<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: Commission file number:
APRIL 30, 1999 0-14939
CROWN GROUP, INC.
(Exact name of registrant as specified in its charter)
TEXAS 63-0851141
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4040 N. MACARTHUR BLVD., SUITE 100, IRVING, TEXAS
(Address of principal executive offices)
75038
(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 11, 1999 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
(7,015,859 shares) was $34,640,804.
As of August 11, 1999 there were 9,763,796 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, 1999 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 1999 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.
<PAGE> 2
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
Annual Report on Form 10-K contains, and other materials filed or to be filed by
the Company with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company or its management) contain or will contain, forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The
words "believe," "expect," "anticipate," "estimate," "project" and similar
expressions identify forward-looking statements, which speak only as of the date
the statement was made. The Company undertakes no obligation to publicly update
or revise any forward-looking statements. Such forward-looking statements
address, among other things, the Company's current focus on the development and
expansion of its existing businesses, and the potential acquisition or
development of businesses in other fields. Such forward-looking statements are
based upon management's current plans or expectations and are subject to a
number of uncertainties and risks that could significantly affect current plans,
anticipated actions and the Company's future financial condition and results. As
a consequence, actual results may differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company as a result of
various factors. Uncertainties and risks related to such forward-looking
statements include, but are not limited to, those relating to the development of
the Company's businesses, continued availability of lines of credit for the
Company's businesses, changes in interest rates, changes in the industries in
which the Company operates, competition, dependence on existing management, the
stability of Argentina's and El Salvador's governments, currency exchange rate
fluctuations, the repatriation of funds from Argentina and El Salvador, domestic
or global economic conditions (particularly in the states of Texas and
Arkansas), changes in foreign or domestic tax laws or the administration of such
laws and changes in gaming or lending laws or regulations. Any forward-looking
statements are made pursuant to the Private Securities Litigation Reform Act of
1995 and, as such, speak only as of the date made.
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) 100% of
America's Car-Mart, Inc. ("Car-Mart") and 85% of Paaco Automotive Group, Inc.
and Premium Auto Acceptance Corporation (collectively, "Paaco"), vertically
integrated used car sales and finance companies, (ii) 100% of Precision IBC,
Inc. ("Precision"), a firm specializing in the sale and rental of intermediate
bulk containers ("IBC's"), (iii) 80% of Concorde Acceptance Corporation
("Concorde"), a sub-prime mortgage lender, (iv) 49% of Casino Magic Neuquen S.A.
("CMN"), a casino operator in the Province of Neuquen, Argentina, (v) 50.1% of
CG Incorporated, S.A. de C.V. ("Crown El Salvador"), a newly formed company
focusing on the development and operation of casinos in El Salvador, (vi) 80% of
Home Stay Lodge I, Ltd. ("Home Stay"), a partnership focusing on the
development and operation of extended-stay lodging facilities, and (vii) 45% of
Atlantic Castings, Inc. ("Atlantic Castings"), an investment casting
manufacturer of turbine engine components. In addition, from time to time the
Company purchases and sells small ownership interests in securities of privately
held and publicly traded firms. For a summary of the Company's operating results
and other financial data by business segment, see Note U 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.
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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
in cash. 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.
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 in 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 who prior to this transaction were the sole shareholders of
Paaco. Effective May 1, 1998 and February 1, 1999 the Company purchased
an additional 12% and 15% interest, respectively, in Paaco from the
management shareholders. The May 1, 1998 purchase price of $1.7 million
was paid by issuing 412,500 shares of the Company's common stock. The
February 1, 1999 purchase price of approximately $2.6 million consisted
of 257,811 shares of the Company's common stock and approximately $1.0
million in cash. In July 1999, upon discovering certain accounting
errors and irregularities at Paaco, the Company and the Paaco selling
shareholders amended and restated the three prior purchase agreements
such that the Company received approximately $4 million in
consideration and an additional 5% interest in Paaco (see Note T to the
Consolidated Financial Statements). Paaco is a vertically integrated
used car sales and finance company which operates eight dealerships in
the Dallas-Ft. Worth metropolitan area and two dealerships in Houston,
Texas. 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. 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.
HOME STAY - In May 1998 the Company, along with a minority holder,
formed Home Stay. Home Stay is in the business of constructing and
operating extended-stay lodging facilities. In March 1999 Home Stay
began operating two newly constructed 128 unit extended-stay lodging
facilities in the Pensacola, Florida area.
CAR-MART - In January 1999 the Company acquired 100% of the outstanding
common stock of Fleeman Holding Company, including its wholly-owned
subsidiary Car-Mart, for $41.35 million. The purchase price consisted
of $33.85 million in cash and the issuance of promissory notes
aggregating $7.5 million. Car-Mart operates 35 "Buy-Here Pay-Here"
used car dealerships located in niche markets throughout Arkansas,
Oklahoma, Texas and Missouri. Car-Mart sells, underwrites and finances
used cars and trucks.
CROWN EL SALVADOR - In March 1999 the Company, along with minority
holders, formed Crown El Salvador. Crown El Salvador is in the business
of developing and operating casino properties in El Salvador. In June
and July 1999 Crown El Salvador completed the construction and began
operating its first and second casinos, respectively, in El Salvador.
ATLANTIC CASTINGS - In March 1999 the Company acquired a 45% interest
in Atlantic Castings for a purchase price of $.3 million in cash.
Atlantic Castings is an investment casting manufacturer of turbine
engine components.
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USED CAR SALES AND FINANCE (CAR-MART AND PAACO)
GENERAL
Car-Mart and Paaco operate separate vertically integrated used car sales and
finance companies that primarily target customers who have limited credit
histories, low incomes, or past credit problems (hereinafter referred to as
"Sub-Prime Borrowers"). These operations include (i) the purchase,
reconditioning (Paaco only) and sale of used cars and trucks, (ii) the
underwriting, financing and servicing of the related retail installment
contract, and, if necessary, (iii) the repossession and remarketing of the
vehicle. While Car-Mart and Paaco are in the same business and share a number of
operating characteristics, the companies are different in many respects. Paaco
operates in large metropolitan areas (Dallas/Fort Worth and Houston, Texas),
reconditions most every vehicle prior to its sale and focuses on the Hispanic
market. Car-Mart on the other hand operates principally in smaller communities,
performs little or no vehicle reconditioning and does not focus on any
particular customer group. Paaco also tends to sell newer vehicles with an
average selling price more than twice that of Car-Mart. Presented below is a
summary of certain information with respect to Car-Mart and Paaco as of April
30, 1999 and for the year then ended.
<TABLE>
<CAPTION>
Car-Mart Paaco
-------------- ---------
<S> <C> <C>
Founded 1981 1992
Acquired by Crown Jan. 1999 Feb. 1998
Dealerships 35 10
Location of dealerships AR, OK, TX, MO Texas
Customer accounts 16,746 6,694
</TABLE>
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. Management 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, (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 industry analysts expect these trends to
continue, leading to further expansion of the used car sales market.
Car-Mart and Paaco participate 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 due 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.
Management believes traditional lenders avoid this market because of its high
credit risk and the associated collection efforts. Many of the approximately
63,000 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.
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OPERATIONS
Purchasing Vehicles
Car-Mart and Paaco purchase vehicles from (i) franchised new and late-model used
car dealers, (ii) auctions, (iii) wholesalers, and (iv) customer trade-ins.
Prior to purchasing a vehicle, buyers perform an inspection and, as permitted,
test drive each vehicle. The identity of the buyer responsible for each vehicle
acquired is tracked through Car-Mart's and Paaco's computer systems which allow
them to monitor the results of each buyer. Management 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 Company buyers and in
comparison to wholesale market values.
Reconditioning
Paaco reconditions almost every vehicle it purchases at its 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.
In general, Car-Mart performs little or no reconditioning on vehicles it
purchases. Its buyers are instructed to thoroughly inspect and evaluate each
vehicle in order to identify and purchase vehicles that require little or no
reconditioning. Like Paaco, Car-Mart offers a service contract to its customers
which covers certain vehicle components and assemblies for a specified duration.
For covered components Car-Mart customers have their vehicles serviced at third
party service centers with which Car-Mart has in many cases previously
negotiated labor rates and mark-up on parts. Substantially all of Car-Mart
customers elect to purchase a service contract when purchasing a vehicle.
Selling, Marketing and Advertising
Paaco lots are 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 8:00 pm. Each lot maintains an inventory level of 35 to 75 cars
and trucks. Periodically, Paaco 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.
The number of persons employed at a Car-Mart dealership varies between two and
ten based upon the number of active customer accounts serviced at such
dealership. A new dealership with a limited number of accounts may only have a
manager and an assistant. In contrast, a mature dealership with several hundred
active accounts may have a manager, an assistant manager, a manager trainee, two
collectors, two payment takers/office workers, a buyer and an assistant or two.
Car-Mart dealerships are operated six days a week from 9:00 am to 6:00 pm. Each
dealership maintains an inventory level ranging from 15 to 50 vehicles depending
on the maturity of the dealership. Selling is done principally by the manager,
assistant manager, manager trainee and sales associate.
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Car-Mart's objective is to offer its customers basic transportation at a fair
price and treat each customer courteously and with respect. Car-Mart attempts to
build a positive reputation in each community it operates and generate new
business from such reputation as well as referrals from existing customers.
Car-Mart recognizes repeat customers with silver and gold certificates
representing the purchase of five and ten vehicles, respectively. Such
certificates are prominently displayed at the dealership location where the
vehicles were purchased. Its dealerships are generally located on heavily
traveled roads that offer high visibility. Car-Mart also advertises in local
newspapers, billboards and radio spots.
Underwriting and Finance
Each of Car-Mart and Paaco finance more than 95% of the used cars and trucks
sold at their dealerships. These retail installment contracts are serviced
exclusively by Car-Mart and Paaco personnel, respectively. In connection with
each such financing, the Company requires the sale be made on acceptable terms
and to a customer with a satisfactory credit profile. Most financings require a
down payment of 10% to 15% of the retail sales price, a term not in excess of 24
months (up to 36 months for Paaco) and payment terms (generally weekly) that
coincide with the customer's pay dates.
Upon the customer and the Company coming to a preliminary agreement as to terms,
the Company obtains a detailed credit application from the customer which
includes information regarding employment, residence and credit history, income
level and personal references. This information is then verified by Company
personnel. After the verification process, it is the dealership manager who
makes the decision to accept, reject, or modify (perhaps obtain a greater down
payment or require an acceptable co-buyer) the proposed transaction. The results
of each manager's decisions are constantly monitored by Company personnel
through the review of finance receivables agings and repossession reports which
are stratified by dealership. In addition, Company personnel periodically review
credit files to evaluate the soundness of the manager's judgement and ensure
appropriate information was obtained and verified.
Collections
Providing financing to Sub-Prime Borrowers requires not only that the Company
have an effective underwriting process, but that its collection policies and
procedures be sound and diligently executed. The majority of the Company's
customers make their payments in person at one of the dealerships. Each of
Car-Mart and Paaco closely monitor their customer accounts using collections
software that stratifies past due accounts by dealership and the number of days
past due. Customers are normally contacted by phone within a few days if their
payment is not received on the scheduled due date. The results of each phone
contact are documented (promises to pay, alternative payment arrangements, etc.)
by Company personnel.
If a customer becomes seriously delinquent in his payments and management
determines that timely collection of future payments is not probable, the
Company will take steps to repossess the vehicle. Of the vehicles repossessed,
many are returned by the customer on a voluntary basis. Other repossessions are
performed by Company personnel and third party repossession agents. Depending on
the condition of a repossessed vehicle, it is either resold through a Company
dealership (generally after some reconditioning in the case of Paaco), or sold
for cash to a wholesaler or other third party at an auction.
The Company monitors the results of its collection personnel based upon a number
of quantitative criteria including (i) installment contract agings, (ii) the
percentage of accounts past due versus a standard, (iii) the average number of
days the finance receivable portfolio is past due, and (iv) static pool
analysis.
COMPETITION
The used automotive retailing industry is highly competitive and fragmented.
Presently there are an estimated 23,000 franchised automobile dealers and 63,000
independent used vehicle dealers. In recent years a number of large companies
including AutoNation U.S.A. and Car Max 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 Car-Mart or
Paaco as they tend to sell higher priced vehicles to consumers with stronger
credit histories. Car-Mart and Paaco compete principally with other independent
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.
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Management 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, in the case of Paaco, (iii) the
availability of popular vehicles, (iv) pricing, (v) the convenience of a
dealership's location, (vi) customer service, and (vii) in the case of Paaco,
the ability to communicate in Spanish and English with its customers. Management
believes that its dealerships are competitive in each of these areas.
REGULATION AND LICENSING
Car-Mart's and Paaco's operations are subject to ongoing regulation,
supervision, and licensing under various federal, state, and local statutes,
ordinances, and regulations pertaining to the sale and financing of vehicles.
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
require that the Company obtain and maintain certain licenses and
qualifications, limit or prescribe terms of the contracts it originates, require
specified disclosures to customers, limit the Company's right to repossess and
sell collateral, and prohibit discrimination against customers on the basis of
certain characteristics including age, race and gender.
In many cases the Company charges fixed interest rates in excess of traditional
finance companies on the contracts originated at its dealerships. The states in
which the Company operates impose limits on interest rates the Company can
charge on its loans. These limits are generally based on either (i) a specified
margin above the federal discount rate, or (ii) the age of the vehicle.
Management believes the Company is in substantial compliance with all applicable
federal, state, and local laws and regulations. However, if the Company does not
remain in compliance with such laws, this failure could have a material adverse
effect on operations. In addition, the adoption of additional laws, changes in
the interpretation of existing laws, or the Company's entrance into
jurisdictions with more stringent regulatory requirements could have a material
adverse effect on the Company.
GAMING (CMN AND CROWN EL SALVADOR)
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 E of the Company's consolidated financial
statements appearing elsewhere in this annual report.
In June and July 1999 Crown El Salvador opened its first and second casinos,
respectively, in the cities of San Miguel and Antiguo Cuscatlan, El Salvador.
The casinos are operated pursuant to licenses granted by the cities. Crown El
Salvador anticipates opening a third casino in the City of Santa Ana, El
Salvador by April, 2000.
LOCATION, FACILITIES AND OPERATIONS
The Province of Neuquen is located approximately 300 miles west 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. Each of Crown El Salvador's San Miguel and Antiguo Cuscatlan facilities
are located within the city limits and are leased from third parties. Certain
information regarding the CMN's and Crown El Salvador's casinos is as follows:
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<TABLE>
<CAPTION>
Crown
CMN El Salvador
------ -----------
<S> <C> <C>
Gaming square feet 29,500 12,000
Slot machines 473 234
Table games 56 26
Revenues (in millions):
Fiscal 1998 $ 18.3 Not open
Fiscal 1999 21.4 Not open
</TABLE>
CMN's casinos are open seven days a week generally from 7:00 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.
Crown El Salvador's casinos are open 7 days a week generally from 7:00 p.m. to
4:00 a.m. Peak admission occurs around 11:00 p.m. The casinos offer slot
machines, table games and limited food and beverages. Table games include black
jack, poker and roulette. On weekends the Antiguo Cuscatlan casino provides live
entertainment.
MARKET AND MARKETING STRATEGY
Greater Neuquen City has a population of approximately 220,000 with an estimated
600,000 people living within 120 miles of the city while San Martin has a
population of approximately 17,000 with an estimated 150,000 people living
within 120 miles of the city. 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, placing little or no emphasis on slot play
and rarely providing 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 substantially increased the customer count and revenues of its two casinos.
Greater San Miguel has a population of approximately 400,000, while the
population within 15 miles of Antiguo Cuscatlan (including the City of San
Salvador) is approximately 1.5 million. El Salvador's economy has been growing
in recent years with agriculture and manufacturing (textiles, leather and
machinery) being important industries. Inflation has been low (2% in 1997), and
the exchange rate between the Salvadoran colon and the U.S. dollar has been
stable (around 8.7 colones for each dollar since 1995).
Like CMN, Crown El Salvador's strategy is to provide (i) American style gaming
in a comfortable atmosphere with well decorated and spacious facilities, (ii)
American slot machines, and (iii) friendly and courteous service. Competing
gaming facilities in El Salvador offer older slot machines oftentimes
manufactured outside the United States. Crown El Salvador believes its casinos
are in most cases superior to the casinos of its competitors due to the age and
lack of technological features of the competitors slot machines and general lack
of overall casino finish.
CONCESSION CONTRACT AND LICENSING
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 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
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<PAGE> 9
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 34% 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.
Crown El Salvador has been granted a non-exclusive gaming license by each city
in which it operates. Generally, the licenses specify the location in which
gaming may be conducted, the amount of gaming taxes to be paid and permitted
hours of operation. The licenses do not contain a specified term. Generally,
gaming taxes are assessed based upon the number of slot machines and table games
in operation.
SHAREHOLDERS' AGREEMENTS
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.
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.
Crown El Salvador's articles of incorporation contain certain provisions
oftentimes found in shareholder agreements. These provisions provide that the
unanimous approval of all shareholders is required in connection with (i)
amending the articles of incorporation, (ii) a liquidation or merger, (iii)
issuing additional shares of Crown El Salvador stock, (iv) the sale of all or
substantially all of Crown El Salvador's assets, and (v) entering into related
party transactions.
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.
Crown El Salvador presently competes with four casino facilities located in
Greater San Salvador and will compete with one other competitor in San Miguel
beginning in September 1999. Furthermore, the licenses granted to Crown El
Salvador are non-exclusive, and thus additional casinos could commence
operations within Crown El Salvador's primary market.
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
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<PAGE> 10
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.
Presently, the regulatory environment in which Crown El Salvador operates is not
fully developed. No national body has established rules and regulations for the
operation of casinos within El Salvador. The El Salvadoran government has
granted cities the right to issue gaming licenses and establish rules and
regulations that govern the operation of such casinos. The cities in which Crown
El Salvador operates have not as yet promulgated such rules and regulations.
There can be no assurance that adherence to such rules and regulations, if and
when adopted, will be without excessive cost or administrative burden.
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 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.
MORTGAGE LENDING (CONCORDE)
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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<PAGE> 11
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 Internet, telemarketing and direct mail programs. Concorde also
purchases some mortgage loans from a network of wholesale loan brokers and
correspondents, including banks and thrift institutions. Concorde typically pays
a premium for loans purchased from wholesale loan brokers and correspondents, as
well as to retail mortgage brokers for loans they originate. A summary of
Concorde's loan originations and purchases for the fiscal years ended April 30,
1999 and 1998 is as follows (dollars in millions):
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998
-------------------- --------------------
<S> <C> <C> <C> <C>
Direct $ 38.1 34.1% $ 9.6 25.7%
Retail brokers 64.5 57.7 18.0 48.3
Wholesale brokers 9.1 8.2 9.7 26.0
------ ------ ------ ------
$111.7 100.0% $ 37.3 100.0%
====== ====== ====== ======
</TABLE>
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 broker, which includes a review of the
mortgage broker's licenses and financial statements. Upon approval, Concorde
typically requires each mortgage broker to enter into a purchase and sale
agreement that contains customary representations and warranties regarding the
loans such mortgage broker 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
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<PAGE> 12
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. Concorde's servicing
portfolio is subject to reduction by normal monthly payments, prepayments,
foreclosures and the sale of mortgage loans. 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 90 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
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<PAGE> 13
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.
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, disclosures 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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<PAGE> 14
IBC RENTALS AND SALES (PRECISION)
GENERAL
Precision is in the business of renting and selling intermediate bulk containers
("IBC's" or "portable 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 transport and 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, testing, tracking and reconditioning services, and sells spare
parts such as valves and lids on both a retail and OEM basis. Precision operates
from facilities in Fairhope, Alabama and Lafayette, Louisiana and presently has
a fleet of approximately 6,000 stainless steel tanks.
OPERATIONS
Precision's portable tanks are manufactured according to its specifications
principally from two contractors, although other manufacturing sources are
available. Precision maintains a supply of tanks, valves and lids to meet the
sometimes immediate needs of its customers. Precision's lids are also sold to
tank manufacturers as a component in making new tanks. These lids are typically
manufactured by Precision in house with the occasional assistance of 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 used tanks. 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, perform
external cleanings and provide reconditioning services. These services are
performed at Precision's LaFayette, Louisiana facility as well as on site.
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. Precision
advertises in nationally distributed periodicals and direct markets extensively.
Precision's sales personnel also attend 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, water treatment,
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. 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 such a transition.
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 initially considerably more expensive than drums. However,
Precision's tanks offer certain competitive advantages over drums, including
their (i) greater durability and ease in storing and dispensing liquids, (ii)
longer useful life, and (iii) greater space efficiencies. They also eliminate
the disposal costs associated with carbon steel drums.
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<PAGE> 15
LODGING (HOME STAY)
GENERAL
Home Stay operates two extended-stay lodging facilities in the Pensacola,
Florida metropolitan area. Each property contains 120 units and commenced
operations in March 1999 after an eight month construction period. Presently the
properties are approximately 80% occupied, which is expected to stabilize in the
85% to 90% range in the next few months. If the initial two properties perform
as anticipated, Home Stay expects to build additional properties throughout the
Southeastern United States.
FACILITIES AND OPERATION
Each Home Stay studio unit affords 288 square feet of living area and provides a
variety of features which are attractive to the extended-stay guest, including a
fully-equipped kitchenette, dining area, sofa, weekly housekeeping, a
coin-operated laundromat, telephone, and color television with cable service. In
order to control operating costs and offer attractive rental rates, no
restaurants, swimming pools, or other recreational amenities have been provided.
Management plans to locate future Home Stay facilities near commercial,
industrial and/or military centers where the employment base consists largely of
low to moderate income workers, or in rapidly growing metropolitan areas where
demand for temporary housing is the greatest. Home Stay properties are managed
by the Windham Company, an experienced operator of hotels, motels and
apartments.
MARKET
Home Stay targets a significant and rapidly growing "economy" niche within the
extended-stay lodging market which management believes is largely underserved by
other industry participants. Its facilities are designed to offer clean,
moderately appointed guest accommodations at rates generally lower than those
charged by other extended-stay lodging providers. Weekly rental rates average
less than $150 for single occupancy and approximately $185 for double occupancy.
Home Stay customers primarily include budget conscience business travelers,
blue-collar workers on temporary assignment, military personnel, construction
crews and leisure-oriented tourists, with most guests staying for multiple
weeks.
COMPETITION
The lodging industry is highly competitive. Competitive factors within the
lodging industry include room rates, quality of accommodations, service levels,
convenience of location, corporate reputation, brand name recognition as well as
the overall supply and availability of other lodging alternatives. Home Stay
presently competes with budget and economy motels, moderately priced hotels and
extended-stay lodging facilities and short-term lease apartments.
Management anticipates that competition within the extended-stay lodging
industry will increase as participants in other segments of the lodging industry
and others focus on this relatively new market. Many of Home Stay's competitors
are established entities with significantly greater financial resources, and
better relationships with land owners and lenders than the Company. Further,
there can be no assurance that new or existing competitors will not
significantly reduce their rates or offer greater convenience, services, or
amenities or significantly expand, improve, or develop facilities in a market in
which Home Stay competes, thereby adversely affecting Home Stay's operations.
EMPLOYEES
As of April 30, 1999 the Company, including its consolidated subsidiaries,
employed approximately 630 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.
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<PAGE> 16
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Edward R. McMurphy...................................48 Chairman of the Board,
President and Chief Executive Officer
Tilman J. Falgout, III...............................50 Executive Vice President,
General Counsel and Director
Mark D. Slusser......................................41 Chief Financial Officer,
Vice President Finance and Secretary
</TABLE>
EDWARD R. MCMURPHY, has served as the Company's Chief Executive Officer since
July 1984. Mr. McMurphy has been a director of the Company since its inception
in April 1983. From 1979 to June 1986, Mr. McMurphy served as President of
Marion Properties, Inc., a real estate development company and former parent of
the Company from July 1984 to June 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, 1999 the Company leased substantially all of its facilities,
including dealerships, collection facilities that service dealership portfolios,
and the Company's corporate offices. Paaco leases eight of its ten dealership
facilities in the Dallas/Fort Worth and Houston metropolitan areas. Car-Mart
leases all 35 of its dealership facilities located principally in Arkansas, but
also including Oklahoma, Missouri and Texas. The Company's corporate
administrative offices are located in approximately 6,000 square feet of leased
space in Irving, Texas.
ITEM 3. LEGAL PROCEEDINGS
In August 1998 an action was filed against the Company in the 8th Judicial
District Court of Clark County, Nevada by Resort Properties of America ("RPA").
In this action RPA alleged it had a verbal agreement with the Company pertaining
to the sale of the Company's Las Vegas land which was sold in September 1997.
RPA claimed it is due a brokerage commission of $450,000 plus attorney's fees.
This matter was settled in August, 1999, by the payment to RPA of $75,000.
In the ordinary course of business, the Company has become a defendant in
various other types of legal proceedings. Although the Company cannot determine
at this time the amount of the ultimate exposure from these lawsuits, if any,
management, based on the advice of counsel, does not expect the final outcome of
any of these actions, individually or in the aggregate, to have a material
adverse effect on the Company's financial position or results of operations.
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, 1999.
16
<PAGE> 17
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 1999 Annual
Report to Stockholders ("1999 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 1999 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 1999 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
The Company is exposed to market risk on its financial instruments from changes
in interest rates. The Company does not use financial instruments for trading
purposes or to manage interest rate risk. The Company's earnings are impacted by
its net interest income, which is the difference between the income earned on
interest-bearing assets and the interest paid on interest bearing notes payable.
Increases in market interest rates could have an adverse effect on
profitability. Financial instruments consist of fixed rate finance receivables
and fixed and variable rate notes payable. The Company's finance receivables
generally bear interest at fixed rates ranging from 10% to 22%. These finance
receivables have scheduled maturities from one to 36 months. Financial
instruments also include mortgage notes held for sale. The Company does not
experience significant market risk with such mortgage notes as they are
generally sold within 30 to 45 days of origination. At April 30, 1999 the
majority of the Company's notes payable contained variable interest rates that
fluctuate with market rates. Therefore, an increase in market interest rates
would decrease the Company's net interest income and profitability.
The table below illustrates the impact which hypothetical changes in market
interest rates could have on the Company's pretax earnings. The calculations
assume (i) the increase or decrease in market interest rates remain in effect
for twelve months, (ii) the amount of variable rate notes payable outstanding
during the period decreases in direct proportion to decreases in finance
receivables as a result of scheduled payments, and (iii) there is no change in
prepayment rates as a result of the interest rate changes.
<TABLE>
<CAPTION>
Change in Change in
Interest Rates Pretax Earnings
-------------- ---------------
(in thousands)
<S> <C>
+2% $(840)
+1% $(420)
0% 0
-1% $ 420
-2% $ 840
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements included in the Company's 1999 Annual Report are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
<PAGE> 18
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 1999. 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 1999 (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 1999 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 1999 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 1999 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 1999 Annual Report are incorporated herein by reference
in Item 8 of this report:
Report of Independent Accountants
Consolidated Balance Sheets as of April 30, 1998 and 1999
Consolidated Statements of Operations for the fiscal years
ended April 30, 1997, 1998 and 1999
Consolidated Statements of Cash Flows for the fiscal years
ended April 30, 1997, 1998 and 1999
Consolidated Statements of Stockholders' Equity for the fiscal
years ended April 30, 1997, 1998 and 1999
Notes to Consolidated Financial Statements
18
<PAGE> 19
(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)
2.4 Stock Purchase Agreement dated as of December 1, 1998 by and among Bill
Fleeman Revocable Trust, Fleeman Charitable Remainder Annuity Trust and
certain other trusts and individuals, and Crown Group, Inc. (15)
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. (14)
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)
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)
19
<PAGE> 20
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. (14)
4.7.1 First Amended and Restated Loan and Security Agreement by and among
Finova Capital Corporation, Paaco Automotive Group, Inc. and Premium
Auto Acceptance Corporation including the Schedule of First Amended and
Restated Loan Security Agreement and the Twelfth Amended and Restated
Promissory Note. (16)
4.8 Loan and Security Agreement dated January 15, 1999 by and among
BankAmerica Business Credit, Inc. and America's Car-Mart, Inc. (15)
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, 1999.
(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. (1)
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)
20
<PAGE> 21
27.1 Financial Data Schedule. (1)
- ----------
(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.
(14) Previously filed as an Exhibit to the Company's Annual Report on Form
10-K for the year ended April 30, 1998 and incorporated herein by
reference.
(15) Previously filed as an Exhibit to the Company's Current Report on Form
8-K dated January 15, 1999 and incorporated herein by reference.
(16) Previously filed as an Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1999 and incorporated
herein by reference.
21
<PAGE> 22
(b) REPORTS ON FORM 8-K
During the fiscal quarter ended April 30, 1999 the Company filed reports on Form
8-K and 8-K/A as follows:
<TABLE>
<CAPTION>
EVENT
FORM DATE DESCRIPTION OF EVENT
-------- ---------------- ---------------------------------------------------------
<S> <C> <C>
8-K/A January 15, 1999 Amendment No. 1 to Form 8-K dated January 15, 1999
including the financial statements of America's Car-Mart,
Inc. and pro-forma financial information of the Company.
8-K February 3, 1999 Updated description of the Company's securities.
</TABLE>
22
<PAGE> 23
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 13, 1999 By: /s/ Edward R. McMurphy
------------------------------------
Edward R. McMurphy
President and Chief Executive Officer
(principal executive officer)
Dated: August 13, 1999 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 13, 1999
- ------------------------------------- and Chief Executive Officer
Edward R. McMurphy
* Executive Vice President, August 13, 1999
- -------------------------------------- General Counsel and Director
Tilman J. Falgout, III
* Director August 13, 1999
- --------------------------------------
David J. Douglas
* Director August 13, 1999
- --------------------------------------
John David Simmons
* Director August 13, 1999
- --------------------------------------
Gerald L. Adams
* Director August 13, 1999
- --------------------------------------
Gerard M. Jacobs
* Director August 13, 1999
- --------------------------------------
Robert J. Kehl
* By /s/ Mark D. Slusser
----------------------------------
Mark D. Slusser
As Attorney-in-Fact
Pursuant to Powers of
Attorney filed herewith
</TABLE>
23
<PAGE> 24
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF CROWN GROUP, INC. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30,
1999 1998
----------- -----------
(Restated)
<S> <C> <C>
Assets:
Cash and cash equivalents $12,660,789 $ 5,030,861
Marketable equity securities 4,742,180
Receivables from subsidiaries 12,232,940 4,640,718
Investment in subsidiaries 26,584,853 10,250,174
Investment in CMN and related assets, net 5,167,161 6,606,114
Goodwill, net 10,234,197 7,359,555
Other 2,840,661 688,329
----------- -----------
$69,720,601 $39,317,931
=========== ===========
Liabilities and stockholders' equity:
Accounts payable and accrued liabilities $ 4,535,430 $ 373,165
Payables to subsidiaries 2,641,637 2,641,637
Debt 8,658,000
Deferred tax liability 826,650 1,251,805
----------- -----------
Total liabilities 16,661,717 4,266,607
----------- -----------
Stockholders' equity 53,058,884 35,051,324
----------- -----------
$69,720,601 $39,317,931
=========== ===========
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
April 30,
1999 1998
----------- -----------
(Restated)
<S> <C> <C>
Revenues:
Interest income $ 1,038,645 $ 1,081,583
Interest income from subsidiaries 818,831 387,615
Interest, fees and rentals from CMN 694,146 680,697
Other 239,346 388,827
----------- -----------
2,790,968 2,538,722
----------- -----------
Costs and expenses:
Selling, general and administrative 3,616,797 2,924,675
Interest expense 211,210 13,444
Depreciation and amortization 1,079,564 574,568
----------- -----------
4,907,571 3,512,687
----------- -----------
Other income:
Equity in earnings of non-consolidated subsidiaries 1,259,734 926,598
Equity in earnings of subsidiaries 1,696,385 10,980
Gain on sale of securities 24,689,130 38,258
----------- -----------
27,645,249 975,836
----------- -----------
Income before income taxes 25,528,646 1,871
Provision (Benefit) for income taxes 8,020,236 (365,295)
----------- -----------
Net income $17,508,410 $ 367,166
=========== ===========
</TABLE>
See accompanying notes to condensed financial information.
<PAGE> 25
SCHEDULE I (CONTINUED)
CROWN GROUP, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
April 30,
1999 1998
------------ ------------
(Restated)
<S> <C> <C>
Operating activities:
Net income $ 17,508,410 $ 367,166
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization 1,079,564 574,568
Amortization of discount (825,198) (252,765)
Deferred income taxes 778,307 305,341
Gain on sale of assets (136,196) (373,999)
Gain on sale of securities (24,689,130) (38,258)
Equity in earnings of unconsolidated subsidiaries (1,259,734) (926,598)
Equity in earnings of subsidiaries (1,696,385) (10,980)
Changes in assets and liabilities, net of transactions:
Other 756,298 86,139
Accounts payable and accrued liabilities 398,515 (169,203)
Income taxes payable 3,238,210 (271,525)
------------ ------------
Net cash used by operating activities (4,847,339) (710,114)
------------ ------------
Investing activities:
Purchase of assets (3,475,908) (788,784)
Sale of assets 1,043,711 2,191,861
Purchase of securities (6,643,496) (5,551,714)
Sale of securities 33,149,806 3,772,792
Advances to subsidiaries (2,213,221) (4,618,220)
Repayments from subsidiaries 5,350,000 13,732,772
Dividends and note collections from CMN 2,389,152 1,050,750
Formation of El Salvador (1,207,000)
Investment in unconsolidated subsidiaries (1,000,341)
Formation of Home Stay (640,000)
Formation of Concorde (2,000,800)
Purchase of Car-Mart (10,005,863)
Purchase of CMN and related assets (7,000,001)
Purchase of Paaco (3,431,250) (9,174,212)
Purchase of Precision and M&S (2,000) (4,032,389)
------------ ------------
Net cash provided (used) by investing activities 13,313,590 (12,417,945)
------------ ------------
Financing activities:
Issuance of common stock 93,282
Issuance of debt 1,158,000
Purchase of common stock (1,994,323) (3,052,322)
------------ ------------
Net cash used by financing activities (836,323) (2,959,040)
------------ ------------
Increase (Decrease) in cash and cash equivalents 7,629,928 (16,087,099)
Cash and cash equivalents at: Beginning of year 5,030,861 21,117,960
------------ ------------
End of year $ 12,660,789 $ 5,030,861
============ ============
</TABLE>
See accompanying notes to condensed financial information.
<PAGE> 26
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, 1999 Guarantee
- --------- ------------- -------------- -------------
<S> <C> <C> <C>
Paaco $60.0 million $41.8 million $10.0 million
Car-Mart 30.0 million 25.2 million 10.0 million
Concorde 20.0 million 7.2 million 5.0 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, 1999 the amount of debt guaranteed by such
minority shareholders was approximately $41.8 million. To the extent such
minority shareholders pay monies pursuant to such guaranties, Crown has
agreed to reimburse the minority shareholders 80% thereof.
B - ELIMINATION OF BALANCES AND TRANSACTIONS WITH SUBSIDIARIES
As of April 30, 1999 and 1998 the following balances were eliminated in
the consolidated financial statements of Crown:
<TABLE>
<CAPTION>
April 30,
1999 1998
-------------- ------------
<S> <C> <C>
Receivables from subsidiaries $12,232,940 $ 4,640,718
Investments in subsidiaries 26,584,853 10,250,174
Payables to subsidiaries 2,641,637 2,641,637
</TABLE>
<TABLE>
<CAPTION>
April 30,
1999 1998
-------------- ------------
<S> <C> <C>
Interest income $ 818,831 $387,615
</TABLE>
C - DEBT
A summary of debt at April 30, 1999 is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Facility Interest Primary Balance at
Lender Amount Rate Maturity Collateral April 30, 1999
- ---------------- -------- -------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Car-Mart sellers N/A 8.50% Jan 2004 Finance rec. $ 7,500,000
Bank of America N/A 7.00% Apr 2001 Equipment 1,158,000
--------------
$ 8,658,000
==============
</TABLE>
A summary of future minimum principal payments required under the
aforementioned debt as of April 30,1999 is as follows:
<TABLE>
<CAPTION>
Years Ended
April 30, Amount
----------- ------------
<S> <C>
2000 $ -0-
2001 1,158,000
2002 -0-
2003 -0-
2004 7,500,000
------------
$ 8,658,000
============
</TABLE>
D - RESTATEMENT
In connection with the April 30, 1999 year end closing process and
subsequent analyses performed, the Company identified certain accounting errors
and irregularities at Paaco relating principally to finance receivables,
inventory and drafts payable. Such errors and irregularities existed at and
subsequent to the Company's purchase of a 53% interest in Paaco on February 1,
1998. To correct for such errors and irregularities, the Company has restated
its previously issued consolidated financial statements for the year ended
April 30, 1998.
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
13.1 Annual Report of Stockholders for the fiscal year ended April 30, 1999.
21.1 Subsidiaries of Crown Group, Inc.
23.1 Consent of Independent Accountants.
23.2 Report 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 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) 100% of
America's Car-Mart, Inc. ("Car-Mart") and 85% of Paaco Automotive Group, Inc.
and Premium Auto Acceptance Corporation (collectively, "Paaco"), vertically
integrated used car sales and finance companies, (ii) 100% of Precision IBC,
Inc. ("Precision"), a firm specializing in the sale and rental of intermediate
bulk containers ("IBC's"), (iii) 80% of Concorde Acceptance Corporation
("Concorde"), a sub-prime mortgage lender, (iv) 49% of Casino Magic Neuquen S.A.
("CMN"), a casino operator in the Province of Neuquen, Argentina, (v) 50.1% of
CG Incorporated, S.A. de C.V. ("Crown El Salvador"), a newly formed company
focusing on the development and operation of casinos in El Salvador, (vi) 80% of
Home Stay Lodges I, Ltd. ("Home Stay"), a partnership focusing on the
development and operation of extended-stay lodging facilities, and (vii) 45% of
Atlantic Castings, Inc. ("Atlantic Castings"), an investment casting
manufacturer of turbine engine components. In addition, from time to time the
Company purchases and sells small ownership interests in securities of privately
held and publicly traded firms. For a summary of the Company's operating results
and other financial data by business segment, see Note U 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.
ACQUISITIONS SINCE FISCAL 1997
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 in cash. 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.
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 in 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 who prior to this
transaction were the sole shareholders of Paaco. Effective May 1, 1998 and
February 1, 1999 the Company purchased an additional 12% and 15% interest,
respectively, in Paaco from the management shareholders. The May 1, 1998
purchase price of $1.7 million was paid by issuing 412,500 shares of the
Company's common stock. The February 1, 1999 purchase price of approximately
$2.6 million consisted of 257,811 shares of the Company's common stock and
approximately $1.0 million in cash. In July 1999, upon discovering certain
accounting errors and irregularities at Paaco, the Company and the Paaco selling
shareholders amended and restated the three prior purchase agreements such that
the Company received approximately $4 million in consideration and an additional
5% interest in Paaco. Paaco is a vertically integrated used car sales and
finance company which operates eight dealerships in the Dallas-Ft. Worth
metropolitan area and two dealerships in Houston, Texas. 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. 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
HOME STAY - In May 1998 the Company, along with a minority holder, formed Home
Stay. Home Stay is in the business of constructing and operating extended-stay
lodging facilities. In March 1999 Home Stay began operating two newly
constructed 128 unit extended-stay lodging facilities in the Pensacola, Florida
area.
CAR-MART - In January 1999 the Company acquired 100% of the outstanding common
stock of Fleeman Holding Company, including its wholly-owned subsidiary
Car-Mart, for $41.35 million. The purchase price consisted of $33.85 million in
cash and the issuance of promissory notes aggregating $7.5 million. Car-Mart
operates thirty "Buy-Here Pay-Here" used car dealerships located in niche
markets throughout Arkansas, Oklahoma, Texas and Missouri. Car-Mart sells,
underwrites and finances used cars and trucks.
CROWN EL SALVADOR - In March 1999 the Company, along with minority holders,
formed Crown El Salvador. Crown El Salvador is in the business of developing and
operating casino properties in El Salvador. In June and July 1999 Crown El
Salvador completed the construction and began operating its first and second
casinos, respectively, in El Salvador.
ATLANTIC CASTINGS - In March 1999 the Company acquired a 45% interest in
Atlantic Castings for a purchase price of $.3 million in cash. Atlantic Castings
is an investment casting manufacturer of turbine engine components.
RESULTS OF OPERATIONS
As detailed above the Company has made a variety of acquisitions over the
last two years. Acquisitions involving the purchase of greater than a 50%
interest have been accounted for using the purchase method of accounting. The
Company has included the operating results of each majority-owned company from
the respective acquisition date. As a result of the acquisitions occurring
throughout the last two fiscal years, operating results for the years ended
April 30, 1999, 1998 and 1997 are not entirely comparable. Below is a summary of
the number of months of operation each acquired companies' operating results are
included in the Company's consolidated results of operations for the fiscal
years ended April 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ----
<S> <C> <C> <C>
CMN 12 mo. 11 mo. -
Concorde 12 mo. 10 mo. -
Paaco 12 mo. 3 mo. -
Precision 12 mo. 3 mo. -
Home Stay 12 mo. - -
Car-Mart 4 mo. - -
Crown El Salvador 2 mo. - -
Atlantic Castings 2 mo. - -
</TABLE>
During the course of its fiscal 1999 year end closing process, the Company
discovered certain accounting errors and irregularities at Paaco, as a result of
which fiscal 1999 earnings of the Company were reduced by certain finance
receivable and inventory write-downs, together with an increase in finance
receivable reserves and drafts payable. Such errors and irregularities existed
at and subsequent to the Company's initial purchase of its interest in Paaco in
February 1998. The investigation at Paaco has also resulted in a restatement of
fiscal 1998 results of operations and subsequent quarterly financial statements
during fiscal 1999. See Notes V and W to the consolidated financial statements
for a summary of the impact of the required adjustments on the Company's fiscal
1998 consolidated financial statements and fiscal 1999 quarterly results of
operations. As a result of its investigation of Paaco, management of the Company
has restructured Paaco's management organization and has implemented cost
reductions at that subsidiary, while taking steps to ensure the integrity of
Paaco's accounting and reporting procedures in future periods. Daniel Chu,
former President of Paaco, resigned in July 1999.
Below is a presentation of the operating results for the four principal
business segments of the Company for the years ended April 30, 1999 and 1998 (in
thousands). The segments include (i) automobile, which pertains to Car-Mart's
and Paaco's selling and financing of used vehicles, (ii) IBC's, which pertains
to Precision's rental and sales of intermediate bulk containers, (iii) mortgage,
which pertains to Concorde's originating and selling of sub-prime mortgage
loans, and (iv) other, which includes corporate operations, Home Stay, Crown El
Salvador, activities of relatively inactive subsidiaries and the Company's
equity investments in CMN and Atlantic Castings. For the year ended April 30,
1997 the Company operated in a single business segment, and, accordingly, no
separate segment disclosures are necessary.
<PAGE> 3
<TABLE>
<CAPTION>
Year Ended April 30, 1999
---------------------------------------------------------------------------------
Automobile IBC's Mortgage Other Eliminations Consolidated
---------- -------- -------- -------- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other $ 87,121 $ 5,237 $ 4,634 $ 973 $ 97,965
Interest income 10,638 19 1,616 1,867 $ (819) 13,321
-------- -------- -------- -------- ------ --------
Total 97,759 5,256 6,250 2,840 (819) 111,286
-------- -------- -------- -------- ------ --------
Costs and expenses:
Cost of sales 55,265 1,865 57,130
Selling, gen. and admin 19,354 1,716 4,498 3,916 29,484
Prov. for credit losses 15,251 83 164 15,498
Interest expense 5,771 377 1,187 250 (819) 6,766
Depreciation and amort 433 707 161 1,098 2,399
-------- -------- -------- -------- ------ --------
Total 96,074 4,748 6,010 5,264 (819) 111,277
-------- -------- -------- -------- ------ --------
Security gains and other 25,949 25,949
-------- -------- -------- -------- ------ --------
Income before taxes
and minority interests $ 1,685 $ 508 $ 240 $ 23,525 $ -- $ 25,958
======== ======== ======== ======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended April 30, 1998 (Restated)
------------------------------------------------------------------------------
Automobile IBC's Mortgage 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 1,491 815 1,472 $ (388) 3,390
------- ------- ------- ------- ------ -------
Total 15,732 1,351 1,915 2,577 (388) 21,187
------- ------- ------- ------- ------ -------
Costs and expenses:
Cost of sales 8,472 628 9,100
Selling, gen. and admin 3,363 235 2,042 2,928 8,568
Prov. for credit losses 1,744 4 52 1,800
Interest expense 942 81 586 14 (388) 1,235
Depreciation and amort 64 122 42 574 802
------- ------- ------- ------- ------ -------
Total 14,585 1,070 2,722 3,516 (388) 21,505
------- ------- ------- ------- ------ -------
Security gains and other 965 965
------- ------- ------- ------- ------ -------
Income (loss) before taxes
and minority interests $ 1,147 $ 281 $ (807) $ 26 $ -- $ 647
======= ======= ======= ======= ====== =======
</TABLE>
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
Net income for fiscal 1999 increased $17.1 million compared to fiscal 1998.
The increase was the result of (i) recognizing a substantial gain on the sale of
certain securities (principally Inktomi common stock), (ii) including the
results of operations of Car-Mart, (iii) improved operating results at Concorde,
and (iv) including Precision's operating results for a full year, partially
offset by (i) operating losses at Paaco and (ii) expensing certain preopening
costs of Crown El Salvador.
Revenues from sales and other for fiscal 1999 increased $80.2 million
compared to fiscal 1998. The increase was principally the result of (i)
increases from Paaco ($47.6 million), Precision ($3.9 million) and Concorde
($3.5 million) as a result of including a full twelve months of operating
results and growth in revenues at those companies, and (ii) including four
months of Car-Mart's operations ($25.3 million). Interest income for fiscal 1999
increased $9.9 million compared to fiscal 1998. The increase was principally the
result of (i) interest earned on Car-Mart's finance receivable portfolio ($1.4
million), (ii) greater interest earned on Paaco's finance receivable portfolio
($7.4 million) as a result of including a full twelve months of operating
results and growth in the portfolio, and (iii) greater interest earned on
Concorde's mortgage loans ($.8 million) as a result of an increase in the
average amount of mortgage loans held for sale.
<PAGE> 4
Cost of sales pertains to the operations of Car-Mart, Paaco and Precision.
As a percentage of sales, fiscal 1999 cost of sales increased to 63.7% compared
to 60.9% in fiscal 1998. The 2.8% increase is principally the result of lower
margins at Paaco resulting from selling higher priced vehicles, partially offset
by the inclusion of Car-Mart, which has higher gross profit margins as a result
of selling lower priced vehicles. Provision for credit losses pertains
principally to Car-Mart's and Paaco's operations. Selling, general and
administrative expenses for fiscal 1999 increased $20.9 million compared to
fiscal 1998. The increase resulted principally from (i) expenses relating to
Car-Mart ($3.5 million), (ii) increases in expenses at Paaco ($12.5 million) and
Precision ($1.5 million) as a result of including a full twelve months of
operating results and general growth at those companies, (iii) the development
of Concorde's mortgage based lending business ($2.5 million), (iv) Crown's
abandonment of certain business ventures which it had been pursuing ($.5
million), and (v) preopening costs associated with Crown El Salvador ($.2
million). Interest expense for fiscal 1999 increased $5.5 million compared to
fiscal 1998. The increase principally resulted from (i) including Car-Mart in
the Company's consolidated results of operations ($.9 million) and (ii)
including a full twelve months of operating results of Paaco, Precision and
Concorde and generally higher debt balances at those subsidiaries ($4.8
million). Depreciation and amortization expense for fiscal 1999 increased $1.6
million compared to fiscal 1998. The increase resulted principally from (i)
amortizing goodwill that was created in the acquisitions of Paaco and Precision
for a full twelve months ($.6 million) and (ii) depreciating the assets of
Paaco, Precision and Concorde for a full twelve months and higher fixed asset
balances at those subsidiaries ($.9 million).
The provision for income taxes for fiscal 1999 was $9.0 million on pretax
income of $26.0 million. This equates to a 36.4% effective tax rate after
removing from pretax income the equity in earnings of unconsolidated
subsidiaries ($1.3 million), which earnings are presented on an after tax basis.
The benefit for income taxes for fiscal 1998 was $.1 million on pretax income of
$.6 million. This equates to a 32.6% effective tax rate after removing from
pretax income the equity in earnings of unconsolidated subsidiaries ($.9
million), which earnings are presented on an after tax basis. Minority interest
pertains to the portions of consolidated subsidiaries not owned by the Company
during fiscal 1999 (Paaco and Crown El Salvador) and fiscal 1998 (Paaco and
Precision).
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, respectively, which were acquired or formed during
fiscal 1998. Interest income for fiscal 1998 increased $1.9 million compared to
fiscal 1997. The increase resulted from (i) the acquisition of Paaco during the
fourth quarter of fiscal 1998 ($1.5 million), and (ii) interest earned on
Concorde's mortgage loans and excess cash ($.8 million), partially offset by a
decrease in Crown's interest income as a result of Crown using its cash to make
acquisitions and investments. Other income in fiscal 1998 consists principally
of a gain on the sale of certain equipment ($.4 million). Other income in fiscal
1997 pertains to a fee earned by the Company in assisting another company
complete an acquisition.
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 $5.8 million compared to
fiscal 1997. The increase resulted principally from (i) the acquisitions of
Paaco and Precision during the fourth quarter of fiscal 1998 ($3.6 million), and
(ii) the formation and development of Concorde's mortgage based lending business
($2.0 million). Interest expense for fiscal 1998 increased $1.2 million 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 $.6 million compared to fiscal 1997. The increase resulted from (i)
amortizing certain agreements and other assets obtained in the acquisition of
49% of CMN ($.3 million), (ii) amortizing goodwill that was created in the
acquisitions of Paaco and Precision ($.1 million), and (iii) depreciating the
assets of Paaco and Precision ($.2 million).
The benefit for income taxes for fiscal 1998 was $.1 million on pretax
income of $.6 million. This equates to an effective tax rate of 32.6% after
removing from pretax income the equity in earnings of CMN ($.9 million), which
earnings are presented on an after tax basis. The benefit for income taxes for
fiscal 1997 was $1.9 million on pretax income of $6.9 million. The fiscal 1997
benefit differed from the amount determined by applying the 34% federal
statutory rate as a result of a difference in the book and tax basis of SCGC
stock sold during the period. Minority interests for fiscal 1998 ($.4 million)
pertain to the portions of Paaco (47%) and Precision (20%) not owned by the
Company during the period. Net income for fiscal 1998 decreased $8.5 million
compared to fiscal 1997. The decrease was principally the result of fiscal 1997
including a $14.9 million pretax gain on the sale of its remaining 50% interest
in SCGC, which was partially offset by a loss on the sale of securities received
in the sale of SCGC ($5.3 million) and a write-down of land held for sale ($1.0
million).
LIQUIDITY AND CAPITAL RESOURCES
For fiscal 1999 net cash provided by operating activities amounted to $28.7
million. The principal sources of cash resulted from the sale of mortgage loans
and net income generated by the Company. The excess of mortgage loans sold and
principal repayments over mortgage loans originated or acquired was $8.0
million. Net cash used by investing activities of $64.1 million included (i) a
$33.4 million use of cash in the acquisition of Car-Mart, (ii) a $44.2 million
use of cash in finance receivable originations in excess of finance receivable
collections, (iii) a $16.3 million use of cash in the purchase of assets (rental
and other equipment and the construction of lodging facilities), and (iv) a
$26.5 million net source of cash from the sale of securities (principally
Inktomi common stock) in excess of the cost of purchased securities. Net cash
provided by financing activities of $41.7 million principally relates to (i)
$37.8 million of net cash provided by the asset based revolving credit
facilities of Car-Mart, Paaco and Precision, and (ii) $4.9 million of net
proceeds from the issuance of other debt (Home Stay construction loan and
financing of Paaco and Precision real estate).
As of April 30, 1999 the Company's sources of liquidity included
approximately (i) $12.9 million of cash on hand, of which $12.7 million was held
by Crown, (ii) $36.1 million remaining to be drawn on the credit facilities of
Car-Mart, Paaco, Concorde and Precision,
<PAGE> 5
although the majority of such additional draws may only be made in connection
with a corresponding increase in the related collateral asset (i.e., finance
receivables, mortgage loans held for sale and intermediate bulk containers), and
(iii) the potential issuance of additional debt and/or equity, although the
Company has no specific commitments or arrangements to issue such additional
debt and/or equity. The loan agreements which govern the credit facilities of
Crown's subsidiaries limit dividends and other distributions from such
subsidiaries to Crown. The amount available to be drawn under each of the
Company's revolving credit facilities is a function of the underlying collateral
asset. Generally, the Company is able to borrow a specified percentage of the
face value of eligible finance receivables in the case of Car-Mart and Paaco,
and eligible mortgage loans in the case of Concorde. Precision's borrowing base
is a function of the number of tanks owned. The Company's revolving credit
facilities mature at various times between 1999 and 2002.
As a result of the investigation of accounting errors and irregularities at
Paaco, it was discovered that Paaco was in breach of certain loan covenants and
had exceeded its maximum available advances under its principal credit facility.
However, Paaco has received waivers of each covenant violation and has entered
into a forbearance agreement with its principal lender. The forbearance
agreement affords Paaco a period of nine months to gradually come into
compliance with the availability provisions and leverage ratio of the original
agreement. Paaco is presently in compliance with the forbearance agreement and
expects to come into compliance with the original agreement within the nine
month period provided in the forbearance agreement.
The Company is focusing on the development and expansion of its existing
businesses and the potential acquisition or development of other unrelated
businesses. Car-Mart's, Paaco's, Precision's and Concorde's credit facilities
can support the majority of their expected growth over the next twelve months.
As of April 30, 1999 the Company had an outstanding commitment of approximately
$1.3 million pertaining to an investment in a private venture capital fund which
focuses on high technology businesses, such as Internet related concerns. The
Company plans to fund this commitment from cash on hand.
In March 1996 the Company's Board of Directors approved a program, as
amended, to repurchase up to 4,000,000 shares of the Company's common stock from
time to time in the open market. As of April 30, 1999 the Company had
repurchased 2,876,648 shares pursuant to this program. The timing and amount of
future share repurchases, if any, will depend on various factors including
market conditions, available alternative investments and the Company's financial
position.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" which, as amended by SFAS No.
137, is effective for all fiscal quarters and years beginning after June 15,
2000. SFAS No. 133 standardizes the accounting for derivative instruments and
hedging activities, including certain derivative instruments imbedded in other
contracts. Under this standard, entities are required to carry all derivative
instruments in the statement of financial position at fair value. The Company
does not believe the adoption of SFAS No. 133 will have a material impact on its
financial position or results of operations.
DATA PROCESSING AND YEAR 2000
Each of Crown and its subsidiaries operate their data processing systems
independently. Almost all of the software utilized by the Company is licensed
from third parties. With the exception of Car-Mart, all of the Company's
hardware, software and networking systems are year 2000 compliant. Car-Mart
expects its systems to be year 2000 compliant by September 1999. A more complete
description on a company by company basis is as follows:
PAACO - Paaco utilizes two primary software packages (operating and
accounting), and several secondary software packages (word
processing, spreadsheet and database) in the operation of its
business. Each of its operating, accounting and secondary software
applications are year 2000 compliant. Paaco utilizes two local area
networking systems, both of which are year 2000 compliant. All of
Paaco's data processing hardware is year 2000 compliant.
CONCORDE - Concorde utilizes three primary software packages
(front-end origination and processing, mortgage servicing and
accounting), and approximately nine secondary software packages
(document generation, scanning, telephone management, E-mail,
database, fax, credit bureau, word processing and spreadsheet) in the
operation of its business. All of its software applications are year
2000 compliant. In addition, Concorde's local area networking
software and all of its data processing hardware are year 2000
compliant.
PRECISION - Precision utilizes two primary software packages (tank
tracking and accounting), and approximately five secondary software
packages (word processing, database, spreadsheet, desktop publishing
and lock box communication) in the operation of its business. All of
Precision's primary and secondary software packages are year 2000
compliant. All of Precision's data processing equipment, which
consists principally of personal computers, is year 2000 compliant.
CMN - CMN utilizes one primary software package (accounting), and a
few secondary software packages (word processing and spreadsheet) in
the operation of its business. All of CMN's software applications are
year 2000 compliant. CMN's data processing equipment, which consists
principally of personal computers, is year 2000 compliant.
<PAGE> 6
CROWN - Crown utilizes one primary software package (accounting), and
approximately three secondary software packages (word processing,
spreadsheet and desktop publishing) in the operation of its business.
All of its software applications are year 2000 compliant. In
addition, Crown's local area networking software and all of its data
processing hardware are year 2000 compliant
CAR-MART - Car-Mart utilizes two primary software packages (operating
and accounting), and several secondary software packages (word
processing, spreadsheet, database and communication) in the operation
of its business. The present version of the operating software
utilized by Car-Mart is not year 2000 compliant, however, Car-Mart is
in the process of installing a more recent version which is year 2000
compliant and plans to have such installation completed by September
1999. The accounting software utilized by Car-Mart is not year 2000
compliant, however, Car-Mart is in the process of installing new
accounting software that is year 2000 compliant and plans to have
such installation completed by September 1999. All of Car-Mart's
secondary software packages are year 2000 compliant. The majority of
Car-Mart's data processing hardware is year 2000 compliant, and the
portion that is not will be updated or replaced by September 1999.
Each of Crown and its subsidiaries rely to varying degrees on third parties
in the operation of their businesses. Such third parties include banking
institutions, telecommunications companies, utilities, manufacturers and parts
suppliers. The Company has made inquiries of some, but not all, of these third
parties as to their year 2000 compliance. The Company believes to the extent a
particular third party vendor does not become year 2000 compliant, and such lack
of compliance is expected to have a material impact on such vendor's ability to
effectively provide goods or services, the Company could replace such vendor to
obtain the goods or services it needs. The Company plans to monitor its more
material third party relationships and take appropriate action as necessary.
The Company has not incurred any appreciable costs in its process of
becoming year 2000 compliant, nor does it expect to do so in the future. The
Company does not presently have a contingency plan with respect to its year 2000
compliance as it expects to be fully compliant by September of 1999.
SEASONALITY
The Company's automobile sales operation is seasonal in nature. In the
automobile business, the Company's third fiscal quarter (November through
January) is historically the slowest period of time for car and truck sales.
Many of the Company's operating expenses such as administrative personnel, rent
and insurance are fixed and cannot be reduced during periods of decreased sales.
None of the Company's other businesses experience significant seasonal
fluctuations.
<PAGE> 7
CONSOLIDATED BALANCE SHEETS CROWN GROUP, INC.
<TABLE>
<CAPTION>
April 30, 1999 April 30, 1998
-------------- --------------
(Restated)
<S> <C> <C>
Assets:
Cash and cash equivalents $ 12,910,535 $ 6,481,706
Marketable equity securities 4,742,180
Accounts and other receivables, net 2,572,535 1,936,055
Mortgage loans held for sale, net 10,636,933 14,350,437
Finance receivables, net 88,424,897 33,918,014
Inventory 9,290,272 3,798,800
Prepaid and other assets 2,748,831 572,089
Property and equipment, net 22,055,174 9,165,703
Investment in CMN and related assets, net 5,167,161 6,606,114
Goodwill, net 14,328,241 10,631,737
------------ ------------
$168,134,579 $ 92,202,835
============ ============
Liabilities and stockholders' equity:
Accounts payable $ 4,747,358 $ 2,514,081
Accrued liabilities 5,040,007 1,952,828
Income taxes payable 3,875,583 142,572
Revolving credit facilities 78,928,121 41,164,524
Other notes payable 17,259,544 4,870,074
Deferred sales tax 2,713,914 2,090,303
Deferred income taxes, net 797,437 1,855,058
------------ ------------
Total liabilities 113,361,964 54,589,440
------------ ------------
Minority interests 1,713,731 2,562,071
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;
10,096,842 issued and outstanding (9,433,963 at April 30, 1998) 100,968 94,340
Additional paid-in capital 37,970,391 35,547,369
Retained earnings (accumulated deficit) 14,987,525 (2,520,885)
Unrealized appreciation of securities 1,930,500
------------ ------------
Total stockholders' equity 53,058,884 35,051,324
------------ ------------
$168,134,579 $ 92,202,835
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 8
CONSOLIDATED STATEMENTS OF OPERATIONS CROWN GROUP, INC.
<TABLE>
<CAPTION>
Years Ended April 30,
1999 1998 1997
------------- ------------- -------------
(Restated)
<S> <C> <C> <C>
Revenues:
Sales $ 89,731,527 $ 14,938,617
Rental income 2,634,854 494,374
Gain on sale of mortgage loans 4,406,974 1,087,303
Interest income 13,320,513 3,390,161 $ 1,530,324
Interest, fees and rentals from CMN 694,146 680,697
Other 498,201 596,709 500,000
------------- ------------- -------------
111,286,215 21,187,861 2,030,324
------------- ------------- -------------
Costs and expenses:
Cost of sales 57,129,838 9,100,053
Selling, general and administrative 29,484,380 8,567,614 2,796,273
Provision for credit losses 15,498,111 1,800,164
Interest expense 6,766,258 1,235,358 68,757
Depreciation and amortization 2,398,901 802,319 168,443
Write-down of land held for sale 1,019,709
Gaming development and abandonment 736,942
------------- ------------- -------------
111,277,488 21,505,508 4,790,124
------------- ------------- -------------
Other income (expense):
Equity in earnings of unconsolidated subsidiaries 1,259,734 926,598
Gain (loss) on sale of securities, net 24,689,130 38,258 (5,254,858)
Gain on sale of SCGC 14,934,543
------------- ------------- -------------
25,948,864 964,856 9,679,685
------------- ------------- -------------
Income before taxes and minority interests 25,957,591 647,209 6,919,885
Provision (benefit) for income taxes 9,000,661 (91,030) (1,940,000)
Minority interests (551,480) 371,073
------------- ------------- -------------
Net income $ 17,508,410 $ 367,166 $ 8,859,885
============= ============= =============
Earnings per share:
Basic $ 1.73 $ .04 $ .82
Diluted $ 1.68 $ .04 $ .80
Weighted average number of shares outstanding:
Basic 10,095,614 9,829,392 10,868,119
Diluted 10,400,504 9,905,819 11,027,077
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 9
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME CROWN GROUP, INC.
<TABLE>
<CAPTION>
Years Ended April 30,
1999 1998 1997
------------ ------------ ------------
(Restated)
<S> <C> <C> <C>
Net income $ 17,508,410 $ 367,166 $ 8,859,885
Change in unrealized appreciation of securities, net of tax:
Unrealized appreciation arising during period 14,172,605 1,930,500
Less realized gain included in net income (16,103,105)
------------ ------------ ------------
(1,930,500) 1,930,500
------------ ------------ ------------
Comprehensive income $ 15,577,910 $ 2,297,666 $ 8,859,885
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 10
CONSOLIDATED STATEMENTS OF CASH FLOWS CROWN GROUP, INC.
<TABLE>
<CAPTION>
Years Ended April 30,
1999 1998 1997
------------- ------------- -------------
(Restated)
<S> <C> <C> <C>
Operating activities:
Net income $ 17,508,410 $ 367,166 $ 8,859,885
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 2,398,901 802,319 168,443
Amortization of finance receivable discount (1,186,350) (252,765)
Deferred income taxes 944,961 (950,343) (2,275,000)
Provision for credit losses 15,498,111 1,800,164
Minority interests (551,480) 371,073
Write down of assets 1,715,718
Gain on sale of mortgage loans (4,406,974) (1,087,303)
Gain on sale of assets (286,225) (437,171)
(Gain) loss on sale of securities (24,689,130) (38,258) 5,254,858
Gain on sale of SCGC (14,934,543)
Equity in earnings of unconsolidated subsidiaries (1,259,734) (926,598)
Changes in assets and liabilities, net of transactions:
Accounts and other receivables 3,226,886 (598,109) 396,466
Mortgage loans originated or acquired (99,206,479) (36,757,608)
Mortgage loans sold and principal repayments 107,188,926 23,441,905
Inventory 8,832,626 567,689
Prepaids and other assets (1,542,587) 107,938 12,092
Accounts payable, accrued liabilities and deferred
sales tax 3,630,783 1,298,385 (145,398)
Income taxes payable 2,640,797 (192,428) (335,000)
------------- ------------- -------------
Net cash provided (used) by operating
activities 28,741,442 (12,483,944) (1,282,479)
------------- ------------- -------------
Investing activities:
Finance receivable originations (80,431,081) (13,324,694)
Finance receivable collections 36,252,894 4,723,150
Purchase of property and equipment (16,312,815) (4,061,196) (1,076,142)
Sale of property and equipment 2,004,520 17,721,787 325,000
Purchase of securities (6,643,496) (5,551,714) (4,023,118)
Sale of securities 33,149,806 3,772,792 11,593,260
Sale of notes receivable 19,200,000
Dividends and note collections from CMN 2,389,152 1,050,750
Purchase of CMN and related assets (7,000,001)
Purchase of Paaco, net of cash acquired (1,031,250) (4,378,459)
Purchase of Precision, net of cash acquired (4,021,142)
Purchase of Car-Mart, net of cash acquired (33,437,087)
------------- ------------- -------------
Net cash provided (used) by investing
activities (64,059,357) (11,068,727) 26,019,000
------------- ------------- -------------
Financing activities:
Capital contributions from minority owners 1,088,000
Issuance of common stock 93,282
Purchase of common stock (1,994,323) (3,052,322) (3,299,845)
Proceeds from revolving credit facilities, net 37,763,597 13,979,273
Proceeds from (repayments of) other debt, net 4,889,470 (2,103,816) (987,569)
------------- ------------- -------------
Net cash provided (used) by financing
activities 41,746,744 8,916,417 (4,287,414)
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents 6,428,829 (14,636,254) 20,449,107
Cash and cash equivalents at: Beginning of period 6,481,706 21,117,960 668,853
------------- ------------- -------------
End of period $ 12,910,535 $ 6,481,706 $ 21,117,960
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 11
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY CROWN GROUP, INC.
<TABLE>
<CAPTION>
For the Three Years in the Period Ended April 30, 1999
Retained
Additional Earnings 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, 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, as
reported 9,433,963 94,340 35,547,369 (2,539,956) 1,930,500 35,032,253
Restatement (Note V) 19,071 19,071
------------ ------------ ------------ ------------ ----------- ------------
Balance at April 30, 1998, as
restated 9,433,963 94,340 35,547,369 (2,520,885) 1,930,500 35,051,324
Issuance of common stock 958,338 9,583 4,414,390 4,423,973
Purchase of common stock (492,909) (4,929) (1,989,394) (1,994,323)
Stock options and warrants
exercised 197,450 1,974 (1,974) --
Unrealized appreciation of
securities (1,930,500) (1,930,500)
Net income 17,508,410 17,508,410
------------ ------------ ------------ ------------ ----------- ------------
Balance at April 30, 1999 10,096,842 $ 100,968 $ 37,970,391 $ 14,987,525 $ -- $ 53,058,884
============ ============ ============ ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 12
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) 100% of
America's Car-Mart, Inc. ("Car-Mart") and 85% of Paaco Automotive Group, Inc.
and Premium Auto Acceptance Corporation (collectively, "Paaco"), vertically
integrated used car sales and finance companies, (ii) 100% of Precision IBC,
Inc. ("Precision"), a firm specializing in the sale and rental of intermediate
bulk containers ("IBC's"), (iii) 80% of Concorde Acceptance Corporation
("Concorde"), a sub-prime mortgage lender, (iv) 49% of Casino Magic Neuquen S.A.
("CMN"), a casino operator in the Province of Neuquen, Argentina, (v) 50.1% of
CG Incorporated, S.A. de C.V. ("Crown El Salvador"), a newly formed company
focusing on the development and operation of casinos in El Salvador, (vi) 80% of
Home Stay Lodge I, Ltd. ("Home Stay"), a partnership focusing on the
development and operation of extended-stay lodging facilities, and (vii) 45% of
Atlantic Castings, Inc. ("Atlantic Castings"), an investment casting
manufacturer of turbine engine components. In addition, from time to time the
Company purchases and sells small ownership interests in securities of privately
held and publicly traded firms. The Company is presently focusing on (i) the
development and expansion of its existing businesses, and (ii) the potential
acquisition or development of other unrelated businesses.
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
Principles 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 45% investment in Atlantic Castings and its 49% investment in
CMN on the equity method as the Company does not control these entities.
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 Texas and Arkansas. 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> 13
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, 1999 the Company had no marketable equity securities.
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 were subject to an
underwriter's lock-up agreement which restricted the Company from selling its
Inktomi stock until December 8, 1998. 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 reflected a
gross unrealized gain of $2,925,000 over the Company's cost of $1,075,000. The
Company uses the specific identification method for accounting for securities
transactions. During fiscal 1999 the Company sold all of its marketable equity
securities.
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 $190,600 and $27,000
at April 30, 1999 and 1998, respectively. 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 contracts from the sale of used vehicles
at its dealerships. Finance receivables consist of contractually scheduled
payments from installment 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 contract.
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, the borrowers' ability to repay, and collateral values. Since the
loss reserve is based upon a number factors, most of which are subject to change
over time (i.e. economic conditions), it is reasonably possible that a change in
such factors may cause the allowance for credit losses to increase or decrease
by a material amount in the near term. 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 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 using the specific
identification method.
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:
<TABLE>
<S> <C>
Leasehold improvements Life of lease
Furniture, fixtures and equipment 3 to 10 years
Rental equipment 12 years
Buildings 39 years
</TABLE>
Goodwill
Goodwill represents the excess of the Company's cost over the fair value of
net identifiable assets acquired in its purchases of Paaco ($11.0 million) and
Precision ($4.3 million). 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, 1999 and 1998
accumulated amortization of goodwill amounted to $936,171 and $154,680,
respectively.
<PAGE> 14
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to
future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
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 N).
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 1998 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" which, as amended by SFAS No.
137, is effective for all fiscal quarters and years beginning after June 15,
2000. SFAS No. 133 standardizes the accounting for derivative instruments and
hedging activities, including certain derivative instruments imbedded in other
contracts. Under this standard, entities are required to carry all derivative
instruments in the statement of financial position at fair value. The Company
does not believe the adoption of SFAS No. 133 will have a material impact on its
financial position or results of operations.
Reclassifications
Certain prior year amounts in the accompanying financial statements have been
reclassified to conform to the fiscal 1999 presentation.
C - ACQUISITIONS
Car-Mart Purchase
On January 15, 1999 the Company acquired 100% of the outstanding common stock
of Fleeman Holding Company, including its wholly-owned subsidiary America's
Car-Mart, Inc., ("Car-Mart") for $41.35 million. The purchase price consisted of
$33.85 million in cash and the issuance of promissory notes aggregating $7.5
million (the "Notes"). The Notes bear interest at 8.5% per annum payable
quarterly, with the principal due in five years. Approximately $24 million of
the cash portion of the purchase price was obtained pursuant to a $30 million
revolving credit facility with a major banking institution. The remaining $9.85
million was funded from cash on hand.
Car-Mart was founded in 1981 and presently operates 35 "buy-here-pay-here"
used car dealerships located in niche markets throughout Arkansas, Oklahoma,
Texas and Missouri. Car-Mart underwrites, finances and services retail
installment contracts generated at its dealerships. The majority of Car-Mart's
assets consist of over 15,000 retail installment contracts. Car-Mart's revenues
for the fiscal years ended May 31, 1998 and 1997 were approximately $65.7
million and $58.1 million, respectively.
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 who prior to this
transaction were the sole shareholders of Paaco (the "Paaco Management
Shareholders"). Effective May 1, 1998 and February 1, 1999 the Company acquired
an additional 12% and 15% interest, respectively, in Paaco directly from the
Paaco Management Shareholders. The May 1, 1998 purchase price of approximately
$1.7 million was paid by issuing 412,500 shares of the Company's common stock.
The February 1, 1999 purchase price of approximately $2.6 million was paid by
issuing 257,811 shares of the Company's common stock and approximately $1.0
million in cash. In July 1999, upon discovering certain
<PAGE> 15
accounting errors and irregularities at Paaco, the Company and the Paaco
Management Shareholders amended and restated the three prior purchase agreements
such that the Company received approximately $4 million in consideration and an
additional 5% interest in Paaco (see Note T).
Paaco is a vertically integrated used car sales and finance company which
operates eight used car dealerships in the Dallas-Ft. Worth metropolitan area
and two dealerships in Houston, Texas. Paaco sells, underwrites and finances
used cars and trucks with a focus on the Hispanic market. For the years ended
December 31, 1997 and 1996, Paaco's revenues were approximately $48.3 million
and $28.9 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 and 1996 Precision's
unaudited revenues were approximately $4.1 million and $2.8 million,
respectively.
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, 1999 and 1998 accumulated
amortization and depreciation of the Company's investment in various CMN
agreements and slot machines, respectively, amounted to $595,355 and $284,735,
respectively.
Each of the above acquisitions have been accounted for using the purchase
method of accounting with existing assets and liabilities being marked to
market. Goodwill resulting from the transactions is being amortized on a
straight-line basis over periods ranging from 15 to 25 years. The activities of
Car-Mart, Paaco, Precision and CMN have been included in the Company's
consolidated results of operations since their respective dates of acquisition.
In fiscal 1997 the Company elected not to complete the proposed acquisition
of a casino gaming property. As a result of this decision the Company recorded a
charge of $696,009 in fiscal 1997. Such amount is 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 year ended April 30, 1999 were prepared as if
the Car-Mart acquisition had occurred on May 1, 1998, and the following
unaudited pro forma condensed consolidated results of operations of the Company
for the year ended April 30, 1998 were prepared as if the acquisitions of
Car-Mart, Paaco (80%), Precision and CMN had occurred on May 1, 1997, (in
thousands, except per share amounts). The adjustments to the historical
financial statements principally consist of (i) eliminating interest income on
the cash used in the acquisitions, (ii) amortizing goodwill resulting from the
acquisitions, (iii) recording interest expense on the debt issued in the
Car-Mart acquisition, (iv) adjusting depreciation expense and interest income
resulting from purchase accounting entries, and (v) 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,
1999 1998
------ ------
<S> <C> <C>
Revenue $161,080 $129,381
Net income 21,117 2,534
Earnings per share $ 2.03 $ .23
</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> 16
D - SALE OF SECURITIES
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 a $20 million note
receivable from Louisiana Riverboat Gaming Partnership ("LRGP") received in the
sale of the first 50% interest in SCGC 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) a non-detachable five-year warrant to purchase up
to 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 February 1998 the Company purchased 444,444 shares of Inktomi Corporation
common stock in a private transaction for $1.1 million. In June 1998 Inktomi, an
Internet related concern, completed its initial public offering. During fiscal
1999 the Company sold all of its Inktomi common stock which, net of a management
bonus of $1.3 million, resulted in a gain of approximately $25.1 million.
Below is a summary of gains and losses on the sale of securities:
<TABLE>
<CAPTION>
Years Ended April 30,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Gain on sale of Inktomi common stock, net $ 25,077,290
Loss on sale of Casino America common stock $ (4,454,858)
Loss on sale of LRGP Note B (800,000)
Gain (loss) on sale of other equity securities, net (388,160) $ 38,258
------------ ------------ ------------
$ 24,689,130 $ 38,258 $ (5,254,858)
============ ============ ============
</TABLE>
E - CMN OPERATING RESULTS
The operating results of CMN for the years ended April 30, 1999 and 1998
were as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended April 30,
1999 1998
------- -------
<S> <C> <C>
Revenues $21,388 $18,255
Costs and expenses 13,850 13,355
Lawsuit settlement and costs 917
Interest, fees, and rentals to shareholders 1,057 1,910
Provision for income taxes 2,121 978
------- -------
Net income $ 3,443 $ 2,012
======= =======
</TABLE>
For the year ended April 30, 1999, the Company recorded an after tax charge
of approximately $365,000 relating to its share of the estimated costs of a
dispute between CMN and the City of Neuquen with respect to entrance taxes being
charged by the City of Neuquen for each patron entering CMN's casinos. Such
amount has been included in "equity in earnings of unconsolidated subsidiaries"
on the accompanying Consolidated Statements of Operations. At April 30, 1999 CMN
had assets, liabilities and stockholders' equity of $14.5 million, $6.3 million
and $8.2 million, respectively.
<PAGE> 17
F - FINANCE RECEIVABLES
The Company originates installment sale contracts from the sale of used
vehicles at its dealerships. These installment sale contracts typically include
interest rates ranging from 10 to 22% per annum and provide for payments over
periods ranging from 12 to 36 months. A summary of finance receivables as of
April 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
April 30,
1999 1998
------------- -------------
(Restated)
<S> <C> <C>
Finance receivables $ 123,142,202 $ 48,776,278
Unearned finance charges (16,669,411) (9,420,164)
Allowance for credit losses (17,045,063) (4,727,679)
Valuation discount (1,002,831) (710,421)
------------- -------------
$ 88,424,897 $ 33,918,014
============= =============
</TABLE>
In accordance with APB Opinion No. 16, as of the dates the Company acquired
an interest in Paaco (53% on February 1, 1998, 12% on May 1, 1998 and 15% on
February 1, 1999) and Car-Mart, the Company valued Paaco's and Car-Mart's
finance receivable portfolios at market value and determined that an aggregate
valuation discount of $1,577,781 in the case of Paaco, and $864,165 in the case
of Car-Mart, was appropriate. These discounts are being amortized into interest
income over the life of the related finance receivable portfolios that existed
on the dates of purchase using the interest method.
A summary of the finance receivables allowance for credit losses for the
period from May 1, 1997 to April 30, 1999 is as follows:
<TABLE>
<CAPTION>
Years Ended April 30,
1999 1998
------------ ------------
(Restated)
<S> <C> <C>
Balance at beginning of period $ 4,727,679
Acquisition of Paaco $ 4,248,643
Acquisition of Car-Mart 8,726,309
Provision for credit losses 15,251,225 1,743,318
Net charge offs (11,660,150) (1,264,282)
------------ ------------
Balance at end of period $ 17,045,063 $ 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
($190,600 and $27,000) and trade accounts receivable ($35,000 and $2,500) as of
April 30, 1999 and 1998, respectively.
<PAGE> 18
G - PROPERTY AND EQUIPMENT
A summary of property and equipment as of April 30, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
April 30,
1999 1998
------------ ------------
<S> <C> <C>
Land and buildings $ 8,651,003 $ 2,332,750
Rental equipment 7,644,949 4,749,652
Furniture, fixtures and equipment 5,691,910 1,904,536
Leasehold improvements 2,003,575 920,583
Less accumulated depreciation and amortization (1,936,263) (741,818)
------------ ------------
$ 22,055,174 $ 9,165,703
============ ============
</TABLE>
For the years ended April 30, 1999, 1998 and 1997 depreciation expense amounted
to $1,616,762, $362,904, and $168,443, respectively.
H - ACCRUED LIABILITIES
A summary of accrued liabilities at April 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
April 30,
1999 1998
---------- ----------
<S> <C> <C>
Compensation $1,182,468 $ 370,938
Deferred commissions 1,643,996
Interest 519,517 390,361
Service contracts 534,725 280,000
Other 1,159,301 911,529
---------- ----------
$5,040,007 $1,952,828
========== ==========
</TABLE>
<PAGE> 19
I - DEBT
A summary of debt at April 30, 1999 is as follows:
<TABLE>
<CAPTION>
Revolving Credit Facilities
---------------------------------------------------------------------------------------------------------------
Facility Interest Primary Balance at
Borrower Lender Amount Rate Maturity Collateral April 30, 1999
---------- --------------- ----------- ------------- ---------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Paaco Finova $60 million Prime + 3.00% Jun 2000 Finance rec. $ 41,823,680
Car-Mart Bank of America $30 million Prime + 1.13% Jan 2002 Finance rec. 25,176,594
Concorde Bank One $20 million Libor + 2.00% Sep 1999 Mortgage loans 7,191,101
Precision Wells Fargo $5 million Prime Jun 2000 IBC's and rec. 4,736,746
------------
$ 78,928,121
============
</TABLE>
<TABLE>
<CAPTION>
Other Notes Payable
--------------------------------------------------------------------------------------------------------------
Facility Interest Primary Balance at
Borrower Lender Amount Rate Maturity Collateral April 30, 1999
----------- -------------- ----------- ------------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Crown Car-Mart sellers N/A 8.50% Jan 2004 Finance rec $ 7,500,000
Crown Bank of America N/A 7.00% Apr 2001 Equipment 1,158,000
Home Stay Bank of Pensacola N/A 8.50% Feb 2004 Real estate 5,388,417
Precision South Trust Bank N/A 7.35% Jan 2014 Real estate 673,787
Paaco Texas Commerce N/A 8.50% May 2003 Real estate 939,905
Paaco Heller Financial N/A Prime + 2.25% Dec 2015 Real estate 617,595
Paaco Various N/A Various Various None 981,840
-----------
$17,259,544
===========
</TABLE>
Interest is payable monthly or quarterly on all of the Company's debt. The
loan agreements relating to certain of the above described debt contain various
reporting and performance covenants including (i) maintenance of certain
financial ratios and tests, (ii) limitations on borrowings from other sources,
(iii) restrictions on certain operating activities, and (iv) restrictions on the
payment of dividends. The amount of restricted net assets of the Company's
subsidiaries as of April 30, 1999 was approximately $23 million. The Company was
in compliance with the loan agreements as of April 30, 1999, except for certain
matters for which the respective lender waived compliance with such covenants.
As a result of the investigation of accounting errors and irregularities at
Paaco, it was discovered that Paaco was in breach of certain loan covenants and
had exceeded its maximum available advances under its principal credit facility.
However, Paaco has received waivers of each covenant violation and has entered
into a forbearance agreement with its principal lender. The forbearance
agreement affords Paaco a period of nine months to gradually come into
compliance with the availability provisions and leverage ratio of the original
agreement. Paaco is presently in compliance with the forbearance agreement and
expects to come into compliance with the original agreement within the nine
month period provided in the forbearance agreement.
A summary of future minimum principal payments required under the
aforementioned debt as of April 30,1999 is as follows:
<TABLE>
<CAPTION>
Years Ended
April 30, Amount
----------- -----------
<S> <C>
2000 $ 7,790,074
2001 48,118,011
2002 25,911,670
2003 294,183
2004 13,019,672
Thereafter 1,054,055
-----------
$96,187,665
===========
</TABLE>
<PAGE> 20
J - INCOME TAXES
The Company files a consolidated federal income tax return with its 80% or
more owned subsidiaries. The provision (benefit) for income taxes for the fiscal
years ended April 30, 1999, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
Years Ended April 30,
1999 1998 1997
----------- ----------- -----------
(Restated)
<S> <C> <C> <C>
Provision (benefit) for income taxes
Current $ 9,945,622 $(1,041,373) $ 335,000
Deferred (944,961) 950,343 (2,275,000)
----------- ----------- -----------
$ 9,000,661 $ (91,030) $(1,940,000)
=========== =========== ===========
</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,
1999 1998 1997
----------- ----------- -----------
(Restated)
<S> <C> <C> <C>
Tax provision at statutory rate $ 9,085,157 $ 220,052 $ 2,352,761
Equity in earnings of unconsolidated subsidiaries (440,907) (315,043)
Basis difference in SCGC stock (4,254,558)
Goodwill amortization 273,749 52,591
Other, net 82,662 (48,630) (38,203)
----------- ----------- -----------
$ 9,000,661 $ (91,030) $(1,940,000)
=========== =========== ===========
</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, 1999 and 1998
were as follows:
<TABLE>
<CAPTION>
April 30,
1999 1998
---------- ----------
(Restated)
<S> <C> <C>
Deferred tax liabilities:
Unrealized gain on securities $ 994,500
Allowance for loan losses $ 63,502 1,634,165
Tax over book depreciation 1,680,557 884,132
Other 679,750 443,034
---------- ----------
Total 2,423,809 3,955,831
---------- ----------
Deferred tax assets:
Finance receivable valuation discount 371,047 241,543
Reserves 220,418 239,290
Net operating loss 798,399 1,570,685
Other 236,508 49,255
---------- ----------
Total 1,626,372 2,100,773
---------- ----------
Net deferred tax liability $ 797,437 $1,855,058
========== ==========
</TABLE>
In fiscal 1999 and 1997 the Company utilized approximately $2.1 million and
$1.4 million of net operating loss carryforwards in determining its federal
income tax provision. At April 30, 1999 Paaco had a net operating loss
carryforward of approximately $2.2 million available to offset future PAACO
taxable income. The net operating loss carryforward expires in 2013.
<PAGE> 21
K - CAPITAL STOCK
Effective May 1, 1998 the Company issued 375,000 and 288,027 shares of its
common stock in the purchases of an additional 12% interest in Paaco and an
additional 20% interest in Precision, respectively (see Note C and Note T).
Furthermore, in June 1998 the Company issued 169,941 shares of its common stock
to Nomura Holding America, Inc. ("Nomura") in connection with Nomura's full
exercise of a warrant held by them to purchase 508,414 shares of the Company's
common stock. Nomura exercised the warrant pursuant to its "cashless exercise"
feature. Effective February 1, 1999 the Company issued 257,811 shares of its
common stock as partial consideration in the purchase of an additional 15%
interest in Paaco. Also effective February 1, 1999 the Company issued 37,500
shares of its common stock in satisfaction of a liability in connection with the
May 1, 1998 purchase of an additional 12% interest in Paaco.
In March 1996 the Company's Board of Directors approved a program, as
amended, to repurchase up to 4,000,000 shares of the Company's common stock from
time to time in the open market. At April 30, 1999 the Company had repurchased
2,876,648 shares pursuant to this program. The timing and amount of future share
repurchases, if any, will depend on various factors including market conditions,
available alternative investments and the Company's financial position.
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.
L - COMPREHENSIVE INCOME INFORMATION
Supplemental comprehensive income disclosures for the years ended April 30,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Years Ended April 30,
1999 1998
----------- -----------
<S> <C> <C>
Gross unrealized appreciation of
securities arising during period $21,804,008 $ 2,925,000
Provision for income taxes 7,631,403 994,500
----------- -----------
Unrealized appreciation of securities
arising during period, net of tax $14,172,605 1,930,500
=========== ===========
</TABLE>
Changes to unrealized appreciation of securities on a net of tax basis for
the years ended April 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Years Ended April 30,
1999 1998
------------ ------------
<S> <C> <C>
Balance at beginning of period $ 1,930,500 $ --
Unrealized appreciation of securities
arising during period 14,172,605 1,930,500
Less realized gain included in net income (16,103,105)
------------ ------------
Balance at end of period $ -- $ 1,930,500
============ ============
</TABLE>
<PAGE> 22
M - EARNINGS PER SHARE
A summary of the reconciliation from basic earnings per share to diluted
earnings per share for the years ended April 30, 1999, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
Years Ended April 30,
1999 1998 1997
----------- ----------- -----------
(Restated)
<S> <C> <C> <C>
Net income $17,508,410 $ 367,166 $ 8,859,885
=========== =========== ===========
Average shares outstanding - basic 10,095,614 9,829,392 10,868,119
Dilutive options 288,469 76,427 158,958
Dilutive warrants 16,421
----------- ----------- -----------
Average shares outstanding - diluted 10,400,504 9,905,819 11,027,077
=========== =========== ===========
Earnings per share:
Basic $ 1.73 $ 0.04 $ 0.82
Diluted $ 1.68 $ 0.04 $ 0.80
Antidilutive securities not included:
Options 420,000 516,068 547,000
=========== =========== ===========
Warrants 391,198 899,612 1,184,246
=========== =========== ===========
</TABLE>
N - 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, 1999 and 1998 there were 202,500 and 915,000 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 2001
through 2008.
The following is an aggregate summary of the activity in the Company's stock
option plans from April 30, 1996 to April 30, 1999:
<TABLE>
<CAPTION>
Number Exercise Price Proceeds
of Shares Per Share on Exercise
--------- -------------- -----------
<S> <C> <C> <C>
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
Granted 717,500 $3.13 to $5.50 3,197,031
Exercised (25,000) $1.55 (38,672)
Canceled (5,000) $3.31 (16,563)
--------- -----------
Outstanding at April 30, 1999 1,445,000 $0.41 to $7.38 $ 5,546,952
========= ===========
</TABLE>
<PAGE> 23
A summary of stock options outstanding as of April 30, 1999 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 $1.41 87,500 3.94 $1.29
$2.44 to $4.03 937,500 7.31 3.26
$5.50 to $7.38 420,000 9.28 5.65
---------
$0.41 to $7.38 1,445,000 7.68 $3.84
=========
</TABLE>
All of the above options were exercisable at April 30, 1999 with the
exception of options to purchase 280,000 shares at $5.50 per share. Such shares
become exercisable in 1999 through 2002 and expire in 2008.
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 certain valuation techniques with the assumptions detailed
below:
<TABLE>
<CAPTION>
Years Ended April 30,
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Pro forma net income $ 16,808,848 $ 281,391 $ 8,800,827
Pro forma earnings per share:
Basic $ 1.66 $ 0.03 $ 0.81
Diluted $ 1.62 $ 0.03 $ 0.80
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>
Warrants
As of April 30, 1999 the Company had stock purchase warrants
outstanding to purchase 100,000 shares of the Company's common stock at prices
ranging from $6.00 to $7.25 per share. In May 1999 warrants to purchase 50,000
shares were exercised on a "cashless basis" whereby the Company issued 2,000
shares of its common stock in full satisfaction of its obligations.
<PAGE> 24
O - 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, 1999 and
1998:
<TABLE>
<CAPTION>
April 30, 1999 April 30, 1998
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $12,910,535 $12,910,535 $ 6,481,706 $ 6,481,706
Marketable equity securities 4,742,180 4,742,180
Mortgage loans held for sale 10,636,933 11,115,595 14,350,437 15,067,959
Finance receivables 88,424,897 84,003,652 32,222,113 32,222,113
Revolving credit facilities 78,928,121 78,928,121 41,164,524 41,164,524
Other note payable 17,259,544 17,259,544 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 was estimated based on management's
knowledge of the sale of other finance receivable portfolios
within the sub-prime auto industry.
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>
P - LEASES
The Company has certain operating leases for equipment and its dealerships,
payment centers and office facilities. As of April 30, 1999 the aggregate
rentals due under such non-cancelable operating leases with remaining lease
terms in excess of one year were as follows:
<TABLE>
<CAPTION>
Years Ended
April 30, Amount
----------- ----------
<S> <C>
2000 $2,506,902
2001 2,198,161
2002 1,550,490
2003 1,343,833
2004 809,507
</TABLE>
Rent expense for all operating leases was approximately $2,077,000, $467,000
and $136,000 during fiscal 1999, 1998 and 1997, respectively.
<PAGE> 25
Q - RELATED PARTY TRANSACTIONS
In March 1999 the Company paid an outside director $30,000 as a fee in
connection with providing certain consulting services related to its used car
sales and finance businesses.
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 1999 and 1998, in exchange for a fee, Paaco sold approximately
$2,558,000 and $608,000, respectively 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.
During fiscal 1999 and 1998 certain family members of the minority
shareholders of Paaco loaned money to Paaco at interest rates ranging from 15 to
18%. At April 30, 1999 all of such loans had been repaid.
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).
R - COMMITMENTS AND CONTINGENCIES
Mortgage Loan Sales
In connection with the Company's sale of mortgage loans in the ordinary
course of business, in certain circumstances such loan sales involve limited
recourse to the Company for up to the first twelve months following the sale.
Generally, the events which could give rise to these recourse provisions involve
the prepayment or foreclosure of a loan, and violations of customary
representations and warranties. If the recourse provisions are triggered the
Company may be required to refund all or part of the premium received on the
sale of such loan, and in some cases the Company may be required to repurchase
the loan. Periodically the Company estimates the potential exposure related to
such recourse provisions and accrues a percentage of the total potential
liability.
Severance Agreements
The Company has entered into severance agreements with its three executive
officers which provide for payments to the executives in the event of their
termination after a change in control, as defined, of the Company. The
agreements provide, among other things, for a compensation payment equal to 2.99
times the annual compensation paid to the executive, as well as accelerated
vesting of any unvested options under the Company's stock option plans, in the
event of such executive's termination in connection with a change in control.
Litigation
In the ordinary course of business, the Company has become a defendant in
various types of legal proceedings. Although the Company cannot determine at
this time the amount of the ultimate exposure from these lawsuits, if any,
management, based on the advice of counsel, does not expect the final outcome of
any of these actions, individually or in the aggregate, to have a material
adverse effect on the Company's financial position or results of operations.
Investment Fund
In November 1998 the Company committed $2.0 million to Monarch Venture
Partners' Fund I, L.P. ("Monarch"), a private venture capital fund focusing on
high technology businesses, such as Internet related concerns. As of April 30,
1999 the Company had funded approximately $.7 million of its $2.0 million
commitment. The Company expects it will fund the remaining $1.3 million over the
next 12 months. Principals of Monarch assisted the Company in its investment in
Inktomi common stock (see Note D) and one of the Monarch principals is the 20%
minority shareholder of Home Stay.
<PAGE> 26
S - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures for the fiscal years ended April 30, 1999,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Years Ended April 30,
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Issuance of notes in Car-Mart acquisition $ 7,500,000
Value of stock issued in acquisitions 4,423,973
Stock received for sale of second 50% interest in SCGC $ 12,025,000
Interest paid, net of amount capitalized 6,637,102 1,356,075 68,757
Income taxes paid 5,632,986 925,000
Inventory acquired in repossession 12,570,596 1,710,220
Conversion of portion of CMN note to equity 2,516,493
</TABLE>
In connection with the Company's purchase of Car-Mart, Paaco and Precision,
assumed liabilities were as follows:
<TABLE>
<CAPTION>
Car-Mart Paaco Precision
------------ ------------ ------------
(Restated)
<S> <C> <C> <C>
Fair value of assets acquired $ 44,592,839 $ 46,391,955 $ 8,258,112
Cash paid for capital stock and costs (34,514,029) (9,174,212) (4,032,389)
Note issued for capital stock (7,500,000)
Minority interests (2,062,337) (128,461)
------------ ------------ ------------
Liabilities assumed $ 2,578,810 $ 35,155,406 $ 4,097,262
============ ============ ============
</TABLE>
T - SUBSEQUENT EVENT
In July 1999, upon discovering certain accounting errors and irregularities
at Paaco, the Company and the shareholders from whom the Company purchased an
interest in Paaco amended and restated the three prior purchase agreements such
that the Company received approximately $4 million in consideration and an
additional 5% interest in Paaco. The consideration consisted of (i) 315,046
shares of the Company's common stock, (ii) a commitment to deliver 355,265
shares of the Company's common stock by April 30, 2000, or, in the absence of
receiving such shares, a commitment to deliver a promissory note in the amount
of $1,776,325, (iii) the assignment of $600,000 of promissory notes issued by
Paaco, (iv) the issuance of $323,437 in promissory notes, and (v) an additional
5% interest in Paaco. The Company has recorded the fair value of the
consideration received as a reduction of goodwill in July 1999.
<PAGE> 27
U - BUSINESS SEGMENTS
Operating results and other financial data are presented for the four
principal business segments of the Company for the years ended April 30, 1999
and 1998. These segments are categorized by the lines of business of the
Company. The segments include (i) automobile, which pertains to Car-Mart's and
Paaco's selling and financing of used vehicles, (ii) IBC's, which pertains to
Precision's rental and sales of intermediate bulk containers, (iii) mortgage,
which pertains to Concorde's originating and selling of sub-prime mortgage
loans, and (iv) other, which includes corporate operations, Home Stay, Crown El
Salvador, activities of relatively inactive subsidiaries and the Company's
equity investments in Atlantic Castings and CMN. The Company's business segment
data for the years ended April 30, 1999 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended April 30, 1999
------------------------------------------------------------------------------
Automobile IBC's Mortgage Other Eliminations Consolidated
---------- -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other $ 87,121 $ 5,237 $ 4,634 $ 973 $ 97,965
Interest income 10,638 19 1,616 1,867 $ (819) 13,321
-------- -------- -------- -------- --------- --------
Total 97,759 5,256 6,250 2,840 (819) 111,286
-------- -------- -------- -------- --------- --------
Costs and expenses:
Cost of sales 55,265 1,865 57,130
Selling, gen. and admin 19,354 1,716 4,498 3,916 29,484
Prov. for credit losses 15,251 83 164 15,498
Interest expense 5,771 377 1,187 250 (819) 6,766
Depreciation and amort 433 707 161 1,098 2,399
-------- -------- -------- -------- --------- --------
Total 96,074 4,748 6,010 5,264 (819) 111,277
-------- -------- -------- -------- --------- --------
Security gains and other 25,949 25,949
-------- -------- -------- -------- --------- --------
Income before taxes
and minority interests $ 1,685 $ 508 $ 240 $ 23,525 $ -- $ 25,958
======== ======== ======== ======== ========= ========
Capital expenditures $ 897 $ 4,498 $ 324 $ 10,594 $ -- $ 16,313
======== ======== ======== ======== ========= ========
Total assets $106,785 $ 14,031 $ 12,646 $ 77,316 $ (42,643) $168,135
======== ======== ======== ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended April 30, 1998 (Restated)
-------------------------------------------------------------------------------
Automobile IBC's Mortgage Other Eliminations Consolidated
---------- -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other $ 14,241 $ 1,351 $ 1,100 $ 1,105 $ 17,797
Interest income 1,491 815 1,472 $ (388) 3,390
-------- -------- -------- -------- -------- --------
Total 15,732 1,351 1,915 2,577 (388) 21,187
-------- -------- -------- -------- -------- --------
Costs and expenses:
Cost of sales 8,472 628 9,100
Selling, gen. and admin 3,363 235 2,042 2,928 8,568
Prov. for credit losses 1,744 4 52 1,800
Interest expense 942 81 586 14 (388) 1,235
Depreciation and amort 64 122 42 574 802
-------- -------- -------- -------- -------- --------
Total 14,585 1,070 2,722 3,516 (388) 21,505
-------- -------- -------- -------- -------- --------
Security gains and other 965 965
-------- -------- -------- -------- -------- --------
Income (loss) before taxes
and minority interests $ 1,147 $ 281 $ (807) $ 26 $ -- $ 647
======== ======== ======== ======== ======== ========
Capital expenditures $ 1,648 $ 1,057 $ 568 $ 788 $ -- $ 4,061
======== ======== ======== ======== ======== ========
Total assets $ 42,935 $ 9,337 $ 16,211 $ 44,376 $(20,656) $ 92,203
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE> 28
V - RESTATEMENT
In connection with the April 30, 1999 year end closing process and subsequent
analyses performed, the Company identified certain accounting errors and
irregularities at Paaco relating principally to finance receivables, inventory
and drafts payable. Such errors and irregularities existed at and subsequent to
the Company's purchase of a 53% interest in Paaco on February 1, 1998. To
correct for such errors and irregularities, the Company has restated its
previously issued consolidated financial statements for the year ended April 30,
1998 and will file amended quarterly reports on Form 10-Q with respect to the
fiscal quarters during the year ended April 30, 1999. A summary of the impact of
these corrections on the Company's fiscal 1998 consolidated financial statements
is set forth below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended April 30, 1998
-------------------------
As Previously As
Reported Restated
------------- ----------
<S> <C> <C>
Revenues $21,215 $21,188
Income before taxes and minority interests 556 647
Net income 348 367
Earnings per share (diluted) $ .04 $ .04
</TABLE>
<TABLE>
<CAPTION>
April 30, 1998
-----------------------
As Previously As
Reported Restated
------------- --------
<S> <C> <C>
Finance receivables, net $36,050 $33,918
Goodwill 9,614 10,632
Total assets 93,677 92,202
Accounts payable 2,015 2,514
Deferred income taxes 2,962 1,855
Total liabilities 55,197 54,589
Minority interests 3,448 2,562
Stockholders' equity 35,032 35,051
</TABLE>
W - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of the Company's quarterly results of operations for the years
ended April 30, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended April 30, 1999
-------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue, as previously reported (a) $21,070 $19,750 $23,289
Revenue, as restated (a) 21,070 19,750 23,289 $ 47,177 $111,286
Net income, as previously reported (b) $ 1,007 $ 501 $12,587
Net income, as restated (b) 766 46 11,855 $ 4,841 $ 17,508
EPS, as previously reported (b) $ .10 $ .05 $ 1.21
EPS, as restated (b) .07 .00 1.14 $ .47 $ 1.68
</TABLE>
<TABLE>
<CAPTION>
Year Ended April 30, 1998 (Restated)
-------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
(Restated) (Restated)
<S> <C> <C> <C> <C> <C>
Revenue (c) $ 494 $ 556 $ 1,165 $18,973 $21,188
Net income (loss) (309) (51) 14 713 367
EPS (.03) (.01) .00 .07 .04
</TABLE>
<PAGE> 29
a - Late in the third quarter in the year ended April 30, 1999, the Company
acquired Car-Mart which caused revenues to increase significantly in the
fourth quarter of such year.
b - During the third and fourth quarter in the year ended April 30, 1999, the
Company sold all of its shares of Inktomi Corporation common stock which
resulted in significant gains during such periods.
c - During the fourth quarter in the year ended April 30, 1998 the Company
acquired Paaco and Precision which caused revenues to increase
significantly.
<PAGE> 30
REPORT OF INDEPENDENT ACCOUNTANTS CROWN GROUP, INC.
Shareholders and Board of Directors
Crown Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive income, stockholders'
equity and of cash flows, after the restatement described in Note V, present
fairly, in all material respects, the financial position of Crown Group, Inc.
and its subsidiaries at April 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
April 30, 1999, 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.
Dallas, Texas PricewaterhouseCoopers LLP
August 12, 1999
<PAGE> 31
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") National
Market Systems 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 1999 Fiscal 1998
High Low High Low
----- ----- ----- -----
<S> <C> <C> <C> <C>
First quarter $4.88 $3.38 $2.56 $2.00
Second quarter 4.25 3.00 4.00 2.38
Third quarter 7.75 4.00 3.56 3.00
Fourth quarter 7.88 5.13 4.31 3.00
</TABLE>
As of August 9, 1999 there were approximately 1,491 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,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Restated)
<S> <C> <C> <C> <C> <C>
Revenues $111,286 $ 21,188 $ 2,030 $ 2,293 $ 177
Net income (loss) $ 17,508 $ 367 $ 8,860 $ 12,298 $(20,325)
Earnings (loss) per share (diluted): $ 1.68 $ 0.04 $ 0.80 $ 1.03 $ (2.01)
Total assets $168,135 $ 92,203 $ 38,237 $ 39,329 $ 54,507
Total debt 96,187 46,035 987 31,660
Stockholders' equity 53,059 35,051 35,713 30,153 17,930
Shares outstanding 10,097 9,434 10,395 11,650 11,678
</TABLE>
<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.
America's Car-Mart, Inc.
CG Incorporated, SA de CV
Atlantic Castings, Inc.
Casino Magic Neuquen S.A.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby 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, 33-41960, 33-22590, 33-71090 and 333-38475) of our report
dated August 12, 1999, relating to the consolidated financial statements, which
appears in the Annual Report to Shareholders, which is incorporated in this
Annual Report on Form 10-K. We also consent to the incorporation by reference of
our report dated August 12, 1999 relating to the financial statement schedule,
which appears in this Form 10-K.
Dallas, Texas PricewaterhouseCoopers LLP
August 13, 1999
<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 12, 1999 (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, this financial statement schedule, after the restatement
described in Note D, presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
Dallas, Texas PricewaterhouseCoopers LLP
August 12, 1999
<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 and Exchange Act of 1934, the Annual Report on Form 10-K for CROWN
GROUP, INC. for the fiscal year ended April 30, 1999 and to file the same with
the Securities and Exchange Commission and National Association of Securities
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, 1999.
/s/ Edward R. McMurphy
-----------------------------
EDWARD R. MCMURPHY
ACKNOWLEDGMENT
Before me this 10th day of August, 1999, 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, TILMAN J. FALGOUT, III, 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 and Exchange Act of 1934, the Annual Report on Form 10-K for CROWN
GROUP, INC. for the fiscal year ended April 30, 1999 and to file the same with
the Securities and Exchange Commission and National Association of Securities
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, 1999.
/s/ Tilman J. Falgout, III
--------------------------------
TILMAN J. FALGOUT, III
ACKNOWLEDGMENT
Before me this 10th day of August, 1999, came TILMAN 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 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 and
Exchange Act of 1934, the Annual Report on Form 10-K for CROWN GROUP, INC. for
the fiscal year ended April 30, 1999 and to file the same with the Securities
and Exchange Commission and National Association of Securities 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, 1999.
/s/ David J. Douglas
--------------------------------
DAVID J. DOUGLAS
ACKNOWLEDGMENT
Before me this 10th day of August, 1999, 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/ April May
--------------------------------
NOTARY PUBLIC
<PAGE> 1
EXHIBIT 24.4
STATE OF ALABAMA )
)
COUNTY OF BALDWIN )
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 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 and
Exchange Act of 1934, the Annual Report on Form 10-K for CROWN GROUP, INC. for
the fiscal year ended April 30, 1999 and to file the same with the Securities
and Exchange Commission and National Association of Securities 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, 1999.
/s/ J. David Simmons
--------------------------------
J. DAVID SIMMONS
ACKNOWLEDGMENT
Before me this 11th day of August, 1999, 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/ T. L. Hall
--------------------------------
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 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 and
Exchange Act of 1934, the Annual Report on Form 10-K for CROWN GROUP, INC. for
the fiscal year ended April 30, 1999 and to file the same with the Securities
and Exchange Commission and National Association of Securities 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, 1999.
/s/ Gerald L. Adams
--------------------------------
GERALD L. ADAMS
ACKNOWLEDGMENT
Before me this 11th day of August, 1999, 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/ April May
--------------------------------
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 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 and
Exchange Act of 1934, the Annual Report on Form 10-K for CROWN GROUP, INC. for
the fiscal year ended April 30, 1999 and to file the same with the Securities
and Exchange Commission and National Association of Securities 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 13th day of
August, 1999.
/s/ GERARD M. JACOBS
--------------------------------
GERARD M. JACOBS
ACKNOWLEDGMENT
Before me this 13th day of August, 1999, 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 NEVADA )
)
COUNTY OF CLARK )
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 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 and
Exchange Act of 1934, the Annual Report on Form 10-K for CROWN GROUP, INC. for
the fiscal year ended April 30, 1999 and to file the same with the Securities
and Exchange Commission and National Association of Securities 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, 1999.
/s/ ROBERT J. KEHL
--------------------------------
ROBERT J. KEHL
ACKNOWLEDGMENT
Before me this 11th day of August, 1999, 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/ BARBARA RAY
--------------------------------
NOTARY PUBLIC
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> APR-30-1999
<CASH> 12,910,535
<SECURITIES> 0
<RECEIVABLES> 118,905,028
<ALLOWANCES> (17,270,663)
<INVENTORY> 9,290,272
<CURRENT-ASSETS> 0
<PP&E> 23,991,437
<DEPRECIATION> (1,936,263)
<TOTAL-ASSETS> 168,134,579
<CURRENT-LIABILITIES> 0
<BONDS> 96,187,665
0
0
<COMMON> 100,968
<OTHER-SE> 52,957,916
<TOTAL-LIABILITY-AND-EQUITY> 168,134,579
<SALES> 89,731,527
<TOTAL-REVENUES> 111,286,215
<CGS> 57,129,838
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 31,883,281
<LOSS-PROVISION> 15,498,111
<INTEREST-EXPENSE> 6,766,258
<INCOME-PRETAX> 25,957,591
<INCOME-TAX> 9,000,661
<INCOME-CONTINUING> 17,508,410
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,508,410
<EPS-BASIC> 1.73
<EPS-DILUTED> 1.68
</TABLE>
