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, 2001 0-14939
CROWN GROUP, INC.
(Exact name of registrant as specified in its charter)
<Table>
TEXAS 63-0851141
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</Table>
4040 N. MACARTHUR BLVD., SUITE 100, IRVING, TEXAS
(Address of principal executive offices)
75038-6424
(Zip Code)
(972) 717-3423
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<Table>
<Caption>
Outstanding at
Title of Each Class September 11, 2001
------------------- ------------------
Common stock, par value $.01 per share 6,735,367
</Table>
2
PART I
ITEM 1. FINANCIAL STATEMENTS CROWN GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
July 31, 2001
(unaudited) April 30, 2001
------------- --------------
Assets:
Cash and cash equivalents $ 2,206,844 $ 2,193,342
Accounts and other receivables 4,841,853 6,642,760
Mortgage loans held for sale, net 17,595,346 16,200,439
Finance receivables, net 209,455,523 211,605,630
Inventory 12,604,528 10,993,585
Prepaid and other assets 1,071,132 1,043,233
Investments 6,790,367 6,670,265
Deferred tax assets, net 22,022,815 21,302,939
Property and equipment, net 16,722,809 17,016,321
Goodwill, net 8,851,602 8,851,602
------------ ------------
$302,162,819 $302,520,116
============ ============
Liabilities and stockholders' equity:
Accounts payable $ 6,054,833 $ 6,441,606
Accrued liabilities 9,466,537 11,167,421
Income taxes payable 3,988,984 6,127,419
Revolving credit facilities 196,024,776 190,062,226
Other notes payable 16,643,932 19,325,376
Deferred sales tax 4,956,653 4,963,154
------------ ------------
237,135,715 238,087,202
------------ ------------
Minority interests 5,825,075 5,500,661
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;
6,735,367 issued and outstanding (6,980,367 at April 30, 2001) 67,354 69,804
Additional paid-in capital 22,154,005 23,075,677
Retained earnings 36,980,670 35,786,772
------------ ------------
Total stockholders' equity 59,202,029 58,932,253
------------ ------------
$302,162,819 $302,520,116
============ ============
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
2
3
CONSOLIDATED STATEMENTS OF OPERATIONS CROWN GROUP, INC.
(UNAUDITED)
<Table>
<Caption>
Three Months Ended
July 31,
2001 2000
------------ ------------
Revenues:
Sales $ 64,715,828 $ 66,904,528
Interest income 12,503,091 11,730,913
Gain on sale of mortgage loans 2,392,107 1,851,185
Other 510,380 1,964,303
------------ ------------
80,121,406 82,450,929
------------ ------------
Costs and expenses:
Cost of sales 38,189,494 38,879,279
Selling, general and administrative 17,817,721 17,201,481
Provision for credit losses 16,660,395 14,294,193
Interest expense 4,889,917 5,522,555
Depreciation and amortization 611,409 1,042,637
Write-down of equipment 400,000
------------ ------------
78,568,936 76,940,145
------------ ------------
Other income:
Equity in earnings of unconsolidated subsidiary 107,727
------------ ------------
107,727
------------ ------------
Income before taxes and minority interests 1,660,197 5,510,784
Provision for income taxes 830,352 2,248,436
Minority interests (364,053) 495,206
------------ ------------
Net income $ 1,193,898 $ 2,767,142
============ ============
Earnings per share:
Basic $ .17 $ .34
Diluted $ .17 $ .32
Weighted average number of shares outstanding:
Basic 6,868,541 8,179,391
Diluted 7,038,749 8,582,006
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
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4
CONSOLIDATED STATEMENTS OF CASH FLOWS CROWN GROUP, INC.
(UNAUDITED)
<Table>
<Caption>
Three Months Ended
July 31,
2001 2000
------------ ------------
Operating activities:
Net income $ 1,193,898 $ 2,767,142
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 611,409 1,042,637
Accretion of purchase discount (150,778) (342,238)
Deferred income taxes (719,876) (1,100,000)
Provision for credit losses 16,660,395 14,294,193
Write-down of equipment 400,000
Minority interests (364,053) 495,206
Gain on sale of mortgage loans (2,392,107) (1,851,185)
(Gain) loss on sale of assets 8,959 (86,446)
Equity in earnings of unconsolidated subsidiary (107,727)
Changes in operating assets and liabilities:
Accounts and other receivables 1,800,908 990,016
Mortgage loans originated or acquired (62,268,742) (45,927,877)
Mortgage loans sold and principal repayments 63,155,418 49,014,205
Finance receivable originations (60,051,544) (62,961,012)
Finance receivable collections 38,880,259 32,870,913
Inventory acquired in repossession 6,922,299 7,551,798
Inventory (1,610,943) (975,478)
Prepaids and other assets (27,900) (468,374)
Accounts payable, accrued liabilities and deferred sales tax (1,405,692) (1,834,396)
Income taxes payable (2,138,435) (4,589,946)
------------ ------------
Net cash used in operating activities (1,604,252) (11,110,842)
------------ ------------
Investing activities:
Purchase of property and equipment (746,856) (1,664,579)
Sale of assets 20,000 361,831
Purchase of investments (12,375) (601,475)
------------ ------------
Net cash used in investing activities (739,231) (1,904,223)
------------ ------------
Financing activities:
Purchase of common stock (924,122) (835,456)
Proceeds from revolving credit facilities, net 5,962,550 8,836,875
Repayments of other debt (2,681,443) (776,055)
------------ ------------
Net cash provided by financing activities 2,356,985 7,225,364
------------ ------------
Increase (decrease) in cash and cash equivalents 13,502 (5,789,701)
Cash and cash equivalents at: Beginning of period 2,193,342 9,843,310
------------ ------------
End of period $ 2,206,844 $ 4,053,609
============ ============
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
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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 primarily in the business of selling and financing used
automobiles and trucks principally to consumers with limited or damaged credit
histories. In addition, Crown also has investments in other industries. As of
July 31, 2001 Crown owned a 95% 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.
("Paaco"). Each of Car-Mart, Smart Choice and Paaco sell and finance used
vehicles. As of July 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 prime and sub-prime mortgage lender, and (iii) minority positions in certain
other entities that operate in the high technology industry or focus on Internet
commerce. The Company is presently focusing on (i) the development and expansion
of its automobile businesses, and (ii) maximizing its return on its other
businesses and investments.
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 accounting principles generally accepted in the United States of
America 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, 2001 are not necessarily indicative of the results that
may be expected for the year ended April 30, 2002. 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, 2001.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations", which eliminates the pooling method of accounting for business
combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the
accounting for intangible assets and goodwill acquired in a business
combination. This portion of SFAS 141 is effective for business combinations
completed after June 30, 2001. The Company does not expect SFAS 141 will have a
material impact on the Company's financial position or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Intangible Assets", which revises the accounting
for purchased goodwill and intangible assets. Under SFAS 142, goodwill and
intangible assets with indefinite lives will no longer be amortized, but will be
tested for impairment annually, and in the event of an impairment indicator.
SFAS 142 is effective for fiscal years beginning after December 15, 2001, with
earlier adoption permitted. The Company has adopted SFAS 142 effective May 1,
2001. Presented below is a reconciliation of reported net income and per share
amounts to adjusted net income and per share amounts for the three months ended
July 31, 2001 and 2000 to adjust for the amortization of intangible assets for
periods prior to the adoption of SFAS 142 on May 1, 2001 (in thousands, except
per share amounts). The reconciliation presents the Company's results of
operations for periods prior to the adoption of SFAS 142 on a basis comparable
with periods since the adoption of SFAS 142.
<Table>
<Caption>
Net Income Basic Earnings Per Share Diluted Earnings Per Share
------------------------ ------------------------ --------------------------
Three Months Ended Three Months Ended Three Months Ended
July 31, July 31, July 31,
2001 2000 2001 2000 2001 2000
-------- -------- -------- -------- --------- ---------
As reported $ 1,194 $ 2,767 $ .17 $ .34 $ .17 $ .32
Add back goodwill amort. -- 233 -- .03 -- .03
-------- -------- -------- -------- -------- --------
As adjusted $ 1,194 $ 3,000 $ .17 $ .37 $ .17 $ .35
======== ======== ======== ======== ======== ========
</Table>
Reclassifications
Certain prior year amounts in the accompanying financial statements have been
reclassified to conform to the fiscal 2002 presentation.
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6
C - 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 8% 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, 2001 and April 30, 2001 are as follows:
<Table>
<Caption>
July 31, April 30,
2001 2001
------------- -------------
Finance receivables $ 292,312,101 $ 300,228,162
Unearned finance charges (32,088,475) (36,965,956)
Allowance for credit losses (50,320,382) (51,058,077)
Purchase discounts (447,721) (598,499)
------------- -------------
$ 209,455,523 $ 211,605,630
============= =============
</Table>
In accordance with APB Opinion No. 16, as of the dates the Company acquired
interests in Paaco and Smart Choice, the Company valued Paaco's and Smart
Choice's finance receivables portfolios at market value and determined that
purchase discounts of $1,577,781 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, 2001 and 2000 are as follows:
<Table>
<Caption>
Three Months Ended
July 31,
2001 2000
------------ ------------
Balance at beginning of period $ 51,058,077 $ 43,783,529
Provision for credit losses 16,549,871 14,161,193
Net charge offs (17,287,566) (11,250,424)
------------ ------------
Balance at end of period $ 50,320,382 $ 46,694,298
============ ============
</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
of $688,700 and $577,972 as of July 31, 2001 and April 30, 2001, respectively.
D - INVESTMENTS
A summary of investments as of July 31, 2001 and April 30, 2001 is as
follows:
<Table>
<Caption>
July 31, April 30,
2001 2001
---------- ----------
Precision IBC, Inc. $3,304,231 $3,196,505
Monarch Venture Partners' Fund I, L.P. 1,836,136 1,823,760
Mariah Vision 3, Inc. 1,650,000 1,650,000
---------- ----------
$6,790,367 $6,670,265
========== ==========
</Table>
6
7
E - PROPERTY AND EQUIPMENT
A summary of property and equipment as of July 31, 2001 and April 30, 2001 is
as follows:
<Table>
<Caption>
July 31, April 30,
2001 2001
------------ ------------
Land and buildings $ 7,814,283 $ 7,461,891
Furniture, fixtures and equipment 9,798,513 10,007,553
Leasehold improvements 4,059,390 3,914,807
Less accumulated depreciation and amortization (4,949,377) (4,367,930)
------------ ------------
$ 16,722,809 $ 17,016,321
============ ============
</Table>
For the three months ended July 31, 2001 and 2000 depreciation and
amortization of property and equipment amounted to $611,409 and $783,647,
respectively.
F - DEBT
A summary of debt as of July 31, 2001 and April 30, 2001 is as follows:
<Table>
<Caption>
Revolving Credit Facilities
----------------------------------------------------------------------------------------------------------------------------
Facility Interest Balance at
Borrower Lender Amount Rate Maturity July 31, 2001 April 30, 2001
------------ ----------------- ------------- ------------- -------- ----------------- ----------------
Smart Choice Finova $ 98 million Prime + 2.25% Nov 2004 $ 88,394,135 $ 88,394,135
Paaco Finova $ 62 million Prime + 2.00% Nov 2004 59,047,810 59,047,810
Car-Mart Bank of America $ 35 million Prime + .88% Jan 2002 34,328,178 29,767,688
Concorde Washington Mutual $ 25 million Libor + 2.00% Sep 2001 14,254,653 12,852,593
----------------- ----------------
$ 196,024,776 $ 190,062,226
================= ================
</Table>
<Table>
<Caption>
Other Notes Payable
-----------------------------------------------------------------------------------------------------------------------------
Facility Interest Balance at
Borrower Lender Amount Rate Maturity July 31, 2001 April 30, 2001
-------------- ----------------- -------- ------------- -------- ----------------- ----------------
Crown Car-Mart sellers N/A 8.50% Jan 2004 $ 7,500,000 $ 7,500,000
Crown Bank of America N/A 8.00% Sep 2001 2,016,000 2,316,000
Crown Regions Bank N/A Prime + .50% May 2001 2,000,000
Paaco Washington Mutual N/A 8.50% May 2003 772,512 792,815
Paaco Heller Financial N/A Prime + 2.25% Dec 2015 582,247 586,836
Smart Choice Huntington N/A Prime + .75% Oct 2001 1,903,563 1,932,373
Smart Choice High Capital N/A 10.0% Nov 2001 725,000 725,000
Various Various N/A Various Various 3,144,610 3,472,352
----------------- ----------------
$ 16,643,932 $ 19,325,376
================= ================
</Table>
The Company's revolving credit facilities are primarily collateralized by
finance receivables, inventory 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 July
31, 2001 substantially all of the Company's $49.3 million equity investment in
its consolidated subsidiaries was restricted due to covenants in each of such
subsidiaries' revolving credit facilities which prohibit certain distributions
from such subsidiary 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.
7
8
At April 30, 2001 Concorde was in violation of its $1.5 million minimum net
worth covenant under its revolving credit facility. At July 31, 2001 Concorde's
net worth exceeded the $1.5 million minimum threshold, however, the lender has
not waived the prior default. Concorde expects to execute a new agreement with
its lender to cure the violation when the current agreement expires in September
2001, or replace its credit facility with a different lender. In addition, at
July 31, 2001 Smart Choice was in violation and, as a result of Smart Choice's
violation, Paaco may be in violation, of certain terms of their revolving credit
facilities with Finova Capital Corporation ("Finova") (see Note G).
G - DEFAULT ON FINOVA CREDIT FACILITY
Each of Paaco and Smart Choice have revolving credit facilities with Finova.
Since December 2000 Smart Choice has been over-advanced on its revolving credit
facility, which constitutes an event of default under the facility. As of July
31, 2001 Smart Choice was over-advanced by $20.9 million. Absent funding from an
outside source, Smart Choice does not expect it will be able to come into
compliance with the current advance rate provisions of the Finova revolving
credit facility. There is uncertainty as to whether Smart Choice's event of
default is the basis for an event of default under Paaco's revolving credit
facility. In any event, Paaco is a wholly-owned subsidiary of Smart Choice, and
ultimately Paaco could be affected by the default of Smart Choice under its
Finova credit facility. As a result of the event of default, Smart Choice is
currently not entitled to receive additional advances under its credit facility,
and Paaco may not be entitled to receive additional advances under its credit
facility.
Since January 2001 Smart Choice has been in discussions with Finova with
regard to possible solutions to the over-advanced position. There are several
possible outcomes that may result from these negotiations, including:
(i) a restructuring of the Smart Choice credit facility which brings Smart
Choice back into compliance;
(ii) a sale of substantially all of Smart Choice's assets with the proceeds
being used to pay down a portion of its credit facility, and the unpaid
portion being absorbed by Finova (forgiveness of debt) and Paaco as the
parties may negotiate;
(iii) an agreement among Smart Choice, Paaco and Finova whereby substantially
all of the assets and liabilities of Smart Choice are liquidated with
the proceeds being used to pay down a portion of its credit facility,
and the unpaid portion being absorbed by Finova (forgiveness of debt)
and Paaco as the parties may negotiate; or
(iv) Finova's exercise of its rights under the credit facility and
acceleration of the maturity of the loan seeking to liquidate or sell
the collateral, which action may prompt Smart Choice to take actions to
protect the interests of its shareholders, including the filing of a
plan of reorganization under federal bankruptcy laws.
Although management is exploring a number of alternatives, including those
listed above, the Company cannot predict how or whether Smart Choice's default
will be resolved. The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of Smart Choice as a going concern.
Recoverability of a significant portion of the assets of Smart Choice may be
materially impacted if Smart Choice ceases to continue as a going concern. The
financial statements do not include any adjustments relating to the
recoverability of recorded asset amounts that might be necessary should Smart
Choice be unable to continue in existence.
As of July 31, 2001 Crown's investment in Paaco/Smart Choice was $19.0
million ($16.4 million equity and $2.6 million debt). In addition, Crown
guarantees the credit facilities of Smart Choice and Paaco to a maximum combined
amount of $5 million.
8
9
H - EARNINGS PER SHARE
A summary reconciliation of basic earnings per share to diluted earnings per
share for the three months ended July 31, 2001 and 2000 is as follows:
<Table>
<Caption>
Three Months Ended
July 31,
2001 2000
---------- ----------
Net income $1,193,898 $2,767,142
========== ==========
Average shares outstanding-basic 6,868,541 8,179,391
Dilutive options 170,208 402,615
---------- ----------
Average shares outstanding-diluted 7,038,749 8,582,006
========== ==========
Earnings per share:
Basic $ .17 $ .34
Diluted $ .17 $ .32
Antidilutive securities not included:
Options 627,500 432,500
========== ==========
</Table>
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.
Car-Mart Stock Options
In connection with the Company's acquisition of Car-Mart in January 1999,
Car-Mart issued options to certain employees to purchase an aggregate 10%
interest in Car-Mart. Such options become exercisable over a period of
approximately five years and are subject to meeting certain annual earnings
targets. The earnings targets are established each year by Car-Mart's Board of
Directors. Pursuant to such option plan, as of July 31, 2001 Car-Mart employees
had purchased, or had the right to purchase at a nominal cost, an aggregate 5%
interest in Car-Mart. Options to purchase the remaining 5% interest become
exercisable upon meeting the earnings targets for the fiscal years ending April
30, 2002 and 2003.
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 the plaintiffs to purchase Smart Choice
securities at artificially inflated prices. In April 2001 Smart Choice and the
plaintiffs' representatives executed an agreement whereby Smart Choice will pay
$2.5 million in full settlement of the above described actions. All of the $2.5
million settlement amount has been funded by Smart Choice's insurance carrier.
The agreement is subject to final approval of the court.
9
10
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.
J - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures for the three months ended July 31, 2001
and 2000 are as follows:
<Table>
<Caption>
Three Months Ended
July 31,
2001 2000
---------- ----------
Interest paid $4,798,889 $6,045,402
Income taxes paid, net of refund 3,688,661 7,938,382
</Table>
K - BUSINESS SEGMENTS
Operating results and other financial data are presented for the principal
business segments of the Company for the three months ended July 31, 2001 and
2000. These segments are categorized principally by legal entity, which is how
management organizes the segments for making operating decisions and assessing
performance. The segments include (i) Car-Mart, (ii) Paaco, (iii) Smart Choice,
and (iv) other. Each of Car-Mart, Paaco and Smart Choice sell and finance used
vehicles. For the three months ended July 31, 2001 "Other" includes corporate
operations, Concorde (mortgage loans), and the Company's equity investment in
Precision (IBC rentals and sales). For the three months ended July 31, 2000
"Other" includes corporate operations, Concorde, Precision and Crown El
Salvador. The Company's business segment data for the three months ended July
31, 2001 and 2000 is as follows (in thousands):
<Table>
<Caption>
Three Months Ended July 31, 2001
---------------------------------------------------------------------------------
Car-Mart Paaco S. Choice Other Eliminations Consolidated
-------- -------- --------- -------- ------------ ------------
Revenues:
Sales and other $ 28,124 $ 25,367 $ 11,506 $ 2,621 $ 67,618
Interest income 2,233 4,748 4,899 866 $ (243) 12,503
-------- -------- -------- -------- ----------- --------
Total 30,357 30,115 16,405 3,487 (243) 80,121
-------- -------- -------- -------- ----------- --------
Costs and expenses:
Cost of sales 15,010 16,272 6,908 38,190
Selling, gen. and admin. 4,097 6,728 4,050 2,943 17,818
Prov. for credit losses 5,497 3,820 7,232 111 16,660
Interest expense 784 1,502 2,198 649 (243) 4,890
Depreciation and amort. 34 202 213 162 611
Write-down of equip. 400 400
-------- -------- -------- -------- ----------- --------
Total 25,422 28,524 20,601 4,265 (243) 78,569
-------- -------- -------- -------- ----------- --------
Other income 108 108
-------- -------- -------- -------- ----------- --------
Income (loss) before taxes
and minority interests $ 4,935 $ 1,591 $ (4,196) $ (670) $ -- $ 1,660
======== ======== ======== ======== =========== ========
Capital expenditures $ 384 $ 109 $ 161 $ 93 $ -- $ 747
======== ======== ======== ======== =========== ========
Total assets $ 76,787 $ 91,081 $ 95,343 $ 91,551 $ (52,599) $302,163
======== ======== ======== ======== =========== ========
</Table>
10
11
<Table>
<Caption>
Three Months Ended July 31, 2000
-------------------------------------------------------------------------------------
Car-Mart Paaco S. Choice Other Eliminations Consolidated
--------- --------- --------- --------- ------------ ------------
Revenues:
Sales and other $ 22,360 $ 25,096 $ 18,924 $ 4,340 $ 70,720
Interest income 1,768 3,827 5,546 947 $ (357) 11,731
--------- --------- --------- --------- ----------- ---------
Total 24,128 28,923 24,470 5,287 (357) 82,451
--------- --------- --------- --------- ----------- ---------
Costs and expenses:
Cost of sales 12,107 15,437 10,751 584 38,879
Selling, gen. and admin. 3,597 5,275 4,529 3,800 17,201
Prov. for credit losses 3,569 4,748 5,844 133 14,294
Interest expense 938 1,735 2,463 744 (357) 5,523
Depreciation and amort. 39 126 253 625 1,043
--------- --------- --------- --------- ----------- ---------
Total 20,250 27,321 23,840 5,886 (357) 76,940
--------- --------- --------- --------- ----------- ---------
Other income
--------- --------- --------- --------- ----------- ---------
Income (loss) before taxes
and minority interests $ 3,878 $ 1,602 $ 630 $ (599) $ -- $ 5,511
========= ========= ========= ========= =========== =========
Capital expenditures $ 118 $ 525 $ 329 $ 693 $ -- $ 1,665
========= ========= ========= ========= =========== =========
Total assets $ 62,025 $ 84,622 $ 101,357 $ 106,812 $ (59,845) $ 294,971
========= ========= ========= ========= =========== =========
</Table>
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 automobile businesses, and its goal of
maximizing its return on its other businesses and investments. 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, competition, dependence on existing management, economic
conditions (particularly in the states of Texas, Arkansas and Florida), changes
in 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 primarily in the business of selling and financing used
automobiles and trucks principally to consumers with limited or damaged credit
histories. In addition, Crown also has investments in other industries. As of
July 31, 2001 Crown owned a 95% 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.
("Paaco"). Each of Car-Mart, Smart Choice and Paaco sell and finance used
vehicles. As of July 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 prime and sub-prime mortgage lender, and (iii) minority positions in certain
other entities that operate in the high technology industry or focus on Internet
commerce. The Company is presently focusing on (i) the development and expansion
of its automobile businesses, and (ii) maximizing its return on its other
businesses and investments.
11
12
RESULTS OF OPERATIONS
The Company sold a 50% interest in Precision in November 2000 and 100% of
Crown El Salvador in April 2001. Accordingly, the operating results for the
three months ended July 31, 2001 and 2000 are not entirely comparable. Below is
a summary of the number of months of operation each subsidiary's operating
results are included in the Company's consolidated results of operations for the
three months ended July 31, 2001 and 2000:
<Table>
<Caption>
Number of Months
Subsidiary Included In
Three Months Ended
Month Crown Month Crown July 31,
Acquired Disposed -------------------------
Entity or Formed or Sold 2001 2000
- ----------------- ----------- ---------------- -------- --------
Car-Mart 1-99 3 months 3 months
Paaco 2-98 3 months 3 months
Smart Choice 12-99 3 months 3 months
Concorde 6-97 3 months 3 months
Precision 2-98 11-00 (50% sold) - 3 months
Crown El Salvador 2-99 4-01 - 3 months
</Table>
The Company's business segments are categorized principally by legal entity,
which is how management organizes the segments for making operating decisions
and assessing performance. The segments include (i) Car-Mart, (ii) Paaco, (iii)
Smart Choice, and (iv) other. Each of Car-Mart, Paaco and Smart Choice sell and
finance used vehicles. For the three months ended July 31, 2001 "Other" includes
corporate operations, Concorde (mortgage loans) and the Company's equity
investment in Precision (IBC rentals and sales). For the three months ended July
31, 2000 "Other" includes corporate operations, Concorde, Precision and Crown El
Salvador. Below is a summary of revenue and pretax income by business segment,
and a more detailed operating statement by segment, for the three months ended
July 31, 2001 and 2000:
CONSOLIDATED
(In Thousands)
<Table>
<Caption>
Revenues Pretax Income (Loss)
--------------------------- ---------------------------
Three Months Ended July 31, Three Months Ended July 31,
2001 2000 2001 2000
-------- -------- -------- --------
Car-Mart $ 30,357 $ 24,128 $ 4,935 $ 3,878
Paaco 30,115 28,923 1,591 1,602
Smart Choice 16,405 24,470 (4,196) 630
Other 3,487 5,287 (670) (599)
Eliminations (243) (357) -- --
-------- -------- -------- --------
Consolidated $ 80,121 $ 82,451 $ 1,660 $ 5,511
======== ======== ======== ========
</Table>
THREE MONTHS ENDED JULY 31, 2001 VS. THREE MONTHS ENDED JULY 31, 2000
Revenues decreased $2.3 million, or 2.8%, for the three months ended July 31,
2001 compared to the same period in the prior fiscal year. The decrease was
principally the result of (i) a decrease in revenues at Smart Choice ($8.1
million) resulting from a 25% decrease in the number of vehicles sold and a 20%
decrease in the average retail sales price per unit, partially offset by (ii)
higher revenues at Car-Mart ($6.2 million) resulting from (a) an increase in the
average number of regular and satellite stores in operation, (b) a 2.7% increase
in the average sales price per retail vehicle sold, and (c) an increase in the
average number of retail vehicles sold per dealership by 1.5%. Pretax income
decreased $3.9 million, or 69.9%, for the three months ended July 31, 2001
compared to the same period in the prior fiscal year. The decrease was
principally the result of (i) Smart Choice reporting a $4.2 million pretax loss
in the current fiscal period as compared to $.6 million pretax income in the
same period of the prior fiscal year, partially offset by (ii) a $1.1 million
increase in Car-Mart's pretax income. The $4.8 million decrease in Smart
Choice's pretax income was principally the result of (i) a higher provision for
credit losses, and (ii) a significant decrease in revenues without a
corresponding decrease in costs and expenses.
12
13
CAR-MART
(Dollars in Thousands)
<Table>
<Caption>
% Change As a % of Sales and Other
-------- -------------------------
Three Months Ended 2001 Three Months Ended
July 31, vs July 31,
2001 2000 2000 2001 2000
------- ------- -------- -------- --------
Revenues:
Sales and other $28,124 $22,360 25.8% 100.0% 100.0%
Interest income 2,233 1,768 26.3 7.9 7.9
------- ------- ------ ------ ------
Total 30,357 24,128 25.8 107.9 107.9
------- ------- ------ ------ ------
Costs and expenses:
Cost of sales 15,010 12,107 24.0 53.4 54.1
Selling, gen and admin 4,097 3,597 13.9 14.6 16.1
Prov for credit losses 5,497 3,569 54.0 19.5 16.0
Interest expense 784 938 (16.4) 2.8 4.2
Depreciation and amort 34 39 (12.8) .1 .2
------- ------- ------ ------ ------
Total 25,422 20,250 25.5 90.4 90.6
------- ------- ------ ------ ------
Pretax income $ 4,935 $ 3,878 27.3 17.5 17.3
======= ======= ====== ====== ======
</Table>
THREE MONTHS ENDED JULY 31, 2001 VS. THREE MONTHS ENDED JULY 31, 2000
Revenues increased $6.2 million, or 25.8%, for the three months ended July
31, 2001 as compared to the same period in the prior fiscal year. The increase
was principally the result of (i) increasing the average number of regular and
satellite stores in operation to 50.3 in the current fiscal period from 42.0 in
the prior fiscal period, (ii) increasing the average sales price per retail
vehicle by approximately 2.7%, and (iii) increasing the average number of retail
vehicles sold per dealership by 1.5%. Pretax income increased $1.1 million, or
27.3%, for the three months ended July 31, 2001 as compared to the same period
in the prior fiscal year. The increase was principally the result of (i)
increased revenues (25.8%), and (ii) slightly lower costs and expenses (.2%) as
a percentage of sales and other.
PAACO
(Dollars in Thousands)
<Table>
<Caption>
% Change As a % of Sales and Other
-------- -------------------------
Three Months Ended 2001 Three Months Ended
July 31, vs July 31,
2001 2000 2000 2001 2000
------- ------- -------- -------- --------
Revenues:
Sales and other $25,367 $25,096 1.1% 100.0% 100.0%
Interest income 4,748 3,827 24.1 18.7 15.2
------- ------- ------- ------- -------
Total 30,115 28,923 4.1 118.7 115.2
------- ------- ------- ------- -------
Costs and expenses:
Cost of sales 16,272 15,437 5.4 64.1 61.5
Selling, gen and admin 6,728 5,275 27.5 26.5 21.0
Prov for credit losses 3,820 4,748 (19.5) 15.1 18.9
Interest expense 1,502 1,735 (13.4) 5.9 6.9
Depreciation and amort 202 126 60.3 .8 .5
------- ------- ------- ------- -------
Total 28,524 27,321 4.4 112.4 108.8
------- ------- ------- ------- -------
Pretax income $ 1,591 $ 1,602 (.7) 6.3 6.4
======= ======= ======= ======= =======
</Table>
13
14
THREE MONTHS ENDED JULY 31, 2001 VS. THREE MONTHS ENDED JULY 31, 2000
Revenues increased $1.2 million, or 4.1%, for the three months ended July 31,
2001 as compared to the same period in the prior fiscal year. The increase was
principally the result of higher interest income resulting from (i) a 14.4%
increase in the average finance receivables balances outstanding, and (ii) a
slight increase in the average interest rate charged on Paaco's installment
loans. Pretax income was virtually unchanged during the two periods as costs and
expenses increased substantially the same amount ($1.2 million) as the increase
in revenues.
SMART CHOICE
(Dollars in Thousands)
<Table>
<Caption>
% Change As a % of Sales and Other
-------- --------------------------
Three Months Ended 2001 Three Months Ended
July 31, vs July 31,
2001 2000 2000 2001 2000
-------- -------- -------- -------- --------
Revenues:
Sales and other $ 11,506 $ 18,924 (39.2)% 100.0% 100.0%
Interest income 4,899 5,546 (11.7) 42.6 29.3
-------- -------- -------- -------- --------
Total 16,405 24,470 (33.0) 142.6 129.3
-------- -------- -------- -------- --------
Costs and expenses:
Cost of sales 6,908 10,751 (35.7) 60.0 56.8
Selling, gen and admin 4,050 4,529 (10.6) 35.2 23.9
Prov for credit losses 7,232 5,844 (23.8) 62.9 30.9
Interest expense 2,198 2,463 (10.8) 19.1 13.0
Depreciation and amort 213 253 (15.8) 1.9 1.3
-------- -------- -------- -------- --------
Total 20,601 23,840 (13.6) 179.1 125.9
-------- -------- -------- -------- --------
Pretax income $ (4,196) $ 630 NM (36.5) 3.4
======== ======== ======== ======== ========
</Table>
NM - Not meaningful
THREE MONTHS ENDED JULY 31, 2001 VS. THREE MONTHS ENDED JULY 31, 2000
Revenues decreased $8.1 million, or 33.0%, for the three months ended July
31, 2001 as compared to the same period in the prior fiscal year. The decrease
was principally the result of (i) a 25% decrease in the number of vehicles sold,
and (ii) a 20% decrease in the average sales price per retail vehicle sold.
Beginning in March 2001 Smart Choice changed its underwriting practices in an
effort to reduce credit losses. The changes in its underwriting practices
resulted in fewer individuals being approved for credit, which resulted in a
lower number of vehicles sold. In addition, Smart Choice also reduced the
average retail sales price per unit by 20% during the current fiscal period.
Smart Choice believes that by selling a lower priced vehicle and financing it
over a shorter term, its credit losses will decline.
Smart Choice reported a pretax loss of $4.2 million for the three months
ended July 31, 2001 as compared to $.6 million pretax income for the same period
in the prior fiscal year. The $4.8 million decrease is principally the result of
(i) the provision for credit losses increasing to $7.2 million in the current
fiscal period from $5.8 million in the same period in the prior fiscal year
($1.4 million), (ii) cost of sales increasing to 60.0% of sales and other in the
current fiscal period from 56.8% in the same period in the prior fiscal year
($.4 million), and (iii) a 33% decrease in revenues without a corresponding
decrease in costs and expenses. Smart Choice believes that changes in the
structure of its installment sales contracts and inventory mix beginning in May
2000 and continuing into February 2001 may have contributed to the increase in
credit losses during the three months ended July 31, 2001. In particular, during
this period Smart Choice sold a higher priced vehicle and shortened the term of
its installment sales contracts. These actions increased the average monthly
payment on its contracts to a level which may have made it difficult for certain
customers to remain current in their payments. Many of the accounts charged-off
and vehicles repossessed during the three months ended July 31, 2001 pertain to
loans originated between May 2000 and February 2001. In March 2001 Smart Choice
began selling lower priced vehicles and reduced the average interest rate
charged on its loans which has decreased the average monthly payment required on
its contracts. Smart Choice believes that by making its monthly payments more
affordable, its credit losses will decline.
14
15
OTHER
(Dollars in Thousands)
<Table>
<Caption>
% Change
--------
Three Months Ended 2001
July 31, vs
2001 2000 2000
------- ------- -------
Revenues:
Sales and other $ 2,621 $ 4,340 (39.6)%
Interest income 866 947 (8.6)
------- ------- ------
Total 3,487 5,287 (34.0)
------- ------- ------
Costs and expenses:
Cost of sales 584 NM
Selling, gen and admin 2,943 3,800 (22.6)
Prov for credit losses 111 133 (16.5)
Interest expense 649 744 (12.8)
Depreciation and amort 162 625 (74.1)
Write-down of equip 400 NM
------- ------- ------
Total 4,265 5,886 (27.5)
------- ------- ------
Other income 108 NM
------- ------- ------
Pretax income $ (670) $ (599) 11.9
======= ======= ======
</Table>
THREE MONTHS ENDED JULY 31, 2001 VS. THREE MONTHS ENDED JULY 31, 2000
Revenues decreased $1.8 million, or 34.0%, for the three months ended July
31, 2001 as compared to the same period in the prior fiscal year. The decrease
was principally the result of (i) excluding Precision ($1.7 million) and Crown
El Salvador ($.6 million) from the Company's consolidated operating results in
the current fiscal period as a result of the sale of 50% of Precision and all of
Crown El Salvador in the prior year, partially offset by (ii) an increase in
Concorde's revenues ($.8 million) as a result of greater mortgage loan
originations and sales. Other pretax loss remained relatively unchanged during
the three months ended July 31, 2001 as compared to the same period in the prior
fiscal period. The increase in Concorde's pretax income ($.3 million) was more
than offset by a write-down of certain equipment at Crown ($.4 million) that
after review and evaluation was determined to be impaired.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $1.6 million for the three months
ended July 31, 2001 as compared to $11.1 million for the same period in the
prior fiscal year. The $9.5 million decrease was principally the result of the
net finance receivables portfolio increasing by $8.7 million in the prior fiscal
period as compared to a decrease of $2.2 million in the current fiscal period.
During the current fiscal period, net cash was used in operating activities to
reduce certain payables and accrued liabilities, and increase inventories. Net
cash used in investing activities was $.7 million for the three months ended
July 31, 2001 as compared to $1.9 million in the same period in the prior fiscal
year. The $1.2 million decrease was principally the result of a decrease in the
purchase of property and equipment ($.9 million). Net cash provided by financing
activities was $2.4 million for the three months ended July 31, 2001 as compared
to $7.2 million in the same period in the prior fiscal year. The $4.9 million
decrease was principally the result of (i) a smaller increase in borrowings from
revolving credit facilities ($2.9 million), and (ii) higher repayments of other
debt ($1.9 million) in the current fiscal period as compared to the same period
in the prior fiscal year.
CROWN
As of July 31, 2001 Crown's (parent company only) sources of liquidity
included (i) $.8 million of cash on hand, (ii) $10.0 million of receivables from
its subsidiaries, of which approximately $8.7 million was restricted due to the
terms of the credit facilities of its subsidiaries, (iii) $1.5 million of other
receivables, and (iv) the potential issuance of additional debt and/or equity,
although Crown had no specific commitments or arrangements to issue such
additional debt and/or equity. Crown expects that it will have adequate
liquidity to satisfy its capital needs for the foreseeable future.
15
16
CAR-MART
Car-Mart's sources of liquidity include cash from operations and its $35
million revolving credit facility with a group of banks, of which $34.3 million
was outstanding at July 31, 2001. Based upon the collateral on hand at July 31,
2001, Car-Mart could have drawn an additional $.7 million on its revolving
credit facility at such date. Car-Mart's revolving credit facility matures in
January 2002. Car-Mart expects that it will be able to renew or refinance its
revolving credit facility on or before the scheduled maturity date. Car-Mart
believes it will have adequate liquidity to satisfy its capital needs for the
foreseeable future.
PAACO
Paaco's sources of liquidity principally include cash on hand ($.7 million at
July 31, 2001) and cash generated from operations. In addition, Paaco has a $62
million revolving credit facility with Finova, of which $59.0 million was
outstanding at July 31, 2001. However, as of July 31, 2001, Smart Choice's
revolving credit facility with Finova was in default, and there is a question as
to whether such default is a basis for an event of default under Paaco's
revolving credit facility (see Smart Choice discussion below). Accordingly,
there is uncertainty as to whether Paaco is eligible to draw any additional
monies under its revolving credit facility. Paaco's revolving credit facility
matures in November 2004.
It is unlikely that Finova will increase the size of Paaco's credit facility,
or that Paaco could refinance such facility with a new lender since Paaco's
advance rate (ie. 70% of eligible receivables and inventory) is believed to be
above market. Accordingly, for the foreseeable future, Paaco's ability to expand
its operations may be limited as a result of a shortage of additional capital.
Consequently, Paaco anticipates operating its business at sales and asset levels
consistent with its recent past, and not substantially expanding its operations.
SMART CHOICE
For the three months ended July 31, 2001 Smart Choice (excluding Paaco)
reported a net loss of $2.7 million. Smart Choice has a $98 million revolving
credit facility with Finova, of which $88.4 million was outstanding as of July
31, 2001. Since December 2000 Smart Choice has been over-advanced on its
revolving credit facility, which constitutes an event of default under the
facility. As of July 31, 2001 Smart Choice was over-advanced by $20.9 million.
Absent funding from an outside source, Smart Choice does not expect it will be
able to come into compliance with the current advance rate provisions of its
credit facility. As a result of the event of default, Smart Choice is currently
not entitled to receive additional advances under its credit facility. Smart
Choice is presently operating its business from the cash generated from the
collection of its finance receivables and down payments received in connection
with the sale of vehicles.
Since January 2001 Smart Choice has been in discussions with Finova with
regard to possible solutions to the over-advanced position. There are several
possible outcomes that may result from these negotiations, including:
(i) a restructuring of the Smart Choice credit facility which brings Smart
Choice back into compliance;
(ii) a sale of substantially all of Smart Choice's assets with the proceeds
being used to pay down a portion of its credit facility, and the unpaid
portion being absorbed by Finova (forgiveness of debt) and Paaco as the
parties may negotiate;
(iii) an agreement among Smart Choice, Paaco and Finova whereby substantially
all of the assets and liabilities of Smart Choice are liquidated with
the proceeds being used to pay down a portion of its credit facility,
and the unpaid portion being absorbed by Finova (forgiveness of debt)
and Paaco as the parties may negotiate; or
(iv) Finova's exercise of its rights under the credit facility and
acceleration of the maturity of the loan seeking to liquidate or sell
the collateral, which action may prompt Smart Choice to take actions to
protect the interests of its shareholders, including the filing of a
plan of reorganization under federal bankruptcy laws.
Although management is exploring a number of alternatives, including those
listed above, the Company cannot predict how or whether Smart Choice's default
will be resolved. The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of Smart Choice as a going concern.
Recoverability of a significant portion of the assets of Smart Choice may be
materially impacted if Smart Choice ceases to continue as a going concern. The
financial statements do not include any adjustments relating to the
recoverability of recorded asset amounts that might be necessary should Smart
Choice be unable to continue in existence.
As of July 31, 2001 Crown's investment in Paaco/Smart Choice was $19.0
million ($16.4 million equity and $2.6 million debt). In addition, Crown
guarantees the credit facilities of Smart Choice and Paaco to a maximum combined
amount of $5 million.
16
17
OTHER
Concorde's sources of liquidity include cash on hand ($.9 million at July 31,
2001) and its $25 million revolving credit facility with a bank, of which $14.3
million was outstanding at July 31, 2001. Concorde is able to borrow a specified
percentage of eligible mortgage loans under the facility. Based upon eligible
mortgage loans on hand at July 31, 2001, Concorde was fully advanced under its
revolving credit facility. Concorde's revolving credit facility matures in
September 2001.
At April 30, 2001 Concorde was in violation of the $1.5 million minimum net
worth covenant under its revolving credit facility. At July 31, 2001 Concorde's
net worth exceeded the $1.5 million minimum threshold, however, the lender has
not waived the prior default. Concorde expects to execute a new agreement with
its lender to cure the violation when the current agreement expires in September
2001, or replace its credit facility with a different lender.
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, 2001
the Company had repurchased 5,424,642 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations", which eliminates the pooling method of accounting for business
combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the
accounting for intangible assets and goodwill acquired in a business
combination. This portion of SFAS 141 is effective for business combinations
completed after June 30, 2001. The Company does not expect SFAS 141 will have a
material impact on the Company's financial position or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Intangible Assets", which revises the accounting
for purchased goodwill and intangible assets. Under SFAS 142, goodwill and
intangible assets with indefinite lives will no longer be amortized, but will be
tested for impairment annually, and in the event of an impairment indicator.
SFAS 142 is effective for fiscal years beginning after December 15, 2001, with
earlier adoption permitted. The Company has adopted SFAS 142 effective May 1,
2001.
SEASONALITY
The Company's automobile sales and finance business is seasonal in nature. In
such 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 8% to 26%. These
finance receivables have remaining maturities from one to 42 months. Financial
instruments also include mortgage loans held for sale. The Company does not
experience significant market risk with such mortgage loans as they are
generally sold within 45 days of origination or purchase. At July 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.
17
18
The table below illustrates the impact which hypothetical changes in market
interest rates could have on the Company's pretax earnings. The calculations
assume (i) the increase or decrease in market interest rates remain in effect
for twelve months, (ii) the amount of variable rate notes payable outstanding
during the period decreases in direct proportion to decreases in finance
receivables as a result of scheduled payments and 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
Interest Rates Pretax Earnings
-------------- ---------------
(in thousands)
+2% $(2,427)
+1% (1,213)
-1% 1,213
-2% 2,427
</Table>
18
19
PART II
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Each of Paaco and Smart Choice have revolving credit facilities with Finova.
Since December 2000 Smart Choice has been over-advanced on its revolving credit
facility, which constitutes an event of default under the facility. As of July
31, 2001 Smart Choice was over-advanced by $20.9 million. Absent funding from an
outside source, Smart Choice does not expect it will be able to come into
compliance with the current advance rate provisions of its credit facility.
There is uncertainty as to whether Smart Choice's event of default is the basis
for an event of default under Paaco's revolving credit facility. In any event,
Paaco is a wholly-owned subsidiary of Smart Choice, and ultimately Paaco could
be affected by the default of Smart Choice under its Finova credit facility. As
a result of the event of default, Smart Choice is currently not entitled to
receive additional advances under its credit facility, and Paaco may not be
entitled to receive additional advances under its credit facility.
Since January 2001 Smart Choice has been in discussions with Finova with
regard to possible solutions to the over-advanced position. There are several
possible outcomes that may result from these negotiations, including:
(i) a restructuring of the Smart Choice credit facility which brings Smart
Choice back into compliance;
(ii) a sale of substantially all of Smart Choice's assets with the proceeds
being used to pay down a portion of its credit facility, and the unpaid
portion being absorbed by Finova (forgiveness of debt) and Paaco as the
parties may negotiate;
(iii) an agreement among Smart Choice, Paaco and Finova whereby substantially
all of the assets and liabilities of Smart Choice are liquidated with
the proceeds being used to pay down a portion of its credit facility,
and the unpaid portion being absorbed by Finova (forgiveness of debt)
and Paaco as the parties may negotiate; or
(iv) Finova's exercise of its rights under the credit facility and
acceleration of the maturity of the loan seeking to liquidate or sell
the collateral, which action may prompt Smart Choice to take actions to
protect the interests of its shareholders, including the filing of a
plan of reorganization under federal bankruptcy laws.
Although management is exploring a number of alternatives, including those
listed above, the Company cannot predict how or whether Smart Choice's default
will be resolved. The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of Smart Choice as a going concern.
Recoverability of a significant portion of the assets of Smart Choice may be
materially impacted if Smart Choice ceases to continue as a going concern. The
financial statements do not include any adjustments relating to the
recoverability of recorded asset amounts that might be necessary should Smart
Choice be unable to continue in existence.
As of July 31, 2001 Crown's investment in Paaco/Smart Choice was $19.0
million ($16.4 million equity and $2.6 million debt). In addition, Crown
guarantees the credit facilities of Smart Choice and Paaco to a maximum combined
amount of $5 million.
At April 30, 2001 Concorde was in violation of the $1.5 million minimum net
worth covenant under its revolving credit facility. At July 31, 2001 Concorde's
net worth exceeded the $1.5 million minimum threshold, however, the lender has
not waived the prior default. Concorde expects to execute an agreement with its
lender to cure the violation when the current agreement expires in September
2001, or replace its credit facility with a different lender.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
During the fiscal quarter ended July 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: September 13, 2001
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