1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QA
AMENDMENT NO. 1
[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, 1998 0-14939
CROWN GROUP, INC.
(Exact name of registrant as specified in its charter)
TEXAS 63-0851141
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4040 N. MACARTHUR BLVD., SUITE 100, IRVING, TEXAS
(Address of principal executive offices)
75038-6424
(Zip Code)
(972) 717-3423
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Title of Each Class September 11, 1998
------------------- ------------------
Common stock, par value $.01 per share 10,019,031
2
PART I
ITEM 1. FINANCIAL STATEMENTS CROWN GROUP, INC.
CONSOLIDATED BALANCE SHEETS
July 31, 1998
(unaudited) April 30, 1998
--------------- ---------------
(Restated) (Restated)
Assets:
Cash and cash equivalents $ 3,788,310 $ 6,481,706
Marketable equity securities 12,029,033 4,742,180
Accounts and other receivables 2,072,652 1,936,055
Mortgage loans held for sale, net 11,952,515 14,350,437
Finance receivables, net 39,660,401 33,918,014
Inventory 3,887,001 3,798,800
Prepaid and other assets 600,260 572,089
Property and equipment, net 13,246,827 9,165,703
Investment in CMN and related assets, net 6,305,047 6,606,114
Goodwill, net 12,491,847 10,631,737
--------------- ---------------
$ 106,033,893 $ 92,202,835
=============== ===============
Liabilities and stockholders' equity:
Accounts payable $ 2,604,154 $ 2,514,081
Accrued liabilities 1,603,311 1,952,828
Income taxes payable 87,723 142,572
Revolving credit facilities 43,163,484 41,164,524
Other notes payable 6,613,508 4,870,074
Deferred sales tax 2,445,005 2,090,303
Deferred income taxes 4,412,798 1,855,058
--------------- ---------------
Total liabilities 60,929,983 54,589,440
--------------- ---------------
Minority interests 1,932,336 2,562,071
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; 10,243,731 issued and outstanding
(9,433,963 at April 30) 102,437 94,340
Additional paid-in capital 38,108,261 35,547,369
Accumulated deficit (1,755,268) (2,520,885)
Unrealized appreciation of securities 6,716,144 1,930,500
--------------- ---------------
Total stockholders' equity 43,171,574 35,051,324
--------------- ---------------
$ 106,033,893 $ 92,202,835
=============== ===============
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS CROWN GROUP, INC.
(UNAUDITED)
Three Months Ended
July 31,
1998 1997
--------------- ---------------
(Restated)
Revenues:
Sales $ 16,513,001
Rental income 629,058
Gain on sale of mortgage loans 1,142,195
Interest income 2,524,070 $ 318,595
Interest, fees and rentals from CMN 250,302 150,420
Other 11,164 25,195
--------------- ---------------
21,069,790 494,210
--------------- ---------------
Costs and expenses:
Cost of sales 10,900,812
Selling, general and administrative 5,749,731 1,110,287
Provision for credit losses 1,981,321
Interest expense 1,311,425
Depreciation and amortization 510,210 92,364
--------------- ---------------
20,453,499 1,202,651
--------------- ---------------
Other income (expense):
Equity in earnings of CMN 568,621 239,879
Loss on sale of securities (74,403)
--------------- ---------------
494,218 239,879
--------------- ---------------
Income (loss) before taxes and minority interests 1,110,509 (468,562)
Provision (benefit) for income taxes 261,010 (159,169)
Minority interests 83,882
--------------- ---------------
Net income (loss) $ 765,617 $ (309,393)
=============== ===============
Earnings (loss) per share:
Basic $ 0.08 $ (0.03)
Diluted $ 0.07 $ (0.03)
Weighted average number of shares outstanding:
Basic 10,207,065 10,240,868
Diluted 10,454,696 10,240,868
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME CROWN GROUP, INC.
(UNAUDITED)
Three Months Ended
July 31,
1998 1997
--------------- ---------------
(Restated)
Net income (loss) $ 765,617 $ (309,393)
Unrealized appreciation of securities arising during period 4,785,644
--------------- ---------------
Comprehensive income (loss) $ 5,551,261 $ (309,393)
=============== ===============
See accompanying notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS CROWN GROUP, INC.
(UNAUDITED)
Three Months Ended
July 31,
1998 1997
--------------- ---------------
(Restated)
Operating activities:
Net income (loss) $ 765,617 $ (309,393)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 510,210 92,364
Amortization of finance receivable discount (268,976)
Deferred income taxes 178,354 155,000
Provision for credit losses 1,981,321
Minority interests 83,882
Gain on sale of mortgage loans (1,142,195)
Gain on sale of assets (16,997)
Loss on sale of securities 74,403
Equity in earnings of CMN (568,621) (239,879)
Changes in assets and liabilities, net of transactions:
Accounts and other receivables (136,597) (389,991)
Mortgage loans originated or acquired (22,533,785) (314,500)
Mortgage loans sold and principal repayments 25,999,910
Inventory 1,565,625
Prepaids and other assets (28,171) (59,547)
Accounts payable, accrued liabilities and deferred sales tax 282,594 412,103
Income taxes payable (54,849) (335,000)
--------------- ---------------
Net cash provided (used) by operating activities 6,691,725 (988,843)
--------------- ---------------
Investing activities:
Finance receivable originations (14,793,819)
Finance receivable collections 5,319,139
Purchase of property and equipment (4,457,983) (128,522)
Sale of assets 146,516
Purchase of securities (471,266)
Sale of securities 360,984
Dividends and collections of notes receivable from CMN 792,033
Purchase of CMN and related assets (7,000,001)
--------------- ---------------
Net cash used by investing activities (13,104,396) (7,128,523)
--------------- ---------------
Financing activities:
Capital contribution from minority owner 60,000
Purchase of common stock (83,119) (1,110,463)
Proceeds from revolving credit facilities, net 1,998,960
Proceeds from other debt, net 1,743,434
--------------- ---------------
Net cash provided (used) by financing activities 3,719,275 (1,110,463)
--------------- ---------------
Decrease in cash and cash equivalents (2,693,396) (9,227,829)
Cash and cash equivalents at: Beginning of period 6,481,706 21,117,960
--------------- ---------------
End of period $ 3,788,310 $ 11,890,131
=============== ===============
See accompanying notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CROWN GROUP, INC.
A - HISTORY AND DESCRIPTION OF BUSINESS
Crown Group, Inc. ("Crown"), and collectively with its subsidiaries (the
"Company"), is a publicly traded buy-out firm which as of July 31, 1998 owned
(i) 65% of Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation
(collectively, "Paaco"), a vertically integrated used car sales and finance
company, (ii) 100% of Precision IBC, Inc. ("Precision"), a firm specializing in
the sale and rental of intermediate bulk containers, (iii) 80% of Concorde
Acceptance Corporation ("Concorde"), a sub-prime mortgage lender, (iv) 49% of
Casino Magic Neuquen S.A. ("CMN"), a casino operator in the Province of Neuquen,
Argentina, and (v) 80% of Home Stay Lodges I, Ltd. ("Home Stay"), a partnership
focusing on the development and operation of extended-stay lodging facilities.
In addition, from time to time the Company purchases and sells small ownership
interests in securities of privately held and publicly traded firms. The Company
is presently focusing on (i) the development and expansion of its existing
businesses, and (ii) the potential acquisition or development of other unrelated
businesses.
Since its inception in 1983 through June 1993 the Company was engaged in
various facets of the cable and related programming businesses. From June 1993
until November 1996, the Company's primary business focus was that of owning,
operating and developing casino gaming properties. In November 1996 the Company
decided to expand its business interests beyond casino gaming and began pursuing
business opportunities in other fields. As a result the Company has recently
acquired or formed a number of businesses in a variety of industries.
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three month period ended July 31, 1998 are
not necessarily indicative of the results that may be expected for the year
ended April 30, 1999. 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, 1998.
Marketable Equity Securities
Investments in marketable equity securities are recorded at market value
based upon closing stock prices as quoted on national stock exchanges or
over-the-counter markets. The Company considers all of its equity securities to
be "available for sale" securities, and the difference between the Company's
cost and such security's market value is included as a separate component of
stockholders' equity entitled "unrealized appreciation of securities," on a net
of tax basis.
At July 31, 1998 the Company held 222,222 shares of Inktomi Corporation
common stock, which company completed its initial public offering ("IPO") on or
about June 9, 1998. The Company's Inktomi shares are subject to an underwriter's
lock-up agreement which restricts the Company from selling its Inktomi stock
until December 8, 1998. Further, the Company's Inktomi shares are not
registered, and thus the Company may not sell such shares in the public markets
until the completion of a one year holding period which ends on February 25,
1999. The Company valued its Inktomi shares based upon the closing stock price
of $56.875 per share on July 31, 1998, less a 10% discount to reflect the
restrictions on such shares. Accordingly, at July 31, 1998 the carrying value of
the Company's Inktomi stock was $11,374,989, which reflects a gross unrealized
gain of $10,299,989 over the Company's cost of $1,075,000.
Goodwill
Goodwill represents the excess of the Company's cost over the fair value of
net identifiable assets acquired in its purchases of Paaco and Precision.
Goodwill is amortized on a straight line basis over periods ranging from 15 to
25 years. The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operation. At July 31, 1998 accumulated amortization of goodwill
amounted to $339,895.
Reclassifications
Certain prior year amounts in the accompanying financial statements have
been reclassified to conform to the fiscal 1999 presentation.
7
C - ACQUISITIONS
Paaco Purchase
Effective February 1, 1998 the Company acquired 53% of the common stock of
Paaco for a purchase price of approximately $9.1 million cash. Approximately
$4.9 million of Paaco common stock was purchased directly from Paaco, and the
remaining $4.2 million was purchased from Paaco management personnel who prior
to this transaction were the sole shareholders of Paaco (the "Paaco Management
Shareholders"). Effective May 1, 1998 the Company acquired an additional 12%
interest in Paaco directly from the Paaco Management Shareholders. With this
purchase the Company owns 65% of Paaco as of July 31, 1998. The purchase price
of $1.5 million was paid by issuing 375,000 shares of the Company's common
stock.
Precision Purchase
On February 3, 1998 the Company acquired 80% of the common stock of
Precision IBC, Incorporated ("Original Precision") for a purchase price of
approximately $2.4 million cash. On March 5, 1998 the Company acquired 80% of
the common stock of M&S Tank Rentals, Inc. ("M&S") for a purchase price of $1.65
million cash. Original Precision and M&S were subsequently merged together into
a newly formed corporation, Precision IBC, Inc. ("Precision"). Effective May 1,
1998 the Company acquired the remaining 20% interest in Precision it did not
previously own by issuing 288,027 shares of the Company's common stock.
D - CMN OPERATING RESULTS
The operating results of CMN for the three months ended July 31, 1998 and
1997 were as follows (in thousands):
Three Months Ended
July 31,
1998 1997
--------------- ---------------
Revenues $ 5,651 $ 4,639
Costs and expenses 3,450 3,140
Interest, fees and rentals to shareholders 436 552
Provision for income taxes 605 322
--------------- ---------------
Net income $ 1,160 $ 625
=============== ===============
E - FINANCE RECEIVABLES
The Company originates installment sales contracts from the sale of used
vehicles at its dealerships. These installment sales contracts typically include
interest rates ranging from 18-26% per annum and provide for payments over
periods ranging from 24 to 36 months. A summary of finance receivables as of
July 31, 1998 and April 30, 1998 is as follows:
July 31, April 30,
1998 1998
--------------- ---------------
(Restated) (Restated)
Finance receivables $ 56,816,244 $ 48,776,278
Unearned finance charges (10,991,624) (9,420,164)
Allowance for credit losses (5,469,994) (4,727,679)
Valuation discount (694,225) (710,421)
--------------- ---------------
$ 39,660,401 $ 33,918,014
=============== ===============
In accordance with APB Opinion No. 16, as of the dates the Company acquired
an interest in Paaco (53% on February 1, 1998 and 12% on May 1, 1998), the
Company valued Paaco's finance receivable portfolios at market value and
determined that an aggregate valuation discount of $1,215,966 was appropriate.
This discount is being amortized into interest income over the life of the
related finance receivable portfolio that existed on the purchase date using the
interest method.
8
A summary of the restated finance receivables allowance for credit losses
for the period from April 30, 1998 to July 31, 1998 is as follows:
Balance at April 30, 1998 $ 4,727,679
Provision for credit losses 1,937,221
Net charge offs (1,194,906)
---------------
Balance at July 31, 1998 $ 5,469,994
===============
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
and trade accounts receivable aggregating $73,600 as of July 31, 1998.
F - PROPERTY AND EQUIPMENT
A summary of property and equipment as of July 31, 1998 and April 30, 1998
is as follows:
July 31, April 30,
1998 1998
--------------- ---------------
Land and buildings $ 3,762,442 $ 2,332,750
Rental equipment 5,572,688 4,749,652
Furniture, fixtures and equipment 3,837,843 1,904,536
Leasehold improvements 1,048,577 920,583
Less accumulated depreciation and amortization (974,723) (741,818)
--------------- ---------------
$ 13,246,827 $ 9,165,703
=============== ===============
G - DEBT
A summary of debt at July 31, 1998 is as follows:
Revolving Credit Facilities
- ----------------------------------------------------------------------------------------------------------------
Facility Interest Primary Balance at
Borrower Lender Amount Rate Maturity Collateral July 31, 1998
- -------------- ----------------- ------------ -------------- ------------- --------------- ---------------
Paaco Finova $35 million Prime + 3.00% Apr 2000 Finance rec. $ 30,672,375
Concorde Bank One $20 million Libor + 2.25% Dec 1998 Mortgage loans 8,324,445
Precision Wells Fargo $5 million Prime June 2000 IBC's and rec. 3,666,664
Paaco Comerica $500,000 Prime + 2.00% Demand Vehicle inv. 500,000
---------------
$ 43,163,484
===============
Other Notes Payable
- ----------------------------------------------------------------------------------------------------------------
Facility Interest Primary Balance at
Borrower Lender Amount Rate Maturity Collateral July 31, 1998
- -------------- ----------------- ------------ -------------- ------------- --------------- ---------------
Home Stay Bank of Pensacola $5.4 million 8.50% Feb 2004 Real estate $ 1,092,727
Paaco Texas Commerce N/A 8.50% Oct 2003 Real estate 988,875
Paaco Heller Financial N/A Prime + 2.25% Dec 2015 Real estate 626,194
Paaco Various N/A Various 1998 to 1999 None 3,905,712
---------------
$ 6,613,508
===============
9
H - COMPREHENSIVE INCOME INFORMATION
Supplemental comprehensive income disclosures for the three months ended
July 31, 1998 are as follows:
Three Months
Ended
July 31, 1998
---------------
Gross unrealized appreciation of securities arising during period $ 7,250,974
Provision for income taxes 2,465,330
---------------
Unrealized appreciation of securities arising during period $ 4,785,644
===============
Changes to unrealized appreciation of securities for the three months ended
July 31, 1998 are as follows:
Three Months
Ended
July 31, 1998
---------------
Balance at April 30, 1998 $ 1,930,500
Current period change 4,785,644
---------------
Balance at July 31, 1998 $ 6,716,144
===============
I - EARNINGS PER SHARE
A summary reconciliation of basic earnings per share to diluted earnings
per share for the three months ended July 31, 1998 and 1997 is as follows:
Three Months Ended
July 31,
1998 1997
--------------- ---------------
(Restated)
Net income (loss) $ 765,617 $ (309,393)
=============== ===============
Average shares outstanding-basic 10,207,065 10,240,868
Dilutive options 198,653
Dilutive warrants 48,978
--------------- ---------------
Average shares outstanding-diluted 10,454,696 10,240,868
=============== ===============
Earnings (loss) per share:
Basic $ 0.08 $ (0.03)
Diluted $ 0.07 $ (0.03)
Antidilutive securities not included:
Options 35,000 899,643
=============== ===============
Warrants 391,198 1,084,246
=============== ===============
10
J - COMMON STOCK ISSUANCES
Effective May 1, 1998 the Company issued 375,000 and 288,027 shares of its
common stock in the purchases of an additional 12% interest in Paaco and an
additional 20% interest in Precision, respectively (see Note C). Furthermore, in
June 1998 the Company issued 169,941 shares of its common stock to Nomura
Holding America, Inc. ("Nomura") in connection with Nomura's full exercise of a
warrant held by them to purchase 508,414 shares of the Company's common stock.
Nomura exercised the warrant pursuant to its "cashless exercise" feature.
K - 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 a percentage of the total potential
liability.
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.
Paaco Purchase Contingent Consideration
In connection with the Company's purchase of an additional 12% interest in
Paaco effective May 1, 1998, the Company agreed to pay the sellers as additional
consideration an amount equal to 60% of the excess of Paaco's pretax income in
excess of $2.5 million for the twelve months ending January 31, 1999. Such
additional consideration, if any, is to be paid in Company common stock valued
at $4.00 per share.
Litigation
In August 1998 an action was filed against the Company in the 8th Judicial
District Court of Clark County, Nevada by Resort Properties of America ("RPA").
In this action RPA alleges it had a verbal agreement with the Company pertaining
to the sale of the Company's Las Vegas land which was sold in September 1997.
RPA claims it is due a brokerage commission of $450,000 plus attorney's fees.
While the Company has yet to formally respond to the complaint, it intends to
deny the material allegations of the claim and vigorously contest any liability
in the matter. While no assurance can be given as to the ultimate outcome of
this litigation, management believes that the resolution of this matter will not
have a material adverse effect on the Company.
L - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures for the three months ended July 31, 1998
and 1997 are as follows:
Three Months Ended
July 31,
1998 1997
-------------- --------------
Value of stock issued in acquisitions $ 2,652,108
Inventory acquired in repossession 1,653,826
Interest paid, net of amount capitalized 1,287,801
Income taxes paid 100,000 $ 300,000
11
M - BUSINESS SEGMENTS
Operating results and other financial data are presented for the four
principal business segments of the Company for the three months ended July 31,
1998 and 1997. These segments are categorized by legal entity, which also
corresponds to the lines of business of the Company. The segments include (i)
Paaco, which sells and finances used vehicles, (ii) Precision, which rents and
sells intermediate bulk containers, (iii) Concorde, which originates and sells
sub-prime mortgage loans, and (iv) other, which includes corporate operations,
Home Stay, activities of relatively inactive subsidiaries and the Company's
equity investment in CMN. The Company's business segment data for the three
months ended July 31, 1998 and 1997 is as follows (in thousands):
Three Months Ended July 31, 1998 (Restated)
-------------------------------------------------------------------------
Paaco Precision Concorde Other Eliminations Consolidated
--------- --------- --------- --------- ------------ ------------
Revenues:
Sales and other $ 15,861 $ 1,282 $ 1,151 $ 252 $ 18,546
Interest income 1,810 411 418 $ (115) 2,524
--------- --------- --------- --------- --------- ---------
Total 17,671 1,282 1,562 670 (115) 21,070
--------- --------- --------- --------- --------- ---------
Costs and expenses:
Interest expense 1,030 92 304 (115) 1,311
Depreciation and amort 68 153 32 257 510
Other 16,161 768 1,151 553 18,633
--------- --------- --------- --------- --------- ---------
Total 17,259 1,013 1,487 810 (115) 20,454
--------- --------- --------- --------- --------- ---------
CMN earnings and other 494 494
--------- --------- --------- --------- --------- ---------
Income before taxes
and minority interests $ 412 $ 269 $ 75 $ 354 $ -- $ 1,110
========= ========= ========= ========= ========= =========
Capital expenditures $ 227 $ 1,065 $ 142 $ 3,024 $ -- $ 4,458
========= ========= ========= ========= ========= =========
Total assets $ 48,852 $ 11,064 $ 14,158 $ 59,184 $ (27,224) $ 106,034
========= ========= ========= ========= ========= =========
Three Months Ended July 31, 1997
-------------------------------------------------------------------------
Paaco Precision Concorde Other Eliminations Consolidated
--------- --------- --------- --------- ------------ ------------
Revenues:
Sales and other $ 1 $ 174 $ -- $ 175
Interest income 12 307 319
--------- --------- ------------ ------------
Total 13 481 -- 494
--------- --------- ------------ ------------
Costs and expenses:
Depreciation and amort. 92 92
Other 201 909 1,110
--------- --------- ------------ ------------
Total 201 1,001 -- 1,202
--------- --------- ------------ ------------
CMN earnings and other 239 239
--------- --------- ------------ ------------
Loss before taxes
and minority interests $ (188) $ (281) $ -- $ (469)
========= ========= ============ ============
Capital expenditures $ -- $ 129 $ -- $ 129
========= ========= ============ ============
Total assets $ 1,908 $ 51,945 $ (16,789) $ 37,064
========= ========= ============ ============
12
N - RESTATEMENT
In connection with the April 30, 1999 year end closing process and
subsequent analyses performed, the Company identified certain accounting errors
and irregularities at Paaco relating principally to finance receivables,
inventory and drafts payable. Such errors and irregularities existed at and
subsequent to the Company's purchase of a 53% interest in Paaco on February 1,
1998. To correct for such errors and irregularities, the Company has restated
its previously issued consolidated financial statements for the year ended April
30, 1998 and has amended each of its quarterly reports on Form 10-Q with respect
to the fiscal quarters during the year ended April 30, 1999. A summary of the
impact of these corrections on the Company's consolidated financial statements
for the three months ended July 31, 1998 is set forth below (in thousands,
except per share amounts):
Three Months Ended July 31, 1998
----------------------------------
As Previously As
Reported Restated
-------------- ---------------
Revenues $ 21,070 $ 21,070
Income before taxes and minority
interests 1,670 1,111
Net income 1,007 766
Earnings per share (diluted) $ .10 $ .07
July 31, 1998
----------------------------------
As Previously As
Reported Restated
-------------- ---------------
Finance receivables, net $ 41,864 $ 39,660
Inventory 4,575 3,887
Goodwill, net 11,268 12,492
Total assets 108,078 106,034
Accounts payable 2,342 2,604
Deferred income taxes 5,719 4,413
Total liabilities 61,974 60,930
Minority interests 2,711 1,932
Stockholders' equity 43,394 43,172
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 appearing elsewhere in this report.
OVERVIEW
Crown Group, Inc. ("Crown"), and collectively with its subsidiaries (the
"Company"), is a publicly traded buy-out firm which as of July 31, 1998 owned
(i) 65% of Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation
(collectively, "Paaco"), a vertically integrated used car sales and finance
company, (ii) 100% of Precision IBC, Inc. ("Precision"), a firm specializing in
the sale and rental of intermediate bulk containers, (iii) 80% of Concorde
Acceptance Corporation ("Concorde"), a sub-prime mortgage lender, (iv) 49% of
Casino Magic Neuquen S.A. ("CMN"), a casino operator in the Province of Neuquen,
Argentina, and (v) 80% of Home Stay Lodges I, Ltd. ("Home Stay"), a partnership
focusing on the development and operation of extended-stay lodging facilities.
In addition, from time to time the Company purchases and sells small ownership
interests in securities of privately held and publicly traded firms. The Company
is presently focusing on (i) the development and expansion of its existing
businesses, and (ii) the potential acquisition or development of other unrelated
businesses.
Since its inception in 1983 through June 1993 the Company was engaged in
various facets of the cable and related programming businesses. From June 1993
until November 1996, the Company's primary business focus was that of owning,
operating and developing casino gaming properties. In November 1996 the Company
decided to expand its business interests beyond casino gaming and began pursuing
business opportunities in other fields. As a result the Company has recently
acquired or formed a number of businesses in a variety of industries as follows:
CMN - In June 1997 the Company acquired a 49% interest in CMN for a
purchase price of $7 million cash. CMN operates casinos in the cities
of Neuquen and San Martin de los Andes in the Province of Neuquen,
Argentina under an exclusive concession contract.
CONCORDE - In June 1997 the Company, along with certain newly hired
management personnel, formed Concorde. Concorde is in the business of
originating, purchasing, servicing and selling sub-prime mortgage
loans which are secured primarily by first and second liens on
residential properties. These loans are sold in privately negotiated
transactions to institutional investors and other third parties.
PAACO - In February 1998 the Company acquired 53% of the common stock
of Paaco for a purchase price of approximately $9.1 million cash.
Approximately $4.9 million of Paaco common stock was purchased
directly from Paaco, and the remaining $4.2 million was purchased from
Paaco management personnel who prior to this transaction were the sole
shareholders of Paaco. Effective May 1, 1998 the Company purchased an
additional 12% interest in Paaco from the management shareholders. The
purchase price of $1.5 million was paid by issuing 375,000 shares of
the Company's common stock. Paaco is a vertically integrated used car
sales and finance company which operates eight used car dealerships in
the Dallas-Ft. Worth metropolitan area. Paaco sells, underwrites and
finances used cars and trucks with a focus on the Hispanic market.
PRECISION - In February 1998 the Company acquired 80% of the common
stock of Precision IBC, Incorporated ("Original Precision") for a
purchase price of approximately $2.4 million cash. In March 1998 the
Company acquired 80% of the common stock of M&S Tank Rentals, Inc.
("M&S") for a purchase price of $1.65 million cash. Original Precision
and M&S were subsequently merged together into a newly formed
corporation, Precision IBC, Inc. ("Precision"). Effective May 1, 1998
the Company purchased the remaining 20% of Precision. The purchase
price of approximately $1.1 million was paid by issuing 288,027 shares
of the Company's common stock. Precision is in the business of
renting, selling, testing and servicing principally stainless steel
intermediate bulk containers.
RESULTS OF OPERATIONS
The Company's investment in 49% of CMN is accounted for on the equity
method. Since the Company's investment in CMN was completed in June 1997, the
fiscal quarter ended July 31, 1997 only includes two months of CMN operating
results. Concorde was formed in June 1997, and, as a result, only had limited
operations during the fiscal quarter ended July 31, 1997. Paaco and Precision
were acquired in February 1998, and, as a result, are not reflected in the
Company's operating results for the fiscal quarter ended July 31, 1997. As a
result of the above transactions, operating results of the Company for the three
months ended July 31, 1998 and 1997 are not entirely comparable.
During the course of its fiscal 1999 year end closing process, the Company
discovered certain accounting errors and irregularities at Paaco, as a result of
which fiscal 1999 earnings of the Company were reduced by certain finance
receivable and inventory write-downs, together with an increase in finance
receivable reserves and drafts payable. Such errors and irregularities existed
at and subsequent to the Company's
14
initial purchase of its interest in Paaco in February 1998. The investigation at
Paaco has also resulted in a restatement of fiscal 1998 results of operations
and the quarterly financial statements during fiscal 1999. See Note N to the
consolidated financial statements for a summary of the impact of the required
adjustments on the Company's consolidated financial statements as of July 31,
1998 and for the three months then ended. As a result of its investigation of
Paaco, management of the Company has restructured Paaco's management
organization and has implemented cost reductions at that subsidiary, while
taking steps to ensure the integrity of Paaco's accounting and reporting
procedures in future periods. Daniel Chu, former President of Paaco, resigned in
July 1999.
THREE MONTHS ENDED JULY 31, 1998 COMPARED TO THE THREE MONTHS ENDED JULY 31,
1997
Revenues from sales and rental income pertain to the businesses of Paaco
and Precision, which were acquired during the fourth quarter of fiscal 1998.
Interest income for the three months ended July 31, 1998 increased $2.2 million
compared to the same period in the prior fiscal period. The increase resulted
from (i) interest earned on Paaco's finance receivable portfolio ($1.8 million),
and (ii) interest earned on Concorde's mortgage loans ($.4 million).
Cost of sales pertains to the operations of Paaco and Precision. Provision
for credit losses pertains principally to Paaco's operations. Selling, general
and administrative expenses for the three months ended July 31, 1998 increased
$4.6 million compared to the same period in the prior fiscal period. The
increase resulted principally from (i) expenses relating to Paaco and Precision
($4.1 million), and (ii) the formation and development of Concorde's mortgage
based lending business ($1.1 million), offset partially by a decrease in costs
associated with defending and settling certain lawsuits ($.5 million). Interest
expense for the three months ended July 31, 1998 increased $1.3 million compared
to the same period in the prior fiscal period. The increase resulted from
interest associated with the debt of Paaco, Precision and Concorde. Depreciation
and amortization for the three months ended July 31, 1998 increased $.4 million
compared to the same period in the prior fiscal period. The increase resulted
from (i) amortizing certain agreements and other assets obtained in the
acquisition of 49% of CMN for three months in the current fiscal period versus
two months in the prior fiscal period ($25,885), (ii) amortizing goodwill that
was created in the acquisitions of Paaco and Precision ($185,215), and (iii)
depreciating the assets of Paaco and Precision ($178,135).
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1998 the Company's sources of liquidity included
approximately (i) $4 million of cash on hand, of which $2 million was held by
Crown, (ii) $12 million of marketable equity securities held by Crown, the
majority of which is subject to a lock-up agreement with an underwriter which
prohibits Crown from selling such securities until December 8, 1998, (iii) $22
million remaining to be drawn on the credit facilities of Paaco, Concorde,
Precision and Home Stay, although the majority of such additional draws may only
be made in connection with a corresponding increase in the related collateral
asset (i.e., finance receivables, mortgage loans held for sale, intermediate
bulk containers and lodging facilities), and (iv) the issuance of additional
debt and/or equity. The loan agreements which govern the credit facilities of
Crown's subsidiaries limit dividends and other distributions from such
subsidiaries to Crown.
For the three months ended July 31, 1998 net cash provided by operating
activities amounted to $6.7 million. The principal source of cash resulted from
the sale of mortgage loans. The excess of mortgage loans sold and principal
repayments over mortgage loans originated or acquired was $3.5 million. Net cash
used by investing activities of $13.1 million included (i) a $9.5 million use of
cash in finance receivable originations in excess of finance receivable
collections, and (ii) a $4.5 million use of cash in the purchase of assets
(rental and other equipment and construction of lodging facilities). Net cash
provided by financing activities of $3.7 million principally relates to $2.0
million of cash provided by the asset based revolving credit facilities of
Paaco, Concorde and Precision, and $1.7 million of proceeds from the issuance of
other debt (Home Stay construction loan and financing of Paaco real estate).
The Company is presently focusing on the development and expansion of its
existing businesses and the potential acquisition or development of other
unrelated businesses. The Company's credit facilities can support the majority
of the expected growth of the Company's existing businesses over the next twelve
months. Presently management believes that the Company's capital resources are
sufficient to satisfy its identified capital needs for the next twelve months.
In March 1996 the Company's Board of Directors approved a program, as
amended, to repurchase up to 3,000,000 shares of the Company's common stock from
time to time in the open market. As of July 31, 1998 the Company had repurchased
2,406,939 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.
DATA PROCESSING AND YEAR 2000
Each of Crown and its subsidiaries operate their data processing systems
independently. Almost all of the software utilized by the Company is licensed
from third parties. Most of the Company's hardware, software and networking
systems are year 2000 compliant, however, a more complete description on a
company by company basis as of July 31, 1998 is as follows:
15
PAACO - Paaco utilizes two primary software packages (operating and
accounting), and several secondary software packages (word
processing, spreadsheet and database) in the operation of its
business. Its operating software, which includes (i) finance
receivables and related collection records and (ii) vehicle data
relating to cars sold and those in inventory, is year 2000
compliant. In addition, all of its secondary software applications
are year 2000 compliant. The version of accounting software
presently utilized by Paaco is not year 2000 compliant. However, the
respective software vendor has a more recent version available which
is year 2000 compliant, and has made arrangements with Paaco to
install the updated software in October 1998. Paaco utilizes two
local area networking systems. The local area network associated
with its operating software is year 2000 compliant. The local area
network associated with its accounting software is not presently
year 2000 compliant, but is expected to be updated in October 1998.
All of Paaco's data processing hardware is year 2000 compliant.
CONCORDE - Concorde utilizes three primary software packages
(front-end origination and processing, mortgage servicing and
accounting), and approximately nine secondary software packages
(document generation, scanning, telephone management, E-mail,
database, fax, credit bureau, word processing and spreadsheet) in
the operation of its business. All of its software applications are
year 2000 compliant. In addition, Concorde's local area networking
software and all of its data processing hardware is year 2000
compliant.
PRECISION - Precision utilizes two primary software packages (tank
tracking and accounting), and approximately five secondary software
packages (word processing, database, spreadsheet, desktop publishing
and lock box communication) in the operation of its business.
Precision's accounting software and most of its secondary software
applications are year 2000 compliant. Precision has yet to determine
whether its tank tracking, database and lock box communication
software is year 2000 compliant. All of Precision's data processing
equipment, which consists principally of personal computers, is year
2000 compliant. In the near future, Precision expects to determine
the year 2000 compliance of all its software packages.
CMN - CMN utilizes one primary software package (accounting), and a
few secondary software packages (word processing and spreadsheet) in
the operation of its business. All of CMN's software applications
are year 2000 compliant. CMN's data processing equipment, which
consists principally of personal computers, is year 2000 compliant.
CROWN - Crown utilizes one primary software package (accounting),
and approximately three secondary software packages (word
processing, spreadsheet and desktop publishing) in the operation of
its business. All of its software applications are year 2000
compliant. Crown's file server and local area networking software
are not presently year 2000 compliant. However, Crown is in the
process of replacing such file server and networking software, and
expects to complete this process in October 1998. All of Crown's
other data processing equipment, which consists principally of
personal computers, is year 2000 compliant.
Each of Crown and its subsidiaries rely to varying degrees on third parties
in the operation of their businesses. Such third parties include banking
institutions, telecommunications companies, utilities, manufacturers and parts
suppliers. The Company has made inquiries of some of these third parties as to
their year 2000 compliance, but has yet to complete this process. The Company
believes to the extent a particular third party vendor does not become year 2000
compliant, and such lack of compliance is expected to have a material impact on
such vendor's ability to effectively provide goods or services, the Company
could replace such vendor to obtain the goods or services it needs. The Company
plans to monitor its more material third party relationships and take
appropriate action as necessary.
The Company has not incurred any appreciable costs in its process of
becoming year 2000 compliant, nor does it expect to do so in the future. The
Company does not presently have a contingency plan with respect to its year 2000
compliance as it expects to be fully compliant prior to the year 2000.
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. Such forward-looking statements address, among other things, the
Company's current focus on the development and expansion of its existing
businesses, and the potential acquisition or development of businesses in other
fields. Such forward-looking statements are based upon management's current
plans or expectations and are subject to a number of uncertainties and risks
that could significantly affect current plans, anticipated actions and the
Company's future financial condition and results. As a consequence, actual
results may differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company as a result of various factors.
Uncertainties and risks related to such forward-looking statements include, but
are not limited to, those relating to the development of the Company's
businesses, continued availability of lines of credit for the Company's
businesses, changes in interest rates, changes in the industries in which the
Company operates, competition, dependence on existing management, the stability
of Argentina's government, currency exchange rate fluctuations, the repatriation
of funds from Argentina,
16
domestic or global economic conditions (particularly in the Dallas/Ft. Worth
area), changes in foreign or domestic tax laws or the administration of such
laws and changes in gaming or 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.
SEASONALITY
The Company's automobile sales operation is seasonal in nature. In the
automobile business, the Company's third fiscal quarter (November through
January) is historically the slowest period of time for car and truck sales.
Many of the Company's operating expenses such as administrative personnel, rent
and insurance are fixed and cannot easily be reduced during periods of decreased
sales. None of the Company's other businesses experience significant seasonal
fluctuations.
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PART II
ITEM 1. LEGAL PROCEEDINGS
In August 1998 an action was filed against the Company in the 8th Judicial
District Court of Clark County, Nevada by Resort Properties of America ("RPA").
In this action RPA alleges it had a verbal agreement with the Company pertaining
to the sale of the Company's Las Vegas land which was sold in September 1997.
RPA claims it is due a brokerage commission of $450,000 plus attorney's fees.
While the Company has yet to formally respond to the complaint, it intends to
deny the material allegations of the claim and vigorously contest any liability
in the matter. While no assurance can be given as to the ultimate outcome of
this litigation, management believes that the resolution of this matter will not
have a material adverse effect on the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Paaco Purchase
Effective May 1, 1998 the Company issued 375,000 shares of its common stock
to the minority shareholders of Paaco to acquire an additional 12% interest in
Paaco. The shares were valued at $1.5 million in the aggregate.
Precision Purchase
Effective May 1, 1998 the Company issued 288,027 shares of its common stock
to the minority shareholders of Precision to acquire the remaining 20% interest
in Precision it did not previously own. The shares were valued at approximately
$1.1 million in the aggregate.
Warrant Exercise
In June 1998 the Company issued 169,941 shares of its common stock to
Nomura Holding America, Inc. ("Nomura") in connection with Nomura's full
exercise of a warrant held by them to purchase 508,414 shares of the Company's
common stock. Nomura exercised the warrant pursuant to its "cashless exercise"
feature.
All of the above securities were issued in reliance upon an exemption from
registration pursuant to Section 506 of Regulation D under the Securities Act of
1933, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial data schedule (1).
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fiscal quarter
ended July 31, 1998.
- ---------------------
(1) Filed herewith.
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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 16, 1999
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
27.1 Financial data schedule (1).
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(1) Filed herewith.