1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal quarter ended: Commission file number:
JULY 31, 1999 0-14939
CROWN GROUP, INC.
(Exact name of registrant as specified in its charter)
TEXAS 63-0851141
(State or other jurisdiction (I.R.S. Employer Identification No.)
of 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 15, 1999
------------------- ------------------
Common stock, par value $.01 per share 9,711,296
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PART I
ITEM 1. FINANCIAL STATEMENTS CROWN GROUP, INC.
CONSOLIDATED BALANCE SHEETS
July 31, 1999
(unaudited) April 30, 1999
------------- --------------
Assets:
Cash and cash equivalents $ 2,212,676 $ 12,910,535
Accounts and other receivables, net 4,066,766 2,572,535
Mortgage loans held for sale, net 14,991,839 10,636,933
Finance receivables, net 95,392,548 88,424,897
Inventory 9,240,946 9,290,272
Prepaid and other assets 3,170,861 2,748,831
Property and equipment, net 25,091,395 22,055,174
Investment in CMN and related assets, net 5,823,136 5,167,161
Goodwill, net 9,649,897 14,328,241
------------ ------------
$169,640,064 $168,134,579
============ ============
Liabilities and stockholders' equity:
Accounts payable $ 3,095,509 $ 4,747,358
Accrued liabilities 5,138,078 5,040,007
Income taxes payable 1,655,491 3,875,583
Revolving credit facilities 83,420,477 78,928,121
Other notes payable 17,446,272 17,259,544
Deferred sales tax 3,223,494 2,713,914
Deferred income taxes 230,569 797,437
------------ ------------
Total liabilities 114,209,890 113,361,964
------------ ------------
Minority interests 1,394,997 1,713,731
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;
9,765,796 issued and outstanding (10,096,842 at April 30, 1999) 97,658 100,968
Additional paid-in capital 36,371,587 37,970,391
Retained earnings 17,565,932 14,987,525
------------ ------------
Total stockholders' equity 54,035,177 53,058,884
------------ ------------
$169,640,064 $168,134,579
============ ============
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS CROWN GROUP, INC.
(UNAUDITED)
Three Months Ended
July 31,
1999 1998
------------ ------------
Revenues:
Sales $ 40,876,106 $ 16,513,001
Rental income 1,067,294 629,058
Gain on sale of mortgage loans 1,329,082 1,142,195
Gaming 215,286
Interest income 4,997,683 2,524,070
Interest, fees and rentals from CMN 250,302
Other 70,485 11,164
------------ ------------
48,555,936 21,069,790
------------ ------------
Costs and expenses:
Cost of sales 25,096,913 10,900,812
Selling, general and administrative 11,356,568 5,749,731
Provision for credit losses 5,855,127 1,981,321
Interest expense 2,415,432 1,311,425
Depreciation and amortization 754,797 510,210
------------ ------------
45,478,837 20,453,499
------------ ------------
Other income:
Equity in earnings of unconsolidated subsidiaries 740,802 568,621
Gain on sale of securities, net (74,403)
------------ ------------
740,802 494,218
------------ ------------
Income before taxes and minority interests 3,817,901 1,110,509
Provision for income taxes 1,213,037 261,010
Minority interests 26,457 83,882
------------ ------------
Net income $ 2,578,407 $ 765,617
============ ============
Earnings per share:
Basic $ .26 $ 0.08
Diluted $ .25 $ 0.07
Weighted average number of shares outstanding:
Basic 10,068,220 10,207,065
Diluted 10,512,850 10,454,696
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME CROWN GROUP, INC.
(UNAUDITED)
Three Months Ended
July 31,
1999 1998
---------- ----------
Net income $2,578,407 $ 765,617
Unrealized appreciation of securities arising during period 4,785,644
---------- ----------
Comprehensive income $2,578,407 $5,551,261
========== ==========
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS CROWN GROUP, INC.
(UNAUDITED)
Three Months Ended
July 31,
1999 1998
------------ ------------
Operating activities:
Net income $ 2,578,407 $ 765,617
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 754,797 510,210
Amortization of finance receivable discount (351,796) (268,976)
Deferred income taxes (566,867) 178,354
Provision for credit losses 5,855,127 1,981,321
Minority interests 26,457 83,882
Gain on sale of mortgage loans (1,329,082) (1,142,195)
Gain on sale of assets (26,979) (16,997)
Gain on sale of securities 74,403
Equity in earnings of unconsolidated subsidiaries (740,802) (568,621)
Changes in assets and liabilities:
Accounts and other receivables 517,358 (136,597)
Mortgage loans originated or acquired (39,641,531) (22,533,785)
Mortgage loans sold and principal repayments 36,609,607 25,999,910
Inventory 4,541,916 1,565,625
Prepaids and other assets (414,865) (28,171)
Accounts payable, accrued liabilities and deferred sales tax (1,044,198) 282,594
Income taxes payable (2,220,093) (54,849)
------------ ------------
Net cash provided by operating activities 4,547,456 6,691,725
------------ ------------
Investing activities:
Finance receivable originations (36,604,371) (14,793,819)
Finance receivable collections 19,646,257 5,319,139
Purchase of property and equipment (2,958,541) (4,457,983)
Sale of assets 197,902 146,516
Purchase of securities (471,266)
Sale of securities 360,984
Dividends and collections of notes receivable from CMN 792,033
------------ ------------
Net cash used by investing activities (19,718,753) (13,104,396)
------------ ------------
Financing activities:
Capital contribution from minority owner 60,000
Purchase of common stock (105,646) (83,119)
Proceeds from revolving credit facilities, net 4,492,356 1,998,960
Proceeds from other debt, net 86,728 1,743,434
------------ ------------
Net cash provided by financing activities 4,473,438 3,719,275
------------ ------------
Decrease in cash and cash equivalents (10,697,859) (2,693,396)
Cash and cash equivalents at: Beginning of period 12,910,535 6,481,706
------------ ------------
End of period $ 2,212,676 $ 3,788,310
============ ============
See accompanying notes to consolidated financial statements.
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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 presently owns (i) 100% of
America's Car-Mart, Inc. ("Car-Mart") and 85% of Paaco Automotive Group, Inc.
and Premium Auto Acceptance Corporation (collectively, "Paaco"), vertically
integrated used car sales and finance companies, (ii) 100% of Precision IBC,
Inc. ("Precision"), a firm specializing in the sale and rental of intermediate
bulk containers ("IBC's"), (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, (v) 50.1% of
CG Incorporated, S.A. de C.V. ("Crown El Salvador"), a newly formed company
focusing on the development and operation of casinos in El Salvador, (vi) 80% of
Home Stay Lodges I, Ltd. ("Home Stay"), a partnership focusing on the
development and operation of extended-stay lodging facilities, and (vii) 45% of
Atlantic Castings, Inc. ("Atlantic Castings"), an investment casting
manufacturer of turbine engine components. In addition, from time to time the
Company purchases and sells small ownership interests in securities of privately
held and publicly traded firms. The Company is presently focusing on (i) the
development and expansion of its existing businesses, and (ii) the potential
acquisition or development of other unrelated businesses.
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three month period ended July 31, 1999 are
not necessarily indicative of the results that may be expected for the year
ended April 30, 2000. 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, 1999.
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, 1999 accumulated amortization of goodwill
amounted to $1,161,918.
Recent Accounting Pronouncements
In June 1998 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" which, as amended by SFAS No.
137, is effective for all fiscal quarters and years beginning after June 15,
2000. SFAS No. 133 standardizes the accounting for derivative instruments and
hedging activities, including certain derivative instruments imbedded in other
contracts. Under this standard, entities are required to carry all derivative
instruments in the statement of financial position at fair value. The Company
does not believe the adoption of SFAS No. 133 will have a material impact on its
financial position or results of operations.
Reclassifications
Certain prior year amounts in the accompanying financial statements have been
reclassified to conform to the fiscal 2000 presentation.
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C - ACQUISITION
Car-Mart Purchase
On January 15, 1999 the Company acquired 100% of the outstanding common stock
of Fleeman Holding Company, including its wholly-owned subsidiary Car-Mart for
$41.35 million. The purchase price consisted of $33.85 million in cash and the
issuance of promissory notes aggregating $7.5 million (the "Notes"). The Notes
bear interest at 8.5% per annum payable quarterly, with the principal due in
five years. Approximately $24 million of the cash portion of the purchase price
was obtained pursuant to a $30 million revolving credit facility with a major
banking institution. The remaining $9.85 million was funded from cash on hand.
The activities of Car-Mart have been included in the Company's consolidated
results of operation since the acquisition date.
Car-Mart was founded in 1981 and presently operates 35 "buy-here-pay-here"
used car dealerships located in niche markets throughout Arkansas, Oklahoma,
Texas and Missouri. Car-Mart underwrites, finances and services retail
installment contracts generated at its dealerships. The majority of Car-Mart's
assets consist of over 16,000 retail installment contracts. Car-Mart's revenues
for the fiscal years ended May 31, 1998 and 1997 were approximately $65.7
million and $58.1 million, respectively.
Pro Forma Financial Information
The following unaudited pro forma condensed consolidated results of
operations of the Company for the three months ended July 31, 1998 were prepared
as if the Car-Mart acquisition had occurred on May 1, 1998 (in thousands, except
per share amount). The adjustments to the historical financial statements
principally consist of (i) eliminating interest income on the cash used in the
acquisition, (ii) recording interest expense on the debt issued in the Car-Mart
acquisition, (iii) adjusting interest income resulting from purchase accounting
entries, and (iv) adjusting income tax expense to reflect the above described
adjustments.
Three Months Ended
July 31,
1998
------------------
Revenues $39,065
Net income 2,371
Earnings per share - diluted $ .23
The unaudited pro forma results of operations are not necessarily indicative
of future results or the results that would have occurred had the acquisition
taken place on the date indicated.
D - CMN OPERATING RESULTS
The operating results of CMN for the three months ended July 31, 1999 and
1998 were as follows (in thousands):
Three Months Ended
July 31,
1999 1998
------ ------
Revenues $6,117 $5,651
Costs and expenses 3,795 3,450
Interest, fees, and rentals to shareholders 436
Provision for income taxes 825 605
------ ------
Net income $1,497 $1,160
====== ======
At July 31, 1999 CMN had assets, liabilities and stockholders' equity of
$15.1 million, $5.4 million and $9.7 million, respectively.
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E - FINANCE RECEIVABLES
The Company originates installment sale contracts from the sale of used
vehicles at its dealerships. These installment sale contracts typically include
interest rates ranging from 10 to 22% per annum and provide for payments over
periods ranging from 12 to 36 months. A summary of finance receivables as of
July 31, 1999 and April 30, 1999 is as follows:
July 31, April 30,
1999 1999
------------- -------------
Finance receivables $ 123,824,215 $ 123,142,202
Unearned finance charges (9,488,588) (16,669,411)
Allowance for credit losses (18,292,044) (17,045,063)
Valuation discount (651,035) (1,002,831)
------------- -------------
$ 95,392,548 $ 88,424,897
============= =============
In accordance with APB Opinion No. 16, as of the dates the Company acquired
interests in Paaco and Car-Mart, the Company valued Paaco's and Car-Mart's
finance receivable portfolios at market value and determined that an aggregate
valuation discount of $1,577,781 in the case of Paaco, and $864,165 in the case
of Car-Mart, was appropriate. These discounts are being amortized into interest
income over the life of the related finance receivable portfolios that existed
on the dates of purchase using the interest method.
A summary of the finance receivables allowance for credit losses for the
period from April 30, 1999 to July 31, 1999 is as follows:
Balance at April 30, 1999 $ 17,045,063
Provision for credit losses 5,849,670
Net charge offs (4,602,689)
------------
Balance at July 31, 1999 $ 18,292,044
============
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
($196,700) and trade accounts receivable ($35,000) as of July 31, 1999.
F - PROPERTY AND EQUIPMENT
A summary of property and equipment as of July 31, 1999 and April 30, 1999 is
as follows:
July 31, April 30,
1999 1999
------------ ------------
Land and buildings $ 9,934,248 $ 8,651,003
Rental equipment 8,626,238 7,644,949
Furniture, fixtures and equipment 5,994,911 5,691,910
Leasehold improvements 2,905,014 2,003,575
Less accumulated depreciation and amortization (2,369,016) (1,936,263)
------------ ------------
$ 25,091,395 $ 22,055,174
============ ============
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G - DEBT
A summary of debt as of July 31, 1999 is as follows:
Revolving Credit Facilities
-----------------------------------------------------------------------------------------------------------------
Facility Interest Primary Balance at
Borrower Lender Amount Rate Maturity Collateral July 31, 1999
------------- -------------- ----------- ------------- ---------- ------------- ---------------
Paaco Finova $60 million Prime + 3.00% Jun 2000 Finance rec. $ 43,833,680
Car-Mart Bank of America $30 million Prime + 1.13% Jan 2002 Finance rec. 25,002,162
Concorde Bank One $20 million Libor + 2.00% Sep 1999 Mortgage loans 10,378,412
Precision Wells Fargo $8 million Prime Dec 2000 IBC's and rec. 4,206,223
------------
$ 83,420,477
============
Other Notes Payable
-----------------------------------------------------------------------------------------------------------------
Facility Interest Primary Balance at
Borrower Lender Amount Rate Maturity Collateral July 31, 1999
------------- -------------- ----------- ------------- ---------- ------------- ---------------
Crown Car-Mart sellers N/A 8.50% Jan 2004 Finance rec. $ 7,500,000
Crown Bank of America N/A 7.00% Apr 2001 Equipment 1,158,000
Home Stay Bank of Pensacola N/A 8.50% Feb 2004 Real estate 5,374,007
Precision South Trust Bank N/A 7.35% Jan 2014 Real estate 667,456
Paaco Chase Texas N/A 8.50% May 2003 Real estate 922,785
Paaco Heller Financial N/A Prime + 2.25% Dec 2015 Real estate 614,127
Various Various N/A Various Various Real estate 1,209,897
------------
$ 17,446,272
============
Interest is payable monthly or quarterly on all of the Company's debt. The
loan agreements relating to certain of the above described debt contain various
reporting and performance covenants including (i) maintenance of certain
financial ratios and tests, (ii) limitations on borrowings from other sources,
(iii) restrictions on certain operating activities, and (iv) restrictions on the
payment of dividends. The Company was in compliance with the loan agreements as
of July 31, 1999, except for certain matters for which the respective lender
waived compliance with such covenants.
As of July 31, 1999 Paaco was in breach of certain loan covenants and had
exceeded its maximum available advances under its principal credit facility.
However, Paaco has received waivers of each covenant violation and has entered
into a forbearance agreement with its principal lender. The forbearance
agreement affords Paaco a period of nine months to gradually come into
compliance with the availability provisions and leverage ratio of the original
agreement. Paaco is presently in compliance with the forbearance agreement and
expects to come into compliance with the original agreement within the nine
month period provided in the forbearance agreement.
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
==========
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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
Unrealized appreciation of securities arising during period 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, 1999 and 1998 is as follows:
Three Months Ended
July 31,
1999 1998
----------- -----------
Net income $ 2,578,407 $ 765,617
=========== ===========
Average shares outstanding-basic 10,068,220 10,207,065
Dilutive options 444,630 198,653
Dilutive warrants 48,978
----------- -----------
Average shares outstanding-diluted 10,512,850 10,454,696
=========== ===========
Earnings per share:
Basic $ .26 $ .08
Diluted $ .25 $ .07
Antidilutive securities not included:
Options 432,500 35,000
=========== ===========
Warrants -- 391,198
=========== ===========
J - CAPITAL STOCK
In July 1999, upon discovering certain accounting errors and irregularities
at Paaco, the Company and the shareholders from whom the Company purchased an
interest in Paaco amended and restated the three prior purchase agreements such
that the Company received approximately $4 million in consideration and an
additional 5% interest in Paaco. A portion of the consideration received
consisted of (i) 315,046 shares of the Company's common stock and (ii) a
commitment to deliver 355,265 shares of the Company's common stock by April 30,
2000, or, in the absence of receiving such shares, a commitment to deliver a
promissory note in the amount of $1,776,325. The commitment to deliver 355,265
shares was recorded as a receivable at July 31, 1999 based upon the number of
shares required to be delivered (355,265) and the fair value of the Company's
common stock on the date of the commitment ($4.75 per share). The total value of
the consideration received in this transaction was recorded as a reduction of
goodwill in July 1999.
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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.
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 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 or results of operations.
Investment Fund
In November 1998 the Company committed $2.0 million to Monarch Venture
Partners' Fund L.L.P. ("Monarch"), a private venture capital fund focusing on
high technology businesses, such as Internet related concerns. As of July 31,
1999 the Company had funded approximately $.9 million of its $2.0 million
commitment. The Company expects it will fund the remaining $1.1 million over the
next 12 months.
L - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures for the three months ended July 31, 1999
and 1998 are as follows:
Three Months Ended
July 31,
1999 1998
---------- ----------
Value of stock issued in acquisitions $2,652,108
Inventory acquired in repossession $4,492,589 1,653,826
Note issued in purchase of property 700,000
Interest paid, net of amount capitalized 2,262,882 1,287,801
Income taxes paid 4,000,000 100,000
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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,
1999 and 1998. These segments are categorized by the lines of business of the
Company. The segments include (i) automobile, which pertains to Car-Mart's and
Paaco's selling and financing of used vehicles, (ii) IBC's, which pertains to
Precision's rental and sales of intermediate bulk containers, (iii) mortgage,
which pertains to Concorde's originating and selling of sub-prime mortgage
loans, and (iv) other, which includes corporate operations, Home Stay, Crown El
Salvador, activities of relatively inactive subsidiaries and the Company's
equity investments in CMN and Atlantic Castings. The Company's business segment
data for the three months ended July 31, 1999 and 1998 is as follows (in
thousands):
Three Months Ended July 31, 1999
----------------------------------------------------------------------------------------------
Automobile IBC's Mortgage Other Eliminations Consolidated
---------- -------- -------- -------- ------------ ------------
Revenues:
Sales and other $ 40,198 $ 1,480 $ 1,389 $ 491 $ 43,558
Interest income 4,372 7 452 620 $ (453) 4,998
-------- -------- -------- -------- -------- --------
Total 44,570 1,487 1,841 1,111 (453) 48,556
-------- -------- -------- -------- -------- --------
Costs and expenses:
Cost of sales 24,635 462 25,097
Selling, gen. and admin. 8,098 457 1,344 1,458 11,357
Prov. for credit losses 5,850 (1) 6 5,855
Interest expense 2,112 137 320 299 (453) 2,415
Depreciation and amort. 122 227 48 358 755
-------- -------- -------- -------- -------- --------
Total 40,817 1,282 1,718 2,115 (453) 45,479
-------- -------- -------- -------- -------- --------
Security gains and other 741 741
-------- -------- -------- -------- -------- --------
Income (loss) before taxes
and minority interests $ 3,753 $ 205 $ 123 $ (263) $ -- $ 3,818
======== ======== ======== ======== ======== ========
Capital expenditures $ 559 $ 1,186 $ 32 $ 1,182 $ -- $ 2,959
======== ======== ======== ======== ======== ========
Total assets $112,777 $ 14,603 $ 16,571 $ 74,533 $(48,844) $169,640
======== ======== ======== ======== ======== ========
Three Months Ended July 31, 1998
----------------------------------------------------------------------------------------------
Automobile IBC's Mortgage 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:
Cost of sales 10,444 457 10,901
Selling, gen. and admin. 3,779 311 1,107 553 5,750
Prov. for credit losses 1,938 44 1,982
Interest expense 1,030 92 304 (115) 1,311
Depreciation and amort. 68 153 32 257 510
-------- -------- -------- -------- -------- --------
Total 17,259 1,013 1,487 810 (115) 20,454
-------- -------- -------- -------- -------- --------
Security gains and other 494 494
-------- -------- -------- -------- -------- --------
Income (loss) 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
======== ======== ======== ======== ======== ========
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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 report contains, and other materials filed or to be filed by the Company
with the Securities and Exchange Commission (as well as information included in
oral statements or other written statements made or to be made by the Company or
its management) contain or will contain, forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended. The words "believe,"
"expect," "anticipate," "estimate," "project" and similar expressions identify
forward-looking statements, which speak only as of the date the statement was
made. The Company undertakes no obligation to publicly update or revise any
forward-looking statements. Such forward-looking statements address, among other
things, the Company's current focus on the development and expansion of its
existing businesses, and the potential acquisition or development of businesses
in other fields. Such forward-looking statements are based upon management's
current plans or expectations and are subject to a number of uncertainties and
risks that could significantly affect current plans, anticipated actions and the
Company's future financial condition and results. As a consequence, actual
results may differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company as a result of various factors.
Uncertainties and risks related to such forward-looking statements include, but
are not limited to, those relating to the development of the Company's
businesses, continued availability of lines of credit for the Company's
businesses, changes in interest rates, changes in the industries in which the
Company operates, competition, dependence on existing management, the stability
of Argentina's and El Salvador's governments, currency exchange rate
fluctuations, the repatriation of funds from Argentina and El Salvador, domestic
or global economic conditions (particularly in the states of Texas and
Arkansas), 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.
OVERVIEW
Crown Group, Inc. ("Crown"), and collectively with its subsidiaries (the
"Company"), is a publicly traded buy-out firm which presently owns (i) 100% of
America's Car-Mart, Inc. ("Car-Mart") and 85% of Paaco Automotive Group, Inc.
and Premium Auto Acceptance Corporation (collectively, "Paaco"), vertically
integrated used car sales and finance companies, (ii) 100% of Precision IBC,
Inc. ("Precision"), a firm specializing in the sale and rental of intermediate
bulk containers ("IBC's"), (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, (v) 50.1% of
CG Incorporated, S.A. de C.V. ("Crown El Salvador"), a newly formed company
focusing on the development and operation of casinos in El Salvador, (vi) 80% of
Home Stay Lodges I, Ltd. ("Home Stay"), a partnership focusing on the
development and operation of extended-stay lodging facilities, and (vii) 45% of
Atlantic Castings, Inc. ("Atlantic Castings"), an investment casting
manufacturer of turbine engine components. In addition, from time to time the
Company purchases and sells small ownership interests in securities of privately
held and publicly traded firms. For a summary of the Company's operating results
and other financial data by business segment, see Note M of the Company's
consolidated financial statements appearing elsewhere in this report. The
Company is presently focusing on (i) the development and expansion of its
existing businesses, and (ii) the potential acquisition or development of other
unrelated businesses.
RESULTS OF OPERATIONS
The Company has made a variety of acquisitions and business investments over
the last two years. Acquisitions involving the purchase of greater than a 50%
interest have been accounted for using the purchase method of accounting. The
Company has included the operating results of each majority-owned company from
the respective acquisition date. As a result of the acquisitions and business
investments occurring throughout the last two fiscal years, operating results
for the three month periods ending July 31, 1999 and 1998 are not entirely
comparable. Below is a summary of the number of months of operation each
companies' operating results are included in the Company's consolidated results
of operations for the three month periods ending July 31, 1999 and 1998.
1999 1998
---- -----
CMN 3 mo. 3 mo.
Concorde 3 mo. 3 mo.
Paaco 3 mo. 3 mo.
Precision 3 mo. 3 mo.
Home Stay 3 mo. 3 mo.
Car-Mart 3 mo. --
Crown El Salvador 3 mo. --
Atlantic Castings 3 mo. --
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THREE MONTHS ENDED JULY 31, 1999 COMPARED TO THE THREE MONTHS ENDED JULY 31,
1998
Below is a presentation of the operating results for the four principal
business segments of the Company for the three months ended July 31, 1999 and
1998. The segments include (i) automobile, which pertains to Car-Mart's and
Paaco's selling and financing of used vehicles, (ii) IBC's, which pertains to
Precision's rental and sales of intermediate bulk containers, (iii) mortgage,
which pertains to Concorde's originating and selling of sub-prime mortgage
loans, and (iv) other, which includes corporate operations, Home Stay, Crown El
Salvador, activities of relatively inactive subsidiaries and the Company's
equity investments in CMN and Atlantic Castings. The Company's business segment
data for the three months ended July 31, 1999 and 1998 is as follows (in
thousands):
Three Months Ended July 31, 1999
-----------------------------------------------------------------------------------------
Automobile IBC's Mortgage Other Eliminations Consolidated
---------- -------- -------- -------- ------------ ------------
Revenues:
Sales and other $40,198 $ 1,480 $ 1,389 $ 491 $ 43,558
Interest income 4,372 7 452 620 $ (453) 4,998
------- ------- ------- ------- -------- -------
Total 44,570 1,487 1,841 1,111 (453) 48,556
------- ------- ------- ------- -------- -------
Costs and expenses:
Cost of sales 24,635 462 25,097
Selling, gen. and admin. 8,098 457 1,344 1,458 11,357
Prov. for credit losses 5,850 (1) 6 5,855
Interest expense 2,112 137 320 299 (453) 2,415
Depreciation and amort. 122 227 48 358 755
------- ------- ------- ------- -------- -------
Total 40,817 1,282 1,718 2,115 (453) 45,479
------- ------- ------- ------- -------- -------
Security gains and other 741 741
------- ------- ------- ------- -------- -------
Income (loss) before taxes
and minority interests $ 3,753 $ 205 $ 123 $ (263) $ -- $ 3,818
======= ======= ======= ======= ======== =======
Three Months Ended July 31, 1998
-----------------------------------------------------------------------------------------
Automobile IBC's Mortgage 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:
Cost of sales 10,444 457 10,901
Selling, gen. and admin. 3,779 311 1,107 553 5,750
Prov. for credit losses 1,938 44 1,982
Interest expense 1,030 92 304 (115) 1,311
Depreciation and amort. 68 153 32 257 510
------- ------- ------- ------- -------- -------
Total 17,259 1,013 1,487 810 (115) 20,454
------- ------- ------- ------- -------- -------
Security gains and other 494 494
------- ------- ------- ------- -------- -------
Income (loss) before taxes
and minority interests $ 412 $ 269 $ 75 $ 354 $ -- $ 1,110
======= ======= ======= ======= ======== =======
Revenues from sales and other for the three months ended July 31, 1999
increased $25.0 million compared to the same period in the prior fiscal year.
The increase was principally the result of (i) including Car-Mart in the
Company's consolidated results of operations ($20.6 million), and (ii) higher
revenues at Paaco ($3.7 million), Precision ($.2 million) and Concorde ($.2
million). Interest income for the three months ended July 31, 1999 increased
$2.5 million compared to the same period in the prior fiscal year. The increase
was principally the result of (i) including Car-Mart in the Company's
consolidated results of operations ($1.5 million) and (ii) greater interest
earned on Paaco's finance receivable portfolio ($1.1 million) as a result of
growth in the portfolio.
As a percentage of sales, cost of sales for the three months ended July 31,
1999 decreased to 61.4% from 66.0% in the same period in the prior fiscal year.
The decrease is principally the result of including Car-Mart, which has higher
gross profit margins as a result of selling lower priced vehicles, in the
Company's consolidated results of operations. Selling, general and
administrative expense for the three months ended July 31, 1999 increased $5.6
million compared to the same period in the prior fiscal year. The increase is
principally the result of
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(i) including Car-Mart ($3.1 million) and Crown El Salvador ($.2 million) in the
Company's consolidated results of operations, and (ii) higher expenses at Paaco
($1.2 million), Concorde ($.2 million) and Home Stay ($.2 million) which
corresponds to increased revenues at those subsidiaries. Provision for credit
losses for the three months ended July 31, 1999 increased $3.9 million compared
to the same period in the prior fiscal year. The increase was principally the
result of including Car-Mart in the Company's consolidated results of
operations. Interest expense for the three months ended July 31, 1999 increased
$1.1 million compared to the same period in the prior fiscal year. The increase
was principally the result of (i) including Car-Mart in the Company's
consolidated results of operations ($.8 million), and (ii) higher interest
expense at Paaco ($.3 million) resulting from an increase in the balance of its
revolving credit facility.
The provision for income taxes for the three months ended July 31, 1999 was
$1.2 million on pretax income of $3.8 million. This equates to a 39.4% effective
tax rate after removing from pretax income the equity in earnings of
unconsolidated subsidiaries ($.7 million), which earnings are presented on an
after tax basis. The provision for income taxes for the three months ended July
31, 1998 was $.3 million on pretax income of $1.1 million. This equates to a
48.2% effective tax rate after removing from pretax income the equity in
earnings of unconsolidated subsidiaries ($.6 million), which earnings are
presented on an after tax basis. Minority interests pertain to the portions of
consolidated subsidiaries not owned by the Company during the three months ended
July 31, 1999 (Paaco, Crown El Salvador, and Home Stay) and the three months
ended July 31, 1998 (Paaco and Home Stay).
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended July 31, 1999 net cash provided by operating
activities amounted to $4.5 million. The principal sources of cash resulted from
(i) net income generated by the Company, and (ii) certain non cash expenses
(provision for credit losses and depreciation and amortization), offset by (iii)
mortgage loans originated or acquired in excess of mortgage loans sold and
principal payments ($3.0 million). Net cash used by investing activities of
$19.7 million included (i) a $17.0 million use of cash in finance receivable
originations in excess of finance receivable collections, and (ii) a $3.0
million use of cash in the purchase of property and equipment. Net cash provided
by financing activities of $4.5 million principally relates to the asset based
revolving credit facilities of Car-Mart, Paaco, Concorde and Precision.
As of July 31, 1999 the Company's sources of liquidity included
approximately (i) $2.2 million of cash on hand, of which $1.0 million was held
by Crown, (ii) $34.6 million remaining to be drawn on the revolving credit
facilities of Car-Mart, Paaco, Concorde and Precision, although the majority of
such additional draws may only be made in connection with a corresponding
increase in the related collateral asset (i.e., finance receivables, mortgage
loans held for sale and intermediate bulk containers), and (iii) the potential
issuance of additional debt and/or equity, although the Company has no specific
commitments or arrangements to issue such additional debt and/or equity. The
loan agreements which govern the credit facilities of Crown's subsidiaries limit
dividends and other distributions from such subsidiaries to Crown. The amount
available to be drawn under each of the Company's revolving credit facilities is
a function of the underlying collateral asset. Generally, the Company is able to
borrow a specified percentage of the face value of eligible finance receivables
in the case of Car-Mart and Paaco, and eligible mortgage loans in the case of
Concorde. Precision's borrowing base is a function of the number of tanks owned
and operating cash flow, as defined. The Company's revolving credit facilities
mature at various times between 1999 and 2002.
As of July 31, 1999 Paaco was in breach of certain loan covenants and had
exceeded its maximum available advances under its principal credit facility.
However, Paaco has received waivers of each covenant violation and has entered
into a forbearance agreement with its principal lender. The forbearance
agreement affords Paaco a period of nine months to gradually come into
compliance with the availability provisions and leverage ratio of the original
agreement. Paaco is presently in compliance with the forbearance agreement and
expects to come into compliance with the original agreement within the nine
month period provided in the forbearance agreement.
The Company is focusing on the development and expansion of its existing
businesses and the potential acquisition or development of other unrelated
businesses. Car-Mart's, Paaco's, Precision's and Concorde's credit facilities
can support the majority of their expected growth over the next twelve months.
As of July 31, 1999 the Company had an outstanding commitment of approximately
$1.1 million pertaining to an investment in a private venture capital fund which
focuses on high technology businesses, such as Internet related concerns. The
Company plans to fund this commitment from cash on hand.
In March 1996 the Company's Board of Directors approved a program, as
amended, to repurchase up to 4,000,000 shares of the Company's common stock from
time to time in the open market. As of July 31, 1999 the Company had repurchased
2,894,648 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.
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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. With the exception of Car-Mart, all of the Company's
hardware, software and networking systems are year 2000 compliant. Car-Mart
expects its systems to be year 2000 compliant by November 1999. A more complete
description on a company by company basis is as follows:
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. Each of its operating, accounting and secondary software
applications are year 2000 compliant. Paaco utilizes two local area
networking systems, both of which are year 2000 compliant. 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 are 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. All of
Precision's primary and secondary software packages are year 2000
compliant. All of Precision's data processing equipment, which
consists principally of personal computers, is year 2000 compliant.
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. In
addition, Crown's local area networking software and all of its data
processing hardware are year 2000 compliant
CAR-MART - Car-Mart utilizes two primary software packages (operating
and accounting), and several secondary software packages (word
processing, spreadsheet, database and communication) in the operation
of its business. The present version of the operating software
utilized by Car-Mart is not year 2000 compliant, however, Car-Mart is
in the process of installing a more recent version which is year 2000
compliant and plans to have such installation completed by September
1999. The accounting software utilized by Car-Mart is not year 2000
compliant, however, Car-Mart is in the process of installing new
accounting software that is year 2000 compliant and plans to have
such installation completed by November 1999. All of Car-Mart's
secondary software packages are year 2000 compliant. The majority of
Car-Mart's data processing hardware is year 2000 compliant, and the
portion that is not will be updated or replaced by September 1999.
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, but not all, of these third
parties as to their year 2000 compliance. 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 by November 1999.
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 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 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, 1999.
----------------
(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 17, 1999
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27.1 Financial data schedule(1).
- -----------
(1) Filed herewith.