-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UYrCuYM4wQjfQo3INVbvNvWDmiNRztYSD9ABRO3pxTu4yRvrw4tVspmZ7bg3ixEH /oRhXTIcr6KA55qeLcfKXQ== 0000950134-98-003351.txt : 19980420 0000950134-98-003351.hdr.sgml : 19980420 ACCESSION NUMBER: 0000950134-98-003351 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980201 ITEM INFORMATION: FILED AS OF DATE: 19980417 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CROWN GROUP INC /TX/ CENTRAL INDEX KEY: 0000799850 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 630851141 STATE OF INCORPORATION: TX FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-14939 FILM NUMBER: 98596745 BUSINESS ADDRESS: STREET 1: 4040 N. MACARTHUR BLVD. STREET 2: SUITE 100 CITY: IRVING STATE: TX ZIP: 75038 BUSINESS PHONE: 9727173423 MAIL ADDRESS: STREET 1: 4040 N. MACARTHUR BLVD. STREET 2: SUITE 100 CITY: IRVING STATE: TX ZIP: 75038 FORMER COMPANY: FORMER CONFORMED NAME: CROWN CASINO CORP DATE OF NAME CHANGE: 19931104 FORMER COMPANY: FORMER CONFORMED NAME: SKYLINK AMERICA INC DATE OF NAME CHANGE: 19920703 8-K/A 1 AMENDMENT NO. 1 TO FORM 8-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A (AMENDMENT NO. 1) CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 Date of Report (Date of earliest event reported) FEBRUARY 1, 1998 ------------------------------- CROWN GROUP, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) TEXAS 0-14939 63-0851141 - -------------------------------------------------------------------------------- (State or other jurisdiction (Commission File Number) (IRS Employer of incorporation) Identification No.) 4040 NORTH MACARTHUR BOULEVARD, SUITE 100, IRVING, TEXAS 75038 - -------------------------------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code (972) 717-3423 ------------------------------ - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report) 2 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (a) Financial statements of businesses acquired. The following combined financial statements of Paaco, Inc. and Premium Auto Acceptance Corporation are hereby filed with this report: Report of Independent Public Accountants Report of Independent Auditors Combined Balance Sheets as of December 31, 1997 and 1996 Combined Statements of Operations for the years ended December 31, 1997, 1996 and 1995 Combined Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 Combined Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Notes to Combined Financial Statements (b) Pro-Forma financial information. The following pro-forma financial statements of Crown Group, Inc. are hereby filed with this Report: Introduction to Pro-Forma Financial Information Pro-Forma Condensed Consolidated Balance Sheet (unaudited) as of January 31, 1998 Pro-Forma Condensed Consolidated Statement of Operations (unaudited) for the year ended April 30, 1997 Pro-Forma Condensed Consolidated Statement of Operations (unaudited) for the nine months ended January 31, 1998 Notes to Pro-Forma Condensed Consolidated Financial Statements (c) Exhibits: 23.1 - Consent of Independent Public Accountants 23.2 - Consent of Independent Auditors 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized. Crown Group, Inc. By: \s\ Mark D. Slusser ------------------------------------- Mark D. Slusser Chief Financial Officer Dated: April 16, 1998 -------------- 4 PAACO, INC. PREMIUM AUTO ACCEPTANCE CORPORATION COMBINED FINANCIAL STATEMENTS WITH REPORT OF INDEPENDENT ACCOUNTANTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 5 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors PAACO, Inc. Premium Auto Acceptance Corporation: We have audited the accompanying combined balance sheet of PAACO, Inc. and Premium Auto Acceptance Corporation (the "Companies") as of December 31, 1997 and the related combined statement of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of PAACO, Inc. and Premium Auto Acceptance Corporation as of December 31, 1997 and the combined results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Dallas, Texas April 13, 1998 6 REPORT OF INDEPENDENT AUDITORS Board of Directors PAACO, Inc. Premium Auto Acceptance Corporation We have audited the accompanying combined balance sheet of PAACO, Inc. and Premium Auto Acceptance Corporation as of December 31, 1996, and the related combined statements of operations, stockholders' equity and cash flows for each of the two years in the period ended December 31, 1996. These financial statements are the responsibility of the Combined Companies' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of PAACO, Inc. and Premium Auto Acceptance Corporation at December 31, 1996, and the combined results of their operations and their cash flows for each of the two years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP April 28, 1997 Dallas, Texas 7 PAACO, INC. PREMIUM AUTO ACCEPTANCE CORPORATION COMBINED BALANCE SHEETS DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996 ----------- ------------ Cash and cash equivalents $ 194,877 $ 281,395 Finance receivables, net of an allowance for credit losses of $3,882,261 and $2,540,740, respectively, and unearned interest of $8,205,032 and $4,701,075, respectively 30,146,679 16,443,060 Other receivables 431,940 148,793 Inventory 2,649,380 1,741,296 Land, buildings and equipment, net of accumulated depreciation of $311,806 and $148,200, respectively 1,652,768 1,056,404 Prepaids and other assets 657,555 506,240 Income tax receivable 546,125 -- Deferred tax asset, net -- 546,125 ----------- ----------- Total assets $36,279,324 $20,723,313 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Notes payable to financial institutions $23,409,875 $12,451,125 Subordinated notes payable 6,094,164 3,836,352 Mortgage and other notes payable 751,664 725,385 Allowance for credit losses on sold finance receivables -- 132,555 Accounts payable and accrued expenses 2,911,194 2,243,346 Income taxes payable -- 500,843 Deferred tax liability, net 1,010,261 -- ----------- ----------- Total liabilities 34,177,158 19,889,606 ----------- ----------- Commitments and contingencies (Note 8) Stockholders' equity: Common stock: 200,000 shares authorized; 101,000 issued and outstanding 2,000 2,000 Retained earnings 2,100,166 831,707 ----------- ----------- Total stockholders' equity 2,102,166 833,707 ----------- ----------- Total liabilities and stockholders' equity $36,279,324 $20,723,313 =========== ===========
The accompanying notes are an integral part of these combined financial statements. F-3 8 PAACO, INC. PREMIUM AUTO ACCEPTANCE CORPORATION COMBINED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ------------ ------------ ------------ Sales of vehicles $ 43,115,477 $ 26,110,863 $ 18,751,961 Cost of sales 28,911,194 16,575,661 10,650,905 ------------ ------------ ------------ Gross margin on sale of vehicles 14,204,283 9,535,202 8,101,056 Interest income 4,939,193 2,469,467 1,230,777 Other income 257,536 277,068 81,412 ------------ ------------ ------------ 19,401,012 12,281,737 9,413,245 Provision for credit losses 4,928,107 3,091,132 3,511,258 ------------ ------------ ------------ Operating profit before expenses 14,472,905 9,190,605 5,901,987 ------------ ------------ ------------ Expenses: Salaries and employee benefits 4,355,883 2,484,038 1,550,882 Interest expense 2,746,765 1,635,563 972,727 Other operating expenses 5,091,537 4,256,769 3,216,881 Loss on sale of finance receivables -- 193,088 272,616 ------------ ------------ ------------ Total operating expenses 12,194,185 8,569,458 6,013,106 ------------ ------------ ------------ Earnings (loss) before income taxes 2,278,720 621,147 (111,119) Provision for income taxes 1,010,261 -- -- ------------ ------------ ------------ Net income (loss) $ 1,268,459 $ 621,147 $ (111,119) ============ ============ ============
The accompanying notes are an integral part of these combined financial statements. F-4 9 PAACO, INC. PREMIUM AUTO ACCEPTANCE CORPORATION COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Common Stock Total --------------------------- Retained Stockholders' Shares Amount Earnings Equity ----------- ----------- ------------ -------------- Balance at December 31, 1994 101,000 $ 2,000 $ 321,679 $ 323,679 Net loss for the year ended December 31, 1995 -- -- (111,119) (111,119) ----------- ----------- ----------- ----------- Balance at December 31, 1995 101,000 2,000 210,560 212,560 Net income for the year ended December 31, 1996 -- -- 621,147 621,147 ----------- ----------- ----------- ----------- Balance at December 31, 1996 101,000 2,000 831,707 833,707 Net income for the year ended December 31, 1997 -- -- 1,268,459 1,268,459 ----------- ----------- ----------- ----------- Balance at December 31, 1997 101,000 $ 2,000 $ 2,100,166 $ 2,102,166 =========== =========== =========== ===========
The accompanying notes are an integral part of these combined financial statements. F-5 10 PAACO, INC. PREMIUM AUTO ACCEPTANCE CORPORATION COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ------------ ------------ ------------- Operating activities: Net income $ 1,268,459 $ 621,147 $ (111,119) Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 4,928,107 3,091,132 3,511,258 Loss on sale of finance receivables -- 193,088 272,616 Deferred income taxes 1,556,386 (500,843) (12,948) Depreciation 163,606 76,911 44,641 Changes in operating assets and liabilities: Inventory 5,255,797 4,254,027 1,476,636 Other receivables (283,147) 221,711 (164,363) Prepaid and other assets (151,315) (86,074) (375,457) Accounts payable and accrued expenses 667,848 1,556,808 548,596 Income tax payable/receivable (1,046,968) -- -- ------------ ------------ ------------ Net cash provided by operating activities 12,358,773 9,427,907 5,189,860 ------------ ------------ ------------ Investing activities: Finance receivable originations (36,253,047) (24,357,947) (18,112,168) Collections of finance receivables 11,324,885 7,480,338 6,549,055 Purchases of fixed assets (759,970) (279,516) (859,726) ------------ ------------ ------------ Net cash used in investing activities (25,688,132) (17,157,125) (12,422,839) ------------ ------------ ------------ Financing activities: Net increase in notes payable to financial institutions 10,958,750 8,466,000 3,985,125 Net increase (decrease) in subordinated notes payable 2,257,812 (729,931) 2,786,630 Net increase in mortgages and other notes payable 26,279 18,948 706,437 ------------ ------------ ------------ Net cash provided by financing activities 13,242,841 7,755,017 7,478,192 ------------ ------------ ------------ Net (decrease)/ increase in cash and cash equivalents (86,518) 25,799 245,213 Cash and cash equivalents at beginning of year 281,395 255,596 10,383 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 194,877 $ 281,395 $ 255,596 ============ ============ ============ Supplemental Cash Flow Information: Interest paid $ 2,746,765 $ 1,505,233 $ 880,851 ============ ============ ============ Income taxes paid $ 500,843 $ 25,000 $ 32,334 ============ ============ ============ Inventory acquired upon repossession $ 6,163,881 $ 5,035,503 $ 1,605,825 ============ ============ ============
The accompanying notes are an integral part of these combined financial statements. F-6 11 PAACO, INC. PREMIUM AUTO ACCEPTANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS: These financial statements represent the combined operations of PAACO, Inc. ("PAACO") and Premium Auto Acceptance Corporation ("Premium"), collectively referred to as the Combined Company. PAACO sells, underwrites, and finances used cars and trucks through its wholly-owned chain of used car dealerships. Premium invests in finance receivables originated by PAACO. PAACO has authorized and issued 100,000 shares of common stock at par value of $0.01; Premium has 100,000 shares of no-par common stock authorized and 1,000 shares issued and outstanding for combined common stock of $2,000. The Combined Company provides financing primarily to the Hispanic market in the Dallas/Fort Worth metroplex. The Combined Company's target market consists of borrowers who have limited access to consumer financing primarily due to the lack of or limited credit histories. PAACO and Premium share common ownership. The combined financial statements of PAACO and Premium include the accounts of the Combined Company. Significant intercompany accounts and transactions have been eliminated. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual amounts could differ from those estimates. CONCENTRATIONS OF CREDIT RISK The Combined Company's customer base is primarily comprised of the Hispanic market in the Dallas/Ft. Worth metroplex. F-7 12 PAACO, INC. PREMIUM AUTO ACCEPTANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED CASH AND CASH EQUIVALENTS For the purposes of the statement of cash flows, cash and cash equivalents include cash on hand and investments with original maturities of three months or less. FINANCE RECEIVABLES PAACO, through its seven retail dealerships, sells, underwrites, finances and services installment sales contracts collateralized by used motor vehicles. Finance receivables, which are periodically sold to Premium, consist of contractually scheduled payments from installment sales contracts, net of unearned finance charges, and an allowance for credit losses. Unearned finance charges represent the balance of interest income remaining from the capitalization of the total interest to be earned over the original term of the related installment sales contract. The Combined Company discontinues the accrual of interest income when the receivable becomes greater than sixty days delinquent. Provision for credit losses is charged to income in amounts sufficient to maintain the allowance at a level considered adequate to cover anticipated losses resulting from repossession of the underlying collateral. The allowance for credit losses is based upon a periodic analysis of the portfolio, economic conditions and trends, historical credit loss experience, borrowers' ability to repay, and collateral values. While management believes the provision for credit losses included in the financial statements to be adequate, such estimates may be more or less than the amounts ultimately charged off. The estimates are continually reviewed by management with any changes reflected in current operations. INVENTORY Inventory consists of used vehicles held for sale and is valued at the lower of cost or market. The cost of used vehicles sold, which includes capitalized reconditioning costs, is determined on a specific identification basis. Repossessed vehicles are recorded at wholesale value or original cost. The decision to repossess an automobile is made on a case by case evaluation of various factors, including the creditor's ability and willingness to pay as demonstrated by the borrower's payment history with the Combined Company. F-8 13 PAACO, INC. PREMIUM AUTO ACCEPTANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS, Continued PROPERTY AND EQUIPMENT Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using an accelerated method over the estimated useful lives of the respective assets ranging from thirty-nine years for buildings and five to seven years for equipment. Leasehold improvements are stated at historical cost and are amortized over the lease period. Repair and maintenance expenses are charged to expense as incurred. INCOME TAXES PAACO, a Subchapter C Corporation, utilizes an asset and liability approach for financial accounting and reporting for income taxes in accordance with Statement on Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." No tax provision for federal income taxes is recorded for income or losses attributed to Premium because of its designation as a Subchapter S Corporation. REVENUE RECOGNITION Revenue is recognized as income at the time the vehicle is sold. Interest on finance receivables is earned over time using the effective interest method. The Combined Company maintains an allowance for estimated uncollectible customer finance receivables. RECLASSIFICATIONS Certain reclassifications have been made to prior years' balances to conform with current year presentation. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," which is effective for fiscal years beginning after December 15, 1997. This statement establishes standards for reporting and display of comprehensive income and its components. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. This statement establishes standards for the way that public companies report information about segments in annual and interim financial statements. F-9 14 PAACO, INC. PREMIUM AUTO ACCEPTANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED 3. FINANCE RECEIVABLES: Premium provides financing for a substantial portion of the sales of used cars sold by PAACO. Installment sales contracts generated by PAACO's dealerships are executed by customers with terms which typically consist of down payments including trade-ins of approximately 10-12%, interest rates ranging from 18-26%, and maturity terms ranging from 24 to 36 months. Finance receivables consist of the following:
Year Ended December 31, ------------------------------ 1997 1996 ------------ ------------ Finance receivables $ 42,233,972 $ 23,684,875 Unearned finance income (8,205,032) (4,701,075) Allowances for credit losses (3,882,261) (2,540,740) ------------ ------------ Finance receivables, net $ 30,146,679 $ 16,443,060 ============ ============
The following table summarizes changes in the allowance for credit losses for the years ended December 31:
Year Ended December 31, ---------------------------- 1997 1996 ----------- ----------- Allowance for credit losses, beginning of year $ 2,673,295 $ 2,419,954 Provision for credit losses 4,928,107 3,091,132 Charge-offs, net of recoveries (3,719,141) (2,837,791) ----------- ----------- Allowance for credit losses, end of year $ 3,882,261 $ 2,673,295 =========== ===========
The components of the allowance for credit losses are as follows:
Year Ended December 31, -------------------------- 1997 1996 ---------- -------------- Allowance for credit losses on finance receivables held by the Combined Company $3,882,261 $2,540,740 Allowance for credit losses on sold finance receivables -- 132,555 ---------- ---------- Allowance for credit losses $3,882,261 $2,673,295 ========== ==========
F-10 15 PAACO, INC. PREMIUM AUTO ACCEPTANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED On occasion, the Combined Company sold finance receivables to fund the Combined Company's growth. During 1995, the Combined Company sold $2,852,515 of finance receivables to a third party with recourse and at a discount. The Combined Company also retained the future servicing rights related to these loans. A servicing fee of $5 per account outstanding is collected on a monthly basis. The servicing fee adequately compensates the Combined Company for the services provided. At December 31, 1997 and 1996, the Combined Company serviced $130,164 and $883,699, respectively, of finance receivables with recourse obligations. The Combined Company no longer maintains an allowance for credit losses for finance receivables sold with recourse as management does not expect significant losses on the remaining sold finance receivables. 4. PROPERTY AND EQUIPMENT: A summary of property and equipment is as follows:
Year Ended December 31, ---------------------------- 1997 1996 ----------- ----------- Land $ 210,114 $ 210,114 Building and leasehold improvements 1,036,638 696,357 Furniture and equipment 717,822 298,133 Less accumulated depreciation and amortization (311,806) (148,200) ----------- ----------- Property and equipment, net $ 1,652,768 $ 1,056,404 =========== ===========
During the years ended December 31, 1997, 1996 and 1995, the Combined Company recorded depreciation expense of $163,606, $76,911 and $44,641, respectively. F-11 16 PAACO, INC. PREMIUM AUTO ACCEPTANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED 5. NOTES PAYABLE: Notes payable consist of the following:
Year Ended December 31, --------------------------- 1997 1996 ----------- ------------ Note payable to a financial institution, collateralized by finance receivables $22,909,875 $12,125,125 Note payable to a financial institution, collateralized by certain inventory 500,000 326,000 Subordinated notes payable 6,094,164 3,836,352 Mortgage payable 633,972 644,093 Other notes payable, collateralized by vehicles 41,612 81,292 Other notes payable, collateralized by equipment 76,080 -- ----------- ----------- $30,255,703 $17,012,862 =========== ===========
The note payable collateralized by substantially all of the Combined Company's finance receivables is a revolving credit facility used to finance receivables. At December 31, 1997, approximately $21,600,000 of this credit facility accrues interest at a rate of prime (8.5% at December 31, 1997) plus 2.75%, while the remaining $1,300,000 accrues at prime plus 7.00%. Interest on the credit facility is paid monthly. This note payable was amended on November 25, 1997, to increase the revolving credit facility from $12,000,000 to $25,000,000. Restrictive covenants on this credit facility, among others, require the Combined Company to limit yearly distributions to shareholders to 75% of net income and to maintain certain financial ratios as defined in the agreement. The note payable to a financial institution collateralized by certain of PAACO's inventory accrues interest at prime plus 2% and is payable on demand. The subordinated notes payable ($1,000,000 of which is payable to Crown Group, Inc. - See Note 10) are subordinate to the notes payable collateralized by finance receivables and certain inventory described above, and represent several notes with interest rates ranging from 12% to 24%. These notes mature at various dates beginning in 1998 through 2001. Subordinated notes payable also include approximately $1,093,000 and $1,640,000 at December 31, 1997 and 1996, respectively, of financing provided from affiliates, primarily investments made by officers of the company and their relatives. Interest rates on notes payable to affiliates range from 15% to 18%. Interest expense on notes to affiliates totaled approximately $194,000, $227,000 and $179,000 for the years ended December 31, 1997, 1996 and 1995, respectively. F-12 17 PAACO, INC. PREMIUM AUTO ACCEPTANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED During the year ended December 31, 1997, the Company issued approximately $4,000,000 and repaid approximately $2,100,000 of subordinated notes payable. The mortgage payable represents two notes to a financial institution, collateralized by land and building. The notes accrue interest at prime plus 2.25% and mature in December 2015. A summary of debt maturities is as follows: 1998 $ 4,454,595 1999 812,026 2000 23,130,460 2001 81,643 2002 78,667 Thereafter 1,698,312 ----------- $30,255,703 ===========
6. INCOME TAXES: PAACO, a Subchapter C Corporation, and Premium, a Subchapter S Corporation, file separate tax returns. No tax provision is recorded for income or losses attributed to Premium due to its designation as a Subchapter S Corporation. A summary of income before taxes for the Combined Company is as follows:
Year Ended December 31, -------------------------------------------------- 1997 1996 1995 --------------- ---------------- --------------- Income (loss) before income taxes, PAACO $ 3,244,109 $ 997,752 $ (1,033,538) Income (loss) before income taxes, Premium (965,389) 379,646 (384,113) Eliminating entries - (756,251) 1,306,532 --------------- ---------------- --------------- Combined income (loss) before income taxes $ 2,278,720 $ 621,147 $ (111,119) =============== ================ ===============
F-13 18 PAACO, INC. PREMIUM AUTO ACCEPTANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED Income tax provision (benefit) consisted of the following:
Year Ended December 31, --------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Current tax (benefit) provision $ (546,125) $ 500,843 $ 12,948 Deferred tax provision (benefit), net 1,556,386 (500,843) (12,948) ----------- ----------- ----------- $ 1,010,261 $ -- $ -- =========== =========== ===========
Following is a reconciliation of taxes computed at the statutory federal income tax rate with the provision for income taxes in the combined financial statements for each of the three years in the period ended December 31:
Year Ended December 31, ----------------------------------------------- 1997 1996 1995 ----------- ----------- ------------ Income (loss) before taxes - PAACO $ 3,244,109 $ 997,752 $(1,033,538) =========== =========== =========== Statutory federal rate 34% 34% 34% Provision (benefit) for federal income taxes at the statutory federal rate $ 1,102,997 $ 339,236 $ (351,403) Change in valuation allowance (42,486) (342,996) 357,552 Allocation of expenses (69,182) Other 18,932 3,760 (6,149) ----------- ----------- ----------- $ 1,010,261 $ -- $ -- =========== =========== ===========
The components of the deferred tax assets and liabilities are as follows:
December 31, -------------------------------------------------------------- 1997 1996 ------------------------------ ------------------------------ Assets Liabilities Assets Liabilities ------------- -------------- -------------- ------------- Allowance for losses $ - $ 1,388,381 $ 670,401 $ - Accrued interest - 113,689 - 43,830 Net operating loss 491,809 - - - Other - - - 37,959 ------------- -------------- -------------- ------------- $ 491,809 $ 1,502,070 $ 670,401 $ 81,789 ============= ============== ============== ============= Deferred tax (liability)/asset $ (1,010,261) $ 588,612 Less valuation allowance - (42,487) -------------- ------------- Net deferred tax (liability)/asset $ (1,010,261) $ 546,125 ============== =============
F-14 19 PAACO, INC. PREMIUM AUTO ACCEPTANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED During the year ended December 31, 1997, PAACO elected to implement Internal Revenue Service code section 475 ("IRC ss.475") which allows companies to mark certain securities to market for tax purposes. As a result, the Company realized the deferred tax asset recorded at December 31, 1996 and established a deferred tax liability in 1997 for future book deductions already taken for tax purposes. At December 31, 1996, PAACO recorded a valuation allowance to the extent realizability of the deferred tax asset was dependent upon future earnings. 7. FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" ("SFAS No. 107"), requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet. Fair values are based on estimates using present value or other valuation techniques in cases where quoted market prices are not available. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. SFAS No. 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented in the accompanying table do not represent the underlying value of the Combined Company. The estimated fair values of the Combined Company's financial instruments are as follows:
December 31, -------------------------------------------------------------- 1997 1996 ------------------------------ ------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value ------------- -------------- -------------- ------------- Financial assets: Cash and cash equivalents $ 194,877 $ 194,877 $ 281,395 $ 281,395 Finance receivables, net 30,146,679 26,060,000 16,443,060 14,165,000 Financial liabilities: Notes payable to financial institutions $ 23,409,875 $ 23,409,875 $ 12,451,125 $ 12,451,125 Subordinated notes payable 6,094,164 6,094,164 3,836,352 3,836,352 Mortgages and other notes payable 751,664 751,664 725,385 725,385
The following methods and assumptions were used to estimate the fair value for each class of financial instruments for which it is practical to estimate fair value: Cash and cash equivalents: The carrying amount is considered to be a reasonable estimate of fair value. F-15 20 PAACO, INC. PREMIUM AUTO ACCEPTANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED Finance receivables: The fair value was estimated by discounting future cash flows using rates which management believes an investor would demand for instruments with similar risk and remaining maturities. Notes payable to financial institutions, subordinated notes payable, mortgages and other notes payable: The carrying amounts of the Combined Company's notes payable to financial institutions, subordinated notes payable, and mortgages and other notes payable approximate fair value as the interest rates on such debt approximate market. 8. COMMITMENTS AND CONTINGENCIES: The Combined Company leases premises and equipment under operating leases with various expiration dates. Future minimum lease obligations are as follows: 1998 $ 987,690 1999 767,845 2000 475,992 2001 104,588 2002 12,530 ------------ $ 2,348,645 ===========
Rent expense for the years ended December 31, 1997, 1996 and 1995 was $682,387, $406,424 and $346,760, respectively. 9. RELATED PARTIES: During 1996, PAACO purchased approximately $225,000 of alarm systems from Vehicle Security, Ltd., a company with common ownership. During 1997 and 1996, PAACO sold 90-day service contract warranties to its customers for Medallia de Oro L.L.C., a company with common ownership that only transacts business with PAACO. PAACO retains a fee for each warranty sold. Additionally, PAACO services the contract warranties for Medallia de Oro. At December 31, 1997 and 1996, PAACO had earned warranty fees of approximately $190,000 and $11,000, respectively, and had a net receivable (payable) to/from Medallia de Oro of approximately $162,000 and ($50,000), respectively. F-16 21 PAACO, INC. PREMIUM AUTO ACCEPTANCE CORPORATION NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED During 1997, PAACO sent the bulk of its trade-ins to Irving Boulevard Public Auto Auction, LLC, a company owned 25% by existing shareholders. 10. SUBSEQUENT EVENTS: Effective February 1, 1998, Crown Group Inc. ("Crown") acquired 53% of the Combined Company for a purchase price of approximately $9,100,000. The purchase price consisted of cash and the conversion of a $3,000,000 note due Crown from the Combined Company ($1,000,000 of such note was funded prior to December 31, 1997 and is included in subordinated notes payable in the accompanying balance sheet; the remaining $2,000,000 was funded during January 1998). Approximately $4,900,000 of the Combined Company common stock was purchased directly from the Combined Company, and the remaining $4,200,000 was purchased from the Combined Company's management personnel, who prior to this transaction were the sole shareholders of the Combined Company. In connection with the Crown transaction, the Combined Company's Management/Shareholders and Crown entered into a shareholders' agreement (the "Shareholders' Agreement") which provides, among other things, that in the event any Combined Company Management Shareholder or Crown desire to sell their interest in the Combined Company, such shareholder must first offer to sell such interest to the Combined Company and the other Shareholders in accordance with the provisions of the Shareholders' Agreement. On February 5, 1998, the Combined Company amended the $25,000,000 revolving credit facility to increase the commitment to $30,000,000 with a maturity date of April 30, 2000. On February 27, 1998, the Combined Company purchased a location at 3363 West Northwest Highway, Dallas, Texas for $1,350,000. The purchase was funded by a $1,000,000 note from Crown and a $350,000 note from an existing shareholder. F-17 22 CROWN GROUP, INC. INTRODUCTION TO PRO-FORMA FINANCIAL INFORMATION PURCHASE OF 53% OF PAACO Effective February 1, 1998, pursuant to a definitive stock purchase agreement, Crown Group, Inc. ("Crown") acquired 53% of the common stock of each of Paaco, Inc. and Premium Auto Acceptance Corporation (collectively, "Paaco") for an aggregate purchase price of approximately $9.1 million cash. Approximately $4.9 million of Paaco common stock was purchased directly from Paaco, and the remaining $4.2 million of Paaco common stock was purchased from Paaco shareholders. The purchase price was funded from cash on hand. Paaco is a vertically integrated used car sales and finance company which operates eight used car dealerships in the Dallas-Ft. Worth area. Paaco sells, underwrites and finances used cars and trucks with a focus on the Hispanic market. PURCHASE OF 80% OF PRECISION AND M&S On February 3, 1998, pursuant to a definitive stock purchase agreement, Crown acquired 80% of the common stock of Precision IBC, Incorporated ("Precision") for a purchase price of approximately $2.4 million cash. The shares of Precision common stock were purchased directly from the then sole shareholder of Precision. The purchase price was funded from cash on hand. In connection with this transaction, Crown loaned Precision approximately $3.1 million, the proceeds of which were used to pay off existing bank debt. On March 5, 1998, pursuant to a definitive stock purchase agreement, Crown acquired 80% of the common stock of M&S Tank Rentals, Inc. ("M&S") for a purchase price of $1.65 million. The shares of M&S were purchased directly from the then sole shareholder of M&S. The purchase price was funded from cash on hand. Precision and M&S are in the business of renting, selling, testing and servicing intermediate bulk containers to customers primarily in the petroleum and chemical industries. PRO-FORMA FINANCIAL STATEMENTS The following Pro-Forma Condensed Consolidated Balance Sheet of Crown as of January 31, 1998 gives effect to the above described transactions, as if such transactions had occurred on that date. The following Pro-Forma Condensed Consolidated Statement of Operations of Crown for the year ended April 30, 1997 gives effect to the above described transactions, as if such transactions had occurred at the beginning of the period (May 1, 1996). Paaco's, Precision's and M&S's historical accounting year ends on December 31. Paaco's, Precision's and M&S's operating results for the year ended April 30, 1997 have been derived by adding (i) their respective operating results for the four months ended April 30, 1997, and subtracting (ii) their respective operating results for the four months ended April 30, 1996, from (iii) their respective operating results for the year ended December 31, 1996. The following Pro-Forma Condensed Consolidated Statement of Operations for the nine months ended January 31, 1998 gives effect to the above described transactions, as if such transactions had occurred at the beginning of the period (May 1, 1997). Paaco's, Precision's and M&S's historical accounting year ends on December 31. Paaco's, Precision's and M&S's operating results for the nine months ended January 31, 1998 have been derived by adding (i) their respective operating results for the month of January 1998, and subtracting (ii) their respective operating results for the four months ended April 30, 1997, from (iii) their respective operating results for the year ended December 31, 1997. The pro-forma information is based on the historical financial statements of Crown, Paaco, Precision and M&S giving effect to the transactions described above and the adjustments described in the accompanying Notes to Pro-Forma Condensed Consolidated Financial Statements and may not be indicative of the results that actually would have occurred had the transactions taken place on the dates indicated or the results which may be obtained in the future. P-1 23 CROWN GROUP, INC. PRO-FORMA CONDENSED CONSOLIDATED BALANCE SHEET UNAUDITED JANUARY 31, 1998 (IN THOUSANDS)
Acquisition Historical Acquisition of Precision Pro-Forma Crown of Paaco and M&S Consolidated ---------- ------------ ------------- ------------ Assets: Cash and cash equivalents $ 16,030 $ (4,458)(a) $ (7,077)(f) $ 4,495 Finance and other receivables, net 889 29,866 (b) 475 31,230 Mortgage loans held for sale, net 8,708 8,708 Inventory 2,745 262 3,007 Prepaids and other assets 418 658 2 1,078 Property and equipment, net 2,547 1,703 3,786 8,036 Note receivable from Paaco 3,000 (3,000)(c) Note receivable from CMN 1,172 1,172 Investment in CMN and related assets 5,631 5,631 Goodwill 7,674 (d) 3,534 (g) 11,208 -------- -------- -------- -------- $ 38,395 $ 35,188 $ 982 $ 74,565 ======== ======== ======== ======== Liabilities: Accounts payable and accrued liabilities $ 699 $ 2,918 $ 178 $ 3,795 Revolving credit facilities 4,190 23,575 27,765 Notes payable 4,474 (c) 4,474 Deferred income taxes 351 1,010 550 1,911 -------- -------- -------- -------- 5,240 31,977 728 37,945 -------- -------- -------- -------- Minority interest 3,211 (e) 254 (h) 3,465 Stockholders' equity 33,155 33,155 -------- -------- -------- -------- $ 38,395 $ 35,188 $ 982 $ 74,565 ======== ======== ======== ========
See accompanying Notes to Pro-Forma Condensed Consolidated Financial Statements. P-2 24 CROWN GROUP, INC. PRO-FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED APRIL 30, 1997 UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE DATA)
Historical Historical Historical Precision Pro-Forma Crown Paaco and M&S Adjustments Consolidated ---------- ---------- ---------- ----------- ------------ Revenues: Sales $ 29,106 $ 1,398 $ 30,504 Tank rentals 1,696 1,696 Interest $ 1,530 2,859 2 $ (126)(3) 4,265 Other income 500 409 143 1,052 ---------- ---------- ---------- ----------- ------------ 2,030 32,374 3,239 (126) 37,517 ---------- ---------- ---------- ----------- ------------ Costs and expenses: Cost of sales 18,434 1,195 19,629 General and administrative 2,837 6,887 706 10,430 Provision for credit losses 3,409 (1,060)(1) 2,349 Depreciation and amortization 168 78 520 653 (2) 1,419 Write-down of assets 1,716 1,716 ---------- ---------- ---------- ----------- ------------ 4,721 28,808 2,421 (407) 35,543 ---------- ---------- ---------- ----------- ------------ Other income (expense): Interest expense (69) (1,879) (264) 201(3) (2,011) Gain on sale of securities 9,680 9,680 ---------- ---------- ---------- ----------- ------------ 9,611 (1,879) (264) 201 7,669 ---------- ---------- ---------- ----------- ------------ Income before taxes and minority interest 6,920 1,687 554 482 9,643 Provision (benefit) for income taxes (1,940) 533 84 552(4) (771) Minority interest in earnings 662(5) 662 ---------- ---------- ---------- ----------- ------------ Net income $ 8,860 $ 1,154 $ 470 $ (732) $ 9,752 ========== ========== ========== =========== ============ Earnings per share: Basic $ .82 $ .90 ========== ============ Diluted $ .80 $ .88 ========== ============ Average shares outstanding 10,868 10,868 ========== ============
See accompanying Notes to Pro-Forma Condensed Consolidated Financial Statements. P-3 25 CROWN GROUP, INC. PRO-FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED JANUARY 31, 1998 UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE DATA)
Historical Historical Historical Precision Pro-Forma Crown Paaco and M&S Adjustments Consolidated ---------- --------- ----------- ----------- ------------ Revenues: Sales $ 35,337 $ 1,630 $ 36,967 Tank rentals 1,472 1,472 Interest $ 1,381 4,224 $ (119)(3) 5,486 Gain on sale of mortgage loans 430 430 Other income 403 69 96 568 --------- --------- ---------- --------- --------- 2,214 39,630 3,198 (119) 44,923 --------- --------- ---------- --------- --------- Costs and expenses: Cost of sales 24,032 1,329 25,361 General and administrative 3,330 8,021 701 12,052 Provision for credit losses 4,123 (795)(1) 3,328 Depreciation and amortization 350 151 630 490(2) 1,621 --------- --------- ---------- --------- --------- 3,680 36,327 2,660 (305) 42,362 --------- --------- ---------- --------- --------- Other income (expense): Equity in earnings of CMN 533 533 Interest expense (82) (2,375) (235) 191(3) (2,501) Gain on sale of securities 65 65 --------- --------- ---------- --------- --------- 516 (2,375) (235) 191 (1,903) --------- --------- ---------- --------- --------- Income (loss) before taxes and minority interest (950) 928 303 377 658 Provision (benefit) for income taxes (603) 419 71 420(4) 307 Minority interest 307(5) 307 --------- --------- ---------- --------- --------- Net income (loss) $ (347) $ 509 $ 232 $ (350) $ 44 ========= ========= ========== ========= ========= Earnings (loss) per share: Basic $ (.03) $ .00 ========= ========= Diluted $ (.03) $ .00 ========= ========= Average shares outstanding 9,951 9,951 ========= =========
See accompanying Notes to Pro-Forma Condensed Consolidated Financial Statements. P-4 26 CROWN GROUP, INC. NOTES TO PRO-FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND PERCENTAGES) BALANCE SHEET a - Purchase of Paaco shares from shareholders $ (4,167) Crown transaction costs (91) Paaco transaction costs (200) -------- $ (4,458) ======== b - Historical carrying value of finance receivables $ 31,986 Crown's share of market value adjustment ($4,000 x 53%) (2,120) -------- $ 29,866 ======== c - Historical carrying value of notes payable $ 7,474 Conversion of note payable to Crown to equity (3,000) -------- $ 4,474 ======== d - Crown's basis in 53% of Paaco's common stock $ 9,175 Crown's share of Paaco's equity after transaction ($6,832 x 53%) $ 3,621 Crown's share of market value adjustment ($4,000 x 53%) (2,120) ------- Crown's share of Paaco's equity 1,501 -------- $ 7,674 ======== e - Paaco's equity after transaction $ 6,832 Minority shareholders ownership percentage 47% -------- $ 3,211 ======== f - Precision's and M&S's existing cash $ 69 Purchase of 80% of Precision (2,382) Purchase of 80% of M&S (1,650) Pay off of Precision debt (3,114) -------- $ (7,077) ========
P-5 27 g - Crown's basis in 80% of Precision and M&S $ 4,032 Crown's share of Precision and M&S equity after transaction ($1,272 x 80%) $ 1,018 Crown's share of market value adjustment ($650 x 80%) (520) ------- Crown's share of Precision's and M&S's equity 498 -------- $ 3,534 h - Precision and M&S equity after transaction $ 1,272 Minority shareholders ownership percentage 20% -------- $ 254 ========
STATEMENTS OF OPERATIONS 1 - To adjust provision for credit losses to reflect recording finance receivables at fair value. 2 - To record amortization of goodwill based upon a 15 year amortization period for Paaco, and a 25 year amortization period for Precision and M&S. 3 - To eliminate Precision's interest expense and reduce Crown's interest income as a result of Crown paying off Precision's debt at closing. 4 - To record a provision for income taxes on the income before income taxes of Precision and the adjustments described above based upon a 38% effective income tax rate. Precision is currently a subchapter S corporation and does not pay corporate income taxes. Since completing the acquisition the Company will cause Precision to become a subchapter C corporation and file a consolidated income tax return with the Company. 5 - To record minority interest in the earnings of Paaco, Precision and M&S. P-6 28 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ----------- 23.1 -- Consent of Independent Public Accountants 23.2 -- Consent of Independent Auditors
EX-23.1 2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Crown Group, Inc. on Form S-8 (File No. 33-59519, File No. 33-59527 and File No. 333-38475) of our report dated April 13, 1998, on our audit of the combined financial statements of PAACO, Inc. and Premium Auto Acceptance Corporation as of and for the year ended December 31, 1997, which report is included in this Form 8-K/A. Coopers & Lybrand L.L.P. Dallas, Texas April 16, 1998 EX-23.2 3 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement (S-8, No. 33-22590) relating to the 1986 Incentive Stock Option Plan; Registration Statement (S-8, No. 33-41960) relating to the 1991 Non-qualified Stock Option Plan; and Registration Statement (S-8, No. 333-38475) relating to the 1997 Stock Option Plan, of our report dated April 28, 1997, with respect to the combined financial statements of PAACO, Inc. and Premium Auto Acceptance Corporation for the two years ended December 31, 1996, included in Crown Group, Inc.'s filing on Form 8-K/A (Amendment No. 1) dated on or about April 16, 1998, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP April 16, 1998 Dallas, Texas -----END PRIVACY-ENHANCED MESSAGE-----