UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal quarter ended: Commission file number: OCTOBER 31, 2001 0-14939 CROWN GROUP, INC. (Exact name of registrant as specified in its charter) TEXAS 63-0851141 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4040 N. MACARTHUR BLVD., SUITE 100, IRVING, TEXAS (Address of principal executive offices) 75038-6424 (Zip Code) (972) 717-3423 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. <Table> <Caption> Outstanding at Title of Each Class December 14, 2001 ------------------- ----------------- <S> <C> Common stock, par value $.01 per share 6,747,524 </Table> 1
PART I ITEM 1. FINANCIAL STATEMENTS CROWN GROUP, INC. CONSOLIDATED BALANCE SHEETS <Table> <Caption> October 31, 2001 (unaudited) April 30, 2001 ---------------- -------------- <S> <C> <C> Assets: Cash and cash equivalents $ 1,285,934 $ 718,134 Income tax receivable 2,126,251 Notes and other receivables, net 1,035,581 4,441,391 Finance receivables, net 68,977,908 61,969,879 Inventory 2,955,729 3,013,293 Prepaid and other assets 247,702 359,395 Investments 200,000 3,473,761 Deferred tax assets, net 7,614,441 5,401,487 Property and equipment, net 2,997,048 4,233,443 Assets held for sale 26,253,075 218,909,333 ------------- ------------- $ 113,693,669 $ 302,520,116 ============= ============= Liabilities and stockholders' equity: Accounts payable $ 2,016,724 $ 1,942,261 Accrued liabilities 6,941,718 3,565,981 Income taxes payable 633,309 4,987,609 Revolving credit facility 32,487,277 29,767,688 Other notes payable 8,400,000 11,816,000 Liabilities held for sale 17,228,875 190,655,389 ------------- ------------- 67,707,903 242,734,928 ------------- ------------- Minority interests 1,802,229 852,935 Commitments and contingencies Stockholders' equity: Preferred stock, par value $.01 per share, 1,000,000 shares authorized; none issued or outstanding Common stock, par value $.01 per share, 50,000,000 shares authorized; 6,722,267 issued and outstanding (6,980,367 at April 30, 2001) 67,223 69,804 Additional paid-in capital 22,102,941 23,075,677 Retained earnings 22,013,373 35,786,772 ------------- ------------- Total stockholders' equity 44,183,537 58,932,253 ------------- ------------- $ 113,693,669 $ 302,520,116 ============= ============= </Table> The accompanying notes are an integral part of these consolidated financial statements. 2
CONSOLIDATED STATEMENTS OF OPERATIONS CROWN GROUP, INC. (UNAUDITED) <Table> <Caption> Three Months Ended Six Months Ended October 31, October 31, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Revenues: Sales $ 29,342,546 $ 23,641,678 $ 57,466,661 $ 46,001,358 Interest income 2,424,987 2,130,486 4,839,894 4,233,773 ------------ ------------ ------------ ------------ 31,767,533 25,772,164 62,306,555 50,235,131 ------------ ------------ ------------ ------------ Costs and expenses: Cost of sales 16,032,843 12,912,987 31,042,937 25,020,075 Selling, general and administrative 5,166,307 4,728,088 10,175,257 9,450,132 Provision for credit losses 6,125,477 4,174,795 11,622,683 7,743,783 Interest expense 847,563 1,043,120 1,782,407 2,027,335 Depreciation and amortization 72,470 83,733 157,620 167,267 Restructuring charge 2,732,106 2,732,106 Write-down of investments and equipment 3,527,631 3,927,631 ------------ ------------ ------------ ------------ 34,504,397 22,942,723 61,440,641 44,408,592 ------------ ------------ ------------ ------------ Income (loss) from continuing operations before taxes and minority interests (2,736,864) 2,829,441 865,914 5,826,539 Provision (benefit) for income taxes (709,071) 1,185,914 776,656 2,402,561 Minority interests 125,702 81,887 279,860 156,261 ------------ ------------ ------------ ------------ Income (loss) from continuing operations (2,153,495) 1,561,640 (190,602) 3,267,717 Discontinued operations: Income (loss) from discontinued operations, net of taxes and minority interests (12,813,802) (11,654) (13,582,797) 1,049,411 ------------ ------------ ------------ ------------ Net income (loss) $ 14,967,297) $ 1,549,986 $(13,773,399) $ 4,317,128 ============ ============ ============ ============ Basic earnings (loss) per share: Continuing operations $ (.32) $ .20 $ (.03) $ .41 Discontinued operations (1.90) (2.00) .13 ------------ ------------ ------------ ------------ Total $ (2.22) $ .20 $ (2.03) $ .54 ============ ============ ============ ============ Diluted earnings (loss) per share: Continuing operations $ (.32) $ .19 $ (.03) $ .39 Discontinued operations (1.90) (2.00) .12 ------------ ------------ ------------ ------------ Total $ (2.22) $ .19 $ (2.03) $ .51 ============ ============ ============ ============ Weighted average number of shares outstanding: Basic 6,731,351 7,914,719 6,799,946 8,047,055 Diluted 6,731,351 8,299,369 6,799,946 8,440,688 </Table> The accompanying notes are an integral part of these consolidated financial statements. 3
CONSOLIDATED STATEMENTS OF CASH FLOWS CROWN GROUP, INC. (UNAUDITED) <Table> <Caption> Six Months Ended October 31, 2001 2000 ------------- ------------- <S> <C> <C> Operating activities: Net income (loss) $ (13,773,399) $ 4,317,128 Add: (Income) loss from discontinued operations 13,582,797 (1,049,411) ------------- ------------- Income (loss) from continuing operations (190,602) 3,267,717 Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities: Depreciation and amortization 157,620 167,267 Deferred income taxes (2,212,954) (921,348) Provision for credit losses 11,622,683 7,743,783 Write-down of investments and equipment 3,927,631 Minority interests 279,860 156,261 Accretion of purchase discount (27,268) Changes in operating assets and liabilities: Receivables 2,013,685 2,400,061 Finance receivable originations (52,319,326) (41,763,217) Finance receivable collections 31,035,864 26,572,236 Inventory acquired in repossession 2,752,750 2,255,031 Inventory 57,564 (275,282) Prepaids and other assets 111,693 71,615 Accounts payable and accrued liabilities 3,123,455 6,803 Income taxes payable 1,454,700 (3,929,471) ------------- ------------- Net cash provided by (used in) operating activities 1,814,623 (4,275,812) ------------- ------------- Investing activities: Purchase of property and equipment (666,345) (433,888) Purchase of investments (24,750) (922,750) ------------- ------------- Net cash used in investing activities (691,095) (1,356,638) ------------- ------------- Financing activities: Sale of common stock 60,937 Purchase of common stock (975,317) (2,350,800) Proceeds from revolving credit facility, net 2,719,589 1,957,451 Repayments of other debt (2,300,000) ------------- ------------- Net cash used in financing activities (555,728) (332,412) ------------- ------------- Cash provided by (used in) discontinued operations 2,003,966 (996,091) ------------- ------------- Increase (decrease) in cash and cash equivalents 2,571,766 (6,960,953) Cash and cash equivalents at: Beginning of period 2,193,342 9,843,310 ------------- ------------- End of period 4,765,108 2,882,357 Less: Cash and cash equivalents of discontinued operations (3,479,174) (2,097,433) ------------- ------------- Cash and cash equivalents of continuing operations $ 1,285,934 $ 784,924 ============= ============= </Table> The accompanying notes are an integral part of these consolidated financial statements. 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CROWN GROUP, INC. A -- DESCRIPTION OF BUSINESS Crown Group, Inc. ("Crown") is a holding company which owns a 95% fully diluted ownership interest in America's Car-Mart, Inc. ("Car-Mart") (collectively, Crown and Car-Mart are referred to as "the Company"). Car-Mart sells and finances the sale of used automobiles and trucks principally to consumers with limited or damaged credit histories. As of October 31, 2001 Car-Mart operated 52 stores in seven states. In addition, at October 31, 2001, Crown also owned (i) a 70% interest in Smart Choice Automotive Group, Inc. ("Smart Choice"), a used car sales and finance company, (ii) an 80% interest in Concorde Acceptance Corporation ("Concorde"), a prime and sub-prime mortgage lender, and (iii) a 50% interest in Precision IBC, Inc. ("Precision"), a firm specializing in the sale and rental of intermediate bulk containers. In October 2001 Crown made the decision to sell all of its subsidiaries except Car-Mart, and relocate its corporate headquarters to Rogers, Arkansas where Car-Mart is based. Accordingly, the operating results of Smart Choice, Concorde and Precision, as well as the operating results of another business that was sold in the prior fiscal year, are included in discontinued operations (see Note I). Similarly, the assets and liabilities of Concorde and Precision are included in "Assets held for sale" and "Liabilities held for sale", respectively, in the accompanying consolidated balance sheet. B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended October 31, 2001 are not necessarily indicative of the results that may be expected for the year ended April 30, 2002. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended April 30, 2001. Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations", which eliminates the pooling method of accounting for business combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the accounting for intangible assets and goodwill acquired in a business combination. This portion of SFAS 141 is effective for business combinations completed after June 30, 2001. The Company adopted SFAS 141 effective May 1, 2001. Such adoption did not have any impact on the Company's financial position or results of operations. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Intangible Assets", which revises the accounting for purchased goodwill and intangible assets. Under SFAS 142, goodwill and intangible assets with indefinite lives will no longer be amortized, but will be tested for impairment annually, and in the event of an impairment indicator. SFAS 142 is effective for fiscal years beginning after December 15, 2001, with earlier adoption permitted. The Company has adopted SFAS 142 effective May 1, 2001. Such adoption did not have any impact on the continuing operations of the Company. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment of Long-Lived Assets", which requires a single accounting model to be used for long-lived assets to be sold and broadens the presentation of discontinued operations to include a "component of an entity" (rather than a segment of a business). A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. A component of an entity that is classified as held for sale or has been disposed of is presented as a discontinued operation if the operations and cash flows of the component will be (or have been) eliminated from the ongoing operations of the entity and the entity will not have any significant continuing involvement in the operations of the component. The Company adopted SFAS 144 effective August 1, 2001. Consequently, the operating results of Smart Choice, Concorde and Precision, which are presently held for sale, are included in discontinued operations. Assets and liabilities of these businesses held for sale are included in "Assets held for sale" and "Liabilities held for sale", respectively (see Note I). Reclassifications Certain prior year amounts in the accompanying financial statements have been reclassified to conform to the fiscal 2002 presentation. In particular, the operating results of CG Incorporated S.A. de C.V. ("Crown El Salvador"), which was sold in April 2001, were not included in discontinued operations in the prior fiscal year due to the relatively insignificant size of its operations. However, in the current fiscal period, as the Company has other discontinued operations, the operating results of Crown El Salvador have been reclassified to discontinued operations for all periods presented. 5
C -- FINANCE RECEIVABLES The Company originates installment sale contracts from the sale of used vehicles at its dealerships. These installment sale contracts typically include interest rates ranging from 6% to 18% per annum and provide for payments over periods ranging from 12 to 30 months. The components of finance receivables as of October 31, 2001 and April 30, 2001 are as follows: <Table> <Caption> October 31, April 30, 2001 2001 ------------ ------------ <S> <C> <C> Finance receivables $ 92,256,684 $ 83,439,089 Unearned finance charges (7,621,224) (7,402,428) Allowance for credit losses (15,657,552) (14,066,782) ------------ ------------ $ 68,977,908 $ 61,969,879 ============ ============ </Table> Changes in the finance receivables allowance for credit losses for the six months ended October 31, 2001 and 2000 are as follows: <Table> <Caption> Six Months Ended October 31, 2001 2000 ------------ ------------ <S> <C> <C> Balance at beginning of period $ 14,066,782 $ 11,492,611 Provision for credit losses 11,522,683 7,743,783 Net charge offs (9,931,913) (6,565,179) ------------ ------------ Balance at end of period $ 15,657,552 $ 12,671,215 ============ ============ </Table> D -- PROPERTY AND EQUIPMENT A summary of property and equipment as of October 31, 2001 and April 30, 2001 is as follows: <Table> <Caption> October 31, April 30, 2001 2001 ----------- ------------ <S> <C> <C> Land and buildings $ 1,046,015 $ 650,191 Furniture, fixtures and equipment 1,940,253 3,826,051 Leasehold improvements 962,134 871,390 Less accumulated depreciation and amortization (951,354) (1,114,189) ----------- ------------ $ 2,997,048 $ 4,233,443 =========== ============ </Table> For the six months ended October 31, 2001 and 2000 depreciation and amortization of property and equipment amounted to $157,620 and $167,267, respectively. 6
E - DEBT A summary of debt as of October 31, 2001 and April 30, 2001 is as follows: <Table> <Caption> Revolving Credit Facility ------------------------------------------------------------------------------------------------------------------------------ Facility Interest Balance at Borrower Lender Amount Rate Maturity October 31, 2001 April 30, 2001 --------------- --------------- ----------- ------------- ------------ ------------------ ----------------- <S> <C> <C> <C> <C> <C> <C> Car-Mart Bank of America $ 35 million Prime + .88% Jan 2002 $ 32,487,277 $ 29,767,688 </Table> <Table> <Caption> Other Notes Payable ------------------------------------------------------------------------------------------------------------------------------ Facility Interest Balance at Borrower Lender Amount Rate Maturity October 31, 2001 April 30, 2001 --------------- --------------- ----------- ------------- ------------ ------------------ ----------------- <S> <C> <C> <C> <C> <C> <C> Crown Car-Mart sellers N/A 8.50% Jan 2004 $ 7,500,000 $ 7,500,000 Crown Bank of America N/A 8.00% Sep 2001 2,316,000 Crown Regions Bank N/A Prime + .50% May 2001 2,000,000 Crown First Mercantile N/A Prime + .25% Sept 2002 900,000 ------------------ ----------------- $ 8,400,000 $ 11,816,000 ================== ================= </Table> Car-Mart's revolving credit facility is primarily collateralized by finance receivables and inventory. Crown's note payable to First Mercantile Bank is collateralized by equipment. Interest is payable monthly or quarterly on all of the Company's debt. Car-Mart's revolving credit facility contains various reporting and performance covenants including (i) maintenance of certain financial ratios and tests, (ii) limitations on borrowings from other sources, (iii) restrictions on certain operating activities, and (iv) restrictions on the payment of dividends. At October 31, 2001, all of Crown's $33.6 million equity investment in Car-Mart was restricted due to covenants in Car-Mart's revolving credit facility which prohibits distributions to Crown. The amount available to be drawn under Car-Mart's revolving credit facility is a function of eligible finance receivables. Based on eligible finance receivables at October 31, 2001, Car-Mart could have drawn an additional $2.5 million under its revolving credit facility. As of October 31, 2001 Crown guaranteed the revolving credit facilities of certain of Smart Choice's subsidiaries with Finova Capital Corporation ("Finova") up to a maximum amount of $5 million. However, on November 8, 2001 Crown entered into a settlement agreement with Finova that released Crown from this guarantee in exchange for the payment of $1 million to Finova, and granting Finova a 120 day option to purchase Crown's equity interest in Smart Choice for $1.00 (see Note F). F -- SETTLEMENT AGREEMENTS WITH SMART CHOICE'S LENDER SMART CHOICE AGREEMENT WITH FINOVA On November 8, 2001, Crown's 70% owned subsidiary, Smart Choice, and certain of Smart Choice's subsidiaries, entered into a forbearance agreement with Finova, the primary lender to Smart Choice's subsidiaries, that resulted in the foreclosure of receivables and inventory of certain Florida-based subsidiaries of Smart Choice (the "Florida Finance Group"), and the probable sale of Smart Choice's wholly-owned subsidiaries, Paaco Automotive Group, L.P. and Premium Auto Acceptance Corporation (collectively, "Paaco"), to Finova. Prior to November 9, 2001, the Florida Finance Group sold and financed used cars and trucks in Florida. Paaco sells and finances used cars and trucks in Texas. The Florida Finance Group had, and Paaco continues to have, a revolving credit facility with Finova. Prior to November 9, 2001, the Florida Finance Group was over-advanced on its revolving credit facility ($25 million over-advanced at September 30, 2001), which constituted an event of default under the facility. Pursuant to the forbearance agreement, on November 9, 2001, the collateral for the Florida Finance Group's credit facility with Finova, which consisted principally of receivables and inventory, was sold at a public foreclosure sale to Finova for $55 million. Prior to the foreclosure sale, the Florida Finance Group owed Finova $88.4 million. Thus, after applying the proceeds from the foreclosure sale, the Florida Finance Group owes Finova $33.4 million (the "Deficiency"). Further, as part of the forbearance agreement, Smart Choice granted Finova (i) an option to purchase Paaco (the "Paaco Option") for an amount equal to the Deficiency, subject to shareholder approval and an appraisal indicating the value of Paaco is not greater than the Deficiency, and (ii) an option to purchase up to 100% of Smart Choice's remaining shares of authorized but unissued common stock (approximately 39 million shares) (the "Smart Choice Stock Option") at a price of $0.30 per share. The Smart Choice Stock Option will terminate upon the closing of the exercise of the Paaco Option. Presently, Smart Choice has approximately 9.8 million shares of common stock outstanding, of which Crown owns approximately 6.9 million shares. Both the Paaco Option and the Smart Choice Stock Option expire March 8, 2002. 7
As a result of the Finova agreement and the lack of other available capital, on November 9, 2001 Smart Choice began to wind-down its Florida-based operations. On December 12, 2001 Finova exercised its option to purchase Paaco subject to certain conditions. If the exercise of the Paaco Option is closed as expected, Smart Choice's remaining assets would consist of certain improved and unimproved real estate in Titusville, Florida, including a 35,000 square-foot office facility, and certain other current and fixed assets. Assuming the sale of Paaco, management presently anticipates that Smart Choice's remaining assets will likely be sold by Smart Choice in an effort to realize the maximum value for these assets and repay its obligations to unsecured creditors to the extent possible. CROWN AGREEMENT WITH FINOVA Separately, Crown entered into a settlement agreement with Finova that provides for Crown to (i) pay Finova $1 million in cash, and (ii) grant Finova an option to purchase Crown's 6.9 million shares of Smart Choice common stock for $1.00, in exchange for Finova unconditionally releasing Crown from its $5 million guaranty of the Florida Finance Group's and Paaco's obligations to Finova. As a result of these transactions and operating losses at Smart Choice, Crown's equity investment in Smart Choice, which totaled $16.4 million at July 31, 2001, has been written off as of October 31, 2001. In addition, as a result of revised subordination language that requires Finova to be paid in full prior to Crown receiving any note payments from Paaco, Crown has fully reserved its $1.6 million receivable from Paaco as of October 31, 2001. Crown anticipates that it will receive a federal income tax benefit of approximately $6.1 million following the ultimate disposition of its investment in Smart Choice. The write-off of Crown's investment in Smart Choice and the loss resulting from the $1 million guaranty payment to Finova and related tax benefits, are included in discontinued operations (see Note I). G -- WRITE-DOWN OF INVESTMENTS AND EQUIPMENT During the second quarter ended October 31, 2001, financing for early-stage emerging technology/Internet investments, such as the Company's Monarch Venture Partners' Fund I, L.P. ("Monarch") and Mariah Vision 3, Inc. ("Mariah"), became increasingly difficult to obtain. The adverse conditions in the capital markets, combined with poor operating results and prospects of Mariah and some of Monarch's investee companies, caused the Company to consider whether its carrying value of Mariah and Monarch were impaired. After review and analysis, the Company wrote-down the carrying value of Mariah and Monarch and certain equipment as follows (in thousands): <Table> <Caption> Three Months Six Months Ended Ended October 31, October 31, 2001 2001 ------------ ---------- <S> <C> <C> Monarch $ 1,649 $ 1,649 Mariah 1,650 1,650 Equipment 229 629 ------- ------- $ 3,528 $ 3,928 ======= ======= </Table> The Company's remaining investment in Monarch and Mariah at October 31, 2001 was $200,000 and $0, respectively, and is included in "Investments" in the accompanying consolidated balance sheet. H -- RESTRUCTURING CHARGE As discussed in Note I, in October 2001, the Company made the decision to sell all of its subsidiaries except Car-Mart and relocate its corporate headquarters to Rogers, Arkansas where Car-Mart is based. As a result, the Company recorded severance ($2.6 million) and office closing costs ($.1 million) aggregating $2.7 million during the period ended October 31, 2001. No amounts were paid as of October 31, 2001. 8
I -- DISCONTINUED OPERATIONS In October 2001 Crown made the decision to sell all its subsidiaries except Car-Mart, and relocate its corporate headquarters to Rogers, Arkansas where Car-Mart is based. This decision was based on management's desire to separate the highly profitable and modestly leveraged operations of Car-Mart from the operating losses or lower level of profitability and highly leveraged operations of the Company's other subsidiaries. In addition, management believes that the Company's ownership of businesses in a variety of different industries may have created confusion within the investment community, possibly making it difficult for investors to analyze and properly value the Company's common stock. Accordingly, the Company plans to sell its equity interests in Smart Choice, Concorde and Precision. It is anticipated the sale of these businesses will be completed by October 31, 2002. In addition, in April 2001, the Company sold its Crown El Salvador subsidiary. As discussed in Note F, Crown wrote off its investment in Smart Choice in October 2001. At October 31, 2001 Smart Choice had assets of $151.1 million and liabilities of $170.4 million. The assets and liabilities of Smart Choice are not included in assets held for sale and liabilities held for sale, respectively, at October 31, 2001 as at such date (i) Crown's investment in Smart Choice was reduced to zero, and (ii) Crown is not liable for, or a guarantor of, any of the obligations of Smart Choice other than $1.0 million to Finova (Smart Choice's principal lender) pursuant to a settlement agreement. The $1.0 million settlement amount was accrued at October 31, 2001 and paid in November 2001. A summary of assets held for sale and liabilities held for sale as of October 31, 2001 and April 30, 2001 is as follows (in thousands): <Table> <Caption> October 31, April 30, 2001 2001 ----------- --------- <S> <C> <C> Assets held for sale: Mortgage loans held for sale, net $ 21,485 $ 16,200 Finance receivables, net 149,656 Inventory 7,980 Property and equipment, net 602 12,783 Deferred tax asset, net 15,902 Other 4,166 16,388 --------- --------- $ 26,253 $ 218,909 ========= ========= Liabilities held for sale: Accounts payable and accrued liabilities $ 1,915 $ 13,255 Deferred sales tax 4,963 Revolving credit facilities 15,207 160,294 Notes payable to Crown 3,275 6,112 Other notes payable 33 7,495 Minority interests 74 4,648 --------- --------- 20,504 196,767 Less: Notes payable to Crown (3,275) (6,112) --------- --------- $ 17,229 $ 190,655 ========= ========= </Table> As of October 31, 2001 and April 30, 2001 the Company's equity investment in businesses held for sale was as follows (in thousands): <Table> <Caption> October 31, April 30, 2001 2001 ----------- --------- <S> <C> <C> Smart Choice $ -- $ 17,591 Concorde 2,294 1,354 Precision 3,455 3,197 -------- -------- $ 5,749 $ 22,142 ======== ======== </Table> 9
Operating results are presented for the discontinued operations of the Company by business segment for the three and six months ended October 31, 2001 and 2000. The segments include Smart Choice and other. The Smart Choice segment includes the results of the Florida Finance Group and Paaco. For the three and six months ended October 31, 2001 "Other" includes Concorde and the Company's equity investment in Precision. For the three and six months ended October 31, 2000 "Other" includes Concorde, Precision and Crown El Salvador. The Company's discontinued operations by business segment for the three and six months ended October 31, 2001 and 2000 are as follows (in thousands): <Table> <Caption> Three Months Ended October 31, 2001 Six Months Ended October 31, 2001 ------------------------------------------ ------------------------------------------ S. Choice Other Total S. Choice Other Total ----------- ------------ ----------- ------------ ------------ ----------- <S> <C> <C> <C> <C> <C> <C> Revenues $ 43,218 $ 3,618 $ 46,836 $ 89,748 $ 6,926 $ 96,674 Costs and expenses: Cost of sales 21,947 21,947 45,127 45,127 Selling, gen. and admin. 11,055 2,094 13,149 21,833 4,125 25,958 Prov. for credit loss 9,988 406 10,394 21,040 517 21,557 Interest expense 3,430 345 3,775 7,130 749 7,879 Depreciation and amort. 430 58 488 845 168 1,013 Write-down of assets 39,294 39,294 39,294 39,294 Loss in excess of basis (19,349) (19,349) (19,349) (19,349) --------- ---------- --------- --------- --------- --------- 66,795 2,903 69,698 115,920 5,559 121,479 --------- ---------- --------- --------- --------- --------- Income (loss) before tax and minority interests (23,577) 715 (22,862) (26,172) 1,367 (24,805) Prov. (benefit) for taxes (6,184) 192 (5,992) (7,025) 377 (6,648) Minority interests (4,129) 73 (4,056) (4,647) 73 (4,574) --------- ---------- --------- --------- --------- --------- Income (loss) from discontinued operations $ (13,264) $ 450 $ (12,814) $ (14,500) $ 917 $ (13,583) ========== ========== ========= ========= ========= ========= </Table> <Table> <Caption> Three Months Ended October 31, 2000 Six Months Ended October 31, 2000 ----------------------------------------- ----------------------------------------- S. Choice Other Total S. Choice Other Total ----------- ----------- ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> Revenues $ 59,375 $ 4,601 $ 63,976 $ 112,808 $ 9,359 $ 122,167 Costs and expenses: Cost of sales 30,755 595 31,350 56,943 1,180 58,123 Selling, gen. and admin. 10,855 2,861 13,716 20,659 5,536 26,195 Prov. for credit loss 11,446 107 11,553 22,038 240 22,278 Interest expense 4,539 531 5,070 8,737 1,074 9,811 Depreciation and amort. 524 483 1,007 1,032 934 1,966 Write-down of assets 800 800 800 800 -------- --------- --------- --------- ------- --------- 58,119 5,377 63,496 109,409 9,764 119,173 -------- --------- --------- --------- ------- --------- Income (loss) before tax and minority interests 1,256 (776) 480 3,399 (405) 2,994 Prov. (benefit) for taxes 524 (283) 241 1,354 (80) 1,274 Minority interests 250 250 670 670 -------- --------- --------- --------- ------- --------- Income (loss) from discontinued operations $ 482 $ (493) $ (11) $ 1,375 $ (325) $ 1,050 ======== ========= ========= ========= ======= ========= </Table> 10
J -- EARNINGS PER SHARE Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the sum of the weighted average number of common and common equivalent shares outstanding. Common equivalent shares include, where appropriate, the assumed exercise or conversion of warrants and options to purchase common stock. Diluted loss per share is the same as basic loss per share in 2001 since common stock equivalents are excluded from the computation as they are antidilutive. In computing diluted earnings per share, the Company utilized the treasury stock method. Basic and diluted weighted average shares outstanding, which are used in the calculation of basic and diluted earnings (loss) per share, are as follows for the periods ended October 31: <Table> <Caption> Three Months Ended Six Months Ended October 31, October 31, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Weighted average shares outstanding-basic 6,731,351 7,914,719 6,799,946 8,047,055 Dilutive options and warrants 384,650 393,633 ------------ ------------ ------------ ------------ Weighted average shares outstanding-diluted 6,731,351 8,299,369 6,799,946 8,440,688 ============ ============ ============ ============ Antidilutive securities not included: Options and warrants 1,510,000 445,000 1,510,000 432,500 ============ ============ ============ ============ </Table> K -- COMMITMENTS AND CONTINGENCIES Car-Mart Stock Options In connection with the Company's acquisition of Car-Mart in January 1999, Car-Mart issued options to certain employees to purchase an aggregate 10% interest in Car-Mart. Such options become exercisable over a period of approximately five years and are subject to meeting certain annual earnings targets. The earnings targets are established each year by Car-Mart's Board of Directors. Pursuant to such option plan, as of October 31, 2001 Car-Mart employees had purchased, or had the right to purchase at a nominal cost, an aggregate 5% interest in Car-Mart. Options to purchase the remaining 5% interest become exercisable upon meeting the earnings targets for the fiscal years ending April 30, 2002 and 2003. Litigation In the ordinary course of business, the Company has become a defendant in various types of legal proceedings. Although the Company cannot determine at this time the amount of the ultimate exposure from these ordinary course of business lawsuits, if any, management, based on the advice of counsel, does not expect the final outcome of any of these actions, individually or in the aggregate, to have a material adverse effect on the Company's financial position, results of operations or cash flows. L -- SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow disclosures for the six months ended October 31, 2001 and 2000 are as follows: <Table> <Caption> Six Months Ended October 31, 2001 2000 ----------- ------------ <S> <C> <C> Interest paid $ 1,685,584 $ 1,921,428 Income taxes paid 3,661,161 7,243,383 </Table> 11
M - BUSINESS SEGMENTS Operating results and other financial data are presented for the continuing operations of the Company by business segment for the three months ended October 31, 2001 and 2000. The segments are categorized by legal entity, which is how management organizes its segments for making operating decisions and assessing performance. The segments include Car-Mart and Corporate operations. The Company's continuing operations and other financial data by business segment for the three months ended October 31, 2001 and 2000 are as follows (in thousands): <Table> <Caption> Three Months Ended October 31, 2001 ----------------------------------------------------------- Car-Mart Corporate Eliminations Consolidated ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Revenues: Sales $ 29,343 $ 29,343 Interest income 2,268 $ 240 $ (83) 2,425 ------------ ------------ ------------ ------------ Total 31,611 240 (83) 31,768 ------------ ------------ ------------ ------------ Costs and expenses: Cost of sales 16,033 16,033 Selling, gen. and admin 4,624 542 5,166 Prov. for credit losses 6,026 100 6,126 Interest expense 732 198 (83) 847 Depreciation and amort 36 36 72 Restructuring charge 2,732 2,732 Write-down of investments/equip 3,528 3,528 ------------ ------------ ------------ ------------ Total 27,451 7,136 (83) 34,504 ------------ ------------ ------------ ------------ Income (loss) before taxes and minority interests $ 4,160 $ (6,896) $ -- $ (2,736) ============ ============ ============ ============ Capital expenditures $ 384 $ -- $ -- $ 384 ============ ============ ============ ============ Total assets $ 80,530 $ 57,735 ============ ============ </Table> <Table> <Caption> Three Months Ended October 31, 2000 ----------------------------------------------------------- Car-Mart Corporate Eliminations Consolidated ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Revenues: Sales $ 23,641 $ 23,641 Interest income 1,901 $ 340 $ (110) 2,131 ------------ ------------ ------------ ------------ Total 25,542 340 (110) 25,772 ------------ ------------ ------------ ------------ Costs and expenses: Cost of sales 12,913 12,913 Selling, gen. and admin 3,681 1,047 4,728 Prov. for credit losses 4,175 4,175 Interest expense 952 201 (110) 1,043 Depreciation and amort 38 46 84 ------------ ------------ ------------ ------------ Total 21,759 1,294 (110) 22,943 ------------ ------------ ------------ ------------ Income (loss) before taxes and minority interests $ 3,783 $ (954) $ -- $ 2,829 ============ ============ ============ ============ Capital expenditures $ 290 $ 2 $ -- $ 292 ============ ============ ============ ============ Total assets $ 64,597 $ 73,315 ============ ============ </Table> 12
The Company's continuing operations and other financial data by business segment for the six months ended October 31, 2001 and 2000 are as follows (in thousands): <Table> <Caption> Six Months Ended October 31, 2001 ----------------------------------------------------------- Car-Mart Corporate Eliminations Consolidated ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Revenues: Sales $ 57,467 $ 57,467 Interest income 4,501 $ 516 $ (177) 4,840 ------------ ------------ ------------ ------------ Total 61,968 516 (177) 62,307 ------------ ------------ ------------ ------------ Costs and expenses: Cost of sales 31,043 31,043 Selling, gen. and admin 8,721 1,454 10,175 Prov. for credit losses 11,523 100 11,623 Interest expense 1,516 443 (177) 1,782 Depreciation and amort 70 88 158 Restructuring charge 2,732 2,732 Write-down of investments/equip 3,928 3,928 ------------ ------------ ------------ ------------ Total 52,873 8,745 (177) 61,441 ------------ ------------ ------------ ------------ Income (loss) before taxes and minority interests $ 9,095 $ (8,229) $ -- $ 866 ============ ============ ============ ============ Capital expenditures $ 513 $ 153 $ -- $ 666 ============ ============ ============ ============ Total assets $ 80,530 $ 57,735 ============ ============ </Table> <Table> <Caption> Six Months Ended October 31, 2000 ----------------------------------------------------------- Car-Mart Corporate Eliminations Consolidated ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Revenues: Sales $ 46,001 $ 46,001 Interest income 3,669 $ 830 $ (265) 4,234 ------------ ------------ ------------ ------------ Total 49,670 830 (265) 50,235 ------------ ------------ ------------ ------------ Costs and expenses: Cost of sales 25,020 25,020 Selling, gen. and admin 7,278 2,172 9,450 Prov. for credit losses 7,744 7,744 Interest expense 1,890 403 (265) 2,028 Depreciation and amort 77 90 167 ------------ ------------ ------------ ------------ Total 42,009 2,665 (265) 44,409 ------------ ------------ ------------ ------------ Income (loss) before taxes and minority interests $ 7,661 $ (1,835) $ -- $ 5,826 ============ ============ ============ ============ Capital expenditures $ 425 $ 9 $ -- $ 434 ============ ============ ============ ============ Total assets $ 64,597 $ 73,315 ============ ============ </Table> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's consolidated financial statements and notes thereto appearing elsewhere in this report. FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. Certain information included in this Quarterly Report on Form 10-Q contains, and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company or its management) contain or will contain, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words "believe," "expect," "anticipate," "estimate," "project" and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements. Such forward-looking statements are based upon management's current plans or expectations and are subject to a number of uncertainties and risks that could significantly affect current plans, anticipated actions and the Company's future financial condition and results. As a consequence, actual results may differ materially from those expressed in any forward-looking statements made by or on behalf of the Company as a result of various factors. Uncertainties and risks related to such forward-looking statements include, but are not limited to, those relating to the continued availability of lines of credit for the Company's business, the Company's ability to effectively underwrite and collect its installment loans, changes in estimates and assumptions in determining the adequacy of the Company's allowance for credit losses, changes in interest rates, competition, dependence on existing management, adverse economic conditions (particularly in the State of Arkansas), changes in tax laws or the administration of such laws and changes in lending laws or regulations. Any forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. OVERVIEW Crown Group, Inc. ("Crown") is a holding company which owns a 95% fully diluted ownership interest in America's Car-Mart, Inc. ("Car-Mart") (collectively, Crown and Car-Mart are referred to as "the Company"). Car-Mart sells and finances the sale of used automobiles and trucks principally to consumers with limited or damaged credit histories. As of October 31, 2001 Car-Mart operated 52 stores in seven states. In addition, at October 31, 2001, Crown also owned (i) a 70% interest in Smart Choice Automotive Group, Inc. ("Smart Choice"), a used car sales and finance company, (ii) an 80% interest in Concorde Acceptance Corporation ("Concorde"), a prime and sub-prime mortgage lender, and (iii) a 50% interest in Precision IBC, Inc. ("Precision"), a firm specializing in the sale and rental of intermediate bulk containers. In October 2001 Crown made the decision to sell all of its subsidiaries except Car-Mart, and relocate its corporate headquarters to Rogers, Arkansas where Car-Mart is based. Accordingly, the operating results of Smart Choice, Concorde and Precision, as well as the operating results of another business that was sold in the prior fiscal year, are included in discontinued operations (see Note I). Similarly, the assets and liabilities of Concorde and Precision are included in "Assets held for sale" and "Liabilities held for sale", respectively, in the accompanying consolidated balance sheet. 14
RESULTS OF CONTINUING OPERATIONS Operating results are presented for the continuing operations of the Company by business segment for the three and six months ended October 31, 2001 and 2000. These segments are categorized by legal entity, which is how management organizes its segments for making operating decisions and assessing performance. The segments include Car-Mart and Corporate operations. A summary of the Company's continuing operations by business segment for the three and six months ended October 31, 2001 and 2000 is as follows: CONSOLIDATED (In Thousands) <Table> <Caption> Revenues Pretax Income (Loss) ---------------------------------------------------- ---------------------------------------------------- Three Months Ended Six Months Ended Three Months Ended Six Months Ended October 31, October 31, October 31, October 31, ------------------------ ------------------------ ------------------------ ------------------------ 2001 2000 2001 2000 2001 2000 2001 2000 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Car-Mart $ 31,611 $ 25,542 $ 61,968 $ 49,670 $ 4,160 $ 3,783 $ 9,095 $ 7,661 Corporate 240 340 516 830 (6,896) (954) (8,229) (1,835) Eliminations (83) (110) (177) (265) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Consolidated $ 31,768 $ 25,772 $ 62,307 $ 50,235 $ (2,736) $ 2,829 $ 866 $ 5,826 ========== ========== ========== ========== ========== ========== ========== ========== </Table> THREE MONTHS ENDED OCTOBER 31, 2001 VS. THREE MONTHS ENDED OCTOBER 31, 2000 Revenues increased $6.0 million, or 23.3%, for the three months ended October 31, 2001 compared to the same period in the prior fiscal year. The increase was principally the result of (i) increasing the average number of Car-Mart regular and satellite stores in operation to 52.0 in the current fiscal period from 44.0 in the prior fiscal period, and (ii) increasing the average number of retail vehicles sold per Car-Mart store by 4.2%. Pretax loss was $2.7 million for the three months ended October 31, 2001 as compared to pretax income of $2.8 million in the same period in the prior fiscal year, a decrease of $5.6 million. The decrease was principally the result of (i) the three months ended October 31, 2001 including a $2.7 million restructuring charge and a $3.5 million write-down of investments and equipment, with no comparable charge or write-down in the prior fiscal period, partially offset by (ii) higher earnings at Car-Mart ($.4 million). The restructuring charge pertains to severance and office closing costs relating to the Company's decision to relocate its corporate headquarters to Rogers, Arkansas where Car-Mart is based. The write-down of investments and equipment principally pertains to two emerging technology/Internet investments made in a prior fiscal year that were deemed to be impaired at October 31, 2001. SIX MONTHS ENDED OCTOBER 31, 2001 VS. SIX MONTHS ENDED OCTOBER 31, 2000 Revenues increased $12.1 million, or 24.0%, for the six months ended October 31, 2001 compared to the same period in the prior fiscal year. The increase was principally the result of (i) increasing the average number of Car-Mart regular and satellite stores in operation to 51.2 in the current fiscal period from 43.0 in the prior fiscal period, and (ii) increasing the average number of retail vehicles sold per Car-Mart store by 2.8%. Pretax income was $.9 million for the six months ended October 31, 2001 as compared to $5.8 million in the same period in the prior fiscal year, a decrease of $5.0 million. The decrease was principally the result of (i) the six months ended October 31, 2001 including a $2.7 million restructuring charge and a $3.9 million write-down of investments and equipment, with no comparable charge or write-down in the prior fiscal period, partially offset by (ii) higher earnings at Car-Mart ($1.4 million). The restructuring charge pertains to severance and office closing costs relating to the Company's decision to relocate its corporate headquarters to Rogers, Arkansas where Car-Mart is based. The write-down of investments and equipment principally pertains to two emerging technology/Internet investments made in a prior fiscal year that were deemed to be impaired at October 31, 2001. 15
CAR-MART (Dollars in Thousands) <Table> <Caption> % Change As a % of Sales ------------- ------------------------------ Three Months Ended 2001 Three Months Ended October 31, vs October 31, 2001 2000 2000 2001 2000 ------------- ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> <C> Revenues: Sales $ 29,343 $ 23,641 24.1% 100.0% 100.0% Interest income 2,268 1,901 19.3 7.7 8.0 ------------- ------------- ------------- ------------- ------------- Total 31,611 25,542 23.8 107.7 108.0 ------------- ------------- ------------- ------------- ------------- Costs and expenses: Cost of sales 16,033 12,913 24.2 54.6 54.6 Selling, gen and admin 4,624 3,681 25.6 15.8 15.6 Prov. for credit losses 6,026 4,175 44.3 20.5 17.7 Interest expense 732 952 (23.1) 2.5 4.0 Depreciation and amort 36 38 (5.3) .1 .1 ------------- ------------- ------------- ------------- ------------- Total 27,451 21,759 26.2 93.5 92.0 ------------- ------------- ------------- ------------- ------------- Pretax income $ 4,160 $ 3,783 10.0 14.2 16.0 ============= ============= ============= ============= ============= </Table> THREE MONTHS ENDED OCTOBER 31, 2001 VS. THREE MONTHS ENDED OCTOBER 31, 2000 Revenues increased $6.1 million, or 23.8%, for the three months ended October 31, 2001 as compared to the same period in the prior fiscal year. The increase was principally the result of (i) increasing the average number of regular and satellite stores in operation to 52.0 in the current fiscal period from 44.0 in the prior fiscal period, and (ii) increasing the average number of retail vehicles sold per store by 4.2%. Pretax income increased $.4 million, or 10.0%, for the three months ended October 31, 2001 as compared to the same period in the prior fiscal year. The increase was principally the result of increased revenues (23.8%), partially offset by higher costs and expenses as a percentage of sales (1.5%). Pretax income as a percentage of sales decreased to 14.2% in the three months ended October 31, 2001, from 16.0% in the three months ended October 31, 2000, a decrease of 1.8%. The decrease was principally the result of a higher provision for credit loss, partially offset by lower interest expense associated with a decrease in the prime interest rate. The Company believes the higher provision for credit loss as a percentage of sales, 20.5% during the three months ended October 31, 2001 as compared to 17.7% in the same period in the prior fiscal year, is due to a general slowdown in the economy during the three months ended October 31, 2001 as compared to the same period in the prior fiscal year. <Table> <Caption> % Change As a % of Sales ------------- ------------------------------ Six Months Ended 2001 Six Months Ended October 31, vs October 31, 2001 2000 2000 2001 2000 ------------- ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> <C> Revenues: Sales $ 57,467 $ 46,001 24.9% 100.0% 100.0% Interest income 4,501 3,669 22.7 7.8 8.0 ------------- ------------- ------------- ------------- ------------- Total 61,968 49,670 24.8 107.8 108.0 ------------- ------------- ------------- ------------- ------------- Costs and expenses: Cost of sales 31,043 25,020 24.1 54.0 54.4 Selling, gen and admin 8,721 7,278 19.8 15.2 15.8 Prov. for credit losses 11,523 7,744 48.8 20.1 16.8 Interest expense 1,516 1,890 (19.8) 2.6 4.1 Depreciation and amort 70 77 (9.1) .1 .2 ------------- ------------- ------------- ------------- ------------- Total 52,873 42,009 25.9 92.0 91.3 ------------- ------------- ------------- ------------- ------------- Pretax income $ 9,095 $ 7,661 18.7 15.8 16.7 ============= ============= ============= ============= ============= </Table> 16
SIX MONTHS ENDED OCTOBER 31, 2001 VS. SIX MONTHS ENDED OCTOBER 31, 2000 Revenues increased $12.3 million, or 24.8%, for the six months ended October 31, 2001 as compared to the same period in the prior fiscal year. The increase was principally the result of (i) increasing the average number of regular and satellite stores in operation to 51.2 in the current fiscal period from 43.0 in the prior fiscal period, (ii) increasing the average sales price per retail vehicle by approximately .6%, and (iii) increasing the average number of retail vehicles sold per dealership by 2.8%. Pretax income increased $1.4 million, or 18.7%, for the six months ended October 31, 2001 as compared to the same period in the prior fiscal year. The increase was principally the result of (i) increased revenues (24.8%), partially offset by higher costs and expenses as a percentage of sales (.7%). Pretax income as a percentage of sales decreased to 15.8% in the six months ended October 31, 2001, from 16.7% in the six months ended October 31, 2000, a decrease of .9%. The decrease was principally the result of a higher provision for credit loss, partially offset by lower interest expense associated with a decrease in the prime interest rate. The Company believes the higher provision for credit loss as a percentage of sales, 20.1% during the six months ended October 31, 2001 as compared to 16.8% in the same period in the prior fiscal year, is due to a general slowdown in the economy during the six months ended October 31, 2001 as compared to the same period in the prior fiscal year. CORPORATE (Dollars in Thousands) <Table> <Caption> % Change % Change ------------ ------------ Three Months Ended 2001 Six Months Ended 2001 October 31, vs October 31, vs 2001 2000 2000 2001 2000 2000 ------------ ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> <C> Revenues: Interest income $ 240 $ 340 (29.4)% $ 516 $ 830 (37.8)% ------------ ------------ ------------ ------------ ------------ ------------ Total 240 340 (29.4) 516 830 (37.8) ------------ ------------ ------------ ------------ ------------ ------------ Costs and expenses: Selling, gen and admin 542 1,047 (48.2) 1,454 2,172 (33.1) Prov. for credit losses 100 NM 100 NM Interest expense 198 201 (1.5) 443 403 9.9 Depreciation and amort 36 46 (21.7) 88 90 (2.2) Restructuring charge 2,732 NM 2,732 NM Write-down of investments/equip 3,528 NM 3,928 NM ------------ ------------ ------------ ------------ ------------ ------------ Total 7,136 1,294 NM 8,745 2,665 NM ------------ ------------ ------------ ------------ ------------ ------------ Pretax income (loss) $ (6,896) $ (954) NM $ (8,229) $ (1,835) NM ============ ============ ============ ============ ============ ============ </Table> NM = Not meaningful THREE MONTHS ENDED OCTOBER 31, 2001 VS. THREE MONTHS ENDED OCTOBER 31, 2000 Pretax loss increased to $6.9 million for the three months ended October 31, 2001 from $1.0 million for the three months ended October 31, 2000, an increase of $5.9 million. The increase was principally the result of the three months ended October 31, 2001 including a $2.7 million restructuring charge and a $3.5 million write-down of investments and equipment, with no comparable charge or write-down in the prior fiscal period. The restructuring charge pertains to severance and office closing costs relating to the Company's decision to relocate its corporate headquarters to Rogers, Arkansas where Car-Mart is based. The write-down of investments and equipment principally pertains to two emerging technology/Internet investments made in a prior fiscal year that were deemed to be impaired at October 31, 2001. Selling, general and administrative expenses decreased $.5 million for the three months ended October 31, 2001 as compared to the same period in the prior fiscal year. The decrease was principally the result of lower personnel costs as the Company is in the process of decreasing the overhead at its corporate headquarters in anticipation of a planned relocation to Rogers, Arkansas. SIX MONTHS ENDED OCTOBER 31, 2001 VS. SIX MONTHS ENDED OCTOBER 31, 2000 Pretax loss increased to $8.2 million for the six months ended October 31, 2001 from $1.8 million for the six months ended October 31, 2000, an increase of $6.4 million. The increase was principally the result of including a $2.7 million restructuring charge and a $3.9 million write-down of investments and equipment in the current fiscal period, with no comparable charge or write-down in the prior fiscal period. The restructuring charge pertains to severance and office closing costs relating to the Company's decision to relocate its corporate headquarters to Rogers, Arkansas where Car-Mart is based. The write-down of investments and equipment principally pertains to two emerging technology/Internet investments made in a prior fiscal year that were deemed to be impaired at October 31, 2001. Selling, general and administrative expenses decreased $.7 million for the six months ended October 31, 2001 as compared to the same period in the prior fiscal year. The decrease was principally the result of lower personnel costs as the Company is in the process of decreasing the overhead at its corporate headquarters in anticipation of a planned relocation to Rogers, Arkansas. 17
RESULTS OF DISCONTINUED OPERATIONS Operating results are presented for the discontinued operations of the Company by business segment for the three and six months ended October 31, 2001 and 2000. The segments include Smart Choice and other. The Smart Choice segment includes the results of the Florida Finance Group and Paaco. For the three and six months ended October 31, 2001 "Other" includes Concorde and the Company's equity investment in Precision. For the three and six months ended October 31, 2000 "Other" includes Concorde, Precision and Crown El Salvador. The Company's discontinued operations by business segment for the three and six months ended October 31, 2001 and 2000 are as follows (in thousands): SMART CHOICE (Dollars in Thousands) <Table> <Caption> % Change % Change ------------- ------------- Three Months Ended 2001 Six Months Ended 2001 October 31, vs October 31, vs 2001 2000 2000 2001 2000 2000 ------------- ------------- ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> <C> <C> Revenues: Sales and other $ 34,407 $ 49,821 (30.9)% $ 71,280 $ 93,841 (24.0)% Interest income 8,811 9,554 (7.8) 18,468 18,967 (2.6) ------------- ------------- ------------- ------------- ------------- ------------- Total 43,218 59,375 (27.2) 89,748 112,808 (20.4) ------------- ------------- ------------- ------------- ------------- ------------- Costs and expenses: Cost of sales 21,947 30,755 (28.6) 45,127 56,943 (20.8) Selling, gen and admin 11,055 10,855 1.8 21,833 20,659 5.7 Prov. for credit losses 9,988 11,446 (12.7) 21,040 22,038 (4.5) Interest expense 3,430 4,539 (24.4) 7,130 8,737 (18.4) Depreciation and amort 430 524 (17.9) 845 1,032 (18.1) Write-down of assets 39,294 NM 39,294 NM Loss in excess of basis (19,349) NM (19,349) NM ------------- ------------- ------------- ------------- ------------- ------------- Total 66,795 58,119 NM 115,920 109,409 NM ------------- ------------- ------------- ------------- ------------- ------------- Pretax income (loss) $ (23,577) $ 1,256 NM $ (26,172) $ 3,399 NM ============= ============= ============= ============= ============= ============= </Table> NM = Not meaningful THREE MONTHS ENDED OCTOBER 31, 2001 VS. THREE MONTHS ENDED OCTOBER 31, 2000 Revenues decreased $16.2 million, or 27.2%, for the three months ended October 31, 2001 as compared to the same period in the prior fiscal year. The decrease was principally the result of (i) a 39.0% decrease in the number of vehicles sold, and (ii) a 32.6% decrease in the average sales price per retail vehicle sold at Smart Choice's Florida Finance Group subsidiaries. Beginning in March 2001 the Florida Finance Group changed its underwriting practices in an effort to reduce credit losses. The changes in its underwriting practices resulted in fewer individuals being approved for credit, which resulted in a lower number of vehicles sold. Smart Choice reported a pretax loss of $23.6 million for the three months ended October 31, 2001 as compared to $1.3 million pretax income for the same period in the prior fiscal year. The $24.8 million decrease is principally the result of a $39.3 million write-down of assets, partially offset by a $19.3 million credit which represents Smart Choice stockholders' deficit at October 31, 2001. Once Crown's investment in Smart Choice was reduced to zero, no additional losses were recorded by Crown to reflect losses at Smart Choice. The $39.3 million write-down pertains to certain Smart Choice assets (finance receivables, property and equipment, deferred tax assets and goodwill) that were deemed to be impaired in connection with the foreclosure by Finova of certain Florida Finance Group assets and the winding-down of the Florida Finance Group's operations (see Note F to the accompanying consolidated financial statements). In addition, the Florida Finance Group's provision for credit loss and selling, general and administrative expenses have not decreased proportionately with its 50.8% decrease in revenues. 18
SIX MONTHS ENDED OCTOBER 31, 2001 VS. SIX MONTHS ENDED OCTOBER 31, 2000 Revenues decreased $23.1 million, or 20.4%, for the six months ended October 31, 2001 as compared to the same period in the prior fiscal year. The decrease was principally the result of (i) a 32.9% decrease in the number of vehicles sold, and (ii) a 26.3% decrease in the average sales price per retail vehicle sold at Smart Choice's Florida Finance Group subsidiaries. Beginning in March 2001 the Florida Finance Group changed its underwriting practices in an effort to reduce credit losses. The changes in its underwriting practices resulted in fewer individuals being approved for credit, which resulted in a lower number of vehicles sold. Smart Choice reported a pretax loss of $26.2 million for the six months ended October 31, 2001 as compared to $3.4 million pretax income for the same period in the prior fiscal year. The $29.6 million decrease is principally the result of a $39.3 million write-down of assets, partially offset by a $19.3 million credit which represents Smart Choice stockholders' deficit at October 31, 2001. Once Crown's investment in Smart Choice was reduced to zero, no additional losses were recorded by Crown to reflect losses at Smart Choice. The $39.3 million write-down pertains to certain Smart Choice assets (finance receivables, property and equipment, deferred tax assets and goodwill) that were deemed to be impaired in connection with the foreclosure by Finova of certain Florida Finance Group assets and the winding-down of the Florida Finance Group's operations (see Note F to the accompanying consolidated financial statements). In addition, the Florida Finance Group's provision for credit loss and selling, general and administrative expenses have not decreased proportionately with its 50.0% decrease in revenues. OTHER (Dollars in Thousands) <Table> <Caption> % Change % Change ------------ ------------ Three Months Ended 2001 Six Months Ended 2001 October 31, vs October 31, vs 2001 2000 2000 2001 2000 2000 ------------ ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> <C> Revenues: Sales and other $ 3,054 $ 4,118 (25.8)% $ 5,782 $ 8,392 (31.1)% Interest income 564 483 16.8 1,144 967 18.3 ------------ ------------ ------------ ------------ ------------ ------------ Total 3,618 4,601 (21.4) 6,926 9,359 (26.0) ------------ ------------ ------------ ------------ ------------ ------------ Costs and expenses: Cost of sales 595 NM 1,180 NM Selling, gen and admin 2,094 2,861 (26.8) 4,125 5,536 (25.5) Prov. for credit losses 406 107 279.4 517 240 115.4 Interest expense 345 531 (35.0) 749 1,074 (30.3) Depreciation and amort 58 483 (88.0) 168 934 (82.0) Write-down of assets 800 NM 800 NM ------------ ------------ ------------ ------------ ------------ ------------ Total 2,903 5,377 (46.0) 5,559 9,764 (43.1) ------------ ------------ ------------ ------------ ------------ ------------ Pretax income (loss) $ 715 $ (776) NM $ 1,367 $ (405) NM ============ ============ ============ ============ ============ ============ </Table> NM = Not meaningful THREE MONTHS ENDED OCTOBER 31, 2001 VS. THREE MONTHS ENDED OCTOBER 31, 2000 Revenues decreased $1.0 million, or 21.4%, for the three months ended October 31, 2001 as compared to the same period in the prior fiscal year. The decrease was principally the result of (i) excluding Precision ($1.6 million) and Crown El Salvador ($.5 million) from the Company's consolidated operating results in the current fiscal period as a result of the sale of 50% of Precision and all of Crown El Salvador in the prior fiscal year, partially offset by (ii) an increase in Concorde's revenues ($1.1 million) as a result of greater mortgage loan originations and sales. Other pretax income increased to $.7 million for the three months ended October 31, 2001 from a pretax loss of $.8 million for the same period in the prior fiscal year, an increase of $1.5 million. The increase was principally the result of (i) not including Crown El Salvador's loss ($.9 million in the prior fiscal period) as a result of the sale of that subsidiary, and (ii) improved operating results at Concorde ($1.0 million). SIX MONTHS ENDED OCTOBER 31, 2001 VS. SIX MONTHS ENDED OCTOBER 31, 2000 Revenues decreased $2.4 million, or 26.0%, for the six months ended October 31, 2001 as compared to the same period in the prior fiscal year. The increase was principally the result of (i) excluding Precision ($3.3 million) and Crown El Salvador ($1.1 million) from the Company's consolidated operating results in the current fiscal period as a result of the sale of 50% of Precision and all of Crown El Salvador in the prior fiscal year, partially offset by (ii) an increase in Concorde's revenues ($2.0 million) as a result of greater mortgage loan originations and sales. Other pretax income increased to $1.4 million for the six months ended October 31, 2001 from a pretax loss of $.4 million for the same period in the prior fiscal year, an increase of $1.8 million. The increase was principally the result of (i) not including Crown El Salvador's loss ($1.0 million in the prior fiscal period) as a result of the sale of that subsidiary, and (ii) improved operating results at Concorde ($1.4 million). 19
LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $1.8 million for the six months ended October 31, 2001 as compared to a net use of cash of $4.3 million for the same period in the prior fiscal year. The $6.1 million increase was principally the result of changes in the operating liability accounts. During the current fiscal period net cash was provided by operating activities as accounts payable, accrued liabilities and income taxes payable from continuing operations increased. In the prior fiscal period net cash was used in operating activities to reduce income taxes payable. Net cash used in investing activities was $.7 million for the six months ended October 31, 2001 as compared to $1.4 million in the same period in the prior fiscal year. The $.7 million decrease was principally the result of a decrease in the purchase of investments ($.9 million). Net cash used in financing activities was $.5 million for the six months ended October 31, 2001 as compared to $.3 million in the same period in the prior fiscal year. The $.2 million increase was principally the result of (i) higher repayments of other debt ($2.3 million), partially offset by (ii) a lower level of net stock purchases by the Company ($1.3 million), and (iii) an increase in borrowings from Car-Mart's revolving credit facility ($.8 million), in the current fiscal period as compared to the same period in the prior fiscal year. CAR-MART Car-Mart's sources of liquidity include cash from operations and its $35 million revolving credit facility with a group of banks, of which $32.5 million was outstanding at October 31, 2001. Based upon the collateral on hand at October 31, 2001, Car-Mart could have drawn an additional $2.5 million on its revolving credit facility at such date. Car-Mart's revolving credit facility matures in January 2002. Car-Mart expects that it will be able to renew or refinance its revolving credit facility on or before the scheduled maturity date. Car-Mart believes it will have adequate liquidity to satisfy its capital needs for the foreseeable future. CORPORATE As of October 31, 2001 Crown's (parent company only) sources of liquidity included (i) $1.3 million of cash on hand, (ii) $7.0 million of receivables from its subsidiaries, of which approximately $1.2 million was restricted due to the terms of the credit facilities of its subsidiaries, (iii) $2.9 million of other receivables, and (iv) the potential issuance of additional debt and/or equity, although Crown had no specific commitments or arrangements to issue such additional debt and/or equity. Crown expects that it will have adequate liquidity to satisfy its capital needs for the foreseeable future. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations", which eliminates the pooling method of accounting for business combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the accounting for intangible assets and goodwill acquired in a business combination. This portion of SFAS 141 is effective for business combinations completed after June 30, 2001. The Company adopted SFAS 141 effective May 1, 2001. Such adoption did not have any impact on the Company's financial position or results of operations. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Intangible Assets", which revises the accounting for purchased goodwill and intangible assets. Under SFAS 142, goodwill and intangible assets with indefinite lives will no longer be amortized, but will be tested for impairment annually, and in the event of an impairment indicator. SFAS 142 is effective for fiscal years beginning after December 15, 2001, with earlier adoption permitted. The Company has adopted SFAS 142 effective May 1, 2001. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment of Long-Lived Assets", which requires a single accounting model to be used for long-lived assets to be sold and broadens the presentation of discontinued operations to include a "component of an entity" (rather than a segment of a business). A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. A component of an entity that is classified as held for sale or has been disposed of is presented as a discontinued operation if the operations and cash flows of the component will be (or have been) eliminated from the ongoing operations of the entity and the entity will not have any significant continuing involvement in the operations of the component. The Company adopted SFAS 144 effective August 1, 2001. Consequently, the operating results of Smart Choice, Concorde and Precision, which are presently held for sale, are included in discontinued operations. Assets and liabilities of these business held for sale are included in "Assets held for sale" and "Liabilities held for sale", respectively (see Note I). 20
SEASONALITY The Company's automobile sales and finance business is seasonal in nature. In such business, the Company's third fiscal quarter (November through January) is historically the slowest period for car and truck sales. Many of the Company's operating expenses such as administrative personnel, rent and insurance are fixed and cannot be reduced during periods of decreased sales. Conversely, the Company's fourth fiscal quarter (February through April) is historically the busiest time for car and truck sales as many of the Company's customers use income tax refunds as a down payment on the purchase of a vehicle. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk on its financial instruments from changes in interest rates. The Company does not use financial instruments for trading purposes or to manage interest rate risk. The Company's earnings are impacted by its net interest income, which is the difference between the income earned on interest-bearing assets and the interest paid on interest bearing notes payable. Decreases in market interest rates could eventually have an adverse effect on profitability. Financial instruments consist of fixed rate finance receivables and fixed and variable rate notes payable. The Company's finance receivables generally bear interest at fixed rates ranging from 6% to 18%. These finance receivables have remaining maturities from one to 30 months. A majority of the Company's borrowings contain variable interest rates that fluctuate with market interest rates (ie. revolving credit facility). However, interest rates charged on finance receivables originated in the State of Arkansas are limited to the federal discount rate (2.0% at October 31, 2001) plus 5.0%. Typically, the Company charges interest on its Arkansas loans at or near the maximum rate allowed by law. Thus, while the interest rates charged on the Company's loans do not fluctuate once established, new loans originated in Arkansas tend to fluctuate with the federal discount rate. At October 31, 2001 approximately 75% of the Company's finance receivables were originated in Arkansas. Assuming that this percentage is held constant for future loan originations, the long-term effect of decreases in the federal discount rate could have a negative effect on profitability of the Company. This is the case because the amount of interest income lost on Arkansas originated loans would likely exceed the amount of interest expense saved on the Company's variable rate borrowings. The initial impact on profitability resulting from a decrease in the federal discount rate is positive, as the immediate interest expense savings outweighs the loss of interest income on new loan originations. However, as the amount of new loans originated at the lower interest rate exceeds the amount of variable interest rate borrowings, the effect on profitability becomes negative. The table below illustrates the impact which hypothetical changes in the federal discount rate could have on the Company's continuing pretax earnings. The calculations assume (i) the increase or decrease in the federal discount rate remains in effect for two years, (ii) the increase or decrease in the federal discount rate results in a like increase or decrease in the rate charged on the Company's variable rate borrowings, (iii) the principal amount of finance receivables and variable interest rate borrowings, and the percentage of Arkansas originated finance receivables, remains constant during the periods, and (iv) the Company's historical collection and charge-off experience continues throughout the periods. <Table> <Caption> Year 1 Year 2 Change in Change in Change in Interest Rates Pretax Earnings Pretax Earnings -------------- --------------- --------------- (in thousands) (in thousands) <S> <C> <C> +2% $ (9) $ 558 +1% (5) 279 -1% 5 (279) -2% 9 (558) </Table> 21
PART II ITEM 3. DEFAULTS UPON SENIOR SECURITIES SMART CHOICE AGREEMENT WITH FINOVA On November 8, 2001, Crown's 70% owned subsidiary, Smart Choice, and certain of Smart Choice's subsidiaries, entered into a forbearance agreement with Finova, the primary lender to Smart Choice's subsidiaries, that resulted in the foreclosure of receivables and inventory of certain Florida-based subsidiaries of Smart Choice (the "Florida Finance Group"), and the probable sale of Smart Choice's wholly-owned subsidiaries, Paaco Automotive Group, L.P. and Premium Auto Acceptance Corporation (collectively, "Paaco"), to Finova. Prior to November 9, 2001, the Florida Finance Group sold and financed used cars and trucks in Florida. Paaco sells and finances used cars and trucks in Texas. The Florida Finance Group had, and Paaco continues to have, a revolving credit facility with Finova. Prior to November 9, 2001, the Florida Finance Group was over-advanced on its revolving credit facility ($25 million over-advanced at September 30, 2001), which constituted an event of default under the facility. Pursuant to the forbearance agreement, on November 9, 2001, the collateral for the Florida Finance Group's credit facility with Finova, which consisted principally of receivables and inventory, was sold at a public foreclosure sale to Finova for $55 million. Prior to the foreclosure sale, the Florida Finance Group owed Finova $88.4 million. Thus, after applying the proceeds from the foreclosure sale, the Florida Finance Group owes Finova $33.4 million (the "Deficiency"). Further, as part of the forbearance agreement, Smart Choice granted Finova (i) an option to purchase Paaco (the "Paaco Option") for an amount equal to the Deficiency, subject to shareholder approval and an appraisal indicating the value of Paaco is not greater than the Deficiency, and (ii) an option to purchase up to 100% of Smart Choice's remaining shares of authorized but unissued common stock (approximately 39 million shares) (the "Smart Choice Stock Option") at a price of $0.30 per share. The Smart Choice Stock Option will terminate upon the closing of the exercise of the Paaco Option. Presently, Smart Choice has approximately 9.8 million shares of common stock outstanding, of which Crown owns approximately 6.9 million shares. Both the Paaco Option and the Smart Choice Stock Option expire March 8, 2002. As a result of the Finova agreement and the lack of other available capital, on November 9, 2001 Smart Choice began to wind-down its Florida-based operations. On December 12, 2001 Finova exercised its option to purchase Paaco subject to certain conditions. If the exercise of the Paaco Option is closed as expected, Smart Choice's remaining assets would consist of certain improved and unimproved real estate in Titusville, Florida, including a 35,000 square-foot office facility, and certain other current and fixed assets. Assuming the sale of Paaco, management presently anticipates that Smart Choice's remaining assets will likely be sold by Smart Choice in an effort to realize the maximum value for these assets and repay its obligations to unsecured creditors to the extent possible. CROWN AGREEMENT WITH FINOVA Separately, Crown entered into a settlement agreement with Finova that provides for Crown to (i) pay Finova $1 million in cash, and (ii) grant Finova an option to purchase Crown's 6.9 million shares of Smart Choice common stock for $1.00, in exchange for Finova unconditionally releasing Crown from its $5 million guaranty of the Florida Finance Group's and Paaco's obligations to Finova. As a result of these transactions and operating losses at Smart Choice, Crown's equity investment in Smart Choice, which totaled $16.4 million at July 31, 2001, has been written off as of October 31, 2001. In addition, as a result of revised subordination language that requires Finova to be paid in full prior to Crown receiving any note payments from Paaco, Crown has fully reserved its $1.6 million receivable from Paaco as of October 31, 2001. Crown anticipates that it will receive a federal income tax benefit of approximately $6.1 million following the ultimate disposition of its investment in Smart Choice. The write-off of Crown's investment in Smart Choice and the loss resulting from the $1 million guaranty payment to Finova and related tax benefits, are included in discontinued operations (see Note I). ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: None. (b) Reports on Form 8-K: During the fiscal quarter ended October 31, 2001 no reports on Form 8-K were filed. 22
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CROWN GROUP, INC. By: /s/ Mark D. Slusser ------------------------------------- Mark D. Slusser Chief Financial Officer, Vice President Finance and Secretary (Principal Financial and Accounting Officer) Dated: December 14, 2001