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: JANUARY 31, 2002 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 of 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 March 7, 2002 ------------------- ------------- <S> <C> Common stock, par value $.01 per share 6,777,338 </Table> 1
PART I ITEM 1. FINANCIAL STATEMENTS CROWN GROUP, INC. CONSOLIDATED BALANCE SHEETS <Table> <Caption> January 31, 2002 (unaudited) April 30, 2001 ---------------- -------------- <S> <C> <C> Assets: Cash and cash equivalents $ 698,826 $ 718,134 Income tax receivable 9,266,243 Notes and other receivables, net 1,167,890 4,441,391 Finance receivables, net 71,421,600 61,969,879 Inventory 3,693,644 3,013,293 Prepaid and other assets 259,914 359,395 Investments 229,768 3,473,761 Deferred tax assets, net 5,401,487 Property and equipment, net 3,188,607 4,233,443 Assets of subsidiaries held for sale 32,439,881 218,909,333 ------------ ------------ $122,366,373 $302,520,116 ============ ============ Liabilities and stockholders' equity: Accounts payable $ 3,259,984 $ 1,942,261 Accrued liabilities 5,499,376 3,565,981 Income taxes payable 4,987,609 Deferred tax liabilities, net 10,766 Revolving credit facility 32,505,703 29,767,688 Other notes payable 8,375,000 11,816,000 Liabilities of subsidiaries held for sale 24,091,538 190,655,389 ------------ ------------ 73,742,367 242,734,928 ------------ ------------ Minority interests 1,900,818 852,935 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; 6,773,082 issued and outstanding (6,980,367 at April 30, 2001) 67,731 69,804 Additional paid-in capital 22,113,572 23,075,677 Retained earnings 24,541,885 35,786,772 ------------ ------------ Total stockholders' equity 46,723,188 58,932,253 ------------ ------------ $122,366,373 $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 Nine Months Ended January 31, January 31, 2002 2001 2002 2001 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Revenues: Sales $ 28,655,084 $ 24,502,764 $ 86,121,745 $ 70,504,122 Interest income 2,265,420 2,237,445 7,105,314 6,471,218 ------------ ------------ ------------ ------------ 30,920,504 26,740,209 93,227,059 76,975,340 ------------ ------------ ------------ ------------ Costs and expenses: Cost of sales 14,506,250 13,347,919 45,549,187 38,367,994 Selling, general and administrative 5,867,055 4,594,415 16,042,312 14,044,547 Provision for credit losses 5,887,001 4,431,717 17,509,684 12,175,500 Interest expense 656,354 1,055,044 2,438,761 3,082,379 Depreciation and amortization 51,248 230,888 208,868 398,155 Restructuring charge 2,732,106 Write-down of investments and equipment 3,927,631 ------------ ------------ ------------ ------------ 26,967,908 23,659,983 88,408,549 68,068,575 ------------ ------------ ------------ ------------ Income from continuing operations before taxes and minority interests 3,952,596 3,080,226 4,818,510 8,906,765 Provision for income taxes 1,593,078 1,217,455 2,369,734 3,620,016 Minority interests 138,329 74,184 418,189 230,445 ------------ ------------ ------------ ------------ Income from continuing operations 2,221,189 1,788,587 2,030,587 5,056,304 Discontinued operations: Income (loss) from discontinued operations, net of taxes and minority interests 307,323 (795,357) (13,275,474) 254,054 Gain on sale of discontinued operation, net of tax 3,119 3,119 ------------ ------------ ------------ ------------ Income (loss) from discontinued operations 307,323 (792,238) (13,275,474) 257,173 ------------ ------------ ------------ ------------ Net income (loss) $ 2,528,512 $ 996,349 $(11,244,887) $ 5,313,477 ============ ============ ============ ============ Basic earnings (loss) per share: Continuing operations $ .33 $ .24 $ .30 $ .65 Discontinued operations .04 (.11) (1.96) .03 ------------ ------------ ------------ ------------ Total $ .37 $ .13 $ (1.66) $ .68 ============ ============ ============ ============ Diluted earnings (loss) per share: Continuing operations $ .31 $ .23 $ .29 $ .62 Discontinued operations .04 (.10) (1.89) .03 ------------ ------------ ------------ ------------ Total $ .35 $ .13 $ (1.60) $ .65 ============ ============ ============ ============ Weighted average number of shares outstanding: Basic 6,747,458 7,474,780 6,782,439 7,856,297 Diluted 7,149,145 7,768,330 7,032,625 8,218,856 </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> Nine Months Ended January 31, 2002 2001 ------------ ------------ <S> <C> <C> Operating activities: Net income (loss) $(11,244,887) $ 5,313,477 Add: (Income) loss from discontinued operations 13,275,474 (257,173) ------------ ------------ Income from continuing operations 2,030,587 5,056,304 Adjustments to reconcile income from continuing operations to net cash used in operating activities: Depreciation and amortization 208,868 398,155 Deferred income taxes 5,412,253 (1,570,971) Provision for credit losses 17,509,684 12,175,500 Write-down of investments and equipment 3,927,631 Minority interests 418,189 230,445 Accretion of purchase discount (29,095) Changes in operating assets and liabilities: Receivables (2,809,955) 318,623 Finance receivable originations (78,713,912) (63,980,960) Finance receivable collections 47,759,066 40,337,513 Inventory acquired in repossession 4,093,441 3,367,061 Inventory (680,351) (494,273) Prepaids and other assets 102,938 150,331 Accounts payable and accrued liabilities 3,880,812 (523,036) Income taxes payable (4,987,609) (3,719,806) ------------ ------------ Net cash used in operating activities (1,848,358) (8,284,209) ------------ ------------ Investing activities: Purchase of property and equipment (937,609) (496,883) Sale of equipment 25,000 Sale of securities 2,229,468 Note collections from discontinued subsidiaries 1,347,340 3,230,247 Purchase of investments (54,518) (805,877) ------------ ------------ Net cash provided by investing activities 380,213 4,156,955 ------------ ------------ Financing activities: Sale of common stock 48,359 60,937 Purchase of common stock (1,012,537) (3,785,670) Proceeds from revolving credit facility, net 2,738,015 1,211,017 Repayments of other debt (325,000) ------------ ------------ Net cash provided by (used in) financing activities 1,448,837 (2,513,716) ------------ ------------ Cash used in continuing operations (19,308) (6,640,970) Cash provided by (used in) discontinued operations 300,098 (1,421,360) ------------ ------------ Increase (decrease) in cash and cash equivalents 280,790 (8,062,330) Cash and cash equivalents at: Beginning of period 2,193,342 9,843,310 ------------ ------------ End of period 2,474,132 1,780,980 Less: Cash and cash equivalents of discontinued operations (1,775,306) (1,672,163) ------------ ------------ Cash and cash equivalents of continuing operations $ 698,826 $ 108,817 ============ ============ </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 January 31, 2002 Car-Mart operated 54 stores in seven south-centrally located states. In addition, at January 31, 2002, Crown also owned (i) an 80% interest in Concorde Acceptance Corporation ("Concorde"), a prime and sub-prime mortgage lender, and (ii) 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 Concorde and Precision, as well as the operating results of Smart Choice Automotive Group, Inc. ("Smart Choice"), Crown's 70% owned subsidiary which was written-off in October 2001, and CG Incorporated, S.A. de C.V. ("Crown El Salvador") that was sold in the prior fiscal year, are included in discontinued operations (see Note L). Similarly, the assets and liabilities of Concorde and Precision are included in "Assets of subsidiaries held for sale" and "Liabilities of subsidiaries held for sale", respectively, in the accompanying consolidated balance sheet at January 31, 2002 (Concorde, Precision and Smart Choice at April 30, 2001). 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 nine-month period ended January 31, 2002 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 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 Concorde and Precision, which are presently held for sale, as well as the operating results of Smart Choice, which was written-off in October 2001, and Crown El Salvador that was sold in the prior fiscal year, are included in discontinued operations. Assets and liabilities of Concorde and Precision are included in "Assets of subsidiaries held for sale" and "Liabilities of subsidiaries held for sale", respectively, at January 31, 2002 (Concorde, Precision and Smart Choice at April 30, 2001) (see Note L). 5
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 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. 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 January 31, 2002 and April 30, 2001 are as follows: <Table> <Caption> January 31, April 30, 2002 2001 ------------ ------------ <S> <C> <C> Finance receivables $ 95,112,481 $ 83,439,089 Unearned finance charges (7,355,928) (7,402,428) Allowance for credit losses (16,334,953) (14,066,782) ------------ ------------ $ 71,421,600 $ 61,969,879 ============ ============ </Table> Changes in the finance receivables allowance for credit losses for the nine months ended January 31, 2002 and 2001 are as follows: <Table> <Caption> Nine Months Ended January 31, 2002 2001 ------------ ------------ <S> <C> <C> Balance at beginning of period $ 14,066,782 $ 11,492,611 Provision for credit losses 17,409,684 12,175,500 Net charge offs (15,141,513) (10,336,636) ------------ ------------ Balance at end of period $ 16,334,953 $ 13,331,475 ============ ============ </Table> D - PROPERTY AND EQUIPMENT A summary of property and equipment as of January 31, 2002 and April 30, 2001 is as follows: <Table> <Caption> January 31, April 30, 2002 2001 ----------- ----------- <S> <C> <C> Land and buildings $ 1,261,309 $ 650,191 Furniture, fixtures and equipment 1,903,647 3,826,051 Leasehold improvements 1,010,848 871,390 Less accumulated depreciation and amortization (987,197) (1,114,189) ----------- ----------- $ 3,188,607 $ 4,233,443 =========== =========== </Table> For the nine months ended January 31, 2002 and 2001 depreciation and amortization of property and equipment amounted to $208,868 and $398,155, respectively. 6
E - DEBT A summary of debt as of January 31, 2002 and April 30, 2001 is as follows: <Table> <Caption> Revolving Credit Facility ------------------------------------------------------------------------------------------------------------------------------ Facility Interest Balance at Borrower Lender Amount Rate Maturity January 31, 2002 April 30, 2001 --------------- --------------- ----------- ------------- ------------ ------------------ ----------------- <S> <C> <C> <C> <C> <C> <C> Car-Mart Bank of Oklahoma $ 37 million Prime + .50% Dec 2003 $ 32,505,703 Car-Mart Bank of America $ 35 million Prime + .88% Jan 2002 $ 29,767,688 </Table> <Table> <Caption> Other Notes Payable ------------------------------------------------------------------------------------------------------------------------------ Facility Interest Balance at Borrower Lender Amount Rate Maturity January 31, 2002 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 First Mercantile N/A Prime + .25% Sept 2002 875,000 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 ------------- ------------- $ 8,375,000 $ 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 or distributions. At January 31, 2002, all of Crown's $36.3 million equity investment in Car-Mart was restricted due to covenants in Car-Mart's revolving credit facility which prohibits dividend or other 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 January 31, 2002, Car-Mart could have drawn an additional $4.5 million under its revolving credit facility. F - 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 investment in 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 values 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: <Table> <Caption> Three Months Nine Months Ended Ended January 31, January 31, 2002 2002 ---------- ---------- <S> <C> <C> Monarch $ -- $1,648,511 Mariah 1,650,000 Equipment 629,120 ---------- ---------- $ -- $3,927,631 ========== ========== </Table> The Company's remaining investment in Monarch and Mariah at January 31, 2002 was $229,768 and $0, respectively, and is included in "Investments" in the accompanying consolidated balance sheet. 7
G - RESTRUCTURING CHARGE As discussed in Note L, 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. As of January 31, 2002, $12,500 had been paid pertaining to severance costs. The Company's remaining restructuring liability at January 31, 2002 was $2.7 million. H - 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 (loss) 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. 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 January 31: <Table> <Caption> Three Months Ended Nine Months Ended January 31, January 31, 2002 2001 2002 2001 --------- --------- --------- --------- <S> <C> <C> <C> <C> Weighted average shares outstanding-basic 6,747,458 7,474,780 6,782,439 7,856,297 Dilutive options and warrants 401,687 293,550 250,186 362,559 --------- --------- --------- --------- Weighted average shares outstanding-diluted 7,149,145 7,768,330 7,032,625 8,218,856 ========= ========= ========= ========= Antidilutive securities not included: Options and warrants 432,500 445,000 432,500 445,000 ========= ========= ========= ========= </Table> I - 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 January 31, 2002 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. J - SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow disclosures for the nine months ended January 31, 2002 and 2001 are as follows: <Table> <Caption> Nine Months Ended January 31, 2002 2001 ---------------- ----------------- <S> <C> <C> Interest paid $ 2,299,615 $ 2,904,637 Income taxes paid 5,502,331 8,639,240 </Table> 8
K - 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 January 31, 2002 and 2001. 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 January 31, 2002 and 2001 are as follows (in thousands): <Table> <Caption> Three Months Ended January 31, 2002 ---------------------------------------------- Car-Mart Corporate Eliminations Consolidated -------- --------- ------------ ------------ <S> <C> <C> <C> <C> Revenues: Sales $ 28,655 $ 28,655 Interest income 2,157 $ 189 $ (80) 2,266 -------- -------- -------- -------- Total 30,812 189 (80) 30,921 -------- -------- -------- -------- Costs and expenses: Cost of sales 14,506 14,506 Selling, general and admin 5,090 777 5,867 Provision for credit losses 5,887 5,887 Interest expense 558 179 (80) 657 Depreciation and amortization 35 17 52 -------- -------- -------- -------- Total 26,076 973 (80) 26,969 -------- -------- -------- -------- Income (loss) before taxes and minority interests $ 4,736 $ (784) $ -- $ 3,952 ======== ======== ======== ======== Capital expenditures $ 272 $ -- $ -- $ 272 ======== ======== ======== ======== Total assets $ 77,756 $ 60,475 ======== ======== </Table> <Table> <Caption> Three Months Ended January 31, 2001 ---------------------------------------------- Car-Mart Corporate Eliminations Consolidated -------- --------- ------------ ------------ <S> <C> <C> <C> <C> Revenues: Sales $ 24,503 $ 24,503 Interest income 1,986 $ 359 $ (107) 2,238 -------- -------- -------- -------- Total 26,489 359 (107) 26,741 -------- -------- -------- -------- Costs and expenses: Cost of sales 13,348 13,348 Selling, general and admin 3,649 945 4,594 Provision for credit losses 4,432 4,432 Interest expense 927 236 (107) 1,056 Depreciation and amortization 38 193 231 -------- -------- -------- -------- Total 22,394 1,374 (107) 23,661 -------- -------- -------- -------- Income (loss) before taxes and minority interests $ 4,095 $ (1,015) $ -- $ 3,080 ======== ======== ======== ======== Capital expenditures $ 24 $ 39 $ -- $ 63 ======== ======== ======== ======== Total assets $ 67,633 $ 72,281 ======== ======== </Table> 9
The Company's continuing operations and other financial data by business segment for the nine months ended January 31, 2002 and 2001 are as follows (in thousands): <Table> <Caption> Nine Months Ended January 31, 2002 ---------------------------------------------- Car-Mart Corporate Eliminations Consolidated -------- --------- ------------ ------------ <S> <C> <C> <C> <C> Revenues: Sales $ 86,122 $ 86,122 Interest income 6,658 $ 705 $ (258) 7,105 -------- -------- -------- -------- Total 92,780 705 (258) 93,227 -------- -------- -------- -------- Costs and expenses: Cost of sales 45,549 45,549 Selling, general and admin 13,811 2,231 16,042 Provision for credit losses 17,410 100 17,510 Interest expense 2,074 622 (258) 2,438 Depreciation and amortization 105 105 210 Restructuring charge 2,732 2,732 Write-down of investments/equip 3,928 3,928 -------- -------- -------- -------- Total 78,949 9,718 (258) 88,409 -------- -------- -------- -------- Income (loss) before taxes and minority interests $ 13,831 $ (9,013) $ -- $ 4,818 ======== ======== ======== ======== Capital expenditures $ 785 $ 153 $ -- $ 938 ======== ======== ======== ======== Total assets $ 77,756 $ 60,475 ======== ======== </Table> <Table> <Caption> Nine Months Ended January 31, 2001 ---------------------------------------------- Car-Mart Corporate Eliminations Consolidated -------- --------- ------------ ------------ <S> <C> <C> <C> <C> Revenues: Sales $ 70,504 $ 70,504 Interest income 5,655 $ 1,189 $ (372) 6,472 -------- -------- -------- -------- Total 76,159 1,189 (372) 76,976 -------- -------- -------- -------- Costs and expenses: Cost of sales 38,368 38,368 Selling, general and admin 10,927 3,117 14,044 Provision for credit losses 12,176 12,176 Interest expense 2,817 639 (372) 3,084 Depreciation and amortization 115 283 398 -------- -------- -------- -------- Total 64,403 4,039 (372) 68,070 -------- -------- -------- -------- Income (loss) before taxes and minority interests $ 11,756 $ (2,850) $ -- $ 8,906 ======== ======== ======== ======== Capital expenditures $ 449 $ 48 $ -- $ 497 ======== ======== ======== ======== Total assets $ 67,633 $ 72,281 ======== ======== </Table> 10
L - 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, it is management's belief 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 Concorde and Precision, which sales are expected to be completed by October 31, 2002. Since January 2001 Smart Choice's Florida-based subsidiaries (the "Florida Finance Group") have been over-advanced on their revolving credit facility with Finova Capital Corporation ("Finova"). On November 8, 2001, Smart Choice, the Florida Finance Group and Smart Choice's Texas-based subsidiaries ("Paaco") entered into an agreement with Finova that resulted in the foreclosure of the Florida Finance Group's receivables and inventory. The Florida Finance Group ceased operations in November 2001 and it is likely that Paaco will be sold to Finova, or Finova's designee, for the amount the Florida Finance Group continues to owe Finova (more than $33 million). If Paaco is sold to Finova, or Finova's designee, as expected, Smart Choice's remaining assets (consisting principally of a 35,000 square foot office building, and certain other current and fixed assets) will likely be sold or conveyed 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. Separately, Crown entered into a settlement agreement with Finova that resulted in Crown paying Finova $1 million and granting 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 $17.6 million at April 30, 2001, was 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. 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. The assets and liabilities of Smart Choice are not included in assets and liabilities of subsidiaries held for sale at January 31, 2002 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. A summary of assets and liabilities of subsidiaries held for sale as of January 31, 2002 and April 30, 2001 is as follows (in thousands): <Table> <Caption> January 31, April 30, 2002 2001 ---------- --------- <S> <C> <C> Assets of subsidiaries held for sale: Mortgage loans held for sale, net $ 24,499 $ 16,200 Finance receivables, net 149,656 Inventory 7,980 Property and equipment, net 682 12,783 Deferred tax asset, net 256 15,902 Other 7,003 16,388 --------- --------- $ 32,440 $ 218,909 ========= ========= Liabilities of subsidiaries held for sale: Accounts payable and accrued liabilities $ 2,919 $ 13,255 Deferred sales tax 4,963 Income taxes payable 628 Revolving credit facilities 20,427 160,294 Notes payable to Crown 2,191 6,112 Other notes payable 7,495 Minority interests 118 4,648 --------- --------- 26,283 196,767 Less: Notes payable to Crown (2,191) (6,112) --------- --------- $ 24,092 $ 190,655 ========= ========= </Table> 11
As of January 31, 2002 and April 30, 2001 the Company's equity investment in businesses held for sale was as follows (in thousands): <Table> <Caption> January 31, April 30, 2002 2001 ---------- ---------- <S> <C> <C> Smart Choice $ -- $17,591 Concorde 2,523 1,354 Precision 3,634 3,197 ------- ------- $ 6,157 $22,142 ======= ======= </Table> 12
Operating results are presented for the discontinued operations of the Company by business segment for the three and nine months ended January 31, 2002 and 2001. The segments include Smart Choice and other. The Smart Choice segment is included in discontinued operations through October 31, 2001, the date the Company's investment in Smart Choice was written off. For the three and nine months ended January 31, 2002 "Other" includes Concorde and the Company's equity investment in Precision. For the three and nine months ended January 31, 2001 "Other" includes Concorde, Precision (consolidated through October 31, 2000, equity method thereafter) and Crown El Salvador. The Company's discontinued operations by business segment for the three and nine months ended January 31, 2002 and 2001 are as follows (in thousands): <Table> <Caption> Three Months Ended January 31, 2002 Nine Months Ended January 31, 2002 ----------------------------------- ---------------------------------- S. Choice Other Total S. Choice Other Total --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> Revenues $ -- $ 3,388 $ 3,388 $ 89,748 $ 10,314 $ 100,062 Costs and expenses: Cost of sales 45,127 45,127 Selling, gen. and admin 2,300 2,300 21,833 6,425 28,258 Prov. for credit loss 13 13 21,040 530 21,570 Interest expense 401 401 7,130 1,150 8,280 Depreciation and amort. 62 62 845 230 1,075 Write-down of assets 39,294 39,294 Loss in excess of basis (19,349) (19,349) ------- --------- --------- --------- --------- --------- 2,776 2,776 115,920 8,335 124,255 ------- --------- --------- --------- --------- --------- Income (loss) before tax and minority interests 612 612 (26,172) 1,979 (24,193) Prov. (benefit) for taxes 247 247 (7,025) 624 (6,401) Minority interests 57 57 (4,647) 130 (4,517) ------- --------- --------- --------- --------- --------- Income (loss) from discontinued operations $ -- $ 308 $ 308 $ (14,500) $ 1,225 $ (13,275) ======= ========= ========= ========= ========= ========= </Table> <Table> <Caption> Three Months Ended January 31, 2001 Nine Months Ended January 31, 2001 ----------------------------------- ---------------------------------- S. Choice Other Total S. Choice Other Total --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> Revenues $ 50,690 $ 2,924 $ 53,614 $ 163,498 $ 12,283 $ 175,781 Costs and expenses: Cost of sales 26,456 26,456 83,399 1,180 84,579 Selling, gen. and admin 10,767 2,532 13,299 31,426 8,068 39,494 Prov. for credit loss 9,469 187 9,656 31,507 427 31,934 Interest expense 4,650 340 4,990 13,387 1,414 14,801 Depreciation and amort. 613 182 795 1,645 1,116 2,761 Write-down of assets 800 800 --------- --------- --------- --------- --------- --------- 51,955 3,241 55,196 161,364 13,005 174,369 --------- --------- --------- --------- --------- --------- Income (loss) before tax and minority interests (1,265) (317) (1,582) 2,134 (722) 1,412 Prov. (benefit) for taxes (430) (138) (568) 924 (218) 706 Minority interests (218) (218) 452 452 --------- --------- --------- --------- --------- --------- Income (loss) from discontinued operations $ (617) $ (179) $ (796) $ 758 $ (504) $ 254 ========= ========= ========= ========= ========= ========= </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 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 January 31, 2002 Car-Mart operated 54 stores in seven south-centrally located states. In addition, at January 31, 2002, Crown also owned (i) an 80% interest in Concorde Acceptance Corporation ("Concorde"), a prime and sub-prime mortgage lender, and (ii) 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 Concorde and Precision, as well as the operating results of Smart Choice Automotive Group, Inc. ("Smart Choice"), Crown's 70% owned subsidiary which was written-off in October 2001, and CG Incorporated, S.A. de C.V. ("Crown El Salvador") that was sold in the prior fiscal year, are included in discontinued operations (see Note L to the accompanying consolidated financial statements). Similarly, the assets and liabilities of Concorde and Precision are included in "Assets of subsidiaries held for sale" and "Liabilities of subsidiaries held for sale", respectively, in the accompanying consolidated balance sheet at January 31, 2002 (Concorde, Precision and Smart Choice at April 30, 2001). 14
RESULTS OF CONTINUING OPERATIONS Operating results are presented for the continuing operations of the Company by business segment for the three and nine months ended January 31, 2002 and 2001. 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 nine months ended January 31, 2002 and 2001 are as follows: CONSOLIDATED (In Thousands) <Table> <Caption> Revenues Pretax Income (Loss) -------------------------------------------- -------------------------------------------- Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended January 31, January 31, January 31, January 31, -------------------- -------------------- -------------------- -------------------- 2002 2001 2002 2001 2002 2001 2002 2001 -------- -------- -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Car-Mart $ 30,812 $ 26,489 $ 92,780 $ 76,159 $ 4,736 $ 4,095 $ 13,831 $ 11,756 Corporate 189 359 705 1,189 (784) (1,015) (9,013) (2,850) Eliminations (80) (107) (258) (372) -------- -------- -------- -------- -------- -------- -------- -------- Consolidated $ 30,921 $ 26,741 $ 93,227 $ 76,976 $ 3,952 $ 3,080 $ 4,818 $ 8,906 ======== ======== ======== ======== ======== ======== ======== ======== </Table> THREE MONTHS ENDED JANUARY 31, 2002 VS. THREE MONTHS ENDED JANUARY 31, 2001 Revenues increased $4.2 million, or 15.6%, for the three months ended January 31, 2002 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 52.7 in the current fiscal period from 46.0 in the prior fiscal period, (ii) increasing the average number of retail vehicles sold per Car-Mart store by 1.4%, and (iii) increasing the average sales price per retail vehicle by 1.1%. Pretax income increased $.9 million, or 28.3%, for the three months ended January 31, 2002 as compared to the same period in the prior fiscal year. The increase was principally the result of a 16.3% increase in Car-Mart's revenues and a reduction in Corporate operating expenses. NINE MONTHS ENDED JANUARY 31, 2002 VS. NINE MONTHS ENDED JANUARY 31, 2001 Revenues increased $16.3 million, or 21.1%, for the nine months ended January 31, 2002 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 51.7 in the current fiscal period from 44.0 in the prior fiscal period, (ii) increasing the average number of retail vehicles sold per Car-Mart store by 2.3%, and (iii) increasing the average sales price per retail vehicle by .8%. Pretax income was $4.8 million for the nine months ended January 31, 2002 as compared to $8.9 million in the same period in the prior fiscal year, a decrease of $4.1 million. The decrease was principally the result of (i) the nine months ended January 31, 2002 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 ($2.1 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 2002 Three Months Ended January 31, vs January 31, 2002 2001 2001 2002 2001 ------- ------- ----- ------ ------ <S> <C> <C> <C> <C> <C> Revenues: Sales $28,655 $24,503 16.9% 100.0% 100.0% Interest income 2,157 1,986 8.6 7.5 8.1 ------- ------- ----- ----- ----- Total 30,812 26,489 16.3 107.5 108.1 ------- ------- ----- ----- ----- Costs and expenses: Cost of sales 14,506 13,348 8.7 50.6 54.5 Selling, general and admin 5,090 3,649 39.5 17.8 14.9 Provision for credit losses 5,887 4,432 32.8 20.5 18.1 Interest expense 558 927 (39.8) 2.0 3.8 Depreciation and amortization 35 38 (7.9) .1 .1 ------- ------- ----- ----- ----- Total 26,076 22,394 16.4 91.0 91.4 ------- ------- ----- ----- ----- Pretax income $ 4,736 $ 4,095 15.7 16.5 16.7 ======= ======= ===== ===== ===== </Table> THREE MONTHS ENDED JANUARY 31, 2002 VS. THREE MONTHS ENDED JANUARY 31, 2001 Revenues increased $4.3 million, or 16.3%, for the three months ended January 31, 2002 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 52.7 in the current fiscal period from 46.0 in the prior fiscal period, (ii) increasing the average number of retail vehicles sold per store by 1.4%, and (iii) increasing the average sales price per retail vehicle by 1.1%. Pretax income increased $.6 million, or 15.7%, for the three months ended January 31, 2002 as compared to the same period in the prior fiscal year. The increase was principally the result of a 16.3% increase in revenues. Pretax income as a percentage of sales decreased slightly to 16.5% in the three months ended January 31, 2002 from 16.7% in the three months ended January 31, 2001, a decrease of .2%. The decrease was principally the result of increases in selling, general and administrative expenses and the provision for credit loss as a percentage of sales (2.9% and 2.4%, respectively), partially offset by decreases in cost of sales and interest expense as a percentage of sales (3.9% and 1.8%, respectively). The selling, general and administrative expense percentage increased partially as a result of higher payroll costs associated with building Car-Mart's infrastructure. The Company believes the higher provision for credit loss as a percentage of sales is partially attributable to a general slowdown in the economy during the three months ended January 31, 2002 as compared to the same period in the prior fiscal year. The Company does not expect the provision for credit loss percentage to increase from its present level during the fourth quarter ending April 30, 2002, and perhaps beyond, as the Company has seen improvements in its receivable agings and repossessions since January 31, 2002. The cost of sales percentage decreased as a result of a concerted effort to reduce the price paid for inventory and a decision to raise vehicle prices slightly. The interest expense percentage decrease is associated with a decrease in the prime interest rate. <Table> <Caption> % Change As a % of Sales -------- ------------------- Nine Months Ended 2002 Nine Months Ended January 31, vs January 31, 2002 2001 2001 2002 2001 ------- ------- ----- ------ ------ <S> <C> <C> <C> <C> <C> Revenues: Sales $86,122 $70,504 22.2% 100.0% 100.0% Interest income 6,658 5,655 17.7 7.7 8.0 ------- ------- ----- ----- ----- Total 92,780 76,159 21.8 107.7 108.0 ------- ------- ----- ----- ----- Costs and expenses: Cost of sales 45,549 38,368 18.7 52.9 54.4 Selling, general and admin 13,811 10,927 26.4 16.0 15.5 Provision for credit losses 17,410 12,176 43.0 20.2 17.3 Interest expense 2,074 2,817 (26.4) 2.4 4.0 Depreciation and amortization 105 115 (8.7) .1 .2 ------- ------- ----- ----- ----- Total 78,949 64,403 22.6 91.6 91.4 ------- ------- ----- ----- ----- Pretax income $13,831 $11,756 17.7 16.1 16.6 ======= ======= ===== ===== ===== </Table> 16
NINE MONTHS ENDED JANUARY 31, 2002 VS. NINE MONTHS ENDED JANUARY 31, 2001 Revenues increased $16.6 million, or 21.8%, for the nine months ended January 31, 2002 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 51.7 in the current fiscal period from 44.0 in the prior fiscal period, (ii) increasing the average number of retail vehicles sold per dealership by 2.3%, and (iii) increasing the average sales price per retail vehicle by .8%. Pretax income increased $2.1 million, or 17.7%, for the nine months ended January 31, 2002 as compared to the same period in the prior fiscal year. The increase was principally the result of (i) increased revenues (21.8%), partially offset by slightly higher costs and expenses as a percentage of sales (.2%). Pretax income as a percentage of sales decreased to 16.1% in the nine months ended January 31, 2002 from 16.6% in the nine months ended January 31, 2001, a decrease of .5%. The decrease was principally the result of increases in selling, general and administrative expenses and the provision for credit loss as a percentage of sales (.5% and 2.9%, respectively), partially offset by decreases in cost of sales and interest expense as a percentage of sales (1.5% and 1.6%, respectively). The selling, general and administrative expense percentage increased partially as a result of higher payroll costs associated with building Car-Mart's infrastructure. The Company believes the higher provision for credit loss as a percentage of sales is partially attributable to a general slowdown in the economy during the nine months ended January 31, 2002 as compared to the same period in the prior fiscal year. The Company does not expect the provision for credit loss percentage to increase from its present level during the fourth quarter ending April 30, 2002, and perhaps beyond, as the Company has seen improvements in its receivable agings and repossessions since January 31, 2002. The cost of sales percentage decreased as a result of a concerted effort to reduce the price paid for inventory and a decision to raise vehicle prices slightly. The interest expense percentage decrease is associated with a decrease in the prime interest rate. CORPORATE (Dollars in Thousands) <Table> <Caption> % Change % Change -------- -------- Three Months Ended 2002 Nine Months Ended 2002 January 31, vs January 31, vs 2002 2001 2001 2002 2001 2001 ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> Revenues: Interest income $ 189 $ 359 (47.4)% $ 705 $ 1,189 (40.7)% ------- ------- ------- ------- ------- ------- Total 189 359 (47.4) 705 1,189 (40.7) ------- ------- ------- ------- ------- ------- Costs and expenses: Selling, general and admin 777 945 (17.8) 2,231 3,117 (28.4) Provision for credit losses 100 NM Interest expense 179 236 (24.2) 622 639 (2.7) Depreciation and amortization 17 193 (91.2) 105 283 (62.9) Restructuring charge 2,732 NM Write-down of investments/equip. 3,928 NM ------- ------- ------- ------- ------- ------- Total 973 1,374 (29.2) 9,718 4,039 NM ------- ------- ------- ------- ------- ------- Pretax loss $ (784) $(1,015) (22.8) $(9,013) $(2,850) NM ======= ======= ======= ======= ======= ======= </Table> NM = Not meaningful THREE MONTHS ENDED JANUARY 31, 2002 VS. THREE MONTHS ENDED JANUARY 31, 2001 Pretax loss decreased to $.8 million for the three months ended January 31, 2002 from $1.0 million for the three months ended January 31, 2001, a decrease of $.2 million. The decrease was principally the result of lower selling, general and administrative expenses and depreciation and amortization, partially offset by a reduction in interest income. Selling, general and administrative expenses decreased $.2 million for the three months ended January 31, 2002 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. NINE MONTHS ENDED JANUARY 31, 2002 VS. NINE MONTHS ENDED JANUARY 31, 2001 Pretax loss increased to $9.0 million for the nine months ended January 31, 2002 from $2.8 million for the nine months ended January 31, 2001, an increase of $6.2 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 in the current period. Selling, general and administrative expenses decreased $.9 million for the nine months ended January 31, 2002 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 nine months ended January 31, 2002 and 2001. The segments include Smart Choice and other. The Smart Choice segment is comprised of two components (the Florida Finance Group and Paaco) and is included in the Company's operating results though October 31, 2001, the date the Company's investment in Smart Choice was written off. For the three and nine months ended January 31, 2002 "Other" includes Concorde and the Company's equity investment in Precision. For the three and nine months ended January 31, 2001 "Other" includes Concorde, Precision (consolidated through October 31, 2000, equity method thereafter) and Crown El Salvador. The Company's discontinued operations by business segment for the three and nine months ended January 31, 2002 and 2001 are as follows: SMART CHOICE (Dollars in Thousands) <Table> <Caption> % Change % Change -------- -------- Three Months Ended 2002 Nine Months Ended 2002 January 31, vs January 31, vs 2002 2001 2001 2002 2001 2001 ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> Revenues: Sales and other $ -- $ 41,275 NM $ 71,280 $ 135,116 (47.2)% Interest income 9,415 NM 18,468 28,382 (34.9) ------- --------- ------- --------- --------- ------- Total 50,690 NM 89,748 163,498 (45.1) ------- --------- ------- --------- --------- ------- Costs and expenses: Cost of sales 26,456 NM 45,127 83,399 (45.9) Selling, general and admin 10,767 NM 21,833 31,426 (30.5) Provision for credit losses 9,469 NM 21,040 31,507 (33.2) Interest expense 4,650 NM 7,130 13,387 (46.7) Depreciation and amortization 613 NM 845 1,645 (48.6) Write-down of assets 39,294 NM Loss in excess of basis (19,349) NM ------- --------- ------- --------- --------- ------- Total 51,955 NM 115,920 161,364 NM ------- --------- ------- --------- --------- ------- Pretax income (loss) $ -- $ (1,265) NM $ (26,172) $ 2,134 NM ======= ========= ======= ========= ========= ======= </Table> NM = Not meaningful NINE MONTHS ENDED JANUARY 31, 2002 VS. NINE MONTHS ENDED JANUARY 31, 2001 Revenues decreased $73.8 million, or 45.1%, for the nine months ended January 31, 2002 as compared to the same period in the prior fiscal year. The decrease was principally the result of (i) the current fiscal period only including six months of Smart Choice's operations versus nine months in the prior fiscal period, (ii) a 32.9% decrease in the number of vehicles sold and a 26.3% decrease in the average sales price per retail vehicle sold at Smart Choice's Florida Finance Group subsidiaries during the first six months of both periods. 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 nine months ended January 31, 2002 as compared to $2.1 million pretax income for the same period in the prior fiscal year. The $28.3 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 L to the accompanying consolidated financial statements). In addition, the Florida Finance Group's provision for credit loss and selling, general and administrative expenses did not decrease proportionately with its decrease in revenues. 18
OTHER (Dollars in Thousands) <Table> <Caption> % Change % Change -------- -------- Three Months Ended 2002 Nine Months Ended 2002 January 31, vs January 31, vs 2002 2001 2001 2002 2001 2001 ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> Revenues: Sales and other $ 2,782 $ 2,464 12.9% $ 8,564 $ 10,856 (21.1)% Interest income 606 460 31.7 1,750 1,427 22.6 -------- -------- -------- -------- -------- -------- Total 3,388 2,924 15.9 10,314 12,283 (16.0) -------- -------- -------- -------- -------- -------- Costs and expenses: Cost of sales 1,180 NM Selling, general and admin 2,300 2,532 (9.2) 6,425 8,068 (20.4) Provision for credit losses 13 187 (93.0) 530 427 24.1 Interest expense 401 340 17.9 1,150 1,414 (18.7) Depreciation and amortization 62 182 (65.9) 230 1,116 (79.4) Write-down of assets 800 NM -------- -------- -------- -------- -------- -------- Total 2,776 3,241 (14.3) 8,335 13,005 (35.9) -------- -------- -------- -------- -------- -------- Pretax income (loss) $ 612 $ (317) NM $ 1,979 $ (722) NM ======== ======== ======== ======== ======== ======== </Table> NM = Not meaningful THREE MONTHS ENDED JANUARY 31, 2002 VS. THREE MONTHS ENDED JANUARY 31, 2001 Revenues increased $.5 million, or 15.9%, for the three months ended January 31, 2002 as compared to the same period in the prior fiscal year. The increase was principally the result of (i) an increase in Concorde's revenues ($.8 million) as a result of greater mortgage loan originations and sales, partially offset by excluding Crown El Salvador ($.5 million) from the Company's consolidated operating results in the current fiscal period as a result of the sale of Crown El Salvador in the prior fiscal year. Other pretax income increased to $.6 million for the three months ended January 31, 2002 from a pretax loss of $.3 million for the same period in the prior fiscal year, an increase of $.9 million. The increase was principally the result of (i) improved operating results at Concorde ($.7 million), and (ii) excluding Crown El Salvador's loss ($.2 million in the prior fiscal period) as a result of the sale of that subsidiary. NINE MONTHS ENDED JANUARY 31, 2002 VS. NINE MONTHS ENDED JANUARY 31, 2001 Revenues decreased $2.0 million, or 16.0%, for the nine months ended January 31, 2002 as compared to the same period in the prior fiscal year. The decrease was principally the result of (i) excluding Precision ($3.2 million) and Crown El Salvador ($1.6 million) from the Company's consolidated operating results in the current fiscal period as a result of the sale of 50% of Precision and all of Crown El Salvador in the prior fiscal year, partially offset by (ii) an increase in Concorde's revenues ($2.8 million) as a result of greater mortgage loan originations and sales. Other pretax income increased to $2.0 million for the nine months ended January 31, 2002 from a pretax loss of $.7 million for the same period in the prior fiscal year, an increase of $2.7 million. The increase was principally the result of (i) improved operating results at Concorde ($2.0 million), and (ii) excluding Crown El Salvador's loss ($1.2 million in the prior fiscal period) as a result of the sale of that subsidiary. 19
LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities was $1.8 million for the nine months ended January 31, 2002 as compared to $8.3 million for the same period in the prior fiscal year. The $6.5 million improvement was principally the result of an increase in accounts payable and accrued liabilities and a reduction in deferred tax assets, partially offset by lower income from continuing operations. Cash is used in operating activities principally to fund finance receivable growth. For the nine months ended January 31, 2002 and 2001, net finance receivables grew by $9.5 million and $8.1 million, respectively. Net cash provided by investing activities was $.4 million for the nine months ended January 31, 2002 as compared to $4.2 million in the same period in the prior fiscal year. The $3.8 million decrease was principally the result of a decrease in note collections from discontinued subsidiaries ($1.9 million), and the prior period including $2.2 million in cash received from the sale of a 50% interest in Precision. Net cash provided by financing activities was $1.4 million for the nine months ended January 31, 2002 as compared to a $2.5 million use of cash in the same period in the prior fiscal year. The $3.9 million increase was principally the result of (i) a lower level of net stock purchases by the Company ($2.8 million), and (ii) an increase in borrowings from Car-Mart's revolving credit facility ($1.5 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 $37.0 million revolving credit facility with a group of banks, of which $32.5 million was outstanding at January 31, 2002. Based upon the collateral on hand at January 31, 2002, Car-Mart could have drawn an additional $4.5 million on its revolving credit facility at such date. Car-Mart's revolving credit facility matures in December 2003. 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 January 31, 2002 Crown's (parent company only) sources of liquidity included (i) $.4 million of cash on hand, (ii) $5.9 million of receivables from its subsidiaries, (iii) a $7.3 million federal income tax receivable stemming principally from the Company's loss on Smart Choice, (iv) $.9 million of other receivables, and (v) the planned sale of the Company's ownership interests in Concorde and Precision. 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. 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 Concorde and Precision, which are presently held for sale, as well as the operating results of Smart Choice, which was written-off in October 2001, and Crown El Salvador that was sold in the prior fiscal year, are included in discontinued operations. Assets and liabilities of Concorde and Precision are included in "Assets of subsidiaries held for sale" and "Liabilities of subsidiaries held for sale", respectively (see Note L to the accompanying consolidated financial statements). 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 (1.25% at January 31, 2002) 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 are set at a spread above the federal discount rate which flucuates. At January 31, 2002 approximately 71% 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 ($87.8 million) and variable interest rate borrowings ($32.5 million), and the percentage of Arkansas originated finance receivables (71%), remain 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 Increase Increase Increase (Decrease) (decrease) (Decrease) in Interest Rates in Pretax Earnings in Pretax Earnings - ---------------------- ------------------- ------------------- (in thousands) (in thousands) <S> <C> <C> +2% $ 14 $ 602 +1% 7 301 -1% (7) (301) -2% (14) (602) </Table> 21
PART II ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's 2001 annual meeting was held on January 16, 2002. The record date for such meeting was November 23, 2001 on which date there were a total of 6,748,424 shares of common stock outstanding and entitled to vote. At such meeting all matters presented were approved by the Company's shareholders as follows: 1. Election of Directors: <Table> <Caption> Votes Votes Votes Director For Against Abstained - -------- ----- ------- --------- <S> <C> <C> <C> Edward R. McMurphy 6,266,234 161 28,573 T.J. Falgout, III 6,266,234 161 28,573 Robert J. Kehl 6,254,534 11,861 28,573 J. David Simmons 6,148,234 118,161 28,573 Bennie M. Bray 6,266,234 161 28,573 Nan R. Smith 6,137,484 128,911 28,573 </Table> 2. Proposal to amend the Company's Articles of Incorporation to change the Company's name to America's Car-Mart, Inc. and delete certain provisions of the Articles of Incorporation relating to the gaming business, in which the Company is no longer engaged (votes for 6,283,381, votes against 7,492, votes abstained 4,095). ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit 4.6 Agented Revolving Credit Agreement dated December 18, 2001 by and between America's Car-Mart, Inc. and Colonial Auto Finance, Inc. as borrowers, and Bank of Oklahoma, N.A., Bank of Arkansas, N.A., Superior Federal Bank, Great Southern Bank, Community Bank and Arkansas State Bank as lenders. (b) Reports on Form 8-K: During the fiscal quarter ended January 31, 2002, the Company filed a report on Form 8-K dated November 26, 2001 (event date November 9, 2001) respecting Smart Choice's sale of receivables and inventory at a public foreclosure sale. 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: March 8, 2002 23
INDEX TO EXHIBITS <Table> <Caption> EXHIBIT NUMBER DESCRIPTION - ------- ----------- <S> <C> Exhibit 4.6 Agented Revolving Credit Agreement dated December 18, 2001 by and between America's Car-Mart, Inc. and Colonial Auto Finance, Inc. as borrowers, and Bank of Oklahoma, N.A., Bank of Arkansas, N.A., Superior Federal Bank, Great Southern Bank, Community Bank and Arkansas State Bank as lenders. </Table>