> <C> <C>
Revenues:
Sales $78,334,693 $31,314,081
Rental income 2,230,168 1,272,015
Gain on sale of mortgage loans 2,439,094 2,313,653
Gaming 934,870
Interest income 10,049,838 5,269,502
Interest, fees and rentals from CMN 609,013
Other 97,254 41,550
----------- -----------
94,085,917 40,819,814
----------- -----------
Costs and expenses:
Cost of sales 46,704,729 20,763,335
Selling, general and administrative 23,106,447 11,524,459
Provision for credit losses 12,718,662 4,391,961
Interest expense 5,075,133 2,789,702
Depreciation and amortization 1,634,967 1,041,356
----------- -----------
89,239,938 40,510,813
----------- -----------
Other income:
Equity in earnings of unconsolidated subsidiaries 942,843 716,428
Gain (loss) on sale of securities, net 10,237,832 (74,403)
----------- -----------
11,180,675 642,025
----------- -----------
Income before taxes and minority interests 16,026,654 951,026
Provision for income taxes 6,010,138 150,989
Minority interests (168,369) (11,793)
----------- -----------
Net income $10,184,885 $ 811,830
=========== ===========
Earnings per share:
Basic $ 1.03 $ 0.08
Diluted $ 0.99 $ 0.08
Weighted average number of shares outstanding:
Basic 9,866,852 10,143,969
Diluted 10,277,549 10,305,483
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME CROWN GROUP, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
1999 1998 1999 1998
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net income $7,606,478 $ 46,213 $10,184,885 $ 811,830
Unrealized appreciation of securities arising during period 3,489,754 8,275,398
---------- ---------- ----------- ----------
Comprehensive income $7,606,478 $3,535,967 $10,184,885 $9,087,228
========== ========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOWS CROWN GROUP, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
October 31,
1999 1998
------------- -------------
<S> <C> <C>
Operating activities:
Net income $ 10,184,885 $ 811,830
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,634,967 1,041,356
Amortization of finance receivable discount (594,177) (479,208)
Deferred income taxes (2,275,501) 4,123
Provision for credit losses 12,718,662 4,391,961
Minority interests (168,369) (11,793)
Gain on sale of mortgage loans (2,439,094) (2,313,653)
Gain on sale of assets (80,187) (85,629)
(Gain) loss on sale of securities (10,237,832) 74,403
Equity in earnings of unconsolidated subsidiaries (942,843) (716,428)
Changes in assets and liabilities:
Accounts and other receivables 83,294 (804,417)
Mortgage loans originated or acquired (74,865,125) (45,185,853)
Mortgage loans sold and principal repayments 73,836,516 52,068,737
Inventory 9,678,049 2,888,153
Prepaids and other assets (564,388) 78,214
Accounts payable, accrued liabilities and deferred sales tax (100,689) 265,840
Income taxes payable 3,241,347 (34,894)
------------- -------------
Net cash provided by operating activities 19,109,515 11,992,742
------------- -------------
Investing activities:
Finance receivable originations (70,594,548) (28,219,935)
Finance receivable collections 39,166,972 11,167,831
Purchase of property and equipment (4,098,480) (8,131,647)
Sale of assets 494,134 501,356
Purchase of securities (471,266)
Sale of securities 16,500,000 360,984
Dividends and collections of notes receivable from CMN 306,487 1,665,685
------------- -------------
Net cash used by investing activities (18,225,435) (23,126,992)
------------- -------------
Financing activities:
Capital contribution from minority owner 60,000
Purchase of common stock (2,009,993) (1,124,145)
Proceeds from (repayments of) revolving credit facilities, net (265,916) 3,688,750
Proceeds from other debt, net 22,956 3,739,943
------------- -------------
Net cash provided (used) by financing activities (2,252,953) 6,364,548
------------- -------------
Decrease in cash and cash equivalents (1,368,873) (4,769,702)
Cash and cash equivalents at: Beginning of period 12,910,535 6,481,706
------------- -------------
End of period $ 11,541,662 $ 1,712,004
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<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, 1999 owned
(i) 100% of America's Car-Mart, Inc. ("Car-Mart") and 85% of Paaco Automotive
Group, Inc. and Premium Auto Acceptance Corporation (collectively, "Paaco"),
vertically integrated used car sales and finance companies, (ii) 100% of
Precision IBC, Inc. ("Precision"), a firm specializing in the sale and rental of
intermediate bulk containers ("IBC's"), (iii) 80% of Concorde Acceptance
Corporation ("Concorde"), a sub-prime mortgage lender, (iv) 50.1% of CG
Incorporated, S.A. de C.V. ("Crown El Salvador"), a newly formed company
focusing on the development and operation of casinos in El Salvador, (v) 80% of
Home Stay Lodges I, Ltd. ("Home Stay"), a partnership focusing on the
development and operation of extended-stay lodging facilities, and (vi) 45% of
Atlantic Castings, Inc. ("Atlantic Castings"), an investment casting
manufacturer of turbine engine components. In addition, from time to time the
Company purchases and sells small ownership interests in securities of privately
held and publicly traded firms. The Company is presently focusing on (i) the
development and expansion of its existing businesses, and (ii) the potential
acquisition or development of other unrelated businesses.
In December 1999 the Company (i) acquired a 70% interest in Smart Choice
Automotive Group, Inc., a vertically integrated used car sales and finance
company based in Titusville, Florida, and (ii) sold its 80% interest in Home
Stay (see Note M).
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six month period ended October 31, 1999 are
not necessarily indicative of the results that may be expected for the year
ended April 30, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended April 30, 1999.
Goodwill
Goodwill represents the excess of the Company's cost over the fair value of
net identifiable assets acquired in its purchases of Paaco and Precision.
Goodwill is amortized on a straight line basis over periods ranging from 15 to
25 years. The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operation. At October 31, 1999 accumulated amortization of goodwill
amounted to $1,313,456.
Recent Accounting Pronouncements
In June 1998 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" which, as amended by SFAS No.
137, is effective for all fiscal quarters and years beginning after June 15,
2000. SFAS No. 133 standardizes the accounting for derivative instruments and
hedging activities, including certain derivative instruments imbedded in other
contracts. Under this standard, entities are required to carry all derivative
instruments in the statement of financial position at fair value. The Company
does not believe the adoption of SFAS No. 133 will have a material impact on its
financial position or results of operations.
Reclassifications
Certain prior year amounts in the accompanying financial statements have been
reclassified to conform to the fiscal 2000 presentation.
7
<PAGE> 8
C - ACQUISITION
Car-Mart Purchase
On January 15, 1999 the Company acquired 100% of the outstanding common stock
of Fleeman Holding Company, including its wholly-owned subsidiary Car-Mart for
$41.35 million. The purchase price consisted of $33.85 million in cash and the
issuance of promissory notes aggregating $7.5 million (the "Notes"). The Notes
bear interest at 8.5% per annum payable quarterly, with the principal due in
five years. Approximately $24 million of the cash portion of the purchase price
was obtained pursuant to a $30 million revolving credit facility with a major
banking institution. The remaining $9.85 million was funded from cash on hand.
The activities of Car-Mart have been included in the Company's consolidated
results of operation since the acquisition date.
Car-Mart was founded in 1981 and operates "buy-here-pay-here" used car
dealerships located in niche markets throughout Arkansas, Oklahoma, Texas and
Missouri. Car-Mart underwrites, finances and services retail installment
contracts generated at its dealerships. The majority of Car-Mart's assets
consist of over 16,000 retail installment contracts. Car-Mart's revenues for the
fiscal years ended May 31, 1998 and 1997 were approximately $65.7 million and
$58.1 million, respectively.
Pro Forma Financial Information
The following unaudited pro forma condensed consolidated results of
operations of the Company for the six months ended October 31, 1998 were
prepared as if the Car-Mart acquisition had occurred on May 1, 1998 (in
thousands, except per share amount). The adjustments to the historical financial
statements principally consist of (i) eliminating interest income on the cash
used in the acquisition, (ii) recording interest expense on the debt issued in
the Car-Mart acquisition, (iii) adjusting interest income resulting from
purchase accounting entries, and (iv) adjusting income tax expense to reflect
the above described adjustments.
<TABLE>
<CAPTION>
Six Months Ended
October 31,
1998
----------------
<S> <C>
Revenues $ 77,740
Net income 3,708
Earnings per share - diluted $ .36
</TABLE>
The unaudited pro forma results of operations are not necessarily indicative
of future results or the results that would have occurred had the acquisition
taken place on the date indicated.
D - SALE OF CASINO MAGIC NEUQUEN
Effective October 1, 1999 the Company sold its 49% interest in Casino Magic
Neuquen ("CMN") and related assets for $16.5 million cash resulting in a gain
before income taxes of $10.2 million. The gain, which is net of a $.5 million
bonus pursuant to the Company's executive compensation program, is included in
gain on sale of securities in the consolidated statements of operations. The
operating results of CMN for the five months ended September 30, 1999 and the
six months ended October 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Five Months Six Months
Ended Ended
September 30, October 31,
1999 1998
------------- -----------
<S> <C> <C>
Revenues $ 9,929 $ 10,945
Costs and expenses 6,732 7,944
Interest, fees, and rentals to shareholders 832
Provision for income taxes 1,135 707
--------- ---------
Net income $ 2,062 $ 1,462
========= =========
</TABLE>
8
<PAGE> 9
E - FINANCE RECEIVABLES
The Company originates installment sale contracts from the sale of used
vehicles at its dealerships. These installment sale contracts typically include
interest rates ranging from 10% to 22% per annum and provide for payments over
periods ranging from 12 to 36 months. A summary of finance receivables as of
October 31, 1999 and April 30, 1999 is as follows:
<TABLE>
<CAPTION>
October 31, April 30,
1999 1999
------------- -------------
<S> <C> <C>
Finance receivables $ 128,650,958 $ 123,142,202
Unearned finance charges (7,888,805) (16,669,411)
Allowance for credit losses (20,152,323) (17,045,063)
Valuation discount (408,654) (1,002,831)
------------- -------------
$ 100,201,176 $ 88,424,897
============= =============
</TABLE>
In accordance with APB Opinion No. 16, as of the dates the Company acquired
interests in Paaco and Car-Mart, the Company valued Paaco's and Car-Mart's
finance receivable portfolios at market value and determined that an aggregate
valuation discount of $1,577,781 in the case of Paaco, and $864,165 in the case
of Car-Mart, was appropriate. These discounts are being amortized into interest
income over the life of the related finance receivable portfolios that existed
on the dates of purchase using the interest method.
A summary of the finance receivables allowance for credit losses for the
period from April 30, 1999 to October 31, 1999 is as follows:
Balance at April 30, 1999 $ 17,045,063
Provision for credit losses 12,628,688
Net charge offs (9,521,428)
------------
Balance at October 31, 1999 $ 20,152,323
============
In addition to the finance receivables allowance for credit losses the
Company also has an allowance for credit losses on mortgage loans held for sale
($227,200) and trade accounts receivable ($50,000) as of October 31, 1999.
F - PROPERTY AND EQUIPMENT
A summary of property and equipment as of October 31, 1999 and April 30, 1999
is as follows:
<TABLE>
<CAPTION>
October 31, April 30,
1999 1999
----------- -----------
<S> <C> <C>
Land and buildings $ 9,955,247 $ 8,651,003
Rental equipment 8,870,466 7,644,949
Furniture, fixtures and equipment 8,080,852 5,691,910
Leasehold improvements 2,746,513 2,003,575
Less accumulated depreciation and amortization (2,946,230) (1,936,263)
----------- -----------
$26,706,848 $22,055,174
=========== ===========
</TABLE>
9
<PAGE> 10
G - DEBT
A summary of debt as of October 31, 1999 is as follows:
Revolving Credit Facilities
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Facility Interest Primary Balance at
Borrower Lender Amount Rate Maturity Collateral October 31, 1999
------------- -------------- ----------- ------------ ---------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Paaco Finova $60 million Prime + 3.00% Jun 2000 Finance rec. $ 43,833,680
Car-Mart Bank of America $30 million Prime + 1.13% Jan 2002 Finance rec. 25,564,028
Concorde Bank One $20 million Libor + 2.00% Sep 2000 Mortgage loans 9,049,649
Precision Wells Fargo $8 million Prime Dec 2000 IBC's and rec. 214,848
-------------
$ 78,662,205
=============
Other Notes Payable
-------------------------------------------------------------------------------------------------------------------
Facility Interest Primary Balance at
Borrower Lender Amount Rate Maturity Collateral October 31, 1999
------------- -------------- ----------- ------------ ---------- ------------- -----------------
Crown Car-Mart sellers N/A 8.50% Jan 2004 Finance rec $ 7,500,000
Crown Bank of America N/A 7.00% Apr 2001 Equipment 2,316,000
Home Stay Bank of Pensacola N/A 8.50% Feb 2004 Real estate 5,348,137
Precision South Trust Bank N/A 7.35% Jan 2014 Real estate 661,007
Paaco Chase Texas N/A 8.50% May 2003 Real estate 905,515
Paaco Heller Financial N/A Prime + 2.25% Dec 2015 Real estate 610,689
Various Various N/A Various Various Real estate 1,385,152
-----------
$ 18,726,500
============
</TABLE>
Interest is payable monthly or quarterly on all of the Company's debt. The
loan agreements relating to certain of the above described debt contain various
reporting and performance covenants including (i) maintenance of certain
financial ratios and tests, (ii) limitations on borrowings from other sources,
(iii) restrictions on certain operating activities, and (iv) restrictions on the
payment of dividends. The Company was in compliance with all of its loan
agreements as of October 31, 1999, except for Paaco's and Car-Mart's revolving
credit facilities. Paaco's financial covenant violation was subsequently cured
by amendment and Car-Mart's non-financial covenant violation is expected to be
cured by amendment in the immediate future.
H - COMPREHENSIVE INCOME INFORMATION
Supplemental comprehensive income disclosures for the six months ended
October 31, 1998 are as follows:
<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>
10
<PAGE> 11
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
Unrealized appreciation of securities arising during period 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, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Six Months Ended
October 31,
1999 1998
----------- -----------
<S> <C> <C>
Net income $10,184,885 $ 811,830
=========== ===========
Average shares outstanding-basic 9,866,852 10,143,969
Dilutive options 410,697 143,543
Dilutive warrants 17,971
----------- -----------
Average shares outstanding-diluted 10,277,549 10,305,483
=========== ===========
Earnings per share:
Basic $ 1.03 $ .08
Diluted $ .99 $ .08
Antidilutive securities not included:
Options 432,500 185,000
=========== ===========
Warrants -- 391,198
=========== ===========
</TABLE>
J - CAPITAL STOCK
In July 1999, upon discovering certain accounting errors and irregularities
at Paaco, the Company and the shareholders from whom the Company purchased an
interest in Paaco amended and restated the three prior purchase agreements such
that the Company received approximately $4 million in consideration and an
additional 5% interest in Paaco. A portion of the consideration received
consisted of (i) 315,046 shares of the Company's common stock and (ii) a
commitment to deliver 355,265 shares of the Company's common stock by April 30,
2000, or, in the absence of receiving such shares, a commitment to deliver a
promissory note in the amount of $1,776,325. Between October and December 1999
the Company received the 355,265 shares of its common stock which delivery had
been pending. The total value of the consideration received in this transaction
($4.5 million) was recorded as a reduction of goodwill in July 1999.
11
<PAGE> 12
K - COMMITMENTS AND CONTINGENCIES
Mortgage Loan Sales
In connection with the Company's sale of mortgage loans in the ordinary
course of business, in certain circumstances such loan sales involve limited
recourse to the Company for up to the first twelve months following the sale.
Generally, the events which could give rise to these recourse provisions involve
the prepayment or foreclosure of a loan, and violations of customary
representations and warranties. If the recourse provisions are triggered the
Company may be required to refund all or part of the premium received on the
sale of such loan, and in some cases the Company may be required to repurchase
the loan. Periodically the Company estimates the potential exposure related to
such recourse provisions and accrues a percentage of the total potential
liability.
Severance Agreements
The Company has entered into severance agreements with its three executive
officers which provide for payments to the executives in the event of their
termination after a change in control, as defined, of the Company. The
agreements provide, among other things, for a compensation payment equal to 2.99
times the annual compensation paid to the executive, as well as accelerated
vesting of any unvested options under the Company's stock option plans, in the
event of such executive's termination in connection with a change in control.
Litigation
In the ordinary course of business, the Company has become a defendant in
various types of legal proceedings. Although the Company cannot determine at
this time the amount of the ultimate exposure from these lawsuits, if any,
management, based on the advice of counsel, does not expect the final outcome of
any of these actions, individually or in the aggregate, to have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
Investment Fund
In November 1998 the Company committed $2.0 million to Monarch Venture
Partners' Fund L.L.P. ("Monarch"), a private venture capital fund focusing on
high technology businesses, such as Internet related concerns. As of October 31,
1999 the Company had funded approximately $1.3 million of its $2.0 million
commitment. The Company expects it will fund the remaining $.7 million over the
next 12 months.
L - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures for the six months ended October 31, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
Six Months Ended
October 31,
1999 1998
----------- ----------
<S> <C> <C>
Value of stock issued in acquisitions $2,652,108
Value of securities received in acquisition amendment $4,452,597
Inventory acquired in repossession 7,616,786 3,274,568
Notes issued in purchase of property and equipment 2,044,000
Interest paid, net of amount capitalized 4,838,700 2,738,257
Income taxes paid, net of refund 5,058,829 100,000
</TABLE>
M - SUBSEQUENT EVENTS
Purchase of Smart Choice
On December 1, 1999, pursuant to a definitive stock purchase agreement, Crown
acquired a 70% voting and economic interest in Smart Choice Automotive Group,
Inc. ("Smart Choice") directly from Smart Choice. The purchase price ("Purchase
Price") consisted of (i) $3.0 million cash, (ii) the conversion to equity of
$4.5 million of Smart Choice debt, which Crown had contemporaneously acquired
from a third party for approximately $2.3 million cash, and (iii) the
contribution of Crown's 85% interest in Paaco. In consideration for the Purchase
Price, Crown received 1,371,581.47 shares of Smart Choice Series E Convertible
Preferred Stock, which is convertible into 137,158,147 shares of Smart Choice
common stock representing 70% of the ownership and voting rights of Smart Choice
on an "as converted" basis. The preferred stock carries voting rights equal to
the number of common shares into which the preferred stock may be converted.
Contemporaneously with Crown's purchase of a 70% interest in Smart Choice,
approximately $15.0 million of Smart Choice's outstanding debt and preferred
stock was converted into shares of common stock representing a 20.7% interest in
Smart Choice. In addition, the Paaco minority shareholders converted their 15%
interest in Paaco into shares of Smart Choice Series E Convertible Preferred
Stock representing a 5% voting and economic interest in Smart Choice. Paaco is
now a wholly-owned subsidiary of Smart Choice. In connection with the
transactions, each of Paaco and Smart Choice amended and restructured their
senior finance receivables and inventory credit facilities on more favorable
terms than the facilities they replaced.
12
<PAGE> 13
Excluding Paaco, Smart Choice operates eleven "buy-here pay-here" used car
dealerships in central Florida. Smart Choice's assets consist principally of (i)
finance receivables originated in the sale of used vehicles, and (ii) inventory.
For its most recent fiscal year ended December 31, 1998, Smart Choice reported
revenues from continuing operations of $95.4 million and a loss from continuing
operations of $7.3 million. For the nine months ended September 30, 1999, Smart
Choice reported revenues of $71.4 million and a loss from continuing operations
of $24.2 million.
Sale of Home Stay
Effective December 2, 1999 Crown sold its 80% interest in Home Stay to
Efficiency Lodge, Inc. for approximately $850,000, of which approximately
$210,000 was paid in cash and the balance is payable over five years with
interest at an annual rate of prime plus 1%. In connection with the transaction,
Crown has been released as a guarantor of Home Stay's mortgage debt of
approximately $5.4 million. The Company anticipates reporting a small gain in
connection with the transaction.
13
<PAGE> 14
N - BUSINESS SEGMENTS
Operating results and other financial data are presented for the four
principal business segments of the Company for the three months ended October
31, 1999 and 1998. These segments are categorized by the lines of business of
the Company. The segments include (i) automobile, which pertains to Car-Mart's
and Paaco's selling and financing of used vehicles, (ii) IBC's, which pertains
to Precision's rental and sales of intermediate bulk containers, (iii) mortgage,
which pertains to Concorde's originating and selling of sub-prime mortgage
loans, and (iv) other, which includes corporate operations, Home Stay, Crown El
Salvador, activities of relatively inactive subsidiaries and the Company's
equity investments in CMN and Atlantic Castings. The Company's business segment
data for the three months ended October 31, 1999 and 1998 is as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended October 31, 1999
----------------------------------------------------------------------------------------
Automobile IBC's Mortgage Other Eliminations Consolidated
---------- -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other $ 36,534 $ 1,777 $ 1,127 $ 1,040 $ 40,478
Interest income 4,405 7 483 601 $ (444) 5,052
-------- -------- -------- -------- -------- --------
Total 40,939 1,784 1,610 1,641 (444) 45,530
-------- -------- -------- -------- -------- --------
Costs and expenses:
Cost of sales 20,862 746 21,608
Selling, gen. and admin. 7,738 518 1,214 2,279 11,749
Prov. for credit losses 6,779 54 31 -- 6,864
Interest expense 2,261 138 366 339 (444) 2,660
Depreciation and amort. 104 245 49 482 880
-------- -------- -------- -------- -------- --------
Total 37,744 1,701 1,660 3,100 (444) 43,761
-------- -------- -------- -------- -------- --------
Security gains and other 10,440 10,440
-------- -------- -------- -------- -------- --------
Income (loss) before taxes
and minority interests $ 3,195 $ 83 $ (50) $ 8,981 $ -- $ 12,209
======== ======== ======== ======== ======== ========
Capital expenditures $ 260 $ 537 $ 16 $ 326 $ -- $ 1,139
======== ======== ======== ======== ======== ========
Total assets $113,817 $ 15,224 $ 15,499 $ 86,475 $(53,415) $177,600
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended October 31, 1998
---------------------------------------------------------------------------------------------
Automobile IBC's Mortgage 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:
Cost of sales 9,312 551 9,863
Selling, gen. and admin. 3,614 319 1,116 726 5,775
Prov. for credit losses 2,369 10 32 2,411
Interest expense 1,220 98 304 (144) 1,478
Depreciation and amort. 66 163 41 261 531
--------- --------- --------- --------- --------- ---------
Total 16,581 1,141 1,493 987 (144) 20,058
--------- --------- --------- --------- --------- ---------
Security gains and other 148 148
--------- --------- --------- --------- --------- ---------
Income (loss) before taxes
and minority interests $ (424) $ 257 $ 105 $ (98) $ -- $ (160)
========= ========= ========= ========= ========= =========
Capital expenditures $ 147 $ 1,103 $ 77 $ 2,347 $ -- $ 3,674
========= ========= ========= ========= ========= =========
Total assets $ 52,465 $ 11,438 $ 10,981 $ 65,502 $ (26,730) $ 113,656
========= ========= ========= ========= ========= =========
</TABLE>
14
<PAGE> 15
The Company's business segment data for the six months ended October 31,
1999 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended October 31, 1999
--------------------------------------------------------------------------------------
Automobile IBC's Mortgage Other Eliminations Consolidated
---------- -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other $ 76,732 $ 3,257 $ 2,516 $ 1,531 $ 84,036
Interest income 8,777 14 935 1,221 $ (897) 10,050
-------- -------- -------- -------- -------- --------
Total 85,509 3,271 3,451 2,752 (897) 94,086
-------- -------- -------- -------- -------- --------
Costs and expenses:
Cost of sales 45,497 1,208 46,705
Selling, gen. and admin. 15,836 975 2,558 3,737 23,106
Prov. for credit losses 12,629 53 37 12,719
Interest expense 4,373 275 686 638 (897) 5,075
Depreciation and amort. 226 472 97 840 1,635
-------- -------- -------- -------- -------- --------
Total 78,561 2,983 3,378 5,215 (897) 89,240
-------- -------- -------- -------- -------- --------
Security gains and other 11,181 11,181
-------- -------- -------- -------- -------- --------
Income (loss) before taxes
and minority interests $ 6,948 $ 288 $ 73 $ 8,718 $ -- $ 16,027
======== ======== ======== ======== ======== ========
Capital expenditures $ 819 $ 1,723 $ 48 $ 1,508 $ -- $ 4,098
======== ======== ======== ======== ======== ========
Total assets $113,817 $ 15,224 $ 15,499 $ 86,475 $(53,415) $177,600
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended October 31, 1998
-----------------------------------------------------------------------------------------
Automobile IBC's Mortgage 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:
Cost of sales 19,755 1,008 20,763
Selling, gen. and admin. 7,393 629 2,223 1,280 11,525
Prov. for credit losses 4,306 10 76 4,392
Interest expense 2,250 190 609 (259) 2,790
Depreciation and amort. 135 315 73 518 1,041
-------- -------- -------- -------- -------- --------
Total 33,839 2,152 2,981 1,798 (259) 40,511
-------- -------- -------- -------- -------- --------
Security gains and other 642 642
-------- -------- -------- -------- -------- --------
Income (loss) before taxes
and minority interests $ (11) $ 528 $ 179 $ 255 $ -- $ 951
======== ======== ======== ======== ======== ========
Capital expenditures $ 374 $ 2,168 $ 219 $ 5,371 $ -- $ 8,132
======== ======== ======== ======== ======== ========
Total assets $ 52,465 $ 11,438 $ 10,981 $ 65,502 $(26,730) $113,656
======== ======== ======== ======== ======== ========
</TABLE>
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto appearing elsewhere in this
report.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. Certain information included in
this report contains, and other materials filed or to be filed by the Company
with the Securities and Exchange Commission (as well as information included in
oral statements or other written statements made or to be made by the Company or
its management) contain or will contain, forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended. The words "believe,"
"expect," "anticipate," "estimate," "project" and similar expressions identify
forward-looking statements, which speak only as of the date the statement was
made. The Company undertakes no obligation to publicly update or revise any
forward-looking statements. Such forward-looking statements address, among other
things, the Company's current focus on the development and expansion of its
existing businesses, and the potential acquisition or development of businesses
in other fields. Such forward-looking statements are based upon management's
current plans or expectations and are subject to a number of uncertainties and
risks that could significantly affect current plans, anticipated actions and the
Company's future financial condition and results. As a consequence, actual
results may differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company as a result of various factors.
Uncertainties and risks related to such forward-looking statements include, but
are not limited to, those relating to the development of the Company's
businesses, continued availability of lines of credit for the Company's
businesses, changes in interest rates, changes in the industries in which the
Company operates, competition, dependence on existing management, the stability
of El Salvador's government, currency exchange rate fluctuations, the
repatriation of funds from El Salvador, domestic or global economic conditions
(particularly in the states of Texas and Arkansas), changes in foreign or
domestic tax laws or the administration of such laws and changes in gaming or
lending laws or regulations. Any forward-looking statements are made pursuant to
the Private Securities Litigation Reform Act of 1995 and, as such, speak only as
of the date made.
OVERVIEW
Crown Group, Inc. ("Crown"), and collectively with its subsidiaries (the
"Company"), is a publicly traded buy-out firm which as of October 31, 1999 owned
(i) 100% of America's Car-Mart, Inc. ("Car-Mart") and 85% of Paaco Automotive
Group, Inc. and Premium Auto Acceptance Corporation (collectively, "Paaco"),
vertically integrated used car sales and finance companies, (ii) 100% of
Precision IBC, Inc. ("Precision"), a firm specializing in the sale and rental of
intermediate bulk containers ("IBC's"), (iii) 80% of Concorde Acceptance
Corporation ("Concorde"), a sub-prime mortgage lender, (iv) 50.1% of CG
Incorporated, S.A. de C.V. ("Crown El Salvador"), a newly formed company
focusing on the development and operation of casinos in El Salvador, (v) 80% of
Home Stay Lodges I, Ltd. ("Home Stay"), a partnership focusing on the
development and operation of extended-stay lodging facilities, and (vi) 45% of
Atlantic Castings, Inc. ("Atlantic Castings"), an investment casting
manufacturer of turbine engine components. In addition, from time to time the
Company purchases and sells small ownership interests in securities of privately
held and publicly traded firms. For a summary of the Company's operating results
and other financial data by business segment, see Note N of the Company's
consolidated financial statements appearing elsewhere in this report. The
Company is presently focusing on (i) the development and expansion of its
existing businesses, and (ii) the potential acquisition or development of other
unrelated businesses.
In December 1999 the Company (i) acquired a 70% interest in Smart Choice
Automotive Group, Inc., a vertically integrated used car sales and finance
company based in Titusville, Florida, and (ii) sold its 80% interest in Home
Stay (see Note M of the Company's consolidated financial statements appearing
elsewhere in this report).
16
<PAGE> 17
RESULTS OF OPERATIONS
The Company has made a variety of acquisitions and business investments over
the last two years. Acquisitions involving the purchase of greater than a 50%
interest have been accounted for using the purchase method of accounting. The
Company has included the operating results of each majority-owned company from
the respective acquisition date. As a result of the acquisitions and business
investments occurring throughout the last two fiscal years, operating results
for the six month periods ending October 31, 1999 and 1998 are not entirely
comparable. Below is a summary of the number of months of operation each
companies' operating results are included in the Company's consolidated results
of operations for the six month periods ending October 31, 1999 and 1998.
1999 1998
-------- --------
Casino Magic Neuquen 5 months 6 months
Concorde 6 months 6 months
Paaco 6 months 6 months
Precision 6 months 6 months
Home Stay 6 months 6 months
Car-Mart 6 months -
Crown El Salvador 6 months -
Atlantic Castings 6 months -
17
<PAGE> 18
THREE MONTHS ENDED OCTOBER 31, 1999 COMPARED TO THE THREE MONTHS ENDED
OCTOBER 31, 1998
Below is a presentation of the operating results for the four principal
business segments of the Company for the three months ended October 31, 1999 and
1998. The segments include (i) automobile, which pertains to Car-Mart's and
Paaco's selling and financing of used vehicles, (ii) IBC's, which pertains to
Precision's rental and sales of intermediate bulk containers, (iii) mortgage,
which pertains to Concorde's originating and selling of sub-prime mortgage
loans, and (iv) other, which includes corporate operations, Home Stay, Crown El
Salvador, activities of relatively inactive subsidiaries and the Company's
equity investments in CMN and Atlantic Castings. The Company's business segment
data for the three months ended October 31, 1999 and 1998 is as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended October 31, 1999
---------------------------------------------------------------------------------------
Automobile IBC's Mortgage Other Eliminations Consolidated
---------- -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other $ 36,534 $ 1,777 $ 1,127 $ 1,040 -- $ 40,478
Interest income 4,405 7 483 601 $ (444) 5,052
-------- -------- -------- -------- -------- --------
Total 40,939 1,784 1,610 1,641 (444) 45,530
-------- -------- -------- -------- -------- --------
Costs and expenses:
Cost of sales 20,862 746 -- -- -- 21,608
Selling, gen. and 7,738 518 1,214 2,279 11,749
admin
Prov. for credit 6,779 54 31 -- -- 6,864
losses
Interest expense 2,261 138 366 339 (444) 2,660
Depreciation and 104 245 49 482 880
amort
-------- -------- -------- -------- -------- --------
Total 37,744 1,701 1,660 3,100 (444) 43,761
-------- -------- -------- -------- -------- --------
Security gains and other -- -- -- 10,440 -- 10,440
-------- -------- -------- -------- -------- --------
Income (loss) before taxes
and minority interests $ 3,195 $ 83 $ (50) $ 8,981 $ -- $ 12,209
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended October 31, 1998
------------------------------------------------------------------------------------
Automobile IBC's Mortgage 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:
Cost of sales 9,312 551 -- -- -- 9,863
Selling, gen. and 3,614 319 1,116 726 -- 5,775
admin
Prov. for credit 2,369 10 32 -- -- 2,411
losses
Interest expense 1,220 98 304 (144) 1,478
Depreciation and 66 163 41 261 531
amort
------- ------- ------- ------- ------- -------
Total 16,581 1,141 1,493 987 (144) 20,058
------- ------- ------- ------- ------- -------
Security gains and other -- -- -- 148 -- 148
------- ------- ------- ------- ------- -------
Income (loss) before taxes
and minority interests $ (424) $ 257 $ 105 $ (98) $ -- $ (160)
======= ======= ======= ======= ======= =======
</TABLE>
Revenues from sales and other for the three months ended October 31, 1999
increased $23.5 million compared to the same period in the prior fiscal year.
The increase was principally the result of (i) including Car-Mart ($19.6
million) and Crown El Salvador ($.7 million) in the Company's consolidated
results of operations, and (ii) higher revenues at Paaco ($2.9 million) and
Precision ($.4 million). Interest income for the three months ended October 31,
1999 increased $2.3 million compared to the same period in the prior fiscal
year. The increase was principally the result of (i) including Car-Mart in the
Company's consolidated results of operations ($1.6 million) and (ii) greater
interest earned on Paaco's finance receivables portfolio ($.7 million) as a
result of growth in the portfolio.
As a percentage of sales, cost of sales for the three months ended October
31, 1999 decreased to 57.7% from 66.6% in the same period in the prior fiscal
year. The decrease is principally the result of including Car-Mart, which has
higher gross profit margins as a result of selling
18
<PAGE> 19
lower priced vehicles, in the Company's consolidated results of operations.
Selling, general and administrative expense for the three months ended October
31, 1999 increased $6.0 million compared to the same period in the prior fiscal
year. The increase is principally the result of (i) including Car-Mart ($3.3
million) and Crown El Salvador ($1.2 million) in the Company's consolidated
results of operations, and (ii) higher expenses at Paaco ($.8 million),
Precision ($.2 million), Concorde ($.1 million) and Home Stay ($.2 million)
which corresponds to increased revenues at those subsidiaries. Provision for
credit losses for the three months ended October 31, 1999 increased $4.5 million
compared to the same period in the prior fiscal year. The increase was
principally the result of (i) including Car-Mart in the Company's consolidated
results of operations ($3.8 million), and (ii) higher credit losses at Paaco
($.6 million) partially attributable to increased sales levels. Interest expense
for the three months ended October 31, 1999 increased $1.2 million compared to
the same period in the prior fiscal year. The increase was principally the
result of (i) including Car-Mart in the Company's consolidated results of
operations ($.8 million), and (ii) higher interest expense at Paaco ($.2
million) resulting from an increase in the balance of its revolving credit
facility.
The provision for income taxes for the three months ended October 31, 1999
was $4.8 million on pretax income of $12.2 million. This equates to a 40.0%
effective tax rate after removing from pretax income the equity in earnings of
unconsolidated subsidiaries ($.2 million), which earnings are presented on an
after tax basis. The benefit for income taxes for the three months ended October
31, 1998 was $.1 million on a pretax loss of $.2 million. This equates to a
35.8% effective tax rate after removing from pretax income the equity in
earnings of unconsolidated subsidiaries ($.1 million), which earnings are
presented on an after tax basis. Minority interests pertain to the portions of
consolidated subsidiaries not owned by the Company during the three months ended
October 31, 1999 (Paaco, Crown El Salvador, and Home Stay) and the three months
ended October 31, 1998 (Paaco and Home Stay).
SIX MONTHS ENDED OCTOBER 31, 1999 COMPARED TO THE SIX MONTHS ENDED
OCTOBER 31, 1998
Below is a presentation of the operating results for the four principal
business segments of the Company for the six months ended October, 31, 1999 and
1998 (in thousands):
<TABLE>
<CAPTION>
Six Months Ended October 31, 1999
----------------------------------------------------------------------------------
Automobile IBC's Mortgage Other Eliminations Consolidated
---------- ------- -------- ----- ------------ ------------
Revenues:
<S> <C> <C> <C> <C> <C> <C>
Sales and other $76,732 $ 3,257 $ 2,516 $ 1,531 -- $84,036
Interest income 8,777 14 935 1,221 $ (897) 10,050
------- ------- ------- ------- ------- -------
Total 85,509 3,271 3,451 2,752 (897) 94,086
------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of sales 45,497 1,208 -- -- -- 46,705
Selling, gen. and 15,836 975 2,558 3,737 -- 23,106
admin
Prov. for credit 12,629 53 37 -- -- 12,719
losses
Interest expense 4,373 275 686 638 (897) 5,075
Depreciation and
amort 226 472 97 840 1,635
------- ------- ------- ------- ------- -------
Total 78,561 2,983 3,378 5,215 (897) 89,240
------- ------- ------- ------- ------- -------
Security gains and other -- -- -- 11,181 -- 11,181
------- ------- ------- ------- ------- -------
Income (loss) before taxes
and minority interests $ 6,948 $ 288 $ 73 $ 8,718 $ -- $16,027
======= ======= ======= ======= ======= =======
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
Six Months Ended October 31, 1998
-------------------------------------------------------------------------------------------
Automobile IBC's Mortgage 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:
Cost of sales 19,755 1,008 20,763
Selling, gen. and 7,393 629 2,223 1,280 11,525
admin
Prov. for credit 4,306 10 76 4,392
losses
Interest expense 2,250 190 609 (259) 2,790
Depreciation and
amort 135 315 73 518 1,041
-------- -------- -------- -------- -------- --------
Total 33,839 2,152 2,981 1,798 (259) 40,511
-------- -------- -------- -------- -------- --------
Security gains and other 642 642
-------- -------- -------- -------- -------- --------
Income (loss) before taxes
and minority interests $ (11) $ 528 $ 179 $ 255 $ -- $ 951
======== ======== ======== ======== ======== ========
</TABLE>
Revenues from sales and other for the six months ended October 31, 1999
increased $48.5 million compared to the same period in the prior fiscal year.
The increase was principally the result of (i) including Car-Mart ($40.2
million) and Crown El Salvador ($.9 million) in the Company's consolidated
results of operations, and (ii) higher revenues at Paaco ($6.6 million),
Precision ($.6 million) and Concorde ($.2 million). Interest income for the six
months ended October 31, 1999 increased $4.8 million compared to the same period
in the prior fiscal year. The increase was principally the result of (i)
including Car-Mart in the Company's consolidated results of operations ($3.1
million) and (ii) greater interest earned on Paaco's finance receivable
portfolio ($1.8 million) as a result of growth in the portfolio.
As a percentage of sales, cost of sales for the six months ended October 31,
1999 decreased to 59.6% from 66.3% in the same period in the prior fiscal year.
The decrease is principally the result of including Car-Mart, which has higher
gross profit margins as a result of selling lower priced vehicles, in the
Company's consolidated results of operations. Selling, general and
administrative expense for the six months ended October 31, 1999 increased $11.6
million compared to the same period in the prior fiscal year. The increase is
principally the result of (i) including Car-Mart ($6.4 million) and Crown El
Salvador ($1.4 million) in the Company's consolidated results of operations, and
(ii) higher expenses at Paaco ($2.1 million), Precision ($.3 million), Concorde
($.3 million) and Home Stay ($.3 million) which corresponds to increased
revenues at those subsidiaries. Provision for credit losses for the six months
ended October 31, 1999 increased $8.3 million compared to the same period in the
prior fiscal year. The increase was principally the result of (i) including
Car-Mart in the Company's consolidated results of operations ($7.0 million), and
(ii) higher credit losses at Paaco ($1.3 million) partially attributable to
increased sales levels. Interest expense for the six months ended October 31,
1999 increased $2.3 million compared to the same period in the prior fiscal
year. The increase was principally the result of (i) including Car-Mart in the
Company's consolidated results of operations ($1.6 million), and (ii) higher
interest expense at Paaco ($.6 million) resulting from an increase in the
balance of its revolving credit facility.
The provision for income taxes for the six months ended October 31, 1999 was
$6.0 million on pretax income of $16.0 million. This equates to a 39.8%
effective tax rate after removing from pretax income the equity in earnings of
unconsolidated subsidiaries ($.9 million), which earnings are presented on an
after tax basis. The provision for income taxes for the six months ended October
31, 1998 was $.2 million on pretax income of $1.0 million. This equates to a
64.4% effective tax rate after removing from pretax income the equity in
earnings of unconsolidated subsidiaries ($.7 million), which earnings are
presented on an after tax basis. Minority interests pertain to the portions of
consolidated subsidiaries not owned by the Company during the six months ended
October 31, 1999 (Paaco, Crown El Salvador, and Home Stay) and the six months
ended October 31, 1998 (Paaco and Home Stay).
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended October 31, 1999 net cash provided by operating
activities amounted to $19.1 million. The principal sources of cash resulted
from (i) net income generated by the Company, and (ii) certain non cash expenses
(provision for credit losses and depreciation and amortization). Net cash used
by investing activities of $18.2 million included (i) a $31.4 million use of
cash in finance receivable originations in excess of finance receivable
collections, and (ii) a $4.1 million use of cash in the purchase of property and
equipment, offset by a $16.5 million source of cash resulting from the sale of
the Company's 49% interest in Casino Magic Neuquen. Net cash used by financing
activities of $2.3 million principally relates to the purchase of the Company's
common stock.
As of October 31, 1999 the Company's sources of liquidity included
approximately (i) $11.5 million of cash on hand, of which $11.3 million was held
by Crown, (ii) $39.3 million remaining to be drawn on the revolving credit
facilities of Car-Mart, Paaco, Concorde and Precision, although the majority of
such additional draws may only be made in connection with a corresponding
increase in the related collateral
20
<PAGE> 21
asset (i.e., finance receivables, mortgage loans held for sale and intermediate
bulk containers), and (iii) the potential issuance of additional debt and/or
equity, although the Company has no specific commitments or arrangements to
issue such additional debt and/or equity. The loan agreements which govern the
credit facilities of Crown's subsidiaries limit dividends and other
distributions from such subsidiaries to Crown. The amount available to be drawn
under each of the Company's revolving credit facilities is a function of the
underlying collateral asset. Generally, the Company is able to borrow a
specified percentage of the face value of eligible finance receivables in the
case of Car-Mart and Paaco, and eligible mortgage loans in the case of Concorde.
Precision's borrowing base is a function of the number of tanks owned and
operating cash flow, as defined. The Company's revolving credit facilities
mature at various times between September 2000 and January 2002, and bear
interest at rates ranging from libor plus 2.0% to prime plus 2.25%.
As of October 31, 1999 the Company was in compliance with all of its loan
agreements, except for Paaco's and Car-Mart's revolving credit facilities.
Paaco's financial covenant violation was subsequently cured by amendment and
Car-Mart's non-financial covenant violation is expected to be cured by amendment
in the immediate future.
In December 1999 Crown acquired a 70% voting and economic interest in Smart
Choice Automotive Group, Inc. The cash utilized in this transaction amounted to
$5.3 million. Also in December 1999 Crown sold its 80% interest in Home Stay for
$.2 million cash and a $.6 million five year promissory note.
The Company is focusing on the development and expansion of its existing
businesses and the potential acquisition or development of other unrelated
businesses. Car-Mart's, Paaco's, Precision's and Concorde's credit facilities
can support the majority of their expected growth over the next twelve months.
As of October 31, 1999 the Company had an outstanding commitment of
approximately $.7 million pertaining to an investment in a private venture
capital fund which focuses on high technology businesses, such as Internet
related concerns. The Company plans to fund this commitment from cash on hand.
In March 1996 the Company's Board of Directors approved a program, as
amended, to repurchase up to 4,000,000 shares of the Company's common stock from
time to time in the open market. As of October 31, 1999 the Company had
repurchased 3,274,717 shares pursuant to this program. The timing and amount of
future share repurchases, if any, will depend on various factors including
market conditions, available alternative investments and the Company's financial
position.
DATA PROCESSING AND YEAR 2000
Each of Crown and its subsidiaries operate their data processing systems
independently. Almost all of the software utilized by the Company is licensed
from third parties. The Company believes that all of its significant hardware,
software and networking systems are year 2000 compliant. This belief is based
upon (i) detailed review of the Company's hardware, software and networking
systems, (ii) year 2000 compliance letters obtained from vendors (particularly
software vendors), (iii) testing performed by Company personnel, and (iv)
testing performed by independent third parties.
Each of Crown and its subsidiaries rely to varying degrees on third parties
in the operation of their businesses. Such third parties include banking
institutions, telecommunications companies, utilities, manufacturers and parts
suppliers. The Company has made inquiries of some, but not all, of these third
parties as to their year 2000 compliance. The Company believes to the extent a
particular third party vendor does not become year 2000 compliant, and such lack
of compliance is expected to have a material impact on such vendor's ability to
effectively provide goods or services, the Company could replace such vendor to
obtain the goods or services it needs.
The Company has not incurred any appreciable costs in its process of
becoming year 2000 compliant, nor does it expect to do so in the future. While
the Company believes its significant data processing systems are year 2000
compliant, it plans to take precautionary measures to backup, store and print
hard copies of significant financial, accounting and operating records on
December 31, 1999. It has also made certain contingency plans in the event some
of its systems prove to not be year 2000 compliant.
SEASONALITY
The Company's automobile sales operation is seasonal in nature. In the
automobile business, the Company's third fiscal quarter (November through
January) is historically the slowest period of time for car and truck sales.
Many of the Company's operating expenses such as administrative personnel, rent
and insurance are fixed and cannot be reduced during periods of decreased sales.
None of the Company's other businesses experience significant seasonal
fluctuations.
21
<PAGE> 22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk on its financial instruments from
changes in interest rates. The Company does not use financial instruments for
trading purposes or to manage interest rate risk. The Company's earnings are
impacted by its net interest income, which is the difference between the income
earned on interest-bearing assets and the interest paid on interest bearing
notes payable. Increases in market interest rates could have an adverse effect
on profitability. Financial instruments consist of fixed rate finance
receivables and fixed and variable rate notes payable. The Company's finance
receivables generally bear interest at fixed rates ranging from 10% to 22%.
These finance receivables have scheduled maturities from one to 36 months.
Financial instruments also include mortgage notes held for sale. The Company
does not experience significant market risk with such mortgage notes as they are
generally sold within 30 to 45 days of origination. The majority of the
Company's notes payable contain variable interest rates that fluctuate with
market rates. Therefore, an increase in market interest rates would decrease the
Company's net interest income and profitability.
The table below illustrates the impact which hypothetical changes in market
interest rates could have on the Company's pretax earnings. The calculations
assume (i) the increase or decrease in market interest rates remain in effect
for twelve months, (ii) the amount of variable rate notes payable outstanding
during the period decreases in direct proportion to decreases in finance
receivables as a result of scheduled payments, and (iii) there is no change in
prepayment rates as a result of the interest rate changes.
Change in Change in
Interest Rates Pretax Earnings
-------------- ---------------
(in thousands)
+2% $ (960)
+1% (480)
0% 0
-1% 480
-2% 960
22
<PAGE> 23
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1999 annual meeting of shareholders was held on October 25,
1999. The record date for such meeting was August 27, 1999 on which date there
were a total of 9,741,796 shares of common stock outstanding and entitled to
vote. At such meeting the election of directors was approved by the Company's
shareholders with a summary of the voting as follows:
<TABLE>
<CAPTION>
VOTES VOTES VOTES
DIRECTOR FOR AGAINST ABSTAINED
------------------ --------- ------- ---------
<S> <C> <C> <C>
Edward R. McMurphy 5,590,866 259 9,300
T.J. Falgout, III 5,590,766 359 9,300
David J. Douglas 5,590,866 259 9,300
J. David Simmons 5,472,866 118,259 9,300
Gerald L. Adams 5,590,866 259 9,300
Robert J. Kehl 5,590,766 359 9,300
Gerard M. Jacobs 5,590,866 259 9,300
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial data schedule (1).
(b) Reports on Form 8-K:
During the fiscal quarter ended October 31, 1999 the Company
filed a report on Form 8-K dated October 25, 1999 (event date
October 20, 1999) respecting the dismissal of
PricewaterhouseCoopers LLP as the Company's independent
accountants and the engagement of Grant Thornton LLP as the
Company's new independent accountants.
-----------------------
(1) Filed herewith.
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CROWN GROUP, INC.
By: /s/ Mark D. Slusser
--------------------------------------------
Mark D. Slusser
Chief Financial Officer, Vice President
Finance and Secretary
(Principal Financial and Accounting Officer)
Dated: December 15, 1999
24
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. 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-31-1999
<CASH> 11,541,662
<SECURITIES> 0
<RECEIVABLES> 138,381,740
<ALLOWANCES> (20,429,523)
<INVENTORY> 7,229,010
<CURRENT-ASSETS> 0
<PP&E> 29,653,078
<DEPRECIATION> (2,946,230)
<TOTAL-ASSETS> 177,600,259
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 92,292
<OTHER-SE> 58,901,571
<TOTAL-LIABILITY-AND-EQUITY> 177,600,259
<SALES> 78,334,693
<TOTAL-REVENUES> 94,085,917
<CGS> 46,704,729
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 24,741,414
<LOSS-PROVISION> 12,718,662
<INTEREST-EXPENSE> 5,075,133
<INCOME-PRETAX> 16,026,654
<INCOME-TAX> 6,010,138
<INCOME-CONTINUING> 10,184,885
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,184,885
<EPS-BASIC> 1.03
<EPS-DILUTED> .99
</TABLE>
