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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: Commission file number:
APRIL 30, 1999 0-14939
CROWN GROUP, INC.
(Exact name of registrant as specified in its charter)
TEXAS 63-0851141
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4040 N. MACARTHUR BLVD., SUITE 100, IRVING, TEXAS
(Address of principal executive offices)
75038
(Zip Code)
(972) 717-3423
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 par share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of August 11, 1999 the aggregate market value of the voting stock held by
non-affiliates (all persons other than executive officers, directors and
holder's of 5% or more of the Registrant's common stock) of the Registrant
(7,015,859 shares) was $34,640,804.
As of August 11, 1999 there were 9,763,796 shares of the Registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Annual Report to Stockholders for the year ended
April 30, 1999 are incorporated by reference into Part II of this report, and
portions of the Registrant's definitive Proxy Statement for its Annual Meeting
of Stockholders to be held in 1999 are incorporated by reference into Part III
of this report, with the exception of information regarding executive officers
required under Item 10 of Part III, which information is included in Part I,
Item 1.
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. Certain information included in this
Annual Report on Form 10-K contains, and other materials filed or to be filed by
the Company with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company or its management) contain or will contain, forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The
words "believe," "expect," "anticipate," "estimate," "project" and similar
expressions identify forward-looking statements, which speak only as of the date
the statement was made. The Company undertakes no obligation to publicly update
or revise any forward-looking statements. Such forward-looking statements
address, among other things, the Company's current focus on the development and
expansion of its existing businesses, and the potential acquisition or
development of businesses in other fields. Such forward-looking statements are
based upon management's current plans or expectations and are subject to a
number of uncertainties and risks that could significantly affect current plans,
anticipated actions and the Company's future financial condition and results. As
a consequence, actual results may differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company as a result of
various factors. Uncertainties and risks related to such forward-looking
statements include, but are not limited to, those relating to the development of
the Company's businesses, continued availability of lines of credit for the
Company's businesses, changes in interest rates, changes in the industries in
which the Company operates, competition, dependence on existing management, the
stability of Argentina's and El Salvador's governments, currency exchange rate
fluctuations, the repatriation of funds from Argentina and El Salvador, domestic
or global economic conditions (particularly in the states of Texas and
Arkansas), changes in foreign or domestic tax laws or the administration of such
laws and changes in gaming or lending laws or regulations. Any forward-looking
statements are made pursuant to the Private Securities Litigation Reform Act of
1995 and, as such, speak only as of the date made.
GENERAL AND HISTORY
Crown Group, Inc. ("Crown"), and collectively with its subsidiaries (the
"Company"), is a publicly traded buy-out firm which presently owns (i) 100% of
America's Car-Mart, Inc. ("Car-Mart") and 85% of Paaco Automotive Group, Inc.
and Premium Auto Acceptance Corporation (collectively, "Paaco"), vertically
integrated used car sales and finance companies, (ii) 100% of Precision IBC,
Inc. ("Precision"), a firm specializing in the sale and rental of intermediate
bulk containers ("IBC's"), (iii) 80% of Concorde Acceptance Corporation
("Concorde"), a sub-prime mortgage lender, (iv) 49% of Casino Magic Neuquen S.A.
("CMN"), a casino operator in the Province of Neuquen, Argentina, (v) 50.1% of
CG Incorporated, S.A. de C.V. ("Crown El Salvador"), a newly formed company
focusing on the development and operation of casinos in El Salvador, (vi) 80% of
Home Stay Lodge I, Ltd. ("Home Stay"), a partnership focusing on the
development and operation of extended-stay lodging facilities, and (vii) 45% of
Atlantic Castings, Inc. ("Atlantic Castings"), an investment casting
manufacturer of turbine engine components. In addition, from time to time the
Company purchases and sells small ownership interests in securities of privately
held and publicly traded firms. For a summary of the Company's operating results
and other financial data by business segment, see Note U of the Company's
consolidated financial statements appearing elsewhere in this annual report. The
Company is presently focusing on (i) the development and expansion of its
existing businesses, and (ii) the potential acquisition or development of other
businesses unrelated to its existing businesses.
Since its inception in 1983 through June 1993 the Company was engaged in various
facets of the cable and related programming businesses. During 1992 the Company
sold the majority of its programming business and began exploring new business
opportunities. In June 1993 the Company made the decision to enter the gaming
business, and, as a result, proceeded to sell the balance of its cable assets.
From June 1993, with the acquisition of 100% of St. Charles Gaming Company, Inc.
("SCGC"), until November 1996, the Company's primary business focus was that of
owning, operating and developing casino gaming properties. SCGC owns and
operates a riverboat gaming casino located in Calcasieu Parish, Louisiana which
had been in the development stage until opening in July 1995. The Company sold a
50% interest in SCGC in June 1995 and the remaining 50% interest in May 1996, in
each case resulting in a substantial gain.
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In November 1996 the Company decided to expand its business interests beyond
casino gaming and began pursuing business opportunities in other fields. As a
result the Company has either acquired or formed a number of businesses in a
variety of industries as follows:
CMN - In June 1997 the Company acquired a 49% interest in CMN from
Casino Magic Corp. ("Casino Magic") for a purchase price of $7 million
in cash. CMN operates casinos in the cities of Neuquen and San Martin
de los Andes ("San Martin") in the Province of Neuquen, Argentina under
an exclusive concession contract.
CONCORDE - In June 1997 the Company, along with certain newly hired
management personnel, formed Concorde. Concorde is in the business of
originating, purchasing, servicing and selling sub-prime mortgage loans
which are secured primarily by first and second liens on residential
properties. These loans are sold in privately negotiated transactions
to institutional investors and other third parties.
PAACO - In February 1998 the Company acquired 53% of the common stock
of Paaco for a purchase price of approximately $9.1 million in cash.
Approximately $4.9 million of Paaco common stock was purchased directly
from Paaco, and the remaining $4.2 million was purchased from Paaco
management who prior to this transaction were the sole shareholders of
Paaco. Effective May 1, 1998 and February 1, 1999 the Company purchased
an additional 12% and 15% interest, respectively, in Paaco from the
management shareholders. The May 1, 1998 purchase price of $1.7 million
was paid by issuing 412,500 shares of the Company's common stock. The
February 1, 1999 purchase price of approximately $2.6 million consisted
of 257,811 shares of the Company's common stock and approximately $1.0
million in cash. In July 1999, upon discovering certain accounting
errors and irregularities at Paaco, the Company and the Paaco selling
shareholders amended and restated the three prior purchase agreements
such that the Company received approximately $4 million in
consideration and an additional 5% interest in Paaco (see Note T to the
Consolidated Financial Statements). Paaco is a vertically integrated
used car sales and finance company which operates eight dealerships in
the Dallas-Ft. Worth metropolitan area and two dealerships in Houston,
Texas. Paaco sells, underwrites and finances used cars and trucks with
a focus on the Hispanic market.
PRECISION - In February 1998 the Company acquired 80% of the common
stock of Precision IBC, Incorporated ("Original Precision") for a
purchase price of approximately $2.4 million cash. In March 1998 the
Company acquired 80% of the common stock of M&S Tank Rentals, Inc.
("M&S") for a purchase price of $1.65 million cash. Original Precision
and M&S were subsequently merged together into a newly formed
corporation, Precision IBC, Inc. ("Precision"). Effective May 1, 1998
the Company acquired the remaining 20% of Precision. The purchase price
of approximately $1.1 million was paid by issuing 288,027 shares of the
Company's common stock. Precision is in the business of renting,
selling, testing and servicing principally stainless steel intermediate
bulk containers.
HOME STAY - In May 1998 the Company, along with a minority holder,
formed Home Stay. Home Stay is in the business of constructing and
operating extended-stay lodging facilities. In March 1999 Home Stay
began operating two newly constructed 128 unit extended-stay lodging
facilities in the Pensacola, Florida area.
CAR-MART - In January 1999 the Company acquired 100% of the outstanding
common stock of Fleeman Holding Company, including its wholly-owned
subsidiary Car-Mart, for $41.35 million. The purchase price consisted
of $33.85 million in cash and the issuance of promissory notes
aggregating $7.5 million. Car-Mart operates 35 "Buy-Here Pay-Here"
used car dealerships located in niche markets throughout Arkansas,
Oklahoma, Texas and Missouri. Car-Mart sells, underwrites and finances
used cars and trucks.
CROWN EL SALVADOR - In March 1999 the Company, along with minority
holders, formed Crown El Salvador. Crown El Salvador is in the business
of developing and operating casino properties in El Salvador. In June
and July 1999 Crown El Salvador completed the construction and began
operating its first and second casinos, respectively, in El Salvador.
ATLANTIC CASTINGS - In March 1999 the Company acquired a 45% interest
in Atlantic Castings for a purchase price of $.3 million in cash.
Atlantic Castings is an investment casting manufacturer of turbine
engine components.
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USED CAR SALES AND FINANCE (CAR-MART AND PAACO)
GENERAL
Car-Mart and Paaco operate separate vertically integrated used car sales and
finance companies that primarily target customers who have limited credit
histories, low incomes, or past credit problems (hereinafter referred to as
"Sub-Prime Borrowers"). These operations include (i) the purchase,
reconditioning (Paaco only) and sale of used cars and trucks, (ii) the
underwriting, financing and servicing of the related retail installment
contract, and, if necessary, (iii) the repossession and remarketing of the
vehicle. While Car-Mart and Paaco are in the same business and share a number of
operating characteristics, the companies are different in many respects. Paaco
operates in large metropolitan areas (Dallas/Fort Worth and Houston, Texas),
reconditions most every vehicle prior to its sale and focuses on the Hispanic
market. Car-Mart on the other hand operates principally in smaller communities,
performs little or no vehicle reconditioning and does not focus on any
particular customer group. Paaco also tends to sell newer vehicles with an
average selling price more than twice that of Car-Mart. Presented below is a
summary of certain information with respect to Car-Mart and Paaco as of April
30, 1999 and for the year then ended.
Car-Mart Paaco
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Founded 1981 1992
Acquired by Crown Jan. 1999 Feb. 1998
Dealerships 35 10
Location of dealerships AR, OK, TX, MO Texas
Customer accounts 16,746 6,694
INDUSTRY
Used Car Sales
Used car retail sales typically occur through franchised new car dealerships
that sell used cars or independent used car dealerships. The market for used car
sales in the United States is significant and has steadily increased over the
past five years. Management believes that the factors that have led to growth in
this industry include (i) substantial increases in new car prices, which have
made new cars less affordable to the average consumer, (ii) the greater
reliability and durability of used cars resulting from the production of higher
quality cars, and (iii) the increasing number of vehicles coming off lease
programs in recent years. Many industry analysts expect these trends to
continue, leading to further expansion of the used car sales market.
Car-Mart and Paaco participate in the sub-prime segment of the independent used
car sales and finance market. This segment is serviced primarily by numerous
small independent used car dealerships that sell and finance sales of used cars
to Sub-Prime Borrowers ("Buy Here-Pay Here" dealers). Buy Here-Pay Here dealers
typically offer their customers certain advantages over more traditional
financing sources, such as broader and more flexible underwriting guidelines,
flexible payment terms (including prorating customer payments due within one
month into several smaller payments and scheduling payments to coincide with a
customer's pay days), and the ability to make payments in person, an important
feature to many Sub-Prime Borrowers who may not have checking accounts or are
otherwise unable to make payments by the due date through the mail because of
the timing of paychecks.
Used Car Financing
The automobile financing industry is the third-largest consumer finance market
in the country, after mortgage debt and revolving credit card debt. Growth in
automobile financing has been fueled by increasing prices of both new and used
cars, which has forced more buyers to seek financing when purchasing a car. This
industry is served by such traditional lending sources as banks, savings and
loans, and captive finance subsidiaries of automobile manufacturers, as well as
by independent finance companies and Buy Here-Pay Here dealers. In general, the
industry is categorized according to the type of car sold (new versus used) and
the credit characteristics of the borrower.
Despite significant opportunities, many of the traditional lending sources do
not consistently provide financing to the sub-prime consumer finance market.
Management believes traditional lenders avoid this market because of its high
credit risk and the associated collection efforts. Many of the approximately
63,000 independent used car dealers are not able to obtain debt financing from
traditional lending sources such as banks, credit unions, or major finance
companies. These dealers typically finance their operations through the sale of
contract receivables at a discount.
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OPERATIONS
Purchasing Vehicles
Car-Mart and Paaco purchase vehicles from (i) franchised new and late-model used
car dealers, (ii) auctions, (iii) wholesalers, and (iv) customer trade-ins.
Prior to purchasing a vehicle, buyers perform an inspection and, as permitted,
test drive each vehicle. The identity of the buyer responsible for each vehicle
acquired is tracked through Car-Mart's and Paaco's computer systems which allow
them to monitor the results of each buyer. Management monitors (i) the average
number of days vehicles are held in inventory, and (ii) the cost of each vehicle
in comparison to similar models purchased by other Company buyers and in
comparison to wholesale market values.
Reconditioning
Paaco reconditions almost every vehicle it purchases at its centralized
reconditioning center in Irving, Texas where a variety of parts, assemblies, and
systems are inspected and, if necessary, repaired or replaced. In addition to
inspecting, repairing and preparing acquired vehicles for sale, the Irving
facility performs repair and service work on vehicles for cash paying customers
and pursuant to service contracts. More than 90% of Paaco's customers elect to
purchase a service contract when purchasing a vehicle.
In general, Car-Mart performs little or no reconditioning on vehicles it
purchases. Its buyers are instructed to thoroughly inspect and evaluate each
vehicle in order to identify and purchase vehicles that require little or no
reconditioning. Like Paaco, Car-Mart offers a service contract to its customers
which covers certain vehicle components and assemblies for a specified duration.
For covered components Car-Mart customers have their vehicles serviced at third
party service centers with which Car-Mart has in many cases previously
negotiated labor rates and mark-up on parts. Substantially all of Car-Mart
customers elect to purchase a service contract when purchasing a vehicle.
Selling, Marketing and Advertising
Paaco lots are typically staffed with a manager, up to six bilingual sales
personnel, and several others including clerical workers, collectors, mechanics
and a porter. The lots are operated six days a week, generally between the hours
of 10:00 am and 8:00 pm. Each lot maintains an inventory level of 35 to 75 cars
and trucks. Periodically, Paaco sales personnel attend training classes
conducted by a full-time sales trainer. Each phase of the sales process is
rehearsed with the salesman employing trial closing questions. Salesmen are paid
principally on a commission basis.
Paaco's marketing objective is to cause Paaco to become a distinguishable brand
name among the Hispanic community that stands for value, dependability and
service. Paaco achieves this goal by (i) locating its dealerships in densely
populated Hispanic neighborhoods, (ii) frequently airing a series of
advertisements on local Hispanic television and radio stations, and (iii)
offering a thoroughly inspected and reconditioned vehicle for sale at a fair
price.
In addition to its television and radio advertising, Paaco conducts a variety of
promotional activities including a sales referral program, occasional live
entertainment at its dealerships, and distribution of promotional items.
Existing customers have historically been a good source of referrals. Paaco also
has a mascot named "Senor Paaco", a jovial Hispanic gentleman who wears an
oversized sombrero and has become very popular with the customers.
The number of persons employed at a Car-Mart dealership varies between two and
ten based upon the number of active customer accounts serviced at such
dealership. A new dealership with a limited number of accounts may only have a
manager and an assistant. In contrast, a mature dealership with several hundred
active accounts may have a manager, an assistant manager, a manager trainee, two
collectors, two payment takers/office workers, a buyer and an assistant or two.
Car-Mart dealerships are operated six days a week from 9:00 am to 6:00 pm. Each
dealership maintains an inventory level ranging from 15 to 50 vehicles depending
on the maturity of the dealership. Selling is done principally by the manager,
assistant manager, manager trainee and sales associate.
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Car-Mart's objective is to offer its customers basic transportation at a fair
price and treat each customer courteously and with respect. Car-Mart attempts to
build a positive reputation in each community it operates and generate new
business from such reputation as well as referrals from existing customers.
Car-Mart recognizes repeat customers with silver and gold certificates
representing the purchase of five and ten vehicles, respectively. Such
certificates are prominently displayed at the dealership location where the
vehicles were purchased. Its dealerships are generally located on heavily
traveled roads that offer high visibility. Car-Mart also advertises in local
newspapers, billboards and radio spots.
Underwriting and Finance
Each of Car-Mart and Paaco finance more than 95% of the used cars and trucks
sold at their dealerships. These retail installment contracts are serviced
exclusively by Car-Mart and Paaco personnel, respectively. In connection with
each such financing, the Company requires the sale be made on acceptable terms
and to a customer with a satisfactory credit profile. Most financings require a
down payment of 10% to 15% of the retail sales price, a term not in excess of 24
months (up to 36 months for Paaco) and payment terms (generally weekly) that
coincide with the customer's pay dates.
Upon the customer and the Company coming to a preliminary agreement as to terms,
the Company obtains a detailed credit application from the customer which
includes information regarding employment, residence and credit history, income
level and personal references. This information is then verified by Company
personnel. After the verification process, it is the dealership manager who
makes the decision to accept, reject, or modify (perhaps obtain a greater down
payment or require an acceptable co-buyer) the proposed transaction. The results
of each manager's decisions are constantly monitored by Company personnel
through the review of finance receivables agings and repossession reports which
are stratified by dealership. In addition, Company personnel periodically review
credit files to evaluate the soundness of the manager's judgement and ensure
appropriate information was obtained and verified.
Collections
Providing financing to Sub-Prime Borrowers requires not only that the Company
have an effective underwriting process, but that its collection policies and
procedures be sound and diligently executed. The majority of the Company's
customers make their payments in person at one of the dealerships. Each of
Car-Mart and Paaco closely monitor their customer accounts using collections
software that stratifies past due accounts by dealership and the number of days
past due. Customers are normally contacted by phone within a few days if their
payment is not received on the scheduled due date. The results of each phone
contact are documented (promises to pay, alternative payment arrangements, etc.)
by Company personnel.
If a customer becomes seriously delinquent in his payments and management
determines that timely collection of future payments is not probable, the
Company will take steps to repossess the vehicle. Of the vehicles repossessed,
many are returned by the customer on a voluntary basis. Other repossessions are
performed by Company personnel and third party repossession agents. Depending on
the condition of a repossessed vehicle, it is either resold through a Company
dealership (generally after some reconditioning in the case of Paaco), or sold
for cash to a wholesaler or other third party at an auction.
The Company monitors the results of its collection personnel based upon a number
of quantitative criteria including (i) installment contract agings, (ii) the
percentage of accounts past due versus a standard, (iii) the average number of
days the finance receivable portfolio is past due, and (iv) static pool
analysis.
COMPETITION
The used automotive retailing industry is highly competitive and fragmented.
Presently there are an estimated 23,000 franchised automobile dealers and 63,000
independent used vehicle dealers. In recent years a number of large companies
including AutoNation U.S.A. and Car Max have entered the used car sales business
or announced plans to develop large used car sales operations. Management
believes these operations do not provide significant competition for Car-Mart or
Paaco as they tend to sell higher priced vehicles to consumers with stronger
credit histories. Car-Mart and Paaco compete principally with other independent
Buy Here-Pay Here dealers, and to a lesser degree with (i) the used vehicle
retailing operation of franchised automobile dealerships, (ii) independent used
vehicle dealers, and (iii) individual consumers who sell used vehicles in
private transactions.
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Management believes the principal competitive factors in the sale of its used
vehicles include (i) the availability of financing to Sub-Prime Borrowers, (ii)
the breadth and quality of vehicle selection, in the case of Paaco, (iii) the
availability of popular vehicles, (iv) pricing, (v) the convenience of a
dealership's location, (vi) customer service, and (vii) in the case of Paaco,
the ability to communicate in Spanish and English with its customers. Management
believes that its dealerships are competitive in each of these areas.
REGULATION AND LICENSING
Car-Mart's and Paaco's operations are subject to ongoing regulation,
supervision, and licensing under various federal, state, and local statutes,
ordinances, and regulations pertaining to the sale and financing of vehicles.
These laws include the Truth In Lending Act, the Equal Credit Opportunity Act
and the Fair Credit Reporting Act of 1970. Among other things, these laws
require that the Company obtain and maintain certain licenses and
qualifications, limit or prescribe terms of the contracts it originates, require
specified disclosures to customers, limit the Company's right to repossess and
sell collateral, and prohibit discrimination against customers on the basis of
certain characteristics including age, race and gender.
In many cases the Company charges fixed interest rates in excess of traditional
finance companies on the contracts originated at its dealerships. The states in
which the Company operates impose limits on interest rates the Company can
charge on its loans. These limits are generally based on either (i) a specified
margin above the federal discount rate, or (ii) the age of the vehicle.
Management believes the Company is in substantial compliance with all applicable
federal, state, and local laws and regulations. However, if the Company does not
remain in compliance with such laws, this failure could have a material adverse
effect on operations. In addition, the adoption of additional laws, changes in
the interpretation of existing laws, or the Company's entrance into
jurisdictions with more stringent regulatory requirements could have a material
adverse effect on the Company.
GAMING (CMN AND CROWN EL SALVADOR)
GENERAL
CMN operates casinos in the cities of Neuquen and San Martin in the Province of
Neuquen, Argentina. Prior to 1995 these casinos were operated by the provincial
government. In January 1995 CMN entered into a twelve-year exclusive concession
contract to operate these casinos. The concession contract can be extended by
CMN for an additional five years under certain circumstances. CMN is owned 51%
by Casino Magic and 49% by the Company. In addition, the Company also owns (i) a
16.4% interest in a certain management agreement relating to CMN, and (ii) a 49%
interest in (a) slot machines and a related lease agreement, and (b) a certain
royalty agreement relating to CMN. In addition to receiving periodic dividends
from CMN's earnings, the Company also receives its pro-rata share of fees and
rentals from these agreements. For a summary of CMN's operating results and
identifiable assets, see Note E of the Company's consolidated financial
statements appearing elsewhere in this annual report.
In June and July 1999 Crown El Salvador opened its first and second casinos,
respectively, in the cities of San Miguel and Antiguo Cuscatlan, El Salvador.
The casinos are operated pursuant to licenses granted by the cities. Crown El
Salvador anticipates opening a third casino in the City of Santa Ana, El
Salvador by April, 2000.
LOCATION, FACILITIES AND OPERATIONS
The Province of Neuquen is located approximately 300 miles west of Buenos Aires
in central Argentina. The Neuquen facility, which is leased by CMN from the
Province of Neuquen, is located at the Neuquen International Airport
approximately 15 miles from downtown Neuquen City. This facility has
approximately 1,000 dedicated parking spaces available to its patrons, and has
an additional 3,000 parking spaces available at the adjacent airport. The San
Martin facility is leased from a third party and is located in the center of the
city. Each of Crown El Salvador's San Miguel and Antiguo Cuscatlan facilities
are located within the city limits and are leased from third parties. Certain
information regarding the CMN's and Crown El Salvador's casinos is as follows:
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Crown
CMN El Salvador
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Gaming square feet 29,500 12,000
Slot machines 473 234
Table games 56 26
Revenues (in millions):
Fiscal 1998 $ 18.3 Not open
Fiscal 1999 21.4 Not open
CMN's casinos are open seven days a week generally from 7:00 p.m. to 5:00 a.m.
Monday through Thursday, 5:00 p.m. to 5:00 a.m. on Friday, and 2:00 p.m. to 5:00
a.m. on Saturday and Sunday. Peak admission occurs around 1:00 a.m. The casinos
offer slot machines, table games, food, beverages and gift items, as well as
live entertainment at the Neuquen casino on weekends. Table games include
roulette, black jack, punto y banca and big six.
Crown El Salvador's casinos are open 7 days a week generally from 7:00 p.m. to
4:00 a.m. Peak admission occurs around 11:00 p.m. The casinos offer slot
machines, table games and limited food and beverages. Table games include black
jack, poker and roulette. On weekends the Antiguo Cuscatlan casino provides live
entertainment.
MARKET AND MARKETING STRATEGY
Greater Neuquen City has a population of approximately 220,000 with an estimated
600,000 people living within 120 miles of the city while San Martin has a
population of approximately 17,000 with an estimated 150,000 people living
within 120 miles of the city. Neuquen is one of the wealthiest Argentine
provinces per capita, principally due to energy production. The Province of
Neuquen holds approximately 40% of Argentina's proven oil and gas reserves. San
Martin is located in the Andes Mountains near one of the country's largest ski
resorts, and is well known for its trout and salmon fly fishing.
CMN's marketing strategy has been to provide the customer with an American style
gaming atmosphere. Most casinos in Argentina have a European style gaming
atmosphere. European style casinos tend to be more formal, oftentimes with
casino dealers dressed in tuxedos, placing little or no emphasis on slot play
and rarely providing live entertainment. Since taking over operating control of
the Neuquen and San Martin casinos in early 1995 CMN has substantially increased
the number of slot machines, eliminated admission fees, reduced the price of
food and beverages, encouraged a casual dress code and provided live
entertainment at no charge on the weekends. As a result of these changes, CMN
has substantially increased the customer count and revenues of its two casinos.
Greater San Miguel has a population of approximately 400,000, while the
population within 15 miles of Antiguo Cuscatlan (including the City of San
Salvador) is approximately 1.5 million. El Salvador's economy has been growing
in recent years with agriculture and manufacturing (textiles, leather and
machinery) being important industries. Inflation has been low (2% in 1997), and
the exchange rate between the Salvadoran colon and the U.S. dollar has been
stable (around 8.7 colones for each dollar since 1995).
Like CMN, Crown El Salvador's strategy is to provide (i) American style gaming
in a comfortable atmosphere with well decorated and spacious facilities, (ii)
American slot machines, and (iii) friendly and courteous service. Competing
gaming facilities in El Salvador offer older slot machines oftentimes
manufactured outside the United States. Crown El Salvador believes its casinos
are in most cases superior to the casinos of its competitors due to the age and
lack of technological features of the competitors slot machines and general lack
of overall casino finish.
CONCESSION CONTRACT AND LICENSING
In January 1995 CMN entered into a twelve-year concession contract with the
Province of Neuquen providing CMN with the exclusive right to develop and
operate all gaming activities within 50 kilometers (31 miles) of each of the
Neuquen and San Martin casinos, within the boundaries of the Province, during
the concession term. The concession term will automatically be extended an
additional five years in the event CMN individually, or jointly with others,
invests at least $5 million in lodging infrastructure. The transfer of the
ownership of the concession is subject to the approval of the Province.
In connection with the granting of the concession contract CMN paid a one-time
concession fee to the Province of Neuquen. CMN also pays the Province $220,000
per month as a combination tax/rent payment. If CMN decides to move from the
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Neuquen casino location, which is currently being leased from the Province, it
will receive a $40,000 per month reduction in its payment to the Province. The
monthly tax/rent payment is subject to increase in the event annual net gaming
revenues exceed $52.8 million.
In addition, CMN is obligated to pay all applicable federal and provincial taxes
including a 2% provincial tax on net gaming revenue, and a 34% federal income
tax on earnings. Pursuant to the concession, the Province of Neuquen guarantees
that no additional municipal or provincial taxes will be levied on CMN's
operations, and that existing provincial and municipal taxes will not be
increased.
Crown El Salvador has been granted a non-exclusive gaming license by each city
in which it operates. Generally, the licenses specify the location in which
gaming may be conducted, the amount of gaming taxes to be paid and permitted
hours of operation. The licenses do not contain a specified term. Generally,
gaming taxes are assessed based upon the number of slot machines and table games
in operation.
SHAREHOLDERS' AGREEMENTS
In connection with the Company's 49% purchase of CMN, the Company and Casino
Magic entered into a shareholders' agreement (the "Shareholders' Agreement")
which provides, among other things, that in the event either the Company or
Casino Magic desires to sell its interest in CMN such shareholder must first
offer to sell its interest to the other shareholder under the terms and
conditions provided in the Shareholders' Agreement. Except as expressly
permitted by the Shareholders' Agreement, neither the Company nor Casino Magic
may sell, assign, or otherwise transfer or encumber any part of the CMN stock
owned by either of them without the written consent of the other shareholder.
As required by the Shareholders' Agreement CMN has four directors on its board,
two of which are appointed by the Company and the other two are appointed by
Casino Magic. The Shareholders' Agreement requires the unanimous approval of all
shareholders prior to authorizing certain corporate actions. Those actions
requiring unanimous CMN shareholder approval include matters pertaining to (i)
the issuance or purchase of CMN stock, (ii) amendments to CMN's articles of
incorporation or by-laws, (iii) a liquidation or merger, (iv) the sale of a
substantial portion of CMN's assets, (v) material or related party contracts,
(vi) incurring debt, and (vii) amendments to the concession contract with the
Province of Neuquen.
The Shareholders' Agreement also provides that the Company and Casino Magic may
jointly develop additional casinos in Argentina on mutually satisfactory terms,
and that neither the Company nor Casino Magic may own, operate or obtain any
material benefit from another casino in Argentina without the prior written
consent of the other shareholder.
Crown El Salvador's articles of incorporation contain certain provisions
oftentimes found in shareholder agreements. These provisions provide that the
unanimous approval of all shareholders is required in connection with (i)
amending the articles of incorporation, (ii) a liquidation or merger, (iii)
issuing additional shares of Crown El Salvador stock, (iv) the sale of all or
substantially all of Crown El Salvador's assets, and (v) entering into related
party transactions.
COMPETITION
CMN's two casinos are currently the only operating casinos in the Province of
Neuquen. Since the concession contract restricts competition in the Province of
Neuquen that is within 50 kilometers (31 miles) of CMN's two casinos, CMN does
not experience significant competition in its primary market area. There are,
however, approximately 44 government-operated casino properties throughout the
country, including a casino in Chipolletti, across the Rio Negro River from the
City of Neuquen in the Rio Negro Province, and a second casino in the Rio Negro
Province approximately 30 miles southeast of the City of Neuquen.
Crown El Salvador presently competes with four casino facilities located in
Greater San Salvador and will compete with one other competitor in San Miguel
beginning in September 1999. Furthermore, the licenses granted to Crown El
Salvador are non-exclusive, and thus additional casinos could commence
operations within Crown El Salvador's primary market.
REGULATION
The Province of Neuquen enacted a casino privatization program in order for it
to issue the twelve-year exclusive concession contract to CMN to operate the
Neuquen and San Martin casinos. These two casinos are the only casinos in the
Province of Neuquen. The casinos had previously been operated by the provincial
government. The Ministry of Finance of Argentina has adopted a modified
regulatory system for casinos, based on the regulatory system utilized by the
State of Nevada, and such
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regulatory system is being administered by the Province of Neuquen. Such
modified regulatory system provides rules and regulations relating to, among
other things, (i) the suitability of officers, directors and significant
shareholders, (ii) maintenance of effective controls over operating and
financial practices, and (iii) the submission of financial reports. CMN can not
predict what effect the enactment of other laws, regulations or pronouncements
that relate to casino gaming may have on the operations of CMN.
Presently, the regulatory environment in which Crown El Salvador operates is not
fully developed. No national body has established rules and regulations for the
operation of casinos within El Salvador. The El Salvadoran government has
granted cities the right to issue gaming licenses and establish rules and
regulations that govern the operation of such casinos. The cities in which Crown
El Salvador operates have not as yet promulgated such rules and regulations.
There can be no assurance that adherence to such rules and regulations, if and
when adopted, will be without excessive cost or administrative burden.
REQUIRED DIVESTITURE OF COMMON STOCK
The Articles of Incorporation of the Company provide that any shareholder of the
Company who is found to be unsuitable by any gaming regulatory authority with
jurisdiction over the Company's operations, may, in the discretion of the Board
of Directors, be required to divest the shares of Company stock owned by such
person within forty-five (45) days from the date on which the Company notifies
the disqualified holder of the regulatory authority's determination of
unsuitability, or the Company will have the right to purchase such stock at a
price equal to its fair market value, as defined in the Articles of
Incorporation, less twenty-five percent (25%).
In addition, the Articles of Incorporation require that the Company maintain
compliance under the federal Merchant Marine Act of 1936 and the federal
Shipping Act of 1916, as amended, restricting the amount of shares of Company
common stock which may be held by non-U.S. citizens. The Company may require
foreign persons to divest their shares of Company common stock in accordance
with the provisions of the Articles of Incorporation in the event that the
Company determines that it is in violation of either of these Acts.
MORTGAGE LENDING (CONCORDE)
GENERAL
In June 1997 the Company, along with certain newly hired management personnel,
formed Concorde. Concorde is in the business of originating, purchasing,
servicing and selling sub-prime mortgage loans which are secured primarily by
first and second liens on residential properties. These loans are sold in
privately negotiated transactions to institutional investors and other third
parties, and in the future may be sold in the secondary market through
securitization programs.
Concorde focuses on lending to individuals who have impaired or unsubstantiated
credit histories and/or unverifiable income. Loans made to these individuals do
not qualify for purchase by government-sponsored agencies such as the Federal
Home Loan Mortgage Association and the Federal Home Loan Mortgage Corporation,
and thus are sometimes referred to as non-conforming or sub-prime mortgage
loans. Such loans generally provide higher yields than conforming loans. The
principal differences between conforming loans and non-conforming loans include
the applicable loan-to-value ratios, the credit and income histories of the
mortgagors, the documentation required for approval of the mortgagors, the type
of properties securing the mortgage loans, the loan sizes, and the mortgagors'
occupancy status with respect to the mortgaged properties. Second mortgage loans
are made to borrowers owning single-family homes for the purpose of debt
consolidation, home improvements, education and a variety of other purposes.
These loans generally provide a higher interest rate yield than first mortgage
loans, and are secured by a second lien on the property.
Management believes the sub-prime mortgage loan industry is fragmented and
operates inefficiently compared to the conforming loan industry, and as a
result, higher interest rate yields are available to sub-prime mortgage lenders
even after considering a higher rate of loan defaults. Management also believes
the sub-prime mortgage loan industry is less cyclical than the conforming loan
industry because the sub-prime mortgage borrower is more "payment" sensitive
rather than "interest rate" sensitive. In addition, the federal tax code's
preferential treatment of the interest expense deduction for home mortgage loans
makes it financially advantageous for many individuals to convert their credit
card and other consumer loans into a mortgage loan.
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LOAN ORIGINATIONS AND PURCHASES
Concorde began originating and purchasing mortgage loans in July 1997. Concorde
originates loans through a network of independent retail mortgage brokers and
directly through Internet, telemarketing and direct mail programs. Concorde also
purchases some mortgage loans from a network of wholesale loan brokers and
correspondents, including banks and thrift institutions. Concorde typically pays
a premium for loans purchased from wholesale loan brokers and correspondents, as
well as to retail mortgage brokers for loans they originate. A summary of
Concorde's loan originations and purchases for the fiscal years ended April 30,
1999 and 1998 is as follows (dollars in millions):
Fiscal 1999 Fiscal 1998
-------------------- --------------------
Direct $ 38.1 34.1% $ 9.6 25.7%
Retail brokers 64.5 57.7 18.0 48.3
Wholesale brokers 9.1 8.2 9.7 26.0
------ ------ ------ ------
$111.7 100.0% $ 37.3 100.0%
====== ====== ====== ======
Prior to purchasing loans through wholesale loan brokers and correspondents,
Concorde reviews the loan packages to determine whether the packages are
complete and adhere to Concorde's underwriting guidelines. Depending on the size
of the pool of loans purchased, Concorde may engage a third-party underwriter to
reunderwrite the loans, verify the borrower's employment status, determine the
quality of the appraisal and assign a credit grade. Concorde also analyzes the
financial condition of the mortgage broker, which includes a review of the
mortgage broker's licenses and financial statements. Upon approval, Concorde
typically requires each mortgage broker to enter into a purchase and sale
agreement that contains customary representations and warranties regarding the
loans such mortgage broker will sell to Concorde.
UNDERWRITING
Concorde's underwriting guidelines are provided to mortgage loan brokers and
mortgage bankers so they can create loan applications or bulk purchase packages
which meet such guidelines. Upon receipt of a completed loan package from a
mortgage loan broker, Concorde's underwriting staff reviews the package, which
includes the loan application, a current appraisal of the underlying collateral
property, a preliminary title report and a credit report to determine if the
proposed loan meets its underwriting guidelines. To assess the credit quality of
each loan, Concorde's underwriters consider various factors, including the
appraised value of the collateral property, the applicant's debt payment
history, credit profile and employment status, and the combined debt ratio and
loan-to-value ratio upon completion of the proposed mortgage loan. Personal
circumstances including divorce, family illnesses or deaths and temporary job
loss due to layoffs and corporate downsizing often impair an applicant's credit
record. On an exception basis mortgage loans may be made to individuals whose
credit profile does not conform to Concorde's guidelines, but only with the
approval of an officer of Concorde. Concorde does not delegate underwriting
authority to any broker or correspondent.
Property appraisals for loans originated or purchased by Concorde are conducted
by licensed, independent appraisers who are approved by Concorde. Upon receipt
of the appraisal, Concorde's underwriting staff reviews the value of the
underlying collateral based upon a full review of the appraisal. Concorde
selects its appraisers based on professional experience, education, membership
in related professional organizations and experience with the appraiser. For
wholesale and correspondent loans purchased, Concorde will typically request a
second appraisal if the original appraisal was completed by an appraiser who is
not acceptable to Concorde.
Prior to funding a loan, Concorde's underwriting staff determines the
applicant's creditworthiness and ability to service the loan. Verification of
personal financial information, credit history, and employment history is
required prior to closing the loan. Concorde has established classifications
with respect to its borrowers based upon the credit profile of such borrower and
certain other borrower characteristics. Each loan applicant is placed into one
of four letter ratings ("A" through "D", with sub-ratings within each category),
depending upon a number of factors including the applicant's credit history and
employment status. Terms of loans made by Concorde, as well as the maximum
loan-to-value ratio and debt service-to-income ratio (calculated by dividing
fixed monthly debt payments by gross monthly income), vary depending upon the
classification of the borrower. Borrowers with lower credit ratings generally
pay higher interest rates and loan origination fees. Generally, loan applicants
are required to have two years of employment with their current employer or two
years of similar business experience. Verification of information regarding the
first mortgage, if any, is also required, including balance, status and whether
local taxes, interest, insurance and assessments are included in the applicant's
monthly payment. All taxes and assessments not
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included in the payment are required to be verified as current. Upon successful
completion of the underwriting process, the closing of the loan is scheduled
with an independent closing attorney or title company who is responsible for
closing the loan in accordance with Concorde's closing procedures.
LOAN SERVICING AND COLLECTIONS
Servicing involves, among other things, collecting payments, applying such
payments of principal and interest to the appropriate loan, ensuring the
underlying collateral is properly insured, preparing reports relative to such
loans and enforcing the lender's rights with respect to the loans, including,
recovering delinquent payments, instituting foreclosures and liquidating the
underlying collateral. Management believes that servicing Concorde's own
portfolio enhances certain operating efficiencies. Concorde's servicing
portfolio is subject to reduction by normal monthly payments, prepayments,
foreclosures and the sale of mortgage loans. In some states in which Concorde
operates, prepayment fees may be limited or prohibited by applicable law.
Concorde sends borrowers a monthly billing statement twenty days prior to the
monthly payment due date. Although borrowers generally make loan payments within
ten to fifteen days after the due date (the "grace period"), if a borrower fails
to pay the monthly payment within the grace period, Concorde commences
collection efforts by notifying the borrower of the delinquency. If the loan
remains unpaid, Concorde will contact the borrower to determine the cause of the
delinquency and to obtain a commitment to cure the delinquency at the earliest
possible time.
As a general matter, if efforts to obtain payment have not been successful, a
pre-foreclosure notice will be sent to the borrower generally 30 days after the
due date of the next subsequently scheduled installment, providing 30 days
notice of the impending foreclosure action. During the 30-day notice period,
collection efforts continue. However, if no substantial progress has been made
in collecting delinquent payments from the borrower, foreclosure proceedings
generally begin. Generally, Concorde will have commenced foreclosure proceedings
when a loan is over 90 days delinquent.
Loans originated or purchased by Concorde are secured by mortgages, deeds of
trust, security deeds or deeds to secure debt, depending upon the prevailing
practice in the state in which the property securing the loan is located.
Depending on local law, foreclosure is effected by judicial action or
nonjudicial sale, and is subject to various notice and filing requirements. In
general, the borrower, or any person having a junior encumbrance on the real
estate, may cure a monetary default by paying the entire amount in arrears plus
other designated costs and expenses incurred in enforcing the obligation during
a statutorily prescribed reinstatement period. Generally, state law controls the
amount of foreclosure expenses and costs, including attorneys' fees, which may
be recovered by a lender. After the reinstatement period has expired without the
default having been cured, the borrower or junior lienholder no longer has the
right to reinstate the loan and must pay the loan in full to prevent the
scheduled foreclosure sale.
Although foreclosure sales are typically public sales, frequently no third-party
purchaser bids in excess of the lender's lien because of the difficulty of
determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus, it is likely the lender will purchase the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure. Depending
upon market conditions and loan-to-value ratios, the ultimate proceeds from the
sale of the collateral may not equal Concorde's investment in the property.
LOAN SALES AND SECURITIZATIONS
Concorde sells the majority of the loans it originates and purchases to
institutional investors and other third parties. In the future Concorde may sell
loans in the secondary market through securitization transactions. Loans are
sold periodically to provide Concorde with greater flexibility and operating
leverage than that of a traditional portfolio lender. Loans sold on a wholesale
basis are done so to third party institutions on a limited recourse basis for
cash with servicing rights released. Securitizations, on the other hand, are
loan sales in which the lender continues to be exposed to some prepayment and
credit risk as long as the underlying loan portfolio remains outstanding.
Generally, in a securitization transaction, a lender sells mortgage loans it has
originated or purchased to a special purpose trust. The trust issues mortgage
passthrough certificates. The senior certificates, which typically carry a
coupon well below the weighted average coupon of the underlying mortgage loans,
are sold in an offering and the lender retains the interest-only and residual
certificates, which are amortized over the estimated average life of the loan
portfolio. The cash flow realized from these interest only and residual
certificates is subject to the prepayment and loss characteristics of the
underlying loans. These
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interest only and residual certificates are valued at the time of the
securitization. The valuation takes into account certain loss and prepayment
assumptions, servicing and other fees to be paid and discounts the projected
future net cash flow stream to its present value. Thus, to the extent loss and
prepayment rates exceed the original assumptions used in recording the
interest-only and residual certificates, the value of such certificates will be
reduced.
Typically the special purpose trust has the benefit of a financial guaranty
policy from a monoline insurance company, which insures the timely payment of
interest and the ultimate payment of principal of the investor certificate. Loan
losses first reduce the amounts otherwise available to the interest-only and
residual certificate holders and thereafter, if necessary, the monoline
insurance company will pay any further losses experienced by the holders of the
senior certificates.
REGULATION
The operations of Concorde are subject to extensive regulation, supervision and
licensing by federal, state and local government authorities. Regulated matters
include, without limitation, loan origination, credit activities, maximum
interest rates and finance and other charges, disclosures to customers, the
terms of secured transactions, the collection, repossession and claims-handling
procedures utilized by Concorde, multiple qualification and licensing
requirements for doing business in various jurisdictions and other trade
practices. Concorde's loan origination activities are subject to the laws and
regulations in each of the states in which those activities are conducted.
Concorde's activities as a lender are also subject to various federal laws
including, among others, the Truth in Lending Act ("TILA"), the Real Estate
Settlement Procedures Act ("RESPA"), the Equal Credit Opportunity Act of 1974,
as amended ("ECOA"), the Home Mortgage Disclosure Act and the Fair Credit
Reporting Act of 1970, as amended ("FCRA").
The TILA and Regulation Z promulgated thereunder contain disclosure requirements
designed to provide consumers with uniform, understandable information with
respect to the terms and conditions of loans and credit transactions in order to
give them the ability to compare credit terms. TILA also guarantees consumers a
three-day right to cancel certain credit transactions including loans of the
type originated by Concorde. Management of Concorde believes that it is in
compliance with TILA and Regulation Z in all material respects.
Concorde is also required to comply with the ECOA, which prohibits creditors
from discriminating against applicants on the basis of race, color, sex, age or
marital status. Regulation B promulgated under ECOA restricts creditors from
obtaining certain types of information from loan applicants. It also requires
certain disclosures by the lender regarding consumer rights and requires lenders
to advise applicants of the reasons for any credit denial. In instances where
the applicant is denied credit or the rate or charge for a loan increases as a
result of information obtained from a consumer credit agency, another statute,
the FCRA, requires the lender to supply the applicant with a name and address of
the reporting agency. Concorde is also subject to RESPA and is required to file
an annual report with the Department of Housing and Urban Development pursuant
to the Home Mortgage Disclosure Act.
In the course of its business, Concorde may acquire properties as a result of
foreclosure. There is a risk that hazardous or toxic waste could be found on
such properties. In such event, under certain state and federal environmental
laws, Concorde could be held responsible for the cost of cleaning up or removing
such waste, and such cost could exceed the value of the underlying properties.
The laws, rules and regulations applicable to Concorde are subject to amendment
and change. Changes or amendments to existing law, or new laws could make
compliance much more difficult or expensive, restrict Concorde's ability to
originate, purchase, broker or sell loans, further limit or restrict the amount
of commissions, interest and other charges earned on loans originated or sold by
Concorde, or otherwise adversely affect the business or prospects of Concorde.
COMPETITION
The Company is a new entrant in the sub-prime mortgage lending industry, is
small compared to many of its competitors and faces intense competition in the
business of originating, purchasing and selling mortgage loans. Competition in
the industry takes many forms including convenience in obtaining a loan,
customer service, marketing and distribution channels, and amount and terms of
the loan. Traditional competitors in the financial services business include
other mortgage banking companies, commercial banks, credit unions, thrift
institutions, credit card issuers and finance companies. Most of these
competitors in the consumer finance business are substantially larger and have
considerably greater financial, technical and marketing resources than Concorde.
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IBC RENTALS AND SALES (PRECISION)
GENERAL
Precision is in the business of renting and selling intermediate bulk containers
("IBC's" or "portable tanks") to petroleum related, industrial and manufacturing
concerns. Precision's tanks generally come in two sizes (350 gallon and 550
gallon) and are used primarily to transport and store liquids in bulk. These
liquids include industrial and textile chemicals (surfactants, soaps, dyes and
brighteners), solvents, lubricants, water clarifiers, corrosive inhibitors,
contract packaging items (shampoo), and food items (mayonnaise, ketchup,
barbecue sauce, honey, syrup and concentrate). Precision also performs certain
tank maintenance, testing, tracking and reconditioning services, and sells spare
parts such as valves and lids on both a retail and OEM basis. Precision operates
from facilities in Fairhope, Alabama and Lafayette, Louisiana and presently has
a fleet of approximately 6,000 stainless steel tanks.
OPERATIONS
Precision's portable tanks are manufactured according to its specifications
principally from two contractors, although other manufacturing sources are
available. Precision maintains a supply of tanks, valves and lids to meet the
sometimes immediate needs of its customers. Precision's lids are also sold to
tank manufacturers as a component in making new tanks. These lids are typically
manufactured by Precision in house with the occasional assistance of certain
subcontractors, while valves are manufactured overseas according to Precision's
specifications.
Periodically, Precision receives tanks back from customers who are returning
them from rental. As necessary, these tanks are cleaned and repaired, and either
returned to the rental fleet, or sold as used tanks. Precision also performs
testing services on a fee basis for its customers. The U.S. Department of
Transportation regulations require that Precision's tanks be tested every 30
months if they are being used to transport regulated materials (flammables,
corrosives, methanol) over public roadways. This certification is the customer's
responsibility to maintain. For some customers Precision performs maintenance
services on its tanks. For a fee, Precision will change valves and lids, perform
external cleanings and provide reconditioning services. These services are
performed at Precision's LaFayette, Louisiana facility as well as on site.
MARKET AND MARKETING
Precision's primary focus is on renting tanks. As a secondary focus Precision
sells new and used tanks and related spare parts. A large portion of tank
rentals and sales comes from existing customers and referrals. Precision
advertises in nationally distributed periodicals and direct markets extensively.
Precision's sales personnel also attend industry trade shows and make sales
calls to existing and potential customers. Presently, Precision has about 100
customers in 20 states throughout the United States. Precision's customers are
principally in the oil field production and drilling, chemical, water treatment,
textile and manufacturing industry segments.
A portion of Precision's new business comes from industrial and manufacturing
concerns that previously used 55 gallon polyethylene or carbon steel drums
("drums") to store liquids in bulk. Management believes its stainless steel 350
and 550 gallon tanks are far superior to drums in many respects. In particular,
drums are expensive to dispose of as a result of the environmentally damaging
materials they sometimes contain. Drums are also more difficult to handle and
dispense from, have more problems with leaks, and require more space to store
the same amount of liquid. Typically fluids are extracted from drums via a
removable pump, which may require cleaning prior to placing it into another
drum. Tanks, on the other hand, discharge fluids through a valve located on the
bottom of the tank. Management believes there is a trend of drums being replaced
by reusable and returnable 350 and 550 gallon tanks, and that Precision is in a
position to benefit from those making such a transition.
COMPETITION
Precision competes with other companies specializing in the sale and rental of
tanks. Precision believes it is the second largest supplier of tanks in the
country. Competitive factors in the industry include price, availability,
service, product quality and convenience. Precision believes it competes
effectively with other tank suppliers.
Precision's tanks also compete with 55 gallon drums. Precision's 350 and 550
gallon tanks are initially considerably more expensive than drums. However,
Precision's tanks offer certain competitive advantages over drums, including
their (i) greater durability and ease in storing and dispensing liquids, (ii)
longer useful life, and (iii) greater space efficiencies. They also eliminate
the disposal costs associated with carbon steel drums.
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LODGING (HOME STAY)
GENERAL
Home Stay operates two extended-stay lodging facilities in the Pensacola,
Florida metropolitan area. Each property contains 120 units and commenced
operations in March 1999 after an eight month construction period. Presently the
properties are approximately 80% occupied, which is expected to stabilize in the
85% to 90% range in the next few months. If the initial two properties perform
as anticipated, Home Stay expects to build additional properties throughout the
Southeastern United States.
FACILITIES AND OPERATION
Each Home Stay studio unit affords 288 square feet of living area and provides a
variety of features which are attractive to the extended-stay guest, including a
fully-equipped kitchenette, dining area, sofa, weekly housekeeping, a
coin-operated laundromat, telephone, and color television with cable service. In
order to control operating costs and offer attractive rental rates, no
restaurants, swimming pools, or other recreational amenities have been provided.
Management plans to locate future Home Stay facilities near commercial,
industrial and/or military centers where the employment base consists largely of
low to moderate income workers, or in rapidly growing metropolitan areas where
demand for temporary housing is the greatest. Home Stay properties are managed
by the Windham Company, an experienced operator of hotels, motels and
apartments.
MARKET
Home Stay targets a significant and rapidly growing "economy" niche within the
extended-stay lodging market which management believes is largely underserved by
other industry participants. Its facilities are designed to offer clean,
moderately appointed guest accommodations at rates generally lower than those
charged by other extended-stay lodging providers. Weekly rental rates average
less than $150 for single occupancy and approximately $185 for double occupancy.
Home Stay customers primarily include budget conscience business travelers,
blue-collar workers on temporary assignment, military personnel, construction
crews and leisure-oriented tourists, with most guests staying for multiple
weeks.
COMPETITION
The lodging industry is highly competitive. Competitive factors within the
lodging industry include room rates, quality of accommodations, service levels,
convenience of location, corporate reputation, brand name recognition as well as
the overall supply and availability of other lodging alternatives. Home Stay
presently competes with budget and economy motels, moderately priced hotels and
extended-stay lodging facilities and short-term lease apartments.
Management anticipates that competition within the extended-stay lodging
industry will increase as participants in other segments of the lodging industry
and others focus on this relatively new market. Many of Home Stay's competitors
are established entities with significantly greater financial resources, and
better relationships with land owners and lenders than the Company. Further,
there can be no assurance that new or existing competitors will not
significantly reduce their rates or offer greater convenience, services, or
amenities or significantly expand, improve, or develop facilities in a market in
which Home Stay competes, thereby adversely affecting Home Stay's operations.
EMPLOYEES
As of April 30, 1999 the Company, including its consolidated subsidiaries,
employed approximately 630 persons full time. None of the Company's employees
are covered by a collective bargaining agreement and the Company believes that
its employee relations are satisfactory.
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EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Edward R. McMurphy...................................48 Chairman of the Board,
President and Chief Executive Officer
Tilman J. Falgout, III...............................50 Executive Vice President,
General Counsel and Director
Mark D. Slusser......................................41 Chief Financial Officer,
Vice President Finance and Secretary
EDWARD R. MCMURPHY, has served as the Company's Chief Executive Officer since
July 1984. Mr. McMurphy has been a director of the Company since its inception
in April 1983. From 1979 to June 1986, Mr. McMurphy served as President of
Marion Properties, Inc., a real estate development company and former parent of
the Company from July 1984 to June 1986.
TILMAN J. FALGOUT, III, has served as Executive Vice President and General
Counsel of the Company since March 1995 and as a director of the Company since
September 1992. From 1978 through June 1995, Mr. Falgout was a partner in the
law firm of Stumpf & Falgout, Houston, Texas.
MARK D. SLUSSER, has served as Chief Financial Officer of the Company since
October 1989 and as Secretary since April 1990. From 1981 until joining the
Company, Mr. Slusser was employed by Ernst & Young LLP, where he held various
positions in the Audit Department including Senior Manager.
ITEM 2. PROPERTIES
As of April 30, 1999 the Company leased substantially all of its facilities,
including dealerships, collection facilities that service dealership portfolios,
and the Company's corporate offices. Paaco leases eight of its ten dealership
facilities in the Dallas/Fort Worth and Houston metropolitan areas. Car-Mart
leases all 35 of its dealership facilities located principally in Arkansas, but
also including Oklahoma, Missouri and Texas. The Company's corporate
administrative offices are located in approximately 6,000 square feet of leased
space in Irving, Texas.
ITEM 3. LEGAL PROCEEDINGS
In August 1998 an action was filed against the Company in the 8th Judicial
District Court of Clark County, Nevada by Resort Properties of America ("RPA").
In this action RPA alleged it had a verbal agreement with the Company pertaining
to the sale of the Company's Las Vegas land which was sold in September 1997.
RPA claimed it is due a brokerage commission of $450,000 plus attorney's fees.
This matter was settled in August, 1999, by the payment to RPA of $75,000.
In the ordinary course of business, the Company has become a defendant in
various other types of legal proceedings. Although the Company cannot determine
at this time the amount of the ultimate exposure from these lawsuits, if any,
management, based on the advice of counsel, does not expect the final outcome of
any of these actions, individually or in the aggregate, to have a material
adverse effect on the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company during
the fourth quarter ended April 30, 1999.
16
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this item is included in the Company's 1999 Annual
Report to Stockholders ("1999 Annual Report") under the heading "Common Stock
Information, Dividends and Related Stockholder Matters" and such information is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included in the Company's 1999 Annual
Report under the heading "Selected Financial Data" and such information is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is included in the Company's 1999 Annual
Report under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and such information is incorporated herein
by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk on its financial instruments from changes
in interest rates. The Company does not use financial instruments for trading
purposes or to manage interest rate risk. The Company's earnings are impacted by
its net interest income, which is the difference between the income earned on
interest-bearing assets and the interest paid on interest bearing notes payable.
Increases in market interest rates could have an adverse effect on
profitability. Financial instruments consist of fixed rate finance receivables
and fixed and variable rate notes payable. The Company's finance receivables
generally bear interest at fixed rates ranging from 10% to 22%. These finance
receivables have scheduled maturities from one to 36 months. Financial
instruments also include mortgage notes held for sale. The Company does not
experience significant market risk with such mortgage notes as they are
generally sold within 30 to 45 days of origination. At April 30, 1999 the
majority of the Company's notes payable contained variable interest rates that
fluctuate with market rates. Therefore, an increase in market interest rates
would decrease the Company's net interest income and profitability.
The table below illustrates the impact which hypothetical changes in market
interest rates could have on the Company's pretax earnings. The calculations
assume (i) the increase or decrease in market interest rates remain in effect
for twelve months, (ii) the amount of variable rate notes payable outstanding
during the period decreases in direct proportion to decreases in finance
receivables as a result of scheduled payments, and (iii) there is no change in
prepayment rates as a result of the interest rate changes.
Change in Change in
Interest Rates Pretax Earnings
-------------- ---------------
(in thousands)
+2% $(840)
+1% $(420)
0% 0
-1% $ 420
-2% $ 840
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements included in the Company's 1999 Annual Report are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
18
PART III
Except as to information with respect to executive officers which is contained
in a separate heading under Item 1 to this Form 10-K, the information required
by Part III of Form 10-K is, pursuant to General Instruction G(3) of Form 10-K,
incorporated by reference from the Company's definitive proxy statement to be
filed pursuant to Regulation 14A for the Company's Annual Meeting of
Stockholders to be held in 1999. The Company will, within 120 days of the end of
its fiscal year, file with the Securities and Exchange Commission a definitive
proxy statement pursuant to Regulation 14A.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors and executive officers of the registrant is
set forth in the Proxy Statement to be delivered to stockholders in connection
with the Company's Annual Meeting of Stockholders to be held in 1999 (the "Proxy
Statement") under the headings "Election of Directors" and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934," which information is
incorporated herein by reference. The name, age and position of each executive
officer of the Company is set forth under the heading "Executive Officers" in
Item 1 of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is set forth in the 1999 Proxy
Statement under the heading "Executive Compensation," which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial owners and
management is set forth in the 1999 Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management," which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transactions is set
forth in the 1999 Proxy Statement under the heading "Certain Transactions,"
which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1). FINANCIAL STATEMENTS AND ACCOUNTANT'S REPORT
The following financial statements and accountant's report included in
the Company's 1999 Annual Report are incorporated herein by reference
in Item 8 of this report:
Report of Independent Accountants
Consolidated Balance Sheets as of April 30, 1998 and 1999
Consolidated Statements of Operations for the fiscal years
ended April 30, 1997, 1998 and 1999
Consolidated Statements of Cash Flows for the fiscal years
ended April 30, 1997, 1998 and 1999
Consolidated Statements of Stockholders' Equity for the fiscal
years ended April 30, 1997, 1998 and 1999
Notes to Consolidated Financial Statements
18
19
(a)(2). FINANCIAL STATEMENT SCHEDULES
Schedule I - Condensed Financial Information of Crown Group, Inc.
(Parent Company Only)
The other financial statement schedules are omitted since the required
information is not present, or is not present in amounts sufficient to
require submission of the schedules, or because the information
required is included in the consolidated financial statements and notes
thereto.
(a)(3). EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
2.1 Purchase Agreement dated as of May 31, 1997 by and among the Company
and Casino Magic Corp. ("Casino Magic"). (11)
2.2 Stock Purchase Agreement dated as of February 1, 1998 by and among
Paaco Automotive Group, Inc., Premium Auto Acceptance Corporation,
Larry Lange, Daniel Chu, Ted Lange and Crown Group, Inc. (13)
2.3 Stock Purchase Agreement dated February 3, 1998 by and among Van P.
Finger and Crown Group, Inc. (13)
2.4 Stock Purchase Agreement dated as of December 1, 1998 by and among Bill
Fleeman Revocable Trust, Fleeman Charitable Remainder Annuity Trust and
certain other trusts and individuals, and Crown Group, Inc. (15)
3.1 Articles of Incorporation of the Company (formerly SKAI, Inc.). (3)
3.1.1 Articles of Merger of the Company and SKAI, Inc. filed with the
Secretary of State of the State of Alabama on September 29, 1989. (3)
3.1.2 Articles of Merger of the Company and SKAI, Inc. filed with the
Secretary of State of the State of Texas on October 10, 1989. (3)
3.1.3 Articles of Amendment filed with the Secretary of State of the State of
Texas on October 7, 1993. (8)
3.1.4 Articles of Amendment filed with the Secretary of State of the State of
Texas on October 5, 1994. (8)
3.1.5 Articles of Amendment filed with the Secretary of State of the State of
Texas on October 2, 1997. (14)
3.2 By-Laws dated August 24, 1989. (4)
4.1 Specimen stock certificate. (9)
4.2 Form of Registration Rights Agreement dated January 5, 1994 by and
between the Company and Dabney-Resnick, Inc. (8)
4.2.1 Form of Stock Purchase Warrant dated January 5, 1994 allowing
Dabney-Resnick, Inc. to purchase shares of common stock of the Company.
(8)
4.3 Form of Registration Rights Agreement dated January 5, 1994 by and
between the Company and Sun Life Insurance Company of America, Inc. (8)
4.3.1 Form of Stock Purchase Warrant dated January 5, 1994 allowing Sun Life
Insurance Company of America, Inc. to purchase shares of common stock
of the Company. (8)
4.4 Form of Stock Purchase Warrant dated March 18, 1994 granting
Dabney-Resnick, Inc. the right to purchase 120,000 shares of Common
Stock of the Company. (8)
19
20
4.5 Stock Purchase Warrant dated October 6, 1994 granting Don Farris the
right to purchase 50,000 shares of Common Stock of the Company. (8)
4.6 Stock Purchase Warrant dated June 2, 1994 granting Gerard M. Jacobs the
right to purchase 50,000 shares of Common Stock of the Company. (8)
4.7 Loan and Security Agreement by and among Finova Capital Corporation,
Paaco Automotive Group, Inc. and Premium Auto Acceptance Corporation
including the Eighth Amended and Restated Schedule to Loan and Security
Agreement and the Eighth Amended and Restated Promissory Note. (14)
4.7.1 First Amended and Restated Loan and Security Agreement by and among
Finova Capital Corporation, Paaco Automotive Group, Inc. and Premium
Auto Acceptance Corporation including the Schedule of First Amended and
Restated Loan Security Agreement and the Twelfth Amended and Restated
Promissory Note. (16)
4.8 Loan and Security Agreement dated January 15, 1999 by and among
BankAmerica Business Credit, Inc. and America's Car-Mart, Inc. (15)
10.1 1986 Incentive Stock Option Plan. (2)
10.1.1 Amendment to 1986 Incentive Stock Option Plan adopted September 27,
1990. (5)
10.2 1991 Non-Qualified Stock Option Plan. (6)
10.3 1997 Stock Option Plan. (12)
10.4 Form of Indemnification Agreement between the Company and Edward R.
McMurphy, Mark D. Slusser, T.J. Falgout, III, David J. Douglas, J.
David Simmons, Gerald L. Adams, Robert J. Kehl, Gerard M. Jacobs and
Michael B. Cloud. (7)
10.5 Form of Severance Agreement dated July 2, 1996 between the Company and
Edward R. McMurphy, T.J. Falgout, III and Mark D. Slusser. (10)
10.6 Shareholders' Agreement dated as of May 31, 1997 between the Company
and Casino Magic. (11)
10.7 Shareholders' Agreement dated as February 1, 1998 by and among Larry
Lange, Daniel Chu, Ted Lange and Crown Group, Inc. (13)
13.1 Annual Report to Stockholders for the fiscal year ended April 30, 1999.
(1)
21.1 Subsidiaries of Crown Group, Inc. (1)
23.1 Consent of Independent Accountants. (1)
23.2 Opinion of Independent Accountants on Financial Statement Schedule. (1)
24.1 Power of Attorney of Edward R. McMurphy. (1)
24.2 Power of Attorney of Tilman J. Falgout, III. (1)
24.3 Power of Attorney of David J. Douglas. (1)
24.4 Power of Attorney of J. David Simmons. (1)
24.5 Power of Attorney of Gerald L. Adams. (1)
24.6 Power of Attorney of Gerard M. Jacobs. (1)
24.7 Power of Attorney of Robert J. Kehl. (1)
20
21
27.1 Financial Data Schedule. (1)
- ----------
(1) Filed herewith.
(2) Previously filed as an Exhibit to the Company's Registration Statement
on Form 10, as amended (No. 0-14939) and incorporated herein by
reference.
(3) Previously filed as an Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended October 31, 1989 and incorporated
herein by reference.
(4) Previously filed as an Exhibit to the Company's Annual Report on Form
10-K for the year ended April 30, 1990 and incorporated herein by
reference.
(5) Previously filed as an Exhibit to the Company's Annual Report on Form
10-K for the year ended April 30, 1991 and incorporated herein by
reference.
(6) Previously filed as an Exhibit to the Company's Annual Report on Form
10-K for the year ended April 30, 1992 and incorporated herein by
reference.
(7) Previously filed as an Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended July 31, 1993 and incorporated herein
by reference.
(8) Previously filed as an Exhibit to the Company's Registration Statement
on Form S-1, as amended, initially filed with the Securities and
Exchange Commission on May 31, 1994 (No. 33-79484) and incorporated
herein by reference.
(9) Previously filed as an Exhibit to the Company's Annual Report on Form
10-K for the year ended April 30, 1994 and incorporated herein by
reference.
(10) Previously filed as an Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1997 and incorporated
herein by reference.
(11) Previously filed as an Exhibit to the Company's Current Report on Form
8-K dated June 2, 1997 and incorporated herein by reference.
(12) Previously filed as an Exhibit to the Company's Registration Statement
on Form S-8, as amended, initially filed with the Securities and
Exchange Commission on October 20, 1997 (No. 333-38475) and
incorporated herein by reference.
(13) Previously filed as an Exhibit to the Company's Current Report on Form
8-K dated February 1, 1998 and incorporated herein by reference.
(14) Previously filed as an Exhibit to the Company's Annual Report on Form
10-K for the year ended April 30, 1998 and incorporated herein by
reference.
(15) Previously filed as an Exhibit to the Company's Current Report on Form
8-K dated January 15, 1999 and incorporated herein by reference.
(16) Previously filed as an Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1999 and incorporated
herein by reference.
21
22
(b) REPORTS ON FORM 8-K
During the fiscal quarter ended April 30, 1999 the Company filed reports on Form
8-K and 8-K/A as follows:
EVENT
FORM DATE DESCRIPTION OF EVENT
-------- ---------------- ---------------------------------------------------------
8-K/A January 15, 1999 Amendment No. 1 to Form 8-K dated January 15, 1999
including the financial statements of America's Car-Mart,
Inc. and pro-forma financial information of the Company.
8-K February 3, 1999 Updated description of the Company's securities.
22
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CROWN GROUP, INC.
Dated: August 13, 1999 By: /s/ Edward R. McMurphy
------------------------------------
Edward R. McMurphy
President and Chief Executive Officer
(principal executive officer)
Dated: August 13, 1999 By: /s/ Mark D. Slusser
------------------------------------
Mark D. Slusser
Vice President Finance and Chief
Financial Officer (principal
financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
* Chairman of the Board, President August 13, 1999
- ------------------------------------- and Chief Executive Officer
Edward R. McMurphy
* Executive Vice President, August 13, 1999
- -------------------------------------- General Counsel and Director
Tilman J. Falgout, III
* Director August 13, 1999
- --------------------------------------
David J. Douglas
* Director August 13, 1999
- --------------------------------------
John David Simmons
* Director August 13, 1999
- --------------------------------------
Gerald L. Adams
* Director August 13, 1999
- --------------------------------------
Gerard M. Jacobs
* Director August 13, 1999
- --------------------------------------
Robert J. Kehl
* By /s/ Mark D. Slusser
----------------------------------
Mark D. Slusser
As Attorney-in-Fact
Pursuant to Powers of
Attorney filed herewith
23
24
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF CROWN GROUP, INC. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
April 30,
1999 1998
----------- -----------
(Restated)
Assets:
Cash and cash equivalents $12,660,789 $ 5,030,861
Marketable equity securities 4,742,180
Receivables from subsidiaries 12,232,940 4,640,718
Investment in subsidiaries 26,584,853 10,250,174
Investment in CMN and related assets, net 5,167,161 6,606,114
Goodwill, net 10,234,197 7,359,555
Other 2,840,661 688,329
----------- -----------
$69,720,601 $39,317,931
=========== ===========
Liabilities and stockholders' equity:
Accounts payable and accrued liabilities $ 4,535,430 $ 373,165
Payables to subsidiaries 2,641,637 2,641,637
Debt 8,658,000
Deferred tax liability 826,650 1,251,805
----------- -----------
Total liabilities 16,661,717 4,266,607
----------- -----------
Stockholders' equity 53,058,884 35,051,324
----------- -----------
$69,720,601 $39,317,931
=========== ===========
CONDENSED STATEMENTS OF OPERATIONS
April 30,
1999 1998
----------- -----------
(Restated)
Revenues:
Interest income $ 1,038,645 $ 1,081,583
Interest income from subsidiaries 818,831 387,615
Interest, fees and rentals from CMN 694,146 680,697
Other 239,346 388,827
----------- -----------
2,790,968 2,538,722
----------- -----------
Costs and expenses:
Selling, general and administrative 3,616,797 2,924,675
Interest expense 211,210 13,444
Depreciation and amortization 1,079,564 574,568
----------- -----------
4,907,571 3,512,687
----------- -----------
Other income:
Equity in earnings of non-consolidated subsidiaries 1,259,734 926,598
Equity in earnings of subsidiaries 1,696,385 10,980
Gain on sale of securities 24,689,130 38,258
----------- -----------
27,645,249 975,836
----------- -----------
Income before income taxes 25,528,646 1,871
Provision (Benefit) for income taxes 8,020,236 (365,295)
----------- -----------
Net income $17,508,410 $ 367,166
=========== ===========
See accompanying notes to condensed financial information.
25
SCHEDULE I (CONTINUED)
CROWN GROUP, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
April 30,
1999 1998
------------ ------------
(Restated)
Operating activities:
Net income $ 17,508,410 $ 367,166
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization 1,079,564 574,568
Amortization of discount (825,198) (252,765)
Deferred income taxes 778,307 305,341
Gain on sale of assets (136,196) (373,999)
Gain on sale of securities (24,689,130) (38,258)
Equity in earnings of unconsolidated subsidiaries (1,259,734) (926,598)
Equity in earnings of subsidiaries (1,696,385) (10,980)
Changes in assets and liabilities, net of transactions:
Other 756,298 86,139
Accounts payable and accrued liabilities 398,515 (169,203)
Income taxes payable 3,238,210 (271,525)
------------ ------------
Net cash used by operating activities (4,847,339) (710,114)
------------ ------------
Investing activities:
Purchase of assets (3,475,908) (788,784)
Sale of assets 1,043,711 2,191,861
Purchase of securities (6,643,496) (5,551,714)
Sale of securities 33,149,806 3,772,792
Advances to subsidiaries (2,213,221) (4,618,220)
Repayments from subsidiaries 5,350,000 13,732,772
Dividends and note collections from CMN 2,389,152 1,050,750
Formation of El Salvador (1,207,000)
Investment in unconsolidated subsidiaries (1,000,341)
Formation of Home Stay (640,000)
Formation of Concorde (2,000,800)
Purchase of Car-Mart (10,005,863)
Purchase of CMN and related assets (7,000,001)
Purchase of Paaco (3,431,250) (9,174,212)
Purchase of Precision and M&S (2,000) (4,032,389)
------------ ------------
Net cash provided (used) by investing activities 13,313,590 (12,417,945)
------------ ------------
Financing activities:
Issuance of common stock 93,282
Issuance of debt 1,158,000
Purchase of common stock (1,994,323) (3,052,322)
------------ ------------
Net cash used by financing activities (836,323) (2,959,040)
------------ ------------
Increase (Decrease) in cash and cash equivalents 7,629,928 (16,087,099)
Cash and cash equivalents at: Beginning of year 5,030,861 21,117,960
------------ ------------
End of year $ 12,660,789 $ 5,030,861
============ ============
See accompanying notes to condensed financial information.
26
SCHEDULE I (CONTINUED)
CROWN GROUP, INC. (PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION
A - GUARANTEES
Crown Group, Inc. ("Crown") has made the following guarantees with respect
to its subsidiaries:
Amount
Facility Drawn at Maximum
Debtor Amount April 30, 1999 Guarantee
- --------- ------------- -------------- -------------
Paaco $60.0 million $41.8 million $10.0 million
Car-Mart 30.0 million 25.2 million 10.0 million
Concorde 20.0 million 7.2 million 5.0 million
In addition, Crown has entered into a reimbursement agreement with the
minority shareholders of Paaco who have guaranteed Paaco's debt with a
specific lender. At April 30, 1999 the amount of debt guaranteed by such
minority shareholders was approximately $41.8 million. To the extent such
minority shareholders pay monies pursuant to such guaranties, Crown has
agreed to reimburse the minority shareholders 80% thereof.
B - ELIMINATION OF BALANCES AND TRANSACTIONS WITH SUBSIDIARIES
As of April 30, 1999 and 1998 the following balances were eliminated in
the consolidated financial statements of Crown:
April 30,
1999 1998
-------------- ------------
Receivables from subsidiaries $12,232,940 $ 4,640,718
Investments in subsidiaries 26,584,853 10,250,174
Payables to subsidiaries 2,641,637 2,641,637
April 30,
1999 1998
-------------- ------------
Interest income $ 818,831 $387,615
C - DEBT
A summary of debt at April 30, 1999 is as follows:
- --------------------------------------------------------------------------------
Facility Interest Primary Balance at
Lender Amount Rate Maturity Collateral April 30, 1999
- ---------------- -------- -------- -------- ----------- --------------
Car-Mart sellers N/A 8.50% Jan 2004 Finance rec. $ 7,500,000
Bank of America N/A 7.00% Apr 2001 Equipment 1,158,000
--------------
$ 8,658,000
==============
A summary of future minimum principal payments required under the
aforementioned debt as of April 30,1999 is as follows:
Years Ended
April 30, Amount
----------- ------------
2000 $ -0-
2001 1,158,000
2002 -0-
2003 -0-
2004 7,500,000
------------
$ 8,658,000
============
D - RESTATEMENT
In connection with the April 30, 1999 year end closing process and
subsequent analyses performed, the Company identified certain accounting errors
and irregularities at Paaco relating principally to finance receivables,
inventory and drafts payable. Such errors and irregularities existed at and
subsequent to the Company's purchase of a 53% interest in Paaco on February 1,
1998. To correct for such errors and irregularities, the Company has restated
its previously issued consolidated financial statements for the year ended
April 30, 1998.
27
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
13.1 Annual Report of Stockholders for the fiscal year ended April 30, 1999.
21.1 Subsidiaries of Crown Group, Inc.
23.1 Consent of Independent Accountants.
23.2 Report of Independent Accountants on Financial Statement Schedule.
24.1 Power of Attorney of Edward R. McMurphy.
24.2 Power of Attorney of Tilman J. Falgout, III.
24.3 Power of Attorney of David J. Douglas.
24.4 Power of Attorney of J. David Simmons.
24.5 Power of Attorney of Gerald L. Adams.
24.6 Power of Attorney of Gerard M. Jacobs.
24.7 Power of Attorney of Robert J. Kehl.
27.1 Financial Data Schedule.