<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, 2000 0-14939
CROWN GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
TEXAS 63-0851141
(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 6, 2000
------------------- ----------------
Common stock, par value $.01 per share 7,544,208
<PAGE> 2
PART I
ITEM 1. FINANCIAL STATEMENTS CROWN GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31,
2000
(unaudited) April 30, 2000
------------- --------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 2,375,314 $ 9,843,310
Accounts and other receivables, net 5,019,135 5,489,686
Mortgage loans held for sale, net 15,282,648 14,202,420
Finance receivables, net 202,718,679 183,331,361
Inventory 17,545,704 14,948,365
Prepaid and other assets 2,150,219 1,753,074
Investments 3,525,896 2,503,146
Deferred tax assets, net 13,118,919 13,859,897
Property and equipment, net 28,031,013 27,736,105
Goodwill, net 16,773,373 17,239,955
------------- -------------
$ 306,540,900 $ 290,907,319
============= =============
Liabilities and stockholders' equity:
Accounts payable $ 8,741,353 $ 8,606,983
Accrued liabilities 11,047,866 13,557,228
Income taxes payable 3,211,115 9,599,439
Revolving credit facilities 194,008,405 172,709,224
Other notes payable 17,477,017 18,342,379
Deferred sales tax 4,907,792 4,207,117
------------- -------------
239,393,548 227,022,370
------------- -------------
Minority interests 6,252,872 5,017,734
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;
7,816,478 issued and outstanding (8,247,762 at April 30, 2000) 78,165 82,478
Additional paid-in capital 26,675,243 28,960,793
Retained earnings 34,141,072 29,823,944
------------- -------------
Total stockholders' equity 60,894,480 58,867,215
------------- -------------
$ 306,540,900 $ 290,907,319
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
CONSOLIDATED STATEMENTS OF OPERATIONS CROWN GROUP, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 74,096,102 $ 37,458,587 $ 141,000,630 $ 78,334,693
Interest income 11,983,066 5,052,155 23,713,979 10,049,838
Gain on sale of mortgage loans 1,728,013 1,110,012 3,579,198 2,439,094
Rental income 1,011,389 1,162,874 1,973,795 2,230,168
Gaming 511,477 719,584 1,136,381 934,870
Other 234,380 26,769 611,373 97,254
------------- ------------- ------------- -------------
89,564,427 45,529,981 172,015,356 94,085,917
------------- ------------- ------------- -------------
Costs and expenses:
Cost of sales 44,263,322 21,607,816 83,142,601 46,704,729
Selling, general and administrative 18,443,566 12,249,879 35,645,047 23,606,447
Provision for credit losses 15,728,157 6,863,535 30,022,350 12,718,662
Interest expense 5,929,510 2,659,701 11,452,065 5,075,133
Depreciation and amortization 1,090,823 880,170 2,133,460 1,634,967
Write-down of Crown El Salvador 800,000 800,000
------------- ------------- ------------- -------------
86,255,378 44,261,101 163,195,523 89,739,938
------------- ------------- ------------- -------------
Other income:
Equity in earnings of unconsolidated 202,041 942,843
subsidiaries
Gain on sale of securities, net 10,737,832 10,737,832
------------- ------------- ------------- -------------
10,939,873 11,680,675
------------- ------------- ------------- -------------
Income before taxes and minority 3,309,049 12,208,753 8,819,833 16,026,654
interests
Provision for income taxes 1,427,607 4,797,101 3,676,043 6,010,138
Minority interests 331,456 (194,826) 826,662 (168,369)
------------- ------------- ------------- -------------
Net income $ 1,549,986 $ 7,606,478 $ 4,317,128 $ 10,184,885
============= ============= ============= =============
Earnings per share:
Basic $ 0.20 $ 0.79 $ 0.54 $ 1.03
Diluted $ 0.19 $ 0.76 $ 0.51 $ 0.99
Weighted average number of shares outstanding:
Basic 7,914,719 9,665,483 8,047,055 9,866,852
Diluted 8,299,369 10,038,033 8,440,688 10,277,549
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
CONSOLIDATED STATEMENTS OF CASH FLOWS CROWN GROUP, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
October 31,
2000 1999
-------------- --------------
<S> <C> <C>
Operating activities:
Net income $ 4,317,128 $ 10,184,885
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,133,460 1,634,967
Accretion of purchase discount (618,525) (594,177)
Deferred income taxes 740,978 (2,275,501)
Provision for credit losses 30,022,350 12,718,662
Minority interests 826,662 (168,369)
Write-down of Crown El Salvador 800,000
Gain on sale of mortgage loans (3,579,198) (2,439,094)
Gain on sale of assets (154,009) (80,187)
Gain on sale of securities (10,737,832)
Equity in earnings of unconsolidated subsidiaries (942,843)
Changes in assets and liabilities, net of acquisitions:
Accounts and other receivables 472,205 83,294
Mortgage loans originated or acquired (89,786,537) (74,865,125)
Mortgage loans sold and principal repayments 91,790,035 73,836,516
Inventory 13,114,887 9,678,049
Prepaids and other assets (194,886) (564,388)
Accounts payable, accrued liabilities and deferred sales tax (1,145,504) 399,311
Income taxes payable (6,388,324) 3,241,347
-------------- --------------
Net cash provided by operating activities 42,350,722 19,109,515
-------------- --------------
Investing activities:
Finance receivable originations (132,015,587) (70,594,548)
Finance receivable collections 67,752,373 39,166,972
Purchase of property and equipment (3,326,755) (4,098,480)
Sale of assets 650,045 494,134
Purchase of investments (1,322,750)
Sale of securities 300,000 16,500,000
Dividends and collections of notes receivable from CMN 306,487
-------------- --------------
Net cash used in investing activities (67,962,674) (18,225,435)
-------------- --------------
Financing activities:
Sale of common stock 60,937
Purchase of common stock (2,350,800) (2,009,993)
Proceeds from (repayments of) revolving credit facilities, net 21,299,181 (265,916)
Proceeds from (repayments of) other debt, net (865,362) 22,956
-------------- --------------
Net cash provided by (used in) financing activities 18,143,956 (2,252,953)
-------------- --------------
Decrease in cash and cash equivalents (7,467,996) (1,368,873)
Cash and cash equivalents at: Beginning of period 9,843,310 12,910,535
-------------- --------------
End of period $ 2,375,314 $ 11,541,662
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CROWN GROUP, INC.
A - 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, 2000
owned a 97% fully diluted ownership interest in America's Car-Mart, Inc.
("Car-Mart") and 70% of Smart Choice Automotive Group, Inc. ("Smart Choice").
Smart Choice owns 100% of Paaco Automotive Group, Inc. and Premium Auto
Acceptance Corporation (collectively, "Paaco"). Each of Car-Mart, Smart Choice
and Paaco sell and finance used vehicles. At October 31, 2000 Crown also owned
(i) 100% of Precision IBC, Inc. ("Precision"), a firm specializing in the sale
and rental of intermediate bulk containers ("IBC's"), (ii) 80% of Concorde
Acceptance Corporation ("Concorde"), a sub-prime mortgage lender, (iii) 90% of
CG Incorporated, S.A. de C.V. ("Crown El Salvador"), an operator of two casinos
in El Salvador, and (iv) minority positions in certain other entities that
operate in the high technology industry or focus on Internet commerce. Effective
November 1, 2000 the Company sold a 50% interest in Precision to the President
of Precision, for total consideration of approximately $3.1 million (see Note
J). 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.
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, 2000 are
not necessarily indicative of the results that may be expected for the year
ended April 30, 2001. 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, 2000.
Goodwill
Goodwill represents the excess of the Company's cost over the fair
value of net identifiable assets acquired in its purchases of Smart Choice,
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, 2000 accumulated
amortization of goodwill amounted to $2,331,515.
Reclassifications
Certain prior year amounts in the accompanying financial statements
have been reclassified to conform to the fiscal 2001 presentation.
C - ACQUISITION
Smart Choice Purchase
On December 1, 1999, Crown acquired a 70% voting and economic interest
in Smart Choice directly from Smart Choice. Smart Choice operates "buy-here
pay-here" used car dealerships in central Florida. The purchase price ("Purchase
Price") consisted of (i) $3.0 million in cash, (ii) the conversion 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 6,857,907 shares of Smart Choice common stock,
or 70% the total outstanding shares.
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.
5
<PAGE> 6
Pro Forma Financial Information
The following unaudited pro forma condensed consolidated results of
operations of the Company for the six months ended October 31, 1999 were
prepared as if the acquisition of Smart Choice had occurred on May 1, 1999 (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) eliminating interest expense and preferred stock
dividends pertaining to certain Smart Choice debt and preferred stock that was
converted to Smart Choice common stock, (iii) amortizing goodwill created in the
Smart Choice acquisition, (iv) adjusting interest income resulting from purchase
accounting entries, (v) eliminating Smart Choice's discontinued operations and
write off of historical goodwill, and (vi) adjusting income tax expense to
reflect the above described adjustments.
<TABLE>
<CAPTION>
Six Months Ended
October 31, 1999
----------------
<S> <C>
Revenues $ 135,347
Net income 6,913
Earnings per share - diluted $ .67
</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 - 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 26% per annum and provide for payments over
periods ranging from 12 to 42 months. The components of finance receivables as
of October 31, 2000 and April 30, 2000 are as follows:
<TABLE>
<CAPTION>
October 31, April 30,
2000 2000
------------- -------------
<S> <C> <C>
Finance receivables $ 289,326,561 $ 267,389,412
Unearned finance charges (38,498,663) (38,659,786)
Allowance for credit losses (47,113,008) (43,783,529)
Purchase discounts (996,211) (1,614,736)
------------- -------------
$ 202,718,679 $ 183,331,361
============= =============
</TABLE>
In accordance with APB Opinion No. 16, as of the dates the Company
acquired interests in Paaco, Car-Mart and Smart Choice, the Company valued
Paaco's, Car-Mart's and Smart Choice's finance receivables portfolios at market
value and determined that purchase discounts of $1,577,781, $864,165 and
$2,046,964, respectively, were appropriate. These discounts are being amortized
into interest income over the life of the related finance receivables portfolios
that existed on the dates of purchase using the interest method.
Changes in the finance receivables allowance for credit losses for the six
months ended October 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Six Months Ended
October 31,
2000 1999
------------- -------------
<S> <C> <C>
Balance at beginning of period $ 43,783,529 $ 17,045,063
Provision for credit losses 29,782,195 12,628,688
Net charge offs (26,452,716) (9,521,428)
------------- -------------
Balance at end of period $ 47,113,008 $ 20,152,323
============= =============
</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
($631,900 and $515,900) and trade accounts receivable ($27,256 and $27,256) as
of October 31, 2000 and April 30, 2000, respectively.
6
<PAGE> 7
E - PROPERTY AND EQUIPMENT
A summary of property and equipment as of October 31, 2000 and April
30, 2000 is as follows:
<TABLE>
<CAPTION>
October 31, April 30,
2000 2000
------------- -------------
<S> <C> <C>
Land and buildings $ 8,489,996 $ 8,310,614
Rental equipment 10,563,390 9,937,557
Furniture, fixtures and equipment 10,609,118 10,144,565
Leasehold improvements 3,826,297 3,292,660
Less accumulated depreciation and amortization (5,457,788) (3,949,291)
------------- -------------
$ 28,031,013 $ 27,736,105
============= =============
</TABLE>
For the six months ended October 31, 2000 and 1999 depreciation and amortization
of property and equipment amounted to $1,615,478 and $1,257,682, respectively.
F - DEBT
A summary of debt as of October 31, 2000 and April 30, 2000 is as follows:
<TABLE>
<CAPTION>
Revolving Credit Facilities
----------------------------------------------------------------------------------------------------------------------------------
Facility Interest Balance at
Borrower Lender Amount Rate Maturity October 31, 2000 April 30, 2000
--------------- --------------- -------------- ------------- ------------ ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Smart Choice Finova $ 98 million Prime + 2.25% Nov 2004 $ 84,293,825 $ 77,533,325
Paaco Finova $ 62 million Prime + 2.25% Nov 2004 61,987,515 52,833,680
Car-Mart Bank of America $ 30 million Prime + 1.13% Jan 2002 29,460,065 27,502,614
Concorde Bank United $ 25 million Libor + 2.00% Sep 2001 11,689,314 9,839,067
Precision Wells Fargo $ 8 million Prime Dec 2000 6,577,686 5,000,538
----------------- -----------------
$ 194,008,405 $ 172,709,224
================= =================
</TABLE>
<TABLE>
<CAPTION>
Other Notes Payable
----------------------------------------------------------------------------------------------------------------------------------
Facility Interest Balance at
Borrower Lender Amount Rate Maturity October 31, 2000 April 30, 2000
--------------- --------------- -------------- ------------- ------------ ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Crown Car-Mart sellers N/A 8.50% Jan 2004 $ 7,500,000 $ 7,500,000
Crown Bank of America N/A 7.00% Apr 2001 2,316,000 2,316,000
Precision South Trust Bank N/A 7.35% Jan 2014 633,974 647,743
Paaco Chase Texas N/A 8.50% May 2003 832,131 869,616
Paaco Heller Financial N/A Prime + 2.25% Dec 2015 596,414 603,084
Smart Choice Huntington N/A Prime + .75% Jul 2001 2,003,741 2,090,171
Smart Choice High Capital N/A 10.0% Nov 2001 725,000 1,000,000
Various Various N/A Various Various 2,869,757 3,315,765
----------------- -----------------
$ 17,477,017 $ 18,342,379
================= =================
</TABLE>
The Company's revolving credit facilities are primarily collateralized
by finance receivables, mortgage loans and IBC's. Other notes payable are
primarily collateralized by equipment and real estate. 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. At
October 31, 2000 substantially all of the Company's $42.0 million equity
investment in its consolidated subsidiaries was restricted due to lender
covenants. The amount available to be drawn under each of the Company's
revolving credit facilities is a function of the underlying collateral assets.
Generally, the Company is able to borrow a specified percentage of the face
value of eligible finance receivables in the case of Car-Mart, Smart Choice and
Paaco, and eligible mortgage loans in the case of Concorde.
7
<PAGE> 8
Precision's borrowing base is a function of the number of tanks owned and
operating cash flow, as defined. The advance rates on eligible finance
receivables decline from 85.0% to 70.0% for Smart Choice and from 72.0 % to
67.5% for Paaco over the term of the respective credit facilities.
G - EARNINGS PER SHARE
A summary reconciliation of basic earnings per share to diluted
earnings per share for the three and six months ended October 31, 2000 and 1999
is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 1,549,986 $ 7,606,478 $ 4,317,128 $ 10,184,885
============ ============ ============ ============
Average shares outstanding-basic 7,914,719 9,665,483 8,047,055 9,866,852
Dilutive options 384,650 372,550 393,633 410,697
------------ ------------ ------------ ------------
Average shares outstanding-diluted 8,299,369 10,038,033 8,440,688 10,277,549
============ ============ ============ ============
Earnings per share:
Basic $ .20 $ .79 $ .54 $ 1.03
Diluted $ .19 $ .76 $ .51 $ .99
Antidilutive securities not included:
Options 445,000 432,500 432,500 432,500
============ ============ ============ ============
</TABLE>
H - 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 losses where required.
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.
Smart Choice Class Action Lawsuit
In March 1999, prior to Crown's ownership interest in Smart Choice,
certain shareholders of Smart Choice filed two putative class action lawsuits
against Smart Choice and certain of Smart Choice's officers and directors in the
United States District Court for the Middle District of Florida (collectively,
the "Securities Actions"). The Securities Actions purport to be brought by
plaintiffs in their individual capacity and on behalf of the class of persons
who purchased or otherwise acquired Smart Choice publicly traded securities
between April 15, 1998 and February 26, 1999. These lawsuits were filed
following Smart Choice's announcement on February 26, 1999 that a preliminary
determination had been reached that the net income it had announced on February
10, 1999 for the fiscal year ended December 31, 1998 was likely overstated in a
material, undetermined amount. Each of the complaints assert claims for
violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5 of the Securities and Exchange Commission as well as a claim for the
violation of Section 20(a) of the Exchange Act. The plaintiffs allege that the
defendants prepared and issued deceptive and materially false and misleading
statements to the public, which caused plaintiffs to purchase Smart Choice
securities at artificially inflated prices. The plaintiffs seek unspecified
damages. Smart Choice intends to contest these claims vigorously. The Company
cannot predict the ultimate resolution of these actions. The two class action
lawsuits have subsequently been consolidated.
8
<PAGE> 9
Other Litigation
In the ordinary course of business, the Company has become a defendant
in various other types of legal proceedings. Although the Company cannot
determine at this time the amount of the ultimate exposure from these ordinary
course of business 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, a
private venture capital fund focusing on the investment in Internet related or
emerging technology companies. As of October 31, 2000 the Company had funded
approximately $1.7 million of its $2.0 million commitment. The Company expects
it will fund the remaining $.3 million over the next 12 months.
I - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures for the six months ended October 31,
2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Six Months Ended
October 31,
2000 1999
------------- -------------
<S> <C> <C>
Inventory acquired in repossession $ 15,712,226 $ 7,616,786
Notes issued in purchase of property and equipment 188,445 2,044,000
Interest paid, net of amount capitalized 10,995,683 4,838,700
Income taxes paid, net of refund 9,313,383 5,058,829
Value of securities received in acquisition amendment 4,452,597
</TABLE>
J - SUBSEQUENT EVENT
Effective November 1, 2000 the Company sold a 50% interest in Precision
to Van P. Finger, the President of Precision, for total consideration of
approximately $3.1 million. The consideration consisted of approximately $2.2
million in cash and 170,170 shares of Crown common stock. The Company expects to
report a nominal gain in the third fiscal quarter in connection with the sale.
9
<PAGE> 10
K - 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, 2000 and 1999. These segments are categorized by the lines of business of
the Company. The segments include (i) automobile, which pertains to Car-Mart's,
Smart Choice'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 investment in Casino Magic Neuquen and Atlantic Castings.
The Company's business segment data for the three months ended October 31, 2000
and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended October 31, 2000
-------------------------------------------------------------------------------------------------
Automobile IBC's Mortgage Other Eliminations Consolidated
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other $ 73,462 $ 1,769 $ 1,839 $ 511 $ 77,581
Interest income 11,426 10 472 369 $ (294) 11,983
------------- ------------- ------------- ------------- ------------- -------------
Total 84,888 1,779 2,311 880 (294) 89,564
------------- ------------- ------------- ------------- ------------- -------------
Costs and expenses:
Cost of sales 43,668 596 44,264
Selling, gen. and admin. 14,535 544 1,806 1,559 18,444
Prov. for credit losses 15,621 (2) 109 15,728
Interest expense 5,491 159 372 201 (294) 5,929
Depreciation and amort. 433 280 56 321 1,090
El Salvador write-down 800 800
------------- ------------- ------------- ------------- ------------- -------------
Total 79,748 1,577 2,343 2,881 (294) 86,255
------------- ------------- ------------- ------------- ------------- -------------
Security gains and other -- -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Income (loss) before taxes
and minority interests $ 5,140 $ 202 $ (32) $ (2,001) $ -- $ 3,309
============= ============= ============= ============= ============= =============
Capital expenditures $ 1,000 $ 552 $ 90 $ 20 $ -- $ 1,662
============= ============= ============= ============= ============= =============
Total assets $ 267,955 $ 16,343 $ 18,414 $ 74,709 $ (70,880) $ 306,541
============= ============= ============= ============= ============= =============
</TABLE>
<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 2,779 12,249
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 3,600 (444) 44,261
------------- ------------- ------------- ------------- ------------- -------------
Security gains and other 10,940 10,940
------------- ------------- ------------- ------------- ------------- -------------
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>
10
<PAGE> 11
The Company's business segment data for the six months ended October
31, 2000 and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended October 31, 2000
------------------------------------------------------------------------------------------------
Automobile IBC's Mortgage Other Eliminations Consolidated
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other $ 139,842 $ 3,487 $ 3,768 $ 1,204 $ 148,301
Interest income 22,567 22 945 831 $ (651) 23,714
------------- ------------- ------------- ------------- ------------- -------------
Total 162,409 3,509 4,713 2,035 (651) 172,015
------------- ------------- ------------- ------------- ------------- -------------
Costs and expenses:
Cost of sales 81,963 1,180 83,143
Selling, gen. and admin. 27,937 997 3,443 3,268 35,645
Prov. for credit losses 29,782 (2) 242 30,022
Interest expense 10,627 321 751 404 (651) 11,452
Depreciation and amort. 850 556 108 619 2,133
El Salvador write-down 800 800
------------- ------------- ------------- ------------- ------------- -------------
Total 151,159 3,052 4,544 5,091 (651) 163,195
------------- ------------- ------------- ------------- ------------- -------------
Security gains and other -- -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Income (loss) before taxes
and minority interests $ 11,250 $ 457 $ 169 $ (3,056) $ -- $ 8,820
============= ============= ============= ============= ============= =============
Capital expenditures $ 1,972 $ 1,206 $ 122 $ 27 $ -- $ 3,327
============= ============= ============= ============= ============= =============
Total assets $ 267,955 $ 16,343 $ 18,414 $ 74,709 $ (70,880) $ 306,541
============= ============= ============= ============= ============= =============
</TABLE>
<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 4,237 23,606
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 5,715 (897) 89,740
------------- ------------- ------------- ------------- ------------- -------------
Security gains and other 11,681 11,681
------------- ------------- ------------- ------------- ------------- -------------
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>
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Company's consolidated financial statements 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. 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, Arkansas and Florida),
changes in foreign or domestic tax laws or the administration of such laws and
changes in 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, 2000
owned a 97% fully diluted ownership interest in America's Car-Mart, Inc.
("Car-Mart") and 70% of Smart Choice Automotive Group, Inc. ("Smart Choice").
Smart Choice owns 100% of Paaco Automotive Group, Inc. and Premium Auto
Acceptance Corporation (collectively, "Paaco"). Each of Car-Mart, Smart Choice
and Paaco sell and finance used vehicles. At October 31, 2000 Crown also owned
(i) 100% of Precision IBC, Inc. ("Precision"), a firm specializing in the sale
and rental of intermediate bulk containers ("IBC's"), (ii) 80% of Concorde
Acceptance Corporation ("Concorde"), a sub-prime mortgage lender, (iii) 90% of
CG Incorporated, S.A. de C.V. ("Crown El Salvador"), an operator of two casinos
in El Salvador, and (iv) minority positions in certain other entities that
operate in the high technology industry or focus on Internet commerce. Effective
November 1, 2000 the Company sold a 50% interest in Precision to Van P. Finger,
President of Precision, for total consideration of approximately $3.1 million.
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.
RESULTS OF OPERATIONS
The Company has made a variety of acquisitions, dispositions and
business investments over the last two years. All acquisitions 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, dispositions and business
investments, operating results for the three and six months ended October 31,
2000 and 1999 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 three and six months ended
October 31, 2000 and 1999:
<TABLE>
<CAPTION>
Number of Months Subsidiary Included In
-------------------------------------------------------------
Three Months Ended Six Months Ended
Month Crown Month Crown October 31, October 31,
Acquired Disposed ----------------------------- -----------------------------
Entity or Formed or Sold 2000 1999 2000 1999
-------------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Casino Magic Neuquen 6-97 10-99 -- 2 months -- 5 months
Concorde 6-97 3 months 3 months 6 months 6 months
Paaco 2-98 3 months 3 months 6 months 6 months
Precision 2-98 3 months 3 months 6 months 6 months
Home Stay 5-98 12-99 -- 3 months -- 6 months
Car-Mart 1-99 3 months 3 months 6 months 6 months
Crown El Salvador 2-99 3 months 3 months 6 months 6 months
Atlantic Castings 3-99 4-00 -- 3 months -- 6 months
Smart Choice 12-99 3 months -- 6 months --
</TABLE>
12
<PAGE> 13
THREE MONTHS ENDED OCTOBER 31, 2000 COMPARED TO THE THREE MONTHS ENDED OCTOBER
31, 1999
Operating results and other financial data are presented for the four
principal business segments of the Company for the three months ended October
31, 2000 and 1999. These segments are categorized by the lines of business of
the Company. The segments include (i) automobile, which pertains to Car-Mart's,
Smart Choice'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 investment in Casino Magic Neuquen and Atlantic Castings.
The Company's business segment data for the three months ended October 31, 2000
and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended October 31, 2000
-------------------------------------------------------------------------------------------------
Automobile IBC's Mortgage Other Eliminations Consolidated
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other $ 73,462 $ 1,769 $ 1,839 $ 511 $ 77,581
Interest income 11,426 $ 10 472 369 $ (294) 11,983
------------- ------------- ------------- ------------- ------------- -------------
Total 84,888 1,779 2,311 880 (294) 89,564
------------- ------------- ------------- ------------- ------------- -------------
Costs and expenses:
Cost of sales 43,668 596 44,264
Selling, gen. and admin. 14,535 544 1,806 1,559 18,444
Prov. for credit losses 15,621 (2) 109 15,728
Interest expense 5,491 159 372 201 (294) 5,929
Depreciation and amort. 433 280 56 321 1,090
El Salvador write-down 800 800
------------- ------------- ------------- ------------- ------------- -------------
Total 79,748 1,577 2,343 2,881 (294) 86,255
------------- ------------- ------------- ------------- ------------- -------------
Security gains and other -- -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Income (loss) before taxes
and minority interests $ 5,140 $ 202 $ (32) $ (2,001) $ -- $ 3,309
============= ============= ============= ============= ============= =============
</TABLE>
<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 2,779 12,249
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 3,600 (444) 44,261
------------- ------------- ------------- ------------- ------------- -------------
Security gains and other 10,940 10,940
------------- ------------- ------------- ------------- ------------- -------------
Income (loss) before taxes
and minority interests $ 3,195 $ 83 $ (50) $ 8,981 $ -- $ 12,209
============= ============= ============= ============= ============= =============
</TABLE>
Net income for the three months ended October 31, 2000 decreased $6.1
million compared to the same period in the prior fiscal year. The decrease was
primarily attributable to (i) the prior period including a $7.0 million after
tax gain on the sale of Casino Magic Neuquen, and (ii) the current period
including a $.5 million after tax loss on the write-down of the Company's
investment in Crown El Salvador, partially offset by (iii) greater earnings from
the Company's automobile segment.
13
<PAGE> 14
Revenues from sales and other for the three months ended October 31,
2000 increased $37.1 million compared to the same period in the prior fiscal
year. The increase was principally the result of (i) including Smart Choice
($23.7 million) in the Company's consolidated results of operations, and (ii)
higher revenues at Car-Mart ($4.1 million) and Paaco ($9.2 million). Interest
income for the three months ended October 31, 2000 increased $6.9 million
compared to the same period in the prior fiscal year. The increase was
principally the result of (i) including Smart Choice ($5.5 million) in the
Company's consolidated results of operations, and (ii) greater interest earned
on Car-Mart's ($.3 million) and Paaco's ($1.1 million) finance receivables
portfolios as a result of growth in such portfolios.
As a percentage of sales, cost of sales for the three months ended
October 31, 2000 increased to 59.7% from 57.7% in the same period in the prior
fiscal year. The increase is principally the result of lower gross profit
margins at Paaco stemming from a decision to decrease margins in order to
increase revenues. Selling, general and administrative expense for the three
months ended October 31, 2000 increased $6.2 million compared to the same period
in the prior fiscal year. The increase was principally the result of (i)
including Smart Choice ($5.1 million) in the Company's consolidated results of
operations, and (ii) higher expenses at Car-Mart ($.4 million), Paaco ($1.3
million) and Concorde ($.6 million) which corresponds to increased revenues at
those subsidiaries. Provision for credit losses for the three months ended
October 31, 2000 increased $8.9 million compared to the same period in the prior
fiscal year. The increase was principally the result of (i) including Smart
Choice ($7.8 million) in the Company's consolidated results of operations, and
(ii) higher credit losses at Car-Mart ($.4 million) and Paaco ($.7 million)
which corresponds to an increase in the finance receivables portfolios as a
result of increased sales levels. Interest expense for the three months ended
October 31, 2000 increased $3.3 million compared to the same period in the prior
fiscal year. The increase was principally the result of (i) including Smart
Choice ($2.6 million) in the Company's consolidated results of operations, and
(ii) higher interest expense at Car-Mart ($.2 million) and Paaco ($.5 million)
resulting from an increase in the balance of their revolving credit facilities
and an increase in interest rates during the periods.
The provision for income taxes for the three months ended October 31,
2000 was $1.4 million on pretax income of $3.3 million. This equates to a 43.1%
effective tax rate. 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. Minority interests pertain to the portions
of consolidated subsidiaries not owned by the Company during the three months
ended October 31, 2000 (Car-Mart, Smart Choice and Paaco) and the three months
ended October 31, 1999 (Paaco, Crown El Salvador and Home Stay).
14
<PAGE> 15
SIX MONTHS ENDED OCTOBER 31, 2000 COMPARED TO THE SIX MONTHS ENDED OCTOBER 31,
1999
Operating results and other financial data are presented for the four
principal business segments of the Company for the six months ended October 31,
2000 and 1999. These segments are categorized by the lines of business of the
Company. The segments include (i) automobile, which pertains to Car-Mart's,
Smart Choice'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 investment in Casino Magic Neuquen and Atlantic Castings.
The Company's business segment data for the six months ended October 31, 2000
and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended October 31, 2000
-----------------------------------------------------------------------------------------------
Automobile IBC's Mortgage Other Eliminations Consolidated
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other $ 139,842 $ 3,487 $ 3,768 $ 1,204 $ 148,301
Interest income 22,567 22 945 831 $ (651) 23,714
------------- ------------- ------------- ------------- ------------- -------------
Total 162,409 3,509 4,713 2,035 (651) 172,015
------------- ------------- ------------- ------------- ------------- -------------
Costs and expenses:
Cost of sales 81,963 1,180 83,143
Selling, gen. and admin. 27,937 997 3,443 3,268 35,645
Prov. for credit losses 29,782 (2) 242 30,022
Interest expense 10,627 321 751 404 (651) 11,452
Depreciation and amort. 850 556 108 619 2,133
El Salvador write-down 800 800
------------- ------------- ------------- ------------- ------------- -------------
Total 151,159 3,052 4,544 5,091 (651) 163,195
------------- ------------- ------------- ------------- ------------- -------------
Security gains and other -- -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Income (loss) before taxes
and minority interests $ 11,250 $ 457 $ 169 $ (3,056) $ -- $ 8,820
============= ============= ============= ============= ============= =============
</TABLE>
<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 4,237 23,606
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 5,715 (897) 89,740
------------- ------------- ------------- ------------- ------------- -------------
Security gains and other 11,681 11,681
------------- ------------- ------------- ------------- ------------- -------------
Income (loss) before taxes
and minority interests $ 6,948 $ 288 $ 73 $ 8,718 $ -- $ 16,027
============= ============= ============= ============= ============= =============
</TABLE>
Net income for the six months ended October 31, 2000 decreased $5.9
million compared to the same period in the prior fiscal year. The decrease was
primarily attributable to (i) the prior period including a $7.0 million after
tax gain on the sale of Casino Magic Neuquen, and (ii) the current period
including a $.5 million after tax loss on the write-down of the Company's
investment in Crown El Salvador, partially offset by (iii) greater earnings from
the Company's automobile segment.
15
<PAGE> 16
Revenues from sales and other for the six months ended October 31, 2000
increased $64.3 million compared to the same period in the prior fiscal year.
The increase was principally the result of (i) including Smart Choice ($42.6
million) in the Company's consolidated results of operations, and (ii) higher
revenues at Car-Mart ($5.8 million) and Paaco ($14.7 million). Interest income
for the six months ended October 31, 2000 increased $13.7 million compared to
the same period in the prior fiscal year. The increase was principally the
result of (i) including Smart Choice ($11.1 million) in the Company's
consolidated results of operations, and (ii) greater interest earned on
Car-Mart's ($.6 million) and Paaco's ($2.1 million) finance receivables
portfolios as a result of growth in such portfolios.
As a percentage of sales, cost of sales for the six months ended
October 31, 2000 decreased to 59.0% from 59.6% in the same period in the prior
fiscal year. The decrease is principally the result of the inclusion of Smart
Choice, which has higher gross profit margins than historically generated by the
Company, and slightly improved gross profit margins at Paaco and Car-Mart as a
result of a management focus on gross profit margins. Selling, general and
administrative expense for the six months ended October 31, 2000 increased $12.0
million compared to the same period in the prior fiscal year. The increase was
principally the result of (i) including Smart Choice ($9.7 million) in the
Company's consolidated results of operations, and (ii) higher expenses at
Car-Mart ($.9 million), Paaco ($1.5 million) and Concorde ($.9 million) which
corresponds to increased revenues at those subsidiaries. Provision for credit
losses for the six months ended October 31, 2000 increased $17.3 million
compared to the same period in the prior fiscal year. The increase was
principally the result of (i) including Smart Choice ($13.6 million) in the
Company's consolidated results of operations, and (ii) higher credit losses at
Car-Mart ($.8 million) and Paaco ($2.8 million) which corresponds to an increase
in the finance receivables portfolios as a result of increased sales levels.
Interest expense for the six months ended October 31, 2000 increased $6.4
million compared to the same period in the prior fiscal year. The increase was
principally the result of (i) including Smart Choice ($5.1 million) in the
Company's consolidated results of operations, and (ii) higher interest expense
at Car-Mart ($.3 million) and Paaco ($.9 million) resulting from an increase in
the balance of their revolving credit facilities and an increase in interest
rates during the periods.
The provision for income taxes for the six months ended October 31,
2000 was $3.7 million on pretax income of $8.8 million. This equates to a 41.7%
effective tax rate. 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. Minority interests pertain to the portions
of consolidated subsidiaries not owned by the Company during the six months
ended October 31, 2000 (Car-Mart, Smart Choice and Paaco) and the six months
ended October 31, 1999 (Paaco, Crown El Salvador and Home Stay).
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended October 31, 2000, net cash provided by
operating activities amounted to $42.4 million. The principal sources of cash
resulted from (i) net income, (ii) certain non-cash expenses (provision for
credit losses and depreciation and amortization), and (iii) the sale of
repossessed vehicles. Net cash used by investing activities of $68.0 million
included (i) a $64.3 million use of cash in finance receivables originations in
excess of finance receivables collections, and (ii) a $3.3 million use of cash
in the purchase of property and equipment. Net cash provided by financing
activities of $18.1 million principally relates to (i) net borrowings from
revolving credit facilities ($21.3 million), offset by (ii) purchases of the
Company's common stock ($2.4 million) and repayments of other debt ($.9
million).
As of October 31, 2000 the Company's sources of liquidity included
approximately (i) $2.4 million of cash on hand, of which $.8 million was held by
Crown, (ii) an aggregate of $24.0 million remaining to be drawn on the revolving
credit facilities of Car-Mart, Smart Choice, 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 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. Based on the collateral on hand at October 31, 2000, the
Company's subsidiaries could have collectively drawn an additional $2.5 million
on their revolving credit facilities. 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, Smart Choice 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 December 2000 and November 2004, and
bear interest at rates ranging from Libor plus 2.0% to prime plus 2.25%. The
advance rates on eligible finance receivables decline from 85.0% to 70.0% for
Smart Choice and from 72.0% to 67.5% for Paaco over the term of the respective
credit facilities. The Company expects that it will have adequate liquidity to
satisfy the reductions in advance rates over the terms of the credit facilities.
The Company also expects that it will renew or refinance each of its credit
facilities with the existing or a new lender on or before the scheduled maturity
date of the facility.
The Company is focusing on the development and expansion of its
existing businesses and the potential acquisition or development of other
unrelated businesses. The credit facilities of Car-Mart, Smart Choice, Paaco,
Precision and Concorde are expected to be able to support the majority of their
anticipated growth over the next twelve months. As of October 31, 2000 the
Company had an outstanding commitment of approximately $.3 million pertaining to
an investment in a private venture capital fund which focuses on the investment
in Internet related or emerging technology companies. 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 6,000,000 shares of the Company's common stock from
time to time in the open market or in private transactions. As of October 31,
2000 the Company had repurchased 4,513,701
16
<PAGE> 17
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.
SEASONALITY
The Company's automobile sales business is seasonal in nature. In the
automobile business, the Company's third fiscal quarter (November through
January) is historically the slowest period 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.
Conversely, the Company's fourth fiscal quarter (February through April) is
historically the busiest time for car and truck sales as many of the Company's
customers use income tax refunds as a down payment on the purchase of a vehicle.
None of the Company's other businesses experience significant seasonal
fluctuations.
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 26%.
These finance receivables have scheduled maturities from one to 42 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 45 days of origination or purchase. At October 31, 2000
the majority of the Company's notes payable contained 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 annual 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 anticipated
charge-offs, and (iii) there is no change in prepayment rates as a result of the
interest rate changes.
<TABLE>
Change in Change in Annual
Interest Rates Pretax Earnings
-------------------- ------------------
(in thousands)
<S> <C>
+2% $ (2,518)
+1% (1,259)
-1% 1,259
-2% 2,518
</TABLE>
17
<PAGE> 18
PART II
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, 2000 no reports on Form 8-K
were filed.
----------
(1) Filed herewith.
18
<PAGE> 19
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 and Secretary (Principal
Financial and Accounting Officer)
Dated: December 8, 2000
19
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
