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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the fiscal year ended: Commission file number:
APRIL 30, 1998 0-14939
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CROWN GROUP, INC.
(Exact name of registrant as specified in its charter)
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TEXAS 63-0851141
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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4040 N. MACARTHUR BLVD., SUITE 100, IRVING, TEXAS
(Address of principal executive offices)
75038
(Zip Code)
(972) 717-3423
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 par share
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of August 10, 1998 the aggregate market value of the voting stock held by
non-affiliates (all persons other than executive officers, directors and
holder's of 5% or more of the Registrant's common stock) of the Registrant
(7,516,394 shares) was $26,777,154.
As of August 10, 1998 there were 10,243,731 shares of the Registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Annual Report to Stockholders for the year ended
April 30, 1998 are incorporated by reference into Part II of this report, and
portions of the Registrant's definitive Proxy Statement for its Annual Meeting
of Stockholders to be held in 1998 are incorporated by reference into Part III
of this report, with the exception of information regarding executive officers
required under Item 10 of Part III, which information is included in Part I,
Item 1.
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. Certain information included in this
Form 10-K 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)
contains statements that are forward-looking, such as statements relating to
plans for future expansion and other business development activities as well as
capital spending, financing sources and the effects of regulation and
competition. Such forward-looking information involves important risks and
uncertainties that could significantly affect anticipated results and,
accordingly, such results may differ from those expressed in any
forward-looking statements made by or on behalf of the Company. These risks
and uncertainties include, but are not limited to, those relating to the
development of the Company's businesses, continued availability of lines of
credit for the Company's businesses, changes in the industries in which the
Company operates, competition, dependence on existing management, the stability
of Argentina's government, currency exchange rate fluctuations, the
repatriation of funds from Argentina, domestic or global economic conditions
(particularly in the Dallas/Ft. Worth area), changes in foreign or domestic tax
laws or the administration of such laws and changes in gaming or lending laws
or regulations.
GENERAL AND HISTORY
Crown Group, Inc. ("Crown") and collectively with its subsidiaries (the
"Company"), is a publicly traded buy-out firm which presently owns (i) 65% of
Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation
(collectively, "Paaco"), a vertically integrated used car sales and finance
company, (ii) 100% of Precision IBC, Inc. ("Precision"), a firm specializing in
the sale and rental of intermediate bulk containers, (iii) 80% of Concorde
Acceptance Corporation ("Concorde"), a sub-prime mortgage lender, (iv) 49% of
Casino Magic Neuquen S.A. ("CMN"), a casino operator in the Province of
Neuquen, Argentina, and (v) 80% of Home Stay Lodges I, Ltd. ("Home Stay"), a
partnership focusing on the development and operation of extended-stay lodging
facilities. In addition, from time to time the Company purchases and sells
small ownership interests in securities of privately held and publicly traded
firms. For a summary of the Company's operating results and other financial
data by business segment, see Note S of the Company's consolidated financial
statements appearing elsewhere in this annual report. The Company is presently
focusing on (i) the development and expansion of its existing businesses, and
(ii) the potential acquisition or development of other businesses unrelated to
its existing businesses.
Since its inception in 1983 through June 1993 the Company was engaged in
various facets of the cable and related programming businesses. During 1992
the Company sold the majority of its programming business and began exploring
new business opportunities. In June 1993 the Company made the decision to
enter the gaming business, and, as a result, proceeded to sell the balance of
its cable assets.
From June 1993, with the acquisition of 100% of St. Charles Gaming Company,
Inc. ("SCGC"), until November 1996, the Company's primary business focus was
that of owning, operating and developing casino gaming properties. SCGC owns
and operates a riverboat gaming casino located in Calcasieu Parish, Louisiana
which had been in the development stage until opening in July 1995. The
Company sold a 50% interest in SCGC in June 1995 and the remaining 50% interest
in May 1996, in each case resulting in a substantial gain.
In November 1996 the Company decided to expand its business interests beyond
casino gaming and began pursuing business opportunities in other fields. As a
result the Company has either acquired or formed a number of businesses in a
variety of industries as follows:
CMN - In June 1997 the Company acquired a 49% interest in CMN from
Casino Magic Corp. ("Casino Magic") for a purchase price of $7
million. CMN operates casinos in the cities of Neuquen and San Martin
de los Andes ("San Martin") in the Province of Neuquen, Argentina
under an exclusive concession contract.
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CONCORDE - In June 1997 the Company, along with certain newly hired
management personnel, formed Concorde. Concorde is in the business of
originating, purchasing, servicing and selling sub-prime mortgage
loans which are secured primarily by first and second liens on
residential properties. These loans are sold in privately negotiated
transactions to institutional investors and other third parties.
PAACO - In February 1998 the Company acquired 53% of the common stock
of Paaco for a purchase price of approximately $9.1 million cash.
Approximately $4.9 million of Paaco common stock was purchased
directly from Paaco, and the remaining $4.2 million was purchased from
Paaco management personnel who prior to this transaction were the sole
shareholders of Paaco. Effective May 1, 1998 the Company purchased an
additional 12% interest in Paaco from the management shareholders. The
purchase price of approximately $1.5 million was paid by issuing
375,000 shares of the Company's common stock. Paaco is a vertically
integrated used car sales and finance company which operates seven
used car dealerships in the Dallas-Ft. Worth metropolitan area. Paaco
sells, underwrites and finances used cars and trucks with a focus on
the Hispanic market.
PRECISION - In February 1998 the Company acquired 80% of the common
stock of Precision IBC, Incorporated ("Original Precision") for a
purchase price of approximately $2.4 million cash. In March 1998 the
Company acquired 80% of the common stock of M&S Tank Rentals, Inc.
("M&S") for a purchase price of $1.65 million cash. Original
Precision and M&S were subsequently merged together into a newly
formed corporation, Precision IBC, Inc. ("Precision"). Effective May
1, 1998 the Company acquired the remaining 20% of Precision by issuing
288,027 shares of the Company's common stock. Precision is in the
business of renting, selling, testing and servicing principally
stainless steel intermediate bulk containers.
CMN - GAMING
GENERAL
CMN operates casinos in the cities of Neuquen and San Martin in the Province of
Neuquen, Argentina. Prior to 1995 these casinos were operated by the
provincial government. In January 1995 CMN entered into a twelve-year
exclusive concession contract to operate these casinos. The concession
contract can be extended by CMN for an additional five years under certain
circumstances. CMN is owned 51% by Casino Magic and 49% by the Company. In
addition, the Company also owns (i) a 16.4% interest in a certain management
agreement relating to CMN, and (ii) a 49% interest in (a) slot machines and a
related lease agreement, and (b) a certain royalty agreement relating to CMN.
In addition to receiving periodic dividends from CMN's earnings, the Company
also receives its pro-rata share of fees and rentals from these agreements.
For a summary of CMN's operating results and identifiable assets, see Note C of
the Company's consolidated financial statements appearing elsewhere in this
annual report.
LOCATION, FACILITIES AND OPERATIONS
The Province of Neuquen is located approximately 400 miles east of Buenos Aires
in central Argentina. The Neuquen facility, which is leased by CMN from the
Province of Neuquen, is located at the Neuquen International Airport
approximately 15 miles from downtown Neuquen City. This facility has
approximately 1,000 dedicated parking spaces available to its patrons, and has
an additional 3,000 parking spaces available at the adjacent airport. The San
Martin facility is leased from a third party and is located in the center of
the city. Certain combined information regarding the Neuquen and San Martin
casinos is as follows:
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Gaming square feet 29,500
Slot machines 473
Table games 56
Revenues (in millions):
Calendar 1995 $ 13.0
Calendar 1996 15.9
Calendar 1997 17.5
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The casinos are open seven days a week generally from 10:00 p.m. to 5:00 a.m.
Monday through Thursday, 5:00 p.m. to 5:00 a.m. on Friday, and 2:00 p.m. to
5:00 a.m. on Saturday and Sunday. Peak admission occurs around 1:00 a.m. The
casinos offer slot machines, table games, food, beverages and gift items, as
well as live entertainment at the Neuquen casino on weekends. Table games
include roulette, black jack, punto y banca and big six.
MARKET AND MARKETING STRATEGY
Greater Neuquen City has a population of approximately 220,000 with an
estimated 600,000 people living within 120 miles while San Martin has a
population of approximately 17,000 with an estimated 150,000 people living
within 120 miles. Neuquen is one of the wealthiest Argentine provinces per
capita, principally due to energy production. The Province of Neuquen holds
approximately 40% of Argentina's proven oil and gas reserves. San Martin is
located in the Andes Mountains near one of the country's largest ski resorts,
and is well known for its trout and salmon fly fishing.
CMN's marketing strategy has been to provide the customer with an American
style gaming atmosphere. Most casinos in Argentina have a European style
gaming atmosphere. European style casinos tend to be more formal, oftentimes
with casino dealers dressed in tuxedos, little or no emphasis on slot play and
rarely provide live entertainment. Since taking over operating control of the
Neuquen and San Martin casinos in early 1995 CMN has substantially increased
the number of slot machines, eliminated admission fees, reduced the price of
food and beverages, encouraged a casual dress code and provided live
entertainment at no charge on the weekends. As a result of these changes, CMN
has dramatically increased the customer count and revenues of its two casinos.
CONCESSION CONTRACT
In January 1995 CMN entered into a twelve-year concession contract with the
Province of Neuquen providing CMN with the exclusive right to develop and
operate all gaming activities within 50 kilometers (31 miles) of each of the
Neuquen and San Martin casinos, within the boundaries of the Province, during
the concession term. The concession term will automatically be extended an
additional five years in the event CMN individually, or jointly with others,
invests at least $5 million in lodging infrastructure. The transfer of the
ownership of the concession is subject to the approval of the Province.
In connection with the granting of the concession contract CMN paid a one-time
concession fee of $9 million to the Province of Neuquen. CMN also pays the
Province $220,000 per month as a combination tax/rent payment. If CMN decides
to move from the Neuquen casino location, which is currently being leased from
the Province, it will receive a $40,000 per month reduction in its payment to
the Province. The monthly tax/rent payment is subject to increase in the event
annual net gaming revenues exceed $52.8 million.
In addition, CMN is obligated to pay all applicable federal and provincial
taxes including a 2% provincial tax on net gaming revenue, and a 33% federal
income tax on earnings. Pursuant to the concession, the Province of Neuquen
guarantees that no additional municipal or provincial taxes will be levied on
CMN's operations, and that existing provincial and municipal taxes will not be
increased.
SHAREHOLDERS' AGREEMENT
In connection with the Company's 49% purchase of CMN, the Company and Casino
Magic entered into a shareholders' agreement (the "Shareholders' Agreement")
which provides, among other things, that in the event either the Company or
Casino Magic desires to sell its interest in CMN such shareholder must first
offer to sell its interest to the other shareholder under the terms and
conditions provided in the Shareholders' Agreement. Except as expressly
permitted by the Shareholders' Agreement, neither the Company nor Casino Magic
may sell, assign, or otherwise transfer or encumber any part of the CMN stock
owned by either of them without the written consent of the other shareholder.
As required by the Shareholders' Agreement CMN has four directors on its board,
two of which are appointed by the Company and the other two are appointed by
Casino Magic. The Shareholders' Agreement requires the unanimous approval of
all shareholders prior to authorizing certain corporate actions. Those actions
requiring unanimous CMN shareholder approval include matters pertaining to (i)
the issuance or purchase of CMN stock, (ii) amendments to CMN's articles of
incorporation or by-laws, (iii) a liquidation or merger, (iv) the sale of a
substantial portion of CMN's assets, (v) material or related party contracts,
(vi) incurring debt, and (vii) amendments to the concession contract with the
Province of Neuquen.
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The Shareholders' Agreement also provides that the Company and Casino Magic may
jointly develop additional casinos in Argentina on mutually satisfactory terms,
and that neither the Company nor Casino Magic may own, operate or obtain any
material benefit from another casino in Argentina without the prior written
consent of the other shareholder.
COMPETITION
CMN's two casinos are currently the only operating casinos in the Province of
Neuquen. Since the concession contract restricts competition in the Province of
Neuquen that is within 50 kilometers (31 miles) of CMN's two casinos, CMN does
not experience significant competition in its primary market area. There are,
however, approximately 44 government-operated casino properties throughout the
country, including a casino in Chipolletti, across the Rio Negro River from the
City of Neuquen in the Rio Negro Province, and a second casino in the Rio Negro
Province approximately 30 miles southeast of the City of Neuquen.
REGULATION
The Province of Neuquen enacted a casino privatization program in order for it
to issue the twelve-year exclusive concession contract to CMN to operate the
Neuquen and San Martin casinos. These two casinos are the only casinos in the
Province of Neuquen. The casinos had previously been operated by the
provincial government. The Ministry of Finance of Argentina has adopted a
modified regulatory system for casinos, based on the regulatory system utilized
by the State of Nevada, and such regulatory system is being administered by the
Province of Neuquen. Such modified regulatory system provides rules and
regulations relating to, among other things, (i) the suitability of officers,
directors and significant shareholders, (ii) maintenance of effective controls
over operating and financial practices, and (iii) the submission of financial
reports. CMN can not predict what effect the enactment of other laws,
regulations or pronouncements that relate to casino gaming may have on the
operations of CMN.
CONCORDE - MORTGAGE BUSINESS
GENERAL
In June 1997 the Company, along with certain newly hired management personnel,
formed Concorde. Concorde is in the business of originating, purchasing,
servicing and selling sub-prime mortgage loans which are secured primarily by
first and second liens on residential properties. These loans are sold in
privately negotiated transactions to institutional investors and other third
parties, and in the future may be sold in the secondary market through
securitization programs.
Concorde focuses on lending to individuals who have impaired or unsubstantiated
credit histories and/or unverifiable income. Loans made to these individuals do
not qualify for purchase by government-sponsored agencies such as the Federal
Home Loan Mortgage Association and the Federal Home Loan Mortgage Corporation,
and thus are sometimes referred to as non-conforming or sub-prime mortgage
loans. Such loans generally provide higher yields than conforming loans. The
principal differences between conforming loans and non-conforming loans include
the applicable loan-to-value ratios, the credit and income histories of the
mortgagors, the documentation required for approval of the mortgagors, the type
of properties securing the mortgage loans, the loan sizes, and the mortgagors'
occupancy status with respect to the mortgaged properties. Second mortgage
loans are made to borrowers owning single-family homes for the purpose of debt
consolidation, home improvements, education and a variety of other purposes.
These loans generally provide a higher interest rate yield than first mortgage
loans, and are secured by a second lien on the property.
Management believes the sub-prime mortgage loan industry is fragmented and
operates inefficiently compared to the conforming loan industry, and as a
result, higher interest rate yields are available to sub-prime mortgage lenders
even after considering a higher rate of loan defaults. Management also
believes the sub-prime mortgage loan industry is less cyclical than the
conforming loan industry because the sub-prime mortgage borrower is more
"payment" sensitive rather than "interest rate" sensitive. In addition, the
federal tax code's preferential treatment of the interest expense deduction for
home mortgage loans makes it financially advantageous for many individuals to
convert their credit card and other consumer loans into a mortgage loan.
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LOAN ORIGINATIONS AND PURCHASES
Concorde began originating and purchasing mortgage loans in July 1997.
Concorde originates loans through a network of independent retail mortgage
brokers and directly through telemarketing and direct mail programs. Concorde
also purchases mortgage loans from a network of wholesale loan brokers and
correspondents, including banks and thrift institutions. Loans purchased from
wholesale loan brokers and correspondents typically require Concorde to pay a
premium, whereas Concorde generally does not pay premiums on loans originated
through retail mortgage brokers.
Prior to purchasing loans through wholesale loan brokers and correspondents,
Concorde reviews the loan packages to determine whether the packages are
complete and adhere to Concorde's underwriting guidelines. Depending on the
size of the pool of loans purchased, Concorde may engage a third-party
underwriter to reunderwrite the loans, verify the borrower's employment status,
determine the quality of the appraisal and assign a credit grade. Concorde
also analyzes the financial condition of the mortgage banker, which includes a
review of the mortgage bankers' licenses and financial statements. Upon
approval, Concorde typically requires each mortgage banker to enter into a
purchase and sale agreement that contains customary representations and
warranties regarding the loans such mortgage banker will sell to Concorde.
UNDERWRITING
Concorde's underwriting guidelines are provided to mortgage loan brokers and
mortgage bankers so they can create loan applications or bulk purchase packages
which meet such guidelines. Upon receipt of a completed loan package from a
mortgage loan broker, Concorde's underwriting staff reviews the package, which
includes the loan application, a current appraisal of the underlying collateral
property, a preliminary title report and a credit report to determine if the
proposed loan meets its underwriting guidelines. To assess the credit quality
of each loan, Concorde's underwriters consider various factors, including the
appraised value of the collateral property, the applicant's debt payment
history, credit profile and employment status, and the combined debt ratio and
loan-to-value ratio upon completion of the proposed mortgage loan. Personal
circumstances including divorce, family illnesses or deaths and temporary job
loss due to layoffs and corporate downsizing often impair an applicant's credit
record. On an exception basis mortgage loans may be made to individuals whose
credit profile does not conform to Concorde's guidelines, but only with the
approval of an officer of Concorde. Concorde does not delegate underwriting
authority to any broker or correspondent.
Property appraisals for loans originated or purchased by Concorde are conducted
by licensed, independent appraisers who are approved by Concorde. Upon receipt
of the appraisal, Concorde's underwriting staff reviews the value of the
underlying collateral based upon a full review of the appraisal. Concorde
selects its appraisers based on professional experience, education, membership
in related professional organizations and experience with the appraiser. For
wholesale and correspondent loans purchased, Concorde will typically request a
second appraisal if the original appraisal was completed by an appraiser who is
not acceptable to Concorde.
Prior to funding a loan, Concorde's underwriting staff determines the
applicant's creditworthiness and ability to service the loan. Verification of
personal financial information, credit history, and employment history is
required prior to closing the loan. Concorde has established classifications
with respect to its borrowers based upon the credit profile of such borrower
and certain other borrower characteristics. Each loan applicant is placed into
one of four letter ratings ("A" through "D", with sub-ratings within each
category), depending upon a number of factors including the applicant's credit
history and employment status. Terms of loans made by Concorde, as well as the
maximum loan-to- value ratio and debt service-to-income ratio (calculated by
dividing fixed monthly debt payments by gross monthly income), vary depending
upon the classification of the borrower. Borrowers with lower credit ratings
generally pay higher interest rates and loan origination fees. Generally, loan
applicants are required to have two years of employment with their current
employer or two years of similar business experience. Verification of
information regarding the first mortgage, if any, is also required, including
balance, status and whether local taxes, interest, insurance and assessments
are included in the applicant's monthly payment. All taxes and assessments not
included in the payment are required to be verified as current. Upon
successful completion of the underwriting process, the closing of the loan is
scheduled with an independent closing attorney or title company who is
responsible for closing the loan in accordance with Concorde's closing
procedures.
LOAN SERVICING AND COLLECTIONS
Servicing involves, among other things, collecting payments, applying such
payments of principal and interest to the appropriate loan, ensuring the
underlying collateral is properly insured, preparing reports relative to such
loans and enforcing the lender's rights with respect to the loans, including,
recovering delinquent payments, instituting foreclosures and liquidating the
underlying collateral. Management believes that servicing Concorde's own
portfolio enhances certain operating efficiencies
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and provides an additional and profitable revenue stream that is less cyclical
than the business of originating and purchasing loans. Concorde's servicing
portfolio is subject to reduction by normal monthly payments, prepayments and
foreclosures. In general, revenue from Concorde's loan servicing portfolio may
be adversely affected as interest rates decline and loan prepayments increase.
In some states in which Concorde operates, prepayment fees may be limited or
prohibited by applicable law.
Concorde sends borrowers a monthly billing statement twenty days prior to the
monthly payment due date. Although borrowers generally make loan payments
within ten to fifteen days after the due date (the "grace period"), if a
borrower fails to pay the monthly payment within the grace period, Concorde
commences collection efforts by notifying the borrower of the delinquency. If
the loan remains unpaid, Concorde will contact the borrower to determine the
cause of the delinquency and to obtain a commitment to cure the delinquency at
the earliest possible time.
As a general matter, if efforts to obtain payment have not been successful, a
pre-foreclosure notice will be sent to the borrower generally 30 days after the
due date of the next subsequently scheduled installment, providing 30 days
notice of the impending foreclosure action. During the 30-day notice period,
collection efforts continue. However, if no substantial progress has been made
in collecting delinquent payments from the borrower, foreclosure proceedings
generally begin. Generally, Concorde will have commenced foreclosure
proceedings when a loan is over 60 days delinquent.
Loans originated or purchased by Concorde are secured by mortgages, deeds of
trust, security deeds or deeds to secure debt, depending upon the prevailing
practice in the state in which the property securing the loan is located.
Depending on local law, foreclosure is effected by judicial action or
nonjudicial sale, and is subject to various notice and filing requirements. In
general, the borrower, or any person having a junior encumbrance on the real
estate, may cure a monetary default by paying the entire amount in arrears plus
other designated costs and expenses incurred in enforcing the obligation during
a statutorily prescribed reinstatement period. Generally, state law controls
the amount of foreclosure expenses and costs, including attorneys' fees, which
may be recovered by a lender. After the reinstatement period has expired
without the default having been cured, the borrower or junior lienholder no
longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale.
Although foreclosure sales are typically public sales, frequently no
third-party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus, it is likely the lender will purchase the property from the
trustee or referee for an amount equal to the principal amount outstanding
under the loan, accrued and unpaid interest and the expenses of foreclosure.
Depending upon market conditions and loan-to-value ratios, the ultimate
proceeds from the sale of the collateral may not equal Concorde's investment in
the property.
LOAN SALES AND SECURITIZATIONS
Concorde sells the majority of the loans it originates and purchases to
institutional investors and other third parties. In the future Concorde may
sell loans in the secondary market through securitization transactions. Loans
are sold periodically to provide Concorde with greater flexibility and
operating leverage than that of a traditional portfolio lender. Loans sold on
a wholesale basis are done so to third party institutions on a limited recourse
basis for cash with servicing rights released. Securitizations, on the other
hand, are loan sales in which the lender continues to be exposed to some
prepayment and credit risk as long as the underlying loan portfolio remains
outstanding.
Generally, in a securitization transaction, a lender sells mortgage loans it
has originated or purchased to a special purpose trust. The trust issues
mortgage passthrough certificates. The senior certificates, which typically
carry a coupon well below the weighted average coupon of the underlying
mortgage loans, are sold in an offering and the lender retains the
interest-only and residual certificates, which are amortized over the estimated
average life of the loan portfolio. The cash flow realized from these interest
only and residual certificates is subject to the prepayment and loss
characteristics of the underlying loans. These interest only and residual
certificates are valued at the time of the securitization. The valuation takes
into account certain loss and prepayment assumptions, servicing and other fees
to be paid and discounts the projected future net cash flow stream to its
present value. Thus, to the extent loss and prepayment rates exceed the
original assumptions used in recording the interest-only and residual
certificates, the value of such certificates will be reduced.
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Typically the special purpose trust has the benefit of a financial guaranty
policy from a monoline insurance company, which insures the timely payment of
interest and the ultimate payment of principal of the investor certificate.
Loan losses first reduce the amounts otherwise available to the interest-only
and residual certificate holders and thereafter, if necessary, the monoline
insurance company will pay any further losses experienced by the holders of the
senior certificates.
REGULATION
The operations of Concorde are subject to extensive regulation, supervision and
licensing by federal, state and local government authorities. Regulated
matters include, without limitation, loan origination, credit activities,
maximum interest rates and finance and other charges, disclosure to customers,
the terms of secured transactions, the collection, repossession and
claims-handling procedures utilized by Concorde, multiple qualification and
licensing requirements for doing business in various jurisdictions and other
trade practices.
Concorde's loan origination activities are subject to the laws and regulations
in each of the states in which those activities are conducted. Concorde's
activities as a lender are also subject to various federal laws including,
among others, the Truth in Lending Act ("TILA"), the Real Estate Settlement
Procedures Act ("RESPA"), the Equal Credit Opportunity Act of 1974, as amended
("ECOA"), the Home Mortgage Disclosure Act and the Fair Credit Reporting Act of
1970, as amended ("FCRA").
The TILA and Regulation Z promulgated thereunder contain disclosure
requirements designed to provide consumers with uniform, understandable
information with respect to the terms and conditions of loans and credit
transactions in order to give them the ability to compare credit terms. TILA
also guarantees consumers a three-day right to cancel certain credit
transactions including loans of the type originated by Concorde. Management of
Concorde believes that it is in compliance with TILA and Regulation Z in all
material respects.
Concorde is also required to comply with the ECOA, which prohibits creditors
from discriminating against applicants on the basis of race, color, sex, age or
marital status. Regulation B promulgated under ECOA restricts creditors from
obtaining certain types of information from loan applicants. It also requires
certain disclosures by the lender regarding consumer rights and requires
lenders to advise applicants of the reasons for any credit denial. In
instances where the applicant is denied credit or the rate or charge for a loan
increases as a result of information obtained from a consumer credit agency,
another statute, the FCRA, requires the lender to supply the applicant with a
name and address of the reporting agency. Concorde is also subject to RESPA
and is required to file an annual report with the Department of Housing and
Urban Development pursuant to the Home Mortgage Disclosure Act.
In the course of its business, Concorde may acquire properties as a result of
foreclosure. There is a risk that hazardous or toxic waste could be found on
such properties. In such event, under certain state and federal environmental
laws, Concorde could be held responsible for the cost of cleaning up or
removing such waste, and such cost could exceed the value of the underlying
properties.
The laws, rules and regulations applicable to Concorde are subject to amendment
and change. Changes or amendments to existing law, or new laws could make
compliance much more difficult or expensive, restrict Concorde's ability to
originate, purchase, broker or sell loans, further limit or restrict the amount
of commissions, interest and other charges earned on loans originated or sold
by Concorde, or otherwise adversely affect the business or prospects of
Concorde.
COMPETITION
The Company is a new entrant in the sub-prime mortgage lending industry, is
small compared to many of its competitors and faces intense competition in the
business of originating, purchasing and selling mortgage loans. Competition in
the industry takes many forms including convenience in obtaining a loan,
customer service, marketing and distribution channels, and amount and terms of
the loan. Traditional competitors in the financial services business include
other mortgage banking companies, commercial banks, credit unions, thrift
institutions, credit card issuers and finance companies. Most of these
competitors in the consumer finance business are substantially larger and have
considerably greater financial, technical and marketing resources than
Concorde.
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PAACO - USED CAR SALES AND FINANCE
GENERAL
Paaco is a vertically integrated used car sales and finance company that
presently operates seven used car dealerships in the Dallas-Ft. Worth
metropolitan area ("DFW Metroplex"). Paaco's dealerships target Hispanic
customers who have limited credit histories, low incomes, or past credit
problems (hereinafter referred to as "Sub-Prime Borrowers"). Paaco's
operations include the purchase, reconditioning and sale of used cars and
trucks, and the underwriting, financing and servicing of the related retail
installment contract, and, if necessary, the repossession and remarketing of a
vehicle.
INDUSTRY
Used Car Sales
Used car retail sales typically occur through franchised new car dealerships
that sell used cars or independent used car dealerships. The market for used
car sales in the United States is significant and has steadily increased over
the past five years. Paaco believes that the factors that have led to growth in
this industry include (i) substantial increases in new car prices, which have
made new cars less affordable to the average consumer relative to used cars,
(ii) the greater reliability and durability of used cars resulting from the
production of higher quality cars, and (iii) the increasing number of vehicles
coming off lease programs in recent years. Many analysts expect these trends
to continue, leading to further expansion of the used car sales market.
Paaco participates in the sub-prime segment of the independent used car sales
and finance market. This segment is serviced primarily by numerous small
independent used car dealerships that sell and finance sales of used cars to
Sub-Prime Borrowers ("Buy Here-Pay Here" dealers). Buy Here-Pay Here dealers
typically offer their customers certain advantages over more traditional
financing sources, such as broader and more flexible underwriting guidelines,
flexible payment terms (including prorating customer payments dues within one
month into several smaller payments and scheduling payments to coincide with a
customer's pay days), and the ability to make payments in person, an important
feature to many Sub-Prime Borrowers who may not have checking accounts or are
otherwise unable to make payments by the due date through the mail because of
the timing of paychecks.
Used Car Financing
The automobile financing industry is the third-largest consumer finance market
in the country, after mortgage debt and revolving credit card debt. Growth in
automobile financing has been fueled by increasing prices of both new and used
cars, which has forced more buyers to seek financing when purchasing a car.
This industry is served by such traditional lending sources as banks, savings
and loans, and captive finance subsidiaries of automobile manufacturers, as
well as by independent finance companies and Buy Here-Pay Here dealers. In
general, the industry is categorized according to the type of car sold (new
versus used) and the credit characteristics of the borrower.
Despite significant opportunities, many of the traditional lending sources do
not consistently provide financing to the sub-prime consumer finance market.
Paaco believes traditional lenders avoid this market because of its high credit
risk and the associated collection efforts. Many of the approximately 64,000
independent used car dealers are not able to obtain debt financing from
traditional lending sources such as banks, credit unions, or major finance
companies. These dealers typically finance their operations through the sale
of contract receivables at a discount.
OPERATIONS
Purchasing Vehicles
Paaco purchases the majority of its vehicles from about twelve auctions held in
cities throughout the State of Texas and in neighboring states. In addition,
Paaco purchases vehicles on a wholesale basis from dealers in and around the
DFW Metroplex. Vehicles are purchased at prices ranging from about $4,000 to
$9,000, with an average purchase price of $6,000. Prior to purchasing a
vehicle, Paaco performs certain inspections and, as permitted, test drives each
vehicle. The identity of the buyer responsible for each vehicle acquired is
tracked through Paaco's system in order for Paaco to monitor the results of
that buyer's purchases. For each buyer Paaco monitors (i) the average number
of days vehicles are held in inventory, and (ii) the cost of each vehicle in
comparison to similar models purchased by other buyers and in comparison to
NADA wholesale values.
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Reconditioning
Each vehicle purchased is taken to Paaco's centralized reconditioning center in
Irving, Texas where a variety of parts, assemblies, and systems are inspected
and, if necessary, repaired or replaced. In addition to inspecting, repairing
and preparing acquired vehicles for sale, the Irving facility performs repair
and service work on vehicles for cash paying customers and pursuant to service
contracts. More than 90% of Paaco's customers elect to purchase a service
contract when purchasing a vehicle.
Selling, Marketing and Advertising
Each lot is typically staffed with a manager, up to six bilingual sales
personnel, and several others including clerical workers, collectors, mechanics
and a porter. The lots are operated six days a week, generally between the
hours of 10:00 am and 9:00 pm. Each lot maintains an inventory level of 40 to
75 cars and trucks. Each week Paaco's sales personnel attend training classes
conducted by a full-time sales trainer. Each phase of the sales process is
rehearsed with the salesman employing trial closing questions. Salesmen are
paid principally on a commission basis.
Paaco's marketing objective is to cause Paaco to become a distinguishable brand
name among the Hispanic community that stands for value, dependability and
service. Paaco achieves this goal by (i) locating its dealerships in densely
populated Hispanic neighborhoods, (ii) frequently airing a series of
advertisements on local Hispanic television and radio stations, and (iii)
offering a thoroughly inspected and reconditioned vehicle for sale at a fair
price.
In addition to its television and radio advertising, Paaco conducts a variety
of promotional activities including a sales referral program, occasional live
entertainment at its dealerships, and distribution of promotional items.
Existing customers have historically been a good source of referrals. Paaco
also has a mascot named "Senor Paaco", a jovial Hispanic gentleman who wears an
oversized sombrero and has become very popular with the customers.
Underwriting and Finance
Paaco finances approximately 98% of the used cars and trucks sold at its
dealerships. These retail installment contracts are serviced exclusively by
Paaco. In connection with such financing, Paaco requires an acceptable deal
structure and credit profile. The required deal structure typically involves a
down payment between 10% and 15% of the vehicles purchase price, a term not to
exceed 36 months, an acceptable interest rate and payment terms that coincide
with the customer's pay dates.
Upon the customer agreeing to a specific deal structure, the salesmen turns the
potential customer over to credit personnel who obtain a credit application.
Paaco's credit personnel reviews and verifies the credit information including
employment, residence and credit history, income information and personal
references. Upon completion of the review and verification process, each deal
is forwarded to a centralized deal desk where the proposed transaction is
reviewed for adherence to Paaco's underwriting and financing guidelines.
Collections
Paaco believes a key element in the success of its business is its effective
collections department. Upon completion of a financed sale pertinent data is
entered into Paaco's computer system. Paaco's bilingual collection staff
utilizes its collection software to monitor the payment activity of its
installment contracts. This software provides its collections staff with
reports stratified principally by the number of days a payment is past due. If
a customer's payment is late, collection personnel will contact the customer by
phone within three days (one day if its the first payment) of the scheduled due
date. Paaco personnel document pertinent information (promises to pay,
alternative payment schedules, etc.) from each phone contact with a customer.
The collections staff works in teams and team members can receive bonuses based
upon the results of their collection efforts. Paaco monitors the results of
its collections department based upon a number of quantitative criteria
including (i) the number of calls placed, contacts made and promises received,
(ii) the gross number of payments and dollars collected each week, (iii) the
average number of days past due, (iv) installment contract agings, and (v)
static pool analysis.
If a customer becomes seriously delinquent in his payments and management
determines that timely collection of future payments is not probable, Paaco
will take steps to repossess the vehicle. Of the vehicles repossessed, many
are returned to Paaco by the customer on a voluntary basis. Other
repossessions are performed using third party repossession agents. The majority
of repossessed vehicles are reconditioned and resold through Paaco's
dealerships.
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COMPETITION
The used automotive retailing industry is highly competitive and fragmented.
Presently there are an estimated 23,000 franchised automobile dealers and 64,000
independent used vehicle dealers. In recent years a number of large companies
including Auto Nation USA and Driver's Mart have entered the used car sales
business or announced plans to develop large used car sales operations.
Management believes these operations do not provide significant competition for
Paaco as they tend to sell higher priced vehicles to consumers with stronger
credit histories. Paaco competes principally with other Buy Here-Pay Here
dealers, and to a lesser degree with (i) the used vehicle retailing operation of
franchised automobile dealerships, (ii) independent used vehicle dealers, and
(iii) individual consumers who sell used vehicles in private transactions.
Paaco believes the principal competitive factors in the sale of its used
vehicles include (i) the availability of financing to Sub-Prime Borrowers, (ii)
the breadth and quality of vehicle selection, (iii) the availability of popular
vehicles, (iv) pricing, (v) the convenience of a dealership's location, (vi)
customer service, and (vii) the ability to communicate in Spanish and English
with its customers. Paaco believes that its dealerships are competitive in
each of these areas.
REGULATION AND LICENSING
Paaco's operations are subject to ongoing regulation, supervision, and
licensing under various federal, state, and local statues, ordinances, and
regulations. These laws include the Truth In Lending Act, the Equal Credit
Opportunity Act and the Fair Credit Reporting Act of 1970. Among other things,
these laws required that Paaco obtain and maintain certain licenses and
qualifications, limit or prescribe terms of the contracts that Paaco
originates, require specified disclosures to customers, limit Paaco's right to
repossess and sell collateral, and prohibit Paaco from discriminating against
customers on the basis of certain characteristics including age, race and
gender.
Paaco typically charges fixed interest rates in excess of traditional finance
companies on the contracts originated at its dealerships. The State of Texas
imposes limits on the interest rates the Paaco may charge on its loans, with
such limits generally being a function of the age of the vehicle.
PRECISION - IBC RENTALS AND SALES
GENERAL
Precision is in the business of renting and selling intermediate bulk
containers ("IBC's" or "tanks") to petroleum related, industrial and
manufacturing concerns. Precision's tanks generally come in two sizes (350
gallon and 550 gallon) and are used primarily to store liquids in bulk. These
liquids include industrial and textile chemicals (surfactants, soaps, dyes and
brighteners), solvents, lubricants, water clarifiers, corrosive inhibitors,
contract packaging items (shampoo), and food items (mayonnaise, ketchup,
barbecue sauce, honey, syrup and concentrate). Precision also performs certain
tank maintenance and testing services, and sells spare parts such as valves and
lids. Precision operates from facilities in Fairhope, Alabama and Lafayette,
Louisiana and presently has a fleet of approximately 4,800 stainless steel
tanks.
MARKET AND MARKETING
Precision's primary focus is on renting tanks. As a secondary focus Precision
sells new and used tanks and related spare parts. A large portion of tank
rentals and sales comes from existing customers and referrals. On occasion
Precision mails marketing literature to a list of potential customers.
Precision's sales personnel also attend certain industry trade shows and make
sales calls to existing and potential customers. Presently, Precision has
about 100 customers in 20 states throughout the United States. Precision's
customers are principally in the oil field production and drilling, chemical,
textile and manufacturing industry segments.
A portion of Precision's new business comes from industrial and manufacturing
concerns that previously used 55 gallon polyethylene or carbon steel drums
("drums") to store liquids in bulk. Management believes its stainless steel
350 and 550 gallon tanks are far superior to drums in many respects. In
particular, drums are expensive to dispose of as a result of the
environmentally damaging materials they sometimes contain. Drums are also more
difficult to handle and dispense from, have more problems with leaks, and
require more space to store the same amount of liquid. Typically fluids are
extracted from drums via a removable pump, which may require cleaning prior to
placing it into another drum. Tanks, on the other hand, discharge fluids
through a valve located on the bottom of the tank which operates on the
principal of gravity.
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Management believes there is a trend of drums being replaced by reusable and
returnable 350 and 550 gallon tanks, and that Precision is in a position to
benefit from those making the transition.
OPERATIONS
Tanks are purchased principally from two suppliers, although other
manufacturing sources are available. Precision maintains a supply of tanks,
valves and lids to meet the needs of its customers. The lids are also sold to
tank manufacturers as a component in making new tanks. These lids are
manufactured by Precision utilizing certain subcontractors, while valves are
manufactured overseas according to Precision's specifications.
Periodically Precision receives tanks back from customers who are returning
them from rental. As necessary, these tanks are cleaned and repaired, and
either returned to the rental fleet, or sold as a used tank. Precision also
performs testing services on a fee basis for its customers. The U.S.
Department of Transportation regulations require that Precision's tanks be
tested every 30 months if they are being used to transport regulated materials
(flammables, corrosives, methanol) over public roadways. This certification is
the customer's responsibility to maintain. For some customers Precision
performs maintenance services on its tanks. For a fee Precision will change
valves and lids as needed and perform external cleanings.
COMPETITION
Precision competes with other companies specializing in the sale and rental of
tanks. Precision believes it is the second largest supplier of tanks in the
country. Competitive factors in the industry include price, availability,
service, product quality and convenience. Precision believes it competes
effectively with other tank suppliers.
Precision's tanks also compete with 55 gallon drums. Precision's 350 and 550
gallon tanks are considerably more expensive than drums. However, Precision
believes its tanks have certain competitive advantages over drums, including
their (i) greater durability and ease in storing and dispensing liquids, (ii)
longer useful life, and (iii) higher space efficiencies.
HOME STAY - LODGING
In May 1998 the Company along with a 20% minority partner formed Home Stay to
develop and operate extended-stay lodging facilities in the Southeastern United
States. Presently, Home Stay has two facilities under construction in the
Pensacola, Florida area. Each of these facilities will contain 120 units. The
total cost of these two facilities is estimated to be approximately $6.2
million, of which $5.4 million is being financed by a local bank. If the
initial two properties perform as anticipated, the Company expects to build
additional properties throughout the Southeastern United States.
Home Stay will target a market niche in the lodging industry which it believes
is currently underserved by other extended-stay chains. Its facilities will be
designed to offer quality accommodations for guests, at rates generally lower
than are charged by most other extended-stay lodging providers. Weekly lodging
rates are expected to average less than $150 for single occupancy and less than
$175 for double occupancy. Management expects Home Stay customers to primarily
include business travelers (particularly those with limited expense accounts),
blue-collar workers on temporary assignments, persons between domestic
situations, and persons relocating or purchasing a home, with most guests
staying for multiple weeks.
Each Home Stay studio unit will contain 288 square feet and will provide a
variety of features which are attractive to the extended-stay guest, including
a fully-equipped kitchenette, weekly housekeeping, color television with cable
or satellite hook-up, coin-operated laundromat, and telephone service with
voice mail messaging. In order to control operating costs and offer attractive
rental rates, no restaurants, swimming pools, or recreational facilities will
be provided. Management plans to locate Home Stay facilities near commercial,
industrial and/or military centers where the employment base consists largely
of lower to moderate income workers, or where large numbers of people are
living on modest pensions. The initial properties will be managed by the
Windham Company, an experienced property manager for hotels, motels and
apartments.
REQUIRED DIVESTITURE OF COMMON STOCK
The Articles of Incorporation of the Company provide that any shareholder of
the Company who is found to be unsuitable by any gaming regulatory authority
with jurisdiction over the Company's operations, may, in the discretion of the
Board of
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Directors, be required to divest the shares of Company stock owned by such
person within forty-five (45) days from the date on which the Company notifies
the disqualified holder of the regulatory authority's determination of
unsuitability, or the Company will have the right to purchase such stock at a
price equal to its fair market value, as defined in the Articles of
Incorporation, less twenty-five percent (25%).
In addition, the Articles of Incorporation require that the Company maintain
compliance under the federal Merchant Marine Act of 1936 and the federal
Shipping Act of 1916, as amended, restricting the amount of shares of Company
common stock which may be held by non-U.S. citizens. The Company may require
foreign persons to divest their shares of Company common stock in accordance
with the provisions of the Articles of Incorporation in the event that the
Company determines that it is in violation of either of these Acts.
EMPLOYEES
As of April 30, 1998 the Company, including its consolidated subsidiaries
employed approximately 275 persons full time. None of the Company's employees
are covered by a collective bargaining agreement and the Company believes that
its employee relations are satisfactory.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
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NAME AGE POSITION WITH THE COMPANY
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<S> <C> <C>
Edward R. McMurphy . . . . . . . . . . . . . . . 47 Chairman of the Board,
President and Chief Executive Officer
Tilman J. Falgout, III . . . . . . . . . . . . . 49 Executive Vice President,
General Counsel and Director
Mark D. Slusser . . . . . . . . . . . . . . . . . 40 Chief Financial Officer,
Vice President Finance and Secretary
</TABLE>
EDWARD R. MCMURPHY, has served as President of the Company since July 1984 and
as Chief Executive Officer since January 1988. He has been a director of the
Company since its inception in April 1983. Prior to and during his involvement
with the Company, Mr. McMurphy served as President of Marion Properties, Inc.,
a real estate investment and development company, from 1979 to 1986.
TILMAN J. FALGOUT, III, has served as Executive Vice President and General
Counsel of the Company since March 1995 and as a director of the Company since
September 1992. From 1978 through June 1995, Mr. Falgout was a partner in the
law firm of Stumpf & Falgout, Houston, Texas.
MARK D. SLUSSER, has served as Chief Financial Officer of the Company since
October 1989 and as Secretary since April 1990. From 1981 until joining the
Company, Mr. Slusser was employed by Ernst & Young LLP, where he held various
positions in the Audit Department including Senior Manager.
ITEM 2. PROPERTIES
As of April 30, 1998 the Company owned the properties on which two of its
automobile dealerships are located, and a 3.5 acre tract of land in Louisiana
where it plans to build an office/warehouse facility that will house a portion
of Precision's IBC business. In addition, the Company leases nine other
facilities, five of which are automobile dealerships and four are office
facilities. The Company's corporate headquarters are located in approximately
6,000 square feet of leased space in Irving, Texas.
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ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company is a party or to
which its properties are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company during
the fourth quarter ended April 30, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this item is included in the Company's 1998 Annual
Report to Stockholders ("1998 Annual Report") under the heading "Common Stock
Information, Dividends and Related Stockholder Matters" and such information is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included in the Company's 1998 Annual
Report under the heading "Selected Financial Data" and such information is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is included in the Company's 1998 Annual
Report under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and such information is incorporated
herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements included in the Company's 1998 Annual Report are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
Except as to information with respect to executive officers which is contained
in a separate heading under Item 1 to this Form 10-K, the information required
by Part III of Form 10-K is, pursuant to General Instruction G(3) of Form 10-K,
incorporated by reference from the Company's definitive proxy statement to be
filed pursuant to Regulation 14A for the Company's Annual Meeting of
Stockholders to be held in 1998. The Company will, within 120 days of the end
of its fiscal year, file with the Securities and Exchange Commission a
definitive proxy statement pursuant to Regulation 14A.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors and executive officers of the registrant
is set forth in the Proxy Statement to be delivered to stockholders in
connection with the Company's Annual Meeting of Stockholders to be held in 1998
(the "Proxy Statement") under the headings "Election of Directors" and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934," which
information is incorporated herein by reference. The name, age and position of
each executive officer of the Company is set forth under the heading "Executive
Officers" in Item 1 of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Executive Compensation," which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial owners and
management is set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management," which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transactions is
set forth in the Proxy Statement under the heading "Certain Transactions,"
which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1). FINANCIAL STATEMENTS AND ACCOUNTANT'S REPORT
The following financial statements and accountant's report included in
the Company's 1998 Annual Report are incorporated herein by reference
in Item 8 of this report:
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Report of Independent Accountants
Consolidated Balance Sheets as of April 30, 1997 and 1998
Consolidated Statements of Operations for the fiscal years
ended April 30, 1996, 1997 and 1998
Consolidated Statements of Cash Flows for the fiscal years
ended April 30, 1996, 1997 and 1998
Consolidated Statements of Stockholders' Equity for the fiscal
years ended April 30, 1996, 1997 and 1998
Notes to Consolidated Financial Statements
(a)(2). FINANCIAL STATEMENT SCHEDULES
Schedule I - Condensed Financial Information of Crown Group, Inc.
(Parent Company Only)
The other financial statement schedules are omitted since the required
information is not present, or is not present in amounts sufficient to
require submission of the schedules, or because the information
required is included in the consolidated financial statements and notes
thereto.
(a)(3). EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
2.1 Purchase Agreement dated as of May 31, 1997 by and among the Company
and Casino Magic Corp. ("Casino Magic"). (11)
2.2 Stock Purchase Agreement dated as of February 1, 1998 by and among
Paaco Automotive Group, Inc., Premium Auto Acceptance Corporation,
Larry Lange, Daniel Chu, Ted Lange and Crown Group, Inc. (13)
2.3 Stock Purchase Agreement dated February 3, 1998 by and among Van P.
Finger and Crown Group, Inc. (13)
3.1 Articles of Incorporation of the Company (formerly SKAI, Inc.). (3)
3.1.1 Articles of Merger of the Company and SKAI, Inc. filed with the
Secretary of State of the State of Alabama on September 29, 1989. (3)
3.1.2 Articles of Merger of the Company and SKAI, Inc. filed with the
Secretary of State of the State of Texas on October 10, 1989. (3)
3.1.3 Articles of Amendment filed with the Secretary of State of the State of
Texas on October 7, 1993. (8)
3.1.4 Articles of Amendment filed with the Secretary of State of the State of
Texas on October 5, 1994. (8)
3.1.5 Articles of Amendment filed with the Secretary of State of the State of
Texas on October 2, 1997. (1)
3.2 By-Laws dated August 24, 1989. (4)
4.1 Specimen stock certificate. (9)
4.2 Form of Registration Rights Agreement dated January 5, 1994 by and
between the Company and Dabney-Resnick, Inc. (8)
4.2.1 Form of Stock Purchase Warrant dated January 5, 1994 allowing
Dabney-Resnick, Inc. to purchase shares of common stock of the Company.
(8)
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4.3 Form of Registration Rights Agreement dated January 5, 1994 by and
between the Company and Sun Life Insurance Company of America, Inc. (8)
4.3.1 Form of Stock Purchase Warrant dated January 5, 1994 allowing Sun Life
Insurance Company of America, Inc. to purchase shares of common stock
of the Company. (8)
4.4 Form of Stock Purchase Warrant dated March 18, 1994 granting
Dabney-Resnick, Inc. the right to purchase 120,000 shares of Common
Stock of the Company. (8)
4.5 Stock Purchase Warrant dated October 6, 1994 granting Don Farris the
right to purchase 50,000 shares of Common Stock of the Company. (8)
4.6 Stock Purchase Warrant dated June 2, 1994 granting Gerard M. Jacobs the
right to purchase 50,000 shares of Common Stock of the Company. (8)
4.7 Loan and Security Agreement by and among Finova Capital Corporation,
Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation
including the Eighth Amended and Restated Schedule to Loan and Security
Agreement and the Eighth Amended and Restated Promissory Note. (1)
10.1 1986 Incentive Stock Option Plan. (2)
10.1.1 Amendment to 1986 Incentive Stock Option Plan adopted September 27,
1990. (5)
10.2 1991 Non-Qualified Stock Option Plan. (6)
10.3 1997 Stock Option Plan. (12)
10.4 Form of Indemnification Agreement between the Company and Edward R.
McMurphy, Mark D. Slusser, T.J. Falgout, III, David J. Douglas, J.
David Simmons, Gerald L. Adams, Robert J. Kehl, Gerard M. Jacobs and
Michael B. Cloud. (7)
10.5 Form of Severance Agreement dated July 2, 1996 between the Company and
Edward R. McMurphy, T.J. Falgout, III and Mark D. Slusser. (10)
10.6 Shareholders' Agreement dated as of May 31, 1997 between the Company
and Casino Magic. (11)
10.7 Shareholders' Agreement dated as February 1, 1998 by and among Larry
Lange, Daniel Chu, Ted Lange and Crown Group, Inc. (13)
13.1 Annual Report to Stockholders for the fiscal year ended April 30, 1998.
(1)
21.1 Subsidiaries of Crown Group, Inc. (1)
23.1 Consent of Independent Accountants. (1)
23.2 Opinion of Independent Accountants on Financial Statement Schedule.
24.1 Power of Attorney of Edward R. McMurphy. (1)
24.2 Power of Attorney of Tilman J. Falgout, III. (1)
24.3 Power of Attorney of David J. Douglas. (1)
24.4 Power of Attorney of J. David Simmons. (1)
24.5 Power of Attorney of Gerald L. Adams. (1)
24.6 Power of Attorney of Gerard M. Jacobs. (1)
24.7 Power of Attorney of Robert J. Kehl. (1)
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27.1 Financial Data Schedule. (1)
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(1) Filed herewith.
(2) Previously filed as an Exhibit to the Company's Registration Statement
on Form 10, as amended (No. 0-14939) and incorporated herein by
reference.
(3) Previously filed as an Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended October 31, 1989 and incorporated
herein by reference.
(4) Previously filed as an Exhibit to the Company's Annual Report on Form
10-K for the year ended April 30, 1990 and incorporated herein by
reference.
(5) Previously filed as an Exhibit to the Company's Annual Report on Form
10-K for the year ended April 30, 1991 and incorporated herein by
reference.
(6) Previously filed as an Exhibit to the Company's Annual Report on Form
10-K for the year ended April 30, 1992 and incorporated herein by
reference.
(7) Previously filed as an Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended July 31, 1993 and incorporated herein
by reference.
(8) Previously filed as an Exhibit to the Company's Registration Statement
on Form S-1, as amended, initially filed with the Securities and
Exchange Commission on May 31, 1994 (No. 33-79484) and incorporated
herein by reference.
(9) Previously filed as an Exhibit to the Company's Annual Report on Form
10-K for the year ended April 30, 1994 and incorporated herein by
reference.
(10) Previously filed as an Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1997 and incorporated
herein by reference.
(11) Previously filed as an Exhibit to the Company's Current Report on Form
8-K dated June 2, 1997 and incorporated herein by reference.
(12) Previously filed as an Exhibit to the Company's Registration Statement
on Form S-8, as amended, initially filed with the Securities and
Exchange Commission on October 20, 1997 (No. 333-38475) and
incorporated herein by reference.
(13) Previously filed as an Exhibit to the Company's Current Report on Form
8-K dated February 1, 1998 and incorporated herein by reference.
(b) REPORTS ON FORM 8-K
During the fiscal quarter ended April 30, 1998 the Company filed reports on Form
8-K and 8-K/A as follows:
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EVENT
FORM DATE DESCRIPTION OF EVENT
- ------------------ ----------------- -------------------------------------------------------
<S> <C> <C>
8-K February 1, 1998 Acquisition of 53% of Paaco and 80% of Precision.
8-K/A February 1, 1998 Amendment No. 1 to Form 8-K dated February 1, 1998
including the financial statements of Paaco and
pro-forma financial information of the Company.
8-K April 15, 1998 Ownership of Inktomi stock.
</TABLE>
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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.
Dated: August 11, 1998 By: /s/ Edward R. McMurphy
------------------------------------
Edward R. McMurphy
President and Chief Executive
Officer (principal executive
officer)
Dated: August 11, 1998 By: /s/ Mark D. Slusser
------------------------------------
Mark D. Slusser
Vice President Finance and Chief
Financial Officer (principal
financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman of the Board, President August 11, 1998
- ------------------------------------- and Chief Executive Officer
Edward R. McMurphy
* Executive Vice President, August 11, 1998
- -------------------------------------- General Counsel and Director
Tilman J. Falgout, III
* Director August 11, 1998
- --------------------------------------
David J. Douglas
* Director August 11, 1998
- --------------------------------------
John David Simmons
* Director August 11, 1998
- --------------------------------------
Gerald L. Adams
* Director August 11, 1998
- --------------------------------------
Gerard M. Jacobs
* Director August 11, 1998
- --------------------------------------
Robert J. Kehl
* By /s/ Mark D. Slusser August 11, 1998
---------------------------------
Mark D. Slusser
As Attorney-in-Fact
Pursuant to Powers of
Attorney filed herewith
</TABLE>
19
<PAGE> 20
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF CROWN GROUP, INC. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEET
APRIL 30, 1998
<TABLE>
<S> <C>
Assets:
Cash and cash equivalents $ 5,030,861
Marketable equity securities 4,742,180
Receivables from subsidiaries 4,640,718
Investment in subsidiaries 17,590,658
Investment in CMN and related assets, net 6,606,114
Other 688,329
-----------
$39,298,860
===========
Liabilities and stockholders' equity:
Accounts payable and accrued liabilities $ 373,165
Payables to subsidiaries 2,641,637
Deferred tax liability 1,251,805
-----------
Total liabilities 4,266,607
-----------
Stockholders' equity 35,032,253
-----------
$39,298,860
===========
</TABLE>
CONDENSED STATEMENT OF OPERATION
FOR THE YEAR ENDED APRIL 30, 1998
<TABLE>
<S> <C>
Revenues:
Interest income $ 1,081,583
Interest income from subsidiaries 387,615
Interest, fees and rentals from CMN 680,697
Other 388,827
-----------
2,538,722
-----------
Costs and expenses:
Selling, general and administrative 2,924,675
Interest expense 13,444
Depreciation and amortization 557,318
-----------
3,495,437
-----------
Other income:
Equity in earnings of CMN 926,598
Equity in loss of subsidiaries (25,341)
Gain on sale of securities 38,258
-----------
939,515
-----------
Loss before income taxes (17,200)
Benefit for income taxes 365,295
-----------
Net income $ 348,095
===========
</TABLE>
See accompanying notes to condensed financial information.
<PAGE> 21
SCHEDULE I (CONTINUED)
CROWN GROUP, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED APRIL 30, 1998
<TABLE>
<S> <C>
Operating activities:
Net income $ 348,095
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization 557,318
Amortization of discount (252,765)
Deferred income taxes 305,341
Gain on sale of assets (373,999)
Gain on sale of securities (38,258)
Equity in earnings of CMN (926,598)
Equity in loss of subsidiaries 25,341
Changes in assets and liabilities, net of transactions:
Other 86,139
Accounts payable and accrued liabilities (169,203)
Income taxes payable (271,525)
-----------
Net cash used by operating activities (710,114)
-----------
Investing activities:
Purchase of assets (788,784)
Sale of assets 2,191,861
Purchase of securities (5,551,714)
Sale of securities 3,772,792
Advances to subsidiaries (4,618,220)
Repayments from subsidiaries 13,732,772
Collection of notes receivable 1,050,750
Formation of Concorde (2,000,800)
Purchase of CMN and related assets (7,000,001)
Purchase of Paaco (9,174,212)
Purchase of Precision and M&S (4,032,389)
-----------
Net cash used by investing activities (12,417,945)
-----------
Financing activities:
Issuance of common stock 93,282
Purchase of common stock (3,052,322)
-----------
Net cash used by financing activities (2,959,040)
-----------
Decrease in cash and cash equivalents (16,087,099)
Cash and cash equivalents at: Beginning of year 21,117,960
-----------
End of year $ 5,030,861
===========
</TABLE>
See accompanying notes to condensed financial information.
<PAGE> 22
SCHEDULE I (CONTINUED)
CROWN GROUP, INC. (PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION
A - GUARANTEES
Crown Group, Inc. ("Crown") has made the following guarantees with respect
to its subsidiaries:
<TABLE>
<CAPTION>
Amount
Facility Drawn at Maximum
Debtor Amount April 30, 1998 Guarantee
------ ------ -------------- ---------
<S> <C> <C> <C>
Concorde $20 million $11.1 million $5.0 million
Home Stay 5.4 million -- 5.4 million
</TABLE>
In addition, Crown has entered into a reimbursement agreement with the
minority shareholders of Paaco who have guaranteed Paaco's debt with a
specific lender. At April 30, 1998 the amount of debt guaranteed by such
minority shareholders was approximately $26 million. To the extent such
minority shareholders pay monies pursuant to such guaranties, Crown has
agreed to reimburse the minority shareholders 65% thereof.
B - ELIMINATION OF BALANCES AND TRANSACTIONS WITH SUBSIDIARIES
As of April 30, 1998 the following balances were eliminated in the
consolidated financial statements of Crown:
<TABLE>
<S> <C>
Receivables from subsidiaries $ 4,640,718
Investments in subsidiaries 17,590,658
Payables to subsidiaries 2,641,637
</TABLE>
For the year ended April 30, 1998 the following transactions were
eliminated in the consolidated financial statements of Crown:
<TABLE>
<S> <C>
Interest income $ 387,615
</TABLE>
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<S> <C>
3.1.5 Articles of Amendment filed with the Secretary of State of the
State of Texas on October 2, 1997.
4.7 Loan and Security Agreement by and among Finova Capital Corporation, Paaco Automotive
Group, Inc. and Premium Auto Acceptance Corporation including the Eighth Amended and
Restated Schedule to Loan and Security Agreement and the Eighth Amended and Restated
Promissory Note.
13.1 Annual Report of Stockholders for the fiscal year ended April 30, 1998.
21.1 Subsidiaries of Crown Group, Inc.
23.1 Consent of Independent Accountants.
23.2 Opinion of Independent Accountants on Financial Statement Schedule.
24.1 Power of Attorney of Edward R. McMurphy.
24.2 Power of Attorney of Tilman J. Falgout, III.
24.3 Power of Attorney of David J. Douglas.
24.4 Power of Attorney of J. David Simmons.
24.5 Power of Attorney of Gerald L. Adams.
24.6 Power of Attorney of Gerard M. Jacobs.
24.7 Power of Attorney of Robert J. Kehl.
27.1 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 3.1.5
ARTICLES OF AMENDMENT
of
CROWN CASINO CORPORATION
I.
The name of the Corporation is Crown Casino Corporation.
II.
The Articles of Incorporation of Crown Casino Corporation shall be amended
by deleting Article I thereof in its entirety and substituting the following in
lieu thereof:
"Article One
The name of the Corporation is Crown Group, Inc."
III.
The amendment set forth in these Articles of Amendment was adopted by the
stockholders of the Corporation on October 1, 1997.
IV.
On August 15, 1997, the record date for determining stockholders entitled
to vote at the stockholders' meeting there were 9,935,785 shares of common stock
outstanding and entitled to vote on the amendment to the Articles of
Incorporation.
V.
The amendment set forth in these Articles of Amendment received the number
of votes in favor of and against its adoption as indicated below:
<TABLE>
<CAPTION>
Votes in Votes
Favor Against
----- -------
<S> <C>
9,211,650 37,567
</TABLE>
IN WITNESS WHEREOF, the Corporation has caused the Articles of Amendment to
be executed by its president, a duly authorized officer of the Corporation on
this 1st day of October, 1997.
CROWN CASINO CORPORATION
By: /s/ EDWARD R. McMURPHY
-----------------------------
Edward R. McMurphy
President and Chief Executive
Officer
<PAGE> 1
EXHIBIT 4.7
- --------------------------------------------------------------------------------
FINOVA Capital Corporation
Rediscount Finance
LOAN AND SECURITY AGREEMENT
(MULTIPLE BORROWERS)
BORROWER: PREMIUM AUTO ACCEPTANCE CORPORATION
ADDRESS: 5420 LBJ FREEWAY, SUITE 240
DALLAS, TEXAS 75240
BORROWER: PAACO, INC.
ADDRESS: 5420 LBJ FREEWAY, SUITE 240
DALLAS, TEXAS 75240
DATE: DECEMBER 14, 1995
================================================================================
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between
FINOVA CAPITAL CORPORATION, a Delaware corporation ("Lender"), whose corporate
address is Dial Tower, Dial Corporate Center, Phoenix, Arizona 85077 and whose
Rediscount Finance Office address is 13355 Noel Road, Suite 800, Dallas, Texas
75240 and the borrowers named above (collectively referred to herein as the
"Borrowers" and singularly as "Borrower"), all of whose chief executive offices
are located at the above addresses (collectively referred to herein as
"Borrowers' Address"). Each Borrower shall be separately defined as set forth in
the Schedule. All representations, warranties, covenants, agreements,
undertaking or other obligations of Borrowers as set forth in this Agreement and
all other Loan Documents are made by each Borrower as if separately set forth
for each Borrower in this Agreement and the other Loan Documents. All financial
covenants and ratios set forth herein shall be applied to the Borrowers in the
aggregate.
1. DEFINITIONS
1.1. ACCOUNT DEBTOR. The term "Account Debtor" shall mean any person or
persons that are an obligor in any contractual arrangement with Borrower or any
co-signor in respect of any Receivable.
1.2. AGREEMENT. The term "Agreement" shall mean this Loan and Security
Agreement and any amendment, modifications or extension hereof.
1.3. BUSINESS DAY. The term "Business Day" shall mean a day, other than a
Saturday or Sunday, on which
-1-
<PAGE> 2
commercial banks are open for business to the public in Phoenix, Arizona and New
York, New York.
1.4. CHARGE OFFS. The term "Charge Offs" shall mean the amount due
(including the principal balance plus all earned fees and charges) pursuant to a
Receivable on the date that Borrower charges off such Receivable as
uncollectible, pursuant to Borrower's policies and/or procedures.
1.5. CODE. The term "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
1.6. COLLATERAL. The term "Collateral" shall have the meaning set forth in
Section 3.1. hereof.
1.7. COLLATERAL RECOVERY RATE. The term "Collateral Recovery Rate" shall
mean, for any period of determination, (i) the total cash collected from all
Receivables (including but not limited to all cash proceeds from charge off
recoveries), divided by (ii) the sum of (a) the Included Rebates plus (b) the
total cash collected from all Receivables (excluding all cash proceeds from
charge off recoveries) plus (c) the aggregate of all Charge Offs for that
period.
1.8. COMMONLY CONTROLLED ENTITY. The term "Commonly Controlled Entity"
shall mean an entity, whether or not incorporated, which is under common control
with Borrower within the meaning of Section 414(b) or (c) of the Code.
1.9. DEFAULT. The term "Default" shall mean an event which with the passage
of time or notice or both would constitute an Event of Default (as defined in
Section 7.1).
1.10. DISTRIBUTIONS. The term "Distributions" shall mean any dividends or
other distribution of earnings to Borrower's shareholders, loans to officers,
directors, affiliates or shareholders.
1.11. ELIGIBLE RECEIVABLES. The term "Eligible Receivables" shall mean
those Receivables of Borrower that are acceptable to Lender, in its reasonable
discretion, and, in each case, that meet, at a minimum, all of the following
requirements: (i) arise from the extension of credit, the sale and delivery of
vehicles or the rendering of services in conjunction with the sale of such
vehicles in the ordinary course of Borrower's business; (ii) represent a valid
and binding obligation enforceable in accordance with its terms for the amount
outstanding thereof without offset, counterclaim or defense (whether actual or
alleged); (iii) comply in all respects with all applicable laws and regulations,
including, but not limited to, truth in lending and credit disclosure laws and
regulations; (iv) all amounts and information appearing thereon or furnished to
Lender in connection therewith are true and correct and undisputed by the
Account Debtor thereon or any guarantor thereof; (v) Borrower and the Account
Debtor are not engaged in any litigation regarding nonpayment of the Receivable;
(vi) to the best knowledge of Borrower neither the Account Debtor thereon nor
any guarantor thereof is subject to any receivership, insolvency or bankruptcy
proceeding, is insolvent or has failed to meet its debts as they mature; (vii)
Borrower has good and sufficient right to pledge, assign and deliver the
Receivables free from all liens, claims, encumbrances or security interests
whatsoever; (viii) neither the Account Debtor thereon nor any guarantor thereof
is employed by, related to or affiliated with Borrower; (ix) to the best
knowledge of Borrower no condition exists that materially or adversely affects
the value of the Receivables or jeopardizes any security therefor; (x) if the
Receivables arise from the sale of goods, such goods have been delivered and
accepted by the Account Debtor and are still subject to the lawful possession
and control of the Account Debtor and have not been otherwise returned to or
repossessed by Borrower; (xi) is not a renewal or extension of any Receivable
previously ineligible hereunder; (xii) the original principal amount thereof
does not exceed the Maximum Amount of an Eligible Receivable (Schedule Sections
1.11.A.) and the original term thereof does not exceed the Maximum Term of an
Eligible Receivable (Schedule Section 1.11.B.); (xiii) meets the Eligibility
Test and has been reported to Lender in compliance with the Aging Procedures
(Schedule Section 1.11.C.); (xiv) is not evidenced by a judgment or has not been
reduced to judgment; (xv) is not an open account; (xvi) is evidenced by a
written payment agreement, bearing interest or containing a time price
differential, which has been executed by the Account Debtor; (xvii) the Account
Debtor thereunder is a legal resident of the United States; and (xviii) payments
under the Receivable are to be made in United States dollars.
1.12. ERISA. The term "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended from time to time.
1.13. GAAP. The term "GAAP" shall mean generally accepted accounting
principles and other standards as promulgated by the American Institute of
Certified Public Accountants.
1.14. GUARANTOR. The term "Guarantor" shall mean any person or persons who
execute a guaranty agreement in favor of Lender guaranteeing the repayment of
the Borrower's Indebtedness to Lender (Schedule Section 4.5).
1.15. GUARANTY AGREEMENT. The term "Guaranty Agreement" shall mean that
certain agreement executed by the Guarantor, in a form and substance approved by
Lender.
-2-
<PAGE> 3
1.16. GOVERNING RATE. The term "Governing Rate" shall mean the "Prime" rate
publicly announced by Citibank N.A., New York, New York (or such other "money
center" bank as Lender, in its sole discretion, may select from time to time,
but shall not be more than the highest rate of the five largest banks in the
Continental United States as their respective corporate base, reference, prime
or similar benchmark rate), provided however, that such rate may not be the
lowest rate charged to such bank's customers.
1.17. INCLUDED REBATE PERCENTAGE. The term "Included Rebate Percentage"
shall mean, for any period of determination, the percentage determined by (i)
the aggregate of all Charge Offs for that period, divided by (ii) the Nonpayment
Net Receivable Reductions for that period.
1.18. INCLUDED REBATES. The term "Included Rebates" shall mean, for any
period of determination, (i) the aggregate of all rebates of interest for that
period, multiplied by (ii) the Included Rebate Percentage.
1.19. INDEBTEDNESS. The term "Indebtedness" shall mean all amounts advanced
hereunder by Lender to Borrower together with all other amounts owing or
becoming owing to Lender by Borrower, direct or indirect, absolute or
contingent, now or hereafter existing, whether pursuant to the terms of this
Agreement or any document or instrument evidencing or securing the transaction
contemplated hereby.
1.20. LEVERAGE RATIO. The term "Leverage Ratio" shall mean, at any date of
determination, the remainder of the total liabilities of Borrower, including the
outstanding balance of the Indebtedness, less the outstanding balance pursuant
to all Subordinated Debt, divided by the sum of the amount of Borrower's
Tangible Net Worth plus the outstanding balance due pursuant to all
Subordinated Debt.
1.21. LOAN DOCUMENTS. The term "Loan Documents" shall mean this Agreement,
the Note, the Schedule, the Guaranty, Subordination Agreements Agency and
Custodian Agreements and all other documents executed in connection with this
Agreement, together with any and all renewals, amendments, restatements or
replacements of such documents.
1.22. MAXIMUM RATE. The term "Maximum Rate" shall mean the highest lawful
and nonusurious rate of interest applicable to the Note made and delivered by
Borrower to Lender in connection herewith, that at any time or from time to time
may be contracted for, taken, reserved, charged, or received on the Note and the
Indebtedness under the laws of the United States and the laws of such states as
may be applicable thereto, that are in effect or, to the extent allowed by such
laws, that may be hereafter in effect and that allow a higher maximum
nonusurious and lawful interest rate than would any applicable laws now allow.
1.23. NET INCOME. The term "Net Income" shall mean with respect to any
fiscal period, the net earnings of Borrower (excluding all extraordinary gains
or nonrecurring income) before provision for income taxes for such fiscal period
of Borrower, all as reflected on the financial statements of Borrower supplied
to Lender pursuant to Sections 4.4(A) and 4.4(B) hereof.
1.24. NONPAYMENT NET RECEIVABLE REDUCTIONS. The term "Nonpayment Net
Receivable Reductions" shall mean, for any period of determination, the sum of
(i) the aggregate of all Charge Offs for that period, plus (ii) the aggregate of
all net refinanced balances of a Receivable for that period.
1.25. NOTE. The term "Note" shall mean the promissory note of even date
herewith, executed by Borrower and payable to the order of Lender.
1.26. PLAN. The term "Plan" shall mean any pension plan that is covered by
Title IV of ERISA and with respect to which Borrower or a Commonly Controlled
Entity is an "Employer" as defined in section 3(5) of ERISA.
1.27. RECEIVABLES. The term "Receivables" shall mean all accounts of
Borrower and any other right of Borrower to receive payment, including, without
limitation, all loans, extensions of credit or Borrower's right to payment for
goods sold or services rendered by Borrower.
1.28. REQUEST FOR ADVANCE. The term "Request for Advance" shall mean a
written request for an advance in the form of Exhibit "A" attached hereto and
made a part hereof.
1.29. SCHEDULE. The term "Schedule" shall mean the schedule executed in
conjunction with this Agreement of even date herewith, as may be amended from
time to time, upon written agreement of Lender and Borrower.
1.30. SUBORDINATED DEBT. The term "Subordinated Debt" shall mean the
aggregate amount of any indebtedness of Borrower to persons other than Lender
that by its terms is subordinated in all respects, including, but not limited
to, the right of payment, to the prior payment in full of the Indebtedness. A
subordination and standstill agreement, in a form and substance satisfactory to
Lender, shall be entered into by all holders of Subordinated Debt.
1.31. TANGIBLE NET WORTH. The term "Tangible Net Worth" shall mean, at any
time of determination, the
-3-
<PAGE> 4
shareholder's equity of Borrower determined in accordance with GAAP minus the
aggregate amount of all intangible assets and all assets consisting of
obligations due to Borrower from shareholders, directors, officers, or any
affiliate of Borrower or any Guarantor hereunder.
2. LOAN
2.1. AMOUNT OF LOAN. Subject to the terms, covenants and conditions
hereinafter set forth, Lender agrees upon the Borrower's request from time to
time, until the Maturity Date, to make advances to Borrower (collectively, the
"Loan"), in an aggregate amount not to exceed at any time outstanding the lesser
of the following: (a) the Amount of Revolving Credit Line (SCHEDULE SECTION
2.1.A.) or (b) the Availability on Eligible Receivables (SCHEDULE SECTION
2.1.B.). Within the limits of this Section 2.1, Borrower may borrow, repay
and reborrow the advances. The Loan shall be evidenced by the Note.
2.2. INTEREST RATE. The outstanding principal balance of Loan shall bear
interest at the Stated Interest Rate (SCHEDULE SECTION 2.2). If Lender is ever
prevented from charging or collecting interest at the rate set forth in Stated
Interest Rate Section (i) because interest at such rate would exceed interest at
the Maximum Rate, then the rate set forth in Stated Interest Rate Section (i)
shall continue to be the Maximum Rate until Lender has charged and collected the
full amount of interest chargeable and collectable had interest at the rate set
forth in Stated Interest Rate Section (i) always been lawfully chargeable and
collectible. As the Governing Rate changes, the rate set forth in Stated
Interest Rate Section (i) shall be increased or decreased (subject to the
Maximum Rate) on the first day of each calendar month to correspond with the
change in the Governing Rate then in effect and shall remain fixed at such rate
until the first day of the next succeeding calendar month, notwithstanding
fluctuations in the Governing Rate during the month. All changes in the
Governing Rate shall be made without notice to Borrower. The monthly interest
due on the principal balance of the Loan outstanding shall be computed for the
actual number of days elapsed during the month in question on the basis of a
year consisting of three hundred sixty (360) days and shall be calculated by
determining the average daily principal balance outstanding for each day of the
month in question. The daily rate shall be equal to 1/360th times the Stated
Interest Rate (but shall not exceed the Maximum Rate).
2.3. PAYMENTS. All payments to Lender shall be payable at FINOVA Capital
Corporation, File No. 96425, P.O. Box 668100, Charlotte, NC 28266-8100. All
payments received pursuant to this Agreement shall be applied to Borrower's
Indebtedness three (3) Business Days after the actual receipt of such payment by
Lender's depository bank if such payment is credited to Lender's account. The
Indebtedness shall be due and payable as follows:
A. Accrued but unpaid interest for each calendar month during the term
hereof shall be due and payable, in arrears, on or before the fifteenth (15th)
day of the immediately succeeding calendar month; if such accrued but unpaid
interest for the preceding month is not received by the fifteenth (15th) of the
month, such unpaid interest shall be added to the Indebtedness.
B. Costs, fees and expenses payable pursuant to this Agreement shall be due
and payable by Borrower to Lender or to such other person(s) designated by
Lender in writing on demand; and
C. The entire outstanding balance of the Indebtedness shall be due and
payable, if not prepaid, on the Maturity Date (SCHEDULE SECTION 2.3.).
2.4. PAYMENT DUE ON A NON-BUSINESS DAY. If any payment of the Indebtedness
falls due on a day other than a Business Day, then such due date shall be
extended to the next succeeding Business Day.
2.5. MANDATORY PAYMENTS. Provided that Borrower is not otherwise in Default
hereunder, if at any time the amount advanced by Lender to Borrower exceeds the
maximum amount of the Loan allowed pursuant to Section 2.1, Borrower shall
immediately and without notice, repay to Lender an amount sufficient to
eliminate such excess, or, at Lender's option, assign and deliver additional
Eligible Receivables sufficient for such purpose. In the event Borrower sells,
transfers, assigns or otherwise disposes of all or any portion of its
Receivables, other than in the ordinary course of business, Borrower shall apply
all proceeds of any such sale, transfer, assignment or other disposition to
reduce the outstanding balance of the Indebtedness.
2.6. VOLUNTARY PREPAYMENTS. Borrower may, at its option, voluntarily prepay
the Indebtedness in full at any time, provided, however, that Borrower has given
Lender ninety (90) days written notice of any such intention to prepay the
Indebtedness in full, requests Lender to terminate its security interest in the
collateral upon such prepayment in full and as liquidated damages, not as a
penalty, Borrower pays to Lender the amount of liquidated damages ("Liquidated
Damages") (SCHEDULE SECTION 2.6). Borrower may not make such prepayment prior to
the expiration of such ninety (90) day period. Upon written notice of prepayment
of the Indebtedness in full, the commitment by Lender to advance funds to
Borrower and all the obligations of Lender shall terminate on the expiration of
said ninety (90) day notice
-4-
<PAGE> 5
period, and the entire amount of the Indebtedness and the Liquidated Damages
shall be due and payable on such date.
2.7. MAXIMUM INTEREST; CONTROLLING AGREEMENT. If a court of competent
jurisdiction determines that the laws of any state other than the State of
Arizona apply to this Agreement then the following paragraph A. shall be
applicable to this Agreement and paragraph 2.7.B. hereinbelow shall be of no
force or effect.
A. It is the intent of the parties hereto to conform strictly to the
usury laws in force that apply to this transaction. Accordingly, all
agreements between Lender and Borrower, whether now existing or hereafter
arising and whether written or oral, are hereby limited so that in no
contingency, whether by reason of demand or acceleration of the maturity of
the Indebtedness or otherwise, shall the interest (and all other sums that
are deemed to be interest) contracted for, charged, received, paid or
agreed to be paid to Lender exceed interest computed at the Maximum Rate.
If, from any circumstance whatsoever, interest would otherwise be payable
to Lender in excess of interest computed at the Maximum Rate and, if from
any circumstance Lender shall ever receive anything of value deemed
interest by applicable law in excess of interest computed at the Maximum
Rate, then Lender's receipt of the same shall be deemed unintentional, the
interest payable to Lender shall be reduced to interest computed at the
Maximum Rate; and such excess interest received by Lender shall, at the
option of Lender, be repaid to Borrower or credited to the unpaid principal
balance of the Indebtedness. If the Indebtedness is prepaid or the maturity
of the Indebtedness is accelerated by reason of an election of Lender, then
the unearned interest, if any, shall be canceled and, if theretofore paid,
shall be either refunded to Borrower or credited on the Indebtedness as the
Lender elects. All interest paid or agreed to be paid to Lender shall, to
the extent permitted by applicable law, be amortized, prorated, allocated
and spread throughout the full period until payment in full of the
principal (including the period of any renewal and extension thereof) so
that the interest so computed shall not exceed the Maximum Rate.
Notwithstanding that the parties hereto in good faith deem each and every
fee provided by this Agreement or paid to Lender in connection with this
Agreement to be a bona fide fee for services rendered and to be rendered
separate and apart from the lending of money or the provision of credit, if
any such fee is ever determined by a court of competent jurisdiction or
other tribunal or by Lender to constitute interest, then the treatment of
such fee for usury purposes shall be controlled by the provisions of this
Section 2.7. This paragraph shall control all agreements between Borrower
and Lender.
If a court of competent jurisdiction determines that the laws of the State
of Arizona apply to this Agreement then the following paragraph B. shall be
applicable to this Agreement and paragraph 2.7.A. hereinabove shall be of no
force or effect.
B. The contracted for rate of interest of the loan contemplated
hereby, without limitation, shall consist of the following: (i) the Stated
Interest Rate, calculated and applied to the principal balance of this
Agreement in accordance with the provisions of this Agreement and the other
Loan Documents; (ii) interest after event of default or due date,
calculated and applied to the amounts due under this Agreement in
accordance with the provisions hereof; and (iii) all Additional Sums (as
herein defined), if any. Borrower agrees to pay an effective contracted for
rate of interest which is the sum of the above-referenced elements. All
fees, charges, goods, things in action or any other sums or things of value
(other than amounts described in the immediately previous paragraph), paid
or payable by Borrower (collectively, the "Additional Sums"), whether
pursuant to this Agreement, the Loan Agreement or any other documents or
instruments in any way pertaining to this lending transaction, or otherwise
with respect to this lending transaction, that under any applicable law may
be deemed to be interest with respect to this lending transaction, for the
purpose of any applicable law that may limit the maximum amount of interest
to be charged with respect to this lending transaction, shall be payable by
Borrower as, and shall be deemed to be, additional interest and for such
purposes only, the agreed upon and "contracted for rate of interest" of
this lending transaction shall be deemed to be increased by the rate of
interest resulting from the inclusion of the Additional Sums.
It is the intent of the parties to comply with the usury law
("Applicable Usury Law") applicable pursuant to the terms of the preceding
paragraph or such other usury law which is applicable if the law chosen by
the parties is not applicable. Accordingly, it is agreed that
notwithstanding any provisions to the contrary in this Agreement, or in any
of the documents securing payment hereof or otherwise relating hereto, in
no event shall this Agreement or such documents require the payment or
permit the collection of interest in excess of the maximum contract rate
permitted by the Applicable Usury Law. In the event (a) any such excess of
interest otherwise would be contracted for, charged or received from
Borrower or otherwise in connection with the loan evidenced hereby, or (b)
the maturity of the indebtedness evidenced by this Agreement is accelerated
in whole or in part, or (c) all or part of the principal or interest of
this Agreement shall be prepaid, so that under any of such circumstances
the amount of interest contracted for, shared or received in connection
with the
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loan evidenced hereby, would exceed the maximum contract rate permitted by
the Applicable Usury Law, then in any such event (1) the provisions of this
paragraph shall govern and control, (2) neither Borrower nor any other
person or entity now or hereafter liable for the payment hereof will be
obligated to pay the amount of such interest to the extent that it is in
excess of the maximum contract rate permitted by the Applicable Usury Law,
(3) any such excess which may have been collected shall be either applied
as a credit against the then unpaid principal amount hereof or refunded to
Borrower, at Lender's option, and (4) the effective rate of interest will
be automatically reduced to the maximum amount of interest permitted by the
Applicable Usury Law. It is further agreed, without limiting the generality
of the foregoing, that to the extent permitted by the Applicable Usury Law;
(x) all calculations of interest which are made for the purpose of
determining whether such rate would exceed the maximum contract rate
permitted by the Applicable Usury Law shall be made by amortizing,
prorating, allocating and spreading during the period of the full stated
term of the loan evidenced hereby, all interest at any time contracted for,
charged or received from Borrower or otherwise in connection with such
loan; and (y) in the event that the effective rate of interest on the loan
should at any time exceed the maximum contract rate allowed under the
Applicable Usury Law, such excess interest that would otherwise have been
collected had there been no ceiling imposed by the Applicable Usury Law
shall be paid to Lender from time to time, if and when the effective
interest rate on the loan otherwise falls below the maximum amount
permitted by the Applicable Usury Law, to the extent that interest paid to
the date of calculation does not exceed the maximum contract rate permitted
by the Applicable Usury Law, until the entire amount of interest which
would have otherwise been collected had there been no ceiling imposed by
the Applicable Usury Law has been paid in full. Borrower further agrees
that should the maximum contract rate permitted by the Applicable Usury Law
be increased at any time hereafter because of a change in the law, then to
the extent not prohibited by the Applicable Usury Law, such increases shall
apply to all indebtedness evidenced hereby regardless of when incurred;
but, again to the extent not prohibited by the Applicable Usury Law, should
the maximum contract rate permitted by the Applicable Usury Law be
decreased because of a change in the law, such decreases shall not apply to
the indebtedness evidenced hereby regardless of when incurred.
2.8. STATEMENT OF ACCOUNT. Lender shall provide Borrower, each month, with
a statement of Borrower's account, prepared from Lender's records, which shall
conclusively be deemed correct and accepted by Borrower, unless Borrower gives
Lender a written statement of exceptions within ten (10) days after receipt of
such statement.
2.9. CONDITIONS PRECEDENT TO ADVANCES. The obligation of Lender to make
advances is subject to the following conditions: (i) no Default or Event of
Default shall have occurred; (ii) all actions to be taken by Borrower in
connection with the transactions contemplated hereby shall be reasonably
satisfactory in form and substance to Lender; (iii) the warranties and
representations of Borrower contained herein shall be true and correct on the
date hereof and shall be deemed to have been made again on the date of each
advance and shall then also be true and correct; (iv) Borrower shall have
performed and complied with all obligations or conditions required by this
Agreement to be performed or complied with prior to each advance and Borrower
shall not then be in default under any document or instrument evidencing or
securing the Indebtedness; (v) Borrower shall submit to Lender a completed
Request for Advance Report in the form and substance of Exhibit "A" attached
hereto, on the date such advance is requested or shall have complied with the
provisions concerning oral advances hereunder as set forth in Section 2.10
hereof; (vi) prior to the initial advance hereunder, Borrower shall submit to
Lender the initial Availability Report and all other documents, instruments,
financing statements, evidence of authority, evidence of compliance with
applicable laws, opinions of counsel and other information which Lender may
reasonably request; and (vii) Borrower shall submit to Lender resolutions of its
Board of Directors designating personnel authorized by Borrower to execute
Availability Reports on behalf of Borrower and each specific request for advance
shall be executed by one such person.
2.10. ORAL REQUEST FOR ADVANCE. All oral requests for advances shall be
made only by an authorized agent of Borrower designated by or acting under the
authority of a resolution of the Board of Directors of Borrower, a duly
certified or executed copy of which shall be furnished to Lender prior to any
oral request. Lender shall be entitled to rely upon such authorization until
written notice to the contrary is received by Lender. Borrower covenants and
agrees to furnish to Lender written confirmation of any such oral request within
two (2) days after such oral request, in a form set forth on Exhibit "A"
attached hereto and incorporated herein, but any such loan or advance shall be
deemed to be made under and entitled to the benefits of this Agreement and any
other documents or instruments executed in connection herewith irrespective of
any failure by Borrower to furnish such written confirmation. Any loan or
advance shall be conclusively presumed to have been made under the terms of this
Agreement, to or for the benefit of Borrower, when made pursuant to the terms of
any written agreement executed in connection herewith; or in accordance with
such requests and directions; or when an advance is deposited to the credit of
the
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<PAGE> 7
account of any person or persons corporation or corporations comprising
Borrower, regardless of the fact that persons other than those authorized
hereunder may have authority to draw against such account or regardless of the
fact that the advance was not made or deposited for the benefit of all persons
or corporations comprising Borrower.
2.11. ALL ADVANCES TO CONSTITUTE ONE LOAN. All evidences of credit, loans
and advances made by Lender to Borrower under this Agreement and any other
documents or instruments executed in connection herewith shall constitute one
loan, and all indebtedness and obligations of Borrower to Lender under this
Agreement and all other such documents and instruments shall constitute one
general obligation secured by Lender's security interest in all of the
Collateral and by all other security interests, liens, claims and encumbrances
heretofore, now, or at any time or times hereafter granted by Borrower to
Lender. Borrower agrees that all of the rights of Lender set forth in this
Agreement shall apply to any modification of or supplement to this Agreement and
any other such documents and instruments.
2.12. ADVANCES. Lender shall have the right in Lender's discretion, subject
to availability hereunder on behalf of and without notice to Borrower, to make
and use advances to pay Lender for any amounts due to Lender pursuant to this
Agreement or otherwise, to cure any default hereunder, notwithstanding the
expiration of any applicable cure period.
2.13. APPLICATION OF PAYMENTS. Borrower does hereby irrevocably agree that
Lender shall have the continuing exclusive right to apply and reapply any and
all payments and collections at any time or times hereafter received by Lender
against the Indebtedness, in such manner as Lender may determine.
3. SECURITY AGREEMENT
3.1. SECURITY INTEREST. To secure the prompt payment to Lender of the
Indebtedness and any and all other obligations now existing or hereinafter
arising owed by Borrower to Lender, Borrower hereby irrevocably grants to Lender
a first and continuing security interest in the following property and interests
in property of Borrower, whether now owned or existing or hereafter acquired or
arising and wheresoever located:
A. All Receivables and all accounts, chattel paper, instruments, contract
rights and general intangibles, all of Borrower's right, remedies, security,
liens, guaranties, or other contracts of suretyship with respect thereto, all
deposits or other security or support for the obligation of any Account Debtor
thereunder and credit and other insurance acquired by Account Debtor or the
Borrower in connection therewith;
B. All inventory, new or used, including parts and accessories;
C. All bank accounts of Borrower;
D. All monies, securities and property, now or hereafter held, received by,
or intrusted to, in the possession or under the control of Lender or a bailee of
Lender;
E. All accessions to, substitutions for and all replacements, products and
proceeds of the foregoing, including, without limitation, proceeds of insurance
policies referenced in Section 3.1.A above (including but not limited to claims
paid and premium refunds); and
F. All books and records (including, without limitation, customer lists,
credit files, tapes, ledger cards, computer software and hardware, electronic
data processing software, computer printouts and other computer materials and
records) of Borrower evidencing or containing information regarding any of the
foregoing.
3.2. FINANCING STATEMENTS AND FURTHER ASSURANCES. Borrower hereby agrees to
execute UCC-1 Financing Statements, in the form and substance of Exhibit "B"
hereto, and any other instruments or documents reasonably necessary to evidence,
preserve or protect Lender's security interest in the Collateral. Borrower
agrees that financing statements shall be filed covering all of Borrower's
locations (SCHEDULE SECTION 3.2.).
Upon Lender's request, Borrower agrees to deliver to Lender, at such places
as Lender may reasonably designate, schedules executed by Borrower, listing the
Receivables and fully and correctly specifying in adequate detail the aggregate
unmatured unpaid face amount of each Receivable and the amount of the deferred
installments thereof falling due each month. These schedules shall be in form
and tenor satisfactory to or supplied by Lender. All schedules delivered and
Collateral pledged to Lender shall be assigned to Lender pursuant to the
"Schedule of Receivables and Assignment" in the form and substance of Exhibit
"E" attached hereto. Borrower further warrants and agrees that in each case
where the terms of any Receivable require the Borrower or the Account Debtor
named in such Receivable to place or carry fire insurance or other insurance in
respect of the merchandise or property to which such Receivable relates, the
Borrower shall or shall cause the Account Debtor to maintain such insurance
until the full amount of such Receivable is collected and if not, Lender, at its
option, may place and maintain such insurance, charging the cost thereof to
Borrower.
3.3. FAILURE TO DELIVER. Failure to deliver physical possession of any
instruments, documents or writings in
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<PAGE> 8
respect of any Receivable to Lender shall not invalidate Lender's security
interest therein. To the extent that possession may be required by applicable
law for the perfection of Lender's security interest, the original chattel paper
and instruments representing the Receivables shall be deemed to be held by
Lender, although kept by the Borrower as the custodial agent of Lender.
3.4. NOTICE OF COLLATERAL ASSIGNMENT. All contracts, documents or
instruments representing or evidencing a Receivable shall contain (by way of
stamp or other method satisfactory to Lender) the following language: "ASSIGNED
TO FINOVA CAPITAL CORPORATION AS COLLATERAL".
3.5. LOCATION OF RECEIVABLES. Borrower shall, at any reasonable time and at
Borrower's own expense, upon Lender's request, physically deliver to Lender all
Receivables (including any instruments, documents or writings in respect of any
Receivable together with all instruments, documents or writings in respect of
any collateral securing each Receivable) assigned to Lender to any reasonable
place or places designated by Lender. All Receivables shall, regardless of their
location, be deemed to be Lender Under's domination and control (with files so
labeled) and deemed to be in Lender's possession.
3.6. RECORDS AND INSPECTIONS. Borrower shall at all times keep complete and
accurate records pertaining to the Collateral, which records shall be current on
a daily basis and located only at the locations (SCHEDULE SECTION 3.2.). Lender
by or through any of its officers, agents, employees, attorneys or accountants,
shall have the right to enter any such locations, at any reasonable time or
times during regular business hours, for so long as Lender may desire, to
inspect the Collateral and to inspect, audit and make extractions or copies from
the books, records, journals, orders, receipts, correspondence or other data
relating to the Collateral or this Agreement.
3.7. ADDITIONAL DOCUMENTS. Borrower hereby agrees to execute any additional
documents or financing statements which Lender deems necessary in its reasonable
discretion in order to evidence Lender's security interest in the Collateral.
Borrower shall not allow any financing statement or notice of assignment of
accounts receivable, other than those executed in connection with this
Agreement, to be on file in any public office covering any Collateral, proceeds
thereof or other matters subject to the security interest granted to Lender.
3.8. COLLECTION. Borrower agrees at its own expense to promptly and
diligently collect each installment of all Receivables in trust for the
exclusive account of Lender, to hold Lender harmless from any and all loss,
damage, penalty, liability, fine or expense arising from such collection by
Borrower or its agents and to faithfully account therefor to Lender. Upon the
occurrence of a Default, Lender expressly retains the unqualified right at any
time it so elects to take over the collection of the Receivables.
3.9. BLOCKED ACCOUNTS. Upon the occurrence of a Default or an Event of
Default, at Lender's request, any checks, notes, drafts or any other payment
upon and/or proceeds of the Collateral received by Borrower (or any
subsidiaries, divisions, affiliates, proprietorships, shareholders, directors,
officers, employees, agents or those persons acting for or in concert with
Borrower), shall no later than the next Business Day following receipt thereof,
be delivered to Lender, at Lender's address set forth above, for application on
account of the Indebtedness and shall be reflected in the Statement of Account
as provided in Section 2.8 herein, until such time as Lender has established a
depository account at a bank for the deposit of such payments, made arrangements
for such deposits to be transferred to Lender daily and thereafter established a
lock-box arrangement or otherwise. Borrower shall (i) deposit or cause all
Items, as defined below, to be deposited in the special account so established
by Lender or transfer all Items to Lender for application on account of the
Indebtedness and to be reflected in the Statement of Account as provided in
Section 2.8 herein and (ii) maintain copies of all checks or other items of
payment and deposit slips related thereto, together with a collection report in
a form satisfactory to Lender. All cash payments, checks, drafts, or similar
items of payment upon and/or proceeds of the Receivables (collectively "Items")
by or for the account of Borrower shall be the sole and exclusive property of
Lender immediately upon the earlier of the receipt of such Items by Lender or
the receipt of such Items by Borrower; provided, however, that no such item
received by Lender shall constitute payment to Lender and be applied to reduce
the Indebtedness until the later of: (i) three (3) Business Days from collection
of such Item by Lender's depository bank, or (ii) such Item being actually
collected by Lender's depository bank and such collection being credited to
Lender's account. Notwithstanding anything to the contrary herein, all such
items of payment shall be deemed not received if the same is subsequently
dishonored or not duly credited to Lender's depository account for any reason
whatsoever.
3.10. PROTECTION OF RECEIVABLE RECORDS. Borrower hereby agrees to take the
following protective actions to prevent destruction of Borrower's Collateral and
records pertaining to such Collateral: (i) if Borrower maintains its Collateral
records on a manual system such records shall be kept in a fire proof cabinet or
on no less than a monthly basis, a record of all payments on Receivables and all
other matters relating to the Collateral shall be placed in an off site safety
deposit box (and Lender shall have access to
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<PAGE> 9
such safety deposit box); or (ii) if the Collateral records are computerized,
Borrower agrees to create a tape or diskette "back-up" of the computerized
information and upon the request of Lender, provide Lender with a tape or
diskette copy of such "back-up" information.
3.11. USE OF COLLECTIONS AND MODIFICATION OF RECEIVABLES. Provided that
Lender has not required that Borrower remit all collections or proceeds of
Collateral to Lender, Borrower may use or dispose of the funds received on the
Receivables in the ordinary course of business (including returned or
repossessed goods), collect or compromise accounts or obligations and accept
returned goods or make repossessions, as Borrower shall determine based upon its
reasonable discretion.
3.12. USE OF PROCEEDS. Borrower shall use the proceeds of the Loan in the
ordinary course of business, solely in its operations for costs incurred in the
purchasing of Receivables, or for payments to Lender hereunder.
3.13. RETURN OF COLLATERAL. Upon the payment in full or renewal of any
Receivable to which the written documents evidencing such Receivable are held by
Lender, Borrower shall submit all requests for the return of such documents
pursuant to the "Request For Return of Collateral" form, a copy of which is
attached hereto as Exhibit "C".
3.14. LENDER'S PAYMENT OF CLAIMS. Lender may, in its sole discretion,
discharge or obtain the release of any security interest, lien, claim or
encumbrance asserted by any person against the Collateral. All sums paid by
Lender in respect thereof shall be payable, on demand, by Borrower to Lender and
shall be a part of the Indebtedness.
3.15. CROSS COLLATERALIZATION Each Borrower agrees that the Collateral of
each Borrower pledged hereunder shall secure all of the obligations of the
Borrowers to Lender hereunder. Upon and after an Event of Default by any
Borrower, Lender may pursue all rights and remedies it may have against all or
any part of the Collateral regardless of the status of legal title to such
Collateral. Each Borrower hereby acknowledges that this Cross Collateralization
of their Collateral is in consideration of Lender's extending the credit
hereunder and mutually beneficial to each Borrower.
4. REPORTING REQUIREMENTS
4.1. ACCOUNTING PRACTICES. Borrower shall maintain (i) a modern system of
accounting in accordance with GAAP or other systems of accounting acceptable to
Lender and (ii) standard operating procedures applicable to all of its locations
with respect to the handling and disposition of cash receipts and other proceeds
of Collateral on a daily basis, including the depositing thereof, aging of
account receivables, record keeping and such other matters as Lender may
reasonably request. For the purpose of determining the availability pursuant to
Section 2.1 hereof, Lender shall have the right to recast any financial
statement or report presented to Lender by or on behalf of Borrower.
4.2. PLEDGE OF RECEIVABLES. Borrower hereby agrees to pledge all
Receivables and, if so requested by Lender, Borrower shall deliver to Lender all
documents evidencing Receivables of Borrower, no less often than on the
twentieth (20th) day of each calendar month during the term of this Agreement.
If the evidence of title of the collateral securing the pledged Receivables is
not delivered to Lender with the original Receivable documentation, such
evidence of title shall be delivered to Lender not later than fifteen (15) days
after such evidence of title is received by Borrower. Borrower will deliver
monthly, with the delivery of the documentation evidencing the Receivables
above, a "Vehicle Title Exception Report" listing all vehicle titles which have
not been received by Lender or are due from the appropriate state motor vehicle
department, together with the Schedule of Receivables and Assignment, as set
forth in Section 3.2 hereof.
4.3. ACCOUNT DEBTORS' ADDRESSES. Borrower agrees to furnish to Lender from
time to time, promptly upon request, a list of all Account Debtors' names and
their most current addresses. Borrower agrees that Lender may from time to time,
consistent with standard or generally accepted auditing practices, verify the
validity, amount and any other matters relating to the Receivables by means of
mail, telephone or otherwise, in the name of Borrower and upon the occurrence of
an Event of Default in the name of Lender or such other name as Lender may
choose.
4.4. FINANCIAL REPORTS. Borrower shall furnish to Lender the following
financial statements and reports, in a form satisfactory to Lender:
A. As soon as practicable and in any event mailed within twenty (20) days
after the end of each fiscal month: (i) "Availability Report," in the form and
substance of Exhibit "D" attached hereto; (ii) Statement of Accounts Receivable
showing the detailed aging of each Receivable according to the procedures
(SCHEDULE SECTION 1.11.C.); (iii) a monthly Profit and Loss Statement and
Balance Sheet, certified by Borrower's chief financial officer or equivalent
duly elected officer of Borrower; and (iv) Schedule of Receivables and
Assignment in the form and substance of Exhibit "E" attached hereto.
B. Within one hundred twenty (120) days after the end of each of Borrower's
fiscal years, annual financial statements, or consolidated statements, as the
case may be, of Borrower
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prepared in accordance with GAAP, consistently applied and certified by its
chief financial officer or equivalent duly elected officer. The financial
statements shall be prepared by and under the method acceptable to Lender and
shall consist of a balance sheet as of the end of such fiscal year and
comparative statements of earnings, cash flows, and change in stockholders'
equity for such fiscal year (SCHEDULE SECTION 4.4.).
C. With reasonable promptness, such other financial data as Lender may
reasonably request, including but not limited to tax returns, business plans and
reports.
Together with each delivery of financial statements required by subsections
A, B and C above, Borrower shall deliver to Lender and shall cause each of its
subsidiaries to deliver to Lender, if requested by Lender, a certificate in form
satisfactory to Lender, certifying that no Default or Event of Default exists
under this Agreement as of the date of such certificate, or if a Default or an
Event of Default exists, specifying the nature and period of existence thereof
and what action Borrower proposes to take with respect thereto.
4.5. FINANCIAL STATEMENTS OF GUARANTORS. Each of the Guarantors (SCHEDULE
SECTION 4.5.) shall furnish to Lender annual personal financial statements in
form reasonably satisfactory to Lender and certified by such Guarantor and a
copy of each Guarantor's personal Federal Income Tax Return (including all
schedules thereto and amendments thereof) filed during the term hereof, within
thirty (30) days of the filing of the same.
4.6. NOTICE OF CHANGES. Borrower shall promptly notify Lender in writing of
any change of its officers, directors or key employees; change of location of
its principal offices, change of location of any of its principal assets; any
acquisition, disposition or reorganization of any corporate subsidiary,
affiliate or parent of Borrower; change of Borrower's name; death or withdrawal
of any partner (if Borrower is a partnership); any sale or purchase out of the
regular course of Borrower's business; litigation of which Borrower or a
Guarantor is a party; and any other material change in the business or financial
affairs of Borrower.
5. REPRESENTATIONS AND WARRANTIES OF BORROWERS AND GUARANTOR.
5.1. REPRESENTATIONS AND WARRANTIES. Borrower and Guarantor hereby
continuously represent and warrant to Lender as follows:
A. Borrower is a corporation duly incorporated, validly existing and in
good standing under the laws of the state of its incorporation, is duly
qualified to do business and is in good standing as a foreign corporation in all
states where such qualification is required, has all necessary corporate power
and authority to enter into this Agreement and each of the documents and
instruments relating hereto and to perform all of its obligations hereunder and
thereunder.
B. Borrower operates its business only under the assumed names (SCHEDULE
SECTION 5.1.) and has not used any other assumed name for the operation of its
business activities for the previous seven (7) years.
C. Borrower has all requisite corporate right and power and is duly
authorized and empowered to enter into, execute, deliver and perform this
Agreement and all documents and instruments relating hereto and this Agreement
and all documents and instruments relating hereto are the legal, valid and
binding obligations of Borrower and are enforceable against Borrower in
accordance with their terms.
D. Each Guarantor is competent to enter into this Agreement and the
Guaranty and to perform all of Guarantor's obligations thereunder.
E. The execution, delivery and performance by Borrower of this Agreement
does not and shall not (i) violate any provision of any law, rule, regulation,
order, writ, judgment, injunction, decree, determination or award presently in
effect having applicability to Borrower; (ii) violate any provision of its
Articles of Incorporation or Bylaws; or (iii) result in a breach of or
constitute a default under any indenture or loan or credit agreement or any
other agreement, lease or instrument to which Borrower is a party or by which it
or any of its assets or properties may be bound or affected; and Borrower is not
in default of any such law, rule, regulation, order, writ, judgment, injunction,
decree, determination or award or any such indenture, agreement, lease or
instrument.
F. No consent, approval, license, exemption of or filing or registration
with, giving of notice to, or other authorization of or by, any court,
administrative agency or other governmental authority is or shall be required in
connection with the execution, delivery or performance by Borrower for the valid
consummation of the transactions contemplated by this Agreement.
G. No event has occurred and is continuing which constitutes a Default or
an Event of Default, as defined in this Agreement. There is no action, suit,
proceeding or investigation pending or threatened against or affecting Borrower
before or by any court, administrative agency or other governmental authority
that brings into question the validity of the transactions contemplated hereby,
or that might
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<PAGE> 11
result in any material adverse change in the businesses, assets, properties or
financial conditions of Borrower or Guarantor.
H. Borrower and/or Guarantor are not in default in the payment of any taxes
levied or assessed against either of them or any of their assets or properties,
except for taxes being contested in good faith and by appropriate proceedings.
I. Borrower and Guarantor have good and marketable title to their assets
and properties as reflected in their financial statements furnished to Lender.
J. Each of the financial statements furnished to Lender by the Borrower and
Guarantor was prepared in accordance with GAAP and fairly and accurately
reflects their financial condition as of the date thereof; and each hereby
certifies that there have been no material adverse changes in their condition,
financial or otherwise, since the date of such statements, and there are no
contingent liabilities not provided for or disclosed in such statements.
K. Neither this Agreement, any Availability Report or any statement or
document referred to herein or delivered to Lender by Borrower and/or Guarantor
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements made herein or therein not misleading.
L. Borrower has good, indefeasible and merchantable title to and ownership
of the Collateral, free and clear of all liens, claims, security interests and
encumbrances, except those of Lender and except where such liens, claims,
charges, security interests and encumbrances are removed contemporaneously with
the execution of this Agreement or are subordinate to those of Lender, in a form
and substance acceptable to Lender.
M. All books, records and documents relating to the Collateral are and
shall be genuine and in all respects what they purport to be; the original
amount and the unpaid balance of each Receivable shown on the books and records
of Borrower and in the schedules represented as owing by each Account Debtor is
and shall be the correct amount actually owing or to be owing by such Account
Debtor at maturity; each Account Debtor liable upon the Receivables has and
shall have capacity to contract; Borrower has no knowledge of any fact which
would impair the validity or collectibility of any of the Receivables; and the
payments shown to have been made by each Account Debtor on the books and records
of Borrower shall reflect the amounts of and dates on which said payments were
actually made.
N. Borrower has places of business only at the locations (SCHEDULE SECTION
3.2.). Borrower shall not begin or do business (either directly or through
subsidiaries) at other locations or cease to do business at any of the above
locations or at Borrower's principal place of business without first notifying
Lender.
O. The present value of all benefits vested under all Plans of Borrower or
any Commonly Controlled Entity (based on the assumptions used to fund the Plans)
did not, as of the last annual valuation date (which in case of any Plan was not
earlier than December 31, 1982) exceed the value of the assets of the Plans
applicable to such vested benefits.
P. The liability to which Borrower or any Commonly Controlled Entity would
become subject under Sections 4063 or 4064 of ERISA if Borrower or any Commonly
Controlled Entity were to withdraw from all Multi-employer Plans or if such
Multi-employer Plans were to be terminated as of the valuation date most closely
preceding the date hereof, is not in excess of One Thousand Dollars ($1,000.00);
Q. Borrower is not engaged nor shall it engage, principally or as one of
its important activities, in a business of extending credit for the purpose of
"purchasing" or "carrying" any "margin stock" within the respective meanings of
each of the quoted terms under Regulations G or X of the Board of Governors of
the Federal Reserve System as now and from time to time hereafter in effect. No
part of the proceeds of any advances hereunder shall be used for "purchasing"
or "carrying" "margin stock" as so defined or for any purpose which violates, or
which would be inconsistent with, the provisions of the Regulations of such
Board of Governors. If requested by Lender, Borrower shall furnish to Lender a
statement in conformity with the requirement of Federal Reserve Form G-3
referred to in said Regulation G to the foregoing effect. All of the outstanding
securities of Borrower have been offered, issued, sold and delivered in
compliance with, or are exempt from, all federal and state laws and rules and
regulations of federal and state regulatory bodies governing the offering,
issuance, sale and delivery of securities.
R. Borrower is not an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
S. Each of the Exhibits and Schedules to this Agreement contain true,
complete and correct information.
T. To the best of Borrower's knowledge, the land and improvements owned or
leased by Borrower for use in its business operations are free of dangerous
levels of contaminates, oils, asbestos, radon, PCB's, hazardous substances or
waste as defined by federal, state or local
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environmental laws, regulations or administrative orders or other materials, the
removal of which is required or the maintenance of which is prohibited,
regulated or penalized by any federal, state or local governmental authority.
U. Borrower is solvent, generally able to pay its obligations as they
become due, has sufficient capital to carry on its business and transactions and
all businesses and transactions in which it intends to engage, and the current
value of Borrower's assets, at fair saleable valuation, exceeds the sum of its
liabilities. Borrower shall not be rendered insolvent by the execution and
delivery of the Loan Documents and the consummation of the transactions
contemplated thereby and the capital remaining in Borrower is not now and shall
not foreseeably become unreasonably small to permit Borrower to carry on its
business and transactions and all businesses and transactions in which it is
about to engage. Borrower does not intend to, nor does it reasonably believe it
shall, incur debts beyond its ability to repay the same as they mature.
V. Lender has a perfected security interest in favor of Lender in all of
Borrower's right, title and interest in the Collateral, prior and superior to
any other security interest or lien, except any statutory or constitutional lien
for taxes not yet due and payable.
W. There are no material actions, suits or proceedings pending, or
threatened against or affecting the assets of Borrower or the consummation of
the transactions contemplated hereby, at law, or in equity, or before or by any
governmental authority or instrumentality or before any arbitrator of any kind.
Neither Borrower nor Guarantor is subject to any judgment, order, writ,
injunction or decree of any court or governmental agency. There is not a
reasonable likelihood of an adverse determination of any pending proceeding
which would, individually or in the aggregate, have a material adverse effect on
the business operations or financial condition of Borrower or Guarantor.
5.2. WARRANTIES AND REPRESENTATIONS AS TO ELIGIBLE RECEIVABLES. With
respect to Eligible Receivables, Borrower and Guarantor continuously warrant and
represent to Lender that during the term of this Agreement and so long as any of
the Indebtedness remains unpaid: (i) in determining which Receivables are
"Eligible Receivables," Lender may rely upon all statements or representations
made by Borrower; and (ii) those Receivables designated as Eligible Receivables
meet each requirement set forth below at the time any request for advance is
provided to Lender.
A. The Eligible Receivables are genuine; are in all respects what they
purport to be; and are evidenced by at least one executed original instrument,
agreement, contract or document which has been or shall be delivered to Lender;
B. The Eligible Receivables represent undisputed, bona fide transactions
completed in accordance with the terms and provisions contained in any documents
related thereto;
C. The amounts of the face value shown on any schedule of Receivables
provided to Lender, and/or all invoices or statements delivered to Lender with
respect to any Eligible Receivables, are actually and absolutely owing to
Borrower and are not contingent for any reason;
D. No set-offs, counterclaims or disputes as to payments or liability
thereon exist or have been asserted with respect thereto and Borrower has not
made any agreement with any Account Debtor thereunder for any deduction
therefrom, except a discount or allowance allowed by Borrower in the ordinary
course of its business for prompt payment, all of which discounts or allowances
are reflected in the calculation of the outstanding amount of the Receivable;
E. No facts, events or occurrences exist that, in any way, impair the
validity or enforcement thereof or tend to reduce the amount payable thereunder
from the amount of the Receivable shown on any schedule, or on all contracts,
invoices or statements delivered to Lender with respect thereto;
F. All Account Debtors in connection with Eligible Receivables: (i) had the
capacity to contract at the time any contract or other document giving rise to
the Receivable was executed; and (ii) generally have the ability to pay their
debts as become due;
G. Within Borrower's knowledge, no proceedings or actions are threatened or
pending against any Account Debtor that might result in any material adverse
change in the Account Debtor's financial condition;
H. The Eligible Receivables have not been assigned or pledged to any other
person or entity;
I. The goods giving rise to the Eligible Receivables are not, and were not
at the time of the sale, rental and/or lease thereof, subject to any lien,
claim, encumbrance or security interest except those of Lender, those removed or
terminated prior to the date hereof or those subordinated to Lender's security
interest, by a subordination and standstill agreement acceptable to Lender;
J. The End of Month Delinquency set forth in Section 12 of the Availability
Report shall be delivered to Lender by
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Borrower hereunder as determined pursuant to the Aging Procedures and
Eligibility Test (SCHEDULE SECTION 1.11.D.).
6. COVENANTS AND OTHER AGREEMENTS
6.1. AFFIRMATIVE COVENANTS. During the term of this Agreement and so long
as any of the Indebtedness remains unpaid, Borrower and Guarantor agree and
covenant, jointly and severally, that they shall:
A. Pay or cause to be paid currently all of their expenses, including all
payments on their obligations whenever due, as well as all payments of any and
all taxes of whatever nature when due. This provision shall not apply to taxes
or expenses which are due, but which are challenged in good faith.
B. Maintain, preserve, and protect the Collateral, including, but not
limited to, keeping documents, instruments or other written records otherwise
evidencing the Collateral in a fire proof cabinet.
C. Furnish to Lender written notice as to the occurrence any Default or
Event of Default hereunder.
D. Furnish to Lender notice of: (i) any development related to the
business, financial condition, properties or assets of Borrower or Guarantor,
that would have or has a materially adverse affect on such business, financial
condition, properties or assets, or ability to perform their obligations under
this Agreement and (ii) any material and adverse litigation or investigation to
which either of them may be a party.
E. Carry on and conduct their business in the same manner and in the same
fields of enterprise as they are presently engaged, and Borrower shall preserve
its corporate existence, licenses or qualifications as a domestic corporation in
the jurisdiction of its incorporation and as a foreign corporation in every
jurisdiction in which the character of its assets or properties or the nature of
the business transacted by it at any time makes qualification as a foreign
corporation necessary, and to maintain all other material corporate rights and
franchises, provided, however, nothing herein shall be construed to prevent
Borrower from closing any retail location in the good faith exercise of its
business judgment.
F. Comply, and cause each affiliate to comply, with all statutes,
governmental rules and regulations applicable to them.
G. Permit and authorize Lender, without notifying Borrower or Guarantor, to
make such inquiries through business credit or other credit reporting services
concerning Borrower or Guarantor as Lender shall deem appropriate.
H. Provide Lender with evidence of insurance issued by a reputable carrier,
as reasonably required by Lender. This insurance shall reflect Lender as the
loss payee or additional insured, as required by Lender, and contain a provision
that Lender shall be notified by the carrier thirty (30) days prior to the
termination or cancellation of any such insurance.
6.2. NEGATIVE COVENANTS. During the term of this Agreement and until the
Indebtedness secured hereby has been paid in full, Borrower and Guarantor
covenant and agree that they shall not, without Lender's prior written consent,
which consent shall not be unreasonably withheld, do any of the following:
A. Incur or permit to exist any mortgage, pledge, title retention lien or
other lien, encumbrance or security interest with respect to the Collateral now
owned or hereafter acquired by Borrower, except liens in favor of Lender.
B. Delegate, transfer or assign any of their obligations or liabilities
under this Agreement, or any part thereof, to any other person or entity.
C. Be a party to or participate in: (i) any merger or consolidation; (ii)
any purchase or other acquisition of all or substantially all of the assets or
properties or shares of any class of, or any partnership or joint venture
interest in, any other corporation or entity; (iii) any sale, transfer,
conveyance or lease of all or substantially all of Borrower's assets or
properties; or (iv) any sale or assignment with or without recourse of any
Receivables.
D. Cause or take any of the following actions with respect to Borrower: (i)
redeem, retire, purchase or otherwise acquire, directly or indirectly, any of
Borrower's outstanding securities; or (ii) purchase or acquire, directly or
indirectly, any shares of capital stock, evidences of indebtedness or other
securities of any person or entity.
E. Amend, supplement or otherwise modify Borrower's Articles of
Incorporation or Bylaws which would have a material adverse affect on the
condition and operations, prospects or financial condition of the Borrower.
F. Incur, assume or suffer to exist any debt (including capitalized leases)
other than (i) the Indebtedness, (ii) accounts payable incurred in the ordinary
course of business, (iii) Subordinated Debt, or (iv) other Debt consented to in
writing, by Lender.
G. Directly or indirectly make loans to, invest in, extend credit to, or
guaranty the debt of any person or entity, other than in the ordinary course of
Borrower's business.
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<PAGE> 14
H. Amend, modify, or otherwise change in any respect any material
agreement, instrument, or arrangement (written or oral) by which Borrower, or
any of its assets, are bound.
I. Allow Borrower to be owned and controlled directly or indirectly by any
person or entity other than the shareholders and senior management that own and
control Borrower as of the date hereof.
6.3. JOINT NEGATIVE COVENANTS. During the term of this Agreement until the
Indebtedness secured hereby has been paid in full, both Borrowers, as defined in
(SCHEDULE SECTION 1.A.) jointly covenant and agree that they shall not, allow or
permit any of the following, which covenants shall be applied in the aggregate
by combining each element of such financial covenants for each Borrower:
A. Permit the aggregate Leverage Ratio to be more than the Leverage Ratio
Limit (SCHEDULE SECTION 6.3.A.).
B. Permit the aggregate Net Income to be less than the Minimum Net Income
Requirement (SCHEDULE SECTION 6.3.B.).
C. Make or allow Distributions, in the aggregate, to exceed, without
Lender's prior written consent, which consent shall not be unreasonably
withheld, the Distributions Limitation (SCHEDULE SECTION 6.3.C.); provided,
however, that no Distribution shall be made if a Default or an Event of Default
shall exist.
7. EVENTS OF DEFAULT AND REMEDIES
7.1. EVENTS OF DEFAULT. The occurrence of any one or more of the following
events shall constitute an "Event of Default":
A. If any payment of principal or interest or any other amount due Lender
is not paid within five (5) days after the same shall be due and payable.
B. If Borrower or Guarantor fails or neglects to perform, keep or observe
any of the terms, provisions, conditions or covenants, contained in this
Agreement, any of the other Loan Documents or any other agreement or document
executed in connection with the transactions contemplated by this Agreement or
if any representation, warranty or certification made by Borrower herein or in
any certificate or other writing delivered pursuant hereto shall prove to be
untrue in any material respect as of the date upon which the same was made or at
any time thereafter, and the same is not cured to Lender's satisfaction within
ten (10) days after Lender has given written notice to Borrower identifying such
default.
C. If the validity or enforceability of any lien, charge, security
interest, mortgage, pledge or other encumbrance granted to Lender to secure the
Indebtedness shall be impaired in any respect or to any degree, for any reason,
or if any other lien, charge, security interest, mortgage, pledge or other
encumbrance shall be created or imposed upon the Collateral unless such lien,
charge, security interest, mortgage, pledge or other encumbrance is subordinate
to that of Lender, pursuant to a subordination and standstill agreement in a
form and substance acceptable to Lender.
D. If any judgment against Borrower not covered by insurance in an amount
in excess of Twenty-Five Thousand Dollars ($25,000.00), or any attachment or
other levy against the properties or assets of Borrower with respect to a claim
for any amount in excess of Twenty-Five Thousand Dollars ($25,000.00), remains
unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a period
of thirty (30) days.
E. Default in the payment of any sum due under any instrument of
indebtedness for borrowed money owed by Borrower or any Guarantor to any person,
or any other default under such instrument of indebtedness for borrowed money
that permits such indebtedness for borrowed money to become due prior to its
stated maturity or permits the holders of such indebtedness for borrowed money
to elect a majority of the board of directors or manage the business of Borrower
or any Guarantor.
F. If a court or governmental authority of competent jurisdiction shall
enter an order, judgment or decree appointing, with or without Borrower's or
Guarantor's consent or acquiescence, a receiver, custodian, liquidator, trustee
or other officer with similar powers of Borrower or Guarantor or of the whole or
any substantial part of its properties or assets, or approving a petition filed
against Borrower or Guarantor seeking reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under the federal
bankruptcy laws or any other applicable law, and such order, judgment or decree
shall remain unvacated, unstayed or not set aside for an aggregate of thirty
(30) days (whether or not consecutive) from the date of the entry thereof or if
any petition seeking such relief shall be filed against Borrower or Guarantor
and such petition shall not be dismissed within thirty (30) days.
G. An event shall occur which shall have a material adverse affect on the
condition and operations, prospects or financial condition of the Borrower or
Guarantor.
H. If either Borrower or Guarantor shall: (i) be generally not paying their
respective debts as they become due; (ii) file a petition in bankruptcy or a
petition to take advantage of any
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<PAGE> 15
insolvency act or other act for the relief or aid of debtors; (iii) make an
assignment for the benefit of their creditors; (iv) consent to or acquiesce in
the appointment of a receiver, custodian, liquidator, trustee or other officer
with similar powers of either of their properties or assets; (v) file a petition
or answer seeking reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under the federal bankruptcy laws or
any other applicable law; (vi) be adjudicated insolvent or be liquidated; (vii)
admit in writing either of their inability to pay debts as they become due;
(viii) voluntarily suspend transaction of usual business; or (ix) take any
action, corporate or otherwise, for the purpose of any of the foregoing.
I. Any of the following shall occur: (i) entry of a court order that
enjoins, restrains or in any way prevents Borrower from conducting all or any
material part of its business affairs in the ordinary course of business or (ii)
withdrawal or suspension of any license or authority required for the conduct of
any material part of Borrower's business.
J. If any Guarantor gives notice of termination or terminates his liability
pursuant to the Guaranty Agreement executed in conjunction with this Agreement.
7.2. ACCELERATION OF THE INDEBTEDNESS. Upon and after an Event of Default,
the outstanding principal balance together with all accrued but unpaid interest
on the Indebtedness and all other sums due and payable by Borrower to Lender
may, at the option of Lender and without demand, presentment, notice of
dishonor, notice of intent to demand or accelerate payment, diligence in
collecting, grace, notice and protest or a legal process of any kind, all of
which are hereby expressly waived, be declared, and immediately shall become due
and payable.
7.3. LOUISIANA CONFESSION OF JUDGMENT. In the event that Borrower is
domiciled in, or Collateral is located in, Louisiana, and to the extent of such
domicile or location where Louisiana law is applicable to this Agreement:
A. Borrower hereby confesses judgment, up to the full amount of principal,
interest and attorney's fees and for any sums that Lender may advance during the
life of this Agreement for the payment of premiums of insurance, taxes and
assessments or for the protection and preservation of this Agreement as
authorized elsewhere in this Agreement, and does by these presents, consent,
agree and stipulate that, in the event of any payment of principal or interest
due hereunder not being promptly and fully paid when the same becomes due and
payable, or in the event of failure to comply with any of the obligations set
forth herein, the Indebtedness shall, at the option of Lender become due and
payable, and it shall be lawful for Lender, without making a demand and without
notice or putting in default, the same being hereby expressly waived, to cause
all and singular the Collateral herein secured to be seized and sold by
executory process issued by any competent court or to proceed with enforcement
of its security interest in any other manner provided by law; and
B. Borrower hereby expressly waives: (a) the benefit of appraisement, as
provided in Articles 2332, 2336, 2723, and 2724, Louisiana Code of Civil
Procedure, and all other laws conferring the same; (b) the demand and three (3)
days delay according by Articles 2639 and 2721, Louisiana Code of Civil
Procedure, and all other laws conferring the same; (c) the notice of seizure
required by Articles 2293 and 2721, Louisiana Code of Civil Procedure, and all
other laws conferring the same; (d) the three (3) days delay provided by
Articles 2331 and 2722, Louisiana Code of Civil Procedure, and all other laws
conferring the same; and (e) the benefit of the other provisions of Articles
2331, 2722 and 2723, Louisiana Code of Civil Procedure, and all other Articles
not specifically mentioned above; and Borrower expressly agrees to the immediate
seizure of the Collateral in the event of suit thereon.
7.4. REMEDIES. Upon and after an Event of Default, Lender shall have the
following rights and remedies, which individual remedies shall be non-exclusive,
cumulative and in addition to each and every other remedy set forth in the Loan
Documents or in this Agreement:
A. All of the rights and remedies of a secured party under the Uniform
Commercial Code as enacted in the State of Arizona, as amended, or other
applicable law.
B. The right, to the fullest extent permissible by law, to: (i) enter upon
the premises of Borrower, or any other place or places where the Collateral is
located and kept, without any obligation to pay rent to Borrower, through
self-help and without judicial process, without first obtaining a final judgment
or giving Borrower notice and opportunity for a hearing on the validity of
Lender's claim, and remove the Collateral therefrom to the premises of Lender or
any agent of Lender, for such time as Lender may desire, in order to effectively
collect and liquidate the Collateral; and/or (ii) require Borrower to assemble
the Collateral and make it available to Lender at a place to be designated by
Lender, in Lender's reasonable discretion.
C. The right to sell or otherwise dispose of any or all Collateral in its
then condition at public or private sale or sales, in lots or in bulk, for cash
or on credit, all as Lender, in its discretion, may deem advisable; provided
that such sales may be adjourned from time to time with or without notice. The
requirement of reasonable notice to Borrower of the time and place of any public
sale of the Collateral or of the time
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<PAGE> 16
after which any private sale either by Lender or at its option, a broker, or any
other intended disposition thereof is to be made, shall be met if such notice is
mailed, postage prepaid, to Borrower at the address of Borrower designated
herein at least ten (10) Business Days before the date of any public sale or at
least ten (10) Business Days before the time after which any private sale or
other disposition is to be made unless applicable law requires otherwise.
Lender shall have the right to conduct such sales on Borrower's premises or
elsewhere and shall have the right to use Borrower's premises without charge for
such sales for such time or times as Lender may see fit. Lender is hereby
granted a license or other right to use, without charge, Borrower's labels,
copyrights, rights of use of any name, trade secrets, trade names, trademarks
and advertising matter, or any property of a similar nature, as it pertains to
the Collateral, in advertising for sale and selling any Collateral and
Borrower's rights under all licenses and all franchise agreements shall inure to
Lender's benefit. Lender agrees to hold Borrower harmless from any liability
arising out of Lender's use of Borrower's premises, labels, copyrights, rights
of use of any name, trade secrets, trade names, trademarks and advertising
matter, or any property of a similar nature as it pertains to advertising for
sale, marshalling or selling the Collateral.
Lender shall have the right to sell, lease or otherwise dispose of the
Collateral, or any part thereof, for cash, credit or any combination thereof,
and Lender may purchase all or part of the Collateral at public or, if permitted
by law, private sale and, in lieu of actual payment of such purchase price, may
set off the amount of such price against the Indebtedness owing by Borrower to
Lender. The proceeds realized from the sale of any Collateral shall be applied
first to reasonable costs and expenses, attorney's fees, expert witness fees
incurred by Lender for collection and for acquisition, completion, protection,
removal, storage, sale and delivery of the Collateral; second to all payments,
other than principal and interest, due under this Agreement; third to interest
due upon any of the Indebtedness; fourth to the principal balance owing on the
Indebtedness; and fifth the remainder, if any, to Borrower, its successors or
assigns, or to whomsoever may be lawfully entitled to receive the same. If any
deficiency shall arise, Borrower shall remain liable to Lender therefor.
D. In the event that Borrower is domiciled in, or Collateral is located in,
Louisiana, and to the extent of such domicile or location where Louisiana law is
applicable to this Agreement, the right to cause all and singular the
hereinabove described Collateral to be seized and sold under executory process
without appraisement, appraisement being hereby expressly waived, as an entirety
or in parcels, as Lender may determine, to the highest bidder for cash.
E. The right to appoint or seek appointment of a receiver, custodian or
trustee of Borrower or any of its properties or assets pursuant to court order.
F. The right to cease all advances hereunder.
G. All other rights and remedies that Lender may have at law or in equity.
7.5. NO WAIVER. No delay, failure or omission of Lender to exercise any
right upon the occurrence of any Default or Event of Default shall impair any
such right or shall be construed to be a waiver of any such Default or Event of
Default or an acquiescence therein. Lender may, from time to time, in a writing
waive compliance by the other parties with any of the terms of this Agreement
and its rights and remedies upon any Default or Event of Default, and, Borrower
agrees that no waiver by Lender shall ever be legally effective unless such
waiver shall be acknowledged and agreed in writing by Lender. No waiver of any
Default or Event of Default shall impair any right or remedy of Lender not
specifically waived. No single, partial or full exercise of any right of Lender
shall preclude any other or further exercise thereof. No modification or
amendment of or supplement to this Agreement or any other written agreement
between the parties hereto shall be valid or effective (or serve as a basis of
reliance by way of estoppel) unless the same is in writing and signed by the
party against whom it is sought to be enforced. The acceptance by Lender at any
time and from time to time of a partial payment or partial performance of any of
Borrower's obligations set forth herein shall not be deemed a waiver, reduction,
modification or release from any Default or Event of Default then existing. No
waiver by Lender of any Default or Event of Default shall be deemed to be a
waiver of any other existing or any subsequent Default or Event of Default.
7.6. GENERAL INDEMNIFICATION. Borrower hereby agrees to indemnify and hold
Lender harmless from and against any and all claims, liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements (collectively "Claim" or "Claims") of any kind or nature
whatsoever, asserted by any party other than Borrower, or with respect to
Borrower only as otherwise provided in this Agreement or pursuant to applicable
law regarding Lender's obligations to Borrower, which may be imposed on,
incurred by or asserted against Lender, or any of its officers, directors,
employees or agents (including accountants, attorneys or other professionals
hired by Lender) in any way relating to or arising out of the Loan Documents or
any action taken or omitted by Lender, or any of its officers, directors,
employees or agents (including accountants, attorneys or other professionals
hired by Lender) under the Loan Documents, except to the extent such
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<PAGE> 17
indemnified matters are finally found by a court to be caused by Lender's gross
negligence or wilful misconduct.
7.7. APPLICATION OF PROCEEDS. After an Event of Default shall have occurred
and is continuing, all amounts received by Lender on account of any Indebtedness
and realized by Lender with respect to the Collateral, including any sums which
may be held by Lender, or the proceeds of any thereof, shall be applied in the
same manner as proceeds of Collateral as set forth in Section 7.4.C. hereof.
7.8. APPOINTMENT OF LENDER AS ATTORNEY-IN-FACT. Borrower irrevocably
designates, makes, constitutes and appoints Lender (and all persons reasonably
designated by Lender), with full power of substitution, as Borrower's true and
lawful attorney-in-fact (and not agent-in-fact) and Lender, or Lender's agent,
may, without notice to Borrower, and at such time or times thereafter as Lender
or said agent, in its discretion, may determine, in Borrower's or Lender's name,
at no duty or obligation on Lender, do the following:
A. All acts and things necessary to fulfill Borrower's administrative
duties pursuant to this Agreement, including, but not limited to, the execution
of financing statements;
B. Upon the occurrence of any Default, all acts and things necessary to
fulfill Borrower's obligations under this Agreement and the Loan Documents,
except as set forth in Section 7.8.C below, at the cost and expense of Borrower.
C. In addition to, but not in limitation of the foregoing, at any time or
times upon the occurrence of an Event of Default, Lender shall have the right:
(i) to enter upon Borrower's premises and to receive and open all mail directed
to Borrower and remove all payments to Borrower on the Receivables; however,
Lender shall turn over to Borrower all of such mail not relating to Receivables;
(ii) in the name of Borrower, to notify the Post Office authorities to change
the address for the delivery of mail addressed to Borrower to such address as
Lender may designate (notwithstanding the foregoing, for the purposes of notice
and service of process to or upon Borrower as set forth in this Agreement,
Lender's rights to change the address for the delivery of mail shall not give
Lender the right to change the address for notice and service of process to or
upon Borrower in this Agreement); (iii) demand, collect, receive for and give
renewals, extensions, discharges and releases of any Receivable; (iv) institute
and prosecute legal and equitable proceedings to realize upon the Receivables;
(v) settle, compromise, compound or adjust claims in respect of any Receivable
or any legal proceedings brought in respect thereof; (vi) generally, sell in
whole or in part for cash, credit or property to others or to itself at any
public or private sale, assign, make any agreement with respect to or otherwise
deal with any of the Receivables as fully and completely as though Lender were
the absolute owner thereof for all purposes, except to the extent limited by any
applicable laws and subject to any requirements of notice to Borrower or other
persons under applicable laws; (vii) take possession and control in any manner
and in any place of any cash or non-cash items of payment or proceeds of
Receivables; (viii) endorse the name of Borrower upon any notes, acceptances,
checks, drafts, money orders, chattel paper or other evidences of payment of
Receivables that may come into Lender's possession; and (ix) sign Borrower's
name on any instruments or documents relating to any of the Collateral, or on
drafts against Account Debtors.
The appointment of Lender as attorney-in-fact for Borrower is coupled with
an interest and is irrevocable.
8. MISCELLANEOUS
8.1. REIMBURSEMENT FOR EXPENSES. Upon the occurrence of a Default, except
as set forth in the SCHEDULE SECTION 8.1., Borrower agrees to reimburse Lender,
upon demand, for all reasonable out-of-pocket expenses (including costs of
establishing and maintaining accounts or arrangements set forth in Section 3.9,
attorney's fees, expert witness fees and legal expenses) incurred in connection
with the evaluation of collateral, preservation of collateral, or collection of
the indebtedness.
8.2. NOTICES. All notices, demands, billings, requests and other written
communications hereunder shall be deemed to have been properly given: (i) upon
personal delivery; (ii) on the third Business Day following the day sent, if
sent by registered or certified mail; (iii) on the next Business Day following
the day sent, if sent by overnight express courier; or (iv) on the day sent or
if such day is not a Business Day on the next Business Day after the day sent if
sent by telecopy providing the receiving party has acknowledged receipt by
return telecopy, in each case, to Lender, Borrower or Guarantors at its address
and/or telecopy number as set forth in this Agreement or SCHEDULE SECTION 8.2,
or at such other address and/or telecopy number as either party may designate
for such purpose in a written notice given to the other party.
Lender shall have the right, on or after initial funding pursuant to the
terms of this Agreement, to issue a press release or other brochure announcing
the consummation of the Loan Documents and to distribute that information to
third parties in the normal course of Lender's business, at no cost to Borrower.
8.3. PARTICIPATIONS. Borrower and Guarantors acknowledge and agree that
Lender may from time to time sell or offer to sell interests in the Indebtedness
and the Loan
-17-
<PAGE> 18
Documents to one or more participants. Borrower and Guarantors authorize Lender
to disseminate any information it has pertaining to the Indebtedness, including
without limitation, complete and current credit information on Borrower and any
of its principals and Guarantors, to any such participant or prospective
participant.
8.4. SURVIVAL OF AGREEMENTS. All of the various representations,
warranties, covenants and agreements of Borrower (including without limitation,
any agreements to pay costs and expenses and to indemnify Lender) in the Loan
Documents shall survive the execution and delivery of the Loan Documents and the
performance under such Loan Documents, and shall further survive until one (1)
year and one (1) month after all of the Indebtedness is paid in full to Lender
and all of Lender's obligations to Borrower under the Loan Documents are
terminated.
8.5. NO OBLIGATION BEYOND MATURITY. Borrower agrees and acknowledges that
upon the Maturity Date, Lender shall have no obligation to renew, extend, modify
or rearrange the Loan and shall have the right to require all amounts due and
owing under the Loan to be paid in full upon such date.
8.6. PRIOR AGREEMENTS SUPERSEDED. This Agreement constitutes the sole and
only agreement of the parties hereto and supersedes any prior understandings or
written or oral agreements between the parties respecting the subject matter of
this Agreement. No provision of this Agreement or other document or instrument
relating hereto may be modified, waived or terminated except by instrument in
writing executed by the party against whom a modification, waiver or termination
is sought to be enforced.
8.7. PARTIES BOUND. This Agreement shall be binding on and inure to the
benefit of the parties hereto and their respective heirs, executors,
administrators, legal representatives, successors and assigns, except as
otherwise expressly provided for herein. Borrower and Guarantor shall not assign
any of their respective rights or obligations pursuant this Agreement.
8.8. NUMBER AND GENDER. Whenever used herein, the singular number shall
include the plural and the plural the singular, and the use of any gender shall
be applicable to all genders. The duties, covenants, obligations and warranties
of Borrower in this Agreement shall be joint and several obligations of Borrower
and of each Borrower if more than one.
8.9. NO THIRD PARTY BENEFICIARY. This Agreement is for the sole benefit of
Lender and Borrower and is not for the benefit of any third party.
8.10. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed and delivered shall be deemed to be an original, and
all of which taken together shall constitute but one and the same instrument.
8.11. SEVERABILITY OF PROVISIONS. Any provision which is determined to be
unconscionable, against public policy or any provision of this Agreement which
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
8.12. HEADINGS. The Article and Section headings used in this Agreement are
for convenience only and shall not affect the construction of this Agreement.
8.13. SCHEDULES AND EXHIBITS. Any and all exhibits hereto are hereby
expressly incorporated by reference as though fully set forth at that point
verbatim. All terms and provisions as defined or set forth in Article 1 and in
any Schedule are hereby incorporated into and made a part of this Agreement.
Each reference in this Agreement and the Schedule hereto to any information or
definitions contained in Article 1 or the Schedule shall mean and refer to the
information or definitions as set forth in Article 1 and the Schedule unless the
context specifically requires otherwise. Any terms used in Article 1 and in the
Schedule which are not defined shall have the meanings ascribed to such terms,
as of the date of this Agreement, by the Uniform Commercial Code as enacted in
the State of Arizona to the extent the same are defined therein.
8.14. FURTHER INSTRUMENTS. Borrower and Guarantors shall from time to time
execute and deliver, and shall cause each of Borrower's subsidiaries to execute
and deliver, all such amendments, supplements and other modifications hereto and
to the other Loan Documents and all such financing statements or continuation
statements, instruments of further assurance and any other instruments, and
shall take such other actions, as Lender reasonably requests and deems necessary
or advisable in furtherance of the agreements contained herein.
8.15. LENDER'S EXPENSES AND ATTORNEY'S FEES. UPON AND AFTER AN EVENT OF
DEFAULT, LENDER SHALL BE ENTITLED TO RECOVER FROM BORROWER AND GUARANTORS ALL OF
LENDER'S ATTORNEY'S FEES AND REASONABLE COSTS AND EXPENSES INCURRED IN THE
EXERCISE OF LENDER'S RIGHTS SET FORTH IN THIS AGREEMENT,
-18-
<PAGE> 19
AND ALL DAMAGES SUSTAINED BY LENDER BY REASON OF MISREPRESENTATION, BREACH OF
WARRANTY OR BREACH OF COVENANT OF BORROWER HEREIN, EXPRESSED OR IMPLIED, WHETHER
CAUSED BY THE ACTS OR DEFAULTS OF BORROWER, ACCOUNT DEBTORS OR OTHERS; INCLUDING
WITHOUT LIMITATION, ALL ATTORNEY'S FEES ARISING FROM SUCH SERVICES, EXPERT
WITNESS FEES AND ANY EXPENSES, COSTS AND CHARGES RELATING THERETO, AND ALL OF
THE FOREGOING SHALL CONSTITUTE PART OF THE INDEBTEDNESS SECURED BY THE
COLLATERAL AND SHALL BE PAYABLE ON DEMAND.
8.16. GOVERNING LAW. THIS AGREEMENT HAS BEEN EXECUTED AND DELIVERED BY
BORROWER AND GUARANTOR AND ACCEPTED BY LENDER IN MARICOPA COUNTY, ARIZONA AND
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS
OPPOSED TO THE CONFLICTS OF LAWS PROVISIONS) OF THE STATE OF ARIZONA.
8.17. JURISDICTION AND VENUE. TO INDUCE THE LENDER TO ENTER INTO THIS
AGREEMENT, BORROWER, GUARANTORS AND LENDER IRREVOCABLY AGREE THAT, SUBJECT TO
THE LENDER'S ELECTION, ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR RESPECT,
ARISING OUT OF OR FROM OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR
THE COLLATERAL SHALL BE LITIGATED IN COURTS HAVING SITUS WITHIN THE COUNTY OF
MARICOPA, STATE OF ARIZONA. BORROWER, GUARANTORS AND LENDER HEREBY CONSENT AND
SUBMIT TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN
SAID COUNTY AND STATE AND WAIVE PERSONAL SERVICE OF ANY AND ALL PROCESS UPON
BORROWER, AND AGREE THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY REGISTERED
MAIL DIRECTED TO BORROWER AT THE ADDRESS SET FORTH IN SCHEDULE SECTION 8.17 AND
SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON ACTUAL RECEIPT THEREOF.
8.18. WAIVER. EXCEPT AS OTHERWISE PROVIDED FOR IN THIS AGREEMENT AND TO THE
EXTENT NOT PROHIBITED BY APPLICABLE LAW, BORROWER AND EACH GUARANTOR HEREBY
WAIVES (i) PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF PRESENTMENT, PROTEST,
DEFAULT, NON-PAYMENT, MATURITY, RELEASE, COMPROMISE, SETTLEMENT, AND ONE OR MORE
EXTENSIONS OR RENEWALS OF ANY OR ALL ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS,
INSTRUMENTS, CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY THE LENDER ON
WHICH BORROWER MAY IN ANY WAY BE LIABLE AND HEREBY RATIFIES AND CONFIRMS
WHATEVER THE LENDER MAY DO IN THIS REGARD; (ii) ALL RIGHTS TO NOTICE AND HEARING
PRIOR TO THE LENDER'S TAKING POSSESSION OR CONTROL OF, OR THE LENDER'S REPLEVIN,
ATTACHMENT OR LEVY ON OR OF THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT
BE REQUIRED BY ANY COURT PRIOR TO ALLOWING THE LENDER TO EXERCISE ANY OF THE
LENDER'S REMEDIES; AND (iii) THE BENEFIT OF ALL VALUATION, APPRAISEMENT OR
EXEMPTION LAWS.
8.19. ADVICE OF COUNSEL. BORROWER AND EACH GUARANTOR ACKNOWLEDGES THAT THEY
HAVE BEEN REPRESENTED AND ADVISED BY INDEPENDENT LEGAL COUNSEL WITH RESPECT TO
THE NEGOTIATION, EXECUTION AND ACCEPTANCE OF THIS AGREEMENT AND THE TRANSACTION
GOVERNED BY THIS AGREEMENT AND SPECIFICALLY WITH RESPECT TO THE PROVISIONS
CONTAINED IN SECTIONS 7.3, 8.15, 8.16, 8.17, 8.18, 8.19 and 8.20 HEREOF AND HAS
RELIED UPON THE ADVICE OF ITS INDEPENDENT LEGAL COUNSEL IN AGREEING TO THE TERMS
AND CONDITIONS HEREIN AND IN EXECUTING AND DELIVERING THIS AGREEMENT, AND THAT
THEY HAVE FREELY AND VOLUNTARILY ENTERED INTO THIS AGREEMENT AS THE PRODUCT OF
ARMS' LENGTH NEGOTIATIONS.
8.20. WAIVER OF RIGHT TO TRIAL BY JURY. LENDER, BORROWER AND GUARANTORS
HEREBY COVENANT AND AGREE THAT IN ANY SUIT, ACTION OR PROCEEDING IN RESPECT OF
ANY MATTER ARISING OUT OF THIS AGREEMENT, THE DOCUMENTS EXECUTED IN CONNECTION
HEREWITH, ANY WRITTEN AGREEMENT BETWEEN THE PARTIES HERETO, WHETHER NOW EXISTING
OR HEREAFTER ARISING OR IN ANY WAY RELATED TO, CONNECTED WITH OR INCIDENTAL TO
THE DEALINGS OF THE PARTIES HERETO OR TRANSACTIONS CONTEMPLATED HEREBY OR
THEREBY WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE, TRIAL SHALL BE TO A
COURT OF COMPETENT JURISDICTION AND NOT TO A JURY: LENDER, BORROWER AND EACH
GUARANTOR HEREBY EXPRESSLY WAIVE ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY. ANY
PARTY MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS
-19-
<PAGE> 20
AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES
HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
8.21. TIME OF ESSENCE Time is of the essence for the performance the
obligations set forth in this Agreement and the Loan Documents.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first set forth above.
BORROWER:
PREMIUM AUTO ACCEPTANCE CORPORATION
By: /s/ DANIEL CHU
---------------------------------------
(Signature)
Daniel Chu, President
- ------------------------------------------
(Printed Name and Title) (Date)
75-2573171
- ------------------------------------------
Tax Payer Identification No.
PAACO, INC.
By: /s/ DANIEL CHU
---------------------------------------
(Signature)
Daniel Chu, President
- ------------------------------------------
(Printed Name and Title) (Date)
75-2457739
- ------------------------------------------
Tax Payer Identification No.
GUARANTORS:
/s/ LARRY W. LANGE
- ------------------------------------------
Larry W. Lange
###-##-####
- ------------------------------------------
Social Security No.
/s/ MARY LANGE
- ------------------------------------------
Mary Lange
###-##-####
- ------------------------------------------
Social Security No.
/s/ DANIEL CHU
- ------------------------------------------
Daniel Chu
###-##-####
- ------------------------------------------
Social Security No.
/s/ VICKY CHU
- ------------------------------------------
Vicky Chu
###-##-####
- ------------------------------------------
Social Security No.
/s/ THEODORE LANGE
- ------------------------------------------
Theodore Lange
###-##-####
- ------------------------------------------
Social Security No.
LENDER:
FINOVA CAPITAL CORPORATION,
a Delaware corporation
By: /s/ STEPHEN J. THOMAS
---------------------------------------
(Signature)
Stephen J. Thomas, Vice President 12/14/95
- ------------------------------------------
(Printed Name and Title) (Date)
94-1278569
- ------------------------------------------
Tax Payer Identification Number
-20-
<PAGE> 21
[FINOVA LOGO]
- --------------------------------------------------------------------------------
EIGHTH AMENDED AND RESTATED
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: PREMIUM AUTO ACCEPTANCE CORPORATION
ADDRESS: 605 SOUTH LOOP 12
IRVING, TEXAS 75225
BORROWER: PAACO, INC.
ADDRESS: 605 SOUTH LOOP 12
IRVING, TEXAS 75225
DATE: FEBRUARY 5, 1998
This Eighth Amended and Restated Schedule ("Eighth Amended Schedule") is
executed in conjunction with a certain Loan and Security Agreement
("Agreement"), dated December 14, 1995, and as an amendment to and a restatement
of that certain Schedule to Loan and Security Agreement ("Original Schedule"),
dated December 14, 1995, that certain Amended and Restated Schedule to Loan and
Security Agreement ("Amended Schedule"), dated May 22, 1996, that certain Second
Amended and Restated Schedule to Loan and Security Agreement ("Second Amended
Schedule"), dated January 7, 1997, that certain Third Amended and Restated
Schedule to Loan and Security Agreement ("Third Amended Schedule"), dated March
24, 1997, that certain Fourth Amended and Restated Schedule to Loan and Security
Agreement ("Fourth Amended Schedule"), dated April 17, 1997, that certain Fifth
Amended and Restated Schedule to Loan and Security Agreement ("Fifth Amended
Schedule"), dated October 2, 1997, that certain Sixth Amended and Restated
Schedule to Loan and Security Agreement ("Sixth Amended Schedule"), dated
October 27, 1997, and that certain Seventh Amended and Restated Schedule to Loan
and Security Agreement ("Seventh Amended Schedule"), dated November, 1997, by
and between FINOVA Capital Corporation, as Lender, and the above Borrower, as
Borrower. All references to Section numbers herein refer to Sections in the
Agreement. The terms and provision of this Eighth Amended Schedule shall
supersede all terms and provisions contained in all prior Schedules.
================================================================================
1.A. BORROWERS (SECTION 1).
Each Borrower shall be referred to herein as follows:
Premium Auto Acceptance Corporation - "Premium"
PAACO, Inc. - "PAACO"
-1-
<PAGE> 22
================================================================================
1.11.A. MAXIMUM AMOUNT OF AN ELIGIBLE RECEIVABLE (SECTION 1.11).
The term "Maximum Amount of an Eligible Receivable" shall mean the sum
of Eighteen Thousand Dollars ($18,000.00) remaining due thereon at any
date of determination, including all unearned finance charges,
insurance fees and other fees and charges pursuant to the Eligible
Receivables.
================================================================================
1.11.B. MAXIMUM TERM OF AN ELIGIBLE RECEIVABLE (SECTION 1.11).
The "Maximum Term of an Eligible Receivable" shall be thirty-six (36)
months remaining until the due date of such Eligible Receivable at any
date of determination.
================================================================================
1.11.C. AGING PROCEDURES AND ELIGIBILITY TEST (SECTION 1.11).
AGING PROCEDURES FOR A CONTRACTUAL AGING:
1. No payment missed or due = Current.
2. 1 to 30 days past due = "30 day Account".
3. 31 to 60 days past due = "60 day Account".
4. 61 or more days past due = "60 + day Account"
ELIGIBILITY TEST:
The term "Eligibility Test" shall mean the test to determine the eligibility of
a Receivable for the purposes of Section 1.11 hereof, that test, being as
follows: no payment due on said Receivable remains unpaid more than sixty (60)
days from the specific date on which such payment was due pursuant to the terms
of said Receivable.
================================================================================
2.1.A. AMOUNT OF REVOLVING CREDIT LINE (SECTION 2.1):
The "Amount of the Revolving Credit Line shall be as follows,
provided, however, if a Default or Event of Default exist on the date
of any increase of the "Amount of the Revolving Credit Line" as set
forth below, the "Amount of the Revolving Credit Line shall not
increase, and shall only increase thereafter, at the sole discretion
of Lender:
(1) If the date of determination is on or before June 30, 1998, then
the Amount of Revolving Credit Line shall be Thirty Million
Dollars ($30,000,000.00);
(2) If the date of determination is after June 30, 1998, but on or
before September 30, 1998, then the Amount of Revolving Credit
Line shall be Thirty Two Million Five Hundred Thousand Dollars
($32,500,000.00); and
(3) If the date of determination is after September 30, 1998, then
the Amount of the Revolving Credit Line shall be Thirty Five
Million Dollars ($35,000,000.00).
-2-
<PAGE> 23
Notwithstanding any provision contained in the Loan Documents to
the contrary, the Amount of the Revolving Credit Line shall not
exceed Thirty Million Dollars ($30,000,000.00), until Borrower
has hired, as a full time employee of Borrower, a qualified chief
financial officer that has experience and qualifications
commensurate with a chief financial officer in a same or similar
industry and value of assets as that of Borrower.
================================================================================
2.1.B. AVAILABILITY ON ELIGIBLE RECEIVABLES (SECTION 2.1):
The "Availability on Eligible Receivables" shall be an amount
equal to sixty-seven and one-half percent (67.5%) of the
aggregate unmatured and unpaid amount due to Borrower from the
Account Debtor named thereon, excluding all unearned finance
charges, insurance fees and other fees and charges pursuant to
the Eligible Receivables.
Notwithstanding any provision contained in the Loan Documents to
the contrary, if (i) for the twelve (12) calendar month period
immediately prior to any date of determination, the Collateral
Recovery Rate is less than seventy-two percent (72%), or (ii) on
any date of determination the percentage, determined by the
aggregate outstanding balance of all Receivables that are
ineligible, divided by the aggregate outstanding balance of all
Receivables, is greater than seven percent (7%), then in either
event, Lender, in its sole and absolute discretion, may modify
the Availability on Eligible advance percentage set forth above.
================================================================================
2.2. STATED INTEREST RATE (SECTION 2.2).
The lesser of (i) the Governing Rate plus three percent (3.0%)
per annum or (ii) the Maximum Rate.
================================================================================
2.3. MATURITY DATE (SECTION 2.3.C).
The primary term of this Agreement shall expire on April 30,
2000. If Borrower desires to extend the primary term or any term
thereafter of this Agreement, Borrower shall give Lender notice
of its intent to extend the term no earlier than one hundred and
eighty (180) days and no later than one hundred and fifty (150)
days prior to any expiration date of this Agreement. Upon the
receipt by Lender of Borrower's notice to extend the term of this
Agreement, if Lender desires to renew and extend the term of this
Agreement, Lender shall give Borrower notice of Lender's intent
to extend the term of this Agreement, within sixty (60) days of
Lenders receipt of Borrower's notice to extend. If Lender does
not give Borrower notice of Lender's intent to extend the term of
this Agreement within the sixty (60) days period, then it shall
be deemed that Lender does not intend to renew and extend the
term of this Agreement. Notwithstanding the foregoing, this
Agreement shall remain in full force and effect until the
Indebtedness due and owing to Lender has been paid in full.
================================================================================
2.6. LIQUIDATED DAMAGES (SECTION 2.6).
The amount of "Liquidated Damages" shall be, prior to April 30,
2000, Borrower pays the balance of the Indebtedness in full and
Borrower requests Lender to terminate Lender's security interest
in the Collateral, an amount equal to three percent (3%) of the
Amount of the Revolving Credit Line.
================================================================================
2.14 FACILITY INCREASE FEE (SECTION 2.14)
The following Section 2.14 is hereby added to the Agreement.
-3-
<PAGE> 24
2.14 FACILITY INCREASE FEE. Immediately upon the execution of
the those certain Loan Documents to increase the Amount of the
Revolving Credit Facility from Twenty Million Dollars
($20,000,000.00) to a maximum of Thirty Five Million Dollars
($35,000,000.00), with such Thirty Five Million Dollars
($35,000,000.00) to be available on or after October 1, 1998,
upon Borrower's compliance with all of the conditions with
respect thereto, Borrower shall pay a facility increase fee in
the amount of One Hundred Fifty Thousand Dollars ($150,000.00).
================================================================================
3.2. BUSINESS LOCATIONS OF BORROWER (SECTIONS 3.2, 3.6 and 5.1.N.).
All locations are as follows: 605 South Loop 12
Irving, Texas 75225
3200 E. Randol Mill Road
Arlington, Texas 76011
3500 N.E. 28th Street
Ft. Worth, Texas 76111
821 Avenue K
Plano, Texas 75074
5125 Ross Avenue
Dallas, Texas 75206
945 E. Jefferson Street
Dallas, Texas 75203
2751-2781 S. Garland Road
Garland, Texas 75041
================================================================================
4.4. ANNUAL FINANCIAL STATEMENTS (SECTION 4.4).
Annual financial statements shall be audited annually by
independent certified public accountants acceptable to Lender.
================================================================================
4.5. GUARANTOR (WHETHER ONE OR MORE) (SECTION 4.5).
Larry Lange and Mary Lange
Daniel Chu and Vicky Chu
Theodore Lange
================================================================================
5.1. BORROWER'S TRADENAMES (WHETHER ONE OR MORE)(SECTION 5.1.B.)
None
================================================================================
6.1. AFFIRMATIVE COVENANTS (SECTION 6.1.I)
-4-
<PAGE> 25
Section 6.1.1 of the Agreement is hereby deleted in its entirety
and the following is hereby substituted in lieu thereof:
I. Open a new location without Lender's prior written
consent.
================================================================================
6.2.A. MODIFICATION TO A NEGATIVE COVENANT (SECTION 6.2.A.)
Section 6.2.A. is hereby deleted in its entirety and the
following is substituted in lieu thereof:
A. Incur or permit or exist any mortgage, pledge, title
retention lien or other lien, encumbrance or security
interest with respect to the Collateral now owned or
hereafter acquired by Borrower, except liens in favor
of Lender or in favor of a floor plan lender who has
executed an intercreditor agreement with Lender, in a
form and substance acceptable to Lender.
================================================================================
6.3.A. LEVERAGE RATIO LIMIT (SECTION 6.3.A).
The term "Leverage Ratio Limit" shall mean 4.0 to 1.0.
================================================================================
6.3.B. MINIMUM NET INCOME (SECTION 6.3.B).
The Minimum Net Income shall be One Dollar ($1.00) for any fiscal
quarter of Borrower.
================================================================================
6.3.C. DISTRIBUTIONS LIMITATION (SECTION 6.3.C).
Maximum Distributions shall not exceed seventy-five percent (75%)
of Net Income of the fiscal year in which such Distributions are
made.
================================================================================
8.1. REIMBURSEMENT OF EXPENSES (SECTION 8.1).
Borrower shall reimburse Lender for all of Lenders' legal costs
and expenses incurred by Lender with respect to preparation,
negotiation, and execution of this Eighth Amended and Restated
Schedule to Loan and Security Agreement and the review of all
documentation and other due diligence with respect to the Crown,
Inc. and Alexander Group transactions.
================================================================================
8.2. NOTICES (SECTION 8.2).
Lender: FINOVA Capital Corporation
(copy each office below with all notices)
CORPORATE FINANCE OFFICE:
FINOVA Capital Corporation
355 South Grand Avenue, Suite 2400
Los Angeles, CA 90071
Attn: John J. Bonano, Senior Vice President
Telephone: (213) 253-1600
Telecopy No.: (213) 625-0268
-5-
<PAGE> 26
CORPORATE OFFICE:
FINOVA Capital Corporation
1850 N. Central Avenue
Phoenix, AZ 85077
Attn: Joseph R. D'Amore, Vice President -
Group Counsel
Telephone: (602) 207-4900
Telecopy No.: (602) 207-5543
REDISCOUNT FINANCE OFFICE:
FINOVA Capital Corporation
13355 Noel Road, Suite 800
Dallas, TX 75240
Attn: Dan Black (Account Executive)
Telephone: (214) 458-5600
Telecopy No.: (214) 458-5650
Borrower: Premium Auto Acceptance Corporation
605 South Loop 12
Irving, Texas 75225
Telephone:
--------------
Telecopy No.:
--------------
Borrower: PAACO, Inc.
605 South Loop 12
Irving, Texas 75225
Telephone:
--------------
Telecopy No.:
--------------
Guarantor: Larry W. Lange & Mary Lange
6 Braewick Ct.
Dallas, TX 75225
Telephone:
--------------
Telecopy No.:
--------------
Guarantor: Daniel Chu & Vicky Chu
10165 Gaywood
Dallas, TX 75229
Telephone:
--------------
Telecopy No.:
--------------
Guarantor: Theodore Lange
4040 Avondale, #408
Dallas, TX 75219
Telephone:
--------------
Telecopy No.:
--------------
================================================================================
8.17. AGENT FOR SERVICE OF PROCESS (SECTION 8.17).
Daniel Chu, whose address is 605 South Loop 12, Irving, Texas
75225. (Agent)
================================================================================
-6-
<PAGE> 27
IN WITNESS WHEREOF, the parties have executed this Schedule on the day and
year first set forth above.
LENDER:
FINOVA CAPITAL CORPORATION,
a Delaware corporation
By: /s/ BRAD FYHER
----------------------------------------------
(Signature)
Brad Fisher, Vice President 2-17-98
----------------------------------------------
(Printed Name and Title) (Date)
BORROWER:
PREMIUM AUTO ACCEPTANCE CORPORATION
By: /s/ DANIEL CHU
----------------------------------------------
(Signature)
Daniel Chu, President
----------------------------------------------
(Printed Name and Title) (Date)
PAACO, INC.
By: /s/ DANIEL CHU
----------------------------------------------
(Signature)
Daniel Chu, President
----------------------------------------------
(Printed Name and Title) (Date)
GUARANTORS:
/s/ LARRY W. LANGE
----------------------------------------------
Larry W. Lange
/s/ MARY LANGE
----------------------------------------------
Mary Lange
/s/ DANIEL CHU
----------------------------------------------
Daniel Chu
/s/ VICKY CHU
----------------------------------------------
Vicky Chu
/s/ THEODORE LANGE
----------------------------------------------
Theodore Lange
-7-
<PAGE> 28
[FINOVA LOGO]
- --------------------------------------------------------------------------------
EIGHTH AMENDED AND RESTATED
PROMISSORY NOTE
$35,000,000.00 PHOENIX, ARIZONA February 5, 1998
FOR VALUE RECEIVED, the undersigned ("MAKER"), hereby unconditionally
promises to pay to the order of FINOVA CAPITAL CORPORATION, a Delaware
corporation, ("HOLDER") formerly known as Greyhound Financial Corporation, at
HOLDER's branch address at 13355 Noel Road, Suite 800, Dallas, Texas 75240, or
at such other place as HOLDER may designate in writing, the principal sum of
Thirty Five Million Dollars ($35,000,000.00) or so much thereof as shall be
advanced or readvanced, with interest thereon at the Stated Interest Rate
calculated on the average daily balance outstanding, as follows:
1. DEFINITIONS. When used herein, the following terms have the meanings
given in this paragraph:
A. Loan Agreement. The term "Loan Agreement" shall mean that certain
Loan and Security Agreement dated December 14, 1995, entered into by and
between FINOVA Capital Corporation, as Lender, and MAKER, as Borrower, and
all amendments, substitutions, renewals and extensions thereof. All terms
used herein which are not expressly defined herein shall have the meanings
ascribed to them in the Loan Agreement.
B. Maximum Rate. The term "Maximum Rate" shall mean the highest lawful
rate of interest applicable to this NOTE. In determining the Maximum Rate,
due regard shall be given to all payments, fees, charges, deposits,
balances and agreements which may constitute interest or be deducted from
principal when calculating interest.
2. PAYMENT. The principal and interest of this NOTE are payable as follows:
A. Accrued but unpaid interest for each calendar month during the term
hereof shall be due and payable monthly, in arrears, on the fifteenth
(15th) day of the immediately succeeding calendar month that commences on
February 15, 1997. All outstanding principal together with all accrued and
unpaid interest shall be due and payable, if not sooner paid, on April 30,
2000. All payments received hereunder shall be applied as set forth in the
Loan Agreement.
B. Notwithstanding the foregoing, principal shall be immediately due
and payable without written notice and demand from Lender in such amounts
so that the outstanding balance hereunder does not, at anytime, exceed the
amount of the Loan as determined pursuant to Section 2.1 of the Loan
Agreement. The amount of such payments shall be determined by HOLDER
pursuant to the terms of the Loan Agreement and based upon the principal
balance of this NOTE then outstanding as determined pursuant to the Loan
Agreement and as shown on the books and records of HOLDER, maintained in
accordance with its usual practice, the entries of which being conclusive
evidence of the existence and amounts as therein recorded.
C. All of the principal hereunder may be prepaid in full or in part at
any time; however, such voluntary prepayments shall be subject to the
voluntary prepayment provisions set forth in Article 2.6 of the Loan
Agreement.
-1-
<PAGE> 29
3. PRINCIPAL BALANCE. The unpaid principal balance of this NOTE at any time
shall be the total amounts loaned or advanced hereunder by HOLDER, less the
amount of payments or prepayments of principal made hereon by or for the account
of MAKER. It is contemplated that by reason of payments or prepayments hereon
there may be times when no indebtedness is owing hereunder; but notwithstanding
such occurrences, this NOTE shall remain valid and shall be in force and effect
as to loans or advances made pursuant to and under the terms of this NOTE
subsequent to each such occurrence. All loans or advances and all payments or
prepayments made hereunder on account of principal or interest may be evidenced
by HOLDER, or any subsequent holder, maintaining in accordance with its usual
practice an account or accounts evidencing the indebtedness of MAKER resulting
from all loans or advances and all payments or prepayments hereunder from time
to time in the amounts of principal and interest payable and paid from time to
time hereunder, in which event, in any legal action or proceeding in respect of
this NOTE, subject to Section 2.8 of the Loan Agreement, the entries made in
such account or accounts shall be conclusive evidence of the existence and
amounts of the obligations of MAKER therein recorded. In the event that the
unpaid principal amount hereof, at any time and for any reason, exceeds the
maximum amount hereinabove specified, MAKER covenants and agrees to pay the
excess principal amount immediately without notice or demand; such excess
principal amount shall in all respects be deemed to be included among the loans
or advances made pursuant to the other terms of this NOTE and shall bear
interest at the rate hereinabove stated.
4. ADVANCES. This Promissory Note is the "Note" referred to in the Loan
Agreement and the Holder is entitled to all the rights, remedies and benefits of
the Lender thereunder. Reference is hereby made to the Loan Agreement for the
terms and conditions under which this Note is to be made and to be repaid.
5. DEFAULT, REMEDIES. Upon the occurrence of any one or more of the Events
of Default set forth in the Loan Agreement, at the option of the holder of this
NOTE, the entire unpaid principal balance and accrued and unpaid interest hereon
shall at once become due and payable without notice or demand and the Holder may
foreclose and enforce all liens and security interests securing this NOTE.
If this NOTE is not paid when due, whether at maturity or by acceleration,
or if it is collected through a bankruptcy, probate, or other judicial
proceeding, whether before or after maturity, MAKER agrees to pay attorney's
fees, together with all actual expenses of collection and litigation and costs
of court incurred by the Holder, whether or not suit is actually filed or not.
6. WAIVER. MAKER and all other makers, signers, sureties, guarantors and
endorsers of this NOTE waive demand, presentment, notice of dishonor, notice of
intent to demand or accelerate payment hereof, diligence in the collecting,
grace, notice and protest, and agree to one or more extensions for any period or
periods of time and partial payments, before or after maturity, without
prejudice to HOLDER.
7. SECURITY. This NOTE is secured by certain security interests as set
forth in the Loan Agreement.
8. CONTROLLING AGREEMENT. The contracted for rate of interest of the Loan
without limitation, shall consist of the following: (i) the Stated Interest
Rate, calculated and applied to the principal balance of the Note in accordance
with the provisions of this Note and the Loan Agreement; (ii) Interest After
Event of Default or Due Date, calculated and applied to the amounts due under
this Note in accordance with the provisions thereof; and (iii) all Additional
Sums (as herein defined), if any. Borrower agrees to pay an effective contracted
for rate of interest which is the sum of the above-referenced elements.
All fees, charges, goods, things in action or any other sums or things of
value (other than amounts described in the immediately previous paragraph), paid
or payable by Borrower (collectively, the "Additional Sums"), whether pursuant
to this Note, the Loan Agreement or any other documents or instruments in any
way pertaining to this lending transaction, or otherwise with respect to this
lending transaction, that under any applicable law may be deemed to be interest
with respect to this lending transaction, for the purpose of any applicable law
that may limit the maximum amount of interest to be charged with respect to this
lending transaction, shall be payable by Borrower as, and shall be deemed to be,
additional interest and for such purposes only, the agreed upon and "contracted
for rate of interest" of this
-2-
<PAGE> 30
lending transaction shall be deemed to be increased by the rate of interest
resulting from the inclusion of the Additional Sums.
It is the intent of the parties to comply with the usury law ("Applicable
Usury Law") applicable pursuant to the terms of the preceding paragraph or such
other usury law which is applicable if the law chosen by the parties is not
applicable. Accordingly, it is agreed that notwithstanding any provisions to the
contrary in this NOTE, or in any of the documents securing payment hereof or
otherwise relating hereto, in no event shall this NOTE or such documents require
the payment or permit the collection of interest in excess of the maximum
contract rate permitted by the Applicable Usury Law. In the event (a) any such
excess of interest otherwise would be contracted for, charged or received from
Maker or otherwise in connection with the loan evidenced hereby, or (b) the
maturity of the indebtedness evidenced by this NOTE is accelerated in whole or
in part, or (c) all or part of the principal or interest of this NOTE shall be
prepaid, so that under any of such circumstances the amount of interest
contracted for, shared or received in connection with the loan evidenced hereby,
would exceed the maximum contract rate permitted by the Applicable Usury Law,
then in any such event (1) the provisions of this paragraph shall govern and
control, (2) neither Maker nor any other person or entity now or hereafter
liable for the payment hereof will be obligated to pay the amount of such
interest to the extent that it is in excess of the maximum contract rate
permitted by the Applicable Usury Law, (3) any such excess which may have been
collected shall be either applied as a credit against the then unpaid principal
amount hereof or refunded to Maker, at Holder's option, and (4) the effective
rate of interest will be automatically reduced to the maximum amount of interest
permitted by the Applicable Usury Law. It is further agreed, without limiting
the generality of the foregoing, that to the extent permitted by the Applicable
Usury Law; (x) all calculations of interest which are made for the purpose of
determining whether such rate would exceed the maximum contract rate permitted
by the Applicable Usury Law shall be made by amortizing, prorating, allocating
and spreading during the period of the full stated term of the loan evidenced
hereby, all interest at any time contracted for, charged or received from Maker
or otherwise in connection with such loan; and (y) in the event that the
effective rate of interest on the loan should at any time exceed the maximum
contract rate allowed under the Applicable Usury Law, such excess interest that
would otherwise have been collected had there been no ceiling imposed by the
Applicable Usury Law shall be paid to Holder from time to time, if and when the
effective interest rate on the loan otherwise falls below the maximum amount
permitted by the Applicable Usury Law, to the extent that interest paid to the
date of calculation does not exceed the maximum contract rate permitted by the
Applicable Usury Law, until the entire amount of interest which would have
otherwise been collected had there been no ceiling imposed by the Applicable
Usury Law has been paid in full. Maker further agrees that should the maximum
contract rate permitted by the Applicable Usury Law be increased at any time
hereafter because of a change in the law, then to the extent not prohibited by
the Applicable Usury Law, such increases shall apply to all indebtedness
evidenced hereby regardless of when incurred; but, again to the extent not
prohibited by the Applicable Usury Law, should the maximum contract rate
permitted by the Applicable Usury Law be decreased because of a change in the
law, such decreases shall not apply to the indebtedness evidenced hereby
regardless of when incurred.
9. APPLICABLE LAW. This NOTE shall be construed in accordance with the laws
of the State of Arizona and the laws of the United States applicable to
transactions in the State of Arizona.
10. NO WAIVER. No delay on the part of the HOLDER in the exercise of any
power or right under this NOTE, or under the LOAN AGREEMENT or any other
instrument executed in connection herewith, shall operate as a waiver thereof,
nor shall a single or partial exercise of any power or right preclude other or
further exercise thereof or exercise of any other power or right. Enforcement by
HOLDER of any security for the payment hereof shall not constitute any election
by it of remedies so as to preclude the exercise of any other remedy available
to it.
11. SUCCESSORS, ASSIGNS. The term "HOLDER" shall include all of HOLDER's
successors and assigns to whom the benefits of this NOTE shall inure.
-3-
<PAGE> 31
12. RENEWAL AND EXTENSION. This Eighth Amended and Restated Promissory Note
is executed in conjunction with that certain Eighth Amended and Restated
Schedule to Loan and Security Agreement, dated of even date herewith, by and
between HOLDER and MAKER amending that certain Amended and Restated Schedule to
Loan and Security Agreement, dated May 22, 1996, that certain Second Amended and
Restated Schedule to Loan and Security Agreement, dated January 7, 1997, that
certain Third Amended and Restated Schedule to Loan and Security Agreement,
dated March 24, 1997, that certain Fourth Amended and Restated Schedule to Loan
and Security Agreement, dated April 17, 1997, that certain Fifth Amended and
Restated Schedule to Loan and Security Agreement, dated October 2, 1997, that
certain Sixth Amended and Restated Schedule to Loan and Security Agreement,
dated October 27, 1997, and that certain Seventh Amended and Restated Schedule
to Loan and Security Agreement, dated November 25, 1997. This Eighth Amended and
Restated Promissory Note is a renewal and extension of and not an extinguishment
of that certain Promissory Note, dated December 14, 1995, in the stated
principal amount of $6,500,000.00, that certain Amended and Restated Promissory
Note, dated May 22, 1996, in the stated principal amount of Twelve Million
Dollars ($12,000,000.00), that certain Second Amended and Restated Promissory
Note, dated January 7, 1997, in the stated principal amount of Thirteen Million
Dollars ($13,000,000.00), that certain Third Amended and Restated Promissory
Note, dated March 24, 1997, in the stated principal amount of Fourteen Million
Dollars ($14,000,000.00), that certain Fourth Amended and Restated Promissory
Note, dated April 17, 1997, in the stated principal amount of Twenty Million
Dollars ($20,000,000.00), that certain Fifth Amended and Restated Promissory
Note, dated October 2, 1997, in the stated principal amount of Twenty One
Million Dollars ($21,000,000.00), and that certain Sixth Amended and Restated
Promissory Note, dated October 27, 1997, in the stated principal amount of
Twenty Two Million Dollars ($22,000,000.00), and that certain Seventh Amended
and Restated Promissory Note, dated November 25, 1997, in the stated principal
amount of Twenty Five Million Dollars ($25,000,000.00) each executed by MAKER in
favor of HOLDER. This Eighth Amended and Restated Promissory Note is secured by
liens granted to Holder on certain collateral, this Eighth Amended and Restated
Promissory Note is a continuation of MAKER's obligations to HOLDER and such
obligations and liens, mortgages, deeds of trust or security interests are not
extinguished by this Eighth Amended and Restated Promissory Note but are hereby
renewed and extended.
13. AVAILABILITY LIMITATIONS. The maximum outstanding balance of this Note
shall be limited as the Amount of the Revolving Credit Line is restricted in the
Eighth Amended and Restated Schedule to Loan and Security Agreement, as even
date herewith, as follows:
if a Default or Event of Default exist on the date of any increase of the
"Amount of the Revolving Credit Line" as set forth below, the "Amount of
the Revolving Credit Line" shall not increase, and shall only increase
thereafter, at the sole discretion of Lender:
i. If the date of determination is on or before June 30, 1998, then
the Amount of Revolving Credit Line shall be Thirty Million
Dollars ($30,000,000.00);
ii. If the date of determination is after June 30, 1998, but on or
before September 30, 1998, then the Amount of Revolving Credit
Line shall be Thirty Two Million Five Hundred Thousand Dollars
($32,500,000.00); and
iii. If the date of determination is after September 30, 1998, then
the Amount of the Revolving Credit Line shall be Thirty Five
Million Dollars ($35,000,000.00).
-4-
<PAGE> 32
MAKER:
Premium Auto Acceptance Corporation,
a Texas corporation
By: /s/ DANIEL CHU
---------------------------------
Name: Daniel Chu
-------------------------------
Title: President
------------------------------
PAACO, Inc.,
a Texas corporation
By: /s/ DANIEL CHU
---------------------------------
Name: Daniel Chu
-------------------------------
Title: President
------------------------------
-5-
<PAGE> 1
EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CROWN GROUP, INC.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements appearing elsewhere in this annual report.
OVERVIEW
Crown Group, Inc. ("Crown"), and collectively with its subsidiaries (the
"Company"), is a publicly traded buy-out firm which presently owns (i) 65% of
Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation
(collectively, "Paaco"), a vertically integrated used car sales and finance
company, (ii) 100% of Precision IBC, Inc. ("Precision"), a firm specializing in
the sale and rental of intermediate bulk containers, (iii) 80% of Concorde
Acceptance Corporation ("Concorde"), a sub-prime mortgage lender, (iv) 49% of
Casino Magic Neuquen S.A. ("CMN"), a casino operator in the Province of Neuquen,
Argentina, and (v) 80% of Home Stay Lodges I, Ltd., a partnership focusing on
the development and operation of extended-stay lodging facilities. In addition,
from time to time the Company purchases and sells small ownership interests in
securities of privately held and publicly traded firms. The Company is presently
focusing on (i) the development and expansion of its existing businesses, and
(ii) the potential acquisition or development of other unrelated businesses.
Since its inception in 1983 through June 1993 the Company was engaged in
various facets of the cable and related programming businesses. During 1992 the
Company sold the majority of its programming business and began exploring new
business opportunities. In June 1993 the Company made the decision to enter the
gaming business, and as a result, proceeded to sell the balance of its cable
assets.
From June 1993, with the acquisition of 100% of St. Charles Gaming Company,
Inc. ("SCGC"), until November 1996, the Company's primary business focus was
that of owning, operating and developing casino gaming properties. SCGC owns and
operates a riverboat gaming casino located in Calcasieu Parish, Louisiana which
had been in the development stage until opening in July 1995. The Company sold a
50% interest in SCGC in June 1995 and the remaining 50% interest in May 1996, in
each case resulting in a substantial gain.
In November 1996 the Company decided to expand its business interests
beyond casino gaming and began pursuing business opportunities in other fields.
As a result the Company has either acquired or formed a number of businesses in
a variety of industries.
RECENT ACQUISITIONS
CMN - In June 1997 the Company acquired a 49% interest in CMN for a purchase
price of $7 million cash. CMN operates casinos in the cities of Neuquen and San
Martin de los Andes in the Province of Neuquen, Argentina under an exclusive
concession contract.
CONCORDE - In June 1997 the Company, along with certain newly hired management
personnel, formed Concorde. Concorde is in the business of originating,
purchasing, servicing and selling sub-prime mortgage loans which are secured
primarily by first and second liens on residential properties. These loans are
sold in privately negotiated transactions to institutional investors and other
third parties.
PAACO - In February 1998 the Company acquired 53% of the common stock of Paaco
for a purchase price of approximately $9.1 million cash. Approximately $4.9
million of Paaco common stock was purchased directly from Paaco, and the
remaining $4.2 million was purchased from Paaco management personnel who prior
to this transaction were the sole shareholders of Paaco. Effective May 1, 1998
the Company purchased an additional 12% interest in Paaco from the management
shareholders. The purchase price of approximately $1.5 million was paid by
issuing 375,000 shares of the Company's common stock. Paaco is a vertically
integrated used car sales and finance company which operates seven used car
dealerships in the Dallas-Ft. Worth metropolitan area. Paaco sells, underwrites
and finances used cars and trucks with a focus on the Hispanic market.
PRECISION - In February 1998 the Company acquired 80% of the common stock of
Precision IBC, Incorporated ("Original Precision") for a purchase price of
approximately $2.4 million cash. In March 1998 the Company acquired 80% of the
common stock of M&S Tank Rentals, Inc. ("M&S") for a purchase price of $1.65
million cash. Original Precision and M&S were subsequently merged together into
a newly formed corporation, Precision IBC, Inc. ("Precision"). Effective May 1,
1998 the Company purchased the remaining 20% of Precision. The purchase price of
approximately $1.1 million was paid by issuing 288,027 shares of the Company's
common stock. Precision is in the business of renting, selling, testing and
servicing principally stainless steel intermediate bulk containers.
<PAGE> 2
RESULTS OF OPERATIONS
SCGC was a consolidated subsidiary of the Company through June 8, 1995.
From June 9, 1995 (the date the first 50% interest in SCGC was sold) through May
3, 1996 (the date the remaining 50% interest in SCGC was sold) the Company
accounted for its 50% interest in SCGC using the equity method. The Company's
investment in 49% of CMN is accounted for on the equity method. The operating
results of Paaco and Precision have been included in the Company's consolidated
results of operations from their respective dates of acquisition. As a result of
the above transactions, operating results of the Company for the years ended
April 30, 1998, 1997 and 1996 are not entirely comparable.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
Revenues from sales, rental income, gain on sale of mortgage loans and
interest, fees and rentals from CMN pertain to the businesses of Paaco,
Precision, Concorde and CMN, which were acquired or formed during fiscal 1998.
Interest income for fiscal 1998 increased $1,887,365 compared to fiscal 1997.
The increase resulted from (i) the acquisition of Paaco during the fourth
quarter of fiscal 1998 ($1,519,249), and (ii) interest earned on Concorde's
mortgage loans ($761,252), partially offset by a decrease in Crown's interest
income as a result of Crown using its cash to make acquisitions and investments.
Cost of sales pertains to Paaco and Precision's operations. Provision for
credit losses pertains principally to Paaco's operations. Selling, general and
administrative expenses for fiscal 1998 increased $5,771,341 compared to fiscal
1997. The increase resulted principally from (i) the acquisitions of Paaco and
Precision during the fourth quarter of fiscal 1998 ($3,641,834), and (ii) the
formation and development of Concorde's mortgage based lending business
($2,034,895). Interest expense for fiscal 1998 increased $1,166,601 compared to
fiscal 1997. The increase resulted from interest associated with the debt of
Paaco, Precision and Concorde. Depreciation and amortization for fiscal 1998
increased $616,626 compared to fiscal 1997. The increase resulted from (i)
amortizing certain agreements and other assets obtained in the acquisition of
49% of CMN ($284,735), (ii) amortizing goodwill that was created in the
acquisitions of Paaco and Precision ($137,430), and (iii) depreciating the
assets of Paaco and Precision ($156,218).
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
General and administrative expenses for fiscal 1997 decreased $245,801
compared to fiscal 1996. The decrease was primarily attributable to a reduction
in compensation costs, partially offset by increases in consulting and
transportation expenses. Gaming development and abandonment costs for fiscal
1997 decreased $144,012 compared to fiscal 1996 as a result of the Company's
decision to begin pursuing business opportunities in fields other than casino
gaming.
Interest expense for fiscal 1997 decreased $939,955 compared to fiscal
1996. The decrease was principally the result of the Company no longer
consolidating the operating results of SCGC from and after June 9, 1995 as SCGC
was formerly responsible for substantially all of the Company's consolidated
interest expense. Interest income for fiscal 1997 decreased $762,272 compared to
fiscal 1996. The decrease was principally the result of the prepayment of a $10
million note by Louisiana Riverboat Gaming Partnership in August 1996 and the
sale of a second $10 million note in October 1996 both of which had been earning
interest at 11.5% per annum. The proceeds from such notes were placed in money
market funds which earned interest at approximately 5.3% per annum. Other income
in fiscal 1997 pertains to a fee earned by the Company in assisting another
company complete an acquisition.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1998 the Company's sources of liquidity included
approximately (i) $3 million of cash on hand, of which $2 million was held by
Crown, (ii) $12 million of marketable equity securities held by Crown, the
majority of which is subject to a lock-up agreement with an underwriter which
prohibits Crown from selling such securities until December 8, 1998,
(iii) $17 million remaining to be drawn on the credit facilities of Paaco,
Concorde and Precision, although the majority of such additional draws may only
be made in connection with a corresponding increase in the related collateral
asset (i.e., finance receivables, mortgage loans held for sale and intermediate
bulk containers), and (iv) the issuance of additional debt and/or equity. The
loan agreements which govern the credit facilities of Crown's subsidiaries limit
dividends and other distributions from such subsidiaries to Crown. The total
amount of restricted net assets of such subsidiaries as of April 30, 1998 was
approximately $15 million.
For fiscal 1998 net cash used by operating activities amounted to $12.5
million. The principal use of cash was to originate and acquire mortgage loans.
The excess of mortgage loans originated or acquired over mortgage loans sold and
principal repayments was $13.3 million. Net cash used by investing activities of
$11.1 million included (i) an $8.6 million use of cash in finance receivable
originations over principal payments received, (ii) a $15.4 million use of cash
in the acquisitions of Paaco, Precision and CMN, and (iii) a $17.7 million
source of cash resulting from the sale of certain assets including $15.3 million
from the sale of the Company's 18.6 acre tract of land in Las Vegas. Net cash
provided by financing activities of $8.9 million principally relates to $14.0
million of cash provided by the asset based revolving credit facilities of
Paaco, Concorde and Precision, offset by (i) $3.1 million of cash used to
<PAGE> 3
repurchase the Company's common stock, and (ii) $2.1 million of net debt
repayments.
The Company is presently focusing on the development and expansion of its
existing businesses and the potential acquisition or development of other
unrelated businesses. The Company's existing credit facilities can support the
majority of the expected growth of the Company's existing businesses over the
next twelve months. In August 1998 the Company reached a preliminary agreement,
subject to certain conditions, to acquire Bengal Chemical, Inc. ("Bengal") for
approximately $8.3 million, of which $6 million is to be paid in cash. Bengal
specializes in the distribution of pesticide products in the southeastern United
States. The Company plans to finance a significant portion of the cash required
in this acquisition. Presently management believes that the Company's capital
resources are sufficient to satisfy its identified capital needs for the next
twelve months.
In March 1996 the Company's Board of Directors approved a program, as
amended, to repurchase up to 3,000,000 shares of the Company's common stock from
time to time in the open market. As of April 30, 1998 the Company had
repurchased 2,383,739 shares pursuant to this program. The timing and amount of
future share repurchases, if any, will depend on various factors including
market conditions, available alternative investments and the Company's financial
position.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997 the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting
comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Comprehensive income includes net income and certain other
items that are excluded from net income but are included as a separate component
of stockholders' equity such as unrealized appreciation of securities and
foreign currency translation adjustments. If the Company had adopted SFAS No.
130 during fiscal 1998 comprehensive income would have been $2,278,595, or $.23
per share, as a result of including the $1,930,500 of unrealized appreciation of
securities in comprehensive income.
DATA PROCESSING AND YEAR 2000
Each of the Crown and its subsidiaries operate their data processing systems
independently. The Crown and its subsidiaries are at different stages with
respect to their hardware, software and networking systems being year 2000
compliant. Some of the software utilized by the Company is licensed from third
parties, and to the extent such software is not presently year 2000 compliant,
the Company has been advised by such third party software vendor that their
software will be updated in the near future. The Company presently has a limited
amount of electronic communication with third parties, and as such, has a lower
level of exposure to interruptions in its operations due to these third parties
not being year 2000 compliant. The Company has contacted some of the third
parties in which it communicates with electronically to assess their compliance
with the year 2000. Based upon a preliminary review of its data processing
systems, the Company does not anticipate the cost to bring all its systems year
2000 compliant will have a material adverse impact on its financial position or
results of operations.
SEASONALITY
The Company's automobile sales operation is seasonal in nature. In the
automobile business, the Company's third fiscal quarter (November through
January) is historically the slowest period of time for car and truck sales.
Many of the Company's operating expenses such as administrative personnel, rent
and insurance are fixed and cannot be reduced during periods of decreased sales.
None of the Company's other businesses experience significant seasonal
fluctuations.
<PAGE> 4
CONSOLIDATED BALANCE SHEETS CROWN GROUP, INC.
<TABLE>
<CAPTION>
April 30,
1998 1997
------------ ------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 6,481,706 $ 21,117,960
Marketable equity securities 4,742,180
Accounts and other receivables 2,311,668 345,780
Mortgage loans held for sale, net 14,350,437
Finance receivables, net 36,049,525
Inventory 3,783,290
Prepaid and other assets 572,089 37,674
Property and equipment, net 9,165,703 1,585,177
Investment in CMN and related assets, net 6,606,114
Goodwill, net 9,613,972
Land held for sale 15,150,000
------------ ------------
$ 93,676,684 $ 38,236,591
============ ============
Liabilities and stockholders' equity:
Accounts payable $ 2,014,698 $ 41,284
Accrued liabilities 1,952,828 422,609
Income taxes payable 142,572 335,000
Revolving credit facilities 41,164,524
Other notes payable 4,870,074
Deferred sales tax 2,090,303
Deferred income taxes 2,961,727 1,725,000
------------ ------------
Total liabilities 55,196,726 2,523,893
------------ ------------
Minority interests 3,447,705
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share, 1,000,000 shares
authorized; none issued or outstanding
Common stock, par value $.01 per share, 50,000,000 shares
authorized; 9,433,963 issued and outstanding (10,394,585 in 1997) 94,340 103,946
Additional paid-in capital 35,547,369 38,496,803
Accumulated deficit (2,539,956) (2,888,051)
Unrealized appreciation of securities 1,930,500
------------ ------------
Total stockholders' equity 35,032,253 35,712,698
------------ ------------
$ 93,676,684 $ 38,236,591
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
CONSOLIDATED STATEMENTS OF OPERATIONS CROWN GROUP, INC.
<TABLE>
<CAPTION>
Years Ended April 30,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Sales $ 14,938,617
Rental income 494,374
Gain on sale of mortgage loans 1,087,303
Interest income 3,417,689 $ 1,530,324 $ 2,292,596
Interest, fees and rentals from CMN 680,697
Other 596,709 500,000
------------ ------------ ------------
21,215,389 2,030,324 2,292,596
------------ ------------ ------------
Costs and expenses:
Cost of sales 9,275,055
Selling, general and administrative 8,567,614 2,796,273 3,042,074
Provision for credit losses 1,761,469
Interest expense 1,235,358 68,757 1,008,712
Depreciation and amortization 785,069 168,443 130,556
Write-down of land held for sale 1,019,709
Gaming development and abandonment 736,942 880,954
SCGC pre-opening and development 536,110
------------ ------------ ------------
21,624,565 4,790,124 5,598,406
------------ ------------ ------------
Other income (expense):
Equity in earnings of CMN 926,598
Gain (loss) on sale of securities 38,258 (5,254,858)
Gain on sale of SCGC 14,934,543 21,512,640
Equity in loss of SCGC (2,408,213)
------------ ------------ ------------
964,856 9,679,685 19,104,427
------------ ------------ ------------
Income before taxes and minority interest 555,680 6,919,885 15,798,617
Provision (benefit) for income taxes (131,279) (1,940,000) 3,500,000
Minority interests 338,864
------------ ------------ ------------
Net income $ 348,095 $ 8,859,885 $ 12,298,617
============ ============ ============
Earnings per share:
Basic $ 0.04 $ 0.82 $ 1.05
Diluted $ 0.04 $ 0.80 $ 1.03
Weighted average number of shares outstanding:
Basic 9,829,392 10,868,119 11,716,462
Diluted 9,905,819 11,027,077 11,981,757
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOWS CROWN GROUP, INC.
<TABLE>
<CAPTION>
Years Ended April 30,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net income $ 348,095 $ 8,859,885 $ 12,298,617
Adjustments to reconcile net income
to net cash used by operating activities:
Depreciation and amortization 785,069 168,443 130,556
Amortization of debt issuance costs (discount) (252,765) 389,360
Deferred income taxes (990,592) (2,275,000) 3,500,000
Provision for credit losses 1,761,469
Minority interests 338,864
Write down of assets 1,715,718 51,496
Gain on sale of mortgage loans (1,087,303)
Gain on sale of assets (437,171)
(Gain) loss on sale of securities (38,258) 5,254,858
Gain on sale of SCGC (14,934,543) (21,512,640)
Equity in earnings of CMN (926,598)
Equity in loss of SCGC 2,408,213
Changes in assets and liabilities, net of transactions:
Accounts and other receivables (625,637) 396,466 (780,747)
Mortgage loans originated or acquired (36,757,608)
Mortgage loans sold and principal repayments 23,441,905
Inventory 862,753
Prepaids and other assets 107,938 12,092 54,347
Accounts payable, accrued liabilities and deferred sales tax 1,178,323 (145,398) 243,606
Income taxes payable (192,428) (335,000)
------------ ------------ ------------
Net cash used by operating activities (12,483,944) (1,282,479) (3,217,192)
------------ ------------ ------------
Investing activities:
Finance receivable originations (13,324,694)
Collections of finance receivables 4,723,150
Purchase of assets (4,061,196) (1,076,142) (4,536,401)
Sale of land/assets 17,721,787 325,000 441,023
Purchase of securities (5,551,714) (4,023,118)
Sale of securities 3,772,792 11,593,260
Sale/collection of notes receivable 1,050,750 19,200,000
Sale of SCGC 1,000,000
Purchase of CMN and related assets (7,000,001)
Purchase of Paaco, net of cash acquired (4,378,459)
Purchase of Precision, net of cash acquired (4,021,142)
------------ ------------ ------------
Net cash provided (used) by investing activities (11,068,727) 26,019,000 (3,095,378)
------------ ------------ ------------
Financing activities:
Issuance of common stock 93,282 23,125
Purchase of common stock (3,052,322) (3,299,845) (298,723)
Proceeds from revolving credit facilities, net 13,979,273
Proceeds from (repayments of) other debt, net (2,103,816) (987,569) 936,684
Advances from LRGP 4,627,897
------------ ------------ ------------
Net cash provided (used) by financing activities 8,916,417 (4,287,414) 5,288,983
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (14,636,254) 20,449,107 (1,023,587)
Cash and cash equivalents at: Beginning of year 21,117,960 668,853 1,692,440
------------ ------------ ------------
End of year $ 6,481,706 $ 21,117,960 $ 668,853
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 7
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY CROWN GROUP, INC.
<TABLE>
<CAPTION>
For the Three Years in the Period Ended April 30, 1998
Additional Unrealized Total
Common Stock Paid-In Accumulated Appreciation Stockholders'
Shares Amount Capital Deficit of Securities Equity
------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1995 11,678,459 $ 116,785 $ 41,859,407 $(24,046,553) $ 17,929,639
Issuance of common stock 50,000 500 199,500 200,000
Purchase of common stock (90,900) (909) (297,814) (298,723)
Stock options exercised 13,000 130 22,995 23,125
Net income 12,298,617 12,298,617
------------ ------------ ------------ ------------ ------------ ------------
Balance at April 30, 1996 11,650,559 116,506 41,784,088 (11,747,936) 30,152,658
Purchase of common stock (1,255,974) (12,560) (3,287,285) (3,299,845)
Net income 8,859,885 8,859,885
------------ ------------ ------------ ------------ ------------ ------------
Balance at April 30, 1997 10,394,585 103,946 38,496,803 (2,888,051) 35,712,698
Purchase of common stock (1,102,765) (11,028) (3,041,294) (3,052,322)
Stock options exercised 142,143 1,422 91,860 93,282
Unrealized appreciation of
securities $ 1,930,500 1,930,500
Net income 348,095 348,095
------------ ------------ ------------ ------------ ------------ ------------
Balance at April 30, 1998 9,433,963 $ 94,340 $ 35,547,369 $ (2,539,956) $ 1,930,500 $ 35,032,253
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CROWN GROUP, INC.
A - HISTORY AND DESCRIPTION OF BUSINESS
Crown Group, Inc. ("Crown"), and collectively with its subsidiaries (the
"Company"), is a publicly traded buy-out firm which presently owns (i) 65% of
Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation
(collectively, "Paaco"), a vertically integrated used car sales and finance
company, (ii) 100% of Precision IBC, Inc. ("Precision"), a firm specializing in
the sale and rental of intermediate bulk containers, (iii) 80% of Concorde
Acceptance Corporation ("Concorde"), a sub-prime mortgage lender, (iv) 49% of
Casino Magic Neuquen S.A. ("CMN"), a casino operator in the Province of Neuquen,
Argentina, and (v) 80% of Home Stay Lodges I, Ltd., a partnership focusing on
the development and operation of extended-stay lodging facilities. In addition,
from time to time the Company purchases and sells small ownership interests in
securities of privately held and publicly traded firms. The Company is presently
focusing on (i) the development and expansion of its existing businesses, and
(ii) the potential acquisition or development of other unrelated businesses.
Since its inception in 1983 through June 1993 the Company was engaged in
various facets of the cable and related programming business. During 1992 the
Company sold the majority of its programming business and began exploring new
business opportunities. In June 1993 the Company made the decision to enter the
gaming business, and, as a result, proceeded to sell the balance of its cable
assets.
From June 1993, with the acquisition of 100% of St. Charles Gaming Company,
Inc. ("SCGC"), until November 1996, the Company's primary business focus was
that of owning, operating and developing casino gaming properties. SCGC owns and
operates a riverboat gaming casino located in Calcasieu Parish, Louisiana which
had been in the development stage until opening in July 1995. The Company sold a
50% interest in SCGC in June 1995 and the remaining 50% interest in May 1996, in
each case resulting in a substantial gain (see Note D).
In November 1996 the Company decided to expand its business interests
beyond casino gaming and began pursuing business opportunities in other fields.
As a result the Company has either acquired (see Note C) or formed a number of
businesses in a variety of industries. Generally, it is the Company's desire to
hold majority ownership positions in businesses that have above average
potential for growth in earnings.
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principals of Consolidation
The consolidated financial statements include the accounts of Crown Group,
Inc. and all of its majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. The Company's subsidiaries are
included in its consolidated results of operations from the point in time such
subsidiary became a majority-owned subsidiary of the Company. The Company has
accounted for its investment in 49% of CMN on the equity method.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
Concentration of Risk
The Company provides financing in connection with the sale of substantially
all of its used vehicles. These sales are made primarily to customers residing
in the Dallas-Ft. Worth metropolitan area. Periodically, the Company maintains
cash in financial institutions in excess of the amounts insured by the federal
government. CMN's revenues principally originate from persons living in and
around the City of Neuquen, Argentina.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents. Cash equivalents
generally consist of interest bearing money market accounts.
<PAGE> 9
Marketable Equity Securities
Investments in marketable equity securities are recorded at market value
based upon closing stock prices as quoted on national stock exchanges or
over-the-counter markets. To the extent the Company considers a particular
equity security to be a "trading" security, the difference between the Company's
historical cost and such security's market value is included in the accompanying
statement of operations. All other equity securities are considered to be
"available for sale" securities, and the difference between the Company's
historical cost and such security's market value is included as a separate
component of stockholders' equity entitled "unrealized appreciation of
securities," on a net of tax basis. At April 30, 1998 the Company had trading
securities and available for sale securities of $742,180 and $4,000,000,
respectively.
At April 30, 1998 the Company held 222,222 shares of Inktomi Corporation
common stock, which company completed its initial public offering ("IPO") on or
about June 9, 1998. The Company's Inktomi shares are subject to an underwriter's
lock-up agreement which restricts the Company from selling its Inktomi stock
until December 8, 1998. Further, the Company's Inktomi shares are not
registered, and thus the Company may not sell such shares in the public markets
until the completion of a one year holding period which ends on February 25,
1999. The Company valued its Inktomi shares based upon the IPO price of $18.00
per share. Accordingly, at April 30, 1998 the carrying value of the Company's
Inktomi stock was $4,000,000, which reflects a gross unrealized gain of
$2,925,000 over the Company's cost of $1,075,000. The Company considers its
Inktomi shares to be "available for sale."
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of aggregate cost or
market. Market value is determined by current investor yield requirements. A
portion of these loans are pledged against the Company's revolving credit
facility. The cost of mortgage loans held for sale includes the cost of
originating or purchasing the mortgage loans reduced by (i) deferred loan
origination fees, and (ii) an allowance for loan losses of $27,000 at April 30,
1998. While management believes the allowance for loan losses included in the
financial statements to be adequate, such estimate may be more or less than the
amount ultimately charged off. The adequacy of the allowance for loan losses is
periodically reviewed by management with any changes reflected in current
operations.
Finance Receivables and Allowance for Credit Losses
The Company originates installment sales contracts from the sale of used
vehicles at its dealerships. Finance receivables consist of contractually
scheduled payments from installment sales contracts net of unearned finance
charges and an allowance for credit losses. Unearned finance charges represent
the balance of interest income remaining from the capitalization of the total
interest to be earned over the original term of the related installment sales
contract. The Company discontinues the accrual of interest income when the
receivable becomes greater than sixty days delinquent.
The Company maintains an allowance for credit losses at a level it
considers sufficient to cover anticipated losses in the collection of its
finance receivables. The allowance for credit losses is based upon a periodic
analysis of the portfolio, economic conditions and trends, historical credit
loss experience, borrowers' ability to repay, and collateral values. While
management believes the allowance for credit losses included in the financial
statements to be adequate, such estimate may be more or less than the amount
ultimately charged off. The allowance for credit losses is periodically reviewed
by management with any changes reflected in current operations.
Inventory
Inventory is valued at the lower of cost or market on a specific
identification basis. Inventory includes used vehicles, parts for vehicles and
supplies and parts related to the intermediate bulk container ("IBC") business.
Repossessed vehicles are recorded at the lower of cost or market, which
approximates wholesale value. Vehicle reconditioning costs are capitalized as a
component of inventory. The cost of used vehicles and IBC's sold is determined
on a specific identification basis.
Property and Equipment
Property and equipment are stated at cost. Expenditures for additions,
renewals and improvements are capitalized. Costs of repairs and maintenance are
expensed as incurred. Depreciation is computed using the straight-line method
over the following estimated useful lives:
Leasehold improvements Life of lease
Furniture, fixtures and equipment 3 to 10 years
Rental equipment 12 years
Buildings 39 years
Goodwill
Goodwill represents the excess of the Company's cost over the fair value of
net identifiable assets acquired in its purchases of Paaco and Precision.
Goodwill is amortized on a straight line basis over periods ranging from 15 to
25 years. The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operation. At April 30, 1998 accumulated amortization of goodwill
amounted to $137,430.
<PAGE> 10
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Revenue Recognition
Interest income on finance receivables is recognized using the interest
method. Revenue from the sale of used vehicles is recognized upon delivery, when
the sales contract is signed and the down payment has been received.
Stock Option Plan
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. As such,
compensation expense is recorded on the date of grant only if the current market
price of the underlying stock exceeds the exercise price. Beginning in fiscal
1997, the Company adopted the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", which requires entities to provide pro forma earnings and
earnings per share disclosures for employee stock option grants as if the fair
value based method as defined in SFAS No. 123 had been applied (see Note L).
Earnings Per Share
Basic earnings per share is computed by dividing net income by the average
number of common shares outstanding during the period. Diluted earnings per
share takes into consideration the potentially dilutive effect of common stock
equivalents, such as outstanding stock options and warrants, that if exercised
or converted into common stock would then share in the earnings of the Company.
Recent Accounting Pronouncements
In June 1997 the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting
comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Comprehensive income includes net income and certain other
items that are excluded from net income but are included as a separate component
of stockholders' equity such as unrealized appreciation of securities and
foreign currency translation adjustments. If the Company had adopted SFAS No.
130 during fiscal 1998 comprehensive income would have been $2,278,595 or $.23
per share, as a result of including the $1,930,500 of unrealized appreciation of
securities in comprehensive income.
Reclassifications
Certain prior year amounts in the accompanying financial statements have
been reclassified to conform to the fiscal 1998 presentation.
C - ACQUISITIONS
CMN Purchase
On June 2, 1997 the Company acquired 49% of the capital stock of CMN, as
well as interests in certain other assets and contracts related to CMN, from
Casino Magic Corp. ("Casino Magic") for a purchase price of $7 million cash. CMN
owns and operates casinos in the cities of Neuquen and San Martin de los Andes
in the Province of Neuquen, Argentina under an exclusive concession contract
that expires in 2007, but can be extended by CMN for an additional five years
under certain circumstances. The interests in certain other assets and contracts
included (i) a demand promissory note in the amount of $4,226,743 issued by CMN,
(ii) a 16.4% interest in a certain management agreement relating to CMN, and
(iii) a 49% interest in (a) slot machines and a related lease agreement and (b)
a certain royalty agreement relating to CMN. Pursuant to the various CMN
agreements, the Company receives its respective share of fees and rental
payments due under such agreements. At April 30, 1998 accumulated amortization
and depreciation of the Company's investment in various CMN agreements and slot
machines, respectively, amounted to $284,735.
In October 1997 each of the Company and Casino Magic converted
approximately $2.5 million of principal due on certain notes receivable from CMN
into shares of CMN capital stock such that each party retained the same
ownership percentage of CMN as previously held. At April 30, 1998 CMN had
assets, liabilities and stockholders' equity of approximately $12.6 million,
$3.6 million, and $9.0 million, respectively. For the twelve months ended April
30, 1998 CMN's summarized unaudited results of operations were as follows (in
thousands):
<TABLE>
<S> <C>
Revenues $18,255
Costs and expenses 13,355
Interest, fees and rentals to shareholders 1,910
Provision for income taxes 978
-------
Net income $ 2,012
=======
</TABLE>
<PAGE> 11
Paaco Purchase
Effective February 1, 1998 the Company acquired 53% of the common stock of
Paaco for a purchase price of approximately $9.1 million cash. Approximately
$4.9 million of Paaco common stock was purchased directly from Paaco, and the
remaining $4.2 million was purchased from Paaco management personnel who prior
to this transaction were the sole shareholders of Paaco (the "Paaco Management
Shareholders"). Effective May 1, 1998 the Company acquired an additional 12%
interest in Paaco directly from the Paaco Management Shareholders. With this
purchase the Company now owns 65% of Paaco. The purchase price of approximately
$1.5 million was paid by issuing 375,000 shares of the Company's common stock
(see Note R). In connection with the Paaco transactions, the Company and the
Paaco Management Shareholders entered into a Shareholders' Agreement (the "Paaco
Shareholders' Agreement") which provides, among other things, that in the event
either the Company or any Paaco Management Shareholder desires to sell their
interest in Paaco such shareholder must first offer to sell such interest to
Paaco and the other shareholders in accordance with the provisions of the Paaco
Shareholders' Agreement.
Paaco is a vertically integrated used car sales and finance company which
operates seven used car dealerships in the Dallas-Ft. Worth metropolitan area.
Paaco sells, underwrites and finances used cars and trucks with a focus on the
Hispanic market. For the years ended December 31, 1997, 1996 and 1995, Paaco's
revenues were approximately $48.3 million, $28.9 million and $20.1 million,
respectively.
Precision Purchase
On February 3, 1998 the Company acquired 80% of the common stock of
Precision IBC, Incorporated ("Original Precision") for a purchase price of
approximately $2.4 million cash. On March 5, 1998 the Company acquired 80% of
the common stock of M&S Tank Rentals, Inc. ("M&S") for a purchase price of $1.65
million cash. Original Precision and M&S were subsequently merged together into
a newly formed corporation, Precision IBC, Inc. ("Precision"). Effective May 1,
1998 the Company acquired the remaining 20% interest in Precision it did not
previously own by issuing 288,027 shares of the Company's common stock. All
references to Precision include the former entities of Original Precision and
M&S.
Precision is in the business of renting, selling, testing and servicing
principally stainless steel IBC's to customers primarily in the petroleum and
chemical industries. For the years ended December 31, 1997, 1996 and 1995
Precision's unaudited revenues were approximately $4.1 million, $2.8 million and
$.7 million, respectively.
Each of the above acquisitions have been accounted for using the purchase
method of accounting. Goodwill resulting from the transactions is being
amortized on a straight-line basis over periods ranging from 15 to 25 years. The
activities of CMN, Paaco and Precision have been included in the Company's
consolidated results of operations since their respective dates of acquisition.
In each of fiscal 1997 and 1996 the Company elected not to complete the
proposed acquisition of a casino gaming property. As a result of these decisions
the Company recorded charges of $696,009 and $664,991 in fiscal 1997 and 1996,
respectively. Such amounts are included in "gaming development and abandonment"
in the accompanying Consolidated Statements of Operations.
Pro Forma Financial Information
The following unaudited pro forma condensed consolidated results of
operations of the Company for the years ended April 30, 1998 and 1997 were
prepared as if the CMN, Paaco and Precision acquisitions had occurred on May 1,
1997 and May 1, 1996, respectively (in thousands, except per share amounts). The
adjustments to the historical financial statements principally consist of (i)
recognizing the Company's pro-rata share of CMN earnings and contractual fees,
(ii) recording interest income on the note receivable from CMN, (iii)
eliminating interest income on the cash used in the acquisitions, (iv)
amortizing the CMN related agreements and equipment, (v) amortizing goodwill
resulting from the acquisitions, (vi) adjusting depreciation expense and
interest income resulting from purchase accounting entries, and (vii) adjusting
income tax expense to reflect the elimination of an S-corporation in the case of
Precision and to take into account the above described adjustments.
<TABLE>
<CAPTION>
Years Ended
April 30,
1998 1997
---- ----
<S> <C> <C>
Revenue $63,514 $38,127
Net income 120 10,340
Earnings per share $ .01 $ .90
</TABLE>
The unaudited pro forma results of operations are not necessarily
indicative of future results or the results that would have occurred had the
acquisitions taken place on the dates indicated.
<PAGE> 12
D - SALE OF SCGC
On June 9, 1995 the Company sold a 50% interest in SCGC to Louisiana
Riverboat Gaming Partnership ("LRGP"), a joint venture then owned 50% by Casino
America, Inc. ("Casino America") and 50% by Louisiana Downs, Inc. The purchase
price consisted of (i) a five-year $20 million non-recourse note with interest
payable monthly at 11.5% per annum (the "LRGP Note"), (ii) $1 million cash, and
(iii) a non-detachable five-year warrant to purchase 416,667 shares of Casino
America common stock at $12 per share. In connection with this transaction, in
June 1995, the Company recorded a gain before income taxes of approximately
$21.5 million.
On May 3, 1996 the Company sold its remaining 50% interest in SCGC to
Casino America for (i) 1,850,000 shares of Casino America common stock, which
the Company valued at $6.50 per share, (ii) the exchange of the $20 million LRGP
Note for LRGP Note A ("Note A") and LRGP Note B ("Note B"), each in the
principal amount of $10 million and bearing interest at 11.5% per annum, and
(iii) an additional non-detachable five-year warrant to purchase up to another
416,667 shares of Casino America common stock at an exercise price of $12 per
share. In connection with this transaction, in May 1996, the Company recorded a
gain before income taxes of approximately $14.9 million.
In August 1996 LRGP paid off Note A in full and in October 1996 the Company
sold Note B at a discount of $800,000. In November 1996 the Company sold the
1,850,000 shares of Casino America common stock it had received in the sale of
its remaining 50% interest in SCGC for net proceeds of $7,363,003, resulting in
a loss before income taxes of $4,661,997.
The Company has included 100% of SCGC's operating results in its
consolidated results of operations through June 8, 1995. From and after June 9,
1995 (the date of sale of the first 50% interest in SCGC), the Company has
accounted for its investment in SCGC on the equity method, and accordingly has
included its proportionate share of SCGC's operating results in its consolidated
results of operations. The Company's gain before income taxes on the sale of
SCGC is calculated as follows (in thousands):
<TABLE>
<CAPTION>
Sale of Sale of
First 50% Second 50%
(June 1995) (May 1996)
----------- ----------
<S> <C> <C>
Consideration received in sale $ 21,000 $ 12,025
The Company's negative basis in stock sold 889 3,297
Transaction and other costs (376) (388)
-------- --------
Gain before income taxes on sale of SCGC $ 21,513 $ 14,934
======== ========
</TABLE>
Upon closing of the sale of its remaining 50% interest in SCGC on May 3,
1996, the Company's investment in SCGC was eliminated. Other than a guarantee of
certain leases, for which the Company has been indemnified by LRGP, the Company
is not liable for any obligations of SCGC.
For the year ended April 30, 1996 SCGC had revenues and a net loss of $57.3
million and $6.3 million, respectively. During such year the Company included
approximately $3.4 million of net costs and expenses, or approximately $.28 per
share, attributable to SCGC in its consolidated results of operations.
<PAGE> 13
E - FINANCE RECEIVABLES
The Company originates installment sales contracts from the sale of used
vehicles at its dealerships. These installment sales contracts typically include
interest rates ranging from 18-26% per annum and provide for payments over
periods ranging from 24 to 36 months. A summary of finance receivables at April
30, 1998 is as follows:
<TABLE>
<S> <C>
Finance receivables $ 51,417,981
Unearned finance charges (9,930,356)
Allowance for credit losses (4,727,679)
Valuation discount (710,421)
------------
$ 36,049,525
============
</TABLE>
In accordance with APB Opinion No. 16, as of the acquisition date the
Company valued Paaco's finance receivables at market value and determined a
valuation discount of $963,186 was appropriate. This discount is being amortized
over the life of the finance receivable portfolio that existed on the purchase
date using the interest method.
A summary of the finance receivables allowance for credit losses for the
period from February 1, 1998 (acquisition date) to April 30, 1998 is as follows:
<TABLE>
<S> <C>
Balance at February 1, 1998 $ 4,248,643
Provision for credit losses 1,704,623
Net charge offs (1,225,587)
-----------
Balance at April 30, 1998 $ 4,727,679
===========
</TABLE>
In addition to the finance receivables allowance for credit losses the
Company also has an allowance for credit losses on mortgage loans held for sale
and trade accounts receivable aggregating $55,069 as of April 30, 1998.
F - PROPERTY AND EQUIPMENT
A summary of property and equipment as of April 30, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
April 30,
1998 1997
----------- -----------
<S> <C> <C>
Land and buildings $ 2,332,750
Rental equipment 4,749,652
Furniture, fixtures and equipment 1,904,536 $ 1,811,581
Leasehold improvements 920,583
Less accumulated depreciation and amortization (741,818) (226,404)
----------- -----------
$ 9,165,703 $ 1,585,177
=========== ===========
</TABLE>
For the years ended April 30, 1998, 1997 and 1996 depreciation expense amounted
to $362,904, $168,443 and $130,556, respectively.
G - LAND HELD FOR SALE
In April 1997 the Company entered into an agreement to sell its 18.6 acre
tract of land in Las Vegas, Nevada for $15.25 million cash. As a result of this
agreement, the Company wrote down the value of such land to $15.15 million,
which represents the contract selling price of the land less the estimated
transaction costs. In September 1997 the sale was consummated.
<PAGE> 14
H - DEBT
A summary of debt at April 30, 1998 is as follows:
<TABLE>
<CAPTION>
Revolving Credit Facilities
- ------------------------------------------------------------------------------------------------------------
Facility Interest Primary Balance at
Borrower Lender Amount Rate Maturity Collateral April 30, 1998
- -------- ----------- ----------- ------------- -------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Paaco Finova $35 million Prime + 3.00% Apr 2000 Finance rec. $ 26,049,875
Concorde Bank One $20 million Libor + 2.25% Dec 1998 Mortgage loans 11,096,224
Precision Wells Fargo $ 5 million Prime June 2000 IBC's and rec. 3,518,425
Paaco Comerica $ 500,000 Prime + 2.00% Demand Vehicle inv. 500,000
------------
$ 41,164,524
============
</TABLE>
<TABLE>
<CAPTION>
Other Notes Payable
- -----------------------------------------------------------------------------------------------------------
Principal Interest Primary Balance at
Borrower Lender Payments Rate Maturity Collateral April 30, 1998
- ----------- ---------------- ------------- ------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Paaco Heller Financial $ 2,197 month Prime + 2.25% Dec 2015 Real estate $ 630,556
Paaco Various None Various 1998 to 1999 None 4,239,518
-----------
$ 4,870,074
===========
</TABLE>
Interest is payable monthly on all of the Company's debt. The loan
agreements relating to certain of the above described debt contain various
reporting and performance covenants including (i) maintenance of certain
financial ratios and tests, (ii) limitations on borrowings from other sources,
(iii) restrictions on certain operating activities, and (iv) restrictions on the
payment of dividends. The amount of restricted net assets of the Company's
subsidiaries as of April 30, 1998 was approximately $15 million. The Company was
in compliance with the loan agreements as of April 30, 1998.
A summary of future minimum principal payments required under the
aforementioned debt as of April 30, 1998 is as follows:
<TABLE>
<CAPTION>
Years Ended
April 30, Amount
------------- ---------------
<S> <C>
1999 $15,208,144
2000 26,508,515
2001 3,707,093
2002 38,723
2003 18,842
Thereafter 553,281
-----------
$46,034,598
===========
</TABLE>
<PAGE> 15
I - INCOME TAXES
The Company files a consolidated federal income tax return with its
subsidiaries, with the exception of Paaco which files a separate tax return. The
provision (benefit) for income taxes for the fiscal years ended April 30, 1998,
1997 and 1996 was as follows:
<TABLE>
<CAPTION>
Years Ended April 30,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C>
Provision (benefit) for income taxes
Current $(1,121,871) $ 335,000
Deferred 990,592 (2,275,000) $ 3,500,000
----------- ----------- -----------
$ (131,279) $(1,940,000) $ 3,500,000
=========== =========== ===========
</TABLE>
The provision (benefit) for income taxes is different from the amount
computed by applying the statutory federal income tax rate to income (loss)
before income taxes for the following reasons:
<TABLE>
<CAPTION>
Years Ended April 30,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Tax provision at 34% statutory rate $ 188,931 $ 2,352,761 $ 5,371,530
Equity in earnings of CMN (315,043)
Equity in loss of SCGC 818,792
Basis difference in SCGC stock (4,254,558) (3,459,015)
Goodwill amortization 46,726
Other, net (51,893) (38,203) 768,693
----------- ----------- -----------
$ (131,279) $(1,940,000) $ 3,500,000
=========== =========== ===========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of April 30, 1998 and 1997
were as follows:
<TABLE>
<CAPTION>
April 30,
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Unrealized gain on securities $ 994,500
Allowance for loan losses 1,634,165
Tax over book depreciation 884,132
Land held for sale $1,445,553
Other 443,034 395,332
---------- ----------
Total 3,955,831 1,840,885
---------- ----------
Deferred tax assets:
Finance receivable valuation discount 241,543
Reserves 239,290
Net operating loss 464,016
Other 49,255 115,885
---------- ----------
Total 994,104 115,885
---------- ----------
Net deferred tax liability $2,961,727 $1,725,000
========== ==========
</TABLE>
In fiscal 1997 the Company utilized approximately $1.4 million of net
operating loss carryforwards in determining its federal income tax provision. At
April 30, 1998 Paaco had a net operating loss carryforward of $1,364,753
available to offset future taxable income. The net operating loss carryforward
expires in 2012.
<PAGE> 16
J - CAPITAL STOCK
In March 1996 the Company's Board of Directors approved a program, as
amended, to repurchase up to 3,000,000 shares of the Company's common stock from
time to time in the open market. At April 30, 1998 the Company had repurchased
2,383,739 shares pursuant to this program. The timing and amount of future share
repurchases, if any, will depend on various factors including market conditions,
available alternative investments and the Company's financial position.
The Company is authorized to issue up to one million shares of $.01 par
value preferred stock in one or more series having such respective terms, rights
and preferences as are designated by the Board of Directors. No preferred stock
has been issued.
K - EARNINGS PER SHARE
A summary of the reconciliation from basic earnings per share to diluted
earnings per share for the years ended April 30, 1998, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
Years Ended April 30,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net income $ 348,095 $ 8,859,885 $12,298,617
=========== =========== ===========
Average shares outstanding-basic 9,829,392 10,868,119 11,716,462
Dilutive options 76,427 158,958 195,148
Dilutive warrants 70,147
----------- ----------- -----------
Average shares outstanding-diluted 9,905,819 11,027,077 11,981,757
=========== =========== ===========
Earnings per share:
Basic $ 0.04 $ 0.82 $ 1.05
Diluted $ 0.04 $ 0.80 $ 1.03
Antidilutive securities not included:
Options 516,068 547,000 382,224
=========== =========== ===========
Warrants 899,612 1,184,246 675,832
=========== =========== ===========
</TABLE>
L - STOCK OPTIONS AND WARRANTS
Options
Since inception, the shareholders of the Company have approved three stock
option plans including the 1986 Incentive Stock Option Plan ("1986 Plan"), the
1991 Non-Qualified Stock Option Plan ("1991 Plan") and the 1997 Stock Option
Plan ("1997 Plan"). While previously granted options remain effective, the
provisions of the 1986 and 1991 Plans permitting additional option grants have
expired. The 1997 Plan sets aside 1,000,000 shares of the Company's common stock
to be granted to employees, directors and certain advisors of the Company at a
price not less than the fair market value of the stock on the date of grant. At
April 30, 1998 and 1997 there were 915,000 and zero shares of common stock
available for grant under the Company's stock option plans, respectively.
Options granted under the Company's stock option plans expire in the years 1998
through 2007.
<PAGE> 17
The following is an aggregate summary of the activity in the Company's
stock option plans since April 30, 1995:
<TABLE>
<CAPTION>
Number Exercise Price Proceeds
of Shares per Share on Exercise
--------- -------------- -----------
<S> <C> <C> <C>
Outstanding at April 30, 1995 797,643 $0.41 to $7.38 $ 2,359,219
Exercised (18,000) $1.41 to $3.31 (53,906)
Canceled (25,000) $7.31 (182,813)
--------- -----------
Outstanding at April 30, 1996 754,643 $0.41 to $7.38 2,122,500
Granted 60,000 $2.81 168,750
--------- -----------
Outstanding at April 30, 1997 814,643 $0.41 to $7.38 2,291,250
Granted 85,000 $2.44 207,188
Exercised (142,143) $0.66 (93,282)
--------- -----------
Outstanding at April 30, 1998 757,500 $0.41 to $7.38 $ 2,405,156
========= ===========
</TABLE>
A summary of stock options outstanding as of April 30, 1998 is as follows:
<TABLE>
<CAPTION>
Weighted Average
Range of Remaining Weighted
Exercise Number Contractual Life Average
Prices of Shares (in years) Exercise Price
------------------ ---------- ----------------- -----------------
<S> <C> <C> <C>
$0.41 to $1.55 112,500 3.87 $ 1.34
$2.44 to $4.03 610,000 7.25 3.27
$7.31 to $7.38 35,000 5.94 7.33
----------
$0.41 to $7.38 757,500 6.68 $ 3.18
==========
</TABLE>
All of the above options were exercisable at April 30, 1998 with the
exception of options to purchase 75,000 shares at prices ranging from $3.31 to
$3.88 which become exercisable in 1999 and expire in 2005.
The Company applies APB Opinion No. 25 in accounting for the issuance of
stock options and, accordingly, no compensation cost has been recognized in the
consolidated financial statements. Had the Company determined compensation cost
on the date of grant based upon the fair value of its stock options under SFAS
No. 123, the Company's pro forma income and earnings per share would have been
as follows using the Black-Scholes pricing model with the assumptions detailed
below:
<TABLE>
<CAPTION>
Years Ended April 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income $ 262,320 $ 8,800,827 $ 12,298,617
Earnings per share:
Basic $ 0.03 $ 0.81 $ 1.05
Diluted $ 0.03 $ 0.80 $ 1.03
Assumptions:
Dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate 6.5% 6.5% 6.5%
Expected volatility 52.5% 52.5% 52.5%
Expected life 5 years 5 years 5 years
</TABLE>
<PAGE> 18
Warrants
The Company issued common stock purchase warrants to a variety of parties
in connection with financing activities, the development of SCGC's riverboat
gaming project and certain other matters. The warrants issued were valued based
upon a composite of commonly accepted warrant valuation models.
The following is an aggregate summary of warrants outstanding as of April
30, 1998:
<TABLE>
<CAPTION>
Number of
Underlying Exercise Price Proceeds
Shares per Share on Exercise
---------------- -------------- --------------
<S> <C> <C>
899,612 $3.00 to $12.00 $4,053,021
</TABLE>
All of the warrants are presently exercisable. The warrants expire in 1999,
contain certain anti-dilution provisions and provide the holders with certain
registration rights relative to the underlying shares.
M - FAIR VALUE OF FINANCIAL INSTRUMENTS
The table below summarizes information about the fair value of financial
instruments included in the Company's financial statements at April 30, 1998 and
1997:
<TABLE>
<CAPTION>
April 30, 1998 April 30, 1997
---------------------------- -----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 6,481,706 $ 6,481,706 $ 21,117,960 $ 21,117,960
Marketable equity securities 4,742,180 4,742,180
Mortgage loans held for sale 14,350,437 15,067,959
Finance receivables 36,049,525 36,049,525
Revolving credit facilities 41,164,524 41,164,524
Other notes payable 4,870,074 4,870,074
</TABLE>
Because no market exists for certain of the Company's financial
instruments, fair value estimates are based on judgments and estimates regarding
yield expectations of investors, credit risk, normal cost of administration of
mortgage loans and finance receivables and other risk characteristics, including
interest rate and prepayment risk. These estimates are subjective in nature and
involve uncertainties and matters of judgment and therefore cannot be determined
with precision. Changes in assumptions could significantly affect these
estimates. The methodology and assumptions utilized to estimate the fair value
of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
Financial Instrument Valuation Methodology
-------------------- ---------------------
<S> <C>
Cash and cash equivalents The carrying amount is considered to be a
reasonable estimate of fair value.
Marketable equity securities The fair value was based on stock prices as quoted
on stock exchanges or over-the-counter markets (see
Note B).
Mortgage loans held for sale The fair value was estimated based on recent sales.
Finance receivables The fair value approximates carrying value based
upon yields of similar instruments and considering
the relatively short maturity of the portfolio.
Revolving credit facilities The fair value approximates carrying value due to
the short-term nature of the borrowings and the
variable interest rates charged on the borrowings.
Other notes payable The fair value approximates carrying value as the
interest rates charged on such debt approximates
market.
</TABLE>
<PAGE> 19
N - LEASES
The Company has certain operating leases for equipment and its office
facilities. As of April 30, 1998 the aggregate rentals due under such leases
were as follows:
<TABLE>
<CAPTION>
Years Ended
April 30, Amount
--------- ------------
<S> <C>
1999 $ 1,193,125
2000 857,439
2001 621,050
2002 81,832
2003 26,555
</TABLE>
Rent expense for all operating leases was approximately $467,000, $136,000,
and $115,000, during fiscal 1998, 1997 and 1996, respectively.
O - RELATED PARTY TRANSACTIONS
In February 1998 the Company paid an outside director $90,834 as a fee in
connection with the Company's purchase of Paaco (see Note C).
During fiscal 1998, in exchange for a fee, Paaco sold approximately
$608,000 of 90-day service contracts to its customers on behalf of Medallia de
Oro LLC ("Medallia"), a company owned by the minority shareholders of Paaco. In
addition, Paaco sends the majority of its vehicle trade-ins to an auction
company that is partially owned by its minority shareholders.
From time to time the minority shareholders of Paaco, and certain of their
family members, have loaned money to Paaco at interest rates ranging from 10 to
15%. At April 30, 1998 the aggregate amount of such loans totaled $2,317,350.
In June 1996 the Company entered into a definitive asset purchase agreement
to acquire a riverboat casino in Clinton, Iowa. This casino is principally owned
by the adult children of an outside director of the Company. In November 1996
the Company determined to abandon the proposed transaction, and, as a result,
forfeited a $500,000 deposit (see Note C).
The Company incurred legal fees of approximately $121,000 during fiscal
1996 from a law firm of which a director of the Company was a partner. In July
1995 this director left such law firm and became a full-time executive officer
of the Company.
P - COMMITMENTS AND CONTINGENCIES
Mortgage Loan Sales
In connection with the Company's sale of mortgage loans in the ordinary
course of business, in certain circumstances such loan sales involve limited
recourse to the Company for up to the first twelve months following the sale.
Generally, the events which could give rise to these recourse provisions involve
the prepayment or foreclosure of a loan, and violations of customary
representations and warranties. If the recourse provisions are triggered the
Company may be required to refund all or part of the premium received on the
sale of such loan, and in some cases the Company may be required to repurchase
the loan. Periodically the Company estimates the potential exposure related to
such recourse provisions and accrues a percentage of the total potential
liability.
Severance Agreements
The Company has entered into severance agreements with its three executive
officers which provide for payments to the executives in the event of their
termination after a change in control, as defined, of the Company. The
agreements provide, among other things, for a compensation payment equal to 2.99
times the annual compensation paid to the executive, as well as accelerated
vesting of any unvested options under the Company's stock option plans, in the
event of such executive's termination in connection with a change in control.
<PAGE> 20
Paaco Purchase Contingent Consideration
In connection with the Company's purchase of an additional 12% interest in
Paaco effective May 1, 1998, the Company agreed to pay the sellers as additional
consideration an amount equal to 60% of the excess of Paaco's pretax income in
excess of $2.5 million for the twelve months ended January 31, 1999. Such
additional consideration, if any, is to be paid in Company common stock valued
at $4.00 per share.
Q - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures for the fiscal years ended April 30,
1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Years Ended April 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Note received for sale of first 50% interest in SCGC $ 20,000,000
Stock received for sale of second 50% interest in SCGC $ 12,025,000
Interest paid, net of amount capitalized $ 1,356,075 68,757 922,801
Income taxes paid 925,000
Inventory acquired in repossession 1,710,220
Conversion of a portion of CMN note to equity 2,516,493
</TABLE>
In connection with the Company's purchase of Paaco and Precision, assumed
liabilities were as follows:
<TABLE>
<CAPTION>
Paaco Precision
------------ ------------
<S> <C> <C>
Fair value of assets acquired $ 48,077,386 $ 8,258,112
Cash paid for capital stock (9,174,212) (4,032,389)
Minority interests (2,980,180) (128,461)
------------ ------------
Liabilities assumed $ 35,922,994 $ 4,097,262
============ ============
</TABLE>
R - SUBSEQUENT EVENTS
Paaco and Precision Purchases
Effective May 1, 1998 the Company purchased the remaining 20% interest in
Precision it did not previously own by issuing 288,027 shares of the Company's
common stock. Also effective May 1, 1998 the Company purchased an additional 12%
interest in Paaco, bringing its ownership interest to 65%, by issuing 375,000
shares of the Company's common stock.
Bengal Acquisition
In August 1998 the Company reached a preliminary agreement, subject to
certain conditions, to acquire 100% of the outstanding common stock Bengal
Chemical, Inc. ("Bengal") for approximately $8.3 million. Bengal specializes in
the distribution of pesticide products in the southeastern United States. For
the year ended December 31, 1997 Bengal had unaudited revenues of approximately
$12 million.
<PAGE> 21
S - BUSINESS SEGMENTS
Operating results and other financial data are presented for the four
principal business segments of the Company for the year ended April 30, 1998.
These segments are categorized by legal entity, which also corresponds to their
line of business and how they are operated. The segments include (i) Paaco,
which sells and finances used vehicles, (ii) Precision, which rents and sells
intermediate bulk containers, (iii) Concorde, which originates and sells
sub-prime mortgage loans, and (iv) other, which includes corporate operations,
activities of relatively inactive subsidiaries and the Company's equity
investment in CMN. For the years ended April 30, 1997 and 1996 the Company
operated in a single business segment, and, accordingly, no separate segment
disclosures are necessary. The Company's business segment data for the year
ended April 30, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended April 30, 1998
------------------------------------------------------------------------------
Paaco Precision Concorde Other Eliminations Consolidated
-------- --------- -------- -------- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other $ 14,241 $ 1,351 $ 1,100 $ 1,105 $ 17,797
Interest income 1,519 815 1,472 $ (388) 3,418
-------- -------- -------- -------- -------- --------
Total 15,760 1,351 1,915 2,577 (388) 21,215
-------- -------- -------- -------- -------- --------
Costs and expenses:
Interest expense 942 81 586 14 (388) 1,235
Depreciation and
amortization 64 122 42 557 785
Other 13,715 867 2,094 2,928 19,604
-------- -------- -------- -------- -------- --------
Total 14,721 1,070 2,722 3,499 (388) 21,624
-------- -------- -------- -------- -------- --------
CMN earnings and other 965 965
-------- -------- -------- -------- -------- --------
Income (loss) before taxes
and minority interests $ 1,039 $ 281 $ (807) $ 43 $ -- $ 556
======== ======== ======== ======== ======== ========
Capital expenditures $ 1,648 $ 1,057 $ 568 $ 788 $ -- $ 4,061
======== ======== ======== ======== ======== ========
Total assets $ 45,427 $ 9,337 $ 16,211 $ 43,358 $(20,656) $ 93,677
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE> 22
T - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of the Company's quarterly results of operations for the years
ended April 30, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended April 30, 1998
---------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Revenue (a) $ 494 $ 556 $ 1,165 $19,000 $21,215
Net income (loss) (309) (51) 14 694 348
Diluted earnings (loss) per share (0.03) (0.01) -- 0.07 0.04
</TABLE>
<TABLE>
<CAPTION>
Year Ended April 30, 1997
-----------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Revenue $ 601 $ 854 $ 298 $ 277 $ 2,030
Net income (loss) (b) 13,621 (468) (3,531) (762) 8,860
Diluted earnings (loss) per share (b) 1.16 (0.04) (0.34) (0.07) 0.80
</TABLE>
a - During the fourth quarter in the year ended April 30, 1998 revenues
increased significantly as a result of the Company's acquisitions of Paaco
and Precision.
b - During the first quarter in the year ended April 30, 1997 the Company
recognized a $14.9 million gain on the sale of its remaining 50% interest
in SCGC. During the third quarter of the year ended April 30, 1997 the
Company recognized a loss of $4.7 million from the sale of 1,850,000 shares
of Casino America common stock it had received in the sale of its remaining
50% interest in SCGC.
<PAGE> 23
REPORT OF INDEPENDENT ACCOUNTANTS
Stockholders and Board of Directors
Crown Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of Crown
Group, Inc. and its subsidiaries at April 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended April 30, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards, which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
August 1, 1998
<PAGE> 24
COMMON STOCK INFORMATION, DIVIDENDS AND CROWN GROUP, INC.
RELATED STOCKHOLDER MATTERS
The Company's common stock is authorized for quotation on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") Small
Cap Market under the NASDAQ symbol CNGR. The following table sets forth, by
fiscal quarter, the high and low sale prices reported by NASDAQ for the
Company's common stock for the periods indicated.
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First quarter $ 2.56 $ 2.00 $ 3.63 $1.69
Second quarter 4.00 2.38 3.06 2.00
Third quarter 3.56 3.00 3.25 2.00
Fourth quarter 4.31 3.00 2.94 2.00
</TABLE>
As of July 31, 1998 there were approximately 1,590 stockholders of record.
This number excludes individual stockholders holding stock under nominee
security position listings.
Since its inception the Company has paid no dividends on its common stock.
The Company currently intends to follow a policy of retaining earnings to
finance future growth. Payment of dividends in the future will be determined by
the Company's Board of Directors and will depend upon, among other things, the
Company's future earnings, operations, capital requirements and surplus, general
financial condition, and contractual restrictions that may exist, and such other
factors as the Board of Directors may deem relevant.
SELECTED FINANCIAL DATA
The financial data set forth below was derived from the audited
consolidated financial statements of the Company and should be read in
conjunction with the consolidated financial statements and related notes
thereto, and Management's Discussion and Analysis of Financial Condition and
Results of Operations contained elsewhere herein. (In thousands, except per
share amounts.)
<TABLE>
<CAPTION>
Years Ended April 30,
1998 1997 1996 1995 1994
-------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Revenues from:
Continuing operations $ 21,215 $ 2,030 $ 2,293 $ 177 $ 197
Discontinued operations 604
Net income (loss) from:
Continuing operations $ 348 $ 8,860 $ 12,298 $(20,325) $ (2,052)
Discontinued operations (177)
-------- -------- -------- -------- --------
$ 348 $ 8,860 $ 12,298 $(20,325) $ (2,229)
======== ======== ======== ======== ========
Earnings (loss) per share (diluted):
Continuing operations $ 0.04 $ 0.80 $ 1.03 $ (2.01) $ (0.34)
Discontinued operations (0.03)
-------- -------- -------- -------- --------
$ 0.04 $ 0.80 $ 1.03 $ (2.01) $ (0.37)
======== ======== ======== ======== ========
Total assets $ 93,677 $ 38,237 $ 39,329 $ 54,507 $ 30,974
Total debt 46,035 987 31,660
Stockholders' equity 35,032 35,713 30,153 17,930 23,837
Shares outstanding 9,434 10,395 11,650 11,678 8,999
</TABLE>
<PAGE> 25
CORPORATE INFORMATION CROWN GROUP, INC.
DIRECTORS
Edward R. McMurphy
Chairman of the Board, Chief Executive Officer
and President
Crown Group, Inc.
John David Simmons
President
Simmons & Associates, Inc.
David J. Douglas
Managing Director
Tuesday Afternoon, Inc.
T. J. Falgout, III
Executive Vice President and General Counsel
Crown Group, Inc.
Gerald L. Adams
President
River Development, Inc.
Gerard M. Jacobs
Chief Executive Officer
Metal Management, Inc.
Robert J. Kehl
President
Kehl River Boats, Inc.
OFFICERS
Edward R. McMurphy
Chairman of the Board, Chief Executive Officer
and President
T. J. Falgout, III
Executive Vice President and General Counsel
Mark D. Slusser
Chief Financial Officer, Vice President Finance
and Secretary
Edward J. Preuss, Jr.
Vice President Project Development
Michael B. Cloud
Controller and Assistant Secretary
Investor Communications
Inquiries and requests regarding the Annual Report or other materials should be
directed to:
Edward J. Preuss, Jr.
4040 N. MacArthur Blvd., Suite 100
Irving, Texas 75038-6424
(972) 717-3423
Form 10-K
Additional information is included in the Company's report to the Securities and
Exchange Commission on Form 10-K. Copies of the Form 10-K are available at no
charge to stockholders upon written request. See Investor Communications.
Corporate Offices
4040 N. MacArthur Blvd., Suite 100
Irving, Texas 75038-6424
(972) 717-3423
Internet address: http://www.thecrowngroup.com
Annual Meeting
The annual meeting of stockholders of Crown Group, Inc. will be held at the Four
Seasons Hotel and Resort, 4150 N. MacArthur Blvd., Irving, Texas at 9:30 a.m. on
Thursday, October 15, 1998.
Transfer Agent and Registrar
Securities Transfer Corporation
Dallas, Texas
(972) 447-9890
Independent Accountants
PricewaterhouseCoopers LLP
Dallas, Texas
General Counsel
Smith, Gambrell & Russell
Atlanta, Georgia
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF CROWN GROUP, INC.
Crown Group of Nevada, Inc.
Crown Delaware Investments Corp.
Paaco Automotive Group, Inc.
Premium Auto Acceptance Corporation
Precision IBC, Inc.
Concorde Acceptance Corporation
Home Stay Lodge I, Ltd.
Home Stay Lodge, Inc.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Crown Group, Inc. and subsidiaries on Form S-8 (File Nos. 33-59519, 33-59527
and 333-38475) of our report dated August 1, 1998, on our audits of the
consolidated financial statements and financial statement schedule of Crown
Group, Inc. and subsidiaries as of April 30, 1998 and 1997, and for the years
ended April 30, 1998, 1997 and 1996, which report is incorporated by reference
in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Dallas, Texas
August 12, 1998
<PAGE> 1
EXHIBIT 23.2
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
Board of Directors
Crown Group, Inc.
Our audits of the consolidated financial statements referred to in our report
dated August 1, 1998 of Crown Group, Inc. (which report and consolidated
financial statements are incorporated by reference in this Annual Report on
Form 10-K) also included an audit of the Financial Statement Schedule listed
in Item 14(a)(2) of this Form 10-K. In our opinion, the Financial Statement
Schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PricewaterhouseCoopers LLP
Dallas, Texas
August 1, 1998
<PAGE> 1
Exhibit 24.1
STATE OF TEXAS )
)
COUNTY OF DALLAS )
POWER OF ATTORNEY
Know all men by these presents, that I, EDWARD R. MCMURPHY, a Director of CROWN
GROUP, INC., a Texas corporation, do constitute and appoint MARK D. SLUSSER, my
true and lawful attorney-in-fact, with full power of substitution, for me in any
and all capacities, to sign, pursuant to the requirements of the Securities
Exchange Act of 1934, the Annual Report on Form 10-K for CROWN GROUP, INC., for
the fiscal year ended April 30, 1998, and to file the same with the Securities
and Exchange Commission and the National Association of Security Dealers, Inc.,
together with all exhibits thereto and other documents in connection therewith,
and to sign on my behalf and in my stead, in any and all capacities, any
amendments to said Annual Report, incorporating such changes as said
attorney-in-fact deems appropriate, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
In witness whereof, I have hereunto set my hand and seal this 5th day of August,
1998.
/s/ Edward R. McMurphy
---------------------------
Edward R. McMurphy
ACKNOWLEDGEMENT
Before me this 5th day of August, 1998, came EDWARD R. MCMURPHY, personally
known to me, who in my presence did sign and seal the above and foregoing Power
of Attorney and acknowledged the same as his true act and deed.
/s/ April May
---------------------------
NOTARY PUBLIC
<PAGE> 1
EXHIBIT 24.2
STATE OF TEXAS )
)
COUNTY OF DALLAS )
POWER OF ATTORNEY
Know all men by these presents, that I, T.J. FALGOUT, III, a Director of CROWN
GROUP, INC., a Texas corporation, do constitute and appoint EDWARD R. MCMURPHY
and MARK D. SLUSSER, my true and lawful attorney-in-fact, with full power of
substitution, for me in any and all capacities, to sign, pursuant to the
requirements of the Securities Exchange Act of 1934, the Annual Report on Form
10-K for CROWN GROUP, INC., for the fiscal year ended April 30, 1998, and to
file the same with the Securities and Exchange Commission and the National
Association of Security Dealers, Inc., together with all exhibits thereto and
other documents in connection therewith, and to sign on my behalf and in my
stead, in any and all capacities, any amendments to said Annual Report,
incorporating such changes as said attorney-in-fact deems appropriate, hereby
ratifying and confirming all that said attorney-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
In witness whereof, I have hereunto set my hand and seal this 3rd day of August,
1998.
/s/ T. J. Falgout, III
------------------------------
T. J. FALGOUT, III
ACKNOWLEDGEMENT
Before me this 3rd day of August, 1998, came T. J. FALGOUT, III, personally
known to me, who in my presence did sign and seal the above and foregoing Power
of Attorney and acknowledged the same as his true act and deed.
/s/ April May
------------------------------
NOTARY PUBLIC
<PAGE> 1
EXHIBIT 24.3
STATE OF TEXAS )
)
COUNTY OF DALLAS )
POWER OF ATTORNEY
Know all men by these presents, that I, DAVID J. DOUGLAS, a Director of CROWN
GROUP, INC., a Texas corporation, do constitute and appoint EDWARD R. MCMURPHY
and MARK D. SLUSSER, my true and lawful attorney-in-fact, with full power of
substitution, for me in any and all capacities, to sign, pursuant to the
requirements of the Securities Exchange Act of 1934, the Annual Report on Form
10-K for CROWN GROUP, INC., for the fiscal year ended April 30, 1998, and to
file the same with the Securities and Exchange Commission and the National
Association of Security Dealers, Inc., together with all exhibits thereto and
other documents in connection therewith, and to sign on my behalf and in my
stead, in any and all capacities, any amendments to said Annual Report,
incorporating such changes as said attorney-in-fact deems appropriate, hereby
ratifying and confirming all that said attorney-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
In witness whereof, I have hereunto set my hand and seal this 11th day of
August, 1998.
/s/ David J. Douglas
------------------------------
DAVID J. DOUGLAS
ACKNOWLEDGEMENT
Before me this 11th day of August, 1998, came DAVID J. DOUGLAS, personally known
to me, who in my presence did sign and seal the above and foregoing Power of
Attorney and acknowledged the same as his true act and deed.
/s/ Rhonda H. Bigsby
------------------------------
NOTARY PUBLIC
<PAGE> 1
EXHIBIT 24.4
STATE OF TEXAS }
)
COUNTY OF DALLAS )
POWER OF ATTORNEY
Know all men by these presents, that I, J. DAVID SIMMONS, a Director of CROWN
GROUP, INC., a Texas corporation, do constitute and appoint EDWARD R. MCMURPHY
and MARK D. SLUSSER, my true and lawful attorney-in-fact, with full power of
substitution, for me in any and all capacities, to sign, pursuant to the
requirements of the Securities Exchange Act of 1934, the Annual Report on Form
10-K for CROWN GROUP, INC., for the fiscal year ended April 30, 1998, and to
file the same with the Securities and Exchange Commission and the National
Association of Security Dealers, Inc., together with all exhibits thereto and
other documents in connection therewith, and to sign on my behalf and in my
stead, in any and all capacities, any amendments to said Annual Report,
incorporating such changes as said attorney-in-fact deems appropriate, hereby
ratifying and confirming all that said attorney-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
In witness whereof, I have hereunto set my hand and seal this 7th day of August,
1998.
/s/ J. David Simmons
------------------------------
J. DAVID SIMMONS
ACKNOWLEDGEMENT
Before me this 7th day of August, 1998, came J. DAVID SIMMONS, personally known
to me, who in my presence did sign and seal the above and foregoing Power of
Attorney and acknowledged the same as his true act and deed.
/s/ Debra B. Smith
------------------------------
NOTARY PUBLIC
<PAGE> 1
EXHIBIT 24.5
STATE OF TEXAS )
)
COUNTY OF DALLAS )
POWER OF ATTORNEY
Know all men by these presents, that I, GERALD L. ADAMS, a Director of CROWN
GROUP, INC., a Texas corporation, do constitute and appoint EDWARD R. MCMURPHY
and MARK D. SLUSSER, my true and lawful attorney-in-fact, with full power of
substitution, for me in any and all capacities, to sign, pursuant to the
requirements of the Securities Exchange Act of 1934, the Annual Report on Form
10-K for CROWN GROUP, INC., for the fiscal year ended April 30, 1998, and to
file the same with the Securities and Exchange Commission and the National
Association of Security Dealers, Inc., together with all exhibits thereto and
other documents in connection therewith, and to sign on my behalf and in my
stead, in any and all capacities, any amendments to said Annual Report,
incorporating such changes as said attorney-in-fact deems appropriate, hereby
ratifying and confirming all that said attorney-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
In witness whereof, I have hereunto set my hand and seal this 10th day of
August, 1998.
/s/ Gerald L.Adams
------------------------------
GERALD L. ADAMS
ACKNOWLEDGEMENT
Before me this 10th day of August, 1998, came GERALD L. ADAMS, personally known
to me, who in my presence did sign and seal the above and foregoing Power of
Attorney and acknowledged the same as his true act and deed.
/s/ Michelle Ann Dilda
------------------------------
NOTARY PUBLIC
<PAGE> 1
EXHIBIT 24.6
STATE OF TEXAS )
)
COUNTY OF DALLAS )
POWER OF ATTORNEY
Know all men by these presents, that I, GERARD M. JACOBS, a Director of CROWN
GROUP, INC., a Texas corporation, do constitute and appoint EDWARD R. MCMURPHY
and MARK D. SLUSSER, my true and lawful attorney-in-fact, with full power of
substitution, for me in any and all capacities, to sign, pursuant to the
requirements of the Securities Exchange Act of 1934, the Annual Report on Form
10-K for CROWN GROUP, INC., for the fiscal year ended April 30, 1998, and to
file the same with the Securities and Exchange Commission and the National
Association of Security Dealers, Inc., together with all exhibits thereto and
other documents in connection therewith, and to sign on my behalf and in my
stead, in any and all capacities, any amendments to said Annual Report,
incorporating such changes as said attorney-in-fact deems appropriate, hereby
ratifying and confirming all that said attorney-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
In witness whereof, I have hereunto set my hand and seal this 7th day of August,
1998.
/s/ Gerard M.Jacobs
------------------------------
GERARD M. JACOBS
ACKNOWLEDGEMENT
Before me this 7th day of August, 1998, came GERARD M. JACOBS, personally known
to me, who in my presence did sign and seal the above and foregoing Power of
Attorney and acknowledged the same as his true act and deed.
/s/ April May
------------------------------
NOTARY PUBLIC
<PAGE> 1
EXHIBIT 24.7
STATE OF TEXAS )
)
COUNTY OF DALLAS )
POWER OF ATTORNEY
Know all men by these presents, that I, ROBERT J. KEHL, a Director of CROWN
GROUP, INC., a Texas corporation, do constitute and appoint EDWARD R. MCMURPHY
and MARK D. SLUSSER, my true and lawful attorney-in-fact, with full power of
substitution, for me in any and all capacities, to sign, pursuant to the
requirements of the Securities Exchange Act of 1934, the Annual Report on Form
10-K for CROWN GROUP, INC., for the fiscal year ended April 30, 1998, and to
file the same with the Securities and Exchange Commission and the National
Association of Security Dealers, Inc., together with all exhibits thereto and
other documents in connection therewith, and to sign on my behalf and in my
stead, in any and all capacities, any amendments to said Annual Report,
incorporating such changes as said attorney-in-fact deems appropriate, hereby
ratifying and confirming all that said attorney-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
In witness whereof, I have hereunto set my hand and seal this 11th day of
August, 1998.
/s/ Robert J. Kehl
------------------------------
ROBERT J. KEHL
ACKNOWLEDGEMENT
Before me this 11th day of August, 1998, came ROBERT J. KEHL, personally known
to me, who in my presence did sign and seal the above and foregoing Power of
Attorney and acknowledged the same as his true act and deed.
/s/ Michelle Ann Dilda
------------------------------
NOTARY PUBLIC
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> APR-30-1998
<CASH> 6,481,706
<SECURITIES> 4,742,180
<RECEIVABLES> 57,439,309
<ALLOWANCES> (4,727,679)
<INVENTORY> 3,783,290
<CURRENT-ASSETS> 0
<PP&E> 9,907,521
<DEPRECIATION> (741,818)
<TOTAL-ASSETS> 93,676,684
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 94,340
<OTHER-SE> 34,937,913
<TOTAL-LIABILITY-AND-EQUITY> 93,676,684
<SALES> 14,938,617
<TOTAL-REVENUES> 21,215,389
<CGS> 9,275,055
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,352,683
<LOSS-PROVISION> 1,761,469
<INTEREST-EXPENSE> 1,235,358
<INCOME-PRETAX> 555,680
<INCOME-TAX> (131,279)
<INCOME-CONTINUING> 348,095
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 348,095
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
