<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:
JULY 31, 2000 0-14939
CROWN GROUP, INC.
(Exact name of registrant as specified in its charter)
TEXAS 63-0851141
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4040 N. MACARTHUR BLVD., SUITE 100, IRVING, TEXAS
(Address of principal executive offices)
75038-6424
(Zip Code)
(972) 717-3423
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Title of Each Class September 11, 2000
------------------- ------------------
Common stock, par value $.01 per share 7,921,412
<PAGE> 2
PART I
ITEM 1. FINANCIAL STATEMENTS CROWN GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, 2000
(unaudited) April 30, 2000
------------- --------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 4,053,609 $ 9,843,310
Accounts and other receivables, net 4,499,671 5,489,686
Mortgage loans held for sale, net 12,580,616 14,202,420
Finance receivables, net 192,050,707 183,331,361
Inventory 15,923,843 14,948,365
Prepaid and other assets 2,449,406 1,753,074
Investments 3,104,621 2,503,146
Deferred tax assets, net 14,959,897 13,859,897
Property and equipment, net 28,341,654 27,736,105
Goodwill, net 17,006,664 17,239,955
------------ ------------
$294,970,688 $290,907,319
============ ============
Liabilities and stockholders' equity:
Accounts payable $ 8,147,359 $ 8,606,983
Accrued liabilities 11,227,053 13,557,228
Income taxes payable 5,009,493 9,599,439
Revolving credit facilities 181,546,098 172,709,224
Other notes payable 17,566,324 18,342,379
Deferred sales tax 4,743,414 4,207,117
------------ ------------
Total liabilities 228,239,741 227,022,370
------------ ------------
Minority interests 5,932,046 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;
8,085,662 issued and outstanding (8,247,762 at April 30, 2000) 80,857 82,478
Additional paid-in capital 28,126,958 28,960,793
Retained earnings 32,591,086 29,823,944
------------ ------------
Total stockholders' equity 60,798,901 58,867,215
------------ ------------
$294,970,688 $290,907,319
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 3
CONSOLIDATED STATEMENTS OF OPERATIONS CROWN GROUP, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
July 31,
2000 1999
----------- -----------
<S> <C> <C>
Revenues:
Sales $66,904,528 $40,876,106
Interest income 11,730,913 4,997,683
Gain on sale of mortgage loans 1,851,185 1,329,082
Rental income 962,406 1,067,294
Gaming 624,904 215,286
Other 376,993 70,485
----------- -----------
82,450,929 48,555,936
----------- -----------
Costs and expenses:
Cost of sales 38,879,279 25,096,913
Selling, general and administrative 17,201,481 11,356,568
Provision for credit losses 14,294,193 5,855,127
Interest expense 5,522,555 2,415,432
Depreciation and amortization 1,042,637 754,797
----------- -----------
76,940,145 45,478,837
----------- -----------
Other income:
Equity in earnings of unconsolidated subsidiaries 740,802
----------- -----------
740,802
----------- -----------
Income before taxes and minority interests 5,510,784 3,817,901
Provision for income taxes 2,248,436 1,213,037
Minority interests 495,206 26,457
----------- -----------
Net income $ 2,767,142 $ 2,578,407
=========== ===========
Earnings per share:
Basic $ .34 $ .26
Diluted $ .32 $ .25
Weighted average number of shares outstanding:
Basic 8,179,391 10,068,220
Diluted 8,582,006 10,512,850
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
CONSOLIDATED STATEMENTS OF CASH FLOWS CROWN GROUP, INC.
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
July 31,
2000 1999
------------ ------------
<S> <C> <C>
Operating activities:
Net income $ 2,767,142 $ 2,578,407
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,042,637 754,797
Accretion of purchase discount (342,238) (351,796)
Deferred income taxes (1,100,000) (566,867)
Provision for credit losses 14,294,193 5,855,127
Minority interests 495,206 26,457
Gain on sale of mortgage loans (1,851,185) (1,329,082)
Gain on sale of assets (86,446) (26,979)
Equity in earnings of unconsolidated subsidiaries (740,802)
Changes in assets and liabilities, net of acquisitions:
Accounts and other receivables 990,016 517,358
Mortgage loans originated or acquired (45,927,877) (39,641,531)
Mortgage loans sold and principal repayments 49,014,205 36,609,607
Inventory 6,576,320 4,541,916
Prepaids and other assets (468,374) (414,865)
Accounts payable, accrued liabilities and deferred sales tax (1,834,396) (1,044,198)
Income taxes payable (4,589,946) (2,220,093)
------------ ------------
Net cash provided by operating activities 18,979,257 4,547,456
------------ ------------
Investing activities:
Finance receivable originations (62,961,012) (36,604,371)
Finance receivable collections 32,870,913 19,646,257
Purchase of property and equipment (1,664,579) (2,958,541)
Sale of assets 361,831 197,902
Purchase of investments (601,475)
------------ ------------
Net cash used by investing activities (31,994,322) (19,718,753)
------------ ------------
Financing activities:
Purchase of common stock (835,456) (105,646)
Proceeds from revolving credit facilities, net 8,836,875 4,492,356
Proceeds from (repayments of) other debt, net (776,055) 86,728
------------ ------------
Net cash provided by financing activities 7,225,364 4,473,438
------------ ------------
Decrease in cash and cash equivalents (5,789,701) (10,697,859)
Cash and cash equivalents at: Beginning of period 9,843,310 12,910,535
------------ ------------
End of period $ 4,053,609 $ 2,212,676
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<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 July 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 July 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. 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 three month period ended July 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 July 31, 2000 accumulated amortization of goodwill
amounted to $2,098,223.
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 after Smart Choice's recent 20 for 1 reverse stock split, is
convertible into 6,857,907 shares of Smart Choice common stock representing 70%
of the ownership and voting rights of Smart Choice on an "as converted" basis.
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.
<PAGE> 6
Pro Forma Financial Information
The following unaudited pro forma condensed consolidated results of
operations of the Company for the three months ended July 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, and (v) adjusting income tax expense to reflect the above
described adjustments.
<TABLE>
<CAPTION>
Three Months Ended
July 31, 1999
------------------
<S> <C>
Revenues $ 69,127
Net income 2,402
Earnings per share - diluted $ .23
</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 July 31, 2000 and April 30, 2000 are as follows:
<TABLE>
<CAPTION>
July 31, April 30,
2000 2000
------------- -------------
<S> <C> <C>
Finance receivables $ 277,439,643 $ 267,389,412
Unearned finance charges (37,422,140) (38,659,786)
Allowance for credit losses (46,694,298) (43,783,529)
Purchase discounts (1,272,498) (1,614,736)
------------- -------------
$ 192,050,707 $ 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 three
months ended July 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended
July 31,
2000 1999
------------ ------------
<S> <C> <C>
Balance at beginning of period $ 43,783,529 $ 17,045,063
Provision for credit losses 14,161,193
5,849,670
Net charge offs (11,250,424) (4,602,689)
------------ ------------
Balance at end of period $ 46,694,298 $ 18,292,044
============ ============
</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
($648,900 and $515,900) and trade accounts receivable ($27,256 and $27,256) as
of July 31, 2000 and April 30, 2000, respectively.
<PAGE> 7
E - PROPERTY AND EQUIPMENT
A summary of property and equipment as of July 31, 2000 and April 30, 2000
is as follows:
<TABLE>
<CAPTION>
July 31, April 30,
2000 2000
------------ ------------
<S> <C> <C>
Land and buildings $ 8,404,393 $ 8,310,614
Rental equipment 10,267,902 9,937,557
Furniture, fixtures and equipment 10,575,064 10,144,565
Leasehold improvements 3,808,769 3,292,660
Less accumulated depreciation and amortization (4,714,474) (3,949,291)
------------ ------------
$ 28,341,654 $ 27,736,105
============ ============
</TABLE>
For the three months ended July 31, 2000 and 1999 depreciation and amortization
of property and equipment amounted to $783,647 and $451,395, respectively.
F - DEBT
A summary of debt as of July 31, 2000 and April 30, 2000 is as follows:
<TABLE>
<CAPTION>
Revolving Credit Facilities
-------------------------------------------------------------------------------------------------------------------------
Facility Interest Balance at
Borrower Lender Amount Rate Maturity July 31, 2000 April 30, 2000
-------- ------ -------- -------- -------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Smart Choice Finova $100 million Prime - 2.25% Nov 2004 $ 79,533,324 $ 77,533,325
Paaco Finova $ 60 million Prime - 2.25% Nov 2004 59,007,433 52,833,680
Car-Mart Bank of America $ 30 million Prime - 1.13% Jan 2002 27,870,993 27,502,614
Concorde Bank One $ 20 million Libor - 2.00% Sep 2000 8,221,185 9,839,067
Precision Wells Fargo $ 8 million Prime Dec 2000 6,913,163 5,000,538
--------------- ----------------
$ 181,546,098 $ 172,709,224
=============== ================
</TABLE>
<TABLE>
<CAPTION>
Other Notes Payable
-----------------------------------------------------------------------------------------------------------------------------
Facility Interest Balance at
Borrower Lender Amount Rate Maturity July 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 640,923 647,743
Paaco Chase Texas N/A 8.50% May 2003 850,972 869,616
Paaco Heller Financial N/A Prime - 2.25% Dec 2015 600,324 603,084
Smart Choice Huntington N/A Prime - .75% Jul 2001 2,046,956 2,090,171
Smart Choice High Capital N/A 10.0% Nov 2001 725,000 1,000,000
Various Various N/A Various Various 2,886,149 3,315,765
---------------- ----------------
$ 17,566,324 $ 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 July
31, 2000 substantially all of the Company's $40.1 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 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
<PAGE> 8
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 months ended July 31, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
July 31,
2000 1999
----------- -----------
<S> <C> <C>
Net income $ 2,767,142 $ 2,578,407
=========== ===========
Average shares outstanding-basic 8,179,391 10,068,220
Dilutive options 402,615 444,630
----------- -----------
Average shares outstanding-diluted 8,582,006 10,512,850
=========== ===========
Earnings per share:
Basic $ .34 $ .26
Diluted $ .32 $ .25
Antidilutive securities not included:
Options 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.
<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 July 31, 2000 the Company had funded approximately
$1.6 million of its $2.0 million commitment. The Company expects it will fund
the remaining $400,000 over the next 12 months.
I - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures for the three months ended July 31, 2000
and 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended
July 31,
2000 1999
---------- ----------
<S> <C> <C>
Inventory acquired in repossession $7,551,798 $4,492,589
Notes issued in purchase of property and equipment 700,000
Interest paid, net of amount capitalized 6,045,402 2,262,882
Income taxes paid, net of refund 7,938,382 4,000,000
Value of securities received in acquisition amendment 4,452,597
</TABLE>
<PAGE> 10
J - BUSINESS SEGMENTS
Operating results and other financial data are presented for the four
principal business segments of the Company for the three months ended July 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 July 31, 2000 and
1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended July 31, 2000
------------------------------------------------------------------------------
Automobile IBC's Mortgage Other Eliminations Consolidated
---------- -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other $ 66,380 $ 1,718 $ 1,929 $ 693 $ 70,720
Interest income 11,141 12 473 462 $ (357) 11,731
-------- -------- -------- -------- -------- --------
Total 77,521 1,730 2,402 1,155 (357) 82,451
-------- -------- -------- -------- -------- --------
Costs and expenses:
Cost of sales 38,295 584 38,879
Selling, gen. and admin. 13,402 453 1,637 1,709 17,201
Prov. for credit losses 14,161 133 14,294
Interest expense 5,136 162 379 203 (357) 5,523
Depreciation and amort. 417 276 52 298 1,043
-------- -------- -------- -------- -------- --------
Total 71,411 1,475 2,201 2,210 (357) 76,940
-------- -------- -------- -------- -------- --------
Other income
-------- -------- -------- -------- -------- --------
Income (loss) before taxes
and minority interests $ 6,110 $ 255 $ 201 $ (1,055) $ $ 5,511
======== ======== ======== ======== ======== ========
Capital expenditures $ 972 $ 654 $ 32 $ 7 $ $ 1,665
======== ======== ======== ======== ======== ========
Total assets $257,091 $ 16,324 $ 15,195 $ 75,293 $(68,932) $294,971
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended July 31, 1999
-------------------------------------------------------------------------------
Automobile IBC's Mortgage Other Eliminations Consolidated
--------- -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other $ 40,198 $ 1,480 $ 1,389 $ 491 $ 43,558
Interest income 4,372 7 452 620 $ (453) 4,998
-------- -------- -------- -------- -------- --------
Total 44,570 1,487 1,841 1,111 (453) 48,556
-------- -------- -------- -------- -------- --------
Costs and expenses:
Cost of sales 24,635 462 25,097
Selling, gen. and admin. 8,098 457 1,344 1,458 11,357
Prov. for credit losses 5,850 (1) 6 5,855
Interest expense 2,112 137 320 299 (453) 2,415
Depreciation and amort. 122 227 48 358 755
-------- -------- -------- -------- -------- --------
Total 40,817 1,282 1,718 2,115 (453) 45,479
-------- -------- -------- -------- -------- --------
Other income 741 741
-------- -------- -------- -------- -------- --------
Income (loss) before taxes
and minority interests $ 3,753 $ 205 $ 123 $ (263) $ $ 3,818
======== ======== ======== ======== ======== ========
Capital expenditures $ 559 $ 1,186 $ 32 $ 1,182 $ $ 2,959
======== ======== ======== ======== ======== ========
Total assets $112,777 $ 14,603 $ 16,571 $ 74,533 $(48,844) $169,640
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE> 11
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 July 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 July 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. 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 months ended July 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 months ended July 31, 2000 and 1999:
<TABLE>
<CAPTION>
Number of Months Included in
Month Crown Month Crown Three Months Ended July 31,
Acquired Disposed ----------------------------
Entity or Formed or Sold 2000 1999
------ ----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Casino Magic Neuquen 6-97 10-99 -- 3 months
Concorde 6-97 3 months 3 months
Paaco 2-98 3 months 3 months
Precision 2-98 3 months 3 months
Home Stay 5-98 12-99 -- 3 months
Car-Mart 1-99 3 months 3 months
Crown El Salvador 2-99 3 months 3 months
Atlantic Castings 3-99 4-00 -- 3 months
Smart Choice 12-99 3 months --
</TABLE>
<PAGE> 12
THREE MONTHS ENDED JULY 31, 2000 COMPARED TO THE THREE MONTHS ENDED JULY 31,
1999
Operating results and other financial data are presented for the four
principal business segments of the Company for the three months ended July 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 July 31, 2000 and
1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended July 31, 2000
--------------------------------------------------------------------------
Automobile IBC's Mortgage Other Eliminations Consolidated
---------- ----- -------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other $66,380 $ 1,718 $ 1,929 $ 693 $70,720
Interest income 11,141 12 473 462 $ (357) 11,731
------- ------- ------- ------- ------- -------
Total 77,521 1,730 2,402 1,155 (357) 82,451
------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of sales 38,295 584 38,879
Selling, gen. and admin. 13,402 453 1,637 1,709 17,201
Prov. for credit losses 14,161 133 14,294
Interest expense 5,136 162 379 203 (357) 5,523
Depreciation and amort. 417 276 52 298 1,043
------- ------- ------- ------- ------- -------
Total 71,411 1,475 2,201 2,210 (357) 76,940
------- ------- ------- ------- ------- -------
Other income
------- ------- ------- ------- ------- -------
Income (loss) before taxes
and minority interests $ 6,110 $ 255 $ 201 $(1,055) $ -- $ 5,511
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended July 31, 1999
---------------------------------------------------------------------------
Automobile IBC's Mortgage Other Eliminations Consolidated
---------- ----- -------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other $40,198 $ 1,480 $ 1,389 $ 491 $43,558
Interest income 4,372 7 452 620 $ (453) 4,998
------- ------- ------- ------- ------- -------
Total 44,570 1,487 1,841 1,111 (453) 48,556
------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of sales 24,635 462 25,097
Selling, gen. and admin. 8,098 457 1,344 1,458 11,357
Prov. for credit losses 5,850 (1) 6 5,855
Interest expense 2,112 137 320 299 (453) 2,415
Depreciation and amort. 122 227 48 358 755
------- ------- ------- ------- ------- -------
Total 40,817 1,282 1,718 2,115 (453) 45,479
------- ------- ------- ------- ------- -------
Other income 741 741
------- ------- ------- ------- ------- -------
Income (loss) before taxes
and minority interests $ 3,753 $ 205 $ 123 $ (263) $ -- $ 3,818
======= ======= ======= ======= ======= =======
</TABLE>
Net income for the three months ended July 31, 2000 increased $.2 million
compared to the same period in the prior fiscal year. The increase was primarily
attributable to greater earnings in the Company's automobile segment, partially
offset by a reduction of other income ($.7 million) as a result of the Company
no longer having an equity investment in Casino Magic Neuquen.
Revenues from sales and other for the three months ended July 31, 2000
increased $27.2 million compared to the same period in the prior fiscal year.
The increase was principally the result of (i) including Smart Choice ($18.8
million) in the Company's consolidated results of operations, and (ii) higher
revenues at Car-Mart ($1.7) and Paaco ($5.5 million). Interest income for the
three months ended July 31, 2000 increased $6.7 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 finance receivables portfolios ($1.0 million) as a result of growth in
such portfolios.
<PAGE> 13
As a percentage of sales, cost of sales for the three months ended July 31,
2000 decreased to 58.1% from 61.4% 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
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 three months ended July 31, 2000 increased $5.8 million compared to the same
period in the prior fiscal year. The increase is principally the result of (i)
including Smart Choice ($4.5 million) in the Company's consolidated results of
operations, and (ii) higher expenses at Car-Mart ($.5 million), Paaco ($.3
million) and Concorde ($.3 million) which corresponds to increased revenues at
those subsidiaries. Provision for credit losses for the three months ended July
31, 2000 increased $8.4 million compared to the same period in the prior fiscal
year. The increase was principally the result of (i) including Smart Choice
($5.8 million) in the Company's consolidated results of operations, and (ii)
higher credit losses at Car-Mart ($.4 million) and Paaco ($2.1 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 July 31,
2000 increased $3.1 million compared to the same period in the prior fiscal
year. The increase was principally the result of (i) including Smart Choice
($2.5 million) in the Company's consolidated results of operations, and (ii)
higher interest expense at Car-Mart ($.2 million) and Paaco ($.4 million)
resulting from an increase in the balance of their revolving credit facilities.
The provision for income taxes for the three months ended July 31, 2000 was
$2.2 million on pretax income of $5.5 million. This equates to a 40.8% effective
tax rate. The provision for income taxes for the three months ended July 31,
1999 was $1.2 million on pretax income of $3.8 million. This equates to a 39.4%
effective tax rate after removing from pretax income the equity in earnings of
unconsolidated subsidiaries ($.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 three months ended July 31,
2000 (Car-Mart, Smart Choice, Paaco and Crown El Salvador) and the three months
ended July 31, 1999 (Paaco, Crown El Salvador and Home Stay).
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended July 31, 2000, net cash provided by operating
activities amounted to $19.0 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 $32.0 million included (i) an $30.1
million use of cash in finance receivables originations in excess of finance
receivables collections, and (ii) a $1.7 million use of cash in the purchase of
property and equipment. Net cash provided by financing activities of $7.2
million principally relates to (i) net borrowings from revolving credit
facilities ($8.8 million), offset by (ii) purchases of the Company's common
stock ($.8 million) and repayments of other debt ($.8 million).
As of July 31, 2000 the Company's sources of liquidity included
approximately (i) $4.1 million of cash on hand, of which $1.2 million was held
by Crown, (ii) an aggregate of $36.5 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 July 31, 2000,
the Company's subsidiaries could have collectively drawn an additional $4.5
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 September 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 July 31, 2000 the Company
had an outstanding commitment of approximately $.4 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 July 31, 2000
the Company had repurchased 4,219,517 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.
<PAGE> 14
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 July 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>
<CAPTION>
Change in Change in Annual
Interest Rates Pretax Earnings
-------------------- ------------------
(in thousands)
<S> <C>
+2% $ (2,384)
+1% (1,192)
-1% 1,192
-2% 2,384
</TABLE>
<PAGE> 15
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 July 31, 2000 no reports on Form 8-K
were filed.
----------
(1) Filed herewith.
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CROWN GROUP, INC.
By: \s\ Mark D. Slusser
--------------------------------------------
Mark D. Slusser
Chief Financial Officer,
Vice President Finance and Secretary
(Principal Financial and Accounting Officer)
Dated: September 13, 2000
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial data schedule
</TABLE>
