<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-KA
AMENDMENT NO. 1
[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, 1998 0-14939
CROWN GROUP, INC.
(Exact name of registrant as specified in its charter)
TEXAS 63-0851141
(State or other jurisdiction of (I.R.S. Employer Identification No.)
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 10, 1998 the aggregate market value of the voting stock held by
non-affiliates (all persons other than executive officers, directors and
holder's of 5% or more of the Registrant's common stock) of the Registrant
(7,516,394 shares) was $26,777,154.
As of August 10, 1998 there were 10,243,731 shares of the Registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Annual Report to Stockholders for the year ended
April 30, 1998 are incorporated by reference into Part II of this report.
1
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PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is included in the Company's 1998 Annual
Report under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and such information is incorporated herein
by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements included in the Company's 1998 Annual Report are
incorporated herein by reference.
The Company owns a 49% interest in Casino Magic Neuquen S.A. ("CMN"). CMN's
financial results are not consolidated with the Company, but rather are
accounted for on the equity method. Following are the consolidated financial
statements of CMN as of December 31, 1997 and April 30, 1998 (unaudited)
together with the report of independent public accountants.
2
<PAGE> 3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Casino Magic Neuquen S.A.:
We have audited the accompanying consolidated balance sheet of Casino Magic
Neuquen S.A. (a majority-owned subsidiary of Casino Magic Corp.) and subsidiary
as of December 31, 1997 and the related consolidated statements of operations,
shareholders' equity, and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Casino Magic Neuquen
S.A. and subsidiary as of December 31, 1997, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
New Orleans, Louisiana Arthur Andersen LLP
March 6, 1998
3
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CASINO MAGIC NEUQUEN S.A.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, 1998 December 31,
Assets (Unaudited) 1997
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 2,358,052 $ 1,312,969
Other receivables 394,893 540,326
Inventories 54,501 54,501
------------ ------------
Total current assets 2,807,446 1,907,796
Property and equipment:
Machinery and equipment 1,536,852 1,371,698
Furniture, fixtures and equipment 231,213 219,786
Transportation equipment 74,953 96,733
------------ ------------
1,843,018 1,688,217
Less accumulated depreciation (651,779) (544,074)
------------ ------------
1,191,239 1,144,143
Concession costs, net of accumulated amortization of $3,162,983
and $2,846,685, respectively 8,223,757 8,540,055
Organization and development costs, net of accumulated
amortization of $1,409,754 and $1,277,599, respectively 317,129 522,055
------------ ------------
$ 12,539,571 $ 12,114,049
============ ============
Liabilities and Shareholders' Equity
Accounts payable $ 121,899 $ 67,063
Payroll and payroll taxes 373,114 237,407
Taxes payable 1,326,113 869,820
Other liabilities 295,411 422,016
Payables to Shareholders 134,321 278,332
------------ ------------
Total current liabilities 2,250,858 1,874,638
Notes payable to Shareholders 1,358,182 2,398,050
Minority interest (86) (932)
Shareholders' equity:
Common stock, par value $1.00 per share, 3,917,000
shares authorized, issued and outstanding 3,917,000 3,917,000
Additional paid-in-capital 2,777,957 21,142,000
Premium not yet paid in -- (18,364,043)
Earnings reserved 37,569 37,569
Retained earnings 2,198,091 1,109,767
------------ ------------
Total shareholders' equity 8,930,617 7,842,293
------------ ------------
$ 12,539,571 $ 12,114,049
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
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CASINO MAGIC NEUQUEN S.A.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Unaudited
Four Months Ended
April 30, Year Ended
1998 1997 December 31, 1997
------------ ------------ -----------------
<S> <C> <C> <C>
Revenues:
Casino $ 6,078,062 $ 5,411,106 $ 16,241,138
Food and beverage 452,773 460,040 1,183,609
------------ ------------ ------------
6,530,835 5,871,146 17,424,747
Costs and expenses:
Casino 2,929,577 2,845,427 9,042,634
Food and beverage 408,102 348,841 1,042,524
Selling, general and administrative 972,726 1,054,650 2,691,455
Depreciation and amortization 569,952 602,852 1,823,404
------------ ------------ ------------
4,880,357 4,851,770 14,600,017
------------ ------------ ------------
Operating income 1,650,478 1,019,376 2,824,730
Other income (expense):
Interest expense (54,659) (247,926) (652,459)
Interest income 21,465 14,921 35,811
Other (68,816) (98,766) (112,042)
------------ ------------ ------------
(102,010) (331,771) (728,690)
Minority interest (114) 438 960
Income before income taxes 1,548,354 688,043 2,097,000
Provision for income taxes 460,030 232,489 708,679
------------ ------------ ------------
Net income $ 1,088,324 $ 455,554 $ 1,388,321
============ ============ ============
Earnings per share $ 0.28 $ 0.81 $ 1.23
============ ============ ============
Weighted average common shares outstanding 3,917,000 560,000 1,130,230
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
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CASINO MAGIC NEUQUEN S.A.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Additional Retained Shareholders'
Common Paid-In Earnings Legal Equity
Stock Capital (Deficit) Reserve (Deficit)
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 560,000 $ 1,000,000 $ (240,985) $ -- $ 1,319,015
Issuance of common stock 3,357,000 20,142,000 -- -- 23,499,000
Premium not yet paid in -- (18,364,043) -- -- (18,364,043)
Appropriation of retained earnings (37,569) 37,569 --
Net income -- -- 1,388,321 -- 1,388,321
-------------- ------------ ------------ ------------ ------------
Balance at December 31, 1997 3,917,000 2,777,957 1,109,767 37,569 7,842,293
-------------- ------------ ------------ ------------ ------------
Net income (unaudited) -- -- 1,088,324 -- 1,088,324
-------------- ------------ ------------ ------------ ------------
Balance at April 30, 1998 (unaudited) $ 3,917,000 $ 2,777,957 $ 2,198,091 $ 37,569 $ 8,930,617
============== ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
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CASINO MAGIC NEUQUEN S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Unaudited
Four Months Ended
April 30, Year Ended
1998 1997 December 31, 1997
----------- ----------- -----------------
<S> <C> <C> <C>
Operating activities:
Net income $ 1,088,324 $ 455,554 $ 1,388,321
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 569,952 602,852 1,823,404
Minority interest 846 512 178
Changes in assets and liabilities:
Receivables 145,433 (151,461) (429,385)
Inventories -- -- (20,389)
Accounts payable and accrued liabilities (7,196) (1,142,100) (1,034,649)
Taxes payable 456,293 193,525 725,856
----------- ----------- -----------
Net cash provided (used) by operating activities 2,253,652 (41,118) 2,453,336
----------- ----------- -----------
Investing activities:
Purchase of equipment (79,766) (19,975) (545,297)
Organization and development costs (16,058) -- (203,159)
----------- ----------- -----------
Net cash used by investing activities (95,824) (19,975) (748,456)
----------- ----------- -----------
Financing activities:
Issuance of common stock -- -- 5,134,957
Payables to shareholders (1,176,683) (1,016,856) (7,739,411)
Other proceeds from issuance of debt 63,938 209,347 317,797
----------- ----------- -----------
Net cash used by financing activities (1,112,745) (807,509) (2,286,657)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 1,045,083 (868,602) (581,777)
Cash and cash equivalents at beginning of period 1,312,969 1,894,746 1,894,746
----------- ----------- -----------
Cash and cash equivalents at end of period $ 2,358,052 $ 1,026,144 $ 1,312,969
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
CASINO MAGIC NEUQUEN S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND APRIL 30, 1998 (UNAUDITED)
1. HISTORY AND DESCRIPTION OF BUSINESS
In December 1994 Casino Magic Corp. ("CMC"), a United States based casino
company, was the successful bidder pursuant to an international call for bids to
manage and operate two casino properties owned by the Province of Neuquen,
Argentina (the "Province"). Pursuant to the bid requirements, CMC was then
required to form a new corporation to become a party to the concession contract
with the Province. Accordingly, in December 1994 CMC formed Casino Magic Neuquen
S.A. (the "Company") to manage and operate the Province's two casinos located in
the cities of Neuquen and San Martin de los Andes (collectively, the "Casinos").
The Casinos are managed pursuant to an exclusive twelve-year concession contract
that provides for certain renewal options (see Note 3). The Company was a 99.9%
majority-owned subsidiary of the CMC until June 1997 (see below and Note 8). The
Company began operating the Casinos in January 1995.
On June 2, 1997 Crown Group, Inc. ("Crown"), a United States based holding
company, acquired 49% of the common stock of the Company, as well as interests
in certain other assets and contracts related to the Company, from the CMC. From
that date the Company is owned 51% by CMC and 49% by Crown (collectively the
"Shareholders").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates. The consolidated financial
statements include the accounts of Casino Magic Neuquen S.A. and its 99.9%
majority-owned subsidiary, Casino Magic Support Services S.A. ("CMSS"). All
significant intercompany accounts and transactions have been eliminated.
References to the Company include its subsidiary.
Cash and Cash Equivalents
The Company considers cash and all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Casino Revenues
In accordance with industry practice, the Company recognizes as casino revenues
the net win from gaming activities, which is the difference between gaming wins
and losses.
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 of property and equipment is computed using the
straight-line method over five years.
Concession Costs
Costs incurred to enter into the concession contract with the Province have been
capitalized and are being amortized over the twelve-year initial term of the
contract.
Organization and Development Costs
The Company incurred certain costs in connection with the organization and
development of the Company's business. These costs are being amortized using the
straight-line method over three years.
Common Stock
As of December 31, 1997 and April 30, 1998 the Company had 3,917,000 shares of
its common stock outstanding, of which 60,000 shares were registered. The
remaining shares are in the process of being registered.
Foreign Currency Translation
The Company keeps its accounting records in Argentine pesos, the legal tender in
the Republic of Argentina. The Company's financial statements have been
translated from its functional currency (Argentine pesos) into U.S. dollars in
accordance with Statement of Financial Accounting Standards No. 52 "Foreign
Currency Translation" ("SFAS No. 52") issued by the Financial Accounting
Standards Board. In general, SFAS No. 52 requires that assets and liabilities be
translated based upon the prevailing exchange rate in effect on the balance
sheet date. Revenues, expenses, gains and losses are translated based upon the
average exchange rate during the period. All throughout the periods presented
the prevailing exchange rate between the Argentine peso and the U.S. dollar was
1.00 to 1.00.
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<PAGE> 9
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.
Recent Accounting Pronouncements
Accounting for Start-up Costs. During April 1998, the Accounting Standards
Executive Committee of the AICPA issued Statement of Position 98-5 ("SOP"),
"Reporting on the Costs of Start-Up Activities." The SOP requires costs of
start-up activities and organization costs to be expensed as incurred. The SOP
is effective for financial statements for fiscal years beginning after December
15, 1998.
Accounting for Derivative Instruments and Hedging Activities. In June 1998, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities". The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. SFAS 133 is effective for fiscal years beginning
after June 15, 1999 and must be applied to instruments issued, acquired, or
substantively modified after December 31, 1997. The Company does not expect the
adoption of this accounting pronouncement to have a material effect on its
financial position or results of operations.
3. CONCESSION CONTRACT
On December 21, 1994 the Company entered into a concession contract (the
"Concession") with the Province which provides the Company with the exclusive
right to operate the Casinos, and any other casino located in the Province which
is within a 50 kilometer radius of either of the Casinos. The Company is
required to operate, manage, maintain and repair the Casinos and related
facilities during the term of the Concession. The Company may provide ancillary
goods and services related to the operation of the Casinos.
The twelve-year initial term may be extended by the Province at its option for a
period of up to ten years, provided the Company requests such extension two
years prior to the end of the initial term. Furthermore, should the Company,
individually or jointly with others, invest $5 million or more in hotel
infrastructure in the Province, the Concession term will automatically be
extended for a minimum of five additional years.
Pursuant to the Concession, the Company is required to pay the Province a
monthly rental equal to the greater of (i) $220,000, which amount will be
reduced $40,000 in the event the Company ceases to use the Neuquen facility in
the operation of the Neuquen casino, or (ii) five percent of the monthly average
net gaming revenue for the immediately preceding calendar year. In addition, the
Company pays the Province a tax of 2% of its net gaming revenue. The Province
has guaranteed the Company that no additional municipal or provincial taxes will
be levied on the Company's operations, and that existing municipal or provincial
taxes will not be increased. The Concession is not assignable and a transfer of
more than 49% of the Company's common stock is not permitted without the consent
of the Province.
4. TRANSACTIONS WITH SHAREHOLDERS
The Shareholders provide services to the Company under various agreements. Under
the Technical Assistance Agreement the Shareholders provide the Company with
certain expertise, technology, information and know-how in the course of
operating the Casinos for a fee equal to 3% of revenue. Under the Trademark and
Trade Name License Agreement, the Shareholders grant the Company a non-exclusive
license to use the trade name "Casino Magic" and related symbols and logotypes
in connection with the operation of the Casinos for a fee equal to 2% of
revenue. The Shareholders also lease certain slot machine equipment to the
Company for a fee of $44,000 per month. A summary of expenses incurred by the
Company pursuant to the above agreements are as follows:
<TABLE>
<CAPTION>
Four Months Ended
April 30,
Year Ended -------------------------
December 31, 1997 1998 1997
----------------- ---------- ----------
<S> <C> <C> <C>
Technical assistance $ 533,021 $ 199,067 $ 178,623
Royalties for trade name 355,348 132,700 119,082
Lease of slot machines 528,000 176,000 176,000
---------- ---------- ----------
$1,416,369 $ 507,767 $ 473,705
========== ========== ==========
</TABLE>
9
<PAGE> 10
Pursuant to Crown's Purchase of 49% of the Company and certain other assets as
described in Note 1, and as set forth in the purchase agreement of such shares,
the above mentioned commissions should be distributed as from June 1997 between
CMC and Crown in the following way:
- Technical Assistance Agreement: 83.6% to CMC and 16.4% to Crown
- Trademark and Trade Name License Agreement: 51% to CMC and 49% to Crown
- Slot machines lease Agreement: 51% to CMC and 49% to Crown
5. PAYABLES TO SHAREHOLDERS
The Company has certain payables to the Shareholders. The majority of
such monies due pertain to a loan made by CMC to the Company to fund the initial
cost of the Concession. Such loan is in the form of a note payable, which is due
no later than December 27, 2006, and bears interest at a rate equal to the prime
rate in the United States as published in the Wall Street Journal. Pursuant to
such loan the Company incurred interest expense of $652,459 during the year
ended December 31, 1997. In addition, the Company has accumulated non-interest
bearing balances due to the Shareholders as a result of the various agreements
with the Shareholders and other advances made by the Shareholders. The total
balances due to the Shareholders by the Company as of December 31, 1997 and
April 30, 1998 were as follows:
<TABLE>
<CAPTION>
December 31, 1997 April 30, 1998
----------------- --------------
<S> <C> <C>
Payables to Shareholders $ 278,332 $ 134,321
Notes payable to Shareholders 2,398,050 1,358,182
------------ ------------
$ 2,676,382 $ 1,492,503
============ ============
</TABLE>
Pursuant to Crown's Purchase of 49% of the Company and certain other assets as
described in Note 1, and as set forth in the purchase agreement of such shares,
the payables described above are due 51% to CMC and 49% to Crown.
6. INCOME TAXES
The provisions for income taxes were as follows:
<TABLE>
<CAPTION>
Four Months Ended
April 30,
Year Ended -----------------------------
December 31, 1997 1998 1997
----------------- ------------ ----------
<S> <C> <C> <C>
Current $ 708,679 $ 460,030 $ 232,489
Deferred - - -
----------- ------------ ----------
$ 708,679 $ 460,030 $ 232,489
============ ============ ==========
</TABLE>
7. LITIGATION
Customs Authority
On February 15, 1996 the Argentina Customs Authority ("Customs Authority"), by
means of an injunction, attempted to stop the Company from using its slot
machines located in the Neuquen casino facility. The Customs Authority demanded
the Company file certain documentation with respect to imported slot machines
including the number of slot machines, unit prices and the accounting treatment.
In response to such demand, on February 19, 1996, the Company filed with the
Customs Authority the requested documentation.
Presently the Customs Authority is determining whether the Company's valuation
of imported slot machines was proper for purposes of import taxes. Management of
the Company does not believe the resolution of this matter will have a material
adverse effect on the Company.
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<PAGE> 11
Cities of Neuquen and San Martin de los Andes
In July 1996 the cities of Neuquen and San Martin de los Andes modified certain
of their respective municipal ordinances in order to impose a $1 cover charge on
each person entering the Casinos. Historically the Company has not collected
cover charges. In response, the Company filed various actions with the court
stating that such cover charge is unconstitutional and that it violates the
Concession, in that the Concession provides that the Province will guarantee the
Company that there will not be any new or additional taxes relative to the
Company's operation of the Casinos during the Concession term.
As of December 31, 1997 the total estimated claim by the cities of Neuquen and
San Martin de los Andes amounted to approximately $870,000 for which the Company
has made no provision. Management of the Company does not believe the resolution
of this matter will have a material adverse effect on the Company.
Pursuant to the purchase agreement between Crown and the CMC, CMC has agreed to
reimburse the Company for certain costs and expenses in connection with the
litigation previously described. In particular, CMC will reimburse the Company
for (i) any fine, penalty or other assessment paid by the Company in connection
with the dispute with the Customs Authority, and (ii) an amount equal to the
unpaid cover charges for all periods prior to June 2, 1997 to the extent such
cover charges are paid by the Company. CMC and Crown also entered into a
shareholders' agreement which provides, among other things, that certain
material corporate actions require the approval of both CMC and Crown.
11
<PAGE> 12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1). FINANCIAL STATEMENTS AND ACCOUNTANT'S REPORT
The following Crown Group, Inc. financial statements and accountant's
report included in the Company's 1998 Annual Report are incorporated
herein by reference in Item 8 of this report:
Report of Independent Accountants
Consolidated Balance Sheets as of April 30, 1997 and 1998
Consolidated Statements of Operations for the fiscal years ended
April 30, 1996, 1997 and 1998
Consolidated Statements of Cash Flows for the fiscal years ended
April 30, 1996, 1997 and 1998
Consolidated Statements of Stockholders' Equity for the fiscal
years ended April 30, 1996, 1997 and 1998
Notes to Consolidated Financial Statements
The following Casino Magic Neuquen S.A. financial statements are
included in Item 8 of this report:
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1997 and April 30,
1998 (unaudited)
Consolidated Statements of Operations for the year ended December
31, 1997 and the unaudited four months ended April 30, 1998 and
1997
Consolidated Statements of Shareholders Equity for the year ended
December 31, 1997 and the unaudited four months ended April 30,
1998
Consolidated Statements of Cash Flows for the year ended December
31, 1997 and the unaudited four months ended April 30, 1998 and
1997
Notes to Consolidated Financial Statements
(a)(2). FINANCIAL STATEMENT SCHEDULES
Schedule I - Condensed Financial Information of Crown Group, Inc.
(Parent Company Only)
The other financial statement schedules are omitted since the required
information is not present, or is not present in amounts sufficient to
require submission of the schedules, or because the information
required is included in the consolidated financial statements and notes
thereto.
(a)(3). EXHIBITS
12
<PAGE> 13
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
2.1 Purchase Agreement dated as of May 31, 1997 by and among the Company
and Casino Magic Corp. ("Casino Magic"). (11)
2.2 Stock Purchase Agreement dated as of February 1, 1998 by and among
Paaco Automotive Group, Inc., Premium Auto Acceptance Corporation,
Larry Lange, Daniel Chu, Ted Lange and Crown Group, Inc. (13)
2.3 Stock Purchase Agreement dated February 3, 1998 by and among Van P.
Finger and Crown Group, Inc. (13)
3.1 Articles of Incorporation of the Company (formerly SKAI, Inc.). (3)
3.1.1 Articles of Merger of the Company and SKAI, Inc. filed with the
Secretary of State of the State of Alabama on September 29, 1989. (3)
3.1.2 Articles of Merger of the Company and SKAI, Inc. filed with the
Secretary of State of the State of Texas on October 10, 1989. (3)
3.1.3 Articles of Amendment filed with the Secretary of State of the State
of Texas on October 7, 1993. (8)
3.1.4 Articles of Amendment filed with the Secretary of State of the State
of Texas on October 5, 1994. (8)
3.1.5 Articles of Amendment filed with the Secretary of State of the State
of Texas on October 2, 1997. (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)
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)
10.1 1986 Incentive Stock Option Plan. (2)
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<PAGE> 14
10.1.1 Amendment to 1986 Incentive Stock Option Plan adopted September 27,
1990. (5)
10.2 1991 Non-Qualified Stock Option Plan. (6)
10.3 1997 Stock Option Plan. (12)
10.4 Form of Indemnification Agreement between the Company and Edward R.
McMurphy, Mark D. Slusser, T.J. Falgout, III, David J. Douglas, J.
David Simmons, Gerald L. Adams, Robert J. Kehl, Gerard M. Jacobs and
Michael B. Cloud. (7)
10.5 Form of Severance Agreement dated July 2, 1996 between the Company and
Edward R. McMurphy, T.J. Falgout, III and Mark D. Slusser. (10)
10.6 Shareholders' Agreement dated as of May 31, 1997 between the Company
and Casino Magic. (11)
10.7 Shareholders' Agreement dated as February 1, 1998 by and among Larry
Lange, Daniel Chu, Ted Lange and Crown Group, Inc. (13)
13.1 Annual Report to Stockholders for the fiscal year ended April 30,
1998. (1)
21.1 Subsidiaries of Crown Group, Inc. (14)
23.1 Consent of Independent Accountants. (1)
23.2 Opinion of Independent Accountants on Financial Statement Schedule.
(14)
23.3 Consent of Independent Public Accountants. (1)
24.1 Power of Attorney of Edward R. McMurphy. (14)
24.2 Power of Attorney of Tilman J. Falgout, III. (14)
24.3 Power of Attorney of David J. Douglas. (14)
24.4 Power of Attorney of J. David Simmons. (14)
24.5 Power of Attorney of Gerald L. Adams. (14)
24.6 Power of Attorney of Gerard M. Jacobs. (14)
24.7 Power of Attorney of Robert J. Kehl. (14)
27.1 Financial Data Schedule. (14)
- -------------------
(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.
14
<PAGE> 15
(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.
(b) REPORTS ON FORM 8-K
During the fiscal quarter ended April 30, 1998 the Company filed reports on Form
8-K and 8-K/A as follows:
<TABLE>
<CAPTION>
EVENT
FORM DATE DESCRIPTION OF EVENT
- ------------------ --------------------- -------------------------------------------------------------
<S> <C> <C>
8-K February 1, 1998 Acquisition of 53% of Paaco and 80% of Precision.
8-K/A February 1, 1998 Amendment No. 1 to Form 8-K dated February 1, 1998
including the financial statements of Paaco and pro-forma
financial information of the Company.
8-K April 15, 1998 Ownership of Inktomi stock.
</TABLE>
15
<PAGE> 16
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: January 12, 1999 By: /s/ Mark D. Slusser
-------------------------------------
Mark D. Slusser
Vice President Finance and
Chief Financial Officer
(principal financial and
accounting officer)
16
<PAGE> 17
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF CROWN GROUP, INC. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEET
APRIL 30, 1998
<TABLE>
<S> <C>
Assets:
Cash and cash equivalents $ 5,030,861
Marketable equity securities 4,742,180
Receivables from subsidiaries 4,640,718
Investment in subsidiaries 17,590,658
Investment in CMN and related assets, net 6,606,114
Other 688,329
------------
$ 39,298,860
============
Liabilities and stockholders' equity:
Accounts payable and accrued liabilities $ 373,165
Payables to subsidiaries 2,641,637
Deferred tax liability 1,251,805
------------
Total liabilities 4,266,607
------------
Stockholders' equity 35,032,253
------------
$ 39,298,860
============
CONDENSED STATEMENT OF OPERATION
FOR THE YEAR ENDED APRIL 30, 1998
Revenues:
Interest income $ 1,081,583
Interest income from subsidiaries 387,615
Interest, fees and rentals from CMN 680,697
Other 388,827
------------
2,538,722
------------
Costs and expenses:
Selling, general and administrative 2,924,675
Interest expense 13,444
Depreciation and amortization 557,318
------------
3,495,437
------------
Other income:
Equity in earnings of CMN 926,598
Equity in loss of subsidiaries (25,341)
Gain on sale of securities 38,258
------------
939,515
------------
Loss before income taxes (17,200)
Benefit for income taxes 365,295
------------
Net income $ 348,095
============
</TABLE>
See accompanying notes to condensed financial information.
<PAGE> 18
SCHEDULE I (CONTINUED)
CROWN GROUP, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED APRIL 30, 1998
<TABLE>
<S> <C>
Operating activities:
Net income $ 348,095
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 557,318
Amortization of discount (252,765)
Deferred income taxes 305,341
Gain on sale of assets (373,999)
Gain on sale of securities (38,258)
Equity in earnings of CMN (926,598)
Equity in loss of subsidiaries 25,341
Changes in assets and liabilities, net of transactions:
Other 86,139
Accounts payable and accrued liabilities (169,203)
Income taxes payable (271,525)
-------------
Net cash used by operating activities (710,114)
-------------
Investing activities:
Purchase of assets (788,784)
Sale of assets 2,191,861
Purchase of securities (5,551,714)
Sale of securities 3,772,792
Advances to subsidiaries (4,618,220)
Repayments from subsidiaries 13,732,772
Collection of notes receivable 1,050,750
Formation of Concorde (2,000,800)
Purchase of CMN and related assets (7,000,001)
Purchase of Paaco (9,174,212)
Purchase of Precision and M&S (4,032,389)
-------------
Net cash used by investing activities (12,417,945)
-------------
Financing activities:
Issuance of common stock 93,282
Purchase of common stock (3,052,322)
-------------
Net cash used by financing activities (2,959,040)
-------------
Decrease in cash and cash equivalents (16,087,099)
Cash and cash equivalents at: Beginning of year 21,117,960
-------------
End of year $ 5,030,861
=============
</TABLE>
See accompanying notes to condensed financial information.
<PAGE> 19
SCHEDULE I (CONTINUED)
CROWN GROUP, INC. (PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION
A - GUARANTEES
Crown Group, Inc. ("Crown") has made the following guarantees with respect
to its subsidiaries:
<TABLE>
<CAPTION>
Amount
Facility Drawn at Maximum
Debtor Amount April 30, 1998 Guarantee
------ ------ -------------- ---------
<S> <C> <C> <C>
Concorde $20 million $11.1 million $5.0 million
Home Stay 5.4 million -- 5.4 million
</TABLE>
In addition, Crown has entered into a reimbursement agreement with the
minority shareholders of Paaco who have guaranteed Paaco's debt with a
specific lender. At April 30, 1998 the amount of debt guaranteed by such
minority shareholders was approximately $26 million. To the extent such
minority shareholders pay monies pursuant to such guaranties, Crown has
agreed to reimburse the minority shareholders 65% thereof.
B - ELIMINATION OF BALANCES AND TRANSACTIONS WITH SUBSIDIARIES
As of April 30, 1998 the following balances were eliminated in the
consolidated financial statements of Crown:
<TABLE>
<S> <C>
Receivables from subsidiaries $ 4,640,718
Investments in subsidiaries 17,590,658
Payables to subsidiaries 2,641,637
</TABLE>
For the year ended April 30, 1998 the following transactions were eliminated
in the consolidated financial statements of Crown:
<TABLE>
<S> <C>
Interest income $ 387,615
</TABLE>
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<S> <C>
2.1 Purchase Agreement dated as of May 31, 1997 by and among the Company
and Casino Magic Corp. ("Casino Magic"). (11)
2.2 Stock Purchase Agreement dated as of February 1, 1998 by and among
Paaco Automotive Group, Inc., Premium Auto Acceptance Corporation,
Larry Lange, Daniel Chu, Ted Lange and Crown Group, Inc. (13)
2.3 Stock Purchase Agreement dated February 3, 1998 by and among Van P.
Finger and Crown Group, Inc. (13)
3.1 Articles of Incorporation of the Company (formerly SKAI, Inc.). (3)
3.1.1 Articles of Merger of the Company and SKAI, Inc. filed with the
Secretary of State of the State of Alabama on September 29, 1989. (3)
3.1.2 Articles of Merger of the Company and SKAI, Inc. filed with the
Secretary of State of the State of Texas on October 10, 1989. (3)
3.1.3 Articles of Amendment filed with the Secretary of State of the State
of Texas on October 7, 1993. (8)
3.1.4 Articles of Amendment filed with the Secretary of State of the State
of Texas on October 5, 1994. (8)
3.1.5 Articles of Amendment filed with the Secretary of State of the State
of Texas on October 2, 1997. (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)
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)
10.1 1986 Incentive Stock Option Plan. (2)
</TABLE>
<PAGE> 21
<TABLE>
<S> <C>
10.1.1 Amendment to 1986 Incentive Stock Option Plan adopted September 27,
1990. (5)
10.2 1991 Non-Qualified Stock Option Plan. (6)
10.3 1997 Stock Option Plan. (12)
10.4 Form of Indemnification Agreement between the Company and Edward R.
McMurphy, Mark D. Slusser, T.J. Falgout, III, David J. Douglas, J.
David Simmons, Gerald L. Adams, Robert J. Kehl, Gerard M. Jacobs and
Michael B. Cloud. (7)
10.5 Form of Severance Agreement dated July 2, 1996 between the Company and
Edward R. McMurphy, T.J. Falgout, III and Mark D. Slusser. (10)
10.6 Shareholders' Agreement dated as of May 31, 1997 between the Company
and Casino Magic. (11)
10.7 Shareholders' Agreement dated as February 1, 1998 by and among Larry
Lange, Daniel Chu, Ted Lange and Crown Group, Inc. (13)
13.1 Annual Report to Stockholders for the fiscal year ended April 30,
1998. (1)
21.1 Subsidiaries of Crown Group, Inc. (14)
23.1 Consent of Independent Accountants. (1)
23.2 Opinion of Independent Accountants on Financial Statement
Schedule. (14)
23.3 Consent of Independent Public Accountants. (1)
24.1 Power of Attorney of Edward R. McMurphy. (14)
24.2 Power of Attorney of Tilman J. Falgout, III. (14)
24.3 Power of Attorney of David J. Douglas. (14)
24.4 Power of Attorney of J. David Simmons. (14)
24.5 Power of Attorney of Gerald L. Adams. (14)
24.6 Power of Attorney of Gerard M. Jacobs. (14)
24.7 Power of Attorney of Robert J. Kehl. (14)
27.1 Financial Data Schedule. (14)
</TABLE>
- -------------------
(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.
<PAGE> 22
(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.
<PAGE> 1
EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CROWN GROUP, INC.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements appearing elsewhere in this annual report.
OVERVIEW
Crown Group, Inc. ("Crown"), and collectively with its subsidiaries (the
"Company"), is a publicly traded buy-out firm which presently owns (i) 65% of
Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation
(collectively, "Paaco"), a vertically integrated used car sales and finance
company, (ii) 100% of Precision IBC, Inc. ("Precision"), a firm specializing in
the sale and rental of intermediate bulk containers, (iii) 80% of Concorde
Acceptance Corporation ("Concorde"), a sub-prime mortgage lender, (iv) 49% of
Casino Magic Neuquen S.A. ("CMN"), a casino operator in the Province of Neuquen,
Argentina, and (v) 80% of Home Stay Lodges I, Ltd., a partnership focusing on
the development and operation of extended-stay lodging facilities. In addition,
from time to time the Company purchases and sells small ownership interests in
securities of privately held and publicly traded firms. The Company is presently
focusing on (i) the development and expansion of its existing businesses, and
(ii) the potential acquisition or development of other unrelated businesses.
Since its inception in 1983 through June 1993 the Company was engaged in
various facets of the cable and related programming businesses. During 1992 the
Company sold the majority of its programming business and began exploring new
business opportunities. In June 1993 the Company made the decision to enter the
gaming business, and as a result, proceeded to sell the balance of its cable
assets.
From June 1993, with the acquisition of 100% of St. Charles Gaming Company,
Inc. ("SCGC"), until November 1996, the Company's primary business focus was
that of owning, operating and developing casino gaming properties. SCGC owns and
operates a riverboat gaming casino located in Calcasieu Parish, Louisiana which
had been in the development stage until opening in July 1995. The Company sold a
50% interest in SCGC in June 1995 and the remaining 50% interest in May 1996, in
each case resulting in a substantial gain.
In November 1996 the Company decided to expand its business interests beyond
casino gaming and began pursuing business opportunities in other fields. As a
result the Company has either acquired or formed a number of businesses in a
variety of industries.
RECENT ACQUISITIONS
CMN - In June 1997 the Company acquired a 49% interest in CMN for a purchase
price of $7 million cash. CMN operates casinos in the cities of Neuquen and San
Martin de los Andes in the Province of Neuquen, Argentina under an exclusive
concession contract.
CONCORDE - In June 1997 the Company, along with certain newly hired management
personnel, formed Concorde. Concorde is in the business of originating,
purchasing, servicing and selling sub-prime mortgage loans which are secured
primarily by first and second liens on residential properties. These loans are
sold in privately negotiated transactions to institutional investors and other
third parties.
PAACO - In February 1998 the Company acquired 53% of the common stock of Paaco
for a purchase price of approximately $9.1 million cash. Approximately $4.9
million of Paaco common stock was purchased directly from Paaco, and the
remaining $4.2 million was purchased from Paaco management personnel who prior
to this transaction were the sole shareholders of Paaco. Effective May 1, 1998
the Company purchased an additional 12% interest in Paaco from the management
shareholders. The purchase price of approximately $1.5 million was paid by
issuing 375,000 shares of the Company's common stock. Paaco is a vertically
integrated used car sales and finance company which operates seven used car
dealerships in the Dallas-Ft. Worth metropolitan area. Paaco sells, underwrites
and finances used cars and trucks with a focus on the Hispanic market.
PRECISION - In February 1998 the Company acquired 80% of the common stock of
Precision IBC, Incorporated ("Original Precision") for a purchase price of
approximately $2.4 million cash. In March 1998 the Company acquired 80% of the
common stock of M&S Tank Rentals, Inc. ("M&S") for a purchase price of $1.65
million cash. Original Precision and M&S were subsequently merged together into
a newly formed corporation, Precision IBC, Inc. ("Precision"). Effective May 1,
1998 the Company purchased the remaining 20% of Precision. The purchase price of
approximately $1.1 million was paid by issuing 288,027 shares of the Company's
common stock. Precision is in the business of renting, selling, testing and
servicing principally stainless steel intermediate bulk containers.
<PAGE> 2
RESULTS OF OPERATIONS
SCGC was a consolidated subsidiary of the Company through June 8, 1995. From
June 9, 1995 (the date the first 50% interest in SCGC was sold) through May 3,
1996 (the date the remaining 50% interest in SCGC was sold) the Company
accounted for its 50% interest in SCGC using the equity method. The Company's
investment in 49% of CMN is accounted for on the equity method. The operating
results of Paaco and Precision have been included in the Company's consolidated
results of operations from their respective dates of acquisition (February
1998). As a result of the above transactions, operating results of the Company
for the years ended April 30, 1998, 1997 and 1996 are not entirely comparable.
Below is a presentation of the operating results for the four principal
business segments of the Company for the year ended April 30, 1998 (in
thousands). The segments include (i) Paaco, which sells and finances used
vehicles, (ii) Precision, which rents and sells intermediate bulk containers,
(iii) Concorde, which originates and sells sub-prime mortgage loans, and (iv)
other, which includes corporate operations, activities of relatively inactive
subsidiaries and the Company's equity investment in CMN. For the years ended
April 30, 1997 and 1996 the Company operated in a single business segment, and,
accordingly, no separate segment disclosures are necessary.
<TABLE>
<CAPTION>
Year Ended April 30, 1998
----------------------------------------------------------------------------------
Paaco Precision Concorde Other Eliminations Consolidated
------------ ----------- --------- -------- -------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other $ 14,241 $ 1,351 $ 1,100 $ 1,105 $ 17,797
Interest income 1,519 815 1,472 $ (388) 3,418
-------- -------- -------- -------- -------- --------
Total 15,760 1,351 1,915 2,577 (388) 21,215
-------- -------- -------- -------- -------- --------
Costs and expenses:
Cost of sales 8,647 628 9,275
Selling, gen. and admin. 3,363 235 2,042 2,928 8,568
Prov. for credit losses 1,705 4 52 1,761
Interest expense 942 81 586 14 (388) 1,235
Depreciation and amort. 64 122 42 557 785
-------- -------- -------- -------- -------- --------
Total 14,721 1,070 2,722 3,499 (388) 21,624
-------- -------- -------- -------- -------- --------
CMN earnings and other 965 965
-------- -------- -------- -------- -------- --------
Income (loss) before taxes
and minority interests $ 1,039 $ 281 $ (807) $ 43 $ -- $ 556
======== ======== ======== ======== ======== ========
</TABLE>
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
Revenues from sales, rental income, gain on sale of mortgage loans and
interest, fees and rentals from CMN pertain to the businesses of Paaco,
Precision, Concorde and CMN, which were acquired or formed during fiscal 1998.
Interest income for fiscal 1998 increased $1,887,365 compared to fiscal 1997.
The increase resulted from (i) the acquisition of Paaco during the fourth
quarter of fiscal 1998 ($1,519,249), and (ii) interest earned on Concorde's
mortgage loans and excess cash ($814,735), 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 of a gain on the sale of
certain equipment ($373,999), and service repair, rental and other income
principally pertaining to Paaco. 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 $5,771,341 compared to fiscal
1997. The increase resulted principally from (i) the acquisitions of Paaco and
Precision during the fourth quarter of fiscal 1998 ($3,597,834), and (ii) the
formation and development of Concorde's mortgage based lending business
($2,041,651). Interest expense for fiscal 1998 increased $1,166,601 compared to
fiscal 1997. The increase resulted from interest associated with the debt of
Paaco, Precision and Concorde. Depreciation and amortization for fiscal 1998
increased $616,626 compared to fiscal 1997. The increase resulted from (i)
amortizing certain agreements and other assets obtained in the acquisition of
49% of CMN ($284,735), (ii) amortizing goodwill that was created in the
acquisitions of Paaco and Precision ($137,430), and (iii) depreciating the
assets of Paaco and Precision ($156,218).
<PAGE> 3
The benefit for income taxes for fiscal 1998 was $131,279 on pretax income
of $555,680. This equates to an effective tax rate of 35.4% after removing from
pretax income the equity in earnings of CMN ($926,598), which earnings are
presented on an after tax basis. The benefit for income taxes for fiscal 1997
was $1,940,000 on pretax income of $6,919,885. 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 ($338,864) pertain to the portions of
Paaco (47%) and Precision (20%) not owned by the Company during the period. Net
income for fiscal 1998 decreased $8,511,790 compared to fiscal 1997. The
decrease was principally the result of fiscal 1997 including a $14,934,543
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 ($5,254,858) and a write-down of land held for sale ($1,019,709).
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
General and administrative expenses for fiscal 1997 decreased $245,801
compared to fiscal 1996. The decrease was primarily attributable to a reduction
in compensation costs, partially offset by increases in consulting and
transportation expenses. Gaming development and abandonment costs for fiscal
1997 decreased $144,012 compared to fiscal 1996 as a result of the Company's
decision to begin pursuing business opportunities in fields other than casino
gaming.
Interest expense for fiscal 1997 decreased $939,955 compared to fiscal 1996.
The decrease was principally the result of the Company no longer consolidating
the operating results of SCGC from and after June 9, 1995 as SCGC was formerly
responsible for substantially all of the Company's consolidated interest
expense. Interest income for fiscal 1997 decreased $762,272 compared to fiscal
1996. The decrease was principally the result of the prepayment of a $10 million
note by Louisiana Riverboat Gaming Partnership in August 1996 and the sale of a
second $10 million note in October 1996 both of which had been earning interest
at 11.5% per annum. The proceeds from such notes were placed in money market
funds which earned interest at approximately 5.3% per annum. Other income in
fiscal 1997 pertains to a fee earned by the Company in assisting another company
complete an acquisition.
Gain on sale of SCGC for fiscal 1997 ($14,934,543) pertains to the Company's
sale of its remaining 50% interest in SCGC. During fiscal 1996 the Company sold
the first 50% interest in SCGC which resulted in a gain of $21,512,640. This
initial sale was made approximately one month prior to SCGC's riverboat casino
opening for business in July 1996. The gain on the sale of the second 50%
interest in SCGC declined $6,578,097 as compared to the sale of the first 50%
interest as a result of SCGC's operating results being less than originally
projected. During fiscal 1997 the Company sold certain securities it had
received in its sale of SCGC for an aggregate loss of $5,254,858. The equity in
loss of SCGC for fiscal 1996 ($2,408,213) pertains to the Company's 50% share of
SCGC's operating results from June 9, 1995 (the date the first 50% interest in
SCGC was sold) through April 30, 1996.
The benefit for income taxes for fiscal 1997 was $1,940,000 on pretax income
of $6,919,885. 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. The provision for income
taxes for fiscal 1996 was $3,500,000 on pretax income of $15,798,617. The fiscal
1996 provision 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. Net income for fiscal 1997 decreased $3,438,732
compared to fiscal 1996. The decrease was principally the result of (i) fiscal
1996 including a $21,512,640 pretax gain on the sale of the first 50% interest
in SCGC, as compared to fiscal 1997 including a $14,934,543 pretax gain on the
sale of the remaining 50% interest in SCGC, and (ii) the other items discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1998 the Company's sources of liquidity included
approximately (i) $3 million of cash on hand, of which $2 million was held by
Crown, (ii) $12 million of marketable equity securities held by Crown, the
majority of which is subject to a lock-up agreement with an underwriter which
prohibits Crown from selling such securities until December 8, 1998, (iii) $17
million remaining to be drawn on the credit facilities of Paaco, Concorde and
Precision, although the majority of such additional draws may only be made in
connection with a corresponding increase in the related collateral asset (i.e.,
finance receivables, mortgage loans held for sale and intermediate bulk
containers), and (iv) the 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 total amount of restricted net assets of such
subsidiaries as of April 30, 1998 was approximately $15 million.
For fiscal 1998 net cash used by operating activities amounted to $12.5
million. The principal use of cash was to originate and acquire mortgage loans.
The excess of mortgage loans originated or acquired over mortgage loans sold and
principal repayments was $13.3 million. Net cash used by investing activities of
$11.1 million included (i) an $8.6 million use of cash in finance receivable
originations over principal payments received, (ii) a $15.4 million use of cash
in the acquisitions of Paaco, Precision and CMN, and (iii) a $17.7 million
source of cash resulting from the sale of certain assets including $15.3 million
from the sale of the Company's 18.6 acre tract of land in Las Vegas. Net cash
provided by financing activities of $8.9 million principally relates to $14.0
million of cash provided
<PAGE> 4
by the asset based revolving credit facilities of Paaco, Concorde and Precision,
offset by (i) $3.1 million of cash used to repurchase the Company's common
stock, and (ii) $2.1 million of net debt repayments.
The Company is presently focusing on the development and expansion of its
existing businesses and the potential acquisition or development of other
unrelated businesses. The Company's existing credit facilities can support the
majority of the expected growth of the Company's existing businesses over the
next twelve months. In August 1998 the Company reached a preliminary agreement,
subject to certain conditions, to acquire Bengal Chemical, Inc. ("Bengal") for
approximately $8.3 million, of which $6 million is to be paid in cash. Bengal
specializes in the distribution of pesticide products in the southeastern United
States. The Company plans to finance a significant portion of the cash required
in this acquisition. Presently management believes that the Company's capital
resources are sufficient to satisfy its identified capital needs for the next
twelve months.
In March 1996 the Company's Board of Directors approved a program, as
amended, to repurchase up to 3,000,000 shares of the Company's common stock from
time to time in the open market. As of April 30, 1998 the Company had
repurchased 2,383,739 shares pursuant to this program. The timing and amount of
future share repurchases, if any, will depend on various factors including
market conditions, available alternative investments and the Company's financial
position.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997 the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting
comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Comprehensive income includes net income and certain other
items that are excluded from net income but are included as a separate component
of stockholders' equity such as unrealized appreciation of securities and
foreign currency translation adjustments. If the Company had adopted SFAS No.
130 during fiscal 1998 comprehensive income would have been $2,278,595, or $.23
per share, as a result of including the $1,930,500 of unrealized appreciation of
securities in comprehensive income.
DATA PROCESSING AND YEAR 2000
Each of Crown and its subsidiaries operate their data processing systems
independently. Crown and its subsidiaries are at different stages with respect
to their hardware, software and networking systems being year 2000 compliant.
Some of the software utilized by the Company is licensed from third parties, and
to the extent such software is not presently year 2000 compliant, the Company
has been advised by such third party software vendor that their software will be
updated in the near future. The Company presently has a limited amount of
electronic communication with third parties, and as such, has a lower level of
exposure to interruptions in its operations due to these third parties not being
year 2000 compliant. The Company has contacted some of the third parties in
which it communicates with electronically to assess their compliance with the
year 2000. Based upon a preliminary review of its data processing systems, the
Company does not anticipate the cost to bring all its systems year 2000
compliant will have a material adverse impact on its financial position or
results of operations.
SEASONALITY
The Company's automobile sales operation is seasonal in nature. In the
automobile business, the Company's third fiscal quarter (November through
January) is historically the slowest period of time for car and truck sales.
Many of the Company's operating expenses such as administrative personnel, rent
and insurance are fixed and cannot be reduced during periods of decreased sales.
None of the Company's other businesses experience significant seasonal
fluctuations.
<PAGE> 5
CONSOLIDATED BALANCE SHEETS CROWN GROUP, INC.
<TABLE>
<CAPTION>
April 30,
1998 1997
------------- --------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 6,481,706 $ 21,117,960
Marketable equity securities 4,742,180
Accounts and other receivables 2,311,668 345,780
Mortgage loans held for sale, net 14,350,437
Finance receivables, net 36,049,525
Inventory 3,783,290
Prepaid and other assets 572,089 37,674
Property and equipment, net 9,165,703 1,585,177
Investment in CMN and related assets, net 6,606,114
Goodwill, net 9,613,972
Land held for sale 15,150,000
------------ ------------
$ 93,676,684 $ 38,236,591
============ ============
Liabilities and stockholders' equity:
Accounts payable $ 2,014,698 $ 41,284
Accrued liabilities 1,952,828 422,609
Income taxes payable 142,572 335,000
Revolving credit facilities 41,164,524
Other notes payable 4,870,074
Deferred sales tax 2,090,303
Deferred income taxes 2,961,727 1,725,000
------------ ------------
Total liabilities 55,196,726 2,523,893
------------ ------------
Minority interests 3,447,705
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share, 1,000,000 shares
authorized; none issued or outstanding
Common stock, par value $.01 per share, 50,000,000 shares
authorized; 9,433,963 issued and outstanding (10,394,585 in 1997) 94,340 103,946
Additional paid-in capital 35,547,369 38,496,803
Accumulated deficit (2,539,956) (2,888,051)
Unrealized appreciation of securities 1,930,500
------------ ------------
Total stockholders' equity 35,032,253 35,712,698
------------ ------------
$ 93,676,684 $ 38,236,591
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
CONSOLIDATED STATEMENTS OF OPERATIONS CROWN GROUP, INC.
<TABLE>
<CAPTION>
Years Ended April 30,
1998 1997 1996
------------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Sales $ 14,938,617
Rental income 494,374
Gain on sale of mortgage loans 1,087,303
Interest income 3,417,689 $ 1,530,324 $ 2,292,596
Interest, fees and rentals from CMN 680,697
Other 596,709 500,000
------------ ----------- ------------
21,215,389 2,030,324 2,292,596
------------ ----------- ------------
Costs and expenses:
Cost of sales 9,275,055
Selling, general and administrative 8,567,614 2,796,273 3,042,074
Provision for credit losses 1,761,469
Interest expense 1,235,358 68,757 1,008,712
Depreciation and amortization 785,069 168,443 130,556
Write-down of land held for sale 1,019,709
Gaming development and abandonment 736,942 880,954
SCGC pre-opening and development 536,110
------------ ----------- ------------
21,624,565 4,790,124 5,598,406
------------ ----------- ------------
Other income (expense):
Equity in earnings of CMN 926,598
Gain (loss) on sale of securities 38,258 (5,254,858)
Gain on sale of SCGC 14,934,543 21,512,640
Equity in loss of SCGC (2,408,213)
------------ ----------- ------------
964,856 9,679,685 19,104,427
------------ ----------- ------------
Income before taxes and minority interest 555,680 6,919,885 15,798,617
Provision (benefit) for income taxes (131,279) (1,940,000) 3,500,000
Minority interests 338,864
------------ ----------- ------------
Net income $ 348,095 $ 8,859,885 $ 12,298,617
============ =========== ============
Earnings per share:
Basic $ 0.04 $ 0.82 $ 1.05
Diluted $ 0.04 $ 0.80 $ 1.03
Weighted average number of shares outstanding:
Basic 9,829,392 10,868,119 11,716,462
Diluted 9,905,819 11,027,077 11,981,757
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 7
CONSOLIDATED STATEMENTS OF CASH FLOWS CROWN GROUP, INC.
<TABLE>
<CAPTION>
Years Ended April 30,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net income $ 348,095 $ 8,859,885 $ 12,298,617
Adjustments to reconcile net income
to net cash used by operating activities:
Depreciation and amortization 785,069 168,443 130,556
Amortization of debt issuance costs (discount) (252,765) 389,360
Deferred income taxes (990,592) (2,275,000) 3,500,000
Provision for credit losses 1,761,469
Minority interests 338,864
Write down of assets 1,715,718 51,496
Gain on sale of mortgage loans (1,087,303)
Gain on sale of assets (437,171)
(Gain) loss on sale of securities (38,258) 5,254,858
Gain on sale of SCGC (14,934,543) (21,512,640)
Equity in earnings of CMN (926,598)
Equity in loss of SCGC 2,408,213
Changes in assets and liabilities, net of transactions:
Accounts and other receivables (625,637) 396,466 (780,747)
Mortgage loans originated or acquired (36,757,608)
Mortgage loans sold and principal repayments 23,441,905
Inventory 862,753
Prepaids and other assets 107,938 12,092 54,347
Accounts payable, accrued liabilities and deferred sales tax 1,178,323 (145,398) 243,606
Income taxes payable (192,428) (335,000)
------------ ------------ ------------
Net cash used by operating activities (12,483,944) (1,282,479) (3,217,192)
------------ ------------ ------------
Investing activities:
Finance receivable originations (13,324,694)
Collections of finance receivables 4,723,150
Purchase of assets (4,061,196) (1,076,142) (4,536,401)
Sale of land/assets 17,721,787 325,000 441,023
Purchase of securities (5,551,714) (4,023,118)
Sale of securities 3,772,792 11,593,260
Sale/collection of notes receivable 1,050,750 19,200,000
Sale of SCGC 1,000,000
Purchase of CMN and related assets (7,000,001)
Purchase of Paaco, net of cash acquired (4,378,459)
Purchase of Precision, net of cash acquired (4,021,142)
------------ ------------ ------------
Net cash provided (used) by investing activities (11,068,727) 26,019,000 (3,095,378)
------------ ------------ ------------
Financing activities:
Issuance of common stock 93,282 23,125
Purchase of common stock (3,052,322) (3,299,845) (298,723)
Proceeds from revolving credit facilities, net 13,979,273
Proceeds from (repayments of) other debt, net (2,103,816) (987,569) 936,684
Advances from LRGP 4,627,897
------------ ------------ ------------
Net cash provided (used) by financing activities 8,916,417 (4,287,414) 5,288,983
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (14,636,254) 20,449,107 (1,023,587)
Cash and cash equivalents at: Beginning of year 21,117,960 668,853 1,692,440
------------ ------------ ------------
End of year $ 6,481,706 $ 21,117,960 $ 668,853
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 8
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY CROWN GROUP, INC.
<TABLE>
<CAPTION>
For the Three Years in the Period Ended April 30, 1998
Additional Unrealized Total
Common Stock Paid-In Accumulated Appreciation Stockholders'
Shares Amount Capital Deficit of Securities Equity
----------- ---------- ------------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1995 11,678,459 $ 116,785 $ 41,859,407 $(24,046,553) $ 17,929,639
Issuance of common stock 50,000 500 199,500 200,000
Purchase of common stock (90,900) (909) (297,814) (298,723)
Stock options exercised 13,000 130 22,995 23,125
Net income 12,298,617 12,298,617
---------- --------- ------------ ------------ ----------- ------------
Balance at April 30, 1996 11,650,559 116,506 41,784,088 (11,747,936) 30,152,658
Purchase of common stock (1,255,974) (12,560) (3,287,285) (3,299,845)
Net income 8,859,885 8,859,885
---------- --------- ------------ ------------ ----------- ------------
Balance at April 30, 1997 10,394,585 103,946 38,496,803 (2,888,051) 35,712,698
Purchase of common stock (1,102,765) (11,028) (3,041,294) (3,052,322)
Stock options exercised 142,143 1,422 91,860 93,282
Unrealized appreciation of securities $ 1,930,500 1,930,500
Net income 348,095 348,095
---------- --------- ------------ ------------ ----------- ------------
Balance at April 30, 1998 9,433,963 $ 94,340 $ 35,547,369 $ (2,539,956) $ 1,930,500 $ 35,032,253
========== ========= ============ ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CROWN GROUP, INC.
A - HISTORY AND DESCRIPTION OF BUSINESS
Crown Group, Inc. ("Crown"), and collectively with its subsidiaries (the
"Company"), is a publicly traded buy-out firm which presently owns (i) 65% of
Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation
(collectively, "Paaco"), a vertically integrated used car sales and finance
company, (ii) 100% of Precision IBC, Inc. ("Precision"), a firm specializing in
the sale and rental of intermediate bulk containers, (iii) 80% of Concorde
Acceptance Corporation ("Concorde"), a sub-prime mortgage lender, (iv) 49% of
Casino Magic Neuquen S.A. ("CMN"), a casino operator in the Province of Neuquen,
Argentina, and (v) 80% of Home Stay Lodges I, Ltd., a partnership focusing on
the development and operation of extended-stay lodging facilities. In addition,
from time to time the Company purchases and sells small ownership interests in
securities of privately held and publicly traded firms. The Company is presently
focusing on (i) the development and expansion of its existing businesses, and
(ii) the potential acquisition or development of other unrelated businesses.
Since its inception in 1983 through June 1993 the Company was engaged in
various facets of the cable and related programming business. During 1992 the
Company sold the majority of its programming business and began exploring new
business opportunities. In June 1993 the Company made the decision to enter the
gaming business, and, as a result, proceeded to sell the balance of its cable
assets.
From June 1993, with the acquisition of 100% of St. Charles Gaming Company,
Inc. ("SCGC"), until November 1996, the Company's primary business focus was
that of owning, operating and developing casino gaming properties. SCGC owns and
operates a riverboat gaming casino located in Calcasieu Parish, Louisiana which
had been in the development stage until opening in July 1995. The Company sold a
50% interest in SCGC in June 1995 and the remaining 50% interest in May 1996, in
each case resulting in a substantial gain (see Note D).
In November 1996 the Company decided to expand its business interests beyond
casino gaming and began pursuing business opportunities in other fields. As a
result the Company has either acquired (see Note C) or formed a number of
businesses in a variety of industries. Generally, it is the Company's desire to
hold majority ownership positions in businesses that have above average
potential for growth in earnings.
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principals of Consolidation
The consolidated financial statements include the accounts of Crown Group,
Inc. and all of its majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. The Company's subsidiaries are
included in its consolidated results of operations from the point in time such
subsidiary became a majority-owned subsidiary of the Company. The Company has
accounted for its investment in 49% of CMN on the equity method.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
Concentration of Risk
The Company provides financing in connection with the sale of substantially
all of its used vehicles. These sales are made primarily to customers residing
in the Dallas-Ft. Worth metropolitan area. Periodically, the Company maintains
cash in financial institutions in excess of the amounts insured by the federal
government. CMN's revenues principally originate from persons living in and
around the City of Neuquen, Argentina.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents. Cash equivalents
generally consist of interest bearing money market accounts.
<PAGE> 10
Marketable Equity Securities
Investments in marketable equity securities are recorded at market value
based upon closing stock prices as quoted on national stock exchanges or
over-the-counter markets. To the extent the Company considers a particular
equity security to be a "trading" security, the difference between the Company's
historical cost and such security's market value is included in the accompanying
statement of operations. All other equity securities are considered to be
"available for sale" securities, and the difference between the Company's
historical cost and such security's market value is included as a separate
component of stockholders' equity entitled "unrealized appreciation of
securities," on a net of tax basis. At April 30, 1998 the Company had trading
securities and available for sale securities of $742,180 and $4,000,000,
respectively.
At April 30, 1998 the Company held 222,222 shares of Inktomi Corporation
common stock, which company completed its initial public offering ("IPO") on or
about June 9, 1998. The Company's Inktomi shares are subject to an underwriter's
lock-up agreement which restricts the Company from selling its Inktomi stock
until December 8, 1998. Further, the Company's Inktomi shares are not
registered, and thus the Company may not sell such shares in the public markets
until the completion of a one year holding period which ends on February 25,
1999. The Company valued its Inktomi shares based upon the IPO price of $18.00
per share. Accordingly, at April 30, 1998 the carrying value of the Company's
Inktomi stock was $4,000,000, which reflects a gross unrealized gain of
$2,925,000 over the Company's cost of $1,075,000. The Company considers its
Inktomi shares to be "available for sale."
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of aggregate cost or
market. Market value is determined by current investor yield requirements. A
portion of these loans are pledged against the Company's revolving credit
facility. The cost of mortgage loans held for sale includes the cost of
originating or purchasing the mortgage loans reduced by (i) deferred loan
origination fees, and (ii) an allowance for loan losses of $27,000 at April 30,
1998. While management believes the allowance for loan losses included in the
financial statements to be adequate, such estimate may be more or less than the
amount ultimately charged off. The adequacy of the allowance for loan losses is
periodically reviewed by management with any changes reflected in current
operations.
Finance Receivables and Allowance for Credit Losses
The Company originates installment sales contracts from the sale of used
vehicles at its dealerships. Finance receivables consist of contractually
scheduled payments from installment sales contracts net of unearned finance
charges and an allowance for credit losses. Unearned finance charges represent
the balance of interest income remaining from the capitalization of the total
interest to be earned over the original term of the related installment sales
contract. The Company discontinues the accrual of interest income when the
receivable becomes greater than sixty days delinquent.
The Company maintains an allowance for credit losses at a level it considers
sufficient to cover anticipated losses in the collection of its finance
receivables. The allowance for credit losses is based upon a periodic analysis
of the portfolio, economic conditions and trends, historical credit loss
experience, borrowers' ability to repay, and collateral values. While management
believes the allowance for credit losses included in the financial statements to
be adequate, such estimate may be more or less than the amount ultimately
charged off. The allowance for credit losses is periodically reviewed by
management with any changes reflected in current operations.
Inventory
Inventory is valued at the lower of cost or market on a specific
identification basis. Inventory includes used vehicles, parts for vehicles and
supplies and parts related to the intermediate bulk container ("IBC") business.
Repossessed vehicles are recorded at the lower of cost or market, which
approximates wholesale value. Vehicle reconditioning costs are capitalized as a
component of inventory. The cost of used vehicles and IBC's sold is determined
on a specific identification basis.
Property and Equipment
Property and equipment are stated at cost. Expenditures for additions,
renewals and improvements are capitalized. Costs of repairs and maintenance are
expensed as incurred. Depreciation is computed using the straight-line method
over the following estimated useful lives:
<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 and Precision.
Goodwill is amortized on a straight line basis over periods ranging from 15 to
25 years. The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operation. At April 30, 1998 accumulated amortization of goodwill
amounted to $137,430.
<PAGE> 11
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Revenue Recognition
Interest income on finance receivables is recognized using the interest
method. Revenue from the sale of used vehicles is recognized upon delivery, when
the sales contract is signed and the down payment has been received.
Stock Option Plan
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. As such,
compensation expense is recorded on the date of grant only if the current market
price of the underlying stock exceeds the exercise price. Beginning in fiscal
1997, the Company adopted the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", which requires entities to provide pro forma earnings and
earnings per share disclosures for employee stock option grants as if the fair
value based method as defined in SFAS No. 123 had been applied (see Note L).
Earnings Per Share
Basic earnings per share is computed by dividing net income by the average
number of common shares outstanding during the period. Diluted earnings per
share takes into consideration the potentially dilutive effect of common stock
equivalents, such as outstanding stock options and warrants, that if exercised
or converted into common stock would then share in the earnings of the Company.
Recent Accounting Pronouncements
In June 1997 the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting
comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Comprehensive income includes net income and certain other
items that are excluded from net income but are included as a separate component
of stockholders' equity such as unrealized appreciation of securities and
foreign currency translation adjustments. If the Company had adopted SFAS No.
130 during fiscal 1998 comprehensive income would have been $2,278,595 or $.23
per share, as a result of including the $1,930,500 of unrealized appreciation of
securities in comprehensive income.
Reclassifications
Certain prior year amounts in the accompanying financial statements have been
reclassified to conform to the fiscal 1998 presentation.
C - ACQUISITIONS
CMN Purchase
On June 2, 1997 the Company acquired 49% of the capital stock of CMN, as well
as interests in certain other assets and contracts related to CMN, from Casino
Magic Corp. ("Casino Magic") for a purchase price of $7 million cash. CMN owns
and operates casinos in the cities of Neuquen and San Martin de los Andes in the
Province of Neuquen, Argentina under an exclusive concession contract that
expires in 2007, but can be extended by CMN for an additional five years under
certain circumstances. The interests in certain other assets and contracts
included (i) a demand promissory note in the amount of $4,226,743 issued by CMN,
(ii) a 16.4% interest in a certain management agreement relating to CMN, and
(iii) a 49% interest in (a) slot machines and a related lease agreement and (b)
a certain royalty agreement relating to CMN. Pursuant to the various CMN
agreements, the Company receives its respective share of fees and rental
payments due under such agreements. At April 30, 1998 accumulated amortization
and depreciation of the Company's investment in various CMN agreements and slot
machines, respectively, amounted to $284,735.
In October 1997 each of the Company and Casino Magic converted approximately
$2.5 million of principal due on certain notes receivable from CMN into shares
of CMN capital stock such that each party retained the same ownership percentage
of CMN as previously held. At April 30, 1998 CMN had assets, liabilities and
stockholders' equity of approximately $12.6 million, $3.6 million, and $9.0
million, respectively. For the twelve months ended April 30, 1998 CMN's
summarized unaudited results of operations were as follows (in thousands):
<TABLE>
<S> <C>
Revenues $ 18,255
Costs and expenses 13,355
Interest, fees and rentals to shareholders 1,910
Provision for income taxes 978
-----------
Net income $ 2,012
===========
</TABLE>
<PAGE> 12
Paaco Purchase
Effective February 1, 1998 the Company acquired 53% of the common stock of
Paaco for a purchase price of approximately $9.1 million cash. Approximately
$4.9 million of Paaco common stock was purchased directly from Paaco, and the
remaining $4.2 million was purchased from Paaco management personnel who prior
to this transaction were the sole shareholders of Paaco (the "Paaco Management
Shareholders"). Effective May 1, 1998 the Company acquired an additional 12%
interest in Paaco directly from the Paaco Management Shareholders. With this
purchase the Company now owns 65% of Paaco. The purchase price of approximately
$1.5 million was paid by issuing 375,000 shares of the Company's common stock
(see Note R). In connection with the Paaco transactions, the Company and the
Paaco Management Shareholders entered into a Shareholders' Agreement (the "Paaco
Shareholders' Agreement") which provides, among other things, that in the event
either the Company or any Paaco Management Shareholder desires to sell their
interest in Paaco such shareholder must first offer to sell such interest to
Paaco and the other shareholders in accordance with the provisions of the Paaco
Shareholders' Agreement.
Paaco is a vertically integrated used car sales and finance company which
operates seven used car dealerships in the Dallas-Ft. Worth metropolitan area.
Paaco sells, underwrites and finances used cars and trucks with a focus on the
Hispanic market. For the years ended December 31, 1997, 1996 and 1995, Paaco's
revenues were approximately $48.3 million, $28.9 million and $20.1 million,
respectively.
Precision Purchase
On February 3, 1998 the Company acquired 80% of the common stock of Precision
IBC, Incorporated ("Original Precision") for a purchase price of approximately
$2.4 million cash. On March 5, 1998 the Company acquired 80% of the common stock
of M&S Tank Rentals, Inc. ("M&S") for a purchase price of $1.65 million cash.
Original Precision and M&S were subsequently merged together into a newly formed
corporation, Precision IBC, Inc. ("Precision"). Effective May 1, 1998 the
Company acquired the remaining 20% interest in Precision it did not previously
own by issuing 288,027 shares of the Company's common stock. All references to
Precision include the former entities of Original Precision and M&S.
Precision is in the business of renting, selling, testing and servicing
principally stainless steel IBC's to customers primarily in the petroleum and
chemical industries. For the years ended December 31, 1997, 1996 and 1995
Precision's unaudited revenues were approximately $4.1 million, $2.8 million and
$.7 million, respectively.
Each of the above acquisitions have been accounted for using the purchase
method of accounting. Goodwill resulting from the transactions is being
amortized on a straight-line basis over periods ranging from 15 to 25 years. The
activities of CMN, Paaco and Precision have been included in the Company's
consolidated results of operations since their respective dates of acquisition.
In each of fiscal 1997 and 1996 the Company elected not to complete the
proposed acquisition of a casino gaming property. As a result of these decisions
the Company recorded charges of $696,009 and $664,991 in fiscal 1997 and 1996,
respectively. Such amounts are included in "gaming development and abandonment"
in the accompanying Consolidated Statements of Operations.
Pro Forma Financial Information
The following unaudited pro forma condensed consolidated results of
operations of the Company for the years ended April 30, 1998 and 1997 were
prepared as if the CMN, Paaco and Precision acquisitions had occurred on May 1,
1997 and May 1, 1996, respectively (in thousands, except per share amounts). The
adjustments to the historical financial statements principally consist of (i)
recognizing the Company's pro-rata share of CMN earnings and contractual fees,
(ii) recording interest income on the note receivable from CMN, (iii)
eliminating interest income on the cash used in the acquisitions, (iv)
amortizing the CMN related agreements and equipment, (v) amortizing goodwill
resulting from the acquisitions, (vi) adjusting depreciation expense and
interest income resulting from purchase accounting entries, and (vii) adjusting
income tax expense to reflect the elimination of an S-corporation in the case of
Precision and to take into account the above described adjustments.
<TABLE>
<CAPTION>
Years Ended
April 30,
1998 1997
---- ----
<S> <C> <C>
Revenue $ 63,514 $ 38,127
Net income 120 10,340
Earnings per share $ .01 $ .90
</TABLE>
The unaudited pro forma results of operations are not necessarily indicative
of future results or the results that would have occurred had the acquisitions
taken place on the dates indicated.
<PAGE> 13
D - SALE OF SCGC
On June 9, 1995 the Company sold a 50% interest in SCGC to Louisiana
Riverboat Gaming Partnership ("LRGP"), a joint venture then owned 50% by Casino
America, Inc. ("Casino America") and 50% by Louisiana Downs, Inc. The purchase
price consisted of (i) a five-year $20 million non-recourse note with interest
payable monthly at 11.5% per annum (the "LRGP Note"), (ii) $1 million cash, and
(iii) a non-detachable five-year warrant to purchase 416,667 shares of Casino
America common stock at $12 per share. In connection with this transaction, in
June 1995, the Company recorded a gain before income taxes of approximately
$21.5 million.
On May 3, 1996 the Company sold its remaining 50% interest in SCGC to Casino
America for (i) 1,850,000 shares of Casino America common stock, which the
Company valued at $6.50 per share, (ii) the exchange of the $20 million LRGP
Note for LRGP Note A ("Note A") and LRGP Note B ("Note B"), each in the
principal amount of $10 million and bearing interest at 11.5% per annum, and
(iii) an additional non-detachable five-year warrant to purchase up to another
416,667 shares of Casino America common stock at an exercise price of $12 per
share. In connection with this transaction, in May 1996, the Company recorded a
gain before income taxes of approximately $14.9 million.
In August 1996 LRGP paid off Note A in full and in October 1996 the Company
sold Note B at a discount of $800,000. In November 1996 the Company sold the
1,850,000 shares of Casino America common stock it had received in the sale of
its remaining 50% interest in SCGC for net proceeds of $7,363,003, resulting in
a loss before income taxes of $4,661,997.
The Company has included 100% of SCGC's operating results in its consolidated
results of operations through June 8, 1995. From and after June 9, 1995 (the
date of sale of the first 50% interest in SCGC), the Company has accounted for
its investment in SCGC on the equity method, and accordingly has included its
proportionate share of SCGC's operating results in its consolidated results of
operations. The Company's gain before income taxes on the sale of SCGC is
calculated as follows (in thousands):
<TABLE>
<CAPTION>
Sale of Sale of
First 50% Second 50%
(June 1995) (May 1996)
------------ -----------
<S> <C> <C>
Consideration received in sale $ 21,000 $ 12,025
The Company's negative basis in stock sold 889 3,297
Transaction and other costs (376) (388)
-------- --------
Gain before income taxes on sale of SCGC $ 21,513 $ 14,934
======== ========
</TABLE>
Upon closing of the sale of its remaining 50% interest in SCGC on May 3,
1996, the Company's investment in SCGC was eliminated. Other than a guarantee of
certain leases, for which the Company has been indemnified by LRGP, the Company
is not liable for any obligations of SCGC.
For the year ended April 30, 1996 SCGC had revenues and a net loss of $57.3
million and $6.3 million, respectively. During such year the Company included
approximately $3.4 million of net costs and expenses, or approximately $.28 per
share, attributable to SCGC in its consolidated results of operations.
<PAGE> 14
E - FINANCE RECEIVABLES
The Company originates installment sales contracts from the sale of used
vehicles at its dealerships. These installment sales contracts typically include
interest rates ranging from 18-26% per annum and provide for payments over
periods ranging from 24 to 36 months. A summary of finance receivables at April
30, 1998 is as follows:
<TABLE>
<S> <C>
Finance receivables $ 51,417,981
Unearned finance charges (9,930,356)
Allowance for credit losses (4,727,679)
Valuation discount (710,421)
------------
$ 36,049,525
============
</TABLE>
In accordance with APB Opinion No. 16, as of the acquisition date the Company
valued Paaco's finance receivables at market value and determined a valuation
discount of $963,186 was appropriate. This discount is being amortized over the
life of the finance receivable portfolio that existed on the purchase date using
the interest method.
A summary of the finance receivables allowance for credit losses for the
period from February 1, 1998 (acquisition date) to April 30, 1998 is as follows:
<TABLE>
<S> <C>
Balance at February 1, 1998 $ 4,248,643
Provision for credit losses 1,704,623
Net charge offs (1,225,587)
-----------
Balance at April 30, 1998 $ 4,727,679
===========
</TABLE>
In addition to the finance receivables allowance for credit losses the
Company also has an allowance for credit losses on mortgage loans held for sale
and trade accounts receivable aggregating $55,069 as of April 30, 1998.
F - PROPERTY AND EQUIPMENT
A summary of property and equipment as of April 30, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
April 30,
1998 1997
----------- ------------
<S> <C> <C>
Land and buildings $ 2,332,750
Rental equipment 4,749,652
Furniture, fixtures and equipment 1,904,536 $ 1,811,581
Leasehold improvements 920,583
Less accumulated depreciation and amortization (741,818) (226,404)
----------- ------------
$ 9,165,703 $ 1,585,177
=========== ============
</TABLE>
For the years ended April 30, 1998, 1997 and 1996 depreciation expense amounted
to $362,904, $168,443 and $130,556, respectively.
G - LAND HELD FOR SALE
In April 1997 the Company entered into an agreement to sell its 18.6 acre
tract of land in Las Vegas, Nevada for $15.25 million cash. As a result of this
agreement, the Company wrote down the value of such land to $15.15 million,
which represents the contract selling price of the land less the estimated
transaction costs. In September 1997 the sale was consummated.
<PAGE> 15
H - DEBT
A summary of debt at April 30, 1998 is as follows:
<TABLE>
<CAPTION>
Revolving Credit Facilities
- ----------------------------------------------------------------------------------------------------------------
Facility Interest Primary Balance at
Borrower Lender Amount Rate Maturity Collateral April 30, 1998
- ------------ ------------------ ------------ -------------- ------------ --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Paaco Finova $35 million Prime + 3.00% Apr 2000 Finance rec. $ 26,049,875
Concorde Bank One $20 million Libor + 2.25% Dec 1998 Mortgage loans 11,096,224
Precision Wells Fargo $5 million Prime June 2000 IBC's and rec. 3,518,425
Paaco Comerica $500,000 Prime + 2.00% Demand Vehicle inv. 500,000
------------
$ 41,164,524
============
</TABLE>
<TABLE>
<CAPTION>
Other Notes Payable
- ----------------------------------------------------------------------------------------------------------------
Principal Interest Primary Balance at
Borrower Lender Payments Rate Maturity Collateral April 30, 1998
- ------------ ------------------ ------------ -------------- ------------ --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Paaco Heller Financial $2,197 month Prime + 2.25% Dec 2015 Real estate $ 630,556
Paaco Various None Various 1998 to 1999 None 4,239,518
------------
$ 4,870,074
============
</TABLE>
Interest is payable monthly on all of the Company's debt. The loan agreements
relating to certain of the above described debt contain various reporting and
performance covenants including (i) maintenance of certain financial ratios and
tests, (ii) limitations on borrowings from other sources, (iii) restrictions on
certain operating activities, and (iv) restrictions on the payment of dividends.
The amount of restricted net assets of the Company's subsidiaries as of April
30, 1998 was approximately $15 million. The Company was in compliance with the
loan agreements as of April 30, 1998.
A summary of future minimum principal payments required under the
aforementioned debt as of April 30, 1998 is as follows:
<TABLE>
<CAPTION>
Years Ended
April 30, Amount
-------------- --------------
<S> <C>
1999 $ 15,208,144
2000 26,508,515
2001 3,707,093
2002 38,723
2003 18,842
Thereafter 553,281
------------
$ 46,034,598
============
</TABLE>
<PAGE> 16
I - INCOME TAXES
The Company files a consolidated federal income tax return with its
subsidiaries, with the exception of Paaco which files a separate tax return. The
provision (benefit) for income taxes for the fiscal years ended April 30, 1998,
1997 and 1996 was as follows:
<TABLE>
<CAPTION>
Years Ended April 30,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Provision (benefit) for income taxes
Current $(1,121,871) $ 335,000
Deferred 990,592 (2,275,000) $ 3,500,000
----------- ----------- -----------
$ (131,279) $(1,940,000) $ 3,500,000
=========== =========== ===========
</TABLE>
The provision (benefit) for income taxes is different from the amount
computed by applying the statutory federal income tax rate to income (loss)
before income taxes for the following reasons:
<TABLE>
<CAPTION>
Years Ended April 30,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Tax provision at 34% statutory rate $ 188,931 $ 2,352,761 $ 5,371,530
Equity in earnings of CMN (315,043)
Equity in loss of SCGC 818,792
Basis difference in SCGC stock (4,254,558) (3,459,015)
Goodwill amortization 46,726
Other, net (51,893) (38,203) 768,693
----------- ----------- -----------
$ (131,279) $(1,940,000) $ 3,500,000
=========== =========== ===========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of April 30, 1998 and 1997
were as follows:
<TABLE>
<CAPTION>
April 30,
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Unrealized gain on securities $ 994,500
Allowance for loan losses 1,634,165
Tax over book depreciation 884,132
Land held for sale $ 1,445,553
Other 443,034 395,332
------------ ------------
Total 3,955,831 1,840,885
------------ ------------
Deferred tax assets:
Finance receivable valuation discount 241,543
Reserves 239,290
Net operating loss 464,016
Other 49,255 115,885
------------ ------------
Total 994,104 115,885
------------ ------------
Net deferred tax liability $ 2,961,727 $ 1,725,000
============ ============
</TABLE>
In fiscal 1997 the Company utilized approximately $1.4 million of net
operating loss carryforwards in determining its federal income tax provision. At
April 30, 1998 Paaco had a net operating loss carryforward of $1,364,753
available to offset future taxable income. The net operating loss carryforward
expires in 2012.
<PAGE> 17
J - CAPITAL STOCK
In March 1996 the Company's Board of Directors approved a program, as
amended, to repurchase up to 3,000,000 shares of the Company's common stock from
time to time in the open market. At April 30, 1998 the Company had repurchased
2,383,739 shares pursuant to this program. The timing and amount of future share
repurchases, if any, will depend on various factors including market conditions,
available alternative investments and the Company's financial position.
The Company is authorized to issue up to one million shares of $.01 par value
preferred stock in one or more series having such respective terms, rights and
preferences as are designated by the Board of Directors. No preferred stock has
been issued.
K - EARNINGS PER SHARE
A summary of the reconciliation from basic earnings per share to diluted
earnings per share for the years ended April 30, 1998, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
Years Ended April 30,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net income $ 348,095 $ 8,859,885 $12,298,617
=========== =========== ===========
Average shares outstanding-basic 9,829,392 10,868,119 11,716,462
Dilutive options 76,427 158,958 195,148
Dilutive warrants 70,147
----------- ----------- -----------
Average shares outstanding-diluted 9,905,819 11,027,077 11,981,757
=========== =========== ===========
Earnings per share:
Basic $ 0.04 $ 0.82 $ 1.05
Diluted $ 0.04 $ 0.80 $ 1.03
Antidilutive securities not included:
Options 516,068 547,000 382,224
=========== =========== ===========
Warrants 899,612 1,184,246 675,832
=========== =========== ===========
</TABLE>
L - STOCK OPTIONS AND WARRANTS
Options
Since inception, the shareholders of the Company have approved three stock
option plans including the 1986 Incentive Stock Option Plan ("1986 Plan"), the
1991 Non-Qualified Stock Option Plan ("1991 Plan") and the 1997 Stock Option
Plan ("1997 Plan"). While previously granted options remain effective, the
provisions of the 1986 and 1991 Plans permitting additional option grants have
expired. The 1997 Plan sets aside 1,000,000 shares of the Company's common stock
to be granted to employees, directors and certain advisors of the Company at a
price not less than the fair market value of the stock on the date of grant. At
April 30, 1998 and 1997 there were 915,000 and zero shares of common stock
available for grant under the Company's stock option plans, respectively.
Options granted under the Company's stock option plans expire in the years 1998
through 2007.
<PAGE> 18
The following is an aggregate summary of the activity in the Company's stock
option plans since April 30, 1995:
<TABLE>
<CAPTION>
Number Exercise Price Proceeds
of Shares per Share on Exercise
----------- ------------------ -------------
<S> <C> <C> <C>
Outstanding at April 30, 1995 797,643 $0.41 to $7.38 $ 2,359,219
Exercised (18,000) $1.41 to $3.31 (53,906)
Canceled (25,000) $7.31 (182,813)
----------- -----------
Outstanding at April 30, 1996 754,643 $0.41 to $7.38 2,122,500
Granted 60,000 $2.81 168,750
----------- -----------
Outstanding at April 30, 1997 814,643 $0.41 to $7.38 2,291,250
Granted 85,000 $2.44 207,188
Exercised (142,143) $0.66 (93,282)
----------- -----------
Outstanding at April 30, 1998 757,500 $0.41 to $7.38 $ 2,405,156
=========== ===========
</TABLE>
A summary of stock options outstanding as of April 30, 1998 is as follows:
<TABLE>
<CAPTION>
Weighted Average
Range of Remaining Weighted
Exercise Number Contractual Life Average
Prices of Shares (in years) Exercise Price
- -------------------- ------------ ----------------- -----------------
<S> <C> <C> <C>
$0.41 to $1.55 112,500 3.87 $ 1.34
$2.44 to $4.03 610,000 7.25 3.27
$7.31 to $7.38 35,000 5.94 7.33
-----------
$0.41 to $7.38 757,500 6.68 $ 3.18
===========
</TABLE>
All of the above options were exercisable at April 30, 1998 with the
exception of options to purchase 75,000 shares at prices ranging from $3.31 to
$3.88 which become exercisable in 1999 and expire in 2005.
The Company applies APB Opinion No. 25 in accounting for the issuance of
stock options and, accordingly, no compensation cost has been recognized in the
consolidated financial statements. Had the Company determined compensation cost
on the date of grant based upon the fair value of its stock options under SFAS
No. 123, the Company's pro forma income and earnings per share would have been
as follows using the Black-Scholes pricing model with the assumptions detailed
below:
<TABLE>
<CAPTION>
Years Ended April 30,
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Net income $ 262,320 $ 8,800,827 $ 12,298,617
Earnings per share:
Basic $ 0.03 $ 0.81 $ 1.05
Diluted $ 0.03 $ 0.80 $ 1.03
Assumptions:
Dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate 6.5% 6.5% 6.5%
Expected volatility 52.5% 52.5% 52.5%
Expected life 5 years 5 years 5 years
</TABLE>
<PAGE> 19
Warrants
The Company issued common stock purchase warrants to a variety of parties in
connection with financing activities, the development of SCGC's riverboat gaming
project and certain other matters. The warrants issued were valued based upon a
composite of commonly accepted warrant valuation models.
The following is an aggregate summary of warrants outstanding as of April 30,
1998:
<TABLE>
<CAPTION>
Number of
Underlying Exercise Price Proceeds
Shares per Share on Exercise
- ---------------- -------------- --------------
<S> <C> <C>
899,612 $3.00 to $12.00 $4,053,021
</TABLE>
All of the warrants are presently exercisable. The warrants expire in 1999,
contain certain anti-dilution provisions and provide the holders with certain
registration rights relative to the underlying shares.
M - FAIR VALUE OF FINANCIAL INSTRUMENTS
The table below summarizes information about the fair value of financial
instruments included in the Company's financial statements at April 30, 1998 and
1997:
<TABLE>
<CAPTION>
April 30, 1998 April 30, 1997
-------------------------------- --------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 6,481,706 $ 6,481,706 $ 21,117,960 $ 21,117,960
Marketable equity securities 4,742,180 4,742,180
Mortgage loans held for sale 14,350,437 15,067,959
Finance receivables 36,049,525 36,049,525
Revolving credit facilities 41,164,524 41,164,524
Other notes payable 4,870,074 4,870,074
</TABLE>
Because no market exists for certain of the Company's financial instruments,
fair value estimates are based on judgments and estimates regarding yield
expectations of investors, credit risk, normal cost of administration of
mortgage loans and finance receivables and other risk characteristics, including
interest rate and prepayment risk. These estimates are subjective in nature and
involve uncertainties and matters of judgment and therefore cannot be determined
with precision. Changes in assumptions could significantly affect these
estimates. The methodology and assumptions utilized to estimate the fair value
of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
Financial Instrument Valuation Methodology
-------------------- ---------------------
<S> <C>
Cash and cash equivalents The carrying amount is considered
to be a reasonable estimate of fair value.
Marketable equity securities The fair value was based on
stock prices as quoted on stock exchanges or
over-the-counter markets (see Note B).
Mortgage loans held for sale The fair value was estimated based
on recent sales.
Finance receivables The fair value approximates carrying value based upon
yields of similar instruments and
considering the relatively short maturity
of the portfolio.
Revolving credit facilities The fair value approximates
carrying value due to the short-term nature of the
borrowings and the variable interest rates
charged on the borrowings.
Other notes payable The fair value approximates
carrying value as the interest rates charged on
such debt approximates market.
</TABLE>
<PAGE> 20
N - LEASES
The Company has certain operating leases for equipment and its office
facilities. As of April 30, 1998 the aggregate rentals due under such leases
were as follows:
<TABLE>
<CAPTION>
Years Ended
April 30, Amount
--------------- ---------------
<S> <C> <C>
1999 $ 1,193,125
2000 857,439
2001 621,050
2002 81,832
2003 26,555
</TABLE>
Rent expense for all operating leases was approximately $467,000, $136,000,
and $115,000, during fiscal 1998, 1997 and 1996, respectively.
O - RELATED PARTY TRANSACTIONS
In February 1998 the Company paid an outside director $90,834 as a fee in
connection with the Company's purchase of Paaco (see Note C).
During fiscal 1998, in exchange for a fee, Paaco sold approximately $608,000
of 90-day service contracts to its customers on behalf of Medallia de Oro LLC
("Medallia"), a company owned by the minority shareholders of Paaco. In
addition, Paaco sends the majority of its vehicle trade-ins to an auction
company that is partially owned by its minority shareholders.
From time to time the minority shareholders of Paaco, and certain of their
family members, have loaned money to Paaco at interest rates ranging from 10 to
15%. At April 30, 1998 the aggregate amount of such loans totaled $2,317,350.
In June 1996 the Company entered into a definitive asset purchase agreement
to acquire a riverboat casino in Clinton, Iowa. This casino is principally owned
by the adult children of an outside director of the Company. In November 1996
the Company determined to abandon the proposed transaction, and, as a result,
forfeited a $500,000 deposit (see Note C).
The Company incurred legal fees of approximately $121,000 during fiscal 1996
from a law firm of which a director of the Company was a partner. In July 1995
this director left such law firm and became a full-time executive officer of the
Company.
P - COMMITMENTS AND CONTINGENCIES
Mortgage Loan Sales
In connection with the Company's sale of mortgage loans in the ordinary
course of business, in certain circumstances such loan sales involve limited
recourse to the Company for up to the first twelve months following the sale.
Generally, the events which could give rise to these recourse provisions involve
the prepayment or foreclosure of a loan, and violations of customary
representations and warranties. If the recourse provisions are triggered the
Company may be required to refund all or part of the premium received on the
sale of such loan, and in some cases the Company may be required to repurchase
the loan. Periodically the Company estimates the potential exposure related to
such recourse provisions and accrues a percentage of the total potential
liability.
Severance Agreements
The Company has entered into severance agreements with its three executive
officers which provide for payments to the executives in the event of their
termination after a change in control, as defined, of the Company. The
agreements provide, among other things, for a compensation payment equal to 2.99
times the annual compensation paid to the executive, as well as accelerated
vesting of any unvested options under the Company's stock option plans, in the
event of such executive's termination in connection with a change in control.
<PAGE> 21
Paaco Purchase Contingent Consideration
In connection with the Company's purchase of an additional 12% interest in
Paaco effective May 1, 1998, the Company agreed to pay the sellers as additional
consideration an amount equal to 60% of the excess of Paaco's pretax income in
excess of $2.5 million for the twelve months ended January 31, 1999. Such
additional consideration, if any, is to be paid in Company common stock valued
at $4.00 per share.
Q - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures for the fiscal years ended April 30, 1998,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Years Ended April 30,
1998 1997 1996
-------------- --------------- ---------------
<S> <C> <C> <C>
Note received for sale of first 50% interest in SCGC $ 20,000,000
Stock received for sale of second 50% interest in SCGC $ 12,025,000
Interest paid, net of amount capitalized $ 1,356,075 68,757 922,801
Income taxes paid 925,000
Inventory acquired in repossession 1,710,220
Conversion of a portion of CMN note to equity 2,516,493
</TABLE>
In connection with the Company's purchase of Paaco and Precision, assumed
liabilities were as follows:
<TABLE>
<CAPTION>
Paaco Precision
------------ -----------
<S> <C> <C>
Fair value of assets acquired $ 48,077,386 $ 8,258,112
Cash paid for capital stock (9,174,212) (4,032,389)
Minority interests (2,980,180) (128,461)
------------ -----------
Liabilities assumed $ 35,922,994 $ 4,097,262
============ ===========
</TABLE>
R - SUBSEQUENT EVENTS
Paaco and Precision Purchases
Effective May 1, 1998 the Company purchased the remaining 20% interest in
Precision it did not previously own by issuing 288,027 shares of the Company's
common stock. Also effective May 1, 1998 the Company purchased an additional 12%
interest in Paaco, bringing its ownership interest to 65%, by issuing 375,000
shares of the Company's common stock.
Bengal Acquisition
In August 1998 the Company reached a preliminary agreement, subject to
certain conditions, to acquire 100% of the outstanding common stock Bengal
Chemical, Inc. ("Bengal") for approximately $8.3 million. Bengal specializes in
the distribution of pesticide products in the southeastern United States. For
the year ended December 31, 1997 Bengal had unaudited revenues of approximately
$12 million.
<PAGE> 22
S - BUSINESS SEGMENTS
Operating results and other financial data are presented for the four
principal business segments of the Company for the year ended April 30, 1998.
These segments are categorized by legal entity, which also corresponds to their
line of business and how they are operated. The segments include (i) Paaco,
which sells and finances used vehicles, (ii) Precision, which rents and sells
intermediate bulk containers, (iii) Concorde, which originates and sells
sub-prime mortgage loans, and (iv) other, which includes corporate operations,
activities of relatively inactive subsidiaries and the Company's equity
investment in CMN. For the years ended April 30, 1997 and 1996 the Company
operated in a single business segment, and, accordingly, no separate segment
disclosures are necessary. The Company's business segment data for the year
ended April 30, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended April 30, 1998
--------------------------------------------------------------------------------------
Paaco Precision Concorde Other Eliminations Consolidated
-------- --------- -------- -------- ------------ -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Sales and other $ 14,241 $ 1,351 $ 1,100 $ 1,105 $ 17,797
Interest income 1,519 815 1,472 $ (388) 3,418
-------- ------- -------- -------- --------- --------
Total 15,760 1,351 1,915 2,577 (388) 21,215
-------- ------- -------- -------- --------- --------
Costs and expenses:
Interest expense 942 81 586 14 (388) 1,235
Depreciation and amort. 64 122 42 557 785
Other 13,715 867 2,094 2,928 19,604
-------- ------- -------- -------- --------- --------
Total 14,721 1,070 2,722 3,499 (388) 21,624
-------- ------- -------- -------- --------- --------
CMN earnings and other 965 965
-------- ------- -------- -------- --------- --------
Income (loss) before taxes
and minority interests $ 1,039 $ 281 $ (807) $ 43 $ -- $ 556
======== ======= ======== ======== ========= ========
Capital expenditures $ 1,648 $ 1,057 $ 568 $ 788 $ -- $ 4,061
======== ======= ======== ======== ========= ========
Total assets $ 45,427 $ 9,337 $ 16,211 $ 43,358 $ (20,656) $ 93,677
======== ======= ======== ======== ========= ========
</TABLE>
<PAGE> 23
T - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of the Company's quarterly results of operations for the years
ended April 30, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended April 30, 1998
--------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue(a) $ 494 $ 556 $ 1,165 $ 19,000 $ 21,215
Net income (loss) (309) (51) 14 694 348
Diluted earnings (loss) per share (0.03) (0.01) -- 0.07 0.04
</TABLE>
<TABLE>
<CAPTION>
Year Ended April 30, 1997
---------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue $ 601 $ 854 $ 298 $ 277 $ 2,030
Net income (loss)(b) 13,621 (468) (3,531) (762) 8,860
Diluted earnings (loss) per share(b) 1.16 (0.04) (0.34) (0.07) 0.80
</TABLE>
(a) - During the fourth quarter in the year ended April 30, 1998 revenues
increased significantly as a result of the Company's acquisitions of Paaco
and Precision.
(b) - During the first quarter in the year ended April 30, 1997 the Company
recognized a $14.9 million gain on the sale of its remaining 50% interest
in SCGC. During the third quarter of the year ended April 30, 1997 the
Company recognized a loss of $4.7 million from the sale of 1,850,000
shares of Casino America common stock it had received in the sale of its
remaining 50% interest in SCGC.
<PAGE> 24
REPORT OF INDEPENDENT ACCOUNTANTS CROWN GROUP, INC.
Stockholders and Board of Directors
Crown Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Crown Group,
Inc. and its subsidiaries at April 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
April 30, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Dallas, Texas PricewaterhouseCoopers LLP
August 1, 1998
<PAGE> 25
COMMON STOCK INFORMATION, DIVIDENDS AND CROWN GROUP, INC.
RELATED STOCKHOLDER MATTERS
The Company's common stock is authorized for quotation on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") Small
Cap Market under the NASDAQ symbol CNGR. The following table sets forth, by
fiscal quarter, the high and low sale prices reported by NASDAQ for the
Company's common stock for the periods indicated.
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997
High Low High Low
------ ------ ------ ------
<S> <C> <C> <C> <C>
First quarter $ 2.56 $ 2.00 $ 3.63 $ 1.69
Second quarter 4.00 2.38 3.06 2.00
Third quarter 3.56 3.00 3.25 2.00
Fourth quarter 4.31 3.00 2.94 2.00
</TABLE>
As of July 31, 1998 there were approximately 1,590 stockholders of record.
This number excludes individual stockholders holding stock under nominee
security position listings.
Since its inception the Company has paid no dividends on its common stock.
The Company currently intends to follow a policy of retaining earnings to
finance future growth. Payment of dividends in the future will be determined by
the Company's Board of Directors and will depend upon, among other things, the
Company's future earnings, operations, capital requirements and surplus, general
financial condition, and contractual restrictions that may exist, and such other
factors as the Board of Directors may deem relevant.
SELECTED FINANCIAL DATA
The financial data set forth below was derived from the audited consolidated
financial statements of the Company and should be read in conjunction with the
consolidated financial statements and related notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained elsewhere herein. (In thousands, except per share amounts.)
<TABLE>
<CAPTION>
Years Ended April 30,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues from:
Continuing operations $ 21,215 $ 2,030 $ 2,293 $ 177 $ 197
Discontinued opearations 604
Net income (loss) from:
Continuing operations $ 348 $ 8,860 $ 12,298 $(20,325) $ (2,052)
Discontinued operations (177)
-------- -------- -------- -------- --------
$ 348 $ 8,860 $ 12,298 $(20,325) $ (2,229)
======== ======== ======== ======== ========
Earnings (loss) per share (diluted):
Continuing operations $ 0.04 $ 0.80 $ 1.03 $ (2.01) $ (0.34)
Discontinued operations (0.03)
-------- -------- -------- -------- --------
$ 0.04 $ 0.80 $ 1.03 $ (2.01) $ (0.37)
======== ======== ======== ======== ========
Total assets $ 93,677 $ 38,237 $ 39,329 $ 54,507 $ 30,974
Total debt 46,035 987 31,660
Stockholders' equity 35,032 35,713 30,153 17,930 23,837
Shares outstanding 9,434 10,395 11,650 11,678 8,999
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Crown Group, Inc. and subsidiaries on Form S-8 (File Nos. 33-59519, 33-59527 and
333-38475) of our report dated August 1, 1998, on our audits of the consolidated
financial statements and financial statement schedule of Crown Group, Inc. and
subsidiaries as of April 30, 1998 and 1997, and for the years ended April 30,
1998, 1997 and 1996, which report is incorporated by reference in this Annual
Report on Form 10-KA Amendment No. 1.
Dallas, Texas PricewaterhouseCoopers LLP
January 12, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated March 6, 1998 with respect to the financial statements of
Casino Magic Neuquen S.A. as of December 31, 1997 and for the year then ended
included in this Form 10-K/A, into Crown Group, Inc.'s previously filed
Registration Statements File Nos. 33-59519, 33-59527 and 333-38475.
New Orleans, Louisiana Arthur Andersen LLP
January 11, 1999
