1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: Commission file number:
APRIL 30, 1998 0-14939
CROWN GROUP, INC.
(Exact name of registrant as specified in its charter)
TEXAS 63-0851141
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
4040 N. MACARTHUR BLVD., SUITE 100, IRVING, TEXAS
(Address of principal executive offices)
75038
(Zip Code)
(972) 717-3423
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 par share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of August 10, 1998 the aggregate market value of the voting stock held by
non-affiliates (all persons other than executive officers, directors and
holder's of 5% or more of the Registrant's common stock) of the Registrant
(7,516,394 shares) was $26,777,154.
As of August 10, 1998 there were 10,243,731 shares of the Registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Annual Report to Stockholders for the year ended
April 30, 1998 are incorporated by reference into Part II of this report, and
portions of the Registrant's definitive Proxy Statement for its Annual Meeting
of Stockholders to be held in 1998 are incorporated by reference into Part III
of this report, with the exception of information regarding executive officers
required under Item 10 of Part III, which information is included in Part I,
Item 1.
2
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. Certain information included in this
Form 10-K and other materials filed or to be filed by the Company with the
Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by the Company)
contains statements that are forward-looking, such as statements relating to
plans for future expansion and other business development activities as well as
capital spending, financing sources and the effects of regulation and
competition. Such forward-looking information involves important risks and
uncertainties that could significantly affect anticipated results and,
accordingly, such results may differ from those expressed in any
forward-looking statements made by or on behalf of the Company. These risks
and uncertainties include, but are not limited to, those relating to the
development of the Company's businesses, continued availability of lines of
credit for the Company's businesses, changes in the industries in which the
Company operates, competition, dependence on existing management, the stability
of Argentina's government, currency exchange rate fluctuations, the
repatriation of funds from Argentina, domestic or global economic conditions
(particularly in the Dallas/Ft. Worth area), changes in foreign or domestic tax
laws or the administration of such laws and changes in gaming or lending laws
or regulations.
GENERAL AND HISTORY
Crown Group, Inc. ("Crown") and collectively with its subsidiaries (the
"Company"), is a publicly traded buy-out firm which presently owns (i) 65% of
Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation
(collectively, "Paaco"), a vertically integrated used car sales and finance
company, (ii) 100% of Precision IBC, Inc. ("Precision"), a firm specializing in
the sale and rental of intermediate bulk containers, (iii) 80% of Concorde
Acceptance Corporation ("Concorde"), a sub-prime mortgage lender, (iv) 49% of
Casino Magic Neuquen S.A. ("CMN"), a casino operator in the Province of
Neuquen, Argentina, and (v) 80% of Home Stay Lodges I, Ltd. ("Home Stay"), a
partnership focusing on the development and operation of extended-stay lodging
facilities. In addition, from time to time the Company purchases and sells
small ownership interests in securities of privately held and publicly traded
firms. For a summary of the Company's operating results and other financial
data by business segment, see Note S of the Company's consolidated financial
statements appearing elsewhere in this annual report. The Company is presently
focusing on (i) the development and expansion of its existing businesses, and
(ii) the potential acquisition or development of other businesses unrelated to
its existing businesses.
Since its inception in 1983 through June 1993 the Company was engaged in
various facets of the cable and related programming businesses. During 1992
the Company sold the majority of its programming business and began exploring
new business opportunities. In June 1993 the Company made the decision to
enter the gaming business, and, as a result, proceeded to sell the balance of
its cable assets.
From June 1993, with the acquisition of 100% of St. Charles Gaming Company,
Inc. ("SCGC"), until November 1996, the Company's primary business focus was
that of owning, operating and developing casino gaming properties. SCGC owns
and operates a riverboat gaming casino located in Calcasieu Parish, Louisiana
which had been in the development stage until opening in July 1995. The
Company sold a 50% interest in SCGC in June 1995 and the remaining 50% interest
in May 1996, in each case resulting in a substantial gain.
In November 1996 the Company decided to expand its business interests beyond
casino gaming and began pursuing business opportunities in other fields. As a
result the Company has either acquired or formed a number of businesses in a
variety of industries as follows:
CMN - In June 1997 the Company acquired a 49% interest in CMN from
Casino Magic Corp. ("Casino Magic") for a purchase price of $7
million. CMN operates casinos in the cities of Neuquen and San Martin
de los Andes ("San Martin") in the Province of Neuquen, Argentina
under an exclusive concession contract.
2
3
CONCORDE - In June 1997 the Company, along with certain newly hired
management personnel, formed Concorde. Concorde is in the business of
originating, purchasing, servicing and selling sub-prime mortgage
loans which are secured primarily by first and second liens on
residential properties. These loans are sold in privately negotiated
transactions to institutional investors and other third parties.
PAACO - In February 1998 the Company acquired 53% of the common stock
of Paaco for a purchase price of approximately $9.1 million cash.
Approximately $4.9 million of Paaco common stock was purchased
directly from Paaco, and the remaining $4.2 million was purchased from
Paaco management personnel who prior to this transaction were the sole
shareholders of Paaco. Effective May 1, 1998 the Company purchased an
additional 12% interest in Paaco from the management shareholders. The
purchase price of approximately $1.5 million was paid by issuing
375,000 shares of the Company's common stock. Paaco is a vertically
integrated used car sales and finance company which operates seven
used car dealerships in the Dallas-Ft. Worth metropolitan area. Paaco
sells, underwrites and finances used cars and trucks with a focus on
the Hispanic market.
PRECISION - In February 1998 the Company acquired 80% of the common
stock of Precision IBC, Incorporated ("Original Precision") for a
purchase price of approximately $2.4 million cash. In March 1998 the
Company acquired 80% of the common stock of M&S Tank Rentals, Inc.
("M&S") for a purchase price of $1.65 million cash. Original
Precision and M&S were subsequently merged together into a newly
formed corporation, Precision IBC, Inc. ("Precision"). Effective May
1, 1998 the Company acquired the remaining 20% of Precision by issuing
288,027 shares of the Company's common stock. Precision is in the
business of renting, selling, testing and servicing principally
stainless steel intermediate bulk containers.
CMN - GAMING
GENERAL
CMN operates casinos in the cities of Neuquen and San Martin in the Province of
Neuquen, Argentina. Prior to 1995 these casinos were operated by the
provincial government. In January 1995 CMN entered into a twelve-year
exclusive concession contract to operate these casinos. The concession
contract can be extended by CMN for an additional five years under certain
circumstances. CMN is owned 51% by Casino Magic and 49% by the Company. In
addition, the Company also owns (i) a 16.4% interest in a certain management
agreement relating to CMN, and (ii) a 49% interest in (a) slot machines and a
related lease agreement, and (b) a certain royalty agreement relating to CMN.
In addition to receiving periodic dividends from CMN's earnings, the Company
also receives its pro-rata share of fees and rentals from these agreements.
For a summary of CMN's operating results and identifiable assets, see Note C of
the Company's consolidated financial statements appearing elsewhere in this
annual report.
LOCATION, FACILITIES AND OPERATIONS
The Province of Neuquen is located approximately 400 miles east of Buenos Aires
in central Argentina. The Neuquen facility, which is leased by CMN from the
Province of Neuquen, is located at the Neuquen International Airport
approximately 15 miles from downtown Neuquen City. This facility has
approximately 1,000 dedicated parking spaces available to its patrons, and has
an additional 3,000 parking spaces available at the adjacent airport. The San
Martin facility is leased from a third party and is located in the center of
the city. Certain combined information regarding the Neuquen and San Martin
casinos is as follows:
Gaming square feet 29,500
Slot machines 473
Table games 56
Revenues (in millions):
Calendar 1995 $ 13.0
Calendar 1996 15.9
Calendar 1997 17.5
3
4
The casinos are open seven days a week generally from 10:00 p.m. to 5:00 a.m.
Monday through Thursday, 5:00 p.m. to 5:00 a.m. on Friday, and 2:00 p.m. to
5:00 a.m. on Saturday and Sunday. Peak admission occurs around 1:00 a.m. The
casinos offer slot machines, table games, food, beverages and gift items, as
well as live entertainment at the Neuquen casino on weekends. Table games
include roulette, black jack, punto y banca and big six.
MARKET AND MARKETING STRATEGY
Greater Neuquen City has a population of approximately 220,000 with an
estimated 600,000 people living within 120 miles while San Martin has a
population of approximately 17,000 with an estimated 150,000 people living
within 120 miles. Neuquen is one of the wealthiest Argentine provinces per
capita, principally due to energy production. The Province of Neuquen holds
approximately 40% of Argentina's proven oil and gas reserves. San Martin is
located in the Andes Mountains near one of the country's largest ski resorts,
and is well known for its trout and salmon fly fishing.
CMN's marketing strategy has been to provide the customer with an American
style gaming atmosphere. Most casinos in Argentina have a European style
gaming atmosphere. European style casinos tend to be more formal, oftentimes
with casino dealers dressed in tuxedos, little or no emphasis on slot play and
rarely provide live entertainment. Since taking over operating control of the
Neuquen and San Martin casinos in early 1995 CMN has substantially increased
the number of slot machines, eliminated admission fees, reduced the price of
food and beverages, encouraged a casual dress code and provided live
entertainment at no charge on the weekends. As a result of these changes, CMN
has dramatically increased the customer count and revenues of its two casinos.
CONCESSION CONTRACT
In January 1995 CMN entered into a twelve-year concession contract with the
Province of Neuquen providing CMN with the exclusive right to develop and
operate all gaming activities within 50 kilometers (31 miles) of each of the
Neuquen and San Martin casinos, within the boundaries of the Province, during
the concession term. The concession term will automatically be extended an
additional five years in the event CMN individually, or jointly with others,
invests at least $5 million in lodging infrastructure. The transfer of the
ownership of the concession is subject to the approval of the Province.
In connection with the granting of the concession contract CMN paid a one-time
concession fee of $9 million to the Province of Neuquen. CMN also pays the
Province $220,000 per month as a combination tax/rent payment. If CMN decides
to move from the Neuquen casino location, which is currently being leased from
the Province, it will receive a $40,000 per month reduction in its payment to
the Province. The monthly tax/rent payment is subject to increase in the event
annual net gaming revenues exceed $52.8 million.
In addition, CMN is obligated to pay all applicable federal and provincial
taxes including a 2% provincial tax on net gaming revenue, and a 33% federal
income tax on earnings. Pursuant to the concession, the Province of Neuquen
guarantees that no additional municipal or provincial taxes will be levied on
CMN's operations, and that existing provincial and municipal taxes will not be
increased.
SHAREHOLDERS' AGREEMENT
In connection with the Company's 49% purchase of CMN, the Company and Casino
Magic entered into a shareholders' agreement (the "Shareholders' Agreement")
which provides, among other things, that in the event either the Company or
Casino Magic desires to sell its interest in CMN such shareholder must first
offer to sell its interest to the other shareholder under the terms and
conditions provided in the Shareholders' Agreement. Except as expressly
permitted by the Shareholders' Agreement, neither the Company nor Casino Magic
may sell, assign, or otherwise transfer or encumber any part of the CMN stock
owned by either of them without the written consent of the other shareholder.
As required by the Shareholders' Agreement CMN has four directors on its board,
two of which are appointed by the Company and the other two are appointed by
Casino Magic. The Shareholders' Agreement requires the unanimous approval of
all shareholders prior to authorizing certain corporate actions. Those actions
requiring unanimous CMN shareholder approval include matters pertaining to (i)
the issuance or purchase of CMN stock, (ii) amendments to CMN's articles of
incorporation or by-laws, (iii) a liquidation or merger, (iv) the sale of a
substantial portion of CMN's assets, (v) material or related party contracts,
(vi) incurring debt, and (vii) amendments to the concession contract with the
Province of Neuquen.
4
5
The Shareholders' Agreement also provides that the Company and Casino Magic may
jointly develop additional casinos in Argentina on mutually satisfactory terms,
and that neither the Company nor Casino Magic may own, operate or obtain any
material benefit from another casino in Argentina without the prior written
consent of the other shareholder.
COMPETITION
CMN's two casinos are currently the only operating casinos in the Province of
Neuquen. Since the concession contract restricts competition in the Province of
Neuquen that is within 50 kilometers (31 miles) of CMN's two casinos, CMN does
not experience significant competition in its primary market area. There are,
however, approximately 44 government-operated casino properties throughout the
country, including a casino in Chipolletti, across the Rio Negro River from the
City of Neuquen in the Rio Negro Province, and a second casino in the Rio Negro
Province approximately 30 miles southeast of the City of Neuquen.
REGULATION
The Province of Neuquen enacted a casino privatization program in order for it
to issue the twelve-year exclusive concession contract to CMN to operate the
Neuquen and San Martin casinos. These two casinos are the only casinos in the
Province of Neuquen. The casinos had previously been operated by the
provincial government. The Ministry of Finance of Argentina has adopted a
modified regulatory system for casinos, based on the regulatory system utilized
by the State of Nevada, and such regulatory system is being administered by the
Province of Neuquen. Such modified regulatory system provides rules and
regulations relating to, among other things, (i) the suitability of officers,
directors and significant shareholders, (ii) maintenance of effective controls
over operating and financial practices, and (iii) the submission of financial
reports. CMN can not predict what effect the enactment of other laws,
regulations or pronouncements that relate to casino gaming may have on the
operations of CMN.
CONCORDE - MORTGAGE BUSINESS
GENERAL
In June 1997 the Company, along with certain newly hired management personnel,
formed Concorde. Concorde is in the business of originating, purchasing,
servicing and selling sub-prime mortgage loans which are secured primarily by
first and second liens on residential properties. These loans are sold in
privately negotiated transactions to institutional investors and other third
parties, and in the future may be sold in the secondary market through
securitization programs.
Concorde focuses on lending to individuals who have impaired or unsubstantiated
credit histories and/or unverifiable income. Loans made to these individuals do
not qualify for purchase by government-sponsored agencies such as the Federal
Home Loan Mortgage Association and the Federal Home Loan Mortgage Corporation,
and thus are sometimes referred to as non-conforming or sub-prime mortgage
loans. Such loans generally provide higher yields than conforming loans. The
principal differences between conforming loans and non-conforming loans include
the applicable loan-to-value ratios, the credit and income histories of the
mortgagors, the documentation required for approval of the mortgagors, the type
of properties securing the mortgage loans, the loan sizes, and the mortgagors'
occupancy status with respect to the mortgaged properties. Second mortgage
loans are made to borrowers owning single-family homes for the purpose of debt
consolidation, home improvements, education and a variety of other purposes.
These loans generally provide a higher interest rate yield than first mortgage
loans, and are secured by a second lien on the property.
Management believes the sub-prime mortgage loan industry is fragmented and
operates inefficiently compared to the conforming loan industry, and as a
result, higher interest rate yields are available to sub-prime mortgage lenders
even after considering a higher rate of loan defaults. Management also
believes the sub-prime mortgage loan industry is less cyclical than the
conforming loan industry because the sub-prime mortgage borrower is more
"payment" sensitive rather than "interest rate" sensitive. In addition, the
federal tax code's preferential treatment of the interest expense deduction for
home mortgage loans makes it financially advantageous for many individuals to
convert their credit card and other consumer loans into a mortgage loan.
5
6
LOAN ORIGINATIONS AND PURCHASES
Concorde began originating and purchasing mortgage loans in July 1997.
Concorde originates loans through a network of independent retail mortgage
brokers and directly through telemarketing and direct mail programs. Concorde
also purchases mortgage loans from a network of wholesale loan brokers and
correspondents, including banks and thrift institutions. Loans purchased from
wholesale loan brokers and correspondents typically require Concorde to pay a
premium, whereas Concorde generally does not pay premiums on loans originated
through retail mortgage brokers.
Prior to purchasing loans through wholesale loan brokers and correspondents,
Concorde reviews the loan packages to determine whether the packages are
complete and adhere to Concorde's underwriting guidelines. Depending on the
size of the pool of loans purchased, Concorde may engage a third-party
underwriter to reunderwrite the loans, verify the borrower's employment status,
determine the quality of the appraisal and assign a credit grade. Concorde
also analyzes the financial condition of the mortgage banker, which includes a
review of the mortgage bankers' licenses and financial statements. Upon
approval, Concorde typically requires each mortgage banker to enter into a
purchase and sale agreement that contains customary representations and
warranties regarding the loans such mortgage banker will sell to Concorde.
UNDERWRITING
Concorde's underwriting guidelines are provided to mortgage loan brokers and
mortgage bankers so they can create loan applications or bulk purchase packages
which meet such guidelines. Upon receipt of a completed loan package from a
mortgage loan broker, Concorde's underwriting staff reviews the package, which
includes the loan application, a current appraisal of the underlying collateral
property, a preliminary title report and a credit report to determine if the
proposed loan meets its underwriting guidelines. To assess the credit quality
of each loan, Concorde's underwriters consider various factors, including the
appraised value of the collateral property, the applicant's debt payment
history, credit profile and employment status, and the combined debt ratio and
loan-to-value ratio upon completion of the proposed mortgage loan. Personal
circumstances including divorce, family illnesses or deaths and temporary job
loss due to layoffs and corporate downsizing often impair an applicant's credit
record. On an exception basis mortgage loans may be made to individuals whose
credit profile does not conform to Concorde's guidelines, but only with the
approval of an officer of Concorde. Concorde does not delegate underwriting
authority to any broker or correspondent.
Property appraisals for loans originated or purchased by Concorde are conducted
by licensed, independent appraisers who are approved by Concorde. Upon receipt
of the appraisal, Concorde's underwriting staff reviews the value of the
underlying collateral based upon a full review of the appraisal. Concorde
selects its appraisers based on professional experience, education, membership
in related professional organizations and experience with the appraiser. For
wholesale and correspondent loans purchased, Concorde will typically request a
second appraisal if the original appraisal was completed by an appraiser who is
not acceptable to Concorde.
Prior to funding a loan, Concorde's underwriting staff determines the
applicant's creditworthiness and ability to service the loan. Verification of
personal financial information, credit history, and employment history is
required prior to closing the loan. Concorde has established classifications
with respect to its borrowers based upon the credit profile of such borrower
and certain other borrower characteristics. Each loan applicant is placed into
one of four letter ratings ("A" through "D", with sub-ratings within each
category), depending upon a number of factors including the applicant's credit
history and employment status. Terms of loans made by Concorde, as well as the
maximum loan-to- value ratio and debt service-to-income ratio (calculated by
dividing fixed monthly debt payments by gross monthly income), vary depending
upon the classification of the borrower. Borrowers with lower credit ratings
generally pay higher interest rates and loan origination fees. Generally, loan
applicants are required to have two years of employment with their current
employer or two years of similar business experience. Verification of
information regarding the first mortgage, if any, is also required, including
balance, status and whether local taxes, interest, insurance and assessments
are included in the applicant's monthly payment. All taxes and assessments not
included in the payment are required to be verified as current. Upon
successful completion of the underwriting process, the closing of the loan is
scheduled with an independent closing attorney or title company who is
responsible for closing the loan in accordance with Concorde's closing
procedures.
LOAN SERVICING AND COLLECTIONS
Servicing involves, among other things, collecting payments, applying such
payments of principal and interest to the appropriate loan, ensuring the
underlying collateral is properly insured, preparing reports relative to such
loans and enforcing the lender's rights with respect to the loans, including,
recovering delinquent payments, instituting foreclosures and liquidating the
underlying collateral. Management believes that servicing Concorde's own
portfolio enhances certain operating efficiencies
6
7
and provides an additional and profitable revenue stream that is less cyclical
than the business of originating and purchasing loans. Concorde's servicing
portfolio is subject to reduction by normal monthly payments, prepayments and
foreclosures. In general, revenue from Concorde's loan servicing portfolio may
be adversely affected as interest rates decline and loan prepayments increase.
In some states in which Concorde operates, prepayment fees may be limited or
prohibited by applicable law.
Concorde sends borrowers a monthly billing statement twenty days prior to the
monthly payment due date. Although borrowers generally make loan payments
within ten to fifteen days after the due date (the "grace period"), if a
borrower fails to pay the monthly payment within the grace period, Concorde
commences collection efforts by notifying the borrower of the delinquency. If
the loan remains unpaid, Concorde will contact the borrower to determine the
cause of the delinquency and to obtain a commitment to cure the delinquency at
the earliest possible time.
As a general matter, if efforts to obtain payment have not been successful, a
pre-foreclosure notice will be sent to the borrower generally 30 days after the
due date of the next subsequently scheduled installment, providing 30 days
notice of the impending foreclosure action. During the 30-day notice period,
collection efforts continue. However, if no substantial progress has been made
in collecting delinquent payments from the borrower, foreclosure proceedings
generally begin. Generally, Concorde will have commenced foreclosure
proceedings when a loan is over 60 days delinquent.
Loans originated or purchased by Concorde are secured by mortgages, deeds of
trust, security deeds or deeds to secure debt, depending upon the prevailing
practice in the state in which the property securing the loan is located.
Depending on local law, foreclosure is effected by judicial action or
nonjudicial sale, and is subject to various notice and filing requirements. In
general, the borrower, or any person having a junior encumbrance on the real
estate, may cure a monetary default by paying the entire amount in arrears plus
other designated costs and expenses incurred in enforcing the obligation during
a statutorily prescribed reinstatement period. Generally, state law controls
the amount of foreclosure expenses and costs, including attorneys' fees, which
may be recovered by a lender. After the reinstatement period has expired
without the default having been cured, the borrower or junior lienholder no
longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale.
Although foreclosure sales are typically public sales, frequently no
third-party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus, it is likely the lender will purchase the property from the
trustee or referee for an amount equal to the principal amount outstanding
under the loan, accrued and unpaid interest and the expenses of foreclosure.
Depending upon market conditions and loan-to-value ratios, the ultimate
proceeds from the sale of the collateral may not equal Concorde's investment in
the property.
LOAN SALES AND SECURITIZATIONS
Concorde sells the majority of the loans it originates and purchases to
institutional investors and other third parties. In the future Concorde may
sell loans in the secondary market through securitization transactions. Loans
are sold periodically to provide Concorde with greater flexibility and
operating leverage than that of a traditional portfolio lender. Loans sold on
a wholesale basis are done so to third party institutions on a limited recourse
basis for cash with servicing rights released. Securitizations, on the other
hand, are loan sales in which the lender continues to be exposed to some
prepayment and credit risk as long as the underlying loan portfolio remains
outstanding.
Generally, in a securitization transaction, a lender sells mortgage loans it
has originated or purchased to a special purpose trust. The trust issues
mortgage passthrough certificates. The senior certificates, which typically
carry a coupon well below the weighted average coupon of the underlying
mortgage loans, are sold in an offering and the lender retains the
interest-only and residual certificates, which are amortized over the estimated
average life of the loan portfolio. The cash flow realized from these interest
only and residual certificates is subject to the prepayment and loss
characteristics of the underlying loans. These interest only and residual
certificates are valued at the time of the securitization. The valuation takes
into account certain loss and prepayment assumptions, servicing and other fees
to be paid and discounts the projected future net cash flow stream to its
present value. Thus, to the extent loss and prepayment rates exceed the
original assumptions used in recording the interest-only and residual
certificates, the value of such certificates will be reduced.
7
8
Typically the special purpose trust has the benefit of a financial guaranty
policy from a monoline insurance company, which insures the timely payment of
interest and the ultimate payment of principal of the investor certificate.
Loan losses first reduce the amounts otherwise available to the interest-only
and residual certificate holders and thereafter, if necessary, the monoline
insurance company will pay any further losses experienced by the holders of the
senior certificates.
REGULATION
The operations of Concorde are subject to extensive regulation, supervision and
licensing by federal, state and local government authorities. Regulated
matters include, without limitation, loan origination, credit activities,
maximum interest rates and finance and other charges, disclosure to customers,
the terms of secured transactions, the collection, repossession and
claims-handling procedures utilized by Concorde, multiple qualification and
licensing requirements for doing business in various jurisdictions and other
trade practices.
Concorde's loan origination activities are subject to the laws and regulations
in each of the states in which those activities are conducted. Concorde's
activities as a lender are also subject to various federal laws including,
among others, the Truth in Lending Act ("TILA"), the Real Estate Settlement
Procedures Act ("RESPA"), the Equal Credit Opportunity Act of 1974, as amended
("ECOA"), the Home Mortgage Disclosure Act and the Fair Credit Reporting Act of
1970, as amended ("FCRA").
The TILA and Regulation Z promulgated thereunder contain disclosure
requirements designed to provide consumers with uniform, understandable
information with respect to the terms and conditions of loans and credit
transactions in order to give them the ability to compare credit terms. TILA
also guarantees consumers a three-day right to cancel certain credit
transactions including loans of the type originated by Concorde. Management of
Concorde believes that it is in compliance with TILA and Regulation Z in all
material respects.
Concorde is also required to comply with the ECOA, which prohibits creditors
from discriminating against applicants on the basis of race, color, sex, age or
marital status. Regulation B promulgated under ECOA restricts creditors from
obtaining certain types of information from loan applicants. It also requires
certain disclosures by the lender regarding consumer rights and requires
lenders to advise applicants of the reasons for any credit denial. In
instances where the applicant is denied credit or the rate or charge for a loan
increases as a result of information obtained from a consumer credit agency,
another statute, the FCRA, requires the lender to supply the applicant with a
name and address of the reporting agency. Concorde is also subject to RESPA
and is required to file an annual report with the Department of Housing and
Urban Development pursuant to the Home Mortgage Disclosure Act.
In the course of its business, Concorde may acquire properties as a result of
foreclosure. There is a risk that hazardous or toxic waste could be found on
such properties. In such event, under certain state and federal environmental
laws, Concorde could be held responsible for the cost of cleaning up or
removing such waste, and such cost could exceed the value of the underlying
properties.
The laws, rules and regulations applicable to Concorde are subject to amendment
and change. Changes or amendments to existing law, or new laws could make
compliance much more difficult or expensive, restrict Concorde's ability to
originate, purchase, broker or sell loans, further limit or restrict the amount
of commissions, interest and other charges earned on loans originated or sold
by Concorde, or otherwise adversely affect the business or prospects of
Concorde.
COMPETITION
The Company is a new entrant in the sub-prime mortgage lending industry, is
small compared to many of its competitors and faces intense competition in the
business of originating, purchasing and selling mortgage loans. Competition in
the industry takes many forms including convenience in obtaining a loan,
customer service, marketing and distribution channels, and amount and terms of
the loan. Traditional competitors in the financial services business include
other mortgage banking companies, commercial banks, credit unions, thrift
institutions, credit card issuers and finance companies. Most of these
competitors in the consumer finance business are substantially larger and have
considerably greater financial, technical and marketing resources than
Concorde.
8
9
PAACO - USED CAR SALES AND FINANCE
GENERAL
Paaco is a vertically integrated used car sales and finance company that
presently operates seven used car dealerships in the Dallas-Ft. Worth
metropolitan area ("DFW Metroplex"). Paaco's dealerships target Hispanic
customers who have limited credit histories, low incomes, or past credit
problems (hereinafter referred to as "Sub-Prime Borrowers"). Paaco's
operations include the purchase, reconditioning and sale of used cars and
trucks, and the underwriting, financing and servicing of the related retail
installment contract, and, if necessary, the repossession and remarketing of a
vehicle.
INDUSTRY
Used Car Sales
Used car retail sales typically occur through franchised new car dealerships
that sell used cars or independent used car dealerships. The market for used
car sales in the United States is significant and has steadily increased over
the past five years. Paaco believes that the factors that have led to growth in
this industry include (i) substantial increases in new car prices, which have
made new cars less affordable to the average consumer relative to used cars,
(ii) the greater reliability and durability of used cars resulting from the
production of higher quality cars, and (iii) the increasing number of vehicles
coming off lease programs in recent years. Many analysts expect these trends
to continue, leading to further expansion of the used car sales market.
Paaco participates in the sub-prime segment of the independent used car sales
and finance market. This segment is serviced primarily by numerous small
independent used car dealerships that sell and finance sales of used cars to
Sub-Prime Borrowers ("Buy Here-Pay Here" dealers). Buy Here-Pay Here dealers
typically offer their customers certain advantages over more traditional
financing sources, such as broader and more flexible underwriting guidelines,
flexible payment terms (including prorating customer payments dues within one
month into several smaller payments and scheduling payments to coincide with a
customer's pay days), and the ability to make payments in person, an important
feature to many Sub-Prime Borrowers who may not have checking accounts or are
otherwise unable to make payments by the due date through the mail because of
the timing of paychecks.
Used Car Financing
The automobile financing industry is the third-largest consumer finance market
in the country, after mortgage debt and revolving credit card debt. Growth in
automobile financing has been fueled by increasing prices of both new and used
cars, which has forced more buyers to seek financing when purchasing a car.
This industry is served by such traditional lending sources as banks, savings
and loans, and captive finance subsidiaries of automobile manufacturers, as
well as by independent finance companies and Buy Here-Pay Here dealers. In
general, the industry is categorized according to the type of car sold (new
versus used) and the credit characteristics of the borrower.
Despite significant opportunities, many of the traditional lending sources do
not consistently provide financing to the sub-prime consumer finance market.
Paaco believes traditional lenders avoid this market because of its high credit
risk and the associated collection efforts. Many of the approximately 64,000
independent used car dealers are not able to obtain debt financing from
traditional lending sources such as banks, credit unions, or major finance
companies. These dealers typically finance their operations through the sale
of contract receivables at a discount.
OPERATIONS
Purchasing Vehicles
Paaco purchases the majority of its vehicles from about twelve auctions held in
cities throughout the State of Texas and in neighboring states. In addition,
Paaco purchases vehicles on a wholesale basis from dealers in and around the
DFW Metroplex. Vehicles are purchased at prices ranging from about $4,000 to
$9,000, with an average purchase price of $6,000. Prior to purchasing a
vehicle, Paaco performs certain inspections and, as permitted, test drives each
vehicle. The identity of the buyer responsible for each vehicle acquired is
tracked through Paaco's system in order for Paaco to monitor the results of
that buyer's purchases. For each buyer Paaco monitors (i) the average number
of days vehicles are held in inventory, and (ii) the cost of each vehicle in
comparison to similar models purchased by other buyers and in comparison to
NADA wholesale values.
9
10
Reconditioning
Each vehicle purchased is taken to Paaco's centralized reconditioning center in
Irving, Texas where a variety of parts, assemblies, and systems are inspected
and, if necessary, repaired or replaced. In addition to inspecting, repairing
and preparing acquired vehicles for sale, the Irving facility performs repair
and service work on vehicles for cash paying customers and pursuant to service
contracts. More than 90% of Paaco's customers elect to purchase a service
contract when purchasing a vehicle.
Selling, Marketing and Advertising
Each lot is typically staffed with a manager, up to six bilingual sales
personnel, and several others including clerical workers, collectors, mechanics
and a porter. The lots are operated six days a week, generally between the
hours of 10:00 am and 9:00 pm. Each lot maintains an inventory level of 40 to
75 cars and trucks. Each week Paaco's sales personnel attend training classes
conducted by a full-time sales trainer. Each phase of the sales process is
rehearsed with the salesman employing trial closing questions. Salesmen are
paid principally on a commission basis.
Paaco's marketing objective is to cause Paaco to become a distinguishable brand
name among the Hispanic community that stands for value, dependability and
service. Paaco achieves this goal by (i) locating its dealerships in densely
populated Hispanic neighborhoods, (ii) frequently airing a series of
advertisements on local Hispanic television and radio stations, and (iii)
offering a thoroughly inspected and reconditioned vehicle for sale at a fair
price.
In addition to its television and radio advertising, Paaco conducts a variety
of promotional activities including a sales referral program, occasional live
entertainment at its dealerships, and distribution of promotional items.
Existing customers have historically been a good source of referrals. Paaco
also has a mascot named "Senor Paaco", a jovial Hispanic gentleman who wears an
oversized sombrero and has become very popular with the customers.
Underwriting and Finance
Paaco finances approximately 98% of the used cars and trucks sold at its
dealerships. These retail installment contracts are serviced exclusively by
Paaco. In connection with such financing, Paaco requires an acceptable deal
structure and credit profile. The required deal structure typically involves a
down payment between 10% and 15% of the vehicles purchase price, a term not to
exceed 36 months, an acceptable interest rate and payment terms that coincide
with the customer's pay dates.
Upon the customer agreeing to a specific deal structure, the salesmen turns the
potential customer over to credit personnel who obtain a credit application.
Paaco's credit personnel reviews and verifies the credit information including
employment, residence and credit history, income information and personal
references. Upon completion of the review and verification process, each deal
is forwarded to a centralized deal desk where the proposed transaction is
reviewed for adherence to Paaco's underwriting and financing guidelines.
Collections
Paaco believes a key element in the success of its business is its effective
collections department. Upon completion of a financed sale pertinent data is
entered into Paaco's computer system. Paaco's bilingual collection staff
utilizes its collection software to monitor the payment activity of its
installment contracts. This software provides its collections staff with
reports stratified principally by the number of days a payment is past due. If
a customer's payment is late, collection personnel will contact the customer by
phone within three days (one day if its the first payment) of the scheduled due
date. Paaco personnel document pertinent information (promises to pay,
alternative payment schedules, etc.) from each phone contact with a customer.
The collections staff works in teams and team members can receive bonuses based
upon the results of their collection efforts. Paaco monitors the results of
its collections department based upon a number of quantitative criteria
including (i) the number of calls placed, contacts made and promises received,
(ii) the gross number of payments and dollars collected each week, (iii) the
average number of days past due, (iv) installment contract agings, and (v)
static pool analysis.
If a customer becomes seriously delinquent in his payments and management
determines that timely collection of future payments is not probable, Paaco
will take steps to repossess the vehicle. Of the vehicles repossessed, many
are returned to Paaco by the customer on a voluntary basis. Other
repossessions are performed using third party repossession agents. The majority
of repossessed vehicles are reconditioned and resold through Paaco's
dealerships.
10
11
COMPETITION
The used automotive retailing industry is highly competitive and fragmented.
Presently there are an estimated 23,000 franchised automobile dealers and 64,000
independent used vehicle dealers. In recent years a number of large companies
including Auto Nation USA and Driver's Mart have entered the used car sales
business or announced plans to develop large used car sales operations.
Management believes these operations do not provide significant competition for
Paaco as they tend to sell higher priced vehicles to consumers with stronger
credit histories. Paaco competes principally with other Buy Here-Pay Here
dealers, and to a lesser degree with (i) the used vehicle retailing operation of
franchised automobile dealerships, (ii) independent used vehicle dealers, and
(iii) individual consumers who sell used vehicles in private transactions.
Paaco believes the principal competitive factors in the sale of its used
vehicles include (i) the availability of financing to Sub-Prime Borrowers, (ii)
the breadth and quality of vehicle selection, (iii) the availability of popular
vehicles, (iv) pricing, (v) the convenience of a dealership's location, (vi)
customer service, and (vii) the ability to communicate in Spanish and English
with its customers. Paaco believes that its dealerships are competitive in
each of these areas.
REGULATION AND LICENSING
Paaco's operations are subject to ongoing regulation, supervision, and
licensing under various federal, state, and local statues, ordinances, and
regulations. These laws include the Truth In Lending Act, the Equal Credit
Opportunity Act and the Fair Credit Reporting Act of 1970. Among other things,
these laws required that Paaco obtain and maintain certain licenses and
qualifications, limit or prescribe terms of the contracts that Paaco
originates, require specified disclosures to customers, limit Paaco's right to
repossess and sell collateral, and prohibit Paaco from discriminating against
customers on the basis of certain characteristics including age, race and
gender.
Paaco typically charges fixed interest rates in excess of traditional finance
companies on the contracts originated at its dealerships. The State of Texas
imposes limits on the interest rates the Paaco may charge on its loans, with
such limits generally being a function of the age of the vehicle.
PRECISION - IBC RENTALS AND SALES
GENERAL
Precision is in the business of renting and selling intermediate bulk
containers ("IBC's" or "tanks") to petroleum related, industrial and
manufacturing concerns. Precision's tanks generally come in two sizes (350
gallon and 550 gallon) and are used primarily to store liquids in bulk. These
liquids include industrial and textile chemicals (surfactants, soaps, dyes and
brighteners), solvents, lubricants, water clarifiers, corrosive inhibitors,
contract packaging items (shampoo), and food items (mayonnaise, ketchup,
barbecue sauce, honey, syrup and concentrate). Precision also performs certain
tank maintenance and testing services, and sells spare parts such as valves and
lids. Precision operates from facilities in Fairhope, Alabama and Lafayette,
Louisiana and presently has a fleet of approximately 4,800 stainless steel
tanks.
MARKET AND MARKETING
Precision's primary focus is on renting tanks. As a secondary focus Precision
sells new and used tanks and related spare parts. A large portion of tank
rentals and sales comes from existing customers and referrals. On occasion
Precision mails marketing literature to a list of potential customers.
Precision's sales personnel also attend certain industry trade shows and make
sales calls to existing and potential customers. Presently, Precision has
about 100 customers in 20 states throughout the United States. Precision's
customers are principally in the oil field production and drilling, chemical,
textile and manufacturing industry segments.
A portion of Precision's new business comes from industrial and manufacturing
concerns that previously used 55 gallon polyethylene or carbon steel drums
("drums") to store liquids in bulk. Management believes its stainless steel
350 and 550 gallon tanks are far superior to drums in many respects. In
particular, drums are expensive to dispose of as a result of the
environmentally damaging materials they sometimes contain. Drums are also more
difficult to handle and dispense from, have more problems with leaks, and
require more space to store the same amount of liquid. Typically fluids are
extracted from drums via a removable pump, which may require cleaning prior to
placing it into another drum. Tanks, on the other hand, discharge fluids
through a valve located on the bottom of the tank which operates on the
principal of gravity.
11
12
Management believes there is a trend of drums being replaced by reusable and
returnable 350 and 550 gallon tanks, and that Precision is in a position to
benefit from those making the transition.
OPERATIONS
Tanks are purchased principally from two suppliers, although other
manufacturing sources are available. Precision maintains a supply of tanks,
valves and lids to meet the needs of its customers. The lids are also sold to
tank manufacturers as a component in making new tanks. These lids are
manufactured by Precision utilizing certain subcontractors, while valves are
manufactured overseas according to Precision's specifications.
Periodically Precision receives tanks back from customers who are returning
them from rental. As necessary, these tanks are cleaned and repaired, and
either returned to the rental fleet, or sold as a used tank. Precision also
performs testing services on a fee basis for its customers. The U.S.
Department of Transportation regulations require that Precision's tanks be
tested every 30 months if they are being used to transport regulated materials
(flammables, corrosives, methanol) over public roadways. This certification is
the customer's responsibility to maintain. For some customers Precision
performs maintenance services on its tanks. For a fee Precision will change
valves and lids as needed and perform external cleanings.
COMPETITION
Precision competes with other companies specializing in the sale and rental of
tanks. Precision believes it is the second largest supplier of tanks in the
country. Competitive factors in the industry include price, availability,
service, product quality and convenience. Precision believes it competes
effectively with other tank suppliers.
Precision's tanks also compete with 55 gallon drums. Precision's 350 and 550
gallon tanks are considerably more expensive than drums. However, Precision
believes its tanks have certain competitive advantages over drums, including
their (i) greater durability and ease in storing and dispensing liquids, (ii)
longer useful life, and (iii) higher space efficiencies.
HOME STAY - LODGING
In May 1998 the Company along with a 20% minority partner formed Home Stay to
develop and operate extended-stay lodging facilities in the Southeastern United
States. Presently, Home Stay has two facilities under construction in the
Pensacola, Florida area. Each of these facilities will contain 120 units. The
total cost of these two facilities is estimated to be approximately $6.2
million, of which $5.4 million is being financed by a local bank. If the
initial two properties perform as anticipated, the Company expects to build
additional properties throughout the Southeastern United States.
Home Stay will target a market niche in the lodging industry which it believes
is currently underserved by other extended-stay chains. Its facilities will be
designed to offer quality accommodations for guests, at rates generally lower
than are charged by most other extended-stay lodging providers. Weekly lodging
rates are expected to average less than $150 for single occupancy and less than
$175 for double occupancy. Management expects Home Stay customers to primarily
include business travelers (particularly those with limited expense accounts),
blue-collar workers on temporary assignments, persons between domestic
situations, and persons relocating or purchasing a home, with most guests
staying for multiple weeks.
Each Home Stay studio unit will contain 288 square feet and will provide a
variety of features which are attractive to the extended-stay guest, including
a fully-equipped kitchenette, weekly housekeeping, color television with cable
or satellite hook-up, coin-operated laundromat, and telephone service with
voice mail messaging. In order to control operating costs and offer attractive
rental rates, no restaurants, swimming pools, or recreational facilities will
be provided. Management plans to locate Home Stay facilities near commercial,
industrial and/or military centers where the employment base consists largely
of lower to moderate income workers, or where large numbers of people are
living on modest pensions. The initial properties will be managed by the
Windham Company, an experienced property manager for hotels, motels and
apartments.
REQUIRED DIVESTITURE OF COMMON STOCK
The Articles of Incorporation of the Company provide that any shareholder of
the Company who is found to be unsuitable by any gaming regulatory authority
with jurisdiction over the Company's operations, may, in the discretion of the
Board of
12
13
Directors, be required to divest the shares of Company stock owned by such
person within forty-five (45) days from the date on which the Company notifies
the disqualified holder of the regulatory authority's determination of
unsuitability, or the Company will have the right to purchase such stock at a
price equal to its fair market value, as defined in the Articles of
Incorporation, less twenty-five percent (25%).
In addition, the Articles of Incorporation require that the Company maintain
compliance under the federal Merchant Marine Act of 1936 and the federal
Shipping Act of 1916, as amended, restricting the amount of shares of Company
common stock which may be held by non-U.S. citizens. The Company may require
foreign persons to divest their shares of Company common stock in accordance
with the provisions of the Articles of Incorporation in the event that the
Company determines that it is in violation of either of these Acts.
EMPLOYEES
As of April 30, 1998 the Company, including its consolidated subsidiaries
employed approximately 275 persons full time. None of the Company's employees
are covered by a collective bargaining agreement and the Company believes that
its employee relations are satisfactory.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Edward R. McMurphy . . . . . . . . . . . . . . . 47 Chairman of the Board,
President and Chief Executive Officer
Tilman J. Falgout, III . . . . . . . . . . . . . 49 Executive Vice President,
General Counsel and Director
Mark D. Slusser . . . . . . . . . . . . . . . . . 40 Chief Financial Officer,
Vice President Finance and Secretary
EDWARD R. MCMURPHY, has served as President of the Company since July 1984 and
as Chief Executive Officer since January 1988. He has been a director of the
Company since its inception in April 1983. Prior to and during his involvement
with the Company, Mr. McMurphy served as President of Marion Properties, Inc.,
a real estate investment and development company, from 1979 to 1986.
TILMAN J. FALGOUT, III, has served as Executive Vice President and General
Counsel of the Company since March 1995 and as a director of the Company since
September 1992. From 1978 through June 1995, Mr. Falgout was a partner in the
law firm of Stumpf & Falgout, Houston, Texas.
MARK D. SLUSSER, has served as Chief Financial Officer of the Company since
October 1989 and as Secretary since April 1990. From 1981 until joining the
Company, Mr. Slusser was employed by Ernst & Young LLP, where he held various
positions in the Audit Department including Senior Manager.
ITEM 2. PROPERTIES
As of April 30, 1998 the Company owned the properties on which two of its
automobile dealerships are located, and a 3.5 acre tract of land in Louisiana
where it plans to build an office/warehouse facility that will house a portion
of Precision's IBC business. In addition, the Company leases nine other
facilities, five of which are automobile dealerships and four are office
facilities. The Company's corporate headquarters are located in approximately
6,000 square feet of leased space in Irving, Texas.
13
14
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company is a party or to
which its properties are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company during
the fourth quarter ended April 30, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this item is included in the Company's 1998 Annual
Report to Stockholders ("1998 Annual Report") under the heading "Common Stock
Information, Dividends and Related Stockholder Matters" and such information is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included in the Company's 1998 Annual
Report under the heading "Selected Financial Data" and such information is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is included in the Company's 1998 Annual
Report under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and such information is incorporated
herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements included in the Company's 1998 Annual Report are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
15
PART III
Except as to information with respect to executive officers which is contained
in a separate heading under Item 1 to this Form 10-K, the information required
by Part III of Form 10-K is, pursuant to General Instruction G(3) of Form 10-K,
incorporated by reference from the Company's definitive proxy statement to be
filed pursuant to Regulation 14A for the Company's Annual Meeting of
Stockholders to be held in 1998. The Company will, within 120 days of the end
of its fiscal year, file with the Securities and Exchange Commission a
definitive proxy statement pursuant to Regulation 14A.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors and executive officers of the registrant
is set forth in the Proxy Statement to be delivered to stockholders in
connection with the Company's Annual Meeting of Stockholders to be held in 1998
(the "Proxy Statement") under the headings "Election of Directors" and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934," which
information is incorporated herein by reference. The name, age and position of
each executive officer of the Company is set forth under the heading "Executive
Officers" in Item 1 of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Executive Compensation," which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial owners and
management is set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management," which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transactions is
set forth in the Proxy Statement under the heading "Certain Transactions,"
which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1). FINANCIAL STATEMENTS AND ACCOUNTANT'S REPORT
The following financial statements and accountant's report included in
the Company's 1998 Annual Report are incorporated herein by reference
in Item 8 of this report:
15
16
Report of Independent Accountants
Consolidated Balance Sheets as of April 30, 1997 and 1998
Consolidated Statements of Operations for the fiscal years
ended April 30, 1996, 1997 and 1998
Consolidated Statements of Cash Flows for the fiscal years
ended April 30, 1996, 1997 and 1998
Consolidated Statements of Stockholders' Equity for the fiscal
years ended April 30, 1996, 1997 and 1998
Notes to Consolidated Financial Statements
(a)(2). FINANCIAL STATEMENT SCHEDULES
Schedule I - Condensed Financial Information of Crown Group, Inc.
(Parent Company Only)
The other financial statement schedules are omitted since the required
information is not present, or is not present in amounts sufficient to
require submission of the schedules, or because the information
required is included in the consolidated financial statements and notes
thereto.
(a)(3). EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
2.1 Purchase Agreement dated as of May 31, 1997 by and among the Company
and Casino Magic Corp. ("Casino Magic"). (11)
2.2 Stock Purchase Agreement dated as of February 1, 1998 by and among
Paaco Automotive Group, Inc., Premium Auto Acceptance Corporation,
Larry Lange, Daniel Chu, Ted Lange and Crown Group, Inc. (13)
2.3 Stock Purchase Agreement dated February 3, 1998 by and among Van P.
Finger and Crown Group, Inc. (13)
3.1 Articles of Incorporation of the Company (formerly SKAI, Inc.). (3)
3.1.1 Articles of Merger of the Company and SKAI, Inc. filed with the
Secretary of State of the State of Alabama on September 29, 1989. (3)
3.1.2 Articles of Merger of the Company and SKAI, Inc. filed with the
Secretary of State of the State of Texas on October 10, 1989. (3)
3.1.3 Articles of Amendment filed with the Secretary of State of the State of
Texas on October 7, 1993. (8)
3.1.4 Articles of Amendment filed with the Secretary of State of the State of
Texas on October 5, 1994. (8)
3.1.5 Articles of Amendment filed with the Secretary of State of the State of
Texas on October 2, 1997. (1)
3.2 By-Laws dated August 24, 1989. (4)
4.1 Specimen stock certificate. (9)
4.2 Form of Registration Rights Agreement dated January 5, 1994 by and
between the Company and Dabney-Resnick, Inc. (8)
4.2.1 Form of Stock Purchase Warrant dated January 5, 1994 allowing
Dabney-Resnick, Inc. to purchase shares of common stock of the Company.
(8)
16
17
4.3 Form of Registration Rights Agreement dated January 5, 1994 by and
between the Company and Sun Life Insurance Company of America, Inc. (8)
4.3.1 Form of Stock Purchase Warrant dated January 5, 1994 allowing Sun Life
Insurance Company of America, Inc. to purchase shares of common stock
of the Company. (8)
4.4 Form of Stock Purchase Warrant dated March 18, 1994 granting
Dabney-Resnick, Inc. the right to purchase 120,000 shares of Common
Stock of the Company. (8)
4.5 Stock Purchase Warrant dated October 6, 1994 granting Don Farris the
right to purchase 50,000 shares of Common Stock of the Company. (8)
4.6 Stock Purchase Warrant dated June 2, 1994 granting Gerard M. Jacobs the
right to purchase 50,000 shares of Common Stock of the Company. (8)
4.7 Loan and Security Agreement by and among Finova Capital Corporation,
Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation
including the Eighth Amended and Restated Schedule to Loan and Security
Agreement and the Eighth Amended and Restated Promissory Note. (1)
10.1 1986 Incentive Stock Option Plan. (2)
10.1.1 Amendment to 1986 Incentive Stock Option Plan adopted September 27,
1990. (5)
10.2 1991 Non-Qualified Stock Option Plan. (6)
10.3 1997 Stock Option Plan. (12)
10.4 Form of Indemnification Agreement between the Company and Edward R.
McMurphy, Mark D. Slusser, T.J. Falgout, III, David J. Douglas, J.
David Simmons, Gerald L. Adams, Robert J. Kehl, Gerard M. Jacobs and
Michael B. Cloud. (7)
10.5 Form of Severance Agreement dated July 2, 1996 between the Company and
Edward R. McMurphy, T.J. Falgout, III and Mark D. Slusser. (10)
10.6 Shareholders' Agreement dated as of May 31, 1997 between the Company
and Casino Magic. (11)
10.7 Shareholders' Agreement dated as February 1, 1998 by and among Larry
Lange, Daniel Chu, Ted Lange and Crown Group, Inc. (13)
13.1 Annual Report to Stockholders for the fiscal year ended April 30, 1998.
(1)
21.1 Subsidiaries of Crown Group, Inc. (1)
23.1 Consent of Independent Accountants. (1)
23.2 Opinion of Independent Accountants on Financial Statement Schedule.
24.1 Power of Attorney of Edward R. McMurphy. (1)
24.2 Power of Attorney of Tilman J. Falgout, III. (1)
24.3 Power of Attorney of David J. Douglas. (1)
24.4 Power of Attorney of J. David Simmons. (1)
24.5 Power of Attorney of Gerald L. Adams. (1)
24.6 Power of Attorney of Gerard M. Jacobs. (1)
24.7 Power of Attorney of Robert J. Kehl. (1)
17
18
27.1 Financial Data Schedule. (1)
- ----------
(1) Filed herewith.
(2) Previously filed as an Exhibit to the Company's Registration Statement
on Form 10, as amended (No. 0-14939) and incorporated herein by
reference.
(3) Previously filed as an Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended October 31, 1989 and incorporated
herein by reference.
(4) Previously filed as an Exhibit to the Company's Annual Report on Form
10-K for the year ended April 30, 1990 and incorporated herein by
reference.
(5) Previously filed as an Exhibit to the Company's Annual Report on Form
10-K for the year ended April 30, 1991 and incorporated herein by
reference.
(6) Previously filed as an Exhibit to the Company's Annual Report on Form
10-K for the year ended April 30, 1992 and incorporated herein by
reference.
(7) Previously filed as an Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended July 31, 1993 and incorporated herein
by reference.
(8) Previously filed as an Exhibit to the Company's Registration Statement
on Form S-1, as amended, initially filed with the Securities and
Exchange Commission on May 31, 1994 (No. 33-79484) and incorporated
herein by reference.
(9) Previously filed as an Exhibit to the Company's Annual Report on Form
10-K for the year ended April 30, 1994 and incorporated herein by
reference.
(10) Previously filed as an Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1997 and incorporated
herein by reference.
(11) Previously filed as an Exhibit to the Company's Current Report on Form
8-K dated June 2, 1997 and incorporated herein by reference.
(12) Previously filed as an Exhibit to the Company's Registration Statement
on Form S-8, as amended, initially filed with the Securities and
Exchange Commission on October 20, 1997 (No. 333-38475) and
incorporated herein by reference.
(13) Previously filed as an Exhibit to the Company's Current Report on Form
8-K dated February 1, 1998 and incorporated herein by reference.
(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:
EVENT
FORM DATE DESCRIPTION OF EVENT
- ------------------ ----------------- -------------------------------------------------------
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.
18
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CROWN GROUP, INC.
Dated: August 11, 1998 By: /s/ Edward R. McMurphy
------------------------------------
Edward R. McMurphy
President and Chief Executive
Officer (principal executive
officer)
Dated: August 11, 1998 By: /s/ Mark D. Slusser
------------------------------------
Mark D. Slusser
Vice President Finance and Chief
Financial Officer (principal
financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
* Chairman of the Board, President August 11, 1998
- ------------------------------------- and Chief Executive Officer
Edward R. McMurphy
* Executive Vice President, August 11, 1998
- -------------------------------------- General Counsel and Director
Tilman J. Falgout, III
* Director August 11, 1998
- --------------------------------------
David J. Douglas
* Director August 11, 1998
- --------------------------------------
John David Simmons
* Director August 11, 1998
- --------------------------------------
Gerald L. Adams
* Director August 11, 1998
- --------------------------------------
Gerard M. Jacobs
* Director August 11, 1998
- --------------------------------------
Robert J. Kehl
* By /s/ Mark D. Slusser August 11, 1998
---------------------------------
Mark D. Slusser
As Attorney-in-Fact
Pursuant to Powers of
Attorney filed herewith
19
20
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF CROWN GROUP, INC. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEET
APRIL 30, 1998
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
===========
See accompanying notes to condensed financial information.
21
SCHEDULE I (CONTINUED)
CROWN GROUP, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED APRIL 30, 1998
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
===========
See accompanying notes to condensed financial information.
22
SCHEDULE I (CONTINUED)
CROWN GROUP, INC. (PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION
A - GUARANTEES
Crown Group, Inc. ("Crown") has made the following guarantees with respect
to its subsidiaries:
Amount
Facility Drawn at Maximum
Debtor Amount April 30, 1998 Guarantee
------ ------ -------------- ---------
Concorde $20 million $11.1 million $5.0 million
Home Stay 5.4 million -- 5.4 million
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:
Receivables from subsidiaries $ 4,640,718
Investments in subsidiaries 17,590,658
Payables to subsidiaries 2,641,637
For the year ended April 30, 1998 the following transactions were
eliminated in the consolidated financial statements of Crown:
Interest income $ 387,615
23
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
3.1.5 Articles of Amendment filed with the Secretary of State of the
State of Texas on October 2, 1997.
4.7 Loan and Security Agreement by and among Finova Capital Corporation, Paaco Automotive
Group, Inc. and Premium Auto Acceptance Corporation including the Eighth Amended and
Restated Schedule to Loan and Security Agreement and the Eighth Amended and Restated
Promissory Note.
13.1 Annual Report of Stockholders for the fiscal year ended April 30, 1998.
21.1 Subsidiaries of Crown Group, Inc.
23.1 Consent of Independent Accountants.
23.2 Opinion of Independent Accountants on Financial Statement Schedule.
24.1 Power of Attorney of Edward R. McMurphy.
24.2 Power of Attorney of Tilman J. Falgout, III.
24.3 Power of Attorney of David J. Douglas.
24.4 Power of Attorney of J. David Simmons.
24.5 Power of Attorney of Gerald L. Adams.
24.6 Power of Attorney of Gerard M. Jacobs.
24.7 Power of Attorney of Robert J. Kehl.
27.1 Financial Data Schedule.