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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.
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RESULTS OF OPERATIONS
SCGC was a consolidated subsidiary of the Company through June 8, 1995.
From June 9, 1995 (the date the first 50% interest in SCGC was sold) through May
3, 1996 (the date the remaining 50% interest in SCGC was sold) the Company
accounted for its 50% interest in SCGC using the equity method. The Company's
investment in 49% of CMN is accounted for on the equity method. The operating
results of Paaco and Precision have been included in the Company's consolidated
results of operations from their respective dates of acquisition. As a result of
the above transactions, operating results of the Company for the years ended
April 30, 1998, 1997 and 1996 are not entirely comparable.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
Revenues from sales, rental income, gain on sale of mortgage loans and
interest, fees and rentals from CMN pertain to the businesses of Paaco,
Precision, Concorde and CMN, which were acquired or formed during fiscal 1998.
Interest income for fiscal 1998 increased $1,887,365 compared to fiscal 1997.
The increase resulted from (i) the acquisition of Paaco during the fourth
quarter of fiscal 1998 ($1,519,249), and (ii) interest earned on Concorde's
mortgage loans ($761,252), partially offset by a decrease in Crown's interest
income as a result of Crown using its cash to make acquisitions and investments.
Cost of sales pertains to Paaco and Precision's operations. Provision for
credit losses pertains principally to Paaco's operations. Selling, general and
administrative expenses for fiscal 1998 increased $5,771,341 compared to fiscal
1997. The increase resulted principally from (i) the acquisitions of Paaco and
Precision during the fourth quarter of fiscal 1998 ($3,641,834), and (ii) the
formation and development of Concorde's mortgage based lending business
($2,034,895). Interest expense for fiscal 1998 increased $1,166,601 compared to
fiscal 1997. The increase resulted from interest associated with the debt of
Paaco, Precision and Concorde. Depreciation and amortization for fiscal 1998
increased $616,626 compared to fiscal 1997. The increase resulted from (i)
amortizing certain agreements and other assets obtained in the acquisition of
49% of CMN ($284,735), (ii) amortizing goodwill that was created in the
acquisitions of Paaco and Precision ($137,430), and (iii) depreciating the
assets of Paaco and Precision ($156,218).
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
General and administrative expenses for fiscal 1997 decreased $245,801
compared to fiscal 1996. The decrease was primarily attributable to a reduction
in compensation costs, partially offset by increases in consulting and
transportation expenses. Gaming development and abandonment costs for fiscal
1997 decreased $144,012 compared to fiscal 1996 as a result of the Company's
decision to begin pursuing business opportunities in fields other than casino
gaming.
Interest expense for fiscal 1997 decreased $939,955 compared to fiscal
1996. The decrease was principally the result of the Company no longer
consolidating the operating results of SCGC from and after June 9, 1995 as SCGC
was formerly responsible for substantially all of the Company's consolidated
interest expense. Interest income for fiscal 1997 decreased $762,272 compared to
fiscal 1996. The decrease was principally the result of the prepayment of a $10
million note by Louisiana Riverboat Gaming Partnership in August 1996 and the
sale of a second $10 million note in October 1996 both of which had been earning
interest at 11.5% per annum. The proceeds from such notes were placed in money
market funds which earned interest at approximately 5.3% per annum. Other income
in fiscal 1997 pertains to a fee earned by the Company in assisting another
company complete an acquisition.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1998 the Company's sources of liquidity included
approximately (i) $3 million of cash on hand, of which $2 million was held by
Crown, (ii) $12 million of marketable equity securities held by Crown, the
majority of which is subject to a lock-up agreement with an underwriter which
prohibits Crown from selling such securities until December 8, 1998,
(iii) $17 million remaining to be drawn on the credit facilities of Paaco,
Concorde and Precision, although the majority of such additional draws may only
be made in connection with a corresponding increase in the related collateral
asset (i.e., finance receivables, mortgage loans held for sale and intermediate
bulk containers), and (iv) the issuance of additional debt and/or equity. The
loan agreements which govern the credit facilities of Crown's subsidiaries limit
dividends and other distributions from such subsidiaries to Crown. The total
amount of restricted net assets of such subsidiaries as of April 30, 1998 was
approximately $15 million.
For fiscal 1998 net cash used by operating activities amounted to $12.5
million. The principal use of cash was to originate and acquire mortgage loans.
The excess of mortgage loans originated or acquired over mortgage loans sold and
principal repayments was $13.3 million. Net cash used by investing activities of
$11.1 million included (i) an $8.6 million use of cash in finance receivable
originations over principal payments received, (ii) a $15.4 million use of cash
in the acquisitions of Paaco, Precision and CMN, and (iii) a $17.7 million
source of cash resulting from the sale of certain assets including $15.3 million
from the sale of the Company's 18.6 acre tract of land in Las Vegas. Net cash
provided by financing activities of $8.9 million principally relates to $14.0
million of cash provided by the asset based revolving credit facilities of
Paaco, Concorde and Precision, offset by (i) $3.1 million of cash used to
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repurchase the Company's common stock, and (ii) $2.1 million of net debt
repayments.
The Company is presently focusing on the development and expansion of its
existing businesses and the potential acquisition or development of other
unrelated businesses. The Company's existing credit facilities can support the
majority of the expected growth of the Company's existing businesses over the
next twelve months. In August 1998 the Company reached a preliminary agreement,
subject to certain conditions, to acquire Bengal Chemical, Inc. ("Bengal") for
approximately $8.3 million, of which $6 million is to be paid in cash. Bengal
specializes in the distribution of pesticide products in the southeastern United
States. The Company plans to finance a significant portion of the cash required
in this acquisition. Presently management believes that the Company's capital
resources are sufficient to satisfy its identified capital needs for the next
twelve months.
In March 1996 the Company's Board of Directors approved a program, as
amended, to repurchase up to 3,000,000 shares of the Company's common stock from
time to time in the open market. As of April 30, 1998 the Company had
repurchased 2,383,739 shares pursuant to this program. The timing and amount of
future share repurchases, if any, will depend on various factors including
market conditions, available alternative investments and the Company's financial
position.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997 the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting
comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Comprehensive income includes net income and certain other
items that are excluded from net income but are included as a separate component
of stockholders' equity such as unrealized appreciation of securities and
foreign currency translation adjustments. If the Company had adopted SFAS No.
130 during fiscal 1998 comprehensive income would have been $2,278,595, or $.23
per share, as a result of including the $1,930,500 of unrealized appreciation of
securities in comprehensive income.
DATA PROCESSING AND YEAR 2000
Each of the Crown and its subsidiaries operate their data processing systems
independently. The Crown and its subsidiaries are at different stages with
respect to their hardware, software and networking systems being year 2000
compliant. Some of the software utilized by the Company is licensed from third
parties, and to the extent such software is not presently year 2000 compliant,
the Company has been advised by such third party software vendor that their
software will be updated in the near future. The Company presently has a limited
amount of electronic communication with third parties, and as such, has a lower
level of exposure to interruptions in its operations due to these third parties
not being year 2000 compliant. The Company has contacted some of the third
parties in which it communicates with electronically to assess their compliance
with the year 2000. Based upon a preliminary review of its data processing
systems, the Company does not anticipate the cost to bring all its systems year
2000 compliant will have a material adverse impact on its financial position or
results of operations.
SEASONALITY
The Company's automobile sales operation is seasonal in nature. In the
automobile business, the Company's third fiscal quarter (November through
January) is historically the slowest period of time for car and truck sales.
Many of the Company's operating expenses such as administrative personnel, rent
and insurance are fixed and cannot be reduced during periods of decreased sales.
None of the Company's other businesses experience significant seasonal
fluctuations.
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CONSOLIDATED BALANCE SHEETS CROWN GROUP, INC.
April 30,
1998 1997
------------ ------------
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
============ ============
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS CROWN GROUP, INC.
Years Ended April 30,
1998 1997 1996
------------ ------------ ------------
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
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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
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS CROWN GROUP, INC.
Years Ended April 30,
1998 1997 1996
------------ ------------ ------------
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
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See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY CROWN GROUP, INC.
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
------------ ------------ ------------ ------------ ------------- ------------
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
============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
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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.
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Marketable Equity Securities
Investments in marketable equity securities are recorded at market value
based upon closing stock prices as quoted on national stock exchanges or
over-the-counter markets. To the extent the Company considers a particular
equity security to be a "trading" security, the difference between the Company's
historical cost and such security's market value is included in the accompanying
statement of operations. All other equity securities are considered to be
"available for sale" securities, and the difference between the Company's
historical cost and such security's market value is included as a separate
component of stockholders' equity entitled "unrealized appreciation of
securities," on a net of tax basis. At April 30, 1998 the Company had trading
securities and available for sale securities of $742,180 and $4,000,000,
respectively.
At April 30, 1998 the Company held 222,222 shares of Inktomi Corporation
common stock, which company completed its initial public offering ("IPO") on or
about June 9, 1998. The Company's Inktomi shares are subject to an underwriter's
lock-up agreement which restricts the Company from selling its Inktomi stock
until December 8, 1998. Further, the Company's Inktomi shares are not
registered, and thus the Company may not sell such shares in the public markets
until the completion of a one year holding period which ends on February 25,
1999. The Company valued its Inktomi shares based upon the IPO price of $18.00
per share. Accordingly, at April 30, 1998 the carrying value of the Company's
Inktomi stock was $4,000,000, which reflects a gross unrealized gain of
$2,925,000 over the Company's cost of $1,075,000. The Company considers its
Inktomi shares to be "available for sale."
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of aggregate cost or
market. Market value is determined by current investor yield requirements. A
portion of these loans are pledged against the Company's revolving credit
facility. The cost of mortgage loans held for sale includes the cost of
originating or purchasing the mortgage loans reduced by (i) deferred loan
origination fees, and (ii) an allowance for loan losses of $27,000 at April 30,
1998. While management believes the allowance for loan losses included in the
financial statements to be adequate, such estimate may be more or less than the
amount ultimately charged off. The adequacy of the allowance for loan losses is
periodically reviewed by management with any changes reflected in current
operations.
Finance Receivables and Allowance for Credit Losses
The Company originates installment sales contracts from the sale of used
vehicles at its dealerships. Finance receivables consist of contractually
scheduled payments from installment sales contracts net of unearned finance
charges and an allowance for credit losses. Unearned finance charges represent
the balance of interest income remaining from the capitalization of the total
interest to be earned over the original term of the related installment sales
contract. The Company discontinues the accrual of interest income when the
receivable becomes greater than sixty days delinquent.
The Company maintains an allowance for credit losses at a level it
considers sufficient to cover anticipated losses in the collection of its
finance receivables. The allowance for credit losses is based upon a periodic
analysis of the portfolio, economic conditions and trends, historical credit
loss experience, borrowers' ability to repay, and collateral values. While
management believes the allowance for credit losses included in the financial
statements to be adequate, such estimate may be more or less than the amount
ultimately charged off. The allowance for credit losses is periodically reviewed
by management with any changes reflected in current operations.
Inventory
Inventory is valued at the lower of cost or market on a specific
identification basis. Inventory includes used vehicles, parts for vehicles and
supplies and parts related to the intermediate bulk container ("IBC") business.
Repossessed vehicles are recorded at the lower of cost or market, which
approximates wholesale value. Vehicle reconditioning costs are capitalized as a
component of inventory. The cost of used vehicles and IBC's sold is determined
on a specific identification basis.
Property and Equipment
Property and equipment are stated at cost. Expenditures for additions,
renewals and improvements are capitalized. Costs of repairs and maintenance are
expensed as incurred. Depreciation is computed using the straight-line method
over the following estimated useful lives:
Leasehold improvements Life of lease
Furniture, fixtures and equipment 3 to 10 years
Rental equipment 12 years
Buildings 39 years
Goodwill
Goodwill represents the excess of the Company's cost over the fair value of
net identifiable assets acquired in its purchases of Paaco and Precision.
Goodwill is amortized on a straight line basis over periods ranging from 15 to
25 years. The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operation. At April 30, 1998 accumulated amortization of goodwill
amounted to $137,430.
10
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Revenue Recognition
Interest income on finance receivables is recognized using the interest
method. Revenue from the sale of used vehicles is recognized upon delivery, when
the sales contract is signed and the down payment has been received.
Stock Option Plan
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. As such,
compensation expense is recorded on the date of grant only if the current market
price of the underlying stock exceeds the exercise price. Beginning in fiscal
1997, the Company adopted the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", which requires entities to provide pro forma earnings and
earnings per share disclosures for employee stock option grants as if the fair
value based method as defined in SFAS No. 123 had been applied (see Note L).
Earnings Per Share
Basic earnings per share is computed by dividing net income by the average
number of common shares outstanding during the period. Diluted earnings per
share takes into consideration the potentially dilutive effect of common stock
equivalents, such as outstanding stock options and warrants, that if exercised
or converted into common stock would then share in the earnings of the Company.
Recent Accounting Pronouncements
In June 1997 the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting
comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Comprehensive income includes net income and certain other
items that are excluded from net income but are included as a separate component
of stockholders' equity such as unrealized appreciation of securities and
foreign currency translation adjustments. If the Company had adopted SFAS No.
130 during fiscal 1998 comprehensive income would have been $2,278,595 or $.23
per share, as a result of including the $1,930,500 of unrealized appreciation of
securities in comprehensive income.
Reclassifications
Certain prior year amounts in the accompanying financial statements have
been reclassified to conform to the fiscal 1998 presentation.
C - ACQUISITIONS
CMN Purchase
On June 2, 1997 the Company acquired 49% of the capital stock of CMN, as
well as interests in certain other assets and contracts related to CMN, from
Casino Magic Corp. ("Casino Magic") for a purchase price of $7 million cash. CMN
owns and operates casinos in the cities of Neuquen and San Martin de los Andes
in the Province of Neuquen, Argentina under an exclusive concession contract
that expires in 2007, but can be extended by CMN for an additional five years
under certain circumstances. The interests in certain other assets and contracts
included (i) a demand promissory note in the amount of $4,226,743 issued by CMN,
(ii) a 16.4% interest in a certain management agreement relating to CMN, and
(iii) a 49% interest in (a) slot machines and a related lease agreement and (b)
a certain royalty agreement relating to CMN. Pursuant to the various CMN
agreements, the Company receives its respective share of fees and rental
payments due under such agreements. At April 30, 1998 accumulated amortization
and depreciation of the Company's investment in various CMN agreements and slot
machines, respectively, amounted to $284,735.
In October 1997 each of the Company and Casino Magic converted
approximately $2.5 million of principal due on certain notes receivable from CMN
into shares of CMN capital stock such that each party retained the same
ownership percentage of CMN as previously held. At April 30, 1998 CMN had
assets, liabilities and stockholders' equity of approximately $12.6 million,
$3.6 million, and $9.0 million, respectively. For the twelve months ended April
30, 1998 CMN's summarized unaudited results of operations were as follows (in
thousands):
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
=======
11
Paaco Purchase
Effective February 1, 1998 the Company acquired 53% of the common stock of
Paaco for a purchase price of approximately $9.1 million cash. Approximately
$4.9 million of Paaco common stock was purchased directly from Paaco, and the
remaining $4.2 million was purchased from Paaco management personnel who prior
to this transaction were the sole shareholders of Paaco (the "Paaco Management
Shareholders"). Effective May 1, 1998 the Company acquired an additional 12%
interest in Paaco directly from the Paaco Management Shareholders. With this
purchase the Company now owns 65% of Paaco. The purchase price of approximately
$1.5 million was paid by issuing 375,000 shares of the Company's common stock
(see Note R). In connection with the Paaco transactions, the Company and the
Paaco Management Shareholders entered into a Shareholders' Agreement (the "Paaco
Shareholders' Agreement") which provides, among other things, that in the event
either the Company or any Paaco Management Shareholder desires to sell their
interest in Paaco such shareholder must first offer to sell such interest to
Paaco and the other shareholders in accordance with the provisions of the Paaco
Shareholders' Agreement.
Paaco is a vertically integrated used car sales and finance company which
operates seven used car dealerships in the Dallas-Ft. Worth metropolitan area.
Paaco sells, underwrites and finances used cars and trucks with a focus on the
Hispanic market. For the years ended December 31, 1997, 1996 and 1995, Paaco's
revenues were approximately $48.3 million, $28.9 million and $20.1 million,
respectively.
Precision Purchase
On February 3, 1998 the Company acquired 80% of the common stock of
Precision IBC, Incorporated ("Original Precision") for a purchase price of
approximately $2.4 million cash. On March 5, 1998 the Company acquired 80% of
the common stock of M&S Tank Rentals, Inc. ("M&S") for a purchase price of $1.65
million cash. Original Precision and M&S were subsequently merged together into
a newly formed corporation, Precision IBC, Inc. ("Precision"). Effective May 1,
1998 the Company acquired the remaining 20% interest in Precision it did not
previously own by issuing 288,027 shares of the Company's common stock. All
references to Precision include the former entities of Original Precision and
M&S.
Precision is in the business of renting, selling, testing and servicing
principally stainless steel IBC's to customers primarily in the petroleum and
chemical industries. For the years ended December 31, 1997, 1996 and 1995
Precision's unaudited revenues were approximately $4.1 million, $2.8 million and
$.7 million, respectively.
Each of the above acquisitions have been accounted for using the purchase
method of accounting. Goodwill resulting from the transactions is being
amortized on a straight-line basis over periods ranging from 15 to 25 years. The
activities of CMN, Paaco and Precision have been included in the Company's
consolidated results of operations since their respective dates of acquisition.
In each of fiscal 1997 and 1996 the Company elected not to complete the
proposed acquisition of a casino gaming property. As a result of these decisions
the Company recorded charges of $696,009 and $664,991 in fiscal 1997 and 1996,
respectively. Such amounts are included in "gaming development and abandonment"
in the accompanying Consolidated Statements of Operations.
Pro Forma Financial Information
The following unaudited pro forma condensed consolidated results of
operations of the Company for the years ended April 30, 1998 and 1997 were
prepared as if the CMN, Paaco and Precision acquisitions had occurred on May 1,
1997 and May 1, 1996, respectively (in thousands, except per share amounts). The
adjustments to the historical financial statements principally consist of (i)
recognizing the Company's pro-rata share of CMN earnings and contractual fees,
(ii) recording interest income on the note receivable from CMN, (iii)
eliminating interest income on the cash used in the acquisitions, (iv)
amortizing the CMN related agreements and equipment, (v) amortizing goodwill
resulting from the acquisitions, (vi) adjusting depreciation expense and
interest income resulting from purchase accounting entries, and (vii) adjusting
income tax expense to reflect the elimination of an S-corporation in the case of
Precision and to take into account the above described adjustments.
Years Ended
April 30,
1998 1997
---- ----
Revenue $63,514 $38,127
Net income 120 10,340
Earnings per share $ .01 $ .90
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.
12
D - SALE OF SCGC
On June 9, 1995 the Company sold a 50% interest in SCGC to Louisiana
Riverboat Gaming Partnership ("LRGP"), a joint venture then owned 50% by Casino
America, Inc. ("Casino America") and 50% by Louisiana Downs, Inc. The purchase
price consisted of (i) a five-year $20 million non-recourse note with interest
payable monthly at 11.5% per annum (the "LRGP Note"), (ii) $1 million cash, and
(iii) a non-detachable five-year warrant to purchase 416,667 shares of Casino
America common stock at $12 per share. In connection with this transaction, in
June 1995, the Company recorded a gain before income taxes of approximately
$21.5 million.
On May 3, 1996 the Company sold its remaining 50% interest in SCGC to
Casino America for (i) 1,850,000 shares of Casino America common stock, which
the Company valued at $6.50 per share, (ii) the exchange of the $20 million LRGP
Note for LRGP Note A ("Note A") and LRGP Note B ("Note B"), each in the
principal amount of $10 million and bearing interest at 11.5% per annum, and
(iii) an additional non-detachable five-year warrant to purchase up to another
416,667 shares of Casino America common stock at an exercise price of $12 per
share. In connection with this transaction, in May 1996, the Company recorded a
gain before income taxes of approximately $14.9 million.
In August 1996 LRGP paid off Note A in full and in October 1996 the Company
sold Note B at a discount of $800,000. In November 1996 the Company sold the
1,850,000 shares of Casino America common stock it had received in the sale of
its remaining 50% interest in SCGC for net proceeds of $7,363,003, resulting in
a loss before income taxes of $4,661,997.
The Company has included 100% of SCGC's operating results in its
consolidated results of operations through June 8, 1995. From and after June 9,
1995 (the date of sale of the first 50% interest in SCGC), the Company has
accounted for its investment in SCGC on the equity method, and accordingly has
included its proportionate share of SCGC's operating results in its consolidated
results of operations. The Company's gain before income taxes on the sale of
SCGC is calculated as follows (in thousands):
Sale of Sale of
First 50% Second 50%
(June 1995) (May 1996)
----------- ----------
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
======== ========
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.
13
E - FINANCE RECEIVABLES
The Company originates installment sales contracts from the sale of used
vehicles at its dealerships. These installment sales contracts typically include
interest rates ranging from 18-26% per annum and provide for payments over
periods ranging from 24 to 36 months. A summary of finance receivables at April
30, 1998 is as follows:
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
============
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:
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
===========
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:
April 30,
1998 1997
----------- -----------
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
=========== ===========
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.
14
H - DEBT
A summary of debt at April 30, 1998 is as follows:
Revolving Credit Facilities
- ------------------------------------------------------------------------------------------------------------
Facility Interest Primary Balance at
Borrower Lender Amount Rate Maturity Collateral April 30, 1998
- -------- ----------- ----------- ------------- -------- -------------- --------------
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
============
Other Notes Payable
- -----------------------------------------------------------------------------------------------------------
Principal Interest Primary Balance at
Borrower Lender Payments Rate Maturity Collateral April 30, 1998
- ----------- ---------------- ------------- ------------- ------------ ------------ --------------
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
===========
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:
Years Ended
April 30, Amount
------------- ---------------
1999 $15,208,144
2000 26,508,515
2001 3,707,093
2002 38,723
2003 18,842
Thereafter 553,281
-----------
$46,034,598
===========
15
I - INCOME TAXES
The Company files a consolidated federal income tax return with its
subsidiaries, with the exception of Paaco which files a separate tax return. The
provision (benefit) for income taxes for the fiscal years ended April 30, 1998,
1997 and 1996 was as follows:
Years Ended April 30,
1998 1997 1996
----------- ----------- -----------
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
=========== =========== ===========
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:
Years Ended April 30,
1998 1997 1996
----------- ----------- -----------
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
=========== =========== ===========
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:
April 30,
1998 1997
---------- ----------
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
========== ==========
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.
16
J - CAPITAL STOCK
In March 1996 the Company's Board of Directors approved a program, as
amended, to repurchase up to 3,000,000 shares of the Company's common stock from
time to time in the open market. At April 30, 1998 the Company had repurchased
2,383,739 shares pursuant to this program. The timing and amount of future share
repurchases, if any, will depend on various factors including market conditions,
available alternative investments and the Company's financial position.
The Company is authorized to issue up to one million shares of $.01 par
value preferred stock in one or more series having such respective terms, rights
and preferences as are designated by the Board of Directors. No preferred stock
has been issued.
K - EARNINGS PER SHARE
A summary of the reconciliation from basic earnings per share to diluted
earnings per share for the years ended April 30, 1998, 1997 and 1996 is as
follows:
Years Ended April 30,
1998 1997 1996
----------- ----------- -----------
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
=========== =========== ===========
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.
17
The following is an aggregate summary of the activity in the Company's
stock option plans since April 30, 1995:
Number Exercise Price Proceeds
of Shares per Share on Exercise
--------- -------------- -----------
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
========= ===========
A summary of stock options outstanding as of April 30, 1998 is as follows:
Weighted Average
Range of Remaining Weighted
Exercise Number Contractual Life Average
Prices of Shares (in years) Exercise Price
------------------ ---------- ----------------- -----------------
$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
==========
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:
Years Ended April 30,
1998 1997 1996
---- ---- ----
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
18
Warrants
The Company issued common stock purchase warrants to a variety of parties
in connection with financing activities, the development of SCGC's riverboat
gaming project and certain other matters. The warrants issued were valued based
upon a composite of commonly accepted warrant valuation models.
The following is an aggregate summary of warrants outstanding as of April
30, 1998:
Number of
Underlying Exercise Price Proceeds
Shares per Share on Exercise
---------------- -------------- --------------
899,612 $3.00 to $12.00 $4,053,021
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:
April 30, 1998 April 30, 1997
---------------------------- -----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------- ----------- ------------ ------------
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
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:
Financial Instrument Valuation Methodology
-------------------- ---------------------
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.
19
N - LEASES
The Company has certain operating leases for equipment and its office
facilities. As of April 30, 1998 the aggregate rentals due under such leases
were as follows:
Years Ended
April 30, Amount
--------- ------------
1999 $ 1,193,125
2000 857,439
2001 621,050
2002 81,832
2003 26,555
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.
20
Paaco Purchase Contingent Consideration
In connection with the Company's purchase of an additional 12% interest in
Paaco effective May 1, 1998, the Company agreed to pay the sellers as additional
consideration an amount equal to 60% of the excess of Paaco's pretax income in
excess of $2.5 million for the twelve months ended January 31, 1999. Such
additional consideration, if any, is to be paid in Company common stock valued
at $4.00 per share.
Q - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow disclosures for the fiscal years ended April 30,
1998, 1997 and 1996 are as follows:
Years Ended April 30,
1998 1997 1996
---- ---- ----
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
In connection with the Company's purchase of Paaco and Precision, assumed
liabilities were as follows:
Paaco Precision
------------ ------------
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
============ ============
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.
21
S - BUSINESS SEGMENTS
Operating results and other financial data are presented for the four
principal business segments of the Company for the year ended April 30, 1998.
These segments are categorized by legal entity, which also corresponds to their
line of business and how they are operated. The segments include (i) Paaco,
which sells and finances used vehicles, (ii) Precision, which rents and sells
intermediate bulk containers, (iii) Concorde, which originates and sells
sub-prime mortgage loans, and (iv) other, which includes corporate operations,
activities of relatively inactive subsidiaries and the Company's equity
investment in CMN. For the years ended April 30, 1997 and 1996 the Company
operated in a single business segment, and, accordingly, no separate segment
disclosures are necessary. The Company's business segment data for the year
ended April 30, 1998 is as follows (in thousands):
Year Ended April 30, 1998
------------------------------------------------------------------------------
Paaco Precision Concorde Other Eliminations Consolidated
-------- --------- -------- -------- ------------ ------------
(in thousands)
Revenues:
Sales and other $ 14,241 $ 1,351 $ 1,100 $ 1,105 $ 17,797
Interest income 1,519 815 1,472 $ (388) 3,418
-------- -------- -------- -------- -------- --------
Total 15,760 1,351 1,915 2,577 (388) 21,215
-------- -------- -------- -------- -------- --------
Costs and expenses:
Interest expense 942 81 586 14 (388) 1,235
Depreciation and
amortization 64 122 42 557 785
Other 13,715 867 2,094 2,928 19,604
-------- -------- -------- -------- -------- --------
Total 14,721 1,070 2,722 3,499 (388) 21,624
-------- -------- -------- -------- -------- --------
CMN earnings and other 965 965
-------- -------- -------- -------- -------- --------
Income (loss) before taxes
and minority interests $ 1,039 $ 281 $ (807) $ 43 $ -- $ 556
======== ======== ======== ======== ======== ========
Capital expenditures $ 1,648 $ 1,057 $ 568 $ 788 $ -- $ 4,061
======== ======== ======== ======== ======== ========
Total assets $ 45,427 $ 9,337 $ 16,211 $ 43,358 $(20,656) $ 93,677
======== ======== ======== ======== ======== ========
22
T - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of the Company's quarterly results of operations for the years
ended April 30, 1998 and 1997 is as follows (in thousands):
Year Ended April 30, 1998
---------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
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
Year Ended April 30, 1997
-----------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
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
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.
23
REPORT OF INDEPENDENT ACCOUNTANTS
Stockholders and Board of Directors
Crown Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of Crown
Group, Inc. and its subsidiaries at April 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended April 30, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards, which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
August 1, 1998
24
COMMON STOCK INFORMATION, DIVIDENDS AND CROWN GROUP, INC.
RELATED STOCKHOLDER MATTERS
The Company's common stock is authorized for quotation on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") Small
Cap Market under the NASDAQ symbol CNGR. The following table sets forth, by
fiscal quarter, the high and low sale prices reported by NASDAQ for the
Company's common stock for the periods indicated.
Fiscal 1998 Fiscal 1997
High Low High Low
---- --- ---- ---
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
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.)
Years Ended April 30,
1998 1997 1996 1995 1994
-------- -------- -------- -------- ------------
Revenues from:
Continuing operations $ 21,215 $ 2,030 $ 2,293 $ 177 $ 197
Discontinued operations 604
Net income (loss) from:
Continuing operations $ 348 $ 8,860 $ 12,298 $(20,325) $ (2,052)
Discontinued operations (177)
-------- -------- -------- -------- --------
$ 348 $ 8,860 $ 12,298 $(20,325) $ (2,229)
======== ======== ======== ======== ========
Earnings (loss) per share (diluted):
Continuing operations $ 0.04 $ 0.80 $ 1.03 $ (2.01) $ (0.34)
Discontinued operations (0.03)
-------- -------- -------- -------- --------
$ 0.04 $ 0.80 $ 1.03 $ (2.01) $ (0.37)
======== ======== ======== ======== ========
Total assets $ 93,677 $ 38,237 $ 39,329 $ 54,507 $ 30,974
Total debt 46,035 987 31,660
Stockholders' equity 35,032 35,713 30,153 17,930 23,837
Shares outstanding 9,434 10,395 11,650 11,678 8,999
25
CORPORATE INFORMATION CROWN GROUP, INC.
DIRECTORS
Edward R. McMurphy
Chairman of the Board, Chief Executive Officer
and President
Crown Group, Inc.
John David Simmons
President
Simmons & Associates, Inc.
David J. Douglas
Managing Director
Tuesday Afternoon, Inc.
T. J. Falgout, III
Executive Vice President and General Counsel
Crown Group, Inc.
Gerald L. Adams
President
River Development, Inc.
Gerard M. Jacobs
Chief Executive Officer
Metal Management, Inc.
Robert J. Kehl
President
Kehl River Boats, Inc.
OFFICERS
Edward R. McMurphy
Chairman of the Board, Chief Executive Officer
and President
T. J. Falgout, III
Executive Vice President and General Counsel
Mark D. Slusser
Chief Financial Officer, Vice President Finance
and Secretary
Edward J. Preuss, Jr.
Vice President Project Development
Michael B. Cloud
Controller and Assistant Secretary
Investor Communications
Inquiries and requests regarding the Annual Report or other materials should be
directed to:
Edward J. Preuss, Jr.
4040 N. MacArthur Blvd., Suite 100
Irving, Texas 75038-6424
(972) 717-3423
Form 10-K
Additional information is included in the Company's report to the Securities and
Exchange Commission on Form 10-K. Copies of the Form 10-K are available at no
charge to stockholders upon written request. See Investor Communications.
Corporate Offices
4040 N. MacArthur Blvd., Suite 100
Irving, Texas 75038-6424
(972) 717-3423
Internet address: http://www.thecrowngroup.com
Annual Meeting
The annual meeting of stockholders of Crown Group, Inc. will be held at the Four
Seasons Hotel and Resort, 4150 N. MacArthur Blvd., Irving, Texas at 9:30 a.m. on
Thursday, October 15, 1998.
Transfer Agent and Registrar
Securities Transfer Corporation
Dallas, Texas
(972) 447-9890
Independent Accountants
PricewaterhouseCoopers LLP
Dallas, Texas
General Counsel
Smith, Gambrell & Russell
Atlanta, Georgia