UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended: Commission file number:
OCTOBER 31, 2001 0-14939
CROWN GROUP, INC.
(Exact name of registrant as specified in its charter)
TEXAS 63-0851141
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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.
<Table>
<Caption>
Outstanding at
Title of Each Class December 14, 2001
------------------- -----------------
Common stock, par value $.01 per share 6,747,524
</Table>
1
PART I
ITEM 1. FINANCIAL STATEMENTS CROWN GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
October 31, 2001
(unaudited) April 30, 2001
---------------- --------------
Assets:
Cash and cash equivalents $ 1,285,934 $ 718,134
Income tax receivable 2,126,251
Notes and other receivables, net 1,035,581 4,441,391
Finance receivables, net 68,977,908 61,969,879
Inventory 2,955,729 3,013,293
Prepaid and other assets 247,702 359,395
Investments 200,000 3,473,761
Deferred tax assets, net 7,614,441 5,401,487
Property and equipment, net 2,997,048 4,233,443
Assets held for sale 26,253,075 218,909,333
------------- -------------
$ 113,693,669 $ 302,520,116
============= =============
Liabilities and stockholders' equity:
Accounts payable $ 2,016,724 $ 1,942,261
Accrued liabilities 6,941,718 3,565,981
Income taxes payable 633,309 4,987,609
Revolving credit facility 32,487,277 29,767,688
Other notes payable 8,400,000 11,816,000
Liabilities held for sale 17,228,875 190,655,389
------------- -------------
67,707,903 242,734,928
------------- -------------
Minority interests 1,802,229 852,935
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;
6,722,267 issued and outstanding (6,980,367 at April 30, 2001) 67,223 69,804
Additional paid-in capital 22,102,941 23,075,677
Retained earnings 22,013,373 35,786,772
------------- -------------
Total stockholders' equity 44,183,537 58,932,253
------------- -------------
$ 113,693,669 $ 302,520,116
============= =============
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
2
CONSOLIDATED STATEMENTS OF OPERATIONS CROWN GROUP, INC.
(UNAUDITED)
<Table>
<Caption>
Three Months Ended Six Months Ended
October 31, October 31,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues:
Sales $ 29,342,546 $ 23,641,678 $ 57,466,661 $ 46,001,358
Interest income 2,424,987 2,130,486 4,839,894 4,233,773
------------ ------------ ------------ ------------
31,767,533 25,772,164 62,306,555 50,235,131
------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 16,032,843 12,912,987 31,042,937 25,020,075
Selling, general and administrative 5,166,307 4,728,088 10,175,257 9,450,132
Provision for credit losses 6,125,477 4,174,795 11,622,683 7,743,783
Interest expense 847,563 1,043,120 1,782,407 2,027,335
Depreciation and amortization 72,470 83,733 157,620 167,267
Restructuring charge 2,732,106 2,732,106
Write-down of investments and equipment 3,527,631 3,927,631
------------ ------------ ------------ ------------
34,504,397 22,942,723 61,440,641 44,408,592
------------ ------------ ------------ ------------
Income (loss) from continuing operations
before taxes and minority interests (2,736,864) 2,829,441 865,914 5,826,539
Provision (benefit) for income taxes (709,071) 1,185,914 776,656 2,402,561
Minority interests 125,702 81,887 279,860 156,261
------------ ------------ ------------ ------------
Income (loss) from continuing operations (2,153,495) 1,561,640 (190,602) 3,267,717
Discontinued operations:
Income (loss) from discontinued operations,
net of taxes and minority interests (12,813,802) (11,654) (13,582,797) 1,049,411
------------ ------------ ------------ ------------
Net income (loss) $ 14,967,297) $ 1,549,986 $(13,773,399) $ 4,317,128
============ ============ ============ ============
Basic earnings (loss) per share:
Continuing operations $ (.32) $ .20 $ (.03) $ .41
Discontinued operations (1.90) (2.00) .13
------------ ------------ ------------ ------------
Total $ (2.22) $ .20 $ (2.03) $ .54
============ ============ ============ ============
Diluted earnings (loss) per share:
Continuing operations $ (.32) $ .19 $ (.03) $ .39
Discontinued operations (1.90) (2.00) .12
------------ ------------ ------------ ------------
Total $ (2.22) $ .19 $ (2.03) $ .51
============ ============ ============ ============
Weighted average number of shares outstanding:
Basic 6,731,351 7,914,719 6,799,946 8,047,055
Diluted 6,731,351 8,299,369 6,799,946 8,440,688
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS CROWN GROUP, INC.
(UNAUDITED)
<Table>
<Caption>
Six Months Ended
October 31,
2001 2000
------------- -------------
Operating activities:
Net income (loss) $ (13,773,399) $ 4,317,128
Add: (Income) loss from discontinued operations 13,582,797 (1,049,411)
------------- -------------
Income (loss) from continuing operations (190,602) 3,267,717
Adjustments to reconcile income (loss) from continuing operations to net cash
provided by (used in) operating activities:
Depreciation and amortization 157,620 167,267
Deferred income taxes (2,212,954) (921,348)
Provision for credit losses 11,622,683 7,743,783
Write-down of investments and equipment 3,927,631
Minority interests 279,860 156,261
Accretion of purchase discount (27,268)
Changes in operating assets and liabilities:
Receivables 2,013,685 2,400,061
Finance receivable originations (52,319,326) (41,763,217)
Finance receivable collections 31,035,864 26,572,236
Inventory acquired in repossession 2,752,750 2,255,031
Inventory 57,564 (275,282)
Prepaids and other assets 111,693 71,615
Accounts payable and accrued liabilities 3,123,455 6,803
Income taxes payable 1,454,700 (3,929,471)
------------- -------------
Net cash provided by (used in) operating activities 1,814,623 (4,275,812)
------------- -------------
Investing activities:
Purchase of property and equipment (666,345) (433,888)
Purchase of investments (24,750) (922,750)
------------- -------------
Net cash used in investing activities (691,095) (1,356,638)
------------- -------------
Financing activities:
Sale of common stock 60,937
Purchase of common stock (975,317) (2,350,800)
Proceeds from revolving credit facility, net 2,719,589 1,957,451
Repayments of other debt (2,300,000)
------------- -------------
Net cash used in financing activities (555,728) (332,412)
------------- -------------
Cash provided by (used in) discontinued operations 2,003,966 (996,091)
------------- -------------
Increase (decrease) in cash and cash equivalents 2,571,766 (6,960,953)
Cash and cash equivalents at: Beginning of period 2,193,342 9,843,310
------------- -------------
End of period 4,765,108 2,882,357
Less: Cash and cash equivalents of discontinued operations (3,479,174) (2,097,433)
------------- -------------
Cash and cash equivalents of continuing operations $ 1,285,934 $ 784,924
============= =============
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CROWN GROUP, INC.
A -- DESCRIPTION OF BUSINESS
Crown Group, Inc. ("Crown") is a holding company which owns a 95% fully
diluted ownership interest in America's Car-Mart, Inc. ("Car-Mart")
(collectively, Crown and Car-Mart are referred to as "the Company"). Car-Mart
sells and finances the sale of used automobiles and trucks principally to
consumers with limited or damaged credit histories. As of October 31, 2001
Car-Mart operated 52 stores in seven states.
In addition, at October 31, 2001, Crown also owned (i) a 70% interest in
Smart Choice Automotive Group, Inc. ("Smart Choice"), a used car sales and
finance company, (ii) an 80% interest in Concorde Acceptance Corporation
("Concorde"), a prime and sub-prime mortgage lender, and (iii) a 50% interest in
Precision IBC, Inc. ("Precision"), a firm specializing in the sale and rental of
intermediate bulk containers. In October 2001 Crown made the decision to sell
all of its subsidiaries except Car-Mart, and relocate its corporate headquarters
to Rogers, Arkansas where Car-Mart is based. Accordingly, the operating results
of Smart Choice, Concorde and Precision, as well as the operating results of
another business that was sold in the prior fiscal year, are included in
discontinued operations (see Note I). Similarly, the assets and liabilities of
Concorde and Precision are included in "Assets held for sale" and "Liabilities
held for sale", respectively, in the accompanying consolidated balance sheet.
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 six month period
ended October 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 adopted SFAS 141 effective May 1,
2001. Such adoption did not have any 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. Such adoption did not have any impact on the continuing operations of the
Company.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ("SFAS 144"), "Accounting for the Impairment of Long-Lived Assets",
which requires a single accounting model to be used for long-lived assets to be
sold and broadens the presentation of discontinued operations to include a
"component of an entity" (rather than a segment of a business). A component of
an entity comprises operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity.
A component of an entity that is classified as held for sale or has been
disposed of is presented as a discontinued operation if the operations and cash
flows of the component will be (or have been) eliminated from the ongoing
operations of the entity and the entity will not have any significant continuing
involvement in the operations of the component.
The Company adopted SFAS 144 effective August 1, 2001. Consequently, the
operating results of Smart Choice, Concorde and Precision, which are presently
held for sale, are included in discontinued operations. Assets and liabilities
of these businesses held for sale are included in "Assets held for sale" and
"Liabilities held for sale", respectively (see Note I).
Reclassifications
Certain prior year amounts in the accompanying financial statements have been
reclassified to conform to the fiscal 2002 presentation. In particular, the
operating results of CG Incorporated S.A. de C.V. ("Crown El Salvador"), which
was sold in April 2001, were not included in discontinued operations in the
prior fiscal year due to the relatively insignificant size of its operations.
However, in the current fiscal period, as the Company has other discontinued
operations, the operating results of Crown El Salvador have been reclassified to
discontinued operations for all periods presented.
5
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 6% to 18% per annum and provide for payments over
periods ranging from 12 to 30 months. The components of finance receivables as
of October 31, 2001 and April 30, 2001 are as follows:
<Table>
<Caption>
October 31, April 30,
2001 2001
------------ ------------
Finance receivables $ 92,256,684 $ 83,439,089
Unearned finance charges (7,621,224) (7,402,428)
Allowance for credit losses (15,657,552) (14,066,782)
------------ ------------
$ 68,977,908 $ 61,969,879
============ ============
</Table>
Changes in the finance receivables allowance for credit losses for the six
months ended October 31, 2001 and 2000 are as follows:
<Table>
<Caption>
Six Months Ended
October 31,
2001 2000
------------ ------------
Balance at beginning of period $ 14,066,782 $ 11,492,611
Provision for credit losses 11,522,683 7,743,783
Net charge offs (9,931,913) (6,565,179)
------------ ------------
Balance at end of period $ 15,657,552 $ 12,671,215
============ ============
</Table>
D -- PROPERTY AND EQUIPMENT
A summary of property and equipment as of October 31, 2001 and April 30, 2001
is as follows:
<Table>
<Caption>
October 31, April 30,
2001 2001
----------- ------------
Land and buildings $ 1,046,015 $ 650,191
Furniture, fixtures and equipment 1,940,253 3,826,051
Leasehold improvements 962,134 871,390
Less accumulated depreciation and amortization (951,354) (1,114,189)
----------- ------------
$ 2,997,048 $ 4,233,443
=========== ============
</Table>
For the six months ended October 31, 2001 and 2000 depreciation and
amortization of property and equipment amounted to $157,620 and $167,267,
respectively.
6
E - DEBT
A summary of debt as of October 31, 2001 and April 30, 2001 is as follows:
<Table>
<Caption>
Revolving Credit Facility
------------------------------------------------------------------------------------------------------------------------------
Facility Interest Balance at
Borrower Lender Amount Rate Maturity October 31, 2001 April 30, 2001
--------------- --------------- ----------- ------------- ------------ ------------------ -----------------
Car-Mart Bank of America $ 35 million Prime + .88% Jan 2002 $ 32,487,277 $ 29,767,688
</Table>
<Table>
<Caption>
Other Notes Payable
------------------------------------------------------------------------------------------------------------------------------
Facility Interest Balance at
Borrower Lender Amount Rate Maturity October 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 2,316,000
Crown Regions Bank N/A Prime + .50% May 2001 2,000,000
Crown First Mercantile N/A Prime + .25% Sept 2002 900,000
------------------ -----------------
$ 8,400,000 $ 11,816,000
================== =================
</Table>
Car-Mart's revolving credit facility is primarily collateralized by finance
receivables and inventory. Crown's note payable to First Mercantile Bank is
collateralized by equipment. Interest is payable monthly or quarterly on all of
the Company's debt. Car-Mart's revolving credit facility contains various
reporting and performance covenants including (i) maintenance of certain
financial ratios and tests, (ii) limitations on borrowings from other sources,
(iii) restrictions on certain operating activities, and (iv) restrictions on the
payment of dividends. At October 31, 2001, all of Crown's $33.6 million equity
investment in Car-Mart was restricted due to covenants in Car-Mart's revolving
credit facility which prohibits distributions to Crown. The amount available to
be drawn under Car-Mart's revolving credit facility is a function of eligible
finance receivables. Based on eligible finance receivables at October 31, 2001,
Car-Mart could have drawn an additional $2.5 million under its revolving credit
facility.
As of October 31, 2001 Crown guaranteed the revolving credit facilities of
certain of Smart Choice's subsidiaries with Finova Capital Corporation
("Finova") up to a maximum amount of $5 million. However, on November 8, 2001
Crown entered into a settlement agreement with Finova that released Crown from
this guarantee in exchange for the payment of $1 million to Finova, and granting
Finova a 120 day option to purchase Crown's equity interest in Smart Choice for
$1.00 (see Note F).
F -- SETTLEMENT AGREEMENTS WITH SMART CHOICE'S LENDER
SMART CHOICE AGREEMENT WITH FINOVA
On November 8, 2001, Crown's 70% owned subsidiary, Smart Choice, and certain
of Smart Choice's subsidiaries, entered into a forbearance agreement with
Finova, the primary lender to Smart Choice's subsidiaries, that resulted in the
foreclosure of receivables and inventory of certain Florida-based subsidiaries
of Smart Choice (the "Florida Finance Group"), and the probable sale of Smart
Choice's wholly-owned subsidiaries, Paaco Automotive Group, L.P. and Premium
Auto Acceptance Corporation (collectively, "Paaco"), to Finova.
Prior to November 9, 2001, the Florida Finance Group sold and financed used
cars and trucks in Florida. Paaco sells and finances used cars and trucks in
Texas. The Florida Finance Group had, and Paaco continues to have, a revolving
credit facility with Finova. Prior to November 9, 2001, the Florida Finance
Group was over-advanced on its revolving credit facility ($25 million
over-advanced at September 30, 2001), which constituted an event of default
under the facility.
Pursuant to the forbearance agreement, on November 9, 2001, the collateral
for the Florida Finance Group's credit facility with Finova, which consisted
principally of receivables and inventory, was sold at a public foreclosure sale
to Finova for $55 million. Prior to the foreclosure sale, the Florida Finance
Group owed Finova $88.4 million. Thus, after applying the proceeds from the
foreclosure sale, the Florida Finance Group owes Finova $33.4 million (the
"Deficiency").
Further, as part of the forbearance agreement, Smart Choice granted Finova
(i) an option to purchase Paaco (the "Paaco Option") for an amount equal to the
Deficiency, subject to shareholder approval and an appraisal indicating the
value of Paaco is not greater than the Deficiency, and (ii) an option to
purchase up to 100% of Smart Choice's remaining shares of authorized but
unissued common stock (approximately 39 million shares) (the "Smart Choice Stock
Option") at a price of $0.30 per share. The Smart Choice Stock Option will
terminate upon the closing of the exercise of the Paaco Option. Presently, Smart
Choice has approximately 9.8 million shares of common stock outstanding, of
which Crown owns approximately 6.9 million shares. Both the Paaco Option and the
Smart Choice Stock Option expire March 8, 2002.
7
As a result of the Finova agreement and the lack of other available capital,
on November 9, 2001 Smart Choice began to wind-down its Florida-based
operations. On December 12, 2001 Finova exercised its option to purchase Paaco
subject to certain conditions. If the exercise of the Paaco Option is closed as
expected, Smart Choice's remaining assets would consist of certain improved and
unimproved real estate in Titusville, Florida, including a 35,000 square-foot
office facility, and certain other current and fixed assets. Assuming the sale
of Paaco, management presently anticipates that Smart Choice's remaining assets
will likely be sold by Smart Choice in an effort to realize the maximum value
for these assets and repay its obligations to unsecured creditors to the extent
possible.
CROWN AGREEMENT WITH FINOVA
Separately, Crown entered into a settlement agreement with Finova that
provides for Crown to (i) pay Finova $1 million in cash, and (ii) grant Finova
an option to purchase Crown's 6.9 million shares of Smart Choice common stock
for $1.00, in exchange for Finova unconditionally releasing Crown from its $5
million guaranty of the Florida Finance Group's and Paaco's obligations to
Finova. As a result of these transactions and operating losses at Smart Choice,
Crown's equity investment in Smart Choice, which totaled $16.4 million at July
31, 2001, has been written off as of October 31, 2001. In addition, as a result
of revised subordination language that requires Finova to be paid in full prior
to Crown receiving any note payments from Paaco, Crown has fully reserved its
$1.6 million receivable from Paaco as of October 31, 2001. Crown anticipates
that it will receive a federal income tax benefit of approximately $6.1 million
following the ultimate disposition of its investment in Smart Choice. The
write-off of Crown's investment in Smart Choice and the loss resulting from the
$1 million guaranty payment to Finova and related tax benefits, are included in
discontinued operations (see Note I).
G -- WRITE-DOWN OF INVESTMENTS AND EQUIPMENT
During the second quarter ended October 31, 2001, financing for early-stage
emerging technology/Internet investments, such as the Company's Monarch Venture
Partners' Fund I, L.P. ("Monarch") and Mariah Vision 3, Inc. ("Mariah"), became
increasingly difficult to obtain. The adverse conditions in the capital markets,
combined with poor operating results and prospects of Mariah and some of
Monarch's investee companies, caused the Company to consider whether its
carrying value of Mariah and Monarch were impaired. After review and analysis,
the Company wrote-down the carrying value of Mariah and Monarch and certain
equipment as follows (in thousands):
<Table>
<Caption>
Three Months Six Months
Ended Ended
October 31, October 31,
2001 2001
------------ ----------
Monarch $ 1,649 $ 1,649
Mariah 1,650 1,650
Equipment 229 629
------- -------
$ 3,528 $ 3,928
======= =======
</Table>
The Company's remaining investment in Monarch and Mariah at October 31, 2001
was $200,000 and $0, respectively, and is included in "Investments" in the
accompanying consolidated balance sheet.
H -- RESTRUCTURING CHARGE
As discussed in Note I, in October 2001, the Company made the decision to
sell all of its subsidiaries except Car-Mart and relocate its corporate
headquarters to Rogers, Arkansas where Car-Mart is based. As a result, the
Company recorded severance ($2.6 million) and office closing costs ($.1 million)
aggregating $2.7 million during the period ended October 31, 2001. No amounts
were paid as of October 31, 2001.
8
I -- DISCONTINUED OPERATIONS
In October 2001 Crown made the decision to sell all its subsidiaries except
Car-Mart, and relocate its corporate headquarters to Rogers, Arkansas where
Car-Mart is based. This decision was based on management's desire to separate
the highly profitable and modestly leveraged operations of Car-Mart from the
operating losses or lower level of profitability and highly leveraged operations
of the Company's other subsidiaries. In addition, management believes that the
Company's ownership of businesses in a variety of different industries may have
created confusion within the investment community, possibly making it difficult
for investors to analyze and properly value the Company's common stock.
Accordingly, the Company plans to sell its equity interests in Smart Choice,
Concorde and Precision. It is anticipated the sale of these businesses will be
completed by October 31, 2002. In addition, in April 2001, the Company sold its
Crown El Salvador subsidiary.
As discussed in Note F, Crown wrote off its investment in Smart Choice in
October 2001. At October 31, 2001 Smart Choice had assets of $151.1 million and
liabilities of $170.4 million. The assets and liabilities of Smart Choice are
not included in assets held for sale and liabilities held for sale,
respectively, at October 31, 2001 as at such date (i) Crown's investment in
Smart Choice was reduced to zero, and (ii) Crown is not liable for, or a
guarantor of, any of the obligations of Smart Choice other than $1.0 million to
Finova (Smart Choice's principal lender) pursuant to a settlement agreement. The
$1.0 million settlement amount was accrued at October 31, 2001 and paid in
November 2001. A summary of assets held for sale and liabilities held for sale
as of October 31, 2001 and April 30, 2001 is as follows (in thousands):
<Table>
<Caption>
October 31, April 30,
2001 2001
----------- ---------
Assets held for sale:
Mortgage loans held for sale, net $ 21,485 $ 16,200
Finance receivables, net 149,656
Inventory 7,980
Property and equipment, net 602 12,783
Deferred tax asset, net 15,902
Other 4,166 16,388
--------- ---------
$ 26,253 $ 218,909
========= =========
Liabilities held for sale:
Accounts payable and accrued liabilities $ 1,915 $ 13,255
Deferred sales tax 4,963
Revolving credit facilities 15,207 160,294
Notes payable to Crown 3,275 6,112
Other notes payable 33 7,495
Minority interests 74 4,648
--------- ---------
20,504 196,767
Less: Notes payable to Crown (3,275) (6,112)
--------- ---------
$ 17,229 $ 190,655
========= =========
</Table>
As of October 31, 2001 and April 30, 2001 the Company's equity investment in
businesses held for sale was as follows (in thousands):
<Table>
<Caption>
October 31, April 30,
2001 2001
----------- ---------
Smart Choice $ -- $ 17,591
Concorde 2,294 1,354
Precision 3,455 3,197
-------- --------
$ 5,749 $ 22,142
======== ========
</Table>
9
Operating results are presented for the discontinued operations of the
Company by business segment for the three and six months ended October 31, 2001
and 2000. The segments include Smart Choice and other. The Smart Choice segment
includes the results of the Florida Finance Group and Paaco. For the three and
six months ended October 31, 2001 "Other" includes Concorde and the Company's
equity investment in Precision. For the three and six months ended October 31,
2000 "Other" includes Concorde, Precision and Crown El Salvador. The Company's
discontinued operations by business segment for the three and six months ended
October 31, 2001 and 2000 are as follows (in thousands):
<Table>
<Caption>
Three Months Ended October 31, 2001 Six Months Ended October 31, 2001
------------------------------------------ ------------------------------------------
S. Choice Other Total S. Choice Other Total
----------- ------------ ----------- ------------ ------------ -----------
Revenues $ 43,218 $ 3,618 $ 46,836 $ 89,748 $ 6,926 $ 96,674
Costs and expenses:
Cost of sales 21,947 21,947 45,127 45,127
Selling, gen. and admin. 11,055 2,094 13,149 21,833 4,125 25,958
Prov. for credit loss 9,988 406 10,394 21,040 517 21,557
Interest expense 3,430 345 3,775 7,130 749 7,879
Depreciation and amort. 430 58 488 845 168 1,013
Write-down of assets 39,294 39,294 39,294 39,294
Loss in excess of basis (19,349) (19,349) (19,349) (19,349)
--------- ---------- --------- --------- --------- ---------
66,795 2,903 69,698 115,920 5,559 121,479
--------- ---------- --------- --------- --------- ---------
Income (loss) before tax
and minority interests (23,577) 715 (22,862) (26,172) 1,367 (24,805)
Prov. (benefit) for taxes (6,184) 192 (5,992) (7,025) 377 (6,648)
Minority interests (4,129) 73 (4,056) (4,647) 73 (4,574)
--------- ---------- --------- --------- --------- ---------
Income (loss) from
discontinued operations $ (13,264) $ 450 $ (12,814) $ (14,500) $ 917 $ (13,583)
========== ========== ========= ========= ========= =========
</Table>
<Table>
<Caption>
Three Months Ended October 31, 2000 Six Months Ended October 31, 2000
----------------------------------------- -----------------------------------------
S. Choice Other Total S. Choice Other Total
----------- ----------- ----------- ----------- ----------- -----------
Revenues $ 59,375 $ 4,601 $ 63,976 $ 112,808 $ 9,359 $ 122,167
Costs and expenses:
Cost of sales 30,755 595 31,350 56,943 1,180 58,123
Selling, gen. and admin. 10,855 2,861 13,716 20,659 5,536 26,195
Prov. for credit loss 11,446 107 11,553 22,038 240 22,278
Interest expense 4,539 531 5,070 8,737 1,074 9,811
Depreciation and amort. 524 483 1,007 1,032 934 1,966
Write-down of assets 800 800 800 800
-------- --------- --------- --------- ------- ---------
58,119 5,377 63,496 109,409 9,764 119,173
-------- --------- --------- --------- ------- ---------
Income (loss) before tax
and minority interests 1,256 (776) 480 3,399 (405) 2,994
Prov. (benefit) for taxes 524 (283) 241 1,354 (80) 1,274
Minority interests 250 250 670 670
-------- --------- --------- --------- ------- ---------
Income (loss) from
discontinued operations $ 482 $ (493) $ (11) $ 1,375 $ (325) $ 1,050
======== ========= ========= ========= ======= =========
</Table>
10
J -- EARNINGS PER SHARE
Basic earnings (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net income by the sum of the
weighted average number of common and common equivalent shares outstanding.
Common equivalent shares include, where appropriate, the assumed exercise or
conversion of warrants and options to purchase common stock. Diluted loss per
share is the same as basic loss per share in 2001 since common stock equivalents
are excluded from the computation as they are antidilutive. In computing diluted
earnings per share, the Company utilized the treasury stock method.
Basic and diluted weighted average shares outstanding, which are used in the
calculation of basic and diluted earnings (loss) per share, are as follows for
the periods ended October 31:
<Table>
<Caption>
Three Months Ended Six Months Ended
October 31, October 31,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Weighted average shares outstanding-basic 6,731,351 7,914,719 6,799,946 8,047,055
Dilutive options and warrants 384,650 393,633
------------ ------------ ------------ ------------
Weighted average shares outstanding-diluted 6,731,351 8,299,369 6,799,946 8,440,688
============ ============ ============ ============
Antidilutive securities not included:
Options and warrants 1,510,000 445,000 1,510,000 432,500
============ ============ ============ ============
</Table>
K -- COMMITMENTS AND CONTINGENCIES
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 October 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.
Litigation
In the ordinary course of business, the Company has become a defendant in
various types of legal proceedings. Although the Company cannot determine at
this time the amount of the ultimate exposure from these 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.
L -- SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures for the six months ended October 31, 2001
and 2000 are as follows:
<Table>
<Caption>
Six Months Ended
October 31,
2001 2000
----------- ------------
Interest paid $ 1,685,584 $ 1,921,428
Income taxes paid 3,661,161 7,243,383
</Table>
11
M - BUSINESS SEGMENTS
Operating results and other financial data are presented for the continuing
operations of the Company by business segment for the three months ended October
31, 2001 and 2000. The segments are categorized by legal entity, which is how
management organizes its segments for making operating decisions and assessing
performance. The segments include Car-Mart and Corporate operations. The
Company's continuing operations and other financial data by business segment for
the three months ended October 31, 2001 and 2000 are as follows (in thousands):
<Table>
<Caption>
Three Months Ended October 31, 2001
-----------------------------------------------------------
Car-Mart Corporate Eliminations Consolidated
------------ ------------ ------------ ------------
Revenues:
Sales $ 29,343 $ 29,343
Interest income 2,268 $ 240 $ (83) 2,425
------------ ------------ ------------ ------------
Total 31,611 240 (83) 31,768
------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 16,033 16,033
Selling, gen. and admin 4,624 542 5,166
Prov. for credit losses 6,026 100 6,126
Interest expense 732 198 (83) 847
Depreciation and amort 36 36 72
Restructuring charge 2,732 2,732
Write-down of investments/equip 3,528 3,528
------------ ------------ ------------ ------------
Total 27,451 7,136 (83) 34,504
------------ ------------ ------------ ------------
Income (loss) before taxes
and minority interests $ 4,160 $ (6,896) $ -- $ (2,736)
============ ============ ============ ============
Capital expenditures $ 384 $ -- $ -- $ 384
============ ============ ============ ============
Total assets $ 80,530 $ 57,735
============ ============
</Table>
<Table>
<Caption>
Three Months Ended October 31, 2000
-----------------------------------------------------------
Car-Mart Corporate Eliminations Consolidated
------------ ------------ ------------ ------------
Revenues:
Sales $ 23,641 $ 23,641
Interest income 1,901 $ 340 $ (110) 2,131
------------ ------------ ------------ ------------
Total 25,542 340 (110) 25,772
------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 12,913 12,913
Selling, gen. and admin 3,681 1,047 4,728
Prov. for credit losses 4,175 4,175
Interest expense 952 201 (110) 1,043
Depreciation and amort 38 46 84
------------ ------------ ------------ ------------
Total 21,759 1,294 (110) 22,943
------------ ------------ ------------ ------------
Income (loss) before taxes
and minority interests $ 3,783 $ (954) $ -- $ 2,829
============ ============ ============ ============
Capital expenditures $ 290 $ 2 $ -- $ 292
============ ============ ============ ============
Total assets $ 64,597 $ 73,315
============ ============
</Table>
12
The Company's continuing operations and other financial data by business
segment for the six months ended October 31, 2001 and 2000 are as follows (in
thousands):
<Table>
<Caption>
Six Months Ended October 31, 2001
-----------------------------------------------------------
Car-Mart Corporate Eliminations Consolidated
------------ ------------ ------------ ------------
Revenues:
Sales $ 57,467 $ 57,467
Interest income 4,501 $ 516 $ (177) 4,840
------------ ------------ ------------ ------------
Total 61,968 516 (177) 62,307
------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 31,043 31,043
Selling, gen. and admin 8,721 1,454 10,175
Prov. for credit losses 11,523 100 11,623
Interest expense 1,516 443 (177) 1,782
Depreciation and amort 70 88 158
Restructuring charge 2,732 2,732
Write-down of investments/equip 3,928 3,928
------------ ------------ ------------ ------------
Total 52,873 8,745 (177) 61,441
------------ ------------ ------------ ------------
Income (loss) before taxes
and minority interests $ 9,095 $ (8,229) $ -- $ 866
============ ============ ============ ============
Capital expenditures $ 513 $ 153 $ -- $ 666
============ ============ ============ ============
Total assets $ 80,530 $ 57,735
============ ============
</Table>
<Table>
<Caption>
Six Months Ended October 31, 2000
-----------------------------------------------------------
Car-Mart Corporate Eliminations Consolidated
------------ ------------ ------------ ------------
Revenues:
Sales $ 46,001 $ 46,001
Interest income 3,669 $ 830 $ (265) 4,234
------------ ------------ ------------ ------------
Total 49,670 830 (265) 50,235
------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 25,020 25,020
Selling, gen. and admin 7,278 2,172 9,450
Prov. for credit losses 7,744 7,744
Interest expense 1,890 403 (265) 2,028
Depreciation and amort 77 90 167
------------ ------------ ------------ ------------
Total 42,009 2,665 (265) 44,409
------------ ------------ ------------ ------------
Income (loss) before taxes
and minority interests $ 7,661 $ (1,835) $ -- $ 5,826
============ ============ ============ ============
Capital expenditures $ 425 $ 9 $ -- $ 434
============ ============ ============ ============
Total assets $ 64,597 $ 73,315
============ ============
</Table>
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 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 continued availability of lines of credit for the Company's business, the
Company's ability to effectively underwrite and collect its installment loans,
changes in estimates and assumptions in determining the adequacy of the
Company's allowance for credit losses, changes in interest rates, competition,
dependence on existing management, adverse economic conditions (particularly in
the State of Arkansas), 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") is a holding company which owns a 95% fully
diluted ownership interest in America's Car-Mart, Inc. ("Car-Mart")
(collectively, Crown and Car-Mart are referred to as "the Company"). Car-Mart
sells and finances the sale of used automobiles and trucks principally to
consumers with limited or damaged credit histories. As of October 31, 2001
Car-Mart operated 52 stores in seven states.
In addition, at October 31, 2001, Crown also owned (i) a 70% interest in
Smart Choice Automotive Group, Inc. ("Smart Choice"), a used car sales and
finance company, (ii) an 80% interest in Concorde Acceptance Corporation
("Concorde"), a prime and sub-prime mortgage lender, and (iii) a 50% interest in
Precision IBC, Inc. ("Precision"), a firm specializing in the sale and rental of
intermediate bulk containers. In October 2001 Crown made the decision to sell
all of its subsidiaries except Car-Mart, and relocate its corporate headquarters
to Rogers, Arkansas where Car-Mart is based. Accordingly, the operating results
of Smart Choice, Concorde and Precision, as well as the operating results of
another business that was sold in the prior fiscal year, are included in
discontinued operations (see Note I). Similarly, the assets and liabilities of
Concorde and Precision are included in "Assets held for sale" and "Liabilities
held for sale", respectively, in the accompanying consolidated balance sheet.
14
RESULTS OF CONTINUING OPERATIONS
Operating results are presented for the continuing operations of the Company
by business segment for the three and six months ended October 31, 2001 and
2000. These segments are categorized by legal entity, which is how management
organizes its segments for making operating decisions and assessing performance.
The segments include Car-Mart and Corporate operations. A summary of the
Company's continuing operations by business segment for the three and six months
ended October 31, 2001 and 2000 is as follows:
CONSOLIDATED
(In Thousands)
<Table>
<Caption>
Revenues Pretax Income (Loss)
---------------------------------------------------- ----------------------------------------------------
Three Months Ended Six Months Ended Three Months Ended Six Months Ended
October 31, October 31, October 31, October 31,
------------------------ ------------------------ ------------------------ ------------------------
2001 2000 2001 2000 2001 2000 2001 2000
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Car-Mart $ 31,611 $ 25,542 $ 61,968 $ 49,670 $ 4,160 $ 3,783 $ 9,095 $ 7,661
Corporate 240 340 516 830 (6,896) (954) (8,229) (1,835)
Eliminations (83) (110) (177) (265)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Consolidated $ 31,768 $ 25,772 $ 62,307 $ 50,235 $ (2,736) $ 2,829 $ 866 $ 5,826
========== ========== ========== ========== ========== ========== ========== ==========
</Table>
THREE MONTHS ENDED OCTOBER 31, 2001 VS. THREE MONTHS ENDED OCTOBER 31, 2000
Revenues increased $6.0 million, or 23.3%, for the three months ended October
31, 2001 compared to the same period in the prior fiscal year. The increase was
principally the result of (i) increasing the average number of Car-Mart regular
and satellite stores in operation to 52.0 in the current fiscal period from 44.0
in the prior fiscal period, and (ii) increasing the average number of retail
vehicles sold per Car-Mart store by 4.2%. Pretax loss was $2.7 million for the
three months ended October 31, 2001 as compared to pretax income of $2.8 million
in the same period in the prior fiscal year, a decrease of $5.6 million. The
decrease was principally the result of (i) the three months ended October 31,
2001 including a $2.7 million restructuring charge and a $3.5 million write-down
of investments and equipment, with no comparable charge or write-down in the
prior fiscal period, partially offset by (ii) higher earnings at Car-Mart ($.4
million).
The restructuring charge pertains to severance and office closing costs
relating to the Company's decision to relocate its corporate headquarters to
Rogers, Arkansas where Car-Mart is based. The write-down of investments and
equipment principally pertains to two emerging technology/Internet investments
made in a prior fiscal year that were deemed to be impaired at October 31, 2001.
SIX MONTHS ENDED OCTOBER 31, 2001 VS. SIX MONTHS ENDED OCTOBER 31, 2000
Revenues increased $12.1 million, or 24.0%, for the six months ended October
31, 2001 compared to the same period in the prior fiscal year. The increase was
principally the result of (i) increasing the average number of Car-Mart regular
and satellite stores in operation to 51.2 in the current fiscal period from 43.0
in the prior fiscal period, and (ii) increasing the average number of retail
vehicles sold per Car-Mart store by 2.8%. Pretax income was $.9 million for the
six months ended October 31, 2001 as compared to $5.8 million in the same period
in the prior fiscal year, a decrease of $5.0 million. The decrease was
principally the result of (i) the six months ended October 31, 2001 including a
$2.7 million restructuring charge and a $3.9 million write-down of investments
and equipment, with no comparable charge or write-down in the prior fiscal
period, partially offset by (ii) higher earnings at Car-Mart ($1.4 million).
The restructuring charge pertains to severance and office closing costs
relating to the Company's decision to relocate its corporate headquarters to
Rogers, Arkansas where Car-Mart is based. The write-down of investments and
equipment principally pertains to two emerging technology/Internet investments
made in a prior fiscal year that were deemed to be impaired at October 31, 2001.
15
CAR-MART
(Dollars in Thousands)
<Table>
<Caption>
% Change As a % of Sales
------------- ------------------------------
Three Months Ended 2001 Three Months Ended
October 31, vs October 31,
2001 2000 2000 2001 2000
------------- ------------- ------------- ------------- -------------
Revenues:
Sales $ 29,343 $ 23,641 24.1% 100.0% 100.0%
Interest income 2,268 1,901 19.3 7.7 8.0
------------- ------------- ------------- ------------- -------------
Total 31,611 25,542 23.8 107.7 108.0
------------- ------------- ------------- ------------- -------------
Costs and expenses:
Cost of sales 16,033 12,913 24.2 54.6 54.6
Selling, gen and admin 4,624 3,681 25.6 15.8 15.6
Prov. for credit losses 6,026 4,175 44.3 20.5 17.7
Interest expense 732 952 (23.1) 2.5 4.0
Depreciation and amort 36 38 (5.3) .1 .1
------------- ------------- ------------- ------------- -------------
Total 27,451 21,759 26.2 93.5 92.0
------------- ------------- ------------- ------------- -------------
Pretax income $ 4,160 $ 3,783 10.0 14.2 16.0
============= ============= ============= ============= =============
</Table>
THREE MONTHS ENDED OCTOBER 31, 2001 VS. THREE MONTHS ENDED OCTOBER 31, 2000
Revenues increased $6.1 million, or 23.8%, for the three months ended October
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 52.0 in the current fiscal period from 44.0 in
the prior fiscal period, and (ii) increasing the average number of retail
vehicles sold per store by 4.2%. Pretax income increased $.4 million, or 10.0%,
for the three months ended October 31, 2001 as compared to the same period in
the prior fiscal year. The increase was principally the result of increased
revenues (23.8%), partially offset by higher costs and expenses as a percentage
of sales (1.5%). Pretax income as a percentage of sales decreased to 14.2% in
the three months ended October 31, 2001, from 16.0% in the three months ended
October 31, 2000, a decrease of 1.8%. The decrease was principally the result of
a higher provision for credit loss, partially offset by lower interest expense
associated with a decrease in the prime interest rate. The Company believes the
higher provision for credit loss as a percentage of sales, 20.5% during the
three months ended October 31, 2001 as compared to 17.7% in the same period in
the prior fiscal year, is due to a general slowdown in the economy during the
three months ended October 31, 2001 as compared to the same period in the prior
fiscal year.
<Table>
<Caption>
% Change As a % of Sales
------------- ------------------------------
Six Months Ended 2001 Six Months Ended
October 31, vs October 31,
2001 2000 2000 2001 2000
------------- ------------- ------------- ------------- -------------
Revenues:
Sales $ 57,467 $ 46,001 24.9% 100.0% 100.0%
Interest income 4,501 3,669 22.7 7.8 8.0
------------- ------------- ------------- ------------- -------------
Total 61,968 49,670 24.8 107.8 108.0
------------- ------------- ------------- ------------- -------------
Costs and expenses:
Cost of sales 31,043 25,020 24.1 54.0 54.4
Selling, gen and admin 8,721 7,278 19.8 15.2 15.8
Prov. for credit losses 11,523 7,744 48.8 20.1 16.8
Interest expense 1,516 1,890 (19.8) 2.6 4.1
Depreciation and amort 70 77 (9.1) .1 .2
------------- ------------- ------------- ------------- -------------
Total 52,873 42,009 25.9 92.0 91.3
------------- ------------- ------------- ------------- -------------
Pretax income $ 9,095 $ 7,661 18.7 15.8 16.7
============= ============= ============= ============= =============
</Table>
16
SIX MONTHS ENDED OCTOBER 31, 2001 VS. SIX MONTHS ENDED OCTOBER 31, 2000
Revenues increased $12.3 million, or 24.8%, for the six months ended October
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 51.2 in the current fiscal period from 43.0 in
the prior fiscal period, (ii) increasing the average sales price per retail
vehicle by approximately .6%, and (iii) increasing the average number of retail
vehicles sold per dealership by 2.8%. Pretax income increased $1.4 million, or
18.7%, for the six months ended October 31, 2001 as compared to the same period
in the prior fiscal year. The increase was principally the result of (i)
increased revenues (24.8%), partially offset by higher costs and expenses as a
percentage of sales (.7%). Pretax income as a percentage of sales decreased to
15.8% in the six months ended October 31, 2001, from 16.7% in the six months
ended October 31, 2000, a decrease of .9%. The decrease was principally the
result of a higher provision for credit loss, partially offset by lower interest
expense associated with a decrease in the prime interest rate. The Company
believes the higher provision for credit loss as a percentage of sales, 20.1%
during the six months ended October 31, 2001 as compared to 16.8% in the same
period in the prior fiscal year, is due to a general slowdown in the economy
during the six months ended October 31, 2001 as compared to the same period in
the prior fiscal year.
CORPORATE
(Dollars in Thousands)
<Table>
<Caption>
% Change % Change
------------ ------------
Three Months Ended 2001 Six Months Ended 2001
October 31, vs October 31, vs
2001 2000 2000 2001 2000 2000
------------ ------------ ------------ ------------ ------------ ------------
Revenues:
Interest income $ 240 $ 340 (29.4)% $ 516 $ 830 (37.8)%
------------ ------------ ------------ ------------ ------------ ------------
Total 240 340 (29.4) 516 830 (37.8)
------------ ------------ ------------ ------------ ------------ ------------
Costs and expenses:
Selling, gen and admin 542 1,047 (48.2) 1,454 2,172 (33.1)
Prov. for credit losses 100 NM 100 NM
Interest expense 198 201 (1.5) 443 403 9.9
Depreciation and amort 36 46 (21.7) 88 90 (2.2)
Restructuring charge 2,732 NM 2,732 NM
Write-down of investments/equip 3,528 NM 3,928 NM
------------ ------------ ------------ ------------ ------------ ------------
Total 7,136 1,294 NM 8,745 2,665 NM
------------ ------------ ------------ ------------ ------------ ------------
Pretax income (loss) $ (6,896) $ (954) NM $ (8,229) $ (1,835) NM
============ ============ ============ ============ ============ ============
</Table>
NM = Not meaningful
THREE MONTHS ENDED OCTOBER 31, 2001 VS. THREE MONTHS ENDED OCTOBER 31, 2000
Pretax loss increased to $6.9 million for the three months ended October 31,
2001 from $1.0 million for the three months ended October 31, 2000, an increase
of $5.9 million. The increase was principally the result of the three months
ended October 31, 2001 including a $2.7 million restructuring charge and a $3.5
million write-down of investments and equipment, with no comparable charge or
write-down in the prior fiscal period. The restructuring charge pertains to
severance and office closing costs relating to the Company's decision to
relocate its corporate headquarters to Rogers, Arkansas where Car-Mart is based.
The write-down of investments and equipment principally pertains to two emerging
technology/Internet investments made in a prior fiscal year that were deemed to
be impaired at October 31, 2001. Selling, general and administrative expenses
decreased $.5 million for the three months ended October 31, 2001 as compared to
the same period in the prior fiscal year. The decrease was principally the
result of lower personnel costs as the Company is in the process of decreasing
the overhead at its corporate headquarters in anticipation of a planned
relocation to Rogers, Arkansas.
SIX MONTHS ENDED OCTOBER 31, 2001 VS. SIX MONTHS ENDED OCTOBER 31, 2000
Pretax loss increased to $8.2 million for the six months ended October 31,
2001 from $1.8 million for the six months ended October 31, 2000, an increase of
$6.4 million. The increase was principally the result of including a $2.7
million restructuring charge and a $3.9 million write-down of investments and
equipment in the current fiscal period, with no comparable charge or write-down
in the prior fiscal period. The restructuring charge pertains to severance and
office closing costs relating to the Company's decision to relocate its
corporate headquarters to Rogers, Arkansas where Car-Mart is based. The
write-down of investments and equipment principally pertains to two emerging
technology/Internet investments made in a prior fiscal year that were deemed to
be impaired at October 31, 2001. Selling, general and administrative expenses
decreased $.7 million for the six months ended October 31, 2001 as compared to
the same period in the prior fiscal year. The decrease was principally the
result of lower personnel costs as the Company is in the process of decreasing
the overhead at its corporate headquarters in anticipation of a planned
relocation to Rogers, Arkansas.
17
RESULTS OF DISCONTINUED OPERATIONS
Operating results are presented for the discontinued operations of the
Company by business segment for the three and six months ended October 31, 2001
and 2000. The segments include Smart Choice and other. The Smart Choice segment
includes the results of the Florida Finance Group and Paaco. For the three and
six months ended October 31, 2001 "Other" includes Concorde and the Company's
equity investment in Precision. For the three and six months ended October 31,
2000 "Other" includes Concorde, Precision and Crown El Salvador. The Company's
discontinued operations by business segment for the three and six months ended
October 31, 2001 and 2000 are as follows (in thousands):
SMART CHOICE
(Dollars in Thousands)
<Table>
<Caption>
% Change % Change
------------- -------------
Three Months Ended 2001 Six Months Ended 2001
October 31, vs October 31, vs
2001 2000 2000 2001 2000 2000
------------- ------------- ------------- ------------- ------------- -------------
Revenues:
Sales and other $ 34,407 $ 49,821 (30.9)% $ 71,280 $ 93,841 (24.0)%
Interest income 8,811 9,554 (7.8) 18,468 18,967 (2.6)
------------- ------------- ------------- ------------- ------------- -------------
Total 43,218 59,375 (27.2) 89,748 112,808 (20.4)
------------- ------------- ------------- ------------- ------------- -------------
Costs and expenses:
Cost of sales 21,947 30,755 (28.6) 45,127 56,943 (20.8)
Selling, gen and admin 11,055 10,855 1.8 21,833 20,659 5.7
Prov. for credit losses 9,988 11,446 (12.7) 21,040 22,038 (4.5)
Interest expense 3,430 4,539 (24.4) 7,130 8,737 (18.4)
Depreciation and amort 430 524 (17.9) 845 1,032 (18.1)
Write-down of assets 39,294 NM 39,294 NM
Loss in excess of basis (19,349) NM (19,349) NM
------------- ------------- ------------- ------------- ------------- -------------
Total 66,795 58,119 NM 115,920 109,409 NM
------------- ------------- ------------- ------------- ------------- -------------
Pretax income (loss) $ (23,577) $ 1,256 NM $ (26,172) $ 3,399 NM
============= ============= ============= ============= ============= =============
</Table>
NM = Not meaningful
THREE MONTHS ENDED OCTOBER 31, 2001 VS. THREE MONTHS ENDED OCTOBER 31, 2000
Revenues decreased $16.2 million, or 27.2%, for the three months ended
October 31, 2001 as compared to the same period in the prior fiscal year. The
decrease was principally the result of (i) a 39.0% decrease in the number of
vehicles sold, and (ii) a 32.6% decrease in the average sales price per retail
vehicle sold at Smart Choice's Florida Finance Group subsidiaries. Beginning in
March 2001 the Florida Finance Group 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.
Smart Choice reported a pretax loss of $23.6 million for the three months
ended October 31, 2001 as compared to $1.3 million pretax income for the same
period in the prior fiscal year. The $24.8 million decrease is principally the
result of a $39.3 million write-down of assets, partially offset by a $19.3
million credit which represents Smart Choice stockholders' deficit at October
31, 2001. Once Crown's investment in Smart Choice was reduced to zero, no
additional losses were recorded by Crown to reflect losses at Smart Choice. The
$39.3 million write-down pertains to certain Smart Choice assets (finance
receivables, property and equipment, deferred tax assets and goodwill) that were
deemed to be impaired in connection with the foreclosure by Finova of certain
Florida Finance Group assets and the winding-down of the Florida Finance Group's
operations (see Note F to the accompanying consolidated financial statements).
In addition, the Florida Finance Group's provision for credit loss and selling,
general and administrative expenses have not decreased proportionately with its
50.8% decrease in revenues.
18
SIX MONTHS ENDED OCTOBER 31, 2001 VS. SIX MONTHS ENDED OCTOBER 31, 2000
Revenues decreased $23.1 million, or 20.4%, for the six months ended October
31, 2001 as compared to the same period in the prior fiscal year. The decrease
was principally the result of (i) a 32.9% decrease in the number of vehicles
sold, and (ii) a 26.3% decrease in the average sales price per retail vehicle
sold at Smart Choice's Florida Finance Group subsidiaries. Beginning in March
2001 the Florida Finance Group 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.
Smart Choice reported a pretax loss of $26.2 million for the six months ended
October 31, 2001 as compared to $3.4 million pretax income for the same period
in the prior fiscal year. The $29.6 million decrease is principally the result
of a $39.3 million write-down of assets, partially offset by a $19.3 million
credit which represents Smart Choice stockholders' deficit at October 31, 2001.
Once Crown's investment in Smart Choice was reduced to zero, no additional
losses were recorded by Crown to reflect losses at Smart Choice. The $39.3
million write-down pertains to certain Smart Choice assets (finance receivables,
property and equipment, deferred tax assets and goodwill) that were deemed to be
impaired in connection with the foreclosure by Finova of certain Florida Finance
Group assets and the winding-down of the Florida Finance Group's operations (see
Note F to the accompanying consolidated financial statements). In addition, the
Florida Finance Group's provision for credit loss and selling, general and
administrative expenses have not decreased proportionately with its 50.0%
decrease in revenues.
OTHER
(Dollars in Thousands)
<Table>
<Caption>
% Change % Change
------------ ------------
Three Months Ended 2001 Six Months Ended 2001
October 31, vs October 31, vs
2001 2000 2000 2001 2000 2000
------------ ------------ ------------ ------------ ------------ ------------
Revenues:
Sales and other $ 3,054 $ 4,118 (25.8)% $ 5,782 $ 8,392 (31.1)%
Interest income 564 483 16.8 1,144 967 18.3
------------ ------------ ------------ ------------ ------------ ------------
Total 3,618 4,601 (21.4) 6,926 9,359 (26.0)
------------ ------------ ------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 595 NM 1,180 NM
Selling, gen and admin 2,094 2,861 (26.8) 4,125 5,536 (25.5)
Prov. for credit losses 406 107 279.4 517 240 115.4
Interest expense 345 531 (35.0) 749 1,074 (30.3)
Depreciation and amort 58 483 (88.0) 168 934 (82.0)
Write-down of assets 800 NM 800 NM
------------ ------------ ------------ ------------ ------------ ------------
Total 2,903 5,377 (46.0) 5,559 9,764 (43.1)
------------ ------------ ------------ ------------ ------------ ------------
Pretax income (loss) $ 715 $ (776) NM $ 1,367 $ (405) NM
============ ============ ============ ============ ============ ============
</Table>
NM = Not meaningful
THREE MONTHS ENDED OCTOBER 31, 2001 VS. THREE MONTHS ENDED OCTOBER 31, 2000
Revenues decreased $1.0 million, or 21.4%, for the three months ended October
31, 2001 as compared to the same period in the prior fiscal year. The decrease
was principally the result of (i) excluding Precision ($1.6 million) and Crown
El Salvador ($.5 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 fiscal year, partially offset by (ii) an increase
in Concorde's revenues ($1.1 million) as a result of greater mortgage loan
originations and sales. Other pretax income increased to $.7 million for the
three months ended October 31, 2001 from a pretax loss of $.8 million for the
same period in the prior fiscal year, an increase of $1.5 million. The increase
was principally the result of (i) not including Crown El Salvador's loss ($.9
million in the prior fiscal period) as a result of the sale of that subsidiary,
and (ii) improved operating results at Concorde ($1.0 million).
SIX MONTHS ENDED OCTOBER 31, 2001 VS. SIX MONTHS ENDED OCTOBER 31, 2000
Revenues decreased $2.4 million, or 26.0%, for the six months ended October
31, 2001 as compared to the same period in the prior fiscal year. The increase
was principally the result of (i) excluding Precision ($3.3 million) and Crown
El Salvador ($1.1 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 fiscal year, partially offset by (ii) an increase
in Concorde's revenues ($2.0 million) as a result of greater mortgage loan
originations and sales. Other pretax income increased to $1.4 million for the
six months ended October 31, 2001 from a pretax loss of $.4 million for the same
period in the prior fiscal year, an increase of $1.8 million. The increase was
principally the result of (i) not including Crown El Salvador's loss ($1.0
million in the prior fiscal period) as a result of the sale of that subsidiary,
and (ii) improved operating results at Concorde ($1.4 million).
19
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1.8 million for the six months
ended October 31, 2001 as compared to a net use of cash of $4.3 million for the
same period in the prior fiscal year. The $6.1 million increase was principally
the result of changes in the operating liability accounts. During the current
fiscal period net cash was provided by operating activities as accounts payable,
accrued liabilities and income taxes payable from continuing operations
increased. In the prior fiscal period net cash was used in operating activities
to reduce income taxes payable. Net cash used in investing activities was $.7
million for the six months ended October 31, 2001 as compared to $1.4 million in
the same period in the prior fiscal year. The $.7 million decrease was
principally the result of a decrease in the purchase of investments ($.9
million). Net cash used in financing activities was $.5 million for the six
months ended October 31, 2001 as compared to $.3 million in the same period in
the prior fiscal year. The $.2 million increase was principally the result of
(i) higher repayments of other debt ($2.3 million), partially offset by (ii) a
lower level of net stock purchases by the Company ($1.3 million), and (iii) an
increase in borrowings from Car-Mart's revolving credit facility ($.8 million),
in the current fiscal period as compared to the same period in the prior fiscal
year.
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 $32.5 million
was outstanding at October 31, 2001. Based upon the collateral on hand at
October 31, 2001, Car-Mart could have drawn an additional $2.5 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.
CORPORATE
As of October 31, 2001 Crown's (parent company only) sources of liquidity
included (i) $1.3 million of cash on hand, (ii) $7.0 million of receivables from
its subsidiaries, of which approximately $1.2 million was restricted due to the
terms of the credit facilities of its subsidiaries, (iii) $2.9 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.
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 adopted SFAS 141 effective May 1,
2001. Such adoption did not have any 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.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ("SFAS 144"), "Accounting for the Impairment of Long-Lived Assets",
which requires a single accounting model to be used for long-lived assets to be
sold and broadens the presentation of discontinued operations to include a
"component of an entity" (rather than a segment of a business). A component of
an entity comprises operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity.
A component of an entity that is classified as held for sale or has been
disposed of is presented as a discontinued operation if the operations and cash
flows of the component will be (or have been) eliminated from the ongoing
operations of the entity and the entity will not have any significant continuing
involvement in the operations of the component.
The Company adopted SFAS 144 effective August 1, 2001. Consequently, the
operating results of Smart Choice, Concorde and Precision, which are presently
held for sale, are included in discontinued operations. Assets and liabilities
of these business held for sale are included in "Assets held for sale" and
"Liabilities held for sale", respectively (see Note I).
20
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.
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. Decreases in market interest rates could eventually 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 6% to 18%. These finance receivables have
remaining maturities from one to 30 months. A majority of the Company's
borrowings contain variable interest rates that fluctuate with market interest
rates (ie. revolving credit facility). However, interest rates charged on
finance receivables originated in the State of Arkansas are limited to the
federal discount rate (2.0% at October 31, 2001) plus 5.0%. Typically, the
Company charges interest on its Arkansas loans at or near the maximum rate
allowed by law. Thus, while the interest rates charged on the Company's loans do
not fluctuate once established, new loans originated in Arkansas tend to
fluctuate with the federal discount rate. At October 31, 2001 approximately 75%
of the Company's finance receivables were originated in Arkansas. Assuming that
this percentage is held constant for future loan originations, the long-term
effect of decreases in the federal discount rate could have a negative effect on
profitability of the Company. This is the case because the amount of interest
income lost on Arkansas originated loans would likely exceed the amount of
interest expense saved on the Company's variable rate borrowings. The initial
impact on profitability resulting from a decrease in the federal discount rate
is positive, as the immediate interest expense savings outweighs the loss of
interest income on new loan originations. However, as the amount of new loans
originated at the lower interest rate exceeds the amount of variable interest
rate borrowings, the effect on profitability becomes negative.
The table below illustrates the impact which hypothetical changes in the
federal discount rate could have on the Company's continuing pretax earnings.
The calculations assume (i) the increase or decrease in the federal discount
rate remains in effect for two years, (ii) the increase or decrease in the
federal discount rate results in a like increase or decrease in the rate charged
on the Company's variable rate borrowings, (iii) the principal amount of finance
receivables and variable interest rate borrowings, and the percentage of
Arkansas originated finance receivables, remains constant during the periods,
and (iv) the Company's historical collection and charge-off experience continues
throughout the periods.
<Table>
<Caption>
Year 1 Year 2
Change in Change in Change in
Interest Rates Pretax Earnings Pretax Earnings
-------------- --------------- ---------------
(in thousands) (in thousands)
+2% $ (9) $ 558
+1% (5) 279
-1% 5 (279)
-2% 9 (558)
</Table>
21
PART II
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
SMART CHOICE AGREEMENT WITH FINOVA
On November 8, 2001, Crown's 70% owned subsidiary, Smart Choice, and certain
of Smart Choice's subsidiaries, entered into a forbearance agreement with
Finova, the primary lender to Smart Choice's subsidiaries, that resulted in the
foreclosure of receivables and inventory of certain Florida-based subsidiaries
of Smart Choice (the "Florida Finance Group"), and the probable sale of Smart
Choice's wholly-owned subsidiaries, Paaco Automotive Group, L.P. and Premium
Auto Acceptance Corporation (collectively, "Paaco"), to Finova.
Prior to November 9, 2001, the Florida Finance Group sold and financed used
cars and trucks in Florida. Paaco sells and finances used cars and trucks in
Texas. The Florida Finance Group had, and Paaco continues to have, a revolving
credit facility with Finova. Prior to November 9, 2001, the Florida Finance
Group was over-advanced on its revolving credit facility ($25 million
over-advanced at September 30, 2001), which constituted an event of default
under the facility.
Pursuant to the forbearance agreement, on November 9, 2001, the collateral
for the Florida Finance Group's credit facility with Finova, which consisted
principally of receivables and inventory, was sold at a public foreclosure sale
to Finova for $55 million. Prior to the foreclosure sale, the Florida Finance
Group owed Finova $88.4 million. Thus, after applying the proceeds from the
foreclosure sale, the Florida Finance Group owes Finova $33.4 million (the
"Deficiency").
Further, as part of the forbearance agreement, Smart Choice granted Finova
(i) an option to purchase Paaco (the "Paaco Option") for an amount equal to the
Deficiency, subject to shareholder approval and an appraisal indicating the
value of Paaco is not greater than the Deficiency, and (ii) an option to
purchase up to 100% of Smart Choice's remaining shares of authorized but
unissued common stock (approximately 39 million shares) (the "Smart Choice Stock
Option") at a price of $0.30 per share. The Smart Choice Stock Option will
terminate upon the closing of the exercise of the Paaco Option. Presently, Smart
Choice has approximately 9.8 million shares of common stock outstanding, of
which Crown owns approximately 6.9 million shares. Both the Paaco Option and the
Smart Choice Stock Option expire March 8, 2002.
As a result of the Finova agreement and the lack of other available capital,
on November 9, 2001 Smart Choice began to wind-down its Florida-based
operations. On December 12, 2001 Finova exercised its option to purchase Paaco
subject to certain conditions. If the exercise of the Paaco Option is closed as
expected, Smart Choice's remaining assets would consist of certain improved and
unimproved real estate in Titusville, Florida, including a 35,000 square-foot
office facility, and certain other current and fixed assets. Assuming the sale
of Paaco, management presently anticipates that Smart Choice's remaining assets
will likely be sold by Smart Choice in an effort to realize the maximum value
for these assets and repay its obligations to unsecured creditors to the extent
possible.
CROWN AGREEMENT WITH FINOVA
Separately, Crown entered into a settlement agreement with Finova that
provides for Crown to (i) pay Finova $1 million in cash, and (ii) grant Finova
an option to purchase Crown's 6.9 million shares of Smart Choice common stock
for $1.00, in exchange for Finova unconditionally releasing Crown from its $5
million guaranty of the Florida Finance Group's and Paaco's obligations to
Finova. As a result of these transactions and operating losses at Smart Choice,
Crown's equity investment in Smart Choice, which totaled $16.4 million at July
31, 2001, has been written off as of October 31, 2001. In addition, as a result
of revised subordination language that requires Finova to be paid in full prior
to Crown receiving any note payments from Paaco, Crown has fully reserved its
$1.6 million receivable from Paaco as of October 31, 2001. Crown anticipates
that it will receive a federal income tax benefit of approximately $6.1 million
following the ultimate disposition of its investment in Smart Choice. The
write-off of Crown's investment in Smart Choice and the loss resulting from the
$1 million guaranty payment to Finova and related tax benefits, are included in
discontinued operations (see Note I).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
During the fiscal quarter ended October 31, 2001 no reports on
Form 8-K were filed.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CROWN GROUP, INC.
By: /s/ Mark D. Slusser
-------------------------------------
Mark D. Slusser
Chief Financial Officer,
Vice President Finance and Secretary
(Principal Financial and Accounting
Officer)
Dated: December 14, 2001