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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal quarter ended: Commission file number:
JANUARY 31, 2001 0-14939
CROWN GROUP, INC.
(Exact name of registrant as specified in its charter)
TEXAS 63-0851141
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
4040 N. MACARTHUR BLVD., SUITE 100, IRVING, TEXAS
(Address of principal executive offices)
75038-6424
(Zip Code)
(972) 717-3423
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Title of Each Class March 7, 2001
------------------- -------------
Common stock, par value $.01 per share 7,304,867
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PART I
ITEM 1. FINANCIAL STATEMENTS CROWN GROUP, INC.
CONSOLIDATED BALANCE SHEETS
January 31,
2001
(unaudited) April 30, 2000
------------ --------------
Assets:
Cash and cash equivalents $ 1,780,980 $ 9,843,310
Accounts and other receivables, net 5,499,459 5,489,686
Mortgage loans held for sale, net 11,907,687 14,202,420
Finance receivables, net 207,068,018 183,331,361
Inventory 14,413,857 14,948,365
Prepaid and other assets 1,558,062 1,753,074
Investments 6,547,208 2,503,146
Deferred tax assets, net 15,971,264 13,859,897
Property and equipment, net 18,566,240 27,736,105
Goodwill, net 12,746,589 17,239,955
------------ ------------
$296,059,364 $290,907,319
============ ============
Liabilities and stockholders' equity:
Accounts payable $ 7,258,510 $ 8,606,983
Accrued liabilities 11,105,981 13,557,228
Income taxes payable 3,358,871 9,599,439
Revolving credit facilities 184,420,809 172,709,224
Other notes payable 19,492,225 18,342,379
Deferred sales tax 4,727,112 4,207,117
------------ ------------
230,363,508 227,022,370
------------ ------------
Minority interests 6,073,730 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;
7,332,867 issued and outstanding (8,247,762 at April 30, 2000) 73,329 82,478
Additional paid-in capital 24,411,376 28,960,793
Retained earnings 35,137,421 29,823,944
------------ ------------
Total stockholders' equity 59,622,126 58,867,215
------------ ------------
$296,059,364 $290,907,319
============ ============
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS CROWN GROUP, INC.
(UNAUDITED)
Three Months Ended Nine Months Ended
January 31, January 31,
2001 2000 2001 2000
--------------- --------------- ---------------- -----------------
Revenues:
Sales $ 65,720,274 $ 46,632,384 $ 206,720,904 $ 124,967,077
Interest income 11,952,824 9,123,289 35,666,803 19,173,127
Gain on sale of mortgage loans 1,752,494 1,075,075 5,331,692 3,514,169
Rental income 1,025,985 1,973,795 3,256,153
Gaming 466,067 647,111 1,602,448 1,581,981
Other 222,861 217,043 834,234 314,297
------------- ------------- ------------- -------------
80,114,520 58,720,887 252,129,876 152,806,804
------------- ------------- ------------- -------------
Costs and expenses:
Cost of sales 39,803,981 28,745,845 122,946,582 75,450,574
Selling, general and administrative 17,893,195 13,147,026 53,538,242 36,753,473
Provision for credit losses 14,087,854 8,669,219 44,110,204 21,387,881
Interest expense 5,885,859 4,009,144 17,337,924 9,084,277
Depreciation and amortization 1,025,887 961,977 3,159,347 2,596,944
Write-down of Crown El Salvador 800,000
------------- ------------- ------------- -------------
78,696,776 55,533,211 241,892,299 145,273,149
------------- ------------- ------------- -------------
Other income:
Equity in earnings of unconsolidated 79,609 (312,534) 79,609 630,309
subsidiaries
Gain on sale of securities, net 4,726 123,268 4,726 10,861,100
------------- ------------- ------------- -------------
84,335 (189,266) 84,335 11,491,409
------------- ------------- ------------- -------------
Income before taxes and minority interest 1,502,079 2,998,410 10,321,912 19,025,064
Provision for income taxes 649,750 1,256,205 4,325,793 7,266,343
Minority interests (144,020) 261,723 682,642 93,354
------------- ------------- ------------- -------------
Net income $ 996,349 $ 1,480,482 $ 5,313,477 $ 11,665,367
============= ============= ============= =============
Earnings per share:
Basic $ .13 $ .17 $ .68 $ 1.23
Diluted $ .13 $ .16 $ .65 $ 1.18
Weighted average number of shares outstanding:
Basic 7,474,780 8,790,490 7,856,297 9,508,064
Diluted 7,768,330 9,179,744 8,218,856 9,911,777
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS CROWN GROUP, INC.
(UNAUDITED)
Nine Months Ended
January 31,
2001 2000
------------- -------------
Operating activities:
Net income $ 5,313,477 $ 11,665,367
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,159,347 2,596,944
Accretion of purchase discount (843,126) (1,082,634)
Deferred income taxes (2,431,178) (2,349,763)
Provision for credit losses 44,110,204 21,387,881
Minority interests 682,642 93,354
Write-down of Crown El Salvador 800,000
Gain on sale of mortgage loans (5,331,692) (3,514,169)
Gain on sale of assets (132,294) (105,840)
Gain on sale of securities (4,726) (10,861,100)
Equity in earnings of unconsolidated subsidiaries (79,609) (630,309)
Changes in assets and liabilities, net of acquisitions:
Accounts and other receivables 798,319 (611,689)
Mortgage loans originated or acquired (130,735,181) (106,822,237)
Mortgage loans sold and principal repayments 137,678,934 106,190,189
Inventory 22,102,755 14,660,789
Prepaids and other assets 347,654 (575,905)
Accounts payable, accrued liabilities and deferred sales tax (2,390,556) (3,300,855)
Income taxes payable (3,952,125) 1,677,177
------------- -------------
Net cash provided by operating activities 69,092,845 28,417,200
------------- -------------
Investing activities:
Finance receivable originations (193,558,657) (113,364,312)
Finance receivable collections 105,023,809 64,322,170
Purchase of property and equipment (3,511,400) (5,848,753)
Sale of assets 650,045 856,913
Purchase of investments (905,877)
Sale of securities 2,127,675 16,762,325
Dividends and collections of notes receivable from CMN 306,487
Purchase of Smart Choice, net of cash acquired (866,741)
------------- -------------
Net cash used in investing activities (90,174,405) (37,831,911)
------------- -------------
Financing activities:
Sale of common stock 60,937
Purchase of common stock (3,785,670) (4,492,823)
Proceeds from (repayments of) revolving credit facilities, net 18,289,271 6,228,247
Proceeds from (repayments of) other debt, net (1,545,308) (133,347)
------------- -------------
Net cash provided by financing activities 13,019,230 1,602,077
------------- -------------
Decrease in cash and cash equivalents (8,062,330) (7,812,634)
Cash and cash equivalents at: Beginning of period 9,843,310 12,910,535
------------- -------------
End of period $ 1,780,980 $ 5,097,901
============= =============
See accompanying notes to consolidated financial statements.
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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 January 31, 2001,
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 January 31, 2001 Crown also owned
(i) 50% 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
C). 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 nine month period ended January 31, 2001 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.
Equity Method Investments
The Company accounts for subsidiaries in which it does not control (generally
50% owned or less) by the equity method of accounting. On November 1, 2000 the
Company sold a 50% interest in Precision, bringing its remaining ownership
interest to 50%. As a result, effective November 1, 2000 the Company began
accounting for its ownership interest in Precision on the equity method.
Reclassifications
Certain prior year amounts in the accompanying financial statements have been
reclassified to conform to the fiscal 2001 presentation.
C - ACQUISITION AND DISPOSITIONS
Sale of 50% of Precision
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. In connection with the
transaction, the Company recorded a gain of $4,726 which is included in gain on
sale of securities in the consolidated statements of operations.
Home Stay Sale
Effective December 2, 1999 Crown sold its 80% interest in Home Stay Lodges I,
Ltd. ("Home Stay") to Efficiency Lodge, Inc. for approximately $850,000, of
which approximately $210,000 was paid in cash and the balance is payable over
five years with interest at an annual rate of prime plus 1%. In connection with
the transaction, Crown recorded a gain of approximately $.1 million which is
included in gain on sale of securities in the consolidated statements of
operations.
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 was subsequently converted into 6,857,907 shares of Smart Choice
common stock, or 70% of 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
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minority shareholders converted their 15% interest in Paaco into shares of Smart
Choice Series E Convertible Preferred Stock which was subsequently converted
into 489,851 shares of Smart Choice common stock, or 5% of the total outstanding
shares. Paaco is now a wholly-owned subsidiary of Smart Choice.
Casino Magic Neuquen Sale
Effective October 1, 1999 the Company sold its 49% interest in Casino Magic
Neuquen ("CMN") and related assets for $16.5 million cash. In connection with
the transaction, the Company recorded a gain of approximately $10.7 million
which is included in gain on sale of securities in the consolidated statements
of operations.
Pro Forma Financial Information
The following unaudited pro forma condensed consolidated results of
operations of the Company for the three months ended January 31, 2000 were
prepared as if the acquisition of Smart Choice had occurred on November 1, 1999
(in thousands, except per share amount). The following unaudited pro forma
condensed consolidated results of operations of the Company for the nine months
ended January 31, 2000 were prepared as if the acquisition of Smart Choice and
the disposition of CMN 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, net of cash received in the disposition, (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.
The operating results of Precision and Home Stay did not have a material impact
on the consolidated operating results of the Company during the periods they
were included in the Company's consolidated operating results for the three and
nine months ended January 31, 2001 and 2000. As a result, no adjustments to the
following pro forma financial information has been made to reflect those
dispositions as of the beginning of the periods.
Three Months Ended Nine Months Ended
January 31, 2000 January 31, 2000
------------------ -----------------
Revenues $ 64,907 $200,402
Net income (3,171) 2,925
Earnings per share - diluted $ (.36) $ .30
The unaudited pro forma results of operations are not necessarily indicative
of future results or the results that would have occurred had the transactions
taken place on the dates 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 46 months. The components of finance receivables as
of January 31, 2001 and April 30, 2000 are as follows:
January 31, April 30,
2001 2000
------------- -------------
Finance receivables $ 293,954,848 $ 267,389,412
Unearned finance charges (37,575,097) (38,659,786)
Allowance for credit losses (48,481,053) (43,783,529)
Purchase discounts (830,680) (1,614,736)
------------- -------------
$ 207,068,018 $ 183,331,361
============= =============
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.
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Changes in the finance receivables allowance for credit losses for the nine
months ended January 31, 2001 and 2000 are as follows:
Nine Months Ended
January 31,
2001 2000
------------ ------------
Balance at beginning of period $ 43,783,529 $ 17,045,063
Acquisition of Smart Choice 23,568,788
Provision for credit losses 43,682,849 21,387,881
Net charge offs (38,985,325) (18,616,663)
------------ ------------
Balance at end of period $ 48,481,053 $ 43,385,069
============ ============
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
($819,100 and $515,900) and trade accounts receivable ($0 and $27,256) as of
January 31, 2001 and April 30, 2000, respectively.
E - INVESTMENTS
A summary of investments as of January 31, 2001 and April 30, 2000 is as
follows:
January 31, April 30,
2001 2000
----------- ----------
Precision IBC, Inc. $3,138,185
Monarch Venture Partners Fund I 1,809,023 $1,503,146
Mariah Vision 3, Inc. 1,500,000 1,000,000
Web Real Estate, Inc. 100,000
---------- ----------
$6,547,208 $2,503,146
========== ==========
F - PROPERTY AND EQUIPMENT
A summary of property and equipment as of January 31, 2001 and April 30, 2000
is as follows:
January 31, April 30,
2001 2000
------------ ------------
Land and buildings $ 7,640,830 $ 8,310,614
Rental equipment 9,937,557
Furniture, fixtures and equipment 11,346,757 10,144,565
Leasehold improvements 4,143,017 3,292,660
Less accumulated depreciation and amortization (4,564,364) (3,949,291)
------------ ------------
$ 18,566,240 $ 27,736,105
============ ============
For the nine months ended January 31, 2001 and 2000 depreciation and
amortization of property and equipment amounted to $2,425,309 and $1,715,924,
respectively.
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G - DEBT
A summary of debt as of January 31, 2001 and April 30, 2000 is as follows:
Revolving Credit Facilities
- -----------------------------------------------------------------------------------------------------------------------
Facility Interest Balance at
Borrower Lender Amount Rate Maturity January 31, 2001 April 30, 2000
- ------------ --------------- ------------- ------------- -------- ---------------- --------------
Smart Choice Finova $ 98 million Prime + 2.25% Nov 2004 $ 88,394,135 $ 77,533,325
Paaco Finova $ 62 million Prime + 2.00% Nov 2004 59,047,810 52,833,680
Car-Mart Bank of America $ 35 million Prime + .88% Jan 2002 28,713,631 27,502,614
Concorde Bank United $ 25 million Libor + 2.00% Sep 2001 8,265,233 9,839,067
Precision Wells Fargo $ 8 million Prime Dec 2001 5,000,538
------------- -------------
$ 184,420,809 $ 172,709,224
================ =============
Revolving Credit Facilities
- -----------------------------------------------------------------------------------------------------------------------
Facility Interest Balance at
Borrower Lender Amount Rate Maturity January 31, 2001 April 30, 2000
- ------------ --------------- ------------- ------------- -------- ---------------- --------------
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
Crown Regions Bank N/A Prime + .50% Nov 2002 2,000,000
Precision South Trust Bank N/A 7.35% Jan 2014 647,743
Paaco Bank United N/A 8.50% May 2003 812,877 869,616
Paaco Heller Financial N/A Prime + 2.25% Dec 2015 592,327 603,084
Smart Choice Huntington N/A Prime + .75% Jul 2001 1,960,526 2,090,171
Smart Choice High Capital N/A 10.0% Nov 2001 725,000 1,000,000
Various Various N/A Various Various 3,585,495 3,315,765
----------- -------------
$19,492,225 $ 18,342,379
=========== =============
The Company's revolving credit facilities are primarily collateralized by
finance receivables and mortgage loans. 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
January 31, 2001 substantially all of the Company's $37.6 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. The advance rates on
eligible finance receivables decline from 85.0% to 70.0% for Smart Choice and
from 70.0 % to 67.5% for Paaco over the term of the respective credit
facilities.
Based upon the eligible collateral on hand at January 31, 2001, Paaco and
Smart Choice were collectively over-advanced on their senior credit facilities
with Finova Capital Corporation ("Finova") by approximately $4.9 million. Paaco
and Smart Choice presently expect to come into compliance with the terms of
their credit facilities in April 2001. However, in July 2001 the Smart Choice
credit facility requires a step-down in the finance receivable advance rate from
85.0% to 77.0%. Absent funding from an outside source, Smart Choice does not
expect it will be able to meet this step-down. In February 2001, Smart Choice
and Paaco provided Finova with their most recent financial projections and
requested that the scheduled finance receivable advance rate step-downs over the
next three years be modified to conform to those projections. Presently, it is
the Company's expectation that Finova will either modify the scheduled finance
receivable advance rate step-downs to conform to the financial projections of
Smart Choice and Paaco, or provide Smart Choice and Paaco with a forbearance
letter covering some period of time. However, the Company cannot predict with
certainty the actions of Finova; and, under the terms of the credit facilities,
Finova has the right to accelerate the maturity of the loans, thereby demanding
immediate repayment, and call on Crown's guarantee of $5 million.
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H - EARNINGS PER SHARE
A summary reconciliation of basic earnings per share to diluted earnings per
share for the three and nine months ended January 31, 2001 and 2000 is as
follows:
Three Months Ended Nine Months Ended
January 31, January 31,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net income $ 996,349 $ 1,480,482 $ 5,313,477 $11,665,367
=========== =========== =========== ===========
Average shares outstanding-basic 7,474,780 8,790,490 7,856,297 9,508,064
Dilutive options 293,550 389,254 362,559 403,713
----------- ----------- ----------- -----------
Average shares outstanding-diluted 7,768,330 9,179,744 8,218,856 9,911,777
=========== =========== =========== ===========
Earnings per share:
Basic $ .13 $ .17 $ .68 $ 1.23
Diluted $ .13 $ .16 $ .65 $ 1.18
Antidilutive securities not included:
Options 445,000 432,500 445,000 432,500
=========== =========== =========== ===========
I - 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 purported 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 asserted 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.
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.
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J - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures for the nine months ended January 31, 2001
and 2000 are as follows:
Nine Months Ended
January 31,
2001 2000
----------- -----------
Inventory acquired in repossession $21,958,468 $14,051,983
Notes issued in purchase of property and equipment 1,329,128 2,044,000
Interest paid, net of amount capitalized 16,885,541 8,598,058
Income taxes paid, net of refund 10,709,240 8,058,829
Value of securities received in acquisition amendment 4,452,597
Value of securities received in sale of 50% of Precision 833,833
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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 January
31, 2001 and 2000. 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, for periods prior to November 1, 2000, 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
Precision (for periods after October 31, 2000), Casino Magic Neuquen and
Atlantic Castings. The Company's business segment data for the three months
ended January 31, 2001 and 2000 is as follows (in thousands):
Three Months Ended January 31, 2001
---------------------------------------------------------------------------------------
Automobile IBC's Mortgage Other Eliminations Consolidated
---------- -------- -------- -------- ------------ ------------
Revenues:
Sales and other $ 65,778 $ $ 1,918 $ 466 $ 68,162
Interest income 11,380 460 380 $ (267) 11,953
-------- -------- -------- -------- -------- --------
Total 77,158 2,378 846 (267) 80,115
-------- -------- -------- -------- -------- --------
Costs and expenses:
Cost of sales 39,804 39,804
Selling, gen. and admin 14,415 2,016 1,462 17,893
Prov. for credit losses 13,901 187 14,088
Interest expense 5,577 340 236 (267) 5,886
Depreciation and amort 523 58 445 1,026
-------- -------- -------- -------- -------- --------
Total 74,220 2,601 2,143 (267) 78,697
-------- -------- -------- -------- -------- --------
Security gains and other 84 84
-------- -------- -------- -------- -------- --------
Income (loss) before taxes
and minority interests $ 2,938 $ -- $ (223) $ (1,213) $ -- $ 1,502
======== ======== ======== ======== ======== ========
Capital expenditures $ 1,443 $ -- $ 32 $ 39 $ -- $ 1,514
======== ======== ======== ======== ======== ========
Total assets $270,259 $ -- $ 14,061 $ 73,491 $(61,752) $296,059
======== ======== ======== ======== ======== ========
Three Months Ended January 31, 2000
------------------------------------------------------------------------------------
Automobile IBC's Mortgage Other Eliminations Consolidated
---------- --------- --------- --------- ------------ ------------
Revenues:
Sales and other $ 45,929 $ 1,849 $ 1,080 $ 740 $ 49,598
Interest income 8,447 18 481 856 $ (679) 9,123
--------- --------- --------- --------- --------- ---------
Total 54,376 1,867 1,561 1,596 (679) 58,721
--------- --------- --------- --------- --------- ---------
Costs and expenses:
Cost of sales 27,979 767 28,746
Selling, gen. and admin 9,708 474 1,290 1,675 13,147
Prov. for credit losses 8,570 29 70 8,669
Interest expense 3,785 149 366 388 (679) 4,009
Depreciation and amort 332 254 51 325 962
--------- --------- --------- --------- --------- ---------
Total 50,374 1,673 1,777 2,388 (679) 55,533
--------- --------- --------- --------- --------- ---------
Security gains and other (190) (190)
--------- --------- --------- --------- --------- ---------
Income (loss) before taxes
and minority interests $ 4,002 $ 194 $ (216) $ (982) $ -- $ 2,998
========= ========= ========= ========= ========= =========
Capital expenditures $ 289 $ 1,389 $ 14 $ 59 $ -- $ 1,751
========= ========= ========= ========= ========= =========
Total assets $ 217,337 $ 16,326 $ 16,000 $ 76,542 $ (55,831) $ 270,374
========= ========= ========= ========= ========= =========
11
12
The Company's business segment data for the nine months ended January 31,
2001 and 2000 is as follows (in thousands):
Nine Months Ended January 31, 2001
------------------------------------------------------------------------------------------
Automobile IBC's Mortgage Other Eliminations Consolidated
---------- --------- --------- --------- ------------ ------------
Revenues:
Sales and other $ 205,620 $ 3,487 $ 5,686 $ 1,670 $ 216,463
Interest income 33,947 22 1,405 1,211 $ (918) 35,667
--------- --------- --------- --------- --------- ---------
Total 239,567 3,509 7,091 2,881 (918) 252,130
--------- --------- --------- --------- --------- ---------
Costs and expenses:
Cost of sales 121,767 1,180 122,947
Selling, gen. and admin 42,352 997 5,459 4,730 53,538
Prov. for credit losses 43,683 (2) 429 44,110
Interest expense 16,204 321 1,091 640 (918) 17,338
Depreciation and amort 1,373 556 166 1,064 3,159
El Salvador write-down 800 800
--------- --------- --------- --------- --------- ---------
Total 225,379 3,052 7,145 7,234 (918) 241,892
--------- --------- --------- --------- --------- ---------
Security gains and other 84 84
--------- --------- --------- --------- --------- ---------
Income (loss) before taxes
and minority interests $ 14,188 $ 457 $ (54) $ (4,269) $ -- $ 10,322
========= ========= ========= ========= ========= =========
Capital expenditures $ 3,415 $ 1,206 $ 154 $ 66 $ -- $ 4,841
========= ========= ========= ========= ========= =========
Total assets $ 270,259 $ -- $ 14,061 $ 73,491 $ (61,752) $ 296,059
========= ========= ========= ========= ========= =========
Nine Months Ended January 31, 2000
----------------------------------------------------------------------------------------
Automobile IBC's Mortgage Other Eliminations Consolidated
---------- --------- --------- --------- ------------ ------------
Revenues:
Sales and other $ 122,661 $ 5,106 $ 3,596 $ 2,271 $ 133,634
Interest income 17,224 32 1,416 2,077 $ (1,576) 19,173
--------- --------- --------- --------- --------- ---------
Total 139,885 5,138 5,012 4,348 (1,576) 152,807
--------- --------- --------- --------- --------- ---------
Costs and expenses:
Cost of sales 73,476 1,975 75,451
Selling, gen. and admin 25,544 1,449 3,848 5,912 36,753
Prov. for credit losses 21,199 82 107 21,388
Interest expense 8,158 424 1,052 1,026 (1,576) 9,084
Depreciation and amort 558 726 148 1,165 2,597
--------- --------- --------- --------- --------- ---------
Total 128,935 4,656 5,155 8,103 (1,576) 145,273
--------- --------- --------- --------- --------- ---------
Security gains and other 11,491 11,491
--------- --------- --------- --------- --------- ---------
Income (loss) before taxes
and minority interests $ 10,950 $ 482 $ (143) $ 7,736 $ -- $ 19,025
========= ========= ========= ========= ========= =========
Capital expenditures $ 1,832 $ 3,112 $ 62 $ 2,887 $ -- $ 7,893
========= ========= ========= ========= ========= =========
Total assets $ 217,337 $ 16,326 $ 16,000 $ 76,542 $ (55,831) $ 270,374
========= ========= ========= ========= ========= =========
12
13
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 January 31, 2001,
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 January 31, 2001 Crown also owned
(i) 50% 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. 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 nine months ended January 31, 2001 and 2000 are not
entirely comparable. Below is a summary of the number of months of operation
each company's operating results are included in the Company's consolidated
results of operations for the three and nine months ended January 31, 2001 and
2000:
Number of Months Subsidiary Included In
----------------------------------------------
Three Months Ended Nine Months Ended
Month Crown Month Crown January 31, January 31,
Acquired Disposed --------------------- ---------------------
Entity or Formed or Sold 2001 2000 2001 2000
- --------------------- ----------- ---------------- -------- -------- -------- ---------
Casino Magic Neuquen 6-97 10-99 -- -- -- 5 months
Concorde 6-97 3 months 3 months 9 months 9 months
Paaco 2-98 3 months 3 months 9 months 9 months
Precision 2-98 11-00 (50% sold) 3 months 3 months 9 months 9 months
Home Stay 5-98 12-99 -- 1 month -- 7 months
Car-Mart 1-99 3 months 3 months 9 months 9 months
Crown El Salvador 2-99 3 months 3 months 9 months 9 months
Atlantic Castings 3-99 4-00 -- 3 months -- 9 months
Smart Choice 12-99 3 months 2 months 9 months 2 months
13
14
THREE MONTHS ENDED JANUARY 31, 2001 COMPARED TO THE THREE MONTHS ENDED JANUARY
31, 2000
Operating results and other financial data are presented for the four
principal business segments of the Company for the three months ended January
31, 2001 and 2000. 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, for periods prior to November 1, 2000, 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
Precision (for periods after October 31, 2000), Casino Magic Neuquen and
Atlantic Castings. The Company's business segment data for the three months
ended January 31, 2001 and 2000 is as follows (in thousands):
Three Months Ended January 31, 2001
---------------------------------------------------------------------------------------------------
Automobile IBC's Mortgage Other Eliminations Consolidated
------------ ------------ ------------ ------------ ------------ ------------
Revenues:
Sales and other $ 65,778 $ $ 1,918 $ 466 $ 68,162
Interest income 11,380 460 380 $ (267) 11,953
------------ ------------ ------------ ------------ ------------ ------------
Total 77,158 2,378 846 (267) 80,115
------------ ------------ ------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 39,804 39,804
Selling, gen. and admin 14,415 2,016 1,462 17,893
Prov. for credit losses 13,901 187 14,088
Interest expense 5,577 340 236 (267) 5,886
Depreciation and amort 523 58 445 1,026
------------ ------------ ------------ ------------ ------------ ------------
Total 74,220 2,601 2,143 (267) 78,697
------------ ------------ ------------ ------------ ------------ ------------
Security gains and other 84 84
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) before taxes
and minority interests $ 2,938 $ -- $ (223) $ (1,213) $ -- $ 1,502
============ ============ ============ ============ ============ ============
Three Months Ended January 31, 2000
-------------------------------------------------------------------------------------------------
Automobile IBC's Mortgage Other Eliminations Consolidated
------------ ------------ ------------ ------------ ------------ ------------
Revenues:
Sales and other $ 45,929 $ 1,849 $ 1,080 $ 740 $ 49,598
Interest income 8,447 18 481 856 $ (679) 9,123
------------ ------------ ------------ ------------ ------------ ------------
Total 54,376 1,867 1,561 1,596 (679) 58,721
------------ ------------ ------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 27,979 767 28,746
Selling, gen. and admin 9,708 474 1,290 1,675 13,147
Prov. for credit losses 8,570 29 70 8,669
Interest expense 3,785 149 366 388 (679) 4,009
Depreciation and amort 332 254 51 325 962
------------ ------------ ------------ ------------ ------------ ------------
Total 50,374 1,673 1,777 2,388 (679) 55,533
------------ ------------ ------------ ------------ ------------ ------------
Security gains and other (190) (190)
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) before taxes
and minority interests $ 4,002 $ 194 $ (216) $ (982) $ -- $ 2,998
============ ============ ============ ============ ============ ============
Net income for the three months ended January 31, 2001 decreased $.5 million
compared to the same period in the prior fiscal year. The decrease was primarily
attributable to a decline in Smart Choice's operating results ($2.3 million)
principally due to a higher provision for credit losses, partially offset by
greater earnings at Car-Mart ($.9 million) and Paaco ($.8 million).
Revenues from sales and other for the three months ended January 31, 2001
increased $18.6 million compared to the same period in the prior fiscal year.
The increase was principally the result of (i) including Smart Choice in the
Company's consolidated results of operations for three
14
15
months in the current period versus two months in the prior period ($5.5
million), and (ii) higher revenues at Car-Mart ($6.0 million), Paaco ($6.6
million) and Smart Choice ($1.7 million), partially offset by (iii) the
deconsolidation of Precision ($1.8 million) as a result of the sale of a 50%
interest in that company in November 2000. Interest income for the three months
ended January 31, 2001 increased $2.8 million compared to the same period in the
prior fiscal year. The increase was principally the result of (i) including
Smart Choice in the Company's consolidated results of operations for three
months in the current period versus two months in the prior period ($1.7
million), and (ii) greater interest earned on Car-Mart's ($.4 million) and
Paaco's ($1.1 million) finance receivables portfolios as a result of growth in
such portfolios, partially offset by (iii) lower interest income in the months
of December and January at Smart Choice ($.3 million) as a result of a decline
in interest rates charged on installment loans.
As a percentage of sales, cost of sales for the three months ended January
31, 2001 decreased to 60.6% from 61.6% in the same period in the prior fiscal
year. The decrease was principally the result of higher gross profit margins at
Car-Mart and Smart Choice. Selling, general and administrative expense for the
three months ended January 31, 2001 increased $4.7 million compared to the same
period in the prior fiscal year. The increase was principally the result of (i)
including Smart Choice in the Company's consolidated results of operations for
three months in the current period versus two months in the prior period ($1.7
million), and (ii) higher expenses at Car-Mart ($.6 million), Paaco ($1.9
million), Smart Choice ($.5 million) and Concorde ($.7 million) which
corresponds to increased revenues at those subsidiaries, partially offset by
(iii) the deconsolidation of Precision ($.5 million) as a result of the sale of
a 50% interest in that company in November 2000. Provision for credit losses for
the three months ended January 31, 2001 increased $5.4 million compared to the
same period in the prior fiscal year. The increase was principally the result of
(i) including Smart Choice in the Company's consolidated results of operations
for three months in the current period versus two months in the prior period
($1.3 million), and (ii) higher credit losses at Car-Mart ($1.3 million) and
Smart Choice ($3.5 million) which corresponds to an increase in the finance
receivables portfolios as a result of increased sales levels, partially offset
by (iii) a decline in credit losses at Paaco ($.8 million) resulting from
improved collection results in recent months. Interest expense for the three
months ended January 31, 2001 increased $1.9 million compared to the same period
in the prior fiscal year. The increase was principally the result of (i)
including Smart Choice in the Company's consolidated results of operations for
three months in the current period versus two months in the prior period ($.9
million), and (ii) higher interest expense at Car-Mart ($.1 million), Paaco ($.4
million) and Smart Choice ($.4 million) resulting from an increase in the
balance of their revolving credit facilities during the periods.
The provision for income taxes for the three months ended January 31, 2001
was $.6 million on pretax income of $1.5 million. This equates to a 45.7%
effective tax rate after removing from pretax income the equity in earnings of
unconsolidated subsidiaries ($.1 million), which earnings are presented on an
after tax basis. The provision for income taxes for the three months ended
January 31, 2000 was $1.3 million on pretax income of $3.0 million. This equates
to a 37.9% effective tax rate after removing from pretax income the equity in
losses of unconsolidated subsidiaries ($.3 million), which losses 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
January 31, 2001 (Car-Mart, Smart Choice and Paaco) and the three months ended
January 31, 2000 (Car-Mart, Smart Choice, Paaco and Home Stay).
15
16
NINE MONTHS ENDED JANUARY 31, 2001 COMPARED TO THE NINE MONTHS ENDED JANUARY 31,
2000
Operating results and other financial data are presented for the four
principal business segments of the Company for the nine months ended January 31,
2001 and 2000. 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, for periods prior to November 1, 2000, 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
Precision (for periods after October 31, 2000), Casino Magic Neuquen and
Atlantic Castings. The Company's business segment data for the nine months ended
January 31, 2001 and 2000 is as follows (in thousands):
Nine Months Ended January 31, 2001
-----------------------------------------------------------------------------------------------
Automobile IBC's Mortgage Other Eliminations Consolidated
------------ ------------ ------------ ------------ ------------ ------------
Revenues:
Sales and other $ 205,620 $ 3,487 $ 5,686 $ 1,670 $ 216,463
Interest income 33,947 22 1,405 1,211 $ (918) 35,667
------------ ------------ ------------ ------------ ------------ ------------
Total 239,567 3,509 7,091 2,881 (918) 252,130
------------ ------------ ------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 121,767 1,180 122,947
Selling, gen. and admin 42,352 997 5,459 4,730 53,538
Prov. for credit losses 43,683 (2) 429 44,110
Interest expense 16,204 321 1,091 640 (918) 17,338
Depreciation and amort 1,373 556 166 1,064 3,159
El Salvador write-down 800 800
------------ ------------ ------------ ------------ ------------ ------------
Total 225,379 3,052 7,145 7,234 (918) 241,892
------------ ------------ ------------ ------------ ------------ ------------
Security gains and other 84 84
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) before taxes
and minority interests $ 14,188 $ 457 $ (54) $ (4,269) $ -- $ 10,322
============ ============ ============ ============ ============ ============
Nine Months Ended January 31, 2000
---------------------------------------------------------------------------------------------
Automobile IBC's Mortgage Other Eliminations Consolidated
------------ ------------ ------------ ------------ ------------ ------------
Revenues:
Sales and other $ 122,661 $ 5,106 $ 3,596 $ 2,271 $ 133,634
Interest income 17,224 32 1,416 2,077 $ (1,576) 19,173
------------ ------------ ------------ ------------ ------------ ------------
Total 139,885 5,138 5,012 4,348 (1,576) 152,807
------------ ------------ ------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 73,476 1,975 75,451
Selling, gen. and admin 25,544 1,449 3,848 5,912 36,753
Prov. for credit losses 21,199 82 107 21,388
Interest expense 8,158 424 1,052 1,026 (1,576) 9,084
Depreciation and amort 558 726 148 1,165 2,597
------------ ------------ ------------ ------------ ------------ ------------
Total 128,935 4,656 5,155 8,103 (1,576) 145,273
------------ ------------ ------------ ------------ ------------ ------------
Security gains and other 11,491 11,491
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) before taxes
and minority interests $ 10,950 $ 482 $ (143) $ 7,736 $ -- $ 19,025
============ ============ ============ ============ ============ ============
Net income for the nine months ended January 31, 2001 decreased $6.4 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.
16
17
Revenues from sales and other for the nine months ended January 31, 2001
increased $82.8 million compared to the same period in the prior fiscal year.
The increase was principally the result of (i) including Smart Choice in the
Company's consolidated results of operations for nine months in the current
period versus two months in the prior period ($48.1 million), and (ii) higher
revenues at Car-Mart ($11.8 million), Paaco ($21.3 million) and Smart Choice
($1.7 million). Interest income for the nine months ended January 31, 2001
increased $16.5 million compared to the same period in the prior fiscal year.
The increase was principally the result of (i) including Smart Choice in the
Company's consolidated results of operations for nine months in the current
period versus two months in the prior period ($12.8 million), and (ii) greater
interest earned on Car-Mart's ($1.0 million) and Paaco's ($3.2 million) finance
receivables portfolios as a result of growth in such portfolios, partially
offset by (iii) lower interest income in the months of December and January at
Smart Choice ($.3 million) as a result of a decline in interest rates charged on
installment loans.
As a percentage of sales, cost of sales for the nine months ended January 31,
2001 decreased to 59.5% from 60.4% in the same period in the prior fiscal year.
The decrease was 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 Car-Mart. Selling, general and administrative
expense for the nine months ended January 31, 2001 increased $16.8 million
compared to the same period in the prior fiscal year. The increase was
principally the result of (i) including Smart Choice in the Company's
consolidated results of operations for nine months in the current period versus
two months in the prior period ($11.4 million), and (ii) higher expenses at
Car-Mart ($1.5 million), Paaco ($3.5 million), Smart Choice ($.5 million) and
Concorde ($1.6 million) which corresponds to increased revenues at those
subsidiaries, partially offset by (iii) the deconsolidation of Precision ($.5
million) as a result of the sale of a 50% interest in that company in November
2000. Provision for credit losses for the nine months ended January 31, 2001
increased $22.7 million compared to the same period in the prior fiscal year.
The increase was principally the result of (i) including Smart Choice in the
Company's consolidated results of operations for nine months in the current
period versus two months in the prior period ($14.9 million), and (ii) higher
credit losses at Car-Mart ($2.1 million), Paaco ($1.9 million) and Smart Choice
($3.5 million) which corresponds to an increase in the finance receivables
portfolios as a result of increased sales levels. Interest expense for the nine
months ended January 31, 2001 increased $8.3 million compared to the same period
in the prior fiscal year. The increase was principally the result of (i)
including Smart Choice in the Company's consolidated results of operations for
nine months in the current period versus two months in the prior period ($5.9
million), and (ii) higher interest expense at Car-Mart ($.4 million), Paaco
($1.3 million) and Smart Choice ($.4 million) resulting from an increase in the
balance of their revolving credit facilities.
The provision for income taxes for the nine months ended January 31, 2001 was
$4.3 million on pretax income of $10.3 million. This equates to a 42.2%
effective tax rate after removing from pretax income the equity in earnings of
unconsolidated subsidiaries ($.1 million), which earnings are presented on an
after tax basis. The provision for income taxes for the nine months ended
January 31, 2000 was $7.3 million on pretax income of $19.0 million. This
equates to a 39.5% effective tax rate after removing from pretax income the
equity in earnings of unconsolidated subsidiaries ($.6 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 nine months
ended January 31, 2001 (Car-Mart, Paaco and Smart Choice) and the nine months
ended January 31, 2000 (Car-Mart, Paaco, Smart Choice, Crown El Salvador and
Home Stay).
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended January 31, 2001, net cash provided by operating
activities amounted to $69.1 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 $90.2 million included (i) an $88.5
million use of cash in finance receivables originations in excess of finance
receivables collections, and (ii) a $3.5 million use of cash in the purchase of
property and equipment. Net cash provided by financing activities of $13.0
million principally relates to (i) net borrowings from revolving credit
facilities ($18.3 million), offset by (ii) purchases of the Company's common
stock ($3.8 million) and repayments of other debt ($1.5 million).
As of January 31, 2001, the Company's sources of liquidity included
approximately (i) $1.8 million of cash on hand, of which $.6 million was held by
Crown, (ii) an aggregate of $35.6 million remaining to be drawn on the revolving
credit facilities of Car-Mart, Smart Choice, Paaco and Concorde, 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 and mortgage loans held for sale), 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 January 31, 2001, the Company's subsidiaries could
have collectively drawn an additional $6.3 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 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. The Company's revolving
credit facilities mature at various times between September 2001 and November
2004, and bear interest at rates ranging from Libor plus 2.0% to prime plus
2.25%. The Company 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 advance rates on eligible finance receivables decline
from 85.0% to 70.0% for Smart Choice and from 70.0% to 67.5% for Paaco over the
term of the respective credit facilities.
Based upon the eligible collateral on hand at January 31, 2001, Paaco and
Smart Choice were collectively over-advanced on their senior credit facilities
with Finova by approximately $4.9 million. Paaco and Smart Choice presently
expect to come into compliance with the terms of their credit facilities in
April 2001. However, in July 2001 the Smart Choice credit facility requires a
step-down in the finance receivable advance rate from 85.0% to 77.0%. Absent
funding from an outside source, Smart Choice does not expect it will be able to
meet this step-down. In
17
18
February 2001, Smart Choice and Paaco provided Finova with their most recent
financial projections and requested that the scheduled finance receivable
advance rate step-downs over the next three years be modified to conform to
those projections. Presently, it is the Company's expectation that Finova will
either modify the scheduled finance receivable advance rate step-downs to
conform to the financial projections of Smart Choice and Paaco, or provide Smart
Choice and Paaco with a forbearance letter covering some period of time.
However, the Company cannot predict with certainty the actions of Finova; and,
under the terms of the credit facilities, Finova has the right to accelerate the
maturity of the loans, thereby demanding immediate repayment, and call on
Crown's guarantee of $5 million.
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 and Concorde
are expected to be able to support the majority of their anticipated growth over
the next twelve months.
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 January 31,
2001 the Company had repurchased 4,997,312 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 46 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 January 31, 2001
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.
Change in Change in Annual
Interest Rates Pretax Earnings
-------------- ----------------
(in thousands)
+2% $ (2,478)
+1% (1,239)
-1% 1,239
-2% 2,478
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PART II
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Based upon the eligible collateral on hand at January 31, 2001, Paaco and
Smart Choice were collectively over-advanced on their senior credit facilities
with Finova by approximately $4.9 million. Paaco and Smart Choice presently
expect to come into compliance with the terms of their credit facilities in
April 2001. However, in July 2001 the Smart Choice credit facility requires a
step-down in the finance receivable advance rate from 85.0% to 77.0%. Absent
funding from an outside source, Smart Choice does not expect it will be able to
meet this step-down. In February 2001, Smart Choice and Paaco provided Finova
with their most recent financial projections and requested that the scheduled
finance receivable advance rate step-downs over the next three years be modified
to conform to those projections. Presently, it is the Company's expectation that
Finova will either modify the scheduled finance receivable advance rate
step-downs to conform to the financial projections of Smart Choice and Paaco, or
provide Smart Choice and Paaco with a forbearance letter covering some period of
time. However, the Company cannot predict with certainty the actions of Finova;
and, under the terms of the credit facilities, Finova has the right to
accelerate the maturity of the loans, thereby demanding immediate repayment, and
call on Crown's guarantee of $5 million.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
During the fiscal quarter ended January 31, 2001 no reports on
Form 8-K were filed.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CROWN GROUP, INC.
By: /s/ Mark D. Slusser
--------------------------------------------
Mark D. Slusser
Chief Financial Officer, Vice President
Finance and Secretary
(Principal Financial and Accounting Officer)
Dated: March 9, 2001
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