<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
Date of Report (Date of earliest event reported) FEBRUARY 1, 1998
-------------------------------
CROWN GROUP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 0-14939 63-0851141
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
4040 NORTH MACARTHUR BOULEVARD, SUITE 100, IRVING, TEXAS 75038
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code (972) 717-3423
------------------------------
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of businesses acquired.
The following combined financial statements of Paaco, Inc. and
Premium Auto Acceptance Corporation are hereby filed with this
report:
Report of Independent Public Accountants
Report of Independent Auditors
Combined Balance Sheets as of December 31, 1997 and 1996
Combined Statements of Operations for the years ended December
31, 1997, 1996 and 1995
Combined Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995
Combined Statements of Cash Flows for the years ended December
31, 1997, 1996 and 1995
Notes to Combined Financial Statements
(b) Pro-Forma financial information.
The following pro-forma financial statements of Crown Group,
Inc. are hereby filed with this Report:
Introduction to Pro-Forma Financial Information
Pro-Forma Condensed Consolidated Balance Sheet (unaudited)
as of January 31, 1998
Pro-Forma Condensed Consolidated Statement of Operations
(unaudited) for the year ended April 30, 1997
Pro-Forma Condensed Consolidated Statement of Operations
(unaudited) for the nine months ended January 31, 1998
Notes to Pro-Forma Condensed Consolidated Financial
Statements
(c) Exhibits:
23.1 - Consent of Independent Public Accountants
23.2 - Consent of Independent Auditors
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
Crown Group, Inc.
By: \s\ Mark D. Slusser
-------------------------------------
Mark D. Slusser
Chief Financial Officer
Dated: April 16, 1998
--------------
<PAGE> 4
PAACO, INC.
PREMIUM AUTO ACCEPTANCE CORPORATION
COMBINED FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<PAGE> 5
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
PAACO, Inc.
Premium Auto Acceptance Corporation:
We have audited the accompanying combined balance sheet of PAACO, Inc. and
Premium Auto Acceptance Corporation (the "Companies") as of December 31, 1997
and the related combined statement of operations, stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Companies' management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of PAACO, Inc. and
Premium Auto Acceptance Corporation as of December 31, 1997 and the combined
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
April 13, 1998
<PAGE> 6
REPORT OF INDEPENDENT AUDITORS
Board of Directors
PAACO, Inc.
Premium Auto Acceptance Corporation
We have audited the accompanying combined balance sheet of PAACO, Inc. and
Premium Auto Acceptance Corporation as of December 31, 1996, and the related
combined statements of operations, stockholders' equity and cash flows for each
of the two years in the period ended December 31, 1996. These financial
statements are the responsibility of the Combined Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of PAACO, Inc. and
Premium Auto Acceptance Corporation at December 31, 1996, and the combined
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
April 28, 1997
Dallas, Texas
<PAGE> 7
PAACO, INC.
PREMIUM AUTO ACCEPTANCE CORPORATION
COMBINED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
----------- ------------
<S> <C> <C>
Cash and cash equivalents $ 194,877 $ 281,395
Finance receivables, net of an allowance for credit losses of
$3,882,261 and $2,540,740, respectively, and unearned interest
of $8,205,032 and $4,701,075, respectively 30,146,679 16,443,060
Other receivables 431,940 148,793
Inventory 2,649,380 1,741,296
Land, buildings and equipment, net of accumulated depreciation
of $311,806 and $148,200, respectively 1,652,768 1,056,404
Prepaids and other assets 657,555 506,240
Income tax receivable 546,125 --
Deferred tax asset, net -- 546,125
----------- -----------
Total assets $36,279,324 $20,723,313
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable to financial institutions $23,409,875 $12,451,125
Subordinated notes payable 6,094,164 3,836,352
Mortgage and other notes payable 751,664 725,385
Allowance for credit losses on sold finance receivables -- 132,555
Accounts payable and accrued expenses 2,911,194 2,243,346
Income taxes payable -- 500,843
Deferred tax liability, net 1,010,261 --
----------- -----------
Total liabilities 34,177,158 19,889,606
----------- -----------
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock:
200,000 shares authorized; 101,000 issued and outstanding 2,000 2,000
Retained earnings 2,100,166 831,707
----------- -----------
Total stockholders' equity 2,102,166 833,707
----------- -----------
Total liabilities and stockholders' equity $36,279,324 $20,723,313
=========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-3
<PAGE> 8
PAACO, INC.
PREMIUM AUTO ACCEPTANCE CORPORATION
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Sales of vehicles $ 43,115,477 $ 26,110,863 $ 18,751,961
Cost of sales 28,911,194 16,575,661 10,650,905
------------ ------------ ------------
Gross margin on sale of vehicles 14,204,283 9,535,202 8,101,056
Interest income 4,939,193 2,469,467 1,230,777
Other income 257,536 277,068 81,412
------------ ------------ ------------
19,401,012 12,281,737 9,413,245
Provision for credit losses 4,928,107 3,091,132 3,511,258
------------ ------------ ------------
Operating profit before expenses 14,472,905 9,190,605 5,901,987
------------ ------------ ------------
Expenses:
Salaries and employee benefits 4,355,883 2,484,038 1,550,882
Interest expense 2,746,765 1,635,563 972,727
Other operating expenses 5,091,537 4,256,769 3,216,881
Loss on sale of finance receivables -- 193,088 272,616
------------ ------------ ------------
Total operating expenses 12,194,185 8,569,458 6,013,106
------------ ------------ ------------
Earnings (loss) before income taxes 2,278,720 621,147 (111,119)
Provision for income taxes 1,010,261 -- --
------------ ------------ ------------
Net income (loss) $ 1,268,459 $ 621,147 $ (111,119)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-4
<PAGE> 9
PAACO, INC.
PREMIUM AUTO ACCEPTANCE CORPORATION
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock Total
--------------------------- Retained Stockholders'
Shares Amount Earnings Equity
----------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 101,000 $ 2,000 $ 321,679 $ 323,679
Net loss for the year ended
December 31, 1995 -- -- (111,119) (111,119)
----------- ----------- ----------- -----------
Balance at December 31, 1995 101,000 2,000 210,560 212,560
Net income for the year ended
December 31, 1996 -- -- 621,147 621,147
----------- ----------- ----------- -----------
Balance at December 31, 1996 101,000 2,000 831,707 833,707
Net income for the year ended
December 31, 1997 -- -- 1,268,459 1,268,459
----------- ----------- ----------- -----------
Balance at December 31, 1997 101,000 $ 2,000 $ 2,100,166 $ 2,102,166
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-5
<PAGE> 10
PAACO, INC.
PREMIUM AUTO ACCEPTANCE CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
Operating activities:
Net income $ 1,268,459 $ 621,147 $ (111,119)
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for credit losses 4,928,107 3,091,132 3,511,258
Loss on sale of finance receivables -- 193,088 272,616
Deferred income taxes 1,556,386 (500,843) (12,948)
Depreciation 163,606 76,911 44,641
Changes in operating assets and liabilities:
Inventory 5,255,797 4,254,027 1,476,636
Other receivables (283,147) 221,711 (164,363)
Prepaid and other assets (151,315) (86,074) (375,457)
Accounts payable and accrued expenses 667,848 1,556,808 548,596
Income tax payable/receivable (1,046,968) -- --
------------ ------------ ------------
Net cash provided by operating activities 12,358,773 9,427,907 5,189,860
------------ ------------ ------------
Investing activities:
Finance receivable originations (36,253,047) (24,357,947) (18,112,168)
Collections of finance receivables 11,324,885 7,480,338 6,549,055
Purchases of fixed assets (759,970) (279,516) (859,726)
------------ ------------ ------------
Net cash used in investing activities (25,688,132) (17,157,125) (12,422,839)
------------ ------------ ------------
Financing activities:
Net increase in notes payable to financial institutions 10,958,750 8,466,000 3,985,125
Net increase (decrease) in subordinated notes payable 2,257,812 (729,931) 2,786,630
Net increase in mortgages and other notes payable 26,279 18,948 706,437
------------ ------------ ------------
Net cash provided by financing activities 13,242,841 7,755,017 7,478,192
------------ ------------ ------------
Net (decrease)/ increase in cash and cash equivalents (86,518) 25,799 245,213
Cash and cash equivalents at beginning of year 281,395 255,596 10,383
------------ ------------ ------------
Cash and cash equivalents at end of year $ 194,877 $ 281,395 $ 255,596
============ ============ ============
Supplemental Cash Flow Information:
Interest paid $ 2,746,765 $ 1,505,233 $ 880,851
============ ============ ============
Income taxes paid $ 500,843 $ 25,000 $ 32,334
============ ============ ============
Inventory acquired upon repossession $ 6,163,881 $ 5,035,503 $ 1,605,825
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-6
<PAGE> 11
PAACO, INC.
PREMIUM AUTO ACCEPTANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
These financial statements represent the combined operations of PAACO,
Inc. ("PAACO") and Premium Auto Acceptance Corporation ("Premium"),
collectively referred to as the Combined Company. PAACO sells,
underwrites, and finances used cars and trucks through its wholly-owned
chain of used car dealerships. Premium invests in finance receivables
originated by PAACO. PAACO has authorized and issued 100,000 shares of
common stock at par value of $0.01; Premium has 100,000 shares of
no-par common stock authorized and 1,000 shares issued and outstanding
for combined common stock of $2,000.
The Combined Company provides financing primarily to the Hispanic
market in the Dallas/Fort Worth metroplex. The Combined Company's
target market consists of borrowers who have limited access to consumer
financing primarily due to the lack of or limited credit histories.
PAACO and Premium share common ownership. The combined financial
statements of PAACO and Premium include the accounts of the Combined
Company. Significant intercompany accounts and transactions have been
eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual amounts could differ
from those estimates.
CONCENTRATIONS OF CREDIT RISK
The Combined Company's customer base is primarily comprised of the
Hispanic market in the Dallas/Ft. Worth metroplex.
F-7
<PAGE> 12
PAACO, INC.
PREMIUM AUTO ACCEPTANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
CASH AND CASH EQUIVALENTS
For the purposes of the statement of cash flows, cash and cash
equivalents include cash on hand and investments with original
maturities of three months or less.
FINANCE RECEIVABLES
PAACO, through its seven retail dealerships, sells, underwrites,
finances and services installment sales contracts collateralized by
used motor vehicles. Finance receivables, which are periodically sold
to Premium, 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 Combined Company discontinues the
accrual of interest income when the receivable becomes greater than
sixty days delinquent.
Provision for credit losses is charged to income in amounts sufficient
to maintain the allowance at a level considered adequate to cover
anticipated losses resulting from repossession of the underlying
collateral. 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 provision for credit losses
included in the financial statements to be adequate, such estimates may
be more or less than the amounts ultimately charged off. The estimates
are continually reviewed by management with any changes reflected in
current operations.
INVENTORY
Inventory consists of used vehicles held for sale and is valued at the
lower of cost or market. The cost of used vehicles sold, which includes
capitalized reconditioning costs, is determined on a specific
identification basis. Repossessed vehicles are recorded at wholesale
value or original cost. The decision to repossess an automobile is made
on a case by case evaluation of various factors, including the
creditor's ability and willingness to pay as demonstrated by the
borrower's payment history with the Combined Company.
F-8
<PAGE> 13
PAACO, INC.
PREMIUM AUTO ACCEPTANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS, Continued
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed using an accelerated method over
the estimated useful lives of the respective assets ranging from
thirty-nine years for buildings and five to seven years for equipment.
Leasehold improvements are stated at historical cost and are amortized
over the lease period. Repair and maintenance expenses are charged to
expense as incurred.
INCOME TAXES
PAACO, a Subchapter C Corporation, utilizes an asset and liability
approach for financial accounting and reporting for income taxes in
accordance with Statement on Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes." No tax provision for federal income
taxes is recorded for income or losses attributed to Premium because of
its designation as a Subchapter S Corporation.
REVENUE RECOGNITION
Revenue is recognized as income at the time the vehicle is sold.
Interest on finance receivables is earned over time using the effective
interest method. The Combined Company maintains an allowance for
estimated uncollectible customer finance receivables.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' balances to
conform with current year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," which is effective for fiscal
years beginning after December 15, 1997. This statement establishes
standards for reporting and display of comprehensive income and its
components.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 131 is effective for fiscal years beginning
after December 15, 1997. This statement establishes standards for the
way that public companies report information about segments in annual
and interim financial statements.
F-9
<PAGE> 14
PAACO, INC.
PREMIUM AUTO ACCEPTANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
3. FINANCE RECEIVABLES:
Premium provides financing for a substantial portion of the sales of
used cars sold by PAACO. Installment sales contracts generated by
PAACO's dealerships are executed by customers with terms which
typically consist of down payments including trade-ins of approximately
10-12%, interest rates ranging from 18-26%, and maturity terms ranging
from 24 to 36 months.
Finance receivables consist of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Finance receivables $ 42,233,972 $ 23,684,875
Unearned finance income (8,205,032) (4,701,075)
Allowances for credit losses (3,882,261) (2,540,740)
------------ ------------
Finance receivables, net $ 30,146,679 $ 16,443,060
============ ============
</TABLE>
The following table summarizes changes in the allowance for credit
losses for the years ended December 31:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Allowance for credit losses, beginning of year $ 2,673,295 $ 2,419,954
Provision for credit losses 4,928,107 3,091,132
Charge-offs, net of recoveries (3,719,141) (2,837,791)
----------- -----------
Allowance for credit losses, end of year $ 3,882,261 $ 2,673,295
=========== ===========
</TABLE>
The components of the allowance for credit losses are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1996
---------- --------------
<S> <C> <C>
Allowance for credit losses on finance receivables held by
the Combined Company $3,882,261 $2,540,740
Allowance for credit losses on sold finance receivables -- 132,555
---------- ----------
Allowance for credit losses $3,882,261 $2,673,295
========== ==========
</TABLE>
F-10
<PAGE> 15
PAACO, INC.
PREMIUM AUTO ACCEPTANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
On occasion, the Combined Company sold finance receivables to fund the
Combined Company's growth. During 1995, the Combined Company sold
$2,852,515 of finance receivables to a third party with recourse and at
a discount. The Combined Company also retained the future servicing
rights related to these loans. A servicing fee of $5 per account
outstanding is collected on a monthly basis. The servicing fee
adequately compensates the Combined Company for the services provided.
At December 31, 1997 and 1996, the Combined Company serviced $130,164
and $883,699, respectively, of finance receivables with recourse
obligations. The Combined Company no longer maintains an allowance for
credit losses for finance receivables sold with recourse as management
does not expect significant losses on the remaining sold finance
receivables.
4. PROPERTY AND EQUIPMENT:
A summary of property and equipment is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Land $ 210,114 $ 210,114
Building and leasehold improvements 1,036,638 696,357
Furniture and equipment 717,822 298,133
Less accumulated depreciation and amortization (311,806) (148,200)
----------- -----------
Property and equipment, net $ 1,652,768 $ 1,056,404
=========== ===========
</TABLE>
During the years ended December 31, 1997, 1996 and 1995, the Combined
Company recorded depreciation expense of $163,606, $76,911 and $44,641,
respectively.
F-11
<PAGE> 16
PAACO, INC.
PREMIUM AUTO ACCEPTANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
5. NOTES PAYABLE:
Notes payable consist of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1996
----------- ------------
<S> <C> <C>
Note payable to a financial institution, collateralized by
finance receivables $22,909,875 $12,125,125
Note payable to a financial institution, collateralized by
certain inventory 500,000 326,000
Subordinated notes payable 6,094,164 3,836,352
Mortgage payable 633,972 644,093
Other notes payable, collateralized by vehicles 41,612 81,292
Other notes payable, collateralized by equipment 76,080 --
----------- -----------
$30,255,703 $17,012,862
=========== ===========
</TABLE>
The note payable collateralized by substantially all of the Combined
Company's finance receivables is a revolving credit facility used to
finance receivables. At December 31, 1997, approximately $21,600,000 of
this credit facility accrues interest at a rate of prime (8.5% at
December 31, 1997) plus 2.75%, while the remaining $1,300,000 accrues
at prime plus 7.00%. Interest on the credit facility is paid monthly.
This note payable was amended on November 25, 1997, to increase the
revolving credit facility from $12,000,000 to $25,000,000. Restrictive
covenants on this credit facility, among others, require the Combined
Company to limit yearly distributions to shareholders to 75% of net
income and to maintain certain financial ratios as defined in the
agreement.
The note payable to a financial institution collateralized by certain
of PAACO's inventory accrues interest at prime plus 2% and is payable
on demand.
The subordinated notes payable ($1,000,000 of which is payable to Crown
Group, Inc. - See Note 10) are subordinate to the notes payable
collateralized by finance receivables and certain inventory described
above, and represent several notes with interest rates ranging from 12%
to 24%. These notes mature at various dates beginning in 1998 through
2001. Subordinated notes payable also include approximately $1,093,000
and $1,640,000 at December 31, 1997 and 1996, respectively, of
financing provided from affiliates, primarily investments made by
officers of the company and their relatives. Interest rates on notes
payable to affiliates range from 15% to 18%. Interest expense on notes
to affiliates totaled approximately $194,000, $227,000 and $179,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
F-12
<PAGE> 17
PAACO, INC.
PREMIUM AUTO ACCEPTANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
During the year ended December 31, 1997, the Company issued
approximately $4,000,000 and repaid approximately $2,100,000 of
subordinated notes payable.
The mortgage payable represents two notes to a financial institution,
collateralized by land and building. The notes accrue interest at prime
plus 2.25% and mature in December 2015.
A summary of debt maturities is as follows:
<TABLE>
<S> <C>
1998 $ 4,454,595
1999 812,026
2000 23,130,460
2001 81,643
2002 78,667
Thereafter 1,698,312
-----------
$30,255,703
===========
</TABLE>
6. INCOME TAXES:
PAACO, a Subchapter C Corporation, and Premium, a Subchapter S
Corporation, file separate tax returns. No tax provision is recorded
for income or losses attributed to Premium due to its designation as a
Subchapter S Corporation. A summary of income before taxes for the
Combined Company is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1997 1996 1995
--------------- ---------------- ---------------
<S> <C> <C> <C>
Income (loss) before income taxes, PAACO $ 3,244,109 $ 997,752 $ (1,033,538)
Income (loss) before income taxes, Premium (965,389) 379,646 (384,113)
Eliminating entries - (756,251) 1,306,532
--------------- ---------------- ---------------
Combined income (loss) before income taxes $ 2,278,720 $ 621,147 $ (111,119)
=============== ================ ===============
</TABLE>
F-13
<PAGE> 18
PAACO, INC.
PREMIUM AUTO ACCEPTANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
Income tax provision (benefit) consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Current tax (benefit) provision $ (546,125) $ 500,843 $ 12,948
Deferred tax provision (benefit), net 1,556,386 (500,843) (12,948)
----------- ----------- -----------
$ 1,010,261 $ -- $ --
=========== =========== ===========
</TABLE>
Following is a reconciliation of taxes computed at the statutory
federal income tax rate with the provision for income taxes in the
combined financial statements for each of the three years in the period
ended December 31:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Income (loss) before taxes - PAACO $ 3,244,109 $ 997,752 $(1,033,538)
=========== =========== ===========
Statutory federal rate 34% 34% 34%
Provision (benefit) for federal income taxes at
the statutory federal rate $ 1,102,997 $ 339,236 $ (351,403)
Change in valuation allowance (42,486) (342,996) 357,552
Allocation of expenses (69,182)
Other 18,932 3,760 (6,149)
----------- ----------- -----------
$ 1,010,261 $ -- $ --
=========== =========== ===========
</TABLE>
The components of the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1997 1996
------------------------------ ------------------------------
Assets Liabilities Assets Liabilities
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Allowance for losses $ - $ 1,388,381 $ 670,401 $ -
Accrued interest - 113,689 - 43,830
Net operating loss 491,809 - - -
Other - - - 37,959
------------- -------------- -------------- -------------
$ 491,809 $ 1,502,070 $ 670,401 $ 81,789
============= ============== ============== =============
Deferred tax (liability)/asset $ (1,010,261) $ 588,612
Less valuation allowance - (42,487)
-------------- -------------
Net deferred tax (liability)/asset $ (1,010,261) $ 546,125
============== =============
</TABLE>
F-14
<PAGE> 19
PAACO, INC.
PREMIUM AUTO ACCEPTANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
During the year ended December 31, 1997, PAACO elected to implement
Internal Revenue Service code section 475 ("IRC ss.475") which allows
companies to mark certain securities to market for tax purposes. As a
result, the Company realized the deferred tax asset recorded at
December 31, 1996 and established a deferred tax liability in 1997 for
future book deductions already taken for tax purposes.
At December 31, 1996, PAACO recorded a valuation allowance to the
extent realizability of the deferred tax asset was dependent upon
future earnings.
7. FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" ("SFAS No. 107"), requires
disclosure of fair value information about financial instruments,
whether or not recognized on the balance sheet. Fair values are based
on estimates using present value or other valuation techniques in cases
where quoted market prices are not available. These techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. SFAS No. 107 excludes certain
financial instruments and all non-financial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts
presented in the accompanying table do not represent the underlying
value of the Combined Company.
The estimated fair values of the Combined Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1997 1996
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 194,877 $ 194,877 $ 281,395 $ 281,395
Finance receivables, net 30,146,679 26,060,000 16,443,060 14,165,000
Financial liabilities:
Notes payable to financial
institutions $ 23,409,875 $ 23,409,875 $ 12,451,125 $ 12,451,125
Subordinated notes payable 6,094,164 6,094,164 3,836,352 3,836,352
Mortgages and other notes payable 751,664 751,664 725,385 725,385
</TABLE>
The following methods and assumptions were used to estimate the fair
value for each class of financial instruments for which it is practical
to estimate fair value:
Cash and cash equivalents: The carrying amount is considered to be a
reasonable estimate of fair value.
F-15
<PAGE> 20
PAACO, INC.
PREMIUM AUTO ACCEPTANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
Finance receivables: The fair value was estimated by discounting future
cash flows using rates which management believes an investor would
demand for instruments with similar risk and remaining maturities.
Notes payable to financial institutions, subordinated notes payable,
mortgages and other notes payable: The carrying amounts of the Combined
Company's notes payable to financial institutions, subordinated notes
payable, and mortgages and other notes payable approximate fair value
as the interest rates on such debt approximate market.
8. COMMITMENTS AND CONTINGENCIES:
The Combined Company leases premises and equipment under operating
leases with various expiration dates. Future minimum lease obligations
are as follows:
<TABLE>
<S> <C>
1998 $ 987,690
1999 767,845
2000 475,992
2001 104,588
2002 12,530
------------
$ 2,348,645
===========
</TABLE>
Rent expense for the years ended December 31, 1997, 1996 and 1995
was $682,387, $406,424 and $346,760, respectively.
9. RELATED PARTIES:
During 1996, PAACO purchased approximately $225,000 of alarm systems
from Vehicle Security, Ltd., a company with common ownership.
During 1997 and 1996, PAACO sold 90-day service contract warranties to
its customers for Medallia de Oro L.L.C., a company with common
ownership that only transacts business with PAACO. PAACO retains a fee
for each warranty sold. Additionally, PAACO services the contract
warranties for Medallia de Oro. At December 31, 1997 and 1996, PAACO
had earned warranty fees of approximately $190,000 and $11,000,
respectively, and had a net receivable (payable) to/from Medallia de
Oro of approximately $162,000 and ($50,000), respectively.
F-16
<PAGE> 21
PAACO, INC.
PREMIUM AUTO ACCEPTANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
During 1997, PAACO sent the bulk of its trade-ins to Irving Boulevard
Public Auto Auction, LLC, a company owned 25% by existing shareholders.
10. SUBSEQUENT EVENTS:
Effective February 1, 1998, Crown Group Inc. ("Crown") acquired 53% of
the Combined Company for a purchase price of approximately $9,100,000.
The purchase price consisted of cash and the conversion of a $3,000,000
note due Crown from the Combined Company ($1,000,000 of such note was
funded prior to December 31, 1997 and is included in subordinated notes
payable in the accompanying balance sheet; the remaining $2,000,000 was
funded during January 1998). Approximately $4,900,000 of the Combined
Company common stock was purchased directly from the Combined Company,
and the remaining $4,200,000 was purchased from the Combined Company's
management personnel, who prior to this transaction were the sole
shareholders of the Combined Company.
In connection with the Crown transaction, the Combined Company's
Management/Shareholders and Crown entered into a shareholders'
agreement (the "Shareholders' Agreement") which provides, among other
things, that in the event any Combined Company Management Shareholder
or Crown desire to sell their interest in the Combined Company, such
shareholder must first offer to sell such interest to the Combined
Company and the other Shareholders in accordance with the provisions of
the Shareholders' Agreement.
On February 5, 1998, the Combined Company amended the $25,000,000
revolving credit facility to increase the commitment to $30,000,000
with a maturity date of April 30, 2000.
On February 27, 1998, the Combined Company purchased a location at 3363
West Northwest Highway, Dallas, Texas for $1,350,000. The purchase was
funded by a $1,000,000 note from Crown and a $350,000 note from an
existing shareholder.
F-17
<PAGE> 22
CROWN GROUP, INC.
INTRODUCTION TO PRO-FORMA FINANCIAL INFORMATION
PURCHASE OF 53% OF PAACO
Effective February 1, 1998, pursuant to a definitive stock purchase agreement,
Crown Group, Inc. ("Crown") acquired 53% of the common stock of each of Paaco,
Inc. and Premium Auto Acceptance Corporation (collectively, "Paaco") for an
aggregate 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 of Paaco common stock was purchased from Paaco
shareholders. The purchase price was funded from cash on hand. Paaco is a
vertically integrated used car sales and finance company which operates eight
used car dealerships in the Dallas-Ft. Worth area. Paaco sells, underwrites and
finances used cars and trucks with a focus on the Hispanic market.
PURCHASE OF 80% OF PRECISION AND M&S
On February 3, 1998, pursuant to a definitive stock purchase agreement, Crown
acquired 80% of the common stock of Precision IBC, Incorporated ("Precision")
for a purchase price of approximately $2.4 million cash. The shares of Precision
common stock were purchased directly from the then sole shareholder of
Precision. The purchase price was funded from cash on hand. In connection with
this transaction, Crown loaned Precision approximately $3.1 million, the
proceeds of which were used to pay off existing bank debt.
On March 5, 1998, pursuant to a definitive stock purchase agreement, Crown
acquired 80% of the common stock of M&S Tank Rentals, Inc. ("M&S") for a
purchase price of $1.65 million. The shares of M&S were purchased directly from
the then sole shareholder of M&S. The purchase price was funded from cash on
hand.
Precision and M&S are in the business of renting, selling, testing and servicing
intermediate bulk containers to customers primarily in the petroleum and
chemical industries.
PRO-FORMA FINANCIAL STATEMENTS
The following Pro-Forma Condensed Consolidated Balance Sheet of Crown as of
January 31, 1998 gives effect to the above described transactions, as if such
transactions had occurred on that date.
The following Pro-Forma Condensed Consolidated Statement of Operations of Crown
for the year ended April 30, 1997 gives effect to the above described
transactions, as if such transactions had occurred at the beginning of the
period (May 1, 1996). Paaco's, Precision's and M&S's historical accounting year
ends on December 31. Paaco's, Precision's and M&S's operating results for the
year ended April 30, 1997 have been derived by adding (i) their respective
operating results for the four months ended April 30, 1997, and subtracting (ii)
their respective operating results for the four months ended April 30, 1996,
from (iii) their respective operating results for the year ended December 31,
1996.
The following Pro-Forma Condensed Consolidated Statement of Operations for the
nine months ended January 31, 1998 gives effect to the above described
transactions, as if such transactions had occurred at the beginning of the
period (May 1, 1997). Paaco's, Precision's and M&S's historical accounting year
ends on December 31. Paaco's, Precision's and M&S's operating results for the
nine months ended January 31, 1998 have been derived by adding (i) their
respective operating results for the month of January 1998, and subtracting (ii)
their respective operating results for the four months ended April 30, 1997,
from (iii) their respective operating results for the year ended December 31,
1997.
The pro-forma information is based on the historical financial statements of
Crown, Paaco, Precision and M&S giving effect to the transactions described
above and the adjustments described in the accompanying Notes to Pro-Forma
Condensed Consolidated Financial Statements and may not be indicative of the
results that actually would have occurred had the transactions taken place on
the dates indicated or the results which may be obtained in the future.
P-1
<PAGE> 23
CROWN GROUP, INC.
PRO-FORMA CONDENSED CONSOLIDATED BALANCE SHEET
UNAUDITED
JANUARY 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Acquisition
Historical Acquisition of Precision Pro-Forma
Crown of Paaco and M&S Consolidated
---------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 16,030 $ (4,458)(a) $ (7,077)(f) $ 4,495
Finance and other receivables, net 889 29,866 (b) 475 31,230
Mortgage loans held for sale, net 8,708 8,708
Inventory 2,745 262 3,007
Prepaids and other assets 418 658 2 1,078
Property and equipment, net 2,547 1,703 3,786 8,036
Note receivable from Paaco 3,000 (3,000)(c)
Note receivable from CMN 1,172 1,172
Investment in CMN and related assets 5,631 5,631
Goodwill 7,674 (d) 3,534 (g) 11,208
-------- -------- -------- --------
$ 38,395 $ 35,188 $ 982 $ 74,565
======== ======== ======== ========
Liabilities:
Accounts payable and accrued liabilities $ 699 $ 2,918 $ 178 $ 3,795
Revolving credit facilities 4,190 23,575 27,765
Notes payable 4,474 (c) 4,474
Deferred income taxes 351 1,010 550 1,911
-------- -------- -------- --------
5,240 31,977 728 37,945
-------- -------- -------- --------
Minority interest 3,211 (e) 254 (h) 3,465
Stockholders' equity 33,155 33,155
-------- -------- -------- --------
$ 38,395 $ 35,188 $ 982 $ 74,565
======== ======== ======== ========
</TABLE>
See accompanying Notes to Pro-Forma Condensed Consolidated Financial Statements.
P-2
<PAGE> 24
CROWN GROUP, INC.
PRO-FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1997
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Historical
Historical Historical Precision Pro-Forma
Crown Paaco and M&S Adjustments Consolidated
---------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Sales $ 29,106 $ 1,398 $ 30,504
Tank rentals 1,696 1,696
Interest $ 1,530 2,859 2 $ (126)(3) 4,265
Other income 500 409 143 1,052
---------- ---------- ---------- ----------- ------------
2,030 32,374 3,239 (126) 37,517
---------- ---------- ---------- ----------- ------------
Costs and expenses:
Cost of sales 18,434 1,195 19,629
General and administrative 2,837 6,887 706 10,430
Provision for credit losses 3,409 (1,060)(1) 2,349
Depreciation and amortization 168 78 520 653 (2) 1,419
Write-down of assets 1,716 1,716
---------- ---------- ---------- ----------- ------------
4,721 28,808 2,421 (407) 35,543
---------- ---------- ---------- ----------- ------------
Other income (expense):
Interest expense (69) (1,879) (264) 201(3) (2,011)
Gain on sale of securities 9,680 9,680
---------- ---------- ---------- ----------- ------------
9,611 (1,879) (264) 201 7,669
---------- ---------- ---------- ----------- ------------
Income before taxes and minority
interest 6,920 1,687 554 482 9,643
Provision (benefit) for income taxes (1,940) 533 84 552(4) (771)
Minority interest in earnings 662(5) 662
---------- ---------- ---------- ----------- ------------
Net income $ 8,860 $ 1,154 $ 470 $ (732) $ 9,752
========== ========== ========== =========== ============
Earnings per share:
Basic $ .82 $ .90
========== ============
Diluted $ .80 $ .88
========== ============
Average shares outstanding 10,868 10,868
========== ============
</TABLE>
See accompanying Notes to Pro-Forma Condensed Consolidated Financial Statements.
P-3
<PAGE> 25
CROWN GROUP, INC.
PRO-FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JANUARY 31, 1998
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Historical
Historical Historical Precision Pro-Forma
Crown Paaco and M&S Adjustments Consolidated
---------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Sales $ 35,337 $ 1,630 $ 36,967
Tank rentals 1,472 1,472
Interest $ 1,381 4,224 $ (119)(3) 5,486
Gain on sale of mortgage loans 430 430
Other income 403 69 96 568
--------- --------- ---------- --------- ---------
2,214 39,630 3,198 (119) 44,923
--------- --------- ---------- --------- ---------
Costs and expenses:
Cost of sales 24,032 1,329 25,361
General and administrative 3,330 8,021 701 12,052
Provision for credit losses 4,123 (795)(1) 3,328
Depreciation and amortization 350 151 630 490(2) 1,621
--------- --------- ---------- --------- ---------
3,680 36,327 2,660 (305) 42,362
--------- --------- ---------- --------- ---------
Other income (expense):
Equity in earnings of CMN 533 533
Interest expense (82) (2,375) (235) 191(3) (2,501)
Gain on sale of securities 65 65
--------- --------- ---------- --------- ---------
516 (2,375) (235) 191 (1,903)
--------- --------- ---------- --------- ---------
Income (loss) before taxes and minority interest (950) 928 303 377 658
Provision (benefit) for income taxes (603) 419 71 420(4) 307
Minority interest 307(5) 307
--------- --------- ---------- --------- ---------
Net income (loss) $ (347) $ 509 $ 232 $ (350) $ 44
========= ========= ========== ========= =========
Earnings (loss) per share:
Basic $ (.03) $ .00
========= =========
Diluted $ (.03) $ .00
========= =========
Average shares outstanding 9,951 9,951
========= =========
</TABLE>
See accompanying Notes to Pro-Forma Condensed Consolidated Financial Statements.
P-4
<PAGE> 26
CROWN GROUP, INC.
NOTES TO PRO-FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND PERCENTAGES)
BALANCE SHEET
<TABLE>
<S> <C> <C>
a - Purchase of Paaco shares from shareholders $ (4,167)
Crown transaction costs (91)
Paaco transaction costs (200)
--------
$ (4,458)
========
b - Historical carrying value of finance receivables $ 31,986
Crown's share of market value adjustment ($4,000 x 53%) (2,120)
--------
$ 29,866
========
c - Historical carrying value of notes payable $ 7,474
Conversion of note payable to Crown to equity (3,000)
--------
$ 4,474
========
d - Crown's basis in 53% of Paaco's common stock $ 9,175
Crown's share of Paaco's equity after transaction ($6,832 x 53%) $ 3,621
Crown's share of market value adjustment ($4,000 x 53%) (2,120)
-------
Crown's share of Paaco's equity 1,501
--------
$ 7,674
========
e - Paaco's equity after transaction $ 6,832
Minority shareholders ownership percentage 47%
--------
$ 3,211
========
f - Precision's and M&S's existing cash $ 69
Purchase of 80% of Precision (2,382)
Purchase of 80% of M&S (1,650)
Pay off of Precision debt (3,114)
--------
$ (7,077)
========
</TABLE>
P-5
<PAGE> 27
<TABLE>
<S> <C> <C>
g - Crown's basis in 80% of Precision and M&S $ 4,032
Crown's share of Precision and M&S equity after transaction ($1,272 x 80%) $ 1,018
Crown's share of market value adjustment ($650 x 80%) (520)
-------
Crown's share of Precision's and M&S's equity 498
--------
$ 3,534
h - Precision and M&S equity after transaction $ 1,272
Minority shareholders ownership percentage 20%
--------
$ 254
========
</TABLE>
STATEMENTS OF OPERATIONS
1 - To adjust provision for credit losses to reflect recording finance
receivables at fair value.
2 - To record amortization of goodwill based upon a 15 year amortization period
for Paaco, and a 25 year amortization period for Precision and M&S.
3 - To eliminate Precision's interest expense and reduce Crown's interest
income as a result of Crown paying off Precision's debt at closing.
4 - To record a provision for income taxes on the income before income taxes
of Precision and the adjustments described above based upon a 38% effective
income tax rate. Precision is currently a subchapter S corporation and does
not pay corporate income taxes. Since completing the acquisition the
Company will cause Precision to become a subchapter C corporation and file
a consolidated income tax return with the Company.
5 - To record minority interest in the earnings of Paaco, Precision and M&S.
P-6
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
23.1 -- Consent of Independent Public Accountants
23.2 -- Consent of Independent Auditors
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Crown Group, Inc. on Form S-8 (File No. 33-59519, File No. 33-59527 and File
No. 333-38475) of our report dated April 13, 1998, on our audit of the combined
financial statements of PAACO, Inc. and Premium Auto Acceptance Corporation as
of and for the year ended December 31, 1997, which report is included in this
Form 8-K/A.
Coopers & Lybrand L.L.P.
Dallas, Texas
April 16, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement (S-8, No.
33-22590) relating to the 1986 Incentive Stock Option Plan; Registration
Statement (S-8, No. 33-41960) relating to the 1991 Non-qualified Stock Option
Plan; and Registration Statement (S-8, No. 333-38475) relating to the 1997 Stock
Option Plan, of our report dated April 28, 1997, with respect to the combined
financial statements of PAACO, Inc. and Premium Auto Acceptance Corporation for
the two years ended December 31, 1996, included in Crown Group, Inc.'s filing on
Form 8-K/A (Amendment No. 1) dated on or about April 16, 1998, filed with the
Securities and Exchange Commission.
/s/ Ernst & Young LLP
April 16, 1998
Dallas, Texas
